<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the period ended March 31, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-21719
STEEL DYNAMICS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
INDIANA 35-1929476
(State or other jurisdiction of incorporation or organization) (I.R.S. employer Identification No.)
7030 POINTE INVERNESS WAY, SUITE 310, FORT WAYNE, IN 46804
(Address of principal executive offices) (Zip code)
</TABLE>
Registrant's telephone number, including area code: (219) 459-3553
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
Yes [X] No [ ]
As of May 5, 1999, Registrant had outstanding 49,195,721 shares of Common Stock.
<PAGE> 2
STEEL DYNAMICS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS: Page
Consolidated Balance Sheets as of March 31, 1999 (unaudited) and
December 31, 1998.................................................. 1
Consolidated Statements of Operations for the three month periods
ended March 31, 1999 and 1998 (unaudited).......................... 2
Consolidated Statements of Cash Flows for the three month periods
ended March 31, 1999 and 1998 (unaudited).......................... 3
Notes to Consolidated Financial Statements......................... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................... 6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......... 9
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................. 10
SIGNATURE......................................................... 10
<PAGE> 3
STEEL DYNAMICS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................................ $ 10,917 $ 5,243
Accounts receivable, net ......................................................... 47,954 42,507
Accounts receivable-related parties .............................................. 17,844 23,448
Inventories ...................................................................... 119,055 126,706
Deferred taxes ................................................................... 18,087 15,134
Other current assets ............................................................. 6,417 9,675
--------- ---------
Total current assets .................................................... 220,274 222,713
PROPERTY, PLANT, AND EQUIPMENT, NET ................................................... 695,696 655,872
RESTRICTED CASH ....................................................................... 13,109 13,057
OTHER ASSETS .......................................................................... 16,949 15,828
--------- ---------
TOTAL ASSETS ............................................................ $ 946,028 $ 907,470
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................................. $ 48,396 $ 24,850
Accounts payable-related parties ................................................. 871 9,592
Accrued interest ................................................................. 3,616 3,267
Other accrued expenses ........................................................... 14,234 15,954
Current maturities of long-term debt ............................................. 6,976 6,933
--------- ---------
Total current liabilities ............................................... 74,093 60,596
LONG-TERM DEBT, less current maturities ............................................... 497,510 477,013
DEFERRED TAXES ........................................................................ 20,307 18,796
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A common stock voting, $.01 par value; 100,000,000 shares authorized;
49,183,340 and 49,158,279 shares issued and outstanding as of March 31, 1999
and December 31, 1998, respectively ........................................ 492 492
Treasury stock, at cost; 1,294,100 shares as of March 31, 1999 and
December 31, 1998 .......................................................... (19,650) (19,650)
Additional paid-in capital........................................................ 334,446 334,363
Retained earnings ................................................................ 38,830 35,860
--------- ---------
Total stockholders' equity .............................................. 354,118 351,065
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .............................. $ 946,028 $ 907,470
========= =========
</TABLE>
See notes to consolidated financial statements.
1
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STEEL DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------
1999 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
NET SALES:
Unrelated parties ........................... $ 85,133 $ 87,615
Related parties ............................. 32,320 30,847
--------- ---------
Total net sales ......................... 117,453 118,462
Cost of goods sold ............................... 99,072 103,483
--------- ---------
GROSS PROFIT ..................................... 18,381 14,979
Selling, general and administrative expenses ..... 8,099 3,897
--------- ---------
OPERATING INCOME ................................. 10,282 11,082
Interest expense ................................. (5,599) (3,343)
Other income ..................................... 262 4,723
--------- ---------
INCOME BEFORE INCOME TAXES ....................... 4,945 12,462
Income taxes ..................................... 1,975 4,866
--------- ---------
NET INCOME ....................................... $ 2,970 $ 7,596
========= =========
BASIC EARNINGS PER SHARE:
Net income per share ............................. $ .06 $ .16
========= =========
Weighted average number of shares outstanding .... 47,877 49,002
========= =========
DILUTED EARNINGS PER SHARE:
Net income per share ............................. $ .06 $ .15
========= =========
Weighted average number of shares outstanding .... 48,244 49,451
========= =========
</TABLE>
See notes to consolidated financial statements.
2
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STEEL DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ...................................................................... $ 2,970 $ 7,596
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ............................................. 8,191 6,963
Deferred income taxes ..................................................... (2,631) 4,106
Changes in certain assets and liabilities:
Accounts receivable .................................................. 157 (1,083)
Inventories .......................................................... 7,651 (5,633)
Other assets ......................................................... 3,258 (2,668)
Accounts payable ..................................................... 14,825 (1,634)
Accrued expenses ..................................................... (1,371) (3,924)
Deferred revenue ..................................................... -- 1,372
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........................ 33,050 5,095
-------- --------
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment ................................... (47,851) (46,868)
Other ......................................................................... (134) (190)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ............................ (47,985) (47,058)
-------- --------
FINANCING ACTIVITIES:
Issuance of long-term debt .................................................... 21,762 41,252
Repayments of long-term debt .................................................. (1,222) (1,333)
Purchase of treasury stock .................................................... -- (979)
Issuance of common stock, net of expenses ..................................... 83 29
Debt issuance costs ........................................................... (14) (518)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES ........................ 20,609 38,451
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................... 5,674 (3,512)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................................... 5,243 8,618
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......................................... $ 10,917 $ 5,106
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ............................................................. $ 8,246 $ 4,336
======== ========
Cash paid for taxes ................................................................ $ 310 $ 838
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally accepted
accounting principles requires that management make certain 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. The reported amounts of revenues and expenses during the reporting
period may also be affected by the estimates and assumptions management is
required to make. Actual results may differ from those estimates.
