-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SXQ6VwcQkf+7rBTJIXYKiYEaAsoXK8mACdqCIAJAXMRb4SBK8KoLBiXszi61Vhjq td9iy4zH26fMblzW3aPCjw== 0000950123-97-006597.txt : 19970811 0000950123-97-006597.hdr.sgml : 19970811 ACCESSION NUMBER: 0000950123-97-006597 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19970808 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STEEL DYNAMICS INC CENTRAL INDEX KEY: 0001022671 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 351929476 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-31735 FILM NUMBER: 97654782 BUSINESS ADDRESS: STREET 1: 4500 COUNTY RD 59 CITY: BUTLER STATE: IN ZIP: 46721 BUSINESS PHONE: 2198688000 MAIL ADDRESS: STREET 1: 4500 COUNTY RD 59 CITY: BUTLER STATE: IN ZIP: 46721 S-1/A 1 AMENDED FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 8, 1997 REGISTRATION NO. 333-31735 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 3 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ STEEL DYNAMICS, INC. (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.)
4500 COUNTY ROAD 59 BUTLER, INDIANA 46721 (219) 868-8000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) KEITH E. BUSSE PRESIDENT AND CHIEF EXECUTIVE OFFICER STEEL DYNAMICS, INC. 4500 COUNTY ROAD 59 BUTLER, INDIANA 46721 (219) 868-8000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) Copies to: ROBERT S. WALTERS, ESQ. JOHN MORRISON, ESQ. BARRETT & MCNAGNY SHEARMAN & STERLING 215 EAST BERRY STREET 599 LEXINGTON AVENUE FORT WAYNE, INDIANA 46802 NEW YORK, NEW YORK 10022 (219) 423-9551 (212) 848-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after the Registration Statement is declared effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, 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, 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. [ ] ------------------------ CALCULATION OF REGISTRATION FEE
============================================================================================================ PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED OFFERING PRICE(1) FEE - ------------------------------------------------------------------------------------------------------------ Common Stock, $.01 par value.............................. $254,178,750 $77,023.86(2) ============================================================================================================
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(c). (2) Previously paid. ------------------------ 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 THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 EXPLANATORY NOTE This registration statement contains two forms of prospectus: one to be used in connection with an offering of the registrant's Common Stock in the United States and Canada (the "U.S. Prospectus") and one to be used in a concurrent offering of the registrant's Common Stock outside the United States and Canada (the "International Prospectus" and, together with the U.S. Prospectus, the "Prospectuses"). The Prospectuses are identical except for the front cover page. The U.S. Prospectus is included herein and is followed by the alternate front cover page to be used in the International Prospectus. The alternate page for the International Prospectus included herein is labeled "Alternate Page for International Prospectus." Final forms of each Prospectus will be filed with the Securities and Exchange Commission under Rule 424(b) of the General Rules and Regulations under the Securities Act. 3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS (Subject to Completion) Issued August 8, 1997 8,400,000 Shares Steel Dynamics, Inc. COMMON STOCK ------------------------ OF THE 8,400,000 SHARES OF COMMON STOCK BEING OFFERED HEREBY, 1,255,971 SHARES ARE BEING SOLD BY THE COMPANY AND 7,144,029 SHARES ARE BEING SOLD BY THE SELLING STOCKHOLDERS. SEE "PRINCIPAL AND SELLING STOCKHOLDERS." THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF THE SHARES OF COMMON STOCK BY THE SELLING STOCKHOLDERS. OF THE 8,400,000 SHARES OF COMMON STOCK BEING OFFERED, 6,720,000 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS AND 1,680,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE "UNDERWRITERS." THE COMMON STOCK IS TRADED ON THE NASDAQ STOCK MARKET, UNDER THE SYMBOL "STLD." ON JULY 24, 1997, THE REPORTED LAST SALE PRICE OF THE COMMON STOCK ON THE NASDAQ STOCK MARKET WAS $25 5/8 PER SHARE. ------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ PRICE $ A SHARE ------------------------
UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS ------------------------------------------------------------------------ Per Share............... $ $ $ $ Total(3)................ $ $ $ $
