AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 27,JULY 22, 2002
REGISTRATION NO. 333-90594
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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STEEL DYNAMICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED(Exact name of Registrant as specified in its charter)
INDIANA 3312 35-1929476
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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6714 POINTE INVERNESS WAY
SUITE 200
FORT WAYNE, IN ITS CHARTER)46804
TELEPHONE: 260-459-3553
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
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MR. KEITH E. BUSSE
STEEL DYNAMICS, INC.
6714 POINTE INVERNESS WAY
SUITE 200
FORT WAYNE, IN 46804
TELEPHONE: 260-459-3553
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
COPIES TO:
INDIANA 35-1929476
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6714 POINTE INVERNESS WAY, SUITE 200 TRACY L. SHELLABARGER, VP, CFOROBERT S. WALTERS, ESQ. ANDREW R. SCHLEIDER, ESQ.
BARRETT & MCNAGNY LLP SHEARMAN & STERLING
215 EAST BERRY STREET 599 LEXINGTON AVENUE
FORT WAYNE, INDIANA 46804 6714 POINTE INVERNESS WAY, SUITE 200IN 46802 NEW YORK, NEW YORK 10022
TELEPHONE: (260) 459-3553 FORT WAYNE, INDIANA 46804
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE423-9551 TELEPHONE: (212) 848-4000
FAX: (260) 459-3553
NUMBER, INCLUDING AREA CODE, OF (NAME, ADDRESS, INCLUDING ZIP CODE, AND
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)423-8920 FAX: (212) 848-7179
COPIES TO:
ROBERT S. WALTERS, ESQ.
BARRETT & McNAGNY LLP
215 EAST BERRY STREET
FORT WAYNE, INDIANA 46802
260-423-9551---------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC: From time to timeAs
soon as practicable after the effective date of this registration statement.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]Registration Statement becomes effective.
If any of the securities being registered on this formForm are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]box: [ ]
If this formForm is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) REGISTRATION FEE(2)
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TITLE OF EACH PROPOSED
CLASS OF MAXIMUM PROPOSED
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE MAXIMUM AMOUNT OF
REGISTERED REGISTERED PER SHARE AGGREGATE PRICE (1) REGISTRATION FEE
Common Stock, par value $0.01$.01 per
share.............................. 10,580,000 $16.37 per share $22,005,000 $2,024.46$173,194,600 $15,934
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(1) CalculatedEstimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933 and based on the high
and low prices as reported on the Nasdaq National Market as of July 19,
2002.
(2) The Registrant has not paid any amount in accordanceconnection with Rule 457(o).this filing since
$16,100 was previously paid on June 16, 2002.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THISTHE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THE
SELLING STOCKHOLDERSWE MAY NOT SELL THEIRTHESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT ISWE ARE NOT SOLICITING
AN
OFFEROFFERS TO BUY THESE SECURITIES IN ANY STATEJURISDICTION WHERE THE OFFER OR SALE IS
NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JULY 22, 2002
PROSPECTUS
$22,005,000
STEEL9,200,000 SHARES
[STEEL DYNAMICS, INC. LOGO]
COMMON STOCK
Certain---------------------
Steel Dynamics is offering 7,600,000 shares of its common stock and the selling
stockholders identified in this prospectus are offering for sale from time to time under this prospectus a number of shares of our1,600,000 shares.
Our common stock $.01 par value per share, that will be finally determined by
dividing $7,333,334 byis quoted on the closingNasdaq National Market under the symbol
"STLD." On July 19, 2002, the reported last sale price of our common stock on
the second
business day prior to March 1, 2002 and, again, on March 15 and 29, 2002, for an
aggregate of $22 million in market value on the three issuance dates. These
selling stockholders, which are all banks and other financial institutions that
loaned money to our Iron Dynamics, Inc. subsidiary, are entitled to receive
these newly issued shares as part of a settlement agreement with Iron Dynamics
and us under the terms of which they have agreed to retire Iron Dynamics'
existing $58,986,841 debt, approximately $14.1 million of which we had
previously agreed to guaranty. As consideration, we have agreed to pay them $15
million in cash, which we have already done, we have agreed to issue them $22
million of our common stock, the resale of which is the subject of this
prospectus, and we have agreed to make certain future contingent payments
measured by future Iron Dynamics earnings, not exceeding the unpaid difference
between the sum of these two payments and the existing debt.
The selling stockholders may sell these shares from time to time at prevailing
market prices for the shares or in negotiated transactions. For additional
information on the methods of sale, please refer to the section entitled "Plan
of Distribution" on page 10 of this prospectus.
We will not receive any portion of the proceeds from the sale of these shares by
the selling stockholders. We have agreed to pay all expenses of registration
incurred in connection with this offering, including printing expenses,
accounting fees, legal fees and filing fees. The selling stockholders will pay
their own commissions, discounts, selling and other expenses of disposition.
Our shares of common stock are quoted on The Nasdaq National Market System under
the symbol "STLD." The shares of our common stock offered for the account ofwas $16.35 per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 9.
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS STEEL DYNAMICS STOCKHOLDERS
---------------- ---------------- ---------------- ----------------
Per Share........................... $ $ $ $
Total............................... $ $ $ $
We and the selling stockholders will be offered athave granted the market price onunderwriters the day of sale. On
February 25, 2002, the last reported sale price of our common stock was $13.68
per share.
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 3 of this prospectus.
THIS IS NOT AN UNDERWRITTEN OFFERING.
NEITHERright to
purchase up to an additional 1,380,000 shares to cover over-allotments.
THE SECURITIES AND EXCHANGE COMMISSION NOR ANYAND STATE SECURITIES COMMISSION HASREGULATORS HAVE NOT
APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is March 1,underwriters expect to deliver the shares to purchasers on , 2002.
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MORGAN STANLEY JPMORGAN
, 2002
[STEEL DYNAMICS LOGO]
[PICTURE OF BUTLER MINI-MILL]
[PICTURE OF BUTLER MINI-MILL CONTINUOUS CASTER]
[PICTURE OF BUTLER MINI-MILL HOT ROLLING MILL]
[PICTURE OF HOT STEEL FROM CONTINUOUS CASTER]
[PICTURE OF COLUMBIA CITY STRUCTURAL STEEL AND RAIL MINI-MILL]
TABLE OF CONTENTS
PAGE
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PAGE
Our Company.....................................................Summary............................... 1
Risk Factors.......................... 9
Forward Looking Statements...................................... 1
Risk Factors.................................................... 3Information........... 17
Market Data........................... 18
Use of Proceeds................................................. 9Proceeds....................... 19
Price Range of Common Stock and
Dividend Policy..................... 20
Capitalization........................ 21
Selected Financial and Operating
Data................................ 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 24
Industry Overview..................... 34
Business.............................. 41
Management............................ 58
PAGE
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Related Party Transactions............ 61
Principal and Selling Stockholders............................................ 9
Plan of Distribution............................................ 10
Legal Matters................................................... 11
Experts......................................................... 12
IncorporationStockholders.... 63
Description of Certain Documents by Reference................. 12Indebtedness... 65
Description of Capital Stock.......... 67
Shares Eligible for Future Sale....... 69
United States Federal Tax
Considerations for Non-U.S. Holders
of Our Common Stock................. 71
Underwriters.......................... 74
Legal Matters......................... 76
Experts............................... 76
Where You Can Find More Information............................. 13Additional
Information......................... 76
Information We Incorporate by
Reference........................... 76
Index to Consolidated Financial
Statements.......................... F-1
OUR COMPANY------------------------
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
information different from that contained or incorporated by reference in this
prospectus. We are offering to sell, and seeking offers to buy, shares of common
stock only in jurisdictions where offers and sales are permitted. The
information appearing in this prospectus or in any document incorporated by
reference in this prospectus is accurate only as of the date on the front cover
of the applicable document.
Unless otherwise indicated or as the context otherwise requires, references
in this prospectus to "Steel Dynamics," "we," "our," "ours," and "us" refer to
Steel Dynamics, Inc. is an Indiana corporation,and its subsidiaries.
i
SUMMARY
This summary highlights material information about our business and this
offering. It does not include all the information that may be important to you
in making a decision to invest in our common stock. For a more complete
understanding of our business and the mailing addressoffering, you should read this entire
prospectus, including the section entitled "Risk Factors," our consolidated
financial statements and the related notes and the other information included or
incorporated by reference in this prospectus.
STEEL DYNAMICS
OVERVIEW
We are one of our
executive offices is 6714 Pointe Inverness Way, Suite 200, Fort Wayne, Indiana
46804. Our telephone number is 260-459-3553.the most profitable mini-mill steel producers in the United
States in terms of operating profit per ton. We primarily own and operate a
flat rolledstate-of-the-art, low-cost flat-rolled mini-mill on an 840-acre sitelocated in Butler, Indiana, whichIndiana. Our
Butler mini-mill began commercial production in January 1996. Our Butler mill1996 and was constructed
in only 14 months, whichrepresenting what we believe is the fastestshortest construction
period ever for a facility of this kindkind. The mini-mill currently has an annual
production capacity of facility, and at a2.2 million tons. The total capital cost of approximately
$280our Butler
mini-mill was $630 million, which we believe is approximately 20%significantly less than the cost
of comparable mini-mills currently operating. Our Butler mill has an annual
production capacity of 2.2 million tons andmini-mill produces a
broad range of high quality flat rolled carbonhot-rolled, cold-rolled and coated steel products. We sellproducts,
including a large variety of hot
rolled, cold rolledhigh value-added and coated steel products. We also sell high value-addedmargin specialty products
such as mildthinner gauge rolled products and medium carbon hot rolled bands, high strength low
alloy hot rolled bands, high strength low alloy 80,000 minimum yield hot rolled
sheet, hot rolled and cold rolled hot dipped galvanized sheet and fully
processed cold rolled sheet.products. We sell our
products directly to end usersend-users, intermediate steel processors and
through steel service
centers primarily in the Midwestern United States. Our products are used in
numerous industry sectors, including the automotive, construction and commercial
industries.
DuringIn May 2002, we announced plans to construct a low-cost, coil coating
facility at our Butler mini-mill that will further increase our range of
value-added capabilities. Subject to our receipt of applicable permits, we
anticipate starting construction of the facility within the next several months
and expect to commence coating operations in the middle of 2003. The coating
facility is currently expected to have an annual production capacity of 240,000
tons and is estimated to cost $25-$30 million.
In May 2001, we began construction of a new state-of-the-art structural
steel and rail mini-mill on a 609-acre site in Whitley County,Columbia City, Indiana. We
estimate that this new facility will cost approximately $315 million, excluding
capitalized interest. We believe that this mill willOur Columbia City mini-mill
is designed to have an annual production capacity of 1.0 to 1.3 million tons depending on the mix of products.and
produce structural steel and rails at a higher quality and lower cost than
comparable mini-mills. We expect to commence productionspend approximately $315 million to
construct this mini-mill, of which $280 million has been spent as of June 30,
2002. We believe that the initial capital construction costs of our Columbia
City mini-mill will be among the lowest in the industry for such a facility. We
commenced commercial structural steel duringoperations in late June 2002 and have
shipped our first structural products to initial customers. We expect to ramp up
these operations through regular product introductions and be fully operational
by the second quarterend of 2002 and2002. In addition, we expect to commence commercial production of
rails during the first quarter of 2003. We constructed our structural steel
facility in less than 12 months, which we believe is the shortest construction
period ever for a facility of this kind. Our structural steel facilityoperation is
designed to produce structural steel beams, pilings and other steel componentsproducts for the building, construction, transportation and
industrial machinery markets. Our rail manufacturing facilityoperation is designed to
produce a variety of standard and
premium grade rails, including head-hardened rails, in a range of weights and
lengths,rail products for the railroad industry as well as for rail contractors, transit
districts and short-line railroads.
In July 2000,industry.
Through our newjoint venture, New Millennium Building Systems, LLC, began
commercial production, only seven months after the commencementwe also
produce and sell a broad range of plant
construction. New Millennium produces steel joists, girders and trusses, as well as
roof and floor decking materials for use in the construction of commercial,
industrial and institutional buildings. ItNew Millennium is attemptingseeking to position
itself asto be the premier, low-cost producer of these products.
FORWARD LOOKING STATEMENTS
ThroughoutThe U.S. steel industry has historically been, and continues to be, highly
cyclical in nature, including a significant downturn in the second half of 2000
through most of 2001. During this memorandum,period, our business was also adversely
impacted with our net sales declining from $693 million in 2000 to $607 million
in 2001 and our earnings declining from $54 million in 2000 to $3 million in
2001. However, during the first half of 2002, domestic flat-rolled steel prices
increased dramatically from historical cyclical lows in 2001. This increase has
resulted from a number of factors, including (1) a reduction in domestic steel
production capacity as a result of past bankruptcies and shutdowns of other U.S.
steel producers, (2) a reduction in imports, driven in part by recent favorable
rulings with respect to tariffs and quotas on foreign steel and (3) a
strengthening of the
1
overall U.S. economy and the need for end-users of steel products to replenish
their depleted inventories. As a result of our efficient, low-cost operations,
we may make statementsbelieve that expressalthough our opinions,
expectations, or projections regarding future events or future results,earnings declined significantly, we were one of the
few U.S. steel producers to maintain profitability in contrast with statements2001, and we have already
benefited from the improvements in the domestic flat-rolled steel market in
2002.
COMPETITIVE STRENGTHS
ONE OF LOWEST COST PRODUCERS IN THE UNITED STATES; STATE-OF-THE-ART
FACILITIES
We believe that reflect historical facts. These expressions,our facilities are among the lowest-cost steel
manufacturing facilities in the United States. Operating profit per ton at our
facilities was $65, $23 and $34 in 2000 and 2001 and for the three months ended
March 31, 2002, respectively, which we generally precedebelieve compares favorably with our
competitors. Our low operating costs are primarily a result of our efficient
plant designs and operations, our high productivity rate of between 0.3 to 0.4
man hours per ton at our Butler mini-mill (which is significantly lower than the
rate for integrated steel producers, which we believe is approximately 3.0 man
hours per ton), low ongoing maintenance cost requirements and strategic
locations near supplies of our primary raw material, scrap steel.
WELL-POSITIONED TO BENEFIT FROM IMPROVING STEEL MARKET CONDITIONS
Domestic spot prices for hot-rolled, cold-rolled, and coated sheet have
increased from recent lows of $210/ton, $300/ton and $320/ton, respectively, in
December 2001 to $320/ton, $410/ton and $425/ton, respectively, in May 2002.
Approximately 80% of our flat-rolled products are sold on the spot market under
contracts with terms of twelve months or accompanyless and, therefore, our results of
operations are positively impacted by such typical conditional wordsincreases in domestic flat-rolled steel
prices. We believe that we are well positioned to benefit from the recent
increases in flat-rolled prices. Our capacity utilization rate year-to-date has
been in excess of 100% of our stated capacity.
EXPERIENCED MANAGEMENT TEAM AND UNIQUE CORPORATE CULTURE
Our senior management team is highly experienced and has a proven track
record in the steel industry, including pioneering the development of thin-slab
flat-rolled technology. Their objectives are closely aligned with our
stockholders through meaningful stock ownership positions and incentive
compensation programs. Our corporate culture is also unique for the steel
industry. We emphasize decentralized decision-making and have established
incentive compensation programs specifically designed to reward employee teams
for their efforts towards enhancing productivity, improving profitability and
controlling costs.
DIVERSIFIED PRODUCT MIX
Our products include hot-rolled and cold-rolled steel products, galvanized
sheet products, light gauge steel products, joists and deck materials. This
diversified mix of products allows us to access a broad range of end-user
markets, serve a broad customer base and mitigate our exposure to cyclical
downturns in any one product or end-user market. We will further diversify our
product mix once we commence production of structural steel and rails at our
Columbia City mini-mill.
STRATEGIC GEOGRAPHIC LOCATIONS
The strategic locations of our facilities near sources of scrap materials
and our customer base allow us to realize significant pricing advantages due to
freight savings for inbound scrap as "anticipate," "intend," "believe," "estimate," "plan," "seek," "project" or
"expect," or bywell as for outbound steel products
destined for our customers. Our mini-mills are located in the words "may," "will," or "should," are intended to operate as
"forward looking statements"Upper Midwest, a
region which we believe accounts for a majority of the kind permitted bytotal scrap produced in
the Private Securities
Litigation Reform ActUnited States. Our Butler mini-mill is located within 300 miles of 1995, incorporatedour major
flat-rolled steel customers.
2
BUSINESS STRATEGY
Our objective is to use state-of-the-art technologies to produce a broad
range of high-quality steel products at a low cost. Key elements of our strategy
are:
EXPAND PRODUCT OFFERINGS
The completion of our Columbia City mini-mill and our production of
structural steel and rails will be an important step in Section 27Apursuing our strategy of
product line expansion. This mini-mill is strategically located to serve the
Upper Midwest, Northeast and Canadian markets, which we believe are attractive
and under-served markets. Our strategy to expand our flat-rolled steel product
offerings is to focus on the production of high value-added thinner gauge
products and galvanized products. The margins on high value-added products
typically exceed those of the Securities Actcommodity grade and the number of 1933producers that
make them is more limited. We will continue to seek additional opportunities to
further expand our range of high value-added products through the expansion of
existing facilities, greenfield projects and Section 21Eacquisitions of other steel
manufacturers or steelmaking assets that may become available through the
continuing consolidation of the Securities Exchange Actdomestic steel industry.
ENTER NEW GEOGRAPHIC MARKETS
We may seek to enter new steel markets in strategic geographic locations
such as the Southeastern or Western United States that offer attractive growth
opportunities. Due to the recent restructuring of 1934, as amended. That
legislation protects such predictive statements by creating a "safe harbor" from
liability in the event that a particular prediction does not turn out as
anticipated.
While we always intend to express our best judgment when we make statements
about whatdomestic steel industry,
we believe will occur in the future,there are attractive opportunities to grow our business
geographically either through acquisitions of existing assets or through
strategic partnerships and although we base these
statements on assumptions that we believe to be reasonable when made, these
forward looking statements are not a guarantee of performance, and you should
not place undue reliance on such statements. Forward looking statements are
subject to many uncertainties and other variable circumstances, many of which
are outside of our control, that could cause our actual results and experience
to differ materially from those we thought would occur.
The following listing represents some, but not necessarily all, of the factors
thatalliances. We may cause actual results to differ from those anticipated or predicted:
o cyclical changes in market supply and demand for steel; general
economic conditions; U.S. or foreign trade policy affecting steel
imports or exports; and governmental monetary or fiscal policy in the
U.S. and other major international economies;
1
o risks and uncertainties involving new products or new technologies,also consider growth opportunities
through greenfield projects, such as our Iron Dynamics ironmaking process, in whichColumbia City mini-mill project.
CONTINUE TO MAINTAIN LOW PRODUCTION COSTS
We are focused on continuing to maintain one of the product or
process or certain critical elements thereof may not work at all, may
not work as well as expected, or may turn out to be uneconomic even if
they do work;
o changeslowest operating cost
structures in the availability orNorth American steel industry based upon operating cost per
ton. We will continue to optimize the use of our equipment, enhance our
productivity and explore new technologies to further improve our unit cost of
steel scrap, steel scrap
substitute materials or other raw materials or supplies whichproduction at each of our facilities.
FOSTER ENTREPRENEURIAL CULTURE
We intend to continue to foster our entrepreneurial corporate culture and
emphasize decentralized decision-making while rewarding teamwork, innovation and
operating efficiency. We will also continue to focus on maintaining the
effectiveness of our incentive bonus-based plans that are designed to enhance
overall productivity and align the interests of our management and employees
with our stockholders.
MAINTAIN STRONG FINANCIAL POSITION AND FINANCIAL FLEXIBILITY
We are committed to maintaining a strong capital structure. The refinancing
of our bank facilities in March 2002 was an important step, as it provided us
with greater financial flexibility. As a result of improved domestic flat-rolled
prices, we use
in our production processes, as well as periodic fluctuationsalso believe it will be possible to achieve stronger cash flows than
in the availabilityrecent past. In addition, we estimate that as of May 31, 2002 our capital
expenditures for the remainder of 2002 will be $55 million, as our Columbia City
mini-mill project is largely complete. As of March 31, 2002, we had $32 million
of cash and costan undrawn $75 million revolving credit facility.
RISK FACTORS
Our profitability is subject to the risks described under "Risk Factors."
The following are among the most significant risks that may adversely affect our
future financial performance and our ability to effectively compete within our
industry:
- excess imports of electricity, natural gas or other utilities;
osteel into the occurrence of unanticipated equipment failuresUnited States that depress U.S. steel
prices;
- intense competition and plant outages
or incurrence of extraordinary operating expenses;
o actions by our domestic and foreign competitors, including the
addition or reduction of productionexcess global capacity or loss of business from
one or more of our major customers or end users;
o labor unrest, work stoppages and/or strikes involving our own
workforce, those of our important suppliers or customers, or those
affectingin the steel industry in general;
othat
depress U.S. steel prices;
- changes to President Bush's Section 201 Order that have the effect of
increasing the elements uponlevel of imports of steel into the United States;
3
- reduction of demand for steel or downturn in the industries we serve,
including the automotive industry;
- technology, operating and start-up risks associated with our Iron
Dynamics scrap substitute project;
- inability to secure a stable supply of steel scrap;
- start-up and operating risks associated with the construction of our
Columbia City structural steel and rail mini-mill; and
- unexpected equipment failures that lead to production curtailments or
shutdowns.
For additional information on these factors and others, we refer you to
"Risk Factors".
RECENT DEVELOPMENTS
SECOND QUARTER RESULTS
On July 10, 2002, we announced our preliminary unaudited financial results
for the second quarter of 2002. We reported consolidated earnings of $17.7
million, or $0.37 per diluted share, for the second quarter 2002. Our operating
profit per ton for the second quarter 2002 was $66, a 94% increase compared to
$34 for the first quarter 2002.
Net sales for the second quarter 2002 were $214 million, a 28% increase
compared to the first quarter 2002 and a 54% increase compared to the fourth
quarter 2001. Our second quarter 2002 average consolidated selling price per ton
was $340, 14% higher than the $297 recorded for both the first quarter 2002 and
the fourth quarter 2001. Our second quarter 2002 consolidated shipments were
628,000 tons, and included approximately 65% of value-added, higher-margin
flat-roll products.
Our net sales of $214 million compared favorably to second quarter 2001 of
$158 million, a 35% increase. Total shipments increased from 516,000 to 628,000,
up 22%. We had net income of $2.0 million in the second quarter 2001, versus
$17.7 million for second quarter 2002, a 785% increase. Earnings per share rose
from $0.04 per diluted share for second quarter 2001 to $0.37 per diluted share
for second quarter 2002.
4
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2001 2002 2001 2002
-------- -------- -------- --------
OPERATING DATA:
Net sales.......................................... $157,639 $213,739 $311,725 $380,642
Costs and expenses:
Costs of goods sold.............................. 132,140 160,696 260,663 300,225
Selling, general, & administrative expenses...... 18,176 19,779 31,978 32,867
-------- -------- -------- --------
Income from operations............................. 7,323 33,264 19,084 47,550
Interest expense................................... 4,169 5,030 9,008 9,295
Other (income) expense, net........................ (22) (131) (226) 4,022
-------- -------- -------- --------
Income before income taxes and extraordinary
items............................................ 3,176 28,365 10,302 34,233
Income taxes....................................... 1,223 10,637 3,966 12,837
-------- -------- -------- --------
Income before extraordinary items.................. 1,953 17,728 6,336 21,396
Extraordinary loss on debt extinguishment, net of
tax benefit of $1,216............................ -- -- -- 2,028
-------- -------- -------- --------
Net income......................................... $ 1,953 $ 17,728 $ 6,336 $ 19,368
======== ======== ======== ========
Basic earnings per share:
Income before extraordinary items.................. $ .04 $ .37 $ .14 $ .46
Extraordinary loss on debt extinguishment.......... -- -- -- (.05)
-------- -------- -------- --------
Net income......................................... $ .04 $ .37 $ .14 $ .41
======== ======== ======== ========
Weighted average common shares outstanding......... 45,648 47,423 45,578 46,734
======== ======== ======== ========
Diluted earnings per share:
Income before extraordinary items.................. $ .04 $ .37 $ .14 $ .45
Extraordinary loss on debt extinguishment.......... -- -- -- (.04)
-------- -------- -------- --------
Net income......................................... $ .04 $ .37 $ .14 $ .41
======== ======== ======== ========
Weighted average common shares and share
equivalents outstanding.......................... 45,891 47,859 45,799 47,103
======== ======== ======== ========
OTHER DATA:
Shipments (net tons)............................... 515,658 627,902
Hot band production (net tons)..................... 523,997 599,764
Average consolidated selling price per ton
(dollars)........................................ $ 306 $ 340
Operating profit per ton shipped (dollars)......... 32 66
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
(UNAUDITED)
(IN THOUSANDS)
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents................................... $ 48,747 $ 78,241
---------- ------------
Working capital............................................. 182,064 194,093
---------- ------------
Total assets................................................ 1,199,908 1,180,098
========== ============
Long-term debt (including current maturities)............... 551,675 599,924
Stockholders' equity........................................ 463,569 418,575
---------- ------------
------------------------
Steel Dynamics, Inc. was incorporated in Indiana in August 1993. Our
principal executive offices are located at 6714 Pointe Inverness Way, Suite 200,
Fort Wayne, Indiana 46804 and our telephone number is (260) 459-3553.
5
THE OFFERING
Common stock offered by us................ 7,600,000 shares
Common stock offered by the selling
stockholders............................ 1,600,000 shares
Total common stock offered.............. 9,200,000 shares
Common stock to be outstanding after the
offering................................ 55,115,896 shares
Use of proceeds........................... We estimate we will receive net proceeds from this
offering of approximately $116 million. We intend to use
the net proceeds from this offering for general
corporate purposes, including capital expenditures,
repayment of indebtedness, working capital and potential
acquisitions. We will not receive any proceeds from the
sale of shares by the selling stockholders.
Nasdaq National Market symbol............. "STLD"
------------------------
Unless we specifically state otherwise, the information in this prospectus
does not take into account the sale of up to 1,380,000 shares of common stock
which the underwriters have the option to purchase to cover over-allotments.
The number of shares to be outstanding after this offering is based on
47,515,896 shares outstanding as of June 30, 2002 and does not include 2,458,301
shares issuable upon the production
or needsexercise of outstanding stock options at a weighted
average exercise price of $13.40 per share.
6
SUMMARY FINANCIAL AND OPERATING DATA
The following table sets forth summary consolidated financial and operating
data of Steel Dynamics. The summary consolidated financial and operating data as
of and for each of the years in the three-year period ended December 31, 2001
were derived from our audited consolidated financial statements. The summary
consolidated financial and operating data as of and for the three months ended
March 31, 2001 and 2002 were derived from our unaudited consolidated financial
statements. These unaudited consolidated financial statements include, in our
opinion, all adjustments, consisting of normal recurring adjustments, necessary
to present fairly the data for such periods. Operating results for interim
periods are not necessarily indicative of a full year's operations. You should
read the following data in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and the related notes included elsewhere in this
prospectus.
You should also read the following information in conjunction with the data
in the table on the following page:
- Our first quarter 2002 extraordinary loss of $2.0 million (net of tax
benefit of $1.2 million) consisted of prepayment penalties and the
write-off of capitalized financing costs associated with the refinancing
of our important supplierscredit facilities, effective March 26, 2002.
- "EBITDA" represents income before extraordinary items, income taxes,
interest expense (net of interest income), depreciation and amortization.
EBITDA is not a measure of operating income, operating performance or
customers;
oliquidity under generally accepted accounting principles, or GAAP. We
have presented EBITDA because certain investors may find it to be a
useful tool for analyzing and comparing operating performance and for
determining a company's ability to service and/or incur debt. We believe
that EBITDA, as presented, represents a useful measure of assessing the
performance of our ongoing operating activities, as it reflects our
earnings trends without the impact of or changesa number of non-cash charges. We
use targets and positive trends in environmental laws or in the application
of other legal or regulatory requirements upon our production
processes or costs of production or upon thoseEBITDA to measure performance, and
some of our supplierscreditors use EBITDA to assess our debt covenant compliance.
Nevertheless, EBITDA should not be considered in isolation or customers, including actions by government agencies, such as the U.S.
Environmental Protection Agency or the Indiana Department of
Environmental Management, on pending or future environmentally related
construction ora
substitute for operating permits, suchincome (as determined in accordance with GAAP)
as the one affecting our
Whitley County, Indiana structural and rail manufacturing project;
o pending, anticipated or unanticipated private or governmental
liability claims or litigation, or the impact of any adverse outcome
of any currently pending or future litigation on the adequacyan indicator of our reserves, the availabilityoperating performance, or adequacycash flow from operating
activities (as determined in accordance with GAAP) as a measure of our
insurance coverage,liquidity. In addition, companies calculate EBITDA differently and,
therefore, EBITDA as presented by us may not be comparable to EBITDA
reported by other companies.
- "Operating profit per net ton shipped" represents operating income before
start-up costs divided by net ton shipments. Beginning July 1, 2000, net
shipments included shipments from our financial well-beingsteel fabrication subsidiary, New
Millennium. Beginning March 1, 2001, net shipments also included
shipments from our secondary-steel brokering subsidiary, Paragon Steel.
- "Hot band production" refers to our flat-rolled mini-mill's total
production of finished coiled product. "Prime tons" refer to hot bands
produced, which meet or onexceed quality standards for surface, shape and
metallurgical properties.
- "Yield percentage" refers to our business and assets;
o changes in interest rates or other borrowing costs, orflat-rolled mini-mill's tons of finished
product divided by tons of raw materials.
- "Effective capacity utilization" is the effectflat-rolled mini-mill's ratio of
existing loan covenants or restrictions upontons produced for the cost or availabilityoperational month to the operational month's
capacity. We used an annual capacity of credit to fund operations or take advantage of other business
opportunities;
o changes in our business strategies or development plans which we may
adopt or which may be brought about in response to actions by our
suppliers or customers, and any difficulty or inability to
successfully consummate or implement as planned any of our projects,
acquisitions, joint ventures or strategic alliances; and
o the impact of governmental approvals, litigation, construction delays,
cost overruns or technology risk upon our ability to complete,
start-up or continue to profitably operate a project, or to operate it
as anticipated;
We also believe that you should read the many factors described in "Risk
Factors" in the following section to better understand the risks and
uncertainties inherent in our business and underlying any forward looking
statements.
Any forward looking statements which we make in this memorandum speak only as of
the date of such statement, and we undertake no ongoing 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 viewed as historical data.
22.2 million tons.
7
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1999 2000 2001 2001 2002
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER NET TON DATA)
OPERATING DATA:
Net sales.................................... $ 618,821 $ 692,623 $ 606,984 $ 154,086 $ 166,903
Cost of goods sold........................... 487,629 533,914 522,927 128,523 139,529
---------- ---------- ---------- ---------- ----------
Gross profit............................... 131,192 158,709 84,057 25,563 27,374
Selling, general and administrative
expenses................................... 42,441 53,306 58,132 13,802 13,088
---------- ---------- ---------- ---------- ----------
Income from operations..................... 88,751 105,403 25,925 11,761 14,286
Interest expense............................. 22,178 20,199 18,480 4,839 4,265
Other (income) expense....................... 1,294 719 2,333 (204) 4,153
---------- ---------- ---------- ---------- ----------
Income before income taxes and
extraordinary loss...................... 65,279 84,485 5,112 7,126 5,868
Income tax expense........................... 25,849 30,690 1,968 2,743 2,200
---------- ---------- ---------- ---------- ----------
Income before extraordinary loss............. 39,430 53,795 3,144 4,383 3,668
Extraordinary loss, net of tax............... -- -- -- -- 2,028
---------- ---------- ---------- ---------- ----------
Net income................................. $ 39,430 $ 53,795 $ 3,144 $ 4,383 $ 1,640
========== ========== ========== ========== ==========
Basic earnings per share..................... $ .82 $ 1.15 $ .07 $ .10 $ .04
========== ========== ========== ========== ==========
Weighted average common shares outstanding... 47,914 46,822 45,655 45,511 46,045
========== ========== ========== ========== ==========
Diluted earnings per share................... $ .82 $ 1.15 $ .07 $ .10 $ .04
========== ========== ========== ========== ==========
Weighted average common shares and share
equivalents outstanding.................... 48,153 46,974 45,853 45,710 46,348
========== ========== ========== ========== ==========
OTHER FINANCIAL DATA:
EBITDA....................................... $ 125,804 $ 149,348 $ 71,269 $ 23,160 $ 23,690
Operating profit per net ton shipped......... 58 65 23 36 34
Capital expenditures......................... 126,673 110,379 90,714 10,353 33,759
Cash provided (used) by:
Operating activities....................... 114,779 102,792 67,373 17,964 32,489
Investing activities....................... (126,299) (109,399) (90,710) (10,353) (33,759)
Financing activities....................... 22,892 176 91,394 (12,275) (44,652)
OTHER DATA:
Shipments (net tons)......................... 1,869,714 1,919,368 1,963,602 482,431 561,948
Hot band production (net tons)............... 1,938,234 2,031,025 2,015,991 503,010 579,837
Prime ton percentage -- hot band............. 94.2% 93.9% 95.9% 96.5% 94.0%
Yield percentage -- hot band................. 87.8 87.7 87.5 87.7 88.5
Effective capacity utilization -- hot band... 88.1 92.3 91.6 91.5 105.4
Man-hours per hot band net ton produced...... .41 .37 .37 .38 .32
Number of employees.......................... 650 651 676 646 725
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents.................... $ 16,615 $ 10,184 $ 78,241 $ 5,520 $ 32,319
Working capital.............................. 155,226 165,915 194,093 164,298 167,556
Total assets................................. 991,556 1,067,074 1,180,098 1,065,032 1,155,574
Long-term debt (including current
maturities)................................ 505,963 532,520 599,924 519,903 545,671
Stockholders' equity......................... 391,370 418,784 418,575 419,538 443,925
8
RISK FACTORS
In addition to the information contained elsewhere you should carefully
considerin this prospectus or
incorporated by reference, the following risk factors before purchasing any sharesshould be carefully
considered by you in evaluating an investment in our common stock. Set forth
below is a discussion of the material risk factors specific to: (1) the U.S.
steel industry and how it affects our business, (2) our business and (3) our
common stock and this offering.
RISKS RELATED TO OUR INDUSTRY
IN RECENT YEARS, IMPORTS OF STEEL INTO THE UNITED STATES HAVE ADVERSELY
AFFECTED, AND MAY AGAIN ADVERSELY AFFECT, U.S. STEEL PRICES, WHICH WOULD IMPACT
OUR SALES, MARGINS AND PROFITABILITY
Excessive imports of steel into the United States have in recent years, and
may again in the future, exert downward pressure on U.S. steel prices,
negatively impacting our sales, margins and profitability. U.S. steel producers
compete with many foreign producers. Competition from foreign producers is
typically strong, but it has greatly increased as a result of an excess of
foreign steelmaking capacity and a weakening of certain foreign economies,
particularly in Eastern Europe, Asia and Latin America. The economic
difficulties in these countries have resulted in lower local demand for steel
products and have tended to encourage greater steel exports to the United States
at depressed prices.
In addition, we believe the downward pressure on, and depressed levels of,
U.S. steel prices in recent years have been further exacerbated by imports of
steel involving dumping and subsidy abuses by foreign steel producers. Some
foreign steel producers are owned, controlled or subsidized by foreign
governments. As a result, decisions by these producers with respect to their
production, sales and pricing are often influenced to a greater degree by
political and economic policy considerations than by prevailing market
conditions, realities of the marketplace or consideration of profit or loss. For
example, between 1998 and 2001, when imports of hot-rolled and cold-rolled
products increased dramatically, domestic steel producers, including us, were
adversely affected by unfairly priced or "dumped" imported steel. Even though
various protective actions taken by the U.S. government during 2001, including
the enactment of various steel import quotas and tariffs, have resulted in an
abatement of some steel imports during 2002, these protective measures are only
temporary. When these measures expire or if they are relaxed, or if increasingly
higher U.S. steel prices enable foreign steelmakers to export their steel
products into the United States even with the presence of tariffs, the
resurgence of substantial imports of foreign steel could again create downward
pressure on U.S. steel prices. We refer you to "Industry Overview" for
additional information.
INTENSE COMPETITION AND EXCESS GLOBAL CAPACITY IN THE STEEL INDUSTRY MAY
CONTINUE TO EXERT DOWNWARD PRESSURE ON OUR PRICING
We may not be able to compete effectively in the future as a result of
intense competition. Competition within the steel industry, both domestically
and worldwide, is intense and it is expected to remain so. We compete primarily
on the basis of (1) price, (2) quality and (3) the ability to meet our
customers' product needs and delivery schedules. Our primary competitors are
other mini-mills, which may have cost structures and management cultures more
similar to ours than integrated mills. We also compete with many integrated
producers of hot-rolled, cold-rolled and coated products, many of which are
larger and have substantially greater capital resources. The highly competitive
nature of the industry, in part, exerts downward pressure on prices for some of
our common
stock.products. Further, over the past few years, approximately 30 domestic steel
producers have entered bankruptcy proceedings. In some cases, these previously
marginal producers have been able to emerge from bankruptcy reorganization with
lower and more competitive cost structures. In other cases, steelmaking assets
have been sold through bankruptcy proceedings to other steelmakers or to new
companies, at greatly depressed prices. The reemergence of these producers or
their successors may further increase the competitive environment in the steel
industry and contribute to price declines. In the case of certain product
applications, steel competes with other materials, including plastic, aluminum,
graphite composites, ceramics, glass, wood and concrete.
9
In addition, global overcapacity in steel manufacturing and its negative
impact on U.S. steel pricing are likely to continue to persist and could have a
negative impact on our sales, margins and profitability. The U.S. steel industry
continues to be adversely impacted by excess global steel manufacturing
capacity. Over the last decade, the construction of new mini-mills, expansion
and improved production efficiencies of some integrated mills and substantial
expansion of foreign steel capacity have all led to the excess of manufacturing
capacity. Increasingly, this overcapacity, combined with the high levels of
steel imports into the United States, has exerted downward pressure on domestic
steel prices, including the prices of our products, and has resulted in, at
times, a dramatic narrowing, or with many companies the elimination, of gross
margins. We refer you to "Industry Overview" for additional information.
THE POSITIVE EFFECTS OF PRESIDENT BUSH'S MARCH 5, 2002 ORDER IN
CONTRIBUTING TO THE REDUCTION OF EXCESSIVE IMPORTS OF STEEL INTO THE UNITED
STATES MAY BE LESSENED IF THERE ARE SUCCESSFUL APPEALS TO THE WORLD TRADE
ORGANIZATION BY THE EXPORTING COUNTRIES OR IF DOMESTIC OR INTERNATIONAL
POLITICAL PRESSURE RESULTS IN A RELAXATION OF, OR SUBSTANTIAL EXEMPTIONS FROM,
THE TARIFFS CONTAINED IN THE ORDER
If the amount, scope or duration of the Section 201 orders are lessened or
adversely changed, it could lead to a resurgence of flat-rolled steel imports,
an increase of steel slab imports and/or an increase in welded pipe and tube
imports. Any of these results would again put downward pressure on U.S.
flat-rolled prices which would negatively impact our sales, margins and
profitability. On June 22, 2001, the Bush Administration requested that the
International Trade Commission, or ITC, initiate an investigation under Section
201 of the Trade Act of 1974 to determine whether steel is being imported into
the United States in such quantities as to be a substantial cause of serious
injury to the U.S. steel industry. In October 2001, the ITC found "serious
injury" due to imports of steel products, including the products we manufacture,
and in December 2001, the ITC recommended that the President impose tariffs of
approximately 20%-40%, as well as tariff quotas in connection with certain
products such as steel slabs. On March 5, 2002, President Bush, among other
actions, imposed a three year tariff of 30% for the first year, 24% for the
second year and 18% for the third year on imports of hot-rolled, cold-rolled and
coated sheet, as well as on imports of steel slabs in excess of a specified
annual quota.
Imports of flat-rolled steel have declined, in part, due to the imposition
of dumping duties that have been imposed on certain imports of foreign steel,
and, in part, due to the imposition of significant tariffs as a result of this
Section 201 action. These events have, in part, allowed us to begin restoring
prices on flat-rolled products. While the President's decision to implement a
Section 201 remedy is not appealable to U.S. courts, foreign governments may
appeal, and some have appealed, to the World Trade Organization, or WTO. The
European Union, Japan and other countries are currently prosecuting such
appeals. These dispute settlement proceedings at the WTO and further appeals to
the Appellate Body of the WTO generally take 15-24 months. Moreover, a number of
affected countries have imposed or threatened to impose various retaliatory
tariffs on U.S. steel or other products or have sought various product
exemptions from the imposition of the tariffs. Accordingly, there is a risk that
rulings adverse to the United States or substantial political pressures could
result in the President changing the remedy, granting substantial exemptions
from the remedy, or terminating the remedy entirely prior to the full three
years, although any such modification would apply only prospectively. We refer
you to "Industry Overview -- Section 201 Investigation" for more information.
OUR LEVEL OF PRODUCTION AND OUR SALES AND EARNINGS ARE SUBJECT TO
SIGNIFICANT FLUCTUATIONS AS A RESULT OF THE CYCLICAL NATURE OF THE STEEL
INDUSTRY AND THE INDUSTRIES WE SERVE
The price of steel and steel products may fluctuate significantly due to
many factors beyond our control. This fluctuation directly affects the levels of
our production and our sales and earnings. The steel industry is highly
cyclical, sensitive to general economic conditions and dependent on the
condition of certain other industries. The demand for steel products is
generally affected by macroeconomic fluctuations in the United States and global
economies in which steel companies sell their products. For example, future
economic downturns, stagnant economies or currency fluctuations in the United
States or globally could decrease the demand for our products or increase the
amount of imports of steel into the United States which would have an adverse
impact on our sales, margins and profitability.
10
In addition, a disruption or downturn in the automotive, oil and gas, gas
transmission, construction, commercial equipment, rail transportation,
appliance, agricultural and durable goods industries could negatively impact our
financial condition, production, sales, margins and earnings. We are also
particularly sensitive to trends and events, including strikes and labor unrest,
that may impact these industries. These industries are significant markets for
our products and are themselves highly cyclical.
RISKS RELATED TO OUR BUSINESS
TECHNOLOGY, OPERATING AND START-UP RISKS ASSOCIATED WITH OUR IRON DYNAMICS
SCRAP SUBSTITUTE PROJECT MAY PREVENT US FROM REALIZING THE ANTICIPATED BENEFITS
FROM THIS PROJECT AND COULD RESULT IN A LOSS OF OUR INVESTMENT.INVESTMENT
If we abandon our Iron Dynamics project, or if its process does not
succeed, we will not be able to realize the expected benefits of this project
and will suffer the loss of our entire investment. As of March 31, 2002, our
equity investment in the Iron Dynamics project was $159 million. Since 1997, our
wholly-owned subsidiary, Iron Dynamics, Inc., has tried to develop and commercialize a
pioneering process of producing a virgin form of iron that might serve as a
lower cost substitute for a portion of the metallic raw material mix that goes
into our electric arc furnaces to be melted into new steel. This scrap
substitute project is the first of its kind. It involves processes that are
based on various technical assumptions and new applications of technologies that
have yet to be commercially proven. Since our initial start-up in August 1999,
we have encountered a number of difficulties associated with major pieces of
equipment and with operating processes and systems. Throughout the latter part
of 1999 and 2000, our Iron Dynamics facility was shut down. During these shut
downs, we engaged in time consuming and expensive redesign, re-engineering,
reconstruction and retrofitting of major pieces of equipment, systems and
processes. As a result, the Iron Dynamics project has taken considerably longer
and has required us to expend considerably greater resources than originally
anticipated. While we made significant progress during these shut downs in
correcting various technical and other deficiencies, we have not yet been
successful in achieving the results necessary to bring production output up and
product costs down to the point of being commercially competitive. In February
2001, we re-started operations at our Iron Dynamics facility. However, in July
2001, we suspended these operations again, with no specific date set for
resumption of operations. This shut down was a result ofof:
(1) higher than expected start-up and process refinement costs;
(2) exceptionally high energy costs;
(3) low production quantities achieved at the Iron Dynamics facility; and
(4) historically low steel scrap pricing.
