<PAGE> 1
Filed pursuant to Rule 424(b)(4)
Registration No. 333-31735
PROSPECTUS
8,400,000 Shares
Steel Dynamics, Inc.
COMMON STOCK
------------------------
OF THE 8,400,000 SHARES OF COMMON STOCK BEING OFFERED HEREBY, 1,255,971 SHARES
ARE BEING SOLD BY THE COMPANY AND 7,144,029 SHARES ARE BEING SOLD BY THE SELLING
STOCKHOLDERS. SEE "PRINCIPAL AND SELLING STOCKHOLDERS." THE COMPANY WILL NOT
RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF THE SHARES OF COMMON STOCK BY THE
SELLING STOCKHOLDERS. OF THE 8,400,000 SHARES OF COMMON STOCK BEING OFFERED,
6,720,000 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY
THE U.S. UNDERWRITERS AND 1,680,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE
THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE
"UNDERWRITERS." THE COMMON STOCK IS TRADED ON THE NASDAQ STOCK MARKET, UNDER THE
SYMBOL "STLD." ON AUGUST 13, 1997, THE REPORTED LAST SALE PRICE OF THE COMMON
STOCK ON THE NASDAQ STOCK MARKET WAS $25 1/2 PER SHARE.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE $25 A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............... $25.00 $1.00 $24.00 $24.00
Total(3)................ $210,000,000 $8,400,000 $30,143,304 $171,456,696
</TABLE>
- ------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $600,000.
(3) The Company and certain of the Selling Stockholders have granted the
U.S. Underwriters an option, exercisable within 30 days of the date
hereof, to purchase up to an aggregate of 1,260,000 additional Shares of
Common Stock at the price to public less underwriting discounts and
commissions, for the purpose of covering over-allotments, if any. If the
U.S. Underwriters exercise such option in full, the total price to
public, underwriting discounts and commissions, proceeds to Company and
proceeds to Selling Stockholders will be $241,500,000, $9,660,000,
$33,983,304 and $197,856,696, respectively. See "Underwriters."
------------------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Shearman & Sterling, counsel for the Underwriters. It is expected that
delivery of the Shares will be made on or about August 19, 1997, at the office
of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor
in immediately available funds.
------------------------
MORGAN STANLEY DEAN WITTER PAINEWEBBER INCORPORATED
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
McDONALD & COMPANY SECURITIES, INC.
SALOMON BROTHERS INC
August 13, 1997
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
2
<PAGE> 3
Gatefold page 1:
THE EXISTING MILL
January 1996
- - Twin shell, 195t, AC, Electric Arc Furnace Battery
- - Ladle Metallurgy Facility, Desulphurization
- - SMS, Thin-Slab Caster
- - Tunnel Furnace for Direct Charge
- - Six Stand, SMS Hot Mill, Single Downcoiler
- - CAPACITY @ 1,400,000 TONS
THE COLD MILL PROJECT
Late 1997
- - Continuous Pickle Line
- - Hot-Rolled Products Galvanizing Line
- - Semi-Tandem 2-Stand Reversing Cold Rolling Mill
- - Cold-Rolled Products Galvanizing Line
- - Batch Annealing Furnaces
- - Temper Mill
- - PLANNED CAPACITY @ 1,000,000 TONS
[SDI Logo]
<PAGE> 4
Gatefold page 2:
THE CASTER PROJECT
Mid 1998
- - Second Electric Arc Furnace Battery
- - Second Thin-Slab Caster
- - Second Tunnel Furnace
- - Second Downcoiler
- - PLANNED INCREMENTAL CAPACITY @ 1,000,000 TONS
THE IRON DYNAMICS PROJECT
Late 1998
- - Pelletizing Plant
- - Rotary Hearth Reduction Furnace
- - Hybrid Electric Arc Furnace
- - Desulphurization Station
- - PLANNED LIQUID PIG IRON CAPACITY @ 500,000 TONNES
[SDI Logo]
<PAGE> 5
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT
IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY
CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
For investors outside the United States: No action has been or will be
taken in any jurisdiction by the Company, any Selling Stockholder or any
Underwriter that would permit a public offering of the Common Stock or
possession or distribution of this Prospectus in any jurisdiction where action
for that purpose is required, other than in the United States. Persons into
whose possession this Prospectus comes are required by the Company, the Selling
Stockholders and the Underwriters to inform themselves about, and to observe any
restrictions as to, the offering of the Common Stock and the distribution of
this Prospectus.
------------------------
In this Prospectus, references to "dollar" and "$" are to United States
dollars, and the terms "United States" and "U.S." mean the United States of
America, its states, its territories, its possessions and all areas subject to
its jurisdiction.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................................................................... 4
Risk Factors.......................................................................... 10
Use of Proceeds....................................................................... 17
Price Range of Common Stock and Dividend Policy....................................... 17
Dilution.............................................................................. 18
Capitalization........................................................................ 19
Selected Consolidated Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 22
Business.............................................................................. 29
Management............................................................................ 52
Certain Transactions.................................................................. 61
Principal and Selling Stockholders.................................................... 64
Description of Certain Indebtedness................................................... 67
Description of Capital Stock.......................................................... 69
Shares Eligible for Future Sale....................................................... 71
Certain United States Federal Tax Consequences for Non-United States Holders.......... 72
Underwriters.......................................................................... 76
Legal Matters......................................................................... 79
Experts............................................................................... 79
Available Information................................................................. 79
Index to Consolidated Financial Statements............................................ F-1
</TABLE>
------------------------
The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by its independent
accountants and quarterly reports for the first three quarters of each fiscal
year containing unaudited consolidated financial information.
3
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and the
Company's Consolidated Financial Statements, including the notes thereto,
appearing elsewhere in this Prospectus. As used in this Prospectus, unless the
context otherwise indicates, "Steel Dynamics," "SDI" or the "Company" means
Steel Dynamics, Inc., an Indiana corporation, and its consolidated subsidiaries.
"Common Stock" means the Company's Common Stock, par value $.01 per share.
Unless otherwise indicated, the information contained in this Prospectus assumes
that the U.S. Underwriters' over-allotment option is not exercised. As used in
this Prospectus, the term "tonne" means a metric tonne, equal to 2,204.6 pounds,
and the term "ton" means a net ton, equal to 2,000 pounds. Certain information
contained in this summary and elsewhere in this Prospectus, including
information with respect to the Company's plans and strategy for its business,
are forward-looking statements. For a discussion of important factors which
could cause actual results to differ materially from the forward-looking
statements contained herein, see "Risk Factors."
THE COMPANY
OVERVIEW
Steel Dynamics owns and operates a new, state-of-the-art flat-rolled steel
mini-mill, which commenced operations in January 1996. The Company was founded
by executives and managers who pioneered the development of
thin-slab/flat-rolled compact strip production ("CSP") technology and directed
the construction and operation of the world's first thin-slab/flat-rolled
mini-mill. Building upon their past experience with CSP technology, management
founded SDI to produce steel more efficiently, at a lower cost and of higher
quality. Steel Dynamics' goal is to be the low cost producer of a broad range of
high quality flat-rolled steel products, including hot-rolled, cold-rolled and
galvanized sheet, as well as other specialty steel products, and to serve more
markets than any other flat-rolled mini-mill. In addition, the Company intends
to participate in the development and use of new technologies to produce a broad
range of steel products.
The Company was founded in September 1993 by Keith E. Busse, Mark D.
Millett and Richard P. Teets, Jr. In October 1994, Steel Dynamics commenced
construction of the mini-mill and commissioned it in December 1995. The Company
believes that this 14-month construction period is the fastest ever for this
kind of facility. In addition, the Company believes that the approximately
$275.7 million initial capital cost of its mini-mill is approximately $75.0
million, or approximately 20%, less than the cost of comparable mini-mills
currently operating. Actual production at the mini-mill of primary grade steel
commenced on January 2, 1996. The mill achieved an annualized production rate of
1.2 million tons by the end of June 1997, or 85% of its capacity of 1.4 million
tons, making the mini-mill's start-up and ramp-up the fastest to date in the
industry.
Pursuant to the Company's plan to develop downstream processing facilities
to produce further value-added steel products, Steel Dynamics is currently
constructing a cold mill, contiguous to the mini-mill, with a 1.0 million ton
annual capacity (the "Cold Mill Project") which is scheduled for completion
during the fourth quarter of 1997. Steel Dynamics is also in the process of
adding a second melting furnace, a second caster and tunnel furnace, and an
additional coiler to expand its annual production capacity of hot-rolled steel
from 1.4 million tons to approximately 2.4 million tons (the "Caster Project").
The Caster Project is expected to be completed in the first half of 1998.
In addition, the Company's wholly-owned subsidiary, Iron Dynamics, Inc.
("Iron Dynamics" or "IDI"), intends to construct a 600,000 tonne annual capacity
plant for the manufacture of direct reduced iron ("DRI"), which the Company
expects to be completed in 1998 (the "IDI Project"). The DRI, after further
refining into 500,000 tonnes of liquid pig iron, will be used in SDI's mini-mill
as a steel scrap substitute.
Management strategically located the Company's mini-mill within close
proximity to its natural customer base, steel service centers and other end
users, abundant supplies of automotive and other steel scrap (SDI's principal
raw material), competitive sources of power, and numerous rail and truck
transportation routes. Steel Dynamics believes that its strategic location
provides it with sales and marketing as well as production cost
4
<PAGE> 7
advantages. The Company has secured a stable baseload of sales through long-term
"off-take" contracts with two major steel consumers, a 30,000 ton per month
sales contract with Heidtman Steel Products, Inc. ("Heidtman"), a major
Midwest-based steel service center and distributor and an affiliate of one of
the Company's stockholders, and a 12,000 ton per month sales contract with
Preussag Stahl AG ("Preussag"), a major German steel manufacturer and a
stockholder of the Company, with affiliate distributors and steel service
centers throughout the United States.
The Company has sought to assure itself of a secure supply of both steel
scrap and scrap substitute material. To accomplish this objective, SDI has
entered into a long-term scrap purchasing services contract with OmniSource
Corporation ("OmniSource"), one of the largest scrap dealers in the Midwest and
an affiliate of one of the Company's stockholders. In addition, the Company has
sought to assure itself of a secure supply of scrap substitute material for use
as a lower cost complement to steel scrap as part of the Company's melt mix. SDI
has entered into a long-term 300,000 tonne per year "off-take" contract to
purchase iron carbide from Qualitech Steel Corporation's ("Qualitech's") iron
carbide facility currently under construction in Corpus Christi, Texas which is
expected to be completed in 1998. The Company expects to produce additional
scrap substitute material in 1998 upon completion of the IDI Project.
STRATEGY
The Company's business strategy is to use advanced CSP hot-rolled
steelmaking and cold-rolling technologies to produce high surface quality
flat-rolled steel in a variety of value-added sizes, gauges and surface
treatments, emphasizing low production costs, reliable product quality and
excellent customer service. In addition, SDI intends to remain financially
strong and competitive through the selective purchasing of scrap and scrap
substitutes to offset the effects of cyclical cost/price imbalances. The
principal elements of the Company's strategy include:
- Achieve Lowest Conversion Costs in Industry. Steel Dynamics' electric
arc furnace ("EAF") and its caster and rolling mill designs represent
substantial improvements over earlier mini-mills using CSP technology.
These improvements have been designed to speed the steelmaking process,
to limit "power off time" and other non-productive time in the EAF, to
reduce the per ton cost of consumables and to yield higher quality
finished steel product. The Company believes that its per ton
manufacturing costs are already among the lowest in the industry.
- Emphasize Value-Added Products and Increase Product Breadth. Steel
Dynamics has produced and believes that it will be able to consistently
produce thinner gauge (down to .040") steel in hot-rolled form with
better surface and edge characteristics than most other flat-rolled
producers. The Company believes that its high quality, thinner hot-rolled
products will compete favorably with certain more expensive cold-rolled
(further processed) products, enabling it to obtain higher margins. In
addition, with the anticipated completion of the Cold Mill Project, SDI
expects to devote a substantial portion of its hot-rolled products to the
production of higher value-added cold-rolled and galvanized products, as
well as thinner gauges, down to .015". This increased product breadth
should also allow the Company to further broaden its customer base.
- Secure Reliable Sources of Low Cost Metallics. The principal raw
material used in the Company's mini-mill is steel scrap, which
represented approximately 58% of the Company's total manufacturing costs
for the six months ended June 30, 1997. Steel Dynamics has pursued a
three-part strategy to secure access to adequate low cost supplies of
steel scrap and steel scrap substitute materials. First, the Company has
entered into a long-term steel scrap contract with OmniSource. Second,
SDI has entered into an iron carbide "off-take" contract with Qualitech.
Third, Steel Dynamics is pursuing the IDI Project to produce DRI and
after further refining, liquid pig iron, as another lower cost complement
for use in the melt mix with steel scrap.
- Secure a Solid Baseload of Hot Band Sales. In order to help ensure
consistent and efficient plant utilization, SDI entered into "off-take"
sales and distribution agreements with Heidtman and Preussag, through
2001, pursuant to which Heidtman has agreed to purchase at least 30,000
tons and Preussag
5
<PAGE> 8
has agreed to purchase at least an average of 12,000 tons of the
Company's flat-rolled products per month, at the Company's market price,
subject to certain volume and single run discounts.
- Increase Unit Growth at Low Capital Cost. SDI seeks to continue to grow
its production of flat-rolled steel coil at low capital and unit costs.
The Company plans to invest approximately $85.0 million to finance its
Caster Project. The Caster Project, which is expected to be completed in
the first half of 1998, is expected to increase the annual production
capacity of the Company's mini-mill from 1.4 to approximately 2.4 million
tons of hot-rolled steel. In addition, management intends to continue to
explore new production technologies to further lower its unit costs of
production.
- Incentivize Employees. In contrast to the high fixed labor costs of many
of the Company's competitors, SDI has established certain incentive
compensation programs specifically designed to reward employee teams for
their efforts towards enhancing productivity, thereby encouraging a sense
of ownership throughout Steel Dynamics. Production employees actively
share in the Company's success through a "production" bonus and a
"conversion cost" bonus. The production bonus is directly tied to the
quantity and quality of products manufactured during a particular shift.
The conversion cost bonus encourages employees to use materials and
resources more efficiently. Steel Dynamics' employees' bonuses may equal
or exceed their base hourly wage.
- Pursue Future Opportunities. Steel Dynamics believes that technology
development and management's experience will provide significant
opportunities for SDI in a broad range of markets, potentially including
flat-rolled, non-flat-rolled, stainless and specialty steels. The Company
plans to pursue opportunities through greenfield projects, strategic
alliances or acquisitions, which may include foreign investments, to
secure the long-term future growth and profitability of SDI. The Company
is conducting certain preliminary engineering and feasibility analyses
for a possible 750,000 ton capacity structural steel facility to
manufacture wide flange beams and other structural shapes, utilizing near
net shape casting technology in conjunction with a state-of-the-art bloom
caster. There is no assurance, however, that such a facility will be
approved by the Company for further development efforts once these
preliminary studies have been completed, or, if further developed, that
the facility will be able to be financed and built. Steel Dynamics will
also seek to enter new steel markets and to produce new steel products
using the latest technology, with the objective of being a low cost
producer. In addition, the Company has a technology sharing agreement
with Preussag which will provide SDI with Preussag's expertise and
know-how in steel manufacturing, particularly steel finishing.
6
<PAGE> 9
THE OFFERINGS
<TABLE>
<S> <C>
Common Stock offered:
By the Company......................................... 1,255,971 shares
By the Selling Stockholders............................ 7,144,029 shares
Total............................................... 8,400,000 shares
Common Stock offered:
United States offering................................. 6,720,000 shares
International offering................................. 1,680,000 shares
Total............................................... 8,400,000 shares
Common Stock to be outstanding after the offerings(1).... 49,122,294 shares
Use of proceeds.......................................... The net proceeds to the Company will
be used for the purchase and
installation of a seventh stand for
the Company's hot-rolling mill and
for general corporate purposes. The
Company will not receive any
proceeds from the sale by the
Selling Stockholders of Common Stock
in the offerings. See "Use of
Proceeds."
Nasdaq Stock Market symbol............................... "STLD"
</TABLE>
- ------------
(1) Based on 47,866,323 shares of Common Stock outstanding on June 30, 1997.
Excludes 885,784 shares of Common Stock issuable upon exercise of stock
options outstanding on June 30, 1997, at a weighted average exercise price
of $9.42 per share.
RISK FACTORS
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING
AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS." The risk factors include
(i) Start-up; Limited Operating History; Recent Losses, (ii) Variability of
Financial Results; Production Shutdowns, (iii) Significant Capital Requirements,
(iv) Cost of Steel Scrap and Other Raw Materials, (v) Cyclicality of Steel
Industry and End User Markets, (vi) Competition, (vii) Risks Related to Scrap
Substitutes, (viii) Reliance on Major Customers, (ix) Potential Costs of
Environmental Compliance, (x) Dependence upon Key Management, (xi) Restrictions
on Payment of Dividends on Common Stock, (xii) Restrictive Covenants, (xiii)
Possible Volatility of Stock Prices, (xiv) Shares Eligible for Future Sale, (xv)
Anti-Takeover Provisions, (xvi) Dilution and (xvii) Forward Looking Statements.
7
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth summary consolidated financial and operating
data for the dates and periods indicated. The quarterly and six month summary
statement of operations data and balance sheet data as of June 30, 1997 are
derived from unaudited consolidated financial statements of the Company and, in
the opinion of management, include all adjustments (consisting only of normal
recurring accruals) necessary to present fairly such data. The consolidated
financial data as of and for the year ended December 31, 1996 are derived from
the Company's audited consolidated financial statements. Operating results for
interim periods are not necessarily indicative of a full year's operations. The
information below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED(1) SIX MONTHS
--------------------------------------------------------------------- YEAR ENDED ENDED
MARCH 30, JUNE 29, SEPTEMBER 28, DECEMBER 31, MARCH 31, JUNE 30, DECEMBER 31, JUNE 30,
1996 1996 1996 1996 1997 1997 1996 1997
--------- -------- ------------- ------------ --------- -------- ------------ ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND TON AMOUNTS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................... $ 32,287 $ 66,375 $ 75,957 $ 77,998 $ 98,059 $102,718 $252,617 $200,777
Cost of goods sold............ 35,184 60,407 62,664 62,306 73,910 76,270 220,563 150,180
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit (loss).......... (2,897) 5,968 13,293 15,692 24,149 26,448 32,054 50,597
Selling, general and
administrative expenses...... 2,817 3,077 3,454 4,492 5,339 7,140 13,838 12,479
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations................. (5,714) 2,891 9,839 11,200 18,810 19,308 18,216 38,118
Foreign currency gain
(loss)....................... 154 106 -- 68 92 169 328 261
Interest expense.............. (5,837) (6,291) (5,922) (4,634) (2,401) (1,594) (22,684) (3,995)
Interest income............... 93 486 378 624 752 512 1,581 1,264
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) before
extraordinary loss and
taxes...................... (11,304) (2,808) 4,295 7,258 17,253 18,395 (2,559) 35,648
Extraordinary loss(2)......... -- -- -- (7,271) -- -- (7,271) --
Provision for taxes........... -- -- -- -- 2,668 2,826 -- 5,494
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)............. $(11,304) $ (2,808) $ 4,295 $ (13) $ 14,585 $ 15,569 $ (9,830) $ 30,154
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per share... $ (0.35) $ (0.08) $ 0.11 $ (0.00) $ 0.30 $ 0.33 $ (0.28) $ 0.63
======== ======== ======== ======== ======== ======== ======== ========
Weighted average common shares
outstanding.................. 32,665 36,719 39,045 41,808 47,838 47,855 34,571 47,851
OTHER DATA:
Shipments (net tons).......... 114,914 218,640 228,568 231,726 280,446 295,272 793,848 575,718
Hot band production (net
tons)(3)..................... 127,930 213,391 227,428 245,813 275,035 292,302 814,562 567,337
Prime tons produced........... 94,405 191,034 212,562 229,908 261,957 278,286 727,909 540,243
Prime ton percentage.......... 73.8% 89.5% 93.5% 93.5% 95.2% 95.2% 89.4% 95.2%
Yield percentage(4)........... 83.8% 87.0% 88.5% 88.6% 89.2% 89.7% 87.4% 89.5%
Average sales price per prime
ton.......................... $ 313 $ 320 $ 344 $ 350 $ 360 $ 358 $ 336 $ 359
Effective capacity
utilization(5)............... 35.1% 58.6% 67.7% 73.2% 79.1% 83.0% 58.2% 81.1%
Man-hours per net ton
produced..................... 0.90 0.69 0.66 0.61 0.57 0.57 0.70 0.57
Number of employees (end of
period)...................... 238 255 263 293 329 359 293 359
Operating profit (loss) per
net ton shipped.............. $ (49.72) $ 13.22 $ 43.05 $ 48.34 $ 72.25 $ 72.08 $ 22.95 $ 72.16
Depreciation and
amortization................. 3,588 5,211 5,341 5,165 5,691 5,916 19,403 11,607
Net cash provided by (used
in):
Operating activities......... (27,543) (16,823) (1,689) (6,009) 38,042 10,463 (51,634) 48,505
Investing activities......... (5,013) (13,153) 4,884 (51,433) (46,331) (35,136) (83,146) (81,468)
Financing activities......... 36,359 40,112 24,543 84,338 (992) (1,213) 185,356 (2,204)
EBITDA(6)..................... (2,340) 8,094 15,180 16,366 24,501 25,225 37,300 49,726
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------
ACTUAL AS ADJUSTED(7)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................................... $ 22,293 $ 51,836
Working capital......................................................................................... 60,676 90,219
Property, plant and equipment, net...................................................................... 410,272 410,272
Total assets............................................................................................ 552,603 582,146
Long-term debt (including current portion).............................................................. 205,461 205,461
Stockholders' equity.................................................................................... 294,953 324,496
</TABLE>
(footnotes on following page)
8
<PAGE> 11
- ---------------
(1) The Company commenced actual production of primary grade steel in January
1996. Accordingly, management believes that the Company's results of
operations prior to 1996 are not indicative of results to be expected in the
future.
(2) Represents the loss on early retirement of the Company's subordinated notes
of approximately $7.3 million in the fourth quarter of 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company will incur an extraordinary loss of approximately
$7.6 million (net of tax benefit of $5.1 million) in the third quarter of
1997 as a result of the refinancing of the Company's Credit Agreement (as
defined). See "Description of Certain Indebtedness."
(3) Hot band production refers to the total production of finished coiled
product. Prime tons refer to hot bands produced which meet or exceed
metallurgical and quality standards for surface, shape and metallurgical
properties.
(4) Yield percentage refers to tons of finished products divided by tons of raw
materials.
(5) Effective capacity utilization is the ratio of tons produced for the
operational month to the operational month's capacity based upon an annual
capacity of 1.4 million tons.
(6) EBITDA represents operating income before depreciation and amortization.
Based upon its experience in the steel industry, the Company believes that
EBITDA and related measures of cash flow serve as important financial
analysis tools for measuring and comparing steel companies in several areas,
such as liquidity, operating performance and leverage. However, EBITDA is
not a measurement of financial performance under generally accepted
accounting principles ("GAAP") and may not be comparable to other similarly
titled measures of other companies. EBITDA should not be considered as an
alternative to operating or net income (as determined in accordance with
GAAP), as an indicator of the Company's performance or as an alternative to
cash flows from operating activities (as determined in accordance with GAAP)
as a measure of liquidity. See the Company's Consolidated Statements of
Operations and Consolidated Statement of Cash Flows, including the notes
thereto, appearing elsewhere in this Prospectus.
(7) As adjusted to give effect to the offerings.
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<PAGE> 12
RISK FACTORS
Prospective investors should consider carefully the following factors in
addition to other information set forth in this Prospectus in evaluating an
investment in the shares of the Common Stock offered hereby.
START-UP; LIMITED OPERATING HISTORY; RECENT LOSSES
The Company was formed in September 1993 and commenced primary grade
production at its thin-slab steel mini-mill in January 1996. The Company is in
the process of ramping up steel production to full capacity. The Company has
experienced normal start-up and operational difficulties in bringing its
mini-mill into full scale production, and the mini-mill is not yet operating at
full capacity. By the end of June 1997, the Company was operating at an
annualized production rate of 1.2 million tons, or 85% of full capacity. Because
of the high fixed cost nature of operating a steel mill, failure to bring
production to, or maintain production at, full capacity could have a material
adverse effect on the Company's cost and pricing structure and on its resulting
ability to compete and results of operations. Although the Company believes that
the start-up difficulties it experienced are typical of those encountered when a
new steel mill commences production, there is no assurance that the Company will
not continue to experience operational difficulties beyond start-up
difficulties, or that it will ultimately achieve or be able to sustain full
production. In addition, the Company could experience construction, start-up or
operational difficulties as it implements the Cold Mill, IDI and Caster Projects
or future projects. There can be no assurance that the Company will be able to
operate its mini-mill at full capacity or that the Cold Mill, IDI and Caster
Projects will be successfully built, started-up, and integrated with the
Company's existing operations. Management has no experience in building or
operating scrap substitute manufacturing plants. The Company's continued rapid
development and the implementation of the Cold Mill, IDI and Caster Projects may
place a strain on its administrative, operational and financial resources. As
the Company increases its production and expands its customer base, there will
be additional demands on the Company's ability to coordinate sales and marketing
efforts with production. The failure to produce at full capacity, coordinate its
sales and marketing efforts with production or manage its future development and
growth, or the emergence of unexpected production difficulties could adversely
affect the Company's business, results of operations and financial condition.
Because the Company commenced primary grade production in January 1996, the
Company's results of operations for prior periods will not be comparable with
future periods. As a result, there is only limited financial and operating
information available for a potential investor to evaluate an investment in the
Common Stock. Although the Company had net income of $30.2 million for the six
months ended June 30, 1997, the Company had net losses for each year since its
formation in 1993 and had an accumulated deficit of $9.6 million as of June 30,
1997. These losses have resulted principally from operating expenses during
start-up. The Company will experience additional start-up losses in connection
with the Cold Mill, IDI and Caster Projects. There can be no assurance that the
Company's operations will continue to be profitable. If the Company cannot
maintain profitability it may not be able to make required debt service payments
and the value of the Common Stock could be adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
VARIABILITY OF FINANCIAL RESULTS; PRODUCTION SHUTDOWNS
The Company's results of operations are substantially affected by
variations in the realized sales prices of its products, which in turn depend
both on prevailing prices for steel and demand for particular products. In 1996,
spot prices for hot bands increased from a low of $330 per ton to a high of $360
per ton. Operating results have been, and in the future will be, affected by
numerous factors, including the prices and availability of raw materials,
particularly steel scrap and scrap substitutes, the demand for and prices of the
Company's products, the level of competition, the level of unutilized production
capacity in the steel industry, the mix of products sold by the Company, the
timing and pricing of large orders, start-up difficulties with respect to the
Cold Mill Project, IDI Project or Caster Project, the integration and
modification of facilities and other factors. There can be no assurance that
these events and circumstances or other events or circumstances, such as
seasonal factors like weather, disruptions in the transportation or energy
industry or in the Company's
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<PAGE> 13
customers' industries, or an economic downturn adversely affecting the steel
industry, generally, or the Company, in particular, will not occur, any of which
could have a material adverse effect on the Company.
The Company's manufacturing processes are dependent upon certain critical
pieces of steelmaking equipment, such as its EAF and continuous caster, which on
occasion may be out of service due to routine scheduled maintenance or as the
result of equipment failures. This interruption in the Company's production
capabilities could result in fluctuations in the Company's quarterly results of
operations. The most significant scheduled maintenance outages are planned to
occur quarterly, for three days at a time, and involve routine maintenance work.
Other routine scheduled maintenance could limit the Company's production for a
period of less than a day, while unanticipated equipment failures could limit
the Company's production for a longer period.
Equipment failures at its plant could limit or shut down the Company's
production. Through June 30, 1997, the Company experienced some equipment
failures, none of which lasted more than two days. In order to reduce the risk
of equipment failure, the Company follows a comprehensive maintenance and loss
prevention program, has on-site maintenance and repair facilities, and maintains
an inventory of spare parts and machinery. For example, the Company maintains a
spare EAF transformer as well as spare caster parts, mechanical parts and
electrical controls for its cranes and other tools. No assurance can be given,
however, that material shutdowns will not occur in the future or that a shutdown
would not have a material adverse affect on the Company. In addition to
equipment failures, the mill is also subject to the risk of catastrophic loss.
SIGNIFICANT CAPITAL REQUIREMENTS
The Company's business is capital intensive and will require substantial
expenditures for, among other things, the purchase and maintenance of equipment
used in its steelmaking and finishing operations and compliance with
environmental laws. In addition, the construction and start-up of the Cold Mill,
IDI and Caster Projects (collectively, the "Expansion Projects") will require
substantial capital. The Company may also require additional financing in the
event it decides to enter into strategic alliances, make acquisitions, or build
additional plants. The extent of additional financing will depend on the success
of the Company's business. There can be no assurance that additional financing,
if needed, will be available to the Company or, if available, that it can be
obtained on terms acceptable to the Company and within the limitations contained
in the Company's Credit Agreement (as defined) or any future financing,
including the IDI Financing (as defined). See "-- Restrictive Covenants" and
"Description of Certain Indebtedness."
The Company currently estimates that the funds required for the
construction and start-up of (i) the Cold Mill Project, which is expected to be
completed in the fourth quarter of 1997, will total approximately $200.0
million, of which approximately $136.3 million has been expended thereon through
June 30, 1997, (ii) the IDI Project, which is expected to be completed in 1998,
will total approximately $95.0 million and (iii) the Caster Project, which is
expected to be completed in the first half of 1998, will total approximately
$85.0 million (excluding working capital and start-up costs), of which
approximately $14.9 million has been expended thereon through June 30, 1997.
There can be no assurance that the Expansion Projects will be completed as
planned or at the costs currently budgeted or that the Company will have
adequate sources of funds for any such future capital expenditures.
The Company intends to use cash on hand, funds from operations, borrowings
under the Company's Credit Agreement and borrowings by IDI to finance the
construction and startup of the Expansion Projects. Borrowings under the Credit
Agreement are conditioned upon the Company's compliance with various financial
and other covenants and other conditions set forth therein and, as a result,
there can be no assurance that such financing will be available to the Company
as planned. See "Description of Certain Indebtedness." In addition, the Company
expects to finance $60.0 million of the IDI Project with a separate IDI credit
facility (the "IDI Financing"). The IDI Financing is dependent upon securing and
closing a $50.0 million standby construction and term loan, together with a
$10.0 million revolving credit facility to fund current operations. See
"Description of Certain Indebtedness -- The IDI Financing." Although IDI expects
to secure a commitment for and close the IDI Financing during the third quarter
of 1997, no assurances can be given that such a commitment will in fact be
secured, or, even if secured, that IDI will be able to satisfy all of the
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<PAGE> 14
terms and conditions established by the lenders in order to close the IDI
Financing. Failure to obtain and close the IDI Financing could delay or prevent
the IDI Project, which could have a material adverse effect on the Company.
COST OF STEEL SCRAP AND OTHER RAW MATERIALS
The Company's principal raw material is scrap metal derived from, among
other sources, junked automobiles, industrial scrap, railroad cars and railroad
track materials, agricultural machinery and demolition scrap from obsolete
structures, containers and machines. The prices for scrap are subject to market
forces largely beyond the control of the Company, including demand by U.S. and
international steel producers, freight costs and speculation. The prices for
scrap have varied significantly and may vary significantly in the future. In
addition, the Company's operations require substantial amounts of other raw
materials, including various types of pig iron, alloys, refractories, oxygen,
natural gas and electricity, the price and availability of which are also
subject to market conditions. The Company may not be able to adjust its product
prices, especially in the short-term, to recover the costs of increases in scrap
and other raw material prices. The Company's future profitability may be
adversely affected to the extent it is unable to pass on higher raw material and
energy costs to its customers. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business -- Steel Scrap and
Scrap Substitute Resources" and "-- Energy Resources."
CYCLICALITY OF STEEL INDUSTRY AND END USER MARKETS
The steel industry is highly cyclical in nature and sensitive to general
economic conditions. The financial condition and results of operations of
companies in the steel industry are generally affected by macroeconomic
fluctuations in the U.S. and global economies. The Company is particularly
sensitive to trends in the automotive, oil and gas, gas transmission,
construction, commercial equipment, rail transportation, agriculture and durable
goods industries, because these industries are significant markets for the
Company's products and are highly cyclical. In the early 1980s, U.S. integrated
steel producers incurred significant restructuring charges associated with
efforts to reduce excess capacity. Significant losses, and bankruptcies in
certain cases, occurred as a result of a number of factors, including worldwide
production overcapacity, increased U.S. and global competition, low levels of
steel demand, substitution of alternative materials for steel, high labor costs,
inefficient plants and the strength of the U.S. dollar relative to other
currencies. In the late 1980s, earnings of U.S. steel producers benefitted from
improved industry conditions. During the 1990 to 1992 downturn, substantial
excess worldwide manufacturing capacity for steel products, combined with a
worldwide economic slowdown, resulted in a substantial decrease in the demand
for steel products, increased competition and a decline in financial performance
for the steel industry. Although demand for steel products recovered and the
profitability of the industry has improved recently, there can be no assurance
that economic conditions will remain favorable to the steel industry. Future
economic downturns, a stagnant economy or currency fluctuations may adversely
affect the Company's business, results of operations and financial condition.
COMPETITION
Competition within the steel industry can be intense. The Company competes
primarily on the basis of price, quality, and the ability to meet customers'
product specifications and delivery schedules. Many of the Company's competitors
are integrated steel producers which are larger, have substantially greater
capital resources and experience, and, in some cases, have lower raw material
costs than the Company. The Company also competes with other mini-mills which
may have greater financial resources. The highly competitive nature of the
industry, combined with excess production capacity in some products, may in the
future exert downward pressure on prices for certain of the Company's products.
In addition, in the case of certain product applications, steel competes with
other materials, including plastics, aluminum, graphite composites, ceramics,
glass, wood and concrete. There can be no assurance that the Company will be
able to compete effectively in the future.
U.S. The Company's products compete with many integrated steel producers,
such as Rouge Steel Co. and National Steel Corp.'s Great Lakes Steel Division in
the Detroit area, LTV Steel Co., Inc., Inland Steel Co., Bethlehem Steel Corp.,
U.S. Steel, Acme Steel Co. and Beta Steel Corp. in the northwest Indiana and
12
<PAGE> 15
Chicago area, as well as a growing number of hot-rolled mini-mills, such as
Nucor Corporation's ("Nucor's") Crawfordsville, Indiana and Hickman, Arkansas
facilities and Gallatin Steel Company's mini-mill in Ghent, Kentucky, Delta
Steel, the BHP/Northstar joint venture in Delta, Ohio, and TRICO Steel, the
three-way joint venture in Alabama among LTV Steel Co., Inc., Sumitomo Metal USA
Corp. and British Steel.
Despite significant reductions in raw steel production capacity by major
U.S. producers over the last decade, the U.S. industry continues to be adversely
affected, from time to time, by excess world capacity. According to the American
Iron and Steel Institute (the "AISI"), annual U.S. raw steel production capacity
was reduced from approximately 154 million tons in 1982 to approximately 116
million tons in 1996. This reduction resulted in higher utilization rates.
Average utilization of U.S. industry capacity improved from approximately 61% in
the 1982 to 1986 period to approximately 83% in the 1987 to 1991 period, to
approximately 89% in 1993, to 93% in 1994 and 1995, and to 91% in 1996. Recent
improved production efficiencies also have begun to increase overall production
capacity in the United States. Excess production capacity exists in certain
product lines in U.S. markets and, to a greater extent, worldwide. Increased
industry overcapacity, coupled with economic recession, would intensify an
already competitive environment.
Over the last decade, extensive downsizings have necessitated costly
restructuring charges that, when combined with highly competitive market
conditions, have resulted at times in substantial losses for some U.S.
integrated steel producers. A number of U.S. integrated steel producers have
gone through bankruptcy reorganization. These reorganizations have resulted in
somewhat reduced capital costs for these producers and may permit them to price
their steel products at levels below those that they could have otherwise
maintained.
An increasing number of mini-mills have entered or are expected to enter
the EAF-based thin-slab/flat-rolled steel market in the next several years.
These mini-mills have cost structures and management cultures more closely akin
to those of the Company than to the integrated producers. Flat-rolled mini-mill
production capacity increased from 4.0 million tons in 1994 to approximately 7.3
million tons in 1996, and industry sources expect this cumulative flat-rolled
mini-mill capacity to reach 14.9 million tons in 1997 and up to 18.7 million
tons in 1998. The Company's penetration into the flat-rolled steel market is
limited by geographic considerations, to some extent by gauge and width of
product specifications and by metallurgical and physical quality requirements.
Based on product type and geographic location, the Company believes it will most
closely compete with the following mini-mills: Nucor's Crawfordsville, Indiana
facility, Gallatin Steel's Ghent, Kentucky facility, Delta Steel's Delta, Ohio
facility, and, to a more limited extent, Nucor's Hickman, Arkansas facility,
Nucor's Berkeley County, South Carolina facility, and TRICO Steel's facility in
northern Alabama. Each of these mills produces hot-rolled product. However, an
affiliate of Delta Steel is expected to produce hot-rolled galvanized product,
and Nucor's Crawfordsville, Indiana facility produces cold-rolled and
cold-rolled galvanized products.
Non-U.S. U.S. steel producers face significant competition from certain
non-U.S. steel producers who may have lower labor costs. In addition, U.S. steel
producers may be adversely affected by fluctuations in the relationship between
the U.S. dollar and non-U.S. currencies. Furthermore, some non-U.S. steel
producers have been owned, controlled or subsidized by their governments, and
their decisions with respect to production and sales may be, or may have been in
the past, influenced more by political and economic policy considerations than
by prevailing market conditions. Some non-U.S. producers of steel and steel
products have continued to ship into the U.S. market despite decreasing profit
margins or losses. If certain pending trade proceedings ultimately do not halt
or otherwise provide relief from such trade practices, other relevant U.S. trade
laws are weakened, world demand for steel eases or the U.S. dollar strengthens,
an increase in the market share of imports may occur, which could adversely
affect the pricing of the Company's products. The costs for current and future
environmental compliance may place U.S. steel producers, including the Company,
at a competitive disadvantage with respect to non-U.S. steel producers, which
are not subject to environmental requirements as stringent as those in the U.S.
RISKS RELATED TO SCRAP SUBSTITUTES
The processes that the Company currently plans to use in the IDI Project to
produce DRI and to further refine it into liquid pig iron (the "IDI Process")
has not been previously used commercially for this purpose.
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<PAGE> 16
There are many alternative technologies available to produce commercially viable
scrap substitute material, but only a small number have been commercially
operated. The technologies that the Company intends to use in its IDI Project
have not been previously combined into a steel scrap substitute production
facility. There is a risk, therefore, that the IDI Process will not produce DRI
or that the DRI will not be able to be further refined into liquid pig iron for
a price that makes it commercially viable as a steel scrap substitute. If the
IDI Process does not work as planned, the capital costs incurred in designing
and building the facility may be largely unrecoverable, the planned 500,000
tonnes of low cost liquid pig iron that was intended to be available annually to
help lower the Company's overall metallics costs might be unavailable or
available at higher costs, the Company may be required under the terms of the
IDI Financing to purchase all of IDI's scrap substitute output capacity, even if
the material is substandard and/or overpriced relative to other available scrap
substitutes or steel scrap, and the impact could be materially adverse to the
Company. In addition, the Company does not have any experience in the production
of DRI and there can be no assurance that the Company will be able to
successfully design, construct and operate the IDI Project or that the expected
production capacity will be achieved.
Although the technologies to be employed by Qualitech to produce iron
carbide in its Corpus Christi, Texas plant currently under construction have
been used commercially, Qualitech is a start-up company, and there is no
assurance that it will be able to successfully complete that project, or that
the project, when completed, will produce commercially viable iron carbide. If
this material were not available to the Company, the Company could be unable to
secure a comparable amount of similar material or the cost to the Company could
be materially higher, causing the Company to rely more heavily on potentially
higher-priced steel scrap for a greater proportion of its melt mix. See
"Business -- The Company's Steelmaking Equipment and Technology -- The IDI
Project" and "-- Steel Scrap and Scrap Substitute Resources."
RELIANCE ON MAJOR CUSTOMERS
The Company has entered into long-term "off-take" contracts with Heidtman
and with Preussag pursuant to which they have agreed to purchase an aggregate of
at least 42,000, or 36%, of the Company's monthly output capacity. If the
Company's actual output is less than its full capacity, sales to these customers
increase as a percentage of the Company's total net sales. For the year ended
December 31, 1996, these customers accounted for 36% and 12%, respectively, of
the Company's total net sales, and the Company's top five customers accounted
for approximately 65% of its total net sales. For the six months ended June 30,
1997, Heidtman and Preussag accounted for 32% and 10%, respectively, of the
Company's total net sales, and the Company's top five customers accounted for
approximately 63% of its total net sales. Although the Company expects to
continue to depend upon certain customers for a significant percentage of its
net sales, there can be no assurance that any of the Company's customers will
continue to purchase its steel from the Company. A loss of one or more of them,
or of a group of its next largest customers could have a material adverse effect
on the Company's results of operations and financial condition. Heidtman is an
affiliate of a stockholder of the Company. The President and Chief Executive
Officer of Heidtman serves on the Company's Board of Directors. Preussag is a
stockholder of the Company and a representative of Preussag serves on the
Company's Board of Directors. If the terms of the "off-take" contracts are or
become burdensome to these companies, or if a dispute arises over the contracts,
either or both of the "off-take" providers could be viewed as having a conflict
of interest between what they perceive to be best for their companies as
"off-take" buyers and what is best for the Company as the product seller.
POTENTIAL COSTS OF ENVIRONMENTAL COMPLIANCE
U.S. steel producers, including the Company, are subject to stringent
federal, state and local laws and regulations relating to, among other things,
wastewater, air emissions, toxic use reduction and hazardous material disposal.
The Company believes that its facility is in material compliance with these laws
and regulations and does not believe that future compliance with such laws and
regulations will have a material adverse effect on its results of operations or
financial condition. The Company has made, and will continue to make,
expenditures to comply with such provisions. The Company generates certain waste
products, such as EAF dust, that are classified as hazardous waste and must be
properly disposed of under applicable
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<PAGE> 17
environmental laws, which, despite the Company's due care, could result in the
imposition of strict liability for the costs of clean-up of any landfills to
which the waste may have been transported.
Environmental legislation and regulations and related administrative
policies have changed rapidly in recent years. It is likely that the Company
will be subject to increasingly stringent environmental standards in the future
(including those under the Clean Air Act Amendments of 1990, the Clean Water Act
Amendments of 1990, stormwater permit program and toxic use reduction programs)
and will be required to make additional expenditures, which could be
significant, relating to environmental matters on an ongoing basis. In addition,
due to the possibility of unanticipated regulatory or other developments, the
amount and timing of future environmental expenditures may vary substantially
from those currently anticipated.
DEPENDENCE UPON KEY MANAGEMENT
The Company's ability to maintain its competitive position is dependent to
a large degree on the services of its senior management team, including Keith E.
Busse, President and Chief Executive Officer, Mark D. Millett, Vice President of
Melting and Casting, Richard P. Teets, Jr., Vice President of Rolling and
Finishing, and Tracy L. Shellabarger, Vice President and Chief Financial
Officer. Although these senior managers all have employment agreements with, and
are substantial stockholders of, the Company, there can be no assurance that
such individuals will remain with the Company. The loss of the services of any
of these individuals or an inability to attract, retain and maintain additional
senior management personnel could have a material adverse effect on the Company.
There can be no assurance that the Company will be able to retain its existing
senior management personnel or to attract additional qualified senior management
personnel. See "Management." The Company maintains key man life insurance on
Messrs. Busse, Millett, Teets and Shellabarger.
RESTRICTIONS ON PAYMENT OF DIVIDENDS ON COMMON STOCK
The Company has never paid any dividends on its Common Stock and does not
anticipate paying dividends on its Common Stock in the foreseeable future. Under
the Company's amended and restated Credit Agreement dated as of June 30, 1997
(the "Credit Agreement"), the Company may pay dividends in an aggregate
cumulative amount not exceeding cumulative net income for the period from
January 1, 1997 through the most recently completed fiscal quarter preceding
such payment. See "Dividend Policy" and "Description of Certain Indebtedness."
RESTRICTIVE COVENANTS
The Credit Agreement restricts the Company's ability to incur additional
indebtedness, make capital expenditures, make loans or advances to, or make an
investment in other entities, and create liens on its properties. The Credit
Agreement contains additional restrictive covenants, including among others,
covenants restricting the Company and its subsidiary with respect to disposing
of property or assets, paying dividends, entering into sale-leaseback
transactions, providing guarantees, entering into transactions with affiliates,
mergers and consolidations and the modification of certain agreements. In
addition, the Credit Agreement requires the Company to meet certain financial
tests. These restrictions may make it more difficult for the Company to operate
in a manner that it deems necessary or appropriate to take advantage of
opportunities, to adjust to operational difficulties, or to respond to other
developments. See "Description of Certain Indebtedness."
POSSIBLE VOLATILITY OF STOCK PRICES
The market price for shares of the Common Stock may be significantly
affected by such factors as the Company's net sales, earnings and cash flow, the
difference between the Company's actual results and results expected by
investors and analysts, news announcements including price reductions by the
Company or its competitors or changes in general market conditions. In addition,
broad market fluctuation and general economic conditions may adversely affect
the market price of the Common Stock, regardless of the Company's actual
performance.
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<PAGE> 18
SHARES ELIGIBLE FOR FUTURE SALE
The future sale of a substantial number of shares of Common Stock in the
public market following the offerings, or the perception that such sales could
occur, could adversely affect the market price for the Common Stock and could
make it more difficult for the Company to raise funds through equity offerings
in the future. Upon completion of the offerings, the Company expects to have
49,122,294 shares of Common Stock outstanding including 27,997,931 restricted
shares held by persons who may be deemed affiliates of the Company). The
restricted shares may in the future be sold without registration under the
Securities Act of 1933 to the extent permitted by Rule 144 under the Securities
Act or any applicable exemption under the Securities Act. See "Shares Eligible
for Future Sale." In connection with the offerings, the Company, its executive
officers and directors, the Selling Stockholders, and certain other stockholders
of the Company, have agreed that, subject to certain exceptions, they will not
sell, offer or contract to sell any shares of Common Stock without the prior
written consent of Morgan Stanley & Co. Incorporated, for a period of 90 days
after the date of this Prospectus. Certain of the Company's existing
stockholders also have registration rights with respect to their Common Stock.
In addition, the Company has filed registration statements under the Securities
Act to register shares of Common Stock reserved for issuance under the Company's
1994 and 1996 Incentive Stock Option Plans, thus permitting the resale of such
shares by non-affiliates upon issuance in the public market without restriction
under the Securities Act. As of June 30, 1997, options to purchase 885,784
shares were outstanding under these Plans. See "Management -- Employee Plans,"
"Description of Capital Stock -- The Registration Agreement," "Shares Eligible
for Future Sale" and "Underwriters."
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Indiana Business Corporation Law (the "BCL"), may
have the effect of delaying or preventing transactions involving a change of
control of the Company, including transactions in which stockholders might
otherwise receive a substantial premium for their shares over then current
market prices, may limit the ability of stockholders to approve transactions
that they may deem to be in their best interests or may delay or frustrate the
removal of incumbent directors. See "Description of Capital Stock -- Certain
Provisions of Indiana Law Regarding Takeovers."
DILUTION
Investors in the Common Stock offered hereby will experience an immediate
dilution of $18.63 per share in the net tangible book value of their shares of
Common Stock. See "Dilution."
FORWARD LOOKING STATEMENTS
This Prospectus contains a number of statements regarding the Company's
expectations, intent, or beliefs about future events. These statements are
intended as "forward-looking statements" under the Private Securities Litigation
Act of 1995. Where any such forward-looking statement is made, whether in the
"Business" section, in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section, or elsewhere in this Prospectus,
it is intended to convey the Company's good faith expectations about the
subject, based upon its reasonable beliefs concerning the pertinent facts and
assumptions. The Company cautions that, while it believes such facts or
assumptions to be reasonable and makes them in good faith, assumed facts or
expectations about future events may and often do vary from actual results, the
differences between the assumptions and actual results can be material, and
there can be no assurance that the forward-looking statement will be realized.
The factors and considerations described in this section of the Prospectus as
"Risk Factors" and throughout the Prospectus are intended to caution that any
such forward-looking statements are subject, among other things, to the risks
and uncertainties described in these "Risk Factors" and assumptions regarding
future competitive, economic, technological and market conditions, the accurate
prediction of which may be difficult and may involve the assessment of events
beyond the Company's control. Actual achievements and events may differ
materially from those expressed or implied in such forward-looking statements.
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<PAGE> 19
USE OF PROCEEDS
The net proceeds to the Company from the offerings are estimated to be
approximately $29.5 million, after deducting estimated underwriting discounts
and commissions and estimated offering expenses. The Company will not receive
any proceeds from the sale of Common Stock by the Selling Stockholders.
The Company intends to use the net proceeds of the offerings for capital
expenditures, including the addition of a seventh rolling mill stand to the
Company's hot strip mill, and for general corporate purposes. Pending such use,
the Company expects to pay down its revolving credit obligations (which
obligations had an interest rate of 7.28% on July 24, 1997 and which mature in
June 2002) or invest these funds in short-term, marketable, investment grade
securities. See "Risk Factors -- Significant Capital Requirements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is traded in the over-the-counter market and
since November 22, 1996 has been quoted on the Nasdaq National Market System
(the "Nasdaq Stock Market") under the symbol "STLD." The following table sets
forth for the periods indicated the high and low closing sale prices as reported
by Nasdaq:
<TABLE>
<CAPTION>
COMMON
STOCK PRICE
---------------
HIGH LOW
------ ----
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Fourth Quarter (beginning November 22, 1996)................ $21 $16 3/4
YEAR ENDING DECEMBER 31, 1997:
First Quarter............................................... 25 3/8 17 3/8
Second Quarter.............................................. 26 3/8 16 1/2
Third Quarter (through August 13, 1997)..................... 28 3/4 24 3/4
</TABLE>
A recent reported last sale price for the Company's Common Stock as
reported on the Nasdaq Stock Market is set forth on the cover page of this
Prospectus. On June 30, 1997, there were approximately 300 holders of record and
approximately 6,250 beneficial owners of the Company's Common Stock.
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently anticipates that all of its future earnings will be
retained to finance the expansion of its business and does not anticipate paying
cash dividends on its Common Stock in the foreseeable future. Any determination
to pay cash dividends in the future will be at the discretion of the Company's
Board of Directors after taking into account various factors, including the
Company's financial condition, results of operations, outstanding indebtedness,
current and anticipated cash needs and plans for expansion. Under the terms of
the Company's Credit Agreement, the Company may make stock payments, including
payment of dividends, in an aggregate cumulative amount not exceeding cumulative
net income for the period from January 1, 1997 through the most recently
completed fiscal quarter preceding such payment.
17
<PAGE> 20
DILUTION
The net tangible book value of the Company as of June 30, 1997 was
approximately $283.4 million or approximately $5.92 per share of Common Stock.
Net tangible book value per share is determined by dividing the net tangible
book value (total tangible assets less total liabilities) by the number of
outstanding shares of Common Stock. After giving effect to the sale by the
Company of 1,255,971 shares of Common Stock offered hereby and the application
of the net proceeds as set forth under "Use of Proceeds," the net tangible book
value of the Company as of June 30, 1997, would have been approximately $312.9
million or $6.37 per share, representing an immediate increase in net tangible
book value of $.45 per share to the existing stockholders and an immediate
dilution to investors purchasing shares in the offerings of $18.63 per share.
The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Public offering price................................................. $ 25.00
-------
Net tangible book value per share at June 30, 1997.................. $5.92
-----
Increase per share attributable to sale of Common Stock in the
offerings........................................................ .45
-----
Pro forma net tangible book value per share after the offerings....... 6.37
-------
Dilution per share to new investors................................... $ 18.63
=======
</TABLE>
The foregoing table does not give effect to the exercise of options to
purchase 885,784 shares of Common Stock outstanding on June 30, 1997, at a
weighted average exercise price of $9.42 per share. If all such outstanding
options were exercised, the dilution to new investors would be $18.58 per share.
The following table sets forth on a pro forma basis as of June 30, 1997,
the number of shares and percentage of total outstanding Common Stock purchased,
the total consideration and percentage of total consideration paid and the
weighted average price per share paid by existing stockholders and by investors
purchasing the shares of Common Stock offered by the Company hereby.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION WEIGHTED
---------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)........ 47,866,323 97.4% $308,801,171 90.8% $ 6.45
New investors................... 1,255,971 2.6 31,399,275 9.2 25.00
---------- ------ ------------ -----
Total................. 49,122,294 100.0% $340,200,446 100%
========== ====== ============ =====
</TABLE>
- ------------
(1) Sales by the Selling Stockholders in the offerings will cause the number of
shares held by existing stockholders to be reduced, and the number of shares
held by new investors to be increased by 7,144,029. See "Principal and
Selling Stockholders."
18
<PAGE> 21
CAPITALIZATION
The following table sets forth the actual cash and cash equivalents,
current maturities of long-term debt and capitalization of the Company as of
June 30, 1997, and as adjusted to give effect to the offerings. This information
should be read in conjunction with "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements, including the notes thereto, appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------
AS
ACTUAL ADJUSTED
-------- --------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT PER SHARE
INFORMATION)
<S> <C> <C>
Cash and cash equivalents.............................................. $ 22,293 $ 51,836
======= =======
Current maturities of long-term debt................................... $ 5,931 $ 5,931
======= =======
Long-term debt, excluding current maturities:
Senior term loans.................................................... $150,000 $150,000
Other(1)............................................................. 49,530 49,530
------- -------
Total long-term debt.............................................. $199,530 $199,530
Stockholders' equity:
Common Stock, $.01 par value per share, 100,000,000 shares
authorized, 47,866,323 shares outstanding, 49,122,294 shares
issued and outstanding, as adjusted(2)............................ $ 479 $ 492
Additional paid-in capital............................................. 304,078 333,608
Accumulated deficit.................................................... (9,604) (9,604)
------- -------
Total stockholders' equity........................................ 294,953 324,496
------- -------
Total capitalization......................................... $494,483 $524,026
======= =======
</TABLE>
- ------------
(1) For a description of other long-term debt, see Note 3 to the Company's
consolidated financial statements appearing elsewhere in this Prospectus.
(2) Excludes 885,784 shares of Common Stock issuable upon exercise of stock
options outstanding on June 30, 1997 at a weighted average exercise price of
$9.42 per share.
19
<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for the dates and periods indicated. The selected consolidated financial
data for the period from September 7, 1993 (date of inception) through December
31, 1993, as of December 31, 1993, 1994, 1995 and 1996, and for each of the
three years in the period ended December 31, 1996, were derived from the
Company's consolidated financial statements which have been audited by Deloitte
& Touche LLP. The selected consolidated financial data as of and for the six
months ended June 29, 1996 and June 30, 1997 are derived from the unaudited
consolidated financial statements of the Company and, in the opinion of
management, include all adjustments (consisting only of normal recurring
accruals) necessary to present fairly such data. Operating results for interim
periods are not necessarily indicative of a full year's operations. The
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements, including the notes thereto, appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 7, 1993
(DATE OF INCEPTION) YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
THROUGH ----------------------------- -----------------------------
DECEMBER 31, 1993 1994 1995 1996 JUNE 29, 1996 JUNE 30, 1997
------------------- ------- -------- -------- ------------- -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................... $ -- $ -- $ 137 $252,617 $ 98,662 $ 200,777
Cost of goods sold.................. -- -- 3,169 220,563 95,591 150,180
------- ------- -------- -------- -------- --------
Gross profit (loss)............... -- -- (3,032) 32,054 3,071 50,597
Selling, general and administrative
expenses.......................... 1,159 4,192 13,580 13,838 5,894 12,479
------- ------- -------- -------- -------- --------
Income (loss) from operations..... (1,159) (4,192) (16,612) 18,216 (2,823) 38,118
Foreign currency gain (loss)........ -- (4,952) (3,272) 328 260 261
Interest expense(1)................. (2) (43) (564) (22,684) (12,128) (3,995)
Interest income..................... 1 307 560 1,581 579 1,264
------- ------- -------- -------- -------- --------
Income (loss) before income taxes
and extraordinary loss............ (1,160) (8,880) (19,888) (2,559) (14,112) 35,648
Provision for income taxes.......... -- -- -- -- -- 5,494
------- ------- -------- -------- -------- --------
Income (loss) before extraordinary
loss.............................. (1,160) (8,880) (19,888) (2,559) (14,112) 30,154
Extraordinary loss(2)............... -- -- -- (7,271) -- --
------- ------- -------- -------- -------- --------
Net income (loss)................. $(1,160) $(8,880) $(19,888) $ (9,830) $ (14,112) $ 30,154
======= ======= ======== ======== ======== ========
Income (loss) per share before
extraordinary loss(3)............. $ (0.07) $ (0.36) $ (0.62) $ (0.07) $ (0.41) $ 0.63
Per share effect of extraordinary
loss.............................. -- -- -- (0.21) -- --
------- ------- -------- -------- -------- --------
Net income (loss) per share(3).... $ (0.07) $ (0.36) $ (0.62) $ (0.28) $ (0.41) $ 0.63
======= ======= ======== ======== ======== ========
Weighted average common shares
outstanding(3).................... 15,931 24,679 31,975 34,571 34,695 47,851
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents........... $ 117 $28,108 $ 6,884 $ 57,460 $ 27,823 $ 22,293
Working capital (deficit)........... (29) 8,230 (14,488) 96,142 44,293 60,676
Property, plant and equipment,
net............................... 200 54,566 274,197 339,263 277,463 410,272
Total assets........................ 521 94,618 320,679 522,291 389,484 552,603
Long-term debt (including current
maturities)....................... 800 11,949 223,054 207,343 258,514 205,461
Stockholders' equity (deficiency)... (429) 62,536 62,972 264,566 93,961 294,953
</TABLE>
(footnotes on following page)
20
<PAGE> 23
- ------------
(1) Excludes interest capitalized during the construction of the mini-mill and
cold mill related to costs that are considered to be assets qualifying for
interest capitalization under Statement of Financial Accounting Standards
("SFAS") No. 34, Capitalization of Interest Cost. Capitalized interest for
the years ended December 31, 1994, 1995 and 1996 was $.3 million, $10.1
million and $1.0 million, respectively. Capitalized interest for the six
months ended June 29, 1996 and June 30, 1997 was $60,000 and $3.8 million,
respectively.
(2) Represents the loss on early retirement of the Company's subordinated notes
of approximately $7.3 million in the fourth quarter of 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company will incur an extraordinary loss of approximately
$7.6 million (net of tax benefit of $5.1 million) in the third quarter of
1997 as a result of the refinancing of the Company's Credit Agreement. See
"Description of Certain Indebtedness."
(3) Net income (loss) per share for the period from September 7, 1993 (date of
inception) through December 31, 1993, for the years ended December 31, 1994
and 1995 and for the six months ended June 29, 1996 were calculated by
dividing the net loss by the weighted average number of shares of common
stock outstanding including the anti-dilutive effect of shares issued from
September 23, 1995 through September 23, 1996 using the treasury stock
method. Net loss per share for the year ended December 31, 1996 excludes the
anti-dilutive effect of common stock equivalents.
21
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by reference to, the Company's consolidated financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
Certain information contained below, including information with respect to the
Company's plans with respect to the Cold Mill, IDI and Caster Projects, are
forward-looking statements. See "Risk Factors" for a discussion of important
factors which could cause actual results to differ materially from the forward-
looking statements contained herein.
OVERVIEW
Steel Dynamics owns and operates a new, state-of-the-art flat-rolled steel
mini-mill, which commenced operations in January 1996. The Company was founded
in September 1993 by executives and managers who pioneered the development of
thin-slab/flat-rolled compact strip production technology and directed the
construction and operation of the world's first thin-slab/flat-rolled mini-mill.
Building upon their past experience with CSP technology, management founded SDI
to produce steel more efficiently, at a lower cost and of higher quality. Steel
Dynamics' goal is to become the low cost producer of a broad range of high
quality flat-rolled steel products, including hot-rolled, cold-rolled and
galvanized sheet, as well as other specialty steel products, and to serve more
markets than any other flat-rolled mini-mill. In addition, the Company intends
to participate in the development and use of new technologies to produce a broad
range of steel products.
Pursuant to the Company's plan to develop downstream processing facilities
to produce further value-added steel products, Steel Dynamics is currently
constructing a cold mill contiguous to the mini-mill, with a 1.0 million ton
annual capacity which is scheduled for completion during the fourth quarter of
1997. Steel Dynamics also plans to add a second melting furnace, a second caster
and tunnel furnace, and an additional coiler to expand its annual production
capacity of hot-rolled steel from 1.4 million tons to approximately 2.4 million
tons. The Caster Project is expected to be completed in the first half of 1998.
In addition, the Company intends to construct a 600,000 tonne annual capacity
plant for the manufacture of DRI, which the Company expects to be completed in
1998. The DRI, after further refining into 500,000 tonnes of liquid pig iron,
will be used in SDI's mini-mill as a steel scrap substitute.
Management strategically located the Company's mini-mill within close
proximity to its natural customer base, steel service centers and other end
users, abundant supplies of automotive and other steel scrap, competitive
sources of power, and numerous rail and truck transportation routes. Steel
Dynamics believes that its strategic location provides it with sales and
marketing as well as production cost advantages. The Company has secured a
stable baseload of sales through long-term "off-take" contracts with two major
steel consumers, a 30,000 ton per month sales contract with Heidtman, a major
Midwest-based steel service center and distributor and an affiliate of one of
the Company's stockholders, and a 12,000 ton per month sales contract with
Preussag, a major German steel manufacturer and a stockholder of the Company,
with affiliate distributors and steel service centers throughout the United
States. The Company has also sought to assure itself of a secure supply of steel
scrap and scrap substitute. To accomplish this objective, SDI has entered into a
long-term scrap purchasing services contract with OmniSource, one of the largest
scrap dealers in the Midwest and an affiliate of one of the Company's
stockholders. In addition, the Company has also sought to assure itself of a
secure supply of scrap substitute material for use as a lower cost complement to
steel scrap as part of the Company's melt mix. SDI has entered into a long-term
300,000 tonne per year "off-take" contract to purchase iron carbide from
Qualitech's iron carbide facility currently under construction in Corpus
Christi, Texas, which is expected to be completed in 1998. Additional scrap
substitute material is expected to be provided through the IDI Project.
The Company's business strategy is to use advanced CSP hot-rolled
steelmaking and cold-rolling technologies to produce high surface quality
flat-rolled steel in a variety of value-added sizes, gauges and surface
treatments, emphasizing low production costs, reliable product quality and
excellent customer service. In addition, SDI intends to remain financially
strong and competitive through the selective purchasing of scrap and scrap
substitutes to offset the effects of cyclical cost/price imbalances.
22
<PAGE> 25
The Company's operations are subject to the cyclical nature of the steel
industry and the U.S. economy as a whole. U.S. steel industry production was
approximately 105.3 million tons in 1996, an increase of 4% from an average
during the prior three-year period of approximately 101.1 million tons. This
increase was due primarily to an improvement of general economic conditions and
increased demand for durable goods. Other factors which affect the performance
of the Company include increasing competition from U.S. and international steel
producers (both integrated mills and mini-mills), worldwide supply and demand
for hot bands and the strength of the U.S. dollar relative to the currencies of
other steel producing countries.
The following table summarizes the annual raw steel capacity, raw steel
production, utilization rates and finished shipments information for the U.S.
steel industry (as reported by the AISI) for the years 1994 through 1996:
<TABLE>
<CAPTION>
U.S. RAW STEEL U.S. RAW STEEL TOTAL U.S.
YEAR CAPABILITY PRODUCTION UTILIZATION SHIPMENTS
------------------------------- -------------- ------------------- ----------- ----------
(THOUSANDS OF TONS)
<S> <C> <C> <C> <C>
1994........................... 108,200 100,579 93.0% 95,084
1995........................... 112,400 104,930 93.4 97,494
1996........................... 116,100 105,309 90.7 100,878
</TABLE>
The Company believes that the current market for flat-rolled steel appears
to be sufficiently strong to absorb the current capacity of integrated and
mini-mill producers. In 1995, spot prices for hot band dropped significantly in
the second and third quarters, by approximately $40 and $20 per ton,
respectively, before recovering by $10 per ton in the fourth quarter. Since the
first quarter of 1996 and through the second quarter of 1997, however, spot
prices for hot bands recovered an additional $40 per ton. Although Steel
Dynamics believes the immediate outlook for the U.S. economy remains positive,
there can be no assurance that the level of net tons shipped in the industry and
current price levels will continue or increase from present levels in view of
the modest nature of the improvement in the U.S. economy to date, increasing
worldwide competition within the steel industry and increasing steel production
capacity.
Net Sales. The Company's net sales are a function of net tons shipped,
prices and mix of products. SDI has experienced continued net sales growth since
start-up and expects that trend to continue due to increasing production and
shipments as well as improving pricing. In addition, the Company's products are
sold out through the end of the third quarter of 1997 (the latest date for which
Steel Dynamics has accepted orders).
SDI has not entered into any fixed-price, long-term (exceeding one calendar
quarter) contracts for the sale of steel. Although fixed price contracts may
reduce the risk of price declines, these contracts also limit the ability of the
Company to take advantage of price increases. All of the Company's orders are
taken at its announced pricing levels with price discounts for high volume
purchases when appropriate. SDI is also able to charge premium prices for
certain grades of steel, dimensions of product, or certain smaller volumes,
based upon the cost of production. When the Cold Mill Project is completed in
the fourth quarter of 1997, the Company will be able to manufacture more
value-added products requiring more exacting tolerances, thinner gauges, finer
surface conditions, and galvanized coatings, thereby enabling it to charge
premium prices for those products.
Of the Company's shipments through June 30, 1997, approximately 42% have
been purchased by Heidtman and Preussag pursuant to long-term "off-take"
contracts based upon market pricing. In addition to this stable baseload of
demand, the Company is continually seeking to attract new customers for its
products. The Company had 18 customers at the end of January 1996 and the number
of the Company's customers was 81 at the end of June 1997. SDI is also
continually seeking to enter new markets and believes that when the Cold Mill
Project is completed, it will be able to broaden its customer base, diversify
its product mix and access more profitable markets. See "Business -- The
Flat-Rolled Market."
Cost of Goods Sold. All direct and indirect manufacturing costs are
included in costs of goods sold. The principal elements comprising Steel
Dynamics' costs of goods sold are steel scrap and scrap substitutes,
electricity, natural gas, oxygen and argon, electrodes, alloys, depreciation and
direct and indirect labor and benefits. During the start up of the cold mill
beginning in the fourth quarter of 1997, and prior to the Caster Project
commencing production, the Company will purchase hot bands from third parties.
The Company
23
<PAGE> 26
expects that the price paid for such hot bands will likely be greater than the
Company's cost to produce them once the Caster Project commences production.
Steel scrap and scrap substitutes represent the most significant component
of the Company's total cost of goods sold. Although SDI believes that there will
be an ample supply of high quality, low residual scrap in the future, the
Company recognizes that the construction of additional mini-mills has led to
increased demand for, and higher prices of, steel scrap. The Company believes
that, over the long-term, prices of steel scrap will continue to be volatile but
its price ranges will likely increase. As a result, Steel Dynamics has pursued a
three-part strategy to secure access to adequate supplies of steel scrap and
lower cost steel scrap substitute materials. First, the Company has entered into
a long-term steel scrap contract with OmniSource. Second, SDI has entered into
an iron carbide "off-take" contract with Qualitech. Third, the Company is
pursuing the IDI Project to produce DRI and liquid pig iron.
The Company purchases its electricity from American Electric Power ("AEP"),
pursuant to a contract which extends through 2005. The contract designates a
portion of the Company's load as "firm" with the majority of the load designated
as "interruptible." At full production, the blended rate under the contract is
expected to be between $.024 and $.025 per kilowatt hour. The Company has a
"primary firm" natural gas delivery contract on the Panhandle Eastern Pipeline
that extends through May 2000 and an interruptible delivery contract with
NIPSCO/NIFL/Crossroads that extends through December 2000. The Company's natural
gas contract, at a cost of $1.91 per decatherm, expires at the end of July 1997,
and the Company's current intention is to purchase its natural gas needs on the
spot market thereafter until such time as it determines that extended term
contracts are attractively priced. The Company maintains a liquid propane tank
farm on-site with sufficient reserves to sustain operations for approximately
two weeks in the event of an interruption in the natural gas supply. SDI
purchases all of its requirements for oxygen and argon from Air Products and
Chemicals, Inc. ("Air Products"), which built a large plant adjacent to the
mini-mill. As a result, the Company has been able to buy its oxygen and argon at
what SDI believes to be favorable prices. Steel Dynamics generally purchases its
other raw materials, such as electrodes and alloys, from various sources and
their availability and price are subject to market conditions. Air Products uses
its plant to supply other customers as well as the Company.
For manufacturing plant and equipment, the Company uses the
units-of-production method of depreciation.
The current work force of the Company consists of 359 employees as of June
30, 1997, of which 276 were employed in the hot strip mill, 79 were employed in
connection with the Cold Mill Project, and four were employed by IDI. For the
six months ended June 30, 1997, the Company's employment costs per ton shipped
(excluding Cold Mill and IDI Project employees) were approximately $16. The
Company has established certain incentive compensation programs specifically
designed to reward employee teams for their productivity efforts. Production
employees actively share in SDI's success through a production bonus, a
conversion cost bonus and a profit sharing plan. The Company's employees are not
represented by any labor unions.
Selling, General & Administrative. Selling, general and administrative
expenses are comprised of all costs associated with the sales,
finance/accounting, materials and transportation, and administrative
departments. These costs include labor and benefits, advertising, promotional
materials, bad debt expenses and professional fees. These costs are not directly
affected by sales volumes. SDI has established a Profit Sharing Plan for
eligible employees under which a minimum of 5% of pretax profits are paid into a
"profit sharing pool." The majority of the profit sharing pool is used to fund
the Profit Sharing Plan, with the balance paid to employees as a cash bonus in
March of each year. Selling, general and administrative expenses also include
all non-capitalized start-up costs associated with the construction of the Cold
Mill Project, including all labor and benefits, utilities and general supplies
and services. The Company expects that these costs will increase through the
construction and start-up of the Expansion Projects.
Interest Expense. During the construction of the mini-mill, the cold mill
and the second caster, the costs related to construction expenditures are
considered to be assets qualifying for interest capitalization under SFAS No.
34, Capitalization of Interest Cost. Capitalized interest for the year ended
December 31, 1994, 1995 and 1996 was $.3 million, $10.1 million, and $1.0
million, respectively. For the six months ended
24
<PAGE> 27
June 30, 1997, capitalized interest was $3.8 million, compared to $60,000 for
the six months ended June 29, 1996. Management expects that a majority of the
interest on the indebtedness incurred to finance the construction of the
Expansion Projects will be capitalized.
Extraordinary Loss. The Company used a portion of the net proceeds from
its initial public offering in November 1996 to prepay its subordinated notes.
This prepayment resulted in an extraordinary loss of approximately $7.3 million
for 1996, principally associated with the unamortized debt discount costs
relating to the notes. The Company will incur an extraordinary loss of
approximately $7.6 million (net of tax benefit of $5.1 million) in the third
quarter of 1997 attributable to prepayment penalties and a write-off of
financing costs relating to the refinancing of the Company's Credit Agreement.