- ------------ (1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriters." (2) Before deducting expenses payable by the Company estimated at $600,000. (3) The Company and certain of the Selling Stockholders have granted the U.S. Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 1,260,000 additional Shares of Common Stock at the price to public less underwriting discounts and commissions, for the purpose of covering over-allotments, if any. If the U.S. Underwriters exercise such option in full, the total price to public, underwriting discounts and commissions, proceeds to Company and proceeds to Selling Stockholders will be $ , $ , $ and $ , respectively. See "Underwriters." ------------------------ The Shares are offered, subject to prior sale, when, as and if accepted by the Underwriters named herein and subject to approval of certain legal matters by Shearman & Sterling, counsel for the Underwriters. It is expected that delivery of the Shares will be made on or about , 1997, at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in immediately available funds. ------------------------ MORGAN STANLEY DEAN WITTER PAINEWEBBER INCORPORATED DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION McDONALD & COMPANY SECURITIES, INC. SALOMON BROTHERS INC , 1997 4 CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING, AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS." 2 5 Gatefold page 1: THE EXISTING MILL January 1996 - - Twin shell, 195t, AC, Electric Arc Furnace Battery - - Ladle Metallurgy Facility, Desulphurization - - SMS, Thin-Slab Caster - - Tunnel Furnace for Direct Charge - - Six Stand, SMS Hot Mill, Single Downcoiler - - CAPACITY @ 1,400,000 TONS THE COLD MILL PROJECT Late 1997 - - Continuous Pickle Line - - Hot-Rolled Products Galvanizing Line - - Semi-Tandem 2-Stand Reversing Cold Rolling Mill - - Cold-Rolled Products Galvanizing Line - - Batch Annealing Furnaces - - Temper Mill - - PLANNED CAPACITY @ 1,000,000 TONS [SDI Logo] 6 Gatefold page 2: THE CASTER PROJECT Mid 1998 - - Second Electric Arc Furnace Battery - - Second Thin-Slab Caster - - Second Tunnel Furnace - - Second Downcoiler - - PLANNED INCREMENTAL CAPACITY @ 1,000,000 TONS THE IRON DYNAMICS PROJECT Late 1998 - - Pelletizing Plant - - Rotary Hearth Reduction Furnace - - Hybrid Electric Arc Furnace - - Desulphurization Station - - PLANNED LIQUID PIG IRON CAPACITY @ 500,000 TONNES [SDI Logo] 7 NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------------ For investors outside the United States: No action has been or will be taken in any jurisdiction by the Company, any Selling Stockholder or any Underwriter that would permit a public offering of the Common Stock or possession or distribution of this Prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons into whose possession this Prospectus comes are required by the Company, the Selling Stockholders and the Underwriters to inform themselves about, and to observe any restrictions as to, the offering of the Common Stock and the distribution of this Prospectus. ------------------------ In this Prospectus, references to "dollar" and "$" are to United States dollars, and the terms "United States" and "U.S." mean the United States of America, its states, its territories, its possessions and all areas subject to its jurisdiction. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................................................................... 4 Risk Factors.......................................................................... 10 Use of Proceeds....................................................................... 17 Price Range of Common Stock and Dividend Policy....................................... 17 Dilution.............................................................................. 18 Capitalization........................................................................ 19 Selected Consolidated Financial Data.................................................. 20 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................................... 22 Business.............................................................................. 29 Management............................................................................ 52 Certain Transactions.................................................................. 61 Principal and Selling Stockholders.................................................... 64 Description of Certain Indebtedness................................................... 67 Description of Capital Stock.......................................................... 69 Shares Eligible for Future Sale....................................................... 71 Certain United States Federal Tax Consequences for Non-United States Holders.......... 72 Underwriters.......................................................................... 76 Legal Matters......................................................................... 79 Experts............................................................................... 79 Available Information................................................................. 79 Index to Consolidated Financial Statements............................................ F-1