In the opinion of management these estimates reflect all adjustments, consisting
of only normal recurring accruals, including elimination of all significant
intercompany balances and transactions, which are necessary to a fair statement
of the results for the interim periods covered by such statements. These
financial statements and notes should be read in conjunction with the audited
financial statements included in the Company's 1998 Annual Report on Form 10-K.
2. INVENTORIES (in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------- --------
<S> <C> <C>
Raw Materials .......................... $ 60,774 $ 78,351
Supplies ............................... 31,428 26,849
Work-in-progress ....................... 7,719 7,449
Finished Goods ......................... 19,134 14,057
-------- --------
$119,055 $126,706
======== ========
</TABLE>
3. EARNINGS PER SHARE (in thousands)
The following is a reconciliation of the weighted average common shares for the
basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
March 31,
--------------------
1999 1998
------ ------
<S> <C> <C>
Basic weighted average common shares ............... 47,877 49,002
Dilutive effect of stock options ................... 367 449
------ ------
Diluted weighted average common shares ............. 48,244 49,451
====== ======
</TABLE>
4. NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 1998 the Company adopted Statement of Financial Accounting
Standard No. 131 (SFAS No. 131), "Disclosures about Segments of an Enterprise
and Related Information" which changes 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. SFAS No. 131 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 customer.
The adoption of SFAS No. 131 did not affect results of operations or financial
position or cash flows, but did affect the disclosure for segment information
(See Note 5).
Statement of Financial Standards No. 133 (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities," was issued in June 1998 and is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial condition and measure those instruments at fair value. If certain
conditions are met a derivative may be specifically designated as a fair value
hedge, a cash flow hedge, or a hedge of foreign currency exposure. The
accounting for changes in the fair value of a derivative (that is, gains and
losses) depends on the intended use of the derivative and the resulting
designation. Management has not yet quantified the effect, if any, of the new
standard on the financial statements.
4
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STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. SEGMENT INFORMATION
The Company has two reportable segments: Steel and Scrap Steel Substitute. The
Steel segment consists of the Flat-Rolled Mill, which produces and sells
hot-rolled, cold-rolled and galvanized sheet steel; and the Structural Mill,
which will produce structural steel products but is currently under
construction. The Scrap Steel Substitute segment consists of Iron Dynamics, Inc.
(IDI), which will provide steel scrap substitute to the Company. The Company's
operations are primarily organized and managed by operating segment. The Company
evaluates performance and allocates resources based on operating profit or loss
before income taxes. The accounting policies of the Steel and Scrap Steel
Substitute segments are consistent with those described in Note 1. Intersegment
sales and transfers are accounted for at standard prices and are eliminated in
consolidation.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------------------
1999 1998
-------------------------------------- --------------------------------------
SCRAP STEEL SCRAP STEEL
STEEL SUBSTITUTE TOTAL STEEL SUBSTITUTE TOTAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Segment revenues from external customers $ 117,453 $ -- $ 117,453 $ 118,462 $ -- $ 118,462
Segment income (loss) from operations .. 13,246 (2,964) 10,282 12,183 (1,101) 11,082
Segment assets ......................... 840,478 105,550 946,028 673,823 27,921 701,744
</TABLE>
5
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Throughout this report or elsewhere in other reports filed from time to time
with the Securities and Exchange Commission under the Securities Exchange Act of
1934, as well as in press releases or in oral statements made to the market by
officers, there may be various statements that express Company opinions,
expectations, or projections regarding future events or future results, in
contrast with statements that reflect historical facts. These expressions,
generally preceded by such typical conditional words as "anticipates,"
"intends," "believes," "estimates," and "expects," are intended to operate as
"forward looking statements," as permitted by the Private Securities Litigation
Reform Act of 1995. That legislation creates a "safe harbor" for predictive
statements of this kind, in the event that things do not turn out as
anticipated.
Forward looking statements, by their very nature, involve known and unknown
risks and uncertainties that may cause actual results, performance, or
achievements to differ materially from the anticipated results, performance, or
achievements that may have been expressed or implied by such forward looking
statements. While management intends to express its best judgment when making
statements about what may occur in the future, and although management believes
them to be reasonable in light of the circumstances then known, a number of
important factors can come into play to cause the Company's actual results and
experience to differ materially from those expected or implied by management in
such forward looking statements.