See "Description of Certain Indebtedness."
RESULTS OF OPERATIONS
Founded in September 1993, SDI commenced primary grade steel production in
January 1996. Accordingly, the Company's historical results of operations are
not indicative of results to be expected in the future.
Net Sales. Net sales totaled approximately $252.6 million for 1996. SDI
commenced primary grade steel production on January 2, 1996, and has continued
to increase its net sales as its production of prime tons increased. As of the
end of June 1997, the Company was operating at an annualized production rate of
1.2 million tons, or 85% of full capacity. In addition, the average sales price
per prime ton increased from $302 for January 1996 to $357 for June 1997. For
1993, 1994 and 1995, during which time the mini-mill was under construction,
Steel Dynamics had no net sales other than $137,000 in December 1995 from the
sale of approximately 600 tons of secondary grade steel. For the six months
ended June 29, 1996 and June 30, 1997, net sales were approximately $98.7
million and $200.8 million, respectively.
Cost of Goods Sold. Cost of goods sold totaled approximately $220.6
million, or 87% of net sales, for 1996. For the six months ended June 29, 1996
and June 30, 1997, cost of goods sold were approximately $95.6 million and
$150.2 million, respectively. As the Company continues to increase the number of
prime tons sold, the Company expects that cost of goods sold will continue to
increase but, as a percentage of net sales, the cost of goods sold will
decrease. For 1995, cost of goods sold was $3.2 million.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were approximately $4.2 million, $13.6 million, and
$13.8 million for 1994, 1995, and 1996, respectively. For the six months ended
June 29, 1996 and June 30, 1997, selling, general, and administrative expense
was approximately $5.9 million and $12.5 million, respectively. The increase in
expenses for the first six months of 1997 was due primarily to approximately
$3.2 million of start-up costs for the Cold Mill and Caster Projects and
approximately $1.8 million of profit sharing expenses.
Interest Expense. Interest expense totaled approximately $43,000,
$564,000, and $22.7 million for 1994, 1995, and 1996, respectively. For the six
months ended June 29, 1996 and June 30, 1997, interest expense was $12.1 million
and $4.0 million, respectively. The low level of interest expense during 1994
and 1995 reflects the effect of capitalizing interest relating to construction
costs. The lower interest expense for the first six months of 1997 was primarily
due to lower debt levels resulting from the repayment of subordinated debt with
the net proceeds from the initial public offering and, to a lesser extent, lower
interest rates.
Foreign Currency Gain (Loss). The foreign currency gains and losses
represent transaction gains and losses incurred by the Company for purchases of
equipment used within the Company's mini-mill. A portion of the purchase price,
as stated within the contract to purchase the equipment, was denominated in
German marks. The Company committed to purchase the equipment in December 1993
with settlement of the liability primarily occurring during the construction
period of the mini-mill. No foreign currency financial instruments were entered
into to hedge against foreign currency movements until the first quarter of 1997
when the Company purchased German marks forward contracts approximately equal to
the unsettled liability. No commitments for equipment purchases denominated in a
foreign currency existed as of June 30, 1997. Foreign currency loss totaled
approximately $5.0 million and $3.3 million for 1994 and 1995, respectively. In
1996, the
25
<PAGE> 28
foreign currency gain totaled $328,000. For the six months ended June 29, 1996
and June 30, 1997, foreign currency gains were $260,000 and $261,000,
respectively. The Company's strategy for managing foreign currency risk will
depend on facts and circumstances of the related transaction, and the Company
will consider risk management strategies as appropriate.
Interest Income. Interest income totaled approximately $307,000, $560,000,
and $1.6 million for 1994, 1995, and 1996, respectively, and approximately
$579,000 and $1.3 million for the six months ended June 29, 1996 and June 30,
1997, respectively.
Extraordinary Loss. The Company used a portion of the net proceeds from
its initial public offering in November 1996 to prepay its subordinated notes.
This prepayment resulted in an extraordinary loss of approximately $7.3 million,
principally associated with the unamortized debt discount costs relating to the
notes.
Taxes. At December 31, 1996, the Company had available net operating
losses that can be carried forward for federal income tax purposes of
approximately $49.4 million of which $200,000 expire in 2009, $2.3 million
expire in 2010 and $46.9 million expire in 2011. Because of the Company's
limited operating history, a valuation allowance has been established for a
portion of the deferred tax asset. The Company will continually assess the need
for a valuation allowance for the deferred tax asset based on expectations of
future taxable income. For the six months ended June 29, 1996, the Company had a
net deferred tax asset that was offset entirely by a valuation allowance. For
the six months ended June 30, 1997, the Company has computed income taxes based
upon the expected annual effective tax rate, which gives effect to the
utilization of available net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Steel Dynamics' business is capital intensive and requires substantial
expenditures for, among other things, the purchase and maintenance of equipment
used in its steelmaking and finishing operations and compliance with
environmental laws. See "Risk Factors -- Significant Capital Requirements" and
"-- Potential Costs of Environmental Compliance." The Company's liquidity needs
arise primarily from capital investments, working capital requirements and
principal and interest payments on its indebtedness. Since its inception, SDI
has met these liquidity requirements with cash provided by equity, long-term
borrowings, state and local government grants and capital cost reimbursements.
Net cash used in operating activities totaled approximately $22.7 million
for 1993 through 1995. During 1996, the Company used net cash of approximately
$51.6 million in operating activities. The use of cash in operating activities
for 1996 primarily related to the build-up of raw material inventory as a result
of favorable pricing and the substantial increase in accounts receivable as a
result of sales increases. Net cash used in investing activities totaled
approximately $246.4 million from 1993 through 1995 and approximately $83.1
million for 1996. Investing activities primarily consisted of capital
expenditures of approximately $352.1 million through 1996 for the construction
of the Company's existing facilities and the beginning of the Cold Mill Project.
Cash provided by financing activities totaled approximately $276.0 million from
1993 through 1995 and approximately $185.3 million for 1996. The increase in
cash provided by financing activities primarily relates to the approximately
$140.2 million raised in November 1996 from the Company's initial public
offering, and from private placements of the Company's common stock earlier in
1996.
For the six months ended June 29, 1996, net cash used in operating
activities amounted to $44.4 million, net cash used in investing activities was
$18.2 million and cash provided by financing activities was $76.5 million. For
the six months ended June 30, 1997, net cash provided by operating activities
was $48.5 million, net cash used in investing activities was $81.5 million and
cash used in financing activities was $2.2 million.
The Company issued $55.0 million principal amount of subordinated notes
(together with warrants to purchase common stock) to finance a portion of the
construction of the mini-mill. The subordinated notes were repaid in full in
November 1996 with a portion of the net proceeds from the Company's initial
public offering.
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<PAGE> 29
As of June 30, 1997, the Company entered into the Credit Agreement, which
replaced its previous $345.0 million credit facility. The Credit Agreement
consists of a $450.0 million credit facility, composed of a $250.0 million
five-year revolving credit facility (subject to a borrowing base), a $100.0
million 364-day revolving credit facility (subject to extension if approved by
all of the lenders, or, if not, converted into a five-year term loan amortizable
in equal quarterly installments during the final two years of the five-year term
loan period), and a $100.0 million term loan amortizable in equal quarterly
installments during the final two years of the term loan period, commencing
September 30, 2002. The Credit Agreement is secured by substantially all of the
Company's assets (other than as permitted to be excluded in order to secure the
IDI Financing).
In addition, the Company has received a proposed term sheet for the $60.0
million IDI Financing to finance a portion of the IDI Project. This anticipated
credit facility would be secured by essentially all of the assets of IDI. The
lending banks have also requested that Steel Dynamics cause to be provided an
"Assurance Package," consisting of a package of coordinated completion and
performance guarantees (including failure to achieve an agreed level of
performance by a specified date), together with remedies, acceptable to the
lenders, for up to 100% of the cost of the amount financed. While it is
anticipated that IDI will receive a commitment for the IDI financing, there can
be no assurance that such a commitment will be secured or, even if secured, that
the IDI Financing will be consummated. See "Description of Certain
Indebtedness -- The Credit Agreement" and "-- The IDI Financing."
Borrowings under the Credit Agreement bear and anticipated borrowings under
the IDI Financing will bear interest at floating rates. The Company entered into
an interest rate swap agreement on a notional amount of $100 million pursuant to
which the Company has agreed to make fixed rate payments at 6.935% and will
receive LIBOR payments for the seven year term tranche of the Credit Agreement.
The maturity date of the interest rate swap agreement is July 2, 2001. The
counterparty has the right to extend the maturity date to July 1, 2004 at
predetermined interest rates. As of June 30, 1997, the Company had $199.5
million of indebtedness outstanding, including $150.0 million under the Credit
Agreement, $22.3 million of cash and cash equivalents, and $300.0 million of
availability under the Credit Agreement (subject to borrowing base
restrictions).
The Company intends to use cash on hand, funds from operations and
borrowings under the Credit Agreement and the IDI Financing, if and when
consummated, to finance completion of the construction and start-up of the
Expansion Projects ($200.0 million for the Cold Mill Project; $85.0 million for
the Caster Project (exclusive of start-up expenses); and $95.0 million for the
IDI Project.) See "Risk Factors -- Significant Capital Requirements." The
Company intends to use the proceeds from the offerings to fund an addition to
the hot strip mill of a seventh rolling stand, and will use the balance of the
net proceeds for general corporate purposes.
ENVIRONMENTAL EXPENDITURES AND OTHER CONTINGENCIES
SDI has incurred and, in the future, will continue to incur capital
expenditures and operating expenses for matters relating to environmental
control, remediation, monitoring and compliance. Capital expenditures for
environmental control for 1994, 1995 and 1996 were approximately $595,000, $15.9
million, and $790,000, respectively, and operating expenses relating to
environmental matters were approximately $0, $30,000, and $3.1 million, for the
same periods. The Company has planned expenditures relating to environmental
matters of approximately $4.1 million and $4.8 million for 1997 and 1998,
respectively, principally associated with the addition of equipment required in
connection with the Expansion Projects. Steel Dynamics believes that compliance
with current environmental laws and regulations is not likely to have a material
adverse effect on the Company's financial condition, results of operations or
liquidity. However, environmental laws and regulations have changed rapidly in
recent years and SDI may become subject to more stringent environmental laws and
regulations in the future. See "Risk Factors -- Potential Costs of Environmental
Compliance."
INFLATION
SDI does not believe that inflation has had a material effect on its
results of operations.
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<PAGE> 30
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, SFAS No. 128, Earnings per Share, was issued which
establishes new standards for computing and presenting earnings per share
("EPS"). Specifically, SFAS No. 128 replaces the presentation of primary EPS
with a presentation of basic EPS, requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997; earlier application is not
permitted. Management has determined that the adoption of SFAS No. 128 will not
have a material effect on the Company's consolidated financial statements.
In June 1997 SFAS No. 130, Comprehensive Income, was issued which becomes
effective in 1998 and requires reclassification of earlier financial statements
for comparative purposes. SFAS No. 130 requires that changes in the amounts of
certain items, including foreign currency translation adjustments and gains and
losses on certain securities be shown in the financial statements. SFAS No. 130
does not require a specific format for the financial statement in which
comprehensive income is reported, but does require that an amount representing
total comprehensive income be reported in that statement. Management has not yet
determined the effect, if any, of SFAS No. 130 on the Company's consolidated
financial statements.
Also in June 1997, SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, was issued. This Statement will change the
way public companies report information about segments of their business in
their annual financial statements and requires them to report selected segment
information in their quarterly reports issued to shareholders. It also requires
entity-wide disclosures about the products and services an entity provides, the
material countries in which it holds assets and reports revenues, and its major
customers. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. Management has not yet determined the effect, if any, of SFAS No. 131
on the Company's consolidated financial statements.
28
<PAGE> 31
BUSINESS
OVERVIEW
Steel Dynamics owns and operates a new, state-of-the-art flat-rolled steel
mini-mill, which commenced operations in January 1996. The Company was founded
by executives and managers who pioneered the development of
thin-slab/flat-rolled compact strip production technology and directed the
construction and operation of the world's first thin-slab/flat-rolled mini-mill.
Building upon their past experience with CSP technology, management founded SDI
to produce steel more efficiently, at a lower cost and of higher quality. Steel
Dynamics' goal is to be the low cost producer of a broad range of high quality
flat-rolled steel products, including hot-rolled, cold-rolled and galvanized
sheet, as well as other specialty steel products, and to serve more markets than
any other flat-rolled mini-mill. In addition, the Company intends to participate
in the development and use of new technologies to produce a broad range of steel
products.
The Company was founded in September 1993 by Keith E. Busse, Mark D.
Millett and Richard P. Teets, Jr. In October 1994, Steel Dynamics commenced
construction of the mini-mill and commissioned it in December 1995. The Company
believes that this 14-month construction period is the fastest ever for this
kind of facility. In addition, the Company believes that the approximately
$275.7 million initial capital cost of its mini-mill is approximately $75.0
million, or approximately 20% less than the cost of comparable mini-mills
currently operating. Actual production at the mini-mill of primary grade steel
commenced on January 2, 1996. The mill achieved an annualized production rate of
1.2 million tons by the end of June 1997, or 85% of its capacity of 1.4 million
tons, making the mini-mill's start-up and ramp-up the fastest to date in the
industry.
Pursuant to the Company's plan to develop downstream processing facilities
to produce further value-added steel products, Steel Dynamics is currently
constructing a cold mill, contiguous to the mini-mill, with a 1.0 million ton
annual capacity, which is scheduled for completion during the fourth quarter of
1997. Steel Dynamics plans to add a second melting furnace, a second caster and
tunnel furnace, and an additional coiler in 1998 to expand its annual production
capacity of hot-rolled steel from 1.4 million tons to approximately 2.4 million
tons. The Caster Project is expected to be completed in the first half of 1998.
In addition, the Company's wholly-owned subsidiary, Iron Dynamics, intends
to construct a 600,000 tonne annual capacity plant for the manufacture of direct
reduced iron, which the Company expects to be completed in 1998. The DRI, after
further refining into 500,000 tonnes of liquid pig iron, will be used in SDI's
mini-mill as a steel scrap substitute.
Management strategically located the Company's mini-mill within close
proximity to its natural customer base, steel service centers and other end
users, abundant supplies of automotive and other steel scrap (SDI's principal
raw material), competitive sources of power, and numerous rail and truck
transportation routes. Steel Dynamics believes that its strategic location
provides it with sales and marketing as well as production cost advantages. The
Company has secured a stable baseload of sales through long-term "off-take"
contracts with two major steel consumers, a 30,000 ton per month sales contract
with Heidtman, a major Midwest-based steel service center and distributor and an
affiliate of one of the Company's stockholders, and a 12,000 ton per month sales
contract with Preussag, a major German steel manufacturer and a stockholder of
the Company, with affiliate distributors and steel service centers throughout
the United States.
The Company has sought to assure itself of a secure supply of both steel
scrap and scrap substitute material. To accomplish this objective, SDI has
entered into a long-term scrap purchasing services contract with OmniSource, one
of the largest scrap dealers in the Midwest and an affiliate of one of the
Company's stockholders. In addition, the Company has also sought to assure
itself of a secure supply of scrap substitute material for use as a lower cost
complement to steel scrap as part of the Company's melt mix. SDI has entered
into a long-term 300,000 tonne per year "off-take" contract to purchase iron
carbide from Qualitech's iron carbide facility currently under construction in
Corpus Christi, Texas which is expected to be completed in 1998. The Company
expects to produce additional scrap substitute material in 1998 upon completion
of the IDI Project.
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<PAGE> 32
STRATEGY
The Company's business strategy is to use advanced CSP hot-rolled
steelmaking and cold-rolling technologies to produce high surface quality
flat-rolled steel in a variety of value-added sizes, gauges and surface
treatments, emphasizing low production costs, reliable product quality and
excellent customer service. In addition, SDI intends to remain financially
strong and competitive through the selective purchasing of scrap and scrap
substitutes to offset the effects of cyclical cost/price imbalances. The
principal elements of the Company's strategy include:
- Achieve Lowest Conversion Costs in Industry. Steel Dynamics' electric
arc furnace and its caster and rolling mill designs represent substantial
improvements over earlier mini-mills using CSP technology. These
improvements have been designed to speed the steelmaking process, to limit
"power off time" and other non-productive time in the EAF, to reduce the
per ton cost of consumables and to yield higher quality finished steel
product. The Company believes that its per ton manufacturing costs are
already among the lowest in the industry.
- Emphasize Value-Added Products and Increase Product Breadth. Steel
Dynamics has produced and believes that it will be able to consistently
produce thinner gauge (down to .040") steel in hot-rolled form with better
surface and edge characteristics than most other flat-rolled producers.
The Company believes that its high quality, thinner hot-rolled products
will compete favorably with certain more expensive cold-rolled (further
processed) products, enabling it to obtain higher margins. In addition,
with the anticipated completion of the Cold Mill Project, SDI expects to
devote a substantial portion of its hot-rolled products to the production
of higher value-added cold-rolled and galvanized products, as well as
thinner gauges, down to .015". This increased product breadth should also
allow the Company to further broaden its customer base.
- Secure Reliable Sources of Low Cost Metallics. The principal raw
material used in the Company's mini-mill is steel scrap, which represented
approximately 58% of the Company's total manufacturing costs for the three
months ended June 30, 1997. Steel Dynamics has pursued a three-part
strategy to secure access to adequate low cost supplies of steel scrap and
steel scrap substitute materials. First, the Company has entered into a
long-term steel scrap contract with OmniSource. Second, SDI has entered
into an iron carbide "off-take" contract with Qualitech. Third, Steel
Dynamics is pursuing the IDI Project to produce DRI and after further
refining, liquid pig iron, as another lower cost complement for use in the
melt mix with steel scrap.
- Secure a Solid Baseload of Hot Band Sales. In order to help ensure
consistent and efficient plant utilization, SDI entered into "off-take"
sales and distribution agreements with Heidtman and Preussag, through
2001, pursuant to which Heidtman has agreed to purchase at least 30,000
tons and Preussag has agreed to purchase at least an average of 12,000
tons of the Company's flat-rolled products per month, at the Company's
market price, subject to certain volume and single run discounts.
- Increase Unit Growth at Low Capital Cost. SDI seeks to continue to grow
its production of flat-rolled steel coil at low capital and unit costs.
The Company plans to invest approximately $85.0 million to finance its
Caster Project. The Caster Project, which is expected to be completed in
the first half of 1998, is expected to increase the annual production
capacity of the Company's mini-mill from 1.4 to approximately 2.4 million
tons of hot-rolled steel. In addition, management intends to continue to
explore new production technologies to further lower its unit costs of
production.
- Incentivize Employees. In contrast to the high fixed labor costs of many
of the Company's competitors, SDI has established certain incentive
compensation programs specifically designed to reward employee teams for
their efforts towards enhancing productivity, thereby encouraging a sense
of ownership throughout Steel Dynamics. Production employees actively
share in the Company's success through a "production" bonus and a
"conversion cost" bonus. The production bonus is directly tied to the
quantity and quality of products manufactured during a particular shift.
The conversion cost bonus encourages employees to use materials and
resources more efficiently. Steel Dynamics' employees' bonuses may equal
or exceed their base hourly wage.
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<PAGE> 33
- Pursue Future Opportunities. Steel Dynamics believes that technology
development and management's experience will provide significant
opportunities for SDI in a broad range of markets, potentially including
flat-rolled, non-flat-rolled, stainless and specialty steels. The Company
plans to pursue opportunities through greenfield projects, strategic
alliances or acquisitions to secure the long-term future growth and
profitability of SDI. The Company is conducting certain preliminary
engineering and feasibility analyses for a possible 750,000 ton capacity
structural steel facility to manufacture wide flange beams and other
structural shapes, utilizing near net shape casting technology in
conjunction with a state-of-the-art bloom caster. There is no assurance,
however, that such a facility will be approved by the Company for further
development efforts once these preliminary studies have been completed,
or, if further developed, that the facility will be able to be financed
and built. Steel Dynamics will also seek to enter new steel markets and to
produce new steel products using the latest technology, with the objective
of being a low cost producer. In addition, the Company has a technology
sharing agreement with Preussag which will provide SDI with Preussag's
expertise and know-how in steel manufacturing, particularly steel
finishing.
INDUSTRY OVERVIEW
The steel industry has historically been and continues to be highly
cyclical in nature, influenced by a combination of factors including periods of
economic growth or recession, strength or weakness of the U.S. dollar, worldwide
production capacity, levels of steel imports and tariffs. The industry has also
been affected by other company-specific factors such as failure to adapt to
technological change, plant inefficiency, and high labor costs. As an industry,
most U.S. steel producers suffered losses between 1982 and 1986, earned profits
between 1987 and 1989, weakened again through the end of 1992, strengthened
during 1993 and 1994, weakened again in 1995 and appear to be strengthening at
the present time. Steel, regardless of product type, is a commodity that
responds to forces of supply and demand, and prices have been volatile and have
fluctuated in reaction to general and industry specific economic conditions.
Under such conditions, a steel company must be a low cost, efficient producer
and a quality manufacturer.
There are generally two kinds of primary steel producers, "integrated" and
"mini-mill." The following diagram illustrates the differences in production
methodologies between the typical multi-step integrated mill production process
and the typical continuous mini-mill melting-casting-rolling process.
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<PAGE> 34
DIAGRAM
Steel manufacturing by an "integrated" producer involves a series of
distinct but related processes, often separated in time and in plant geography.
This process generally involves ironmaking followed by steelmaking, followed by
billet or slab making, followed by reheating and further rolling into steel
plate or bar, or flat-rolling into sheet steel or coil. These processes may, in
turn, be followed by various finishing processes (including cold-rolling) or
various coating processes (including galvanizing). In integrated producer
steelmaking, coal is converted to coke in a coke oven, then combined in a blast
furnace with iron ore (or pellets) and limestone to produce pig iron, and then
combined with scrap in a "basic oxygen" or other furnace to produce raw or
liquid steel. Once produced, the liquid steel is metallurgically refined and
then either poured as ingots for later reheating and processing or transported
to a continuous caster for casting into a billet or slab, which is then further
shaped or rolled into its final form. Typically, though not always, and whether
by design or as a result of downsizing or re-configuration, many of these
processes take place in separate and remote facilities.
In contrast, a mini-mill employs an electric arc furnace to directly melt
scrap steel or steel scrap substitute, thus entirely eliminating the
energy-intensive blast furnace. A mini-mill incorporates the melt shop, ladle
metallurgical station, casting, and rolling into a unified continuous flow. The
melting process begins with the charging of a furnace vessel with scrap steel,
carbon, and lime, following which the vessel's top is swung into place and
electrodes lowered into the scrap through holes in the top of the furnace.
Electricity is then applied to melt the scrap. The liquid steel is then checked
for chemistry and the necessary metallurgical
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<PAGE> 35
adjustments are made while the steel is still in the melting furnace or, if the
plant has a separate staging area for that process (as SDI's does), the material
is transported by a ladle to an area, commonly known as a ladle metallurgy
station. From there, the liquid steel is transported by ladle to a turret at the
continuous caster, wherein it is then transferred into a tundish, a kind of
reservoir, which controls the flow of the liquid steel into a water-cooled
copper-lined mold (collectively, the "caster") from which it exits as an
externally solid billet or slab. After a billet is cast, it is then cut to
length and either shipped as billets or stored until needed for further rolling
or processing (which would involve reheating) or it may be sent directly into
the rolling process, after which it may then be cut to length, straightened, or
stacked and bundled. In the case of thin-slab casting, however, the slabs
proceed directly into a tunnel furnace, which maintains and equalizes the slab's
temperature, and then after descaling, into the first stand of the rolling mill
operation. In this rolling process, the steel is progressively reduced in
thickness. In the case of sheet steel, it is wound into coil and may be sold
either directly to end users or to intermediate steel processors or service
centers, where it may be pickled, cold-rolled, annealed, tempered, or
galvanized.
As a group, mini-mills are generally characterized by lower costs of
production and higher productivity than the integrated steelmakers. This is due,
in part, to the mini-mills' lower capital costs and to their lower operating
costs resulting from their streamlined melting process and smaller, more
efficient plant layouts. Moreover, mini-mills have tended to employ a management
culture that emphasizes worker empowerment and flexible, incentive-oriented
non-union labor practices. The smaller plant size of the mini-mill operation
also permits greater flexibility in locating the facility to optimize access to
scrap supply, attractive energy costs, infrastructure and markets. Furthermore,
the mini-mill's more efficient plant size and layout, which incorporates the
melt shop, metallurgical station, casting and rolling in a unified continuous
flow under the same roof (as contrasted with integrated mills, which have
typically been downsized and re-configured over time and thus may perform each
of these functions in separate facilities), have reduced or eliminated costly
re-handling and re-heating of partially finished product. Mini-mills, moreover,
have tended to be more willing to adapt to newer, more innovative and aggressive
management styles, featuring decentralized decision-making. They have also
adapted more quickly to the use of newer, more cost effective and efficient
machinery and equipment, translating technological advances in the industry into
more efficient production more quickly than the integrated mills.
EVOLUTION OF COMPACT STRIP PRODUCTION TECHNOLOGY
Mini-mills have been producing steel since the early 1960s when EAFs and
continuous casting were initially commercialized. For many of these years, the
mini-mills focused almost exclusively on lower-quality, lower-priced "long
products," including merchant shapes such as rebar, wire, rod, angles, and
structurals, due to the mini-mill's relatively smaller size, initial quality
limitations and early power and capacity limitations. In 1989, however, a
mini-mill, using the world's first CSP machine employing a revolutionary mold
design, directly cast a 2" slab that was less than 25% of the thickness of the
typical 8" to 10" slabs cast by the integrated producers.
The CSP technology was one of the most significant advances in steelmaking
in the last forty years. The thinner slab greatly reduces costs, as less
reduction is necessary in the hot-strip rolling mill to create hot-rolled bands
or coils of steel, and there is substantially less re-heating required prior to
rolling. Most important, the development of this thin-slab casting technology,
with its lower capital cost requirement, allowed for the entry of the mini-mills
into the flat-rolled segment of the steel market.
THE FLAT-ROLLED MARKET
The flat-rolled market represents the largest steel product group,
accounting for approximately 61.9% of the total annual U.S. steel shipments in
1996. Flat-rolled products consist of hot-rolled, cold-rolled, and coated sheet
and coil. Currently, the Company's products consist only of hot-rolled coil.
This product group has been the fastest growing segment of the U.S. steel market
over the last 40 years, amounting to approximately 62.5 million tons of
shipments in 1996. The following table shows the U.S. flat-rolled shipments by
hot-rolled, cold-rolled, and coated production (as reported by the AISI) for the
last five years.
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(MILLIONS OF TONS)
<S> <C> <C> <C> <C> <C>
Hot-Rolled(1)........................................... 20.8 22.7 24.6 26.8 27.0
Cold-Rolled(2).......................................... 14.2 14.4 14.7 14.1 15.8
Coated(3)............................................... 15.6 18.3 20.2 19.9 19.7
---- ---- ---- ---- ----
Total......................................... 50.6 55.4 59.5 60.8 62.5
==== ==== ==== ==== ====
% Total Steel Shipments................................. 61.6% 62.3% 62.6% 62.4% 61.9%
</TABLE>
- ------------
(1) Includes pipe/tube, sheet, strip and plate in coils.
(2) Includes blackplate, sheet, strip and electrical.
(3) Includes tin coated, hot dipped, galvanized, electrogalvanized and all other
metallic coated.
The following chart presents 1996 U.S. industry flat-rolled product
shipments by market segment (as reported by the AISI):
PIE CHART plot points in pcn 802
Hot-Rolled Products. All coiled flat-rolled steel is initially
hot-rolled, a process that consists of passing an ingot or a cast slab through a
multi-stand rolling mill to reduce its thickness to less than 1/2" and, in some
mills, to less than 1/16". Hot-rolled steel is minimally processed steel coil
that is used in the manufacture of various non-surface critical applications
such as automobile suspension arms, frames, wheels, and other unexposed parts in
auto and truck bodies, agricultural equipment, construction products, machinery,
tubing, pipe, tools, lawn care products and guard rails. The U.S. market for
hot-rolled steel in 1996 was approximately 27.0 million tons, excluding imports.
This is a market segment that the Company's existing mini-mill currently serves.
The following chart presents 1996 U.S. industry hot-rolled product shipments by
market segment (as reported by the AISI):
PIE CHART plot points in 802
Cold-Rolled Products. Cold-rolled steel is hot-rolled steel that has been
further processed through a pickler and then successively passed through a
rolling mill without reheating until the desired gauge (or thickness) and other
physical properties have been achieved. Cold-rolling reduces gauge and hardens
the steel and, when further processed through an annealing furnace and a temper
mill, improves uniformity, ductility and formability. Cold-rolling can also
impart various surface finishes and textures. Cold-rolled steel is used in
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<PAGE> 37
applications that demand higher quality or finish, such as exposed automobile
and appliance panels. As a result, cold-rolled prices are typically higher than
hot-rolled. The U.S. market for cold-rolled steel in 1996 was approximately 15.8
million tons, excluding imports. This is a market segment that the Company's
cold mill will serve when completed in the fourth quarter of 1997. The following
chart presents 1996 U.S. industry cold-rolled product shipments by market
segment (as reported by the AISI):
PIE CHART Plot points in pcn 801
Coated Products. Coated steel is usually cold-rolled sheet that has been
coated with a non-ferrous metal to render it corrosion-resistant and to improve
its paintability. Hot-dipped galvanized, electrogalvanized and aluminized
products are types of coated steels. These are also the highest value-added
sheet products because they require the greatest degree of processing and tend
to have the strictest quality requirements. Coated steel is used in high volume
applications such as automotive, household appliances, roofing and siding,
heating and air conditioning equipment, air ducts, switch boxes, chimney flues,
awnings, garbage cans and food containers. The use of coated steels in the U.S.
has increased dramatically over the last 40 years. The U.S. market for coated
steels in 1996 was approximately 19.7 million tons, excluding imports. This
market segment will be served by SDI's cold mill when completed in the fourth
quarter of 1997. The following chart presents 1996 U.S. industry coated product
shipments by market segment (as reported by the AISI):
PIE CHART plot points in pcn 801
THE COMPANY'S PRODUCTS AND APPLICATIONS
The Company's current array of hot-rolled products includes a variety of
high quality mild and medium carbon and high strength low alloy hot-rolled bands
in 40" to 62" widths and in thicknesses from .500" down to .040" (1 mm). These
products are suitable for mechanical and structural tubing, gas and fluid
transmission piping, metal building systems, parts and components for
automobiles, trucks, trailers, and recreational vehicles, rail cars, ships,
barges, and other marine equipment, agricultural equipment and farm implements,
lawn, garden, and recreational equipment, industrial machinery and shipping
containers. SDI believes that, because of innovations made in its
state-of-the-art caster, its basic production hot band has surface and edge
quality characteristics that exceed those of the other thin-slab/flat-rolled
mini-mills operating currently. The Company also believes that the surface and
edge quality of its hot bands compares favorably with conventional mills. Steel
Dynamics believes that it is able to access a substantial portion of the current
U.S. shipped hot-rolled market of 27.0 million tons. Based on information from
its customers, the following chart displays SDI's flat-rolled shipments for the
first six months of 1997, by market classification of the ultimate end user,
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<PAGE> 38
regardless of whether the Company's hot band was further processed by a steel
service center or other intermediate processor before being shipped to the end
user.
<TABLE>
<CAPTION>
END USER INDUSTRY PERCENTAGE TYPICAL APPLICATIONS
------------------------- ---------- ----------------------------------------------
<S> <C> <C>
Tubing................... 28% Structural tube, mechanical tube, conduit
Automotive............... 27 Safety restraints, suspension, frame
Commercial equipment..... 13 Racks, shelving, hardware
Construction............. 9 Metal buildings, piling, safety grating
Machinery................ 4 Construction equipment, machine tools
Appliances............... 3 Liners, backs, brackets
Residential equipment.... 3 Lawn equipment, garden implements, motion
furniture
Agriculture.............. 2 Farm equipment, feeders, bins
Rail..................... 2 Rail car sides, tops, end caps
Other.................... 9 Exercise and recreational equipment
---
Total.................... 100%
===
</TABLE>
After completion of the Cold Mill Project (expected to occur during the
fourth quarter of 1997), SDI expects to produce a full range of hot-rolled,
hot-rolled coated, cold-rolled and cold-rolled coated products. At that time,
the Company expects to devote a substantial portion of its hot bands to the
production of higher value added products, including galvanized coatings, as
well as thinner gauge cold-rolled, down to .015". This increased product breadth
should also allow SDI to broaden its direct customer base, so that many of the
products required by end user consumers could be purchased directly from the
Company, instead of through an intermediate processor or steel service center.
The Company believes that upon completion of the Cold Mill Project it will be
able to access a substantial portion of the current U.S. shipped flat-rolled
market of 62.5 million tons.
THE COMPANY'S CUSTOMERS AND MARKETS
Intermediate Steel Processors and Steel Service Centers. The Company's
customers currently are primarily intermediate steel processors and steel
service centers. Of Steel Dynamics' total net sales in 1996 and for the six
months ended June 30, 1997, 71% and 62%, respectively, were to steel processors
or service centers. These steel processors and service centers typically act as
intermediaries between primary steel producers, such as SDI, and the various end
user manufacturers that require further processing of hot bands. The additional
processing performed by the intermediate steel processors and service centers
include pickling, galvanizing, cutting to length, slitting to size, leveling,
blanking, shape correcting, edge rolling, shearing and stamping. After the
completion of the Cold Mill Project, the Company expects to provide additional
value-added cold-rolling and coating services. The Company expects, however,
that its intermediate steel processor and service center customers will remain
an integral part of its future customer base and plans to continue to sell its
hot bands and other products to these customers after the Cold Mill Project is
complete.
The Company's largest customers, Heidtman and Preussag, accounted in the
aggregate for approximately 36% and 12% of Steel Dynamics' total net sales
during 1996, respectively, and 32% and 10% of the Company's total net sales for
the six months ended June 30, 1997, respectively. While the loss of either
Heidtman or Preussag as a customer, or a significant reduction in the business
generated by Heidtman or Preussag, might have a material adverse effect on SDI's
results of operations, the Company believes its relationships with these two
companies have enabled it to baseload the mill, thus helping to ensure
consistent and sufficient plant utilization. Heidtman and Preussag are the only
two customers of SDI that have accounted, individually, for more than 10% of the
Company's total net sales during 1996 and for six months ended June 30, 1997.
Heidtman is an affiliate of one of the Company's stockholders and Preussag is a
stockholder. See "Principal and Selling Stockholders." The Company's five
largest customers in the aggregate accounted for approximately 65% and 63% of
total net sales during 1996 and the six months ended June 30, 1997. See "Risk
Factors -- Reliance on Major Customers."
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SDI has a purchasing agreement with Heidtman for the purchase of at least
30,000 tons of the Company's hot band products per month through the end of
2001, at market prices, determined by reference to the lowest prices charged by
other thin-slab mini-mills or conventional mills for the same products. The
price at which the Company is required to sell 30,000 tons of steel coil to
Heidtman cannot be higher than the lowest price at which SDI offers its products
to any other customer. Heidtman is entitled to single run as well as certain
volume discounts. In addition, Heidtman has priority purchase rights to the
Company's secondary material and field claim material. The Company's aggregate
sales to Heidtman (including its affiliated companies) during 1996 and the six
months ended June 30, 1997, amounted to 279,000 tons and 188,138 tons,
respectively.
SDI also has a Purchasing, U.S. Sales and Export Distribution Agreement
(the "Preussag Purchasing Agreement") with Preussag pursuant to which, and
subject to the Company's obligations to fill Heidtman's orders, Preussag is
obligated to purchase an average of at least 12,000 tons per month of the
Company's available products through the end of 2001, at a market price
determined by reference to the Company's price sheet and by reference to
prevailing competitive market prices charged to large customers by other mills
within the Company's typical marketing area. Preussag is entitled to single run
and certain volume discounts. Under the Preussag Purchasing Agreement, the
Company has also appointed Preussag as its preferred distributor for all sales
to customers outside the United States, Canada and Mexico. See "-- International
Sales." Preussag's affiliated companies include: Delta Steel, Inc., located in
Houston, Texas; Feralloy Corporation, located in Chicago, Illinois; Feralloy
North American Steel Co., LP, located in Melvindale, Michigan; Preussag Handel,
Canada, located in Vancouver, British Columbia, Canada; Preussag Handel, GmbH,
located in Mexico City, Mexico; and Preussag International Steel Corporation,
located in Atlanta, Georgia. The Company's aggregate sales to Preussag
(including its affiliated companies) during 1996 and the six months ended June
30, 1997, amounted to 85,800 tons and 56,230 tons, respectively.
Direct Sales to End Users. The Company sells directly to end users,
including manufacturers of cold-rolled strip, oil and gas transmission pipe, and
mechanical and structural tubing. The Company employs a 10-person direct sales
staff, consisting of a Manager of Sales and Marketing, three Field Sales
Managers, a Manager of Secondary Sales, with the balance dedicated to inside
sales and administration. Steel Dynamics plans on keeping its end user sales and
support staff small and efficient, reflecting the Company's emphasis on
cost-containment and productivity.
Geographic Proximity to Customers. The following map illustrates the
geographic proximity of certain of the more significant U.S. markets for
flat-rolled sheet to the Company's mini-mill in Butler, Indiana.
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CUSTOMER MAP
Of the Company's total net sales during 1996 and the six months ended June
30, 1997, more than 80% and 75%, respectively, were to customers within 300
miles of SDI. In addition to its low production costs, the Company believes that
it also enjoys a pricing advantage over most of its competitors due to freight
savings to its customers to the north and east of SDI's mini-mill, where it sold
more than 50% of its flat-rolled steel in 1996 and the six months ended June 30,
1997.
International Sales. Of the Company's total net sales in 1996 and the six
months ended June 30, 1997, sales outside the continental United States
accounted for less than 5% and 10%, respectively. Pursuant to the Preussag
Purchasing Agreement, the Company has appointed Preussag its preferred
distributor for all sales to customers outside the United States, Canada and
Mexico (the "Export Territory"). Under the Preussag Purchasing Agreement, if the
Company wishes to sell in the Export Territory, it must notify Preussag of the
products available for sale and the price of these products. Preussag must then
use its best efforts to solicit these sales and to present the Company with any
purchase orders for the product, which the Company may then accept or reject.
Sales within the Export Territory are for Preussag's own account, regardless of
whether Preussag is purchasing for its use or for resale. If the Company
receives an unsolicited offer to purchase any products from a prospective
customer in the Export Territory, the Company must notify Preussag of the terms
and Preussag has a right of first refusal to effect the purchase. For sales in
the Export Territory, Preussag is entitled to a sales commission in addition to
any other applicable discounts or rebates. The Company has also entered into a
"second look" export sales agreement for such international sales with Sumitomo
Corporation of America ("Sumitomo"). Sumitomo is also a stockholder in the
Company.
THE COMPANY'S STEELMAKING EQUIPMENT AND TECHNOLOGY
Steel Dynamics' thin-slab/flat-rolled steelmaking equipment represents the
state-of-the-art in EAF melting and thin-slab casting and rolling technology and
embodies advancements and improvements reflecting the combined design and
operating experience with thin-slab steelmaking of the Company's three founders,
Keith E. Busse, Mark D. Millett, and Richard P. Teets, Jr. The Company's
existing equipment and technology, as well as the design criteria of the
equipment and technology that will constitute the Cold Mill
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Project and the Caster Project, are intended to improve steelmaking speed,
efficiency and output, result in less "power off" and down time, require less
maintenance, prolong equipment life and produce steel of better consistency and
of better surface and edge qualities.
The Existing Mill. The principal steelmaking equipment that comprises the
existing thin-slab/flat-rolling plant that is currently producing the Company's
hot bands consists of a melting furnace, a ladle metallurgy station, a turret,
thin-slab caster and rolling mill.
DIAGRAM
The Electric Arc Furnace. The Company's EAF is a 165-ton capacity tap
weight (195-ton gross weight with a 30-ton "hot heel") Fuchs AC-powered 120 MVA
high reactance twin-shell EBT (eccentric bottom tap) furnace, consisting of two
melting hearths working off of a single power source. Although such a large
capacity furnace might have suggested the use of DC power, SDI purchased an
AC-powered unit but with a reactor added to the electrical system on the primary
side of the transformer. In addition to saving approximately 30% in the capital
cost of the EAF (as compared to a DC-type unit), the AC-powered EAF is designed
to use smaller electrodes, which are less expensive than those required by a
DC-type EAF, and to consume a smaller amount of electrodes per pound of steel
produced. With a large capacity EAF, such as Steel Dynamics' furnace, using a DC
power source would require substantially larger (28" to 30" diameter)
electrodes, which cost up to 30% more per pound than the smaller (24" diameter)
electrodes required by the Company's AC-powered EAF. Furthermore, electrode
consumption by the Company's EAF (a substantial operating cost component) is
designed to be less than a DC-powered unit, approximately 3.2 pounds per ton
versus 3.8 to 4.0 pounds per ton, a function of lower amperage to the electrode
brought about by the reactor, which allows it to mimic the power characteristics
of the DC EAF.
SDI's twin-shell EAF design results in virtually continuous melting and
reduces the tap-to-tap time (i.e. the length of time between successive melting
cycles or "heats"). While melting is being done on one side, the other vessel
can be tapped and then refilled with scrap and readied for the next melt. In a
single EAF with a 60-minute tap-to-tap time, typically 10 to 15 minutes is taken
to tap liquid metal, gun refractories onto the side walls of the furnace,
re-sand and repair the tap hole, and recharge the vessel with scrap. Therefore,
for a small incremental capital cost of a second vessel, there is an approximate
20% increase in productivity gained by reducing the tap-to-tap time. Preheating
of the scrap will occur in the idle vessel with both oxygen and natural gas, at
a fairly low cost, aided by the 30-ton "hot heel" of melted scrap remaining in
the idle vessel after tapping. This design enables the Company to save the
additional capital cost of competing technologies such as a shaft furnace with a
scrap preheating feature. The Company believes that shaft furnaces do not work
well with larger pieces of scrap, such as the industrial bundles which the
Company purchases. An additional attractive feature of the twin-shell design is
that if there is a maintenance problem requiring work on one vessel, melting can
proceed in the other vessel without interruption. Electricity consumption in the
EAF is approximately 350 to 375 kWh per ton.
Ladle Metallurgy Station. The Company has a separate ladle metallurgy
station, built by Fuchs, consisting of two small EAFs, each of which consumes
approximately 25 kWh of electricity per ton of steel, and a desulfurization
station. A separate ladle refining station, located apart from the primary
melting furnace, allows metallurgical adjustments to be effected, while still
maintaining the steel at a sufficiently high temperature during the refining
stage. This maximizes the time that the primary furnace can be used for scrap
melting, while enabling the molten steel to continue through metallurgical
testing, stirring, alloying, desulfurization, reheating and other adjustments,
on its way to the casting deck. There are two ladle stations, each of which
receives molten steel from the primary furnaces after tapping. When the
adjustment process has
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been completed the refined metal is then transported by overhead crane to the
casting deck. The ladles are placed on a turret, which rotates an empty ladle
away from the top of the casting machine while simultaneously replacing it with
a full ladle, allowing for a continuous process. The molten steel flows from the
ladle to a tundish (a holding reservoir) and then directly into the mold of the
casting machine.
The Thin-Slab Caster. The state-of-the-art continuous thin-slab caster was
built by SMS Schloemann-Siemag AG and SMS Concast and is equipped with Liquid
Core Reduction ("LCR") which the Company has not yet activated. LCR enables the
caster to perform as a typical thin slab caster producing 50 mm slabs for hot
rolling, as well as allowing the flexibility to produce slabs from 40 mm to 80
mm thick by using a variable thickness mold and movable segments. This feature
is designed to ensure greater quality and a more diversified product line for
the Company by reducing turbulence in the mold; providing for "soft reduction"
on segregation sensitive grades; improving hot rolling reduction ratios on thick
gauge products and the reduction of hot rolling loads to produce light gauge
products.
The caster is also equipped with a newly designed submerged entry nozzle
("SEN"), with an improved geometry. This permits the walls of the SEN to be
thicker, resulting in longer SEN life and, in turn, enables the Company to run a
"string" of 12 heats before the SEN requires replacement (in contrast with 10 or
less with a smaller SEN). These advantages are directly reflected in increased
productivity. Within the newly designed SEN, SDI has incorporated a new baffle
design to modify the fluid flow of molten steel into the mold cavity which slows
and more evenly distributes the molten steel into the mold as compared to
previous designs. This results in a quieter top surface of the liquid steel in
the mold (at the meniscus), a more uniform solidification of the shell, and
effectively eliminates sub-surface inclusions. The tundish design has been
upgraded to include state-of-the-art baffle and other flow modification dividers
which allow for maximum flotation and subsequent removal of inclusions prior to
the molten steel entering the SEN.
The Hot-Rolling Mill. The Company's rolling mill is a state-of-the-art,
six-stand rolling mill built by SMS Schloemann-Siemag AG. The hot-rolling mill
is equipped with a specially designed high pressure 6,000 psi water descaling
system to remove the mill scale after the steel emerges from the
Bricmont-supplied tunnel furnace just before entering the rolling mill. This
system provides an exceptionally clean surface while minimizing the cooling of
the 2,000 degreesF slab. The tunnel furnace restores heat lost during the
casting process. The rolling mill is equipped with the latest electronic and
hydraulic controls. Each rolling stand is driven by a high-powered 10,000
horsepower mill drive motor. The normal exit speed of light gauge steel, prior
to coiling as it exits the last stand of the rolling mill, is approximately 10.5
meters per second. The Company's smaller more closely-spaced rolls on the
run-out table will help prevent the steel strip from cobbling when rolling
lighter gauges. When rolling to a thickness of 1 mm (.040"), the exit speed will
remain the same until the sheet is captured in the down-coiler, at which point
it will "zoom" the strip to a faster speed of 13.3 meters per second; which
increases productivity. The last two stands of the rolling mill use specially
designed work rolls to facilitate the Company's ability to roll to the thinnest
gauge of any hot mill in the industry. Steel Dynamics' coiler is approximately
210 feet from the last stand of the rolling mill, and all necessary foundations
and infrastructure have been pre-engineered and constructed to accommodate the
second coiler that will be added as part of the Caster Project.
Throughout the rolling process, laser optical measuring equipment and
multiple x-ray devices measure all strip dimensions, allowing adjustments to
occur continuously and providing feedback information to the mill process
controls and computers. All positioning and control equipment used to adjust the
rolling mill is hydraulically operated and regulated electronically to achieve a
high degree of accuracy. The entire production process is monitored and
controlled by both business and process computers. Production schedules are
created based on order input information and transmitted to the mill computers
by the plant business system. Mathematical models then determine the optimum
settings for the tunnel furnace, the hot rolling mill and the strip cooling
sprays. This information is then directly transmitted to the equipment
controlling the rolling operations. As the material is processed, operating and
quality data are gathered and stored for analysis of operating performance and
for documentation of product parameters to the customer. The system then
coordinates and monitors the shipping process, and prints all relevant paper
work for shipping when the coil leaves the plant.
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The Cold Mill Project. The Cold Mill Project is under construction
adjacent to and south of the existing hot mill and is expected to be completed
in the fourth quarter of 1997.
As the following diagram illustrates, the Cold Mill Project consists of a
continuous pickle line, two hot dipped galvanizing lines, a semi-tandem
two-stand reversing cold-rolling mill, batch annealing furnaces and a temper
mill. The pickle line consists of a dual payoff system, scale breaker, shallow
bath pickling section, rinsing section and recoiler built by Davy International;
the hot dipped galvanizing lines consist of dual payoff, cleaning, annealing,
coating, rolling, tension leveling, post-coating treatment, and recoiling
systems built by Davy International and others; the semi-tandem two-stand
reversing cold-rolling mill will consist of a payoff system, two take-up reels,
two four-high stands, full instrumentation and quality controls, to be built by
SMS Schloemann-Siemag AG; the batch annealing furnaces built by Ebner Furnaces
consist of 18 bases and nine hydrogen annealing bells; and the temper mill
consists of a single four-high stand built by SMS Schloemann-Siemag AG. All
electric drives and controls have been supplied by the General Electric
Corporation, a stockholder of SDI. One of the galvanizing lines will process
primarily hot-rolled product, while the second galvanizing line will process
primarily cold-rolled product.
[DIAGRAM]
The pickle line commenced production in June 1997 and the first of the two
galvanizing lines to coat hot rolled steel began production in July 1997. The
cold rolled hot dipped galvanizing line is expected to begin production and the
annealing facilities and the temper mill are expected to be ready for
commissioning in September 1997.
The pickle line begins at the existing hot strip mill building, and
delivers pickled product to a coil storage facility centrally located in the
cold-rolling and processing facility. Configuring the facility in this manner
eliminates the need for equipment to transfer coils to the cold-rolling
facility. At the entry end of the pickle line, there are two reels to unwind
coils and a welder to join the coils together. Coils are unwound on alternate
reels and attached end to end by the welder, creating a continuous strip through
the pickle tanks. The center section of the 700-foot pickle line consists of the
scale breaker/tension leveler, the pickling tanks (where the strip moves through
a bath of hydrochloric acid that thoroughly cleans the strip in preparation for
galvanizing and rolling operations), and the rinse tanks. At the delivery end of
the line there is a reel for recoiling the pickled product, and shearing
facilities to separate the strip back into discrete coils. After recoiling, each
coil is stored in the central coil storage facility.
From the central coil storage area, coils can proceed in either of two
directions. Some coils will be immediately galvanized on the hot-rolled
galvanizing line. The ability of the hot-rolling mill to produce steel strip
that is extremely thin by comparison will allow for immediate galvanizing
without the need for further rolling in the cold-rolling mill. The hot-rolled
galvanizing line is designed to efficiently handle this type of material.
Hot-rolled coils that are not intended for immediate galvanizing, and which
the Company intends to further process, will be processed on the cold-rolling
mill. SDI's cold-rolling mill will be unique in that it will
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be a semi-tandem two-stand reversing cold-rolling operation. This configuration
provides considerably higher throughput than a conventional single-stand
reversing mill, yet also takes advantage of considerably lower equipment costs
than the conventional four to six-stand tandem cold-rolling mill. The rolling
mill is configured with multiple x-ray gauges, hydraulic bending systems,
rolling solution controls, gauge controls and strip flatness controls used to
produce an extremely high level of product quality parameters. The cold-rolling
mill will also use a process control computer using sophisticated mathematical
models to optimize both quality and throughput.
Cold-rolled product that requires galvanizing will proceed to the
cold-rolled galvanizing line. There it will be annealed and coated. The
cold-rolled galvanizing line is quite similar to the hot-rolled galvanizing
line, but will have a more elaborate and larger strip heating furnace. This
larger furnace is required to anneal cold-rolled product, which is not necessary
on hot-rolled product. Designing the pickle line and the two galvanizing lines
concurrently and procuring the equipment from the same manufacturer has allowed
a high degree of commonality of parts between the three lines. This provides a
high degree of flexibility and cost savings with regard to management of spare
parts.
Cold-rolled product that does not require galvanizing will then proceed to
the batch annealing furnaces. The batch annealing furnaces heat and then cool
the coils in a controlled manner to reduce the hardness of the steel that is
created in the cold-rolling process. The batch annealing furnaces will heat the
steel in a hydrogen environment that optimizes the efficiency of the heating
process and produces a product that is superior to conventional batch annealing
with regard to cleanliness and uniform metallurgical characteristics. The
heating and cooling of the coils is regulated by means of computer models based
on current knowledge of heat transfers and steel characteristics.
Product from the annealing furnaces will then be temper-rolled. The
temper-rolling facility is a single stand four-high rolling mill designed for
relatively light reduction of the product. The temper mill introduces a small
amount of hardness into the product and further ensures the overall flatness and
surface quality of the product. The temper mill will also have an x-ray gauge to
monitor strip thickness. This mill was purchased concurrently with the two-stand
cold-rolling mill from the same manufacturer. This provides a high degree of
flexibility and cost savings with regard to management of spare parts.
Product from both galvanizing lines and the temper mill will be delivered
directly from the processes to a common coil storage area, where they will then
be shipped by either truck or rail.
As in its hot mill, all facilities in the cold mill will be linked by means
of business and process computers. Business systems will be expanded to
comprehend order entry of the additional cold mill products and all line
scheduling will be accomplished in the business computer systems, with schedules
transmitted to the appropriate process related computers. Operating and quality
data will also be collected for analysis and quality control purposes, and for
reporting product data to customers.
The Caster Project. The Caster Project, which the Company believes will
enable it to increase its annual production capacity of hot-rolled steel from
1.4 million tons to approximately 2.4 million tons, primarily involves the
design and construction of an additional hybrid EAF, a second thin-slab caster,
a second tunnel furnace, a second coiler and minor modifications to the meltshop
building. Construction began in June 1997, and is expected to be completed in
the first half of 1998. The total cost of the Caster Project is estimated to be
approximately $85.0 million. The following diagram shows the components of SDI's
hot-mill upon completion of the Caster Project.
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DIAGRAM - Depicting hot-mill production process upon completion of Caster
Project
The necessary foundations and infrastructure to house and support the
second caster were pre-planned into the existing plant at the time of its design
and construction. This should allow SDI to add additional annual capacity of 1.0
million tons of hot-rolled steel at an incrementally low capital cost. The
Company believes that these additional tons will allow it to maximize its
rolling and finishing capacity that its Cold Mill Project is expected to provide
in the fourth quarter of 1997.
The equipment that is being considered as a part of the Caster Project is
similar in design and use to the equipment that constitutes the existing
mini-mill facility.
The IDI Project. The IDI Project consists of the design, construction, and
operation of a facility for the manufacture of DRI and its further refinement
into liquid pig iron for use by Steel Dynamics (or, when desired, for resale to
others) as a steel scrap substitute. The Company has studied and considered many
alternative methods of securing a low cost source of steel scrap substitute
material. Some of these methods are in limited commercial use while others have
not been tested commercially, either for their ability to successfully yield
useable substitute iron units or, even if technologically successful, their
ability to do so at a cost that makes its use as a scrap substitute commercially
feasible. The existing commercial processes differ by the type of raw feedstock
they employ and the type of reductant that is used to "reduce" the feedstock to
useable or semi-finished iron units. The following diagram illustrates the
sequence of steps in the IDI Process, during which iron ore fines will be
processed into DRI and then further refined into liquid pig iron.
DIAGRAM - Depicting IDI Process
Background of Alternative Scrap Substitute Methodologies. DRI is a
metallic product produced from iron ore that is used as an alternative or
complementary feedstock in EAF steelmaking, blast furnaces and other iron and
steelmaking applications. Of the approximately 33.3 million tonnes of DRI
produced in 1996,
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over 90% was produced by either the Midrex or HYL processes, both of which use
lump form iron ore or pellets that are treated in a direct reduction shaft
furnace with natural gases to reduce the iron oxide to metallic iron. Although
these processes are proven to work commercially, iron ore pellets tend to
command a premium over iron ore fines. There are a number of other processes
that use iron ore fines with natural gas as a reductant. One of these has been
selected by Qualitech in building its iron carbide production facility, with
which the Company has a long-term 300,000 tonne per year "off-take" contract.
The IDI Process. While the IDI Process has not yet been commercially
employed, the Company believes that it has the technical capability to develop
and implement the IDI Process. Moreover, the Company believes that the IDI
Process, when combined with further refining, will produce a liquid pig iron
with a richer iron content, at a lower cost, using readily available raw
material and energy resources, than any other available process, given the
location of SDI's mill.
The IDI Process will begin with the use of low cost iron ore fines. In the
first step of the IDI Process, the iron ore fines, which the Company expects to
purchase under a long-term supply agreement, will be upgraded by processing to
reduce the silica (i.e. sand) content of the fines, thereby minimizing the
undesirable gangue content of the final DRI product. Then the upgraded iron ore
fines and grounds, and the fines, together with ground coal, are mixed with
additives and pelletized on a rotary disk. The resulting ball-like pellets or
"green balls" will then be screened, so that a uniform pellet will proceed
through the rest of the process and so that undersized and oversized pellets can
be recovered and recycled. The correctly sized pellets will next be fed into a
rotary dryer and then into a rotary hearth furnace, where the dry, sized green
balls will be transferred to the top of the rotary hearth via a conveyor, at a
controlled rate, and then distributed uniformly over the hearth. The material
will be heated to 1,300 degrees for approximately 10 to 15 minutes, after which
they will be removed to a refractory-lined container. At this stage, the DRI
will be expected to have a metallic iron content of 88% to 92%. Although this
product is commercially viable at this stage of the process and could be used in
steelmaking, IDI intends to transport the DRI on site to a furnace and then to a
desulfurization station where further impurities will be removed. This further
refining will take DRI to approximately 96% metallic pig iron which could then
be introduced by Steel Dynamics directly into its EAF charge mix. The hybrid EAF
and desulphurization station will be located adjacent to the Company's existing
melt shop in Butler, Indiana, and is included as part of the IDI Project.
An added benefit which the Company expects to realize from the use of this
process is that electricity consumption in Steel Dynamics' EAF can be lowered by
the chemical energy available from the carbon, as well as from the fact that the
liquid pig iron is expected to contain only minimal amounts of iron oxide
(versus 6% iron oxide in most other available DRI), which would otherwise take
additional energy to reduce. Furthermore, since the resulting liquid pig iron
would already be molten at 2,400 degreesF, the electrical energy required in the
Company's regular EAF would be substantially reduced when the liquid pig iron is
introduced into the melt mix, resulting in not only an electrical consumption
savings but a reduction in electrode consumption as well. The Company believes
that there would be between a 15% to 20% productivity gain if pig iron produced
by the IDI Process constituted 25% of the melt mix, and more if iron carbide
(such as that which the Company anticipates receiving from Qualitech beginning
in 1998) is also added into the melt mix.
Steel Dynamics believes that the anticipated advantages of the IDI Process
are that it permits the use of lower cost iron ore fines or concentrates, that
pricing of the fines appears to be stable, and that coal as the reductant is
abundantly available and not affected by shortages that sometimes affect gas
availability and prices. Additionally, the IDI Process is expected to allow for
the use, as additional raw materials, of EAF dust and mill scale, which the
Company will generate and will be able to purchase from other area mills. At
present, the Company generates 30,000 tons of EAF dust per year, which otherwise
causes the Company to incur disposal costs in excess of $120 per ton.
Steel Dynamics also believes that the liquid pig iron, which it expects IDI
to begin producing in 1998, when combined into the melt mix with iron carbide to
be manufactured by Qualitech, will enable the Company to use these steel scrap
substitute materials for up to 40% of its metallics charge, thus reducing its
dependency upon low residual scrap (the most expensive grade).
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STEEL SCRAP AND SCRAP SUBSTITUTE RESOURCES
Steel scrap is the single most important raw material used in the Company's
steelmaking process, representing approximately 50% to 60% of the direct cost of
a ton of finished steel. All steel scrap, however, is not the same. As it
relates to final product quality, EAF flat-rolled producers, such as the
Company, can only tolerate a maximum .2% level of "residuals" (i.e. non-ferrous
metallic contamination such as copper, nickel, tin, chromium, and molybdenum,
which, once having been dissolved into steel cannot be refined out). In order
for the scrap melt to provide this level of quality under present circumstances
(without the anticipated availability of future scrap substitute products), the
mill must use approximately 60% of "low residual" steel scrap or an equivalent
material. There are many grades of scrap (for example, Steel Dynamics maintains
10 to 12 separate grades of scrap in its 20-acre scrap holding yard on premises
adjacent to the mini-mill), but scrap can be broadly categorized as either
"obsolete scrap" or "prompt industrial scrap." Obsolete scrap, which is derived
from discarded agricultural and construction equipment, consumer goods such as
automobiles and appliances, container drums and building demolition scrap,
generally contains residuals that exceed the tolerable maximums for EAF use (the
only exception being old structural steel and rails that were made from Bessemer
and open-hearth steel production process with high iron content, the supply of
which is limited). Prompt industrial scrap, on the other hand, is produced as a
by-product of various metalworking operations, such as steel fabricators,
machine shops, automobile production and stamping plants, and is the most
desirable for EAF steelmaking due to the traceability of its origins and to the
fact that it is generally "low residual" scrap. Such low residual scrap
generally takes the form of No. 1 Dealer Bundles, No. 1 Factory Bundles,
busheling, and clips. Many variables impact scrap prices, the most critical of
which is U.S. steel production. Generally, as steel demand increases, so does
scrap demand (and resulting prices).
Until 1989 when Nucor commenced flat-rolled production of steel in its
Crawfordsville, Indiana mini-mill and the subsequent opening of additional
thin-slab/flat-rolled mini-mills (including the Company's), the availability of
low residual scrap kept pace with demand, indeed exceeded demand, enabling the
United States to be a net exporter of low residual scrap. By 1994, however, the
supply of low residual scrap became tighter, although the shortfall was made up
by a combination of pig iron use, obsolete structural steel, and, to a limited
extent, non-U.S. or imported DRI. This supply/demand pressure on the cost of low
residual scrap is expected to continue, as more flat-rolled EAF production comes
on-line, although this may be mitigated to some extent by the anticipated
production of more steel scrap substitute material (such as the IDI Project or
Qualitech's iron carbide production facility).
The Company uses various grades of obsolete (and thus less expensive) scrap
in its melt mix, which it blends with its low residual scrap to keep within
final tolerances. To the extent that SDI will be able to introduce the
relatively pure pig iron that it expects to obtain from IDI's DRI (commencing in
1998), or the Qualitech iron carbide which it expects to begin receiving in
1998, Steel Dynamics believes that it will be able to use greater amounts of
lower-priced obsolete scrap in its melt and still remain within acceptable
limits.
There are several regions in the United States where scrap generation
exceeds consumption within the region. One of these regions is in the Midwest.
The Company believes that it enjoys freight savings versus other current
mini-mill competitors for scrap generated near the mini-mill and made available
to Steel Dynamics for use in its mini-mill.
The Company believes that the demand for low residual steel scrap will rise
more rapidly than the supply in the coming years. This belief has prompted SDI,
as a means of maintaining a low metallics cost, to seek and secure both a strong
and dependable source through which to purchase steel scrap of all grades,
including low residual scrap, and a reliable source for lower cost steel scrap
substitute resources. SDI has accomplished this through a long-term scrap
purchase agreement with OmniSource, and, in addition to its own IDI Project,
through a long-term purchase contract for iron carbide with Qualitech.
Steel Scrap. The Company has entered into an Agreement To Provide Scrap
Purchasing Services And Certain Priority Purchase Rights with OmniSource, an
affiliate of Heavy Metal, L.C., a stockholder of the Company. See "Principal and
Selling Stockholders." Pursuant to this agreement, OmniSource has agreed to act
as the Company's exclusive scrap purchasing agent, through the end of 2001, and
to use its best efforts to locate and secure for the Company's mini-mill such
scrap supplies as SDI may from time-to-time wish to
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<PAGE> 48
purchase, at the lowest then available market prices for material of like grade,
quantity and delivery dates. The cost to the Company of OmniSource-owned scrap
is the price at which OmniSource, in bona fide market transactions, can actually
sell material of like grade, quality and quantity. With respect to general
market scrap, the cost to the Company is the price at which OmniSource can
actually purchase that scrap in the market (without mark-up or any other
additional cost). For its services, OmniSource receives a commission per gross
ton of scrap received by Steel Dynamics at its mini-mill. All final decisions
regarding scrap purchases belong to the Company, and SDI maintains the sole
right to determine its periodic scrap needs, including the extent to which it
may employ steel scrap substitutes in lieu of or in addition to steel scrap. No
commission is payable to OmniSource for scrap substitutes purchased or
manufactured by the Company.
During 1996 and the six months ended June 30, 1997, the Company purchased
1,068,609 tons and 452,162 tons, respectively, of steel scrap from OmniSource,
and expects to purchase an average of 125,000 to 150,000 tons of steel scrap per
month at full production. Thereafter, although SDI expects that its total output
in tons of flat-rolled steel coil will increase from 1.4 million to
approximately 2.4 million after the completion of the Cold Mill and Caster
Projects, the Company expects that its receipt of substantial quantities of
steel scrap substitute material, both iron carbide from Qualitech and DRI from
the IDI Project, will mitigate its continued dependency on low residual steel
scrap. Steel Dynamics believes that its scrap purchasing relationship with
OmniSource, an affiliate of one of the Company's stockholders, provides the
Company with excellent access to available steel scrap within its primary scrap
generation area.
Steel Scrap Substitutes. In June 1996, the Company entered into an Iron
Carbide Off-Take Agreement (the "Iron Carbide Agreement") with Qualitech, in
whose parent SDI is a 4% stockholder. The Iron Carbide Agreement is for five
years, running from the time that Qualitech begins commercial production of iron
carbide, and is subject to renewal. Qualitech is building a 660,000 tonne annual
capacity iron carbide facility in Corpus Christi, Texas, of which 300,000 tonnes
annually is expected to be sold to Steel Dynamics at a formula purchase price
based on various components of Qualitech's costs of production, which the
Company believes is favorable, and with a ceiling price which SDI believes will
be favorable relative to the price of steel scrap. The Company will also
purchase iron carbide from Qualitech during Qualitech's ramp-up commencing as
early as 1998, although the amount of iron carbide that SDI can anticipate
receiving during that period is unknown. In addition to the Iron Carbide
Agreement, the Company has formed IDI, which is constructing a 600,000 tonne
capacity rotary hearth-based DRI production facility. See "Certain
Transactions."
ENERGY RESOURCES
SDI believes that it has very favorable energy rates, both electricity and
gas, as well as for oxygen. These rates are critical to the Company in
maintaining its status as a low-cost provider of flat-rolled steel.
Electricity. The plant operates at an average electrical power consumption
level of 100 million watts, under an electric service contract with AEP that
extends through 2005. The contract designates a capacity reservation of 150,000
kVa with provisions allowing for a total capacity increase of 80,000 kVa for new
load connected within five years of the commencement date with a one-year notice
of intent requirement. The contract designates a portion of the Company's load
as "firm," which is billed under the applicable AEP retail tariff. All of the
rest of the Company's load is designated as "interruptible service," which
allows customers the option of accepting varying levels of risk of power
interruption as a trade-off for discounted energy prices. With interruptible
service, the Company is subject to risk of interruption at any time in the
operation of the AEP System, as a result of an AEP annual peak demand, or even
when AEP can receive a higher market price from an alternate buyer. Under such
circumstances, the Company has the option of matching the market price of the
alternate buyer in order to avoid interruption.
The interruptible load is billed as either "base" energy or as "peak"
energy. The base energy charge is derived monthly from a formula that includes a
discounted demand component, an energy component, and a fuel component. A peak
energy charge, or "real-time price," is calculated hourly for differing
peak-period hours throughout the year. The real-time price is defined as AEP's
incremental cost of supplying energy that otherwise would not have been incurred
if such energy had not been supplied to the Company, plus a fixed cost
increment. The Company's average price of electricity for the six months ended
June 30, 1997, was $.027 per
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kWh. The Company's negotiated rate with AEP, once it reaches full capacity,
however, should be in the range of $.024 and $.025 per kWh, which SDI believes
is relatively attractive.
Electrical power to the plant site is supplied by AEP over its 14-mile,
345,000 volt transmission line directly to the Company's own electrical
substation. The Company entered into a Transmission Facilities Agreement with
AEP to pay "contributions in aid of construction" for the electric transmission
lines, and these payments to AEP from the Company, pursuant to a $7.8 million
20-year note, at 8% interest, which commenced January 1, 1996, amounts to
$65,400 per month. According to the Transmission Facilities Agreement, if any
other users use these transmission lines, the amount owed by SDI would decrease.
Additionally, the Company entered into a Substation Facilities Agreement with
AEP whereby AEP provided the financing for Steel Dynamics' on-site substation
and related facilities. This financing totaled $13.0 million as of January 1,
1996, and requires repayment, at 8% interest, commencing January 1, 1996, over a
15-year period, amounting to monthly payments of $125,000.
Gas. The Company uses approximately 3,200 decatherms (equivalent to 1,000
BTUs or 1,000 cubic feet) of natural gas per day. The Company holds a "Primary
Firm" delivery contract on the Panhandle Eastern Pipeline that extends through
May 2000, costing the Company $.42 per decatherm, with a current fuel surcharge
equal to 5.72% of the gas the Company flows. The Company also has an
interruptible delivery contract with NIPSCO/NIFL/Crossroads ("LDC") that extends
through December 2000, costing the Company $.20 per decatherm with a fuel
surcharge of .2%. LDC takes the gas from the Panhandle Eastern Pipeline and
delivers it to the mini-mill. The actual purchase of the gas itself is currently
contracted through the end of July 1997 for $1.91 per decatherm, and, upon its
expiration the Company expects to purchase its natural gas supply needs in the
spot market until such time as it determines that long term contracts are at
more attractive prices.
The Company maintains a liquid propane tank farm on site with sufficient
reserves to sustain operations for approximately two weeks in the event of an
interruption in the natural gas supply. During February 1996, when severe
weather conditions disrupted the flow of natural gas, the Company operated on
liquid propane for a period of eight days.
Oxygen. Steel Dynamics uses oxygen, as well as nitrogen and argon for
production purposes, which it purchases from Air Products, which built a plant
on land adjacent to the Butler, Indiana mill site. Air Products uses its plant
not only to supply the Company, but also to provide oxygen and other gasses to
other industrial customers. As a result, SDI has been able to effect very
favorable oxygen and other gas purchase prices on the basis of Air Products'
volume production.
COMPETITION
Competition within the steel industry can be intense. The Company competes
primarily on the basis of price, quality, and the ability to meet customers'
product specifications and delivery schedules. Many of the Company's competitors
are integrated steel producers which are larger, have substantially greater
capital resources and experience, and, in some cases, have lower raw material
costs than the Company. The Company also competes with other mini-mills which
may have greater financial resources. The highly competitive nature of the
industry, combined with excess production capacity in some products, may in the
future exert downward pressure on prices for certain of the Company's products.
In addition, in the case of certain product applications, steel competes with
other materials, including plastics, aluminum, graphite composites, ceramics,
glass, wood and concrete.
U.S. The Company's products compete with many integrated hot-rolled coil
producers, such as Rouge Steel Co. and National Steel Corp.'s Great Lakes Steel
Division in the Detroit area, LTV Steel Co., Inc., Inland Steel Co., Bethlehem
Steel Corp., U.S. Steel, Acme Steel Co. and Beta Steel Corp. in the northwest
Indiana and Chicago area, as well as a growing number of hot-rolled mini-mills,
such as Nucor's Crawfordsville, Indiana and Hickman, Arkansas facilities and
Gallatin Steel Company's mini-mill in Ghent, Kentucky, Delta Steel, the
BHP/Northstar joint venture in Delta, Ohio, and TRICO Steel's mini-mill in
Alabama. Despite significant reductions in raw steel production capacity by
major U.S. producers over the last decade, the U.S. industry continues to be
adversely affected, from time to time, by excess world capacity.
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According to the AISI, annual U.S. raw steel production capacity was reduced
from approximately 154 million tons in 1982 to approximately 116 million tons in
1996. This reduction resulted in higher utilization rates. Average utilization
of U.S. industry capacity improved from approximately 61% in the 1982 to 1986
period to approximately 83% in the 1987 to 1991 period, was approximately 89% in
1993, 93% in 1994 and 1995, and 91% in 1996. Recent improved production
efficiencies also have begun to increase overall production capacity in the
United States. Excess production capacity exists in certain product lines in
U.S. markets and, to a greater extent, worldwide. Increased industry
overcapacity, coupled with economic recession, would intensify an already
competitive environment.