------------------------ The Company intends to furnish its stockholders with annual reports containing consolidated financial statements audited by its independent accountants and quarterly reports for the first three quarters of each fiscal year containing unaudited consolidated financial information. 3 8 PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and the Company's Consolidated Financial Statements, including the notes thereto, appearing elsewhere in this Prospectus. As used in this Prospectus, unless the context otherwise indicates, "Steel Dynamics," "SDI" or the "Company" means Steel Dynamics, Inc., an Indiana corporation, and its consolidated subsidiaries. "Common Stock" means the Company's Common Stock, par value $.01 per share. Unless otherwise indicated, the information contained in this Prospectus assumes that the U.S. Underwriters' over-allotment option is not exercised. As used in this Prospectus, the term "tonne" means a metric tonne, equal to 2,204.6 pounds, and the term "ton" means a net ton, equal to 2,000 pounds. Certain information contained in this summary and elsewhere in this Prospectus, including information with respect to the Company's plans and strategy for its business, are forward-looking statements. For a discussion of important factors which could cause actual results to differ materially from the forward-looking statements contained herein, see "Risk Factors." THE COMPANY OVERVIEW Steel Dynamics owns and operates a new, state-of-the-art flat-rolled steel mini-mill, which commenced operations in January 1996. The Company was founded by executives and managers who pioneered the development of thin-slab/flat-rolled compact strip production ("CSP") technology and directed the construction and operation of the world's first thin-slab/flat-rolled mini-mill. Building upon their past experience with CSP technology, management founded SDI to produce steel more efficiently, at a lower cost and of higher quality. Steel Dynamics' goal is to be the low cost producer of a broad range of high quality flat-rolled steel products, including hot-rolled, cold-rolled and galvanized sheet, as well as other specialty steel products, and to serve more markets than any other flat-rolled mini-mill. In addition, the Company intends to participate in the development and use of new technologies to produce a broad range of steel products. The Company was founded in September 1993 by Keith E. Busse, Mark D. Millett and Richard P. Teets, Jr. In October 1994, Steel Dynamics commenced construction of the mini-mill and commissioned it in December 1995. The Company believes that this 14-month construction period is the fastest ever for this kind of facility. In addition, the Company believes that the approximately $275.7 million initial capital cost of its mini-mill is approximately $75.0 million, or approximately 20%, less than the cost of comparable mini-mills currently operating. Actual production at the mini-mill of primary grade steel commenced on January 2, 1996. The mill achieved an annualized production rate of 1.2 million tons by the end of June 1997, or 85% of its capacity of 1.4 million tons, making the mini-mill's start-up and ramp-up the fastest to date in the industry. Pursuant to the Company's plan to develop downstream processing facilities to produce further value-added steel products, Steel Dynamics is currently constructing a cold mill, contiguous to the mini-mill, with a 1.0 million ton annual capacity (the "Cold Mill Project") which is scheduled for completion during the fourth quarter of 1997. Steel Dynamics is also in the process of adding a second melting furnace, a second caster and tunnel furnace, and an additional coiler to expand its annual production capacity of hot-rolled steel from 1.4 million tons to approximately 2.4 million tons (the "Caster Project"). The Caster Project is expected to be completed in the first half of 1998. In addition, the Company's wholly-owned subsidiary, Iron Dynamics, Inc. ("Iron Dynamics" or "IDI"), intends to construct a 600,000 tonne annual capacity plant for the manufacture of direct reduced iron ("DRI"), which the Company expects to be completed in 1998 (the "IDI Project"). The DRI, after further refining into 500,000 tonnes of liquid pig iron, will be used in SDI's mini-mill as a steel scrap substitute. Management strategically located the Company's mini-mill within close proximity to its natural customer base, steel service centers and other end users, abundant supplies of automotive and other steel scrap (SDI's principal raw material), competitive sources of power, and numerous rail and truck transportation routes. Steel Dynamics believes that its strategic location provides it with sales and marketing as well as production cost 4 9 advantages. The Company has secured a stable baseload of sales through long-term "off-take" contracts with two major steel consumers, a 30,000 ton per month sales contract with Heidtman Steel Products, Inc. ("Heidtman"), a major Midwest-based steel service center and distributor and an affiliate of one of the Company's stockholders, and