These factors made the cost of producing and using Iron Dynamics scrap
substitute at our flat rolled millflat-rolled mini-mill higher than our cost of purchasing and
using steel scrap. Furthermore, we believe that, even with additional
development and refinement to the equipment, technology systems and processes,
the Iron Dynamics facility may only be able to achieve monthly output levels
between 75%-85% of our original estimates, resulting in higher unit costs than
originally planned. We currently estimate that these additional developments and
refinements willwould, if implemented, cost approximately $15 million. However, we
are entitled to a total
of approximately $14$6 million ($6 million of which we anticipate will come from a
creditrefund from one of our equipment manufacturers). We are currently evaluatingmanufacturers in
connection with these improvements, which we would expect to apply toward this
cost. On July 10, 2002, we announced that we expect to begin experimental
production trials in the entire project, its costs and its potential benefits. We cannot assure you that
ourfourth quarter of 2002. If these trials prove
successful, we could begin commercial production in 2003. However, Iron Dynamics
facility will become operational again. However, if we do
decide to commence operations, we estimate that it will take at least 18 months
tomay never become commercially operational.
WhileIn addition, while we remain optimistic that the remaining start-up
difficulties with the equipment, technology, systems and processes can be
resolved, we cannot assure
you that our Iron Dynamics facility willmay not be able to consistently operate or
be able to produce steel scrap substitute material in the quantities that will
enable it to be cost competitive. If we abandon the project or if our Iron
Dynamics process does not succeed, we would suffer the loss of our entire
investment. As of December 31, 2001, our equity investment in the Iron Dynamics
project was $121,331,634, in addition to Iron Dynamics' own $58,986,841
indebtedness to its bank lenders. As of December 31, 2001, after giving effect
to the $15 million cash payment and the issuance of $22 million of our stock to
the Iron Dynamic lenders under the Settlement Agreement, our equity investment
in the Iron Dynamics project would have been $158,331,634. Moreover, we cannot
assure you that, in connection with any restart of
operations, our Iron Dynamics facility will not
3
may experience additional shutdowns or
equipment failures and such shutdowns or that any such shutdown
or failure will notfailures may have a material adverse
effectimpact on our business,liquidity cost structure and earnings. We refer you to
"Business -- Iron Dynamics Steel Scrap Substitute Facility" for additional
information.
11
WE HAVE SUBSTANTIAL INDEBTEDNESS AND DEBT SERVICE REQUIREMENTS WHICH LIMITS
OUR FINANCIAL AND OPERATING FLEXIBILITY
Our substantial indebtedness limits our financial condition or results of operations.
WE FACE LITIGATION RISKS IN CONNECTION WITH OUR TERMINATED THAILAND
ADVISORY TRANSACTION.
During 1999, we and various investment banks were sued, under a variety of
statutory and common law fraud and related claims, in various federal and state
courts in a total of nine separate but related lawsuits. These lawsuits sought
rescissionary or compensatory damages of approximately $240 million, as well as
punitive damages in an unspecified amount, and treble damages in certain of the
actions. The cases were brought by various institutional investors that
purchased notes from the investment bank defendants. The notes were issued in
March 1998 by affiliates of Nakornthai Strip Mill Public Company Limited, a Thai
owner and operator of a steel mini-mill project. We were engagedoperating
flexibility. For example, it could:
- require us to provide
certain technical and operational post-offering advisory services to the Thai
mill.
We have now settled seven of the nine cases. To the extent there were any
monetary payments involved in such settlements, such payments were covered by
our insurance carriers and were within applicable insurance coverages. However,
we have now expended substantially all of our available insurance to settle
these seven cases.
The remaining cases are two consolidated Minnesota federal court cases in the
United States District Court for the District of Minnesota, Fourth Division,
involving a claim for approximately $48 million in damages, and an Illinois
state court case in the Circuit Court of Cook County, Illinois, involving a
claim for approximately $65 million in damages. We have denied liability in
connection with these cases, and we believe that we have meritorious legal and
factual defenses. We cannot assure you, however, as to the ultimate outcome with
respect to these two remaining cases or that we will not be found liable for
damages in connection with one or both of these cases. We also cannot assure you
that any adverse outcome to these cases will not have a material adverse effect
on our business, financial condition and results of operations.
WE RELY HEAVILY ON THE AUTOMOTIVE INDUSTRY TO PURCHASE OUR PRODUCTS.
Demand fordedicate a substantial portion of our cash flow from
operations to payments on our debt, reducing our ability to use these
funds for other purposes;
- limit our ability to obtain additional financing for working capital,
capital expenditures, acquisitions or general corporate purposes;
- limit our ability to adjust rapidly to changing market conditions; and
- increase our vulnerability to downturns in general economic conditions or
in our business.
Our ability to satisfy our debt obligations will depend upon our future
operating performance, which in turn will depend upon the successful
implementation of our strategy and upon financial, competitive, regulatory,
technical and other factors, many of which are beyond our control. If we are not
able to generate sufficient cash from operations to make payments under our
credit agreements or to meet our other debt service obligations, we will need to
refinance our indebtedness. Our ability to obtain such financing will depend
upon our financial condition at the time, the restrictions in the agreements
governing our indebtedness and other factors, including general market and
economic conditions. If such refinancing were not possible, we could be forced
to dispose of assets at unfavorable prices. Even if we could obtain such
financing, we cannot be sure that it would be on terms that are favorable to us.
In addition, we could default on our debt obligations.
As of March 31, 2002, we had $546 million of indebtedness. This
indebtedness represented approximately 54% of our total consolidated
capitalization, including current maturities of long-term debt.
OUR SENIOR SECURED CREDIT AGREEMENT AND THE INDENTURE RELATING TO THE
9 1/2% SENIOR NOTES DUE 2009 CONTAIN RESTRICTIVE COVENANTS THAT MAY LIMIT OUR
FLEXIBILITY
Restrictions and covenants in our existing debt agreements, as well as our
senior secured credit agreement and the indenture relating to the senior notes,
and any future financing agreements, may impair our ability to finance future
operations or capital needs or to engage in other business activities.
Specifically, these agreements will restrict our ability to:
- incur additional indebtedness;
- pay dividends or make distributions with respect to our capital stock;
- repurchase or redeem capital stock;
- make investments;
- create liens and enter into sale and leaseback transactions;
- make capital expenditures;
- enter into transactions with affiliates or related persons;
- issue or sell stock of certain subsidiaries;
- sell or transfer assets; and
- participate in certain joint ventures, acquisitions or mergers.
In addition, a breach of any of the restrictions in our debt agreements
could cause our indebtedness to become immediately due and payable and we may
not be able to obtain sufficient funds to make these accelerated payments. If
any debt is accelerated, our assets may also not be sufficient to repay in full
such indebtedness. The senior secured credit agreement also contains financial
covenants, such as a leverage ratio and an interest coverage ratio. A breach of
any of these covenants may also accelerate our debt.
12
A SUBSTANTIAL PORTION OF OUR FLAT-ROLLED PRODUCTS ARE SOLD ON THE SPOT
MARKET, AND THEREFORE, OUR SALES, MARGINS AND EARNINGS ARE NEGATIVELY IMPACTED
BY DECREASES IN DOMESTIC FLAT-ROLLED STEEL PRICES
Our sales, margins and earnings are negatively impacted by decreases in
domestic flat-rolled steel prices since a significant portion of our flat-rolled
products is affected by, amongare sold on the spot market. As a result, we are vulnerable to
downturns in the domestic flat-rolled steel market. For the three year period
ended December 31, 2001, approximately 80% of our flat-roll products were sold
on the spot market under contracts with terms of twelve months or less.
WEAKNESS IN THE AUTOMOTIVE INDUSTRY WOULD RESULT IN A SUBSTANTIAL REDUCTION
IN DEMAND FOR OUR PRODUCTS
A prolonged weakness in the automotive industry would reduce the demand for
our products and negatively impact our sales. In addition, if automobile
manufacturers choose to incorporate more plastics, aluminum and other things,steel
substitutes in their automobiles, it could reduce demand for our products. Our
sales and earnings fluctuate due to the strength or weaknesscyclical nature of the automotive
industry. The cyclical nature of the automotive industry is cyclical and is affected by such
things as the level of consumer spending, the strength or weakness of the U.S.
dollar and the impact of international trade and various factors, such as labor
unrest and the availability of raw materials, which bear uponaffect the ability of the
automotive industry to actually build cars. While we do not presently sell a
material portion of our steel production directly to the automotive market, a
substantial portion of our sales to the intermediate steel processor and service
center and converter market is resold to various companies in the automotive industry.
In addition, to the extent that
automobile manufacturers choose to incorporate more plastics, aluminum and other
steel substitutes in their automobiles, this could also have a material adverse
affect on our business.
WE CANNOT CONTROLMAY BE UNABLE TO PASS ON INCREASES IN THE COST OF SCRAP AND OTHER RAW
MATERIALS.MATERIALS TO OUR CUSTOMERS WHICH WOULD REDUCE OUR EARNINGS
Our future profitability may be adversely affected if we are unable to pass
on higher scrap and other raw material costs to our customers. We may not be
able to adjust our product prices, especially in the short-term, to recover the
costs of increases in scrap and other raw material prices. Our principal raw
material is scrap metal derived primarily from junked automobiles, industrial
scrap, railroad cars, 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 our control, including
demand by U.S. and international steel producers, freight costs and speculation.
The prices for scrap have varied significantly, may vary significantly in the
future and do not necessarily fluctuate in tandem with the price of steel. In
addition, our 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.
We may not be able to adjust our product
prices, especially in the short-term, to recover the costs of increases in scrap
and other raw material prices. Our future profitability may be adversely
affected to the extent we are unable to pass on higher raw material and energy
costs to our customers.
4
WE HAVE PRIMARILY RELYRELIED UPON ONE SUPPLIER TO MEET OUR STEEL SCRAP
REQUIREMENTS.
Over the last several years,REQUIREMENTS
Since our inception, we have had an exclusive contract with OmniSource,
Corporation, one
of the largest scrap processors and brokers in the Midwest, to purchase steel
scrap. The contract extends at least through the end of December
of 2002.
We cannot assure you that we willmay be ableunable to renew theour contract with OmniSource on terms favorable
terms
to us ifor at all.all which could increase our costs and decrease our earnings. If we
are unable to renew the contract or it otherwise terminates, we would have to
find another supplier for steel scrap.scrap or develop our own scrap purchasing
capability. We cannot
assure you that anymay be unable to secure substitute arrangements for steel scrap would be
on the same or better terms as those in our contract with OmniSource.
Our contract with OmniSource or thatextends at least through December 31, 2002.
For 2001 and the three months ended March 31, 2002, we would be able to get
sufficient quantities of scrap for our operations. Our failure to secure a
stable supplypurchased 1.5 million
tons and 310,600 tons of steel scrap would have an adverse effect onand scrap substitutes from OmniSource,
respectively, which represent approximately 87% and 75% of our business,
financial condition and results of operations.total scrap tons
purchased during those periods.
THERE MAY BE POTENTIAL CONFLICTS OF INTEREST WITH REGARD TO OUR
RELATIONSHIP WITH OMNISOURCE.OMNISOURCE
With respect to any dispute between us and OmniSource involving our
existing contract, including its remaining term, any future contract, or in
connection with the terms of any commercial transaction, OmniSource may be
viewed as having a conflict of interest between what it perceives as being best
for itself as a seller of scrap and what is best for us as a buyer of scrap. We
may not be able to resolve potential conflicts and if we do resolve them, we may
receive a less favorable resolution since we are dealing with OmniSource rather
than an unaffiliated person. The chairman of the board and chief executive
officer of OmniSource is
13
also a member of our board of directors and is a substantial stockholder of
Steel Dynamics. This person has obligations to us as well as to OmniSource and
may have conflicts of interest with respect to matters potentially or actually
involving or affecting us and OmniSource. OmniSource also supplies steelscrap to many
other consumers,customers, including other steel mills. If a dispute should arise over the
terms of the OmniSource agreement, OmniSource may be viewed as having a conflict
of interest between what it perceives as being best for itself as a seller of
scrap and what is best for us as a buyer of scrap. We cannot assure you that we
will be able to resolve any potential conflicts or that, if resolved, we would
not be able to receive a more favorable resolution if we were dealing with
someone other than OmniSource.
WE RELY UPON A SMALL NUMBER OF MAJOR CUSTOMERS FOR A SUBSTANTIAL PERCENTAGE
OF OUR SALES
AND ONE OF OUR MAIN CUSTOMERS IS A RELATED PARTY.loss of any large customer or group of customers could materially reduce
our sales and earnings. We have substantial business relationships with a few
large customers. ForIn 2001 and for the ninethree months ended September 30, 2001,March 31, 2002, our
Butler mini-mill's top ten customers accounted for approximately 53.55%48% and 50% of
our total revenues.net sales, respectively. During this period,those periods, our largest customer,
Heidtman, Steel Products, Inc., accounted for more than approximately 20.75%18% and 17% of our total revenues.net sales. We
expect to continue to depend upon a small number of customers for a significant
percentage of our total revenues,net sales, and cannot assure you that any of them will
continue to purchase steel from us.
A loss of any such customer or
group of customers could have a material adverse effect on our business,
financial condition and results of operations.
THERE MAY BE POTENTIAL CONFLICTS OF INTEREST WITH REGARD TO OUR
RELATIONSHIP WITH HEIDTMAN.HEIDTMAN STEEL PRODUCTS, INC.
If a dispute arises between us and Heidtman, we may be viewed as having a
conflict of interest. What is best for Heidtman as a buyer and what is best for
us as a product seller may be at odds. We may be unable to resolve potential
conflicts. If we do resolve them, we may receive a less favorable resolution
since we are dealing with Heidtman rather than an unaffiliated person. Heidtman
is an affiliate of one of our large stockholders and its president and chief
executive officer serves as one of our directors. This person has obligations to
us as well as to Heidtman and may have conflicts of interest with respect to
matters potentially or actually involving or affecting us and Heidtman.
If a dispute arises over that agreement, Heidtman may be viewed as
having a conflict of interest between what it perceives to be best for them as a
buyer and what is best for us as the product seller. We cannot assure you that
we will be able to resolve any potential conflicts or that, if resolved, we
would not be able to receive a more favorable resolution if we were dealing with
someone other than Heidtman.
CONSTRUCTIONSTART-UP AND OPERATING RISKS ASSOCIATED WITH THE CONSTRUCTION OF OUR
WHITLEY COUNTYCOLUMBIA CITY STRUCTURAL STEEL AND RAIL MANUFACTURING FACILITYMINI-MILL COULD RESULT IN MATERIALLY
GREATER CAPITAL EXPENDITURES OR OPERATING COSTS THAN THOSE WE HAVE ANTICIPATED.
We commenced construction of a structural steelANTICIPATED
Start-up and rail manufacturing facility
in Whitley County, Indiana, on May 1, 2001. We have incurred some and may incur
additional contractor excess charges due to the almost two year delay in getting
final U.S. Environmental Protection Agency approval to commence construction.
There could also be other administrative delays, either local, state or federal,operating risks associated with the need to obtain other environmental, building, zoning or
other permits or approvals. We currently estimate that this new facility will
cost approximately $315 million (excluding capitalized interest), but this
amount could increase if other difficultiesconstruction of our
Columbia City mini-mill may result in materially greater operating costs than we
initially expected. At our Columbia City mini-mill, we are encountered or other unforeseen
events occur.
We are also subject to all of the
general risks associated with building,
starting upthe construction and operating anystart-up of a new manufacturing facility.mini-mill.
These risks involve construction delays, cost overruns orand start-up
difficulties. We could also experience operational difficulties after start-up
that could result in our inability to operate the facilityour Columbia City mini-mill at
full or near full capacity or at all.
Any
of these difficulties could adversely affect our business, results of financial
condition and results of operations.
5
UNEXPECTED EQUIPMENT FAILURES MAY LEAD TO PRODUCTION CURTAILMENTS OR
SHUTDOWNS.
Our manufacturing processes are dependent upon critical pieces of steelmaking
equipment, such as our furnaces, continuous casters and rolling equipment, as
well as electrical equipment, such as transformers, which on occasion may be out
of service as a result of unanticipated equipment failures. We have experienced
and may in the future experience material plant shutdowns or periods of reduced
production as a result of such equipment failures. Such interruptionsSHUTDOWNS
Interruptions in our production capabilities will inevitably adversely
affect our productivityproduction costs, steel available from sales and results of operationearnings for the
affected period. In addition to equipment failures, our facilities are also
subject to the risk of catastrophic loss due to unanticipated events such as
fires, explosions or violent weather conditions. Our manufacturing processes are
dependent upon critical pieces of steelmaking equipment, such as our furnaces,
continuous casters and rolling equipment, as well as electrical equipment, such
as transformers, and this equipment may, on occasion, be out of service as a
result of unanticipated failures. We have experienced and may in the future
experience material plant shutdowns or periods of reduced production as a result
of such equipment failures.
WE DEPEND HEAVILY ON OUR SENIOR MANAGEMENT AND WE MAY BE UNABLE TO REPLACE
KEY EXECUTIVES IF THEY LEAVE.
Our operations and prospects depend in large part on the performance of our
senior management team, including Keith E. Busse, president and chief executive
officer, Mark D. Millett, vice president and general manager of our Flat Roll
Division, Richard P. Teets, Jr., vice president and general manager of our
Structural Division, Tracy L. Shellabarger, vice president and chief financial
officer and John Nolan, vice president, sales and marketing. Although these
senior managers have been employees and stockholders of Steel Dynamics for more
than seven years, we cannot assure you that such individuals will remain with us
as employees. In addition, we cannot be assured that we would be able to find
qualified replacements for any of these individuals if their services were no
longer available.LEAVE
The loss of the services of one or more members of our senior management
team or our inability to attract, retain and maintain additional senior
management personnel could have a material adverse effect on our business,
financial condition, and results of operations.operations and future prospects. Our senior
management founded our company, pioneered the development of thin-slab,
flat-rolled technology and directed the construction of our Butler mini-mill and
Columbia City structural mini-mill. Our operations and prospects depend in large
part on the performance of our senior management team, including Keith E. Busse,
president and chief executive officer, Mark D. Millett, vice president and
general manager of our flat-roll division, Richard P. Teets, Jr., vice president
and general manager of our structural division, Tracy L. Shellabarger, vice
president and chief financial officer and John W. Nolan, vice president, sales
and marketing. Although these senior
14
managers have each been employees and stockholders of Steel Dynamics for more
than seven years, these individuals may not remain with us as employees. In
addition, we may not be able to find qualified replacements for any of these
individuals if their services are no longer available. We do not have key man
insurance on any of these individuals.
WE MAY FACE RISKS ASSOCIATED WITH THE IMPLEMENTATION OF OUR GROWTH STRATEGY.STRATEGY
Our growth strategy subjects us to various risks. As part of our growth
strategy, we may expand our existing facilities, build additional plants,
acquire other businesses, enter into joint ventures, or form strategic alliances
that we believe will complement our existing business. These transactions will
likely involve some or all of the following risks:
o- the difficulty of competing for acquisitions and other growth
opportunities with companies having materially greater financial
resources than ours;
- the difficulty of integrating the acquired operations and personnel into
our existing business;
o- the potential disruption of our ongoing business;
o- the diversion of resources;
o- the inability of management to maintain uniform standards, controls,
procedures and policies;
opolices;
- the difficulty of managing the growth of a larger company;
o- the risk of entering markets in which we have little experience;
o- the risk of becoming involved in labor, commercial, or regulatory
disputes or litigation related to the new enterprise;
6
o- the risk of contractual or operational liability to our venture
participants or to third parties as a result of our participation;
o- the inability to work efficiently with joint venture or strategic
alliance partners; and
o- the difficulties of terminating joint ventures or strategic alliances.
These transactions might be required for us to remain competitive, but we
cannot
assure you that we canmay not be able to complete any such transactions on favorable terms or that
we can obtain
financing, if necessary, for such transactions on favorable terms. We also cannot assure you that any futureFuture
transactions willmay not improve our competitive position and business prospects as
anticipated, and if they do not, our results of operationssales and earnings may be adversely
affected.
ENVIRONMENTAL REGULATION IMPOSES SUBSTANTIAL COSTS AND LIMITATIONS ON OUR
OPERATIONS.OPERATIONS
We are subject to the risk of substantial environmental liability and
limitations on our operations brought about by the requirements of environmental
laws and regulations. We are subject to various federal, state and local
environmental, health and safety laws and regulations concerning such issues as
air emissions, wastewater discharges, and
solid and hazardous waste disposal.handling and
disposal, and the investigation and remediation of contamination. These laws and
regulations are increasingly stringent. While we believe that our facilities are
and will continue to be in material compliance with all applicable environmental
laws and regulations, the risks of substantial costs and liabilities related to
compliance with such laws and regulations are an inherent part of our business.
Although we are not currently involved in any compliance or remediation
activities, it is possible that future conditions may develop, arise or be
discovered that create substantial environmental compliance or remediation
liabilities and costs. For example, our steelmaking operations produce certain
waste products, such as electric arc furnace dust, which are classified as
hazardous waste and must be properly disposed of under applicable environmental
laws. These laws can impose clean up liability on generators of hazardous waste
and other substances that are shipped off-site for disposal, regardless of fault
or the legality of the disposal activities. Other laws may require us to
investigate and remediate contamination at our properties, including
contamination that was caused in whole or in part by third parties. While we
believe that we can comply with environmental legislation and regulatory
requirements and that the costs of doing so have been
15
included within our budgeted cost estimates, it is possible that such restrictionscompliance
will prove to be more limiting and costly than anticipated.
In addition to potential clean up liability, in the past we have been, and
in the future we may bebecome, subject to substantial monetary fines and penalties
for violation of applicable laws, regulations or administrative conditions. We
may also be subject from time to time to legal proceedings brought by private
parties or governmental agencies with respect to environmental matters.matters,
including matters involving alleged property damage or personal injury.
RISKS RELATED TO THE STEEL INDUSTRY
IMPORTS OF STEEL INTO THE UNITED STATES HAVEOUR COMMON STOCK AND CONTINUE TO ADVERSELY
AFFECT U.S. STEEL PRICES, WHICH IN TURN HAS ADVERSELY AFFECTEDTHIS OFFERING
OUR MARGINSSTOCK PRICE MAY BE VOLATILE AND RESULTS OF OPERATIONS.
U.S. steel producers compete with many foreign producers. Competition from
foreign producers is typically strong, but it has increasedCOULD DECLINE SUBSTANTIALLY
Our stock price may decline substantially as certain foreign
economies, particularly in Eastern Europe, Asia and Latin America, have
weakened. The economic difficulties in these countries have resulted in lower
local demand for steel products and increased steel exports to the United States
at depressed prices. To the extent that these economic difficulties continue,
there could be continued downward pressure on U.S. steel prices from imports
that will have an adverse effect upon our margins and results of operations.
In addition, we believe the downward pressure on, and depressed levels of, U.S.
steel prices have been further exacerbated by imports of steel involving dumping
and subsidy abuses by foreign steel producers. Some foreign steel producers are
owned, controlled or subsidized by foreign governments. As a result decisions
by these producers with respect to their production, sales and pricing decisions
are often influenced to a greater degree by political and economic policy
considerations than by prevailing market conditions, realities of the marketplace or consideration of profit or loss. We believe that since 1998, when
imports of hot rolled and cold rolled products increased 44% compared to the
prior year, domestic steel producers, including us, have been adversely affected
by unfairly priced or "dumped" imported steel.
7
INTENSE COMPETITION IN THE STEEL INDUSTRY MAY CONTINUE TO EXERT DOWNWARD
PRESSURE ON OUR PRICING.
Competition within the steel industry, both domestically and worldwide, is
intense and it is expected to remain so. We compete primarily on the basis of
(1) price, (2) quality and (3) the ability to meet our customers' product needs
and delivery schedules. Our primary competitors are other mini-mills, which may
have cost structures and management cultures more similar to ours than the
integrated mills. We also compete with many integrated producers of hot rolled,
cold rolled and coated products, many of which are larger and have substantially
greater capital resources. The highly competitivevolatile
nature of the industry, in
part, exerts downward pressure on prices for some of our products. Further, over
the past few years, more than 18 domestic steel producers have entered
bankruptcy proceedings,stock market and now, some of these previously marginal producers
have been able to emerge or may in the future emerge from bankruptcy
reorganization with lower and more competitive cost structures. Other existing
integrated mills with historically high operating costs, including those
associated with pension and health care costs of retirees, are requesting
financial assistance from the government to provide relief from some of these
costs. As a result, the reemergence of some former bankrupt producers or
possible governmental monetary assistance to certain other producers may further
increase the competitive environment in the steel industry and contribute to
further price declines. In the case of certain product applications, steel
competes with other materials including, plastic, aluminum, graphite composites,
ceramics, glass, wood and concrete. We cannot assure you that we will be able to
compete effectively in the future.
The U.S. steel industry also continues to be adversely impacted by excess world
steel manufacturing capacity. Over the last decade, the construction of new
mini-mills, expansion and improved production efficiencies of some integrated
mills and substantial expansion of foreign steel capacity have all led to the
excess of manufacturing capacity. Increasingly, this overcapacity, combined with
the high levels of steel imports into the United States, have exerted downward
pressure on domestic steel prices, including the prices of our products, and has
resulted in a dramatic narrowing, or with many companies the elimination, of
gross margins. This situation continues to persist. The continued global
overcapacity in steel manufacturing and depressed pricing environment for steel
will have a material adverse impact on our revenues and results of operations.
OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED BY THE CYCLICAL
NATURE OF THE STEEL INDUSTRY AND THE INDUSTRIES WE SERVE.
The steel industry is highly cyclical, sensitive to general economic conditions
and dependent on the condition of certain other industries. As a result, the
price of steel and steel products may fluctuate significantly due to many factors beyond our control. The demand for steel products is generally affected
by macroeconomic fluctuations in the United States and global economies in which
steel companies sell their products. Future economic downturns, stagnant
economies or currency fluctuations in the United States or globally could have
an adverse impact on our results of operations.
In addition, we are also particularly sensitive to trends and events, including
strikes and labor unrest, that may impact the automotive, oil and gas, gas
transmission, construction, commercial equipment, rail transportation,
appliance, agricultural and durable goods industries. These industries are
significant markets for our products and are themselves highly cyclical. A
disruption or downturn in the business of any of these industries could have a
material adverse effect upon our production, sales, financial condition and
results of operations.
RISKS RELATED TO AN INVESTMENT IN OUR COMMON STOCK
OUR STOCK PRICES MAY BE VOLATILE
Thestock
market price for shares of our common stock may be significantly affected by
such factors as our net sales, earnings and cash flow, the difference between
our actual results and results expected by investors and analysts, news
announcements involving such things as other steel industry bankruptcies,
government action or inaction with regard to limitations on foreign steel
imports, price reductions by us or our competitors, or changes in general market
conditions. In addition, broad market fluctuation and general economic
conditions may adversely affect the market price of our common stock, regardless
of our actual performance.
WE CANNOT BE SURE THAT A MORE ACTIVE MARKET FOR OUR COMMON STOCK WILL
DEVELOP
8
Our common stock has, from time to time, experienced relatively low daily trading
volumes,extreme price and there can be no assurance that a more active tradingvolume
fluctuations. Many factors may cause the market price for our common stock will developto
decline following this offering, including:
- our operating results failing to meet the expectations of securities
analysts or if it does develop, that it will be sustained. The
need to liquidateinvestors in any quarter;
- downward revisions in securities analysts' estimates;
- material announcements by us or our competitors;
- public sales of a large block of stock could therefore adversely affect our
stock price.
THE SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK OVER A SHORT
PERIOD COULD ADVERSELY AFFECT THE MARKET PRICE
Thesubstantial number of shares of our common stock
following this offering;
- governmental regulatory action; or
- adverse changes in general market conditions or economic trends.
In the past, companies that we are issuing to the selling
stockholders, as part of our agreement to retire the Iron Dynamics indebtedness,
may number between 1.5 and 1.8 million shares, more or less, depending onhave experienced volatility in the market price
of their stock have been the sharessubject of securities class action litigation. If
we become involved in securities class action litigation in the future, it could
result in substantial costs and diversion of management attention and resources,
thus harming our business.
WE DO NOT EXPECT TO PAY CASH DIVIDENDS IN THE FORESEEABLE FUTURE
Since our initial public offering, we have not declared or paid cash or
other dividends on eachour common stock and do not expect to pay cash dividends for
the foreseeable future. We currently intend to retain all future earnings for
use in the operation of the three issuance dates of March 1, March
15our business and March 29, 2002, all of which will be eligible for resale, without
restriction, after a 90 day period beginning on the date the registration
statement is declared effective by the United States Securities and Exchange
Commission. During the first 90 day period, the selling stockholders are limited
to an aggregate 30,000 share per day resale maximum.fund future growth. In addition, we also havethe
terms of our senior secured credit agreement and the indenture relating to our
senior notes restrict our ability to pay cash dividends. Even if these
restrictions are removed, any future cash dividends will depend upon our results
of operations, financial conditions, cash requirements, the availability of a
surplus and other factors.
SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD ADVERSELY AFFECT
OUR STOCK PRICE
The future sale of a substantial stockholders who may elect to sell theirnumber of our shares either
without restriction or,of common stock in
the case of certain officers, directorspublic market following this offering, or affiliates, subject to the requirements of Rule 144 under the Securities Act. If
persons who have the right to sell their shares elect to do so in quantities
greater than those which can be absorbed in the ordinary course of the daily
trading volumesperception that have historically characterized trading in our shares, thissuch sales
could occur, could adversely affect the marketour stock price for our common stock and could make it more
difficult for you to sell your shares or for us to raise funds through equity offerings in the future.
CERTAINUpon completion of this offering, we expect to have 55,115,896 shares of
common stock outstanding including 14,079,521 restricted shares held by some of
our stockholders. These 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. In addition, some of our stockholders who have restricted shares have
registration rights. We have filed a registration statement under the Securities
Act to register shares of common stock held by the Iron Dynamics bank lenders
who received restricted shares in connection with the settlement of the Iron
Dynamics credit agreement. As of July 16, 2002, there were 436,150 remaining
restricted shares held by one of these holders. Also, other stockholders,
holding 13,643,377 restricted shares as of July 16, 2002, have the right to
require us to file a registration statement under the Securities Act to register
their shares of common stock.
16
In connection with this offering, we, our executive officers and directors,
the selling stockholders and other stockholders have agreed that, subject to
agreed upon exceptions, they will not sell, offer or contract to sell any shares
of common stock without the prior written consent of the underwriters, for a
period of 90 days after the date of this prospectus.
In addition, we have filed registration statements under the Securities Act
to register shares of common stock reserved for issuance under our 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, 2002, options to purchase 2,458,301 shares were outstanding under these
stock option plans.
PROVISIONS OFUNDER INDIANA LAW MAY PRECLUDE A TAKEOVER OF OUR COMPANY
WITHOUT THE CONSENT OF OUR BOARD OF DIRECTORS
Certain provisions ofDETER ACQUISITION BIDS FOR US
Provisions under the Indiana Business Corporation Law may have the effect
of delaying or preventing transactions involving a change of control, as defined
under that law, including
transactions in which stockholders might otherwise receive a substantial premium
for their shares over then current market prices. ThisAs a result, these provisions
may limit the ability of stockholders to approve transactions that they may deem
to be in their best interest or may delay or frustrate the removal of incumbent
directorsdirectors.
FORWARD LOOKING INFORMATION
Throughout this prospectus, including documents we incorporate by
reference, we may make statements that express our opinions, expectations, or
management.projections regarding future events or future results, in contrast with
statements that reflect historical facts. These predictive statements, which we
generally precede or accompany by such typical conditional words as
"anticipate," "intend," "believe," "estimate," "plan," "seek," "project" or
"expect," or by the words "may," "will," or "should," are intended to operate as
"forward looking statements" of the kind permitted by the Private Securities
Litigation Reform Act of 1995, incorporated in Section 27A of the Securities Act
and Section 21E of the Securities Exchange Act of 1934, as amended. That
legislation protects such predictive statements by creating a "safe harbor" from
liability in the event that a particular prediction does not turn out as
anticipated.
While we always intend to express our best judgment when we make statements
about what we believe will occur in the future, and although we base these
statements on assumptions that we believe to be reasonable when made, these
forward looking statements are not a guarantee of performance, and you should
not place undue reliance on such statements. Forward looking statements are
subject to many uncertainties and other variable circumstances, many of which
are outside of our control, that could cause our actual results and experience
to differ materially from those we thought would occur.
The following listing represents some, but not necessarily all, of the
factors that may cause actual results to differ from those anticipated or
predicted:
- cyclical changes in market supply and demand for steel; general economic
conditions; U.S. or foreign trade policy affecting steel imports or
exports; and governmental monetary or fiscal policy in the U.S. and other
major international economies;
- risks and uncertainties involving new products or new technologies, such
as our Iron Dynamics ironmaking process, in which the product or process
or certain critical elements thereof may not work at all, may not work as
well as expected, or may turn out to be uneconomic even if they do work;
- changes in the availability or cost of steel scrap, steel scrap
substitute materials or other raw materials or supplies which we use in
our production processes, as well as periodic fluctuations in the
availability and cost of electricity, natural gas or other utilities;
- the occurrence of unanticipated equipment failures and plant outages or
incurrence of extraordinary operating expenses;
- actions by our domestic and foreign competitors, including the addition
or reduction of production capacity, or loss of business from one or more
of our major customers or end-users;
17
- labor unrest, work stoppages and/or strikes involving our own workforce,
those of our important suppliers or customers, or those affecting the
steel industry in general;
- the effect of the elements upon our production or upon the production or
needs of our important suppliers or customers;
- the impact of, or changes in, environmental laws or in the application of
other legal or regulatory requirements upon our production processes or
costs of production or upon those of our suppliers or customers,
including actions by government agencies, such as the U.S. Environmental
Protection Agency or the Indiana Department of Environmental Management,
on pending or future environmentally related construction or operating
permits;
- pending, anticipated or unanticipated private or governmental liability
claims or litigation, or the impact of any adverse outcome of any
currently pending or future litigation on the adequacy of our reserves,
the availability or adequacy of our insurance coverage, our financial
well-being or our business and assets;
- changes in interest rates or other borrowing costs, or the effect of
existing loan covenants or restrictions upon the cost or availability of
credit to fund operations or take advantage of other business
opportunities;
- changes in our business strategies or development plans which we may
adopt or which may be brought about in response to actions by our
suppliers or customers, and any difficulty or inability to successfully
consummate or implement as planned any of our projects, acquisitions,
joint ventures or strategic alliances; and
- the impact of governmental approvals, litigation, construction delays,
cost overruns or technology risk upon our ability to complete, start-up
or continue to profitably operate a project, or to operate it as
anticipated.
We also believe that you should read the many factors described in "Risk
Factors" to better understand the risks and uncertainties inherent in our
business and underlying any forward looking statements.
Any forward looking statements which we make in this prospectus speak only
as of the date of such statement, and we undertake no ongoing obligation to
update such statements. Comparisons of results between 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 viewed as historical
data.
MARKET DATA
We obtained market and competitive position data used throughout this
prospectus, including documents we incorporate by reference, from internal
surveys, market research, publicly available information and industry
publications. Industry publications generally state that the information
contained therein has been obtained from sources believed to be reliable, but
that the accuracy and completeness of such information is not guaranteed.
Similarly, internal surveys, industry forecasts and market research, while
believed to be reliable, have not been independently verified.
18
USE OF PROCEEDS
We estimate that we will receive net proceeds from this offering of
approximately $116 million, or $ million if the underwriters exercise
their over-allotment option in full, after deducting discounts and commissions
and estimated offering expenses payable by us. We intend to use the net proceeds
of this offering for general corporate purposes, including capital expenditures,
repayment of indebtedness, working capital and potential acquisitions. Pending
such uses, we will invest the proceeds in short-term interest bearing,
investment grade securities.
As of March 31, 2002, we had borrowings of $275 million under our senior
secured credit facilities, including $70 million outstanding under the term A
loan and $205 million outstanding under the term B loan. Our borrowings under
our senior secured credit facilities bear interest at variable rates, had a
weighted average interest rate of 7.4% as of March 31, 2002, and mature as
follows: a $75 million five-year revolving facility, maturing March 26, 2007; a
$70 million five-year term A loan facility payable in quarterly installments
equal to incremental percentages of the outstanding amount of the term A loan,
with the first installment beginning June 26, 2003 and the final installment due
March 26, 2007; and a $205 million six-year term B loan facility payable in
quarterly installments, with no installments payable in the first year,
aggregate installments for the next four years beginning June 26, 2003 equal to
20% of the outstanding amount of the term B loan and each of the last four
installments equal to 20% of the outstanding amount of the term B loan, with the
final maturity on March 26, 2008.
We will not receive any proceeds from the salessale of shares by the selling
stockholders in this offering.
19
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is quoted on the Nasdaq National Market under the symbol
"STLD." The following table presents, for the periods indicated, the high and
low sale prices for our common stock as reported on the Nasdaq National Market.
HIGH LOW
------- -------
YEAR ENDED DECEMBER 31, 2000:
First Quarter............................................... $19.000 $11.125
Second Quarter.............................................. 12.938 8.250
Third Quarter............................................... 12.750 8.813
Fourth Quarter.............................................. 12.000 8.438
YEAR ENDED DECEMBER 31, 2001:
First Quarter............................................... $13.250 $10.000
Second Quarter.............................................. 14.950 10.688
Third Quarter............................................... 14.950 8.930
Fourth Quarter.............................................. 12.040 9.000
YEAR ENDING DECEMBER 31, 2002:
First Quarter............................................... $16.890 $11.400
Second Quarter.............................................. $19.300 $16.100
Third Quarter (through July 17, 2002)....................... $18.400 $15.500
A recent reported last sale price for our common stock as reported on the
Nasdaq National Market is presented on the cover page of this prospectus. As of
March 31, 2002, there were approximately 620 holders of record and approximately
7,600 beneficial owners of our common stock.
We have never declared or paid cash dividends. We currently anticipate that
all of our future earnings will be retained to finance the expansion of our
business and do not anticipate paying cash dividends in the foreseeable future.
Any determination to pay cash dividends in the future will be at the discretion
of our board of directors after taking into account various factors, including
our financial condition, results of operations, outstanding indebtedness,
current and anticipated cash needs and plans for expansion. In addition, the
terms of our senior secured credit agreement and the indenture relating to our
senior notes restrict our ability to pay cash dividends.
20
CAPITALIZATION
The following table sets forth our consolidated cash and cash equivalents
and capitalization as of March 31, 2002:
(1) on an actual basis; and
(2) on an as adjusted basis to give effect to the application of the
net proceeds from the sale by us of shares of common stock being
sold by any selling stockholders underin this
offering at an assumed offering price of $16.35 per share.
You should read this table in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and the related notes included elsewhere in this
prospectus.
SELLING STOCKHOLDERS
All
AS OF MARCH 31, 2002
------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
Cash and cash equivalents................................... $ 32,319 $
========== ========
Long-term debt, excluding current maturities:
Senior secured credit facilities
Revolving credit facility(1)........................... $ -- $ --
Term A loan............................................ 70,000
Term B loan............................................ 205,000 205,000
Other long-term debt, excluding current maturities........ 61,801 61,801
9 1/2% senior notes due 2009.............................. 200,000 200,000
---------- --------
Total long-term debt, excluding current maturities... 536,801
---------- --------
Other long-term contingent obligation(2).................... 21,987 21,987
Stockholders' equity:
Common stock, $.01 par value per share; 100,000,000 shares
authorized; 49,706,131 shares issued on an actual basis
and 57,306,131 shares issued on an as adjusted basis;
47,320,217 shares outstanding on an actual basis and
54,920,217 shares outstanding on an as adjusted
basis......................................... 497 573
Treasury stock, at cost; 2,385,914 shares on an actual and
as adjusted basis...................................... (28,889) (28,889)
Additional paid-in capital................................ 343,197 459,168
Retained earnings......................................... 133,869
Other accumulated comprehensive loss...................... (4,749) (4,749)
---------- --------
Total stockholders' equity........................... 443,925
---------- --------
Total capitalization............................ $1,002,713 $
========== ========
- ---------------
(1) The revolving credit facility is for $75 million, all of which is available
for future borrowing.
(2) In connection with the settlement of the Iron Dynamics credit agreement, we
have agreed to make contingent future payments to the Iron Dynamics senior
lenders, in an aggregate amount not to exceed $22 million, if Iron Dynamics
resumes operations by January 27, 2007 and generates positive cash flow, as
defined in the settlement agreement.
21
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected consolidated financial and
operating data of Steel Dynamics. The selected consolidated financial and
operating data as of and for each of the years in the five-year period ended
December 31, 2001 were derived from our audited consolidated financial
statements. The selected consolidated financial and operating data as of and for
the three months ended March 31, 2001 and 2002 were derived from our unaudited
consolidated financial statements. These unaudited consolidated financial
statements include, in our opinion, all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the data for such periods.
Operating results for interim periods are not necessarily indicative of a full
year's operations. You should read the following data in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the related notes
included elsewhere in this prospectus.
You should also read the following information in conjunction with the data
in the table on the following page:
- Our 1997 extraordinary loss of $7.6 million (net of tax benefit of $5.1
million) consisted of prepayment penalties and the write-off of
capitalized financing costs associated with the amendment of our credit
facilities, effective June 30, 1997.
- Our first quarter 2002 extraordinary loss of $2.0 million (net of tax
benefit of $1.2 million) consisted of prepayment penalties and the
write-off of capitalized financing costs associated with the refinancing
of our credit facilities, effective March 26, 2002.
- "EBITDA" represents income before extraordinary items, income taxes,
interest expense (net of interest income), depreciation and amortization.
EBITDA is not a measure of operating income, operating performance or
liquidity under generally accepted accounting principles, or GAAP. We
have presented EBITDA because certain investors may find it to be a
useful tool for analyzing and comparing operating performance and for
determining a company's ability to service and/or incur debt. We believe
that EBITDA, as presented, represents a useful measure of assessing the
performance of our ongoing operating activities, as it reflects our
earnings trends without the impact of a number of non-cash charges. We
use targets and positive trends in EBITDA to measure performance, and
some of our creditors use EBITDA to assess our debt covenant compliance.
Nevertheless, EBITDA should not be considered in isolation or as a
substitute for operating income (as determined in accordance with GAAP)
as an indicator of our operating performance, or cash flow from operating
activities (as determined in accordance with GAAP) as a measure of our
liquidity. In addition, companies calculate EBITDA differently and,
therefore, EBITDA as presented by us may not be comparable to EBITDA
reported by other companies.
- "Operating profit per net ton shipped" represents operating income before
start-up costs divided by net ton shipments. Beginning July 1, 2000, net
shipments included shipments from our steel fabrication subsidiary, New
Millennium. Beginning March 1, 2001, net shipments also included
shipments from our secondary-steel brokering subsidiary, Paragon Steel.
- "Hot band production" refers to our flat-rolled mini-mill's total
production of finished coiled product. "Prime tons" refer to hot bands
produced, which meet or exceed quality standards for surface, shape and
metallurgical properties.
- "Yield percentage" refers to our flat-rolled mini-mill's tons of finished
product divided by tons of raw materials.
- "Effective capacity utilization" is the flat-rolled mini-mill's ratio of
tons produced for the operational month to the operational month's
capacity. For the data disclosed in the period ended December 31, 1997,
we used an annual capacity of 1.4 million tons for this calculation. For
the data disclosed in the period ended December 31, 1998, we used an
annual capacity of 1.8 million tons. For the data disclosed in the
periods ended December 31, 1999, 2000 and 2001, and March 31, 2001 and
2002, we used an annual capacity of 2.2 million tons.