These factors include, among others, the following: (1) changes in economic
conditions in the United States and other major international economies
(especially affecting the significant steel producing and steel consuming
nations in Europe, Asia, and Russia); (2) elements of United States trade policy
and actions regarding steel imports; (3) effects of changes in the availability
and costs of the principal raw materials such as scrap steel and other supplies
used by the Company in its production processes; (4) changes in market demand
and resulting market prices, against available supply, for the Company's steel
products, including the role of steel substitutes such as aluminum and plastics
in the demand for new steel; (5) unanticipated or extraordinary expenses; (6)
loss of business from major customers; (7) inability of the Company to
successfully consummate or implement acquisitions; (8) changes in business
strategy or development plans; (9) actions by the Company's domestic and foreign
competitors, including new or existing production capacities coming into or
leaving the market; (10) availability and cost, as well as unplanned outages, of
electricity and other utilities, upon which the Company is dependent, especially
in light of current and ongoing deregulation reforms; (11) unplanned equipment
failures and other types of plant outages; (12) labor unrest, work stoppage,
and/or strikes, not only if they involve the Company directly, but if they
negatively impact the Company's suppliers and/or its customers; (13) the impact
of monetary or fiscal policy or of increases in interest rates or in the
Company's cost of borrowing; (14) the effect of weather or the elements; (15)
the impact of changes in environmental laws or in other legal and regulatory
requirements applicable to the Company, or any unanticipated private or
governmental claims arising under any of such laws or regulations; (16) loss of
key members of management; (17) risks and difficulties in implementing new
technology that is not yet operational or is relatively new, such as the
Company's Iron Dynamics Project to manufacture scrap substitutes; (18) changes
in cost, completion, or start-up dates, and the performance and future
capabilities of Company projects; (19) unanticipated outcomes of litigation or
the impact of litigation on the adequacy of reserves, if any, or insurance
coverages in connection with such litigation; and (20) risks and difficulties in
implementing information technology, including year 2000 compliance issues.
Any forward looking statements contained in this report or in any other report,
press releases, or oral statements that operate as forward looking speak only as
of the date of such statement, and the Company undertakes no obligation to
update such statements. Comparisons of results for current and any prior periods
are not intended to express any future trends or indications of future
performance, unless expressed as such, and should only be relied upon as
historical data.
This commentary should be read in conjunction with the Annual Report of Steel
Dynamics, Inc., on Form 10-K, for the year ended December 31, 1998 for a full
understanding of the Company's financial condition and results of operations.
RESULTS OF OPERATIONS
Comparative operating results for the three-month periods ending March 31, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------
1999 1998
------- -------
(In thousands, except ton data)
<S> <C> <C>
Net sales ........................................ 117,453 118,462
Gross profit ..................................... 18,381 14,979
Gross profit as a percentage of net sales ........ 15.6% 12.6%
Tons shipped - hot band .......................... 163,568 168,330
Tons shipped - cold mill ......................... 205,965 153,379
</TABLE>
6
<PAGE> 9
Net Sales
Net sales for the first three months of 1999 decreased $1.0 million or 0.9%
compared to the corresponding 1998 period. The decrease in net sales was
primarily attributable to lower realized prices resulting from the high levels
of unfairly traded steel imports and to an extended January mill outage which
was dedicated to the installation of an additional finishing stand.
Net tons shipped for the first three months of 1999 increased 47,824 tons or
14.9% compared to the corresponding 1998 period. The increase in net tons
shipped was the result of the Cold Mill running at near capacity for the first
time during the first quarter of 1999. The Company deliberately used a
substantial portion of its hot band production as feed stock during the first
quarter for the Cold Mill. This resulted in the decrease in hot band net tons
shipped, in comparison to the increase in hot band net tons produced. Hot band
production increased 35.3% from the first quarter in 1998.
The Company believes that the market has reached its low from a product pricing
perspective during the first quarter of 1999. SDI has positioned itself for
long-term competitiveness through the completion of several construction
projects and through the continuation of start-up activities. The Company
anticipates that these activities will result in a stronger, even more cost
effective operation in future quarters. This cost competitiveness coupled with
anticipated price increases is anticipated to significantly strengthen 1999
operating results during the remaining three quarters.
Cost of Goods Sold
Cost of goods sold for the first quarter of 1999 and 1998 was $99.1 million and
$103.5 million, respectively. This decrease was primarily attributable to scrap
costs that were 24.8% lower per ton in the first quarter 1999 than in the first
quarter 1998. Gross profit in the first three months of 1999 increased $3.4
million or 22.7% compared to the corresponding period in 1998. As a percentage
of net sales, gross profit increased 3.0%. This increase was the net result of
a 15% increase in shipment volumes, a 14% decrease in average sales prices per
ton and a 25% decrease in scrap costs per ton.