a 12,000 ton per month sales contract with Preussag Stahl AG ("Preussag"), a major German steel manufacturer and a stockholder of the Company, with affiliate distributors and steel service centers throughout the United States. The Company has sought to assure itself of a secure supply of both steel scrap and scrap substitute material. To accomplish this objective, SDI has entered into a long-term scrap purchasing services contract with OmniSource Corporation ("OmniSource"), one of the largest scrap dealers in the Midwest and an affiliate of one of the Company's stockholders. In addition, the Company has sought to assure itself of a secure supply of scrap substitute material for use as a lower cost complement to steel scrap as part of the Company's melt mix. SDI has entered into a long-term 300,000 tonne per year "off-take" contract to purchase iron carbide from Qualitech Steel Corporation's ("Qualitech's") iron carbide facility currently under construction in Corpus Christi, Texas which is expected to be completed in 1998. The Company expects to produce additional scrap substitute material in 1998 upon completion of the IDI Project. STRATEGY The Company's business strategy is to use advanced CSP hot-rolled steelmaking and cold-rolling technologies to produce high surface quality flat-rolled steel in a variety of value-added sizes, gauges and surface treatments, emphasizing low production costs, reliable product quality and excellent customer service. In addition, SDI intends to remain financially strong and competitive through the selective purchasing of scrap and scrap substitutes to offset the effects of cyclical cost/price imbalances. The principal elements of the Company's strategy include: - Achieve Lowest Conversion Costs in Industry. Steel Dynamics' electric arc furnace ("EAF") and its caster and rolling mill designs represent substantial improvements over earlier mini-mills using CSP technology. These improvements have been designed to speed the steelmaking process, to limit "power off time" and other non-productive time in the EAF, to reduce the per ton cost of consumables and to yield higher quality finished steel product. The Company believes that its per ton manufacturing costs are already among the lowest in the industry. - Emphasize Value-Added Products and Increase Product Breadth. Steel Dynamics has produced and believes that it will be able to consistently produce thinner gauge (down to .040") steel in hot-rolled form with better surface and edge characteristics than most other flat-rolled producers. The Company believes that its high quality, thinner hot-rolled products will compete favorably with certain more expensive cold-rolled (further processed) products, enabling it to obtain higher margins. In addition, with the anticipated completion of the Cold Mill Project, SDI expects to devote a substantial portion of its hot-rolled products to the production of higher value-added cold-rolled and galvanized products, as well as thinner gauges, down to .015". This increased product breadth should also allow the Company to further broaden its customer base. - Secure Reliable Sources of Low Cost Metallics. The principal raw material used in the Company's mini-mill is steel scrap, which represented approximately 58% of the Company's total manufacturing costs for the six months ended June 30, 1997. Steel Dynamics has pursued a three-part strategy to secure access to adequate low cost supplies of steel scrap and steel scrap substitute materials. First, the Company has entered into a long-term steel scrap contract with OmniSource. Second, SDI has entered into an iron carbide "off-take" contract with Qualitech. Third, Steel Dynamics is pursuing the IDI Project to produce DRI and after further refining, liquid pig iron, as another lower cost complement for use in the melt mix with steel scrap. - Secure a Solid Baseload of Hot Band Sales. In order to help ensure consistent and efficient plant utilization, SDI entered into "off-take" sales and distribution agreements with Heidtman and Preussag, through 2001, pursuant to which Heidtman has agreed to purchase at least 30,000 tons and Preussag 5 10 has agreed to purchase at least an average of 12,000 tons of the Company's flat-rolled products per month, at the Company's market price, subject to certain volume and single run discounts. - Increase Unit Growth at Low Capital Cost. SDI seeks to continue to grow its production of flat-rolled steel coil at low capital and unit costs. The Company plans to invest approximately $85.0 million to finance its Caster Project. The Caster Project, which is expected to be completed in the first half of 1998, is expected to increase the annual production capacity of the Company's mini-mill from 1.4 to approximately 2.4 million tons of hot-rolled steel. In addition, management intends to continue to explore new production technologies to further lower its unit costs of production. - Incentivize Employees. In contrast to the high fixed labor costs of