22
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------------- -----------------------
1997 1998 1999 2000 2001 2001 2002
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER NET TON DATA)
OPERATING DATA:
Net sales.......................... $ 420,132 $ 514,786 $ 618,821 $ 692,623 $ 606,984 $ 154,086 $ 166,903
Cost of goods sold................. 330,529 428,978 487,629 533,914 522,927 128,523 139,529
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit..................... 89,603 85,808 131,192 158,709 84,057 25,563 27,374
Selling, general and administrative
expenses......................... 24,449 20,637 42,441 53,306 58,132 13,802 13,088
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from operations........... 65,154 65,171 88,751 105,403 25,925 11,761 14,286
Interest expense................... 7,697 17,538 22,178 20,199 18,480 4,839 4,265
Other (income) expense............. (1,914) (4,993) 1,294 719 2,333 (204) 4,153
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes and
extraordinary loss............. 59,371 52,626 65,279 84,485 5,112 7,126 5,868
Income tax expense................. 7,813 20,942 25,849 30,690 1,968 2,743 2,200
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before extraordinary loss... 51,558 31,684 39,430 53,795 3,144 4,383 3,668
Extraordinary loss, net of tax..... 7,624 -- -- -- -- -- 2,028
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income....................... $ 43,934 $ 31,684 $ 39,430 $ 53,795 $ 3,144 $ 4,383 $ 1,640
========== ========== ========== ========== ========== ========== ==========
Basic earnings per share........... $ .91 $ .65 $ .82 $ 1.15 $ .07 $ .10 $ .04
========== ========== ========== ========== ========== ========== ==========
Weighted average common shares
outstanding...................... 48,343 48,462 47,914 46,822 45,655 45,511 46,045
========== ========== ========== ========== ========== ========== ==========
Diluted earnings per share......... $ .90 $ .65 $ .82 $ 1.15 $ .07 $ .10 $ .04
========== ========== ========== ========== ========== ========== ==========
Weighted average common shares and
share equivalents outstanding.... 48,843 48,868 48,153 46,974 45,853 45,710 46,348
========== ========== ========== ========== ========== ========== ==========
OTHER FINANCIAL DATA:
EBITDA............................. $ 89,465 $ 100,544 $ 125,804 $ 149,348 $ 71,269 $ 23,160 $ 23,690
Operating profit per net ton
shipped.......................... 61 50 58 65 23 36 34
Capital expenditures............... 175,193 194,131 126,673 110,379 90,714 10,353 33,759
Cash provided (used) by:
Operating activities............. 85,654 (51,060) 114,779 102,792 67,373 17,964 32,489
Investing activities............. (175,157) (196,967) (126,299) (109,399) (90,710) (10,353) (33,759)
Financing activities............. 40,661 244,652 22,892 176 91,394 (12,275) (44,652)
OTHER DATA:
Shipments (net tons)............... 1,205,247 1,416,950 1,869,714 1,919,368 1,963,602 482,431 561,948
Hot band production (net tons)..... 1,181,983 1,425,699 1,938,234 2,031,025 2,015,991 503,010 579,837
Prime ton percentage -- hot band... 95.3% 95.3% 94.2% 93.9% 95.9% 96.5% 94.0%
Yield percentage -- hot band....... 89.0 87.7 87.8 87.7 87.5 87.7 88.5
Effective capacity
utilization -- hot band.......... 84.4 79.2 88.1 92.3 91.6 91.5 105.4
Man-hours per hot band net ton
produced......................... .56 .55 .41 .37 .37 .38 .32
Number of employees................ 425 591 650 651 676 646 725
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents.......... $ 8,618 $ 5,243 $ 16,615 $ 10,184 $ 78,241 $ 5,520 $ 32,319
Working capital.................... 58,774 162,117 155,226 165,915 194,093 164,298 167,556
Total assets....................... 640,882 907,470 991,556 1,067,074 1,180,098 1,065,032 1,155,574
Long-term debt (including current
maturities)...................... 219,541 483,946 505,963 532,520 599,924 519,903 545,671
Stockholders' equity............... 337,595 351,065 391,370 418,784 418,575 419,538 443,925
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward looking statements that involve
numerous risks and uncertainties. Our actual results could differ materially
from those discussed in the forward looking statements as a result of these
risks and uncertainties, including those set forth in this prospectus under
"Forward Looking Information" and under "Risk Factors." You should read the
following discussion in conjunction with "Selected Financial and Operating Data"
and our consolidated financial statements and the related notes appearing
elsewhere in this prospectus.
OVERVIEW
We are one of the most profitable mini-mill steel producers in the United
States in terms of operating profit per ton. We primarily own and operate a
state-of-the-art, low-cost flat-rolled mini-mill located in Butler, Indiana with
an annual production capacity of 2.2 million tons. Our Butler mini-mill produces
a broad range of high quality hot-rolled, cold-rolled and coated steel products,
including a large variety of high value-added and high margin specialty products
such as thinner gauge rolled products and galvanized products. We sell our
products directly to end-users, intermediate steel processors and steel service
centers primarily in the Midwestern United States. Our products are used in
numerous industry sectors, including the automotive, construction and commercial
industries.
In May 2002, we announced plans to construct a low-cost, coil coating
facility at our Butler mini-mill that will further increase our range of
value-added capabilities. Subject to our receipt of applicable permits, we
anticipate starting construction of the facility within the next several months
and expect to commence coating operations in the middle of 2003. The coating
facility is currently expected to have an annual production capacity of 240,000
tons and is estimated to cost $25-$30 million.
In May 2001, we began construction of a new state-of-the-art structural
steel and rail mini-mill in Columbia City, Indiana. Our Columbia City mini-mill
is designed to have an annual production capacity of 1.3 million tons and
produce structural steel and rails at a higher quality and lower cost than
comparable mini-mills. We expect to spend approximately $315 million to
construct this mini-mill, of which $280 million has been spent as of June 30,
2002. We commenced commercial structural steel operations in late June 2002 and
have shipped our first structural products to initial customers. We expect to
ramp up these operations through regular product introductions and be fully
operational by the end of 2002. In addition, we expect to commence commercial
production of rails during the first quarter of 2003. Our structural steel
operation is designed to produce steel products for the construction,
transportation and industrial machinery markets. Our rail manufacturing
operation is designed to produce a variety of rail products for the railroad
industry.
The U.S. steel industry has historically been, and continues to be, highly
cyclical in nature, including a significant downturn in the second half of 2000
through most of 2001. During this period, our business was also adversely
impacted with our net sales declining from $693 million in 2000 to $607 million
in 2001 and our earnings declining from $54 million in 2000 to $3 million in
2001. However, during the first half of 2002, domestic flat-rolled steel prices
increased dramatically from historical cyclical lows in 2001. This increase has
resulted from a number of factors including (1) a reduction in domestic steel
production capacity as a result of past bankruptcies and shutdowns of other U.S.
steel producers, (2) a reduction in imports, driven in part by recent favorable
rulings with respect to tariffs and quotas on foreign steel and (3) a
strengthening of the overall U.S. economy and the need for end-users of steel
products to replenish their depleted inventories. As a result of our efficient,
low-cost operations, we believe that although our earnings declined, we were one
of the few U.S. steel producers to maintain profitability in 2001, and we have
already benefited from the improvements in the domestic flat-rolled steel market
in 2002.
NET SALES
Our total net sales are a factor of net tons shipped, product mix and
related pricing. Our net sales are determined by subtracting product returns,
sales discounts, return allowances and claims from total sales. We charge
premium prices for certain grades of steel, dimensions of product, or certain
smaller volumes, based on
24
our cost of production. We also charge marginally higher prices for our
value-added products from our cold mill. These products include hot-rolled and
cold-rolled galvanized products and cold-rolled products.
COST OF GOODS SOLD
Our cost of goods sold represents all direct and indirect costs associated
with the manufacture of our products. The principal elements of these costs are
steel scrap and scrap substitutes, alloys, natural gas, argon, direct and
indirect labor benefits, electricity, oxygen, electrodes and depreciation. Steel
scrap and scrap substitutes represent the most significant component of our cost
of goods sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses are comprised of all costs
associated with our sales, finance and accounting, materials and transportation,
and administrative departments. These costs include labor and benefits,
professional services, financing cost amortization, property taxes, profit
sharing expense and start-up costs associated with new projects.
INTEREST EXPENSE
Interest expense consists of interest associated with our senior credit
facilities and other debt agreements as described in the notes to our financial
statements contained elsewhere in this prospectus, net of capitalized interest
costs that are related to construction expenditures during the construction
period of capital projects.
OTHER (INCOME) EXPENSE
Other income consists of interest income earned on our cash balances and
any other non-operating income activity, including insurance proceeds from
litigation efforts. Other expense consists of any non-operating costs, including
permanent impairments of reported investments and settlement costs from
litigation efforts.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH THREE MONTHS ENDED MARCH
31, 2001
Net sales. Our net sales were $166.9 million, with total shipments of
561,900 net tons for the three months ended March 31, 2002, as compared to net
sales of $154.1 million, with total shipments of 482,400 net tons for the three
months ended March 31, 2001, an increase in net sales of $12.8 million, or 8%,
and an increase in total shipments of 79,500 net tons, or 16%. During the first
quarter of 2002, the average consolidated selling price per ton decreased
approximately $22, or 7%, in comparison to the same period in 2001. The increase
in our first quarter 2002 net sales in comparison to the first and fourth
quarters of 2001 was driven by volume. A substantial portion of our first
quarter 2002 sales were committed during the fourth quarter 2001 at depressed
pricing levels, resulting in our first quarter average consolidated selling
pricing per ton remaining flat as compared to the fourth quarter; however, we
are already experiencing substantially higher selling prices in our order
backlog for the second quarter 2002 and anticipate further increases during the
third quarter 2002.
Heidtman accounted for approximately 17% and 16% of our net sales for the
three months ended March 31, 2002 and 2001, respectively.
Cost of Goods Sold. Cost of goods sold was $139.5 million for the three
months ended March 31, 2002, as compared to $128.5 million for the three months
ended March 31, 2001, an increase of $11.0 million, or 9%, which was primarily
volume related. As a percentage of net sales, cost of goods sold represented
approximately 84% and 83% for the three months ended March 31, 2002 and 2001,
respectively. Steel scrap represented approximately 43% and 44% of the total
cost of goods sold for the three months ended March 31, 2002 and 2001,
respectively. We experienced a steady decline in scrap pricing from the second
quarter of 2000 through the first quarter of 2002. The average costs associated
with steel scrap averaged $9, or 8%, per ton produced less during the first
quarter of 2002 than during the same period of 2001. We experienced a narrowing
of our
25
gross margin throughout 2001 as our average sales price per ton decreased more
rapidly than our average scrap cost per ton, which is the most significant
single component of our cost of goods sold; however, during the first quarter of
2002 we experienced a further decrease in scrap pricing without a corresponding
decrease in our product pricing, resulting in a strengthening in our gross
margin. We currently anticipate a further strengthening through the third
quarter of 2002.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $13.1 million for the three months ended March 31,
2002, as compared to $13.8 million for the three months ended March 31, 2001, a
decrease of $714,000, or 5%. As a percentage of net sales, selling, general and
administrative expenses represented approximately 8% and 9% for the three months
ended March 31, 2002 and 2001, respectively. Start-up costs were $4.6 million,
all of which were related to construction of our structural and rail mill, for
the three months ended March 31, 2002, as compared to start-up costs of $5.1
million, of which Iron Dynamics represents $3.8 million, for the three months
ended March 31, 2001, a decrease of $552,000, or 11%.
Interest Expense. Interest expense was $4.3 million for the three months
ended March 31, 2002, as compared to $4.8 million for the three months ended
March 31, 2001, a decrease of $574,000, or 12%. Gross interest expense decreased
15% to $8.0 million and capitalized interest decreased 19% to $3.7 million, for
the three months ended March 31, 2002, as compared to the same period in 2001.
Throughout 2001 and into 2002, base interest rates, more specifically LIBOR and
prime rates steadily decreased, resulting in a 15% decrease in our gross
interest expense for the first quarter of 2002, as compared to the same period
in 2001, despite only a $1.0 million decrease in our total net debt (total debt,
including other long-term contingent liabilities, less cash and cash
equivalents).
Other (Income) Expense. Other expense was $4.2 million for the three
months ended March 31, 2002, as compared to other income of $204,000 for the
three months ended March 31, 2001, an increase in expenses of $4.4 million.
During the first quarter of 2002, we recorded settlement costs in association
with the Nakornthai Strip Mill Public Company Ltd. (NSM) related lawsuits. On
May 6, 2002, we settled the remaining NSM-related lawsuit, which was outstanding
on March 31, 2002. Accordingly, we reflected a settlement cost of $4.5 million,
net of any insurance proceeds, in our financial results for the first quarter of
2002.
Income Taxes. Our income tax provision was $2.2 million, net a $1.2
million tax benefit related to our extraordinary loss on debt extinguishment for
the three months ended March 31, 2002, as compared to $2.7 million for the same
period in 2001. Our effective tax rate was 37.5% during 2002, as compared to
38.5% during 2001. During the fourth quarter of 2001, we recorded a $1.9 million
deferred tax asset valuation allowance related to foreign tax credits that may
not be fully realized. This allowance is still outstanding at March 31, 2002.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Net Sales. Our net sales were $607.0 million, with total shipments of 2.0
million net tons for the year ended December 31, 2001, as compared to net sales
of $692.6 million, with total shipments of 1.9 million net tons for the year
ended December 31, 2000, a decrease in net sales of $85.6 million, or 12%, and
an increase in total shipments of 44,000 net tons, or 2%. The entire steel
industry experienced pricing declines from the second half of 2000 throughout
2001, reaching the low in the fourth quarter of 2001. During 2001, the average
selling price per ton decreased approximately $52, or 14%, in comparison to the
same period in 2000, resulting in a 12% decline in net sales despite a 2%
increase in net shipments.
Heidtman accounted for approximately 18% and 21% of our net sales for the
years ended December 31, 2001 and 2000, respectively.
Cost of Goods Sold. Cost of goods sold was $522.9 million for the year
ended December 31, 2001, as compared to $533.9 million for the year ended
December 31, 2000, a decrease of $11.0 million, or 2%. Steel scrap represented
approximately 44% and 51% of the total cost of goods sold for the year ended
December 31, 2001 and 2000, respectively. We experienced a steady decline in
scrap pricing from the second quarter of 2000
26
throughout 2001, reaching the low in the fourth quarter of 2001. The average
costs associated with steel scrap averaged $18, or 14%, per ton less during 2001
than during 2000. As a percentage of net sales, cost of goods sold represented
approximately 86% and 77% for the years ended December 31, 2001 and 2000,
respectively. We experienced a narrowing of our gross margin throughout 2001 as
our average sales price per ton decreased more rapidly than our average scrap
cost per ton, which is the most significant single component of our cost of
goods sold.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $58.1 million for the year ended December 31, 2001,
as compared to $53.3 million for the year ended December 31, 2000, an increase
of $4.8 million, or 9%. A substantial portion of these expenses in both periods
was attributable to litigation costs associated with the NSM litigation efforts
and start-up costs associated with Iron Dynamics and the structural and rail
mill. Litigation costs associated with the NSM litigation efforts were $8.9
million for the year ended December 31, 2001, as compared to $6.1 million for
the year ended December 31, 2000, an increase of $2.8 million, or 45%. Start-up
costs were $19.5 million, of which Iron Dynamics represents $11.0 million
(including $1.7 million of interest expense), for the year ended December 31,
2001, as compared to total start-up costs of $19.9 million, of which Iron
Dynamics represents $12.4 million, for the year ended December 31, 2000, a
decrease of $393,000 or 2%. During 2001, we also recorded bad debt expense of
$6.0 million, as compared to $349,000 during 2000, an increase of $5.7 million.
Approximately $4.7 million of this increase in bad debt expense was the result
of two customer bankruptcies which occurred during 2001. As a percentage of net
sales, selling, general and administrative expenses represented approximately
10% and 8% for the years ended December 31, 2001 and 2000, respectively.
Interest Expense. Interest expense was $18.5 million for the year ended
December 31, 2001, as compared to $20.2 million for the year ended December 31,
2000, a decrease of $1.7 million, or 9%. Gross interest expense decreased 10% to
$34.1 million and capitalized interest decreased 20% to $14.0 million, for the
year ended December 31, 2001, as compared to the same period in 2000. Throughout
2001, base interest rates, more specifically LIBOR and prime rates steadily
decreased in comparison to 2000 levels, resulting in the 10% decrease in our
gross interest expense despite a 4% increase in our total net debt (total debt,
including other long-term contingent liabilities, less cash and cash
equivalents).
Other (Income) Expense. Other expense was $2.3 million for the year ended
December 31, 2001, as compared to $719,000 for the year ended December 31, 2000,
an increase of $1.6 million. During 2001, we recorded settlement costs, along
with the offsetting insurance proceeds, associated with settlements of a portion
of the NSM-related lawsuits. On March 7, 2002, we settled one of two remaining
NSM-related lawsuits, which was outstanding on December 31, 2001. Accordingly,
we reflected a settlement cost of $2.3 million, which represents the settlement
amount not covered by insurance proceeds, in our financial results for 2001.
During 2000, other expense included the write-off of the remaining investment in
NSM of approximately $1.4 million.
Income Taxes. Our income tax provision was $2.0 million for the year ended
December 31, 2001, as compared to $30.7 million for the same period in 2000. Our
effective tax rate was 38.5% during 2001, as compared to 36.3% during 2000.
During 2001, we recorded a $1.9 million deferred tax asset valuation allowance
related to foreign tax credits that may not be fully realized. This allowance
was offset by a $1.4 million reduction in the effective tax rate applied to our
cumulative net deferred tax liability.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Net Sales. Our net sales were $692.6 million, with total shipments of 1.9
million net tons for the year ended December 31, 2000, as compared to net sales
of $618.8 million, with total shipments of 1.9 million net tons for the year
ended December 31, 1999, an increase in net sales of $73.8 million, or 12%. This
increase was attributable to an increase of $27, or 8% in our average price per
ton, for the year ended December 31, 2000, as compared to the same period in
1999. The increase in average price per ton was the direct result of a shift in
our product mix from hot band sales to higher-margin, value-added products,
including pickle and oil, cold-rolled and galvanized. Shipments of these
higher-margin products increased 109,000 net tons, or 11%, with an average price
per ton increase of $34, or 9%, for the year ended December 31, 2000, as
compared to the same
27
period in 1999. More specifically, shipments of our cold-rolled products
increased 87,000 net tons, or 47%, with an average price per ton increase of
$43, or 12%, during the same periods.
Approximately 21% and 19% of our net sales for 2000 and 1999, respectively,
were purchased by Heidtman.
Cost of Goods Sold. Cost of goods sold was $533.9 million for the year
ended December 31, 2000, as compared to $487.6 million for the year ended
December 31, 1999, an increase of $46.3 million, or 9%. Steel scrap represented
approximately 51% and 49% of our total cost of goods sold for the years ended
December 31, 2000 and 1999, respectively. Our costs associated with steel scrap
averaged $10 per ton more during 2000 than during 1999. We experienced a steady
decline in scrap pricing during the second quarter of 2000 and throughout the
remainder of the year. As a percentage of net sales, cost of goods sold
represented approximately 77% and 79% for the years ended December 31, 2000 and
1999, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $53.3 million for the year ended December 31, 2000,
as compared to $42.4 million for the year ended December 31, 1999, an increase
of $10.9 million, or 26%. This increase was due in part to increased costs
associated with our NSM litigation efforts. As a result of significantly
improved operating results during 2000, as compared to 1999, employee
performance-based incentives also comprised a portion of the total selling,
general and administrative expense increase. Start-up costs related to our
structural steel and rail mini-mill project, New Millennium project and Iron
Dynamics were $19.9 million for the year ended December 31, 2000, as compared to
$19.0 million for the year ended December 31, 1999, an increase of $900,000, or
5%.
As a percentage of net sales, selling, general and administrative expenses
represented approximately 8% and 7% for the years ended December 31, 2000 and
1999, respectively.
Interest Expense. Interest expense was $20.2 million for the year ended
December 31, 2000, as compared to $22.2 million for the year ended December 31,
1999, a decrease of $2.0 million, or 9%. Gross interest expense increased 7% to
$37.8 million and capitalized interest increased 33% to $17.5 million, for the
year ended December 31, 2000, as compared to the same period in 1999.
Other (Income) Expense. For the year ended December 31, 2000, other income
was $790,000, as compared to $818,000 for the year ended December 31, 1999.
Other expense was $1.5 million for the year ended December 31, 2000, of
which $1.4 million represented the write-off of our remaining investment in NSM,
and was $2.1 million for the year ended December 31, 1999, of which $1.8 million
represented the write-off of our entire cost-basis investment in Qualitech Steel
Corporation.
Income Taxes. Our federal income tax provision was $29.6 million for the
year ended December 31, 2000, as compared to $22.9 million for the same period
in 1999. This federal tax provision reflects income tax expense at the statutory
income tax rate. During 2000 our effective state tax rate was 3.5%, excluding a
state income tax benefit of $2.2 million, or 2.3%, resulting from the reduction
in our effective tax rate applied to our cumulative net deferred tax liability.
LIQUIDITY AND CAPITAL RESOURCES
Our business is capital intensive and requires substantial expenditures
for, among other things, the purchase and maintenance of equipment used in our
steelmaking and finishing operations and to remain compliant with environmental
laws. Our short-term and long-term liquidity needs arise primarily from capital
expenditures, working capital requirements and principal and interest payments
related to our outstanding indebtedness. We have met these liquidity
requirements with cash provided by operations, equity, long-term borrowings,
state and local grants and capital cost reimbursements.
CASH FLOWS
For the three months ended March 31, 2002, cash provided by operating
activities was $32.5 million, as compared to $18.0 million for the three months
ended March 31, 2001, an increase of $14.5 million, or 81%. A
28
significant portion of this increase was the result of a decrease in our
inventory levels from December 31, 2001 to March 31, 2002, as compared to the
inventory increase from December 31, 2000 to March 31, 2001. Cash used in
investing activities, which represented capital investments, was $33.8 million
and $10.4 million for the three months ended March 31, 2002 and 2001,
respectively. Substantially all of our capital investment costs incurred during
the first quarter of 2002 were utilized in construction efforts related to our
structural steel and rail mini-mill. Cash used in financing activities was $44.7
million for the three months ended March 31, 2002, as compared to $12.3 million
for the three months ended March 31, 2001, an increase of $32.4 million. This
increase in funds used in financing activities was the result of our change in
capital structure after the first quarter 2002 refinancing activities.
For the year ended December 31, 2001, cash provided by operating activities
was $67.4 million, as compared to $102.8 million for the year ended December 31,
2000, a decrease of $35.4 million, or 34%. A significant portion of this
decrease was the result of our decrease in 2001 net income of 94%, as compared
to 2000. Cash used in investing activities, which primarily represents capital
investments, was $90.7 million and $109.4 million for the years ended December
31, 2001 and 2000, respectively. Approximately 87% of our capital investment
costs incurred during 2001 were utilized in construction efforts related to the
structural steel and rail mill. Cash provided by financing activities was $91.4
million for the year ended December 31, 2001, as compared to $176,000 for the
year ended December 31, 2000, an increase of $91.2 million. This increase in
funds provided by financing activities was the direct result of our 34% decrease
in cash provided by operations and continued cash requirements for capital
expenditures related to the construction of our Columbia City mini-mill.
For the year ended December 31, 2001, we received benefits from state and
local governments in the form of real estate and personal property tax
abatements of approximately $5.4 million. Based on our current abatements and
utilizing our existing long-lived asset structure, we estimate the remaining
annual effect on future operations to be approximately $4.7 million, $4.0
million, $3.3 million, $2.6 million, $1.5 million, $1.2 million, $592,000,
$272,000 and $26,000, for the years ended December 31, 2002 through 2010,
respectively.
LIQUIDITY
We believe the principal indicators of our liquidity are our cash position,
remaining availability under our bank credit facilities and excess working
capital. During the three months ended March 31, 2002, our cash position
decreased $45.9 million to $32.3 million and our working capital position
decreased $26.5 million, or 14%, to $167.6 million, as compared to December 31,
2001. As of March 31, 2002, $75.0 million under our senior secured revolving
credit facility remained undrawn and available. Our ability to draw down the
revolver is dependant upon continued compliance with the financial covenants and
other covenants contained in the senior credit agreement.
At December 31, 2001, our $450.0 million senior secured credit agreement
consisted of a $250.0 million five-year revolving credit facility (subject to a
borrowing base), and two $100.0 million, five-year term loans amortizable in
eight equal quarterly installments beginning September 30, 2002. On July 17,
2001, our $50.0 million unsecured credit agreement was reduced by $5.0 million
resulting in a remaining availability of $45.0 million at December 31, 2001.
Previous to our March 2002 refinancing addressed below, we had $577.0 million
available under various senior bank credit facilities, of which $568.6 million
was drawn at December 31, 2001.
In March 2002, we issued $200.0 million of senior unsecured notes and we
entered into a new $350.0 million senior secured credit agreement in order to
refinance our existing senior secured and unsecured credit facilities and to
obtain additional working capital. The $350.0 million credit agreement was made
available to us as $75.0 million in the form of a five-year revolving credit
facility, $70.0 million in the form of a five-year term A loan and $205.0
million in the form of a six-year term B loan. We intend to use a portion of the
net proceeds to repay a portion of the amounts outstanding under the senior
secured credit facilities. The new senior secured credit agreement is secured by
liens and mortgages on substantially all of our personal and real property
assets, by liens and mortgages on substantially all of the personal and real
property assets of our
29
wholly-owned subsidiaries and by pledges of all shares of capital stock and
inter-company debt held by us and each wholly-owned subsidiary. In addition, our
wholly-owned subsidiaries have guaranteed our obligations under the new senior
secured credit agreement. The new senior secured credit agreement contains
financial covenants and other covenants that limit or restrict our ability to
make capital expenditures, incur indebtedness, permit liens on our property,
enter into transactions with affiliates, make restricted payments or
investments, enter into mergers, acquisitions or consolidations, conduct asset
sales, pay dividends or distributions and enter into other specified
transactions and activities. We are also required to prepay any amounts that we
borrowed with the proceeds we receive from a number of specified events or
transactions.
On January 28, 2002, we entered into an agreement with the Iron Dynamics
lenders to extinguish the debt under the Iron Dynamics credit agreement at the
end of March 2002. We complied with each of the settlement requirements, thus
constituting full and final settlement of all of Iron Dynamics' obligations and
our guarantees under the Iron Dynamics credit agreement, causing the Iron
Dynamics credit agreement to terminate. In meeting the requirements of the
settlement agreement, we paid $15.0 million in cash and issued an aggregate of
$22.0 million, or 1.5 million shares of our common stock during March 2002. In
addition, if Iron Dynamics resumes operations by January 27, 2007, and generates
positive cash flow (as defined in the settlement agreement), we are required to
make contingent future payments in an aggregate not to exceed $22.0 million.
Our ability to meet our debt service obligations and reduce our total debt
will depend upon our future performance, which in turn, will depend upon general
economic, financial and business conditions, along with competition, legislation
and regulation, factors that are largely beyond our control. In addition, we
cannot assure you that our operating results, cash flow and capital resources
will be sufficient for repayment of our indebtedness in the future. We believe
that based upon current levels of operations and anticipated growth, cash flow
from operations, together with other available sources of funds, including
additional borrowings under our new senior secured credit agreement, will be
adequate for the next two years for making required payments of principal and
interest on our indebtedness and for funding anticipated capital expenditures
and working capital requirements.
In 2002, we anticipate spending approximately $110 million on capital
expenditures, as follows:
- approximately $93 million (including approximately $9 million of
capitalized interest) in connection with the construction of our Columbia
City structural steel and rail mini-mill;
- approximately $10 million in connection with construction of a low-cost,
coil coating facility at our Butler mini-mill;
- approximately $4 million in connection with a test facility project at
our Iron Dynamics facility; and
- approximately $3 million in connection with maintenance projects at our
Butler mini-mill and our New Millennium facility.
For the three months ended March 31, 2002, we spent approximately $34
million on capital expenditures.
In connection with this offering and the resulting early extinguishment of
a portion of our senior secured credit facilities, we expect to record a
write-off of previously capitalized financing costs, which we expect to be no
more than $2.1 million, in the third quarter of 2002.
Effective June 1, 2000, the board of directors authorized the extension and
continuation of our 1997 share repurchase program, allowing us to repurchase an
additional 5%, or 2,344,000 shares, of our outstanding common stock, at a
purchase price not to exceed $15 per share. As of December 31, 2001, we had
acquired an aggregate 3,843,000 shares of our common stock in open market
purchases at an average price per share of $12, of which none were repurchased
during 2001 and 1999, and 2,549,000 shares were purchased during 2000 at an
average price per share of $11. As of December 31, 2001, approximately 957,000
shares remain available for us to repurchase under the June 2000 repurchase
authorization.
30
INFLATION
We believe that inflation has not had a material effect on our results of
operations.
ENVIRONMENTAL AND OTHER CONTINGENCIES
We have incurred, and in the future will continue to incur, capital
expenditures and operating expenses for matters relating to environmental
control, remediation, monitoring and compliance. We believe, apart from our
dependence on environmental construction and operating permits for our
manufacturing facilities, that compliance with current environmental laws and
regulations is not likely to have a material adverse effect on our financial
condition, results of operations or liquidity; however, environmental laws and
regulations have changed rapidly in recent years and we may become subject to
more stringent environmental laws and regulations in the future.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
In the normal course of business our market risk is limited to changes in
interest rates. We utilize long-term debt as a primary source of capital. A
portion of our debt has an interest component that resets on a periodic basis to
reflect current market conditions. The following table represents the principal
cash repayments and related weighted average interest rates by maturity date for
our long-term debt as of December 31, 2001 after giving effect to the Iron
Dynamics credit agreement settlement and the refinancing of our senior credit
facilities in March 2002 (in millions):
INTEREST RATE RISK
-----------------------------------------
FIXED RATE VARIABLE RATE
------------------- -------------------
AVERAGE AVERAGE
PRINCIPAL RATE PRINCIPAL RATE
--------- ------- --------- -------
Expected Maturity Date:
2002............................................ $ 2.3 7.9% $ 43.7 6.5%
2003............................................ 2.8 7.9 15.7 5.9
2004............................................ 3.0 7.9 28.1 5.8
2005............................................ 3.4 7.9 45.7 6.3
2006............................................ 3.4 7.9 34.2 5.6
Thereafter........................................ 229.8 9.3 187.8 6.0
------ ------
Total............................................. $244.7 $355.2
====== ======
Fair Value........................................ $244.7 $355.2
====== ======
We manage exposure to fluctuations in interest rates through the use of an
interest rate swap. We agree 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 currently
recognized in the consolidated statements of operations as a component of
interest expense.
At December 31, 2001, we had an interest rate swap agreement with a
notional amount of $100.0 million. We agreed to make fixed rate payments at
6.92%, for which we will receive LIBOR payments. The maturity date of the
interest rate swap agreement is January 10, 2005. The fair value of the interest
rate swap agreement was estimated to be a liability of $8.8 million, which
represents the amount we would have to pay to exit this agreement at December
31, 2001.
At March 31, 2002, no material changes had occurred with respect to our
interest rate risk from December 31, 2001.
31
RECENT ACCOUNTING PRONOUNCEMENT
In April 2002, Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections," (SFAS No. 145) was issued. This statement,
among other things, rescinds SFAS No. 4, which required all gains and losses
from extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. We intend to adopt SFAS
No. 145 when required in fiscal 2003. Upon adoption, any gain or loss on
extinguishment of debt that was classified as an extraordinary item in prior
periods presented that does not meet the criteria in APB Opinion No. 30 for
classification as an extraordinary item, will be reclassified. Our management
has determined that the adoption of SFAS No. 145 will not have a material effect
on our consolidated financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of our financial condition and results
of operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. We review the accounting policies we use in reporting our
financial results on a regular basis. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. We evaluate the appropriateness of these
estimations and judgments on an ongoing basis. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Results may differ from these estimates due
to actual outcomes being offereddifferent from those on which we based our assumptions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Revenue Recognition and Allowance for Doubtful Accounts. We generally
recognize revenues from sales and the allowance for estimated costs associated
with returns from these sales when the product is shipped. Provision is made for
estimated product returns and customer claims based on estimates and actual
historical experience. If the historical data used in our estimates does not
reflect future returns and claims trends, additional provision may be necessary.
We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. If the financial
condition of our customers was to deteriorate, resulting in the impairment of
their ability to make payments, additional allowance may be required.
Impairments of Long-Lived Assets. In accordance with the methodology
described in 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," we review long-lived assets for impairment whenever events or
changes in circumstances indicate the carrying amount of such assets may not be
recoverable. Impairment losses are recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by this prospectusthose assets are less than the assets'
carrying amounts. The impairment loss is measured by comparing the fair value of
the asset to its carrying amount. During 2001, events and circumstances
indicated that approximately $125 million of assets related to Iron Dynamics
might be impaired. However, our estimate of undiscounted cash flows was
approximately $76 million in excess of such carrying amounts and therefore no
charge has been recorded at December 31, 2001. Nonetheless, it is reasonably
possible that our estimate of undiscounted cash flows may change in the near
term due to, among other things, technological changes, economic conditions, and
changes in the business model or changes in operating performance, resulting in
the need to write-down those assets to fair value.
Deferred Tax Assets and Liabilities. We are required to estimate our
income taxes as a part of the process of preparing our consolidated financial
statements. This requires us to estimate our actual current tax exposure
together with assessing temporary differences resulting from differing
treatments of items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included within our consolidated
balance sheet. We must then assess the likelihood that our deferred tax assets
will be
32
recovered from future taxable income and to the extent we believe that recovery
is not likely, we must establish a valuation allowance. As of December 31, 2001,
we had available foreign tax credit carryforwards of approximately $3.0 million
for federal income tax purposes, which expire in 2003. Due to the limited time
frame remaining to utilize the foreign tax credits and the decreased likelihood
that the net operating losses will be fully absorbed prior to the expiration of
the credits, a valuation allowance of $1.9 million was created in 2001. Even if
these credits are not utilized as such, they can be treated as tax-deductible
expenses. Therefore, $1.1 million of foreign tax credit remains as a deferred
tax asset as of December 31, 2001.
Contingent Liabilities. The accrual of a contingency involves considerable
judgment on the part of management. We use outside experts, such as lawyers, as
necessary to aid in the estimation of the probability that a loss will occur and
the amount (or range) of that potential loss. During 1999, we were issuedsued by
institutional purchasers in a 1998 note offering by certain investment banks on
behalf of NSM, the owner and operator of a steel mini-mill in Thailand for whom
we agreed to render certain post-offering technical and operational advisory
services. During the second and third quarters of 2001, we settled seven of the
nine pending lawsuits, and in the first quarter of 2002, we settled the two
remaining lawsuits, in each selling stockholder pursuantcase without any admission of liability and for
amounts provided by our insurance carriers within applicable insurance coverage,
except for approximately $2.3 million recorded in 2001 and $4.5 million recorded
in the first quarter of 2002.
33
INDUSTRY OVERVIEW
OVERVIEW
The U.S. 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 and levels of steel imports and applicable tariffs. The
steel industry has also been affected by various company-specific factors, such
as a company's ability or inability to adapt to technological change, plant
inefficiency and high labor costs.
During the second half of 2000 and throughout 2001, the U.S. steel industry
experienced a severe downward cycle, largely as a result of increased imports of
steel at depressed prices, weak economic conditions and excess global steel
production capacity. Moreover, even though approximately 30 U.S. steelmakers
have entered bankruptcy since 1997, including Bethlehem Steel, LTV Steel,
Wheeling-Pittsburgh Steel, Heartland Steel, Geneva Steel, Northwestern Steel,
Gulf States Steel, Acme Metals, Qualitech Steel, GS Technologies and others,
some may emerge from bankruptcy reorganization with reduced costs, which may
make them more competitive. In other cases, assets of bankrupt steelmakers have
been sold through bankruptcy proceedings to other steelmakers or to third
parties, which may allow such formerly idled steelmaking capacity to come back
into production at a more competitive cost structure.
During the first half of 2002, domestic flat-rolled steel prices increased
dramatically from historical cyclical lows in 2001. This increase has resulted
from a number of factors, including (1) a reduction in domestic steel production
capacity as a result of past bankruptcies and shutdowns of other U.S. steel
producers, (2) a reduction in imports, driven in part by recent favorable
rulings with respect to tariffs and quotas on foreign steel and (3) a
strengthening of the overall U.S. economy and the need for end-users of steel
products to replenish their depleted inventories.
ANTI-DUMPING INITIATIVES
U.S. steel producers compete with many foreign producers. Competition from
foreign producers is typically strong, but is also substantially affected by the
relative strength of foreign economies and fluctuation in the value of the U.S.
dollar against foreign currencies, with steel imports tending to increase when
the value of the dollar is strong in relation to foreign currencies. The
situation has been exacerbated by reason of a weakening of certain economies,
particularly in Eastern Europe, Asia and Latin America. Because of the
ownership, control or subsidization of some foreign steel producers by their
governments, decisions by such producers with respect to their production, sales
and pricing decisions are often influenced to a greater degree by political and
economic policy consideration than by prevailing market conditions, realities of
the marketplace or consideration of profit or loss. Since 1998, when imports of
hot-rolled and cold-rolled products increased 43% compared to the prior year,
domestic steel producers, including us, have been adversely affected by
illegally "dumped" imported steel. Dumping involves selling a product below cost
or for less than in the exporter's home country and is a violation of U.S. trade
laws. Most foreign markets are less open than the U.S. market, allowing foreign
producers to maintain higher prices in their own markets, while dumping excess
production at lower and often subsidized prices into the U.S. market.
HOT-ROLLED
In September 1998, eleven U.S. steel companies, including us, as well as
two labor unions, filed anti-dumping complaints with the ITC and the U.S.
Department of Commerce against hot-rolled coiled steel imports from Japan,
Russia and Brazil, seeking determinations that those three countries were
dumping hot-rolled carbon steel in the U.S. market at below fair market prices.
The group also filed a subsidy, or countervailing duty, complaint against
Brazil.
In April 1999, the Department of Commerce issued a final determination that
imports of hot-rolled steel from Japan were dumped at margins ranging from 17%
to 65%, and in June 1999, the ITC reached a final determination that imports of
hot-rolled sheet from Japan caused injury to the U.S. steel industry. As a
consequence, the Department of Commerce issued an anti-dumping order against
imports from Japan.
34
In July 1999, the Department of Commerce also issued suspension agreements
and final anti-dumping duty determinations as to imports of hot-rolled sheet
from Brazil and Russia. "Suspension" agreements generally impose price and/or
quantity restrictions on imports from the subject country for the purpose of
removing the injurious impact of the dumping or subsidies and are often
negotiated with the subject country either in lieu of the imposition of
anti-dumping or countervailing duties or as an alternate remedy to suspend a
previously imposed duty. In February 2002, the Department of Commerce, having
found violations of the suspension agreement by Brazilian producers, revoked the
agreement and reimposed dumping duties of 48%.
While we and the U.S. steel industry benefited from these rulings, with
hot-rolled sheet imports from these three countries, which accounted for
approximately 70% of 1998's hot-rolled import tonnage, declining by
approximately 90%, the benefit was significantly thwarted by the shifting of
imports to hot-rolled sheet from countries other than Japan, Russia and Brazil,
which increased significantly during 2000. Therefore, in November 2000, we
joined three other mini-mills and four integrated producers and filed
anti-dumping cases against imports of hot-rolled sheet from 11 countries
(Argentina, India, Indonesia, Kazakhstan, the Netherlands, the People's Republic
of China, Romania, South Africa, Taiwan, Thailand and Ukraine) and
countervailing duty cases against five countries (Argentina, India, Indonesia,
South Africa and Thailand). On August 17, 2001, the ITC made final affirmative
injury determinations on imports of hot-rolled steel from Argentina and South
Africa, and the Department of Commerce imposed anti-dumping duty orders of
40-45% on hot-rolled steel imported from Argentina and 9.3% on hot-rolled steel
imported from South Africa. On September 23, 2001, the Department of Commerce
issued the following final dumping margins, although these margins are subject
to modification from pending litigation: on hot-rolled steel imported from
India -- 29-43%, Indonesia -- 48%, Kazakhstan -- 243.5%, the Netherlands -- 3%,
China -- 64-91%, Romania -- 17-80%, Taiwan -- 20-29%, Thailand -- 4-20% and
Ukraine -- 90%. In addition, the Department of Commerce issued the following
final countervailing duties on hot-rolled steel imported from the following
countries: India -- 8-32%, Indonesia -- 10%, South Africa -- 6.3% and
Thailand -- 2.4%. The ITC made final affirmative injury determinations on these
remaining cases in November 2001, and the Department of Commerce imposed
anti-dumping duty orders. These orders will remain in effect for at least five
years, subject to annual administrative review. At the end of five years, the
ITC will conduct a sunset review. In June 2002, the U.S. granted "market
economy" status to Russia, which may enable Russia to more effectively defend
itself against future dumping actions on the basis of Russian production costs
rather than on the basis of comparison with surrogate country production costs.
COLD-ROLLED
In June 1999, we, together with other domestic producers and the United
Steel Workers of America, also filed a complaint with the ITC and the Department
of Commerce seeking a determination that cold-rolled steel products from
Argentina, Brazil, China, Indonesia, Japan, Slovakia, South Africa, Taiwan,
Thailand, Turkey, and Venezuela were being dumped in the U.S. market at below
fair market prices. On July 19, 1999, the ITC made unanimous affirmative
preliminary determinations of a reasonable indication of injury by reason of
such imports. The Department of Commerce announced preliminary dumping
determinations, which required the posting of dumping duties in November and
December of 1999. In January 2000, the Department of Commerce issued a
determination that imports of cold-rolled steel from six of the countries were
dumped at margins ranging from 17% to 81%. We were ultimately not successful in
these cold-rolled cases, however, and on March 3, 2000 and thereafter, the ITC
made negative final injury determinations against these eleven countries, ruling
that the industry was not being injured by these imports. These negative
outcomes resulted in a resurgence of dumped cold-rolled imports in the second
half of 2000 and depressed cold-rolled prices caused by these unfair practices.
As a consequence of the approximate 50% increase in imports of cold-rolled sheet
steel from 20 countries during the first half of 2001, at prices averaging $50
or more below their 1998 prices that the Department of Commerce had determined
at that time to have been dumped, we, together with Nucor, United States Steel,
Bethlehem, LTV, National, Weirton and WCI, brought anti-dumping petitions on
September 28, 2001 against imports from these 20 countries and countervailing
duty petitions against five countries. These countries, including Argentina,
Australia, Belgium, Brazil, China, France, Germany, India, Japan, South Korea,
the Netherlands, New Zealand, Russia, South Africa, Spain, Sweden, Taiwan,
Thailand, Turkey and Venezuela, represented nearly 80% of the imported
cold-rolled sheet. In a preliminary ruling in
35
November 2001, the ITC found in favor of the petitioners. On March 4, 2002, the
Department of Commerce issued the following preliminary countervailing duty
margins: Brazil -- 8.22%-12.58%, France -- 1.32%, and Korea -- 0.32%-7%.
However, the Department of Commerce made a preliminary determination that
countervailing subsidies are not being provided in Argentina. On May 9, 2002,
the Department of Commerce issued the following preliminary dumping margins:
Argentina -- 70.56%, Australia -- 24.06%, Belgium -- 11.66%, Brazil -- 43.34%,
France -- 5.17%, Germany -- 8.47%, India -- 153.65%, Japan -- 112.56%-115.22%,
Korea -- 5.25%-19.03%, the Netherlands -- 6.38%, New Zealand -- 7.1%, People's
Republic of China -- 129.85%, Russia -- 137.33%, South Africa -- 43.32%,
Spain -- 46.2%, Sweden -- 40.54%, Taiwan -- 3.15%-16.8%,
Thailand -- 127.44%-142.78%, Turkey -- 7.7%, and Venezuela -- 72.81%. On July
11, 2002, the Department of Commerce announced its final determination in the
anti-dumping duty investigations on imports of certain cold-rolled carbon steel
flat products from the following countries: Australia -- 24.06%,
India -- 153.65%, Japan -- 112.56%-115.22%, Sweden -- 40.54% and
Thailand -- 127.44%-142.78%. The first injury determinations by the ITC are
expected at the end of August 2002.