Over the last decade, extensive downsizings have necessitated costly
restructuring charges that, when combined with highly competitive market
conditions, have resulted at times in substantial losses for some U.S.
integrated steel producers. A number of U.S. integrated steel producers have
gone through bankruptcy reorganization. These reorganizations have resulted in
somewhat reduced capital costs for these producers and may permit them to price
their steel products at levels below those that they could have otherwise
maintained.
An increasing number of mini-mills have entered or are expected to enter
the EAF-based thin-slab/flat-rolled steel market in the next several years.
These mini-mills have cost structures and management cultures more closely akin
to those of the Company than to the integrated producers. Flat-rolled mini-mill
production capacity increased from 4.0 million tons in 1994 to approximately 7.3
million tons in 1996, and industry sources expect this cumulative flat-rolled
mini-mill capacity to reach up to 14.9 million tons in 1997 and up to 18.7
million tons in 1998. The Company's penetration into the total flat-rolled steel
market is limited by geographic considerations, to some extent by gauge and
width of product specifications, and by metallurgical and physical quality
requirements. Based on product type and geographic location, the Company
believes it will most closely compete with the following mini-mills: Nucor's
Crawfordsville, Indiana facility, Gallatin Steel's Ghent, Kentucky facility,
Delta Steel's Delta, Ohio facility, and, to a more limited extent, Nucor's
Hickman, Arkansas facility, Nucor's Berkeley County, South Carolina facility,
and TRICO Steel's facility in northern Alabama. Of the anticipated 14.9 million
tons of 1997 flat-rolled mini-mill capacity, the Company believes that it will
most closely compete for approximately 4.6 million of those flat-rolled tons.
Each of these mills will produce hot-rolled product. However, an affiliate of
Delta Steel is expected to produce hot-rolled galvanized product, and Nucor's
Crawfordsville, Indiana facility produces cold-rolled and cold-rolled galvanized
products.
Non-U.S. U.S. steel producers face significant competition from certain
non-U.S. steel producers who may have lower labor costs. In addition, U.S. steel
producers may be adversely affected by fluctuations in the relationship between
the U.S. dollar and non-U.S. currencies. Furthermore, some non-U.S. steel
producers have been owned, controlled or subsidized by their governments, and
their decisions with respect to production and sales may be, or may have been in
the past, influenced more by political and economic policy considerations than
by prevailing market conditions. Some non-U.S. producers of steel and steel
products have continued to ship into the U.S. market despite decreasing profit
margins or losses. If certain pending trade proceedings ultimately do not halt
or otherwise provide relief from such trade practices, other relevant U.S. trade
laws are weakened, world demand for steel eases or the U.S. dollar strengthens,
an increase in the market share of imports may occur, which could adversely
affect the pricing of the Company's products. The costs for current and future
environmental compliance may place U.S. steel producers, including the Company,
at a competitive disadvantage with respect to non-U.S. steel producers, which
are not subject to environmental requirements as stringent as those in the
United States.
BACKLOG
The Company's hot-rolled steel coil backlog, reflecting orders through the
end of the third quarter of 1997 (the latest date for which Steel Dynamics has
accepted orders), amounted to approximately $100 million (277,967 tons) at June
30, 1997.
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FACILITIES
The Company's plant is located on a greenfield site of approximately 800
acres in DeKalb County, Indiana, strategically located within eight miles of
Interstate 69 (north-south), twenty miles from the Indiana Toll Road System
(east-west Interstate 80). In addition, a cross-country high pressure gas line
is located three-quarters of a mile north of the plant, and a 14-mile, 345,000
volt transmission line brings electrical power to the Company's own electrical
sub-station. In addition, two truck scales and one rail scale have been
installed. The land was formerly farm land, and 67 acres are still being farmed.
The site is served by the east-west rail lines of Conrail, the north-south lines
of the Norfolk & Southern Railway, and the east-west lines of CSX. Railroad
spurs and switching apparatus link the plant with all three railroads. Within
the plant site, the Company has 10 1/2 miles of railroad track, serving both the
plant and the on-site 20-acre scrap yard facility operated by the Company to
receive, hold, and stage its scrap. Water is supplied by two 12" 2,500 gallon
per minute wells which are located on site and which pump out of an aquifer,
located between 160 and 190 feet down, into a 13.0 million gallon reservoir.
Water from this reservoir is pumped to a service water piping system that links
the reservoir to the various water treatment facilities that support the
steelmaking processes.
There are three main buildings that comprise the "hot" mill. They are the
melt shop building, containing four bays totaling 103,740 square feet, the
tunnel furnace building, which is 675 feet long and which is 54,511 square feet
in area (connecting the melt shop to the hot strip mill), and the hot strip mill
building, 283,558 square feet in size, consisting of two bays in width and is
1,146 feet in length. The tunnel furnace building is serviced by a 10-ton crane,
and the hot mill building is serviced by three 80 ton cranes. Office buildings
on site include a general administrative corporate headquarters building,
consisting of 12,000 square feet, a building for the hot rolling, engineering
and safety personnel, consisting of 6,000 square feet, a melt shop office,
consisting of 2,000 square feet, and a shipping office of 1,000 square feet.
There is an employee services building of 8,000 square feet that includes a
shower and locker room facility, as well as the plant cafeteria. A 22,000 square
foot warehouse has been constructed to receive, store, and manage necessary
parts and materials to maintain the plant. The cold mill facility consists of a
continuous pickle line, two hot-dipped galvanizing lines, a semi-tandem
two-stand reversing mill, batch annealing furnaces, and a temper mill, all
housed within a new 550,000 square foot facility contiguous to the hot strip
mill building.
Other support facilities include a bag house and a water treatment system
with buildings located at various places in the plant. The bag house captures
the gasses from the melting operation and cleans them to comply with all federal
emissions standards. The bag house is capable of cleaning 1.5 million cubic feet
per minute of these gasses. The water treatment system cleans, cools, and
recirculates the water used by the plant in various processes at the overall
rate of 100,000 gallons per minute.
The Company considers its manufacturing and operating facilities adequate
for its needs, including the Expansion Projects, and for the foreseeable future.
Equipment failures at its plant could limit or shut down the Company's
production. From its start-up through June 30, 1997, the Company experienced
some equipment failures, none of which lasted more than two days. In order to
reduce the risk of equipment failure, SDI follows a comprehensive maintenance
and loss prevention program, has on-site maintenance and repair facilities, and
maintains an inventory of spare parts and machinery. For example, the Company
maintains a spare EAF transformer as well as spare caster parts, mechanical
parts and electrical controls for its cranes and other tools. No assurance can
be given, however, that material shutdowns will not occur in the future or that
a shutdown would not have a material adverse affect on Steel Dynamics. In
addition to equipment failures, the mill is also subject to the risk of
catastrophic loss. The Company believes that it maintains adequate property
damage insurance to provide for reconstruction of damaged equipment, as well as
business interruption insurance to mitigate losses resulting from any production
shutdown caused by an insured loss.
The Company's executive offices are located at 4500 County Road 59, Butler,
Indiana 46721 and its telephone number is (219) 868-8000.
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ENVIRONMENTAL MATTERS
The Company's operations are subject to substantial and evolving
environmental laws and regulations concerning, among other things, emissions to
the air, discharges to surface and ground water, noise control and the
generation, handling, storage, transportation, treatment and disposal of toxic
and hazardous substances. SDI believes that its facilities are in material
compliance with all provisions of federal and state laws concerning the
environment and does not believe that future compliance with such provisions
will have a material adverse effect on its results of operations or financial
conditions. Since environmental laws and regulations are becoming increasingly
more stringent, the Company's environmental capital expenditures and costs for
environmental compliance may increase in the future. In addition, due to the
possibility of unanticipated regulatory or other developments, the amount and
timing of future environmental expenditures may vary substantially from those
currently anticipated. The cost for current and future environmental compliance
may also place U.S. steel producers at a competitive disadvantage with respect
to foreign steel producers, which may not be required to undertake equivalent
costs in their operations.
Under CERCLA, the Environmental Protection Agency ("EPA") has the authority
to impose joint and several liability for the remediation of contaminated
properties upon generators of waste, current and former site owners and
operators, transporters and other potentially responsible parties, regardless of
fault or the legality of the original disposal activity. Many other states,
including Indiana, have statutes and regulatory authorities similar to CERCLA
and to the EPA. Steel Dynamics has a hazardous waste hauling agreement with The
Waste Management Company of Indiana, Inc. to properly dispose of its flue dust,
ash, and other waste products of steelmaking, but there can be no assurance
that, even through no fault of the Company, SDI may not still be cited as a
waste generator by reason of an environmental clean up at a site to which its
waste products were transported.
EMPLOYEES
SDI's work force consists of approximately 359 employees as of June 30,
1997, of which 294 are hourly and 65 are salaried personnel. Of this number, 79
are assigned to the Cold Mill and four to IDI. The Company's employees are not
represented by labor unions. The Company believes that its relationship with its
employees is good.
Performance Based Incentive Compensation Program. The Company has
established certain incentive compensation programs for its employees, designed
to encourage them to be productive by paying bonuses to groups of employees,
based on various measures of productivity. The programs are designed to reward
employees for productivity efforts. It is not unusual for a significant amount
of an employee's total compensation to consist of such bonuses.
The productivity of the employees is measured by focusing on groups of
employees and not individual performance. Three groups of employees participate
in the bonus program: production, administrative and clerical, and department
managers and officers. Each group of employees has its own bonus program or
programs. See "Management -- Employee Plans" for a description of the department
manager/officer incentive bonus.
Production employees, consisting of those directly involved in the melting,
casting and rolling processes, are eligible to participate in two cash bonus
programs: the production bonus and the conversion cost bonus programs. The
production bonus, if any, is based upon the quantity of quality product produced
that week. The amount of the production bonus is determined for and allocated to
each shift of employees. Depending upon the amount of quality product produced,
the bonus may be equal to or greater than the base hourly wage paid to an
employee. The conversion cost bonus is determined and paid on a monthly basis
based on the costs for converting raw material into finished product. The
program is intended to encourage employees to be efficient in converting the raw
materials into finished steel. Costs of raw materials, over which the production
employees have no control, are not considered.
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The Company has also established a cash bonus plan for its non-production
employees, including accountants, engineers, secretaries, accounting clerks and
receptionists. Bonuses under the plan are based upon the Company's return on
assets.
The Company has also established the 1994 Stock Option Plan, 1996 Stock
Option Plan, the Profit Sharing Plan and the Retirement Savings Plan for certain
of its employees. See "Management -- Employee Plans."
RESEARCH AND DEVELOPMENT
At the present time, the Company engages in no substantial third-party
research and development activities. Steel Dynamics, however, is continually
working to improve the quality, efficiency and cost-effectiveness of its
EAF-based thin-slab/flat-rolled CSP technology. The Company is also engaged in
development efforts in connection with the IDI Project.
PATENTS AND TRADEMARKS
The Company filed an application with the U.S. Patent and Trademark Office
to register the mark "SDI" and an accompanying design of a steel coil. The mark
was published on September 3, 1996, in the Official Gazette and not opposed
within 30 days. A notice of allowance is expected to be issued before year end.
Iron Dynamics has submitted several process patent applications to the U.S.
Patent and Trademark Office, relating to solid based production of low sulfur
direct reduced iron.
LEGAL PROCEEDINGS
The Company is not a party to any lawsuit that, if adversely resolved,
would individually or in the aggregate, have a material effect on the results of
operations or on the financial condition of the Company.
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MANAGEMENT
The following table sets forth information concerning the executive
officers and directors of the Company and its IDI subsidiary as of June 30,
1997. The Company's Board of Directors consists of ten directors. Directors and
executive officers of the Company are elected to serve until they resign or are
removed or are otherwise disqualified to serve or until their successors are
elected and qualified. Directors of the Company are elected at the annual
meeting of stockholders. The directors and executive officers of the Company,
their ages as of June 30, 1997 and positions are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Keith E. Busse............................ 54 President, Chief Executive Officer and
Director
Mark D. Millett........................... 38 Vice President of Melting and Casting and
Director
Richard P. Teets, Jr...................... 42 Vice President of Rolling and Finishing
and Director
Tracy L. Shellabarger..................... 40 Vice President of Finance, Chief Financial
Officer and Director
John W. Nolan............................. 45 Vice President of Sales and Marketing
Larry J. Lehtinen......................... 42 Vice President and General Manager of IDI
John C. Bates............................. 53 Director
Leonard Rifkin............................ 66 Director
Paul B. Edgerley(a)....................... 41 Director
William D. Strittmatter................... 41 Director
William Laverack, Jr.(a).................. 40 Director
Dr. Jurgen Kolb........................... 54 Director
</TABLE>
- ------------
(a) Member of the Audit Committee and member of the Company's Administrative
Committee under the Company's 1994 Incentive Stock Option Plan.
Keith E. Busse co-founded the Company in September 1993 and has been its
President and Chief Executive Officer and a director since its inception. Mr.
Busse is also the President and Chief Executive Officer and a director of IDI.
Previously, for a period of 21 years, he worked for Nucor in a variety of
positions, first as Division Controller and then as Vice President and General
Manager of Nucor's Vulcraft Division, and then, additionally as the Vice
President and General Manager of Nucor's Fastener Division. In 1987, he was
given the responsibility to coordinate and direct the building in
Crawfordsville, Indiana of the world's first thin-slab/flat-rolled mini-mill
(the "Crawfordsville Mini-Mill"). Mr. Busse remained with Nucor's Crawfordsville
Division as its Vice President and General Manager until his resignation in
August 1993. Mr. Busse is a director of Qualitech Steel Holdings, Inc.
Mark D. Millett co-founded the Company in September 1993 and has been its
Vice President of Melting and Casting and a director since its inception.
Previously, Mr. Millett worked for Nucor since 1982 as chief metallurgist at its
Darlington, South Carolina facility and then as manager of its Hazelett
thin-slab casting project in 1985. In 1987, Mr. Millett joined Mr. Busse's
senior management team to help build the Crawfordsville Mini-Mill, and from 1987
until his resignation in August 1993, Mr. Millett served as the Melting and
Casting Manager for the Crawfordsville Mini-Mill.
Richard P. Teets, Jr. co-founded the Company in September 1993 and has been
its Vice President of Rolling and Finishing and a director since its inception.
Previously, Mr. Teets worked for LTV Steel Co., Inc., in its engineering,
maintenance, and production areas, and in 1987, was hired by Nucor to be one of
the senior managers to assist Messrs. Busse and Millett in the construction of
the Crawfordsville Mini-Mill, overseeing the actual engineering and construction
process, including its electrical, mechanical, and environmental aspects. In
1991, Mr. Teets assumed the responsibilities for the Crawfordsville Mini-Mill's
cold-rolling and finishing operations as its Manager.
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Tracy L. Shellabarger joined the Company as its Vice President of Finance
and Chief Financial Officer and a director in July 1994. Previously, from 1987,
Mr. Shellabarger worked for Nucor, first as its Manager of Internal Audit in its
Charlotte, North Carolina home office, and, eight months later, as its
Controller at the Crawfordsville Mini-Mill, where he also served as a member of
the senior management team that constructed and operated that facility for
Nucor.
John W. Nolan joined the Company as its Manager of Sales and Marketing in
December 1994 and was appointed Vice President of Sales and Marketing in January
1997. Prior to that, Mr. Nolan was employed by Bethlehem Steel Company as
Manager of Marketing and by Inland Steel Industries as its Manager of Sales.
Larry J. Lehtinen joined Iron Dynamics, Inc. as its Vice President and
General Manager in January 1997. Prior to that, Mr. Lehtinen worked for
Cleveland Cliffs Inc. where he was most recently Vice President of Operations
for its North American iron ore partnerships. While with Cleveland Cliffs, Mr.
Lehtinen also served as the General Manager for the Company's Empire Mining
Partnership for a two-year period. Prior to 1994, Mr. Lehtinen was with Inland
Steel Industries for 17 years, most recently serving as Vice President/General
Manager of Inland Steel Mining Co. and Manager of Iron Ore.
John C. Bates was elected a director of the Company in September 1994. Mr.
Bates is the President and Chief Executive Officer of Heidtman, which he joined
in 1963, and for which he has served as its President and Chief Executive
Officer since 1969. Mr. Bates is also a director of Heidtman and of National
City Bank, N.W.
Leonard Rifkin was elected a director of the Company in November 1994. Mr.
Rifkin has been the President and Chief Executive Officer of OmniSource since
1959 and since September 1996 has been Chairman of the Board. He is also a
director of Qualitech Steel Holdings, Inc.
Paul B. Edgerley was elected a director of the Company in September 1996.
Mr. Edgerley has been a Managing Director of Bain Capital, Inc. since May 1993
and has been a general partner of Bain Venture Capital since 1990. Mr. Edgerley
was a principal of Bain Capital Partners from 1988 through 1990. Mr. Edgerley is
also a director of GS Industries, Inc. and AMF Group, Inc.
William D. Strittmatter was elected a director of the Company in September
1994. Mr. Strittmatter is a Vice President and Senior Credit Officer of General
Electric Capital Corporation, which he joined in 1982. Mr. Strittmatter is also
Vice Chairman of Shanghai Zhadian Gas Turbine Power Generation Co., Ltd.
William Laverack, Jr. was elected a director of the Company in September
1994. Mr. Laverack is a general partner of J.H. Whitney & Co., a private equity
and mezzanine capital investment firm, which he joined in 1993. Prior to joining
Whitney, he was with Gleacher & Co., a mergers and acquisitions advisory firm,
from 1991 to 1993, and from 1985 to 1991 was employed by Morgan Stanley & Co.
Incorporated in its Merchant Banking Group. Mr. Laverack is also a director of
CRA Managed Care, Inc., The North Face, Inc. and Qualitech Steel Holdings, Inc.
Dr. Jurgen Kolb was elected a director of the Company in April 1996. Dr.
Kolb is a member of the Executive Board of Preussag Stahl AG, which he joined in
1986. Dr. Kolb is also a member of the Supervisory Board of Preussag Handel GmbH
and of Ruhrkohle Bergbau A.G., is Chairman of the Supervisory Board of Universal
GmbH and of Peiner Agrar and Huttenstoffe GmbH and is a director of Feralloy
Corporation.
Daniel M. Rifkin was elected as an alternate director of the Company in
November 1994 to serve as director of the Company in Leonard Rifkin's absence or
unavailability. Daniel M. Rifkin is the son of Leonard Rifkin. Mr. Rifkin is the
President and Chief Operating Officer of OmniSource, which he joined in 1979.
Robert C. Gay was elected as an alternate director of the Company in
September 1996 to serve as director of the Company in Mr. Edgerley's absence or
unavailability. Mr. Gay has been a managing director of Bain Capital, Inc. since
1996 and has been a general partner of Bain Venture Capital since 1989. From
1988 through 1989, Mr. Gay was a principal of Bain Venture Capital. Mr. Gay is a
Vice Chairman of the Board of Directors of IHF Capital, Inc., parent of ICON
Health & Fitness, Inc. In addition, Mr. Gay is a director of
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<PAGE> 56
Alliance Entertainment Corp., American Pad and Paper Company, GT Bicycles, Inc.,
GS Industries, Inc. and its subsidiary, GS Technologies Operating Co., Inc. and
Physio-Control International Corporation.
Molly Ferguson was elected as an alternate director of the Company in
September 1994 to serve as director of the Company in Mr. Strittmatter's absence
or unavailability. Ms. Ferguson is a Manager of Operations of General Electric
Capital Corporation, which she joined in 1987.
Michael L. Stone was elected as an alternate director of the Company in
September, 1994 to serve as a director of the Company in Mr. Laverack's absence
or unavailability. Mr. Stone is a general partner of J.H. Whitney & Co., a
private equity and mezzanine capital investment firm, which he joined in 1989.
Mr. Stone was an associate of the firm from 1989 through January 1992, at which
time he became a general partner.
Dr. Jorg Fuhrmann was elected as an alternate director of the Company in
November 1994 to serve as a director of the Company in Dr. Kolb's absence or
unavailability. Dr. Fuhrmann is a member of the Executive Board of Preussag
Stahl AG, which he joined in 1995.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation paid by the Company for services rendered for 1995 and 1996 for the
Chief Executive Officer and the three other most highly compensated executive
officers of the Company whose salary and bonus amounts exceeded $100,000
(collectively, the "Named Executive Officers"). The amounts shown include
compensation for services rendered in all capacities.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
AWARDS
ANNUAL ----------------------- PAYOUTS
COMPENSATION(1) RESTRICTED -------
--------------------- OTHER ANNUAL STOCK SECURITIES LTIP ALL OTHER
NAME AND FISCAL SALARY BONUS COMPENSATION AWARDS UNDERLYING PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) OPTIONS($) ($) ($)(1)
- ---------------------------- ------ --------- --------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Keith E. Busse, ............ 1996 $ 290,000 $ 219,000 $ -- $ -- $ 5,000 $ -- $ 1,164
President and Chief 1995 275,000 195,000 1,320
Executive Officer
Mark D. Millett, ........... 1996 175,000 115,000 -- -- 3,750 -- 431
Vice President 1995 165,000 99,000 469
Richard P. Teets, Jr., ..... 1996 175,000 115,000 -- -- 3,750 -- 525
Vice President 1995 165,000 99,000 446
Tracy L. Shellabarger, ..... 1996 135,000 81,000 1,050,837(2) -- 3,750 -- 414
Vice President and 1995 120,000 72,000 87,882(3) 366
Chief Financial Officer
</TABLE>
- ------------
(1) Represents matching contributions made by the Company under its Retirement
Savings Plan and officer's life insurance premiums.
(2) Represents forgiveness of indebtedness income to Mr. Shellabarger ($750,000)
and amounts reimbursed to him for the payment of interest on the $750,000
promissory note and taxes on the forgiveness of indebtedness income
($300,837) in connection with the cancellation of the promissory note
executed by Mr. Shellabarger for the purchase of SDI Common Stock at the
time of his employment (the "Shellabarger Note") in connection with the
November 21, 1996 initial public offering of the Company's Common Stock.
(3) Amount reimbursed for the payment of interest and taxes thereon to Mr.
Shellabarger for 1995 interest payments made by the Company on behalf of Mr.
Shellabarger on the Shellabarger Note.
54
<PAGE> 57
INCENTIVE STOCK OPTIONS
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
RATES OF STOCK
PRICE
SECURITIES APPRECIATION FOR
UNDERLYING % OF TOTAL OPTIONS EXERCISE OR OPTION TERM
OPTIONS GRANTED GRANTED TO BASE PRICE EXPIRATION -----------------
NAME (# OF SHARES) EMPLOYEES IN 1996 ($/SH) DATE 5%($) 10%($)
- -------------------------- --------------- ------------------ ----------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Keith E. Busse............ 5,000 5.3% 16.00 11-21-01 22,103 48,841
Mark D. Millett........... 3,750 4.0% 16.00 11-21-01 16,577 36,631
Richard P. Teets, Jr...... 3,750 4.0% 16.00 11-21-01 16,577 36,631
Tracy L. Shellabarger..... 3,750 4.0% 16.00 11-21-01 16,577 36,631
</TABLE>
DIRECTOR COMPENSATION
At present, no separate compensation or fees are payable to directors of
the Company for their services, other than reimbursement of expenses incurred
with respect to such services. The Company expects, however, that new directors
that are not employed by or otherwise affiliated with the Company or its
stockholders will be paid in a manner and at a level consistent with industry
practice.
COMMITTEES OF THE BOARD OF DIRECTORS
In November 1996, the Board of Directors established an Audit Committee.
The Audit Committee makes recommendations to the Board of Directors regarding
the independent auditors to be nominated for election by the stockholders and
reviews the independence of such auditors, approves the scope of the annual
audit activities of the independent auditors, and reviews such audit results.
Deloitte & Touche LLP presently serves as the independent auditors of the
Company. The Board of Directors may also establish other committees to assist in
the discharge of its responsibilities. The Board has appointed directors Paul B.
Edgerley and William Laverack, Jr. as the Administrative Committee under the
Company's 1994 Incentive Stock Option Plan.
The Board of Directors, acting as a compensation committee, will provide a
general review of the Company's compensation and benefit plans to ensure that
they meet corporate objectives. In addition, the Board of Directors will review
the Chief Executive Officer's recommendations on (i) compensation of all
officers of the Company and (ii) adopting and changing major Company
compensation policies and practices.
EMPLOYMENT AGREEMENTS
Effective as of June 24, 1994, the Company entered into an Employment
Agreement with Mr. Busse for a term of five years, to serve as President and
Chief Executive Officer. Mr. Busse received a Base Salary of $290,000 for 1996.
Mr. Busse's Base Salary for 1997 is $310,000. The Employment Agreement provides
for an annual bonus (an "Annual Bonus"). The bonus is determined by making an
award among executive employees selected by the Board of Directors in proportion
to their respective base salaries, out of an "Annual Bonus Pool" consisting of
4% of the Company's pre-tax earnings, less an amount equal to 10% of the "equity
investment" in the Company, determined as of the beginning of the year. The
Annual Bonus is subject to first, a maximum of 200% of Base Salary paid in cash,
then, a maximum of 100% of Base Salary paid in restricted stock vesting ratably
over four years. For the first five years of employment, the Annual Bonus is
guaranteed at not less than 60% of Base Salary, regardless of the Company's
profitability. In addition, Mr. Busse received an additional sum of $30,000
during 1995 and 1996, and will receive the same additional amount for 1997.
In the event that Mr. Busse's employment is terminated by the Company for
cause, Mr. Busse is entitled to compensation earned prior to the date of
termination computed pro rata up to and including the date of termination and
all further obligations of the Company will terminate. For purposes of Mr.
Busse's Employment Agreement, "cause" is defined as Mr. Busse's willful and
knowing commission of a criminal act
55
<PAGE> 58
under applicable state or federal law. In the event that Mr. Busse's employment
is terminated by the Company without "cause" or if he terminates his employment
for certain specified reasons, Mr. Busse is entitled to all compensation set
forth in his Employment Agreement, subject to Mr. Busse's reasonable duty to
mitigate his damages, and provided that compensation payable to Mr. Busse will
be reduced on a dollar for dollar basis to the extent of pre-tax compensation
received by Mr. Busse from any competitor of the Company. In the event that Mr.
Busse terminates his employment for any other reason, he will receive no further
compensation under his employment agreement. Upon termination of Mr. Busse's
employment due to his disability or death, the Company will continue paying to
Mr. Busse or his estate, as the case may be, a base salary during the remainder
of the five-year term; provided that in the case of disability, such payments
will be reduced to the extent of any benefits paid by workers' compensation, or
under any state disability benefit program or under any disability policy
maintained by the Company.
Effective June 24, 1994, the Company entered into five-year Employment
Agreements with Mr. Millett and Mr. Teets, pursuant to which Mr. Millett, as
Vice President of Melting and Casting, and Mr. Teets, as Vice President of
Rolling and Finishing, received a Base Salary of $175,000 for 1996 and will
receive a Base Salary of $187,000 for 1997. Both Mr. Millett and Mr. Teets are
entitled to an Annual Bonus, calculated in the same manner and subject to the
same limitations discussed above for Mr. Busse. The termination provisions
contained in the Employment Agreements with Messrs. Millett and Teets are
identical to those contained in the Employment Agreement with Mr. Busse.
Effective July 7, 1994, the Company entered into a four-year Employment
Agreement with Mr. Shellabarger, to serve as Chief Financial Officer, at a Base
Salary for 1996 of $135,000 ($158,000 for 1997). Mr. Shellabarger is entitled to
an Annual Bonus calculated in the same manner and subject to the same
limitations discussed above for Mr. Busse. In addition, the Company sold to Mr.
Shellabarger, at the commencement of his employment, 280,601 shares of its
Common Stock, at an aggregate purchase price of $750,100, for which he executed
the Shellabarger Note. Pursuant to the terms of his employment agreement the
Shellabarger Note was forgiven in connection with the Company's initial public
offering of its Common Stock in November 1996. See "Certain Transactions."
The termination provisions contained in Mr. Shellabarger's Employment
Agreement are substantially similar to those contained in the other Employment
Agreements. For purposes of Mr. Shellabarger's Employment Agreement, "cause" is
defined as (i) dishonesty with respect to the Company or any of its
subsidiaries; (ii) the unexcused failure, neglect, or refusal to perform his
duties and responsibilities, despite being apprised of such failure, neglect or
refusal and given a reasonable period to correct such problem; (iii) willful
misfeasance or nonfeasance of duty intended to injure or having the effects of
injuring the business or business opportunities of the Company or any of its
subsidiaries; or (iv) his conviction of a crime that materially adversely
affects the business of the Company or any of its subsidiaries, or his ability
to perform his duties and responsibilities as contemplated by the Employment
Agreement.
After the initial employment term expires, and although each of the
foregoing Employment Agreements continues only on a month-to-month basis
thereafter (unless renewed), Messrs. Busse, Millett, Teets, and Shellabarger are
entitled to six months of severance pay, at their Base Salary, if employment is
in fact not continued.
All four Named Executive Officers receive major medical, long-term
disability, and term life insurance equal to twice their Base Salaries.
Effective January 2, 1997, IDI entered into a five year Employment
Agreement with Larry J. Lehtinen as IDI's Vice President and General Manager,
with responsibility to implement the development of the IDI Process, the design
construction, start-up, and operation of the IDI production facility, and the
development and supervision of IDI's sales, licensing, and sub-licensing
activities. Mr. Lehtinen is to receive a base salary of $120,000, subject to
increase on an annual review basis, plus an annual bonus in an amount not less
than $78,000 per year for each of the first two years, and thereafter in
accordance with Steel Dynamics' Bonus Plan (as defined) under the category of a
"Manager." Mr. Lehtinen was granted a 33,672 share option, at fair market value,
under the Steel Dynamics' 1994 Incentive Stock Option Plan, on the effective
date of his Employment Agreement, and received an additional one-time cash
payment of $40,670 to offset certain
56
<PAGE> 59
expenses and/or anticipated losses, expected to be incurred by Mr. Lehtinen as a
result of his change of employment. Mr. Lehtinen is also entitled to participate
under Steel Dynamics' 1996 Incentive Stock Option Plan under the category of a
"Vice President."
EMPLOYEE PLANS
Officer and Manager Cash and Stock Bonus Plan. In October 1996, the board
of directors adopted and the stockholders approved an Officer and Manager Cash
and Stock Bonus Plan (the "Bonus Plan"), which prescribes cash and stock bonus
awards based upon the Company's profitability and the Officer's and Manager's
relative base salaries.
Under the Bonus Plan, 5% of an amount determined by subtracting from the
Company's "Adjusted Pre-Tax Net Income" an amount equal to 10% of "Stockholder's
Equity" as determined by the Company's audited Consolidated Balance Sheets, is
placed into a "Distribution Pool," from which the bonus awards are made.
Adjusted Pre-Tax Net Income for any of the Company's fiscal years, commencing
January 1, 1997, is defined as the Company's net income before taxes,
extraordinary items and bonuses payable to Participants under the Bonus Plan, as
determined by the Company's outside auditors, except that, to the extent
reasonably determinable, the effect upon Adjusted Pre-Tax Net Income of any
income and start-up expenses associated with significant capital expenditures,
for a period not to exceed twelve months following start-up, are to be excluded
from and not taken into account in determining Adjusted Pre-Tax Net Income.
"Participants" under the Bonus Plan include "Officers" and "Managers" selected
from time to time to participate in the Bonus Plan by a committee of the Board
which administers the Bonus Plan, consisting of at least two members of the
Board, each of whom should be both a "non-employee director" (as defined in Rule
16(b)-3 under Section 16 of the Exchange Act) and an "outside director" as
defined in Section 162 of the Code. The Board currently serves as the committee,
in the absence of the appointment of a separate committee. At the present time,
five Officers (the President and four Vice-Presidents) and five Managers have
been selected to participate in the Bonus Plan.
Once the Distribution Pool has been calculated, and if it is a positive
number, the Participants are entitled to receive a bonus, payable in cash and,
if the Distribution Pool is sufficient, in stock of the Company, up to the
amount prescribed in the Bonus Plan's formula. Specifically, each Participant is
entitled to receive a cash bonus in an amount determined by multiplying the
amount in the Distribution Pool by the Participant's Bonus Percentage (as
defined below), except that, with respect to an Officer, the cash bonus is not
to exceed two times the Officer's base salary and, with respect to a Manager,
the cash bonus is not to exceed the Manager's base salary. Inasmuch as Keith E.
Busse, Mark D. Millett, Richard P. Teets, Jr. and Tracy L. Shellabarger, the
four Officers currently covered by the Bonus Plan, have existing employment
agreements which provide for the payment of a cash bonus, and in order to
preclude duplication of bonus payments, the Bonus Plan provides that the amount
of any cash bonus payable to those Officers under their existing employment
agreements is to be deducted from the cash bonus, if any, payable to them under
the Bonus Plan. The "Participant's Bonus Percentage" means, in any year with
respect to a Participant, a fraction, the numerator of which is equal to either
(i) with respect to an Officer, two (2) times the Officer's base salary or (ii)
with respect to a Manager, the Manager's base salary (both (i) and (ii) are
defined as the "Participant's Adjusted Base Salary"), and the denominator of
which is equal to the sum of all the Participants' Adjusted Base Salaries.
If there is any excess in the Distribution Pool over the sum of the
aggregate cash bonuses payable under the Bonus Plan to all Participants and the
amounts deducted from the cash bonuses otherwise payable to Messrs. Busse,
Millett, Teets and Shellabarger because of bonuses already payable to them under
their employment agreements (which sum is defined as the "Adjusted Distribution
Pool"), the amount thereof is to be distributed to the Participants in the form
of "Restricted Stock." Each Participant is to receive that number of shares of
Restricted Stock having a fair market value, at the time of issuance, equal to
the product of that Participant's Bonus Percentage and the Adjusted Distribution
Pool, except that, with respect to an Officer, the aggregate fair market value
of the Restricted Stock so issued is not to exceed the Officer's Base Salary,
and, with respect to a Manager, the aggregate fair market value of the
Restricted Stock so issued is not to exceed 50% of the Manager's Base Salary.
The Bonus Plan provides that Restricted Stock will vest and become
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<PAGE> 60
nonforfeitable over a four year period. Commencing on January 1 following the
year with respect to which the Restricted Stock was issued, the stock will vest
and become nonforfeitable at the rate of 25% thereof for each full year
following the year with respect to which the Restricted Stock was issued. Upon
termination of a Participant's employment for any reason other than retirement,
all shares of Restricted Stock of that Participant which were not vested at the
time of termination of employment are required to be forfeited and returned to
the Company (although the committee, in its discretion, may waive the forfeiture
provisions). Until vested, Restricted Stock is not permitted to be transferred,
assigned, sold, pledged, or otherwise disposed of in any manner, nor subject to
levy, attachment or other legal process, and, while restricted, the stock
certificates evidencing those shares are required to be legended and held by the
Company. Subject to these limitations, however, and as long as a forfeiture has
not occurred, the Participant is treated as the owner of the Restricted Stock
with full dividend and voting rights.
The total number of shares of Common Stock of the Company reserved for
distribution pursuant to the Restricted Stock portion of the Bonus Plan is
450,000 shares, subject to adjustment in the event of any stock dividends, stock
splits, combinations or exchanges of shares, recapitalizations or other changes
in the capital structure of the Company, as well as any other corporate
transaction or event having any effect similar to any of the foregoing. If any
such event occurs, the aggregate number of shares reserved for issuance under
the Bonus Plan would be adjusted to equitably reflect the effect of such
changes. The Bonus Plan commenced with the Company's fiscal year beginning
January 1, 1997, however, no cash or stock bonuses under this Bonus Plan will
accrue until after the conclusion of the Company's 1997 fiscal year.
The Company has also established other bonus plans for its employees. See
"Business -- Employee."
Stock Option Plans. The following general discussion of certain features
of the Company's 1994 Incentive Stock Option Plan (the "1994 Plan") and the 1996
Incentive Stock Option Plan (the "1996 Plan") is subject to and qualified in its
entirety by reference to the 1994 Plan and the 1996 Plan, copies of which have
been filed as exhibits to the Registration Statement of which this Prospectus is
a part.
1994 Incentive Stock Option Plan. In December 1994, the Company adopted
the 1994 Plan, which was approved by stockholders in March 1995. Under the 1994
Plan, the Company's Board of Directors, or a committee designated by the Board
of Directors, grants to managers, supervisors and professionals of the Company
incentive stock options ("ISOs") intended to qualify as such under Section 422
of the Internal Revenue Code of 1986, as amended (the "Code"). However, to the
extent that the aggregate fair market value (determined as of the time of the
option grant) of all shares of Common Stock with respect to which ISOs are first
exercisable by an individual optionee in any calendar year (under all plans of
the Company and any parent or subsidiary) exceeds $100,000, the excess of the
options over $100,000 will be issued as nonstatutory stock options, not
qualifying as ISOs. In any fiscal year of the Company, no employee may be
granted options to purchase more than 300,000 shares of the Company's Common
Stock. The exercise price of an ISO granted to any participant is the fair
market value at the time of the grant (110% of fair market value in the case of
an ISO granted to a 10% stockholder). One-third of the ISOs granted to an
employee under the 1994 Plan become exercisable six months after the date of
grant, and two-thirds of the ISOs become exercisable on the fifth anniversary of
the date of grant, or at such time and subject to such other terms and
conditions as determined by the Board of Directors or the Administrative
Committee. In no event will exercise be permitted after ten years from the date
of grant (five years, in the case of an ISO granted to a 10% stockholder). If an
option expires or terminates without having been exercised in full, the
unpurchased shares will continue to be available for award under the 1994 Plan.
An ISO may be exercised during the life of the participant solely by the
participant or the participant's duly appointed guardian or personal
representative. The total number of shares of Common Stock available for awards
under the 1994 Plan is 1,102,765 shares, subject to adjustment for future stock
splits, stock dividends and similar events. As of June 30, 1997, options for
763,236 shares of Common Stock had been issued under the 1994 Plan, of which
options for 62,043 shares had been exercised.
Awards under the 1994 Plan, through December 31, 1996, were determined by
the Board of Directors, in its discretion. Effective January 1, 1997, awards
under the 1994 Plan are determined by the Administrative Committee, consisting
of two members of the Board each of whom is a "non-employee director," as
defined in
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<PAGE> 61
Rule 16(b)-3 promulgated under Section 16 of the Securities Exchange Act of 1934
and an "outside director" as that term is used in Section 162 of the Code and
the Regulations thereunder.
On January 10, 1997, the Company filed a Registration Statement on Form
S-8, to register, under the Securities Act of 1933, as amended, the issuance of
all 1,102,765 shares of Common Stock available for awards under the 1994 Plan.
1996 Incentive Stock Option Plan. In October 1996, the Company adopted and
the stockholders approved the 1996 Plan. The 1996 Plan covers all full-time
employees of SDI (approximately 359 employees as of June 30, 1997) and its
subsidiaries, including officers, department managers, supervisors, professional
staff, and hourly employees, and provides for automatic semi-annual grants of
stock options to all such employees, by position category, in the following
amounts, based upon the fair market value of the Company's Common Stock on each
semi-annual grant date, with an exercise price equal to the same fair market
value on such date (110% of fair market value in the case of 10% stockholders):
<TABLE>
<CAPTION>
GRANTS SEMI-ANNUAL
POSITION PER YEAR GRANT VALUE
------------------------------------------------------- -------- -----------
<S> <C> <C>
President.............................................. 2 $80,000
Vice-President......................................... 2 60,000
Vice-President......................................... 2 45,000
Manager................................................ 2 30,000
Supervisors/Professionals
Grade 3.............................................. 2 15,000
Grade 2.............................................. 2 12,500
Grade 1.............................................. 2 10,000
Hourly................................................. 2 2,500
</TABLE>
The stock options are intended to qualify as ISOs under the Code, except
that to the extent that the aggregate fair market value (determined as of the
time of the option grant) of all shares of Common Stock with respect to which
ISOs are first exercisable by an individual optionee in any calendar year (under
all plans of the Company and any parent or subsidiary) exceeds $100,000, the
excess of the options over $100,000 will be issued as nonstatutory stock
options, not qualifying as ISOs. In any fiscal year of the Company, no employee
may be granted options to purchase more than 300,000 shares of the Company's
Common Stock.
The 1996 Plan is a five-year plan, which terminates December 31, 2001.
Options issued under the 1996 Plan become exercisable six months after the date
of grant and must be exercised no later than five years thereafter. Subject to
certain exceptions, the employee must remain in the continuous employment of the
Company or any of its subsidiaries from the date of grant to and including the
date of exercise. Options are not transferable, except by will or pursuant to a
qualified domestic relations order, or as permitted under Section 422 of the
Code or under applicable Securities and Exchange Commission rules, and may be
exercised, during the optionee's lifetime, only by the optionee. No shares of
Common Stock may be issued until full payment has been made, and an optionee has
no right to any dividends or other rights of a stockholder with respect to
shares subject to an option until such time as the stock has actually been
issued in the optionee's name in accordance with the 1996 Plan. If an option
expires or terminates without having been exercised in full, the unpurchased
shares will continue to be available for award under the 1996 Plan.
An Administrative Committee, when appointed by the Board of Directors, is
to administer the 1996 Plan. Such Committee must consist of at least two members
of the Board, each of whom must be both a "non-employee director," as defined in
Rule 16(b)-3 promulgated under Section 16 of the Securities Exchange Act of
1934, and an "outside director" as that term is used in Section 162 of the Code
and the regulations thereunder. Currently, however, in the absence of the
appointment of a Committee by the Board, the Board is serving as the Committee.
The Committee is required to administer the 1996 Plan so as to comply at all
times with Rule 16(b)-3 of the Exchange Act and Sections 162, 421, 422, and 424
of the Code.
The Board may amend, alter, or discontinue the 1996 Plan at any time and
from time to time. The total number of shares of Common Stock available for
award under the 1996 Plan is 1,403,000, subject to
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<PAGE> 62
adjustment for future stock splits, stock dividends and similar events. As of
June 30, 1997, options for 185,896 shares of Common Stock have been issued under
the 1996 Plan, of which 939 had been exercised.
On May 21, 1997, the Company filed a Registration Statement on Form S-8, to
register under the Securities Act, the issuance of all 1,403,000 shares of
Common Stock available for awards under the 1996 Plan.
Profit Sharing Plan. Steel Dynamics has also established a Profit Sharing
Plan, for eligible employees. The plan is a "qualified plan" for federal income
tax purposes. Under the Profit Sharing Plan, the Company allocates each year to
a trust fund such sum, if any, as the Board of Directors determines, up to an
amount equal to 15% of the wages paid to Profit Sharing Plan participants
("profit sharing pool"). The profit sharing pool is used to fund the Profit
Sharing Plan as well as a separate cash profit sharing bonus which is paid to
employees in March of the following year. The allocation between the Profit
Sharing Plan contribution and the cash bonus amount is determined by the Board
of Directors each year. Employees become eligible to participate in the Profit
Sharing Plan after they have completed 30 days of employment with the Company.
An employee is entitled to a Profit Sharing Plan allocation only if that
employee has worked at least 1,000 hours during the year. An employee becomes
fully vested over a period of seven years of service with the Company, subject
to prior vesting in the event of retirement, death or disability. Contributions
to the Profit Sharing Plan by Steel Dynamics are deductible by the Company and
the contributions and the income earned thereon are not taxable to an employee
until actually received by the employee at a later date.
Retirement Savings Plan. SDI has also established a Retirement Savings
Plan for eligible employees, which is also a "qualified plan" for federal income
tax purposes. Employees become eligible to participate in the Retirement Savings
Plan on the first day of the month following the date of employment with the
Company. Contributions to the Retirement Savings Plan by the employees may be
made on a pre-tax basis and the income earned on such contributions is not
taxable to an employee until actually received at a later date. Generally,
employees may contribute on a pre-tax basis up to 8% of their eligible
compensation. SDI matches employee contributions in an amount equal to a minimum
of 5% of the employee's pre-tax contribution, subject to certain applicable tax
law limitations and to profitability levels of the Company. Employees are
immediately 100% vested with respect to their pre-tax contributions and the
Company's matching contributions. Contributions by Steel Dynamics are deductible
by the Company and contributions and the income earned thereon are not taxable
to the employee until actually received.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The full Board of Directors acts as a compensation committee. See
"-- Committees of the Board of Directors."
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS.
The Company's Amended and Restated Articles of Incorporation (the
"Articles") limit the liability of directors by providing that the Company shall
indemnify an individual made a party to a proceeding, because the individual is
or was a director, against liability incurred in the proceeding if the
individual's conduct was in good faith, and if the individual reasonably
believed, in the case of "official conduct" with the Company, that the
individual's conduct was in its best interests (or at least that the
individual's conduct was not opposed to the Company's best interests), and, in
the case of any criminal proceeding, that the individual either had reasonable
cause to believe that his conduct was lawful, or had no reasonable cause to
believe that his conduct was unlawful. These subsections prohibit indemnity if a
director is found liable in a proceeding by the Company against the director (or
a stockholder derivative action), or in connection with a proceeding in which
the director has been adjudged liable for having improperly received a personal
benefit in his capacity as a director. Further, in a direct action by the
Company (or in a derivative action), indemnification is permitted but only to
the extent of reasonable expenses incurred by the director in connection with
the proceeding.
The underlying statutory standard for director liability in Indiana,
however, is broad, providing that a director is not liable for any action taken
as a director, or any failure to take any action, unless the director has
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<PAGE> 63
breached or failed to perform the duties of the director's office, and the
breach or failure to perform constitutes willful misconduct or recklessness.
CERTAIN TRANSACTIONS
In 1996 and the six months ended June 30, 1997, the Company has sold
279,000 tons and 188,138 tons, respectively, of its hot bands to Heidtman (and
its affiliated companies) for $91.8 million and $66.1 million, respectively,
pursuant to a six-year "off-take" agreement. See "Business -- The Company's
Customers and Markets." John Bates is the President and Chief Executive Officer
of Heidtman and is a member of Steel Dynamics' Board of Directors, designated by
the Keylock Investments Limited stockholder in which Heidtman and Mr. Bates own
a controlling interest, and by the Mazelina Anstalt stockholder (collectively,
the owners of 5,823,097 shares of the Company's Common Stock, or 12.2% of the
total outstanding shares prior to the offerings). Keylock Investments Limited
was one of the Company's initial investors, becoming a stockholder in September
1993. Pursuant to the Company's off-take agreement with Heidtman, Heidtman has a
6-year obligation to purchase from the Company, and the Company is obligated to
sell to Heidtman, at least 30,000 tons of the Company's hot band products per
month. Heidtman also has priority purchase rights to the Company's secondary and
field claim material. The Company's pricing to Heidtman is determined by
reference to the lowest prices charged by other thin-slab mini-mills or
conventional mills for the same products, and the Company cannot charge Heidtman
higher prices than the lowest prices at which it offers its products to any
other customer. In addition, in 1995 the Company sold approximately 32
unimproved acres of its plant site to Heidtman for $96,000, for the construction
by Heidtman of a steel center processing and storage facility. See "Principal
and Selling Stockholders."
Pursuant to an "off-take" agreement, during 1996 and the six months ended
June 30, 1997, the Company sold 85,800 tons and 56,230 tons, respectively, of
its steel coil to Preussag for an aggregate of $29.9 million and $20.4 million,
respectively. Under this agreement, the Company is obligated to sell to
Preussag, and Preussag is required to purchase, not less than 12,000 tons per
month of the Company's available products, for either domestic or export use or
resale, at market prices determined by reference to the Company's price sheet
and by reference to prevailing competitive market prices charged to large
customers by other mills within the Company's marketing area. In addition,
Preussag has been appointed as the Company's preferred distributor for all
export sales to customers outside the United States, Canada and Mexico. See
"Business -- The Company's Customers and Markets." Dr. Jurgen Kolb, a director
of the Company, is a member of the Executive Board of Preussag and Preussag owns
6,089,865 shares of Common Stock, or 12.7% of the total outstanding shares prior
to the offerings. See "Principal and Selling Stockholders."
Pursuant to a scrap purchasing agreement with OmniSource, during 1996 and
the six months ended June 30, 1997, the Company purchased an aggregate of
1,068,609 tons and 452,162 tons, respectively, of steel scrap for $145.5 million
and $58.5 million, respectively, and paid OmniSource a total of $1.8 million and
$0.8 million, respectively, in fees. See "Business -- Steel Scrap and Scrap
Substitute Resources." Leonard Rifkin is the Chairman of the Board and Chief
Executive Officer of OmniSource and is a member of Steel Dynamics' Board of
Directors designated by the Heavy Metal, L.C. stockholder (the owner of
5,667,612 shares of the Company's Common Stock, or 11.8% of the total
outstanding shares prior to the offerings). Leonard Rifkin, together with
members of his family, and OmniSource collectively own a controlling interest in
Heavy Metal, L.C. See "Principal and Selling Stockholders." Heavy Metal, L.C.
was one of the Company's initial investors, becoming a stockholder in September
1993. Pursuant to the OmniSource scrap purchasing agreement, OmniSource acts as
the exclusive scrap purchasing agent for the Company's steel scrap, which may
involve sales of OmniSource's own scrap, at the prevailing market prices which
OmniSource can get for the same product, or it may involve brokering of general
market scrap, for which the Company pays whatever is the lowest market price for
which OmniSource can purchase that product. OmniSource is paid a commission per
gross ton of scrap received by the Company at its mini-mill. In addition,
OmniSource maintains a scrap handling facility, with its own equipment and
staff, on the Company's plant site. OmniSource does not pay rent for this
facility.
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<PAGE> 64
The Company has entered into a five-year "off-take" agreement with
Qualitech, pursuant to which the Company has agreed to purchase from Qualitech
approximately 300,000 tonnes of iron carbide that Qualitech intends to produce
commencing in 1998. See "Business -- Steel Scrap and Scrap Substitute
Resources." Steel Dynamics owns approximately 4.0% of the common stock of
Qualitech Steel Holdings, Inc. ("Holdings"), the parent company of Qualitech. In
addition, Keith E. Busse, Leonard Rifkin, and William Laverack, directors of the
Company, also serve on Holdings' 12-member board of directors. OmniSource and
Leonard Rifkin, affiliates of Heavy Metal, L.C., one of the Company's
stockholders, own approximately 6% of Holdings' common stock, Whitney Equity
Partners, L.P., an affiliate of J.H. Whitney & Co., a stockholder of the Company
(of which Mr. Laverack is a general partner) owns approximately 10% of Holdings'
common stock and General Electric Capital Corporation, a stockholder of the
Company, owns approximately 1.7% of Holdings' common stock. The Company's iron
carbide supply contact with Qualitech represents approximately 45% of
Qualitech's estimated plant capacity, and the contract was considered vital to
Qualitech's successful financing of its iron carbide project, which is presently
under construction. OmniSource also has an iron carbide off-take contract with
Qualitech, for 120,000 tonnes of iron carbide annually.
The Company has entered into a "second look" export sales agreement with
Sumitomo. See "Business -- The Company's Customers and Markets." Sumitomo and
its parent Sumitomo Corporation (Japan) own in the aggregate 1,284,197 shares of
Common Stock or 2.6% of the total outstanding shares prior to the offerings. The
export sales agreement applies if Preussag declines to handle the particular
export sale. In addition, Sumitomo and IDI have entered into a Sale of Excess
Product Agreement, pursuant to which Sumitomo will represent IDI, once it is
producing DRI, in selling up to half of any of IDI's excess DRI that is not
needed by the Company for its own use and consumption. No export sales have been
made to date under this agreement.
The Company's wholly owned subsidiary, IDI, has also entered into an
agreement with Sumitomo, pursuant to which IDI has agreed to sell to or through
Sumitomo up to 50% of any DRI that IDI manufactures starting in 1998 which Steel
Dynamics does not retain for its own consumption. Such sales would be at the
then prevailing market prices, either for Sumitomo's own account or on a sales
commission basis for sale to third parties. In addition, IDI has entered into a
license agreement with Sumitomo pursuant to which Sumitomo is authorized, on an
exclusive worldwide basis, except for the United States and Canada, and except
for additional plants that IDI may wish to construct for its own use or for
SDI's use, to sublicense others or to use any proprietary know-how or other
intellectual property that constitutes the IDI Process or is part of the IDI
Project and which may be developed by IDI in connection with the manufacture of
DRI, or by Steel Dynamics either in connection with the conversion of DRI into
liquid pig iron or in connection with the use thereof in the steelmaking
process. Such license rights contemplate that Sumitomo would build and construct
plants using this technology for itself or for others within the licensed
territory. IDI is entitled to receive a one-time license fee from Sumitomo,
based upon each plant's rated production capacity, plus a negotiated royalty fee
for the use of any IDI or SDI patents that may be acquired by IDI or SDI in
connection with the enterprise. Any underlying royalties or fees that might have
to be paid to third parties would be passed through to Sumitomo or to its
sub-licensees. IDI has also agreed to afford Sumitomo an opportunity to provide
its proposed DRI plant with its raw material and equipment supplies, on a
competitive basis that is intended to secure for IDI the lowest and best prices
for the supplies and products.
In 1996, the Company sold Common Stock to certain of its existing
shareholders or their affiliates for an aggregate purchase price of $11.9
million in two interrelated private placements of Common Stock, pursuant to
agreements that were entered into during the first and second quarters of 1996.
In February 1996, the Company accepted subscriptions from these stockholders,
all "accredited" purchasers, for the purchase, at approximately $8.20 per share,
of approximately $11.9 million of Common Stock, as part of the Company's efforts
to place an aggregate of $25.0 million of Common Stock to be used in whole or in
part to finance its IDI Project. In the exercise or waiver of their limited
preemptive rights under the Stockholders Agreement stockholders, owning
collectively (prior to the purchase) approximately 78.0% of the total then
outstanding, agreed to purchase that amount. The purchase price was determined
by reference to the arm's length Stock Purchase Agreement of December 1995 with
Preussag, relating to the purchase by Preussag at that time of $50.0 million of
Common Stock at approximately $8.55 per share, which contained a provision that
contemplated the Company's sale to existing stockholders or to others of up to
$10 million of its shares of
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<PAGE> 65
Common Stock at a purchase price of approximately $8.20 per share. Because of
the interrelatedness of the Company's placement of the balance of approximately
$13.0 million before the IDI Project could be undertaken, the approximately
$11.9 million private placement was not closed until September 1996, at which
time the Company also closed a $13.5 million private placement of its Common
Stock with Sumitomo and Sumitomo Corporation (Japan), which was agreed to by the
parties in April 1996, at a per share purchase price of approximately $10.51.
This purchase price was determined at arm's length by the Company's Board of
Directors, in negotiations with Sumitomo.
During August and September 1996, in connection with its Cold Mill Project,
the Company entered into two agreements with units of General Electric Company,
of which General Electric Capital Corporation, the owner of 5,750,029 of the
Company's shares of Common Stock, or 12.0% of the total outstanding shares prior
to the offerings is a wholly-owned subsidiary, for the purchase of equipment for
the Cold Mill Project in the aggregate amount of approximately $23.4 million.
This contract was entered into as a result of a competitive bidding process
conducted by the Company in the same manner that it has used in connection with
the letting of other equipment and supply agreements for its existing mini mill
and for its Cold Mill Project.
In November 1996, the Company used a portion of the proceeds from its
initial public offering to prepay all $55.0 million principal amount of certain
subordinated notes, together with accrued interest thereon and a prepayment
premium. General Electric Capital Corporation and Whitney Subordinated Debt
Fund, L.P., which owned $14.7 million principal amount and $18.5 million
principal amount, respectively, of such subordinated notes and were stockholders
of the Company.
In July 1994, the Company sold Mr. Shellabarger, the Chief Financial
Officer and a director of the Company, 280,601 shares of Common Stock, and
accepted the Shellabarger Note in partial payment of the purchase price.
Pursuant to the terms of his employment agreement, the note was forgiven in
connection with the offerings. See "Management -- Employment Agreements."
THE REGISTRATION AGREEMENT
Under a Registration Agreement dated as of June 30, 1994, as amended,
between the Company and various stockholder groups identified therein as the
"Bain Stockholders," "General Electrical Capital Corporation," "Heavy Metal,
L.C.," the "Keylock Stockholders," the "Whitney Stockholders," the "Management
Stockholders," "Preussag," and "Sumitomo" (collectively the "Stockholders"), the
Stockholders were granted certain demand and piggyback registration rights.
Demand Registrations. The Bain Stockholders and General Electric Capital
Corporation are each entitled to request two demand registrations, and the Heavy
Metal, L.C., Keylock Stockholders and Preussag are entitled to request one
demand registration each. A demand registration must be for at least 50% of the
total Company shares held by the Stockholder making the demand. In connection
with the offerings, the Bain Stockholders will be deemed to have used one demand
registration right each.
Piggyback Registrations. Whenever the Company proposes to register any of
its securities under the Securities Act (other than pursuant to a demand
registration), the Company is required to notify all holders of "Registrable
Securities" and will include all Registrable Securities requested to be included
that may be prudently sold in the offering.
All expenses incident to the Company's compliance with its obligations
under the Registration Agreement will be paid by the Company, regardless of
whether in connection with a demand registration or a piggyback registration,
and the Company has agreed to reimburse the holders of Registrable Securities
for the reasonable fees and disbursements of one legal counsel chosen by all of
them in connection with a registration.
The obligations under the Registration Agreement terminate on November 21,
2004, the seventh anniversary of a sale of the Company's Common Stock pursuant
to an effective registration statement under the Securities Act, subject to
extension for an additional six-month period under certain circumstances.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of June 30, 1997, and as adjusted to reflect
the sale of the Common Stock offered hereby, by (i) each person known by the
Company to be the beneficial owner of more than 5% of the Common Stock, (ii)
each director of the Company, (iii) each Named Executive Officer, (iv) each
Selling Stockholder and (v) all executive officers and directors as a group.
Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares of Common Stock beneficially owned
by them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERINGS NUMBER OF OFFERINGS
-------------------- SHARES BEING --------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------------ ---------- ------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C>
Heavy Metal, L.C.(1)...................... 6,233,926 13.0% -- 5,733,926 11.7%
1610 North Calhoun Street
Fort Wayne, IN 46808
Preussag Stahl AG(2)...................... 6,089,865 12.7 550,000 5,539,865 11.3
Eisenhuttenstr. 99 D-38223
Salzgitter, Germany
Bain Capital Entities(3).................. 4,043,732 8.4 151,002 297,043 *
Two Copley Place
Boston, MA 02116
General Electric Capital Corporation(4)... 5,750,029 12.0 1,486,458 4,310,000 8.8
1600 Summer Street, 5th Floor
Stamford, CT 06927
Keylock Investments Limited(5)............ 3,017,139 6.3 -- 2,917,139 5.9
17 Dame Street
Dublin 2, Ireland
Mazelina Anstalt(6)....................... 2,805,958 5.9 100,000 2,705,958 5.5
c/o Lic. Gentrud Beck
Stadtle 36
9490 Vaduz, Liechtenstein
J.H. Whitney & Co.(7)..................... 1,753,591 3.7 1,450,000 303,591 *
177 Broad Street, 15th Floor
Stamford, CT 06961
Sumitomo Corporation of America........... 513,750 1.1 160,000 353,750 *
5000 USX Tower
600 Grant Street
Pittsburgh, PA 15219
Keith E. Busse(8)......................... 1,682,909 3.5 100,000 1,582,909 3.2
Richard P. Teets, Jr.(9).................. 1,126,156 2.4 -- 1,126,156 2.3
Mark D. Millett(10)....................... 1,067,707 2.2 -- 1,067,707 2.2
Tracy L. Shellabarger(11)................. 286,751 .6 -- 286,751 *
Leonard Rifkin(12)........................ 6,239,926 13.0 -- 5,739,926 11.7
OmniSource Corporation(13)................ 1,716,525 3.6 450,000 1,266,525 2.6
1610 North Calhoun Street
Fort Wayne, IN 46808
John C. Bates(14)......................... 3,017,139 6.3 -- 2,917,139 5.9
Heidtman Steel Products, Inc.(15)......... 3,017,139 6.3 -- 2,917,139 5.9
2401 Front Street
Toledo, OH 43605
Paul B. Edgerley(16)...................... 4,043,732 8.4 -- 297,043 *
William D. Strittmatter(17)............... 5,750,029 12.0 -- 4,310,000 8.8
William Laverack, Jr.(18)................. 1,753,591 3.7 -- 303,591 *
Dr. Jurgen Kolb(19)....................... 6,089,865 12.7 -- 5,539,865 11.3
Directors and Executive Officers as a
Group (10 persons)(8)................... 31,057,805 64.9 100,000 23,171,087 47.2
Other Selling Stockholders(20)............ 2,696,569 6.1 2,696,569 -- --
(None of whom own more than 1% of the
outstanding Common Stock)
</TABLE>
(footnotes on following page)
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<PAGE> 67
- ---------------
* Less than 1%.
(1) Prior to the offerings, Heavy Metal, L.C. distributed 500,000 shares to two
of its members, who are in turn selling those shares in the offerings. Of
these shares, 450,000 were distributed to and are being sold by OmniSource
Corporation and are shown in the "Number of Shares Offered" column for
OmniSource Corporation. The other 50,000 shares were distributed to a
person included in the category of "Other Selling Stockholders" and are
included in the "Number of Shares Being Offered" column for the Other
Selling Stockholders. If the U.S. Underwriters exercise their
over-allotment option in full, Heavy Metal, L.C. will distribute another
266,525 shares to OmniSource Corporation and 33,475 shares to two of the
Other Selling Stockholders, who will then sell those shares. If the U.S.
Underwriters exercise their over-allotment option in full, the shares
beneficially owned by Heavy Metal, L.C. after the offerings would be
5,433,926.
(2) If the U.S. Underwriters exercise their over-allotment option in full, the
shares beneficially owned by Preussag Stahl AG after the offerings would be
5,039,865.
(3) Consists of 1,687,584 shares held of record by Bain Capital Fund IV, L.P.
("Fund IV"), 1,931,272 shares held of record by Bain Capital Fund IV-B,
L.P. ("Fund IV-B"), 325,278 shares held of record by BCIP Associates
("BCIP"), and 99,598 shares held of record by BCIP Trust Associates, L.P.
("BCIP Trust"), in each case as of June 30, 1997. Immediately prior to the
offerings, Fund IV and Fund IV-B distributed a portion of their shares of
the Common Stock to the general partner and their limited partners, certain
of which agreed in turn to sell an aggregate of 2,592,998 shares in the
offerings upon consummation of such distribution. These shares so
distributed are included in the "Number of Shares Being Offered" column for
General Electric Capital Corporation (for 46,429 shares) and the Other
Selling Stockholders (for 2,546,569 shares). The aggregate number of shares
distributed by Fund IV and Fund IV-B to the limited partners thereof was
distributed equally on a pro rata basis to all limited partners of each
such Bain Capital Entity. In addition to the 151,002 shares of BCIP and
BCIP Trust and the distribution of the 2,592,998 shares, all shares to be
sold in the offerings, the number of shares beneficially owned by the Bain
Capital Entities was further reduced by the number of shares distributed by
the Bain Capital Entities to its various partners but not sold in the
offerings, to 297,043 shares.
(4) The number of shares being offered by General Electric Capital Corporation
includes 46,429 shares of Common Stock distributed immediately prior to the
offerings by Bain Capital Fund IV-B, L.P. to General Electric Capital
Corporation as a limited partner thereof, as described in footnote (3)
above, all of which are to be sold in the offerings. Including such shares,
General Electric Capital Corporation beneficially owned 5,796,458 shares,
or approximately 12.1%, of the Common Stock outstanding prior to the
offerings.
(5) Prior to the offerings, Keylock Investments Limited distributed 90,496
shares to HS Processing, Inc., an affiliate of Heidtman Steel Products,
Inc., 8,415 shares to National Material L.P. and 1,089 to Centaur, Inc.,
for a total of 100,000 shares, which are being sold by these entities in
the offerings. These shares are included in the "Number of Shares Being
Offered" column for the Other Selling Stockholders.
(6) If the U.S. Underwriters exercise their over-allotment option in full, the
shares beneficially owned by Mazelina Anstalt after the offerings would be
2,455,958.
(7) Consists of 961,060 shares held of record by Whitney 1990 Equity Fund, L.P.
(139,510 after the offerings), 240,279 shares held of record by J.H.
Whitney & Co. (72,846 after the offerings), and 552,252 shares held of
record by the Whitney Subordinated Debt Fund (91,235 after the offerings).
(8) Includes 300 shares of Common Stock held by Mr. Busse's minor son, with
respect to which Mr. Busse disclaims beneficial ownership. Includes 5,000
shares subject to currently exercisable stock options or stock options
exercisable within 60 days. If the U.S. Underwriters exercise their
over-allotment option in full, the shares beneficially owned by Mr. Busse
after the offerings would be 1,532,909.
(9) Includes 3,750 shares subject to currently exercisable stock options or
stock options exercisable within 60 days.
(10) Includes 3,750 shares subject to currently exercisable stock options or
stock options exercisable within 60 days.
(11) Includes 3,750 shares subject to currently exercisable stock options or
stock options exercisable within 60 days, and also includes 2,400 shares
owned by Mr. Shellabarger's wife for the benefit of Mr. Shellabarger's
minor children.
(footnotes continued on following page)
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<PAGE> 68
(12) Includes 6,239,926 shares of Common Stock held of record for its members by
Heavy Metal, L.C. that Mr. Rifkin may be deemed to beneficially own due to
his relationship with other beneficial owners of that entity. It also
includes 500,000 shares of Common Stock which Heavy Metal, L.C. has
distributed to OmniSource Corporation and to one of the Other Selling
Stockholders immediately prior to the offerings, which OmniSource
Corporation and such Other Selling Stockholder are selling in the
offerings. Mr. Rifkin disclaims beneficial ownership of all but 593,018 of
these shares, none of which are being sold in the offerings.
(13) Includes 1,716,525 shares of the 6,233,926 shares of Common Stock held of
record for its members by Heavy Metal, L.C., 450,000 of which were
distributed by Heavy Metal, L.C. to OmniSource Corporation immediately
prior to the offerings and which OmniSource Corporation are selling in the
offerings. If the U.S. Underwriters exercise their over-allotment option in
full, Heavy Metal, L.C. will distribute an additional 266,525 shares to
OmniSource Corporation which will then sell their shares. In that event,
the shares beneficially owned by OmniSource Corporation after the offerings
would be 1,000,000 shares.
(14) Consists of all 3,017,139 shares of Common Stock held of record by Keylock
Investments Limited that Mr. Bates may be deemed to beneficially own due to
his relationship with that entity. Prior to the offerings, Keylock
Investments Limited will distribute the shares noted in footnote (5) to the
entities noted therein, and these shares are included in the "Number of
Shares Being Offered" column for the Other Selling Stockholders. Mr. Bates
may be deemed the beneficial owner of some of these shares.
(15) Consists of all 3,017,139 shares of Common Stock held of record by Keylock
Investments Limited that Heidtman may be deemed to beneficially own due to
its relationship with Keylock Investments Limited. Heidtman and its
President, John C. Bates, own a controlling interest in Keylock Investments
Limited. Prior to the offerings, Keylock Investments Limited distributed
the shares noted in footnote (5) to the entities noted therein, and these
shares are included in the shares shown in the "Number of Shares Being
Offered" column for the Other Selling Stockholders.
(16) Consists of all 4,043,732 shares of Common Stock held of record by the Bain
Capital Entities, a portion of which are being sold in the offerings, that
Mr. Edgerley may be deemed to beneficially own due to his relationship with
those entities. Mr. Edgerley disclaims beneficial ownership of these
shares. See footnote (3). The "Shares Beneficially Owned After the
Offerings" column for Mr. Edgerley does not include 67,207 shares of Common
Stock, which were distributed by the Bain Capital Entities to Mr. Edgerley,
as described in footnote (3).
(17) Consists of all 5,750,029 shares of Common Stock held of record by General
Electric Capital Corporation that Mr. Strittmatter may be deemed to
beneficially own due to his relationship with this entity. Excludes 46,429
shares of Common Stock distributed by Bain Capital Fund IV-B, L.P.
immediately prior to the offerings to General Electric Capital Corporation
as a limited partner thereof, as described in footnotes (3) and (4) above,
which shares Mr. Strittmatter may be deemed to beneficially own due to his
relationship with this entity. Mr. Strittmatter disclaims beneficial
ownership of all of these shares. The shares that are being sold in the
offerings by General Electric Capital Corporation are shown in the "Number
of Shares Being Offered" column for General Electric Capital Corporation
and are not being offered by Mr. Strittmatter.
(18) Consists of all 1,753,591 shares held of record by J.H. Whitney & Co. and
its affiliated entities noted in footnote (6) that Mr. Laverack may be
deemed to beneficially own due to his relationship with those entities. Mr.
Laverack disclaims beneficial ownership of these shares. The shares that
are being sold in the offerings by J.H. Whitney & Co. and its affiliated
entities are shown in the "Number of Shares Being Offered" column for J.H.
Whitney & Co. and are not being offered by Mr. Laverack.
(19) Consists of all 6,089,591 shares held of record by Preussag Stahl AG that
Dr. Kolb may be deemed to beneficially own due to his relationship with
this entity. Dr. Kolb disclaims beneficial ownership of the shares. The
shares that are being sold in the offerings by Preussag Stahl AG are shown
in the "Number of Shares Being Offered" column for Preussag Stahl AG and
are not being offered by Dr. Kolb.
(20) Consists of 2,546,569 shares distributed to certain of the Other Selling
Stockholders immediately prior to the offerings by the Bain Capital
Entities, and 50,000 and 100,000 shares distributed immediately prior to
the offerings by Heavy Metal, L.C. and Keylock Investments Limited,
respectively. If the U.S. Underwriters exercise their over-allotment option
in full, Heavy Metal, L.C. will distribute 33,475 shares to two of the
Other Selling Stockholders who will then sell those shares. See footnotes
(1), (3) and (5) above.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a brief description of the basic terms of the Company's
Credit Agreement and the proposed indebtedness of its subsidiary, Iron Dynamics,
Inc. The following discussion does not purport to be complete and is subject to,
and is qualified in its entirety by reference to the instruments governing the
respective indebtedness. The Credit Agreement is filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
THE CREDIT AGREEMENT
The Company entered into the Credit Agreement dated as of June 30, 1997,
which amended and restated the Company's previous credit agreement, with Mellon
Bank, N.A. (the "Agent") and the lenders party thereto (the "Lenders"), which
provides for (i) a $250.0 million five-year revolving credit facility (the
"Tranche 1 Facility") for working capital and general corporate purposes; (ii) a
$100.0 million 364-day revolving credit facility (the "Tranche 2 Facility") for
capital expenditures and general corporate purposes; and (iii) a $100.0 million
term loan (the "Tranche 3 Facility"). Indebtedness outstanding under the Credit
Agreement is secured by a first priority lien on substantially all of the assets
of the Company. Borrowings under the Tranche 1 Facility are subject to a
borrowing base consisting of specified percentages of depreciated book value of
specified fixed assets, eligible inventory and receivables. Upon one week's
notice from the Company and approval of all of the Lenders, all or a portion of
the borrowings under the Tranche 2 Facility may be converted to Tranche 1
borrowings.