many of the Company's competitors, SDI has established certain incentive compensation programs specifically designed to reward employee teams for their efforts towards enhancing productivity, thereby encouraging a sense of ownership throughout Steel Dynamics. Production employees actively share in the Company's success through a "production" bonus and a "conversion cost" bonus. The production bonus is directly tied to the quantity and quality of products manufactured during a particular shift. The conversion cost bonus encourages employees to use materials and resources more efficiently. Steel Dynamics' employees' bonuses may equal or exceed their base hourly wage. - Pursue Future Opportunities. Steel Dynamics believes that technology development and management's experience will provide significant opportunities for SDI in a broad range of markets, potentially including flat-rolled, non-flat-rolled, stainless and specialty steels. The Company plans to pursue opportunities through greenfield projects, strategic alliances or acquisitions, which may include foreign investments, to secure the long-term future growth and profitability of SDI. The Company is conducting certain preliminary engineering and feasibility analyses for a possible 750,000 ton capacity structural steel facility to manufacture wide flange beams and other structural shapes, utilizing near net shape casting technology in conjunction with a state-of-the-art bloom caster. There is no assurance, however, that such a facility will be approved by the Company for further development efforts once these preliminary studies have been completed, or, if further developed, that the facility will be able to be financed and built. Steel Dynamics will also seek to enter new steel markets and to produce new steel products using the latest technology, with the objective of being a low cost producer. In addition, the Company has a technology sharing agreement with Preussag which will provide SDI with Preussag's expertise and know-how in steel manufacturing, particularly steel finishing. 6 11 THE OFFERINGS Common Stock offered: By the Company......................................... 1,255,971 shares By the Selling Stockholders............................ 7,144,029 shares Total............................................... 8,400,000 shares Common Stock offered: United States offering................................. 6,720,000 shares International offering................................. 1,680,000 shares Total............................................... 8,400,000 shares Common Stock to be outstanding after the offerings(1).... 49,122,294 shares Use of proceeds.......................................... The net proceeds to the Company will be used for the purchase and installation of a seventh stand for the Company's hot-rolling mill and for general corporate purposes. The Company will not receive any proceeds from the sale by the Selling Stockholders of Common Stock in the offerings. See "Use of Proceeds." Nasdaq Stock Market symbol............................... "STLD"
- ------------ (1) Based on 47,866,323 shares of Common Stock outstanding on June 30, 1997. Excludes 885,784 shares of Common Stock issuable upon exercise of stock options outstanding on June 30, 1997, at a weighted average exercise price of $9.42 per share. RISK FACTORS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS." The risk factors include (i) Start-up; Limited Operating History; Recent Losses, (ii) Variability of Financial Results; Production Shutdowns, (iii) Significant Capital Requirements, (iv) Cost of Steel Scrap and Other Raw Materials, (v) Cyclicality of Steel Industry and End User Markets, (vi) Competition, (vii) Risks Related to Scrap Substitutes, (viii) Reliance on Major Customers, (ix) Potential Costs of Environmental Compliance, (x) Dependence upon Key Management, (xi) Restrictions on Payment of Dividends on Common Stock, (xii) Restrictive Covenants, (xiii) Possible Volatility of Stock Prices, (xiv) Shares Eligible for Future Sale, (xv) Anti-Takeover Provisions, (xvi) Dilution and (xvii) Forward Looking Statements. 7 12 SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA The following table sets forth summary consolidated financial and operating data for the dates and periods indicated. The quarterly and six month summary statement of operations data and balance sheet data as of June 30, 1997 are derived from unaudited consolidated financial statements of the Company and, in the opinion of management, include all adjustments (consisting only of normal recurring accruals) necessary to present fairly such data. The consolidated financial data as of and for the year ended December 31, 1996 are derived from the Company's audited consolidated financial statements. Operating results for interim periods are not necessarily indicative of a full year's operations. The information below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements and notes thereto appearing elsewhere in this Prospectus.