Selling, General and Administrative Expense
Selling, general and administrative expense in the first three months of 1999
was $8.1 million, or 6.9% of net sales, compared to $3.9 million, or 3.3% of
net sales in 1998. The increase is primarily attributable to the Company's
increased start-up costs associated with Iron Dynamics, Inc. (IDI) and the new
structural mill project in 1999. IDI commissioned its submerged arc furnace
during March 1999 and produced 1,200 tonnes of liquid pig iron with sulfur
readings below expectation and with relatively high levels of metallization.
This production of liquid pig iron is anticipated to provide SDI with
considerable cost savings as a steel scrap substitute during the second half
of 1999.
Interest Expense
Interest expense totaled $5.6 million and $3.3 million for the first quarter of
1999 and 1998, respectively. The additional interest expense is a result of
increased borrowings to finance the expansion projects in conjunction with
decreased capitalized interest.
Other Income
For the three months ended March 31, 1999, other income was a more normalized
$262,000 in contrast with $4.7 million for the same period in 1998, which
reflected certain non-recurring fees. These fees were received by the Company in
connection with the Nakornthai Strip Mill Public Co. Limited (NSM). SDI
terminated its NSM agreements at year-end 1998.
Taxes
For the three months ended March 31, 1999 and 1998, income tax provisions were
$2.0 million and $4.9 million, respectively. The tax provision reflects income
tax expense at the statutory income tax rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is capital intensive and requires substantial
expenditures for the purchase and maintenance of equipment used in its
steelmaking and finishing operations and compliance with environmental laws. The
Company's liquidity needs arise primarily from capital investments, working
capital requirements, and principal and interest payments on indebtedness. The
Company has satisfied these liquidity needs with funds provided by equity,
long-term borrowings, state and local government grants and capital cost
reimbursements.
For the three months ended March 31, 1999, cash provided by operating activities
was $33.1 million, an increase of $28.0 million in comparison to the same
period in 1998. This increase is primarily attributable to the increase in
accounts payable and the decrease in inventories and other assets. Significant
construction projects and timing were the primary drivers of the increased
accounts payable. The reduction in inventories is primarily attributable to the
selling of existing inventories due to strengthening domestic steel demand
resulting from foreign trade restrictions. Cash used in investing activities for
the first three months in 1999 and 1998 were $48.0 million and
7
<PAGE> 10
$47.1 million, respectively, of which $47.9 million and $46.9 million
represented the Company's capital investments for the same period. The 1999
capital investments were primarily utilized in the preliminary construction of
the structural mill and the completion of various projects at the Butler
facilities, including the iron carbide receiving system, the batch annealing
furnaces and an additional rolling stand. Cash provided by financing activities
was $20.6 million and $38.5 million in the first quarter 1999 and 1998,
respectively. The $17.9 million decrease was the direct result of the Company's
utilization of increased cash from operations in relation to additional
borrowings.
During the first quarter of 1999, SDI received approval from its bank group to
loan an additional $10.0 million to IDI for costs related to the completion of
its facilities. As of March 31, 1999, IDI had received $5.0 million of the
approved funds.
ENVIRONMENTAL EXPENDITURES AND OTHER CONTINGENCIES
SDI has incurred and, in the future, will continue to incur capital expenditures
and operating expense for matters relating to environmental control,
remediation, monitoring and compliance. 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.
INFLATION
SDI does not believe that inflation has had a material effect on its results of
operations.
IMPACT OF YEAR 2000
THE FOLLOWING IS A YEAR 2000 READINESS DISCLOSURE pursuant to the safe harbor
provisions of Public Law 105-271.
The Year 2000 issue has become a general matter of concern to business, and has
been identified by the Securities and Exchange Commission as a matter requiring
discussion by publicly held companies. The Year 2000 issue arises from the
design of computer operating systems and computer software programs which
recognize only two digits in the date field and, as a result, may interpret "00"
incorrectly as the year 1900 rather than as the year 2000. This incorrect
recognition has the potential to generate application failures or erroneous
information. This could result in major systems failures or miscalculations
within such areas as (a) manufacturing (b) shipping and receiving of product (c)
scheduling of raw materials, parts and supplies inventories (d) billing and
payments records (e) and the availability of utilities, telephones, data and
other essential services.
SDI is relatively new, considering its original hot mill was completed less than
five years ago. Therefore, all of the company's equipment and computer systems
are of recent vintage, and as such, are anticipated to require minor
modifications to become Year 2000 compliant, if they are not currently. SDI is
still in the process of completing its internal reviews by utilizing internal
staff and SDI equipment vendors. SDI expects to incur total costs of less than
$100,000 to address any remaining Year 2000 issues. This estimated amount
primarily consists of costs associated with the accelerated replacement of
software, which is not Year 2000 compliant. This estimate does not include any
costs that may be incurred by SDI as a result of the failure of any supplier or
customer of SDI, or any other party with whom SDI does business, to become Year
2000 compliant.