The Tranche 1 Facility will mature on June 30, 2002, subject to the
Company's option to extend this maturity date for an additional one year at the
end of year three (June 30, 2000) and at the end of year four (June 30, 2001),
provided that the Company's leverage ratio for the twelve month periods ending
on June 30, 2000 and on June 30, 2001, respectively, shall be less than 3.0 to
1. The Tranche 2 Facility will mature on June 30, 1998, subject to 364-day
extensions provided all of the Tranche 2 Facility lenders approve each such
extension. In the event that a Company request for an extension of the Tranche 2
Facility is not approved by such lenders, the Tranche 2 Facility shall be
converted to a five-year term loan with the principal amount of such five-year
term loan to be amortized in equal quarterly installments during the final two
years of the five-year term loan period. The Tranche 3 Facility will amortize in
equal quarterly installments during the final two years of the Tranche 3
Facility term, commencing on September 30, 2002, with the final quarterly
payment being due on June 30, 2004. Borrowings under the Tranche 1 Facility must
be repaid to the extent such borrowings exceed the borrowing base. In addition,
the Company is required to make prepayments under certain circumstances from
asset sales, insurance proceeds and condemnation awards.
Borrowings under the Tranche 1 Facility and the Tranche 2 Facility bear
interest, at the option of the Company, at (i) the "Base Rate" plus an
applicable margin ("Base Rate Option") or (ii) the "Euro-Rate" plus an
applicable margin (the "Euro-Rate Option"). Borrowings under the Tranche 3
Facility bear interest at the Euro-Rate Option. The "Base Rate" for any day is
defined as the greater of (A) the prime rate for such day or (B) .50% plus the
federal funds effective rate for such day. The "Euro-Rate" for any day is
defined as the rate for each funding segment determined by the Agent by dividing
the rate of interest quoted on the Reuter's screen ISDA page to be the average
of the rates per annum for deposits in dollars offered to major money center
banks in the London interbank market two business days prior to the first day of
the funding period in amounts comparable to the funding segment and with
maturities comparable to such funding period by 1.00 minus the Euro-Rate Reserve
Percentage. The Euro-Rate Reserve Percentage is the percentage as determined by
the Agent which is in effect on such day as prescribed by the Board of Governors
of the Federal Reserve System representing the maximum reserve requirement with
respect to eurocurrency funding of a member bank.
The Credit Agreement restricts the Company's ability to incur additional
indebtedness, except (i) licensing or royalty fees payable to SMS
Schloemann-Siemag AG; (ii) accounts payable to trade creditors arising out of
purchases of goods or services in the ordinary course of business, (iii) certain
indebtedness secured by purchase money liens; and (iv) unsecured indebtedness in
an aggregate principal amount at any one time not greater than $10.0 million. In
addition, the Credit Agreement prohibits the Company from
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making capital expenditures in any fiscal year in excess of an aggregate amount
of $50.0 million, unless the Company shall have furnished to the Agent
projections satisfactory to a majority in committed dollar amount of the Lenders
which demonstrate that the Company will satisfy the Financial Covenants (as
defined below). The Company is also prohibited from making any loans or advances
to, or making an investment in other entities except, among other things, (i)
investments in subsidiaries, partnerships or other joint ventures related to the
Company's steel production business which do not exceed (A) $50.0 million plus
35% of the cumulative annual change in net worth of the Company and its
subsidiary in the case of investments in entities in which the Company or its
subsidiary has an equity interest equal to or greater than 10% of the total
equity interests in such entity, or (B) $10.0 million plus 25% of the cumulative
annual change in net worth of the Company and its subsidiary in the case of
other investments and (ii) an investment in IDI not exceeding $30.0 million and
funded solely with the proceeds of the issuance of equity securities. The Credit
Agreement also prohibits the Company from creating any liens on its properties
except (i) liens created in connection with its indebtedness under the Credit
Agreement and in connection with its existing indebtedness; (ii) liens created
and/or deposits made in the ordinary course of business for taxes and
assessments, workmen's compensation, unemployment insurance and other social
security obligations, bids, surety and appeal bonds and the like; and (iii)
purchase money liens on assets acquired in an aggregate amount not to exceed
$5.0 million. The Credit Agreement contains additional restrictive covenants,
including among others, covenants restricting the Company and its subsidiary
with respect to entering into certain contracts, disposition of property or
assets, payment of dividends, providing guarantees, entering into sale-leaseback
transactions, entering into transactions with affiliates, mergers and
consolidations and the modification of certain agreements. In addition, the
Credit Agreement requires the Company to meet certain financial tests (the
"Financial Covenants"), including maintaining (i) its leverage ratio at or below
5.0 to 1 for any period of four consecutive fiscal quarters; (ii) its tangible
net worth at or above the sum of $187 million plus 50% of cumulative net income
at such time; and (iii) its ratio of EBITDA to interest expense at not less than
2.0 to 1 for any period of four consecutive fiscal quarters.
The failure of the Company to satisfy any of the covenants will constitute
an event of default under the Credit Agreement, notwithstanding the Company's
ability to meet its debt service obligations. The Credit Agreement also contains
customary events of default, including the nonpayment of principal, interest,
fees and other amounts, change of control, change of management and
cross-defaults to certain other obligations of the Company and certain events
including bankruptcy, reorganization and insolvency of the Company, Heidtman or
OmniSource.
THE IDI FINANCING
IDI, the wholly owned subsidiary of the Company, expects to receive a
commitment during the third quarter of 1997 for the $60.0 million senior secured
financing facility, the IDI Financing, to finance a portion of the IDI Project.
This anticipated credit facility, as currently being discussed with a group of
lenders would include (i) a $50.0 million eight-year standby construction and
term loan facility (the "IDI Term Facility") for the construction and start-up
of a DRI production facility; and (ii) a $10.0 million eight-year revolving
credit facility (the "IDI Revolving Facility") for working capital and letters
of credit for import requirements. The IDI Term Facility and the IDI Revolving
Facility will be ratably secured by substantially all of the assets of IDI, and
will be further supported by a "take or pay" off-take supply agreement with the
Company for all of IDI's DRI production with an agreement term 18 months longer
than the maturity date of the IDI Financing, and with pricing of the DRI product
tied to market prices of prompt industrial scrap with a ceiling and floor
sufficient to provide for IDI's operating costs and debt service.
The IDI Term Facility will amortize by semi-annual payments beginning in
the year 2000 at 5% of the original principal amount, and increasing to 17.5% on
the final maturity date. In addition, IDI will be required to make prepayments
on the IDI Term Facility under certain circumstances from asset sales, insurance
proceeds and condemnation awards. Borrowings under the IDI Revolving Facility,
upon preliminary acceptance of the DRI production facility, will be subject to a
borrowing base consisting of specified percentages of raw materials, finished
DRI product and accounts receivables. Borrowings under the IDI Revolving
Facility will be required to be repaid to the extent such borrowings exceed the
borrowing base.
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Borrowings under the IDI Financing will bear interest at floating rates tied to
either the Base Rate (as defined above) or the Euro-Rate (as defined above), at
the option of IDI.
In addition to the "take or pay" off-take supply agreement with the
Company, the lenders will require that the Company provide construction
management services to IDI, as well as a package of coordinated completion and
performance guarantees (including repayment of all amounts outstanding under the
IDI Financing in the event the IDI Project fails to achieve a pre-determined
level of performance by a date certain) (the "Assurance Package"). The Assurance
Package will contain, at a minimum, (i) a coordination agreement among vendors
and contractors enabling timely resolution of disputes; (ii) satisfactory
retainages; (iii) payment schedules and payment support facilities; and (iv)
liquidated damages for delay, performance failure and performance shortfall up
to 100% of the contract price.
While it is anticipated that IDI will receive a commitment for the IDI
Financing substantially in accordance with the preceding terms, there can be no
assurance that the commitment will be received or that the IDI Financing will be
consummated.
DESCRIPTION OF CAPITAL STOCK
The following summary of certain provisions of the Common Stock does not
purport to be complete and is subject to, and qualified in its entirety by, the
provisions of the Articles and Bylaws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part, as
well as by the provisions of Indiana's law. The Company's authorized capital
stock consists of 100,000,000 shares of Common Stock, par value $.01 per share.
As of June 30, 1997, there were 47,866,323 shares of Common Stock issued and
outstanding, that were beneficially owned by approximately 6,250 stockholders.
As of June 30, 1997, 885,784 shares of Common Stock were reserved for issuance
upon exercise of outstanding stock options.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders, including the
election of directors. The Articles do not provide for cumulative voting in the
election of directors and, thus, holders of a majority of the shares of Common
Stock may elect all of the directors standing for election.
All holders of Common Stock are entitled to receive ratably such dividends,
if any, as may be declared from time to time by the Board of Directors in its
discretion from funds legally available therefor. Upon the liquidation,
dissolution or winding-up of the Company, the holders of Common Stock are
entitled to receive ratably the net assets of the Company that are available
after the payment of all debts and liabilities. Holders of Common Stock have no
preemptive rights or rights to convert their Common Stock into any other
securities, nor are there any redemption or sinking fund provisions applicable
to the Common Stock.
All outstanding shares of Common Stock are, and the shares to be issued in
the offerings will be, validly issued, fully paid, and non-assessable.
CERTAIN PROVISIONS OF INDIANA LAW REGARDING TAKEOVERS
As an Indiana corporation, the Company is subject to certain provisions of
Indiana law which may discourage or render more difficult an unsolicited
takeover of the Company. There are two principal statutes relating to this issue
that constitute part of the BCL, the statute regulating "business combinations"
and the statute regulating "control share acquisitions."
Under Chapter 43 of the BCL relating to "business combinations" a
corporation (with 100 or more stockholders) may not engage in any "business
combination" with any "interested" stockholder for a period of five years
following the interested stockholder's "share acquisition date" unless the
business combination or the purchase of shares made by the interested
stockholder was approved by the corporation's board of directors prior to the
interested stockholder's share acquisition date. The term "business combination"
is broadly
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defined to apply to any merger or consolidation of the corporation and the
interested stockholder, as well as any sale, lease, exchange, mortgage, pledge,
transfer, or other disposition (in a single or a series of transactions) to or
with the interested stockholder (or any affiliate or associate thereof) of any
assets of the corporation if the transaction represents 10% or more of the
corporation's assets, outstanding shares of stock, or consolidated net income of
the corporation. Similarly, the issuance or transfer by the corporation of any
of its (or its subsidiary's) stock that has an aggregate market value equal to
5% or more of all the outstanding shares of stock to the interested stockholder
(or any affiliate or associate thereof) is a "business combination," except if
it is in connection with the distribution of a dividend or the exercise of
warrants paid or made pro rata to all stockholders. The term is applicable as
well to the adoption of any plan of liquidation or dissolution proposed by or
under any understanding with an interested stockholder (or an affiliate or
associate thereof), and to any reclassification of securities, recapitalization,
merger or consolidation with any subsidiary, or any other transaction proposed
by or under any arrangement with the interested stockholder (or any affiliate or
associate thereof) that has the "effect" of increasing the proportionate
interest of the interested stockholder in the corporation.
An "interested stockholder," as defined, is any person (other than the
corporation or a subsidiary) that is the beneficial owner of 10% or more of the
voting power, or an affiliate or associate of the corporation that at any time
within the five prior years was the beneficial owner of 10% or more of the
voting power. For purposes of the statute, the "share acquisition date" is the
date upon which the person first becomes an interested stockholder of a
corporation. So long as the board of directors does not approve of the business
combination with the interested stockholder, the five year "blackout" period, in
which the business combination is prohibited, applies, and the board of
directors is required to render its decision within a 30-day period (or sooner
if required by the Securities Exchange Act of 1934 (the "Exchange Act")).
In addition to the absolute five-year business combination prohibition, the
statute also requires that, any business combination between the corporation and
an interested stockholder must satisfy additional statutory conditions. The
board of directors must have approved of the business combination before the
interested stockholder's share acquisition date, or a majority of the
outstanding voting stock not beneficially owned by the interested stockholder
must have approved the business combination at a meeting held no earlier than
five years after the interested stockholder's share acquisition date, or the
business combination transaction must meet certain per share values to all
stockholders (keyed to the highest per share price paid by the interested
stockholder within the prior five-year period). All consideration must also be
paid either in cash or in the same form as the interested stockholder has used
to acquire the largest number of shares acquired by it. Furthermore, the statute
requires an interested stockholder to purchase all remaining shares of stock, if
any are purchased, not just one class or series.
Under Chapter 42 of the BCL, the "control share acquisition" statute,
"control shares" (shares that, in the election of directors, could exercise or
direct the exercise of voting power of one-fifth, one-third or a majority or
more of all of the voting power) of any "issuing public corporation" (one
hundred or more stockholders, principal office or place of business, or
substantial assets within Indiana, or 10% of its stockholders resident in
Indiana) that are acquired in a "control share acquisition" by an "acquiring
person" will be accorded only such voting rights, after the acquisition, as are
specifically conferred by the stockholders, voting as a group, excluding all
"interested shares." If a person holding "interested shares" engages in a
control share acquisition of control shares, and the stockholders have not acted
to specifically grant those acquired shares the voting rights they had prior to
the control share acquisition, the acquired shares lose their voting rights. A
majority of the shares (excluding interested shares) must be voted to confer
voting rights upon the acquiring person. The only exemption from this statute is
if the corporation's articles of incorporation or its bylaws provide that this
statute does not apply to control share acquisitions of the corporation's
shares, and such provisions must exist prior to the occurrence of any "control
share acquisition." However, the Company does not have such a provision in
either its Articles or in its Bylaws. Furthermore, if the Articles or Bylaws so
provide (and the Articles and Bylaws do not so provide at this time), control
shares acquired in a control share acquisition with respect to which the shares
have not been accorded full voting rights by the stockholders can be redeemed by
the corporation at "fair value." But if in fact the stockholders of the
corporation do vote to accord full voting rights to the acquiring person's
control shares, and if the acquiring person has acquired
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control with a majority or more of the voting power, all stockholders of the
issuing public corporation are allowed to invoke dissenters' rights, providing
"fair value" to them (defined as not less than the highest price paid per share
by the acquiring person in the control share acquisition. In order to secure
stockholder approval, as required, the acquiring person must deliver an
acquiring person "statement" to the corporation, setting forth pertinent
information concerning the identity of the acquiring person, the number of
shares already owned, the range of voting power that the control share
acquisition seeks, and the terms of the proposed acquisition. Thereafter, the
directors for the issuing public corporation, within ten days, are required to
call a special meeting of the stockholders to consider the voting rights issue,
and the stockholders meeting must be held within 50 days after receipt of the
statement by the issuing public corporation. The acquiring person can
specifically request that the special stockholders meeting not be held sooner
than thirty days after delivery of the acquiring person's statement to the
issuing public corporation. The corporation's notice of the special stockholders
meeting must be accompanied by the acquiring person's statement, as well as a
statement by the Board of Directors of the corporation concerning its position
or recommendation (or that it is taking no position or making no recommendation)
with respect to the voting rights issue in the proposed control share
acquisition.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is First Chicago
Trust Company of New York.
SHARES ELIGIBLE FOR FUTURE SALE
The Company can make no predictions as to the effect, if any, that sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of significant amounts of the
Common Stock in the public market, or the perception that such sales may occur,
could adversely affect the market price of the Common Stock and could impair the
Company's future ability to raise capital through an offering of its equity
securities. See "Risk Factors -- Shares Eligible for Future Sale."
Upon completion of the offerings, the Company will have a total of
49,122,294 shares of Common Stock outstanding. Of these shares, 27,997,931
shares, plus any such shares which may be acquired by an "affiliate" of the
Company (an "Affiliate") as that term is defined in Rule 144 under the
Securities Act, will be "restricted securities" as the term is defined by Rule
144 promulgated under the Securities Act.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, if a period of at least one year has elapsed since
the later of the date the "restricted securities" were acquired from the Company
and the date they were acquired from an Affiliate, then the holder of such
restricted securities (including an Affiliate) is entitled to sell a number of
shares within any three-month period that does not exceed the greater of 1% of
the then outstanding shares of the Common Stock (approximately 491,223 shares
immediately after the offerings) or the average weekly reported volume of
trading of the Common Stock during the four calendar weeks preceding the filing
of a Form 144 with respect to such sale with the Securities and Exchange
Commission (the "Commission"). The holder may only sell such shares through
unsolicited brokers' transactions. Sales under Rule 144 are also subject to
certain requirements pertaining to the manner of such sales, notices of such
sales, and the availability of current public information concerning the
Company. Under Rule 144(k), if a period of at least two years has elapsed
between the later of the date restricted securities were acquired from the
Company and the date they were acquired from an Affiliate, as applicable, a
holder of such restricted securities who is not an Affiliate at the time of the
sale and has not been an Affiliate for at least three months prior to the sale
would be entitled to sell the shares immediately without regard to the
limitations described above.
The Company, its directors and executive officers, the Selling
Stockholders, and certain other stockholders of the Company have entered into
"lock-up" agreements with the Underwriters, providing that they will not (i)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or (ii) enter into any swap or other agreement
that transfers to another, in whole or in part,
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any of the economic consequences of ownership of such shares of Common Stock,
whether any such transaction described in clause (i) or (ii) above is to be
settled by delivery of Common Stock or such other securities, in cash or
otherwise, for a period of 90 days after the date of this Prospectus without the
prior written consent of Morgan Stanley & Co. Incorporated, other than (i) the
sale to the Underwriters of the shares of Common Stock offered hereby, (ii) the
issuance by the Company of shares of Common Stock upon the exercise of an option
sold or granted pursuant to existing benefit plans of the Company and
outstanding on the date of this Prospectus, or (iii) transactions relating to
shares of Common Stock or other securities acquired in open market transactions
after completion of the offerings.
The preceding description does not include shares of Common Stock issuable
upon the exercise of options granted under the Company's 1994 Plan or the 1996
Plan. The Company has registered on Form S-8 under the Securities Act
approximately 2,505,765 shares of Common Stock issuable under options subject to
the Company's 1994 Plan and 1996 Plan thus permitting, subject to the lock-up
agreements described above, the resale of such shares by nonaffiliates upon
issuance in the public market without restriction under the Securities Act. As
of June 30, 1997, 1,102,765 shares had been reserved by the Company for issuance
pursuant to options granted under the 1994 Plan, and 1,403,000 shares had been
reserved for issuance pursuant to options granted under the 1996 Plan.
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
FOR NON-UNITED STATES HOLDERS
GENERAL
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a Non-U.S. Holder. For this purpose, the term "Non-U.S. Holder" is
defined as any person who is, for United States federal income tax purposes, a
foreign corporation, a non-resident alien individual, a foreign partnership or a
foreign estate or trust, as such terms are defined in the Code. This discussion
does not address all aspects of United States federal income and estate taxes
and does not deal with foreign, state and local consequences that may be
relevant to such Non-U.S. Holders in light of their personal circumstances, or
to certain types of Non-U.S. Holders which may be subject to special treatment
under United States federal income tax laws (for example, insurance companies,
tax-exempt organizations, financial institutions and broker-dealers).
Furthermore, this discussion is based on provisions of the Code, existing and
proposed regulations promulgated thereunder and administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly with retroactive effect. PROSPECTIVE INVESTORS ARE URGED TO
CONSULT THEIR TAX ADVISERS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND
NON-U.S. INCOME AND OTHER TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING
OF SHARES OF COMMON STOCK.
An individual may, subject to certain exceptions, be deemed to be a
resident alien (as opposed to a nonresident alien) by virtue of being present in
the United States for at least 31 days in the calendar year and for an aggregate
of at least 183 days during a three-year period ending in the current calendar
year (counting for such purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year, and one-sixth
of the days present in the second preceding year). U.S. resident aliens are
subject to U.S. federal tax as if they were U.S. citizens.
DIVIDENDS
The Company does not anticipate paying cash dividends on its capital stock
in the foreseeable future. See "Dividend Policy." In the event, however, that
dividends are paid on shares of Common Stock, dividends paid to a Non-U.S.
Holder of Common Stock will be subject to withholding of United States federal
income tax at a 30% rate or such lower rate as may be provided by an applicable
income tax treaty between the United States and the country of which the
Non-U.S. Holder is a tax resident, unless (i) the dividends are effectively
connected with the conduct of a trade or business of the Non-U.S. Holder within
the United States and the
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Non-U.S. Holder provides the payor with proper documentation or (ii) if a tax
treaty applies, the dividends are attributable to a U.S. permanent establishment
maintained by the Non-U.S. Holder. In order to claim the benefit of an
applicable tax treaty rate, a Non-U.S. Holder may have to file with the Company
or its dividend paying agent an exemption or reduced treaty rate certificate or
letter in accordance with the terms of such treaty. Dividends that are
effectively connected with the conduct of a trade or business within the United
States or, if a tax treaty applies, are attributable to such a United States
permanent establishment, are subject to United States federal income tax on a
net income basis (that is, after allowance for applicable deductions) at
applicable graduated individual or corporate rates. Any such effectively
connected dividends received by a foreign corporation may, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate or
such lower rate as may be specified by an applicable income tax treaty.
Under current United States Treasury regulations, dividends paid to an
address outside the United States are presumed to be paid to a resident of such
country for purposes of the withholding discussed above (unless the payor has
knowledge to the contrary) and, under the current interpretation of United
States Treasury regulations, for purposes of determining the applicability of a
tax treaty rate. However, under proposed United States Treasury regulations, in
the case of dividends paid after December 31, 1997 (December 31, 1999 in the
case of dividends paid to accounts in existence on or before the date that is 60
days after the proposed United States Treasury regulations are published as
final regulations), a Non-U.S. Holder generally would be subject to United
States withholding tax at a 31% rate under the backup withholding rules
described below, rather than at a 30% rate or a reduced rate under an income tax
treaty, unless certain certification procedures (or, in the case of payments
made outside the United States with respect to an offshore account, certain
documentary evidence procedures) are complied with, directly or through an
intermediary. Certain certification and disclosure requirements must be complied
with in order to be exempt from withholding under the effectively connected
income exemption.
A Non-U.S. Holder of Common Stock eligible for a reduced rate of United
States withholding tax pursuant to an income tax treaty may obtain a refund of
any excess amounts withheld by filing an appropriate claim for refund with the
Internal Revenue Service (the "IRS"), provided that the required information is
furnished to the IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
Common Stock unless (i) (a) the gain is effectively connected with a trade or
business conducted by the Non-U.S. Holder within the United States, or (b) if a
tax treaty applies, the gain is attributable to a United States permanent
establishment maintained by the Non-U.S. Holder, (ii) in the case of a Non-U.S.
Holder who is an individual and holds the Common Stock as a capital asset, such
holder is present in the United States for 183 or more days in the taxable year
of the sale or other disposition and certain other conditions are met, (iii) the
Non-U.S. Holder is subject to tax pursuant to certain provisions of the Code
applicable to United States expatriates, or (iv) the Company is or has been a
"U.S. real property holding corporation" for United States federal income tax
purposes at any time within the shorter of the five-year period preceding such
disposition or the period such Non-U.S. Holder held the Common Stock. If the
Company were, or to become, a U.S. real property holding corporation, gains
realized upon a disposition of Common Stock by a Non-U.S. Holder which did not
directly or indirectly own more than 5% of the Common Stock during the shorter
of the periods described above generally would not be subject to United States
federal income tax so long as the Common Stock is "regularly traded" on an
established securities market. The Company believes that it has not been, is not
currently, and does not anticipate becoming, a "U.S. real property holding
corporation" for United States federal income tax purposes.
If a Non-U.S. Holder who is an individual falls under clause (i) above,
such individual generally will be taxed on the net gain derived from a sale
under regular graduated United States federal income tax rates. If an individual
Non-U.S. Holder falls under clause (ii) above, such individual generally will be
subject to a flat 30% tax on the gain derived from a sale, which may be offset
by certain United States capital losses (notwithstanding the fact that such
individual is not considered a resident alien of the United States). Thus,
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individual Non-U.S. Holders who have spent (or expect to spend) more than a de
minimis period of time in the United States in the taxable year in which they
contemplate a sale of Common Stock are urged to consult their tax advisors prior
to the sale as to the U.S. tax consequences of such sale.
If a Non-U.S. Holder that is a foreign corporation falls under clause (i)
above, it generally will be taxed on its net gain under regular graduated United
States federal income tax rates and, in addition, will be subject to the branch
profits tax equal to 30% of its "effectively connected earnings and profits"
within the meaning of the Code for the taxable year, as adjusted for certain
items, unless it qualifies for a lower rate under an applicable tax treaty.
FEDERAL ESTATE TAX
Common Stock owned or treated as owned by an individual who is neither a
United States citizen nor a United States resident (as defined for United States
federal estate tax purposes) at the time of death will be included in the
individual's gross estate for United States federal estate tax purposes, unless
an applicable estate tax treaty provides otherwise and, therefore, may be
subject to United States federal estate tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Under United States Treasury regulations, the Company must report annually
to the IRS and to each Non-U.S. Holder the amount of dividends paid to such
holder and the tax withheld with respect to such dividends. These information
reporting requirements apply even if withholding was not required because the
dividends were effectively connected with a trade or business in the United
States of the Non-U.S. Holder or withholding was reduced or eliminated by an
applicable income tax treaty. Copies of the information returns reporting such
dividends and withholding may also be made available to the tax authorities in
the country in which the Non-U.S. Holder is a resident under the provisions of
an applicable income tax treaty or agreement.
United States backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain information under the United States information reporting requirements)
generally will not apply to (i) dividends paid to Non-U.S. Holders that are
subject to the 30% withholding discussed above (or that are not so subject
because a tax treaty applies that reduces or eliminates such 30% withholding) or
(ii) under current law, dividends paid to a Non-U.S. Holder at an address
outside of the United States. However, under proposed United States Treasury
regulations, in the case of dividends paid after December 31, 1997 (December 31,
1999 in the case of dividends paid to accounts in existence on or before the
date that is 60 days after the proposed United States Treasury regulations are
published as final regulations), a Non-U.S. Holder generally would be subject to
backup withholding at a 31% rate, unless certain certification procedures (or,
in the case of payments made outside the United States with respect to an
offshore account, certain documentary evidence procedures) are complied with,
directly or through an intermediary.
Backup withholding and information reporting generally will apply to
dividends paid to addresses inside the United States on shares of Common Stock
to beneficial owners that are not "exempt recipients" and that fail to provide
in the manner required certain identifying information.
In general, backup withholding and information reporting will not apply to
a payment of the gross proceeds of a sale of Common Stock effected at a foreign
office of a broker. If, however, such broker is, for United States federal
income tax purposes, a U.S. person, a controlled foreign corporation or a
foreign person, 50% or more of whose gross income for certain periods is derived
from activities that are effectively connected with the conduct of a trade or
business in the United States, such payments will not be subject to backup
withholding but will be subject to information reporting, unless (i) such broker
has documentary evidence in its records that the beneficial owner is a Non-U.S.
Holder and certain other conditions are met, or (ii) the beneficial owner
otherwise establishes an exemption. Temporary United States Treasury regulations
provide that the Treasury is considering whether backup withholding should be
required in such circumstances. Under proposed United States Treasury
regulations not currently in effect, backup withholding will not apply to such
payments absent actual knowledge that the payee is a United States person. The
IRS recently proposed regulations addressing certain withholding, certification
and information reporting rules (some of which have
74
<PAGE> 77
been mentioned above) which could affect treatment of the payment of the
proceeds discussed above. Non-U.S. Holders should consult their tax advisors
regarding the application of these rules to their particular situations, the
availability of an exemption therefrom, the procedure for obtaining such an
exemption, if available, and the possible application of the proposed United
States Treasury regulations addressing the withholding and the information
reporting rules.
Payment by a United States office of a broker of the proceeds of a sale of
Common Stock is subject to both backup withholding and information reporting
unless the beneficial owner certifies under penalties of perjury that it is a
Non-U.S. Holder, or otherwise establishes an exemption. Backup withholding is
not an additional tax. Any amounts withheld under the backup withholding rules
will be allowed as a refund or a credit against such holder's U.S. federal
income tax liability provided the required information is furnished to the IRS.
75
<PAGE> 78
UNDERWRITERS
Under the terms and subject to the conditions in the Underwriting Agreement
dated the date of this Prospectus (the "Underwriting Agreement"), the Company
and the Selling Stockholders have agreed to sell 1,255,971 and 7,144,029 shares,
respectively, of the Company's Common Stock and the U.S. Underwriters named
below have severally agreed to purchase, and the International Underwriters
named below have severally agreed to purchase, the respective number of shares
of Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
-------------------------------------------------------------------------- ----------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated....................................... 2,016,338
PaineWebber Incorporated................................................ 2,016,337
Donaldson, Lufkin & Jenrette Securities Corporation..................... 895,775
McDonald & Company Securities, Inc. .................................... 895,775
Salomon Brothers Inc.................................................... 895,775
----------
Subtotal............................................................. 6,720,000
----------
International Underwriters:
Morgan Stanley & Co. International Limited.............................. 504,085
PaineWebber International (U.K.) Ltd. .................................. 504,084
Donaldson, Lufkin & Jenrette Securities Corporation..................... 223,944
McDonald & Company Securities, Inc...................................... 223,944
Salomon Brothers International Limited.................................. 223,943
----------
Subtotal............................................................. 1,680,000
----------
Total........................................................... 8,400,000
==========
</TABLE>
The U.S. Underwriters and the International Underwriters are collectively
referred to as the "Underwriters." The Underwriting Agreement provides that the
obligations of the several Underwriters to pay for and accept delivery of the
shares of Common Stock offered hereby are subject to the approval of certain
legal matters by their counsel and to certain other conditions. The Underwriters
are obligated to take and pay for all of the shares of Common Stock offered
hereby (other than those covered by the U.S. Underwriters' over-allotment option
described below) if any such shares are taken.
Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions, (a)
it is not purchasing any U.S. Shares (as defined below) for the account of
anyone other than a United States or Canadian Person (as defined below) and (b)
it has not offered or sold, and will not offer or sell, directly or indirectly,
any U.S. Shares or distribute any prospectus relating to the U.S. Shares outside
the United States or Canada or to anyone other than a United States or Canadian
Person. Pursuant to the Agreement Between U.S. and International Underwriters,
each International Underwriter has represented and agreed that, with certain
exceptions, (a) it is not purchasing any International Shares (as defined below)
for the account of any United States or Canadian Person and (b) it has not
offered or sold, and will not offer or sell, directly or indirectly, any
International Shares or distribute any prospectus relating to the International
Shares within the United States or Canada or to a United States or Canadian
Person. The foregoing limitations do not apply to stabilization transactions or
to certain other transactions specified in the Agreement Between U.S. and
International Underwriters. As used herein, "United States or Canadian Person"
means any national or resident of the United States or Canada, or any
corporation, pension, profit-sharing or other trust or other entity organized
under the laws of the United States or Canada or of any political subdivision
thereof (other than a branch located outside the United States and Canada of any
United States or Canadian Person) and includes any United States or Canadian
branch of a person who is otherwise not a United States or Canadian Person. All
shares of Common Stock to be
76
<PAGE> 79
purchased by the U.S. Underwriters and the International Underwriters under the
Underwriting Agreement are referred to herein as the U.S. Shares and the
International Shares, respectively.
Pursuant to the Agreement Between U.S. and International Underwriters,
sales may be made between the U.S. Underwriters and International Underwriters
of any number of shares of Common Stock to be purchased pursuant to the
Underwriting Agreement as may be mutually agreed. The per share price of any
shares sold shall be the Price to Public set forth on the cover page hereof, in
United States dollars, less an amount not greater than the per share amount of
the concession to dealers set forth below.
Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any shares of Common Stock, directly or indirectly, in
Canada in contravention of the securities laws of Canada or any province or
territory thereof and has represented that any offer of shares of Common Stock
in Canada will be made only pursuant to an exemption from the requirement to
file a prospectus in the province or territory of Canada in which such offer is
made. Each U.S. Underwriter has further agreed to send to any dealer who
purchases from it any shares of Common Stock a notice stating in substance that,
by purchasing such shares of Common Stock, such dealer represents and agrees
that it has not offered or sold, and will not offer or sell, directly or
indirectly, any of such shares of Common Stock in Canada or to, or for the
benefit of, any resident of Canada in contravention of the securities laws of
Canada or any province or territory thereof and that any offer of shares of
Common Stock in Canada will be made only pursuant to an exemption from the
requirement to file a prospectus in the province of Canada in which such offer
is made, and that such dealer will deliver to any other dealer to whom it sells
any of such shares of Common Stock a notice to the foregoing effect.
Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented and, during the period of six months
after the date hereof, agreed that (a) it has not offered or sold and will not
offer or sell any shares of Common Stock in the United Kingdom except to persons
whose ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purpose of their
business or otherwise in circumstances which have not resulted and will not
result in an offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations (1995) (the "Regulations"); (b) it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 and the Regulations with respect to anything done by it in
relation to the shares of Common Stock offered hereby in, from or otherwise
involving the United Kingdom; and (c) it has only issued or passed on and will
only issue or pass on to any person in the United Kingdom any document received
by it in connection with the issue of the shares of Common Stock if that person
is of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996, or is a person to whom such
document may otherwise lawfully be issued or passed on.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the Price to Public set forth on the cover page
hereof and part to certain dealers at a price which represents a concession not
in excess of $.60 per share under the Price to Public. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $.10 per
share to other Underwriters or to certain dealers. After the initial offering of
the shares of Common Stock, the offering price and other selling terms may from
time to time be varied by the Underwriters.
Pursuant to the Underwriting Agreement, the Company and certain of the
Selling Stockholders have granted to the U.S. Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to
1,260,000 additional shares of Common Stock at the public offering price set
forth on the cover page hereof, less underwriting discounts and commissions. The
U.S. Underwriters may exercise such option to purchase solely for the purpose of
covering over-allotments, if any, made in connection with the offering of the
shares of Common Stock offered hereby. To the extent such option is exercised,
each U.S. Underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of such additional shares of Common
Stock as the number set forth next to such U.S. Underwriter's name in the
preceding table bears to the total number of shares of Common Stock offered by
the U.S. Underwriters hereby.
77
<PAGE> 80
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may overallot in
connection with the offering, creating a short position in the Common Stock for
their own account. In addition, to cover overallotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
Common Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
Common Stock in the offering, if the syndicate repurchases previously
distributed Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Stock above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.
The Company, its executive officers and directors, the Selling
Stockholders, and certain other stockholders of the Company have agreed that,
without the prior written consent of Morgan Stanley & Co. Incorporated, they
will not, for a period of 90 days after the date of this Prospectus, (a) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (b) enter into any swap or other agreement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of such shares of Common Stock, whether any such transaction described
in clause (a) or (b) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise, other than (i) the sale to the
Underwriters of the shares of Common Stock offered hereby, (ii) the issuance by
the Company of shares of Common Stock upon the exercise of an option sold or
granted pursuant to existing benefit plans of the Company and outstanding on the
date of this Prospectus or (iii) transactions relating to shares of Common Stock
or other securities acquired in open market transactions after completion of the
offerings.
McDonald & Company Securities, Inc. ("McDonald & Company") has provided
investment banking, financial advisory and other services to the Company for
which it has received customary fees and reimbursement of its out-of-pocket
expenses. McDonald & Company and its affiliates are stockholders of the Company.
General Electric Capital Services, Inc. ("GE Capital Services"), which owns
100% of the outstanding common stock of General Electric Capital Corporation,
indirectly owns 21.5 million shares, or approximately 23.48%, of the issued and
outstanding common stock and Convertible Preferred Stock (convertible into
5,515,720 shares of common stock or approximately 5.68% on a conversion-diluted
basis) and Redeemable Preferred Stock of PaineWebber Group Inc., each acquired
in connection with the sale of certain assets and businesses of Kidder, Peabody
Group Inc. in 1994. On August 6, 1997, GE Capital Services and PaineWebber Group
Inc. entered into a definitive agreement, the effect of which would reduce GE
Capital Services's holdings of PaineWebber Group Inc. common stock from 21.5
million shares to 15.5 million shares, representing approximately 17.02% (or
approximately 23.08% on a conversion-diluted basis) of the outstanding common
stock. The transaction is subject to regulatory approval. PaineWebber
Incorporated, a member of the NASD and a subsidiary of PaineWebber Group Inc.,
will participate in the distribution of the Common Stock offered hereby. In
addition, General Electric Capital Corporation owns 5,750,029 of the shares of
Common Stock outstanding prior to the offerings. As a result the offering of the
shares of Common Stock offered hereby are required to be made in accordance with
the applicable provisions of Rule 2720 of the NASD.
In compliance with Rule 2720, the public offering price can be no higher
than that recommended by a "qualified independent underwriter." Morgan Stanley &
Co. Incorporated is assuming the responsibilities of acting as qualified
independent underwriter and the public offering price of the shares of Common
Stock offered hereby will not be higher than the public offering price
recommended by Morgan Stanley & Co. Incorporated. In connection with the
offerings, Morgan Stanley & Co. Incorporated in its role as "qualified
independent underwriter" has performed due diligence investigations and reviewed
and participated in the preparation of the Registration Statement of which this
Prospectus is a part. In addition, the underwriters may not confirm sales to any
discretionary account without the prior written approval of the customer.
78
<PAGE> 81
The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Barrett & McNagny, Fort Wayne, Indiana. Robert S. Walters, a partner
at Barrett & McNagny, may be deemed to beneficially own 2.9% of the equity units
in Heavy Metal, L.C., a stockholder of the Company. Mr. Walters disclaims
beneficial ownership of all but 1.6% of such units. Certain legal matters will
be passed upon for the Underwriters by Shearman & Sterling, New York, New York.
EXPERTS
The consolidated financial statements as of December 31, 1995 and 1996, and
for each of the three years in the period ended December 31, 1996, included in
this Prospectus, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and have been included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement (of
which this Prospectus is a part and which term shall encompass all amendments,
exhibits and schedules thereto) on Form S-1 under the Securities Act with
respect to the shares of Common Stock offered hereby. This Prospectus does not
contain all the information set forth in the Registration Statement certain
parts of which are omitted from the Prospectus in accordance with the rules and
regulations of the Commission, and to which reference is made. For further
information about the Company and the securities offered hereby, reference is
made to the Registration Statement. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract, agreement or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in its entirety by
such reference.
The Company is subject to the information and reporting requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith, is
required to file reports, proxy statements and other information with the
Commission. The Registration Statement, reports, proxy statements and other
information filed by the Company with the Commission, may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the regional offices of the Commission located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material also can
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Such material may also
be accessed electronically by means of the Commission's home page on the
Internet at http://www.sec.gov. The Common Stock of the Company is traded on the
Nasdaq Stock Market (Symbol: STLD), and such reports, proxy statements and other
information concerning the Company also can be inspected at the offices of
Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
79
<PAGE> 82
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and unaudited June 30,
1997................................................................................ F-3
Consolidated Statements of Operations for each of the three years in the period ended
December 31, 1996 and the unaudited six-month periods ended June 29, 1996 and June
30, 1997............................................................................ F-4
Consolidated Statements of Stockholders' Equity for each of the three years in the
period ended December 31, 1996 and for the unaudited six-month period ended June 30,
1997................................................................................ F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 1996 and for the unaudited six-month periods ended June 29, 1996 and
June 30, 1997....................................................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 83
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Steel Dynamics, Inc.
We have audited the accompanying consolidated balance sheets of Steel
Dynamics, Inc. (the "Company") as of December 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Steel Dynamics, Inc. as of
December 31, 1995 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
January 17, 1997
F-2
<PAGE> 84
STEEL DYNAMICS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $6,884... $ 57,460 $ 22,293
Accounts receivable, net of allowance for doubtful
accounts of $628, $628 and $563 as of December 31,
1995 and 1996, and June 30, 1997, respectively....... 125 14,600 22,413
Accounts receivable -- related parties.................. -- 17,860 14,576
Inventories............................................. 13,580.. 65,911 56,829
Other current assets.................................... 1,634 1,599 1,217
-------- -------- --------
Total current assets............................ 22,223 157,430 117,328
PROPERTY, PLANT, AND EQUIPMENT, NET....................... 274,197 339,263 410,272
DEBT ISSUANCE COSTS, less accumulated amortization of $32,
$1,548, and $2,372 as of December 31, 1995 and 1996, and
June 30, 1997, respectively............................. 12,211 12,405 11,591
RESTRICTED CASH........................................... 2,666 2,827 3,456
OTHER ASSETS.............................................. 9,382 10,366 9,956
-------- -------- --------
TOTAL ASSETS.................................... $320,679 $522,291 $ 552,603
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................ $ 24,478 $ 28,968 $ 20,378
Accounts payable-related parties........................ 3,424 12,218 18,004
Accrued interest........................................ 2,660 338 1,216
Accrued foreign currency loss........................... 1,013 261 --
Other accrued expenses.................................. 3,078 8,597 11,123
Current maturities of long-term debt.................... 2,058 11,175 5,931
-------- -------- --------
Total current liabilities....................... 36,711 61,557 56,652
LONG-TERM DEBT, less current maturities................... 220,996 196,168 199,530
DEFERRED TAXES............................................ -- -- 1,468
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A common stock voting, $.01 par value; 100,000,000
shares authorized; 28,644,722, 47,803,341 and
47,866,323 shares issued and outstanding as of
December 31, 1995 and 1996, and June 30, 1997,
respectively......................................... 286 478 479
Additional paid-in capital.............................. 93,083 303,846 304,078
Amounts due from stockholders........................... (469) -- --
Accumulated deficit..................................... (29,928) (39,758) (9,604)
-------- -------- --------
Total stockholders' equity...................... 62,972 264,566 294,953
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...... $320,679 $522,291 $ 552,603
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 85
STEEL DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, ---------------------------
---------------------------------- JUNE 29, JUNE 30,
1994 1995 1996 1996 1997
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES:
Unrelated parties............... $ -- $ 137 $130,886 $ 49,474 $ 114,290
Related parties................. -- -- 121,731 49,188 86,487
------- -------- -------- -------- --------
Total net sales......... -- 137 252,617 98,662 200,777
Cost of goods sold................ -- 3,169 220,563 95,591 150,180
------- -------- -------- -------- --------
GROSS PROFIT (LOSS)............... -- (3,032) 32,054 3,071 50,597
Selling, general and
administrative expenses......... 4,192 13,580 13,838 5,894 12,479
------- -------- -------- -------- --------
OPERATING INCOME (LOSS)........... (4,192) (16,612) 18,216 (2,823) 38,118
Foreign currency gain (loss)...... (4,952) (3,272) 328 260 261
Interest expense.................. (43) (564) (22,684) (12,128) (3,995)
Interest income................... 307 560 1,581 579 1,264
------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY LOSS.......... (8,880) (19,888) (2,559) (14,112) 35,648
Income taxes...................... -- -- -- -- 5,494
------- -------- -------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY
LOSS............................ (8,880) (19,888) (2,559) (14,112) 30,154
Extraordinary loss................ -- -- (7,271) -- --
------- -------- -------- -------- --------
NET INCOME (LOSS)................. $ (8,880) $(19,888) $ (9,830) $ (14,112) $ 30,154
======= ======== ======== ======== ========
INCOME (LOSS) PER SHARE BEFORE
EXTRAORDINARY LOSS.............. $ (.36) $ (.62) $ (.07) $ (.41) $ .63
Per share effect of extraordinary
loss............................ -- -- (.21) -- --
------- -------- -------- -------- --------
NET INCOME (LOSS) PER SHARE....... $ (.36) $ (.62) $ (.28) $ (.41) $ .63
======= ======== ======== ======== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING..................... 24,679 31,975 34,571 34,695 47,851
======= ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 86
STEEL DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL AMOUNTS TOTAL
--------------- PAID-IN DUE FROM ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT EQUITY
------ ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1994....... 13,436 $134 $ 597 -- $ (1,160) $ (429)
Issuance of shares................ 14,624 146 81,042 $(10,750) -- 70,438
Issuance of common stock
warrants........................ -- -- 1,407 -- -- 1,407
Net loss.......................... -- -- -- -- (8,880) (8,880)
------ ---- -------- -------- -------- --------
Balances at December 31,
1994....................... 28,060 280 83,046 (10,750) (10,040) 62,536
Issuance of shares................ 585 6 4,994 -- -- 5,000
Issuance of common stock
warrants........................ -- -- 5,043 -- -- 5,043
Collection of amounts due from
stockholders.................... -- -- -- 10,000 -- 10,000
Amortization of amount due from
officer......................... -- -- -- 281 -- 281
Net loss.......................... -- -- -- -- (19,888) (19,888)
------ ---- -------- -------- -------- --------
Balances at December 31,
1995....................... 28,645 286 93,083 (469) (29,928) 62,972
Exercise of common stock
warrants........................ 1,791 18 382 -- -- 400
Issuance of shares, net of
expenses........................ 17,367 174 210,381 -- -- 210,555
Amortization of amount due from
officer......................... -- -- -- 469 -- 469
Net loss.......................... -- -- -- -- (9,830) (9,830)
------ ---- -------- -------- -------- --------
Balances at December 31,
1996....................... 47,803 478 303,846 -- (39,758) 264,566
Issuance of shares, net of
expenses (unaudited)............ 63 1 232 -- -- 233
Net income (unaudited)............ -- -- -- -- 30,154 30,154
------ ---- -------- -------- -------- --------
Balances at June 30, 1997
(unaudited)................ 47,866 $479 $ 304,078 $ -- $ (9,604) $ 294,953
====== ==== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 87
STEEL DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, --------------------------
--------------------------------- JUNE 29, JUNE 30,
1994 1995 1996 1996 1997
-------- --------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................... $ (8,880) $ (19,888) $ (9,830) $ (14,112) $ 30,154
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization............. 13 876 19,403 8,793 11,607
Foreign currency loss (gain).............. 4,952 3,272 (328) (260) (261)
Deferred taxes............................ -- -- -- -- 1,468
Extraordinary loss........................ -- -- 7,271 -- --
Changes in certain assets and liabilities:
Accounts receivable.................... -- (125) (32,335) (28,020) (4,529)
Inventories............................ (13,580) (52,331) (12,399) 9,082
Other assets........................... (251) (788) 35 (986) 382
Accounts payable....................... 691 6,441 13,284 1,036 (2,804)
Accrued expenses....................... 796 4,822 3,197 1,582 3,406
-------- --------- -------- -------- --------
Net cash (used) provided in operating
activities......................... (2,679) (18,970) (51,634) (44,366) 48,505
-------- --------- -------- -------- --------
INVESTING ACTIVITIES:
Purchases of property, plant, and
equipment................................. (43,709) (224,449) (83,720) (12,062) (81,524)
Proceeds from government grants............. 2,878 21,188 1,558 1,467 --
Purchase of short-term investments.......... -- -- (7,000) (7,000) --
Maturities of short-term investments........ -- -- 7,000 -- --
Other....................................... (549) (1,602) (984) (571) 56
-------- --------- -------- -------- --------
Net cash used in investing
activities......................... (41,380) (204,863) (83,146) (18,166) (81,468)
-------- --------- -------- -------- --------
FINANCING ACTIVITIES:
Repayment of vendor/customer advances....... (800)
Issuance of long-term debt.................. 13,352 188,430 35,411 35,411 --
Repayments of long-term debt................ -- -- (57,927) (493) (2,426)
Issuance of common stock, net of expenses... 70,488 15,281 211,424 45,095 233
Debt issuance costs......................... (10,990) (1,102) (3,552) (3,542) (11)
-------- --------- -------- -------- --------
Net cash (used) provided in financing
activities......................... 72,050 202,609 185,356 76,471 (2,204)
-------- --------- -------- -------- --------
Increase (decrease) in cash and cash
equivalents................................. 27,991 (21,224) 50,576 13,939 (35,167)
Cash and cash equivalents at beginning of
period...................................... 117 28,108 6,884 6,884 57,460
-------- --------- -------- -------- --------
Cash and cash equivalents at end of period.... $ 28,108 $ 6,884 $ 57,460 $ 20,823 $ 22,293
======== ========= ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest...................... $ 14 $ 8,000 $ 26,030 $ 11,813 $ 3,797
======== ========= ======== ======== ========
Cash paid for taxes......................... $ -- $ -- $ -- $ -- $ 3,675
======== ========= ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INFORMATION:
Electric utility transmission facility loan
and other equipment obligation............ $ -- $ 24,349 $ -- $ -- $ --
======== ========= ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 88
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Interim financial information as of June 30, 1997 and for the six months
ended June 30, 1997 and June 29, 1996 is unaudited. The unaudited interim
consolidated financial statements reflect all adjustments consisting of normal
recurring accruals which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods.)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and Iron Dynamics, Inc., a wholly-owned subsidiary. All significant
intercompany transactions have been eliminated. The Company operated on a four
week, four week, five week accounting cycle for 1996. Accordingly, the Company's
interim periods ended on the last day of the fourth or fifth week within the
month. The Company, effective January 1997, operates on a calendar month
accounting cycle.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company records sales upon shipment and provides an allowance for
estimated costs associated with returns.
Business
The Company, formed on September 7, 1993, operates in one industry segment
and operates a thin-slab cast steel mini-mill in the Midwest, with the capacity
to produce 1.4 million tons annually of hot-rolled steel coils. The Company's
products are sold primarily to the automotive, tubing, construction and
commercial equipment industries.
Cash
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Restricted cash
consists of cash held by a trustee in a debt service fund for the repayment of
principal and interest on the Company's municipal bond.
Inventories
Inventories consist of approximately 97%, 91% and 94% of raw materials and
supplies, and 3%, 9% and 6% of finished products as of December 31, 1995 and
1996, and June 30, 1997, respectively. Inventories are stated at the lower of
cost (first-in, first-out method) or market.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost of acquisition which
includes capitalized interest on construction-in-progress of approximately $10.1
million, $1.0 million and $4.9 million in 1995, 1996 and June 30, 1997,
respectively. Depreciation is provided using the units-of-production method for
manufacturing plant and equipment and using the straight-line method for
non-manufacturing equipment over the estimated useful lives of the assets
ranging from 12 years to 30 years. Repairs and maintenance are expensed as
incurred. The Company recorded proceeds received from state and local government
grants and other capital cost reimbursements as reductions of the related
capital assets. Grants and reimbursements recorded as reductions of the related
capital cost, net of accumulated depreciation, totaled $24.0 million as of
December 31, 1995 and 1996.
F-7
<PAGE> 89
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, among other things, requires entities to review long-lived assets for
impairment whenever events or changes in circumstances indicate that their
carrying value may not be recoverable. Adoption of this standard had no effect
on the Company's financial position, results of operations or cash flows in
1996.
Debt Issuance Costs
The costs related to the issuance of debt are deferred and amortized to
interest expense using the effective interest method over the terms of the
related debt.
Income Taxes
Deferred tax assets and liabilities are computed based on differences
between the financial statement and income tax bases of assets and liabilities
using enacted income tax rates. Deferred income tax expense or benefit is based
on the change in deferred tax assets and liabilities from period to period,
subject to an ongoing assessment of realization of deferred tax assets.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, short-term
investments and accounts receivable. The Company places its cash with high
quality financial institutions and limits the amount of credit exposure from any
one institution. Generally, the Company does not require collateral or other
security to support customer receivables.
Foreign Currency Transactions
Transaction gains and losses incurred by the Company for equipment
purchases denominated in a foreign currency are recorded in results of
operations currently.
Net Loss Per Share
Net income (loss) per share is calculated by dividing net income (loss) by
the weighted average number of shares of common stock outstanding using the
treasury stock method. The anti-dilutive effect of shares issued from September
23, 1995 through September 23, 1996 are included in the weighted average number
of shares of common stock outstanding for the years ended December 31, 1994 and
1995 and the six months ended June 29, 1996. The anti-dilutive effect of common
stock equivalents is excluded from the calculation for all periods presented.
Derivatives
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. The Company uses such
instruments to manage certain of its interest rate and foreign currency risks
and accounts for them under the accrual method.
New Pronouncements
In February 1997, SFAS No. 128, Earnings per Share, was issued which
establishes new standards for computing and presenting earnings per share
("EPS"). Specifically, SFAS No. 128 replaces the presentation of primary EPS
with a presentation of basic EPS, requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997; earlier application is not
permitted. Management has determined that the adoption of SFAS No. 128 will not
have a material effect on the accompanying consolidated financial statements.
F-8
<PAGE> 90
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1997, SFAS No. 130, Comprehensive Income, was issued and becomes
effective in 1998 and requires reclassification of earlier financial statements
for comparative purposes. SFAS No. 130 requires that changes in the amounts of
certain items, including foreign currency translation adjustments and gains and
losses on certain securities be shown in the financial statements. SFAS No. 130
does not require a specific format for the financial statement in which
comprehensive income is reported, but does require that an amount representing
total comprehensive income be reported in that statement. Management has not yet
determined the effect, if any, of SFAS No. 130 on the consolidated financial
statements.
Also in June 1997, SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, was issued. This Statement will change the
way public companies report information about segments of their business in
their annual financial statements and requires them to report selected segment
information in their quarterly reports issued to shareholders. It also requires
entity-wide disclosures about the products and services an entity provides, the
material countries in which it holds assets and reports revenues, and its major
customers. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. Management has not yet determined the effect, if any, of SFAS No. 131
on the consolidated financial statements.
2. PROPERTY, PLANT, AND EQUIPMENT (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land and improvements............................. $ 5,309 $ 4,757 $ 4,641
Buildings and improvements........................ 24,849 27,059 27,066
Plant, machinery and equipment.................... 242,690 246,023 243,653
Construction-in-progress.......................... 1,499 78,247 162,250
-------- -------- --------
274,347 356,086 437,610
Less accumulated depreciation..................... 150 16,823 27,338
-------- -------- --------
Property, plant, and equipment, net............. $274,197 $339,263 $ 410,272
======== ======== ========
</TABLE>
F-9
<PAGE> 91
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Senior secured notes payable, principal and
interest due semi-annually beginning in 1997
through 2002, interest is variable (including
the effect of the interest rate cap, the
weighted average rate was 8.6%, 8.0% and 6.9% as
of December 31, 1995 and 1996 and June 30, 1997,
respectively)................................... $115,000 $150,000 $ 150,000
8.01% municipal bond, principal and interest due
monthly through 2015............................ 21,400 21,100 21,100
Electric utility, transmission facility and other
equipment obligation at interest rates ranging
from 7% to 8%, collateralized by on-site
substation and related equipment, principal and
interest due monthly or quarterly through
2015............................................ 37,397 36,243 34,361
11% senior subordinated promissory notes.......... 49,257 -- --
-------- -------- --------
Total debt...................................... 223,054 207,343 205,461
Less current maturities........................... 2,058 11,175 5,931
-------- -------- --------
Long-term debt.................................. $220,996 $196,168 $ 199,530
======== ======== ========
</TABLE>
The Company entered into a credit agreement, as amended, with a syndicate
bank group, on June 30, 1994. Subject to the terms and conditions of the credit
agreement, borrowings of $150 million under senior secured notes were used to
fund the construction of the steel mini-mill; $150 million was designated and
remains available at June 30, 1997 for construction of the cold mill, and $45
million of revolving credit is available for working capital purposes. At
December 31, 1995 and 1996 there were no amounts outstanding under the revolving
credit facility. The senior secured notes and revolving credit facility are
collateralized by substantially all assets of the Company other than certain
property, plant, and equipment securing the electric utility loan. The Company
is required to pay a commitment fee equal to a percentage ranging from 0.125% to
0.50% annually depending upon the principal amount of the unused borrowing
capacity under the senior secured notes and the unused revolving credit
facility.
In 1995 the Company borrowed $21.4 million through a state government
municipal bond program, of which $2.7 million and $2.8 million as of December
31, 1995 and 1996, respectively, is held by a trustee in a debt service reserve
fund and is recorded as restricted cash. At December 31, 1996, a stand-by letter
of credit of $22.0 million relating to the municipal bonds was outstanding.
The electric utility transmission facility loan of $7.8 million and $7.7
million at December 31, 1995 and 1996, respectively, represents the Company's
portion of the cost of the transmission facilities constructed by the utility to
service the Company's site. The corresponding cost is included in other assets
and is being amortized over twenty years on the straight-line basis.
The electric utility loan of $13.0 million and $13.1 million at December
31, 1995 and 1996, respectively, represents the Company's portion of the cost of
the Company's substation constructed on-site. Interest and principal payments
are made equally on a monthly basis in an amount necessary to repay the loan
fifteen years from the date of commencement of operations.
The credit agreement, electric utility loan and transmission facility loan
require the Company to maintain certain covenants, the most restrictive of which
are requirements to maintain tangible net worth of at least $45
F-10
<PAGE> 92
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
million plus 50% of cumulative net income, a minimum current ratio, a maximum
leverage ratio and a minimum fixed charge coverage ratio. The credit agreement
also limits indebtedness of the Company and the amount of capital expenditures
and prohibits the payment of dividends.
The other equipment obligation represents deferred payments for the
purchase of certain equipment. The obligation is non-interest bearing and was
discounted at 7% over a term of five years.
The Company in June 1994 entered into an agreement with respect to senior
subordinated promissory notes ("Subordinated Notes") in the aggregate principal
amount of $55 million and warrants to purchase up to 1,641,827 shares of Class A
common stock (warrants for the purchase of 29,851 shares per $1 million of
Subordinated Notes) at an exercise price which was less than $0.01 per share.
The proceeds received from the issuance of the Subordinated Notes and warrants
were allocated to the Subordinated Notes and warrants based upon their estimated
fair values. The Subordinated Notes were repaid in November 1996 with a portion
of the proceeds from the initial public offering. An extraordinary loss on the
prepayment of the Subordinated Notes in the amount of $7.3 million was recorded
in 1996 and was comprised of the write-off of the unamortized discount,
write-off of the financing costs associated with the Subordinated Notes and a
prepayment penalty.
If the retirement of the Subordinated Notes had occurred on January 1,
1996, income per share before extraordinary loss would have been $.11; the per
share effect of extraordinary loss would have been $.24 and the net loss per
share would have been $.13.
Maturities of outstanding debt as of December 31, 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
1997.............................................. $ 11,175
1998.............................................. 41,376
1999.............................................. 47,934
2000.............................................. 56,597
2001.............................................. 12,112
Thereafter........................................ 38,149
--------
$207,343
========
</TABLE>
4. INCOME TAXES
The effective income tax rate differs from the statutory federal income tax
rate for the years ended December 31, 1994, 1995 and 1996 because of the
valuation allowances recorded.
F-11
<PAGE> 93
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of deferred tax assets and liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
------- -------- JUNE 30,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss and credit carryforwards...... $ 1,002 $ 19,752 $ 13,827
Tax assets expensed for books.................... 7,221 8,628 9,288
Other accrued expenses........................... 2,236 3,824 5,338
------- -------- --------
Total deferred tax assets.......................... 10,459 32,204 28,453
Less valuation allowance........................... (8,071) (11,937) (4,360)
------- -------- --------
Net deferred tax assets............................ 2,388 20,267 24,093
Deferred tax liabilities:
Depreciable assets............................... (2,026) (19,348) (24,311)
Amortization of fees............................. (41) (435) (662)
Other............................................ (321) (484) (588)
------- -------- --------
Total deferred tax liabilities..................... (2,388) (20,267) (25,561)
------- -------- --------
Net deferred tax liabilities....................... $ -- $ -- $ (1,468)
======= ======== ========
</TABLE>
As of December 31, 1996, the Company had available net operating loss
carryforwards of approximately $49.4 million for federal income tax purposes.
The carryforwards expire $200,000 in 2009, $2.3 million in 2010 and $46.9
million in 2011. Because of the Company's limited operating history, a valuation
allowance has been established for a portion of the deferred tax asset. The
Company will continually assess the need for a valuation allowance for the
deferred tax asset based upon expectations of future taxable income.
For the six months ended June 29, 1996, the Company had a net deferred tax
asset that was offset entirely by a valuation allowance. For the six months
ended June 30, 1997, the Company has computed income taxes based upon the
expected annual effective tax rate which gives effect to the utilization of
available net operating loss carryforwards.
5. COMMON STOCK
On November 21, 1996, the Company completed an initial public offering. The
Company issued 9,375,000 shares at a net offering price of $15.08 per share. The
Company received approximately $140.2 million in net proceeds. Existing
shareholders sold 468,750 shares, and the over-allotment was exercised by the
underwriting group, which allowed existing shareholders to sell an additional
1,476,562 shares. The Company's Common Stock currently trades on the Nasdaq
National Market under the STLD symbol.
Warrants related to the Subordinated Notes for 1,641,827 shares of the
Company's Common Stock were exercised in the fourth quarter of 1996. In
addition, other warrants for 149,645 shares were exercised in the fourth quarter
of 1996.
On October 28, 1996, the board of directors approved a 28.06 for one-stock
split. Share and per share data has been restated to give effect to the stock
split for all periods presented.
1994 Incentive Stock Option Plan
The Company adopted the 1994 Incentive Stock Option Plan ("1994 Plan") for
certain key employees who are responsible for management of the Company. A total
of 611,712, 1,102,765 and 1,102,765 shares of Class A common stock have been
reserved for issuance under the 1994 Plan as of December 31, 1995 and 1996, and
June 30, 1997, respectively. Eligible individuals under the 1994 Plan may be
granted options to
F-12
<PAGE> 94
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase the Company's Class A common stock at an exercise price per share of at
least 100% of fair market value at the date of grant. Effective January 10,
1997, options under the 1994 Plan vest one-third six months after the date of
grant and two-thirds five years after the date of grant. The options have a
maximum term of ten years. As of June 30, 1997, options for 62,043 shares had
been exercised.
1996 Incentive Stock Option Plan
The Company on October 28, 1996 adopted the 1996 Incentive Stock Option
Plan ("1996 Plan") for all employees of the Company. A total of 1,403,000 shares
of common stock have been reserved for issuance under the 1996 Plan. Eligible
employees under the 1996 Plan may be granted options to purchase the Company's
common stock at an exercise price per share of at least 100% of fair market
value at the grant of date. Options under the 1996 Plan vest 100% six months
after the date of grant and have a maximum term of five years. As of June 30,
1997, options for 939 shares had been exercised.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, ---------------------------------------
---------------------------------------
JUNE 29, 1996 JUNE 30, 1997
------------------ ------------------
1995 1996
------------------ ------------------
(UNAUDITED) (UNAUDITED)
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994 PLAN
- ------------------------
Outstanding at beginning
of period............. 241,319 $3 572,427 $ 3 572,427 $ 3 645,383 $ 4
Granted................. 331,108 5 81,374 11 16,836 10 117,853 19
Forfeited............... -- -- 8,418 3 8,418 3 -- --
Exercised............... -- -- -- -- -- -- 62,043 4
Outstanding at end of
period................ 572,427 3 645,383 4 580,845 3 701,193 7
Options exercisable at
end of period......... -- -- -- -- -- -- 153,085 5
1996 PLAN
- ------------------------
Outstanding at beginning
of period............. -- -- -- -- -- -- 94,408 16
Granted................. -- -- 94,408 16 -- -- 92,273 21
Forfeited............... -- -- -- -- -- -- 1,151 17
Exercised............... -- -- -- -- -- -- 939 16
Outstanding at end of
period................ -- -- 94,408 16 -- -- 184,591 18
Options exercisable at
end of period......... -- -- -- -- -- -- 92,684 16
</TABLE>
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for the plans. No
compensation cost has been recognized for the plans because the stock option
price is equal to fair value at the grant date. Had compensation cost for the
plans been determined based on the fair value at the grant dates for awards
under the plan consistent with the fair value method of SFAS No. 123, Accounting
for Stock-Based Compensation, the Company's net income (loss) and
F-13
<PAGE> 95
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
net income (loss) per share would change to the pro forma amounts indicated
below (in thousands, except per share data):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER SIX MONTHS ENDED
31, ---------------------------
--------------------- JUNE 29, JUNE 30,
1995 1996 1996 1997
-------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss):
As reported......................... $(19,888) $ (9,830) $ (14,112) $30,154
Pro forma........................... (19,972) (10,274) (14,285) 29,576
Net income (loss) per share:
As reported......................... $ (.62) $ (.28) $ (.41) $ .63
Pro forma........................... (.63) (.30) (.41) .62
</TABLE>
At December 31, 1996, the fair value of the option grants are estimated on
the date of grant using an option pricing model with the following assumptions:
no dividend yield, risk-free interest rates of 5.7% to 7.1%, expected volatility
of 30% and expected lives of one and one-half to eight years. The pro forma
amounts are not representative of the effects on reported net income for future
years.
6. COMMITMENTS
The Company has executed a raw material supply contract with OmniSource
Corporation ("OmniSource") for the purchase of steel scrap resources (see Note
8). Under the terms of the contract, OmniSource will locate and secure at the
lowest then-available market price steel scrap for the Company in grades and
quantities sufficient for the Company to meet substantially all of its
production requirements. The initial term of the contract is through October
2001. The Company retains the right to acquire scrap from other sources if
certain business conditions are present.
The Company has executed finished goods off-take contracts with Heidtman
Steel Products ("Heidtman") and Preussag Stahl, AG ("Preussag") (see Note 8).
Under the terms of the contracts, the Company retains the right to sell its
hot-rolled coils in the open market; however, the Company is required to sell
and Heidtman and Preussag are required to purchase a minimum of 30,000 and
12,000 tons, respectively, each month at the then-current market price the
Company is charging for similar products. The Company is required to provide
Heidtman and Preussag with a volume discount for all tons purchased each month
in which Heidtman and Preussag purchase the minimum tons from the Company. The
initial term of the contracts for Heidtman and Preussag are through December
2001.
The Company purchases its electricity pursuant to a contract which extends
through 2005. Under the contract the Company is subject to a monthly minimum
charge. At December 31, 1996, the Company's fixed and determinable purchase
obligations for electricity are $7.5 million annually from 1997 through 2001.
The Company began construction of its cold mill in August 1996 and has
construction related commitments of approximately $132.0 million as of December
31, 1996. The Company also began construction of its second caster project in
June 1997 and has construction related commitments of approximately $15 million
as of June 30, 1997.
7. LEGAL PROCEEDINGS
The Company, from time to time, is subject to claims relating to the
conduct of its business. In the opinion of management, any such matters
presently outstanding will not have a material adverse effect upon the Company's
financial position, cash flows or future results of operations.
F-14
<PAGE> 96
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. TRANSACTIONS WITH AFFILIATED COMPANIES
The Company sells hot-rolled coils to Heidtman and affiliates of Preussag
and purchases steel scrap resources from OmniSource. Heidtman, Preussag and
OmniSource are stockholders of the Company. During 1996, sales to Heidtman and
Preussag represented 36% and 12%, respectively, and during 1997, sales to
Heidtman and Preussag represented 32% and 10%, respectively, of the Company's
total net sales. The Company had sales of $91.8 million and $29.9 million during
the year ended December 31, 1996 to Heidtman and affiliates of Preussag,
respectively. The Company as of December 31, 1996 had outstanding accounts
receivable of $15.3 million and $2.6 million from Heidtman and affiliates of
Preussag, respectively.
The Company had purchases (including fees) of approximately $7.2 million
and $145.5 million from OmniSource in 1995 and 1996, respectively. The Company
as of December 31, 1995 and 1996 had accounts payable to OmniSource of
approximately $3.4 million and $12.0 million, respectively.
In 1995, the Company sold approximately 32 unimproved acres of its plant
site to Heidtman for $96,000, for the construction by Heidtman of a steel
processing and storage facility. In addition, the Company permits OmniSource to
maintain a scrap handling facility, with its own equipment and staff, on the
Company's plant site. OmniSource does not pay rent for this facility.
The on-site substation was purchased by the Company for approximately $12.8
million in 1995 from General Electric Corporation, the parent of General
Electric Capital Corporation, a stockholder of the Company. The Company has
commitments to purchase additional equipment from General Electric Corporation
for approximately $23.4 million.
9. FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable and accounts payable approximated fair value as
of December 31, 1995 and 1996, because of the relatively short maturity of these
instruments. The carrying value of long-term debt, including the current
portion, approximated fair value as of December 31, 1995 and 1996, respectively.
The fair values of the Company's long-term debt are estimated using discounted
cash flow analyses, based on the Company's current incremental borrowing rates.
As required by the credit agreement, in August 1994 the Company entered
into an interest rate cap agreement with the agent bank whereby the maximum base
rate on fifty percent of the principal amount, up to $75 million, of the
Company's projected outstanding senior term loans during the period from June
30, 1995 through December 31, 1996 was 7.0%. The premium paid for the interest
rate cap agreement was included in other current assets, as of December 31, 1995
and amortized to interest expense during 1996.
10. RETIREMENT PLANS
The Company sponsors a 401(k) retirement savings plan ("401(k) Plan") for
all eligible employees of the Company under which they may elect to contribute
on a pre-tax basis up to 8% of their eligible compensation. The Company provides
matching contributions equal to 5% of the participants' contributions to the
savings plan. Employer contributions are not significant for any periods
presented. The 401(k) Plan was amended effective in 1997 to provide for a
matching contribution that will be dependent upon the Company's return on
assets. In no event will the match be less than 5% or greater than 50% of
employee contributions.
The Company has also established a Profit Sharing Plan ("Profit Sharing
Plan") for eligible employees. The Profit Sharing Plan is a "qualified plan" for
federal income tax purposes. Each year, the Company allocates to a trust fund
such sum, if any, as the Board of Directors determines, up to an amount equal to
15% of the wages paid to Profit Sharing Plan participants ("profit sharing
pool"). The profit sharing pool is used to fund the Profit Sharing Plan as well
as a separate cash profit sharing bonus which is paid to employees in
F-15
<PAGE> 97
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
March of the following year. The allocation between the Profit Sharing Plan
contribution and the cash bonus amount is determined by the Board of Directors
each year.
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
FISCAL YEAR 1997:
Net sales.................................... $ 98,059 $ 102,178 $ -- $ --
Gross profit................................. 24,149 26,448 -- --
Income from operations....................... 18,810 19,308 -- --
Net income................................... 14,585 15,569 -- --
Net income per share......................... .30 .33 -- --
FISCAL YEAR 1996:
Net sales.................................... $ 32,287 $ 66,375 $75,957 $77,998
Gross profit (loss).......................... (2,898) 5,967 13,293 15,692
Income (loss) from operations................ (5,707) 2,883 9,839 11,200
Extraordinary loss........................... -- -- -- 7,271
Net income (loss)............................ (11,296) (2,816) 4,295 (13)
Net income (loss) per share.................. (.35) (.08) .11 --
FISCAL YEAR 1995:
Net sales.................................... $ -- $ -- $ -- $ 137
Gross profit (loss).......................... -- -- -- (3,032)
Loss from operations......................... (1,695) (2,408) (6,871) (8,914)
Net loss..................................... (1,695) (2,408) (6,871) (8,914)
Net loss per share........................... (.05) (.08) (.22) (.28)
</TABLE>
Per share amounts are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly per share amounts may not equal
the total for the year.
12. SUBSEQUENT EVENTS (UNAUDITED)
On July 9, 1997, the Company amended its credit facility which increased
the amount committed to the Company from $345 million to $450 million, changed
the maturities of the tranches, revised the covenants and lowered the effective
interest rate charged by the bank group.
As a result of the substantial modifications with this amendment, the
Company will incur an extraordinary loss of approximately $10.5 million (net of
tax benefit of $2.2 million) related to prepayment penalties and the write-off
of the financing costs associated with the original credit facility.
Effective July 1, 1997, the Company entered into an interest rate swap
agreement with The First National Bank of Chicago ("First Chicago") to make
fixed rate payments at 6.935% and to receive variable rate payments at LIBOR on
a notional amount of $100 million. The interest rate swap agreement was entered
into as an anticipatory hedge of the seven year term tranche of the new credit
facility. The maturity date of the interest rate swap agreement is July 2, 2001;
however, on June 28, 2001, First Chicago has the right to extend the maturity
date to July 1, 2004 at predetermined interest rates. The interest rate swap
agreement will be accounted for on an accrual basis. The Company is exposed to
credit loss in the event of nonperformance by the counterparty for the net
interest differential when variable rates exceed the fixed rate. However, the
Company does not anticipate nonperformance by the counterparty.