STRUCTURAL STEEL AND RAIL
In addition to the various hot and cold flat-rolled steel cases, a number
of structural steel producers have prosecuted anti-dumping cases against imports
of structural steel. In July 1999, Nucor-Yamato, TXI-Chaparral, and Northwestern
Steel and Wire filed anti-dumping cases on imports of structural steel products
from Japan and Korea. In April 2000, the Department of Commerce found duties of
32-65% on imports from Japan and 15-45% on imports from Korea. In June 2000, in
a 6-0 vote, the ITC found injury, or threat of injury, to the U.S. structural
steel industry and the Department of Commerce imposed anti-dumping duty orders.
These orders will remain in effect for at least five years, subject to annual
administrative review. At the end of five years, the ITC will conduct a sunset
review. In May 2001, a coalition of U.S. structural steel beam producers filed
anti-dumping petitions with the Department of Commerce and the ITC, alleging
that imports of structural steel beams from eight other countries, China,
Germany, Italy, Luxembourg, Russia, South Africa, Spain and Taiwan, are being
sold at less than fair value and are causing or threatening to cause material
injury to the U.S. structural steel beam industry. While the Department of
Commerce made affirmative dumping findings, the ITC made final negative injury
determinations in all cases in June 2002, thus ending the investigations without
the imposition of duties.
There are anti-dumping duty and countervailing duty orders against imports
of rails from Canada. However, there are currently no Canadian steel makers
producing rails. There are no anti-dumping duty or countervailing duty orders
outstanding against imports of rails from any other country nor are there any
current investigations.
SECTION 201 INVESTIGATION
On June 5, 2001, President Bush announced a three-part program to address
the excessive imports of steel that have been depressing markets in the United
States. The program involves (1) negotiations with foreign governments seeking
near-term elimination of inefficient excess steel production capacity throughout
the world, (2) negotiations with foreign governments to establish rules that
will govern steel trade in the future and eliminate subsidies, and (3) an
investigation by the ITC under Section 201 of the Trade Act of 1974 to determine
whether steel is being imported into the United States in such quantities as to
be a substantial cause of serious injury to the U.S. steel industry. Therefore,
on June 22, 2001, the Bush Administration requested
36
that the ITC initiate an investigation under Section 201 of the Trade Act of
1974. Products included in the request are in the following categories, subject
to exclusion of certain products:
(1) carbon and alloy flat products;
(2) carbon and alloy long products;
(3) carbon and alloy pipe and tube; and
(4) stainless steel and alloy tool steel products.
HOT-ROLLED, COLD-ROLLED AND COATED STEEL
On October 22, 2001, in the first step of the three-step Section 201
process, the ITC ruled that approximately 80% of the U.S. steel industry
suffered material injury due to imported steel products, including carbon and
alloy hot-rolled, cold-rolled, coated and semi-finished slab products. Of the 33
steel products included in the petition brought by the U.S. Trade Representative
and President Bush, 12 products, including the products we produce, were
affirmed for injury by unanimous 6-0 votes. On December 7, 2001, in the second
step of the process, the ITC recommended tariffs of approximately 20%-40% as
well as tariff quotas in some cases, and these recommendations were transmitted
to President Bush for final action. On March 5, 2002, in the third and final
step of the Section 201 process, President Bush imposed a three year tariff of
30% for the first year, 24% for the second year and 18% for the third year on
imports of hot-rolled, cold-rolled and coated sheet. He also imposed a tariff of
15% for the first year, 12% for the second year and 9% for the third year on
imports of tubular steel products, and a tariff on imported steel slabs of 30%,
24% and 18% in the first, second and third years, respectively, on tons in
excess of an annual quota of 5.4 million in 2002, 5.9 million in 2003 and 6.4
million in 2004. North American Free Trade Agreement partners of the United
States, principally Canada and Mexico, are excluded from the tariffs, as are
"developing countries" that, in the aggregate, account for less than 3% of
imported steel. These Section 201 remedies are cumulative with any existing
tariffs or quotas in the anti-dumping cases. They are also directed at products
rather than the countries that produce those products, thereby providing some
import relief even if some steel products find their way to exporting countries
not covered by anti-dumping margin or countervailing duty orders.
The President's decision to implement a Section 201 remedy is not
appealable to U.S. courts. However, foreign governments may appeal to the WTO,
and the European Union, Japan and other countries have already prosecuted such
appeals. These dispute settlement proceedings at the WTO and further appeals to
the Appellate Body of the WTO generally take 15-24 months. However, a country or
an importer may request specific exemptions from the operation of a Section 201
tariff, and, to date, hundreds of such exemption requests have been filed and
are awaiting official action. Moreover, a number of affected countries have
imposed or threatened to impose various retaliatory tariffs on U.S. steel or
other products. Accordingly, there is a risk that rulings adverse to the United
States or substantial political pressures could result in the President changing
the remedy, granting substantial exemptions from the remedy or terminating the
remedy entirely prior to the full three years, although any such modification
would apply only prospectively.
STRUCTURAL STEEL AND RAIL
By a vote of 4-2, the ITC determined on October 22, 2001, that structural
steel and rails were not being imported into the United States in such increased
quantities as to be a substantial cause of serious injury or the threat of
serious injury to the U.S. industry. Consequently, the U.S. structural steel and
rail producers will not be directly eligible for any relief proposed by the
President as a result of the Section 201 investigations. The ITC determined that
the U.S. structural steel and rail industry was not seriously injured primarily
because of its "double-digit operating margins," and positive performance trends
including, increased capacity and shipments, higher employment and new
investment. With regard to threat of injury, the ITC found that the existing
orders and the pending investigations made future increases in imports unlikely.
37
INTEGRATED MILLS VERSUS MINI-MILLS
There are generally two kinds of primary steel producers, "integrated
mills" and "mini-mills." We are a mini-mill producer. The following diagram
illustrates the different processes the two types of producers use.
[DIAGRAM ILLUSTRATING (1) THE INTEGRATED PRODUCER STEEL MANUFACTURING PROCESS,
WHICH CONSISTS OF COAL BEING CONVERTED TO COKE IN COKE OVENS, COKE BEING
COMBINED WITH IRON ORE AND LIMESTONE IN A BLAST FURNACE, THE RESULTING PIG IRON
BEING COMBINED WITH SCRAP IN A BASIC OXYGEN FURNACE, THE RESULTING LIQUID STEEL
PROCEEDING THROUGH A METALLURGY STATION AND CONTINUOUS CASTER AND THE RESULTING
BILLETS, BLOOMS AND/OR SLABS PROCEEDING THROUGH A REHEAT FURNACE, ROUGHING MILL
AND FINISHING MILL AND (2) THE MINI-MILL STEEL MANUFACTURING PROCESS, WHICH
CONSISTS OF SCRAP OR SCRAP SUBSTITUTE PROCEEDING THROUGH AN ELECTRIC ARC
FURNACE, THE RESULTING LIQUID STEEL PROCEEDING THROUGH A METALLURGY STATION AND
CONTINUOUS CASTER AND THE RESULTING BILLETS, BLOOMS AND/OR SLABS PROCEEDING
THROUGH THE REHEAT/TUNNEL FURNACE AND FINISHING MILL]
Steel manufacturing by an "integrated" producer involves a series of
distinct but related processes, often separated in time and in plant geography.
The process 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, such as our Butler mini-mill, uses an electric
arc furnace to directly melt scrap or scrap substitutes, thus entirely
eliminating the energy-intensive blast furnace. A mini-mill unifies the melting,
casting and the hot-rolling into a continuous process. The melting process
begins with the charging of a furnace vessel with scrap steel, carbon and lime,
following which the furnace vessel's top is swung into place, electrodes are
lowered into the furnace vessel through holes in top of the furnace, and
electricity is applied to melt the scrap. The liquid steel is then checked for
chemistry and the necessary metallurgical adjustments are made, typically while
the steel is still in the melting furnace or, if the plant has a separate
staging area for that process (as our Butler mini-mill does), the liquid steel
is transported to an area, commonly known as a ladle metallurgy station. From
there, the liquid steel is transported to a continuous caster, which consists of
a turret, a tundish (a type of reservoir which controls the flow of liquid
steel) and a water-cooled copper-lined mold. The liquid steel passes through the
continuous caster and exits as an externally solid slab. The slab is then cut to
length and proceeds directly into a tunnel furnace, which maintains and
equalizes the slab's temperature. After leaving the tunnel furnace, the slab is
descaled and then it proceeds into the first stand of a rolling mill operation.
In the rolling process, the steel is progressively reduced in thickness. The
final product 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 integrated mills. This is due, in part,
to lower capital costs and to 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, such as ours, that
emphasizes flexible, incentive-oriented non-union labor practices and have
tended to be more willing to adapt to newer and more innovative management
styles that encourage decentralized decision-making. The smaller plant size of a
mini-mill also permits greater flexibility in the choice of location for the
mini-mill in order to optimize access to scrap supply, energy costs,
infrastructure and markets, as is the case with our Butler mini-mill.
Furthermore, a mini-mill's more efficient
38
plant size and layout, which incorporates the melt shop, metallurgical station,
casting, and rolling in a unified continuous flow under the same roof, have
reduced or eliminated costly re-handling and re-heating of partially finished
product. They have also adapted quickly to the use of new and cost-effective
equipment, thereby translating technological advances in the industry into
efficient production.
THE FLAT-ROLLED STEEL MARKET
The flat-rolled steel market represents the largest steel product group,
accounting for an average of 64% of total U.S. steel shipments from 1997 to
2001. Flat-rolled products consist of hot-rolled, cold-rolled and coated sheet
and coil.
The following table shows the U.S. shipments of flat-rolled steel, in net
tons, by hot-rolled, cold-rolled and coated production, as reported by the
American Iron and Steel Institute, for the five years from 1997 through 2001.
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(MILLIONS OF NET TONS)
U.S. SHIPMENTS:
Hot-Rolled(1)....................................... 29.0 25.3 27.7 29.3 27.8
Cold-Rolled(2)...................................... 15.2 15.8 16.8 18.0 14.8
Coated(3)........................................... 22.0 22.8 24.3 23.9 22.2
---- ---- ---- ---- ----
Total.......................................... 66.2 63.9 68.8 71.2 64.8
==== ==== ==== ==== ====
Percentage of Total U.S. Steel Shipments............ 63% 62% 65% 65% 66%
- ---------------
(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.
HOT-ROLLED PRODUCTS
All coiled flat-rolled steel is initially hot-rolled, a process that
consists of passing a cast slab through a multi-stand rolling mill to reduce its
thickness to less than 1/2 inch. 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.
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 exposed steel
applications that demand higher surface quality or finish, such as exposed
automobile and appliance panels. As a result, cold-rolled prices are typically
higher than hot-rolled prices. Typically, cold-rolled material is coated or
painted.
COATED PRODUCTS
Coated steel can be either hot-rolled or cold-rolled steel that has been
coated with zinc to render it corrosion-resistant and to improve its
paintability. Hot-dipped galvanized, galvannealed, electro-galvanized 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 automobiles, household appliances,
roofing and
39
siding, heating and air conditioning equipment, air ducts, switch boxes, chimney
flues, awnings, garbage cans and food containers.
THE STRUCTURAL STEEL MARKET
The structural steel market is a relatively small part of total U.S. steel
shipments. In 1999, 2000 and 2001, structural steel shipments were 5.7 million
tons, 6.7 million tons and 6.4 million tons, respectively, and averaging 6% of
the total steel market during these three years. Consumption of structural steel
products is influenced both by new construction and manufacturing activity and
by the selection of steel over alternative structural or manufacturing
materials, which has occurred at a relatively constant rate of 50% over the five
years from 1997 through 2001.
THE RAIL MARKET
Rail shipments in 2000 and 2001 were approximately 810,000 tons and 644,000
tons, respectively, with standard rail averaging 80% of the market over 1999,
2000 and 2001 and premium or head-hardened rail averaging 20% over 1999, 2000
and 2001. Increased rail hardness results in a longer lasting product and is
achieved by quenching hot rail with either air or water or by changing rail
chemistry through the addition of alloys. Harder rail is more costly. Rail is
produced in or imported into the U.S. and Canadian markets in standard lengths
of 39 to 80 feet, mainly due to the limitations of existing North American rail
production equipment and plant layouts, as well as the size limitations of ocean
freighters with respect to imports. As a result, in order to produce the
1,600-foot rail "strings" desired by railroads, 20 80-foot rail sections are
required to be welded together. Each weld is costly to make and adds
installation and periodic maintenance costs.
Of the total annual shipments of rail in 2000, approximately 75% was
produced by the two remaining U.S. rail producers and 25% was imported, mainly
from Japan and from Europe. There are currently no Canadian rail producers.
40
BUSINESS
OVERVIEW
We are one of the most profitable mini-mill steel producers in the United
States in terms of operating profit per ton. We primarily own and operate a
state-of-the-art, low-cost flat-rolled mini-mill located in Butler, Indiana. Our
Butler mini-mill began commercial production in January 1996 and was constructed
in only 14 months, representing what we believe is the shortest construction
period ever for a facility of this kind. The mini-mill currently has an annual
production capacity of 2.2 million tons. The total capital cost of our Butler
mini-mill was $630 million, which we believe is significantly less than the cost
of comparable mini-mills currently operating. Our Butler mini-mill produces a
broad range of high quality hot-rolled, cold-rolled and coated steel products,
including a large variety of high value-added and high margin specialty products
such as thinner gauge rolled products and galvanized products. We sell our
products directly to end-users, intermediate steel processors and service
centers primarily in the Midwestern United States. Our products are used in
numerous industry sectors, including the automotive, construction and commercial
industries.
In May 2002, we announced plans to construct a low-cost, coil coating
facility at our Butler mini-mill that will further increase our range of
value-added capabilities. Subject to our receipt of applicable permits, we
anticipate starting construction of the facility within the next several months
and expect to commence coating operations in the middle of 2003. The coating
facility is currently expected to have an annual production capacity of 240,000
tons and is estimated to cost $25-$30 million.
In May 2001, we began construction of a new state-of-the-art structural
steel and rail mini-mill in Columbia City, Indiana. Our Columbia City mini-mill
is designed to have an annual production capacity of 1.3 million tons and
produce structural steel and rails at a higher quality and lower cost than
comparable mini-mills. We expect to spend approximately $315 million to
construct this mini-mill, of which $280 million has been spent as of June 30,
2002. We believe that the initial capital construction costs of our Columbia
City mini-mill will be among the lowest in the industry for such a facility. We
commenced commercial structural steel operations in late June 2002 and have
shipped our first structural products to initial customers. We expect to ramp up
these operations through regular product introductions and be fully operational
by the end of 2002. In addition, we expect to commence commercial production of
rails during the first quarter of 2003. We constructed our structural steel
facility in less than 12 months, which we believe is the shortest construction
period ever for a facility of this kind. Our structural steel operation is
designed to produce steel products for the construction, transportation and
industrial machinery markets. Our rail manufacturing operation is designed to
produce a variety of rail products for the railroad industry as well as for rail
contractors, transit districts and short-line railroads.
Through our joint venture, New Millennium Building Systems, LLC, we also
produce and sell a broad range of steel joists, girders and trusses, as well as
roof and floor decking materials for use in the construction of commercial,
industrial and institutional buildings. New Millennium is seeking to position
itself to be the premier, low-cost producer of these products. New Millennium
began commercial production in July 2000, only seven months after the
commencement of plant construction, and became profitable during its first six
months of operation.
COMPETITIVE STRENGTHS
We believe that we have the following competitive strengths:
ONE OF LOWEST COST PRODUCERS IN THE UNITED STATES; STATE-OF-THE-ART
FACILITIES
We believe that our facilities are among the lowest-cost steel
manufacturing facilities in the United States, providing us with a significant
competitive advantage over other U.S. steel producers. Operating profit per ton
at our facilities was $65, $23 and $34 in 2000 and 2001 and for the three months
ended March 31,
41
2002, respectively, which we believe compares favorably with our competitors.
Our low operating costs are primarily a result of our:
(1) efficient plant designs and operations, which allow us to utilize
a streamlined and more efficient steel making process, optimize our use of
raw materials, and employ fewer workers;
(2) high productivity rate of between 0.3 to 0.4 man hours per ton at
our Butler mini-mill (which is significantly lower than the rate for
integrated steel producers, which we believe is approximately 3.0 man hours
per ton);
(3) low ongoing maintenance cost requirements, which we believe are
below most of our domestic competitors; and
(4) strategic locations near some of the largest supplies of scrap
steel in the United States, which allows us to access low-cost sources of
our primary raw materials due to lower transportation costs and other
factors.
WELL-POSITIONED TO BENEFIT FROM IMPROVING STEEL MARKET CONDITIONS
Domestic spot prices for hot-rolled, cold-rolled, and coated sheet have
increased from recent lows of $210/ton, $300/ton and $320/ton, respectively, in
December 2001 to $320/ton, $410/ton and $425/ton, respectively, in May 2002.
Approximately 80% of our flat-rolled products are sold on the spot market under
contracts with terms of twelve months or less and, therefore, our results of
operations are positively impacted by increases in domestic flat-rolled steel
prices. We believe that we are well positioned to benefit from the recent
increases in flat-rolled prices. Our capacity utilization rate year-to-date has
been in excess of 100% of our stated capacity.
EXPERIENCED MANAGEMENT TEAM AND UNIQUE CORPORATE CULTURE
Our senior management team is highly experienced and has a proven track
record in the steel industry. Our senior management team pioneered the
development of thin-slab flat-rolled technology and directed the construction
and successful operation of the world's first thin-slab flat-rolled mini-mill in
Crawfordsville, Indiana in the late 1980's. This management team also designed,
built and commenced operation of our Butler mini-mill, under budget and in 14
months, which we believe is the shortest construction period ever for a facility
of this kind. Our senior management's objectives are also closely aligned with
our stockholders through meaningful stock ownership positions and incentive
compensation programs. Our corporate culture is also unique for the steel
industry and affects our employees at all levels. We emphasize decentralized
decision-making and have established incentive compensation programs
specifically designed to reward employee teams for their efforts towards
enhancing productivity, improving profitability and controlling costs. Our stock
option plan is available to all Steel Dynamics' employees.
DIVERSIFIED PRODUCT MIX
We believe we have a broad and well-diversified mix of products. Our
products include hot-rolled and cold-rolled steel products, galvanized sheet
products, light gauge steel products, joists and deck materials. Our diversified
mix of products allows us to access a broad range of end-user markets and serve
a broad customer base. In addition, our diversity helps mitigate our exposure to
cyclical downturns in any one product or end-user market. We will further
diversify our product mix once we commence production of structural steel and
rails at our Columbia City mini-mill.
STRATEGIC GEOGRAPHIC LOCATIONS
The strategic locations of our facilities afford us close proximity to an
abundant source of scrap materials and to our customer base. As a result, we
realize significant pricing advantages due to freight savings for inbound scrap
and other raw material resources as well as for outbound steel products destined
for our flat-roll mini-mill customers. Our mini-mills are located in the Upper
Midwest, a region which we believe accounts for a majority of the total scrap
produced in the United States. Our Butler mini-mill is located within 300 miles
of
42
our major flat-rolled steel customers and in 2001, 74% of our sales were to
customers within this area. Our Columbia City mini-mill is well located to serve
markets in the Upper Midwest, Northeast and Canada. In addition, all of our
facilities have ready access to other resources, such as gas, power and water,
and excellent access to highway and rail transportation networks.
BUSINESS STRATEGY
Our objective is to use state-of-the-art technologies to produce a broad
range of high-quality steel products at a low cost. Key elements of our strategy
are:
EXPAND PRODUCT OFFERINGS
The completion of our Columbia City mini-mill will be an important step in
pursuing our strategy of product line expansion. We believe our Columbia City
mini-mill will produce a diverse mix of structural steel and rails at a higher
quality and lower cost than comparable mini-mills. In addition, this mini-mill
is strategically located to serve the Upper Midwest, Northeast and Canadian
markets, which we believe are attractive and under-served markets. We anticipate
that the Columbia City mini-mill will have an annual production capacity of up
to 1.3 million tons, depending on the product mix, which will increase our steel
making capacity by over 50%. In April 2002, we conducted our first structural
steel melting and casting trials, and in May 2002, we began initial rolling
trials. We plan to commence commercial structural steel operations in July 2002.
In addition, we expect to commence commercial production of rails during the
first quarter of 2003. Our structural steel operation is designed to produce
structural steel beams, pilings and other steel components for the construction,
transportation and industrial machinery markets. Our rail manufacturing
operation is designed to produce a variety of standard and premium grade rails,
including head-hardened rails, for the railroad and other industries at a cost
that, we believe, will be below existing domestic competitors.
We will continue to devote a substantial portion of our efforts in the
flat-rolled steel market to the production of high value-added thinner gauge
products and galvanized products. The margins on high value-added products
typically exceed those of the commodity grade and the number of producers that
make them is more limited. In 2001 and for the three months ended March 31,
2002, approximately 37% of the tons of steel we produced were high margin, light
gauge steel products. In May 2002, we announced plans to construct a low-cost,
coil coating facility at our Butler mini-mill that will further increase our
value-added capabilities. We will continue to seek additional opportunities to
further expand our range of high value-added products through the expansion of
existing facilities, greenfield projects and acquisitions of other steel
manufacturers or steelmaking assets that may become available through the
continuing consolidation of the domestic steel industry.
ENTER NEW GEOGRAPHIC MARKETS
We may seek to enter new steel markets in strategic geographic locations
such as the Southeastern or Western United States that offer attractive growth
opportunities. Due to the recent restructuring of the domestic steel industry,
we believe there are attractive opportunities to grow our business
geographically either through acquisitions of existing assets or through
strategic partnerships and alliances. We may also consider growth opportunities
through greenfield projects, such as our Columbia City mini-mill project.
CONTINUE TO MAINTAIN LOW PRODUCTION COSTS
We are focused on continuing to maintain one of the lowest operating cost
structures in the North American steel industry based upon operating cost per
ton. We will continue to optimize the use of our equipment, enhance our
productivity and explore new technologies to further improve our unit cost of
production at each of our facilities. We believe that the initial capital
construction costs of our Columbia City mini-mill will be among the lowest in
the industry for such a facility.
43
FOSTER ENTREPRENEURIAL CULTURE
We intend to continue to foster our entrepreneurial corporate culture and
emphasize decentralized decision-making while rewarding teamwork, innovation and
operating efficiency. We will also continue to focus on maintaining the
effectiveness of our incentive bonus-based plans that are designed to enhance
overall productivity and align the interests of our management and employees
with our stockholders.
MAINTAIN STRONG FINANCIAL POSITION AND FINANCIAL FLEXIBILITY
We are committed to maintaining a strong capital structure. The refinancing
of our bank facilities in March 2002 was an important step in helping us to
achieve this end, as it provided us with greater financial flexibility. As a
result of improved domestic flat-rolled prices, we also believe it will be
possible to achieve stronger cash flows than in the recent past. In addition, we
estimate that as of May 31, 2002 our capital expenditures for the remainder of
2002 will be $55 million, as our Columbia City mini-mill project is largely
complete. As of March 31, 2002, we had $32 million of cash and an undrawn $75
million revolving credit facility.
OUR OPERATIONS
BUTLER FLAT-ROLLED MINI-MILL
Our Butler flat-rolled steel mini-mill manufactures hot-rolled, cold-rolled
and coated steel products. It currently has an annual capacity of 2.2 million
tons. We commenced construction of our Butler mini-mill in October 1994 and
began production of commercial quality steel in January 1996 with an annual
capacity of 1.4 million tons. At the end of 1997, we completed construction of a
cold finishing mill contiguous to our Butler hot mill with an annual capacity of
1.0 million tons. In July 1998, we completed construction, installation and
start-up of a second twin-shell melting furnace battery, thin-slab caster,
tunnel furnace and coiler, increasing our mini-mill's annual production capacity
to its current level of 2.2 million tons. This additional production capacity of
hot-rolled steel also allows us to take full advantage of the 1.0 million ton
rolling and finishing capacity of our cold mill. Our products are characterized
by high quality surface characteristics, precise tolerances and light gauge. In
addition, our Butler mini-mill was one of the first U.S. flat-rolled mini-mills
to achieve ISO 9002 and QS 9000 certifications. We believe that these
certifications have enabled us to serve a broader range of customers and
end-users which historically have been almost exclusively served by integrated
steel producers.
The Hot Mill. The following diagram illustrates our hot-rolled mill
operations:
BUTLER MINI-MILL HOT-ROLLED OPERATION
[DIAGRAM ILLUSTRATING THE PROGRESSION OF SCRAP AND SCRAP SUBSTITUTE THROUGH TWIN
SHELL ELECTRIC ARC FURNACES, LADLE METALLURGY STATION, CONTINUOUS CASTERS,
TUNNEL FURNACES, HOT ROLLING MILL, LAMINAR COOLING TABLE AND DOWN COILERS BEFORE
IT IS SHIPPED TO CUSTOMERS AND DIRECTED TO THE COLD MILL]
Our hot-rolled mini-mill's electric arc furnace melting process begins with
the charging of a furnace vessel with scrap steel, carbon and lime, or with a
combination of scrap and a scrap substitute or alternative iron product. The
furnace vessel's top is swung into place, electrodes are lowered into the
furnace vessel through holes in the top of the furnace, and electricity is
applied to melt the scrap. To the extent any liquid pig iron or other scrap
substitutes are used, such material is typically introduced directly into the
melt mix. We have two twin-shell electric arc melting furnaces that were built
by Fuchs and have a combined annual production capacity in excess of 2.6 million
tons. Our twin-shell furnace design substantially reduces power-off time melting
and reduces tap-to-tap time (the length of time between successive melting
cycles or heats) because when melting is being done in one vessel, we can tap
the other vessel and refill it with scrap and steel scrap substitute to make it
ready for the next melt. This results in more heats and greater productivity per
shift. An additional advantage of our 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.
44
After exiting the furnaces, the liquid steel is transported in a ladle by
overhead crane to an area commonly known as the ladle metallurgy station. At
each metallurgy station, the steel is kept in a molten state while metallurgical
testing, refining, alloying and desulfurizing takes place. We have three
separate ladle metallurgy stations consisting of three furnaces and two
desulfurization stations. Having a separate metallurgy station apart from the
furnaces allows us to maximize the time that the furnaces can be used for
melting scrap.
The liquid steel is then transported to one of our two continuous thin-slab
casters where it is emptied into a tundish, or reservoir. This reservoir
controls the flow of the liquid steel into a water-cooled copper-lined mold from
which it then exits as an externally solid slab. Our casters were built by SMS
Schloemann-Siemag AG and have a combined annual casting capacity of 2.3 million
tons. We have also designed a special nozzle, which transfers the liquid steel
from the reservoir into the mold, that results in increased productivity and
product quality. The slab from the continuous caster is less than two-inches
thick and proceeds directly into one of our two tunnel furnaces. The tunnel
furnaces maintain and equalize the slab's temperature. The slab leaves the
tunnel furnace and is descaled to remove surface scale prior to its rolling.
In the hot-rolling operation, the slab is progressively reduced in
thickness. Our hot-rolling mill consists of a seven-stand rolling mill built by
SMS Schloemann-Siemag AG. The mill is equipped with the latest electronic and
hydraulic controls to control such things as gauge, shape, profile and exit
speeds of the steel strip as it moves along the run-out table to help prevent
thinner steel strip from cobbling. The seventh rolling stand which we added
allows us to further roll our sheet steel to even thinner gauges, down to 1.0
mm, with excellent surface quality, and enables us to access markets previously
available only to more costly cold finished material.
After exiting the hot-rolling mill, the rolled sheet steel is cooled and
wound into coils. The coil form allows the strip to be easily handled and
transported. We sell a portion of our hot band coil production directly to
end-users or to intermediate steel processors or service centers, where they may
be pickled, cold-rolled, annealed, tempered or galvanized. The rest of our hot
band coil production is directed to our cold mill where we add value to this
product through our own pickling, cold-rolling, annealing, tempering or
galvanizing processes.
Throughout the hot-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. 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. 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.
The Cold Mill. Our cold mill is located adjacent to our hot mill and
produces products that require gauges, properties or surfaces that cannot be
achieved in our hot mill. Cold-rolled sheet produced by us is hot-rolled sheet
that has been further processed through a continuous pickle line and then
successively passed through a rolling mill without reheating until the desired
gauge and other physical properties have been achieved. Cold-rolling reduces
gauge, hardens the steel and, when further processed through an annealing
furnace and temper mill, improves uniformity, ductility and formability.
Cold-rolling can also add a variety of finishes and textures to the surface of
the steel. The following diagram illustrates our cold-rolled mill operations:
BUTLER MINI-MILL COLD-ROLLED OPERATION
[DIAGRAM ILLUSTRATING COILS PROCEEDING THROUGH THE CONTINUOUS PICKLER TO THE
CENTRAL COIL STORAGE AREA AND (1) SHIPPED TO CUSTOMERS AS FINISHED PRODUCT, (2)
GALVANIZED ON THE HOT-ROLLED GALVANIZING LINE AND SOLD AS FINISHED PRODUCT OR
(3) PROCESSED THROUGH THE COLD-REVERSING MILL AND UPON EXITING THE
COLD-REVERSING MILL, (1) SHIPPED TO CUSTOMERS, (2) GALVANIZED ON THE COLD-
45
ROLLED GALVANIZING LINE AND SHIPPED TO CUSTOMERS OR (3) PROCESSED THROUGH THE
BATCH ANNEALING FURNACES AND THE TEMPER MILL AND SHIPPED TO CUSTOMERS]
Our cold-rolled mill process begins with hot-rolled product from our
hot-rolling mill entering our continuous pickle line. At the entry end of the
continuous pickle line, we have two reels to unwind coils and a welder to join
the coils together. We unwind the coils on alternate reels and attach them 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 a scale breaker/tension
leveler, 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 rinse tanks. At the delivery end of the line there is a reel for
recoiling the pickled product. After recoiling, each coil is stored in a central
coil storage area. The design of the continuous pickle line allows for the
production of a wide combination of gauges and widths on the light gauge steel
supplied by the hot mill. The process equipment was supplied by Davy
International, while the polypropylene pickling tanks were supplied by Allegheny
Plastics.
From the central coil storage area, we move our coils in one of three
directions. We can (1) ship pickled and oiled coils directly to customers from
the continuous pickle line as finished product; (2) immediately galvanize some
coils on the hot-rolled galvanizing line which is then sold as finished product;
or (3) process coils through our cold-reversing mill.
Pickled and oiled coils that are not intended for immediate shipping or
hot-rolled galvanizing are processed in our cold reversing mill. Our cold
reversing mill was built by SMS Schloemann-Siemag AG and is one of only two
semi-tandem two-stand reversing cold-rolling operations in the world. 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 also uses a process control computer using sophisticated
mathematical models to optimize both quality and throughput.
Product that exits the cold reversing mill can then be shipped as finished
product, transported to our cold-rolled galvanizing line or transported to our
batch annealing furnaces. In the cold-rolled galvanizing line, cold-rolled coils
are heated in an annealing furnace and coated while still hot in a pot of molten
zinc. As the coil leaves the pot, various coating controls ensure that the
product matches the customer's requirements. The coils are then shipped as
finished product. The cold-rolled galvanizing line and the hot-rolled
galvanizing line are very similar, but the cold-rolled galvanizing line has a
more elaborate and larger strip heating furnace that is required to anneal
cold-rolled product. We designed our continuous pickle line and the two
galvanizing lines concurrently and procured the equipment from the same
manufacturer. As a result, the equipment of our three lines share a commonality
of parts and we have been able to realize a high degree of flexibility and cost
savings in the management of our spare parts.
Cold-rolled coils that do not require galvanizing proceed to our 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 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. Computer models determine
and control the heating and cooling the coils based on current knowledge of heat
transfers and steel characteristics.
Coils from the annealing furnaces are then temper-rolled and shipped as
finished product. The temper mill consists of 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 enhances the
overall flatness and surface quality of the product. The temper mill also has an
x-ray gauge to monitor strip thickness. This mill was purchased concurrently
with the two-stand cold-rolling mill from SMS Schloemann-Siemag AG and thus we
have again been able to realize a high degree of flexibility and cost savings
with regard to management of spare parts.
46
As with our hot mill, our cold mill is linked by means of business and
process computers. We expanded our computer systems to comprehend order entry of
the additional cold mill products, and we accomplish all of our line scheduling
in the computer systems through schedules transmitted to the appropriate process
related computers. We collect operating and quality data for analysis and
quality control purposes, and for reporting product data to customers.
COLUMBIA CITY STRUCTURAL STEEL AND RAIL MINI-MILL
In May 2001, we began construction of our new state-of-the-art structural
steel and rail mini-mill in Columbia City, Indiana to produce a variety of
structural steel and rail products. We expect the structural steel and rail
mini-mill to have a meltshop annual capacity of between 1.0 and 1.3 million
tons, depending on product mix. We expect to be able to produce a variety of
structural products, including structural steel beams, pilings and other steel
components for the construction, transportation and industrial machinery
markets, and a variety of standard and premium grade rail products, including
head-hardened rails, for the railroad industry. This mini-mill is currently
designed to produce structural steel shapes in the 6" through 36" range, with a
planned focus on the mid-range of 8" through 24", but we have the flexibility to
move efficiently between various sized structural steel products and between
structural steel and rail products. We expect to commence commercial structural
steel production in the second quarter of 2002 and of commercial rail production
in the first quarter of 2003. We anticipate that our Columbia City mini-mill
will cost approximately $315 million, excluding capitalized interest costs. As
of June 30, 2002, our total incurred capital costs, excluding capitalized
interest costs, for this mini-mill were $280 million.
The following diagram illustrates the melting, casting and rolling process
that we plan to employ in our mini-mill to produce both structural steel and
rail.
COLUMBIA CITY STRUCTURAL STEEL AND RAIL OPERATION
[DIAGRAM ILLUSTRATING THE PROGRESSION OF SCRAP AND SCRAP SUBSTITUTE THROUGH
ELECTRIC ARC FURNACES, LADLE METALLURGY STATION AND CONTINUOUS CASTER, THE
PROGRESSION OF BLOOMS AND BEAM BLANKS, THE RESULTING SEMI-FINISHED SHAPES,
THROUGH THE REHEAT FURNACE AND HOT ROLLING MILL AND THE PROGRESSION OF THE
RESULTING STRUCTURAL SHAPES THROUGH THE COOLING BED AND STRAIGHTENER BEFORE
BEING SHIPPED TO CUSTOMERS AND THE RESULTING RAIL THROUGH HEAD-HARDENING, THE
COOLING BED AND THE STRAIGHTENER BEFORE BEING SHIPPED TO CUSTOMERS]
Our structural steel and rail mini-mill will melt scrap and scrap
substitutes in an electric arc furnace much the same way as in our flat-rolled
mini-mill. We currently plan to use a single shell furnace but have purchased
and will install a second furnace, which will provide us with back-up melting
capability in case of a furnace breakdown or periodic maintenance outage. We are
only currently permitted to use one furnace at any given a time. While we plan
to use 100% scrap as the primary raw material, the system will be configured to
accept a liquid pig iron product should we someday decide to place an Iron
Dynamics module at the Columbia City plant site. The furnace was built by SMS
Demag AG and includes features that are expected to permit us to employ more
thermally efficient melting practices. The furnace will also feature a removable
shell that is expected to enable us to do off-line repair and refractory
relining, will come equipped with a unique quick-change roof configuration and
will also feature a fast tap hole tube change configuration that is expected to
speed up this periodic replacement process.
From the furnace the molten metal will then be transported from the furnace
to a separate ladle metallurgy furnace where, as in the flat-rolled mini-mill,
we will adjust the mix for temperature and chemistry. We will then take the
liquid steel to a continuous caster, where, unlike our Butler mini-mill that
produces a single strand of flat stock, our structural steel caster will cast
three strands, expandable to four, of blooms and beam blanks. The caster
utilizes a curved mold that will produce five sizes of material -- one bloom,
which is rectangular shaped, and four beam blanks, which are dog bone shaped, in
varying lengths of 17-48 feet. The caster design will accommodate a quick-change
tundish nozzle system designed to optimize the continuous
47
casting process and achieve a low operational cost per ton. The tundish bottoms
are also designed to change from a bloom opening to any of four beam blank sizes
to allow greater flexibility in product choice. The caster was built by SMS
Concast and is expected to be capable of producing 1.2 million tons per year in
our initial set-up.
After exiting the mold, the multiple strands will continue through a series
of sprays and roller supports to precisely cool and contain the cast shapes.
Straightener rolls will then unbend the curved strands onto a horizontal
pass-line, where they will be cut to length by automatic torches. We will then
weigh the cast pieces and transport them either directly through a reheat
furnace, built by A.C. Leadbetter, to a hot-rolling mill or into a storage area
for rolling at a later time. In the hot-rolling mill, the product will pass
through a breakdown stand where it will be rolled into either a structural steel
product or a rail product, depending on the roll-configuration and number of
passes. The product will then be transferred to a 3-stand tandem mill, which
consists of a universal rougher, an edger and a universal finisher. The
hot-rolling mill will be an advanced four-stand (all reversing) mill built by
SMS Demag AG with an annual capacity of up to 1.6 million tons. The mini-mill is
expected to be capable of producing wide flange beams from 6" X 4" to 36" X 12",
standard beams, piling sections, M-shape sections, sheet piling, channels, car
building shapes, bulb angles and zee's and rail sections.
Downstream of the hot-rolling mill, a hot saw will cut the structural steel
or rail product to a maximum 246-foot length before it enters a cooling bed.
After cooling, the structural steel products will be straightened on a roller
straightener and cut to length as required by a particular order. The product is
then piled and bundled and shipped as finished product.
For the production of rail products, our caster will be fitted with new
molds and segments to cast the new 13" X 10" bloom required for rail production.
We will also add electro magnetic stirring within the caster to improve surface
quality and reduce internal cracking. The reheat furnace, which will heat the
blooms to the proper rolling temperature, will also be fitted with automation
changes for the charging and discharging machines. We will also operate
additional descaling equipment prior to the rolling process, as well as a rail
stamper and manipulator. Both vertical and horizontal straighteners will be used
to produce a rail that is true along all axes. After straightening, the rail
products will be tested, cut to length and drilled. In our testing center, we
will provide ultrasonic testing or the detection of internal defects, an eddy
current machine to spot surface cracks, a profile gauge for dimensional
accuracy, and a straightness/waviness measurement machine. We have installed the
foundations to have the capability with the purchase and installation of
additional cooling and handling equipment to manufacture 320-foot rail lengths,
which are neither produced in nor imported into the U.S. or Canadian rail
markets.
IRON DYNAMICS STEEL SCRAP SUBSTITUTE FACILITY
Since 1997, Iron Dynamics has tried to develop and commercialize a
pioneering process of producing a virgin form of iron that might serve as a
lower cost substitute for a portion of the metallic raw material mix that goes
into our electric arc furnaces to be melted into new steel. Historically, the
price of steel scrap, as a commodity, has tended to be volatile, rising and
falling with supply and demand and not always in lock step with or in proportion
to the market price of new steel. Therefore, having a lower cost alternative
source of virgin iron for a portion of a mini-mill's melt mix could be expected
to partially buffer some of the anticipated effects of scrap price volatility.
With the growing proportion of electric furnace steelmaking, both worldwide and
domestically, we believe that developing a cost-effective alternate iron source
to augment scrap, our primary raw material, makes good economic sense in the
long run.
We initially funded our Iron Dynamics subsidiary by a $30 million equity
investment. Iron Dynamics also secured a $65 million secured bank credit
facility. Iron Dynamics established a plant site contiguous to and partially
within our Butler, Indiana plant campus, and in October 1997 began construction
of a facility for the production of direct reduced iron and liquid pig iron.
Direct reduced iron is a metallic product made from iron ore or iron ore
"fines" that have been treated in a "direct reduction" furnace, such as a rotary
hearth furnace, with either natural gas or coal to reduce the iron oxide to
metallic iron. The method selected by Iron Dynamics is one that uses coal as the
reducing agent.
48
Liquid pig iron, the ultimate end product intended to be produced by Iron
Dynamics, is a pure metal product produced by smelting the direct reduced iron
in a submerged arc furnace. Our Iron Dynamics facility was designed and built
for the production of direct reduced iron and its conversion into liquid pig
iron. We initially estimated that the Iron Dynamics plant, as designed, would be
capable of producing approximately 480,000 metric tons of liquid pig iron
annually, all of which we planned to use in our own steelmaking operations.
The plant commenced initial start-up in August 1999. During this
preliminary start-up, however, we encountered a number of significant equipment
failures and design deficiencies, which required Iron Dynamics to undertake
certain costly and time-consuming redesign, re-engineering and equipment
replacement work and to operate this new facility at greatly reduced output
levels. A design and retrofit program began in late 1999 and continued
throughout 2000, during which time we produced only slightly over 33,000 metric
tons of liquid pig iron during the first two quarters of 2000, or 14% of
capacity.
In early July 2000, Iron Dynamics suspended operations to effect certain
pre-planned repairs, including the installation of a new submerged arc furnace
and a number of additional capital projects, including the installation of two
hot briquetters, a new off-gas system for the submerged arc furnace, a sludge
reclamation system, and a hot pan conveyance system. In March 2001, Iron
Dynamics restarted the facility. However, while we believed that Iron Dynamics
had corrected many of the deficiencies as a result of higher than expected
start-up and process refinement costs, low production quantities, exceptionally
high energy costs and historically low steel scrap pricing, we again suspended
Iron Dynamics' ironmaking operations in July 2001, with no specific date set for
resumption of actual production.
As of March 31, 2002, our equity investment in the Iron Dynamics project
was $159 million.
We believe that even with additional development and refinement to the
equipment, technology systems and processes, the Iron Dynamics facility may only
be able to achieve monthly output levels between 75%-85% of our original
estimates, resulting in higher unit costs than originally planned. We currently
estimate that these developments and refinements, if implemented, would cost
approximately $15 million. However, we are entitled to a $6 million refund from
one of our equipment manufacturers in connection with these improvements, which
we would expect to apply toward this cost. We are currently evaluating the
entire project, its costs and its potential benefits. On July 10, 2002, we
announced that we expect to begin experimental production trials in the fourth
quarter of 2002. If these trials prove successful, we could begin commercial
production in 2003. However, our Iron Dynamics facility may never become
commercially operational. We refer you to "Risk Factors -- Technology, operating
and start-up risks associated with our Iron Dynamics scrap substitute project
may prevent us from realizing the anticipated benefits from this project and
could result in a loss of our investment" for additional information.
NEW MILLENNIUM FACILITY
In September 1999, we and New Process Steel Holding Co., Inc., a major
processor and distributor of coated flat-rolled products, organized New
Millennium, an Indiana limited liability company. Our ownership interest is
46 1/2%, but our vote is determinative on all material matters requiring an
affirmative vote, except for some matters relating to activities outside the
ordinary course of business, which require a unanimous vote. At March 31, 2002,
our financial investment in New Millennium was $5 million, and we have
unconditionally guaranteed $3 million of the $18 million of debt outstanding
under the New Millennium credit agreement.
New Millennium began construction of its manufacturing facility in Butler,
Indiana, on its own site, in December 1999 and substantially completed the
facility in the second quarter of 2000 for a total capital cost of approximately
$23 million. New Millennium purchases rolled steel for its joist and deck
operation from us as well as from third party steel suppliers. New Millennium
operates in a 242,000 square foot facility on 96 acres in Butler, Indiana and
ships its products through outside freight companies to customers. New
Millennium does not perform any construction work at the job site. New
Millennium also operates a 17,000 square foot engineering and administrative
office on its Butler site.