SDI is in the process of implementing a plan to obtain information from its
third party entities, such as external service providers, significant suppliers
and customers, and financial institutions. The objective is to confirm their
plans and status of readiness to become Year 2000 compliant in order to better
understand and evaluate how their respective Year 2000 issues may affect SDI's
operations, and in order to assess any possible risks of non-compliance. At this
time, the Company is not in a position to assess this aspect of the Year 2000
problem, but plans to take the necessary steps to provide itself with reasonable
assurance that its suppliers, service providers, and customers are Year 2000
compliant by September 1999.
Based on the information currently available, SDI believes that the
implementation of its Year 2000 Project Plan will adequately resolve the
company's Year 2000 issues. However, since it is not possible to anticipate all
possible future outcomes, there could be circumstances under which SDI's
business operations are disrupted as a result of Year 2000 problems. These
disruptions could be caused by (a) the failure of SDI's systems or equipment to
operate (b) the failure of SDI's suppliers to provide SDI with raw materials,
utilities, supplies or other products or services which are necessary to sustain
SDI's manufacturing processes or other business operations or (c) the failure of
SDI's customers to accept delivery of the Company's product. Any such disruption
of SDI's operations could have a material adverse effect on the financial
condition and results of operations of SDI.
However, based on SDI's assessment efforts to date, which does not yet include
an assessment of incoming and outgoing transportation issues involving railroads
and motor carriers, SDI believes that the reasonably worst case scenario
resulting from one or more supply-side failures, internal imbedded operational
failures, or sell-side failures, will not have a material adverse impact on its
financial condition or results of operations. SDI already maintains, and will
continue to maintain adequate on-site quantities of raw materials, parts and
supplies sufficient to buffer any anticipated vendor interruptions. SDI's
manufacturing facilities, and the separate components of its melting, casting,
and finishing facilities, are and will be capable of being operated manually
should an unanticipated breakdown occur as a result of
8
<PAGE> 11
an imbedded failure. SDI's order entry lead times are also of sufficient
magnitude to analyze and repair any anticipated problem that may arise before
they would manifest themselves as loss of or delay in sales.
YEAR 2000 PROJECT PLAN
<TABLE>
<CAPTION>
RESOLUTION PHASES ASSESSMENT REMEDIATION TESTING IMPLEMENTATION
- ----------------- ---------- ----------- ------- --------------
<S> <C> <C> <C> <C>
Business systems and 100% complete 90% complete 80% complete 75% complete
process control systems
Expected completion Expected completion Expected completion
Date, September 1999 date, September 1999 date, September 1999
Operating Equipment 100% complete 90% complete 90% complete 90% complete
with Embedded Chips
or Software Expected completion Expected completion Expected completion
date, September, 1999 date, September 1999 date, September 1999
Third Party 100% for system 100% for system 75% complete 75% complete
interface; 75% for interface.
all other exposures
Develop contingency Expected completion Expected completion
plans as appropriate, date, September 1999 date, September 1999
September 1999
Expected completion
date for surveying all
third parties, September
1999
</TABLE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business the Company's market risk is limited to changes
in interest rates. The Company utilizes long-term debt as a primary source of
capital. A portion of the debt has an interest component that resets on a
periodic basis to reflect current market conditions. The Company manages
exposure to fluctuations in interest rates through the use of interest rate
swaps. The Company agrees to exchange, at specific intervals, the difference
between fixed rate and floating-rate interest amounts calculated on an agreed
upon notional amount. This interest differential paid or received is recognized
in the consolidated statements of operations as a component of interest expense.
At March 31, 1999, no material changes had occurred related to the Company's
interest rate risk from the information disclosed in the Annual Report of Steel
Dynamics, Inc. and on Form 10-K for the year ended December 31, 1998.
9
<PAGE> 12
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits -
Exhibit No.
*10.1b(1) Amended and Restated Credit Agreement between IDI and
Mellon Bank, N.A., et al.; dated June 10, 1998.
*10.1b(2) Second Amended and Restated Credit Agreement between IDI
and Mellon Bank, N.A., et al., dated March 15, 1999.
*27.1 Financial Data Schedule
(B) Reports on Form 8-K for the quarter ended March 31, 1999:
None
- ----------
* Filed herewith
Items 1 - 5 of Part II are not applicable for this reporting period and have
been omitted.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of Securities Exchange
Act of 1934, Steel Dynamics, Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
May 7, 1999
STEEL DYNAMICS, INC.
By: /s/ TRACY L. SHELLABARGER
-------------------------------------------
TRACY L. SHELLABARGER
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
10
<PAGE> 1
AMENDMENT AND WAIVER
THIS AMENDMENT AND WAIVER (this "Agreement"), dated as of June 10,1998, by
and among IRON DYNAMICS, INC., an Indiana corporation (the "Borrower"), the
lenders listed on the signature pages hereof and MELLON BANK, N.A., a national
banking association, as agent for the Lenders under the Credit Agreement
referred to below (the "Agent").