F-16
<PAGE> 98
Filed pursuant to Rule 424(b)(4)
Registration No. 333-31735
PROSPECTUS
8,400,000 Shares
Steel Dynamics, Inc.
COMMON STOCK
------------------------
OF THE 8,400,000 SHARES OF COMMON STOCK BEING OFFERED HEREBY, 1,255,971 SHARES
ARE BEING SOLD BY THE COMPANY AND 7,144,029 SHARES ARE BEING SOLD BY THE SELLING
STOCKHOLDERS. SEE "PRINCIPAL AND SELLING STOCKHOLDERS." THE COMPANY WILL NOT
RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF THE SHARES OF COMMON STOCK BY THE
SELLING STOCKHOLDERS. OF THE 8,400,000 SHARES OF COMMON STOCK BEING OFFERED,
1,680,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND
CANADA BY THE INTERNATIONAL UNDERWRITERS AND 6,720,000 SHARES ARE BEING OFFERED
INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. SEE
"UNDERWRITERS." THE COMMON STOCK IS TRADED ON THE NASDAQ STOCK MARKET, UNDER THE
SYMBOL "STLD." ON AUGUST 13, 1997, THE REPORTED LAST SALE PRICE OF THE COMMON
STOCK ON THE NASDAQ STOCK MARKET WAS $25 1/2 PER SHARE.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE $25 A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............... $25.00 $1.00 $24.00 $24.00
Total(3)................ $210,000,000 $8,400,000 $30,143,304 $171,456,696
</TABLE>
- ------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $600,000.
(3) The Company and certain of the Selling Stockholders have granted the
U.S. Underwriters an option, exercisable within 30 days of the date
hereof, to purchase up to an aggregate of 1,260,000 additional Shares of
Common Stock at the price to public less underwriting discounts and
commissions, for the purpose of covering over-allotments, if any. If the
U.S. Underwriters exercise such option in full, the total price to
public, underwriting discounts and commissions, proceeds to Company and
proceeds to Selling Stockholders will be $241,500,000, $9,660,000,
$33,983,304 and $197,856,696, respectively. See "Underwriters."
------------------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Shearman & Sterling, counsel for the Underwriters. It is expected that
delivery of the Shares will be made on or about August 19, 1997, at the office
of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor
in immediately available funds.
------------------------
MORGAN STANLEY DEAN WITTER PAINEWEBBER INTERNATIONAL
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
McDONALD & COMPANY SECURITIES, INC.
SALOMON BROTHERS INTERNATIONAL LIMITED
August 13, 1997
<PAGE> 99
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
2
<PAGE> 100
Gatefold page 1:
THE EXISTING MILL
January 1996
- - Twin shell, 195t, AC, Electric Arc Furnace Battery
- - Ladle Metallurgy Facility, Desulphurization
- - SMS, Thin-Slab Caster
- - Tunnel Furnace for Direct Charge
- - Six Stand, SMS Hot Mill, Single Downcoiler
- - CAPACITY @ 1,400,000 TONS
THE COLD MILL PROJECT
Late 1997
- - Continuous Pickle Line
- - Hot-Rolled Products Galvanizing Line
- - Semi-Tandem 2-Stand Reversing Cold Rolling Mill
- - Cold-Rolled Products Galvanizing Line
- - Batch Annealing Furnaces
- - Temper Mill
- - PLANNED CAPACITY @ 1,000,000 TONS
[SDI Logo]
<PAGE> 101
Gatefold page 2:
THE CASTER PROJECT
Mid 1998
- - Second Electric Arc Furnace Battery
- - Second Thin-Slab Caster
- - Second Tunnel Furnace
- - Second Downcoiler
- - PLANNED INCREMENTAL CAPACITY @ 1,000,000 TONS
THE IRON DYNAMICS PROJECT
Late 1998
- - Pelletizing Plant
- - Rotary Hearth Reduction Furnace
- - Hybrid Electric Arc Furnace
- - Desulphurization Station
- - PLANNED LIQUID PIG IRON CAPACITY @ 500,000 TONNES
[SDI Logo]
<PAGE> 102
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT
IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY
CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
For investors outside the United States: No action has been or will be
taken in any jurisdiction by the Company, any Selling Stockholder or any
Underwriter that would permit a public offering of the Common Stock or
possession or distribution of this Prospectus in any jurisdiction where action
for that purpose is required, other than in the United States. Persons into
whose possession this Prospectus comes are required by the Company, the Selling
Stockholders and the Underwriters to inform themselves about, and to observe any
restrictions as to, the offering of the Common Stock and the distribution of
this Prospectus.
------------------------
In this Prospectus, references to "dollar" and "$" are to United States
dollars, and the terms "United States" and "U.S." mean the United States of
America, its states, its territories, its possessions and all areas subject to
its jurisdiction.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................................................................... 4
Risk Factors.......................................................................... 10
Use of Proceeds....................................................................... 17
Price Range of Common Stock and Dividend Policy....................................... 17
Dilution.............................................................................. 18
Capitalization........................................................................ 19
Selected Consolidated Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 22
Business.............................................................................. 29
Management............................................................................ 52
Certain Transactions.................................................................. 61
Principal and Selling Stockholders.................................................... 64
Description of Certain Indebtedness................................................... 67
Description of Capital Stock.......................................................... 69
Shares Eligible for Future Sale....................................................... 71
Certain United States Federal Tax Consequences for Non-United States Holders.......... 72
Underwriters.......................................................................... 76
Legal Matters......................................................................... 79
Experts............................................................................... 79
Available Information................................................................. 79
Index to Consolidated Financial Statements............................................ F-1
</TABLE>
------------------------
The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by its independent
accountants and quarterly reports for the first three quarters of each fiscal
year containing unaudited consolidated financial information.
3
<PAGE> 103
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and the
Company's Consolidated Financial Statements, including the notes thereto,
appearing elsewhere in this Prospectus. As used in this Prospectus, unless the
context otherwise indicates, "Steel Dynamics," "SDI" or the "Company" means
Steel Dynamics, Inc., an Indiana corporation, and its consolidated subsidiaries.
"Common Stock" means the Company's Common Stock, par value $.01 per share.
Unless otherwise indicated, the information contained in this Prospectus assumes
that the U.S. Underwriters' over-allotment option is not exercised. As used in
this Prospectus, the term "tonne" means a metric tonne, equal to 2,204.6 pounds,
and the term "ton" means a net ton, equal to 2,000 pounds. Certain information
contained in this summary and elsewhere in this Prospectus, including
information with respect to the Company's plans and strategy for its business,
are forward-looking statements. For a discussion of important factors which
could cause actual results to differ materially from the forward-looking
statements contained herein, see "Risk Factors."
THE COMPANY
OVERVIEW
Steel Dynamics owns and operates a new, state-of-the-art flat-rolled steel
mini-mill, which commenced operations in January 1996. The Company was founded
by executives and managers who pioneered the development of
thin-slab/flat-rolled compact strip production ("CSP") technology and directed
the construction and operation of the world's first thin-slab/flat-rolled
mini-mill. Building upon their past experience with CSP technology, management
founded SDI to produce steel more efficiently, at a lower cost and of higher
quality. Steel Dynamics' goal is to be the low cost producer of a broad range of
high quality flat-rolled steel products, including hot-rolled, cold-rolled and
galvanized sheet, as well as other specialty steel products, and to serve more
markets than any other flat-rolled mini-mill. In addition, the Company intends
to participate in the development and use of new technologies to produce a broad
range of steel products.
The Company was founded in September 1993 by Keith E. Busse, Mark D.
Millett and Richard P. Teets, Jr. In October 1994, Steel Dynamics commenced
construction of the mini-mill and commissioned it in December 1995. The Company
believes that this 14-month construction period is the fastest ever for this
kind of facility. In addition, the Company believes that the approximately
$275.7 million initial capital cost of its mini-mill is approximately $75.0
million, or approximately 20%, less than the cost of comparable mini-mills
currently operating. Actual production at the mini-mill of primary grade steel
commenced on January 2, 1996. The mill achieved an annualized production rate of
1.2 million tons by the end of June 1997, or 85% of its capacity of 1.4 million
tons, making the mini-mill's start-up and ramp-up the fastest to date in the
industry.
Pursuant to the Company's plan to develop downstream processing facilities
to produce further value-added steel products, Steel Dynamics is currently
constructing a cold mill, contiguous to the mini-mill, with a 1.0 million ton
annual capacity (the "Cold Mill Project") which is scheduled for completion
during the fourth quarter of 1997. Steel Dynamics is also in the process of
adding a second melting furnace, a second caster and tunnel furnace, and an
additional coiler to expand its annual production capacity of hot-rolled steel
from 1.4 million tons to approximately 2.4 million tons (the "Caster Project").
The Caster Project is expected to be completed in the first half of 1998.
In addition, the Company's wholly-owned subsidiary, Iron Dynamics, Inc.
("Iron Dynamics" or "IDI"), intends to construct a 600,000 tonne annual capacity
plant for the manufacture of direct reduced iron ("DRI"), which the Company
expects to be completed in 1998 (the "IDI Project"). The DRI, after further
refining into 500,000 tonnes of liquid pig iron, will be used in SDI's mini-mill
as a steel scrap substitute.
Management strategically located the Company's mini-mill within close
proximity to its natural customer base, steel service centers and other end
users, abundant supplies of automotive and other steel scrap (SDI's principal
raw material), competitive sources of power, and numerous rail and truck
transportation routes. Steel Dynamics believes that its strategic location
provides it with sales and marketing as well as production cost
4
<PAGE> 104
advantages. The Company has secured a stable baseload of sales through long-term
"off-take" contracts with two major steel consumers, a 30,000 ton per month
sales contract with Heidtman Steel Products, Inc. ("Heidtman"), a major
Midwest-based steel service center and distributor and an affiliate of one of
the Company's stockholders, and a 12,000 ton per month sales contract with
Preussag Stahl AG ("Preussag"), a major German steel manufacturer and a
stockholder of the Company, with affiliate distributors and steel service
centers throughout the United States.
The Company has sought to assure itself of a secure supply of both steel
scrap and scrap substitute material. To accomplish this objective, SDI has
entered into a long-term scrap purchasing services contract with OmniSource
Corporation ("OmniSource"), one of the largest scrap dealers in the Midwest and
an affiliate of one of the Company's stockholders. In addition, the Company has
sought to assure itself of a secure supply of scrap substitute material for use
as a lower cost complement to steel scrap as part of the Company's melt mix. SDI
has entered into a long-term 300,000 tonne per year "off-take" contract to
purchase iron carbide from Qualitech Steel Corporation's ("Qualitech's") iron
carbide facility currently under construction in Corpus Christi, Texas which is
expected to be completed in 1998. The Company expects to produce additional
scrap substitute material in 1998 upon completion of the IDI Project.
STRATEGY
The Company's business strategy is to use advanced CSP hot-rolled
steelmaking and cold-rolling technologies to produce high surface quality
flat-rolled steel in a variety of value-added sizes, gauges and surface
treatments, emphasizing low production costs, reliable product quality and
excellent customer service. In addition, SDI intends to remain financially
strong and competitive through the selective purchasing of scrap and scrap
substitutes to offset the effects of cyclical cost/price imbalances. The
principal elements of the Company's strategy include:
- Achieve Lowest Conversion Costs in Industry. Steel Dynamics' electric
arc furnace ("EAF") and its caster and rolling mill designs represent
substantial improvements over earlier mini-mills using CSP technology.
These improvements have been designed to speed the steelmaking process,
to limit "power off time" and other non-productive time in the EAF, to
reduce the per ton cost of consumables and to yield higher quality
finished steel product. The Company believes that its per ton
manufacturing costs are already among the lowest in the industry.
- Emphasize Value-Added Products and Increase Product Breadth. Steel
Dynamics has produced and believes that it will be able to consistently
produce thinner gauge (down to .040") steel in hot-rolled form with
better surface and edge characteristics than most other flat-rolled
producers. The Company believes that its high quality, thinner hot-rolled
products will compete favorably with certain more expensive cold-rolled
(further processed) products, enabling it to obtain higher margins. In
addition, with the anticipated completion of the Cold Mill Project, SDI
expects to devote a substantial portion of its hot-rolled products to the
production of higher value-added cold-rolled and galvanized products, as
well as thinner gauges, down to .015". This increased product breadth
should also allow the Company to further broaden its customer base.
- Secure Reliable Sources of Low Cost Metallics. The principal raw
material used in the Company's mini-mill is steel scrap, which
represented approximately 58% of the Company's total manufacturing costs
for the six months ended June 30, 1997. Steel Dynamics has pursued a
three-part strategy to secure access to adequate low cost supplies of
steel scrap and steel scrap substitute materials. First, the Company has
entered into a long-term steel scrap contract with OmniSource. Second,
SDI has entered into an iron carbide "off-take" contract with Qualitech.
Third, Steel Dynamics is pursuing the IDI Project to produce DRI and
after further refining, liquid pig iron, as another lower cost complement
for use in the melt mix with steel scrap.
- Secure a Solid Baseload of Hot Band Sales. In order to help ensure
consistent and efficient plant utilization, SDI entered into "off-take"
sales and distribution agreements with Heidtman and Preussag, through
2001, pursuant to which Heidtman has agreed to purchase at least 30,000
tons and Preussag
5
<PAGE> 105
has agreed to purchase at least an average of 12,000 tons of the
Company's flat-rolled products per month, at the Company's market price,
subject to certain volume and single run discounts.
- Increase Unit Growth at Low Capital Cost. SDI seeks to continue to grow
its production of flat-rolled steel coil at low capital and unit costs.
The Company plans to invest approximately $85.0 million to finance its
Caster Project. The Caster Project, which is expected to be completed in
the first half of 1998, is expected to increase the annual production
capacity of the Company's mini-mill from 1.4 to approximately 2.4 million
tons of hot-rolled steel. In addition, management intends to continue to
explore new production technologies to further lower its unit costs of
production.
- Incentivize Employees. In contrast to the high fixed labor costs of many
of the Company's competitors, SDI has established certain incentive
compensation programs specifically designed to reward employee teams for
their efforts towards enhancing productivity, thereby encouraging a sense
of ownership throughout Steel Dynamics. Production employees actively
share in the Company's success through a "production" bonus and a
"conversion cost" bonus. The production bonus is directly tied to the
quantity and quality of products manufactured during a particular shift.
The conversion cost bonus encourages employees to use materials and
resources more efficiently. Steel Dynamics' employees' bonuses may equal
or exceed their base hourly wage.
- Pursue Future Opportunities. Steel Dynamics believes that technology
development and management's experience will provide significant
opportunities for SDI in a broad range of markets, potentially including
flat-rolled, non-flat-rolled, stainless and specialty steels. The Company
plans to pursue opportunities through greenfield projects, strategic
alliances or acquisitions, which may include foreign investments, to
secure the long-term future growth and profitability of SDI. The Company
is conducting certain preliminary engineering and feasibility analyses
for a possible 750,000 ton capacity structural steel facility to
manufacture wide flange beams and other structural shapes, utilizing near
net shape casting technology in conjunction with a state-of-the-art bloom
caster. There is no assurance, however, that such a facility will be
approved by the Company for further development efforts once these
preliminary studies have been completed, or, if further developed, that
the facility will be able to be financed and built. Steel Dynamics will
also seek to enter new steel markets and to produce new steel products
using the latest technology, with the objective of being a low cost
producer. In addition, the Company has a technology sharing agreement
with Preussag which will provide SDI with Preussag's expertise and
know-how in steel manufacturing, particularly steel finishing.
6
<PAGE> 106
THE OFFERINGS
<TABLE>
<S> <C>
Common Stock offered:
By the Company......................................... 1,255,971 shares
By the Selling Stockholders............................ 7,144,029 shares
Total............................................... 8,400,000 shares
Common Stock offered:
United States offering................................. 6,720,000 shares
International offering................................. 1,680,000 shares
Total............................................... 8,400,000 shares
Common Stock to be outstanding after the offerings(1).... 49,122,294 shares
Use of proceeds.......................................... The net proceeds to the Company will
be used for the purchase and
installation of a seventh stand for
the Company's hot-rolling mill and
for general corporate purposes. The
Company will not receive any
proceeds from the sale by the
Selling Stockholders of Common Stock
in the offerings. See "Use of
Proceeds."
Nasdaq Stock Market symbol............................... "STLD"
</TABLE>
- ------------
(1) Based on 47,866,323 shares of Common Stock outstanding on June 30, 1997.
Excludes 885,784 shares of Common Stock issuable upon exercise of stock
options outstanding on June 30, 1997, at a weighted average exercise price
of $9.42 per share.
RISK FACTORS
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING
AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS." The risk factors include
(i) Start-up; Limited Operating History; Recent Losses, (ii) Variability of
Financial Results; Production Shutdowns, (iii) Significant Capital Requirements,
(iv) Cost of Steel Scrap and Other Raw Materials, (v) Cyclicality of Steel
Industry and End User Markets, (vi) Competition, (vii) Risks Related to Scrap
Substitutes, (viii) Reliance on Major Customers, (ix) Potential Costs of
Environmental Compliance, (x) Dependence upon Key Management, (xi) Restrictions
on Payment of Dividends on Common Stock, (xii) Restrictive Covenants, (xiii)
Possible Volatility of Stock Prices, (xiv) Shares Eligible for Future Sale, (xv)
Anti-Takeover Provisions, (xvi) Dilution and (xvii) Forward Looking Statements.
7
<PAGE> 107
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth summary consolidated financial and operating
data for the dates and periods indicated. The quarterly and six month summary
statement of operations data and balance sheet data as of June 30, 1997 are
derived from unaudited consolidated financial statements of the Company and, in
the opinion of management, include all adjustments (consisting only of normal
recurring accruals) necessary to present fairly such data. The consolidated
financial data as of and for the year ended December 31, 1996 are derived from
the Company's audited consolidated financial statements. Operating results for
interim periods are not necessarily indicative of a full year's operations. The
information below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED(1) SIX MONTHS
--------------------------------------------------------------------- YEAR ENDED ENDED
MARCH 30, JUNE 29, SEPTEMBER 28, DECEMBER 31, MARCH 31, JUNE 30, DECEMBER 31, JUNE 30,
1996 1996 1996 1996 1997 1997 1996 1997
--------- -------- ------------- ------------ --------- -------- ------------ ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND TON AMOUNTS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................... $ 32,287 $ 66,375 $ 75,957 $ 77,998 $ 98,059 $102,718 $252,617 $200,777
Cost of goods sold............ 35,184 60,407 62,664 62,306 73,910 76,270 220,563 150,180
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit (loss).......... (2,897) 5,968 13,293 15,692 24,149 26,448 32,054 50,597
Selling, general and
administrative expenses...... 2,817 3,077 3,454 4,492 5,339 7,140 13,838 12,479
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations................. (5,714) 2,891 9,839 11,200 18,810 19,308 18,216 38,118
Foreign currency gain
(loss)....................... 154 106 -- 68 92 169 328 261
Interest expense.............. (5,837) (6,291) (5,922) (4,634) (2,401) (1,594) (22,684) (3,995)
Interest income............... 93 486 378 624 752 512 1,581 1,264
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) before
extraordinary loss and
taxes...................... (11,304) (2,808) 4,295 7,258 17,253 18,395 (2,559) 35,648
Extraordinary loss(2)......... -- -- -- (7,271) -- -- (7,271) --
Provision for taxes........... -- -- -- -- 2,668 2,826 -- 5,494
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)............. $(11,304) $ (2,808) $ 4,295 $ (13) $ 14,585 $ 15,569 $ (9,830) $ 30,154
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per share... $ (0.35) $ (0.08) $ 0.11 $ (0.00) $ 0.30 $ 0.33 $ (0.28) $ 0.63
======== ======== ======== ======== ======== ======== ======== ========
Weighted average common shares
outstanding.................. 32,665 36,719 39,045 41,808 47,838 47,855 34,571 47,851
OTHER DATA:
Shipments (net tons).......... 114,914 218,640 228,568 231,726 280,446 295,272 793,848 575,718
Hot band production (net
tons)(3)..................... 127,930 213,391 227,428 245,813 275,035 292,302 814,562 567,337
Prime tons produced........... 94,405 191,034 212,562 229,908 261,957 278,286 727,909 540,243
Prime ton percentage.......... 73.8% 89.5% 93.5% 93.5% 95.2% 95.2% 89.4% 95.2%
Yield percentage(4)........... 83.8% 87.0% 88.5% 88.6% 89.2% 89.7% 87.4% 89.5%
Average sales price per prime
ton.......................... $ 313 $ 320 $ 344 $ 350 $ 360 $ 358 $ 336 $ 359
Effective capacity
utilization(5)............... 35.1% 58.6% 67.7% 73.2% 79.1% 83.0% 58.2% 81.1%
Man-hours per net ton
produced..................... 0.90 0.69 0.66 0.61 0.57 0.57 0.70 0.57
Number of employees (end of
period)...................... 238 255 263 293 329 359 293 359
Operating profit (loss) per
net ton shipped.............. $ (49.72) $ 13.22 $ 43.05 $ 48.34 $ 72.25 $ 72.08 $ 22.95 $ 72.16
Depreciation and
amortization................. 3,588 5,211 5,341 5,165 5,691 5,916 19,403 11,607
Net cash provided by (used
in):
Operating activities......... (27,543) (16,823) (1,689) (6,009) 38,042 10,463 (51,634) 48,505
Investing activities......... (5,013) (13,153) 4,884 (51,433) (46,331) (35,136) (83,146) (81,468)
Financing activities......... 36,359 40,112 24,543 84,338 (992) (1,213) 185,356 (2,204)
EBITDA(6)..................... (2,340) 8,094 15,180 16,366 24,501 25,225 37,300 49,726
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------
ACTUAL AS ADJUSTED(7)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................................... $ 22,293 $ 51,836
Working capital......................................................................................... 60,676 90,219
Property, plant and equipment, net...................................................................... 410,272 410,272
Total assets............................................................................................ 552,603 582,146
Long-term debt (including current portion).............................................................. 205,461 205,461
Stockholders' equity.................................................................................... 294,953 324,496
</TABLE>
(footnotes on following page)
8
<PAGE> 108
- ---------------
(1) The Company commenced actual production of primary grade steel in January
1996. Accordingly, management believes that the Company's results of
operations prior to 1996 are not indicative of results to be expected in the
future.
(2) Represents the loss on early retirement of the Company's subordinated notes
of approximately $7.3 million in the fourth quarter of 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company will incur an extraordinary loss of approximately
$7.6 million (net of tax benefit of $5.1 million) in the third quarter of
1997 as a result of the refinancing of the Company's Credit Agreement (as
defined). See "Description of Certain Indebtedness."
(3) Hot band production refers to the total production of finished coiled
product. Prime tons refer to hot bands produced which meet or exceed
metallurgical and quality standards for surface, shape and metallurgical
properties.
(4) Yield percentage refers to tons of finished products divided by tons of raw
materials.
(5) Effective capacity utilization is the ratio of tons produced for the
operational month to the operational month's capacity based upon an annual
capacity of 1.4 million tons.
(6) EBITDA represents operating income before depreciation and amortization.
Based upon its experience in the steel industry, the Company believes that
EBITDA and related measures of cash flow serve as important financial
analysis tools for measuring and comparing steel companies in several areas,
such as liquidity, operating performance and leverage. However, EBITDA is
not a measurement of financial performance under generally accepted
accounting principles ("GAAP") and may not be comparable to other similarly
titled measures of other companies. EBITDA should not be considered as an
alternative to operating or net income (as determined in accordance with
GAAP), as an indicator of the Company's performance or as an alternative to
cash flows from operating activities (as determined in accordance with GAAP)
as a measure of liquidity. See the Company's Consolidated Statements of
Operations and Consolidated Statement of Cash Flows, including the notes
thereto, appearing elsewhere in this Prospectus.
(7) As adjusted to give effect to the offerings.
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<PAGE> 109
RISK FACTORS
Prospective investors should consider carefully the following factors in
addition to other information set forth in this Prospectus in evaluating an
investment in the shares of the Common Stock offered hereby.
START-UP; LIMITED OPERATING HISTORY; RECENT LOSSES
The Company was formed in September 1993 and commenced primary grade
production at its thin-slab steel mini-mill in January 1996. The Company is in
the process of ramping up steel production to full capacity. The Company has
experienced normal start-up and operational difficulties in bringing its
mini-mill into full scale production, and the mini-mill is not yet operating at
full capacity. By the end of June 1997, the Company was operating at an
annualized production rate of 1.2 million tons, or 85% of full capacity. Because
of the high fixed cost nature of operating a steel mill, failure to bring
production to, or maintain production at, full capacity could have a material
adverse effect on the Company's cost and pricing structure and on its resulting
ability to compete and results of operations. Although the Company believes that
the start-up difficulties it experienced are typical of those encountered when a
new steel mill commences production, there is no assurance that the Company will
not continue to experience operational difficulties beyond start-up
difficulties, or that it will ultimately achieve or be able to sustain full
production. In addition, the Company could experience construction, start-up or
operational difficulties as it implements the Cold Mill, IDI and Caster Projects
or future projects. There can be no assurance that the Company will be able to
operate its mini-mill at full capacity or that the Cold Mill, IDI and Caster
Projects will be successfully built, started-up, and integrated with the
Company's existing operations. Management has no experience in building or
operating scrap substitute manufacturing plants. The Company's continued rapid
development and the implementation of the Cold Mill, IDI and Caster Projects may
place a strain on its administrative, operational and financial resources. As
the Company increases its production and expands its customer base, there will
be additional demands on the Company's ability to coordinate sales and marketing
efforts with production. The failure to produce at full capacity, coordinate its
sales and marketing efforts with production or manage its future development and
growth, or the emergence of unexpected production difficulties could adversely
affect the Company's business, results of operations and financial condition.
Because the Company commenced primary grade production in January 1996, the
Company's results of operations for prior periods will not be comparable with
future periods. As a result, there is only limited financial and operating
information available for a potential investor to evaluate an investment in the
Common Stock. Although the Company had net income of $30.2 million for the six
months ended June 30, 1997, the Company had net losses for each year since its
formation in 1993 and had an accumulated deficit of $9.6 million as of June 30,
1997. These losses have resulted principally from operating expenses during
start-up. The Company will experience additional start-up losses in connection
with the Cold Mill, IDI and Caster Projects. There can be no assurance that the
Company's operations will continue to be profitable. If the Company cannot
maintain profitability it may not be able to make required debt service payments
and the value of the Common Stock could be adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
VARIABILITY OF FINANCIAL RESULTS; PRODUCTION SHUTDOWNS
The Company's results of operations are substantially affected by
variations in the realized sales prices of its products, which in turn depend
both on prevailing prices for steel and demand for particular products. In 1996,
spot prices for hot bands increased from a low of $330 per ton to a high of $360
per ton. Operating results have been, and in the future will be, affected by
numerous factors, including the prices and availability of raw materials,
particularly steel scrap and scrap substitutes, the demand for and prices of the
Company's products, the level of competition, the level of unutilized production
capacity in the steel industry, the mix of products sold by the Company, the
timing and pricing of large orders, start-up difficulties with respect to the
Cold Mill Project, IDI Project or Caster Project, the integration and
modification of facilities and other factors. There can be no assurance that
these events and circumstances or other events or circumstances, such as
seasonal factors like weather, disruptions in the transportation or energy
industry or in the Company's
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<PAGE> 110
customers' industries, or an economic downturn adversely affecting the steel
industry, generally, or the Company, in particular, will not occur, any of which
could have a material adverse effect on the Company.
The Company's manufacturing processes are dependent upon certain critical
pieces of steelmaking equipment, such as its EAF and continuous caster, which on
occasion may be out of service due to routine scheduled maintenance or as the
result of equipment failures. This interruption in the Company's production
capabilities could result in fluctuations in the Company's quarterly results of
operations. The most significant scheduled maintenance outages are planned to
occur quarterly, for three days at a time, and involve routine maintenance work.
Other routine scheduled maintenance could limit the Company's production for a
period of less than a day, while unanticipated equipment failures could limit
the Company's production for a longer period.
Equipment failures at its plant could limit or shut down the Company's
production. Through June 30, 1997, the Company experienced some equipment
failures, none of which lasted more than two days. In order to reduce the risk
of equipment failure, the Company follows a comprehensive maintenance and loss
prevention program, has on-site maintenance and repair facilities, and maintains
an inventory of spare parts and machinery. For example, the Company maintains a
spare EAF transformer as well as spare caster parts, mechanical parts and
electrical controls for its cranes and other tools. No assurance can be given,
however, that material shutdowns will not occur in the future or that a shutdown
would not have a material adverse affect on the Company. In addition to
equipment failures, the mill is also subject to the risk of catastrophic loss.
SIGNIFICANT CAPITAL REQUIREMENTS
The Company's business is capital intensive and will require substantial
expenditures for, among other things, the purchase and maintenance of equipment
used in its steelmaking and finishing operations and compliance with
environmental laws. In addition, the construction and start-up of the Cold Mill,
IDI and Caster Projects (collectively, the "Expansion Projects") will require
substantial capital. The Company may also require additional financing in the
event it decides to enter into strategic alliances, make acquisitions, or build
additional plants. The extent of additional financing will depend on the success
of the Company's business. There can be no assurance that additional financing,
if needed, will be available to the Company or, if available, that it can be
obtained on terms acceptable to the Company and within the limitations contained
in the Company's Credit Agreement (as defined) or any future financing,
including the IDI Financing (as defined). See "-- Restrictive Covenants" and
"Description of Certain Indebtedness."
The Company currently estimates that the funds required for the
construction and start-up of (i) the Cold Mill Project, which is expected to be
completed in the fourth quarter of 1997, will total approximately $200.0
million, of which approximately $136.3 million has been expended thereon through
June 30, 1997, (ii) the IDI Project, which is expected to be completed in 1998,
will total approximately $95.0 million and (iii) the Caster Project, which is
expected to be completed in the first half of 1998, will total approximately
$85.0 million (excluding working capital and start-up costs), of which
approximately $14.9 million has been expended thereon through June 30, 1997.
There can be no assurance that the Expansion Projects will be completed as
planned or at the costs currently budgeted or that the Company will have
adequate sources of funds for any such future capital expenditures.
The Company intends to use cash on hand, funds from operations, borrowings
under the Company's Credit Agreement and borrowings by IDI to finance the
construction and startup of the Expansion Projects. Borrowings under the Credit
Agreement are conditioned upon the Company's compliance with various financial
and other covenants and other conditions set forth therein and, as a result,
there can be no assurance that such financing will be available to the Company
as planned. See "Description of Certain Indebtedness." In addition, the Company
expects to finance $60.0 million of the IDI Project with a separate IDI credit
facility (the "IDI Financing"). The IDI Financing is dependent upon securing and
closing a $50.0 million standby construction and term loan, together with a
$10.0 million revolving credit facility to fund current operations. See
"Description of Certain Indebtedness -- The IDI Financing." Although IDI expects
to secure a commitment for and close the IDI Financing during the third quarter
of 1997, no assurances can be given that such a commitment will in fact be
secured, or, even if secured, that IDI will be able to satisfy all of the
11
<PAGE> 111
terms and conditions established by the lenders in order to close the IDI
Financing. Failure to obtain and close the IDI Financing could delay or prevent
the IDI Project, which could have a material adverse effect on the Company.
COST OF STEEL SCRAP AND OTHER RAW MATERIALS
The Company's principal raw material is scrap metal derived from, among
other sources, junked automobiles, industrial scrap, railroad cars and railroad
track materials, agricultural machinery and demolition scrap from obsolete
structures, containers and machines. The prices for scrap are subject to market
forces largely beyond the control of the Company, including demand by U.S. and
international steel producers, freight costs and speculation. The prices for
scrap have varied significantly and may vary significantly in the future. In
addition, the Company's operations require substantial amounts of other raw
materials, including various types of pig iron, alloys, refractories, oxygen,
natural gas and electricity, the price and availability of which are also
subject to market conditions. The Company may not be able to adjust its product
prices, especially in the short-term, to recover the costs of increases in scrap
and other raw material prices. The Company's future profitability may be
adversely affected to the extent it is unable to pass on higher raw material and
energy costs to its customers. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business -- Steel Scrap and
Scrap Substitute Resources" and "-- Energy Resources."
CYCLICALITY OF STEEL INDUSTRY AND END USER MARKETS
The steel industry is highly cyclical in nature and sensitive to general
economic conditions. The financial condition and results of operations of
companies in the steel industry are generally affected by macroeconomic
fluctuations in the U.S. and global economies. The Company is particularly
sensitive to trends in the automotive, oil and gas, gas transmission,
construction, commercial equipment, rail transportation, agriculture and durable
goods industries, because these industries are significant markets for the
Company's products and are highly cyclical. In the early 1980s, U.S. integrated
steel producers incurred significant restructuring charges associated with
efforts to reduce excess capacity. Significant losses, and bankruptcies in
certain cases, occurred as a result of a number of factors, including worldwide
production overcapacity, increased U.S. and global competition, low levels of
steel demand, substitution of alternative materials for steel, high labor costs,
inefficient plants and the strength of the U.S. dollar relative to other
currencies. In the late 1980s, earnings of U.S. steel producers benefitted from
improved industry conditions. During the 1990 to 1992 downturn, substantial
excess worldwide manufacturing capacity for steel products, combined with a
worldwide economic slowdown, resulted in a substantial decrease in the demand
for steel products, increased competition and a decline in financial performance
for the steel industry. Although demand for steel products recovered and the
profitability of the industry has improved recently, there can be no assurance
that economic conditions will remain favorable to the steel industry. Future
economic downturns, a stagnant economy or currency fluctuations may adversely
affect the Company's business, results of operations and financial condition.
COMPETITION
Competition within the steel industry can be intense. The Company competes
primarily on the basis of price, quality, and the ability to meet customers'
product specifications and delivery schedules. Many of the Company's competitors
are integrated steel producers which are larger, have substantially greater
capital resources and experience, and, in some cases, have lower raw material
costs than the Company. The Company also competes with other mini-mills which
may have greater financial resources. The highly competitive nature of the
industry, combined with excess production capacity in some products, may in the
future exert downward pressure on prices for certain of the Company's products.
In addition, in the case of certain product applications, steel competes with
other materials, including plastics, aluminum, graphite composites, ceramics,
glass, wood and concrete. There can be no assurance that the Company will be
able to compete effectively in the future.
U.S. The Company's products compete with many integrated steel producers,
such as Rouge Steel Co. and National Steel Corp.'s Great Lakes Steel Division in
the Detroit area, LTV Steel Co., Inc., Inland Steel Co., Bethlehem Steel Corp.,
U.S. Steel, Acme Steel Co. and Beta Steel Corp. in the northwest Indiana and
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<PAGE> 112
Chicago area, as well as a growing number of hot-rolled mini-mills, such as
Nucor Corporation's ("Nucor's") Crawfordsville, Indiana and Hickman, Arkansas
facilities and Gallatin Steel Company's mini-mill in Ghent, Kentucky, Delta
Steel, the BHP/Northstar joint venture in Delta, Ohio, and TRICO Steel, the
three-way joint venture in Alabama among LTV Steel Co., Inc., Sumitomo Metal USA
Corp. and British Steel.
Despite significant reductions in raw steel production capacity by major
U.S. producers over the last decade, the U.S. industry continues to be adversely
affected, from time to time, by excess world capacity. According to the American
Iron and Steel Institute (the "AISI"), annual U.S. raw steel production capacity
was reduced from approximately 154 million tons in 1982 to approximately 116
million tons in 1996. This reduction resulted in higher utilization rates.
Average utilization of U.S. industry capacity improved from approximately 61% in
the 1982 to 1986 period to approximately 83% in the 1987 to 1991 period, to
approximately 89% in 1993, to 93% in 1994 and 1995, and to 91% in 1996. Recent
improved production efficiencies also have begun to increase overall production
capacity in the United States. Excess production capacity exists in certain
product lines in U.S. markets and, to a greater extent, worldwide. Increased
industry overcapacity, coupled with economic recession, would intensify an
already competitive environment.
Over the last decade, extensive downsizings have necessitated costly
restructuring charges that, when combined with highly competitive market
conditions, have resulted at times in substantial losses for some U.S.
integrated steel producers. A number of U.S. integrated steel producers have
gone through bankruptcy reorganization. These reorganizations have resulted in
somewhat reduced capital costs for these producers and may permit them to price
their steel products at levels below those that they could have otherwise
maintained.
An increasing number of mini-mills have entered or are expected to enter
the EAF-based thin-slab/flat-rolled steel market in the next several years.
These mini-mills have cost structures and management cultures more closely akin
to those of the Company than to the integrated producers. Flat-rolled mini-mill
production capacity increased from 4.0 million tons in 1994 to approximately 7.3
million tons in 1996, and industry sources expect this cumulative flat-rolled
mini-mill capacity to reach 14.9 million tons in 1997 and up to 18.7 million
tons in 1998. The Company's penetration into the flat-rolled steel market is
limited by geographic considerations, to some extent by gauge and width of
product specifications and by metallurgical and physical quality requirements.
Based on product type and geographic location, the Company believes it will most
closely compete with the following mini-mills: Nucor's Crawfordsville, Indiana
facility, Gallatin Steel's Ghent, Kentucky facility, Delta Steel's Delta, Ohio
facility, and, to a more limited extent, Nucor's Hickman, Arkansas facility,
Nucor's Berkeley County, South Carolina facility, and TRICO Steel's facility in
northern Alabama. Each of these mills produces hot-rolled product. However, an
affiliate of Delta Steel is expected to produce hot-rolled galvanized product,
and Nucor's Crawfordsville, Indiana facility produces cold-rolled and
cold-rolled galvanized products.
Non-U.S. U.S. steel producers face significant competition from certain
non-U.S. steel producers who may have lower labor costs. In addition, U.S. steel
producers may be adversely affected by fluctuations in the relationship between
the U.S. dollar and non-U.S. currencies. Furthermore, some non-U.S. steel
producers have been owned, controlled or subsidized by their governments, and
their decisions with respect to production and sales may be, or may have been in
the past, influenced more by political and economic policy considerations than
by prevailing market conditions. Some non-U.S. producers of steel and steel
products have continued to ship into the U.S. market despite decreasing profit
margins or losses. If certain pending trade proceedings ultimately do not halt
or otherwise provide relief from such trade practices, other relevant U.S. trade
laws are weakened, world demand for steel eases or the U.S. dollar strengthens,
an increase in the market share of imports may occur, which could adversely
affect the pricing of the Company's products. The costs for current and future
environmental compliance may place U.S. steel producers, including the Company,
at a competitive disadvantage with respect to non-U.S. steel producers, which
are not subject to environmental requirements as stringent as those in the U.S.
RISKS RELATED TO SCRAP SUBSTITUTES
The processes that the Company currently plans to use in the IDI Project to
produce DRI and to further refine it into liquid pig iron (the "IDI Process")
has not been previously used commercially for this purpose.
13
<PAGE> 113
There are many alternative technologies available to produce commercially viable
scrap substitute material, but only a small number have been commercially
operated. The technologies that the Company intends to use in its IDI Project
have not been previously combined into a steel scrap substitute production
facility. There is a risk, therefore, that the IDI Process will not produce DRI
or that the DRI will not be able to be further refined into liquid pig iron for
a price that makes it commercially viable as a steel scrap substitute. If the
IDI Process does not work as planned, the capital costs incurred in designing
and building the facility may be largely unrecoverable, the planned 500,000
tonnes of low cost liquid pig iron that was intended to be available annually to
help lower the Company's overall metallics costs might be unavailable or
available at higher costs, the Company may be required under the terms of the
IDI Financing to purchase all of IDI's scrap substitute output capacity, even if
the material is substandard and/or overpriced relative to other available scrap
substitutes or steel scrap, and the impact could be materially adverse to the
Company. In addition, the Company does not have any experience in the production
of DRI and there can be no assurance that the Company will be able to
successfully design, construct and operate the IDI Project or that the expected
production capacity will be achieved.
Although the technologies to be employed by Qualitech to produce iron
carbide in its Corpus Christi, Texas plant currently under construction have
been used commercially, Qualitech is a start-up company, and there is no
assurance that it will be able to successfully complete that project, or that
the project, when completed, will produce commercially viable iron carbide. If
this material were not available to the Company, the Company could be unable to
secure a comparable amount of similar material or the cost to the Company could
be materially higher, causing the Company to rely more heavily on potentially
higher-priced steel scrap for a greater proportion of its melt mix. See
"Business -- The Company's Steelmaking Equipment and Technology -- The IDI
Project" and "-- Steel Scrap and Scrap Substitute Resources."
RELIANCE ON MAJOR CUSTOMERS
The Company has entered into long-term "off-take" contracts with Heidtman
and with Preussag pursuant to which they have agreed to purchase an aggregate of
at least 42,000, or 36%, of the Company's monthly output capacity. If the
Company's actual output is less than its full capacity, sales to these customers
increase as a percentage of the Company's total net sales. For the year ended
December 31, 1996, these customers accounted for 36% and 12%, respectively, of
the Company's total net sales, and the Company's top five customers accounted
for approximately 65% of its total net sales. For the six months ended June 30,
1997, Heidtman and Preussag accounted for 32% and 10%, respectively, of the
Company's total net sales, and the Company's top five customers accounted for
approximately 63% of its total net sales. Although the Company expects to
continue to depend upon certain customers for a significant percentage of its
net sales, there can be no assurance that any of the Company's customers will
continue to purchase its steel from the Company. A loss of one or more of them,
or of a group of its next largest customers could have a material adverse effect
on the Company's results of operations and financial condition. Heidtman is an
affiliate of a stockholder of the Company. The President and Chief Executive
Officer of Heidtman serves on the Company's Board of Directors. Preussag is a
stockholder of the Company and a representative of Preussag serves on the
Company's Board of Directors. If the terms of the "off-take" contracts are or
become burdensome to these companies, or if a dispute arises over the contracts,
either or both of the "off-take" providers could be viewed as having a conflict
of interest between what they perceive to be best for their companies as
"off-take" buyers and what is best for the Company as the product seller.
POTENTIAL COSTS OF ENVIRONMENTAL COMPLIANCE
U.S. steel producers, including the Company, are subject to stringent
federal, state and local laws and regulations relating to, among other things,
wastewater, air emissions, toxic use reduction and hazardous material disposal.
The Company believes that its facility is in material compliance with these laws
and regulations and does not believe that future compliance with such laws and
regulations will have a material adverse effect on its results of operations or
financial condition. The Company has made, and will continue to make,
expenditures to comply with such provisions. The Company generates certain waste
products, such as EAF dust, that are classified as hazardous waste and must be
properly disposed of under applicable
14
<PAGE> 114
environmental laws, which, despite the Company's due care, could result in the
imposition of strict liability for the costs of clean-up of any landfills to
which the waste may have been transported.
Environmental legislation and regulations and related administrative
policies have changed rapidly in recent years. It is likely that the Company
will be subject to increasingly stringent environmental standards in the future
(including those under the Clean Air Act Amendments of 1990, the Clean Water Act
Amendments of 1990, stormwater permit program and toxic use reduction programs)
and will be required to make additional expenditures, which could be
significant, relating to environmental matters on an ongoing basis. In addition,
due to the possibility of unanticipated regulatory or other developments, the
amount and timing of future environmental expenditures may vary substantially
from those currently anticipated.
DEPENDENCE UPON KEY MANAGEMENT
The Company's ability to maintain its competitive position is dependent to
a large degree on the services of its senior management team, including Keith E.
Busse, President and Chief Executive Officer, Mark D. Millett, Vice President of
Melting and Casting, Richard P. Teets, Jr., Vice President of Rolling and
Finishing, and Tracy L. Shellabarger, Vice President and Chief Financial
Officer. Although these senior managers all have employment agreements with, and
are substantial stockholders of, the Company, there can be no assurance that
such individuals will remain with the Company. The loss of the services of any
of these individuals or an inability to attract, retain and maintain additional
senior management personnel could have a material adverse effect on the Company.
There can be no assurance that the Company will be able to retain its existing
senior management personnel or to attract additional qualified senior management
personnel. See "Management." The Company maintains key man life insurance on
Messrs. Busse, Millett, Teets and Shellabarger.
RESTRICTIONS ON PAYMENT OF DIVIDENDS ON COMMON STOCK
The Company has never paid any dividends on its Common Stock and does not
anticipate paying dividends on its Common Stock in the foreseeable future. Under
the Company's amended and restated Credit Agreement dated as of June 30, 1997
(the "Credit Agreement"), the Company may pay dividends in an aggregate
cumulative amount not exceeding cumulative net income for the period from
January 1, 1997 through the most recently completed fiscal quarter preceding
such payment. See "Dividend Policy" and "Description of Certain Indebtedness."
RESTRICTIVE COVENANTS
The Credit Agreement restricts the Company's ability to incur additional
indebtedness, make capital expenditures, make loans or advances to, or make an
investment in other entities, and create liens on its properties. The Credit
Agreement contains additional restrictive covenants, including among others,
covenants restricting the Company and its subsidiary with respect to disposing
of property or assets, paying dividends, entering into sale-leaseback
transactions, providing guarantees, entering into transactions with affiliates,
mergers and consolidations and the modification of certain agreements. In
addition, the Credit Agreement requires the Company to meet certain financial
tests. These restrictions may make it more difficult for the Company to operate
in a manner that it deems necessary or appropriate to take advantage of
opportunities, to adjust to operational difficulties, or to respond to other
developments. See "Description of Certain Indebtedness."
POSSIBLE VOLATILITY OF STOCK PRICES
The market price for shares of the Common Stock may be significantly
affected by such factors as the Company's net sales, earnings and cash flow, the
difference between the Company's actual results and results expected by
investors and analysts, news announcements including price reductions by the
Company or its competitors or changes in general market conditions. In addition,
broad market fluctuation and general economic conditions may adversely affect
the market price of the Common Stock, regardless of the Company's actual
performance.
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<PAGE> 115
SHARES ELIGIBLE FOR FUTURE SALE
The future sale of a substantial number of shares of Common Stock in the
public market following the offerings, or the perception that such sales could
occur, could adversely affect the market price for the Common Stock and could
make it more difficult for the Company to raise funds through equity offerings
in the future. Upon completion of the offerings, the Company expects to have
49,122,294 shares of Common Stock outstanding including 27,997,931 restricted
shares held by persons who may be deemed affiliates of the Company). The
restricted shares may in the future be sold without registration under the
Securities Act of 1933 to the extent permitted by Rule 144 under the Securities
Act or any applicable exemption under the Securities Act. See "Shares Eligible
for Future Sale." In connection with the offerings, the Company, its executive
officers and directors, the Selling Stockholders, and certain other stockholders
of the Company, have agreed that, subject to certain exceptions, they will not
sell, offer or contract to sell any shares of Common Stock without the prior
written consent of Morgan Stanley & Co. Incorporated, for a period of 90 days
after the date of this Prospectus. Certain of the Company's existing
stockholders also have registration rights with respect to their Common Stock.
In addition, the Company has filed registration statements under the Securities
Act to register shares of Common Stock reserved for issuance under the Company's
1994 and 1996 Incentive Stock Option Plans, thus permitting the resale of such
shares by non-affiliates upon issuance in the public market without restriction
under the Securities Act. As of June 30, 1997, options to purchase 885,784
shares were outstanding under these Plans. See "Management -- Employee Plans,"
"Description of Capital Stock -- The Registration Agreement," "Shares Eligible
for Future Sale" and "Underwriters."
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Indiana Business Corporation Law (the "BCL"), may
have the effect of delaying or preventing transactions involving a change of
control of the Company, including transactions in which stockholders might
otherwise receive a substantial premium for their shares over then current
market prices, may limit the ability of stockholders to approve transactions
that they may deem to be in their best interests or may delay or frustrate the
removal of incumbent directors. See "Description of Capital Stock -- Certain
Provisions of Indiana Law Regarding Takeovers."
DILUTION
Investors in the Common Stock offered hereby will experience an immediate
dilution of $18.63 per share in the net tangible book value of their shares of
Common Stock. See "Dilution."
FORWARD LOOKING STATEMENTS
This Prospectus contains a number of statements regarding the Company's
expectations, intent, or beliefs about future events. These statements are
intended as "forward-looking statements" under the Private Securities Litigation
Act of 1995. Where any such forward-looking statement is made, whether in the
"Business" section, in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section, or elsewhere in this Prospectus,
it is intended to convey the Company's good faith expectations about the
subject, based upon its reasonable beliefs concerning the pertinent facts and
assumptions. The Company cautions that, while it believes such facts or
assumptions to be reasonable and makes them in good faith, assumed facts or
expectations about future events may and often do vary from actual results, the
differences between the assumptions and actual results can be material, and
there can be no assurance that the forward-looking statement will be realized.
The factors and considerations described in this section of the Prospectus as
"Risk Factors" and throughout the Prospectus are intended to caution that any
such forward-looking statements are subject, among other things, to the risks
and uncertainties described in these "Risk Factors" and assumptions regarding
future competitive, economic, technological and market conditions, the accurate
prediction of which may be difficult and may involve the assessment of events
beyond the Company's control. Actual achievements and events may differ
materially from those expressed or implied in such forward-looking statements.
16
<PAGE> 116
USE OF PROCEEDS
The net proceeds to the Company from the offerings are estimated to be
approximately $29.5 million, after deducting estimated underwriting discounts
and commissions and estimated offering expenses. The Company will not receive
any proceeds from the sale of Common Stock by the Selling Stockholders.
The Company intends to use the net proceeds of the offerings for capital
expenditures, including the addition of a seventh rolling mill stand to the
Company's hot strip mill, and for general corporate purposes. Pending such use,
the Company expects to pay down its revolving credit obligations (which
obligations had an interest rate of 7.28% on July 24, 1997 and which mature in
June 2002) or invest these funds in short-term, marketable, investment grade
securities. See "Risk Factors -- Significant Capital Requirements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is traded in the over-the-counter market and
since November 22, 1996 has been quoted on the Nasdaq National Market System
(the "Nasdaq Stock Market") under the symbol "STLD." The following table sets
forth for the periods indicated the high and low closing sale prices as reported
by Nasdaq:
<TABLE>
<CAPTION>
COMMON
STOCK PRICE
---------------
HIGH LOW
------ ----
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Fourth Quarter (beginning November 22, 1996)................ $21 $16 3/4
YEAR ENDING DECEMBER 31, 1997:
First Quarter............................................... 25 3/8 17 3/8
Second Quarter.............................................. 26 3/8 16 1/2
Third Quarter (through August 13, 1997)..................... 28 3/4 24 3/4
</TABLE>
A recent reported last sale price for the Company's Common Stock as
reported on the Nasdaq Stock Market is set forth on the cover page of this
Prospectus. On June 30, 1997, there were approximately 300 holders of record and
approximately 6,250 beneficial owners of the Company's Common Stock.
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently anticipates that all of its future earnings will be
retained to finance the expansion of its business and does not anticipate paying
cash dividends on its Common Stock in the foreseeable future. Any determination
to pay cash dividends in the future will be at the discretion of the Company's
Board of Directors after taking into account various factors, including the
Company's financial condition, results of operations, outstanding indebtedness,
current and anticipated cash needs and plans for expansion. Under the terms of
the Company's Credit Agreement, the Company may make stock payments, including
payment of dividends, in an aggregate cumulative amount not exceeding cumulative
net income for the period from January 1, 1997 through the most recently
completed fiscal quarter preceding such payment.
17
<PAGE> 117
DILUTION
The net tangible book value of the Company as of June 30, 1997 was
approximately $283.4 million or approximately $5.92 per share of Common Stock.
Net tangible book value per share is determined by dividing the net tangible
book value (total tangible assets less total liabilities) by the number of
outstanding shares of Common Stock. After giving effect to the sale by the
Company of 1,255,971 shares of Common Stock offered hereby and the application
of the net proceeds as set forth under "Use of Proceeds," the net tangible book
value of the Company as of June 30, 1997, would have been approximately $312.9
million or $6.37 per share, representing an immediate increase in net tangible
book value of $.45 per share to the existing stockholders and an immediate
dilution to investors purchasing shares in the offerings of $18.63 per share.
The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Public offering price................................................. $ 25.00
-------
Net tangible book value per share at June 30, 1997.................. $5.92
-----
Increase per share attributable to sale of Common Stock in the
offerings........................................................ .45
-----
Pro forma net tangible book value per share after the offerings....... 6.37
-------
Dilution per share to new investors................................... $ 18.63
=======
</TABLE>
The foregoing table does not give effect to the exercise of options to
purchase 885,784 shares of Common Stock outstanding on June 30, 1997, at a
weighted average exercise price of $9.42 per share. If all such outstanding
options were exercised, the dilution to new investors would be $18.58 per share.
The following table sets forth on a pro forma basis as of June 30, 1997,
the number of shares and percentage of total outstanding Common Stock purchased,
the total consideration and percentage of total consideration paid and the
weighted average price per share paid by existing stockholders and by investors
purchasing the shares of Common Stock offered by the Company hereby.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION WEIGHTED
---------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)........ 47,866,323 97.4% $308,801,171 90.8% $ 6.45
New investors................... 1,255,971 2.6 31,399,275 9.2 25.00
---------- ------ ------------ -----
Total................. 49,122,294 100.0% $340,200,446 100%
========== ====== ============ =====
</TABLE>
- ------------
(1) Sales by the Selling Stockholders in the offerings will cause the number of
shares held by existing stockholders to be reduced, and the number of shares
held by new investors to be increased by 7,144,029. See "Principal and
Selling Stockholders."
18
<PAGE> 118
CAPITALIZATION
The following table sets forth the actual cash and cash equivalents,
current maturities of long-term debt and capitalization of the Company as of
June 30, 1997, and as adjusted to give effect to the offerings. This information
should be read in conjunction with "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements, including the notes thereto, appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------
AS
ACTUAL ADJUSTED
-------- --------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT PER SHARE
INFORMATION)
<S> <C> <C>
Cash and cash equivalents.............................................. $ 22,293 $ 51,836
======= =======
Current maturities of long-term debt................................... $ 5,931 $ 5,931
======= =======
Long-term debt, excluding current maturities:
Senior term loans.................................................... $150,000 $150,000
Other(1)............................................................. 49,530 49,530
------- -------
Total long-term debt.............................................. $199,530 $199,530
Stockholders' equity:
Common Stock, $.01 par value per share, 100,000,000 shares
authorized, 47,866,323 shares outstanding, 49,122,294 shares
issued and outstanding, as adjusted(2)............................ $ 479 $ 492
Additional paid-in capital............................................. 304,078 333,608
Accumulated deficit.................................................... (9,604) (9,604)
------- -------
Total stockholders' equity........................................ 294,953 324,496
------- -------
Total capitalization......................................... $494,483 $524,026
======= =======
</TABLE>
- ------------
(1) For a description of other long-term debt, see Note 3 to the Company's
consolidated financial statements appearing elsewhere in this Prospectus.
(2) Excludes 885,784 shares of Common Stock issuable upon exercise of stock
options outstanding on June 30, 1997 at a weighted average exercise price of
$9.42 per share.
19
<PAGE> 119
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for the dates and periods indicated. The selected consolidated financial
data for the period from September 7, 1993 (date of inception) through December
31, 1993, as of December 31, 1993, 1994, 1995 and 1996, and for each of the
three years in the period ended December 31, 1996, were derived from the
Company's consolidated financial statements which have been audited by Deloitte
& Touche LLP. The selected consolidated financial data as of and for the six
months ended June 29, 1996 and June 30, 1997 are derived from the unaudited
consolidated financial statements of the Company and, in the opinion of
management, include all adjustments (consisting only of normal recurring
accruals) necessary to present fairly such data. Operating results for interim
periods are not necessarily indicative of a full year's operations. The
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements, including the notes thereto, appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 7, 1993
(DATE OF INCEPTION) YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
THROUGH ----------------------------- -----------------------------
DECEMBER 31, 1993 1994 1995 1996 JUNE 29, 1996 JUNE 30, 1997
------------------- ------- -------- -------- ------------- -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................... $ -- $ -- $ 137 $252,617 $ 98,662 $ 200,777
Cost of goods sold.................. -- -- 3,169 220,563 95,591 150,180
------- ------- -------- -------- -------- --------
Gross profit (loss)............... -- -- (3,032) 32,054 3,071 50,597
Selling, general and administrative
expenses.......................... 1,159 4,192 13,580 13,838 5,894 12,479
------- ------- -------- -------- -------- --------
Income (loss) from operations..... (1,159) (4,192) (16,612) 18,216 (2,823) 38,118
Foreign currency gain (loss)........ -- (4,952) (3,272) 328 260 261
Interest expense(1)................. (2) (43) (564) (22,684) (12,128) (3,995)
Interest income..................... 1 307 560 1,581 579 1,264
------- ------- -------- -------- -------- --------
Income (loss) before income taxes
and extraordinary loss............ (1,160) (8,880) (19,888) (2,559) (14,112) 35,648
Provision for income taxes.......... -- -- -- -- -- 5,494
------- ------- -------- -------- -------- --------
Income (loss) before extraordinary
loss.............................. (1,160) (8,880) (19,888) (2,559) (14,112) 30,154
Extraordinary loss(2)............... -- -- -- (7,271) -- --
------- ------- -------- -------- -------- --------
Net income (loss)................. $(1,160) $(8,880) $(19,888) $ (9,830) $ (14,112) $ 30,154
======= ======= ======== ======== ======== ========
Income (loss) per share before
extraordinary loss(3)............. $ (0.07) $ (0.36) $ (0.62) $ (0.07) $ (0.41) $ 0.63
Per share effect of extraordinary
loss.............................. -- -- -- (0.21) -- --
------- ------- -------- -------- -------- --------
Net income (loss) per share(3).... $ (0.07) $ (0.36) $ (0.62) $ (0.28) $ (0.41) $ 0.63
======= ======= ======== ======== ======== ========
Weighted average common shares
outstanding(3).................... 15,931 24,679 31,975 34,571 34,695 47,851
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents........... $ 117 $28,108 $ 6,884 $ 57,460 $ 27,823 $ 22,293
Working capital (deficit)........... (29) 8,230 (14,488) 96,142 44,293 60,676
Property, plant and equipment,
net............................... 200 54,566 274,197 339,263 277,463 410,272
Total assets........................ 521 94,618 320,679 522,291 389,484 552,603
Long-term debt (including current
maturities)....................... 800 11,949 223,054 207,343 258,514 205,461
Stockholders' equity (deficiency)... (429) 62,536 62,972 264,566 93,961 294,953
</TABLE>
(footnotes on following page)
20
<PAGE> 120
- ------------
(1) Excludes interest capitalized during the construction of the mini-mill and
cold mill related to costs that are considered to be assets qualifying for
interest capitalization under Statement of Financial Accounting Standards
("SFAS") No. 34, Capitalization of Interest Cost. Capitalized interest for
the years ended December 31, 1994, 1995 and 1996 was $.3 million, $10.1
million and $1.0 million, respectively. Capitalized interest for the six
months ended June 29, 1996 and June 30, 1997 was $60,000 and $3.8 million,
respectively.
(2) Represents the loss on early retirement of the Company's subordinated notes
of approximately $7.3 million in the fourth quarter of 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company will incur an extraordinary loss of approximately
$7.6 million (net of tax benefit of $5.1 million) in the third quarter of
1997 as a result of the refinancing of the Company's Credit Agreement. See
"Description of Certain Indebtedness."
(3) Net income (loss) per share for the period from September 7, 1993 (date of
inception) through December 31, 1993, for the years ended December 31, 1994
and 1995 and for the six months ended June 29, 1996 were calculated by
dividing the net loss by the weighted average number of shares of common
stock outstanding including the anti-dilutive effect of shares issued from
September 23, 1995 through September 23, 1996 using the treasury stock
method. Net loss per share for the year ended December 31, 1996 excludes the
anti-dilutive effect of common stock equivalents.
21
<PAGE> 121
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by reference to, the Company's consolidated financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
Certain information contained below, including information with respect to the
Company's plans with respect to the Cold Mill, IDI and Caster Projects, are
forward-looking statements. See "Risk Factors" for a discussion of important
factors which could cause actual results to differ materially from the forward-
looking statements contained herein.
OVERVIEW
Steel Dynamics owns and operates a new, state-of-the-art flat-rolled steel
mini-mill, which commenced operations in January 1996. The Company was founded
in September 1993 by executives and managers who pioneered the development of
thin-slab/flat-rolled compact strip production technology and directed the
construction and operation of the world's first thin-slab/flat-rolled mini-mill.
Building upon their past experience with CSP technology, management founded SDI
to produce steel more efficiently, at a lower cost and of higher quality. Steel
Dynamics' goal is to become the low cost producer of a broad range of high
quality flat-rolled steel products, including hot-rolled, cold-rolled and
galvanized sheet, as well as other specialty steel products, and to serve more
markets than any other flat-rolled mini-mill. In addition, the Company intends
to participate in the development and use of new technologies to produce a broad
range of steel products.
Pursuant to the Company's plan to develop downstream processing facilities
to produce further value-added steel products, Steel Dynamics is currently
constructing a cold mill contiguous to the mini-mill, with a 1.0 million ton
annual capacity which is scheduled for completion during the fourth quarter of
1997. Steel Dynamics also plans to add a second melting furnace, a second caster
and tunnel furnace, and an additional coiler to expand its annual production
capacity of hot-rolled steel from 1.4 million tons to approximately 2.4 million
tons. The Caster Project is expected to be completed in the first half of 1998.
In addition, the Company intends to construct a 600,000 tonne annual capacity
plant for the manufacture of DRI, which the Company expects to be completed in
1998. The DRI, after further refining into 500,000 tonnes of liquid pig iron,
will be used in SDI's mini-mill as a steel scrap substitute.
Management strategically located the Company's mini-mill within close
proximity to its natural customer base, steel service centers and other end
users, abundant supplies of automotive and other steel scrap, competitive
sources of power, and numerous rail and truck transportation routes. Steel
Dynamics believes that its strategic location provides it with sales and
marketing as well as production cost advantages. The Company has secured a
stable baseload of sales through long-term "off-take" contracts with two major
steel consumers, a 30,000 ton per month sales contract with Heidtman, a major
Midwest-based steel service center and distributor and an affiliate of one of
the Company's stockholders, and a 12,000 ton per month sales contract with
Preussag, a major German steel manufacturer and a stockholder of the Company,
with affiliate distributors and steel service centers throughout the United
States. The Company has also sought to assure itself of a secure supply of steel
scrap and scrap substitute. To accomplish this objective, SDI has entered into a
long-term scrap purchasing services contract with OmniSource, one of the largest
scrap dealers in the Midwest and an affiliate of one of the Company's
stockholders. In addition, the Company has also sought to assure itself of a
secure supply of scrap substitute material for use as a lower cost complement to
steel scrap as part of the Company's melt mix. SDI has entered into a long-term
300,000 tonne per year "off-take" contract to purchase iron carbide from
Qualitech's iron carbide facility currently under construction in Corpus
Christi, Texas, which is expected to be completed in 1998. Additional scrap
substitute material is expected to be provided through the IDI Project.
The Company's business strategy is to use advanced CSP hot-rolled
steelmaking and cold-rolling technologies to produce high surface quality
flat-rolled steel in a variety of value-added sizes, gauges and surface
treatments, emphasizing low production costs, reliable product quality and
excellent customer service. In addition, SDI intends to remain financially
strong and competitive through the selective purchasing of scrap and scrap
substitutes to offset the effects of cyclical cost/price imbalances.
22
<PAGE> 122
The Company's operations are subject to the cyclical nature of the steel
industry and the U.S. economy as a whole. U.S. steel industry production was
approximately 105.3 million tons in 1996, an increase of 4% from an average
during the prior three-year period of approximately 101.1 million tons. This
increase was due primarily to an improvement of general economic conditions and
increased demand for durable goods. Other factors which affect the performance
of the Company include increasing competition from U.S. and international steel
producers (both integrated mills and mini-mills), worldwide supply and demand
for hot bands and the strength of the U.S. dollar relative to the currencies of
other steel producing countries.
The following table summarizes the annual raw steel capacity, raw steel
production, utilization rates and finished shipments information for the U.S.
steel industry (as reported by the AISI) for the years 1994 through 1996:
<TABLE>
<CAPTION>
U.S. RAW STEEL U.S. RAW STEEL TOTAL U.S.
YEAR CAPABILITY PRODUCTION UTILIZATION SHIPMENTS
------------------------------- -------------- ------------------- ----------- ----------
(THOUSANDS OF TONS)
<S> <C> <C> <C> <C>
1994........................... 108,200 100,579 93.0% 95,084
1995........................... 112,400 104,930 93.4 97,494
1996........................... 116,100 105,309 90.7 100,878
</TABLE>
The Company believes that the current market for flat-rolled steel appears
to be sufficiently strong to absorb the current capacity of integrated and
mini-mill producers. In 1995, spot prices for hot band dropped significantly in
the second and third quarters, by approximately $40 and $20 per ton,
respectively, before recovering by $10 per ton in the fourth quarter. Since the
first quarter of 1996 and through the second quarter of 1997, however, spot
prices for hot bands recovered an additional $40 per ton. Although Steel
Dynamics believes the immediate outlook for the U.S. economy remains positive,
there can be no assurance that the level of net tons shipped in the industry and
current price levels will continue or increase from present levels in view of
the modest nature of the improvement in the U.S. economy to date, increasing
worldwide competition within the steel industry and increasing steel production
capacity.
Net Sales. The Company's net sales are a function of net tons shipped,
prices and mix of products. SDI has experienced continued net sales growth since
start-up and expects that trend to continue due to increasing production and
shipments as well as improving pricing. In addition, the Company's products are
sold out through the end of the third quarter of 1997 (the latest date for which
Steel Dynamics has accepted orders).
SDI has not entered into any fixed-price, long-term (exceeding one calendar
quarter) contracts for the sale of steel. Although fixed price contracts may
reduce the risk of price declines, these contracts also limit the ability of the
Company to take advantage of price increases. All of the Company's orders are
taken at its announced pricing levels with price discounts for high volume
purchases when appropriate. SDI is also able to charge premium prices for
certain grades of steel, dimensions of product, or certain smaller volumes,
based upon the cost of production. When the Cold Mill Project is completed in
the fourth quarter of 1997, the Company will be able to manufacture more
value-added products requiring more exacting tolerances, thinner gauges, finer
surface conditions, and galvanized coatings, thereby enabling it to charge
premium prices for those products.
Of the Company's shipments through June 30, 1997, approximately 42% have
been purchased by Heidtman and Preussag pursuant to long-term "off-take"
contracts based upon market pricing. In addition to this stable baseload of
demand, the Company is continually seeking to attract new customers for its
products. The Company had 18 customers at the end of January 1996 and the number
of the Company's customers was 81 at the end of June 1997. SDI is also
continually seeking to enter new markets and believes that when the Cold Mill
Project is completed, it will be able to broaden its customer base, diversify
its product mix and access more profitable markets. See "Business -- The
Flat-Rolled Market."
Cost of Goods Sold. All direct and indirect manufacturing costs are
included in costs of goods sold. The principal elements comprising Steel
Dynamics' costs of goods sold are steel scrap and scrap substitutes,
electricity, natural gas, oxygen and argon, electrodes, alloys, depreciation and
direct and indirect labor and benefits. During the start up of the cold mill
beginning in the fourth quarter of 1997, and prior to the Caster Project
commencing production, the Company will purchase hot bands from third parties.
The Company
23
<PAGE> 123
expects that the price paid for such hot bands will likely be greater than the
Company's cost to produce them once the Caster Project commences production.
Steel scrap and scrap substitutes represent the most significant component
of the Company's total cost of goods sold. Although SDI believes that there will
be an ample supply of high quality, low residual scrap in the future, the
Company recognizes that the construction of additional mini-mills has led to
increased demand for, and higher prices of, steel scrap. The Company believes
that, over the long-term, prices of steel scrap will continue to be volatile but
its price ranges will likely increase. As a result, Steel Dynamics has pursued a
three-part strategy to secure access to adequate supplies of steel scrap and
lower cost steel scrap substitute materials. First, the Company has entered into
a long-term steel scrap contract with OmniSource. Second, SDI has entered into
an iron carbide "off-take" contract with Qualitech. Third, the Company is
pursuing the IDI Project to produce DRI and liquid pig iron.
The Company purchases its electricity from American Electric Power ("AEP"),
pursuant to a contract which extends through 2005. The contract designates a
portion of the Company's load as "firm" with the majority of the load designated
as "interruptible." At full production, the blended rate under the contract is
expected to be between $.024 and $.025 per kilowatt hour. The Company has a
"primary firm" natural gas delivery contract on the Panhandle Eastern Pipeline
that extends through May 2000 and an interruptible delivery contract with
NIPSCO/NIFL/Crossroads that extends through December 2000. The Company's natural
gas contract, at a cost of $1.91 per decatherm, expires at the end of July 1997,
and the Company's current intention is to purchase its natural gas needs on the
spot market thereafter until such time as it determines that extended term
contracts are attractively priced. The Company maintains a liquid propane tank
farm on-site with sufficient reserves to sustain operations for approximately
two weeks in the event of an interruption in the natural gas supply. SDI
purchases all of its requirements for oxygen and argon from Air Products and
Chemicals, Inc. ("Air Products"), which built a large plant adjacent to the
mini-mill. As a result, the Company has been able to buy its oxygen and argon at
what SDI believes to be favorable prices. Steel Dynamics generally purchases its
other raw materials, such as electrodes and alloys, from various sources and
their availability and price are subject to market conditions. Air Products uses
its plant to supply other customers as well as the Company.
For manufacturing plant and equipment, the Company uses the
units-of-production method of depreciation.
The current work force of the Company consists of 359 employees as of June
30, 1997, of which 276 were employed in the hot strip mill, 79 were employed in
connection with the Cold Mill Project, and four were employed by IDI. For the
six months ended June 30, 1997, the Company's employment costs per ton shipped
(excluding Cold Mill and IDI Project employees) were approximately $16. The
Company has established certain incentive compensation programs specifically
designed to reward employee teams for their productivity efforts. Production
employees actively share in SDI's success through a production bonus, a
conversion cost bonus and a profit sharing plan. The Company's employees are not
represented by any labor unions.
Selling, General & Administrative. Selling, general and administrative
expenses are comprised of all costs associated with the sales,
finance/accounting, materials and transportation, and administrative
departments. These costs include labor and benefits, advertising, promotional
materials, bad debt expenses and professional fees. These costs are not directly
affected by sales volumes. SDI has established a Profit Sharing Plan for
eligible employees under which a minimum of 5% of pretax profits are paid into a
"profit sharing pool." The majority of the profit sharing pool is used to fund
the Profit Sharing Plan, with the balance paid to employees as a cash bonus in
March of each year. Selling, general and administrative expenses also include
all non-capitalized start-up costs associated with the construction of the Cold
Mill Project, including all labor and benefits, utilities and general supplies
and services. The Company expects that these costs will increase through the
construction and start-up of the Expansion Projects.
Interest Expense. During the construction of the mini-mill, the cold mill
and the second caster, the costs related to construction expenditures are
considered to be assets qualifying for interest capitalization under SFAS No.
34, Capitalization of Interest Cost. Capitalized interest for the year ended
December 31, 1994, 1995 and 1996 was $.3 million, $10.1 million, and $1.0
million, respectively. For the six months ended
24
<PAGE> 124
June 30, 1997, capitalized interest was $3.8 million, compared to $60,000 for
the six months ended June 29, 1996. Management expects that a majority of the
interest on the indebtedness incurred to finance the construction of the
Expansion Projects will be capitalized.
Extraordinary Loss. The Company used a portion of the net proceeds from
its initial public offering in November 1996 to prepay its subordinated notes.