49
PRODUCTS AND CUSTOMERS
BUTLER FLAT-ROLLED MINI-MILL
Products. Our Butler mini-mill produces hot-rolled products that include a
variety of high quality mild and medium carbon and high strength low alloy
hot-rolled bands in 40 inch to 62 inch widths and in thicknesses from .500 inch
down to .080 inch. During each of 2000 and 2001, we produced 1.3 million tons of
these hot-rolled products.
We also produce an array of lighter gauge hot-rolled products, ranging in
thickness from .080 inch and thinner, including high strength low alloy 80,000
minimum yield and medium carbon steels made possible by the addition of our
seventh hot-rolling stand. These products are suitable for automobile, truck,
trailer and recreational vehicle parts and components, mechanical and structural
steel tubing, gas and fluid transmission piping, metal building systems, rail
cars, ships, barges, and other marine equipment, agricultural equipment and farm
implements, lawn, garden, and recreation equipment, industrial machinery and
shipping containers. We believe that our basic production hot band material has
shape characteristics that exceed those of the other thin-slab flat-rolled
mini-mills and compares favorably with those of the integrated mills. In
addition, as a result of our lighter gauge hot-rolling capabilities, we are now
able to produce hot-rolled hot-dipped galvanized and galvannealed steel
products. These products are capable of replacing products that have
traditionally only been available as more costly cold-rolled galvanized or
cold-rolled galvannealed steel. During 2000 and 2001, we produced 677,000 and
751,000 tons of these lighter gauge hot-rolled products, respectively.
In our cold mill, we also produce hot-rolled pickled and oiled, hot-rolled
hot dipped galvanized, hot-rolled galvannealed, cold-rolled hot dipped
galvanized, cold-rolled galvannealed and fully processed cold-rolled sheet.
Customers. The following tables show information about the types of
products we produced and the types of customers we sold to in 2000 and 2001:
2000 2001
---- ----
PRODUCTS:
Hot band.................................................... 41% 40%
Pickled and oiled........................................... 8 12
Cold-rolled................................................. 19 14
Hot-rolled galvanized....................................... 16 17
Cold-rolled galvanized...................................... 16 17
--- ---
Total.................................................. 100% 100%
=== ===
CUSTOMERS:
Service center (including end-user intermediaries).......... 88% 82%
Pipe and tube............................................... 8 5
Original equipment manufacturer............................. 4 13
--- ---
Total.................................................. 100% 100%
=== ===
During 2001, we sold our products to approximately 246 customers. In 2001,
our largest customers were Heidtman, Worthington Steel and Metals USA, which in
the aggregate accounted for approximately 29% of our total net sales. Heidtman
accounted, individually, for approximately 19%, 21% and 18% of our net sales in
1999, 2000 and 2001, respectively. Metals USA filed for Chapter 11 bankruptcy
protection on November 14, 2001 and received from the Bankruptcy Court final
approval of a debtor-in-possession financing facility in January 2002.
Steel processors and service centers typically act as intermediaries
between primary steel producers, such as us, and the many 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,
50
cutting to length, slitting to size, leveling, blanking, shape correcting, edge
rolling, shearing and stamping. Notwithstanding the completion of our cold mill
and our increased utilization in our own cold finishing facility for a
considerable portion of our hot band production, we expect that our intermediate
steel processor and service center customers will remain an integral part of our
customer base. Our sales outside the continental United States accounted for
less than 2% of our total net sales in 2001.
COLUMBIA CITY STRUCTURAL STEEL AND RAIL MINI-MILL
Products. When our structural steel mini-mill is completed, we expect to
have the capability to produce various structural steel products such as wide
flange beams, American Standard beams, miscellaneous beams, "H" piling material,
sheet piling material, American Standard and miscellaneous channels, bulb
angles, and "zees." The following listing shows each of our proposed structural
steel products and their intended markets:
PROPOSED PRODUCT PROPOSED MARKET
- ---------------- ---------------
Wide flange, American Standard and
miscellaneous beams................ Framing and structural girders, columns, bridge
stringers, ribs or stiffeners, machine bases or
skids, truck parts and construction equipment
"H" piling........................... Foundational supports
Sheet piling......................... Temporary or permanent bulkhead walls,
cofferdams, shore protection structures, dams
and core walls
Channel sections..................... Diaphragms, stiffeners, ribs and components in
built-up sections
Bulb angles and zees................. Steel building components
Customers. We expect that the principal customers for our structural steel
products will be steel service centers, steel fabricators and various
manufacturers. Service centers, though not the ultimate end-user, provide
valuable mill distribution functions to the fabricators and manufacturers,
including small quantity sales, repackaging, cutting, preliminary processing and
warehousing. We expect that a majority of our structural steel products will be
sold to service centers.
The marketplace for steel rails in the United States and Canada is
relatively small, approximately 800,000 tons in 2001, and specialized, with only
approximately six Class 1 railroad purchasers: Burlington Northern/Santa Fe,
Union Pacific, Canadian Pacific Railway, Norfolk Southern, CSX Transportation
and Canadian National Railway. These purchasers account for approximately
600,000 tons of annual production. Rail contractors, transit districts and
short-line railroads purchase the rest of the rail products.
We intend to produce rail in standard and premium or head-hardened grades,
in a range of weights from 115 lbs. per yard to 141 lbs. per yard, in length
from the traditional 80 feet up to 240 feet initially and, ultimately, to 320
feet. We also intend to weld these 240/320 foot rails into 1,600 foot strings
for delivery to the installation site. Such long strings offer substantial
savings both in terms of initial capital cost and through reduced maintenance.
In contrast, current production of rail in the United States, and available
imported rail, is limited to 80-foot lengths, as a result of existing plant
layout restrictions and the physical limitations of ocean freight. The more
welded joints there are in a mile of track, the greater the maintenance cost to
the railroad due to excessive wear and fatigue cracking at the welds.
NEW MILLENNIUM FACILITY
Products. New Millennium fabricates trusses, girders, steel joist and
steel decking for the construction industry. Specifically, New Millennium
manufactures a complete line of joist products, including bowstring, arched,
scissor, double-pitched and single-pitched joists. Decking products include a
full range of roof, form, and composite floor decks.
Customers. New Millennium's primary customers are non-residential
contractors. Significant portions of New Millennium's sales are to customers
from outside Indiana, with a concentration in the Upper Midwest
51
area of the United States. We believe that the Upper Midwest presently enjoys
the highest non-residential building spending in the country.
COMPETITION
BUTLER FLAT-ROLLED MINI-MILL
Our hot-rolled products compete with many North American integrated
hot-rolled coil producers, such as National Steel Corporation's plants near
Detroit, Michigan and Granite City, Illinois; Ispat Inland Inc.'s plant in East
Chicago, Indiana; Bethlehem Steel Corporation's plants in Burns Harbor, Indiana
and Sparrows Point, Maryland; U.S. Steel's plants in Gary, Indiana, Dravosburg,
Pennsylvania and Fairfield, Alabama; and AK Steel Corporation's plant in
Middletown, Ohio. We will also compete with International Steel Group, which
recently purchased out of bankruptcy LTV Steel Corporation's former steelmaking
facilities at Cleveland, Ohio and Indiana Harbor, Indiana. We also compete with
companies that convert steel slabs into sheet steel, such as Duferco Steel in
Farrell, Pennsylvania.
Our hot-rolled products also compete with the products of a number of
hot-rolled mini-mills, such as Nucor Corporation's 1.6 million ton capacity
plant in Crawfordsville, Indiana, its 1.7 million ton capacity plant in Hickman,
Arkansas and its 2.0 million ton capacity plant in Berkeley, South Carolina;
Gallatin Steel Company's 1.2 million ton capacity plant in Ghent, Kentucky; and
North Star BHP Steel LLC's 1.2 million ton capacity plant in Delta, Ohio. These
mini-mills have low cost structures and flexible production capabilities that
are more akin to ours than to those of the integrated producers.
With the exception of Gallatin Steel, we compete with these same producers
for the sale of our cold-rolled and coated products. We also compete with a
number of companies, such as Worthington Steel of Columbus, Ohio, Winner Steel
of Youngstown, Ohio and Metaltech of Pittsburgh, Pennsylvania, which buy their
hot-rolled or cold-rolled bands from other producers and then convert them into
products that are competitive with ours.
COLUMBIA CITY STRUCTURAL STEEL AND RAIL MINI-MILL
Our structural steel products will compete with a sizable number of
electric arc furnace structural steelmakers, some of which have cost structures
and flexible management cultures similar to our own. Notable competitors will
include Nucor Steel in Berkeley, South Carolina; Nucor-Yamato Steel in
Blytheville, Arkansas; and TXI-Chaparral Steel in Midlothian, Texas and in
Petersburg, Virginia. There are also a number of smaller competitors, including
Ameristeel in Cartersville, Georgia; Bayou Steel in Laplace, Louisiana; and J&L
Structural Steel in Aliquippa, Pennsylvania. The Nucor mini-mills and the
TXI-Chaparral mini-mills accounted for over 89% of the tons produced in North
America in 2001. We also believe, however, that both geography and product
choice will play significant roles. There are currently no other structural
mills located in the Midwest, one of the largest structural steel consuming
regions in the United States, and we believe we will be able to provide
freight-saving and customer service benefits to end users, service centers and
fabricators located in the region. We also believe that most of Canada's
structural steel consumption is located in Canada's eastern provinces, closer to
us than to either of our two largest competitors. Moreover, we intend to provide
a broad product mix, focusing on the mid-range and larger section served only by
Nucor Yamato Steel and TXI-Chaparral from locations more remote than our
mini-mill.
The rail market is presently principally served by two producers: Rocky
Mountain Steel, a division of Oregon Steel Mills, Inc. in Pueblo, Colorado, and
Pennsylvania Steel Technologies, a subsidiary of Bethlehem Steel Corporation in
Steelton, Pennsylvania. Each of these producers has the capability to produce
either standard or premium rail, although neither is equipped to produce rail in
240-foot or 320-foot lengths as we will do. Our rail products will also compete
with similar products from a number of high quality integrated and electric
furnace steel producers in Europe and Asia, including British Steel,
Voest-Alpine Schienen, Nippon Steel and NKK.
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NEW MILLENNIUM FACILITY
New Millennium's main competitors on a national level in the joist business
are Vulcraft, a division of Nucor; Canam; and SMI, a division of Commercial
Metals. In the steel decking business, New Millennium's main competitors on a
national level are Vulcraft; Wheeling Corrugating Co., a division of Wheeling-
Pittsburgh Steel Corp.; and United Steel Deck, Inc. New Millennium also has a
number of competitors on a regional basis, located in the Upper Midwest,
including Canam, Socar and Gooder-Henderson, as well as several local suppliers
with facilities located in Pittsburgh, Cleveland, Detroit, Indianapolis, Chicago
and Milwaukee.
SOURCES AND AVAILABILITY OF SCRAP AND SCRAP SUBSTITUTE
Our 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.
SCRAP
Scrap is the single most important raw material used in our steelmaking
process. The percentage of scrap used in our steelmaking operations may decline
somewhat in future years, depending upon the proportion of scrap substitute
products that may be used from time to time. Currently, scrap substitute
products are not cost competitive with steel scrap.
As it relates to final product quality, electric arc furnace steel
producers, such as us, can normally only tolerate a maximum .2% level of
residual materials such as non-ferrous metallic contamination from 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, the mill must use approximately 60% of
"low residual" scrap or an equivalent material. Such low residual scrap
generally takes the form of No. 1 dealer bundles, No. 1 factory bundles,
busheling, and clips. We may then use various grades of higher residual, and
thus less expensive, scrap, which can be blended with low residual scrap to keep
within impurity tolerances.
Many variables impact scrap prices, the most critical of which is U.S.
steel production. Generally, as steel demand increases, so do scrap demand and
resulting prices. The reverse is also normally but not always true, with scrap
prices following steel prices downward where supply exceeds demand. During late
2000, the flood of imported steel, much of it unfairly traded, resulted in
sharply reduced new steel production with corresponding decreases in the need
for, and thus the price of, scrap. This corresponding decrease in the price of
scrap mitigated somewhat the impact of sharply declining prices for our new
steel products during 2000 and 2001 and enabled us to maintain some modest
profit margins despite the severe market dislocation. The precipitous decline in
scrap prices in 1999 and 2000 caused dealers to retain their inventories and to
withhold them from sale, thus causing some short-term supply shortages even in
the face of a supply/demand inversion at the consumer levels.
Nonetheless, we believe that the demand for low residual scrap will rise
more rapidly than the supply in the coming years, especially with the increased
number of electric arc furnace mini-mills that have been built or commenced
operations in recent years. As a result, in order to maintain an available
supply of scrap at competitive market prices, we seek to maintain a strong and
dependable source through which to purchase scrap of all grades, including low
residual scrap, and have been attempting to develop our own "captive" scrap
substitutes supply.
Since our inception, we have insured a stable scrap supply for our Butler
mini-mill through an exclusive scrap supply agreement with OmniSource, which
extends at least through December 31, 2002. We are
53
currently negotiating a new scrap purchasing agreement with OmniSource, and we
have an agreement in principle for the exclusive provision of 80% of our scrap
needs for a period of two and a half years. These terms are subject to change,
however, as a definitive agreement has yet to be signed. We are also evaluating
the establishment of additional relationships with other major scrap suppliers
as well as the establishment of a direct scrap purchasing capability for all or
a portion of our remaining scrap needs.
SCRAP SUBSTITUTES
Direct reduced iron, hot briquetted iron and pig iron can substitute for a
limited portion of the steel scrap used in electric furnace mini-mill steel
production. Historically, we have used a relatively small percentage of scrap
substitutes in our melt mix. In 2001, the percentage of scrap substitutes we
used in our melt mix was 15% by weight, mainly solid and generally imported pig
iron. During 2001, we purchased approximately 232,000 tons of solid pig iron, of
the 1.7 million tons of metallics that we purchased. We also bought minimal
quantities of direct reduced iron and hot briquetted iron. All of these scrap
substitute purchases were made on the spot market at prevailing market prices,
and we do not anticipate any difficulty in the future in purchasing whatever
quantities we wish, if any, of these materials.
During 2001, prior to the July shutdown of operations, we purchased 22,000
metric tons of Iron Dynamics' liquid pig iron. We have an "off-take" agreement
with Iron Dynamics that obligates us to purchase Iron Dynamics' output of liquid
pig iron, generally at a market based formula price, but this agreement is only
operative if and to the extent that Iron Dynamics is able to produce liquid pig
iron meeting the product specifications prescribed by us in the agreement.
ENERGY RESOURCES
ELECTRICITY
With respect to our Butler mini-mill, our electric service contract with
American Electric Power extends through December 31, 2007. The contract
designates only 185 hours annually as "interruptible service" during 2001 and
these interruptible hours further decrease annually through expiration of the
agreement. The contract also provides that the circumstances necessary to
warrant any hours of service interruptions must be of an emergency nature and
not related to price and demand. The contract also establishes an agreed fixed
rate for the rest of our electrical usage. Interruptible service subjects us to
the risk of interruption at any time in the operation of the AEP system, whether
as a result of an AEP peak demand, or even if AEP were able to obtain a higher
market price from an alternate buyer.
With respect to our Columbia City structural steel and rail mini-mill, the
plant site is located within the service territory of Northeast Indiana
R.E.M.C., a rural electric cooperative and a member of the Wabash Valley Power
Association. We have not yet finalized any electricity supply arrangements for
this mini-mill, but, once finalized, we will be required to arrange power
transmission over lines owned by American Electric Power.
GAS
We use approximately 9,000 to 11,000 decatherms of natural gas per day in
our Butler flat-rolled mini-mill. A decatherm is equivalent to 1 million BTUs or
1,000 cubic feet of natural gas. We have a delivery contract on the Panhandle
Eastern Pipeline that extends through April 2008 relating to our Butler
mini-mill. We also have a delivery contract with NIPSCO/NIFL/Crossroads that
extends through October 2005 relating to our Butler mini-mill. We maintain a
liquid propane storage facility on site in Butler with sufficient reserves to
sustain operations at our flat-rolled mini-mill for approximately one week in
the event of an interruption in the natural gas supply.
With respect to our structural steel and rail mini-mill, we have entered
into an agreement with NIPSCO for gas service under its Rate Schedule 330, which
will provide firm burnertip supply and transportation service for all natural
gas requirements at this mini-mill. The agreement includes a volume-dependent
transportation fee and forgoes all balancing charges. This agreement precludes
the need for a separate pipeline
54
transportation agreement. The agreement is for a period of three years,
beginning with the first use of gas in production. We anticipate purchasing gas
at market prices at commencement of operations. However, we expect to minimize
price volatility by entering into hedging transactions on the futures markets.
OTHER
We use oxygen, nitrogen, hydrogen and argon for production purposes, which
for our Butler mini-mill, we purchase from the adjacent plant of Air Products
and Chemicals, Inc. Air Products uses its plant not only to supply us but also
to provide oxygen and other gases to other industrial customers. As a result, we
have been able to effect very favorable oxygen and other gas purchase prices on
the basis of Air Products' volume production. Praxair, Inc. is building a
similar facility within our Columbia City mini-mill. Praxair will be a captive
facility to our Columbia City mini-mill.
PATENTS AND TRADEMARKS
We have a trademark for the mark "SDI" and an accompanying design of a
steel coil and a chevron. Our Iron Dynamics subsidiary has filed five patent
applications with the U.S. Patent and Trademark Office relating to its methods
of producing low sulfur liquid pig iron. As of the date of this filing, we have
received three of those patents.
RESEARCH AND DEVELOPMENT
At the present time, we engage in no third party research and development
activities. Our Iron Dynamics subsidiary, however, has been engaged in research
and development efforts in connection with its attempts to develop a process for
the production of direct reduced iron and the conversion of that product into
liquid pig iron. Most of this research and development effort has been conducted
in-house by Iron Dynamics' officers and employees.
ENVIRONMENTAL MATTERS
Our operations are subject to substantial and evolving environmental,
health and safety laws and regulations concerning, among other things, emissions
to the air, discharges to surface and ground water and to sewer systems, noise
control and the generation, handling, storage, transportation, treatment and
disposal of toxic and hazardous substances. In particular, we are dependent upon
both state and federal permits regulating discharges into the air or into the
water in order to be permitted to operate our facilities. We believe that in all
current respects our facilities are in material compliance with all provisions
of federal and state laws concerning the environment and we do not believe that
future compliance with such provisions will have a material adverse effect on
our results of operations, cash flows or financial condition. Since
environmental laws and regulations are becoming increasingly stringent and the
subject of increasingly vigorous enforcement, our environmental capital
expenditures and costs for environmental compliance will likely 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.
Pursuant to the Resource Conservation and Recovery Act, or RCRA, which
governs the treatment, handling and disposal of solid and hazardous wastes, the
United States Environmental Protection Agency, or U.S. EPA, and authorized state
environmental agencies conduct inspections of RCRA regulated facilities to
identify areas where there may have been releases of solid or hazardous
constituents into the environment and require the facilities to take corrective
action to remediate any such releases. RCRA also allows citizens to bring
certain suits against regulated facilities for potential damages and clean up.
Our steelmaking facilities are subject to RCRA. While we cannot predict the
future actions of the regulators or other interested parties, the potential
exists for required corrective action at these facilities, the costs of which
could be substantial.
55
Under the Comprehensive Environmental Response, Compensation and Liability
Act, or CERCLA, the U.S. EPA and, in some instances, private parties have 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
states, including Indiana, have statutes and regulatory authorities similar to
CERCLA and to the U.S. EPA. We have a number of waste handling agreements with
various contractors, including a hazardous waste disposal agreement with
Envirosafe Services of Ohio, Inc. to properly dispose of our electric arc
furnace dust and certain other waste products of steelmaking. However, we cannot
assure you that, even if there has been no fault by us, we may not still be
cited as a waste generator by reason of an environmental clean up at a site to
which our waste products were transported.
In addition to RCRA and CERCLA, there are a number of other environmental,
health and safety laws and regulations that apply to our facilities and may
affect our operations.
COLUMBIA CITY MINI-MILL AIR PERMIT
There is a pending U.S. EPA administrative enforcement action alleging that
the company began actual construction of the Columbia City mini-mill before it
had received full approval of its prevention of significant deterioration, or
PSD, permit. Actual construction of the Columbia City mini-mill was not allowed
to begin until its PSD air permit became effective on April 23, 2001, although
certain site preparation activities were permissible beforehand. The company
believes that the Columbia City mini-mill site activities were and are in
material compliance with the applicable laws and regulations and have provided
information to the U.S. EPA, which we believe demonstrates our compliance.
Nevertheless, the February 16, 2001 U.S. EPA Notice of Violation relating to
this matter has not yet been resolved, and we cannot predict what the outcome
will be or when it may be reached. As with any enforcement action, substantial
monetary fines and penalties are possible.
BUTLER MINI-MILL RELEASE REPORTING
On September 27, 2001, the U.S. EPA sent the company a pre-filing notice
letter alleging certain reporting violations of the Emergency Planning and
Community Right-to-Know Act, or EPCRA, and of CERCLA. Under these laws, releases
of regulated chemicals above set threshold quantities must be reported
immediately. The allegations stem from one or more accidental releases of spent
pickle liquor on the Butler mini-mill site and into adjacent waterways in
January 1999. U.S. EPA's letter indicates the agency is seeking $145,200 in
civil penalties, although that amount is subject to change. On October 31, 2001,
the company responded to the allegations. This matter is ongoing, and the
outcome and timing of this contemplated enforcement action cannot be predicted
at this time.
BUTLER MINI-MILL AIR EMISSIONS
There is also a pending U.S. EPA September 27, 2001 Notice of Violation
alleging a number of air emissions-related violations at the Butler mini-mill
between July 1996 and May 2000. The company met with U.S. EPA on November 15,
2001, to discuss the issues raised in the Notice of Violation. The U.S. EPA has
not disclosed the amount of civil penalties it is seeking. As with any ongoing
administrative enforcement action, the company cannot predict what the outcome
will be or when it may be reached.
EMPLOYEES
Our work force consisted of 725 employees at March 31, 2002, excluding
employees then employed by New Millennium and Paragon Steel Enterprises. None of
Steel Dynamics', New Millennium's or Paragon Steel Enterprises' employees are
represented by labor unions. We believe that our relationship with our employees
is good.
PROPERTIES AND FACILITIES
Our corporate headquarters are located in our new building in Fort Wayne at
6714 Pointe Inverness Way, Suite 200. We currently occupy approximately 10,000
square feet of a 50,000 square foot office building we constructed during 2000.
The building is in a prime commercial real estate location and we are presently
in the
56
process of leasing the balance of office space to commercial tenants. Our plant
and administrative offices that serve our Butler mini-mill are located on
approximately 840 acres, in Butler, DeKalb County, Indiana. During 1999, we
purchased approximately 108 acres of additional unimproved farmland contiguous
or in close proximity to our Butler mini-mill for future development. Iron
Dynamics' facility is located on approximately 26 acres, within the footprint of
our Butler, Indiana mill site, that are leased from us under a long-term lease
at nominal consideration. Our Columbia City structural steel and rail mini-mill
is situated on a 609-acre tract of land in Columbia City, Indiana.
LEGAL PROCEEDINGS
H&M Industrial Services, Inc., formerly known as National Industrial
Services, Inc., filed an action on January 24, 2001, against our subsidiary Iron
Dynamics in the Circuit Court of DeKalb County, Indiana, Cause No.
17C01-0101-CP-016. They are asking for damages of approximately $1.7 million
arising out of work allegedly performed by H&M, for which they claim they have
not been paid, in connection with the construction of Iron Dynamics' ironmaking
facility. We have denied all liability to H&M for any amount and believe that we
have adequate defenses to such claims, both factually and legally, under the
governing construction contracts and documents.
57
MANAGEMENT
DIRECTORS AND OFFICERS
The following table sets forth information regarding our directors and
executive officers as of March 31, 2002.
NAME AGE POSITION
- ---- --- --------
Keith E. Busse......................... 59 President, Chief Executive Officer and
Director
Mark D. Millett........................ 42 Vice President and General Manager of the
Flat-Roll Division and Director
Richard P. Teets, Jr. ................. 46 Vice President and General Manager of the
Structural Division and Director
Tracy L. Shellabarger.................. 45 Vice President of Finance, Chief Financial
Officer and Director
Leonard Rifkin......................... 71 Director
John C. Bates.......................... 58 Director
Dr. Jurgen Kolb*....................... 59 Director
Joseph D. Ruffolo*..................... 60 Director
Naoki Hidaka........................... 47 Director
James E. Kelley*....................... 83 Director
Richard J. Freeland.................... 65 Director
Paul B. Edgerley....................... 46 Director
- ---------------
* Member of the Audit Committee
Keith E. Busse co-founded our company in September 1993 and has been our
President and Chief Executive Officer and a director since inception. Mr. Busse
is also the President and Chief Executive Officer and a director of Iron
Dynamics. Prior to 1993, for 21 years, he worked for Nucor Corporation as
Division Controller, as Vice President and General Manager of its Vulcraft
Division and as Vice President and General Manager of its 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.
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 Tower Financial Corporation, a bank holding company.
Mark D. Millett co-founded our company in September 1993 and was our Vice
President of Melting and Casting until 1998. Since then he has served as Vice
President and General Manager of our Flat-Roll Division. Mr. Millett has been a
director since 1993. He is also a Vice President and director of Iron Dynamics.
Previously, from 1982 to 1993, Mr. Millett worked for Nucor as chief
metallurgist at its Darlington, South Carolina facility, and then as manager of
its Hazelett thin-slab casting project in 1985. In 1987, he joined Mr. Busse's
senior management team to help build the Nucor Crawfordsville mini-mill, and
from 1987 until his resignation in August 1993, Mr. Millett served as Melting
and Casting Manager for the Crawfordsville mini-mill.
Richard P. Teets, Jr. co-founded our company in September 1993 and was our
Vice President of Rolling and Finishing until 1998. Since then he has served as
Vice President and General Manager of our Structural Division. Mr. Teets has
been a director since 1993. Previously, Mr. Teets worked for LTV Steel Co., Inc.
in the engineering, maintenance and production areas, and in 1987 was hired by
Nucor to be one of the senior managers of the construction of the Crawfordsville
mini-mill. In 1991, Mr. Teets assumed the responsibilities for the
Crawfordsville mini-mill's cold-rolling and finishing operations as Manager.
Tracy L. Shellabarger joined our company as its Vice President of Finance
and Chief Financial Officer and director in July 1994. He is also Vice President
of Finance and Chief Financial Officer of Iron Dynamics. Previously, from 1987
to 1994, Mr. Shellabarger worked for Nucor, first as its Manager of Internal
Audit in its
58
Charlotte, North Carolina office, and then as its Controller at the
Crawfordsville mini-mill. He also served as a member of the senior management
team that constructed and operated that facility for Nucor.
Leonard Rifkin was elected a director of our company in September 1994. Mr.
Rifkin has been the President and Chief Executive Officer and a director of
OmniSource from 1959 to the present and, since September 1996, has also served
as Chairman of the Board. He is also a director of Tower Financial Corporation,
a bank holding company.
John C. Bates was elected a director of our company in September 1994. Mr.
Bates is the President, Chief Executive Officer and a director of Heidtman,
which he joined in 1963, and for which he has served as President, Chief
Executive Officer and a director since 1969.
Dr. Jurgen Kolb was initially elected a director of our company in April
1996 and is a member of our audit committee. Dr. Kolb is also a director of Iron
Dynamics. Dr. Kolb was a member of the executive board of Salzgitter AG, a
German steelmaker, and, from 1986 to 2001, served as its Director of Sales. He
retired from Salzgitter AG in 2001.
Joseph D. Ruffolo was elected a director of our company in 1999. Mr.
Ruffolo has been a principal of Ruffolo Benson LLC (formerly Ruffolo Richard
LLC), a business and financial consulting firm, since 1994. Prior to that, Mr.
Ruffolo was the President and Chief Executive Officer of North American Van
Lines, Inc. Mr. Ruffolo is a member of our audit committee. Mr. Ruffolo is also
a director of Tower Financial Corporation, a bank holding company.
Naoki Hidaka was elected a director of our company in 2001. Mr. Hidaka is
Senior Vice President and General Manager of the Chicago Office, and General
Manager of the Rolled Steel & Ferrous Raw Materials Division, of Sumitomo
Corporation of America. Prior to that, from June 1998 to March 2001, Mr. Hidaka
was Vice President and Chief Financial Officer of Auburn Steel Company, Inc. and
us,from March 1998 to May 1998, Deputy General Manager of Steel Business Planning
and Investment. From May 1995 to February 1998, he was Manager, Plate Export
with Sumitomo Corporation of Japan.
James E. Kelley has been a director of our company since 2000. For over the
past five years, Mr. Kelley has been the Chairman of Kelley Automotive, Inc. and
various affiliated companies that own and operate approximately 18 franchised
auto dealerships in Indiana and Georgia. In addition, Mr. Kelley is the owner of
Jim Kelley Leasing and Kelley Cars, Inc., fleet automobile and truck leasing
companies; Midwest Auto Parts, a wholesale supplier of car and truck parts;
Consolidated Airways, a fixed based operator at Fort Wayne International
Airport; and Kelley Grain Co. and Trans Oil Ltd., seed and grain enterprises
operating in the Republic of Moldova.
Richard J. Freeland has been a director of our company since 2000. For over
the past five years, Mr. Freeland has been the President and Chief Executive
Officer of Pizza Hut of Fort Wayne, Inc. and six affiliated companies that own
and operate approximately 41 Pizza Hut franchised restaurants in Indiana and
Ohio.
Paul B. Edgerley has been a director of our company since 2002 and was a
director of our company from 1994 to 1999. Mr Edgerley has been Managing
Director of Bain Capital, Inc. (venture capital) since May 1993 and, from 1990
to 1993, a general partner of Bain Venture Capital. He is also a director of
Sealy Corporation, Anthony Crane Rental LP and Walco International, Inc.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The board of directors consists of twelve persons, each selling stockholderserving a one-year
term of office expiring at our Annual Meeting in its
capacity as2003. Under our bylaws,
however, the board of directors may amend the bylaws to specify a greater or
lesser number of directors.
During 2001, we held five regularly scheduled and special meetings of the
board of directors. All directors attended at least 75% of the meetings of the
board and of the various committees on which they served during 2001.
59
We have an Iron Dynamics lender, for the purpose of compromisingaudit committee to which our financial and retiring certain Iron Dynamics indebtedness to those institutions,legal personnel, as
well as our independent auditors, have free access. We established the audit
committee to make recommendations to the board of directors with respect to our
accounting policies, internal controls, financial reporting practices,
contingent risks, and risk management strategies and plans, the services and
fees of our independent auditors, and the selection of our independent auditors.
The audit committee, which consists of three non-employee directors, met five
times during 2001.
DIRECTOR COMPENSATION
We pay non-employee director fees of $3,000 per board of directors meeting
and $1,500 per board of directors' committee meeting. In addition, we have a
board of directors and stockholder approved Non-Employee Director Stock Option
Plan. Under the plan, each person who is a member of the board of directors and
who is not an officer or employee of our company on May 21 and November 21 of
each year during the term of the plan is automatically granted on each such date
a nonstatutory stock option, which vests and is exercisable in six months and
which expires in five years. Each option grant allows the holder to purchase
shares of our common stock equal to the number of whole shares, rounded up or
down, calculated by dividing a grant value of $15,000 by the fair market value
of our common stock on the date such option is granted. The purchase price must
be 100% of the fair market value of the shares on the grant date.
60
RELATED PARTY TRANSACTIONS
HEIDTMAN CONTRACT
During 2000 and 2001, we sold approximately 428,000 tons and 405,000 tons
of our steel products to Heidtman for $142.8 million and $112.3 million,
representing approximately 21% and 18% of our total net sales for each year,
respectively. For the three months ended March 31, 2002, we sold approximately
104,300 tons of our steel products to Heidtman for $27.8 million, representing
approximately 17% of our total net sales for that period. We have a long-term
"off-take" agreement with Heidtman that extends through March 2007. Under the
off-take agreement, Heidtman is obligated to buy and we are obligated to sell to
Heidtman at least 76,000 tons of our hot band products per quarter or 336,000
tons annually and at least 15,000 tons of our cold-rolled products per quarter
or 60,000 tons annually. Our pricing to Heidtman is determined by either a
market or a spot market pricing formula. For market priced sales of hot-rolled
steel, pricing is determined on an "all-in" cost plus basis, together with all
published extras. For spot market sales of hot-rolled steel, pricing is
determined on the basis of a discounted market index. Pricing for cold-rolled
products is determined on a marginal revenue basis over hot-rolled sheet. John
Bates is the President and Chief Executive Officer of Heidtman, is a member of
our board of directors and is the beneficial owner of 6.5% of our common stock
as of March 31, 2002.
OMNISOURCE CONTRACT
We have had an ongoing relationship with OmniSource, pursuant to which
OmniSource has agreed to act as our exclusive scrap purchaser and to use its
best efforts to locate and secure for us such scrap supplies as we may from
time-to-time wish to purchase, at the lowest then available market prices for
material of like grade, quantity and delivery dates. The cost to us 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 brokered scrap, the cost to us 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 us at our mini-mill. All final decisions
regarding scrap purchases belong to us, and we maintain the sole right to
determine our periodic scrap needs, including the extent to which we may employ
scrap substitutes in lieu of or in addition to scrap. No commission is payable
to OmniSource for scrap substitutes purchased or manufactured by us. In
addition, OmniSource maintains a scrap handling facility, with its own equipment
and staff, on our plant site. OmniSource does not pay rent for this facility.
The agreement extends at least through December 31, 2002. We are currently
negotiating a new scrap purchasing agreement with OmniSource, and we have an
agreement in principle for the exclusive provision of 80% of our scrap needs for
a period of two and a half years. These terms are subject to change, however, as
a definitive agreement has yet to be signed.
During 2000 and 2001, we purchased 1.4 million tons of scrap, or 80% of our
total scrap and scrap substitute purchases, and 1.5 million tons of scrap, or
87% of our total scrap and scrap substitute purchases, respectively, from
OmniSource. For these purchasing services, we paid OmniSource fees of $4 million
during 2000 and $4 million during 2001. For the three months ended March 31,
2002, we purchased approximately 310,600 tons of our total scrap from
OmniSource, representing approximately 75% of our total scrap purchases for that
period. We paid OmniSource fees of $869,725 during the first quarter of 2002 for
these services. Leonard Rifkin, who is a member of our board of directors, is
the Chairman of the board of directors of OmniSource and is also a stockholder
of our company.
LICENSE AGREEMENT BETWEEN IRON DYNAMICS AND SUMITOMO
Iron Dynamics has entered into a license agreement with Sumitomo
Corporation of America, pursuant to which Sumitomo is authorized, on an
exclusive world-wide basis, except within the United States and Canada, and
except for additional plants that Iron Dynamics may wish to construct for its
own use or for our use, to sublicense to others or to use certain partial guarantiesproprietary
know-how or other intellectual property that constitutes Iron Dynamics' scrap
substitute manufacturing process or is part of that indebtednessthe Iron Dynamics project and
which may be developed by Iron Dynamics in connection with the manufacture of
direct reduced iron or liquid pig iron.
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Though Iron Dynamics' operations have been suspended, these license rights are
still in effect, and, if Iron Dynamics' operations resume and its ironmaking
process is ultimately proven to be commercially viable, Sumitomo could build and
construct plants for the production of direct reduced iron and liquid pig iron,
either for itself or for others within the licensed territory, for which Iron
Dynamics would be entitled to receive a one-time license fee from Sumitomo,
based on each plant's rated production capacity, plus a negotiated royalty fee
for the use of Iron Dynamics' or our patents or know-how. As of March 31, 2002,
Sumitomo had not licensed or sublicensed any facilities. Sumitomo Corporation of
America is a stockholder and Mr. Naoki Hidaka who is a member of our board of
directors is Senior Vice President and General Manager of the Chicago office and
General Manager of the Rolled Steel and Ferrous Raw Materials Division of
Sumitomo Corporation of America.
NEW MILLENNIUM JOINT VENTURE
In September 1999, we were responsible.and New Process Steel Holding Co., Inc., a major
processor and distributor of coated flat-rolled products, organized New
Millennium, an Indiana limited liability company. Our ownership interest is 46
1/2%, but our vote is determinative on all material matters requiring an
affirmative vote, except for certain matters specifically requiring a unanimous
vote. Our financial investment in New Millennium was $5 million as of March 31,
2002. In addition, we have unconditionally guaranteed $3 million of the $18
million of debt outstanding under the New Millennium credit agreement as of
March 31, 2002. We treat New Millennium as a consolidated subsidiary. New
Millennium fabricates trusses, girders, steel joist and steel decking for the
construction industry.
New Millennium began construction of its manufacturing facility in Butler,
Indiana in December 1999 and substantially completed the facility in the second
quarter of 2000, at a total capital cost of approximately $23 million. New
Millennium purchases rolled steel for its joist and deck operation from us as
well as from third party steel suppliers, at market prices. New Millennium
operates its facility on its own 96-acre plant site in Butler, Indiana.
We believe that all of the transactions described in this section are on
terms no less favorable to us than could be obtained from unaffiliated third
parties.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of July 16, 2002, and as adjusted to reflect
the sale of the common stock offered in this prospectus, by (i) each person
known by us to usbe beneficial owner of more than 5% of our common stock, (ii)
each director of our company, (iii) each named executive officer, (iv) all
executive officers and directors as a group and (v) each selling stockholder.
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.
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
- ------------------------------------- --------- ------- ------------ -------- --------
Salzgitter AG.............................. 4,889,865 9.8
Eisenhuettenstrasse 99
38223 Salzgitter, Germany
Heidtman Steel Products, Inc. ............. 2,995,642 6.0
HS Processing
Centaur, Inc.
640 Landy Road
Erie, MI 48133
Keith E. Busse(1).......................... 1,286,505 2.6
Mark D. Millett(2)......................... 1,117,049 2.2
Richard P. Teets, Jr.(3)................... 1,177,498 2.4
Tracy L. Shellabarger(4)................... 326,245 *
John W. Nolan(5)........................... 59,177 *
Leonard Rifkin(6).......................... 758,687 1.5
John C. Bates(7)........................... 3,001,167 6.0
Dr. Jurgen Kolb(8)......................... 5,525 *
Naoki Hidaka(9)............................ 925,648 1.9
Joseph D. Ruffolo(10)...................... 9,525 *
Richard J. Freeland(11).................... 6,525 *
James E. Kelley(12)........................ 12,754 *
Paul B. Edgerley(13)....................... 1,273,707 2.6
Directors and Executive Officers as a Group
(13 persons)............................. 9,960,012 20.0
General Electric Capital Corporation....... 1,525,650 3.1
1600 Summer Street, 5th Floor
Stamford, CT 06927
Sumitomo Corporation of America............ 924,197 1.9
600 Third Avenue
New York, NY 10016-2001
- ---------------
* Less than 1%
(1) Includes 12,848 shares, of which 4,283 are not yet vested, received during
2001 pursuant to our Amended and Restated Officer and Manager Cash and
Stock Bonus Plan. Also includes 608 shares of common stock held by Mr.
Busse's son, with respect to which Mr. Busse disclaims beneficial
ownership. In addition, includes 53,657 shares subject to currently
exercisable stock options or stock options exercisable within 60 days.
(2) Includes 12,848 shares, of which 4,283 are not yet vested, received during
2001 pursuant to our Amended and Restated Officer and Manager Cash and
Stock Bonus Plan. Includes 40,244 shares subject to currently exercisable
stock options or stock options exercisable within 60 days.
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(3) Includes 12,848 shares, of which 4,283 are not yet vested, received during
2001 pursuant to our Amended and Restated Officer and Manager Cash and
Stock Bonus Plan. Also includes 8,000 shares of common stock owned by Mr.
Teets' spouse, with respect to which Mr. Teets disclaims beneficial
ownership. In addition, includes 40,244 shares subject to currently
exercisable stock options or stock options exercisable within 60 days.
(4) Includes 11,306 shares, of which 3,769 are not yet vested, received during
2001 pursuant to our Amended and Restated Officer and Manager Cash and
Stock Bonus Plan. Also includes 80,600 shares of common stock held by Mr.
Shellabarger's spouse, and 4,800 shares owned by Mr. Shellabarger's spouse
for the benefit of Mr. Shellabarger's minor children, with respect to all
of which Mr. Shellabarger disclaims beneficial ownership. In addition,
includes 40,244 shares subject to currently exercisable stock options or
stock options exercisable within 60 days.
(5) Includes 5,319 shares, of which 1,773 are not yet vested, received during
2001 pursuant to our Amended and Restated Officer and Manager Cash and
Stock Bonus Plan. Includes 30,185 shares subject to currently exercisable
stock options or stock options exercisable within 60 days.
(6) Includes 6,000 shares of common stock held by Mr. Rifkin's spouse, with
respect to which he disclaims beneficial ownership. Includes 5,525 shares
subject to currently exercisable stock options or stock options exercisable
within 60 days.
(7) Consists of all shares of common stock held of record by Centaur, Inc., HS
Processing and Heidtman Steel Products, Inc., of which Mr. Bates is the
President and Chief Executive Officer. Includes 5,525 shares subject to
currently exercisable stock options or stock options exercisable within 60
days.
(8) Consists of 5,525 shares subject to currently exercisable stock options or
stock options exercisable within 60 days.
(9) Includes 924,197 shares held of record by Sumitomo Corporation of America
that Mr. Hidaka may be deemed to beneficially own due to his relationship
with that entity and 1,451 shares subject to currently exercisable stock
options or stock options exercisable within 60 days in favor of Mr. Hidaka.
Mr. Hidaka, however, disclaims beneficial ownership of shares held by
Sumitomo Corporation of America.
(10) Includes 1,000 shares held in Mr. Ruffolo's retirement plan. Also includes
1,000 shares held by Mr. Ruffolo's spouse, with respect to which he
disclaims beneficial ownership. In addition, includes 5,525 shares subject
to currently exercisable stock options or stock options exercisable within
60 days.
(11) Includes 5,525 shares subject to currently exercisable stock options or
stock options exercisable within 60 days.
(12) Includes 5,525 shares subject to currently exercisable stock options or
stock options exercisable within 60 days.
(13) Mr. Edgerley beneficially owns 67,207 of these shares. The balance of
1,206,500 shares are owned by Brookside Capital Partners Fund, L.P. over
which Mr. Edgerley may be deemed to share voting or dispositive power. Mr.
Edgerley disclaims beneficial ownership of such shares except to the extent
of his pecuniary interest therein.
64
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a brief description of the basic terms of our material
indebtedness and that of our subsidiaries. It 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, copies of which have been
filed as exhibits to the registration statement of which this prospectus is a
part.
STEEL DYNAMICS SENIOR SECURED CREDIT AGREEMENT
In March 2002, we entered into a new $350 million senior secured credit
agreement in order to refinance our existing indebtedness and obtain additional
working capital. Of the $350 million that was made available to us under the
agreement, $75 million is in the form of a five-year revolving credit facility,
$70 million is in the form of a five-year term A loan and $205 million is in the
form of a six-year term B loan. In addition to customary fees payable under
credit facilities of this type, the senior secured credit agreement bears
interest at one of two rates selected by us, the Base Rate (as defined in the
senior secured credit agreement) or the Eurodollar Rate (as defined in the
senior secured credit agreement), plus in each case, an Applicable Margin. The
Applicable Margin will be (a) for the first six months after the closing date
for term A loans and the revolving loans, (i) in the case of Base Rate loans,
2.25% and (ii) in the case of Eurodollar Rate loans, 3.25%, (b) thereafter, for
term A loans and the revolving loans, a percentage determined by reference to
our leverage ratio ranging from .75% to 2.25% for Base Rate loans and from 1.75%
to 3.25% for Eurodollar Rate loans and (c) for term B loans, (i) in the case of
Base Rate loans, 2.75% and (ii) in the case of Eurodollar Rate loans, 3.75%.