THREE MONTHS ENDED(1) SIX MONTHS --------------------------------------------------------------------- YEAR ENDED ENDED MARCH 30, JUNE 29, SEPTEMBER 28, DECEMBER 31, MARCH 31, JUNE 30, DECEMBER 31, JUNE 30, 1996 1996 1996 1996 1997 1997 1996 1997 --------- -------- ------------- ------------ --------- -------- ------------ ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND TON AMOUNTS) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Net sales..................... $ 32,287 $ 66,375 $ 75,957 $ 77,998 $ 98,059 $102,718 $252,617 $200,777 Cost of goods sold............ 35,185 60,408 62,664 62,306 73,910 76,270 220,563 150,180 -------- -------- -------- -------- -------- -------- -------- -------- Gross profit (loss).......... (2,898) 5,967 13,293 15,692 24,149 26,448 32,054 50,597 Selling, general and administrative expenses...... 2,809 3,084 3,454 4,492 5,339 7,140 13,838 12,479 -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) from operations................. (5,707) 2,883 9,839 11,200 18,810 19,308 18,216 38,118 Foreign currency gain (loss)....................... 153 106 -- 68 92 169 328 261 Interest expense.............. (5,837) (6,291) (5,922) (4,634) (2,401) (1,594) (22,684) (3,995) Interest income............... 93 486 378 624 752 512 1,581 1,264 -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) before extraordinary loss and taxes...................... (11,298) (2,816) 4,295 7,258 17,253 18,395 (2,559) 35,648 Extraordinary loss(2)......... -- -- -- (7,271) -- -- (7,271) -- Provision for taxes........... -- -- -- -- 2,668 2,826 -- 5,494 -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss)............. $(11,298) $ (2,816) $ 4,295 $ (13) $ 14,585 $ 15,569 $ (9,830) $ 30,154 ======== ======== ======== ======== ======== ======== ======== ======== Net income (loss) per share... $ (0.35) $ (0.08) $ 0.11 $ (0.00) $ 0.30 $ 0.33 $ (0.28) $ 0.63 ======== ======== ======== ======== ======== ======== ======== ======== Weighted average common shares outstanding.................. 32,274 35,200 39,045 41,808 47,838 47,855 34,571 47,851 OTHER DATA: Shipments (net tons).......... 114,914 218,640 228,568 231,726 280,446 295,272 793,848 575,718 Hot band production (net tons)(3)..................... 127,930 213,391 227,428 245,813 275,035 292,302 814,562 567,337 Prime tons produced........... 94,405 191,034 212,562 229,908 261,957 278,286 727,909 540,243 Prime ton percentage.......... 73.8 % 89.5% 93.5% 93.5% 95.2 % 95.2% 89.4% 95.2% Yield percentage(4)........... 83.8 % 87.0% 88.5% 88.6% 89.2 % 89.7% 87.4% 89.5% Average sales price per prime ton.......................... $ 313 $ 320 $ 344 $ 350 $ 360 $ 358 $ 336 $ 359 Effective capacity utilization(5)............... 35.1 % 58.6% 67.7% 73.2% 79.1 % 83.0% 58.2% 81.1% Man-hours per net ton produced..................... 0.90 0.69 0.66 0.61 0.57 0.57 0.70 0.57 Number of employees (end of period)...................... 238 255 263 293 329 359 293 359 Operating profit (loss) per net ton shipped.............. $ (49.66) $ 13.19 $ 43.05 $ 48.34 $ 72.25 $ 72.08 $ 22.95 $ 72.16 Depreciation and amortization................. 3,367 5,211 5,341 5,165 5,691 5,917 19,084 11,608 Net cash provided by (used in): Operating activities......... (27,737) (16,199) (1,689) (6,009) 38,042 10,463 (51,634) 48,505 Investing activities......... (4,815) (31,782) 4,884 (51,433) (46,331) (35,137) (83,146) (81,468) Financing activities......... 36,356 40,119 24,543 84,338 (992) (1,212) 185,356 (2,204) EBITDA(6)..................... (2,340) 8,094 15,180 16,366 24,501 25,225 37,300 49,726
JUNE 30, 1997 ------------------------ ACTUAL AS ADJUSTED(7) -------- -------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents............................................................................... $ 22,293 $ 52,590 Working capital......................................................................................... 60,676 90,973 Property, plant and equipment, net...................................................................... 410,272 410,272 Total assets............................................................................................ 552,603 582,900 Long-term debt (including current portion).............................................................. 205,461 205,461 Stockholders' equity.................................................................................... 294,953 325,250
(footnotes on following page) 8 13 - --------------- (1) The Company commenced actual production of primary grade steel in January 1996. Accordingly, management believes that the Company's results of operations prior to 1996 are not indicative of results to be expected in the future. (2) Represents the loss on early retirement of the Company's subordinated notes of approximately $7.3 million in the fourth quarter of 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company will incur an extraordinary loss of approximately $7.6 million (net of tax benefit of $5.1 million) in the third quarter of 1997 as a result of the refinancing of the Company's Credit Agreement (as defined). See "Description of Certain Indebtedness." (3) Hot band production refers to the total production of finished coiled product. Prime tons refer to hot bands produced which meet or exceed metallurgical and quality standards for surface, shape and metallurgical properties. (4) Yield percentage refers to tons of finished products divided by tons of raw materials. (5) Effective capacity utilization is the ratio of tons produced for the operational