This prepayment resulted in an extraordinary loss of approximately $7.3 million
for 1996, principally associated with the unamortized debt discount costs
relating to the notes. The Company will incur an extraordinary loss of
approximately $7.6 million (net of tax benefit of $5.1 million) in the third
quarter of 1997 attributable to prepayment penalties and a write-off of
financing costs relating to the refinancing of the Company's Credit Agreement.
See "Description of Certain Indebtedness."
RESULTS OF OPERATIONS
Founded in September 1993, SDI commenced primary grade steel production in
January 1996. Accordingly, the Company's historical results of operations are
not indicative of results to be expected in the future.
Net Sales. Net sales totaled approximately $252.6 million for 1996. SDI
commenced primary grade steel production on January 2, 1996, and has continued
to increase its net sales as its production of prime tons increased. As of the
end of June 1997, the Company was operating at an annualized production rate of
1.2 million tons, or 85% of full capacity. In addition, the average sales price
per prime ton increased from $302 for January 1996 to $357 for June 1997. For
1993, 1994 and 1995, during which time the mini-mill was under construction,
Steel Dynamics had no net sales other than $137,000 in December 1995 from the
sale of approximately 600 tons of secondary grade steel. For the six months
ended June 29, 1996 and June 30, 1997, net sales were approximately $98.7
million and $200.8 million, respectively.
Cost of Goods Sold. Cost of goods sold totaled approximately $220.6
million, or 87% of net sales, for 1996. For the six months ended June 29, 1996
and June 30, 1997, cost of goods sold were approximately $95.6 million and
$150.2 million, respectively. As the Company continues to increase the number of
prime tons sold, the Company expects that cost of goods sold will continue to
increase but, as a percentage of net sales, the cost of goods sold will
decrease. For 1995, cost of goods sold was $3.2 million.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were approximately $4.2 million, $13.6 million, and
$13.8 million for 1994, 1995, and 1996, respectively. For the six months ended
June 29, 1996 and June 30, 1997, selling, general, and administrative expense
was approximately $5.9 million and $12.5 million, respectively. The increase in
expenses for the first six months of 1997 was due primarily to approximately
$3.2 million of start-up costs for the Cold Mill and Caster Projects and
approximately $1.8 million of profit sharing expenses.
Interest Expense. Interest expense totaled approximately $43,000,
$564,000, and $22.7 million for 1994, 1995, and 1996, respectively. For the six
months ended June 29, 1996 and June 30, 1997, interest expense was $12.1 million
and $4.0 million, respectively. The low level of interest expense during 1994
and 1995 reflects the effect of capitalizing interest relating to construction
costs. The lower interest expense for the first six months of 1997 was primarily
due to lower debt levels resulting from the repayment of subordinated debt with
the net proceeds from the initial public offering and, to a lesser extent, lower
interest rates.
Foreign Currency Gain (Loss). The foreign currency gains and losses
represent transaction gains and losses incurred by the Company for purchases of
equipment used within the Company's mini-mill. A portion of the purchase price,
as stated within the contract to purchase the equipment, was denominated in
German marks. The Company committed to purchase the equipment in December 1993
with settlement of the liability primarily occurring during the construction
period of the mini-mill. No foreign currency financial instruments were entered
into to hedge against foreign currency movements until the first quarter of 1997
when the Company purchased German marks forward contracts approximately equal to
the unsettled liability. No commitments for equipment purchases denominated in a
foreign currency existed as of June 30, 1997. Foreign currency loss totaled
approximately $5.0 million and $3.3 million for 1994 and 1995, respectively. In
1996, the
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<PAGE> 125
foreign currency gain totaled $328,000. For the six months ended June 29, 1996
and June 30, 1997, foreign currency gains were $260,000 and $261,000,
respectively. The Company's strategy for managing foreign currency risk will
depend on facts and circumstances of the related transaction, and the Company
will consider risk management strategies as appropriate.
Interest Income. Interest income totaled approximately $307,000, $560,000,
and $1.6 million for 1994, 1995, and 1996, respectively, and approximately
$579,000 and $1.3 million for the six months ended June 29, 1996 and June 30,
1997, respectively.
Extraordinary Loss. The Company used a portion of the net proceeds from
its initial public offering in November 1996 to prepay its subordinated notes.
This prepayment resulted in an extraordinary loss of approximately $7.3 million,
principally associated with the unamortized debt discount costs relating to the
notes.
Taxes. At December 31, 1996, the Company had available net operating
losses that can be carried forward for federal income tax purposes of
approximately $49.4 million of which $200,000 expire in 2009, $2.3 million
expire in 2010 and $46.9 million expire in 2011. Because of the Company's
limited operating history, a valuation allowance has been established for a
portion of the deferred tax asset. The Company will continually assess the need
for a valuation allowance for the deferred tax asset based on expectations of
future taxable income. For the six months ended June 29, 1996, the Company had a
net deferred tax asset that was offset entirely by a valuation allowance. For
the six months ended June 30, 1997, the Company has computed income taxes based
upon the expected annual effective tax rate, which gives effect to the
utilization of available net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Steel Dynamics' business is capital intensive and requires substantial
expenditures for, among other things, the purchase and maintenance of equipment
used in its steelmaking and finishing operations and compliance with
environmental laws. See "Risk Factors -- Significant Capital Requirements" and
"-- Potential Costs of Environmental Compliance." The Company's liquidity needs
arise primarily from capital investments, working capital requirements and
principal and interest payments on its indebtedness. Since its inception, SDI
has met these liquidity requirements with cash provided by equity, long-term
borrowings, state and local government grants and capital cost reimbursements.
Net cash used in operating activities totaled approximately $22.7 million
for 1993 through 1995. During 1996, the Company used net cash of approximately
$51.6 million in operating activities. The use of cash in operating activities
for 1996 primarily related to the build-up of raw material inventory as a result
of favorable pricing and the substantial increase in accounts receivable as a
result of sales increases. Net cash used in investing activities totaled
approximately $246.4 million from 1993 through 1995 and approximately $83.1
million for 1996. Investing activities primarily consisted of capital
expenditures of approximately $352.1 million through 1996 for the construction
of the Company's existing facilities and the beginning of the Cold Mill Project.
Cash provided by financing activities totaled approximately $276.0 million from
1993 through 1995 and approximately $185.3 million for 1996. The increase in
cash provided by financing activities primarily relates to the approximately
$140.2 million raised in November 1996 from the Company's initial public
offering, and from private placements of the Company's common stock earlier in
1996.
For the six months ended June 29, 1996, net cash used in operating
activities amounted to $44.4 million, net cash used in investing activities was
$18.2 million and cash provided by financing activities was $76.5 million. For
the six months ended June 30, 1997, net cash provided by operating activities
was $48.5 million, net cash used in investing activities was $81.5 million and
cash used in financing activities was $2.2 million.
The Company issued $55.0 million principal amount of subordinated notes
(together with warrants to purchase common stock) to finance a portion of the
construction of the mini-mill. The subordinated notes were repaid in full in
November 1996 with a portion of the net proceeds from the Company's initial
public offering.
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<PAGE> 126
As of June 30, 1997, the Company entered into the Credit Agreement, which
replaced its previous $345.0 million credit facility. The Credit Agreement
consists of a $450.0 million credit facility, composed of a $250.0 million
five-year revolving credit facility (subject to a borrowing base), a $100.0
million 364-day revolving credit facility (subject to extension if approved by
all of the lenders, or, if not, converted into a five-year term loan amortizable
in equal quarterly installments during the final two years of the five-year term
loan period), and a $100.0 million term loan amortizable in equal quarterly
installments during the final two years of the term loan period, commencing
September 30, 2002. The Credit Agreement is secured by substantially all of the
Company's assets (other than as permitted to be excluded in order to secure the
IDI Financing).
In addition, the Company has received a proposed term sheet for the $60.0
million IDI Financing to finance a portion of the IDI Project. This anticipated
credit facility would be secured by essentially all of the assets of IDI. The
lending banks have also requested that Steel Dynamics cause to be provided an
"Assurance Package," consisting of a package of coordinated completion and
performance guarantees (including failure to achieve an agreed level of
performance by a specified date), together with remedies, acceptable to the
lenders, for up to 100% of the cost of the amount financed. While it is
anticipated that IDI will receive a commitment for the IDI financing, there can
be no assurance that such a commitment will be secured or, even if secured, that
the IDI Financing will be consummated. See "Description of Certain
Indebtedness -- The Credit Agreement" and "-- The IDI Financing."
Borrowings under the Credit Agreement bear and anticipated borrowings under
the IDI Financing will bear interest at floating rates. The Company entered into
an interest rate swap agreement on a notional amount of $100 million pursuant to
which the Company has agreed to make fixed rate payments at 6.935% and will
receive LIBOR payments for the seven year term tranche of the Credit Agreement.
The maturity date of the interest rate swap agreement is July 2, 2001. The
counterparty has the right to extend the maturity date to July 1, 2004 at
predetermined interest rates. As of June 30, 1997, the Company had $199.5
million of indebtedness outstanding, including $150.0 million under the Credit
Agreement, $22.3 million of cash and cash equivalents, and $300.0 million of
availability under the Credit Agreement (subject to borrowing base
restrictions).
The Company intends to use cash on hand, funds from operations and
borrowings under the Credit Agreement and the IDI Financing, if and when
consummated, to finance completion of the construction and start-up of the
Expansion Projects ($200.0 million for the Cold Mill Project; $85.0 million for
the Caster Project (exclusive of start-up expenses); and $95.0 million for the
IDI Project.) See "Risk Factors -- Significant Capital Requirements." The
Company intends to use the proceeds from the offerings to fund an addition to
the hot strip mill of a seventh rolling stand, and will use the balance of the
net proceeds for general corporate purposes.
ENVIRONMENTAL EXPENDITURES AND OTHER CONTINGENCIES
SDI has incurred and, in the future, will continue to incur capital
expenditures and operating expenses for matters relating to environmental
control, remediation, monitoring and compliance. Capital expenditures for
environmental control for 1994, 1995 and 1996 were approximately $595,000, $15.9
million, and $790,000, respectively, and operating expenses relating to
environmental matters were approximately $0, $30,000, and $3.1 million, for the
same periods. The Company has planned expenditures relating to environmental
matters of approximately $4.1 million and $4.8 million for 1997 and 1998,
respectively, principally associated with the addition of equipment required in
connection with the Expansion Projects. Steel Dynamics believes that compliance
with current environmental laws and regulations is not likely to have a material
adverse effect on the Company's financial condition, results of operations or
liquidity. However, environmental laws and regulations have changed rapidly in
recent years and SDI may become subject to more stringent environmental laws and
regulations in the future. See "Risk Factors -- Potential Costs of Environmental
Compliance."
INFLATION
SDI does not believe that inflation has had a material effect on its
results of operations.
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<PAGE> 127
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, SFAS No. 128, Earnings per Share, was issued which
establishes new standards for computing and presenting earnings per share
("EPS"). Specifically, SFAS No. 128 replaces the presentation of primary EPS
with a presentation of basic EPS, requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997; earlier application is not
permitted. Management has determined that the adoption of SFAS No. 128 will not
have a material effect on the Company's consolidated financial statements.
In June 1997 SFAS No. 130, Comprehensive Income, was issued which becomes
effective in 1998 and requires reclassification of earlier financial statements
for comparative purposes. SFAS No. 130 requires that changes in the amounts of
certain items, including foreign currency translation adjustments and gains and
losses on certain securities be shown in the financial statements. SFAS No. 130
does not require a specific format for the financial statement in which
comprehensive income is reported, but does require that an amount representing
total comprehensive income be reported in that statement. Management has not yet
determined the effect, if any, of SFAS No. 130 on the Company's consolidated
financial statements.
Also in June 1997, SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, was issued. This Statement will change the
way public companies report information about segments of their business in
their annual financial statements and requires them to report selected segment
information in their quarterly reports issued to shareholders. It also requires
entity-wide disclosures about the products and services an entity provides, the
material countries in which it holds assets and reports revenues, and its major
customers. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. Management has not yet determined the effect, if any, of SFAS No. 131
on the Company's consolidated financial statements.
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BUSINESS
OVERVIEW
Steel Dynamics owns and operates a new, state-of-the-art flat-rolled steel
mini-mill, which commenced operations in January 1996. The Company was founded
by executives and managers who pioneered the development of
thin-slab/flat-rolled compact strip production technology and directed the
construction and operation of the world's first thin-slab/flat-rolled mini-mill.
Building upon their past experience with CSP technology, management founded SDI
to produce steel more efficiently, at a lower cost and of higher quality. Steel
Dynamics' goal is to be the low cost producer of a broad range of high quality
flat-rolled steel products, including hot-rolled, cold-rolled and galvanized
sheet, as well as other specialty steel products, and to serve more markets than
any other flat-rolled mini-mill. In addition, the Company intends to participate
in the development and use of new technologies to produce a broad range of steel
products.
The Company was founded in September 1993 by Keith E. Busse, Mark D.
Millett and Richard P. Teets, Jr. In October 1994, Steel Dynamics commenced
construction of the mini-mill and commissioned it in December 1995. The Company
believes that this 14-month construction period is the fastest ever for this
kind of facility. In addition, the Company believes that the approximately
$275.7 million initial capital cost of its mini-mill is approximately $75.0
million, or approximately 20% less than the cost of comparable mini-mills
currently operating. Actual production at the mini-mill of primary grade steel
commenced on January 2, 1996. The mill achieved an annualized production rate of
1.2 million tons by the end of June 1997, or 85% of its capacity of 1.4 million
tons, making the mini-mill's start-up and ramp-up the fastest to date in the
industry.
Pursuant to the Company's plan to develop downstream processing facilities
to produce further value-added steel products, Steel Dynamics is currently
constructing a cold mill, contiguous to the mini-mill, with a 1.0 million ton
annual capacity, which is scheduled for completion during the fourth quarter of
1997. Steel Dynamics plans to add a second melting furnace, a second caster and
tunnel furnace, and an additional coiler in 1998 to expand its annual production
capacity of hot-rolled steel from 1.4 million tons to approximately 2.4 million
tons. The Caster Project is expected to be completed in the first half of 1998.
In addition, the Company's wholly-owned subsidiary, Iron Dynamics, intends
to construct a 600,000 tonne annual capacity plant for the manufacture of direct
reduced iron, which the Company expects to be completed in 1998. The DRI, after
further refining into 500,000 tonnes of liquid pig iron, will be used in SDI's
mini-mill as a steel scrap substitute.
Management strategically located the Company's mini-mill within close
proximity to its natural customer base, steel service centers and other end
users, abundant supplies of automotive and other steel scrap (SDI's principal
raw material), competitive sources of power, and numerous rail and truck
transportation routes. Steel Dynamics believes that its strategic location
provides it with sales and marketing as well as production cost advantages. The
Company has secured a stable baseload of sales through long-term "off-take"
contracts with two major steel consumers, a 30,000 ton per month sales contract
with Heidtman, a major Midwest-based steel service center and distributor and an
affiliate of one of the Company's stockholders, and a 12,000 ton per month sales
contract with Preussag, a major German steel manufacturer and a stockholder of
the Company, with affiliate distributors and steel service centers throughout
the United States.
The Company has sought to assure itself of a secure supply of both steel
scrap and scrap substitute material. To accomplish this objective, SDI has
entered into a long-term scrap purchasing services contract with OmniSource, one
of the largest scrap dealers in the Midwest and an affiliate of one of the
Company's stockholders. In addition, the Company has also sought to assure
itself of a secure supply of scrap substitute material for use as a lower cost
complement to steel scrap as part of the Company's melt mix. SDI has entered
into a long-term 300,000 tonne per year "off-take" contract to purchase iron
carbide from Qualitech's iron carbide facility currently under construction in
Corpus Christi, Texas which is expected to be completed in 1998. The Company
expects to produce additional scrap substitute material in 1998 upon completion
of the IDI Project.
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STRATEGY
The Company's business strategy is to use advanced CSP hot-rolled
steelmaking and cold-rolling technologies to produce high surface quality
flat-rolled steel in a variety of value-added sizes, gauges and surface
treatments, emphasizing low production costs, reliable product quality and
excellent customer service. In addition, SDI intends to remain financially
strong and competitive through the selective purchasing of scrap and scrap
substitutes to offset the effects of cyclical cost/price imbalances. The
principal elements of the Company's strategy include:
- Achieve Lowest Conversion Costs in Industry. Steel Dynamics' electric
arc furnace and its caster and rolling mill designs represent substantial
improvements over earlier mini-mills using CSP technology. These
improvements have been designed to speed the steelmaking process, to limit
"power off time" and other non-productive time in the EAF, to reduce the
per ton cost of consumables and to yield higher quality finished steel
product. The Company believes that its per ton manufacturing costs are
already among the lowest in the industry.
- Emphasize Value-Added Products and Increase Product Breadth. Steel
Dynamics has produced and believes that it will be able to consistently
produce thinner gauge (down to .040") steel in hot-rolled form with better
surface and edge characteristics than most other flat-rolled producers.
The Company believes that its high quality, thinner hot-rolled products
will compete favorably with certain more expensive cold-rolled (further
processed) products, enabling it to obtain higher margins. In addition,
with the anticipated completion of the Cold Mill Project, SDI expects to
devote a substantial portion of its hot-rolled products to the production
of higher value-added cold-rolled and galvanized products, as well as
thinner gauges, down to .015". This increased product breadth should also
allow the Company to further broaden its customer base.
- Secure Reliable Sources of Low Cost Metallics. The principal raw
material used in the Company's mini-mill is steel scrap, which represented
approximately 58% of the Company's total manufacturing costs for the three
months ended June 30, 1997. Steel Dynamics has pursued a three-part
strategy to secure access to adequate low cost supplies of steel scrap and
steel scrap substitute materials. First, the Company has entered into a
long-term steel scrap contract with OmniSource. Second, SDI has entered
into an iron carbide "off-take" contract with Qualitech. Third, Steel
Dynamics is pursuing the IDI Project to produce DRI and after further
refining, liquid pig iron, as another lower cost complement for use in the
melt mix with steel scrap.
- Secure a Solid Baseload of Hot Band Sales. In order to help ensure
consistent and efficient plant utilization, SDI entered into "off-take"
sales and distribution agreements with Heidtman and Preussag, through
2001, pursuant to which Heidtman has agreed to purchase at least 30,000
tons and Preussag has agreed to purchase at least an average of 12,000
tons of the Company's flat-rolled products per month, at the Company's
market price, subject to certain volume and single run discounts.
- Increase Unit Growth at Low Capital Cost. SDI seeks to continue to grow
its production of flat-rolled steel coil at low capital and unit costs.
The Company plans to invest approximately $85.0 million to finance its
Caster Project. The Caster Project, which is expected to be completed in
the first half of 1998, is expected to increase the annual production
capacity of the Company's mini-mill from 1.4 to approximately 2.4 million
tons of hot-rolled steel. In addition, management intends to continue to
explore new production technologies to further lower its unit costs of
production.
- Incentivize Employees. In contrast to the high fixed labor costs of many
of the Company's competitors, SDI has established certain incentive
compensation programs specifically designed to reward employee teams for
their efforts towards enhancing productivity, thereby encouraging a sense
of ownership throughout Steel Dynamics. Production employees actively
share in the Company's success through a "production" bonus and a
"conversion cost" bonus. The production bonus is directly tied to the
quantity and quality of products manufactured during a particular shift.
The conversion cost bonus encourages employees to use materials and
resources more efficiently. Steel Dynamics' employees' bonuses may equal
or exceed their base hourly wage.
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<PAGE> 130
- Pursue Future Opportunities. Steel Dynamics believes that technology
development and management's experience will provide significant
opportunities for SDI in a broad range of markets, potentially including
flat-rolled, non-flat-rolled, stainless and specialty steels. The Company
plans to pursue opportunities through greenfield projects, strategic
alliances or acquisitions to secure the long-term future growth and
profitability of SDI. The Company is conducting certain preliminary
engineering and feasibility analyses for a possible 750,000 ton capacity
structural steel facility to manufacture wide flange beams and other
structural shapes, utilizing near net shape casting technology in
conjunction with a state-of-the-art bloom caster. There is no assurance,
however, that such a facility will be approved by the Company for further
development efforts once these preliminary studies have been completed,
or, if further developed, that the facility will be able to be financed
and built. Steel Dynamics will also seek to enter new steel markets and to
produce new steel products using the latest technology, with the objective
of being a low cost producer. In addition, the Company has a technology
sharing agreement with Preussag which will provide SDI with Preussag's
expertise and know-how in steel manufacturing, particularly steel
finishing.
INDUSTRY OVERVIEW
The steel industry has historically been and continues to be highly
cyclical in nature, influenced by a combination of factors including periods of
economic growth or recession, strength or weakness of the U.S. dollar, worldwide
production capacity, levels of steel imports and tariffs. The industry has also
been affected by other company-specific factors such as failure to adapt to
technological change, plant inefficiency, and high labor costs. As an industry,
most U.S. steel producers suffered losses between 1982 and 1986, earned profits
between 1987 and 1989, weakened again through the end of 1992, strengthened
during 1993 and 1994, weakened again in 1995 and appear to be strengthening at
the present time. Steel, regardless of product type, is a commodity that
responds to forces of supply and demand, and prices have been volatile and have
fluctuated in reaction to general and industry specific economic conditions.
Under such conditions, a steel company must be a low cost, efficient producer
and a quality manufacturer.
There are generally two kinds of primary steel producers, "integrated" and
"mini-mill." The following diagram illustrates the differences in production
methodologies between the typical multi-step integrated mill production process
and the typical continuous mini-mill melting-casting-rolling process.
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<PAGE> 131
DIAGRAM
Steel manufacturing by an "integrated" producer involves a series of
distinct but related processes, often separated in time and in plant geography.
This process generally involves ironmaking followed by steelmaking, followed by
billet or slab making, followed by reheating and further rolling into steel
plate or bar, or flat-rolling into sheet steel or coil. These processes may, in
turn, be followed by various finishing processes (including cold-rolling) or
various coating processes (including galvanizing). In integrated producer
steelmaking, coal is converted to coke in a coke oven, then combined in a blast
furnace with iron ore (or pellets) and limestone to produce pig iron, and then
combined with scrap in a "basic oxygen" or other furnace to produce raw or
liquid steel. Once produced, the liquid steel is metallurgically refined and
then either poured as ingots for later reheating and processing or transported
to a continuous caster for casting into a billet or slab, which is then further
shaped or rolled into its final form. Typically, though not always, and whether
by design or as a result of downsizing or re-configuration, many of these
processes take place in separate and remote facilities.
In contrast, a mini-mill employs an electric arc furnace to directly melt
scrap steel or steel scrap substitute, thus entirely eliminating the
energy-intensive blast furnace. A mini-mill incorporates the melt shop, ladle
metallurgical station, casting, and rolling into a unified continuous flow. The
melting process begins with the charging of a furnace vessel with scrap steel,
carbon, and lime, following which the vessel's top is swung into place and
electrodes lowered into the scrap through holes in the top of the furnace.
Electricity is then applied to melt the scrap. The liquid steel is then checked
for chemistry and the necessary metallurgical
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adjustments are made while the steel is still in the melting furnace or, if the
plant has a separate staging area for that process (as SDI's does), the material
is transported by a ladle to an area, commonly known as a ladle metallurgy
station. From there, the liquid steel is transported by ladle to a turret at the
continuous caster, wherein it is then transferred into a tundish, a kind of
reservoir, which controls the flow of the liquid steel into a water-cooled
copper-lined mold (collectively, the "caster") from which it exits as an
externally solid billet or slab. After a billet is cast, it is then cut to
length and either shipped as billets or stored until needed for further rolling
or processing (which would involve reheating) or it may be sent directly into
the rolling process, after which it may then be cut to length, straightened, or
stacked and bundled. In the case of thin-slab casting, however, the slabs
proceed directly into a tunnel furnace, which maintains and equalizes the slab's
temperature, and then after descaling, into the first stand of the rolling mill
operation. In this rolling process, the steel is progressively reduced in
thickness. In the case of sheet steel, it is wound into coil and may be sold
either directly to end users or to intermediate steel processors or service
centers, where it may be pickled, cold-rolled, annealed, tempered, or
galvanized.
As a group, mini-mills are generally characterized by lower costs of
production and higher productivity than the integrated steelmakers. This is due,
in part, to the mini-mills' lower capital costs and to their lower operating
costs resulting from their streamlined melting process and smaller, more
efficient plant layouts. Moreover, mini-mills have tended to employ a management
culture that emphasizes worker empowerment and flexible, incentive-oriented
non-union labor practices. The smaller plant size of the mini-mill operation
also permits greater flexibility in locating the facility to optimize access to
scrap supply, attractive energy costs, infrastructure and markets. Furthermore,
the mini-mill's more efficient plant size and layout, which incorporates the
melt shop, metallurgical station, casting and rolling in a unified continuous
flow under the same roof (as contrasted with integrated mills, which have
typically been downsized and re-configured over time and thus may perform each
of these functions in separate facilities), have reduced or eliminated costly
re-handling and re-heating of partially finished product. Mini-mills, moreover,
have tended to be more willing to adapt to newer, more innovative and aggressive
management styles, featuring decentralized decision-making. They have also
adapted more quickly to the use of newer, more cost effective and efficient
machinery and equipment, translating technological advances in the industry into
more efficient production more quickly than the integrated mills.
EVOLUTION OF COMPACT STRIP PRODUCTION TECHNOLOGY
Mini-mills have been producing steel since the early 1960s when EAFs and
continuous casting were initially commercialized. For many of these years, the
mini-mills focused almost exclusively on lower-quality, lower-priced "long
products," including merchant shapes such as rebar, wire, rod, angles, and
structurals, due to the mini-mill's relatively smaller size, initial quality
limitations and early power and capacity limitations. In 1989, however, a
mini-mill, using the world's first CSP machine employing a revolutionary mold
design, directly cast a 2" slab that was less than 25% of the thickness of the
typical 8" to 10" slabs cast by the integrated producers.
The CSP technology was one of the most significant advances in steelmaking
in the last forty years. The thinner slab greatly reduces costs, as less
reduction is necessary in the hot-strip rolling mill to create hot-rolled bands
or coils of steel, and there is substantially less re-heating required prior to
rolling. Most important, the development of this thin-slab casting technology,
with its lower capital cost requirement, allowed for the entry of the mini-mills
into the flat-rolled segment of the steel market.
THE FLAT-ROLLED MARKET
The flat-rolled market represents the largest steel product group,
accounting for approximately 61.9% of the total annual U.S. steel shipments in
1996. Flat-rolled products consist of hot-rolled, cold-rolled, and coated sheet
and coil. Currently, the Company's products consist only of hot-rolled coil.
This product group has been the fastest growing segment of the U.S. steel market
over the last 40 years, amounting to approximately 62.5 million tons of
shipments in 1996. The following table shows the U.S. flat-rolled shipments by
hot-rolled, cold-rolled, and coated production (as reported by the AISI) for the
last five years.
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(MILLIONS OF TONS)
<S> <C> <C> <C> <C> <C>
Hot-Rolled(1)........................................... 20.8 22.7 24.6 26.8 27.0
Cold-Rolled(2).......................................... 14.2 14.4 14.7 14.1 15.8
Coated(3)............................................... 15.6 18.3 20.2 19.9 19.7
---- ---- ---- ---- ----
Total......................................... 50.6 55.4 59.5 60.8 62.5
==== ==== ==== ==== ====
% Total Steel Shipments................................. 61.6% 62.3% 62.6% 62.4% 61.9%
</TABLE>
- ------------
(1) Includes pipe/tube, sheet, strip and plate in coils.
(2) Includes blackplate, sheet, strip and electrical.
(3) Includes tin coated, hot dipped, galvanized, electrogalvanized and all other
metallic coated.
The following chart presents 1996 U.S. industry flat-rolled product
shipments by market segment (as reported by the AISI):
PIE CHART plot points in pcn 802
Hot-Rolled Products. All coiled flat-rolled steel is initially
hot-rolled, a process that consists of passing an ingot or a cast slab through a
multi-stand rolling mill to reduce its thickness to less than 1/2" and, in some
mills, to less than 1/16". Hot-rolled steel is minimally processed steel coil
that is used in the manufacture of various non-surface critical applications
such as automobile suspension arms, frames, wheels, and other unexposed parts in
auto and truck bodies, agricultural equipment, construction products, machinery,
tubing, pipe, tools, lawn care products and guard rails. The U.S. market for
hot-rolled steel in 1996 was approximately 27.0 million tons, excluding imports.
This is a market segment that the Company's existing mini-mill currently serves.
The following chart presents 1996 U.S. industry hot-rolled product shipments by
market segment (as reported by the AISI):
PIE CHART plot points in 802
Cold-Rolled Products. Cold-rolled steel is hot-rolled steel that has been
further processed through a pickler and then successively passed through a
rolling mill without reheating until the desired gauge (or thickness) and other
physical properties have been achieved. Cold-rolling reduces gauge and hardens
the steel and, when further processed through an annealing furnace and a temper
mill, improves uniformity, ductility and formability. Cold-rolling can also
impart various surface finishes and textures. Cold-rolled steel is used in
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applications that demand higher quality or finish, such as exposed automobile
and appliance panels. As a result, cold-rolled prices are typically higher than
hot-rolled. The U.S. market for cold-rolled steel in 1996 was approximately 15.8
million tons, excluding imports. This is a market segment that the Company's
cold mill will serve when completed in the fourth quarter of 1997. The following
chart presents 1996 U.S. industry cold-rolled product shipments by market
segment (as reported by the AISI):
PIE CHART Plot points in pcn 801
Coated Products. Coated steel is usually cold-rolled sheet that has been
coated with a non-ferrous metal to render it corrosion-resistant and to improve
its paintability. Hot-dipped galvanized, electrogalvanized and aluminized
products are types of coated steels. These are also the highest value-added
sheet products because they require the greatest degree of processing and tend
to have the strictest quality requirements. Coated steel is used in high volume
applications such as automotive, household appliances, roofing and siding,
heating and air conditioning equipment, air ducts, switch boxes, chimney flues,
awnings, garbage cans and food containers. The use of coated steels in the U.S.
has increased dramatically over the last 40 years. The U.S. market for coated
steels in 1996 was approximately 19.7 million tons, excluding imports. This
market segment will be served by SDI's cold mill when completed in the fourth
quarter of 1997. The following chart presents 1996 U.S. industry coated product
shipments by market segment (as reported by the AISI):
PIE CHART plot points in pcn 801
THE COMPANY'S PRODUCTS AND APPLICATIONS
The Company's current array of hot-rolled products includes a variety of
high quality mild and medium carbon and high strength low alloy hot-rolled bands
in 40" to 62" widths and in thicknesses from .500" down to .040" (1 mm). These
products are suitable for mechanical and structural tubing, gas and fluid
transmission piping, metal building systems, parts and components for
automobiles, trucks, trailers, and recreational vehicles, rail cars, ships,
barges, and other marine equipment, agricultural equipment and farm implements,
lawn, garden, and recreational equipment, industrial machinery and shipping
containers. SDI believes that, because of innovations made in its
state-of-the-art caster, its basic production hot band has surface and edge
quality characteristics that exceed those of the other thin-slab/flat-rolled
mini-mills operating currently. The Company also believes that the surface and
edge quality of its hot bands compares favorably with conventional mills. Steel
Dynamics believes that it is able to access a substantial portion of the current
U.S. shipped hot-rolled market of 27.0 million tons. Based on information from
its customers, the following chart displays SDI's flat-rolled shipments for the
first six months of 1997, by market classification of the ultimate end user,
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regardless of whether the Company's hot band was further processed by a steel
service center or other intermediate processor before being shipped to the end
user.
<TABLE>
<CAPTION>
END USER INDUSTRY PERCENTAGE TYPICAL APPLICATIONS
------------------------- ---------- ----------------------------------------------
<S> <C> <C>
Tubing................... 28% Structural tube, mechanical tube, conduit
Automotive............... 27 Safety restraints, suspension, frame
Commercial equipment..... 13 Racks, shelving, hardware
Construction............. 9 Metal buildings, piling, safety grating
Machinery................ 4 Construction equipment, machine tools
Appliances............... 3 Liners, backs, brackets
Residential equipment.... 3 Lawn equipment, garden implements, motion
furniture
Agriculture.............. 2 Farm equipment, feeders, bins
Rail..................... 2 Rail car sides, tops, end caps
Other.................... 9 Exercise and recreational equipment
---
Total.................... 100%
===
</TABLE>
After completion of the Cold Mill Project (expected to occur during the
fourth quarter of 1997), SDI expects to produce a full range of hot-rolled,
hot-rolled coated, cold-rolled and cold-rolled coated products. At that time,
the Company expects to devote a substantial portion of its hot bands to the
production of higher value added products, including galvanized coatings, as
well as thinner gauge cold-rolled, down to .015". This increased product breadth
should also allow SDI to broaden its direct customer base, so that many of the
products required by end user consumers could be purchased directly from the
Company, instead of through an intermediate processor or steel service center.
The Company believes that upon completion of the Cold Mill Project it will be
able to access a substantial portion of the current U.S. shipped flat-rolled
market of 62.5 million tons.
THE COMPANY'S CUSTOMERS AND MARKETS
Intermediate Steel Processors and Steel Service Centers. The Company's
customers currently are primarily intermediate steel processors and steel
service centers. Of Steel Dynamics' total net sales in 1996 and for the six
months ended June 30, 1997, 71% and 62%, respectively, were to steel processors
or service centers. These steel processors and service centers typically act as
intermediaries between primary steel producers, such as SDI, and the various end
user manufacturers that require further processing of hot bands. The additional
processing performed by the intermediate steel processors and service centers
include pickling, galvanizing, cutting to length, slitting to size, leveling,
blanking, shape correcting, edge rolling, shearing and stamping. After the
completion of the Cold Mill Project, the Company expects to provide additional
value-added cold-rolling and coating services. The Company expects, however,
that its intermediate steel processor and service center customers will remain
an integral part of its future customer base and plans to continue to sell its
hot bands and other products to these customers after the Cold Mill Project is
complete.
The Company's largest customers, Heidtman and Preussag, accounted in the
aggregate for approximately 36% and 12% of Steel Dynamics' total net sales
during 1996, respectively, and 32% and 10% of the Company's total net sales for
the six months ended June 30, 1997, respectively. While the loss of either
Heidtman or Preussag as a customer, or a significant reduction in the business
generated by Heidtman or Preussag, might have a material adverse effect on SDI's
results of operations, the Company believes its relationships with these two
companies have enabled it to baseload the mill, thus helping to ensure
consistent and sufficient plant utilization. Heidtman and Preussag are the only
two customers of SDI that have accounted, individually, for more than 10% of the
Company's total net sales during 1996 and for six months ended June 30, 1997.
Heidtman is an affiliate of one of the Company's stockholders and Preussag is a
stockholder. See "Principal and Selling Stockholders." The Company's five
largest customers in the aggregate accounted for approximately 65% and 63% of
total net sales during 1996 and the six months ended June 30, 1997. See "Risk
Factors -- Reliance on Major Customers."
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<PAGE> 136
SDI has a purchasing agreement with Heidtman for the purchase of at least
30,000 tons of the Company's hot band products per month through the end of
2001, at market prices, determined by reference to the lowest prices charged by
other thin-slab mini-mills or conventional mills for the same products. The
price at which the Company is required to sell 30,000 tons of steel coil to
Heidtman cannot be higher than the lowest price at which SDI offers its products
to any other customer. Heidtman is entitled to single run as well as certain
volume discounts. In addition, Heidtman has priority purchase rights to the
Company's secondary material and field claim material. The Company's aggregate
sales to Heidtman (including its affiliated companies) during 1996 and the six
months ended June 30, 1997, amounted to 279,000 tons and 188,138 tons,
respectively.
SDI also has a Purchasing, U.S. Sales and Export Distribution Agreement
(the "Preussag Purchasing Agreement") with Preussag pursuant to which, and
subject to the Company's obligations to fill Heidtman's orders, Preussag is
obligated to purchase an average of at least 12,000 tons per month of the
Company's available products through the end of 2001, at a market price
determined by reference to the Company's price sheet and by reference to
prevailing competitive market prices charged to large customers by other mills
within the Company's typical marketing area. Preussag is entitled to single run
and certain volume discounts. Under the Preussag Purchasing Agreement, the
Company has also appointed Preussag as its preferred distributor for all sales
to customers outside the United States, Canada and Mexico. See "-- International
Sales." Preussag's affiliated companies include: Delta Steel, Inc., located in
Houston, Texas; Feralloy Corporation, located in Chicago, Illinois; Feralloy
North American Steel Co., LP, located in Melvindale, Michigan; Preussag Handel,
Canada, located in Vancouver, British Columbia, Canada; Preussag Handel, GmbH,
located in Mexico City, Mexico; and Preussag International Steel Corporation,
located in Atlanta, Georgia. The Company's aggregate sales to Preussag
(including its affiliated companies) during 1996 and the six months ended June
30, 1997, amounted to 85,800 tons and 56,230 tons, respectively.
Direct Sales to End Users. The Company sells directly to end users,
including manufacturers of cold-rolled strip, oil and gas transmission pipe, and
mechanical and structural tubing. The Company employs a 10-person direct sales
staff, consisting of a Manager of Sales and Marketing, three Field Sales
Managers, a Manager of Secondary Sales, with the balance dedicated to inside
sales and administration. Steel Dynamics plans on keeping its end user sales and
support staff small and efficient, reflecting the Company's emphasis on
cost-containment and productivity.
Geographic Proximity to Customers. The following map illustrates the
geographic proximity of certain of the more significant U.S. markets for
flat-rolled sheet to the Company's mini-mill in Butler, Indiana.
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CUSTOMER MAP
Of the Company's total net sales during 1996 and the six months ended June
30, 1997, more than 80% and 75%, respectively, were to customers within 300
miles of SDI. In addition to its low production costs, the Company believes that
it also enjoys a pricing advantage over most of its competitors due to freight
savings to its customers to the north and east of SDI's mini-mill, where it sold
more than 50% of its flat-rolled steel in 1996 and the six months ended June 30,
1997.
International Sales. Of the Company's total net sales in 1996 and the six
months ended June 30, 1997, sales outside the continental United States
accounted for less than 5% and 10%, respectively. Pursuant to the Preussag
Purchasing Agreement, the Company has appointed Preussag its preferred
distributor for all sales to customers outside the United States, Canada and
Mexico (the "Export Territory"). Under the Preussag Purchasing Agreement, if the
Company wishes to sell in the Export Territory, it must notify Preussag of the
products available for sale and the price of these products. Preussag must then
use its best efforts to solicit these sales and to present the Company with any
purchase orders for the product, which the Company may then accept or reject.
Sales within the Export Territory are for Preussag's own account, regardless of
whether Preussag is purchasing for its use or for resale. If the Company
receives an unsolicited offer to purchase any products from a prospective
customer in the Export Territory, the Company must notify Preussag of the terms
and Preussag has a right of first refusal to effect the purchase. For sales in
the Export Territory, Preussag is entitled to a sales commission in addition to
any other applicable discounts or rebates. The Company has also entered into a
"second look" export sales agreement for such international sales with Sumitomo
Corporation of America ("Sumitomo"). Sumitomo is also a stockholder in the
Company.
THE COMPANY'S STEELMAKING EQUIPMENT AND TECHNOLOGY
Steel Dynamics' thin-slab/flat-rolled steelmaking equipment represents the
state-of-the-art in EAF melting and thin-slab casting and rolling technology and
embodies advancements and improvements reflecting the combined design and
operating experience with thin-slab steelmaking of the Company's three founders,
Keith E. Busse, Mark D. Millett, and Richard P. Teets, Jr. The Company's
existing equipment and technology, as well as the design criteria of the
equipment and technology that will constitute the Cold Mill
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Project and the Caster Project, are intended to improve steelmaking speed,
efficiency and output, result in less "power off" and down time, require less
maintenance, prolong equipment life and produce steel of better consistency and
of better surface and edge qualities.
The Existing Mill. The principal steelmaking equipment that comprises the
existing thin-slab/flat-rolling plant that is currently producing the Company's
hot bands consists of a melting furnace, a ladle metallurgy station, a turret,
thin-slab caster and rolling mill.
DIAGRAM
The Electric Arc Furnace. The Company's EAF is a 165-ton capacity tap
weight (195-ton gross weight with a 30-ton "hot heel") Fuchs AC-powered 120 MVA
high reactance twin-shell EBT (eccentric bottom tap) furnace, consisting of two
melting hearths working off of a single power source. Although such a large
capacity furnace might have suggested the use of DC power, SDI purchased an
AC-powered unit but with a reactor added to the electrical system on the primary
side of the transformer. In addition to saving approximately 30% in the capital
cost of the EAF (as compared to a DC-type unit), the AC-powered EAF is designed
to use smaller electrodes, which are less expensive than those required by a
DC-type EAF, and to consume a smaller amount of electrodes per pound of steel
produced. With a large capacity EAF, such as Steel Dynamics' furnace, using a DC
power source would require substantially larger (28" to 30" diameter)
electrodes, which cost up to 30% more per pound than the smaller (24" diameter)
electrodes required by the Company's AC-powered EAF. Furthermore, electrode
consumption by the Company's EAF (a substantial operating cost component) is
designed to be less than a DC-powered unit, approximately 3.2 pounds per ton
versus 3.8 to 4.0 pounds per ton, a function of lower amperage to the electrode
brought about by the reactor, which allows it to mimic the power characteristics
of the DC EAF.
SDI's twin-shell EAF design results in virtually continuous melting and
reduces the tap-to-tap time (i.e. the length of time between successive melting
cycles or "heats"). While melting is being done on one side, the other vessel
can be tapped and then refilled with scrap and readied for the next melt. In a
single EAF with a 60-minute tap-to-tap time, typically 10 to 15 minutes is taken
to tap liquid metal, gun refractories onto the side walls of the furnace,
re-sand and repair the tap hole, and recharge the vessel with scrap. Therefore,
for a small incremental capital cost of a second vessel, there is an approximate
20% increase in productivity gained by reducing the tap-to-tap time. Preheating
of the scrap will occur in the idle vessel with both oxygen and natural gas, at
a fairly low cost, aided by the 30-ton "hot heel" of melted scrap remaining in
the idle vessel after tapping. This design enables the Company to save the
additional capital cost of competing technologies such as a shaft furnace with a
scrap preheating feature. The Company believes that shaft furnaces do not work
well with larger pieces of scrap, such as the industrial bundles which the
Company purchases. An additional attractive feature of the twin-shell design is
that if there is a maintenance problem requiring work on one vessel, melting can
proceed in the other vessel without interruption. Electricity consumption in the
EAF is approximately 350 to 375 kWh per ton.
Ladle Metallurgy Station. The Company has a separate ladle metallurgy
station, built by Fuchs, consisting of two small EAFs, each of which consumes
approximately 25 kWh of electricity per ton of steel, and a desulfurization
station. A separate ladle refining station, located apart from the primary
melting furnace, allows metallurgical adjustments to be effected, while still
maintaining the steel at a sufficiently high temperature during the refining
stage. This maximizes the time that the primary furnace can be used for scrap
melting, while enabling the molten steel to continue through metallurgical
testing, stirring, alloying, desulfurization, reheating and other adjustments,
on its way to the casting deck. There are two ladle stations, each of which
receives molten steel from the primary furnaces after tapping. When the
adjustment process has
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been completed the refined metal is then transported by overhead crane to the
casting deck. The ladles are placed on a turret, which rotates an empty ladle
away from the top of the casting machine while simultaneously replacing it with
a full ladle, allowing for a continuous process. The molten steel flows from the
ladle to a tundish (a holding reservoir) and then directly into the mold of the
casting machine.
The Thin-Slab Caster. The state-of-the-art continuous thin-slab caster was
built by SMS Schloemann-Siemag AG and SMS Concast and is equipped with Liquid
Core Reduction ("LCR") which the Company has not yet activated. LCR enables the
caster to perform as a typical thin slab caster producing 50 mm slabs for hot
rolling, as well as allowing the flexibility to produce slabs from 40 mm to 80
mm thick by using a variable thickness mold and movable segments. This feature
is designed to ensure greater quality and a more diversified product line for
the Company by reducing turbulence in the mold; providing for "soft reduction"
on segregation sensitive grades; improving hot rolling reduction ratios on thick
gauge products and the reduction of hot rolling loads to produce light gauge
products.
The caster is also equipped with a newly designed submerged entry nozzle
("SEN"), with an improved geometry. This permits the walls of the SEN to be
thicker, resulting in longer SEN life and, in turn, enables the Company to run a
"string" of 12 heats before the SEN requires replacement (in contrast with 10 or
less with a smaller SEN). These advantages are directly reflected in increased
productivity. Within the newly designed SEN, SDI has incorporated a new baffle
design to modify the fluid flow of molten steel into the mold cavity which slows
and more evenly distributes the molten steel into the mold as compared to
previous designs. This results in a quieter top surface of the liquid steel in
the mold (at the meniscus), a more uniform solidification of the shell, and
effectively eliminates sub-surface inclusions. The tundish design has been
upgraded to include state-of-the-art baffle and other flow modification dividers
which allow for maximum flotation and subsequent removal of inclusions prior to
the molten steel entering the SEN.
The Hot-Rolling Mill. The Company's rolling mill is a state-of-the-art,
six-stand rolling mill built by SMS Schloemann-Siemag AG. The hot-rolling mill
is equipped with a specially designed high pressure 6,000 psi water descaling
system to remove the mill scale after the steel emerges from the
Bricmont-supplied tunnel furnace just before entering the rolling mill. This
system provides an exceptionally clean surface while minimizing the cooling of
the 2,000 degreesF slab. The tunnel furnace restores heat lost during the
casting process. The rolling mill is equipped with the latest electronic and
hydraulic controls. Each rolling stand is driven by a high-powered 10,000
horsepower mill drive motor. The normal exit speed of light gauge steel, prior
to coiling as it exits the last stand of the rolling mill, is approximately 10.5
meters per second. The Company's smaller more closely-spaced rolls on the
run-out table will help prevent the steel strip from cobbling when rolling
lighter gauges. When rolling to a thickness of 1 mm (.040"), the exit speed will
remain the same until the sheet is captured in the down-coiler, at which point
it will "zoom" the strip to a faster speed of 13.3 meters per second; which
increases productivity. The last two stands of the rolling mill use specially
designed work rolls to facilitate the Company's ability to roll to the thinnest
gauge of any hot mill in the industry. Steel Dynamics' coiler is approximately
210 feet from the last stand of the rolling mill, and all necessary foundations
and infrastructure have been pre-engineered and constructed to accommodate the
second coiler that will be added as part of the Caster Project.
Throughout the rolling process, laser optical measuring equipment and
multiple x-ray devices measure all strip dimensions, allowing adjustments to
occur continuously and providing feedback information to the mill process
controls and computers. All positioning and control equipment used to adjust the
rolling mill is hydraulically operated and regulated electronically to achieve a
high degree of accuracy. The entire production process is monitored and
controlled by both business and process computers. Production schedules are
created based on order input information and transmitted to the mill computers
by the plant business system. Mathematical models then determine the optimum
settings for the tunnel furnace, the hot rolling mill and the strip cooling
sprays. This information is then directly transmitted to the equipment
controlling the rolling operations. As the material is processed, operating and
quality data are gathered and stored for analysis of operating performance and
for documentation of product parameters to the customer. The system then
coordinates and monitors the shipping process, and prints all relevant paper
work for shipping when the coil leaves the plant.
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The Cold Mill Project. The Cold Mill Project is under construction
adjacent to and south of the existing hot mill and is expected to be completed
in the fourth quarter of 1997.
As the following diagram illustrates, the Cold Mill Project consists of a
continuous pickle line, two hot dipped galvanizing lines, a semi-tandem
two-stand reversing cold-rolling mill, batch annealing furnaces and a temper
mill. The pickle line consists of a dual payoff system, scale breaker, shallow
bath pickling section, rinsing section and recoiler built by Davy International;
the hot dipped galvanizing lines consist of dual payoff, cleaning, annealing,
coating, rolling, tension leveling, post-coating treatment, and recoiling
systems built by Davy International and others; the semi-tandem two-stand
reversing cold-rolling mill will consist of a payoff system, two take-up reels,
two four-high stands, full instrumentation and quality controls, to be built by
SMS Schloemann-Siemag AG; the batch annealing furnaces built by Ebner Furnaces
consist of 18 bases and nine hydrogen annealing bells; and the temper mill
consists of a single four-high stand built by SMS Schloemann-Siemag AG. All
electric drives and controls have been supplied by the General Electric
Corporation, a stockholder of SDI. One of the galvanizing lines will process
primarily hot-rolled product, while the second galvanizing line will process
primarily cold-rolled product.
[DIAGRAM]
The pickle line commenced production in June 1997 and the first of the two
galvanizing lines to coat hot rolled steel began production in July 1997. The
cold rolled hot dipped galvanizing line is expected to begin production and the
annealing facilities and the temper mill are expected to be ready for
commissioning in September 1997.
The pickle line begins at the existing hot strip mill building, and
delivers pickled product to a coil storage facility centrally located in the
cold-rolling and processing facility. Configuring the facility in this manner
eliminates the need for equipment to transfer coils to the cold-rolling
facility. At the entry end of the pickle line, there are two reels to unwind
coils and a welder to join the coils together. Coils are unwound on alternate
reels and attached end to end by the welder, creating a continuous strip through
the pickle tanks. The center section of the 700-foot pickle line consists of the
scale breaker/tension leveler, the pickling tanks (where the strip moves through
a bath of hydrochloric acid that thoroughly cleans the strip in preparation for
galvanizing and rolling operations), and the rinse tanks. At the delivery end of
the line there is a reel for recoiling the pickled product, and shearing
facilities to separate the strip back into discrete coils. After recoiling, each
coil is stored in the central coil storage facility.
From the central coil storage area, coils can proceed in either of two
directions. Some coils will be immediately galvanized on the hot-rolled
galvanizing line. The ability of the hot-rolling mill to produce steel strip
that is extremely thin by comparison will allow for immediate galvanizing
without the need for further rolling in the cold-rolling mill. The hot-rolled
galvanizing line is designed to efficiently handle this type of material.
Hot-rolled coils that are not intended for immediate galvanizing, and which
the Company intends to further process, will be processed on the cold-rolling
mill. SDI's cold-rolling mill will be unique in that it will
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be a semi-tandem two-stand reversing cold-rolling operation. This configuration
provides considerably higher throughput than a conventional single-stand
reversing mill, yet also takes advantage of considerably lower equipment costs
than the conventional four to six-stand tandem cold-rolling mill. The rolling
mill is configured with multiple x-ray gauges, hydraulic bending systems,
rolling solution controls, gauge controls and strip flatness controls used to
produce an extremely high level of product quality parameters. The cold-rolling
mill will also use a process control computer using sophisticated mathematical
models to optimize both quality and throughput.
Cold-rolled product that requires galvanizing will proceed to the
cold-rolled galvanizing line. There it will be annealed and coated. The
cold-rolled galvanizing line is quite similar to the hot-rolled galvanizing
line, but will have a more elaborate and larger strip heating furnace. This
larger furnace is required to anneal cold-rolled product, which is not necessary
on hot-rolled product. Designing the pickle line and the two galvanizing lines
concurrently and procuring the equipment from the same manufacturer has allowed
a high degree of commonality of parts between the three lines. This provides a
high degree of flexibility and cost savings with regard to management of spare
parts.
Cold-rolled product that does not require galvanizing will then proceed to
the batch annealing furnaces. The batch annealing furnaces heat and then cool
the coils in a controlled manner to reduce the hardness of the steel that is
created in the cold-rolling process. The batch annealing furnaces will heat the
steel in a hydrogen environment that optimizes the efficiency of the heating
process and produces a product that is superior to conventional batch annealing
with regard to cleanliness and uniform metallurgical characteristics. The
heating and cooling of the coils is regulated by means of computer models based
on current knowledge of heat transfers and steel characteristics.
Product from the annealing furnaces will then be temper-rolled. The
temper-rolling facility is a single stand four-high rolling mill designed for
relatively light reduction of the product. The temper mill introduces a small
amount of hardness into the product and further ensures the overall flatness and
surface quality of the product. The temper mill will also have an x-ray gauge to
monitor strip thickness. This mill was purchased concurrently with the two-stand
cold-rolling mill from the same manufacturer. This provides a high degree of
flexibility and cost savings with regard to management of spare parts.
Product from both galvanizing lines and the temper mill will be delivered
directly from the processes to a common coil storage area, where they will then
be shipped by either truck or rail.
As in its hot mill, all facilities in the cold mill will be linked by means
of business and process computers. Business systems will be expanded to
comprehend order entry of the additional cold mill products and all line
scheduling will be accomplished in the business computer systems, with schedules
transmitted to the appropriate process related computers. Operating and quality
data will also be collected for analysis and quality control purposes, and for
reporting product data to customers.
The Caster Project. The Caster Project, which the Company believes will
enable it to increase its annual production capacity of hot-rolled steel from
1.4 million tons to approximately 2.4 million tons, primarily involves the
design and construction of an additional hybrid EAF, a second thin-slab caster,
a second tunnel furnace, a second coiler and minor modifications to the meltshop
building. Construction began in June 1997, and is expected to be completed in
the first half of 1998. The total cost of the Caster Project is estimated to be
approximately $85.0 million. The following diagram shows the components of SDI's
hot-mill upon completion of the Caster Project.
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DIAGRAM - Depicting hot-mill production process upon completion of Caster
Project
The necessary foundations and infrastructure to house and support the
second caster were pre-planned into the existing plant at the time of its design
and construction. This should allow SDI to add additional annual capacity of 1.0
million tons of hot-rolled steel at an incrementally low capital cost. The
Company believes that these additional tons will allow it to maximize its
rolling and finishing capacity that its Cold Mill Project is expected to provide
in the fourth quarter of 1997.
The equipment that is being considered as a part of the Caster Project is
similar in design and use to the equipment that constitutes the existing
mini-mill facility.
The IDI Project. The IDI Project consists of the design, construction, and
operation of a facility for the manufacture of DRI and its further refinement
into liquid pig iron for use by Steel Dynamics (or, when desired, for resale to
others) as a steel scrap substitute. The Company has studied and considered many
alternative methods of securing a low cost source of steel scrap substitute
material. Some of these methods are in limited commercial use while others have
not been tested commercially, either for their ability to successfully yield
useable substitute iron units or, even if technologically successful, their
ability to do so at a cost that makes its use as a scrap substitute commercially
feasible. The existing commercial processes differ by the type of raw feedstock
they employ and the type of reductant that is used to "reduce" the feedstock to
useable or semi-finished iron units. The following diagram illustrates the
sequence of steps in the IDI Process, during which iron ore fines will be
processed into DRI and then further refined into liquid pig iron.
DIAGRAM - Depicting IDI Process
Background of Alternative Scrap Substitute Methodologies. DRI is a
metallic product produced from iron ore that is used as an alternative or
complementary feedstock in EAF steelmaking, blast furnaces and other iron and
steelmaking applications. Of the approximately 33.3 million tonnes of DRI
produced in 1996,
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over 90% was produced by either the Midrex or HYL processes, both of which use
lump form iron ore or pellets that are treated in a direct reduction shaft
furnace with natural gases to reduce the iron oxide to metallic iron. Although
these processes are proven to work commercially, iron ore pellets tend to
command a premium over iron ore fines. There are a number of other processes
that use iron ore fines with natural gas as a reductant. One of these has been
selected by Qualitech in building its iron carbide production facility, with
which the Company has a long-term 300,000 tonne per year "off-take" contract.
The IDI Process. While the IDI Process has not yet been commercially
employed, the Company believes that it has the technical capability to develop
and implement the IDI Process. Moreover, the Company believes that the IDI
Process, when combined with further refining, will produce a liquid pig iron
with a richer iron content, at a lower cost, using readily available raw
material and energy resources, than any other available process, given the
location of SDI's mill.
The IDI Process will begin with the use of low cost iron ore fines. In the
first step of the IDI Process, the iron ore fines, which the Company expects to
purchase under a long-term supply agreement, will be upgraded by processing to
reduce the silica (i.e. sand) content of the fines, thereby minimizing the
undesirable gangue content of the final DRI product. Then the upgraded iron ore
fines and grounds, and the fines, together with ground coal, are mixed with
additives and pelletized on a rotary disk. The resulting ball-like pellets or
"green balls" will then be screened, so that a uniform pellet will proceed
through the rest of the process and so that undersized and oversized pellets can
be recovered and recycled. The correctly sized pellets will next be fed into a
rotary dryer and then into a rotary hearth furnace, where the dry, sized green
balls will be transferred to the top of the rotary hearth via a conveyor, at a
controlled rate, and then distributed uniformly over the hearth. The material
will be heated to 1,300 degrees for approximately 10 to 15 minutes, after which
they will be removed to a refractory-lined container. At this stage, the DRI
will be expected to have a metallic iron content of 88% to 92%. Although this
product is commercially viable at this stage of the process and could be used in
steelmaking, IDI intends to transport the DRI on site to a furnace and then to a
desulfurization station where further impurities will be removed. This further
refining will take DRI to approximately 96% metallic pig iron which could then
be introduced by Steel Dynamics directly into its EAF charge mix. The hybrid EAF
and desulphurization station will be located adjacent to the Company's existing
melt shop in Butler, Indiana, and is included as part of the IDI Project.
An added benefit which the Company expects to realize from the use of this
process is that electricity consumption in Steel Dynamics' EAF can be lowered by
the chemical energy available from the carbon, as well as from the fact that the
liquid pig iron is expected to contain only minimal amounts of iron oxide
(versus 6% iron oxide in most other available DRI), which would otherwise take
additional energy to reduce. Furthermore, since the resulting liquid pig iron
would already be molten at 2,400 degreesF, the electrical energy required in the
Company's regular EAF would be substantially reduced when the liquid pig iron is
introduced into the melt mix, resulting in not only an electrical consumption
savings but a reduction in electrode consumption as well. The Company believes
that there would be between a 15% to 20% productivity gain if pig iron produced
by the IDI Process constituted 25% of the melt mix, and more if iron carbide
(such as that which the Company anticipates receiving from Qualitech beginning
in 1998) is also added into the melt mix.
Steel Dynamics believes that the anticipated advantages of the IDI Process
are that it permits the use of lower cost iron ore fines or concentrates, that
pricing of the fines appears to be stable, and that coal as the reductant is
abundantly available and not affected by shortages that sometimes affect gas
availability and prices. Additionally, the IDI Process is expected to allow for
the use, as additional raw materials, of EAF dust and mill scale, which the
Company will generate and will be able to purchase from other area mills. At
present, the Company generates 30,000 tons of EAF dust per year, which otherwise
causes the Company to incur disposal costs in excess of $120 per ton.
Steel Dynamics also believes that the liquid pig iron, which it expects IDI
to begin producing in 1998, when combined into the melt mix with iron carbide to
be manufactured by Qualitech, will enable the Company to use these steel scrap
substitute materials for up to 40% of its metallics charge, thus reducing its
dependency upon low residual scrap (the most expensive grade).
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STEEL SCRAP AND SCRAP SUBSTITUTE RESOURCES
Steel scrap is the single most important raw material used in the Company's
steelmaking process, representing approximately 50% to 60% of the direct cost of
a ton of finished steel. All steel scrap, however, is not the same. As it
relates to final product quality, EAF flat-rolled producers, such as the
Company, can only tolerate a maximum .2% level of "residuals" (i.e. non-ferrous
metallic contamination such as copper, nickel, tin, chromium, and molybdenum,
which, once having been dissolved into steel cannot be refined out). In order
for the scrap melt to provide this level of quality under present circumstances
(without the anticipated availability of future scrap substitute products), the
mill must use approximately 60% of "low residual" steel scrap or an equivalent
material. There are many grades of scrap (for example, Steel Dynamics maintains
10 to 12 separate grades of scrap in its 20-acre scrap holding yard on premises
adjacent to the mini-mill), but scrap can be broadly categorized as either
"obsolete scrap" or "prompt industrial scrap." Obsolete scrap, which is derived
from discarded agricultural and construction equipment, consumer goods such as
automobiles and appliances, container drums and building demolition scrap,
generally contains residuals that exceed the tolerable maximums for EAF use (the
only exception being old structural steel and rails that were made from Bessemer
and open-hearth steel production process with high iron content, the supply of
which is limited). Prompt industrial scrap, on the other hand, is produced as a
by-product of various metalworking operations, such as steel fabricators,
machine shops, automobile production and stamping plants, and is the most
desirable for EAF steelmaking due to the traceability of its origins and to the
fact that it is generally "low residual" scrap. Such low residual scrap
generally takes the form of No. 1 Dealer Bundles, No. 1 Factory Bundles,
busheling, and clips. Many variables impact scrap prices, the most critical of
which is U.S. steel production. Generally, as steel demand increases, so does
scrap demand (and resulting prices).
Until 1989 when Nucor commenced flat-rolled production of steel in its
Crawfordsville, Indiana mini-mill and the subsequent opening of additional
thin-slab/flat-rolled mini-mills (including the Company's), the availability of
low residual scrap kept pace with demand, indeed exceeded demand, enabling the
United States to be a net exporter of low residual scrap. By 1994, however, the
supply of low residual scrap became tighter, although the shortfall was made up
by a combination of pig iron use, obsolete structural steel, and, to a limited
extent, non-U.S. or imported DRI. This supply/demand pressure on the cost of low
residual scrap is expected to continue, as more flat-rolled EAF production comes
on-line, although this may be mitigated to some extent by the anticipated
production of more steel scrap substitute material (such as the IDI Project or
Qualitech's iron carbide production facility).
The Company uses various grades of obsolete (and thus less expensive) scrap
in its melt mix, which it blends with its low residual scrap to keep within
final tolerances. To the extent that SDI will be able to introduce the
relatively pure pig iron that it expects to obtain from IDI's DRI (commencing in
1998), or the Qualitech iron carbide which it expects to begin receiving in
1998, Steel Dynamics believes that it will be able to use greater amounts of
lower-priced obsolete scrap in its melt and still remain within acceptable
limits.
There are several regions in the United States where scrap generation
exceeds consumption within the region. One of these regions is in the Midwest.
The Company believes that it enjoys freight savings versus other current
mini-mill competitors for scrap generated near the mini-mill and made available
to Steel Dynamics for use in its mini-mill.
The Company believes that the demand for low residual steel scrap will rise
more rapidly than the supply in the coming years. This belief has prompted SDI,
as a means of maintaining a low metallics cost, to seek and secure both a strong
and dependable source through which to purchase steel scrap of all grades,
including low residual scrap, and a reliable source for lower cost steel scrap
substitute resources. SDI has accomplished this through a long-term scrap
purchase agreement with OmniSource, and, in addition to its own IDI Project,
through a long-term purchase contract for iron carbide with Qualitech.
Steel Scrap. The Company has entered into an Agreement To Provide Scrap
Purchasing Services And Certain Priority Purchase Rights with OmniSource, an
affiliate of Heavy Metal, L.C., a stockholder of the Company. See "Principal and
Selling Stockholders." Pursuant to this agreement, OmniSource has agreed to act
as the Company's exclusive scrap purchasing agent, through the end of 2001, and
to use its best efforts to locate and secure for the Company's mini-mill such
scrap supplies as SDI may from time-to-time wish to
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purchase, at the lowest then available market prices for material of like grade,
quantity and delivery dates. The cost to the Company of OmniSource-owned scrap
is the price at which OmniSource, in bona fide market transactions, can actually
sell material of like grade, quality and quantity. With respect to general
market scrap, the cost to the Company is the price at which OmniSource can
actually purchase that scrap in the market (without mark-up or any other
additional cost). For its services, OmniSource receives a commission per gross
ton of scrap received by Steel Dynamics at its mini-mill. All final decisions
regarding scrap purchases belong to the Company, and SDI maintains the sole
right to determine its periodic scrap needs, including the extent to which it
may employ steel scrap substitutes in lieu of or in addition to steel scrap. No
commission is payable to OmniSource for scrap substitutes purchased or
manufactured by the Company.
During 1996 and the six months ended June 30, 1997, the Company purchased
1,068,609 tons and 452,162 tons, respectively, of steel scrap from OmniSource,
and expects to purchase an average of 125,000 to 150,000 tons of steel scrap per
month at full production. Thereafter, although SDI expects that its total output
in tons of flat-rolled steel coil will increase from 1.4 million to
approximately 2.4 million after the completion of the Cold Mill and Caster
Projects, the Company expects that its receipt of substantial quantities of
steel scrap substitute material, both iron carbide from Qualitech and DRI from
the IDI Project, will mitigate its continued dependency on low residual steel
scrap. Steel Dynamics believes that its scrap purchasing relationship with
OmniSource, an affiliate of one of the Company's stockholders, provides the
Company with excellent access to available steel scrap within its primary scrap
generation area.
Steel Scrap Substitutes. In June 1996, the Company entered into an Iron
Carbide Off-Take Agreement (the "Iron Carbide Agreement") with Qualitech, in
whose parent SDI is a 4% stockholder. The Iron Carbide Agreement is for five
years, running from the time that Qualitech begins commercial production of iron
carbide, and is subject to renewal. Qualitech is building a 660,000 tonne annual
capacity iron carbide facility in Corpus Christi, Texas, of which 300,000 tonnes
annually is expected to be sold to Steel Dynamics at a formula purchase price
based on various components of Qualitech's costs of production, which the
Company believes is favorable, and with a ceiling price which SDI believes will
be favorable relative to the price of steel scrap. The Company will also
purchase iron carbide from Qualitech during Qualitech's ramp-up commencing as
early as 1998, although the amount of iron carbide that SDI can anticipate
receiving during that period is unknown. In addition to the Iron Carbide
Agreement, the Company has formed IDI, which is constructing a 600,000 tonne
capacity rotary hearth-based DRI production facility. See "Certain
Transactions."
ENERGY RESOURCES
SDI believes that it has very favorable energy rates, both electricity and
gas, as well as for oxygen. These rates are critical to the Company in
maintaining its status as a low-cost provider of flat-rolled steel.
Electricity. The plant operates at an average electrical power consumption
level of 100 million watts, under an electric service contract with AEP that
extends through 2005. The contract designates a capacity reservation of 150,000
kVa with provisions allowing for a total capacity increase of 80,000 kVa for new
load connected within five years of the commencement date with a one-year notice
of intent requirement. The contract designates a portion of the Company's load
as "firm," which is billed under the applicable AEP retail tariff. All of the
rest of the Company's load is designated as "interruptible service," which
allows customers the option of accepting varying levels of risk of power
interruption as a trade-off for discounted energy prices. With interruptible
service, the Company is subject to risk of interruption at any time in the
operation of the AEP System, as a result of an AEP annual peak demand, or even
when AEP can receive a higher market price from an alternate buyer. Under such
circumstances, the Company has the option of matching the market price of the
alternate buyer in order to avoid interruption.
The interruptible load is billed as either "base" energy or as "peak"
energy. The base energy charge is derived monthly from a formula that includes a
discounted demand component, an energy component, and a fuel component. A peak
energy charge, or "real-time price," is calculated hourly for differing
peak-period hours throughout the year. The real-time price is defined as AEP's
incremental cost of supplying energy that otherwise would not have been incurred
if such energy had not been supplied to the Company, plus a fixed cost
increment. The Company's average price of electricity for the six months ended
June 30, 1997, was $.027 per
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kWh. The Company's negotiated rate with AEP, once it reaches full capacity,
however, should be in the range of $.024 and $.025 per kWh, which SDI believes
is relatively attractive.
Electrical power to the plant site is supplied by AEP over its 14-mile,
345,000 volt transmission line directly to the Company's own electrical
substation. The Company entered into a Transmission Facilities Agreement with
AEP to pay "contributions in aid of construction" for the electric transmission
lines, and these payments to AEP from the Company, pursuant to a $7.8 million
20-year note, at 8% interest, which commenced January 1, 1996, amounts to
$65,400 per month. According to the Transmission Facilities Agreement, if any
other users use these transmission lines, the amount owed by SDI would decrease.
Additionally, the Company entered into a Substation Facilities Agreement with
AEP whereby AEP provided the financing for Steel Dynamics' on-site substation
and related facilities. This financing totaled $13.0 million as of January 1,
1996, and requires repayment, at 8% interest, commencing January 1, 1996, over a
15-year period, amounting to monthly payments of $125,000.
Gas. The Company uses approximately 3,200 decatherms (equivalent to 1,000
BTUs or 1,000 cubic feet) of natural gas per day. The Company holds a "Primary
Firm" delivery contract on the Panhandle Eastern Pipeline that extends through
May 2000, costing the Company $.42 per decatherm, with a current fuel surcharge
equal to 5.72% of the gas the Company flows. The Company also has an
interruptible delivery contract with NIPSCO/NIFL/Crossroads ("LDC") that extends
through December 2000, costing the Company $.20 per decatherm with a fuel
surcharge of .2%. LDC takes the gas from the Panhandle Eastern Pipeline and
delivers it to the mini-mill. The actual purchase of the gas itself is currently
contracted through the end of July 1997 for $1.91 per decatherm, and, upon its
expiration the Company expects to purchase its natural gas supply needs in the
spot market until such time as it determines that long term contracts are at
more attractive prices.
The Company maintains a liquid propane tank farm on site with sufficient
reserves to sustain operations for approximately two weeks in the event of an
interruption in the natural gas supply. During February 1996, when severe
weather conditions disrupted the flow of natural gas, the Company operated on
liquid propane for a period of eight days.
Oxygen. Steel Dynamics uses oxygen, as well as nitrogen and argon for
production purposes, which it purchases from Air Products, which built a plant
on land adjacent to the Butler, Indiana mill site. Air Products uses its plant
not only to supply the Company, but also to provide oxygen and other gasses to
other industrial customers. As a result, SDI has been able to effect very
favorable oxygen and other gas purchase prices on the basis of Air Products'
volume production.
COMPETITION
Competition within the steel industry can be intense. The Company competes
primarily on the basis of price, quality, and the ability to meet customers'
product specifications and delivery schedules. Many of the Company's competitors
are integrated steel producers which are larger, have substantially greater
capital resources and experience, and, in some cases, have lower raw material
costs than the Company. The Company also competes with other mini-mills which
may have greater financial resources. The highly competitive nature of the
industry, combined with excess production capacity in some products, may in the
future exert downward pressure on prices for certain of the Company's products.
In addition, in the case of certain product applications, steel competes with
other materials, including plastics, aluminum, graphite composites, ceramics,
glass, wood and concrete.
U.S. The Company's products compete with many integrated hot-rolled coil
producers, such as Rouge Steel Co. and National Steel Corp.'s Great Lakes Steel
Division in the Detroit area, LTV Steel Co., Inc., Inland Steel Co., Bethlehem
Steel Corp., U.S. Steel, Acme Steel Co. and Beta Steel Corp. in the northwest
Indiana and Chicago area, as well as a growing number of hot-rolled mini-mills,
such as Nucor's Crawfordsville, Indiana and Hickman, Arkansas facilities and
Gallatin Steel Company's mini-mill in Ghent, Kentucky, Delta Steel, the
BHP/Northstar joint venture in Delta, Ohio, and TRICO Steel's mini-mill in
Alabama. Despite significant reductions in raw steel production capacity by
major U.S. producers over the last decade, the U.S. industry continues to be
adversely affected, from time to time, by excess world capacity.
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According to the AISI, annual U.S. raw steel production capacity was reduced
from approximately 154 million tons in 1982 to approximately 116 million tons in
1996. This reduction resulted in higher utilization rates. Average utilization
of U.S. industry capacity improved from approximately 61% in the 1982 to 1986
period to approximately 83% in the 1987 to 1991 period, was approximately 89% in
1993, 93% in 1994 and 1995, and 91% in 1996. Recent improved production
efficiencies also have begun to increase overall production capacity in the
United States. Excess production capacity exists in certain product lines in
U.S. markets and, to a greater extent, worldwide. Increased industry
overcapacity, coupled with economic recession, would intensify an already
competitive environment.