RECITALS:
WHEREAS the Borrower, certain lenders, the Agent and Mellon Bank, N.A., as
Issuing Bank entered into a Credit Agreement, dated as of December 31, 1997,
(the "Credit Agreement") pursuant to which the Lenders have agreed to extend
credit to the Borrower;
WHEREAS, the Borrower has requested to the Lenders to make certain
amendments to the Credit Agreement and to waive certain conditions of lending
under the Credit Agreement and the Required Lenders are willing to do so to the
extent provided herein;
WHEREAS, capitalized terms not otherwise defined herein shall have the
meanings assigned thereto in the Credit Agreement.
NOW; THEREFORE, the parties hereto, in consideration of their mutual
covenants and agreements hereinafter set forth and intending to be legally bound
hereby agree as follows:
Section 1. Amendments. It is the intention of the Required Lenders that
the lenders to SDI be permitted to retain the security interest granted by SDI
in the shares of the Borrower which are owned by SDI. Accordingly, (i) the
definition of the term "Change of Control" appearing in Section 1.01 of the
Credit Agreement is hereby amended by deleting the phrase "in effect only prior
to the Closing Date," appearing therein and inserting in lieu thereof the phrase
"in effect prior to and after the Closing Date," and (ii) section 4.01(c)(viii)
of the Credit Agreement is hereby amended by deleting the words "and any
security interest in the stock of IDI" appearing therein. Further, the Borrower
will obtain its electric power through SDI's utility contract and, accordingly,
the Credit Agreement is amended by deleting Section 4.02(k) thereof.
Section 2. Additional Amendments. (a) Section 1.01 of the Credit Agreement
is amended by adding thereto, in appropriate alphabetical sequence, the
following definition:
"Lease" shall mean the Lease, dated as of June 10, 1998, from SDI to IDI,
recorded in the office of the recorder of DeKalb County, Indiana.
(b) Section 1.01 of the Credit Agreement is amended by adding as an
additional sentence at the end of the definition of the term "Loan
Parties" the following:
The terms "Loan Party" and "Loan Parties" shall also include, with
respect to the Mortgage, SDI.
(c) Section 1.01 of the Credit Agreement is amended by inserting in the
definition of the term "Project Agreement", immediately after the
words "the SDI Offtake Agreement," appearing therein, the words "the
Lease,".
(d) Section 4.01(a) of the Credit Agreement is amended by inserting,
immediately after the words "all of the other Loan Documents"
appearing therein and before the comma following such words, the
phrase "(other than the Letter of Credit Agreement, the delivery of
which shall be a condition to the issuance of the first Letter of
Credit hereunder)".
(e) Section 4.01(c)(i) of the Credit Agreement is amended to read in
its entirety as follows:
(i) Executed copies of the Lease and executed copies of one or
more Mortgages, duly executed on behalf of the Borrower and
SDI, in substantially the form of Exhibit J hereto
(collectively, as amended, modified or
<PAGE> 2
supplemented from time to time, the "Mortgage", it being
understood that references herein to the mortgagee under the
Mortgage shall mean either or both of the Borrower and SDI, as
the context may require).
(f) Section 5.01(a) of the Credit Agreement is amended by:
(i) inserting in the first sentence thereof, after the phrase
"within 90 days" appearing therein, the phrase "(160 days in
the case of the fiscal year ended December 31, 1997)"; and
(ii) inserting in the second sentence thereof, after the words
"Such financial statements", appearing at the beginning
thereof, the phrase "(commencing with the statements for the
fiscal year ending December 31, 1998)".
(g) Section 5.01(b) of the Credit Agreement is amended by inserting in
the first sentence thereof, after the phrase "within 60 days"
appearing therein, the phrase "(70 days in the case of the fiscal
quarter ended March 31, 1997)".
(h) Section 5.01(c) of the Credit Agreement is amended by deleting the
phrase "within 30 days after the close of each month" and
substituting therefore the phrase "within 30 days (40 days in the
case of April of 1998) after the close of each month (commencing
with April of 1998)".
(i) Section 5.01(d) of the Credit Agreement is amended by inserting,
after the words "Each set of financial statements delivered pursuant
to Section 5.01 (a) hereof" the phrase "(commencing with the
statements for the fiscal year ending December 31,1998)".
(j) Section 7.01(p) of the Credit Agreement is amended by inserting
therein, immediately after the words "of its obligations under", the
words "the Lease,".
(k) Schedule 3.26 to the Credit Agreement is hereby amended to read as
set forth on Schedule 3.026 attached to this Agreement.
(l) Exhibit J to the Credit Agreement is hereby amended to read in its
entirety as set forth on Exhibit J attached hereto.
Section 3. Limited Waiver of Section 4.02(i). Section 4.02(i) of the
Credit Agreement provides, as a condition of lending with respect to Loans made
during the Term Loan Commitment Period, that each Future Project Agreement
described on Schedule 3.27 to the Credit Agreement as being expected prior to
the initial Term Loans shall have been executed and delivered and the Borrower
shall have complied with the conditions of section 5.15 of the Credit Agreement
with respect thereto. The Borrower confirms that it has advised the Lenders and
the Agent that the Borrower has determined that it is not necessary or desirable
that execution of a limestone supply agreement, a baghouse dust disposal
agreement or a slag processing agreement (each of which is also described on
Schedule 3.27) be accomplished until a later date. Accordingly, the Required
Lenders hereby waive the condition of lending in Section 4.02(i) solely with
respect to each of such three agreements, but only until such time as the
Borrower believes that it is necessary or desirable to enter into such agreement
in order to comply with Section 5.14 of the Credit Agreement, relating to
construction of the Project.