We may elect interest periods of 1, 2, 3 or 6 months. With respect to
Eurodollar Rate loans, interest will be payable at the end of each interest
period and, in any event, at least every three months for interest periods
longer than three months. With respect to Base Rate loans, interest will be
payable quarterly on the last business day of each fiscal quarter.
The senior secured credit agreement is secured by liens and mortgages on
substantially all of our personal and real property assets, by liens and
mortgages on substantially all of the personal and real property assets of our
wholly-owned subsidiaries and by pledges of all shares of capital stock and
inter-company debt held by us and each wholly-owned subsidiary. Our wholly-owned
subsidiaries guarantee our obligations under the senior secured credit
agreement. As of March 31, 2002, we had borrowings of $275 million under our
senior secured credit facilities, including $70 million outstanding under the
term A loans and $205 million outstanding under the term B loans.
The senior secured credit agreement contains financial covenants and other
covenants that limit or restrict our ability to make capital expenditures, incur
indebtedness, permit liens on our property, enter into transactions with
affiliates, make restricted payments or investments, enter into mergers,
acquisitions or consolidations, conduct asset sales, pay dividends or
distributions and enter into other specified transactions and activities. We
will also be required to prepay any amounts that we borrowed with the proceeds
we receive from a number of specified events or transactions, including 50% of
proceeds from this offering that exceed the first $50 million, to be applied pro
rata to the term A and term B loans.
9 1/2% SENIOR NOTES DUE 2009
In March 2002, we issued $200 million aggregate principal amount of senior
unsecured notes due 2009. The senior notes bear interest at a rate of 9 1/2% per
annum, payable semi-annually in arrears on each March 15 and September 15. The
senior notes will mature on March 15, 2009.
The senior notes are not redeemable at our option prior to March 15, 2006.
At any time on or after March 15, 2006, the senior notes will be redeemable at
our option, in whole or in part, at a premium declining ratably to par on March
15, 2008.
The indenture governing the senior notes provides that, in the event of a
change of control (as defined in the indenture), we will be required to make an
offer to purchase the senior notes at a price of 101% of the aggregate principal
amount thereof. The indenture also contains restrictive covenants, that, among
other
65
things, impose limitations on our ability to incur additional indebtedness,
merge, consolidate or sell or dispose of all or substantially all of our assets,
issue certain preferred stock, pay cash dividends or make distributions on
account of our equity interest, repurchase equity and make certain other
restricted payments, create certain liens, enter into transactions with our
affiliates and sell assets.
IRON DYNAMICS SENIOR SECURED CREDIT FACILITY
On January 28, 2002, we entered into an agreement with the Iron Dynamics
lenders to extinguish the debt under the Iron Dynamics credit agreement at the
end of March 2002. We complied with each of the settlement requirements, thus
constituting full and final settlement of all of Iron Dynamics' obligations and
our guarantees under the Iron Dynamics credit agreement, causing the Iron
Dynamics credit agreement to terminate. In meeting the requirements of the
settlement agreement, we paid $15 million in cash and issued an aggregate of $22
million, or 1.5 million shares of our common stock during March 2002. In
addition, if Iron Dynamics resumes operations by January 27, 2007, and generates
positive cash flow (as defined in the settlement agreement), we are required to
make contingent future payments in an aggregate not to exceed $22 million.
66
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 our Articles of Incorporation 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.
Our authorized capital stock consists of 100,000,000 shares of common
stock, par value $.01 per share. As of March 31, 2002, there were 49,706,131
shares of common stock issued and 47,320,217 shares outstanding that were
beneficially owned by approximately 7,600 stockholders. As of March 31, 2002,
2,499,391 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 being sold by each selling
stockholder. The following table assumes that the selling stockholders will sellmay elect all of the shares being offereddirectors 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 our board of directors in its
discretion from funds legally available therefor. Upon the liquidation,
dissolution or winding-up of our company, the holders of common stock are
entitled to receive ratably the net assets of our 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 account by this prospectus. The actual
number ofcommon 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 thatare, and the shares to be issued in
the offering will be, registered will actually be
determined by dividing $7,333,334validly issued, fully paid, and non-assessable.
CERTAIN PROVISIONS OF INDIANA LAW REGARDING TAKEOVERS
As an Indiana corporation, we are subject to certain provisions of Indiana
law which may discourage or render more difficult an unsolicited takeover of our
company. There are two principal statutes relating to this issue that constitute
part of the Indiana corporate law, the statute regulating "business
combinations" and the statute regulating "control share acquisitions."
Under Chapter 43 of the Indiana corporate law 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 closinginterested
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 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 as 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.
67
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).
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 Indiana corporate law 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 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.
68
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is EquiServe Trust
Company, N.A.
SHARES ELIGIBLE FOR FUTURE SALE
We 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 our common stock on
the second business day priorand could impair our
future ability to March 1, 2002 and, again, on March 15 and March
29, 2002. The closing priceraise capital through an offering of our equity securities.
Upon completion of this offering, we will have a total of 55,115,896 shares
of common stock on February 27, 2002 was $[o],
and, accordingly,outstanding. Of these shares, 14,079,521 shares, plus any such
shares which may be acquired by an "affiliate" of us 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, a person, or persons
whose shares are aggregated, who has beneficially owned restricted shares for at
least one year, including the holding period of any prior owner except an
affiliate, would be entitled to sell within any three-month period a number of
shares issued tothat does not exceed the selling stockholders on
March 1, 2002, the firstgreater of:
- one percent of the three issuance dates, was [o] shares.
The following table sets forth with respect to each of the selling stockholders
(1) the number of shares of common stock then outstanding,
which will equal approximately shares immediately after this offering, or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to the
sale.
Sales under Rule 144 also are subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us. Under Rule 144(k), a person who is not deemed to have been an
affiliate of Steel Dynamics at any time during the three months preceding a sale
and who has beneficially owned the shares proposed to be sold for at least two
years, including the holding period of any prior owner except an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701 permits resales of shares in reliance on Rule 144 but without
compliance with specified restrictions of Rule 144. Any employee, officer or
director of or consultant to Steel Dynamics who purchased his or her shares
under a written compensatory plan or contract may be entitled to rely on the
resale provisions of Rule 701. Rule 701 permits affiliates to sell their Rule
701 shares under Rule 144 without complying with the holding period requirements
of Rule 144. Rule 701 further provides that non-affiliates may sell those shares
in reliance on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144.
In addition, some of our stockholders who have restricted shares also have
registration rights with respect to their common stock. In accordance with the
Registration Rights Agreement dated February 26, 2002, we have filed a
registration statement under the Securities Act to register shares of common
stock held by the Iron Dynamics bank lenders who receive restricted shares in
connection with the settlement of the Iron Dynamics credit agreement. As of July
16, 2002, there were 436,150 remaining restricted shares held by one of these
holders. In addition, other stockholders holding restricted shares have the
right to require us to file a registration statement under the Securities Act to
register their restricted shares of common stock under the Registration
Agreement dated as of June 30, 1994. As of July 16, 2002, there were 13,643,377
remaining restricted shares held by these stockholders.
We, our directors and executive officers, the selling stockholders and
other stockholders, have entered into "lock-up" agreements with the
underwriters, providing that selling stockholderwe and they will not (1) 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
69
of common stock or any securities convertible into or exercisable or
exchangeable for common stock, or (2) 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 (1) or (2) 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 and J.P. Morgan Securities Inc. on behalf on the
underwriters, other than (1) the sale to the underwriters of the shares of
common stock offered in this offering, (2) the dollar amountissuance by us of shares of
common stock upon the exercise of an option sold or granted pursuant to our
existing benefit plans and outstanding on the date of this prospectus, or (3)
transactions relating to shares of common stock or other securities acquired in
open market transactions after completion of this offering.
The preceding description does not include shares of common stock issuable
upon the exercise of options granted under our stock option plans. We have
registered on Form S-8 under the Securities Act shares of common stock issuable
under options subject to our stock option 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, 2002, 2,458,301 shares had been reserved by us for issuance
pursuant to options granted under our stock option plans.
70
UNITED STATES FEDERAL TAX CONSIDERATIONS FOR
NON-U.S. HOLDERS OF OUR COMMON STOCK
The following is a general discussion of the material U.S. federal income
and estate tax considerations applicable to non-U.S. holders with respect to
their ownership and disposition of shares of our common stock. In general, a
"non-U.S. Holder" is any beneficial owner of our common stock that is not a
United States person for such tax purposes, such as:
- an individual who is neither a citizen nor a resident of the United
States;
- a corporation that is not created or organized in the United States or
under the laws of the United States or of any state;
- an estate, the income of which is not included in gross income for U.S.
federal income tax purposes regardless of its source; or
- a trust if either (a) a court within the United States is not able to
exercise primary supervision over the administration of the trust or (b)
no U.S. person has the authority to control all substantial decisions of
the trust.
This discussion is based on the current provisions of the Internal Revenue
Code of 1986, as amended, existing and proposed Treasury regulations promulgated
thereunder, current administrative rulings and judicial decisions, all of which
are subject to change. Any change, which may or may not be sold by that
selling stockholderretroactive, could
alter the tax consequences to non-U.S. holders described in this prospectus. We
assume in this discussion that a non-U.S. holder holds shares of our common
stock as a capital asset (generally property held for investment). This
discussion does not address all aspects of U.S. federal income and estate
taxation that may be relevant to a particular non-U.S. holder in light of that
non-U.S. holder's individual circumstances nor does it address any aspects of
U.S. state, local or non-U.S. taxes. This discussion also does not consider any
specific facts or circumstances that may apply to a non-U.S. holder subject to
special treatment under the U.S. federal income tax laws (such as insurance
companies, tax-exempt organizations, financial institutions, brokers, dealers in
securities, partnerships, owners of more than 5% of our common stock and certain
U.S. expatriates). Accordingly, we urge prospective investors to consult with
their own tax advisor regarding the U.S. federal, state, local and non-U.S.
income and other tax considerations of acquiring, holding and disposing of
shares of our common stock.
DISTRIBUTIONS ON OUR COMMON STOCK
As previously discussed, we have not declared or paid distributions on our
common stock since our initial public offering (3)and do not expect to pay any
distributions on our common stock in the foreseeable future. See "Dividend
Policy." In the event we do pay distributions on our common stock, however,
these distributions generally will constitute dividends for U.S. federal income
tax purposes to the extent paid from our current or accumulated earnings and
profits as determined under U.S. federal income tax principles. If a
distribution exceeds our current and accumulated earnings and profits, the
excess will be treated as a tax-free return of the holder's investment, up to
the holder's basis in the common stock. Any remaining excess will be treated as
capital gain. Dividends paid to non-U.S. holders on our common stock that are
not effectively connected with the conduct of a U.S. trade or business will be
subject to U.S. withholding tax at a 30% rate or, if a tax treaty applies, a
lower rate specified by the treaty. To receive a reduced treaty rate, non-U.S.
holders must furnish to us or our paying agent a duly completed IRS Form W-8BEN
or substitute form certifying the holder's qualification for the reduced rate.
Where dividends are paid to a non-U.S. holder that is a partnership or other
pass-through entity, persons holding an interest in the entity may also be
required to provide the certification.
If we determine, at a time reasonably close to the date of payment of a
distribution on our common stock, that the distribution will not qualify as a
dividend because we will not have current or accumulated earnings and profits,
we intend not to withhold any U.S. federal income tax on the distribution as
permitted by Treasury regulations. If we or another withholding agent withholds
tax on any such distribution that is made during a taxable year for which we
have no earnings and profits, you may be entitled to a refund of the tax
withheld which you may claim by filing a United States tax return.
71
GAIN ON SALE OR OTHER DISPOSITION OF COMMON STOCK
In general, a non-U.S. holder will not be subject to U.S. federal income
tax on any gain realized upon such holder's sale or other disposition of shares
of our common stock unless:
- the gain is effectively connected with a trade or business carried on by
the non-U.S. holder within the United States, and if required by an
applicable income tax treaty as a condition to subjecting a non-U.S.
holder to United States income tax on a net basis, the gain is
attributable to a permanent establishment of the non-U.S. holder
maintained in the United States;
- the non-U.S. holder is an individual and is present in the United States
for 183 days or more in the taxable year of disposition and certain other
tests are met; or
- we are or have 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 sale or other disposition or the period
the non-U.S. holder held our common stock. If we were, or were to become,
a U.S. real property holding corporation, gains realized upon a
disposition of shares of our common stock by a non-U.S. holder which did
not directly or indirectly own more than 5% of our common stock during
the shorter of the periods described above generally would not be subject
to United States federal income tax so long as our common stock is
"regularly traded" (within the meaning of applicable Treasury
Regulations) on an established securities market.
INCOME OR GAIN EFFECTIVELY CONNECTED WITH A U.S. TRADE OR BUSINESS
If a non-U.S. holder of our common stock is engaged in a trade or business
in the United States and if dividends on the common stock or gain realized on
the sale, exchange or other disposition of the common stock is effectively
connected with the non-U.S. holder's conduct of such trade or business (and, if
an applicable tax treaty requires, is attributable to a U.S. permanent
establishment maintained by the non-U.S. holder in the U.S.), the non-U.S.
holder, although exempt from U.S. withholding tax (provided that the
certification requirements discussed in the next sentence are met), will
generally be subject to U.S. federal income tax on such dividends or gain on a
net income basis in the same manner as if it were a resident of the United
States. The non-U.S. holder will be required, under Treasury regulations, to
provide a properly executed IRS Form W-8ECI or successor form in order to claim
an exemption from U.S withholding tax. In addition, if such non-U.S. holder is a
foreign corporation, it may be subject to a branch profits tax equal to 30
percent (or such lower rate provided by an applicable U.S. income tax treaty) on
a portion of its effectively connected earnings and profits for the taxable
year.
ESTATE TAX
Shares of our common stock that are owned or treated as owned by an
individual who was a non-U.S. holder at the time of death will be included in
the individual's gross estate for U.S. federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise, and therefore may be subject to
U.S. federal estate tax.
BACKUP WITHHOLDING, INFORMATION REPORTING AND OTHER REPORTING REQUIREMENTS
A non-U.S. holder may have to comply with specific certification procedures
to establish that the holder is not a United States person in order to avoid
backup withholding with respect to our payments of dividends on the common
stock. We must report annually to the Internal Revenue Service and to each
non-U.S. holder the amount of any dividends paid to such holder and the tax
withheld with respect to such dividends, regardless of whether withholding was
not required because the dividends were effectively connected dividends or
withholding was reduced or eliminated by an applicable tax treaty. Copies of
this information also may be made available under the provisions of a specific
treaty or agreement with the tax authorities in the country in which the
non-U.S. holder resides or is established.
The payment of proceeds from the disposition of shares of our common stock
to or through a U.S. office of a broker will be subject to information reporting
and backup withholding unless the non-U.S. holder, under
72
penalties of perjury, certifies, among other things, its status as a non-U.S.
holder or otherwise establishes an exemption. The payment of proceeds from the
disposition of shares of our common stock to or through a foreign office of a
foreign broker generally will not be subject to backup withholding and
information reporting. However, information reporting (but not backup
withholding) will apply to the payment of proceeds from a disposition of shares
of our common stock effected outside the United States by a foreign office of a
broker if the broker is:
- a U.S. person;
- a "controlled foreign corporation" for U.S. federal income tax purposes;
- a foreign person 50% or more of whose gross income from certain periods
is effectively connected with a U.S. trade or business; or
- a foreign partnership if at any time during its tax year (a) one or more
of its partners are U.S. persons who, in the aggregate, hold more than
50% of the income or capital interests of the partnership or (b) the
foreign partnership is engaged in a U.S. trade or business,
unless the broker has documentary evidence in its file that the owner is a
non-U.S. holder and certain other conditions are satisfied, or the non-U.S.
holder otherwise establishes an exemption (and the broker has no actual
knowledge to the contrary).
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from a payment to a non-U.S. holder can be refunded or
audited against the non-U.S. holder's U.S. federal income tax liability, if any,
provided that the required information is furnished to the IRS in a timely
manner.
The foregoing discussion of certain U.S. federal tax considerations is for
general information only. Accordingly, all prospective non-U.S. holders of our
common stock should consult their own tax advisors with respect to the U.S.
federal, state, local and foreign tax consequences of the acquisition, ownership
and disposition of our common stock.
73
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated and J.P. Morgan Securities Inc. are
acting as representatives, have severally agreed to purchase, and we and the
selling stockholders have agreed to sell to them, severally, the number of
shares of our common stock indicated below:
NAME NUMBER OF SHARES
- ---- ----------------
Morgan Stanley & Co. Incorporated...........................
J.P. Morgan Securities Inc. ................................
---------
Total.................................................. 9,200,000
=========
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from us and subject to prior sale. The underwriting
agreement provides that the obligation of the underwriters to pay for and accept
delivery of the shares of common stock offered by this prospectus is subject to
the approval of specific 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 by this prospectus, if any are purchased. However, the
underwriters are not required to take or pay for the shares covered by the
underwriters' over-allotment option described below.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price listed on the cover
page of this prospectus and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price.
After the initial offering of the shares of common stock, the offering price and
other selling terms may from time to time be changed by the representatives.
We and the selling stockholders have granted to the underwriters an option,
exercisable for 30 days from the date of this prospectus, to purchase up to an
aggregate of 1,380,000 additional shares of common stock at the public offering
price listed on the cover page of this prospectus, less underwriting discounts
and commissions. The underwriters may exercise this option solely for the
purpose of covering over-allotments, if any, made in connection with the
offering of the shares of common stock offered by this prospectus. To the extent
the option is exercised, each underwriter will become obligated, subject to
specified conditions, to purchase about the same percentage of the additional
shares of common stock as the number listed next to the underwriter's name in
the preceding table bears to the total number of shares of common stock thatlisted
next to the selling stockholder will own after completionnames of this offering ifall underwriters in the selling stockholder sellspreceding table. If the
maximum number of shares, and (4) the percentage
ofunderwriters' option is exercised in full, the total outstanding common stock thatprice to the selling stockholder will own
after completion of this offering ifpublic would
be $173 million, the selling stockholder sellstotal underwriters' discounts and commissions would be $9
million, the 9
maximum number of shares. Upon completion of this offering,total proceeds to us would be $ and the total proceeds to
the selling stockholders would be $ .
Each of us, our executive officers, directors, the selling stockholders and
certain stockholders has agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated and J.P. Morgan Securities Inc. on behalf of
the underwriters, we, he or she will own thosenot, during the period ending 90 days after
the date of this prospectus:
- 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 which they do not sellor any securities
convertible into or exercisable or exchangeable for common stock; or
- enter into any swap or other arrangement that transfers to another, in
this offering.
Except as indicated below, nonewhole or in part, any of the economic consequences of ownership of the
common stock;
whether any transaction described above is to be settled by delivery of common
stock or such other securities, in cash or otherwise. In addition, each of our
executive officers, directors the selling stockholders and certain
74
stockholders has hadagreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated and J.P. Morgan Securities Inc. on behalf of the
underwriters, it, he or she will not, during the period ending 90 days after the
date of this prospectus make any position, officedemand for, or other material relationshipexercise any right with us within the past three
years, other than as an institutional credit provider and as an owner of our
shares of common stock. The information included below is based on information
provided by the selling stockholders. Because the selling stockholders may offer
some or all of their shares, no definitive estimate asrespect
to, the numberregistration of shares
that will be held by the selling stockholders after such offering can be
provided and the following table has been prepared on the assumption that allany shares of common stock offered hereby will be sold.
PERCENTAGE OF
DOLLAR OUTSTANDING COMMON
NUMBER OF AMOUNT OF NUMBER OF SHARES STOCK OWNED BY
SHARES OF SHARES OF OF COMMON STOCK SELLING STOCKHOLDER
COMMON STOCK COMMON STOCK OWNED AFTER AFTER COMPLETION OF
OWNED PRIOR TO TO BE SOLD IN THIS COMPLETION OF THIS OFFERING IF MAXIMUM
NAME OF SELLING STOCKHOLDER THIS OFFERING OFFERING OFFERING (1) NUMBER OF SHARES ARE
SOLD
GE Capital CFE, Inc. $6,571,046.18 -0- -0-
Kreditanstalt Fur Wiederaufbau 5,314,744.59 -0- -0-
Comerica Bank 3,543,163.06 -0- -0-
ABN AMRO North America, Inc. 3,543,163.06 -0- -0-
National City Bank, Indiana 3,027,883.12 -0- -0-
(1) Assumes that allor any securities convertible
into or exercisable or exchangeable for common stock.
The restrictions described in the preceding paragraph do not apply to:
- the sale of the common stock registered in this offering is sold.
PLAN OF DISTRIBUTION
The selling stockholders will act independently of us in making decisions with
respectshares to the timing, manner and size of each sale. The selling stockholders
have not advisedunderwriters under the underwriting agreement;
- the issuance by us of any specific plan for distribution of the shares offered
hereby, but we anticipate that the shares of common stock will be sold from time
to time by the selling stockholders or their donees, pledgees, transferees and
other successors in interest in one or more transactions, individually or
through one or more brokers acting for the account of one or more of the selling
stockholders, at fixed prices, at market prices at the time of sale, at varying
prices determined at the time of sale or at negotiated prices. When used herein,
the term selling stockholders refers to all of their donees, pledgees,
transferees and other successors in interest. The shares of common stock may be
sold from time to time in one or more types of transactions, which may include
block transactions, on the Nasdaq National Market, on any national securities
exchange or quotation service on which the common stock may be listed or quoted
at the time of sale, in the over-the-counter market, in private transactions,
through options, in an underwritten offering, a combination of any of the above
transactions, or any other lawful methods.
If required, we will distribute a supplement to this prospectus to describe
material changes in the terms of the offering. The supplement will set forth the
aggregate number of shares of common stock being offeredupon the exercise of an
option sold or granted pursuant to our existing benefit plans and
outstanding on the termsdate of such
offering, including the name or names of the broker/dealers or agents,this prospectus; and
- transactions by any discounts, commissions andperson other terms constituting compensation from the
selling stockholders and any discounts, commissions or concessions allowed or
reallowedthan us relating to be paid to broker/dealers.
The shares of common
stock describedor other securities acquired in this prospectusopen market transactions after
completion of the offerings.
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 sell more shares
than they are obligated to purchase under the underwriting agreement, creating a
short position. A short sale is "covered" if the short position is no greater
than the number of shares available for purchase by the underwriters under the
over-allotment option. The underwriters can close out a covered short sale by
exercising the over-allotment option or purchasing shares in the open market. In
determining the source of shares to close out a covered short sale, the
underwriters will consider, among other things, the open market price of shares
compared to the price available under the over-allotment option. The
underwriters may also sell shares in excess of the over-allotment option,
creating a naked short position. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short position is more
likely to be created if the underwriters are concerned that there may be
solddownward pressure on the price of the common stock in the open market after
pricing that could adversely affect investors who purchase in the offering. As
an additional means of facilitating the offering, the underwriters may bid for,
and purchase, shares of common stock in the open market to stabilize the price
of the common stock. The underwriting syndicate may also 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 to cover syndicate short positions or to stabilize the price of the
common stock. Any of these activities may raise or maintain the market price of
the common stock above independent market levels or prevent or retard a decline
in the market price of the common stock. The underwriters are not required to
engage in these activities and may end any of these activities at any time.
The underwriters and their affiliates have in the past provided, and may
continue to provide from time to time, directlyinvestment banking and general financing
and banking services to us and our affiliates for which they have in the past
received, and may in the future receive, customary fees. In connection with our
senior secured credit agreement, we, Morgan Stanley Senior Funding, Inc., an
affiliate of Morgan Stanley & Co. Incorporated, JPMorgan Chase Bank, an
affiliate of J.P. Morgan Securities Inc. and other lenders entered into a $350
million senior secured credit agreement in March 2002. We intend to repay a
portion of the amounts outstanding under those facilities using proceeds from
this offering. Because more than 10% of the net proceeds of this offering, not
including underwriting compensation, may be received by entities who are
affiliated with National Association of Securities Dealers, Inc. members who are
participating in this offering, the selling stockholders. Alternatively,offering is being conducted in accordance
with NASD Conduct Rule 2710(c)(8). Pursuant to that rule, the selling
stockholders may from time to time offer sharesappointment of a
qualified independent underwriter is not necessary in connection with this
offering, as a bona fide independent market (as defined in the NASD Conduct
Rules) exists in our common stock.
In addition, Morgan Stanley & Co. Incorporated and an affiliate of J.P.
Morgan Securities Inc. were underwriters for our initial public offering of
common stock to or through
broker-dealers or agents. Eachin November 1996 and were placement agents for our private offering
of the selling stockholders acquired its shares
other thansenior notes in the ordinary courseMarch 2002. Morgan Stanley & Co. Incorporated was an
underwriter for our public offering of business. None of the selling stockholders
are broker-dealers. Each of the selling stockholders, except for Kreditanstalt
Fur Wiederaufbau, however, has one or more affiliates which are broker-dealers.
Therefore, these selling stockholders, except for Kreditanstalt Fur
Wiederaufbau, and any broker-dealer or agent that participates in the
distribution of the8,400,000 shares of our common stock arein
August 1997. Each underwriter received fees customary for performing those
services.
75
We and the underwriters within the meaning
of Section 2(a)(11) of the Securities Act with respecthave agreed to the sharesindemnify each of
them may offer for sale, and subject to the prospectus delivery requirements of
the Securities Act. Accordingly, any profits on the resale of shares of common
stock and any compensation received by any such broker-dealer or agent may be
deemed to be underwriting discounts and commissionsother against certain
liabilities, including liabilities under the Securities Act.
The selling stockholders, alternatively, may sell all or any part of the shares
offered hereby through an underwriter. No selling stockholder has entered into
any agreement with a prospective underwriter and there is no assurance that any
such agreement will be entered into. We have agreed that if we choose to
register a primary offering of our own common shares, which we have agreed not
to do, in any event if at all, prior to June 15, 2002, we will afford the
selling stockholders "piggyback" registration rights to sell all or any portion
of their shares as a part of such registered offering. If we effect such an
offering, we have the right, at any time after June 15, 2002, on ten days
written notice to the selling stockholders, to suspend the effectiveness of this
shelf registration for a period not to exceed 90 days, during which we would be
able to effect our offering and during which the selling stockholders would not
be entitled to effect sales of shares pursuant to this registration statement.
Following such registration, we would reinstate the effectiveness of this
registration statement. In either case, if one or more selling stockholders
enter into an underwriting agreement of their own, or we elect to effect a
primary registered offering of our own, the relevant details will be set forth
in an amendment to this registration statement and in a supplement or revision
to this prospectus.
The selling stockholders have also agreed that for a period of 90 days, through
May 31, 2002, they will not, in the aggregate, sell more than 30,000 shares on
any single trading day. Each selling stockholder has also individually agreed
that, during this restricted period, and unless the selling stockholders as a
group may otherwise agree to allocate to one selling stockholder a portion of
another selling stockholder's unused daily amount, it will not sell more on any
day than its ratable share of the 30,000 daily maximum.
Any shares covered by this prospectus which qualify for sale pursuant to Rule
144 under the Securities Act of 1933 may be sold under Rule 144 rather than
pursuant to this prospectus. The selling stockholders may not necessarily sell
all of the shares. The selling stockholders may transfer, devise or gift such
shares by other means not described in this prospectus.
10
To comply with the securities laws of certain jurisdictions, if applicable, the
common stock must be offered or sold only through registered or licensed brokers
or dealers. In addition, in certain jurisdictions, the common stock may not be
offered or sold unless they have been registered or qualified for sale or an
exemption is available and complied with.
Under applicable rules and regulations under the Securities Exchange Act of
1934, any person engaged in a distribution of the common stock offered hereby
may not simultaneously engage in market-making activities with respect to our
common stock for a specified period prior to the start of the distribution. In
addition, each selling stockholder and any other person participating in a
distribution will be subject to the Securities Exchange Act and the rules and
regulations promulgated under the Exchange Act, including Regulation M, which
may limit the timing of purchases and sales of common stock by the selling
stockholders or any such other person. These factors may affect the
marketability of the common stock and the ability of brokers or dealers to
engage in market-making activities.
All expenses of this registration will be paid by us. These expenses include the
preparation and filing of this prospectus and the related registration statement
with the Securities and Exchange Commission, as well as filing fees and fees
under state securities or Blue Sky laws. The selling stockholders will pay their
own commissions, discounts, selling and other disposition expenses.
LEGAL MATTERS
TheBarrett & McNagny LLP, Fort Wayne, Indiana, will pass upon the validity of
the shares of common stock being offered by this prospectusprospectus. Certain legal matters in
connection with this offering will be passed upon for usthe underwriters by
Shearman & Sterling, New York, New York. Members of the firm of Barrett &
McNagny LLP Fort Wayne, Indiana.own shares of our common stock amounting to less than one-half of 1%
of our outstanding shares.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements as ofat December 31, 20002001 and 1999,2000, and for each of the twothree
years in the period ended December 31, 2000 included in our Annual Report on Form 10-K
for the year ended December 31, 2000,2001, as set forth in their report, which
is included and incorporated by reference in this prospectus and elsewhere in
the registration statement. Our financial statements are included and
incorporated by reference in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
The consolidated financial statements asWHERE YOU CAN FIND ADDITIONAL INFORMATION
This prospectus constitutes a part of December
31, 1998,a registration statement on Form S-3
filed by us with the SEC under the Securities Act. This prospectus does not
contain all of the information set forth in the registration statement, parts of
which are omitted in accordance with the rules and for year then ended, incorporated byregulations of the SEC. For
further information about Steel Dynamics and the shares of common stock offered,
reference is made to the registration statement. Statements contained in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as statedconcerning the provisions of any document are not necessarily
complete, and each such statement is qualified in their report, which is incorporatedits entirety by reference herein, and have been so
incorporated in reliance uponto
the reportcopy of such firm given upon their
authority as experts in accountingdocuments filed with the SEC.
We file annual, quarterly and auditing.
INCORPORATION OF CERTAIN DOCUMENTSspecial reports, proxy statements, and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference facilities at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's following Regional Offices: Suite 1400,
Northwest Atrium Center, 500 West Madison Street, Chicago, Illinois 60661; and
233 Broadway, New York, New York 10279. Please call the SEC at 1-800-SEC-0330
for further information on the public reference rooms. Our SEC filings are also
available to the public at the SEC's web site http://www.sec.gov.
INFORMATION WE INCORPORATE BY REFERENCE
The SEC allows us to incorporate"incorporate by reference in this prospectusreference" the information we file
with the SEC,them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be a part of this prospectus, and laterprospectus. The most recent information that we
file with the SEC will automatically updateupdates and supersede thissupersedes more dated information.
The followingWe incorporate by reference the documents we have filedlisted below, and any future filings
made with the SEC are incorporated herein by
reference:
1. Our Annual Report on Form 10-K for the year ended December 31, 2000;
11
2. Our Quarterly Report on Form 10-Q for the three month period ended
March 31, 2001;
3. Our Quarterly Report on Form 10-Q for the three month period ended
June 30, 2001;
4. Our Quarterly Report on Form 10-Q for the three month period ended
September 30, 2001;
5. Our Current Report on Form 8-K filed on February 5, 2002;
6. Our Amended Current Report on Form 8-K filed on February 26, 2002;
7. Our Current Report on Form 8-K filed on February 27, 2002; and
8. The description of our common stock, par value $.01 per share,
included in our registration statement on Form 8-A filed with the SEC
on November 13, 1996, including any amendments or reports filed for
the purpose of updating such description.
All documents or reports we file pursuant tounder Section 13(a), 13(c), 14 or 15(d) of the Exchange Act,
afteruntil the date of this prospectus and prior to the
termination of this offering will be deemed to be incorporatedis completed.
The documents we incorporate by reference into
this prospectusare:
1. Our Annual Report on Form 10-K for the fiscal year ended December
31, 2001;
2. Our Quarterly Report on Form 10-Q for the quarter ended March 31,
2002;
3. Our Current Report on Form 8-K filed on May 10, 2002; and
to be a part76
4. The description of this prospectus fromour common stock contained in our registration
statement on Form 8-A as filed with the date of the filing
of the document or report.SEC on November 13, 1996.
Any statement contained in this prospectus, or in a document all or a portion of whichthat is incorporated or deemed to be incorporated by reference
in this prospectus, will be deemed to be modified or supersededsuperceded for all purposes of this prospectus to the extent that a statement
contained in this prospectus or(or in any other document that is subsequently
filed document which also iswith the SEC and incorporated by reference) modifies or is deemedcontrary to
be incorporated by reference in this prospectus modifies or supersedes
thethat previous statement. Any such statement so modified or supersededsuperceded will not be
deemed a part of this prospectus except as so modified or superseded, to constitute a part of the registration
statement or this prospectus.
We will provide without charge to any person, including any beneficial owner, to
whom this prospectus is delivered, on the written or oralsuperceded.
You may request of such
person, a copy of anythese filings, at no cost, by writing or
all of the foregoing documents incorporated by
reference, other than exhibits not specifically incorporated by reference into
the texts of such documents. Requests for such documents should be directed to:telephoning us. You may contact us at Steel Dynamics, Inc., 6714 Pointe
Inverness Way, Suite 200, Fort Wayne, Indiana 46804, Telephone: (260) 459-3553
Attention: Tracy L.
Shellabarger, e-mail: tracy.shellabarger@stld.com
You should relyChief Financial Officer, telephone number: 260-459-3553.
77
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 2001 and
2000...................................................... F-3
Consolidated Statements of Income for each of the three
years in the period ended December 31, 2001............... F-4
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended December 31, 2001..... F-5
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2001............... F-6
Notes to Consolidated Financial Statements.................. F-7
Consolidated Balance Sheets as of March 31, 2002 (unaudited)
and December 31, 2001..................................... F-26
Unaudited Consolidated Statements of Income for three-month
periods ended March 31, 2002 and 2001..................... F-27
Unaudited Consolidated Statements of Cash Flows for the
three-month periods ended March 31, 2002 and 2001......... F-28
Notes to Unaudited Consolidated Financial Statements........ F-29
F-1
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. as of December 31, 2001 and 2000, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2001. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Steel Dynamics,
Inc. at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
As discussed in Note 1 to the financial statements, in 2001 the Company
changed its method of accounting for derivative financial instruments.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
January 31, 2002, except for Note 3,
as to which the date is March 26, 2002, and
Note 7, as to which the date is
March 7, 2002
F-2
STEEL DYNAMICS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------
2001 2000
---------- ----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 78,241 $ 10,184
Accounts receivable, net of allowance for doubtful
accounts of $2,374 and $1,611 as of December 31, 2001
and 2000, respectively................................. 65,589 82,838
Accounts receivable-related parties....................... 16,290 20,148
Inventories............................................... 118,368 106,745
Deferred income taxes..................................... 24,600 12,854
Other current assets...................................... 9,116 9,844
---------- ----------
Total current assets.............................. 312,204 242,613
PROPERTY, PLANT, AND EQUIPMENT, NET......................... 852,061 807,322
RESTRICTED CASH............................................. 3,030 3,465
OTHER ASSETS................................................ 12,803 13,674
---------- ----------
TOTAL ASSETS...................................... $1,180,098 $1,067,074
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 30,228 $ 18,874
Accounts payable-related parties.......................... 11,101 9,114
Accrued interest.......................................... 4,052 5,364
Other accrued expenses.................................... 26,697 26,302
Current maturities of long-term debt...................... 46,033 17,044
---------- ----------
Total current liabilities......................... 118,111 76,698
LONG-TERM DEBT, LESS CURRENT MATURITIES..................... 553,891 515,476
DEFERRED INCOME TAXES....................................... 62,765 52,027
MINORITY INTEREST........................................... 4,769 4,089
OTHER LONG-TERM CONTINGENT LIABILITIES...................... 21,987 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock voting, $.01 par value; 100,000,000 shares
authorized; 49,586,473 and 49,347,626 shares issued;
45,743,473 and 45,504,626 shares outstanding as of
December 31, 2001 and 2000, respectively............... 495 493
Treasury stock, at cost; 3,843,000 shares as of December
31, 2001 and 2000...................................... (46,526) (46,526)
Additional paid-in capital................................ 337,733 335,732
Retained earnings......................................... 132,229 129,085
Other accumulated comprehensive loss...................... (5,356) --
---------- ----------
Total stockholders' equity........................ 418,575 418,784
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $1,180,098 $1,067,074
========== ==========
See notes to consolidated financial statements.
F-3
STEEL DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
NET SALES:
Unrelated parties......................................... $495,079 $549,851 $498,723
Related parties........................................... 111,905 142,772 120,098
-------- -------- --------
Total net sales................................... 606,984 692,623 618,821
Cost of goods sold.......................................... 522,927 533,914 487,629
-------- -------- --------
Gross profit...................................... 84,057 158,709 131,192
Selling, general and administrative expenses................ 58,132 53,306 42,441
-------- -------- --------
Operating income.................................. 25,925 105,403 88,751
Interest expense............................................ 18,480 20,199 22,178
Other expense............................................... 2,333 719 1,294
-------- -------- --------
Income before income taxes........................ 5,112 84,485 65,279
Income tax expense.......................................... 1,968 30,690 25,849
-------- -------- --------
Net income........................................ $ 3,144 $ 53,795 $ 39,430
======== ======== ========
BASIC EARNINGS PER SHARE:
Net income................................................ $ 0.07 $ 1.15 $ 0.82
======== ======== ========
Weighted average common shares outstanding................ 45,655 46,822 47,914
======== ======== ========
DILUTED EARNINGS PER SHARE:
Net income................................................ $ 0.07 $ 1.15 $ 0.82
======== ======== ========
Weighted average common shares and share equivalents
outstanding............................................ 45,853 46,974 48,153
======== ======== ========
See notes to consolidated financial statements.
F-4
STEEL DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
OTHER
ADDITIONAL ACCUMULATED
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY
SHARES STOCK CAPITAL EARNINGS LOSS STOCK TOTAL
------ ------ ---------- -------- ------------- -------- --------
(IN THOUSANDS)
BALANCES AT JANUARY 1, 1999.............. 47,864 $492 $334,363 $ 35,860 $ -- $(19,650) $351,065
Exercise of stock options, including
related tax effect..................... 107 1 874 -- -- -- 875
Net income and comprehensive income...... -- -- -- 39,430 -- -- 39,430
------ ---- -------- -------- ------- -------- --------
BALANCES AT DECEMBER 31, 1999............ 47,971 493 335,237 75,290 -- (19,650) 391,370
Exercise of stock options, including
related tax effect..................... 83 -- 495 -- -- -- 495
Purchase of treasury stock............... (2,549) -- -- -- -- (26,876) (26,876)
Net income and comprehensive income...... -- -- -- 53,795 -- -- 53,795
------ ---- -------- -------- ------- -------- --------
BALANCES AT DECEMBER 31, 2000............ 45,505 493 335,732 129,085 -- (46,526) 418,784
Exercise of stock options, including
related tax effect..................... 238 2 2,001 -- -- -- 2,003
Comprehensive income (loss):
Net income............................. -- -- -- 3,144 -- -- 3,144
Comprehensive loss:
Cumulative effect of an accounting
change, net of tax effect of
$1,545............................. -- -- -- -- (2,468) -- (2,468)
Unrealized loss on derivative
instruments, net of tax effect of
$1,811............................. -- -- -- -- (2,888) -- (2,888)
--------
Total comprehensive loss......... (2,212)
------ ---- -------- -------- ------- -------- --------
BALANCES AT DECEMBER 31, 2001............ 45,743 $495 $337,733 $132,229 $(5,356) $(46,526) $418,575
====== ==== ======== ======== ======= ======== ========
See notes to consolidated financial statements.
F-5
STEEL DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income.............................................. $ 3,144 $ 53,795 $ 39,430
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 46,794 45,443 39,269
Loss on disposal of property, plant and equipment.... 42 155 115
Deferred income taxes................................ (1,008) 20,386 15,125
Minority interest.................................... 680 2,294 1,795
Changes in certain assets and liabilities:
Accounts receivable................................ 21,107 (16,337) (20,694)
Inventories........................................ (11,623) (3) 19,964
Other assets....................................... 1,169 59 10,784
Accounts payable................................... 13,341 (9,648) 3,194
Accrued expenses................................... (6,273) 6,648 5,797
--------- --------- ---------
Net cash provided by operating activities....... 67,373 102,792 114,779
--------- --------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment.............. (90,714) (110,379) (126,673)
Proceeds from sale of property, plant and equipment..... 4 980 374
--------- --------- ---------
Net cash used in investing activities........... (90,710) (109,399) (126,299)
--------- --------- ---------
FINANCING ACTIVITIES:
Issuance of long-term debt.............................. 201,362 68,917 40,042
Repayments of long-term debt............................ (111,971) (42,360) (18,025)
Purchase of treasury stock.............................. -- (26,876) --
Issuance of common stock (net of expenses) and proceeds
from exercise of stock options, including related tax
effect............................................... 2,003 495 875
--------- --------- ---------
Net cash provided by financing activities....... 91,394 176 22,892
--------- --------- ---------
Increase (decrease) in cash and cash equivalents.......... 68,057 (6,431) 11,372
Cash and cash equivalents at beginning of year............ 10,184 16,615 5,243
--------- --------- ---------
Cash and cash equivalents at end of year.................. $ 78,241 $ 10,184 $ 16,615
========= ========= =========
See notes to consolidated financial statements.
F-6
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Steel Dynamics, Inc. (SDI), together with its subsidiaries (the company) is
a domestic manufacturer of steel products with operations in the following
businesses.
Steel Operations. The company's core business operates a technologically
advanced flat-rolled steel mini-mill with an annual production capacity of 2.2
million tons of flat-rolled carbon steel products, including hot rolled, cold
rolled and coated products. The company sells these products directly to
end-users and through steel service centers located primarily in the Midwestern
United States. The company began construction of its structural and rail
division in May 2001 and anticipates the commencement of structural steel
production during the second quarter of 2002 and rail production during the
first quarter of 2003. This facility is designed to produce and sell structural
steel beams, pilings, and other steel components directly to end-users and
service centers for the construction, transportation and industrial machinery
markets. This facility is also designed to produce and sell a variety of
standard and premium grade rails for the railroad industry.
Steel Scrap Substitute and Other Operations. The company's wholly owned
subsidiary, Iron Dynamics, Inc. (IDI), involves the pioneering of a process to
produce direct reduced iron, which is then converted into liquid pig iron.
Liquid pig iron is a high quality steel scrap substitute used in the company's
flat-rolled steel mini-mill. During 1999, IDI commenced initial start-up and
produced and sold a minimal amount of liquid pig iron to the company's flat roll
division; however, it was determined that IDI would require certain design and
equipment modifications to attain its fully intended operating functionality.
These modifications occurred during the second half of 2000 with completion and
restart occurring in the first quarter of 2001. While IDI believed that many of
the design and equipment deficiencies were corrected with these modifications,
the company halted operations at IDI during July 2001 with no specific date set
for resumption of actual production, as a result of higher than expected
start-up and process refinement costs, lower than expected production
quantities, exceptionally high energy costs and historically low steel scrap
pricing. Since operations were halted in 2001, the costs incurred at IDI are
composed of those expenses required to maintain the facility and further
evaluate the project and its related benefits. The company also has two
consolidated subsidiary operations one that receives revenue from the
fabrication of trusses, girders, steel joist and steel decking for the
non-residential construction industry and one that receives revenue from the
further processing, or slitting, and sale of certain secondary and excess steel
products.
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
the accounts of SDI, together with its subsidiaries, including New Millennium
Building Systems LLC (NMBS), after elimination of significant intercompany
accounts and transactions. Minority interest represents the minority
shareholders' proportionate share in the equity or income of the company's
consolidated subsidiaries.