Over the last decade, extensive downsizings have necessitated costly
restructuring charges that, when combined with highly competitive market
conditions, have resulted at times in substantial losses for some U.S.
integrated steel producers. A number of U.S. integrated steel producers have
gone through bankruptcy reorganization. These reorganizations have resulted in
somewhat reduced capital costs for these producers and may permit them to price
their steel products at levels below those that they could have otherwise
maintained.
An increasing number of mini-mills have entered or are expected to enter
the EAF-based thin-slab/flat-rolled steel market in the next several years.
These mini-mills have cost structures and management cultures more closely akin
to those of the Company than to the integrated producers. Flat-rolled mini-mill
production capacity increased from 4.0 million tons in 1994 to approximately 7.3
million tons in 1996, and industry sources expect this cumulative flat-rolled
mini-mill capacity to reach up to 14.9 million tons in 1997 and up to 18.7
million tons in 1998. The Company's penetration into the total flat-rolled steel
market is limited by geographic considerations, to some extent by gauge and
width of product specifications, and by metallurgical and physical quality
requirements. Based on product type and geographic location, the Company
believes it will most closely compete with the following mini-mills: Nucor's
Crawfordsville, Indiana facility, Gallatin Steel's Ghent, Kentucky facility,
Delta Steel's Delta, Ohio facility, and, to a more limited extent, Nucor's
Hickman, Arkansas facility, Nucor's Berkeley County, South Carolina facility,
and TRICO Steel's facility in northern Alabama. Of the anticipated 14.9 million
tons of 1997 flat-rolled mini-mill capacity, the Company believes that it will
most closely compete for approximately 4.6 million of those flat-rolled tons.
Each of these mills will produce hot-rolled product. However, an affiliate of
Delta Steel is expected to produce hot-rolled galvanized product, and Nucor's
Crawfordsville, Indiana facility produces cold-rolled and cold-rolled galvanized
products.
Non-U.S. U.S. steel producers face significant competition from certain
non-U.S. steel producers who may have lower labor costs. In addition, U.S. steel
producers may be adversely affected by fluctuations in the relationship between
the U.S. dollar and non-U.S. currencies. Furthermore, some non-U.S. steel
producers have been owned, controlled or subsidized by their governments, and
their decisions with respect to production and sales may be, or may have been in
the past, influenced more by political and economic policy considerations than
by prevailing market conditions. Some non-U.S. producers of steel and steel
products have continued to ship into the U.S. market despite decreasing profit
margins or losses. If certain pending trade proceedings ultimately do not halt
or otherwise provide relief from such trade practices, other relevant U.S. trade
laws are weakened, world demand for steel eases or the U.S. dollar strengthens,
an increase in the market share of imports may occur, which could adversely
affect the pricing of the Company's products. The costs for current and future
environmental compliance may place U.S. steel producers, including the Company,
at a competitive disadvantage with respect to non-U.S. steel producers, which
are not subject to environmental requirements as stringent as those in the
United States.
BACKLOG
The Company's hot-rolled steel coil backlog, reflecting orders through the
end of the third quarter of 1997 (the latest date for which Steel Dynamics has
accepted orders), amounted to approximately $100 million (277,967 tons) at June
30, 1997.
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FACILITIES
The Company's plant is located on a greenfield site of approximately 800
acres in DeKalb County, Indiana, strategically located within eight miles of
Interstate 69 (north-south), twenty miles from the Indiana Toll Road System
(east-west Interstate 80). In addition, a cross-country high pressure gas line
is located three-quarters of a mile north of the plant, and a 14-mile, 345,000
volt transmission line brings electrical power to the Company's own electrical
sub-station. In addition, two truck scales and one rail scale have been
installed. The land was formerly farm land, and 67 acres are still being farmed.
The site is served by the east-west rail lines of Conrail, the north-south lines
of the Norfolk & Southern Railway, and the east-west lines of CSX. Railroad
spurs and switching apparatus link the plant with all three railroads. Within
the plant site, the Company has 10 1/2 miles of railroad track, serving both the
plant and the on-site 20-acre scrap yard facility operated by the Company to
receive, hold, and stage its scrap. Water is supplied by two 12" 2,500 gallon
per minute wells which are located on site and which pump out of an aquifer,
located between 160 and 190 feet down, into a 13.0 million gallon reservoir.
Water from this reservoir is pumped to a service water piping system that links
the reservoir to the various water treatment facilities that support the
steelmaking processes.
There are three main buildings that comprise the "hot" mill. They are the
melt shop building, containing four bays totaling 103,740 square feet, the
tunnel furnace building, which is 675 feet long and which is 54,511 square feet
in area (connecting the melt shop to the hot strip mill), and the hot strip mill
building, 283,558 square feet in size, consisting of two bays in width and is
1,146 feet in length. The tunnel furnace building is serviced by a 10-ton crane,
and the hot mill building is serviced by three 80 ton cranes. Office buildings
on site include a general administrative corporate headquarters building,
consisting of 12,000 square feet, a building for the hot rolling, engineering
and safety personnel, consisting of 6,000 square feet, a melt shop office,
consisting of 2,000 square feet, and a shipping office of 1,000 square feet.
There is an employee services building of 8,000 square feet that includes a
shower and locker room facility, as well as the plant cafeteria. A 22,000 square
foot warehouse has been constructed to receive, store, and manage necessary
parts and materials to maintain the plant. The cold mill facility consists of a
continuous pickle line, two hot-dipped galvanizing lines, a semi-tandem
two-stand reversing mill, batch annealing furnaces, and a temper mill, all
housed within a new 550,000 square foot facility contiguous to the hot strip
mill building.
Other support facilities include a bag house and a water treatment system
with buildings located at various places in the plant. The bag house captures
the gasses from the melting operation and cleans them to comply with all federal
emissions standards. The bag house is capable of cleaning 1.5 million cubic feet
per minute of these gasses. The water treatment system cleans, cools, and
recirculates the water used by the plant in various processes at the overall
rate of 100,000 gallons per minute.
The Company considers its manufacturing and operating facilities adequate
for its needs, including the Expansion Projects, and for the foreseeable future.
Equipment failures at its plant could limit or shut down the Company's
production. From its start-up through June 30, 1997, the Company experienced
some equipment failures, none of which lasted more than two days. In order to
reduce the risk of equipment failure, SDI follows a comprehensive maintenance
and loss prevention program, has on-site maintenance and repair facilities, and
maintains an inventory of spare parts and machinery. For example, the Company
maintains a spare EAF transformer as well as spare caster parts, mechanical
parts and electrical controls for its cranes and other tools. No assurance can
be given, however, that material shutdowns will not occur in the future or that
a shutdown would not have a material adverse affect on Steel Dynamics. In
addition to equipment failures, the mill is also subject to the risk of
catastrophic loss. The Company believes that it maintains adequate property
damage insurance to provide for reconstruction of damaged equipment, as well as
business interruption insurance to mitigate losses resulting from any production
shutdown caused by an insured loss.
The Company's executive offices are located at 4500 County Road 59, Butler,
Indiana 46721 and its telephone number is (219) 868-8000.
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ENVIRONMENTAL MATTERS
The Company's operations are subject to substantial and evolving
environmental laws and regulations concerning, among other things, emissions to
the air, discharges to surface and ground water, noise control and the
generation, handling, storage, transportation, treatment and disposal of toxic
and hazardous substances. SDI believes that its facilities are in material
compliance with all provisions of federal and state laws concerning the
environment and does not believe that future compliance with such provisions
will have a material adverse effect on its results of operations or financial
conditions. Since environmental laws and regulations are becoming increasingly
more stringent, the Company's environmental capital expenditures and costs for
environmental compliance may increase in the future. In addition, due to the
possibility of unanticipated regulatory or other developments, the amount and
timing of future environmental expenditures may vary substantially from those
currently anticipated. The cost for current and future environmental compliance
may also place U.S. steel producers at a competitive disadvantage with respect
to foreign steel producers, which may not be required to undertake equivalent
costs in their operations.
Under CERCLA, the Environmental Protection Agency ("EPA") has the authority
to impose joint and several liability for the remediation of contaminated
properties upon generators of waste, current and former site owners and
operators, transporters and other potentially responsible parties, regardless of
fault or the legality of the original disposal activity. Many other states,
including Indiana, have statutes and regulatory authorities similar to CERCLA
and to the EPA. Steel Dynamics has a hazardous waste hauling agreement with The
Waste Management Company of Indiana, Inc. to properly dispose of its flue dust,
ash, and other waste products of steelmaking, but there can be no assurance
that, even through no fault of the Company, SDI may not still be cited as a
waste generator by reason of an environmental clean up at a site to which its
waste products were transported.
EMPLOYEES
SDI's work force consists of approximately 359 employees as of June 30,
1997, of which 294 are hourly and 65 are salaried personnel. Of this number, 79
are assigned to the Cold Mill and four to IDI. The Company's employees are not
represented by labor unions. The Company believes that its relationship with its
employees is good.
Performance Based Incentive Compensation Program. The Company has
established certain incentive compensation programs for its employees, designed
to encourage them to be productive by paying bonuses to groups of employees,
based on various measures of productivity. The programs are designed to reward
employees for productivity efforts. It is not unusual for a significant amount
of an employee's total compensation to consist of such bonuses.
The productivity of the employees is measured by focusing on groups of
employees and not individual performance. Three groups of employees participate
in the bonus program: production, administrative and clerical, and department
managers and officers. Each group of employees has its own bonus program or
programs. See "Management -- Employee Plans" for a description of the department
manager/officer incentive bonus.
Production employees, consisting of those directly involved in the melting,
casting and rolling processes, are eligible to participate in two cash bonus
programs: the production bonus and the conversion cost bonus programs. The
production bonus, if any, is based upon the quantity of quality product produced
that week. The amount of the production bonus is determined for and allocated to
each shift of employees. Depending upon the amount of quality product produced,
the bonus may be equal to or greater than the base hourly wage paid to an
employee. The conversion cost bonus is determined and paid on a monthly basis
based on the costs for converting raw material into finished product. The
program is intended to encourage employees to be efficient in converting the raw
materials into finished steel. Costs of raw materials, over which the production
employees have no control, are not considered.
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The Company has also established a cash bonus plan for its non-production
employees, including accountants, engineers, secretaries, accounting clerks and
receptionists. Bonuses under the plan are based upon the Company's return on
assets.
The Company has also established the 1994 Stock Option Plan, 1996 Stock
Option Plan, the Profit Sharing Plan and the Retirement Savings Plan for certain
of its employees. See "Management -- Employee Plans."
RESEARCH AND DEVELOPMENT
At the present time, the Company engages in no substantial third-party
research and development activities. Steel Dynamics, however, is continually
working to improve the quality, efficiency and cost-effectiveness of its
EAF-based thin-slab/flat-rolled CSP technology. The Company is also engaged in
development efforts in connection with the IDI Project.
PATENTS AND TRADEMARKS
The Company filed an application with the U.S. Patent and Trademark Office
to register the mark "SDI" and an accompanying design of a steel coil. The mark
was published on September 3, 1996, in the Official Gazette and not opposed
within 30 days. A notice of allowance is expected to be issued before year end.
Iron Dynamics has submitted several process patent applications to the U.S.
Patent and Trademark Office, relating to solid based production of low sulfur
direct reduced iron.
LEGAL PROCEEDINGS
The Company is not a party to any lawsuit that, if adversely resolved,
would individually or in the aggregate, have a material effect on the results of
operations or on the financial condition of the Company.
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MANAGEMENT
The following table sets forth information concerning the executive
officers and directors of the Company and its IDI subsidiary as of June 30,
1997. The Company's Board of Directors consists of ten directors. Directors and
executive officers of the Company are elected to serve until they resign or are
removed or are otherwise disqualified to serve or until their successors are
elected and qualified. Directors of the Company are elected at the annual
meeting of stockholders. The directors and executive officers of the Company,
their ages as of June 30, 1997 and positions are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Keith E. Busse............................ 54 President, Chief Executive Officer and
Director
Mark D. Millett........................... 38 Vice President of Melting and Casting and
Director
Richard P. Teets, Jr...................... 42 Vice President of Rolling and Finishing
and Director
Tracy L. Shellabarger..................... 40 Vice President of Finance, Chief Financial
Officer and Director
John W. Nolan............................. 45 Vice President of Sales and Marketing
Larry J. Lehtinen......................... 42 Vice President and General Manager of IDI
John C. Bates............................. 53 Director
Leonard Rifkin............................ 66 Director
Paul B. Edgerley(a)....................... 41 Director
William D. Strittmatter................... 41 Director
William Laverack, Jr.(a).................. 40 Director
Dr. Jurgen Kolb........................... 54 Director
</TABLE>
- ------------
(a) Member of the Audit Committee and member of the Company's Administrative
Committee under the Company's 1994 Incentive Stock Option Plan.
Keith E. Busse co-founded the Company in September 1993 and has been its
President and Chief Executive Officer and a director since its inception. Mr.
Busse is also the President and Chief Executive Officer and a director of IDI.
Previously, for a period of 21 years, he worked for Nucor in a variety of
positions, first as Division Controller and then as Vice President and General
Manager of Nucor's Vulcraft Division, and then, additionally as the Vice
President and General Manager of Nucor's Fastener Division. In 1987, he was
given the responsibility to coordinate and direct the building in
Crawfordsville, Indiana of the world's first thin-slab/flat-rolled mini-mill
(the "Crawfordsville Mini-Mill"). Mr. Busse remained with Nucor's Crawfordsville
Division as its Vice President and General Manager until his resignation in
August 1993. Mr. Busse is a director of Qualitech Steel Holdings, Inc.
Mark D. Millett co-founded the Company in September 1993 and has been its
Vice President of Melting and Casting and a director since its inception.
Previously, Mr. Millett worked for Nucor since 1982 as chief metallurgist at its
Darlington, South Carolina facility and then as manager of its Hazelett
thin-slab casting project in 1985. In 1987, Mr. Millett joined Mr. Busse's
senior management team to help build the Crawfordsville Mini-Mill, and from 1987
until his resignation in August 1993, Mr. Millett served as the Melting and
Casting Manager for the Crawfordsville Mini-Mill.
Richard P. Teets, Jr. co-founded the Company in September 1993 and has been
its Vice President of Rolling and Finishing and a director since its inception.
Previously, Mr. Teets worked for LTV Steel Co., Inc., in its engineering,
maintenance, and production areas, and in 1987, was hired by Nucor to be one of
the senior managers to assist Messrs. Busse and Millett in the construction of
the Crawfordsville Mini-Mill, overseeing the actual engineering and construction
process, including its electrical, mechanical, and environmental aspects. In
1991, Mr. Teets assumed the responsibilities for the Crawfordsville Mini-Mill's
cold-rolling and finishing operations as its Manager.
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<PAGE> 152
Tracy L. Shellabarger joined the Company as its Vice President of Finance
and Chief Financial Officer and a director in July 1994. Previously, from 1987,
Mr. Shellabarger worked for Nucor, first as its Manager of Internal Audit in its
Charlotte, North Carolina home office, and, eight months later, as its
Controller at the Crawfordsville Mini-Mill, where he also served as a member of
the senior management team that constructed and operated that facility for
Nucor.
John W. Nolan joined the Company as its Manager of Sales and Marketing in
December 1994 and was appointed Vice President of Sales and Marketing in January
1997. Prior to that, Mr. Nolan was employed by Bethlehem Steel Company as
Manager of Marketing and by Inland Steel Industries as its Manager of Sales.
Larry J. Lehtinen joined Iron Dynamics, Inc. as its Vice President and
General Manager in January 1997. Prior to that, Mr. Lehtinen worked for
Cleveland Cliffs Inc. where he was most recently Vice President of Operations
for its North American iron ore partnerships. While with Cleveland Cliffs, Mr.
Lehtinen also served as the General Manager for the Company's Empire Mining
Partnership for a two-year period. Prior to 1994, Mr. Lehtinen was with Inland
Steel Industries for 17 years, most recently serving as Vice President/General
Manager of Inland Steel Mining Co. and Manager of Iron Ore.
John C. Bates was elected a director of the Company in September 1994. Mr.
Bates is the President and Chief Executive Officer of Heidtman, which he joined
in 1963, and for which he has served as its President and Chief Executive
Officer since 1969. Mr. Bates is also a director of Heidtman and of National
City Bank, N.W.
Leonard Rifkin was elected a director of the Company in November 1994. Mr.
Rifkin has been the President and Chief Executive Officer of OmniSource since
1959 and since September 1996 has been Chairman of the Board. He is also a
director of Qualitech Steel Holdings, Inc.
Paul B. Edgerley was elected a director of the Company in September 1996.
Mr. Edgerley has been a Managing Director of Bain Capital, Inc. since May 1993
and has been a general partner of Bain Venture Capital since 1990. Mr. Edgerley
was a principal of Bain Capital Partners from 1988 through 1990. Mr. Edgerley is
also a director of GS Industries, Inc. and AMF Group, Inc.
William D. Strittmatter was elected a director of the Company in September
1994. Mr. Strittmatter is a Vice President and Senior Credit Officer of General
Electric Capital Corporation, which he joined in 1982. Mr. Strittmatter is also
Vice Chairman of Shanghai Zhadian Gas Turbine Power Generation Co., Ltd.
William Laverack, Jr. was elected a director of the Company in September
1994. Mr. Laverack is a general partner of J.H. Whitney & Co., a private equity
and mezzanine capital investment firm, which he joined in 1993. Prior to joining
Whitney, he was with Gleacher & Co., a mergers and acquisitions advisory firm,
from 1991 to 1993, and from 1985 to 1991 was employed by Morgan Stanley & Co.
Incorporated in its Merchant Banking Group. Mr. Laverack is also a director of
CRA Managed Care, Inc., The North Face, Inc. and Qualitech Steel Holdings, Inc.
Dr. Jurgen Kolb was elected a director of the Company in April 1996. Dr.
Kolb is a member of the Executive Board of Preussag Stahl AG, which he joined in
1986. Dr. Kolb is also a member of the Supervisory Board of Preussag Handel GmbH
and of Ruhrkohle Bergbau A.G., is Chairman of the Supervisory Board of Universal
GmbH and of Peiner Agrar and Huttenstoffe GmbH and is a director of Feralloy
Corporation.
Daniel M. Rifkin was elected as an alternate director of the Company in
November 1994 to serve as director of the Company in Leonard Rifkin's absence or
unavailability. Daniel M. Rifkin is the son of Leonard Rifkin. Mr. Rifkin is the
President and Chief Operating Officer of OmniSource, which he joined in 1979.
Robert C. Gay was elected as an alternate director of the Company in
September 1996 to serve as director of the Company in Mr. Edgerley's absence or
unavailability. Mr. Gay has been a managing director of Bain Capital, Inc. since
1996 and has been a general partner of Bain Venture Capital since 1989. From
1988 through 1989, Mr. Gay was a principal of Bain Venture Capital. Mr. Gay is a
Vice Chairman of the Board of Directors of IHF Capital, Inc., parent of ICON
Health & Fitness, Inc. In addition, Mr. Gay is a director of
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<PAGE> 153
Alliance Entertainment Corp., American Pad and Paper Company, GT Bicycles, Inc.,
GS Industries, Inc. and its subsidiary, GS Technologies Operating Co., Inc. and
Physio-Control International Corporation.
Molly Ferguson was elected as an alternate director of the Company in
September 1994 to serve as director of the Company in Mr. Strittmatter's absence
or unavailability. Ms. Ferguson is a Manager of Operations of General Electric
Capital Corporation, which she joined in 1987.
Michael L. Stone was elected as an alternate director of the Company in
September, 1994 to serve as a director of the Company in Mr. Laverack's absence
or unavailability. Mr. Stone is a general partner of J.H. Whitney & Co., a
private equity and mezzanine capital investment firm, which he joined in 1989.
Mr. Stone was an associate of the firm from 1989 through January 1992, at which
time he became a general partner.
Dr. Jorg Fuhrmann was elected as an alternate director of the Company in
November 1994 to serve as a director of the Company in Dr. Kolb's absence or
unavailability. Dr. Fuhrmann is a member of the Executive Board of Preussag
Stahl AG, which he joined in 1995.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation paid by the Company for services rendered for 1995 and 1996 for the
Chief Executive Officer and the three other most highly compensated executive
officers of the Company whose salary and bonus amounts exceeded $100,000
(collectively, the "Named Executive Officers"). The amounts shown include
compensation for services rendered in all capacities.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
AWARDS
ANNUAL ----------------------- PAYOUTS
COMPENSATION(1) RESTRICTED -------
--------------------- OTHER ANNUAL STOCK SECURITIES LTIP ALL OTHER
NAME AND FISCAL SALARY BONUS COMPENSATION AWARDS UNDERLYING PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) OPTIONS($) ($) ($)(1)
- ---------------------------- ------ --------- --------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Keith E. Busse, ............ 1996 $ 290,000 $ 219,000 $ -- $ -- $ 5,000 $ -- $ 1,164
President and Chief 1995 275,000 195,000 1,320
Executive Officer
Mark D. Millett, ........... 1996 175,000 115,000 -- -- 3,750 -- 431
Vice President 1995 165,000 99,000 469
Richard P. Teets, Jr., ..... 1996 175,000 115,000 -- -- 3,750 -- 525
Vice President 1995 165,000 99,000 446
Tracy L. Shellabarger, ..... 1996 135,000 81,000 1,050,837(2) -- 3,750 -- 414
Vice President and 1995 120,000 72,000 87,882(3) 366
Chief Financial Officer
</TABLE>
- ------------
(1) Represents matching contributions made by the Company under its Retirement
Savings Plan and officer's life insurance premiums.
(2) Represents forgiveness of indebtedness income to Mr. Shellabarger ($750,000)
and amounts reimbursed to him for the payment of interest on the $750,000
promissory note and taxes on the forgiveness of indebtedness income
($300,837) in connection with the cancellation of the promissory note
executed by Mr. Shellabarger for the purchase of SDI Common Stock at the
time of his employment (the "Shellabarger Note") in connection with the
November 21, 1996 initial public offering of the Company's Common Stock.
(3) Amount reimbursed for the payment of interest and taxes thereon to Mr.
Shellabarger for 1995 interest payments made by the Company on behalf of Mr.
Shellabarger on the Shellabarger Note.
54
<PAGE> 154
INCENTIVE STOCK OPTIONS
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
RATES OF STOCK
PRICE
SECURITIES APPRECIATION FOR
UNDERLYING % OF TOTAL OPTIONS EXERCISE OR OPTION TERM
OPTIONS GRANTED GRANTED TO BASE PRICE EXPIRATION -----------------
NAME (# OF SHARES) EMPLOYEES IN 1996 ($/SH) DATE 5%($) 10%($)
- -------------------------- --------------- ------------------ ----------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Keith E. Busse............ 5,000 5.3% 16.00 11-21-01 22,103 48,841
Mark D. Millett........... 3,750 4.0% 16.00 11-21-01 16,577 36,631
Richard P. Teets, Jr...... 3,750 4.0% 16.00 11-21-01 16,577 36,631
Tracy L. Shellabarger..... 3,750 4.0% 16.00 11-21-01 16,577 36,631
</TABLE>
DIRECTOR COMPENSATION
At present, no separate compensation or fees are payable to directors of
the Company for their services, other than reimbursement of expenses incurred
with respect to such services. The Company expects, however, that new directors
that are not employed by or otherwise affiliated with the Company or its
stockholders will be paid in a manner and at a level consistent with industry
practice.
COMMITTEES OF THE BOARD OF DIRECTORS
In November 1996, the Board of Directors established an Audit Committee.
The Audit Committee makes recommendations to the Board of Directors regarding
the independent auditors to be nominated for election by the stockholders and
reviews the independence of such auditors, approves the scope of the annual
audit activities of the independent auditors, and reviews such audit results.
Deloitte & Touche LLP presently serves as the independent auditors of the
Company. The Board of Directors may also establish other committees to assist in
the discharge of its responsibilities. The Board has appointed directors Paul B.
Edgerley and William Laverack, Jr. as the Administrative Committee under the
Company's 1994 Incentive Stock Option Plan.
The Board of Directors, acting as a compensation committee, will provide a
general review of the Company's compensation and benefit plans to ensure that
they meet corporate objectives. In addition, the Board of Directors will review
the Chief Executive Officer's recommendations on (i) compensation of all
officers of the Company and (ii) adopting and changing major Company
compensation policies and practices.
EMPLOYMENT AGREEMENTS
Effective as of June 24, 1994, the Company entered into an Employment
Agreement with Mr. Busse for a term of five years, to serve as President and
Chief Executive Officer. Mr. Busse received a Base Salary of $290,000 for 1996.
Mr. Busse's Base Salary for 1997 is $310,000. The Employment Agreement provides
for an annual bonus (an "Annual Bonus"). The bonus is determined by making an
award among executive employees selected by the Board of Directors in proportion
to their respective base salaries, out of an "Annual Bonus Pool" consisting of
4% of the Company's pre-tax earnings, less an amount equal to 10% of the "equity
investment" in the Company, determined as of the beginning of the year. The
Annual Bonus is subject to first, a maximum of 200% of Base Salary paid in cash,
then, a maximum of 100% of Base Salary paid in restricted stock vesting ratably
over four years. For the first five years of employment, the Annual Bonus is
guaranteed at not less than 60% of Base Salary, regardless of the Company's
profitability. In addition, Mr. Busse received an additional sum of $30,000
during 1995 and 1996, and will receive the same additional amount for 1997.
In the event that Mr. Busse's employment is terminated by the Company for
cause, Mr. Busse is entitled to compensation earned prior to the date of
termination computed pro rata up to and including the date of termination and
all further obligations of the Company will terminate. For purposes of Mr.
Busse's Employment Agreement, "cause" is defined as Mr. Busse's willful and
knowing commission of a criminal act
55
<PAGE> 155
under applicable state or federal law. In the event that Mr. Busse's employment
is terminated by the Company without "cause" or if he terminates his employment
for certain specified reasons, Mr. Busse is entitled to all compensation set
forth in his Employment Agreement, subject to Mr. Busse's reasonable duty to
mitigate his damages, and provided that compensation payable to Mr. Busse will
be reduced on a dollar for dollar basis to the extent of pre-tax compensation
received by Mr. Busse from any competitor of the Company. In the event that Mr.
Busse terminates his employment for any other reason, he will receive no further
compensation under his employment agreement. Upon termination of Mr. Busse's
employment due to his disability or death, the Company will continue paying to
Mr. Busse or his estate, as the case may be, a base salary during the remainder
of the five-year term; provided that in the case of disability, such payments
will be reduced to the extent of any benefits paid by workers' compensation, or
under any state disability benefit program or under any disability policy
maintained by the Company.
Effective June 24, 1994, the Company entered into five-year Employment
Agreements with Mr. Millett and Mr. Teets, pursuant to which Mr. Millett, as
Vice President of Melting and Casting, and Mr. Teets, as Vice President of
Rolling and Finishing, received a Base Salary of $175,000 for 1996 and will
receive a Base Salary of $187,000 for 1997. Both Mr. Millett and Mr. Teets are
entitled to an Annual Bonus, calculated in the same manner and subject to the
same limitations discussed above for Mr. Busse. The termination provisions
contained in the Employment Agreements with Messrs. Millett and Teets are
identical to those contained in the Employment Agreement with Mr. Busse.
Effective July 7, 1994, the Company entered into a four-year Employment
Agreement with Mr. Shellabarger, to serve as Chief Financial Officer, at a Base
Salary for 1996 of $135,000 ($158,000 for 1997). Mr. Shellabarger is entitled to
an Annual Bonus calculated in the same manner and subject to the same
limitations discussed above for Mr. Busse. In addition, the Company sold to Mr.
Shellabarger, at the commencement of his employment, 280,601 shares of its
Common Stock, at an aggregate purchase price of $750,100, for which he executed
the Shellabarger Note. Pursuant to the terms of his employment agreement the
Shellabarger Note was forgiven in connection with the Company's initial public
offering of its Common Stock in November 1996. See "Certain Transactions."
The termination provisions contained in Mr. Shellabarger's Employment
Agreement are substantially similar to those contained in the other Employment
Agreements. For purposes of Mr. Shellabarger's Employment Agreement, "cause" is
defined as (i) dishonesty with respect to the Company or any of its
subsidiaries; (ii) the unexcused failure, neglect, or refusal to perform his
duties and responsibilities, despite being apprised of such failure, neglect or
refusal and given a reasonable period to correct such problem; (iii) willful
misfeasance or nonfeasance of duty intended to injure or having the effects of
injuring the business or business opportunities of the Company or any of its
subsidiaries; or (iv) his conviction of a crime that materially adversely
affects the business of the Company or any of its subsidiaries, or his ability
to perform his duties and responsibilities as contemplated by the Employment
Agreement.
After the initial employment term expires, and although each of the
foregoing Employment Agreements continues only on a month-to-month basis
thereafter (unless renewed), Messrs. Busse, Millett, Teets, and Shellabarger are
entitled to six months of severance pay, at their Base Salary, if employment is
in fact not continued.
All four Named Executive Officers receive major medical, long-term
disability, and term life insurance equal to twice their Base Salaries.
Effective January 2, 1997, IDI entered into a five year Employment
Agreement with Larry J. Lehtinen as IDI's Vice President and General Manager,
with responsibility to implement the development of the IDI Process, the design
construction, start-up, and operation of the IDI production facility, and the
development and supervision of IDI's sales, licensing, and sub-licensing
activities. Mr. Lehtinen is to receive a base salary of $120,000, subject to
increase on an annual review basis, plus an annual bonus in an amount not less
than $78,000 per year for each of the first two years, and thereafter in
accordance with Steel Dynamics' Bonus Plan (as defined) under the category of a
"Manager." Mr. Lehtinen was granted a 33,672 share option, at fair market value,
under the Steel Dynamics' 1994 Incentive Stock Option Plan, on the effective
date of his Employment Agreement, and received an additional one-time cash
payment of $40,670 to offset certain
56
<PAGE> 156
expenses and/or anticipated losses, expected to be incurred by Mr. Lehtinen as a
result of his change of employment. Mr. Lehtinen is also entitled to participate
under Steel Dynamics' 1996 Incentive Stock Option Plan under the category of a
"Vice President."
EMPLOYEE PLANS
Officer and Manager Cash and Stock Bonus Plan. In October 1996, the board
of directors adopted and the stockholders approved an Officer and Manager Cash
and Stock Bonus Plan (the "Bonus Plan"), which prescribes cash and stock bonus
awards based upon the Company's profitability and the Officer's and Manager's
relative base salaries.
Under the Bonus Plan, 5% of an amount determined by subtracting from the
Company's "Adjusted Pre-Tax Net Income" an amount equal to 10% of "Stockholder's
Equity" as determined by the Company's audited Consolidated Balance Sheets, is
placed into a "Distribution Pool," from which the bonus awards are made.
Adjusted Pre-Tax Net Income for any of the Company's fiscal years, commencing
January 1, 1997, is defined as the Company's net income before taxes,
extraordinary items and bonuses payable to Participants under the Bonus Plan, as
determined by the Company's outside auditors, except that, to the extent
reasonably determinable, the effect upon Adjusted Pre-Tax Net Income of any
income and start-up expenses associated with significant capital expenditures,
for a period not to exceed twelve months following start-up, are to be excluded
from and not taken into account in determining Adjusted Pre-Tax Net Income.
"Participants" under the Bonus Plan include "Officers" and "Managers" selected
from time to time to participate in the Bonus Plan by a committee of the Board
which administers the Bonus Plan, consisting of at least two members of the
Board, each of whom should be both a "non-employee director" (as defined in Rule
16(b)-3 under Section 16 of the Exchange Act) and an "outside director" as
defined in Section 162 of the Code. The Board currently serves as the committee,
in the absence of the appointment of a separate committee. At the present time,
five Officers (the President and four Vice-Presidents) and five Managers have
been selected to participate in the Bonus Plan.
Once the Distribution Pool has been calculated, and if it is a positive
number, the Participants are entitled to receive a bonus, payable in cash and,
if the Distribution Pool is sufficient, in stock of the Company, up to the
amount prescribed in the Bonus Plan's formula. Specifically, each Participant is
entitled to receive a cash bonus in an amount determined by multiplying the
amount in the Distribution Pool by the Participant's Bonus Percentage (as
defined below), except that, with respect to an Officer, the cash bonus is not
to exceed two times the Officer's base salary and, with respect to a Manager,
the cash bonus is not to exceed the Manager's base salary. Inasmuch as Keith E.
Busse, Mark D. Millett, Richard P. Teets, Jr. and Tracy L. Shellabarger, the
four Officers currently covered by the Bonus Plan, have existing employment
agreements which provide for the payment of a cash bonus, and in order to
preclude duplication of bonus payments, the Bonus Plan provides that the amount
of any cash bonus payable to those Officers under their existing employment
agreements is to be deducted from the cash bonus, if any, payable to them under
the Bonus Plan. The "Participant's Bonus Percentage" means, in any year with
respect to a Participant, a fraction, the numerator of which is equal to either
(i) with respect to an Officer, two (2) times the Officer's base salary or (ii)
with respect to a Manager, the Manager's base salary (both (i) and (ii) are
defined as the "Participant's Adjusted Base Salary"), and the denominator of
which is equal to the sum of all the Participants' Adjusted Base Salaries.
If there is any excess in the Distribution Pool over the sum of the
aggregate cash bonuses payable under the Bonus Plan to all Participants and the
amounts deducted from the cash bonuses otherwise payable to Messrs. Busse,
Millett, Teets and Shellabarger because of bonuses already payable to them under
their employment agreements (which sum is defined as the "Adjusted Distribution
Pool"), the amount thereof is to be distributed to the Participants in the form
of "Restricted Stock." Each Participant is to receive that number of shares of
Restricted Stock having a fair market value, at the time of issuance, equal to
the product of that Participant's Bonus Percentage and the Adjusted Distribution
Pool, except that, with respect to an Officer, the aggregate fair market value
of the Restricted Stock so issued is not to exceed the Officer's Base Salary,
and, with respect to a Manager, the aggregate fair market value of the
Restricted Stock so issued is not to exceed 50% of the Manager's Base Salary.
The Bonus Plan provides that Restricted Stock will vest and become
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<PAGE> 157
nonforfeitable over a four year period. Commencing on January 1 following the
year with respect to which the Restricted Stock was issued, the stock will vest
and become nonforfeitable at the rate of 25% thereof for each full year
following the year with respect to which the Restricted Stock was issued. Upon
termination of a Participant's employment for any reason other than retirement,
all shares of Restricted Stock of that Participant which were not vested at the
time of termination of employment are required to be forfeited and returned to
the Company (although the committee, in its discretion, may waive the forfeiture
provisions). Until vested, Restricted Stock is not permitted to be transferred,
assigned, sold, pledged, or otherwise disposed of in any manner, nor subject to
levy, attachment or other legal process, and, while restricted, the stock
certificates evidencing those shares are required to be legended and held by the
Company. Subject to these limitations, however, and as long as a forfeiture has
not occurred, the Participant is treated as the owner of the Restricted Stock
with full dividend and voting rights.
The total number of shares of Common Stock of the Company reserved for
distribution pursuant to the Restricted Stock portion of the Bonus Plan is
450,000 shares, subject to adjustment in the event of any stock dividends, stock
splits, combinations or exchanges of shares, recapitalizations or other changes
in the capital structure of the Company, as well as any other corporate
transaction or event having any effect similar to any of the foregoing. If any
such event occurs, the aggregate number of shares reserved for issuance under
the Bonus Plan would be adjusted to equitably reflect the effect of such
changes. The Bonus Plan commenced with the Company's fiscal year beginning
January 1, 1997, however, no cash or stock bonuses under this Bonus Plan will
accrue until after the conclusion of the Company's 1997 fiscal year.
The Company has also established other bonus plans for its employees. See
"Business -- Employee."
Stock Option Plans. The following general discussion of certain features
of the Company's 1994 Incentive Stock Option Plan (the "1994 Plan") and the 1996
Incentive Stock Option Plan (the "1996 Plan") is subject to and qualified in its
entirety by reference to the 1994 Plan and the 1996 Plan, copies of which have
been filed as exhibits to the Registration Statement of which this Prospectus is
a part.
1994 Incentive Stock Option Plan. In December 1994, the Company adopted
the 1994 Plan, which was approved by stockholders in March 1995. Under the 1994
Plan, the Company's Board of Directors, or a committee designated by the Board
of Directors, grants to managers, supervisors and professionals of the Company
incentive stock options ("ISOs") intended to qualify as such under Section 422
of the Internal Revenue Code of 1986, as amended (the "Code"). However, to the
extent that the aggregate fair market value (determined as of the time of the
option grant) of all shares of Common Stock with respect to which ISOs are first
exercisable by an individual optionee in any calendar year (under all plans of
the Company and any parent or subsidiary) exceeds $100,000, the excess of the
options over $100,000 will be issued as nonstatutory stock options, not
qualifying as ISOs. In any fiscal year of the Company, no employee may be
granted options to purchase more than 300,000 shares of the Company's Common
Stock. The exercise price of an ISO granted to any participant is the fair
market value at the time of the grant (110% of fair market value in the case of
an ISO granted to a 10% stockholder). One-third of the ISOs granted to an
employee under the 1994 Plan become exercisable six months after the date of
grant, and two-thirds of the ISOs become exercisable on the fifth anniversary of
the date of grant, or at such time and subject to such other terms and
conditions as determined by the Board of Directors or the Administrative
Committee. In no event will exercise be permitted after ten years from the date
of grant (five years, in the case of an ISO granted to a 10% stockholder). If an
option expires or terminates without having been exercised in full, the
unpurchased shares will continue to be available for award under the 1994 Plan.
An ISO may be exercised during the life of the participant solely by the
participant or the participant's duly appointed guardian or personal
representative. The total number of shares of Common Stock available for awards
under the 1994 Plan is 1,102,765 shares, subject to adjustment for future stock
splits, stock dividends and similar events. As of June 30, 1997, options for
763,236 shares of Common Stock had been issued under the 1994 Plan, of which
options for 62,043 shares had been exercised.
Awards under the 1994 Plan, through December 31, 1996, were determined by
the Board of Directors, in its discretion. Effective January 1, 1997, awards
under the 1994 Plan are determined by the Administrative Committee, consisting
of two members of the Board each of whom is a "non-employee director," as
defined in
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<PAGE> 158
Rule 16(b)-3 promulgated under Section 16 of the Securities Exchange Act of 1934
and an "outside director" as that term is used in Section 162 of the Code and
the Regulations thereunder.
On January 10, 1997, the Company filed a Registration Statement on Form
S-8, to register, under the Securities Act of 1933, as amended, the issuance of
all 1,102,765 shares of Common Stock available for awards under the 1994 Plan.
1996 Incentive Stock Option Plan. In October 1996, the Company adopted and
the stockholders approved the 1996 Plan. The 1996 Plan covers all full-time
employees of SDI (approximately 359 employees as of June 30, 1997) and its
subsidiaries, including officers, department managers, supervisors, professional
staff, and hourly employees, and provides for automatic semi-annual grants of
stock options to all such employees, by position category, in the following
amounts, based upon the fair market value of the Company's Common Stock on each
semi-annual grant date, with an exercise price equal to the same fair market
value on such date (110% of fair market value in the case of 10% stockholders):
<TABLE>
<CAPTION>
GRANTS SEMI-ANNUAL
POSITION PER YEAR GRANT VALUE
------------------------------------------------------- -------- -----------
<S> <C> <C>
President.............................................. 2 $80,000
Vice-President......................................... 2 60,000
Vice-President......................................... 2 45,000
Manager................................................ 2 30,000
Supervisors/Professionals
Grade 3.............................................. 2 15,000
Grade 2.............................................. 2 12,500
Grade 1.............................................. 2 10,000
Hourly................................................. 2 2,500
</TABLE>
The stock options are intended to qualify as ISOs under the Code, except
that to the extent that the aggregate fair market value (determined as of the
time of the option grant) of all shares of Common Stock with respect to which
ISOs are first exercisable by an individual optionee in any calendar year (under
all plans of the Company and any parent or subsidiary) exceeds $100,000, the
excess of the options over $100,000 will be issued as nonstatutory stock
options, not qualifying as ISOs. In any fiscal year of the Company, no employee
may be granted options to purchase more than 300,000 shares of the Company's
Common Stock.
The 1996 Plan is a five-year plan, which terminates December 31, 2001.
Options issued under the 1996 Plan become exercisable six months after the date
of grant and must be exercised no later than five years thereafter. Subject to
certain exceptions, the employee must remain in the continuous employment of the
Company or any of its subsidiaries from the date of grant to and including the
date of exercise. Options are not transferable, except by will or pursuant to a
qualified domestic relations order, or as permitted under Section 422 of the
Code or under applicable Securities and Exchange Commission rules, and may be
exercised, during the optionee's lifetime, only by the optionee. No shares of
Common Stock may be issued until full payment has been made, and an optionee has
no right to any dividends or other rights of a stockholder with respect to
shares subject to an option until such time as the stock has actually been
issued in the optionee's name in accordance with the 1996 Plan. If an option
expires or terminates without having been exercised in full, the unpurchased
shares will continue to be available for award under the 1996 Plan.
An Administrative Committee, when appointed by the Board of Directors, is
to administer the 1996 Plan. Such Committee must consist of at least two members
of the Board, each of whom must be both a "non-employee director," as defined in
Rule 16(b)-3 promulgated under Section 16 of the Securities Exchange Act of
1934, and an "outside director" as that term is used in Section 162 of the Code
and the regulations thereunder. Currently, however, in the absence of the
appointment of a Committee by the Board, the Board is serving as the Committee.
The Committee is required to administer the 1996 Plan so as to comply at all
times with Rule 16(b)-3 of the Exchange Act and Sections 162, 421, 422, and 424
of the Code.
The Board may amend, alter, or discontinue the 1996 Plan at any time and
from time to time. The total number of shares of Common Stock available for
award under the 1996 Plan is 1,403,000, subject to
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adjustment for future stock splits, stock dividends and similar events. As of
June 30, 1997, options for 185,896 shares of Common Stock have been issued under
the 1996 Plan, of which 939 had been exercised.
On May 21, 1997, the Company filed a Registration Statement on Form S-8, to
register under the Securities Act, the issuance of all 1,403,000 shares of
Common Stock available for awards under the 1996 Plan.
Profit Sharing Plan. Steel Dynamics has also established a Profit Sharing
Plan, for eligible employees. The plan is a "qualified plan" for federal income
tax purposes. Under the Profit Sharing Plan, the Company allocates each year to
a trust fund such sum, if any, as the Board of Directors determines, up to an
amount equal to 15% of the wages paid to Profit Sharing Plan participants
("profit sharing pool"). The profit sharing pool is used to fund the Profit
Sharing Plan as well as a separate cash profit sharing bonus which is paid to
employees in March of the following year. The allocation between the Profit
Sharing Plan contribution and the cash bonus amount is determined by the Board
of Directors each year. Employees become eligible to participate in the Profit
Sharing Plan after they have completed 30 days of employment with the Company.
An employee is entitled to a Profit Sharing Plan allocation only if that
employee has worked at least 1,000 hours during the year. An employee becomes
fully vested over a period of seven years of service with the Company, subject
to prior vesting in the event of retirement, death or disability. Contributions
to the Profit Sharing Plan by Steel Dynamics are deductible by the Company and
the contributions and the income earned thereon are not taxable to an employee
until actually received by the employee at a later date.
Retirement Savings Plan. SDI has also established a Retirement Savings
Plan for eligible employees, which is also a "qualified plan" for federal income
tax purposes. Employees become eligible to participate in the Retirement Savings
Plan on the first day of the month following the date of employment with the
Company. Contributions to the Retirement Savings Plan by the employees may be
made on a pre-tax basis and the income earned on such contributions is not
taxable to an employee until actually received at a later date. Generally,
employees may contribute on a pre-tax basis up to 8% of their eligible
compensation. SDI matches employee contributions in an amount equal to a minimum
of 5% of the employee's pre-tax contribution, subject to certain applicable tax
law limitations and to profitability levels of the Company. Employees are
immediately 100% vested with respect to their pre-tax contributions and the
Company's matching contributions. Contributions by Steel Dynamics are deductible
by the Company and contributions and the income earned thereon are not taxable
to the employee until actually received.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The full Board of Directors acts as a compensation committee. See
"-- Committees of the Board of Directors."
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS.
The Company's Amended and Restated Articles of Incorporation (the
"Articles") limit the liability of directors by providing that the Company shall
indemnify an individual made a party to a proceeding, because the individual is
or was a director, against liability incurred in the proceeding if the
individual's conduct was in good faith, and if the individual reasonably
believed, in the case of "official conduct" with the Company, that the
individual's conduct was in its best interests (or at least that the
individual's conduct was not opposed to the Company's best interests), and, in
the case of any criminal proceeding, that the individual either had reasonable
cause to believe that his conduct was lawful, or had no reasonable cause to
believe that his conduct was unlawful. These subsections prohibit indemnity if a
director is found liable in a proceeding by the Company against the director (or
a stockholder derivative action), or in connection with a proceeding in which
the director has been adjudged liable for having improperly received a personal
benefit in his capacity as a director. Further, in a direct action by the
Company (or in a derivative action), indemnification is permitted but only to
the extent of reasonable expenses incurred by the director in connection with
the proceeding.
The underlying statutory standard for director liability in Indiana,
however, is broad, providing that a director is not liable for any action taken
as a director, or any failure to take any action, unless the director has
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breached or failed to perform the duties of the director's office, and the
breach or failure to perform constitutes willful misconduct or recklessness.
CERTAIN TRANSACTIONS
In 1996 and the six months ended June 30, 1997, the Company has sold
279,000 tons and 188,138 tons, respectively, of its hot bands to Heidtman (and
its affiliated companies) for $91.8 million and $66.1 million, respectively,
pursuant to a six-year "off-take" agreement. See "Business -- The Company's
Customers and Markets." John Bates is the President and Chief Executive Officer
of Heidtman and is a member of Steel Dynamics' Board of Directors, designated by
the Keylock Investments Limited stockholder in which Heidtman and Mr. Bates own
a controlling interest, and by the Mazelina Anstalt stockholder (collectively,
the owners of 5,823,097 shares of the Company's Common Stock, or 12.2% of the
total outstanding shares prior to the offerings). Keylock Investments Limited
was one of the Company's initial investors, becoming a stockholder in September
1993. Pursuant to the Company's off-take agreement with Heidtman, Heidtman has a
6-year obligation to purchase from the Company, and the Company is obligated to
sell to Heidtman, at least 30,000 tons of the Company's hot band products per
month. Heidtman also has priority purchase rights to the Company's secondary and
field claim material. The Company's pricing to Heidtman is determined by
reference to the lowest prices charged by other thin-slab mini-mills or
conventional mills for the same products, and the Company cannot charge Heidtman
higher prices than the lowest prices at which it offers its products to any
other customer. In addition, in 1995 the Company sold approximately 32
unimproved acres of its plant site to Heidtman for $96,000, for the construction
by Heidtman of a steel center processing and storage facility. See "Principal
and Selling Stockholders."
Pursuant to an "off-take" agreement, during 1996 and the six months ended
June 30, 1997, the Company sold 85,800 tons and 56,230 tons, respectively, of
its steel coil to Preussag for an aggregate of $29.9 million and $20.4 million,
respectively. Under this agreement, the Company is obligated to sell to
Preussag, and Preussag is required to purchase, not less than 12,000 tons per
month of the Company's available products, for either domestic or export use or
resale, at market prices determined by reference to the Company's price sheet
and by reference to prevailing competitive market prices charged to large
customers by other mills within the Company's marketing area. In addition,
Preussag has been appointed as the Company's preferred distributor for all
export sales to customers outside the United States, Canada and Mexico. See
"Business -- The Company's Customers and Markets." Dr. Jurgen Kolb, a director
of the Company, is a member of the Executive Board of Preussag and Preussag owns
6,089,865 shares of Common Stock, or 12.7% of the total outstanding shares prior
to the offerings. See "Principal and Selling Stockholders."
Pursuant to a scrap purchasing agreement with OmniSource, during 1996 and
the six months ended June 30, 1997, the Company purchased an aggregate of
1,068,609 tons and 452,162 tons, respectively, of steel scrap for $145.5 million
and $58.5 million, respectively, and paid OmniSource a total of $1.8 million and
$0.8 million, respectively, in fees. See "Business -- Steel Scrap and Scrap
Substitute Resources." Leonard Rifkin is the Chairman of the Board and Chief
Executive Officer of OmniSource and is a member of Steel Dynamics' Board of
Directors designated by the Heavy Metal, L.C. stockholder (the owner of
5,667,612 shares of the Company's Common Stock, or 11.8% of the total
outstanding shares prior to the offerings). Leonard Rifkin, together with
members of his family, and OmniSource collectively own a controlling interest in
Heavy Metal, L.C. See "Principal and Selling Stockholders." Heavy Metal, L.C.
was one of the Company's initial investors, becoming a stockholder in September
1993. Pursuant to the OmniSource scrap purchasing agreement, OmniSource acts as
the exclusive scrap purchasing agent for the Company's steel scrap, which may
involve sales of OmniSource's own scrap, at the prevailing market prices which
OmniSource can get for the same product, or it may involve brokering of general
market scrap, for which the Company pays whatever is the lowest market price for
which OmniSource can purchase that product. OmniSource is paid a commission per
gross ton of scrap received by the Company at its mini-mill. In addition,
OmniSource maintains a scrap handling facility, with its own equipment and
staff, on the Company's plant site. OmniSource does not pay rent for this
facility.
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The Company has entered into a five-year "off-take" agreement with
Qualitech, pursuant to which the Company has agreed to purchase from Qualitech
approximately 300,000 tonnes of iron carbide that Qualitech intends to produce
commencing in 1998. See "Business -- Steel Scrap and Scrap Substitute
Resources." Steel Dynamics owns approximately 4.0% of the common stock of
Qualitech Steel Holdings, Inc. ("Holdings"), the parent company of Qualitech. In
addition, Keith E. Busse, Leonard Rifkin, and William Laverack, directors of the
Company, also serve on Holdings' 12-member board of directors. OmniSource and
Leonard Rifkin, affiliates of Heavy Metal, L.C., one of the Company's
stockholders, own approximately 6% of Holdings' common stock, Whitney Equity
Partners, L.P., an affiliate of J.H. Whitney & Co., a stockholder of the Company
(of which Mr. Laverack is a general partner) owns approximately 10% of Holdings'
common stock and General Electric Capital Corporation, a stockholder of the
Company, owns approximately 1.7% of Holdings' common stock. The Company's iron
carbide supply contact with Qualitech represents approximately 45% of
Qualitech's estimated plant capacity, and the contract was considered vital to
Qualitech's successful financing of its iron carbide project, which is presently
under construction. OmniSource also has an iron carbide off-take contract with
Qualitech, for 120,000 tonnes of iron carbide annually.
The Company has entered into a "second look" export sales agreement with
Sumitomo. See "Business -- The Company's Customers and Markets." Sumitomo and
its parent Sumitomo Corporation (Japan) own in the aggregate 1,284,197 shares of
Common Stock or 2.6% of the total outstanding shares prior to the offerings. The
export sales agreement applies if Preussag declines to handle the particular
export sale. In addition, Sumitomo and IDI have entered into a Sale of Excess
Product Agreement, pursuant to which Sumitomo will represent IDI, once it is
producing DRI, in selling up to half of any of IDI's excess DRI that is not
needed by the Company for its own use and consumption. No export sales have been
made to date under this agreement.
The Company's wholly owned subsidiary, IDI, has also entered into an
agreement with Sumitomo, pursuant to which IDI has agreed to sell to or through
Sumitomo up to 50% of any DRI that IDI manufactures starting in 1998 which Steel
Dynamics does not retain for its own consumption. Such sales would be at the
then prevailing market prices, either for Sumitomo's own account or on a sales
commission basis for sale to third parties. In addition, IDI has entered into a
license agreement with Sumitomo pursuant to which Sumitomo is authorized, on an
exclusive worldwide basis, except for the United States and Canada, and except
for additional plants that IDI may wish to construct for its own use or for
SDI's use, to sublicense others or to use any proprietary know-how or other
intellectual property that constitutes the IDI Process or is part of the IDI
Project and which may be developed by IDI in connection with the manufacture of
DRI, or by Steel Dynamics either in connection with the conversion of DRI into
liquid pig iron or in connection with the use thereof in the steelmaking
process. Such license rights contemplate that Sumitomo would build and construct
plants using this technology for itself or for others within the licensed
territory. IDI is entitled to receive a one-time license fee from Sumitomo,
based upon each plant's rated production capacity, plus a negotiated royalty fee
for the use of any IDI or SDI patents that may be acquired by IDI or SDI in
connection with the enterprise. Any underlying royalties or fees that might have
to be paid to third parties would be passed through to Sumitomo or to its
sub-licensees. IDI has also agreed to afford Sumitomo an opportunity to provide
its proposed DRI plant with its raw material and equipment supplies, on a
competitive basis that is intended to secure for IDI the lowest and best prices
for the supplies and products.
In 1996, the Company sold Common Stock to certain of its existing
shareholders or their affiliates for an aggregate purchase price of $11.9
million in two interrelated private placements of Common Stock, pursuant to
agreements that were entered into during the first and second quarters of 1996.
In February 1996, the Company accepted subscriptions from these stockholders,
all "accredited" purchasers, for the purchase, at approximately $8.20 per share,
of approximately $11.9 million of Common Stock, as part of the Company's efforts
to place an aggregate of $25.0 million of Common Stock to be used in whole or in
part to finance its IDI Project. In the exercise or waiver of their limited
preemptive rights under the Stockholders Agreement stockholders, owning
collectively (prior to the purchase) approximately 78.0% of the total then
outstanding, agreed to purchase that amount. The purchase price was determined
by reference to the arm's length Stock Purchase Agreement of December 1995 with
Preussag, relating to the purchase by Preussag at that time of $50.0 million of
Common Stock at approximately $8.55 per share, which contained a provision that
contemplated the Company's sale to existing stockholders or to others of up to
$10 million of its shares of
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Common Stock at a purchase price of approximately $8.20 per share. Because of
the interrelatedness of the Company's placement of the balance of approximately
$13.0 million before the IDI Project could be undertaken, the approximately
$11.9 million private placement was not closed until September 1996, at which
time the Company also closed a $13.5 million private placement of its Common
Stock with Sumitomo and Sumitomo Corporation (Japan), which was agreed to by the
parties in April 1996, at a per share purchase price of approximately $10.51.
This purchase price was determined at arm's length by the Company's Board of
Directors, in negotiations with Sumitomo.
During August and September 1996, in connection with its Cold Mill Project,
the Company entered into two agreements with units of General Electric Company,
of which General Electric Capital Corporation, the owner of 5,750,029 of the
Company's shares of Common Stock, or 12.0% of the total outstanding shares prior
to the offerings is a wholly-owned subsidiary, for the purchase of equipment for
the Cold Mill Project in the aggregate amount of approximately $23.4 million.
This contract was entered into as a result of a competitive bidding process
conducted by the Company in the same manner that it has used in connection with
the letting of other equipment and supply agreements for its existing mini mill
and for its Cold Mill Project.
In November 1996, the Company used a portion of the proceeds from its
initial public offering to prepay all $55.0 million principal amount of certain
subordinated notes, together with accrued interest thereon and a prepayment
premium. General Electric Capital Corporation and Whitney Subordinated Debt
Fund, L.P., which owned $14.7 million principal amount and $18.5 million
principal amount, respectively, of such subordinated notes and were stockholders
of the Company.
In July 1994, the Company sold Mr. Shellabarger, the Chief Financial
Officer and a director of the Company, 280,601 shares of Common Stock, and
accepted the Shellabarger Note in partial payment of the purchase price.
Pursuant to the terms of his employment agreement, the note was forgiven in
connection with the offerings. See "Management -- Employment Agreements."
THE REGISTRATION AGREEMENT
Under a Registration Agreement dated as of June 30, 1994, as amended,
between the Company and various stockholder groups identified therein as the
"Bain Stockholders," "General Electrical Capital Corporation," "Heavy Metal,
L.C.," the "Keylock Stockholders," the "Whitney Stockholders," the "Management
Stockholders," "Preussag," and "Sumitomo" (collectively the "Stockholders"), the
Stockholders were granted certain demand and piggyback registration rights.
Demand Registrations. The Bain Stockholders and General Electric Capital
Corporation are each entitled to request two demand registrations, and the Heavy
Metal, L.C., Keylock Stockholders and Preussag are entitled to request one
demand registration each. A demand registration must be for at least 50% of the
total Company shares held by the Stockholder making the demand. In connection
with the offerings, the Bain Stockholders will be deemed to have used one demand
registration right each.
Piggyback Registrations. Whenever the Company proposes to register any of
its securities under the Securities Act (other than pursuant to a demand
registration), the Company is required to notify all holders of "Registrable
Securities" and will include all Registrable Securities requested to be included
that may be prudently sold in the offering.
All expenses incident to the Company's compliance with its obligations
under the Registration Agreement will be paid by the Company, regardless of
whether in connection with a demand registration or a piggyback registration,
and the Company has agreed to reimburse the holders of Registrable Securities
for the reasonable fees and disbursements of one legal counsel chosen by all of
them in connection with a registration.
The obligations under the Registration Agreement terminate on November 21,
2004, the seventh anniversary of a sale of the Company's Common Stock pursuant
to an effective registration statement under the Securities Act, subject to
extension for an additional six-month period under certain circumstances.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of June 30, 1997, and as adjusted to reflect
the sale of the Common Stock offered hereby, by (i) each person known by the
Company to be the beneficial owner of more than 5% of the Common Stock, (ii)
each director of the Company, (iii) each Named Executive Officer, (iv) each
Selling Stockholder and (v) all executive officers and directors as a group.
Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares of Common Stock beneficially owned
by them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERINGS NUMBER OF OFFERINGS
-------------------- SHARES BEING --------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------------ ---------- ------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C>
Heavy Metal, L.C.(1)...................... 6,233,926 13.0% -- 5,733,926 11.7%
1610 North Calhoun Street
Fort Wayne, IN 46808
Preussag Stahl AG(2)...................... 6,089,865 12.7 550,000 5,539,865 11.3
Eisenhuttenstr. 99 D-38223
Salzgitter, Germany
Bain Capital Entities(3).................. 4,043,732 8.4 151,002 297,043 *
Two Copley Place
Boston, MA 02116
General Electric Capital Corporation(4)... 5,750,029 12.0 1,486,458 4,310,000 8.8
1600 Summer Street, 5th Floor
Stamford, CT 06927
Keylock Investments Limited(5)............ 3,017,139 6.3 -- 2,917,139 5.9
17 Dame Street
Dublin 2, Ireland
Mazelina Anstalt(6)....................... 2,805,958 5.9 100,000 2,705,958 5.5
c/o Lic. Gentrud Beck
Stadtle 36
9490 Vaduz, Liechtenstein
J.H. Whitney & Co.(7)..................... 1,753,591 3.7 1,450,000 303,591 *
177 Broad Street, 15th Floor
Stamford, CT 06961
Sumitomo Corporation of America........... 513,750 1.1 160,000 353,750 *
5000 USX Tower
600 Grant Street
Pittsburgh, PA 15219
Keith E. Busse(8)......................... 1,682,909 3.5 100,000 1,582,909 3.2
Richard P. Teets, Jr.(9).................. 1,126,156 2.4 -- 1,126,156 2.3
Mark D. Millett(10)....................... 1,067,707 2.2 -- 1,067,707 2.2
Tracy L. Shellabarger(11)................. 286,751 .6 -- 286,751 *
Leonard Rifkin(12)........................ 6,239,926 13.0 -- 5,739,926 11.7
OmniSource Corporation(13)................ 1,716,525 3.6 450,000 1,266,525 2.6
1610 North Calhoun Street
Fort Wayne, IN 46808
John C. Bates(14)......................... 3,017,139 6.3 -- 2,917,139 5.9
Heidtman Steel Products, Inc.(15)......... 3,017,139 6.3 -- 2,917,139 5.9
2401 Front Street
Toledo, OH 43605
Paul B. Edgerley(16)...................... 4,043,732 8.4 -- 297,043 *
William D. Strittmatter(17)............... 5,750,029 12.0 -- 4,310,000 8.8
William Laverack, Jr.(18)................. 1,753,591 3.7 -- 303,591 *
Dr. Jurgen Kolb(19)....................... 6,089,865 12.7 -- 5,539,865 11.3
Directors and Executive Officers as a
Group (10 persons)(8)................... 31,057,805 64.9 100,000 23,171,087 47.2
Other Selling Stockholders(20)............ 2,696,569 6.1 2,696,569 -- --
(None of whom own more than 1% of the
outstanding Common Stock)
</TABLE>
(footnotes on following page)
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<PAGE> 164
- ---------------
* Less than 1%.
(1) Prior to the offerings, Heavy Metal, L.C. distributed 500,000 shares to two
of its members, who are in turn selling those shares in the offerings. Of
these shares, 450,000 were distributed to and are being sold by OmniSource
Corporation and are shown in the "Number of Shares Offered" column for
OmniSource Corporation. The other 50,000 shares were distributed to a
person included in the category of "Other Selling Stockholders" and are
included in the "Number of Shares Being Offered" column for the Other
Selling Stockholders. If the U.S. Underwriters exercise their
over-allotment option in full, Heavy Metal, L.C. will distribute another
266,525 shares to OmniSource Corporation and 33,475 shares to two of the
Other Selling Stockholders, who will then sell those shares. If the U.S.
Underwriters exercise their over-allotment option in full, the shares
beneficially owned by Heavy Metal, L.C. after the offerings would be
5,433,926.
(2) If the U.S. Underwriters exercise their over-allotment option in full, the
shares beneficially owned by Preussag Stahl AG after the offerings would be
5,039,865.
(3) Consists of 1,687,584 shares held of record by Bain Capital Fund IV, L.P.
("Fund IV"), 1,931,272 shares held of record by Bain Capital Fund IV-B,
L.P. ("Fund IV-B"), 325,278 shares held of record by BCIP Associates
("BCIP"), and 99,598 shares held of record by BCIP Trust Associates, L.P.
("BCIP Trust"), in each case as of June 30, 1997. Immediately prior to the
offerings, Fund IV and Fund IV-B distributed a portion of their shares of
the Common Stock to the general partner and their limited partners, certain
of which agreed in turn to sell an aggregate of 2,592,998 shares in the
offerings upon consummation of such distribution. These shares so
distributed are included in the "Number of Shares Being Offered" column for
General Electric Capital Corporation (for 46,429 shares) and the Other
Selling Stockholders (for 2,546,569 shares). The aggregate number of shares
distributed by Fund IV and Fund IV-B to the limited partners thereof was
distributed equally on a pro rata basis to all limited partners of each
such Bain Capital Entity. In addition to the 151,002 shares of BCIP and
BCIP Trust and the distribution of the 2,592,998 shares, all shares to be
sold in the offerings, the number of shares beneficially owned by the Bain
Capital Entities was further reduced by the number of shares distributed by
the Bain Capital Entities to its various partners but not sold in the
offerings, to 297,043 shares.
(4) The number of shares being offered by General Electric Capital Corporation
includes 46,429 shares of Common Stock distributed immediately prior to the
offerings by Bain Capital Fund IV-B, L.P. to General Electric Capital
Corporation as a limited partner thereof, as described in footnote (3)
above, all of which are to be sold in the offerings. Including such shares,
General Electric Capital Corporation beneficially owned 5,796,458 shares,
or approximately 12.1%, of the Common Stock outstanding prior to the
offerings.
(5) Prior to the offerings, Keylock Investments Limited distributed 90,496
shares to HS Processing, Inc., an affiliate of Heidtman Steel Products,
Inc., 8,415 shares to National Material L.P. and 1,089 to Centaur, Inc.,
for a total of 100,000 shares, which are being sold by these entities in
the offerings. These shares are included in the "Number of Shares Being
Offered" column for the Other Selling Stockholders.
(6) If the U.S. Underwriters exercise their over-allotment option in full, the
shares beneficially owned by Mazelina Anstalt after the offerings would be
2,455,958.
(7) Consists of 961,060 shares held of record by Whitney 1990 Equity Fund, L.P.
(139,510 after the offerings), 240,279 shares held of record by J.H.
Whitney & Co. (72,846 after the offerings), and 552,252 shares held of
record by the Whitney Subordinated Debt Fund (91,235 after the offerings).
(8) Includes 300 shares of Common Stock held by Mr. Busse's minor son, with
respect to which Mr. Busse disclaims beneficial ownership. Includes 5,000
shares subject to currently exercisable stock options or stock options
exercisable within 60 days. If the U.S. Underwriters exercise their
over-allotment option in full, the shares beneficially owned by Mr. Busse
after the offerings would be 1,532,909.
(9) Includes 3,750 shares subject to currently exercisable stock options or
stock options exercisable within 60 days.
(10) Includes 3,750 shares subject to currently exercisable stock options or
stock options exercisable within 60 days.
(11) Includes 3,750 shares subject to currently exercisable stock options or
stock options exercisable within 60 days, and also includes 2,400 shares
owned by Mr. Shellabarger's wife for the benefit of Mr. Shellabarger's
minor children.
(footnotes continued on following page)
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<PAGE> 165
(12) Includes 6,239,926 shares of Common Stock held of record for its members by
Heavy Metal, L.C. that Mr. Rifkin may be deemed to beneficially own due to
his relationship with other beneficial owners of that entity. It also
includes 500,000 shares of Common Stock which Heavy Metal, L.C. has
distributed to OmniSource Corporation and to one of the Other Selling
Stockholders immediately prior to the offerings, which OmniSource
Corporation and such Other Selling Stockholder are selling in the
offerings. Mr. Rifkin disclaims beneficial ownership of all but 593,018 of
these shares, none of which are being sold in the offerings.
(13) Includes 1,716,525 shares of the 6,233,926 shares of Common Stock held of
record for its members by Heavy Metal, L.C., 450,000 of which were
distributed by Heavy Metal, L.C. to OmniSource Corporation immediately
prior to the offerings and which OmniSource Corporation are selling in the
offerings. If the U.S. Underwriters exercise their over-allotment option in
full, Heavy Metal, L.C. will distribute an additional 266,525 shares to
OmniSource Corporation which will then sell their shares. In that event,
the shares beneficially owned by OmniSource Corporation after the offerings
would be 1,000,000 shares.
(14) Consists of all 3,017,139 shares of Common Stock held of record by Keylock
Investments Limited that Mr. Bates may be deemed to beneficially own due to
his relationship with that entity. Prior to the offerings, Keylock
Investments Limited will distribute the shares noted in footnote (5) to the
entities noted therein, and these shares are included in the "Number of
Shares Being Offered" column for the Other Selling Stockholders. Mr. Bates
may be deemed the beneficial owner of some of these shares.
(15) Consists of all 3,017,139 shares of Common Stock held of record by Keylock
Investments Limited that Heidtman may be deemed to beneficially own due to
its relationship with Keylock Investments Limited. Heidtman and its
President, John C. Bates, own a controlling interest in Keylock Investments
Limited. Prior to the offerings, Keylock Investments Limited distributed
the shares noted in footnote (5) to the entities noted therein, and these
shares are included in the shares shown in the "Number of Shares Being
Offered" column for the Other Selling Stockholders.
(16) Consists of all 4,043,732 shares of Common Stock held of record by the Bain
Capital Entities, a portion of which are being sold in the offerings, that
Mr. Edgerley may be deemed to beneficially own due to his relationship with
those entities. Mr. Edgerley disclaims beneficial ownership of these
shares. See footnote (3). The "Shares Beneficially Owned After the
Offerings" column for Mr. Edgerley does not include 67,207 shares of Common
Stock, which were distributed by the Bain Capital Entities to Mr. Edgerley,
as described in footnote (3).
(17) Consists of all 5,750,029 shares of Common Stock held of record by General
Electric Capital Corporation that Mr. Strittmatter may be deemed to
beneficially own due to his relationship with this entity. Excludes 46,429
shares of Common Stock distributed by Bain Capital Fund IV-B, L.P.
immediately prior to the offerings to General Electric Capital Corporation
as a limited partner thereof, as described in footnotes (3) and (4) above,
which shares Mr. Strittmatter may be deemed to beneficially own due to his
relationship with this entity. Mr. Strittmatter disclaims beneficial
ownership of all of these shares. The shares that are being sold in the
offerings by General Electric Capital Corporation are shown in the "Number
of Shares Being Offered" column for General Electric Capital Corporation
and are not being offered by Mr. Strittmatter.
(18) Consists of all 1,753,591 shares held of record by J.H. Whitney & Co. and
its affiliated entities noted in footnote (6) that Mr. Laverack may be
deemed to beneficially own due to his relationship with those entities. Mr.
Laverack disclaims beneficial ownership of these shares. The shares that
are being sold in the offerings by J.H. Whitney & Co. and its affiliated
entities are shown in the "Number of Shares Being Offered" column for J.H.
Whitney & Co. and are not being offered by Mr. Laverack.
(19) Consists of all 6,089,591 shares held of record by Preussag Stahl AG that
Dr. Kolb may be deemed to beneficially own due to his relationship with
this entity. Dr. Kolb disclaims beneficial ownership of the shares. The
shares that are being sold in the offerings by Preussag Stahl AG are shown
in the "Number of Shares Being Offered" column for Preussag Stahl AG and
are not being offered by Dr. Kolb.
(20) Consists of 2,546,569 shares distributed to certain of the Other Selling
Stockholders immediately prior to the offerings by the Bain Capital
Entities, and 50,000 and 100,000 shares distributed immediately prior to
the offerings by Heavy Metal, L.C. and Keylock Investments Limited,
respectively. If the U.S. Underwriters exercise their over-allotment option
in full, Heavy Metal, L.C. will distribute 33,475 shares to two of the
Other Selling Stockholders who will then sell those shares. See footnotes
(1), (3) and (5) above.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a brief description of the basic terms of the Company's
Credit Agreement and the proposed indebtedness of its subsidiary, Iron Dynamics,
Inc. The following discussion does not purport to be complete and is subject to,
and is qualified in its entirety by reference to the instruments governing the
respective indebtedness. The Credit Agreement is filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
THE CREDIT AGREEMENT
The Company entered into the Credit Agreement dated as of June 30, 1997,
which amended and restated the Company's previous credit agreement, with Mellon
Bank, N.A. (the "Agent") and the lenders party thereto (the "Lenders"), which
provides for (i) a $250.0 million five-year revolving credit facility (the
"Tranche 1 Facility") for working capital and general corporate purposes; (ii) a
$100.0 million 364-day revolving credit facility (the "Tranche 2 Facility") for
capital expenditures and general corporate purposes; and (iii) a $100.0 million
term loan (the "Tranche 3 Facility"). Indebtedness outstanding under the Credit
Agreement is secured by a first priority lien on substantially all of the assets
of the Company. Borrowings under the Tranche 1 Facility are subject to a
borrowing base consisting of specified percentages of depreciated book value of
specified fixed assets, eligible inventory and receivables. Upon one week's
notice from the Company and approval of all of the Lenders, all or a portion of
the borrowings under the Tranche 2 Facility may be converted to Tranche 1
borrowings.