month to the operational month's capacity based upon an annual capacity of 1.4 million tons. (6) EBITDA represents operating income before depreciation and amortization. Based upon its experience in the steel industry, the Company believes that EBITDA and related measures of cash flow serve as important financial analysis tools for measuring and comparing steel companies in several areas, such as liquidity, operating performance and leverage. However, EBITDA is not a measurement of financial performance under generally accepted accounting principles ("GAAP") and may not be comparable to other similarly titled measures of other companies. EBITDA should not be considered as an alternative to operating or net income (as determined in accordance with GAAP), as an indicator of the Company's performance or as an alternative to cash flows from operating activities (as determined in accordance with GAAP) as a measure of liquidity. See the Company's Consolidated Statements of Operations and Consolidated Statement of Cash Flows, including the notes thereto, appearing elsewhere in this Prospectus. (7) As adjusted to give effect to the offerings (assuming a public offering price of $25.625 per share). 9 14 RISK FACTORS Prospective investors should consider carefully the following factors in addition to other information set forth in this Prospectus in evaluating an investment in the shares of the Common Stock offered hereby. START-UP; LIMITED OPERATING HISTORY; RECENT LOSSES The Company was formed in September 1993 and commenced primary grade production at its thin-slab steel mini-mill in January 1996. The Company is in the process of ramping up steel production to full capacity. The Company has experienced normal start-up and operational difficulties in bringing its mini-mill into full scale production, and the mini-mill is not yet operating at full capacity. By the end of June 1997, the Company was operating at an annualized production rate of 1.2 million tons, or 85% of full capacity. Because of the high fixed cost nature of operating a steel mill, failure to bring production to, or maintain production at, full capacity could have a material adverse effect on the Company's cost and pricing structure and on its resulting ability to compete and results of operations. Although the Company believes that the start-up difficulties it experienced are typical of those encountered when a new steel mill commences production, there is no assurance that the Company will not continue to experience operational difficulties beyond start-up difficulties, or that it will ultimately achieve or be able to sustain full production. In addition, the Company could experience construction, start-up or operational difficulties as it implements the Cold Mill, IDI and Caster Projects or future projects. There can be no assurance that the Company will be able to operate its mini-mill at full capacity or that the Cold Mill, IDI and Caster Projects will be successfully built, started-up, and integrated with the Company's existing operations. Management has no experience in building or operating scrap substitute manufacturing plants. The Company's continued rapid development and the implementation of the Cold Mill, IDI and Caster Projects may place a strain on its administrative, operational and financial resources. As the Company increases its production and expands its customer base, there will be additional demands on the Company's ability to coordinate sales and marketing efforts with production. The failure to produce at full capacity, coordinate its sales and marketing efforts with production or manage its future development and growth, or the emergence of unexpected production difficulties could adversely affect the Company's business, results of operations and financial condition. Because the Company commenced primary grade production in January 1996, the Company's results of operations for prior periods will not be comparable with future periods. As a result, there is only limited financial and operating information available for a potential investor to evaluate an investment in the Common Stock. Although the Company had net income of $30.2 million for the six months ended June 30, 1997, the Company had net losses for each year since its formation in 1993 and had an accumulated deficit of $9.6 million as of June 30, 1997. These losses have resulted principally from operating expenses during start-up. The Company will experience additional start-up losses in connection with the Cold Mill, IDI and Caster Projects. There can be no assurance that the Company's operations will continue to be profitable. If the Company cannot maintain profitability it may not be able to make required debt service payments and the value of the Common Stock could be adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." VARIABILITY OF FINANCIAL RESULTS; PRODUCTION SHUTDOWNS The Company's results of operations are substantially affected by variations in the realized sales prices of its products, which in turn depend both on prevailing prices for steel and demand for particular products. In 1996, spot prices for hot bands increased from a low of $330 per ton to a high of $360 per ton. Operating results have been, and in the future will be, affected by numerous factors, including the prices and availability of raw materials, particularly steel scrap and scrap substitutes, the demand for and prices of the Company's products, the level of competition, the level of unutilized production capacity in