Use of Estimates. The financial statements are prepared in conformity with
generally accepted accounting principles and, accordingly, include amounts that
are based on management's estimates and assumptions that affect the amounts
reported in the financial statements and in the notes thereto. Actual results
could differ from these estimates.
Revenue Recognition. The company generally recognizes revenues from sales
and the allowance for estimated costs associated with returns from these sales
when the title of the product transfers. Provision is made for estimated product
returns and customer claims based on estimates and actual historical experience.
Freight Costs. The company reflects freight costs associated with shipping
its products to customers as a component of cost of goods sold.
F-7
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents. Cash and cash equivalents include all highly
liquid investments with a maturity of three months or less at the date of
acquisition. Restricted cash is held by trustees in debt service funds for the
repayment of principal and interest related to the company's municipal bonds and
for use in certain property, plant and equipment purchases related to the
company's revenue bonds.
Inventories. Inventories are stated at lower of cost (principally standard
cost which approximates actual cost on a first-in, first-out basis) or market.
Inventory consisted of the following at December 31 (in thousands):
2001 2000
-------- --------
Raw materials............................................... $ 44,807 $ 39,302
Supplies.................................................... 42,258 41,770
Work in progress............................................ 8,512 7,916
Finished goods.............................................. 22,791 17,757
-------- --------
$118,368 $106,745
======== ========
Property, Plant and Equipment. Property, plant and equipment are stated at
cost, which includes capitalized interest on construction-in-progress and is
reduced by proceeds received from state and local government grants and other
capital cost reimbursements. Depreciation is provided utilizing the units-of-
production method for manufacturing plant and equipment and the straight-line
method for non-manufacturing equipment. The units-of-production method is based
on units produced, subject to a minimum level. The estimated useful lives of
assets range from five to 30 years. Repairs and maintenance are expensed as
incurred. In accordance with the methodology described in 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", the company
reviews long-lived assets for impairment whenever events or changes in
circumstances indicate the carrying amount of such assets may not be
recoverable. Impairment losses are recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amounts. The impairment loss is measured by comparing the fair value of
the asset to its carrying amount. During 2001, events and circumstances
indicated that approximately $125.0 million of assets related to Iron Dynamics
might be impaired. However, the company's estimate of undiscounted cash flows
indicated that such carrying amounts were expected to be recovered. The company
made various assumptions in estimating the undiscounted cash flows including
production levels, significant cost components, required capital expenditures
and commercial start-up date. Nonetheless, it is reasonably possible that the
estimate of undiscounted cash flows may change in the near term resulting in the
need to write-down those assets to fair value.
Concentration of Credit Risk. Financial instruments that potentially
subject the company to significant concentrations of credit risk principally
consist of temporary cash investments and accounts receivable. The company
places its temporary cash investments with high credit 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.
Earnings Per Share. Diluted earnings per share amounts are based upon the
weighted average number of common and common equivalent shares outstanding
during the year. Common equivalent shares are excluded from the computation in
periods in which they have an anti-dilutive effect. The difference between the
company's basic and diluted earnings per share is solely attributable to stock
options. For the years ended December 31, 2001, 2000 and 1999, options to
purchase 1,371,000, 1,631,000 and 767,000 shares, respectively, were excluded
from diluted earnings per share because they were anti-dilutive.
Derivative Financial Instruments. Effective January 1, 2001, the company
adopted SFAS No. 133, "Accounting for Derivative Instrument and Hedging
Activities," as amended. SFAS 133 establishes
F-8
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Derivatives that are not designated as hedges must be
adjusted to fair value through income. Changes in the fair value of derivatives
that are designated as hedges, depending on the information incorporated by referencenature of the hedge, are
recognized as either an offset against the change in fair value of the hedged
balance sheet item through earnings or includedas other comprehensive income, until the
hedged item is recognized in this
prospectusearnings. The ineffective portion of a derivative's
change in fair value is immediately recognized in earnings.
In the normal course of business, the company has limited involvement with
derivative financial instruments in an effort to manage the company's exposure
to fluctuations in interest and foreign exchange rates. The company employs an
interest rate swap agreement, which is accounted for as a cash flow hedge, and
periodically employs foreign currency exchange contracts, as necessary. Upon
adoption of SFAS 133, the company designated and assigned the financial
instruments as hedges of specific assets, liabilities or anticipated
transactions. When hedged assets or liabilities are sold or extinguished or the
applicable prospectus supplement. Weanticipated transaction being hedged is no longer expected to occur, the company
recognizes the gain or loss on the designated hedged financial instrument. The
company classified its derivative financial instruments as held or issued for
purposes other than trading. The company's results of operations and financial
position reflect the impact of adopting SFAS 133 commencing January 1, 2001, as
a one-time after-tax cumulative effect of an accounting change of approximately
$2.5 million as a reduction in other comprehensive income.
Reclassifications. Certain prior year amounts have not authorized
anyone elsebeen reclassified to
conform to the fiscal 2001 presentation.
Recent Accounting Pronouncements. In August 2001, the FASB issued SFAS
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which
supersedes SFAS 121 and the accounting and reporting provisions of APB No. 30
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary Unusual and Infrequently Occurring
Events and Transactions." SFAS 144 retains the fundamental provisions of SFAS
121 for recognition and measurement of the impairment of long-lived assets to be
held and used, and measurement of long-lived assets to be disposed of by sale.
SFAS 144 broadens the presentation requirements of discontinued operations of
APB No. 30 to include a component of an entity (rather than a segment of
business). SFAS 144 is effective for fiscal years beginning after December 15,
2001. The company is currently assessing the impact of SFAS 144, if any, on its
consolidated financial position, results of operations and cash flow.
NOTE 2. PROPERTY, PLANT AND EQUIPMENT
The company's property, plant and equipment at December 31 consisted of the
following (in thousands):
2001 2000
---------- --------
Land and improvements....................................... $ 31,882 $ 24,102
Buildings and improvements.................................. 87,442 80,809
Plant, machinery and equipment.............................. 684,700 644,685
Construction in progress.................................... 247,318 211,078
---------- --------
1,051,342 960,674
Less accumulated depreciation............................... 199,281 153,352
---------- --------
Property, plant, and equipment, net.................... $ 852,061 $807,322
========== ========
F-9
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. DEBT AND OTHER LONG-TERM CONTINGENT LIABILITY
The SDI Refinancing. On March 26, 2002, the company refinanced its
existing $450.0 million senior secured credit facility and its $45.0 million
senior unsecured credit facility with the following:
- $75.0 million in the form of a five-year revolving credit facility,
maturing March 26, 2007, which is subject to a borrowing base and bears
interest at floating rates;
- $70.0 million in the form of a five-year term A loan, payable in
quarterly installments beginning June 26, 2003, with the final
installment due March 26, 2007, and bearing interest at floating rates;
- $205.0 million in the form of a six-year term B loan, payable in
quarterly installments beginning June 26, 2003, with the final
installment due March 26, 2008, and bearing interest at floating rates;
and
- $200.0 million in the form of 9.50% seven-year senior unsecured notes due
March 15, 2009 (non-callable for four years), with interest payable
semi-annually.
The new $350.0 million senior secured credit facility is secured by liens
and mortgages on substantially all of the personal and real property assets of
the company and its wholly-owned subsidiaries and by pledges of all shares of
capital stock and inter-company debt held by the company and its wholly-owned
subsidiaries. The new senior secured credit facility contains financial
covenants and other covenants that limit or restrict the company with respect to
its ability to make capital expenditures, incur indebtedness, and make
restricted payments or investments, among other things.
The $200.0 million 9.50% senior unsecured notes have a maturity of seven
years. The company may redeem the notes at any time on or after March 15, 2006,
at a redemption price of 104.750%, on or after March 15, 2007, at a redemption
price of 102.275%, and on or thereafter March 15, 2008, at a redemption price of
100.000%. In addition, at any time prior to March 15, 2005, the company may
redeem up to 35% of the principal amount of the notes with the net cash proceeds
of its common stock at a redemption price of 109.500% plus accrued interest up
to the redemption date, provided that certain other restrictions as described in
the indenture are met. The notes bear interest at 9.50%, payable semiannually on
each March 15th and September 15th, commencing September 15, 2002.
IDI Settlement. IDI entered into a credit agreement dated as of December
31, 1997, with a syndicate of financial institutions under which the lenders
agreed to provide youIDI with a $55.0 million term loan facility and a $10.0
million revolving credit facility. As of December 31, 2001, there was an
outstanding principal balance of $52.0 million under the term loan facility and
$7.0 million under the revolving facility. As a result of higher than expected
start-up and process refinement costs, lower than expected production
quantities, exceptionally high energy costs and historically low steel scrap
pricing, the company halted operations at IDI during July 2001 with no specific
date set for resumption of actual production. This suspension of operations
placed IDI in a position where it might breach certain future financial
covenants as well as trigger a mandatory principal prepayment under its
revolving credit facility for failure to meet its borrowing base requirements.
On January 28, 2002, the company entered into an agreement with the IDI
lenders to extinguish the debt under the IDI senior secured credit agreement at
the end of March 2002. This agreement required the company, among other things,
to perform the following:
- pay $15.0 million in cash to the IDI lenders on February 1, 2002;
- issue an aggregate of $22.0 million of common stock in three installments
to the IDI lenders during March 2002 at market prices; and
- make contingent future payments in an aggregate amount not to exceed
$22.0 million to the existing IDI lenders if, and only if, IDI resumes
operations by January 27, 2007 and generates positive cash flow, as
defined in the agreement.
F-10
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The company's compliance with the above requirements by March 29, 2002,
will constitute full and final settlement of all of IDI's obligations under the
IDI credit agreement and all of the company's obligations under any outstanding
guarantees of IDI's credit agreement obligations and will cause the IDI credit
agreement to terminate. The contingent future payments of $22.0 million are
classified as a non-interest bearing other long-term contingent liability on the
company's balance sheet. At December 31, 2001, no contingent payments are
expected to be required within the next twelve months.
In connection with the SDI Refinancing and the IDI Settlement, the company
will write-off approximately $1.9 million, net of tax, of the remaining
capitalized financing costs associated with its retired existing senior credit
facilities. The company's borrowings at December 31, after giving effect to the
IDI settlement, consisted of the following (in thousands):
2001 2000
-------- --------
SDI senior secured notes payable, subsequently refinanced... $490,000 $400,000
IDI senior secured notes payable, subsequently settled...... 37,000 60,250
NMBS senior secured notes payable........................... 19,570 19,898
State and local government municipal bond issues............ 26,500 27,600
Electric utility, transmission facility and other equipment
obligation loans.......................................... 26,854 24,772
-------- --------
Total debt............................................. 599,924 532,520
Less current maturities..................................... 46,033 17,044
-------- --------
Long-term debt......................................... $553,891 $515,476
======== ========
The weighted average interest rate was 6.1% and 7.4% for the years ended
December 31, 2001 and 2000, respectively, under the company's existing senior
secured and unsecured credit facilities. The weighted average interest rate was
6.4% and 8.6% for the years ended December 31, 2001 and 2000, respectively,
under IDI's existing senior secured credit facilities. The company has an
interest rate swap agreement with a notional amount of $100.0 million pursuant
to which the company has agreed to make fixed rate payments at 6.92% on the
tenth day of each January, April, July and October and will receive LIBOR
payments. This interest rate swap agreement matures January 10, 2005 and is
accounted for as a cash flow hedge.
New Millennium Building Systems (NMBS) Senior Secured Financing. NMBS has
a $23.0 million bank credit facility with Bank of America, N.A. that is
comprised of:
- $15.0 million in the form of a five-year term loan facility (subject to a
borrowing base), payable in 16 quarterly installments of $562,500
beginning March 31, 2001, with a final balloon installment due March 31,
2005.
- $8.0 million in the form of a five-year revolving facility (subject to a
borrowing base), which matures March 31, 2005.
Borrowings under the NMBS credit agreement bear interest at floating rates.
The weighted average interest rate was 7.9% and 9.4% for the years ended
December 31, 2001 and 2000, respectively. The NMBS bank credit agreement is
secured by liens on substantially all of NMBS's assets. The company has
unconditionally guaranteed $3.4 million of the $19.6 million of debt outstanding
under the NMBS credit agreement as of December 31, 2001.
State and Local Government Municipal Bond Issues. In May 1995, the company
entered into a bond purchase agreement with the Indiana Development Finance
Authority, under which was issued $21.4 million of bonds to finance, among other
things, the construction and equipment for certain sewage works, improvements,
waste and water system improvements and other related facilities located at the
Butler, Indiana mini-mill. The bonds bear interest at 8.01%, with payments of
principal and interest due monthly through final
F-11
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
maturity in August 2015. As of December 31, 2001 and 2000, approximately $3.0
million of the bond proceeds were held by the bond trustee in a debt service
reserve fund and were recorded as restricted cash. A stand-by letter of credit
relating to the municipal bonds was outstanding at December 31, 2001 and 2000,
in the amount of $17.2 million and $22.0 million, respectively.
In November 1998, the company received $10.0 million from Whitley County,
Indiana representing proceeds from solid waste and sewage disposal revenue bonds
to be used to finance certain solid waste and sewage disposal facilities located
at the Whitley County, Indiana structural and rail mill. The bonds bear interest
at 7.25%, with interest payable semi-annually and principal payments commencing
November 2003 through final maturity in November 2018. As of December 31, 2001
and 2000, respectively, approximately $239,000 and $422,000 of the bond proceeds
were held by the bond trustee in a debt service reserve fund and were recorded
as restricted cash.
Electric Utility Development Loan. In June 1994, the company entered into
a loan agreement with Indiana Michigan Power Company for approximately $13.0
million to finance the company's portion of the cost to construct a substation.
The loan bears interest at 8.0%, with equal monthly principal and interest
payments required in amounts sufficient to amortize the substation facility loan
over a period of 15 years. The outstanding principal balance on the substation
facility loan was $10.2 million and $10.9 million, as of December 31, 2001 and
2000, respectively.
In addition, the company entered into another loan agreement with Indiana
Michigan Power Company for approximately $7.8 million to finance the company's
portion of the cost to construct a transmission line and certain related
facilities. The loan bears interest at 8.0%, with equal monthly principal and
interest payments required in amounts sufficient to amortize the transmission
facility loan over a period of 20 years. The outstanding principal balance on
the transmission facility loan was $6.6 million and $6.8 million as of December
31, 2001 and 2000, respectively.
During 1998, IDI entered into an agreement with American Electric Power
Financial Services to provide a $6.5 million eight-year loan. This electric
utility loan is secured by on-site power distribution and related equipment. The
related interest rate is tied to 90-day commercial paper rates with an option to
establish a fixed interest rate based on an average of the interest rates
applicable to one, three and five year U.S. Treasuries. The weighted average
interest rate was 3.0% and 7.9% for the years ended December 31, 2001 and 2000,
respectively. The outstanding principal balance on the on-site power
distribution facility was $4.7 million and $5.5 million as of December 31, 2001
and 2000, respectively.
The above credit agreements contain customary representations and
warranties and affirmative and negative covenants, including, among others,
covenants relating to financial and compliance reporting, capital expenditures,
restricted dividend payments, maintenance of certain financial ratios,
incurrence of liens, sale or disposition of assets and incurrence of other debt.
Maturities of outstanding debt as of December 31, 2001, after giving effect
to the SDI Refinancing and the IDI Settlement, are as follows (in thousands):
2002........................................................ $ 46,033
2003........................................................ 18,553
2004........................................................ 31,108
2005........................................................ 49,009
2006........................................................ 37,600
Thereafter.................................................. 417,621
--------
$599,924
========
F-12
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The company capitalizes interest on construction-in-progress assets. For
the years ended December 31, 2001, 2000, and 1999, total interest costs incurred
were $34.1 million, $37.8 million and $35.4 million, respectively, of which
$14.0 million, $17.5 million and $13.2 million, respectively, were capitalized.
Cash paid for interest was $35.7 million, $37.3 million and $33.7 million for
the years ended December 31, 2001, 2000, and 1999, respectively.
NOTE 4. INCOME TAXES
The company files a consolidated federal income tax return. Cash paid for
taxes was $4.7 million, $17.9 million and $12.6 million for the years ended
December 31, 2001, 2000 and 1999, respectively. The current and deferred federal
and state income tax expense for the years ended December 31 are as follows (in
thousands):
2001 2000 1999
------ ------- -------
Current income tax expense............................... $ 768 $10,086 $12,201
Deferred income tax expense.............................. 1,200 20,604 13,648
------ ------- -------
Total income tax expense............................ $1,968 $30,690 $25,849
====== ======= =======
A reconciliation of the statutory tax rates to the actual effective tax
rates for the years ended December 31, are as follows:
2001 2000 1999
----- ---- ----
Statutory federal tax rate.................................. 35.0% 35.0% 35.0%
State income taxes, net of federal benefit................ (1.5) 3.5 4.5
Other permanent differences............................... 1.4 0.1 0.1
Benefit of rate decrease on cumulative deferred taxes..... (33.8) (2.3) --
Valuation allowance....................................... 37.4 -- --
----- ---- ----
Effective tax rate.......................................... 38.5% 36.3% 39.6%
===== ==== ====
The benefit of rate decrease on cumulative deferred taxes reflected in the
reconciliation above for 2000 and 2001 are the result of decreases in the
effective state income tax rate in years when the deferred tax assets and
liabilities are expected to reverse.
Significant components of the company's deferred tax assets and liabilities
at December 31 are as follows (in thousands):
2001 2000
--------- ---------
DEFERRED TAX ASSETS:
Net operating loss, capital loss, and credit
carryforwards.......................................... $ 27,814 $ 13,925
Alternative minimum tax carryforwards..................... 35,266 35,547
Capitalized start-up costs................................ 17,955 16,764
Tax assets expensed for books............................. 11,077 12,499
Interest rate swap liability.............................. 3,257 --
Accrued expenses.......................................... 1,458 1,530
--------- ---------
Total deferred tax assets................................... 96,827 80,265
Less valuation allowance.................................. (1,913) --
--------- ---------
Net deferred tax assets..................................... 94,914 80,265
--------- ---------
F-13
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2001 2000
--------- ---------
DEFERRED TAX LIABILITIES:
Depreciable assets........................................ (124,884) (111,330)
Amortization of fees...................................... (3,398) (3,001)
Capitalized interest...................................... (4,589) (5,041)
Other..................................................... (208) (66)
--------- ---------
Total deferred tax liabilities.............................. (133,079) (119,438)
--------- ---------
Net deferred tax liability................................ $ (38,165) $ (39,173)
========= =========
The deferred tax assets and liabilities reflect the net tax effects of
temporary differences that are derived from the cumulative taxable or deductible
amounts recorded in the consolidated financial statements in years different
information.from that of the income tax returns. As of December 31, 2001, the company had
available net operating loss carryforwards of approximately $57.6 million for
federal income tax purposes, which expire through 2021. As of December 31, 2001,
the company had available capital loss carryforwards of approximately $5.5
million for federal and state income tax purposes, which expire beginning in
2005.
As of December 31, 2001, the company had available foreign tax credit
carryforwards of approximately $3.0 million for federal income tax purposes,
which expire in 2003. Due to the limited time frame remaining to utilize the
foreign tax credits and the decreased likelihood that the net operating losses
will be fully absorbed prior to the expiration of the credits, a valuation
allowance of $1.9 million was recorded in 2001. Even if these credits are not
utilized as such, they can be treated as tax-deductible expenses. Therefore,
$1.1 million of foreign tax credit remains as a deferred tax asset as of
December 31, 2001.
NOTE 5. COMMON STOCK
Effective June 1, 2000, the board of directors authorized the extension and
continuation of the company's 1997 share repurchase program, allowing the
company to repurchase an additional 5%, or 2,344,000 shares, of its outstanding
common stock, at a purchase price not to exceed $15 per share. At December 31,
2001, the company had acquired 3,843,000 shares of its common stock in open
market purchases, of which none were purchased during 2001, 2,549,000 shares
were purchased during 2000, and none were purchased during 1999. The selling stockholders
may only useaverage
price per share of these purchases is $12. As of December 31, 2001,
approximately 957,000 shares remain available for us to repurchase under the
June 2000 repurchase program.
NOTE 6. INCENTIVE STOCK OPTION AND OTHER PLANS
1994 and 1996 Incentive Stock Option Plans. The company has reserved
6,005,765 shares of common stock for issuance upon exercise of options or grants
under the 1994 Incentive Stock Option Plan (1994 Plan) and the 1996 Incentive
Stock Option Plan (1996 Plan). The 1994 Plan was adopted for certain key
employees who are responsible for management of the company. Options granted
under the 1994 Plan vest two-thirds six months after the date of grant and
one-third five years after the date of grant, with a maximum term of ten years.
All of the company's employees are eligible for the 1996 Plan, with the options
vesting 100% six months after the date of grant, with a maximum term of five
years. Both plans grant options to purchase the company's common stock at an
exercise price of at least 100% of fair market value on the date of grant.
Non-Employee Director Stock Option Plan (Director Plan). The company has
reserved 100,000 shares of common stock for issuance upon exercise of options or
grants under the Director Plan. The Director Plan was adopted in May 2000, for
members of the company's board of directors who are not employees or officers of
the company. Options granted under the Director Plan vest 100% six months after
the date of grant, with a maximum term of five years. The plan grants options to
purchase the company's common stock at an exercise price of at least 100% of
fair market value on the date of grant.
F-14
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The company's combined stock option activity for the 1994 Plan, the 1996
Plan and the Director Plan is as follows:
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
Balance outstanding at January 1, 1999..................... 1,517,483 $13.66
Granted.................................................. 426,258 15.51
Exercised................................................ (106,799) 5.32
Forfeited................................................ (97,060) 18.77
Balance outstanding at December 31, 1999................... 1,739,882 14.34
Granted.................................................. 753,072 9.96
Exercised................................................ (82,748) 4.10
Forfeited................................................ (93,616) 19.27
Balance outstanding at December 31, 2000................... 2,316,590 13.17
Granted.................................................. 636,322 11.90
Exercised................................................ (158,838) 9.29
Forfeited................................................ (117,812) 15.42
Balance outstanding at December 31, 2001................... 2,676,262 $13.00
The following table summarizes certain information concerning the company's
outstanding options as of December 31, 2001:
WEIGHTED AVERAGE
REMAINING
RANGE OF OUTSTANDING CONTRACTUAL LIFE WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICE OPTIONS (YEARS) EXERCISE PRICE OPTIONS EXERCISE PRICE
- -------------- ----------- ---------------- ---------------- ----------- ----------------
$3 to $10............ 876,405 3.4 $7.90 876,405 $7.90
$10 to $15........... 1,081,214 3.9 12.46 713,290 13.56
$15 to $20........... 390,384 3.0 18.44 346,419 18.41
$20 to $30........... 328,259 3.1 21.90 279,615 21.64
The company has elected to follow Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees" and related interpretations
in accounting for its stock options. Under APB No. 25, no compensation expense
is recognized for the plans because the exercise price of the company's employee
stock options equals the market price of the underlying stock on the date of
grant. However, SFAS No. 123, "Accounting for Stock-Based Compensation",
requires presentation of pro forma information as if the company had accounted
for its employee stock options granted subsequent to December 31, 1994, under
the fair value method. For purposes of pro forma disclosure, the estimated fair
value of the options is amortized to expense over the vesting period. Under the
fair value method, the company's net income and earnings per share would have
been as follows (in thousands, except per share data):
2001 2000 1999
------ ------- -------
Net income:
As reported............................................ $3,144 $53,795 $39,430
Pro forma.............................................. 814 51,694 37,712
Diluted earnings per share:
As reported............................................ $ .07 $ 1.15 $ .82
Pro forma.............................................. .02 1.10 .78
F-15
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The estimated weighted average fair value of the individual options granted
during 2001, 2000 and 1999 was $5.17, $4.19 and $6.97, respectively, on the date
of grant. The fair values at the date of grant were estimated using the
Black-Scholes option-pricing model with the following assumptions:
no-dividend-yield, risk-free interest rates from 4.1% to 7.1%, expected
volatility from 30% to 62% and expected lives from five months to nine years.
Officer and Manager Cash and Stock Bonus Plan. Officers and managers of
the company are eligible to receive cash bonuses based on predetermined formulas
designated in the Officer and Manager Cash and Stock Bonus Plan. In the event
the cash portion of the bonus exceeds the predetermined maximum cash payout, the
excess bonus is distributed as common stock of the company. Any common stock
issued pursuant to this prospectusplan vests one-third in January of each of the three
years following the year of award. A total of 450,000 shares have been reserved
under this plan. As of December 31, 2001, approximately 55,000 shares of the
original 82,000 shares related to the 2000 stock bonus award, remained committed
for issuance.
NOTE 7. COMMITMENTS AND CONTINGENCIES
The company has an off-take agreement with Heidtman Steel Products
(Heidtman) that extends through March 2007 (see Note 8). Under the terms of the
agreement, Heidtman is obligated to purchase and the company is obligated to
sell securitiesto Heidtman at least 76,000 tons of hot band products per quarter or
336,000 tons annually and at least 15,000 tons of cold-rolled products per
quarter or 60,000 tons annually. The company's pricing to Heidtman is determined
by either a market pricing formula based on an "all-in" cost plus basis or a
spot market pricing formula determined on the basis of a discounted market
index.
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 term of the contract extends to at least December
31, 2002. The company retains the right to acquire scrap from other sources if
certain business conditions are present.
The company purchases its electricity consumed at its wholly-owned Butler
facilities pursuant to a prospectus supplement is
deliveredcontract, which extends through December 2007. The
contract designates 170 hours as "interruptible service" during 2002 and these
interruptible hours further decrease annually through expiration of the
agreement. The contract also establishes an agreed fixed rate energy charge per
Mill/kWh consumed for each year through the expiration of the agreement. The
company has outstanding construction-related commitments of $78.2 million at
December 31, 2001, related to the structural and rail mill construction.
During 1999, Steel Dynamics, together with a number of investment banks,
was sued for recissionary and compensatory damages of $240 million, as well as
punitive damages and attorney fees, in various state and federal courts in 9
separate but related lawsuits. The lawsuits were brought by institutional
purchasers in a 1998 note offering by certain investment banks on behalf of
Nakornthai Strip Mill Public Co. Limited, the prospectus,owner and operator of a steel
mini-mill in Thailand for whom Steel Dynamics agreed to render certain post-
offering technical and operational advisory services.
During the second and third quarters of 2001, the company settled seven of
the nine pending lawsuits, and in the first quarter of 2002, the company settled
an eighth suit, in each case without any admission of liability and, to the
extent one is required. The selling
stockholders are offering these securities only in states where the offer is
permitted. You should not assume that the information in this prospectus or the
applicable prospectus supplement is accurate as of any date other than the dates
set forth on the front of these documents.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement with the SEC pursuant to the Securities
Act, of which this prospectusmonetary payments, except for approximately $2.3 million, for
amounts provided by our insurance carriers and within applicable insurance
coverage. The remaining lawsuit is a part.consolidated Minnesota federal court case
involving claims for approximately $48 million in compensatory damages; together
with claims for interest and attorney's fees and punitive damages. Discovery has
been substantially completed. The registration statement contains
additional information about uscompany maintains that it was engaged solely
to provide post-offering technical and about our common stock.
We also file annual, quarterlyoperational advice and special reports, proxy statements and other
information with the SEC under the Exchange Act. The file number of our SEC
filings is 0-21719. You may read and copy any document we file with the SEC at
the following SEC public reference rooms:
Judiciary Plaza
450 Fifth Street, N.W. 500 West Madison Street
Room 1024 14th Floor
Washington, D.C. 20549 Chicago, Illinois 60601
12
Washington, D.C. 20549 Chicago, Illinois 60601
You may obtain information on the operation of the public reference rooms by
calling the SEC at 1-800-SEC-0330. For a fee, the SEC will send copiesconsultation
services, that it was not an issuer, guarantor, underwriter or seller of any of
our filingsF-16
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the notes, and that it did not draft any of the offering materials. While the
company believes that it has meritorious legal and factual defenses to you.these
claims, and is vigorously defending itself in the remaining related action, and
while the company believes that it also has meritorious claims against one or
more of the other co-defendants for some or all of the plaintiffs' claims, there
can be no assurance as to the ultimate outcome with respect to the remaining
lawsuit or that the company will not be found liable for all of the claimed
damages in that case. The company has expended all of its available insurance
coverage, and any settlement of this case, to the extent of any monetary
payments, or if the case is tried, the amount of any judgment, will not be
covered by insurance and will impact the company's earnings.
NOTE 8. TRANSACTIONS WITH AFFILIATED COMPANIES
The company sells various flat rolled products to Heidtman and purchases
steel scrap resources from OmniSource, both of which are affiliated companies.
The president and chief executive officer of Heidtman is a member of the
company's board of directors and Heidtman is a stockholder of the company. The
chairman of the board of directors of OmniSource is also a member of the
company's board of directors and is a stockholder of the company. Transactions
with these affiliated companies for the years ended December 31 are as follows
(in millions):
2001 2000 1999
----------------------- ----------------------- -----------------------
PERCENTAGE PERCENTAGE PERCENTAGE
AMOUNT OF TOTAL SALES AMOUNT OF TOTAL SALES AMOUNT OF TOTAL SALES
------ -------------- ------ -------------- ------ --------------
Sales:
Heidtman..................... $112.3 18% $142.8 21% $120.1 19%
Accounts receivable:
Heidtman..................... 16.3 20.1 12.0
Purchases:
OmniSource................... 177.5 179.7 154.3
Accounts payable:
OmniSource................... 11.0 9.1 17.1
NOTE 9. FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable and accounts payable approximate fair value,
because of the relatively short maturity of these instruments. The carrying
value of long-term debt, including the current portion, approximates fair value
due the interest being determined by variable rates, repricing periodically. The
fair value of the interest rate swap agreement was estimated to be a liability
of $8.8 million and $4.0 million at December 31, 2001 and 2000, respectively.
The fair values are estimated by the use of quoted market prices, estimates
obtained from brokers, and other appropriate valuation techniques based on
references available.
NOTE 10. RETIREMENT PLANS
The company sponsors a 401(k) retirement savings and profit sharing plan
for eligible employees, which is a "qualified plan" for federal income tax
purposes. The company's total expense for the plan was $424,000, $4.6 million
and $3.6 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
NOTE 11. SEGMENT INFORMATION
The company has two reportable segments: steel operations and steel scrap
substitute operations. The steel operations segment includes the company's flat
rolled division and structural and rail division. The flat rolled division sells
a broad range of hot-rolled, cold-rolled and coated steel products, including a
large variety
F-17
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of specialty products such as thinner gauge hot-rolled products and galvanized
products. The flat rolled division sells directly to end-users and service
centers located primarily in the Midwestern United States and these products are
used in numerous industry sectors, including the automotive, construction and
commercial industries. The company began significant construction of its
structural and rail division in May 2001 and anticipates the commencement of
structural steel production during the second quarter of 2002 and rail
production during the first quarter of 2003. This facility is designed to
produce and sell structural steel beams, pilings, and other steel components
directly to end-users and service centers for the construction, transportation
and industrial machinery markets. This facility is also designed to produce and
sell a variety of standard and premium grade rails for the railroad industry.
Steel scrap substitute operations include the revenues and expenses
associated with the company's wholly owned subsidiary, Iron Dynamics. Since
1997, IDI has attempted to develop and commercialize a pioneering process to
produce liquid pig iron, a substitute for a portion of the solid pig iron and
steel scrap used in the production processes of the company's flat rolled
division and structural and rail division. During 1999, IDI commenced initial
start-up and produced and sold a minimal amount of liquid pig iron to the
company's flat roll division; however, it was determined that IDI would require
certain design and equipment modifications to attain its fully intended
operating functionality. These modifications occurred during the second half of
2000 with completion and restart occurring in the first quarter of 2001.
However, while IDI believed that many of the design and equipment deficiencies
were corrected with these modifications, the company halted operations at IDI
during July 2001 with no specific date set for resumption of actual production,
as a result of higher than expected start-up and process refinement costs, lower
than expected production quantities, exceptionally high energy costs and
historically low steel scrap pricing. Since operations were halted in 2001,
IDI's costs are composed of those expenses required to maintain the facility and
further evaluate the project and its related benefits.
Revenues included in the category "All Other" are from two subsidiary
operations that are below the quantitative thresholds required for reportable
segments. These revenues are from the fabrication of trusses, girders, steel
joist and steel decking for the non-residential construction industry; from the
further processing, or slitting, and sale of certain steel products; and from
the resale of certain secondary and excess steel products. In addition, our filed reports, proxy"All
Other" also includes certain unallocated corporate accounts, such as the
company's senior secured credit facilities, senior unsecured notes, and certain
other investments.
The company's operations are primarily organized and managed by operating
segment. Operating segment performance and resource allocations are primarily
based on operating results before income taxes. The accounting policies of the
reportable segments are consistent with those described in Note 1 to the
financial statements. Intersegment sales and any related profits are eliminated
in consolidation. The external net sales of the company's steel operations
include sales to non-U.S. companies of $8.0 million, $10.3 million and $8.5
million, for the years ended December 31, 2001, 2000 and 1999, respectively. The
company's segment results are as follows (in thousands):
2001 2000 1999
---------- ---------- --------
STEEL OPERATIONS
Net sales
External................................................ $ 541,693 $ 679,137 $618,821
Other segments.......................................... 33,462 5,548 --
Operating income.......................................... 49,537 138,180 111,977
Depreciation and amortization............................. 43,852 43,923 38,577
Assets.................................................... 890,504 867,075 837,645
Liabilities............................................... 95,251 85,759 98,582
Capital expenditures...................................... 83,399 64,611 107,382
F-18
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2001 2000 1999
---------- ---------- --------
STEEL SCRAP SUBSTITUTE OPERATIONS
Net sales
External................................................ $ -- $ -- $ --
Other segments.......................................... 4,660 5,752 1,171
Operating loss............................................ (14,203) (12,477) (13,504)
Depreciation and amortization............................. 1,274 785 583
Assets.................................................... 155,415 148,897 121,097
Liabilities............................................... 64,670 71,195 72,526
Capital expenditures...................................... 4,619 21,622 14,596
ALL OTHER
Net sales
External................................................ $ 65,291 $ 13,486 $ --
Other segments.......................................... 909 -- --
Operating loss............................................ (8,808) (22,391) (13,591)
Depreciation and amortization............................. 1,668 735 109
Assets.................................................... 211,704 121,665 93,771
Liabilities............................................... 674,871 558,380 488,241
Capital expenditures...................................... 2,696 24,146 4,695
ELIMINATIONS
Net sales
External................................................ $ -- $ -- $ --
Other segments.......................................... (39,031) (11,300) (1,171)
Operating income (loss)................................... (601) 2,091 3,869
Depreciation and amortization............................. -- -- --
Assets.................................................... (77,525) (70,563) (60,957)
Liabilities............................................... (73,269) (67,044) (59,163)
Capital expenditures...................................... -- -- --
CONSOLIDATED
Net sales................................................. $ 606,984 $ 692,623 $618,821
Operating income.......................................... 25,925 105,403 88,751
Depreciation and amortization............................. 46,794 45,443 39,269
Assets.................................................... 1,180,098 1,067,074 991,556
Liabilities............................................... 761,523 648,290 600,186
Capital expenditures...................................... 90,714 110,379 126,673
F-19
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. CONDENSED CONSOLIDATING INFORMATION
SDI Investment company (SDI Investment) is a 100% owned subsidiary of SDI
and was incorporated in 2000. SDI Investment has fully and unconditionally
guaranteed all of the indebtedness relating to the issuance of $200.0 million of
Senior Notes issued in March 2002 and due 2009. Set forth below are condensed
consolidating financial statements of the company, including SDI Investment, as
the guarantor, presented for the information of each of the company's public
note holders.
The following condensed consolidating financial statements present the
financial position, results of operations and cash flows of (i) SDI (in each
case, reflecting investments in its consolidated subsidiaries under the equity
method of accounting, (ii) SDI Investment, as the guarantor, (iii) the
non-guarantor subsidiaries of SDI, and (iv) the eliminations necessary to arrive
at the information for the company on a consolidated basis. The condensed
consolidating financial statements should be read in conjunction with the
accompanying consolidated financial statements of the company.
CONDENSED CONSOLIDATING BALANCE SHEET (IN THOUSANDS):
COMBINED CONSOLIDATING TOTAL
PARENT GUARANTOR NON-GUARANTORS ADJUSTMENTS CONSOLIDATED
---------- --------- -------------- ------------- ------------
(AS OF DECEMBER 31, 2001)
Cash............................. $ 77,407 $ 83 $ 751 $ -- $ 78,241
Accounts receivable.............. 78,461 -- 10,375 (6,957) 81,879
Inventories...................... 100,709 -- 17,680 (21) 118,368
Other current assets............. 32,973 (16) 1,095 (336) 33,716
---------- ------ -------- --------- ----------
Total current assets........ 289,550 67 29,901 (7,314) 312,204
Property, plant and equipment,
net............................ 703,896 -- 148,270 (105) 852,061
Other assets..................... 90,044 7,822 1,405 (83,438) 15,833
---------- ------ -------- --------- ----------
Total assets................ $1,083,490 $7,889 $179,576 $ (90,857) $1,180,098
========== ====== ======== ========= ==========
Accounts payable................. $ 40,081 $ 1 $ 8,204 $ (6,957) $ 41,329
Accrued expenses................. 28,165 -- 2,585 (1) 30,749
Current maturities of long-term
debt........................... 2,337 -- 43,696 -- 46,033
---------- ------ -------- --------- ----------
Total current liabilities... 70,583 1 54,485 (6,958) 118,111
Other liabilities................ 61,308 -- 2,728 20,716 84,752
Long-term debt................... 532,350 -- 21,876 (335) 553,891
Minority interest................ 639 -- -- 4,130 4,769
Common stock..................... 495 1 133,351 (133,352) 495
Treasury stock................... (46,526) -- -- -- (46,526)
Additional paid in capital....... 337,733 16 -- (16) 337,733
Retained earnings................ 132,264 7,871 (32,864) 24,958 132,229
Other accumulated comprehensive
loss........................... (5,356) -- -- -- (5,356)
---------- ------ -------- --------- ----------
Total stockholders'
equity.................... 418,610 7,888 100,487 (108,410) 418,575
---------- ------ -------- --------- ----------
Total liabilities and
stockholders' equity...... $1,083,490 $7,889 $179,576 $ (90,857) $1,180,098
========== ====== ======== ========= ==========
F-20
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET (IN THOUSANDS):
COMBINED CONSOLIDATING TOTAL
PARENT GUARANTOR NON-GUARANTORS ADJUSTMENTS CONSOLIDATED
-------- --------- -------------- ------------- ------------
(AS OF DECEMBER 31, 2000)
Cash.............................. $ 8,924 $ 40 $ 1,220 $ -- $ 10,184
Accounts receivable............... 99,813 -- 6,299 (3,126) 102,986
Inventories....................... 93,907 -- 12,929 (91) 106,745
Other current assets.............. 19,986 -- 2,712 -- 22,698
-------- ------- -------- -------- ----------
Total current assets......... 222,630 40 23,160 (3,217) 242,613
Property, plant and equipment,
net............................. 662,615 -- 144,707 807,322
Other assets...................... 113,688 24,986 (51,350) (70,185) 17,139
-------- ------- -------- -------- ----------
Total assets................. $998,933 $25,026 $116,517 $(73,402) $1,067,074
======== ======= ======== ======== ==========
Accounts payable.................. $ 22,972 $ 3 $ 8,139 $ (3,126) $ 27,988
Accrued expenses.................. 28,345 -- 3,321 -- 31,666
Current maturities of long-term
debt............................ 2,153 -- 14,891 -- 17,044
-------- ------- -------- -------- ----------
Total current liabilities.... 53,470 3 26,351 (3,126) 76,698
Other liabilities................. 81,114 -- -- (29,087) 52,027
Long-term debt.................... 444,666 -- 70,810 -- 515,476
Minority interest................. 661 -- -- 3,428 4,089
Common stock...................... 493 1 41,666 (41,667) 493
Treasury stock.................... (46,526) -- -- -- (46,526)
Additional paid in capital........ 335,732 16 -- (16) 335,732
Retained earnings................. 129,323 25,006 (22,310) (2,934) 129,085
-------- ------- -------- -------- ----------
Total stockholders' equity... 419,022 25,023 19,356 (44,617) 418,784
-------- ------- -------- -------- ----------
Total liabilities and
stockholders' equity....... $998,933 $25,026 $116,517 $(73,402) $1,067,074
======== ======= ======== ======== ==========
F-21
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME (IN THOUSANDS):
COMBINED CONSOLIDATING TOTAL
PARENT GUARANTOR NON-GUARANTORS ADJUSTMENTS CONSOLIDATED
-------- --------- -------------- ------------- ------------
(YEAR ENDED DECEMBER 31, 2001)
Net sales......................... $575,156 $ -- $70,859 $(39,031) $606,984
Cost of goods sold................ 498,707 -- 63,216 (38,996) 522,927
-------- -------- ------- -------- --------
Gross profit.................... 76,449 -- 7,643 (35) 84,057
Selling, general and
administration.................. 38,872 15 19,245 -- 58,132
-------- -------- ------- -------- --------
Operating income (loss)........... 37,577 (15) (11,602) (35) 25,925
Interest expense.................. 14,405 -- 4,075 -- 18,480
Other (income) expense............ 37,698 (35,353) (12) -- 2,333
-------- -------- ------- -------- --------
Income (loss) before income taxes
and equity in net loss of
subsidiaries.................... (14,526) 35,338 (15,665) (35) 5,112
Income tax expense................ (4,405) 12,404 (6,031) -- 1,968
-------- -------- ------- -------- --------
(10,121) 22,934 (9,634) (35) 3,144
Equity in net income of
subsidiaries.................... 13,300 -- -- (13,300) --
-------- -------- ------- -------- --------
Net income (loss)................. $ 3,179 $ 22,934 $(9,634) $(13,335) $ 3,144
======== ======== ======= ======== ========
COMBINED CONSOLIDATING TOTAL
PARENT GUARANTOR NON-GUARANTORS ADJUSTMENTS CONSOLIDATED
-------- --------- -------------- ------------- ------------
(YEAR ENDED DECEMBER 31, 2000)
Net sales......................... $684,684 $ -- $ 14,052 $ (6,113) $692,623
Cost of goods sold................ 527,008 -- 12,781 (5,875) 533,914
-------- -------- -------- -------- --------
Gross profit.................... 157,676 -- 1,271 (238) 158,709
Selling, general and
administration.................. 36,514 18 16,774 -- 53,306
-------- -------- -------- -------- --------
Operating income (loss)........... 121,162 (18) (15,503) (238) 105,403
Interest expense.................. 19,283 -- 916 -- 20,199
Other (income) expense............ 39,208 (38,489) -- -- 719
-------- -------- -------- -------- --------
Income (loss) before income taxes
and equity in net loss of
subsidiaries.................... 62,671 38,471 (16,419) (238) 84,485
Income tax expense................ 23,416 13,465 (6,191) -- 30,690
-------- -------- -------- -------- --------
39,255 25,006 (10,228) (238) 53,795
Equity in net income of
subsidiaries.................... 14,778 -- -- (14,778) --
-------- -------- -------- -------- --------
Net income (loss)................. $ 54,033 $ 25,006 $(10,228) $(15,016) $ 53,795
======== ======== ======== ======== ========
F-22
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMBINED CONSOLIDATING TOTAL
PARENT GUARANTOR NON-GUARANTORS ADJUSTMENTS CONSOLIDATED
-------- --------- -------------- ------------- ------------
(YEAR ENDED DECEMBER 31, 1999)
Net sales.......................... $618,821 $ -- $ -- $ -- $618,821
Cost of goods sold................. 487,629 -- -- -- 487,629
-------- ----- -------- ------ --------
Gross profit..................... 131,192 -- -- -- 131,192
Selling, general and
administration................... 28,334 -- 14,107 -- 42,441
-------- ----- -------- ------ --------
Operating income (loss)............ 102,858 -- (14,107) -- 88,751
Interest expense................... 22,178 -- -- -- 22,178
Other (income) expense............. 1,294 -- -- -- 1,294
-------- ----- -------- ------ --------
Income (loss) before income taxes
and equity in net loss of
subsidiaries..................... 79,386 -- (14,107) -- 65,279
Income tax expense................. 31,494 -- (5,645) -- 25,849
-------- ----- -------- ------ --------
47,892 -- (8,462) -- 39,430
Equity in net loss of
subsidiaries..................... (8,462) -- -- 8,462 --
-------- ----- -------- ------ --------
Net income (loss).................. $ 39,430 $ -- $ (8,462) $8,462 $ 39,430
======== ===== ======== ====== ========
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (IN THOUSANDS):
COMBINED TOTAL
PARENT GUARANTOR NON-GUARANTORS CONSOLIDATED
--------- --------- -------------- ------------
(YEAR ENDED DECEMBER 31, 2001)
Net cash provided by (used in) operations..... $ 53,101 $35,086 $(20,814) $ 67,373
Net cash used in investing
activities -- primarily purchases of
property, plant and equipment............... (84,632) -- (6,078) (90,710)
Financing activities:
Issuance of long-term debt.................. 192,834 -- 8,528 201,362
Repayments of long-term debt................ (105,299) -- (6,672) (111,971)
Other....................................... 12,479 (35,043) 24,567 2,003
--------- ------- -------- ---------
Net cash provided by financing activities..... 100,014 (35,043) 26,423 91,394
--------- ------- -------- ---------
Increase (decrease) in cash and cash
equivalents................................. 68,483 43 (469) 68,057
Cash and cash equivalents at beginning of
year........................................ 8,924 40 1,220 10,184
--------- ------- -------- ---------
Cash and cash equivalents at end of year...... $ 77,407 $ 83 $ 751 $ 78,241
========= ======= ======== =========
F-23
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMBINED TOTAL
PARENT GUARANTOR NON-GUARANTORS CONSOLIDATED
-------- --------- -------------- ------------
(YEAR ENDED DECEMBER 31, 2000)
Net cash provided by (used in) operations...... $122,198 $23 $(19,429) $ 102,792
Net cash used in investing
activities -- primarily purchases of
property, plant and equipment................ (68,926) -- (40,473) (109,399)
Financing activities:
Issuance of long-term debt................... 48,997 -- 19,920 68,917
Repayments of long-term debt................. (38,958) -- (3,402) (42,360)
Purchase of treasury stock................... (26,876) -- -- (26,876)
Other........................................ (42,402) 17 42,880 495
-------- --- -------- ---------
Net cash provided by (used in) financing
activities................................... (59,239) 17 59,398 176
-------- --- -------- ---------
Increase (decrease) in cash and cash
equivalents.................................. (5,967) 40 (504) (6,431)
Cash and cash equivalents at beginning of
year......................................... 14,891 -- 1,724 16,615
-------- --- -------- ---------
Cash and cash equivalents at end of year....... $ 8,924 $40 $ 1,220 $ 10,184
======== === ======== =========
COMBINED TOTAL
PARENT GUARANTOR NON-GUARANTORS CONSOLIDATED
--------- --------- -------------- ------------
(YEAR ENDED DECEMBER 31, 1999)
Net cash provided by (used in) operations..... $ 131,568 $-- $(16,789) $ 114,779
Net cash used in investing
activities -- primarily purchases of
property, plant and equipment............... (108,298) -- (18,001) (126,299)
Financing activities:
Issuance of long-term debt.................. 35,790 -- 4,252 40,042
Repayments of long-term debt................ (17,757) -- (268) (18,025)
Other....................................... (31,180) -- 32,055 875
--------- -- -------- ---------
Net cash provided by (used in) financing
activities.................................. (13,147) -- 36,039 22,892
--------- -- -------- ---------
Increase (decrease) in cash and cash
equivalents................................. 10,123 -- 1,249 11,372
Cash and cash equivalents at beginning of
year........................................ 4,768 -- 475 5,243
--------- -- -------- ---------
Cash and cash equivalents at end of year...... $ 14,891 $-- $ 1,724 $ 16,615
========= == ======== =========
F-24
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED, IN THOUSANDS, EXCEPT PER
SHARE DATA)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
2001:
Net sales....................................... $154,086 $157,639 $156,807 $138,452
Gross profit.................................... 25,563 25,499 21,919 11,076
Operating income................................ 11,761 7,323 9,098 (2,257)
Net income...................................... 4,383 1,953 2,122 (5,314)
Earnings per share:
Basic......................................... .10 .04 .05 (.12)
Diluted....................................... .10 .04 .05 (.12)
2000:
Net sales....................................... $189,172 $190,737 $160,265 $152,449
Gross profit.................................... 44,011 51,942 35,762 26,994
Operating income................................ 30,161 37,012 23,577 14,653
Net income...................................... 15,249 19,059 12,383 7,104
Earnings per share:
Basic......................................... .32 .40 .27 .16
Diluted....................................... .32 .40 .27 .16
Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share may not equal
the total for the year.