The Tranche 1 Facility will mature on June 30, 2002, subject to the
Company's option to extend this maturity date for an additional one year at the
end of year three (June 30, 2000) and at the end of year four (June 30, 2001),
provided that the Company's leverage ratio for the twelve month periods ending
on June 30, 2000 and on June 30, 2001, respectively, shall be less than 3.0 to
1. The Tranche 2 Facility will mature on June 30, 1998, subject to 364-day
extensions provided all of the Tranche 2 Facility lenders approve each such
extension. In the event that a Company request for an extension of the Tranche 2
Facility is not approved by such lenders, the Tranche 2 Facility shall be
converted to a five-year term loan with the principal amount of such five-year
term loan to be amortized in equal quarterly installments during the final two
years of the five-year term loan period. The Tranche 3 Facility will amortize in
equal quarterly installments during the final two years of the Tranche 3
Facility term, commencing on September 30, 2002, with the final quarterly
payment being due on June 30, 2004. Borrowings under the Tranche 1 Facility must
be repaid to the extent such borrowings exceed the borrowing base. In addition,
the Company is required to make prepayments under certain circumstances from
asset sales, insurance proceeds and condemnation awards.
Borrowings under the Tranche 1 Facility and the Tranche 2 Facility bear
interest, at the option of the Company, at (i) the "Base Rate" plus an
applicable margin ("Base Rate Option") or (ii) the "Euro-Rate" plus an
applicable margin (the "Euro-Rate Option"). Borrowings under the Tranche 3
Facility bear interest at the Euro-Rate Option. The "Base Rate" for any day is
defined as the greater of (A) the prime rate for such day or (B) .50% plus the
federal funds effective rate for such day. The "Euro-Rate" for any day is
defined as the rate for each funding segment determined by the Agent by dividing
the rate of interest quoted on the Reuter's screen ISDA page to be the average
of the rates per annum for deposits in dollars offered to major money center
banks in the London interbank market two business days prior to the first day of
the funding period in amounts comparable to the funding segment and with
maturities comparable to such funding period by 1.00 minus the Euro-Rate Reserve
Percentage. The Euro-Rate Reserve Percentage is the percentage as determined by
the Agent which is in effect on such day as prescribed by the Board of Governors
of the Federal Reserve System representing the maximum reserve requirement with
respect to eurocurrency funding of a member bank.
The Credit Agreement restricts the Company's ability to incur additional
indebtedness, except (i) licensing or royalty fees payable to SMS
Schloemann-Siemag AG; (ii) accounts payable to trade creditors arising out of
purchases of goods or services in the ordinary course of business, (iii) certain
indebtedness secured by purchase money liens; and (iv) unsecured indebtedness in
an aggregate principal amount at any one time not greater than $10.0 million. In
addition, the Credit Agreement prohibits the Company from
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making capital expenditures in any fiscal year in excess of an aggregate amount
of $50.0 million, unless the Company shall have furnished to the Agent
projections satisfactory to a majority in committed dollar amount of the Lenders
which demonstrate that the Company will satisfy the Financial Covenants (as
defined below). The Company is also prohibited from making any loans or advances
to, or making an investment in other entities except, among other things, (i)
investments in subsidiaries, partnerships or other joint ventures related to the
Company's steel production business which do not exceed (A) $50.0 million plus
35% of the cumulative annual change in net worth of the Company and its
subsidiary in the case of investments in entities in which the Company or its
subsidiary has an equity interest equal to or greater than 10% of the total
equity interests in such entity, or (B) $10.0 million plus 25% of the cumulative
annual change in net worth of the Company and its subsidiary in the case of
other investments and (ii) an investment in IDI not exceeding $30.0 million and
funded solely with the proceeds of the issuance of equity securities. The Credit
Agreement also prohibits the Company from creating any liens on its properties
except (i) liens created in connection with its indebtedness under the Credit
Agreement and in connection with its existing indebtedness; (ii) liens created
and/or deposits made in the ordinary course of business for taxes and
assessments, workmen's compensation, unemployment insurance and other social
security obligations, bids, surety and appeal bonds and the like; and (iii)
purchase money liens on assets acquired in an aggregate amount not to exceed
$5.0 million. The Credit Agreement contains additional restrictive covenants,
including among others, covenants restricting the Company and its subsidiary
with respect to entering into certain contracts, disposition of property or
assets, payment of dividends, providing guarantees, entering into sale-leaseback
transactions, entering into transactions with affiliates, mergers and
consolidations and the modification of certain agreements. In addition, the
Credit Agreement requires the Company to meet certain financial tests (the
"Financial Covenants"), including maintaining (i) its leverage ratio at or below
5.0 to 1 for any period of four consecutive fiscal quarters; (ii) its tangible
net worth at or above the sum of $187 million plus 50% of cumulative net income
at such time; and (iii) its ratio of EBITDA to interest expense at not less than
2.0 to 1 for any period of four consecutive fiscal quarters.
The failure of the Company to satisfy any of the covenants will constitute
an event of default under the Credit Agreement, notwithstanding the Company's
ability to meet its debt service obligations. The Credit Agreement also contains
customary events of default, including the nonpayment of principal, interest,
fees and other amounts, change of control, change of management and
cross-defaults to certain other obligations of the Company and certain events
including bankruptcy, reorganization and insolvency of the Company, Heidtman or
OmniSource.
THE IDI FINANCING
IDI, the wholly owned subsidiary of the Company, expects to receive a
commitment during the third quarter of 1997 for the $60.0 million senior secured
financing facility, the IDI Financing, to finance a portion of the IDI Project.
This anticipated credit facility, as currently being discussed with a group of
lenders would include (i) a $50.0 million eight-year standby construction and
term loan facility (the "IDI Term Facility") for the construction and start-up
of a DRI production facility; and (ii) a $10.0 million eight-year revolving
credit facility (the "IDI Revolving Facility") for working capital and letters
of credit for import requirements. The IDI Term Facility and the IDI Revolving
Facility will be ratably secured by substantially all of the assets of IDI, and
will be further supported by a "take or pay" off-take supply agreement with the
Company for all of IDI's DRI production with an agreement term 18 months longer
than the maturity date of the IDI Financing, and with pricing of the DRI product
tied to market prices of prompt industrial scrap with a ceiling and floor
sufficient to provide for IDI's operating costs and debt service.
The IDI Term Facility will amortize by semi-annual payments beginning in
the year 2000 at 5% of the original principal amount, and increasing to 17.5% on
the final maturity date. In addition, IDI will be required to make prepayments
on the IDI Term Facility under certain circumstances from asset sales, insurance
proceeds and condemnation awards. Borrowings under the IDI Revolving Facility,
upon preliminary acceptance of the DRI production facility, will be subject to a
borrowing base consisting of specified percentages of raw materials, finished
DRI product and accounts receivables. Borrowings under the IDI Revolving
Facility will be required to be repaid to the extent such borrowings exceed the
borrowing base.
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Borrowings under the IDI Financing will bear interest at floating rates tied to
either the Base Rate (as defined above) or the Euro-Rate (as defined above), at
the option of IDI.
In addition to the "take or pay" off-take supply agreement with the
Company, the lenders will require that the Company provide construction
management services to IDI, as well as a package of coordinated completion and
performance guarantees (including repayment of all amounts outstanding under the
IDI Financing in the event the IDI Project fails to achieve a pre-determined
level of performance by a date certain) (the "Assurance Package"). The Assurance
Package will contain, at a minimum, (i) a coordination agreement among vendors
and contractors enabling timely resolution of disputes; (ii) satisfactory
retainages; (iii) payment schedules and payment support facilities; and (iv)
liquidated damages for delay, performance failure and performance shortfall up
to 100% of the contract price.
While it is anticipated that IDI will receive a commitment for the IDI
Financing substantially in accordance with the preceding terms, there can be no
assurance that the commitment will be received or that the IDI Financing will be
consummated.
DESCRIPTION OF CAPITAL STOCK
The following summary of certain provisions of the Common Stock does not
purport to be complete and is subject to, and qualified in its entirety by, the
provisions of the Articles and Bylaws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part, as
well as by the provisions of Indiana's law. The Company's authorized capital
stock consists of 100,000,000 shares of Common Stock, par value $.01 per share.
As of June 30, 1997, there were 47,866,323 shares of Common Stock issued and
outstanding, that were beneficially owned by approximately 6,250 stockholders.
As of June 30, 1997, 885,784 shares of Common Stock were reserved for issuance
upon exercise of outstanding stock options.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders, including the
election of directors. The Articles do not provide for cumulative voting in the
election of directors and, thus, holders of a majority of the shares of Common
Stock may elect all of the directors standing for election.
All holders of Common Stock are entitled to receive ratably such dividends,
if any, as may be declared from time to time by the Board of Directors in its
discretion from funds legally available therefor. Upon the liquidation,
dissolution or winding-up of the Company, the holders of Common Stock are
entitled to receive ratably the net assets of the Company that are available
after the payment of all debts and liabilities. Holders of Common Stock have no
preemptive rights or rights to convert their Common Stock into any other
securities, nor are there any redemption or sinking fund provisions applicable
to the Common Stock.
All outstanding shares of Common Stock are, and the shares to be issued in
the offerings will be, validly issued, fully paid, and non-assessable.
CERTAIN PROVISIONS OF INDIANA LAW REGARDING TAKEOVERS
As an Indiana corporation, the Company is subject to certain provisions of
Indiana law which may discourage or render more difficult an unsolicited
takeover of the Company. There are two principal statutes relating to this issue
that constitute part of the BCL, the statute regulating "business combinations"
and the statute regulating "control share acquisitions."
Under Chapter 43 of the BCL relating to "business combinations" a
corporation (with 100 or more stockholders) may not engage in any "business
combination" with any "interested" stockholder for a period of five years
following the interested stockholder's "share acquisition date" unless the
business combination or the purchase of shares made by the interested
stockholder was approved by the corporation's board of directors prior to the
interested stockholder's share acquisition date. The term "business combination"
is broadly
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defined to apply to any merger or consolidation of the corporation and the
interested stockholder, as well as any sale, lease, exchange, mortgage, pledge,
transfer, or other disposition (in a single or a series of transactions) to or
with the interested stockholder (or any affiliate or associate thereof) of any
assets of the corporation if the transaction represents 10% or more of the
corporation's assets, outstanding shares of stock, or consolidated net income of
the corporation. Similarly, the issuance or transfer by the corporation of any
of its (or its subsidiary's) stock that has an aggregate market value equal to
5% or more of all the outstanding shares of stock to the interested stockholder
(or any affiliate or associate thereof) is a "business combination," except if
it is in connection with the distribution of a dividend or the exercise of
warrants paid or made pro rata to all stockholders. The term is applicable as
well to the adoption of any plan of liquidation or dissolution proposed by or
under any understanding with an interested stockholder (or an affiliate or
associate thereof), and to any reclassification of securities, recapitalization,
merger or consolidation with any subsidiary, or any other transaction proposed
by or under any arrangement with the interested stockholder (or any affiliate or
associate thereof) that has the "effect" of increasing the proportionate
interest of the interested stockholder in the corporation.
An "interested stockholder," as defined, is any person (other than the
corporation or a subsidiary) that is the beneficial owner of 10% or more of the
voting power, or an affiliate or associate of the corporation that at any time
within the five prior years was the beneficial owner of 10% or more of the
voting power. For purposes of the statute, the "share acquisition date" is the
date upon which the person first becomes an interested stockholder of a
corporation. So long as the board of directors does not approve of the business
combination with the interested stockholder, the five year "blackout" period, in
which the business combination is prohibited, applies, and the board of
directors is required to render its decision within a 30-day period (or sooner
if required by the Securities Exchange Act of 1934 (the "Exchange Act")).
In addition to the absolute five-year business combination prohibition, the
statute also requires that, any business combination between the corporation and
an interested stockholder must satisfy additional statutory conditions. The
board of directors must have approved of the business combination before the
interested stockholder's share acquisition date, or a majority of the
outstanding voting stock not beneficially owned by the interested stockholder
must have approved the business combination at a meeting held no earlier than
five years after the interested stockholder's share acquisition date, or the
business combination transaction must meet certain per share values to all
stockholders (keyed to the highest per share price paid by the interested
stockholder within the prior five-year period). All consideration must also be
paid either in cash or in the same form as the interested stockholder has used
to acquire the largest number of shares acquired by it. Furthermore, the statute
requires an interested stockholder to purchase all remaining shares of stock, if
any are purchased, not just one class or series.
Under Chapter 42 of the BCL, the "control share acquisition" statute,
"control shares" (shares that, in the election of directors, could exercise or
direct the exercise of voting power of one-fifth, one-third or a majority or
more of all of the voting power) of any "issuing public corporation" (one
hundred or more stockholders, principal office or place of business, or
substantial assets within Indiana, or 10% of its stockholders resident in
Indiana) that are acquired in a "control share acquisition" by an "acquiring
person" will be accorded only such voting rights, after the acquisition, as are
specifically conferred by the stockholders, voting as a group, excluding all
"interested shares." If a person holding "interested shares" engages in a
control share acquisition of control shares, and the stockholders have not acted
to specifically grant those acquired shares the voting rights they had prior to
the control share acquisition, the acquired shares lose their voting rights. A
majority of the shares (excluding interested shares) must be voted to confer
voting rights upon the acquiring person. The only exemption from this statute is
if the corporation's articles of incorporation or its bylaws provide that this
statute does not apply to control share acquisitions of the corporation's
shares, and such provisions must exist prior to the occurrence of any "control
share acquisition." However, the Company does not have such a provision in
either its Articles or in its Bylaws. Furthermore, if the Articles or Bylaws so
provide (and the Articles and Bylaws do not so provide at this time), control
shares acquired in a control share acquisition with respect to which the shares
have not been accorded full voting rights by the stockholders can be redeemed by
the corporation at "fair value." But if in fact the stockholders of the
corporation do vote to accord full voting rights to the acquiring person's
control shares, and if the acquiring person has acquired
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control with a majority or more of the voting power, all stockholders of the
issuing public corporation are allowed to invoke dissenters' rights, providing
"fair value" to them (defined as not less than the highest price paid per share
by the acquiring person in the control share acquisition. In order to secure
stockholder approval, as required, the acquiring person must deliver an
acquiring person "statement" to the corporation, setting forth pertinent
information concerning the identity of the acquiring person, the number of
shares already owned, the range of voting power that the control share
acquisition seeks, and the terms of the proposed acquisition. Thereafter, the
directors for the issuing public corporation, within ten days, are required to
call a special meeting of the stockholders to consider the voting rights issue,
and the stockholders meeting must be held within 50 days after receipt of the
statement by the issuing public corporation. The acquiring person can
specifically request that the special stockholders meeting not be held sooner
than thirty days after delivery of the acquiring person's statement to the
issuing public corporation. The corporation's notice of the special stockholders
meeting must be accompanied by the acquiring person's statement, as well as a
statement by the Board of Directors of the corporation concerning its position
or recommendation (or that it is taking no position or making no recommendation)
with respect to the voting rights issue in the proposed control share
acquisition.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is First Chicago
Trust Company of New York.
SHARES ELIGIBLE FOR FUTURE SALE
The Company can make no predictions as to the effect, if any, that sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of significant amounts of the
Common Stock in the public market, or the perception that such sales may occur,
could adversely affect the market price of the Common Stock and could impair the
Company's future ability to raise capital through an offering of its equity
securities. See "Risk Factors -- Shares Eligible for Future Sale."
Upon completion of the offerings, the Company will have a total of
49,122,294 shares of Common Stock outstanding. Of these shares, 27,997,931
shares, plus any such shares which may be acquired by an "affiliate" of the
Company (an "Affiliate") as that term is defined in Rule 144 under the
Securities Act, will be "restricted securities" as the term is defined by Rule
144 promulgated under the Securities Act.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, if a period of at least one year has elapsed since
the later of the date the "restricted securities" were acquired from the Company
and the date they were acquired from an Affiliate, then the holder of such
restricted securities (including an Affiliate) is entitled to sell a number of
shares within any three-month period that does not exceed the greater of 1% of
the then outstanding shares of the Common Stock (approximately 491,223 shares
immediately after the offerings) or the average weekly reported volume of
trading of the Common Stock during the four calendar weeks preceding the filing
of a Form 144 with respect to such sale with the Securities and Exchange
Commission (the "Commission"). The holder may only sell such shares through
unsolicited brokers' transactions. Sales under Rule 144 are also subject to
certain requirements pertaining to the manner of such sales, notices of such
sales, and the availability of current public information concerning the
Company. Under Rule 144(k), if a period of at least two years has elapsed
between the later of the date restricted securities were acquired from the
Company and the date they were acquired from an Affiliate, as applicable, a
holder of such restricted securities who is not an Affiliate at the time of the
sale and has not been an Affiliate for at least three months prior to the sale
would be entitled to sell the shares immediately without regard to the
limitations described above.
The Company, its directors and executive officers, the Selling
Stockholders, and certain other stockholders of the Company have entered into
"lock-up" agreements with the Underwriters, providing that they will not (i)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or (ii) enter into any swap or other agreement
that transfers to another, in whole or in part,
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any of the economic consequences of ownership of such shares of Common Stock,
whether any such transaction described in clause (i) or (ii) above is to be
settled by delivery of Common Stock or such other securities, in cash or
otherwise, for a period of 90 days after the date of this Prospectus without the
prior written consent of Morgan Stanley & Co. Incorporated, other than (i) the
sale to the Underwriters of the shares of Common Stock offered hereby, (ii) the
issuance by the Company of shares of Common Stock upon the exercise of an option
sold or granted pursuant to existing benefit plans of the Company and
outstanding on the date of this Prospectus, or (iii) transactions relating to
shares of Common Stock or other securities acquired in open market transactions
after completion of the offerings.
The preceding description does not include shares of Common Stock issuable
upon the exercise of options granted under the Company's 1994 Plan or the 1996
Plan. The Company has registered on Form S-8 under the Securities Act
approximately 2,505,765 shares of Common Stock issuable under options subject to
the Company's 1994 Plan and 1996 Plan thus permitting, subject to the lock-up
agreements described above, the resale of such shares by nonaffiliates upon
issuance in the public market without restriction under the Securities Act. As
of June 30, 1997, 1,102,765 shares had been reserved by the Company for issuance
pursuant to options granted under the 1994 Plan, and 1,403,000 shares had been
reserved for issuance pursuant to options granted under the 1996 Plan.
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
FOR NON-UNITED STATES HOLDERS
GENERAL
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a Non-U.S. Holder. For this purpose, the term "Non-U.S. Holder" is
defined as any person who is, for United States federal income tax purposes, a
foreign corporation, a non-resident alien individual, a foreign partnership or a
foreign estate or trust, as such terms are defined in the Code. This discussion
does not address all aspects of United States federal income and estate taxes
and does not deal with foreign, state and local consequences that may be
relevant to such Non-U.S. Holders in light of their personal circumstances, or
to certain types of Non-U.S. Holders which may be subject to special treatment
under United States federal income tax laws (for example, insurance companies,
tax-exempt organizations, financial institutions and broker-dealers).
Furthermore, this discussion is based on provisions of the Code, existing and
proposed regulations promulgated thereunder and administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly with retroactive effect. PROSPECTIVE INVESTORS ARE URGED TO
CONSULT THEIR TAX ADVISERS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND
NON-U.S. INCOME AND OTHER TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING
OF SHARES OF COMMON STOCK.
An individual may, subject to certain exceptions, be deemed to be a
resident alien (as opposed to a nonresident alien) by virtue of being present in
the United States for at least 31 days in the calendar year and for an aggregate
of at least 183 days during a three-year period ending in the current calendar
year (counting for such purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year, and one-sixth
of the days present in the second preceding year). U.S. resident aliens are
subject to U.S. federal tax as if they were U.S. citizens.
DIVIDENDS
The Company does not anticipate paying cash dividends on its capital stock
in the foreseeable future. See "Dividend Policy." In the event, however, that
dividends are paid on shares of Common Stock, dividends paid to a Non-U.S.
Holder of Common Stock will be subject to withholding of United States federal
income tax at a 30% rate or such lower rate as may be provided by an applicable
income tax treaty between the United States and the country of which the
Non-U.S. Holder is a tax resident, unless (i) the dividends are effectively
connected with the conduct of a trade or business of the Non-U.S. Holder within
the United States and the
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Non-U.S. Holder provides the payor with proper documentation or (ii) if a tax
treaty applies, the dividends are attributable to a U.S. permanent establishment
maintained by the Non-U.S. Holder. In order to claim the benefit of an
applicable tax treaty rate, a Non-U.S. Holder may have to file with the Company
or its dividend paying agent an exemption or reduced treaty rate certificate or
letter in accordance with the terms of such treaty. Dividends that are
effectively connected with the conduct of a trade or business within the United
States or, if a tax treaty applies, are attributable to such a United States
permanent establishment, are subject to United States federal income tax on a
net income basis (that is, after allowance for applicable deductions) at
applicable graduated individual or corporate rates. Any such effectively
connected dividends received by a foreign corporation may, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate or
such lower rate as may be specified by an applicable income tax treaty.
Under current United States Treasury regulations, dividends paid to an
address outside the United States are presumed to be paid to a resident of such
country for purposes of the withholding discussed above (unless the payor has
knowledge to the contrary) and, under the current interpretation of United
States Treasury regulations, for purposes of determining the applicability of a
tax treaty rate. However, under proposed United States Treasury regulations, in
the case of dividends paid after December 31, 1997 (December 31, 1999 in the
case of dividends paid to accounts in existence on or before the date that is 60
days after the proposed United States Treasury regulations are published as
final regulations), a Non-U.S. Holder generally would be subject to United
States withholding tax at a 31% rate under the backup withholding rules
described below, rather than at a 30% rate or a reduced rate under an income tax
treaty, unless certain certification procedures (or, in the case of payments
made outside the United States with respect to an offshore account, certain
documentary evidence procedures) are complied with, directly or through an
intermediary. Certain certification and disclosure requirements must be complied
with in order to be exempt from withholding under the effectively connected
income exemption.
A Non-U.S. Holder of Common Stock eligible for a reduced rate of United
States withholding tax pursuant to an income tax treaty may obtain a refund of
any excess amounts withheld by filing an appropriate claim for refund with the
Internal Revenue Service (the "IRS"), provided that the required information is
furnished to the IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
Common Stock unless (i) (a) the gain is effectively connected with a trade or
business conducted by the Non-U.S. Holder within the United States, or (b) if a
tax treaty applies, the gain is attributable to a United States permanent
establishment maintained by the Non-U.S. Holder, (ii) in the case of a Non-U.S.
Holder who is an individual and holds the Common Stock as a capital asset, such
holder is present in the United States for 183 or more days in the taxable year
of the sale or other disposition and certain other conditions are met, (iii) the
Non-U.S. Holder is subject to tax pursuant to certain provisions of the Code
applicable to United States expatriates, or (iv) the Company is or has been a
"U.S. real property holding corporation" for United States federal income tax
purposes at any time within the shorter of the five-year period preceding such
disposition or the period such Non-U.S. Holder held the Common Stock. If the
Company were, or to become, a U.S. real property holding corporation, gains
realized upon a disposition of Common Stock by a Non-U.S. Holder which did not
directly or indirectly own more than 5% of the Common Stock during the shorter
of the periods described above generally would not be subject to United States
federal income tax so long as the Common Stock is "regularly traded" on an
established securities market. The Company believes that it has not been, is not
currently, and does not anticipate becoming, a "U.S. real property holding
corporation" for United States federal income tax purposes.
If a Non-U.S. Holder who is an individual falls under clause (i) above,
such individual generally will be taxed on the net gain derived from a sale
under regular graduated United States federal income tax rates. If an individual
Non-U.S. Holder falls under clause (ii) above, such individual generally will be
subject to a flat 30% tax on the gain derived from a sale, which may be offset
by certain United States capital losses (notwithstanding the fact that such
individual is not considered a resident alien of the United States). Thus,
73
<PAGE> 173
individual Non-U.S. Holders who have spent (or expect to spend) more than a de
minimis period of time in the United States in the taxable year in which they
contemplate a sale of Common Stock are urged to consult their tax advisors prior
to the sale as to the U.S. tax consequences of such sale.
If a Non-U.S. Holder that is a foreign corporation falls under clause (i)
above, it generally will be taxed on its net gain under regular graduated United
States federal income tax rates and, in addition, will be subject to the branch
profits tax equal to 30% of its "effectively connected earnings and profits"
within the meaning of the Code for the taxable year, as adjusted for certain
items, unless it qualifies for a lower rate under an applicable tax treaty.
FEDERAL ESTATE TAX
Common Stock owned or treated as owned by an individual who is neither a
United States citizen nor a United States resident (as defined for United States
federal estate tax purposes) at the time of death will be included in the
individual's gross estate for United States federal estate tax purposes, unless
an applicable estate tax treaty provides otherwise and, therefore, may be
subject to United States federal estate tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Under United States Treasury regulations, the Company must report annually
to the IRS and to each Non-U.S. Holder the amount of dividends paid to such
holder and the tax withheld with respect to such dividends. These information
reporting requirements apply even if withholding was not required because the
dividends were effectively connected with a trade or business in the United
States of the Non-U.S. Holder or withholding was reduced or eliminated by an
applicable income tax treaty. Copies of the information returns reporting such
dividends and withholding may also be made available to the tax authorities in
the country in which the Non-U.S. Holder is a resident under the provisions of
an applicable income tax treaty or agreement.
United States backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain information under the United States information reporting requirements)
generally will not apply to (i) dividends paid to Non-U.S. Holders that are
subject to the 30% withholding discussed above (or that are not so subject
because a tax treaty applies that reduces or eliminates such 30% withholding) or
(ii) under current law, dividends paid to a Non-U.S. Holder at an address
outside of the United States. However, under proposed United States Treasury
regulations, in the case of dividends paid after December 31, 1997 (December 31,
1999 in the case of dividends paid to accounts in existence on or before the
date that is 60 days after the proposed United States Treasury regulations are
published as final regulations), a Non-U.S. Holder generally would be subject to
backup withholding at a 31% rate, unless certain certification procedures (or,
in the case of payments made outside the United States with respect to an
offshore account, certain documentary evidence procedures) are complied with,
directly or through an intermediary.
Backup withholding and information reporting generally will apply to
dividends paid to addresses inside the United States on shares of Common Stock
to beneficial owners that are not "exempt recipients" and that fail to provide
in the manner required certain identifying information.
In general, backup withholding and information reporting will not apply to
a payment of the gross proceeds of a sale of Common Stock effected at a foreign
office of a broker. If, however, such broker is, for United States federal
income tax purposes, a U.S. person, a controlled foreign corporation or a
foreign person, 50% or more of whose gross income for certain periods is derived
from activities that are effectively connected with the conduct of a trade or
business in the United States, such payments will not be subject to backup
withholding but will be subject to information reporting, unless (i) such broker
has documentary evidence in its records that the beneficial owner is a Non-U.S.
Holder and certain other conditions are met, or (ii) the beneficial owner
otherwise establishes an exemption. Temporary United States Treasury regulations
provide that the Treasury is considering whether backup withholding should be
required in such circumstances. Under proposed United States Treasury
regulations not currently in effect, backup withholding will not apply to such
payments absent actual knowledge that the payee is a United States person. The
IRS recently proposed regulations addressing certain withholding, certification
and information reporting rules (some of which have
74
<PAGE> 174
been mentioned above) which could affect treatment of the payment of the
proceeds discussed above. Non-U.S. Holders should consult their tax advisors
regarding the application of these rules to their particular situations, the
availability of an exemption therefrom, the procedure for obtaining such an
exemption, if available, and the possible application of the proposed United
States Treasury regulations addressing the withholding and the information
reporting rules.
Payment by a United States office of a broker of the proceeds of a sale of
Common Stock is subject to both backup withholding and information reporting
unless the beneficial owner certifies under penalties of perjury that it is a
Non-U.S. Holder, or otherwise establishes an exemption. Backup withholding is
not an additional tax. Any amounts withheld under the backup withholding rules
will be allowed as a refund or a credit against such holder's U.S. federal
income tax liability provided the required information is furnished to the IRS.
75
<PAGE> 175
UNDERWRITERS
Under the terms and subject to the conditions in the Underwriting Agreement
dated the date of this Prospectus (the "Underwriting Agreement"), the Company
and the Selling Stockholders have agreed to sell 1,255,971 and 7,144,029 shares,
respectively, of the Company's Common Stock and the U.S. Underwriters named
below have severally agreed to purchase, and the International Underwriters
named below have severally agreed to purchase, the respective number of shares
of Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
-------------------------------------------------------------------------- ----------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated....................................... 2,016,338
PaineWebber Incorporated................................................ 2,016,337
Donaldson, Lufkin & Jenrette Securities Corporation..................... 895,775
McDonald & Company Securities, Inc. .................................... 895,775
Salomon Brothers Inc.................................................... 895,775
----------
Subtotal............................................................. 6,720,000
----------
International Underwriters:
Morgan Stanley & Co. International Limited.............................. 504,085
PaineWebber International (U.K.) Ltd. .................................. 504,084
Donaldson, Lufkin & Jenrette Securities Corporation..................... 223,944
McDonald & Company Securities, Inc...................................... 223,944
Salomon Brothers International Limited.................................. 223,943
----------
Subtotal............................................................. 1,680,000
----------
Total........................................................... 8,400,000
==========
</TABLE>
The U.S. Underwriters and the International Underwriters are collectively
referred to as the "Underwriters." The Underwriting Agreement provides that the
obligations of the several Underwriters to pay for and accept delivery of the
shares of Common Stock offered hereby are subject to the approval of certain
legal matters by their counsel and to certain other conditions. The Underwriters
are obligated to take and pay for all of the shares of Common Stock offered
hereby (other than those covered by the U.S. Underwriters' over-allotment option
described below) if any such shares are taken.
Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions, (a)
it is not purchasing any U.S. Shares (as defined below) for the account of
anyone other than a United States or Canadian Person (as defined below) and (b)
it has not offered or sold, and will not offer or sell, directly or indirectly,
any U.S. Shares or distribute any prospectus relating to the U.S. Shares outside
the United States or Canada or to anyone other than a United States or Canadian
Person. Pursuant to the Agreement Between U.S. and International Underwriters,
each International Underwriter has represented and agreed that, with certain
exceptions, (a) it is not purchasing any International Shares (as defined below)
for the account of any United States or Canadian Person and (b) it has not
offered or sold, and will not offer or sell, directly or indirectly, any
International Shares or distribute any prospectus relating to the International
Shares within the United States or Canada or to a United States or Canadian
Person. The foregoing limitations do not apply to stabilization transactions or
to certain other transactions specified in the Agreement Between U.S. and
International Underwriters. As used herein, "United States or Canadian Person"
means any national or resident of the United States or Canada, or any
corporation, pension, profit-sharing or other trust or other entity organized
under the laws of the United States or Canada or of any political subdivision
thereof (other than a branch located outside the United States and Canada of any
United States or Canadian Person) and includes any United States or Canadian
branch of a person who is otherwise not a United States or Canadian Person. All
shares of Common Stock to be
76
<PAGE> 176
purchased by the U.S. Underwriters and the International Underwriters under the
Underwriting Agreement are referred to herein as the U.S. Shares and the
International Shares, respectively.
Pursuant to the Agreement Between U.S. and International Underwriters,
sales may be made between the U.S. Underwriters and International Underwriters
of any number of shares of Common Stock to be purchased pursuant to the
Underwriting Agreement as may be mutually agreed. The per share price of any
shares sold shall be the Price to Public set forth on the cover page hereof, in
United States dollars, less an amount not greater than the per share amount of
the concession to dealers set forth below.
Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any shares of Common Stock, directly or indirectly, in
Canada in contravention of the securities laws of Canada or any province or
territory thereof and has represented that any offer of shares of Common Stock
in Canada will be made only pursuant to an exemption from the requirement to
file a prospectus in the province or territory of Canada in which such offer is
made. Each U.S. Underwriter has further agreed to send to any dealer who
purchases from it any shares of Common Stock a notice stating in substance that,
by purchasing such shares of Common Stock, such dealer represents and agrees
that it has not offered or sold, and will not offer or sell, directly or
indirectly, any of such shares of Common Stock in Canada or to, or for the
benefit of, any resident of Canada in contravention of the securities laws of
Canada or any province or territory thereof and that any offer of shares of
Common Stock in Canada will be made only pursuant to an exemption from the
requirement to file a prospectus in the province of Canada in which such offer
is made, and that such dealer will deliver to any other dealer to whom it sells
any of such shares of Common Stock a notice to the foregoing effect.
Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented and, during the period of six months
after the date hereof, agreed that (a) it has not offered or sold and will not
offer or sell any shares of Common Stock in the United Kingdom except to persons
whose ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purpose of their
business or otherwise in circumstances which have not resulted and will not
result in an offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations (1995) (the "Regulations"); (b) it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 and the Regulations with respect to anything done by it in
relation to the shares of Common Stock offered hereby in, from or otherwise
involving the United Kingdom; and (c) it has only issued or passed on and will
only issue or pass on to any person in the United Kingdom any document received
by it in connection with the issue of the shares of Common Stock if that person
is of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996, or is a person to whom such
document may otherwise lawfully be issued or passed on.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the Price to Public set forth on the cover page
hereof and part to certain dealers at a price which represents a concession not
in excess of $.60 per share under the Price to Public. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $.10 per
share to other Underwriters or to certain dealers. After the initial offering of
the shares of Common Stock, the offering price and other selling terms may from
time to time be varied by the Underwriters.
Pursuant to the Underwriting Agreement, the Company and certain of the
Selling Stockholders have granted to the U.S. Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to
1,260,000 additional shares of Common Stock at the public offering price set
forth on the cover page hereof, less underwriting discounts and commissions. The
U.S. Underwriters may exercise such option to purchase solely for the purpose of
covering over-allotments, if any, made in connection with the offering of the
shares of Common Stock offered hereby. To the extent such option is exercised,
each U.S. Underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of such additional shares of Common
Stock as the number set forth next to such U.S. Underwriter's name in the
preceding table bears to the total number of shares of Common Stock offered by
the U.S. Underwriters hereby.
77
<PAGE> 177
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may overallot in
connection with the offering, creating a short position in the Common Stock for
their own account. In addition, to cover overallotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
Common Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
Common Stock in the offering, if the syndicate repurchases previously
distributed Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Stock above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.
The Company, its executive officers and directors, the Selling
Stockholders, and certain other stockholders of the Company have agreed that,
without the prior written consent of Morgan Stanley & Co. Incorporated, they
will not, for a period of 90 days after the date of this Prospectus, (a) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (b) enter into any swap or other agreement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of such shares of Common Stock, whether any such transaction described
in clause (a) or (b) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise, other than (i) the sale to the
Underwriters of the shares of Common Stock offered hereby, (ii) the issuance by
the Company of shares of Common Stock upon the exercise of an option sold or
granted pursuant to existing benefit plans of the Company and outstanding on the
date of this Prospectus or (iii) transactions relating to shares of Common Stock
or other securities acquired in open market transactions after completion of the
offerings.
McDonald & Company Securities, Inc. ("McDonald & Company") has provided
investment banking, financial advisory and other services to the Company for
which it has received customary fees and reimbursement of its out-of-pocket
expenses. McDonald & Company and its affiliates are stockholders of the Company.
General Electric Capital Services, Inc. ("GE Capital Services"), which owns
100% of the outstanding common stock of General Electric Capital Corporation,
indirectly owns 21.5 million shares, or approximately 23.48%, of the issued and
outstanding common stock and Convertible Preferred Stock (convertible into
5,515,720 shares of common stock or approximately 5.68% on a conversion-diluted
basis) and Redeemable Preferred Stock of PaineWebber Group Inc., each acquired
in connection with the sale of certain assets and businesses of Kidder, Peabody
Group Inc. in 1994. On August 6, 1997, GE Capital Services and PaineWebber Group
Inc. entered into a definitive agreement, the effect of which would reduce GE
Capital Services's holdings of PaineWebber Group Inc. common stock from 21.5
million shares to 15.5 million shares, representing approximately 17.02% (or
approximately 23.08% on a conversion-diluted basis) of the outstanding common
stock. The transaction is subject to regulatory approval. PaineWebber
Incorporated, a member of the NASD and a subsidiary of PaineWebber Group Inc.,
will participate in the distribution of the Common Stock offered hereby. In
addition, General Electric Capital Corporation owns 5,750,029 of the shares of
Common Stock outstanding prior to the offerings. As a result the offering of the
shares of Common Stock offered hereby are required to be made in accordance with
the applicable provisions of Rule 2720 of the NASD.
In compliance with Rule 2720, the public offering price can be no higher
than that recommended by a "qualified independent underwriter." Morgan Stanley &
Co. Incorporated is assuming the responsibilities of acting as qualified
independent underwriter and the public offering price of the shares of Common
Stock offered hereby will not be higher than the public offering price
recommended by Morgan Stanley & Co. Incorporated. In connection with the
offerings, Morgan Stanley & Co. Incorporated in its role as "qualified
independent underwriter" has performed due diligence investigations and reviewed
and participated in the preparation of the Registration Statement of which this
Prospectus is a part. In addition, the underwriters may not confirm sales to any
discretionary account without the prior written approval of the customer.
78
<PAGE> 178
The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Barrett & McNagny, Fort Wayne, Indiana. Robert S. Walters, a partner
at Barrett & McNagny, may be deemed to beneficially own 2.9% of the equity units
in Heavy Metal, L.C., a stockholder of the Company. Mr. Walters disclaims
beneficial ownership of all but 1.6% of such units. Certain legal matters will
be passed upon for the Underwriters by Shearman & Sterling, New York, New York.
EXPERTS
The consolidated financial statements as of December 31, 1995 and 1996, and
for each of the three years in the period ended December 31, 1996, included in
this Prospectus, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and have been included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement (of
which this Prospectus is a part and which term shall encompass all amendments,
exhibits and schedules thereto) on Form S-1 under the Securities Act with
respect to the shares of Common Stock offered hereby. This Prospectus does not
contain all the information set forth in the Registration Statement certain
parts of which are omitted from the Prospectus in accordance with the rules and
regulations of the Commission, and to which reference is made. For further
information about the Company and the securities offered hereby, reference is
made to the Registration Statement. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract, agreement or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in its entirety by
such reference.
The Company is subject to the information and reporting requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith, is
required to file reports, proxy statements and other information with the
Commission. The Registration Statement, reports, proxy statements and other
information filed by the Company with the Commission, may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the regional offices of the Commission located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material also can
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Such material may also
be accessed electronically by means of the Commission's home page on the
Internet at http://www.sec.gov. The Common Stock of the Company is traded on the
Nasdaq Stock Market (Symbol: STLD), and such reports, proxy statements and other
information concerning the Company also can be inspected at the offices of
Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
79
<PAGE> 179
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and unaudited June 30,
1997................................................................................ F-3
Consolidated Statements of Operations for each of the three years in the period ended
December 31, 1996 and the unaudited six-month periods ended June 29, 1996 and June
30, 1997............................................................................ F-4
Consolidated Statements of Stockholders' Equity for each of the three years in the
period ended December 31, 1996 and for the unaudited six-month period ended June 30,
1997................................................................................ F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 1996 and for the unaudited six-month periods ended June 29, 1996 and
June 30, 1997....................................................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 180
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Steel Dynamics, Inc.
We have audited the accompanying consolidated balance sheets of Steel
Dynamics, Inc. (the "Company") as of December 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Steel Dynamics, Inc. as of
December 31, 1995 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
January 17, 1997
F-2
<PAGE> 181
STEEL DYNAMICS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $6,884... $ 57,460 $ 22,293
Accounts receivable, net of allowance for doubtful
accounts of $628, $628 and $563 as of December 31,
1995 and 1996, and June 30, 1997, respectively....... 125 14,600 22,413
Accounts receivable -- related parties.................. -- 17,860 14,576
Inventories............................................. 13,580.. 65,911 56,829
Other current assets.................................... 1,634 1,599 1,217
-------- -------- --------
Total current assets............................ 22,223 157,430 117,328
PROPERTY, PLANT, AND EQUIPMENT, NET....................... 274,197 339,263 410,272
DEBT ISSUANCE COSTS, less accumulated amortization of $32,
$1,548, and $2,372 as of December 31, 1995 and 1996, and
June 30, 1997, respectively............................. 12,211 12,405 11,591
RESTRICTED CASH........................................... 2,666 2,827 3,456
OTHER ASSETS.............................................. 9,382 10,366 9,956
-------- -------- --------
TOTAL ASSETS.................................... $320,679 $522,291 $ 552,603
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................ $ 24,478 $ 28,968 $ 20,378
Accounts payable-related parties........................ 3,424 12,218 18,004
Accrued interest........................................ 2,660 338 1,216
Accrued foreign currency loss........................... 1,013 261 --
Other accrued expenses.................................. 3,078 8,597 11,123
Current maturities of long-term debt.................... 2,058 11,175 5,931
-------- -------- --------
Total current liabilities....................... 36,711 61,557 56,652
LONG-TERM DEBT, less current maturities................... 220,996 196,168 199,530
DEFERRED TAXES............................................ -- -- 1,468
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A common stock voting, $.01 par value; 100,000,000
shares authorized; 28,644,722, 47,803,341 and
47,866,323 shares issued and outstanding as of
December 31, 1995 and 1996, and June 30, 1997,
respectively......................................... 286 478 479
Additional paid-in capital.............................. 93,083 303,846 304,078
Amounts due from stockholders........................... (469) -- --
Accumulated deficit..................................... (29,928) (39,758) (9,604)
-------- -------- --------
Total stockholders' equity...................... 62,972 264,566 294,953
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...... $320,679 $522,291 $ 552,603
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 182
STEEL DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, ---------------------------
---------------------------------- JUNE 29, JUNE 30,
1994 1995 1996 1996 1997
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES:
Unrelated parties............... $ -- $ 137 $130,886 $ 49,474 $ 114,290
Related parties................. -- -- 121,731 49,188 86,487
------- -------- -------- -------- --------
Total net sales......... -- 137 252,617 98,662 200,777
Cost of goods sold................ -- 3,169 220,563 95,591 150,180
------- -------- -------- -------- --------
GROSS PROFIT (LOSS)............... -- (3,032) 32,054 3,071 50,597
Selling, general and
administrative expenses......... 4,192 13,580 13,838 5,894 12,479
------- -------- -------- -------- --------
OPERATING INCOME (LOSS)........... (4,192) (16,612) 18,216 (2,823) 38,118
Foreign currency gain (loss)...... (4,952) (3,272) 328 260 261
Interest expense.................. (43) (564) (22,684) (12,128) (3,995)
Interest income................... 307 560 1,581 579 1,264
------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY LOSS.......... (8,880) (19,888) (2,559) (14,112) 35,648
Income taxes...................... -- -- -- -- 5,494
------- -------- -------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY
LOSS............................ (8,880) (19,888) (2,559) (14,112) 30,154
Extraordinary loss................ -- -- (7,271) -- --
------- -------- -------- -------- --------
NET INCOME (LOSS)................. $ (8,880) $(19,888) $ (9,830) $ (14,112) $ 30,154
======= ======== ======== ======== ========
INCOME (LOSS) PER SHARE BEFORE
EXTRAORDINARY LOSS.............. $ (.36) $ (.62) $ (.07) $ (.41) $ .63
Per share effect of extraordinary
loss............................ -- -- (.21) -- --
------- -------- -------- -------- --------
NET INCOME (LOSS) PER SHARE....... $ (.36) $ (.62) $ (.28) $ (.41) $ .63
======= ======== ======== ======== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING..................... 24,679 31,975 34,571 34,695 47,851
======= ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 183
STEEL DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL AMOUNTS TOTAL
--------------- PAID-IN DUE FROM ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT EQUITY
------ ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1994....... 13,436 $134 $ 597 -- $ (1,160) $ (429)
Issuance of shares................ 14,624 146 81,042 $(10,750) -- 70,438
Issuance of common stock
warrants........................ -- -- 1,407 -- -- 1,407
Net loss.......................... -- -- -- -- (8,880) (8,880)
------ ---- -------- -------- -------- --------
Balances at December 31,
1994....................... 28,060 280 83,046 (10,750) (10,040) 62,536
Issuance of shares................ 585 6 4,994 -- -- 5,000
Issuance of common stock
warrants........................ -- -- 5,043 -- -- 5,043
Collection of amounts due from
stockholders.................... -- -- -- 10,000 -- 10,000
Amortization of amount due from
officer......................... -- -- -- 281 -- 281
Net loss.......................... -- -- -- -- (19,888) (19,888)
------ ---- -------- -------- -------- --------
Balances at December 31,
1995....................... 28,645 286 93,083 (469) (29,928) 62,972
Exercise of common stock
warrants........................ 1,791 18 382 -- -- 400
Issuance of shares, net of
expenses........................ 17,367 174 210,381 -- -- 210,555
Amortization of amount due from
officer......................... -- -- -- 469 -- 469
Net loss.......................... -- -- -- -- (9,830) (9,830)
------ ---- -------- -------- -------- --------
Balances at December 31,
1996....................... 47,803 478 303,846 -- (39,758) 264,566
Issuance of shares, net of
expenses (unaudited)............ 63 1 232 -- -- 233
Net income (unaudited)............ -- -- -- -- 30,154 30,154
------ ---- -------- -------- -------- --------
Balances at June 30, 1997
(unaudited)................ 47,866 $479 $ 304,078 $ -- $ (9,604) $ 294,953
====== ==== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 184
STEEL DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, --------------------------
--------------------------------- JUNE 29, JUNE 30,
1994 1995 1996 1996 1997
-------- --------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................... $ (8,880) $ (19,888) $ (9,830) $ (14,112) $ 30,154
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization............. 13 876 19,403 8,793 11,607
Foreign currency loss (gain).............. 4,952 3,272 (328) (260) (261)
Deferred taxes............................ -- -- -- -- 1,468
Extraordinary loss........................ -- -- 7,271 -- --
Changes in certain assets and liabilities:
Accounts receivable.................... -- (125) (32,335) (28,020) (4,529)
Inventories............................ (13,580) (52,331) (12,399) 9,082
Other assets........................... (251) (788) 35 (986) 382
Accounts payable....................... 691 6,441 13,284 1,036 (2,804)
Accrued expenses....................... 796 4,822 3,197 1,582 3,406
-------- --------- -------- -------- --------
Net cash (used) provided in operating
activities......................... (2,679) (18,970) (51,634) (44,366) 48,505
-------- --------- -------- -------- --------
INVESTING ACTIVITIES:
Purchases of property, plant, and
equipment................................. (43,709) (224,449) (83,720) (12,062) (81,524)
Proceeds from government grants............. 2,878 21,188 1,558 1,467 --
Purchase of short-term investments.......... -- -- (7,000) (7,000) --
Maturities of short-term investments........ -- -- 7,000 -- --
Other....................................... (549) (1,602) (984) (571) 56
-------- --------- -------- -------- --------
Net cash used in investing
activities......................... (41,380) (204,863) (83,146) (18,166) (81,468)
-------- --------- -------- -------- --------
FINANCING ACTIVITIES:
Repayment of vendor/customer advances....... (800)
Issuance of long-term debt.................. 13,352 188,430 35,411 35,411 --
Repayments of long-term debt................ -- -- (57,927) (493) (2,426)
Issuance of common stock, net of expenses... 70,488 15,281 211,424 45,095 233
Debt issuance costs......................... (10,990) (1,102) (3,552) (3,542) (11)
-------- --------- -------- -------- --------
Net cash (used) provided in financing
activities......................... 72,050 202,609 185,356 76,471 (2,204)
-------- --------- -------- -------- --------
Increase (decrease) in cash and cash
equivalents................................. 27,991 (21,224) 50,576 13,939 (35,167)
Cash and cash equivalents at beginning of
period...................................... 117 28,108 6,884 6,884 57,460
-------- --------- -------- -------- --------
Cash and cash equivalents at end of period.... $ 28,108 $ 6,884 $ 57,460 $ 20,823 $ 22,293
======== ========= ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest...................... $ 14 $ 8,000 $ 26,030 $ 11,813 $ 3,797
======== ========= ======== ======== ========
Cash paid for taxes......................... $ -- $ -- $ -- $ -- $ 3,675
======== ========= ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INFORMATION:
Electric utility transmission facility loan
and other equipment obligation............ $ -- $ 24,349 $ -- $ -- $ --
======== ========= ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 185
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Interim financial information as of June 30, 1997 and for the six months
ended June 30, 1997 and June 29, 1996 is unaudited. The unaudited interim
consolidated financial statements reflect all adjustments consisting of normal
recurring accruals which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods.)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and Iron Dynamics, Inc., a wholly-owned subsidiary. All significant
intercompany transactions have been eliminated. The Company operated on a four
week, four week, five week accounting cycle for 1996. Accordingly, the Company's
interim periods ended on the last day of the fourth or fifth week within the
month. The Company, effective January 1997, operates on a calendar month
accounting cycle.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company records sales upon shipment and provides an allowance for
estimated costs associated with returns.
Business
The Company, formed on September 7, 1993, operates in one industry segment
and operates a thin-slab cast steel mini-mill in the Midwest, with the capacity
to produce 1.4 million tons annually of hot-rolled steel coils. The Company's
products are sold primarily to the automotive, tubing, construction and
commercial equipment industries.
Cash
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Restricted cash
consists of cash held by a trustee in a debt service fund for the repayment of
principal and interest on the Company's municipal bond.
Inventories
Inventories consist of approximately 97%, 91% and 94% of raw materials and
supplies, and 3%, 9% and 6% of finished products as of December 31, 1995 and
1996, and June 30, 1997, respectively. Inventories are stated at the lower of
cost (first-in, first-out method) or market.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost of acquisition which
includes capitalized interest on construction-in-progress of approximately $10.1
million, $1.0 million and $4.9 million in 1995, 1996 and June 30, 1997,
respectively. Depreciation is provided using the units-of-production method for
manufacturing plant and equipment and using the straight-line method for
non-manufacturing equipment over the estimated useful lives of the assets
ranging from 12 years to 30 years. Repairs and maintenance are expensed as
incurred. The Company recorded proceeds received from state and local government
grants and other capital cost reimbursements as reductions of the related
capital assets. Grants and reimbursements recorded as reductions of the related
capital cost, net of accumulated depreciation, totaled $24.0 million as of
December 31, 1995 and 1996.
F-7
<PAGE> 186
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, among other things, requires entities to review long-lived assets for
impairment whenever events or changes in circumstances indicate that their
carrying value may not be recoverable. Adoption of this standard had no effect
on the Company's financial position, results of operations or cash flows in
1996.
Debt Issuance Costs
The costs related to the issuance of debt are deferred and amortized to
interest expense using the effective interest method over the terms of the
related debt.
Income Taxes
Deferred tax assets and liabilities are computed based on differences
between the financial statement and income tax bases of assets and liabilities
using enacted income tax rates. Deferred income tax expense or benefit is based
on the change in deferred tax assets and liabilities from period to period,
subject to an ongoing assessment of realization of deferred tax assets.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, short-term
investments and accounts receivable. The Company places its cash with high
quality financial institutions and limits the amount of credit exposure from any
one institution. Generally, the Company does not require collateral or other
security to support customer receivables.
Foreign Currency Transactions
Transaction gains and losses incurred by the Company for equipment
purchases denominated in a foreign currency are recorded in results of
operations currently.
Net Loss Per Share
Net income (loss) per share is calculated by dividing net income (loss) by
the weighted average number of shares of common stock outstanding using the
treasury stock method. The anti-dilutive effect of shares issued from September
23, 1995 through September 23, 1996 are included in the weighted average number
of shares of common stock outstanding for the years ended December 31, 1994 and
1995 and the six months ended June 29, 1996. The anti-dilutive effect of common
stock equivalents is excluded from the calculation for all periods presented.
Derivatives
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. The Company uses such
instruments to manage certain of its interest rate and foreign currency risks
and accounts for them under the accrual method.
New Pronouncements
In February 1997, SFAS No. 128, Earnings per Share, was issued which
establishes new standards for computing and presenting earnings per share
("EPS"). Specifically, SFAS No. 128 replaces the presentation of primary EPS
with a presentation of basic EPS, requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997; earlier application is not
permitted. Management has determined that the adoption of SFAS No. 128 will not
have a material effect on the accompanying consolidated financial statements.
F-8
<PAGE> 187
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1997, SFAS No. 130, Comprehensive Income, was issued and becomes
effective in 1998 and requires reclassification of earlier financial statements
for comparative purposes. SFAS No. 130 requires that changes in the amounts of
certain items, including foreign currency translation adjustments and gains and
losses on certain securities be shown in the financial statements. SFAS No. 130
does not require a specific format for the financial statement in which
comprehensive income is reported, but does require that an amount representing
total comprehensive income be reported in that statement. Management has not yet
determined the effect, if any, of SFAS No. 130 on the consolidated financial
statements.
Also in June 1997, SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, was issued. This Statement will change the
way public companies report information about segments of their business in
their annual financial statements and requires them to report selected segment
information in their quarterly reports issued to shareholders. It also requires
entity-wide disclosures about the products and services an entity provides, the
material countries in which it holds assets and reports revenues, and its major
customers. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. Management has not yet determined the effect, if any, of SFAS No. 131
on the consolidated financial statements.
2. PROPERTY, PLANT, AND EQUIPMENT (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land and improvements............................. $ 5,309 $ 4,757 $ 4,641
Buildings and improvements........................ 24,849 27,059 27,066
Plant, machinery and equipment.................... 242,690 246,023 243,653
Construction-in-progress.......................... 1,499 78,247 162,250
-------- -------- --------
274,347 356,086 437,610
Less accumulated depreciation..................... 150 16,823 27,338
-------- -------- --------
Property, plant, and equipment, net............. $274,197 $339,263 $ 410,272
======== ======== ========
</TABLE>
F-9
<PAGE> 188
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Senior secured notes payable, principal and
interest due semi-annually beginning in 1997
through 2002, interest is variable (including
the effect of the interest rate cap, the
weighted average rate was 8.6%, 8.0% and 6.9% as
of December 31, 1995 and 1996 and June 30, 1997,
respectively)................................... $115,000 $150,000 $ 150,000
8.01% municipal bond, principal and interest due
monthly through 2015............................ 21,400 21,100 21,100
Electric utility, transmission facility and other
equipment obligation at interest rates ranging
from 7% to 8%, collateralized by on-site
substation and related equipment, principal and
interest due monthly or quarterly through
2015............................................ 37,397 36,243 34,361
11% senior subordinated promissory notes.......... 49,257 -- --
-------- -------- --------
Total debt...................................... 223,054 207,343 205,461
Less current maturities........................... 2,058 11,175 5,931
-------- -------- --------
Long-term debt.................................. $220,996 $196,168 $ 199,530
======== ======== ========
</TABLE>
The Company entered into a credit agreement, as amended, with a syndicate
bank group, on June 30, 1994. Subject to the terms and conditions of the credit
agreement, borrowings of $150 million under senior secured notes were used to
fund the construction of the steel mini-mill; $150 million was designated and
remains available at June 30, 1997 for construction of the cold mill, and $45
million of revolving credit is available for working capital purposes. At
December 31, 1995 and 1996 there were no amounts outstanding under the revolving
credit facility. The senior secured notes and revolving credit facility are
collateralized by substantially all assets of the Company other than certain
property, plant, and equipment securing the electric utility loan. The Company
is required to pay a commitment fee equal to a percentage ranging from 0.125% to
0.50% annually depending upon the principal amount of the unused borrowing
capacity under the senior secured notes and the unused revolving credit
facility.
In 1995 the Company borrowed $21.4 million through a state government
municipal bond program, of which $2.7 million and $2.8 million as of December
31, 1995 and 1996, respectively, is held by a trustee in a debt service reserve
fund and is recorded as restricted cash. At December 31, 1996, a stand-by letter
of credit of $22.0 million relating to the municipal bonds was outstanding.
The electric utility transmission facility loan of $7.8 million and $7.7
million at December 31, 1995 and 1996, respectively, represents the Company's
portion of the cost of the transmission facilities constructed by the utility to
service the Company's site. The corresponding cost is included in other assets
and is being amortized over twenty years on the straight-line basis.
The electric utility loan of $13.0 million and $13.1 million at December
31, 1995 and 1996, respectively, represents the Company's portion of the cost of
the Company's substation constructed on-site. Interest and principal payments
are made equally on a monthly basis in an amount necessary to repay the loan
fifteen years from the date of commencement of operations.
The credit agreement, electric utility loan and transmission facility loan
require the Company to maintain certain covenants, the most restrictive of which
are requirements to maintain tangible net worth of at least $45
F-10
<PAGE> 189
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
million plus 50% of cumulative net income, a minimum current ratio, a maximum
leverage ratio and a minimum fixed charge coverage ratio. The credit agreement
also limits indebtedness of the Company and the amount of capital expenditures
and prohibits the payment of dividends.
The other equipment obligation represents deferred payments for the
purchase of certain equipment. The obligation is non-interest bearing and was
discounted at 7% over a term of five years.
The Company in June 1994 entered into an agreement with respect to senior
subordinated promissory notes ("Subordinated Notes") in the aggregate principal
amount of $55 million and warrants to purchase up to 1,641,827 shares of Class A
common stock (warrants for the purchase of 29,851 shares per $1 million of
Subordinated Notes) at an exercise price which was less than $0.01 per share.
The proceeds received from the issuance of the Subordinated Notes and warrants
were allocated to the Subordinated Notes and warrants based upon their estimated
fair values. The Subordinated Notes were repaid in November 1996 with a portion
of the proceeds from the initial public offering. An extraordinary loss on the
prepayment of the Subordinated Notes in the amount of $7.3 million was recorded
in 1996 and was comprised of the write-off of the unamortized discount,
write-off of the financing costs associated with the Subordinated Notes and a
prepayment penalty.
If the retirement of the Subordinated Notes had occurred on January 1,
1996, income per share before extraordinary loss would have been $.11; the per
share effect of extraordinary loss would have been $.24 and the net loss per
share would have been $.13.
Maturities of outstanding debt as of December 31, 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
1997.............................................. $ 11,175
1998.............................................. 41,376
1999.............................................. 47,934
2000.............................................. 56,597
2001.............................................. 12,112
Thereafter........................................ 38,149
--------
$207,343
========
</TABLE>
4. INCOME TAXES
The effective income tax rate differs from the statutory federal income tax
rate for the years ended December 31, 1994, 1995 and 1996 because of the
valuation allowances recorded.
F-11
<PAGE> 190
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of deferred tax assets and liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
------- -------- JUNE 30,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss and credit carryforwards...... $ 1,002 $ 19,752 $ 13,827
Tax assets expensed for books.................... 7,221 8,628 9,288
Other accrued expenses........................... 2,236 3,824 5,338
------- -------- --------
Total deferred tax assets.......................... 10,459 32,204 28,453
Less valuation allowance........................... (8,071) (11,937) (4,360)
------- -------- --------
Net deferred tax assets............................ 2,388 20,267 24,093
Deferred tax liabilities:
Depreciable assets............................... (2,026) (19,348) (24,311)
Amortization of fees............................. (41) (435) (662)
Other............................................ (321) (484) (588)
------- -------- --------
Total deferred tax liabilities..................... (2,388) (20,267) (25,561)
------- -------- --------
Net deferred tax liabilities....................... $ -- $ -- $ (1,468)
======= ======== ========
</TABLE>
As of December 31, 1996, the Company had available net operating loss
carryforwards of approximately $49.4 million for federal income tax purposes.
The carryforwards expire $200,000 in 2009, $2.3 million in 2010 and $46.9
million in 2011. Because of the Company's limited operating history, a valuation
allowance has been established for a portion of the deferred tax asset. The
Company will continually assess the need for a valuation allowance for the
deferred tax asset based upon expectations of future taxable income.
For the six months ended June 29, 1996, the Company had a net deferred tax
asset that was offset entirely by a valuation allowance. For the six months
ended June 30, 1997, the Company has computed income taxes based upon the
expected annual effective tax rate which gives effect to the utilization of
available net operating loss carryforwards.
5. COMMON STOCK
On November 21, 1996, the Company completed an initial public offering. The
Company issued 9,375,000 shares at a net offering price of $15.08 per share. The
Company received approximately $140.2 million in net proceeds. Existing
shareholders sold 468,750 shares, and the over-allotment was exercised by the
underwriting group, which allowed existing shareholders to sell an additional
1,476,562 shares. The Company's Common Stock currently trades on the Nasdaq
National Market under the STLD symbol.
Warrants related to the Subordinated Notes for 1,641,827 shares of the
Company's Common Stock were exercised in the fourth quarter of 1996. In
addition, other warrants for 149,645 shares were exercised in the fourth quarter
of 1996.
On October 28, 1996, the board of directors approved a 28.06 for one-stock
split. Share and per share data has been restated to give effect to the stock
split for all periods presented.
1994 Incentive Stock Option Plan
The Company adopted the 1994 Incentive Stock Option Plan ("1994 Plan") for
certain key employees who are responsible for management of the Company. A total
of 611,712, 1,102,765 and 1,102,765 shares of Class A common stock have been
reserved for issuance under the 1994 Plan as of December 31, 1995 and 1996, and
June 30, 1997, respectively. Eligible individuals under the 1994 Plan may be
granted options to
F-12
<PAGE> 191
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase the Company's Class A common stock at an exercise price per share of at
least 100% of fair market value at the date of grant. Effective January 10,
1997, options under the 1994 Plan vest one-third six months after the date of
grant and two-thirds five years after the date of grant. The options have a
maximum term of ten years. As of June 30, 1997, options for 62,043 shares had
been exercised.
1996 Incentive Stock Option Plan
The Company on October 28, 1996 adopted the 1996 Incentive Stock Option
Plan ("1996 Plan") for all employees of the Company. A total of 1,403,000 shares
of common stock have been reserved for issuance under the 1996 Plan. Eligible
employees under the 1996 Plan may be granted options to purchase the Company's
common stock at an exercise price per share of at least 100% of fair market
value at the grant of date. Options under the 1996 Plan vest 100% six months
after the date of grant and have a maximum term of five years. As of June 30,
1997, options for 939 shares had been exercised.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, ---------------------------------------
---------------------------------------
JUNE 29, 1996 JUNE 30, 1997
------------------ ------------------
1995 1996
------------------ ------------------
(UNAUDITED) (UNAUDITED)
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994 PLAN
- ------------------------
Outstanding at beginning
of period............. 241,319 $3 572,427 $ 3 572,427 $ 3 645,383 $ 4
Granted................. 331,108 5 81,374 11 16,836 10 117,853 19
Forfeited............... -- -- 8,418 3 8,418 3 -- --
Exercised............... -- -- -- -- -- -- 62,043 4
Outstanding at end of
period................ 572,427 3 645,383 4 580,845 3 701,193 7
Options exercisable at
end of period......... -- -- -- -- -- -- 153,085 5
1996 PLAN
- ------------------------
Outstanding at beginning
of period............. -- -- -- -- -- -- 94,408 16
Granted................. -- -- 94,408 16 -- -- 92,273 21
Forfeited............... -- -- -- -- -- -- 1,151 17
Exercised............... -- -- -- -- -- -- 939 16
Outstanding at end of
period................ -- -- 94,408 16 -- -- 184,591 18
Options exercisable at
end of period......... -- -- -- -- -- -- 92,684 16
</TABLE>
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for the plans. No
compensation cost has been recognized for the plans because the stock option
price is equal to fair value at the grant date. Had compensation cost for the
plans been determined based on the fair value at the grant dates for awards
under the plan consistent with the fair value method of SFAS No. 123, Accounting
for Stock-Based Compensation, the Company's net income (loss) and
F-13
<PAGE> 192
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
net income (loss) per share would change to the pro forma amounts indicated
below (in thousands, except per share data):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER SIX MONTHS ENDED
31, ---------------------------
--------------------- JUNE 29, JUNE 30,
1995 1996 1996 1997
-------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss):
As reported......................... $(19,888) $ (9,830) $ (14,112) $30,154
Pro forma........................... (19,972) (10,274) (14,285) 29,576
Net income (loss) per share:
As reported......................... $ (.62) $ (.28) $ (.41) $ .63
Pro forma........................... (.63) (.30) (.41) .62
</TABLE>
At December 31, 1996, the fair value of the option grants are estimated on
the date of grant using an option pricing model with the following assumptions:
no dividend yield, risk-free interest rates of 5.7% to 7.1%, expected volatility
of 30% and expected lives of one and one-half to eight years. The pro forma
amounts are not representative of the effects on reported net income for future
years.
6. COMMITMENTS
The Company has executed a raw material supply contract with OmniSource
Corporation ("OmniSource") for the purchase of steel scrap resources (see Note
8). Under the terms of the contract, OmniSource will locate and secure at the
lowest then-available market price steel scrap for the Company in grades and
quantities sufficient for the Company to meet substantially all of its
production requirements. The initial term of the contract is through October
2001. The Company retains the right to acquire scrap from other sources if
certain business conditions are present.
The Company has executed finished goods off-take contracts with Heidtman
Steel Products ("Heidtman") and Preussag Stahl, AG ("Preussag") (see Note 8).
Under the terms of the contracts, the Company retains the right to sell its
hot-rolled coils in the open market; however, the Company is required to sell
and Heidtman and Preussag are required to purchase a minimum of 30,000 and
12,000 tons, respectively, each month at the then-current market price the
Company is charging for similar products. The Company is required to provide
Heidtman and Preussag with a volume discount for all tons purchased each month
in which Heidtman and Preussag purchase the minimum tons from the Company. The
initial term of the contracts for Heidtman and Preussag are through December
2001.
The Company purchases its electricity pursuant to a contract which extends
through 2005. Under the contract the Company is subject to a monthly minimum
charge. At December 31, 1996, the Company's fixed and determinable purchase
obligations for electricity are $7.5 million annually from 1997 through 2001.
The Company began construction of its cold mill in August 1996 and has
construction related commitments of approximately $132.0 million as of December
31, 1996. The Company also began construction of its second caster project in
June 1997 and has construction related commitments of approximately $15 million
as of June 30, 1997.
7. LEGAL PROCEEDINGS
The Company, from time to time, is subject to claims relating to the
conduct of its business. In the opinion of management, any such matters
presently outstanding will not have a material adverse effect upon the Company's
financial position, cash flows or future results of operations.
F-14
<PAGE> 193
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. TRANSACTIONS WITH AFFILIATED COMPANIES
The Company sells hot-rolled coils to Heidtman and affiliates of Preussag
and purchases steel scrap resources from OmniSource. Heidtman, Preussag and
OmniSource are stockholders of the Company. During 1996, sales to Heidtman and
Preussag represented 36% and 12%, respectively, and during 1997, sales to
Heidtman and Preussag represented 32% and 10%, respectively, of the Company's
total net sales. The Company had sales of $91.8 million and $29.9 million during
the year ended December 31, 1996 to Heidtman and affiliates of Preussag,
respectively. The Company as of December 31, 1996 had outstanding accounts
receivable of $15.3 million and $2.6 million from Heidtman and affiliates of
Preussag, respectively.
The Company had purchases (including fees) of approximately $7.2 million
and $145.5 million from OmniSource in 1995 and 1996, respectively. The Company
as of December 31, 1995 and 1996 had accounts payable to OmniSource of
approximately $3.4 million and $12.0 million, respectively.
In 1995, the Company sold approximately 32 unimproved acres of its plant
site to Heidtman for $96,000, for the construction by Heidtman of a steel
processing and storage facility. In addition, the Company permits OmniSource to
maintain a scrap handling facility, with its own equipment and staff, on the
Company's plant site. OmniSource does not pay rent for this facility.
The on-site substation was purchased by the Company for approximately $12.8
million in 1995 from General Electric Corporation, the parent of General
Electric Capital Corporation, a stockholder of the Company. The Company has
commitments to purchase additional equipment from General Electric Corporation
for approximately $23.4 million.
9. FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable and accounts payable approximated fair value as
of December 31, 1995 and 1996, because of the relatively short maturity of these
instruments. The carrying value of long-term debt, including the current
portion, approximated fair value as of December 31, 1995 and 1996, respectively.
The fair values of the Company's long-term debt are estimated using discounted
cash flow analyses, based on the Company's current incremental borrowing rates.
As required by the credit agreement, in August 1994 the Company entered
into an interest rate cap agreement with the agent bank whereby the maximum base
rate on fifty percent of the principal amount, up to $75 million, of the
Company's projected outstanding senior term loans during the period from June
30, 1995 through December 31, 1996 was 7.0%. The premium paid for the interest
rate cap agreement was included in other current assets, as of December 31, 1995
and amortized to interest expense during 1996.
10. RETIREMENT PLANS
The Company sponsors a 401(k) retirement savings plan ("401(k) Plan") for
all eligible employees of the Company under which they may elect to contribute
on a pre-tax basis up to 8% of their eligible compensation. The Company provides
matching contributions equal to 5% of the participants' contributions to the
savings plan. Employer contributions are not significant for any periods
presented. The 401(k) Plan was amended effective in 1997 to provide for a
matching contribution that will be dependent upon the Company's return on
assets. In no event will the match be less than 5% or greater than 50% of
employee contributions.
The Company has also established a Profit Sharing Plan ("Profit Sharing
Plan") for eligible employees. The Profit Sharing Plan is a "qualified plan" for
federal income tax purposes. Each year, the Company allocates to a trust fund
such sum, if any, as the Board of Directors determines, up to an amount equal to
15% of the wages paid to Profit Sharing Plan participants ("profit sharing
pool"). The profit sharing pool is used to fund the Profit Sharing Plan as well
as a separate cash profit sharing bonus which is paid to employees in
F-15
<PAGE> 194
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
March of the following year. The allocation between the Profit Sharing Plan
contribution and the cash bonus amount is determined by the Board of Directors
each year.
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
FISCAL YEAR 1997:
Net sales.................................... $ 98,059 $ 102,178 $ -- $ --
Gross profit................................. 24,149 26,448 -- --
Income from operations....................... 18,810 19,308 -- --
Net income................................... 14,585 15,569 -- --
Net income per share......................... .30 .33 -- --
FISCAL YEAR 1996:
Net sales.................................... $ 32,287 $ 66,375 $75,957 $77,998
Gross profit (loss).......................... (2,898) 5,967 13,293 15,692
Income (loss) from operations................ (5,707) 2,883 9,839 11,200
Extraordinary loss........................... -- -- -- 7,271
Net income (loss)............................ (11,296) (2,816) 4,295 (13)
Net income (loss) per share.................. (.35) (.08) .11 --
FISCAL YEAR 1995:
Net sales.................................... $ -- $ -- $ -- $ 137
Gross profit (loss).......................... -- -- -- (3,032)
Loss from operations......................... (1,695) (2,408) (6,871) (8,914)
Net loss..................................... (1,695) (2,408) (6,871) (8,914)
Net loss per share........................... (.05) (.08) (.22) (.28)
</TABLE>
Per share amounts are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly per share amounts may not equal
the total for the year.
12. SUBSEQUENT EVENTS (UNAUDITED)
On July 9, 1997, the Company amended its credit facility which increased
the amount committed to the Company from $345 million to $450 million, changed
the maturities of the tranches, revised the covenants and lowered the effective
interest rate charged by the bank group.
As a result of the substantial modifications with this amendment, the
Company will incur an extraordinary loss of approximately $10.5 million (net of
tax benefit of $2.2 million) related to prepayment penalties and the write-off
of the financing costs associated with the original credit facility.
Effective July 1, 1997, the Company entered into an interest rate swap
agreement with The First National Bank of Chicago ("First Chicago") to make
fixed rate payments at 6.935% and to receive variable rate payments at LIBOR on
a notional amount of $100 million. The interest rate swap agreement was entered
into as an anticipatory hedge of the seven year term tranche of the new credit
facility. The maturity date of the interest rate swap agreement is July 2, 2001;
however, on June 28, 2001, First Chicago has the right to extend the maturity
date to July 1, 2004 at predetermined interest rates. The interest rate swap
agreement will be accounted for on an accrual basis. The Company is exposed to
credit loss in the event of nonperformance by the counterparty for the net
interest differential when variable rates exceed the fixed rate. However, the
Company does not anticipate nonperformance by the counterparty.
F-16