Section 4. Limited Waiver of Section 4.01(b)(i)(c). Section 4.01(b)(i)(c)
of the Credit Agreement provides, as a condition of lending with respect
to the initial Loans or Letter of Credit under the Credit Agreement, that the
Agent shall have received Consents to Assignment of Contracts, in substantially
the form of Exhibit N to the Credit Agreement, with respect to the contracts
listed on Schedule 4.01(b) to the Credit Agreement. The Borrower has advised
the Lenders that, while such Consents with respect to a majority of such
contracts have been received and delivered to the Agent, such Consents with
respect to several of such contracts are still the subject of negotiation
because the respective other parties to such contracts have objected to one or
more provisions of such Exhibit N. Accordingly, the Required Lenders hereby
waive the condition of lending in Section 4.01(b)(i)(c) with respect to the
Loans to be made on the Closing Date, provided, however, that, and the Borrower
agrees that, the condition set forth in Section 4.01(b)(i)(c) shall be a
condition to the making of any Loans (and the issuance of Letters of Credit) on
or after June 30, 1998 and to any Loans (or Letters of Credit) which would cause
the aggregate principal amount of Loans and Letters of Credit outstanding under
the Credit Agreement to exceed $15,000,000.
Section 5. Limited Waiver of Section 4.01(v) and Section 4.02(a).
Section 4.01(v) of the Credit Agreement provides as a condition of the initial
Loans under the Credit Agreement that the Borrower shall have received a
commitment for the Utility Loan and at least $650,00 in proceeds thereof shall
have been advanced. Section 4.02(a) makes the receipt of such $650,000 a
condition to subsequent
<PAGE> 3
Loans. The Borrower confirms that it has advised that while such a commitment
has been received, such commitment is subject to public utility commission
approval and no such proceeds will be advanced by the Closing Date. Accordingly,
subject to receipt by the Agent on or before the Closing Date of a written
agreement from SDI, in form satisfactory to the Agent, to the effect that SDI
will, if the Utility Loan is not funded, make advances up to an aggregate amount
of $6,500,00 at such times as advances from SDI to be subordinated to the Loans
under the Credit Agreement in a manner reasonably satisfactory to the Agent, and
subject to receipt by the Borrower of a $650,00 loan from SDI (which loan may be
repaid with the proceeds of the Utility Loan), the Required Lenders hereby waive
the condition of Section 4.01(v). So long as SDI continues to honor such
agreement, the Required Lenders hereby waive the condition of Section 4.02(a)
with respect to $650,000 in proceeds of Utility Loan. For purposes of Section
6.03 of the Credit Agreement, Indebtedness of the Borrower to SDI incurred
pursuant to such agreement with SDI shall be deemed to be Indebtedness incurred
pursuant to the Utility Loan.
Section 6. Authorization to Agent with Respect to Utility Loan. The
Lenders hereby authorize the Agent to release from the Lien of the Security
Documents the personal property (described on Schedule 1.01F hereto) which will
be collateral for the Utility Loan or, to the extent consistent with the
documentation for the Utility Loan, to enter into a subordination agreement
subordinating the Lien of the Security Documents in such property to the Lien
securing the Utility Loan.
Section 7. Direction to Agent. The Required Lenders hereby direct the
Agent to execute and deliver this Agreement.
Section 8. Miscellaneous. (a) This Agreement shall become effective upon
execution and delivery hereof by the Required Lenders, the Borrowers and the
Agent.
(b) The Credit Agreement, as amended or modified by this Amendment, is
in all respects ratified, approved and confirmed and shall, as so
amended, remain in full force and effect. From and after the date
thereof, all references to the "Agreement" in the Credit Agreement
and in the other Loan Documents shall be deemed to be references to
the Credit Agreement as amended by this Agreement.
(c) This Agreement shall be deemed to be a contract under the laws of
the State of New York and for all purposes shall be governed by and
construed and enforced in accordance with the laws of said State.
(d) This Agreement may be executed in any number of counterparts and by
the different parties hereto on separate counterparts, each of
which, when so executed, shall be deemed an original, but all such
counterparts shall constitute but one and the same instrument.
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly
authorized, have executed and delivered this Agreement as of the date first
above written.
Iron Dynamics, Inc.