F-25
STEEL DYNAMICS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2002 2001
----------- ------------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 32,319 $ 78,241
Accounts receivable, net.................................. 68,508 65,589
Accounts receivable -- related parties.................... 17,820 16,290
Inventories............................................... 112,356 118,368
Deferred income taxes..................................... 21,966 24,600
Other current assets...................................... 3,996 9,116
---------- ----------
Total current assets.............................. 256,965 312,204
PROPERTY, PLANT, AND EQUIPMENT, NET......................... 872,538 852,061
RESTRICTED CASH............................................. 3,311 3,030
OTHER ASSETS................................................ 22,760 12,803
---------- ----------
TOTAL ASSETS...................................... $1,155,574 $1,180,098
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 33,153 $ 30,228
Accounts payable -- related parties....................... 17,383 11,101
Accrued interest.......................................... 2,204 4,052
Other accrued expenses.................................... 27,799 26,697
Current maturities of long-term debt...................... 8,870 46,033
---------- ----------
Total current liabilities.............................. 89,409 118,111
LONG-TERM DEBT, LESS CURRENT MATURITIES..................... 536,801 553,891
DEFERRED INCOME TAXES....................................... 58,427 62,765
MINORITY INTEREST........................................... 5,025 4,769
OTHER LONG-TERM CONTINGENT LIABILITIES...................... 21,987 21,987
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock voting, $.01 par value; 100,000,000 shares
authorized; 49,706,131 and 49,586,473 shares issued;
and 47,320,217 and 45,743,473 shares outstanding, as of
March 31, 2002 and December 31, 2001, respectively..... 497 495
Treasury stock, at cost; 2,385,914 and 3,843,000 shares,
at March 31, 2002 and December 31, 2001,
respectively........................................... (28,889) (46,526)
Additional paid-in capital................................ 343,197 337,733
Retained earnings......................................... 133,869 132,229
Other accumulated comprehensive loss...................... (4,749) (5,356)
---------- ----------
Total stockholders' equity........................ 443,925 418,575
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $1,155,574 $1,180,098
========== ==========
See notes to consolidated financial statements.
F-26
STEEL DYNAMICS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED
MARCH 31,
-------------------------
2002 2001
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
NET SALES:
Unrelated parties......................................... $139,149 $129,266
Related parties........................................... 27,754 24,820
-------- --------
Total net sales................................... 166,903 154,086
Cost of goods sold.......................................... 139,529 128,523
-------- --------
Gross profit................................................ 27,374 25,563
Selling, general and administrative expenses................ 13,088 13,802
-------- --------
Operating income....................................... 14,286 11,761
Interest expense............................................ 4,265 4,839
Other (income) expense...................................... 4,153 (204)
-------- --------
Income before income taxes and extraordinary item...... 5,868 7,126
Income tax expense.......................................... 2,200 2,743
-------- --------
Income before extraordinary item....................... 3,668 4,383
Extraordinary loss on debt extinguishment, net of tax
benefit of $1,216......................................... 2,028 --
-------- --------
Net income.................................................. $ 1,640 $ 4,383
======== ========
BASIC EARNINGS PER SHARE:
Income before extraordinary items........................... $ 0.08 $ 0.10
Extraordinary item..................................... (0.04) --
-------- --------
Net income.................................................. $ 0.04 $ 0.10
======== ========
Weighted average number of shares outstanding............... 46,045 45,511
======== ========
DILUTED EARNINGS PER SHARE:
Income before extraordinary items........................... $ 0.08 $ 0.10
Extraordinary item..................................... (0.04) --
-------- --------
Net income.................................................. $ 0.04 $ 0.10
======== ========
Weighted average number of shares outstanding............... 46,348 45,710
======== ========
See notes to consolidated financial statements.
F-27
STEEL DYNAMICS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
--------------------
2002 2001
--------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income................................................ $ 1,640 $ 4,383
Adjustments to reconcile net income to net cash provided
by operating activities:
Extraordinary loss on debt extinguishment.............. 3,244 --
Depreciation and amortization.......................... 13,833 11,551
Deferred income taxes.................................. (1,704) 894
Minority interest...................................... 256 413
Changes in certain assets and liabilities:
Accounts receivable.................................. (4,449) (2,526)
Inventories.......................................... 6,012 (7,742)
Other assets......................................... 4,588 4,869
Accounts payable..................................... 9,207 10,130
Accrued expenses..................................... (139) (4,008)
--------- --------
Net cash provided by operating activities......... 32,489 17,964
--------- --------
INVESTING ACTIVITY:
Purchases of property, plant, and equipment................. (33,759) (10,353)
--------- --------
Net cash used in investing activity............... (33,759) (10,353)
--------- --------
FINANCING ACTIVITIES:
Issuance of long-term debt................................ 476,149 6,299
Repayments of long-term debt.............................. (508,403) (18,916)
Issuance of common stock, net of expenses and proceeds and
tax benefits from exercise of stock options............ 1,103 342
Debt issuance costs....................................... (13,501) --
--------- --------
Net cash used in financing activities............. (44,652) (12,275)
--------- --------
Decrease in cash and cash equivalents....................... (45,922) (4,664)
Cash and cash equivalents at beginning of period............ 78,241 10,184
--------- --------
Cash and cash equivalents at end of period.................. $ 32,319 $ 5,520
========= ========
Supplemental disclosure of cash flow information:
Cash paid for interest...................................... $ 6,187 $ 9,614
========= ========
Cash paid for federal and state income taxes................ $ 110 $ 540
========= ========
Issuance of common stock from treasury to extinguish portion
of long-term debt......................................... $ 22,000 $ --
========= ========
See notes to consolidated financial statements.
F-28
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Principles of Consolidation. The consolidated financial statements include
the accounts of Steel Dynamics, Inc. (SDI), together with its subsidiaries (the
company) after elimination of the significant intercompany accounts and
transactions. Minority interest represents the minority shareholders'
proportionate share in the equity or income of the company's consolidated
subsidiaries.
Use of Estimates. These financial statements are prepared in conformity
with generally accepted accounting principles and, accordingly, include amounts
that are based on management's estimates and assumptions that affect the amounts
reported in the financial statements and other
information are contained in the Internet website maintainednotes thereto. Actual results
may differ from those estimates.
In the opinion of management, these financial statements reflect all normal
recurring adjustments necessary for a fair presentation of the interim period
results. These financial statements and notes should be read in conjunction with
the audited financial statements included in the company's 2001 Annual Report on
Form 10-K.
Recent Accounting Pronouncement.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections," (SFAS No.
145) was issued. This Statement, among other things, rescinds SFAS No. 4, which
required all gains and losses from extinguishment of debt to be aggregated and,
if material, classified as an extraordinary item, net of related income tax
effect. The company intends to adopt SFAS No. 145 when required in fiscal 2003.
Upon adoption, any gain or loss on extinguishment of debt that was classified as
an extraordinary item in prior periods presented that does not meet the criteria
in APB Opinion No. 30 for classification as an extraordinary item, will be
reclassified. Management has determined that the adoption of SFAS No. 145 will
not have a material effect on the company's consolidated financial statements.
2. INVENTORIES
Inventories are stated at lower of cost (principally standard cost which
approximates actual cost on a first-in, first-out basis) or market. Inventories
consisted of the following (in thousands):
MARCH 31, DECEMBER 31,
2002 2001
--------- ------------
Raw Materials............................................... $ 39,116 $ 44,807
Supplies.................................................... 42,384 42,258
Work-in-progress............................................ 11,272 8,512
Finished Goods.............................................. 19,584 22,791
-------- --------
$112,356 $118,368
======== ========
3. EARNINGS PER SHARE
Diluted earnings per share amounts are based upon the weighted average
number of common and common equivalent shares outstanding during the year.
Common equivalent shares are excluded from the computation in periods in which
they have an anti-dilutive effect. The difference between basic and diluted
earnings per share for the company is solely attributable to the dilutive effect
of stock options. The
F-29
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reconciliations of the weighted average common shares for basic and diluted
earnings per share for the three months ended March 31 are as follows (in
thousands):
2002 2001
------ ------
Basic weighted average common shares outstanding............ 46,045 45,511
Dilutive effect of stock options............................ 303 199
------ ------
Diluted weighted average common shares and share equivalents
outstanding............................................... 46,348 45,710
====== ======
4. COMPREHENSIVE INCOME
The following table presents the company's components of comprehensive
income, net of related tax, for the three months ended March 31 (in thousands):
2002 2001
------ -------
Net income available to common shareholders................. $1,640 $ 4,383
Cumulative effect of an accounting change................. -- (2,468)
Unrealized gain (loss) on derivative instrument........... 607 (1,503)
------ -------
Comprehensive income........................................ $2,247 $ 412
====== =======
The company recorded a gain from hedging activities of approximately
$45,000 for the three months ended March 31, 2002, and a loss of approximately
$88,000 for the three months ended March 31, 2001.
5. LONG TERM DEBT
On March 26, 2002, the company refinanced its existing $450.0 million
senior secured credit facility and its $45.0 million senior unsecured credit
facility with the following:
- $75.0 million in the form of a five-year revolving credit facility,
maturing March 26, 2007, which is subject to a borrowing base and bears
interest at floating rates;
- $70.0 million in the form of a five-year term A loan, payable in
quarterly installments beginning June 26, 2003, with the final
installment due March 26, 2007, and bearing interest at floating rates;
- $205.0 million in the form of a six-year term B loan, payable in
quarterly installments beginning June 26, 2003, with the final
installment due March 26, 2008, and bearing interest at floating rates;
and
- $200.0 million in the form of 9.50% seven-year senior unsecured notes due
March 15, 2009 (non-callable for four years), with interest payable
semiannually.
The new $350.0 million senior secured credit facility is secured by liens
and mortgages on substantially all of the personal and real property assets of
the company and its wholly owned subsidiaries and by pledges of all shares of
capital stock and intercompany debt held by the SEC.company and its wholly owned
subsidiaries. The addressnew senior secured credit facility contains financial
covenants and other covenants that limit or restrict the company with respect to
its ability to make capital expenditures, incur indebtedness, and make
restricted payments or investments, among other things.
The $200.0 million 9.50% senior unsecured notes have a maturity of seven
years. The company may redeem the notes at any time on or after March 15, 2006,
at a redemption price of 104.750%, on or after March 15, 2007, at a redemption
price of 102.275%, and on or thereafter March 15, 2008, at a redemption price of
100.000%. In addition, at any time prior to March 15, 2005, the company may
redeem up to 35% of the principal amount of the notes with the net cash proceeds
of its common stock at a redemption price of 109.500% plus accrued interest up
to the redemption date, provided that certain other restrictions as described
F-30
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in the indenture are met. The notes bear interest at 9.50%, payable semiannually
on each March 15 and September 15, commencing September 15, 2002.
6. SEGMENT INFORMATION
The company has two reportable segments: steel operations and steel scrap
substitute operations. The steel operations segment includes the company's flat
rolled division and structural and rail division. The flat rolled division sells
a broad range of hot-rolled, cold-rolled and coated steel products, including a
large variety of specialty products such as thinner gauge hot-rolled products
and galvanized products. The flat rolled division sells directly to end-users
and service centers located primarily in the Midwestern United States and these
products are used in numerous industry sectors, including the automotive,
construction and commercial industries. The company began significant
construction of its structural and rail division in May 2001 and anticipates the
commencement of structural steel production during the second quarter of 2002
and rail production during the first quarter of 2003. This facility is http://www.sec.gov.designed
to produce and sell structural steel beams, pilings, and other steel components
directly to end-users and service centers for the construction, transportation
and industrial machinery markets. This facility is also designed to produce and
sell a variety of standard and premium grade rails for the railroad industry.
Steel scrap substitute operations include the revenues and expenses
associated with the company's wholly owned subsidiary, Iron Dynamics. Since
operational start-up processes at Iron Dynamics were halted in 2001, IDI's costs
are composed of those expenses required to maintain the facility and further
evaluate the project and its related benefits.
Revenues included in the category "All Other" are from two subsidiary
operations that are below the quantitative thresholds required for reportable
segments. These revenues are from the fabrication of trusses, girders, steel
joist and steel decking for the non-residential construction industry; from the
further processing, or slitting, and sale of certain steel products; and from
the resale of certain secondary and excess steel products. In addition, "All
Other" also includes certain unallocated corporate accounts, such as the
company's senior secured credit facilities, senior unsecured notes, and certain
other investments.
The company's operations are primarily organized and managed by operating
segment. Operating segment performance and resource allocations are primarily
based on operating results before income taxes. The accounting policies of the
reportable segments are consistent with those described in Note 1 to the
financial statements. Intersegment sales and any related profits are eliminated
in consolidation. The external net sales of the company's steel operations
include sales to non-U.S. companies of $2.5 million and $1.6 million, for the
three months ended March 31, 2002 and 2001, respectively. Segment results for
the three months ended March 31 are as follows (in thousands):
2002 2001
---------- ----------
STEEL OPERATIONS
Net sales
External.................................................. $ 146,293 $ 141,733
Other segments............................................ 11,182 5,076
Operating income............................................ 19,359 18,579
Assets...................................................... 915,623 866,693
F-31
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2002 2001
---------- ----------
STEEL SCRAP SUBSTITUTE OPERATIONS
Net sales
External.................................................. $ -- $
Other segments............................................ -- 603
Operating loss.............................................. (2,788) (3,827)
Assets...................................................... 154,245 151,200
ALL OTHER
Net sales
External.................................................. $ 20,610 $ 12,353
Other segments............................................ 208 --
Operating loss.............................................. (1,851) (2,737)
Assets...................................................... 172,666 127,867
ELIMINATIONS
Net sales
External.................................................. $ -- $ --
Other segments............................................ (11,390) (5,679)
Operating loss.............................................. (434) (254)
Assets...................................................... (86,960) (80,728)
CONSOLIDATED
Net sales................................................... $ 166,903 $ 154,086
Operating income............................................ 14,286 11,761
Assets...................................................... 1,155,574 1,065,032
7. COMMITMENTS AND CONTINGENCIES
During 1999, Steel Dynamics, together with a number of investment banks,
was sued for recissionary and compensatory damages of $240 million, as well as
punitive damages and attorney fees, in various state and federal courts in 9
separate but related lawsuits. The lawsuits were brought by institutional
purchasers in a 1998 note offering by certain investment banks on behalf of
Nakornthai Strip Mill Public Co. Limited, the owner and operator of a steel
mini-mill in Thailand for whom Steel Dynamics agreed to render certain post-
offering technical and operational advisory services.
During the second and third quarters of 2001, the company settled seven of
the nine pending lawsuits, and in the first quarter of 2002, the company settled
an eighth suit, in each case without any admission of liability and, to the
extent of any monetary payments, except for approximately $2.3 million (which
was appropriately recorded in the 2001 financial statements), for amounts
provided by our insurance carriers and within applicable insurance coverage. The
remaining lawsuit was settled May 6, 2002, without any admission of liability.
8. CONDENSED CONSOLIDATING INFORMATION
SDI Investment company (SDI Investment) is a 100% owned subsidiary of SDI
and was incorporated in 2000. SDI Investment has fully and unconditionally
guaranteed all of the indebtedness relating to the issuance of $200.0 million of
Senior Notes issued in March 2002 and due 2009. Set forth below are condensed
consolidating financial statements of the company, including SDI Investment, as
the guarantor. The following condensed consolidating financial statements
present the financial position, results of operations and cash flows
F-32
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of (i) SDI (in each case, reflecting investments in its consolidated
subsidiaries under the equity method of accounting, (ii) SDI Investment, as the
guarantor, (iii) the non-guarantor subsidiaries of SDI, and (iv) the
eliminations necessary to arrive at the information for the company on a
consolidated basis. The condensed consolidating financial statements should be
read in conjunction with the accompanying consolidated financial statements of
the company and the company's Report on Form 10-K for the year ended December
31, 2001.
CONDENSED CONSOLIDATING BALANCE SHEETS (IN THOUSANDS):
AS OF MARCH 31, 2002
COMBINED CONSOLIDATING TOTAL
PARENT GUARANTOR NON-GUARANTORS ADJUSTMENTS CONSOLIDATED
---------- --------- -------------- ------------- ------------
Cash............................. $ 29,793 $ 116 $ 2,410 $ -- $ 32,319
Accounts receivable.............. 82,377 -- 10,789 (6,838) 86,328
Inventories...................... 96,099 -- 16,448 (191) 112,356
Other current assets............. 26,029 -- 267 (334) 25,962
---------- ------- -------- --------- ----------
Total current assets........... 234,298 116 29,914 (7,363) 256,965
Property, plant and equipment,
net............................ 727,485 -- 145,381 (328) 872,538
Other assets..................... 158,026 13,930 602 (146,487) 26,071
---------- ------- -------- --------- ----------
Total assets................... $1,119,809 $14,046 $175,897 $(154,178) $1,155,574
========== ======= ======== ========= ==========
Accounts payable................. $ 48,855 $ 1 $ 8,518 $ (6,838) $ 50,536
Accrued expenses................. 27,810 -- 2,193 -- 30,003
Current maturities of long-term
debt........................... 2,360 -- 6,527 (17) 8,870
---------- ------- -------- --------- ----------
Total current liabilities...... 79,025 1 17,238 (6,855) 89,409
Other liabilities................ 78,884 -- 1,564 (34) 80,414
Long-term debt................... 517,052 -- 20,289 (540) 536,801
Minority interest................ 627 -- -- 4,398 5,025
Common stock..................... 497 1 171,401 (171,402) 497
Treasury stock................... (28,889) -- -- -- (28,889)
Additional paid in capital....... 343,197 16 -- (16) 343,197
Retained earnings................ 134,165 14,028 (34,595) 20,271 133,869
Other accumulated comprehensive
loss........................... (4,749) -- -- -- (4,749)
---------- ------- -------- --------- ----------
Total stockholders' equity..... 444,221 14,045 136,806 (151,147) 443,925
---------- ------- -------- --------- ----------
Total liabilities and
stockholders' equity........ $1,119,809 $14,046 $175,897 $(154,178) $1,155,574
========== ======= ======== ========= ==========
F-33
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMBINED CONSOLIDATING TOTAL
PARENT GUARANTOR NON-GUARANTORS ADJUSTMENTS CONSOLIDATED
---------- --------- -------------- ------------- ------------
AS OF DECEMBER 31, 2001
Cash............................. $ 77,407 $ 83 $ 751 $ -- $ 78,241
Accounts receivable.............. 78,461 -- 10,375 (6,957) 81,879
Inventories...................... 100,709 -- 17,680 (21) 118,368
Other current assets............. 32,973 (16) 1,095 (336) 33,716
---------- ------- -------- --------- ----------
Total current assets........... 289,550 67 29,901 (7,314) 312,204
Property, plant and equipment,
net............................ 703,896 -- 148,270 (105) 852,061
Other assets..................... 90,044 7,822 1,405 (83,438) 15,833
---------- ------- -------- --------- ----------
Total assets................... $1,083,490 $ 7,889 $179,576 $ (90,857) $1,180,098
========== ======= ======== ========= ==========
Accounts payable................. $ 40,081 $ 1 $ 8,204 $ (6,957) $ 41,329
Accrued expenses................. 28,165 -- 2,585 (1) 30,749
Current maturities of long-term
debt........................... 2,337 -- 43,696 -- 46,033
---------- ------- -------- --------- ----------
Total current liabilities...... 70,583 1 54,485 (6,958) 118,111
Other liabilities................ 61,308 -- 2,728 20,716 84,752
Long-term debt................... 532,350 -- 21,876 (335) 553,891
Minority interest................ 639 -- -- 4,130 4,769
Common stock..................... 495 1 133,351 (133,352) 495
Treasury stock................... (46,526) -- -- -- (46,526)
Additional paid in capital....... 337,733 16 -- (16) 337,733
Retained earnings................ 132,264 7,871 (32,864) 24,958 132,229
Other accumulated comprehensive
loss........................... (5,356) -- -- -- (5,356)
---------- ------- -------- --------- ----------
Total stockholders' equity..... 418,610 7,888 100,487 (108,410) 418,575
---------- ------- -------- --------- ----------
Total liabilities and
stockholders' equity........ $1,083,490 $ 7,889 $179,576 $ (90,857) $1,180,098
========== ======= ======== ========= ==========
F-34
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS (IN THOUSANDS):
FOR THE THREE MONTHS
ENDED MARCH 31, 2002
COMBINED CONSOLIDATING TOTAL
PARENT GUARANTOR NON-GUARANTORS ADJUSTMENTS CONSOLIDATED
-------- --------- -------------- ------------- ------------
Net sales......................... $157,475 $ -- $ 20,818 $(11,390) $166,903
Cost of goods sold................ 131,014 -- 19,735 (11,220) 139,529
-------- -------- -------- -------- --------
Gross profit.................... 26,461 -- 1,083 (170) 27,374
Selling, general and
administration.................. 10,551 3 2,269 265 13,088
-------- -------- -------- -------- --------
Operating income (loss)........... 15,910 (3) (1,186) (435) 14,286
Interest expense.................. 3,381 -- 888 (4) 4,265
Other (income) expense............ 13,609 (9,489) (3) 36 4,153
-------- -------- -------- -------- --------
Income (loss) before income taxes,
equity in net loss of
subsidiaries and extraordinary
item............................ (1,080) 9,486 (2,071) (467) 5,868
Income taxes...................... (325) 3,330 (805) -- 2,200
-------- -------- -------- -------- --------
Income (loss) before extraordinary
item and net loss of
subsidiaries.................... (755) 6,156 (1,266) (467) 3,668
Extraordinary loss on debt
extinguishment, net of tax
benefit of $1,216............... 1,564 -- 464 -- 2,028
Equity in net income of
subsidiaries.................... 4,426 -- -- (4,426) --
-------- -------- -------- -------- --------
Net income (loss)................. $ 2,107 $ 6,156 $ (1,730) $ (4,893) $ 1,640
======== ======== ======== ======== ========
FOR THE THREE MONTHS ENDED MARCH
31, 2001
Net sales......................... $146,809 $ -- $ 12,955 $ (5,678) $154,086
Cost of goods sold................ 123,791 -- 10,448 (5,716) 128,523
-------- -------- -------- -------- --------
Gross profit.................... 23,018 -- 2,507 38 25,563
Selling, general and
administration.................. 8,538 13 5,251 -- 13,802
-------- -------- -------- -------- --------
Operating income (loss)........... 14,480 (13) (2,744) 38 11,761
Interest expense.................. 4,628 -- 476 (265) 4,839
Other (income) expense............ 8,591 (9,059) -- 264 (204)
-------- -------- -------- -------- --------
Income (loss) before income taxes
and equity in net loss of
subsidiaries.................... 1,261 9,046 (3,220) 39 7,126
Income taxes...................... 796 3,175 (1,228) -- 2,743
-------- -------- -------- -------- --------
465 5,871 (1,992) 39 4,383
Equity in net income of
subsidiaries.................... 3,880 -- -- (3,880) --
-------- -------- -------- -------- --------
Net income (loss)................. $ 4,345 $ 5,871 $ (1,992) $ (3,841) $ 4,385
======== ======== ======== ======== ========
F-35
STEEL DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (IN THOUSANDS):
FOR THE THREE MONTHS
ENDED MARCH 31, 2002
COMBINED TOTAL
PARENT GUARANTOR NON-GUARANTORS CONSOLIDATED
-------- --------- -------------- ------------
Net cash provided by operations................ $ 31,273 $ 33 $ 1,183 $ 32,489
Net cash provided by (used in) investing
activities................................... (35,037) -- 1,278 (33,759)
Net cash used in financing activities.......... (43,850) -- (802) (44,652)
-------- -------- -------- --------
Increase (decrease) in cash and cash
equivalents.................................. (47,614) 33 1,659 (45,922)
Cash and cash equivalents at beginning of
year......................................... 77,407 83 751 78,241
-------- -------- -------- --------
Cash and cash equivalents at end of year....... $ 29,793 $ 116 $ 2,410 $ 32,319
======== ======== ======== ========
FOR THE THREE MONTHS
ENDED MARCH 31, 2001
Net cash provided by (used in) operations...... $ (7,338) $ 33,418 $ (8,116) $ 17,964
Net cash used in investing activities.......... (6,551) -- (3,802) (10,353)
Net cash provided by (used in) financing
activities................................... 10,217 (33,440) 10,948 (12,275)
-------- -------- -------- --------
Decrease in cash and cash equivalents.......... (3,672) (22) (970) (4,664)
Cash and cash equivalents at beginning of
year......................................... 8,924 40 1,220 10,184
-------- -------- -------- --------
Cash and cash equivalents at end of year....... $ 5,252 $ 18 $ 250 $ 5,520
======== ======== ======== ========
F-36
[STEEL DYNAMICS, INC. LOGO]
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The followingDISTRIBUTION
Set forth below is an itemized statementa table of estimatedthe registration fee for the Securities and
Exchange Commission, the filing fee for the National Association of Securities
Dealers, Inc., the listing fee for NASDAQ National Market and estimates of all
other expenses to be incurred in connection with the saleissuance and distribution
of the securities being registered by this registration statement.described in the Registration Statement, other than
underwriting discounts and commissions:
Expense Estimated Amount
SecuritiesSEC registration fee........................................ $16,100
NASD filing fee............................................. 18,000
NASDAQ listing fee.......................................... 22,500
Printing and Exchange Commission registration fee..............$ 2,024.46
Printing......................................................... 15,000.00engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses..................................... 7,500.00
Legal feesexpenses................................ *
Transfer agent and expenses.......................................... 15,000.00
----------
Total........................................................registrar fees........................... *
Miscellaneous............................................... *
-------
Total....................................................... $39,524.46
========== *
=======
- ---------------
* To be filed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.OFFICERS
As permitted by Chapter 37 of the Indiana Business Corporation Law, Article
IX of our Amended and Restated Articles of Incorporation provides that we shall
indemnify a director or officer against liability, including expenses and costs
of defense, incurred in any proceeding, if that individual was made a party to
the proceeding because the individual is or was a director or officer, or, at
our request, was serving as a director, officer, partner, trustee, employee, or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan, or other enterprise, whether or not for profit, so long as the
individual's conduct was in good faith and with the reasonably belief, in
connection with the individual's "official capacity," that the conduct was in
our beset interests, or, in all other cases, that the conduct was at least not
opposed to our best interests. In the case of any criminal proceeding, the duty
to indemnify applies so long as the individual either had reasonable cause to
believe that the conduct was lawful, or had no reasonable cause to believe that
the conduct was unlawful. Conduct with respect to an employee benefit plan in
connection with a matter the individual believed to be in the best interests of
the participants in and beneficiaries of the plan is deemed conduct that
satisfies the indemnification standard that the individual reasonably believed
that the conduct was at least not opposed to our best interests.
We may advance or reimburse for reasonable expenses incurred by a person
entitled to indemnification, in advance of final disposition, if the individual
furnishes us with a written affirmation of his or her good faith belief that the
applicable standard of conduct was observed, accompanied by a written
undertaking to repay the advance if it is ultimately determined that the
applicable standards were not met.
II-1
In all cases, whether in connection with advancement of expenses during a
proceeding, or afterward, we may not grant indemnification unless authorized in
the specific case after a determination has been made that indemnification is
permissible under the circumstances. The determination may be made either by our
board of directors, by majority vote of a quorum consisting of directors not at
the time parties to the proceeding, or, if a quorum cannot be so obtained, then
by majority vote of a committee duly designated by the board of directors
consisting solely of two or more directors not at the time parties to the
proceeding. Alternatively, the determination can be made by special legal
counsel selected by the board of directors or the committee, or by the
stockholders, excluding shares owned by or voted under the control of persons
who are at the time parties to the proceeding. In the event that a person
seeking indemnification believes that it has not been properly
II-1
provided that person may apply for indemnification to the court conducting the
proceeding or to another court of competent jurisdiction. In such a proceeding,
a court is empowered to grant indemnification if it determines that the person
is fairly and reasonably entitled to indemnification in view of all of the
relevant circumstances, whether or not the person met the standard of conduct
for indemnification.
We may purchase and maintain insurance on behalf of our directors,
officers, employees or agents, , insuring against liability arising from his or
her status as a director, officer, employee, or agent, whether or not we would
have the power to indemnify the individual against the same liability under
Article IX.
Article IX does not preclude us from providing indemnification in any other
manner.
The indemnification provisions set forth in Article IX of the Amended and
Restated Articles of Incorporation, as well as the authority vested in our board
of directors by Chapter 37 of the Business Corporation Law to grant
indemnification beyond that which is described in Article IX, may be
sufficiently broad to provide indemnification of our directors and officers for
liabilities arising under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, we have been advised that in the opinion of the SEC
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities, other than the payment of expenses incurred or paid by
a director, officer or controlling person in the successful defense of any
action, suit or proceeding, is asserted by such director, officer or controlling
person in connection with the securities being registered, we will, unless in
the opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by us is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
We have obtained liability insurance for the benefit of our directors and
officers which provides coverage for losses of directors and officers for
liabilities arising out of claims against such persons acting as our officers or
directors, or any of our subsidiaries, due to any breach of duty, neglect,
error, misstatement, misleading statement, omission or act done by such
directors and officers, except as prohibited by law.
The underwriting agreement (Exhibit 1.1) provides for indemnification by
the underwriters of the registrant and its officers and directors for certain
liabilities arising under the Securities Act, or otherwise.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
EXHIBITS
2.1 Agreement (Settlement Agreement), dated as of January 28, 2002, by and
among Steel Dynamics, Inc., Iron Dynamics, Inc., various signatory
banks, and Mellon Bank, N.A. as Agent for the Iron Dynamics lenders,
incorporated by reference to the identically numbered exhibit to Steel
Dynamics, Inc.'s Amended Current Report on Form 8-K, filed February 26,
2002.
*3.2a Bylaws of Steel Dynamics, Inc.
4.1 Registration Rights Agreement, dated as of January 28, 2002, among
Steel Dynamics, Inc., various financial institutions which are to
receive Steel Dynamics, Inc. common stock under the Settlement
Agreement annexed as Exhibit 2.1, and Mellon Bank as Agent,
incorporated by reference to the identically numbered exhibit to Steel
Dynamics, Inc.'s Amended Current Report on Form 8-K, filed February 26,
2002.
*5.1 Legal Opinion of Barrett & McNagny LLP regarding legality.
*23.1 Consent of Ernst & Young LLP.
*23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Barrett & McNagny LLP (included in Exhibit 5.1)STATEMENT SCHEDULE
(a) Exhibits
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
1.1 Form of Underwriting Agreement.
4.1 Specimen stock certificate (incorporated by reference to the
identically numbered exhibit in the Company's Registration
Statement on Form 8-A, SEC File No. 96661016, filed November
13, 1996).
5.1 Opinion of Barrett & McNagny LLP.
10.31 Registration Agreement, dated as of June 30, 1994, by and
among Steel Dynamics Holdings, Inc. and the Stockholders
named therein (incorporated by reference to the identically
numbered exhibit in the Company's Registration Statement on
Form S-1, SEC File No. 333-12521, filed September 23, 1996).
10.32 Amendment No. 1 to Registration Agreement (incorporated by
reference to the identically numbered exhibit in the
Company's Registration Statement on Form S-1, SEC File No.
333-12521, filed September 23, 1996).
10.33 Amendment No. 2 to Registration Agreement (incorporated by
reference to the identically numbered exhibit in the
Company's Registration Statement on Form S-1, SEC File No.
333-12521, filed September 23, 1996).
II-2
[24.1] Power of Attorney, incorporated by reference from Exhibit 24.1 to
registrant's Form S-3 registration statement, filed February 5, 2002.
- ---------------------
*Filed herewith
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.34 Amendment No. 3 to Registration Agreement (incorporated by
reference to the identically numbered exhibit in the
Company's Registration Statement on Form S-1, SEC File No.
333-12521, filed September 23, 1996).
23.1 Consent of Barrett & McNagny LLP (included in Exhibit 5.1).
23.2 Consent of independent auditors.
24.1 Power of attorney (included on the signature page to the
registration statement).
(b) Financial Statement Schedules
Schedules are omitted because they are not applicable or because the
required information is contained in the financial statements or notes thereto
included in this Registration Statement.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) ofUNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933;
(ii) To reflect1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the prospectus any facts or events arising after
the effective dateopinion of the registration statement (or the most recent
post-effective amendment thereof) which, individually orSecurities
and Exchange Commission such indemnification is against public policy as
expressed in the aggregate,
representSecurities Act and is, therefore, unenforceable. In the event
that a fundamental changeclaim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the information set forthsuccessful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the registration statement. Notwithstandingopinion of its counsel the foregoing,matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issues.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any increase or
decrease in volume of securities offered (ifliability under the total dollar value of
securities offered would not exceed that which was registered) and any
deviationSecurities
Act, the information omitted from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed withas part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the CommissionRegistrant pursuant to Rule 424(b) if, in(1) or
(4) or 497(h) under the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "CalculationSecurities Act shall be deemed to be part of Registration Fee" table in
the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in thethis
registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) to not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or 15(d)as of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement.time it was declared effective.
(2) That, forFor the purpose of determining any liability under the Securities
Act, of 1933, each such post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(4) If the registrant is a foreign private issuer, to file a
post-effective amendment to the registration statement to include any
financial statements required by Item 8.A. of Form 20-F at the start of any
delayed offering or throughout a continuous offering. Financial statements
and information otherwise required by Section 10(a)(3) of the Act need not be
furnished, provided, that the registrant includes in the prospectus, by means
of a post-effective amendment, financial statements required pursuant to this
paragraph (a)(4) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of those
financial statements. Notwithstanding the foregoing, with respect to
registration statements on Form F-3, a post-effective amendment need not be
filed to include financial statements and information required by Section
10(a)(3) of the Act or Rule 3-19 of this chapter if such financial statements
and information are contained in periodic reports filed with or furnished to
the Commission by the registrant pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 that are incorporated by reference in the
Form F-3.
(b) The undersigned registrant hereby undertakes that, forFor purposes of determining any liability under the Securities Act
of 1933, each filing of the registrant's annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to sectionSection 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as a amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Amendment No. 1amendment to the registration statement to be signed on its behalf by the
undersigned, duly
authorized attorneys-in-fact, thereunto duly authorized, in the City of Fort
Wayne,New York, State of Indiana,New
York on February 27,July 22, 2002.
STEEL DYNAMICS, INC.
By: /s/ Keith E. Busse
Name: Keith E. Busse
Title: President and Chief Executive Officer
By: /s/TRACY L. SHELLABARGER
------------------------------------
Tracy L. Shellabarger
Name: Tracy L. Shellabarger
Title: Vice President and Chief Financial Officer
By: /s/ Tracy L. Shellabarger, Attorney-in-fact
Name: Mark D. Millett
Title: Vice President & Director
By: /s/ Tracy L. Shellabarger, Attorney-in-fact
Name: Richard P. Teets, Jr.
Title: Vice President & Director
By: /s/ Tracy L. Shellabarger, Attorney-in-fact
Name: Leonard Rifkin
Title: Director
By: /s/ Tracy L. Shellabarger, Attorney-in-fact
Name: John C. Bates
Title: Director
By: /s/ Tracy L. Shellabarger, Attorney-in-fact
Name: Richard J. Freeland
Title: Director
By: /s/ Tracy L. Shellabarger, Attorney-in-fact
Name: James E. Kelley
Title: Director
II-3
EXHIBIT INDEX
EXHIBITS
2.1 Agreement (Settlement Agreement), dated as of January 28, 2002, by and
among Steel Dynamics, Inc., Iron Dynamics, Inc., various signatory
banks, and Mellon Bank, N.A. as Agent for the Iron Dynamics lenders,
incorporated by referencePursuant to the identically numbered exhibit to Steel
Dynamics, Inc.'s Amended Current Reportrequirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on Form 8-K, filed February
26,this 22nd day of July, 2002.
*3.2a Bylaws of Steel Dynamics, Inc.
4.1 Registration Rights Agreement, dated as of January 28, 2002, among
Steel Dynamics, Inc., various financial institutions which are to
receive Steel Dynamics, Inc. common stock under the Settlement
Agreement annexed as Exhibit 2.1, and Mellon Bank as Agent,
incorporated by reference to the identically numbered exhibit to Steel
Dynamics, Inc.'s Amended Current Report on Form 8-K, filed February
26, 2002.
*5.1 Legal Opinion of Barrett & McNagny LLP regarding legality.
*23.1 Consent of Ernst & Young LLP.
*23.2 Consent of Deloitte & Touche LLP.
23.3
SIGNATURE TITLE DATE
--------- ----- ----
* President, Chief Executive Officer July 22, 2002
- --------------------------------------------------- and a Director
Keith E. Busse
/s/ TRACY L. SHELLABARGER Vice President of Finance and July 22, 2002
- --------------------------------------------------- Chief Financial Officer and a
Tracy L. Shellabarger Director
(chief accounting and financial
officer)
* Director July 22, 2002
- ---------------------------------------------------
Mark D. Millett
* Director July 22, 2002
- ---------------------------------------------------
Richard P. Teets, Jr.
* Director July 22, 2002
- ---------------------------------------------------
John C. Bates
* Director July 22, 2002
- ---------------------------------------------------
Dr. Jurgen Kolb
* Director July 22, 2002
- ---------------------------------------------------
Joseph D. Ruffolo
* Director July 22, 2002
- ---------------------------------------------------
Richard J. Freeland
* Director July 22, 2002
- ---------------------------------------------------
James E. Kelley
*By: /s/ TRACY L. SHELLABARGER
---------------------------------------------
Tracy L. Shellabarger, as
Attorney-in-Fact
II-4
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBITS
- ------- --------
1.1 Form of Underwriting Agreement.
4.1 Specimen stock certificate (incorporated by reference to the
identically numbered exhibit in the Company's Registration
Statement on Form 8-A, SEC File No. 96661016, filed November
13, 1996).
5.1 Opinion of Barrett & McNagny LLP.
10.31 Registration Agreement, dated as of June 30, 1994, by and
among Steel Dynamics Holdings, Inc. and the Stockholders
named therein (incorporated by reference to the identically
numbered exhibit in the Company's Registration Statement on
Form S-1, SEC File No. 333-12521, filed September 23, 1996).
10.32 Amendment No. 1 to Registration Agreement (incorporated by
reference to the identically numbered exhibit in the
Company's Registration Statement on Form S-1, SEC File No.
333-12521, filed September 23, 1996).
10.33 Amendment No. 2 to Registration Agreement (incorporated by
reference to the identically numbered exhibit in the
Company's Registration Statement on Form S-1, SEC File No.
333-12521, filed September 23, 1996).
10.34 Amendment No. 3 to Registration Agreement (incorporated by
reference to the identically numbered exhibit in the
Company's Registration Statement on Form S-1, SEC File No.
333-12521, filed September 23, 1996).
23.1 Consent of Barrett & McNagny LLP (included in Exhibit 5.1).
23.2 Consent of independent auditors.
24.1 Power of attorney (included on the signature page to the
registration statement).
24.1 Power of Attorney, incorporated by reference from Exhibit 24.1 to
registrant's Form S-3 registration statement, filed February 5, 2002.
- ---------------------
*Filed herewith
II-5