By: /s/
----------------------------------
Tracy Shellabarger
Secretary
Mellon Bank, N.A., as Lender,
As issuing Bank and as Agent
By: /s/
----------------------------------
John K. Walsh
Vice President
Kreditanstalt fur Wiederaufbau
By: /s/
----------------------------------
Norbert Vay
Vice President
By: /s/
----------------------------------
Vera Voelkel
Senior Project Manager
Comerica Bank
By: /s/ undecipherable
----------------------------------
National City Bank, Indiana
By: /s/ undecipherable
----------------------------------
Fort Wayne National Bank
By: /s/
----------------------------------
Gerald Witt
Senior Vice President
LaSalle National Bank
By: /s/ undecipherable
----------------------------------
<PAGE> 1
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Agreement"), dated as of
March 15, 1999, by and among IRON DYNAMICS, INC., an Indiana corporation (the
"Borrower"), the lenders listed on the signature pages hereof and MELLON BANK,
N.A., a national banking association, as agent for the Lenders under the Credit
Agreement referred to below (the "Agent").
RECITALS:
WHEREAS, the Borrower, certain lenders, the Agent and Mellon Bank, N.A.,
as Issuing Bank, entered into a Credit Agreement, dated as of December 31, 1997,
as amended by the Amendment and Waiver, dated as of June 10, 1998 (as so
amended, the "Credit Agreement"), pursuant to which the Lenders have agreed to
extend credit to the Borrower;
WHEREAS, the Borrower has requested the Lenders to make certain amendments
to the Credit Agreement and the Required Lenders are willing to do so to the
extent provided herein,
WHEREAS, capitalized terms not otherwise defined herein shall have the
meanings assigned thereto in the Credit Agreement.
NOW, THEREFORE, the parties hereto, in consideration of their mutual
covenants and agreements hereinafter set forth and intending to be legally bound
hereby agree as follows:
Section 1. Amendments. (a) Section 6.03 of the Credit Agreement is hereby
amended by adding a new subsection (h) at the end thereof to read as follows:
(h) Unsecured Indebtedness of the Borrower to SDI in an aggregate
principal amount not exceeding $10,000,000 at any time outstanding,
pursuant to documentation in substantially the form of Exhibits FF
and GG hereto, which will provide that the principal amount of such
Indebtedness shall accrue interest at a rate per annum not to exceed
the Prime Rate and shall be repayable upon demand by SDI if, and
only if, at the time of such demand and at the time of such payment
(i) such payment is not contrary to the terms of the SDI
Subordination Agreement and (ii) both before and after giving effect
to such repayment (A) each of the conditions set forth in Section
6.06(a)(i) through (vii) are met such that the Borrower would be
permitted to make the one-time cash dividend referred to in Section
6.06(a), or (B) if such one-time cash dividend shall have been made
previously, each of such conditions set forth in Section 6.06(a)
(i) through (v) and (vii) are met and the Tangible Net Worth of the
Borrower is not less than $20,000,000. Such documentation shall
provide that principal amounts of such Indebtedness to SDI once
repaid may not be reborrowed by IDI. The Borrower shall not make any
payment of amounts due, whether of principal, interest or otherwise,
in connection with such Indebtedness to SDI except in accordance
with this Section 6.03(h) and the SDI Subordination Agreement. "SDI
Subordination Agreement" means a Subordination Agreement in
substantially the form of Exhibit GG attached hereto pursuant to
which repayment of such Indebtedness to SDI shall be subordinated to
the Loans under this Agreement.
(b) The Credit Agreement is hereby amended by adding thereto new
Exhibits (FF) and (GG) in the forms attached hereto as Exhibits FF
and GG, respectively.
Section 2. Directions to Agent. The Required Lenders hereby direct the
Agent to execute and deliver this Agreement.
Section 3. Miscellaneous. (a) This Agreement shall become effective upon
execution and delivery hereof by the Required Lenders, the Borrower and Agent.
(b) The Credit Agreement, as amended or modified by this Amendment, is
in all respects ratified, approved and confirmed and shall, as so
amended, remain in full force and effect. From and after the date
hereof, all references to the "Agreement" in the Credit Agreement
and in the other Loan Documents shall be deemed to be references to
the Credit Agreement as amended by this Agreement.
(c) This Agreement shall be deemed to be a contract under the laws of
the State of New York and for all purposes shall be governed by and
construed and enforced in accordance with the laws of said State.
(d) This Agreement may be executed in any number of counterparts and by
the different parties hereto on separate counterparts, each of
which, when so executed, shall be deemed an original, but all such
counterparts shall constitute but one and the same instrument.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly
authorized, have executed and delivered this Agreement as of the date first
above written.
Iron Dynamics, Inc.
By: /s/
----------------------------------
Larry Lehtinen
Vice President
Mellon Bank, N.A., as Lender,
As issuing Bank and as Agent
By: /s/
----------------------------------
John K. Walsh
Vice President
Kreditanstalt Fur Wiederaufbau
By: /s/ undecipherable
----------------------------------
Comerica Bank
By: /s/ undecipherable
----------------------------------
National City Bank, Indiana
By: /s/
----------------------------------
Gerald Witte
Senior Vice President
National City Bank, Indiana F/K/A
Fort Wayne National Bank
By: /s/
----------------------------------
Gerald Witte
Senior Vice President
LaSalle National Bank
By: /s/ undecipherable
----------------------------------
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