the steel industry, the mix of products sold by the Company, the timing and pricing of large orders, start-up difficulties with respect to the Cold Mill Project, IDI Project or Caster Project, the integration and modification of facilities and other factors. There can be no assurance that these events and circumstances or other events or circumstances, such as seasonal factors like weather, disruptions in the transportation or energy industry or in the Company's 10 15 customers' industries, or an economic downturn adversely affecting the steel industry, generally, or the Company, in particular, will not occur, any of which could have a material adverse effect on the Company. The Company's manufacturing processes are dependent upon certain critical pieces of steelmaking equipment, such as its EAF and continuous caster, which on occasion may be out of service due to routine scheduled maintenance or as the result of equipment failures. This interruption in the Company's production capabilities could result in fluctuations in the Company's quarterly results of operations. The most significant scheduled maintenance outages are planned to occur quarterly, for three days at a time, and involve routine maintenance work. Other routine scheduled maintenance could limit the Company's production for a period of less than a day, while unanticipated equipment failures could limit the Company's production for a longer period. Equipment failures at its plant could limit or shut down the Company's production. Through June 30, 1997, the Company experienced some equipment failures, none of which lasted more than two days. In order to reduce the risk of equipment failure, the Company follows a comprehensive maintenance and loss prevention program, has on-site maintenance and repair facilities, and maintains an inventory of spare parts and machinery. For example, the Company maintains a spare EAF transformer as well as spare caster parts, mechanical parts and electrical controls for its cranes and other tools. No assurance can be given, however, that material shutdowns will not occur in the future or that a shutdown would not have a material adverse affect on the Company. In addition to equipment failures, the mill is also subject to the risk of catastrophic loss. SIGNIFICANT CAPITAL REQUIREMENTS The Company's business is capital intensive and will require substantial expenditures for, among other things, the purchase and maintenance of equipment used in its steelmaking and finishing operations and compliance with environmental laws. In addition, the construction and start-up of the Cold Mill, IDI and Caster Projects (collectively, the "Expansion Projects") will require substantial capital. The Company may also require additional financing in the event it decides to enter into strategic alliances, make acquisitions, or build additional plants. The extent of additional financing will depend on the success of the Company's business. There can be no assurance that additional financing, if needed, will be available to the Company or, if available, that it can be obtained on terms acceptable to the Company and within the limitations contained in the Company's Credit Agreement (as defined) or any future financing, including the IDI Financing (as defined). See "-- Restrictive Covenants" and "Description of Certain Indebtedness." The Company currently estimates that the funds required for the construction and start-up of (i) the Cold Mill Project, which is expected to be completed in the fourth quarter of 1997, will total approximately $200.0 million, of which approximately $136.3 million has been expended thereon through June 30, 1997, (ii) the IDI Project, which is expected to be completed in 1998, will total approximately $95.0 million and (iii) the Caster Project, which is expected to be completed in the first half of 1998, will total approximately $85.0 million (excluding working capital and start-up costs), of which approximately $14.9 million has been expended thereon through June 30, 1997. There can be no assurance that the Expansion Projects will be completed as planned or at the costs currently budgeted or that the Company will have adequate sources of funds for any such future capital expenditures. The Company intends to use cash on hand, funds from operations, borrowings under the Company's Credit Agreement and borrowings by IDI to finance the construction and startup of the Expansion Projects. Borrowings under the Credit Agreement are conditioned upon the Company's compliance with various financial and other covenants and other conditions set forth therein and, as a result, there can be no assurance that such financing will be available to the Company as planned. See "Description of Certain Indebtedness." In addition, the Company expects to finance $60.0 million of the IDI Project with a separate IDI credit facility (the "IDI Financing"). The IDI Financing is dependent upon securing and closing a $50.0 million standby construction and term loan, together with a $10.0 million revolving credit facility to fund current operations. See "Description of Certain Indebtedness -- The IDI Financing." Although IDI expects to secure a commitment for and close the IDI Financing during the third quarter of 1997, no assurances can be given that such a commitment will in fact be secured, or, even if secured, that IDI will be able to satisfy all of the 11 16 terms and conditions established by the lenders in order to close the IDI Financing. Failure to obtain and close the IDI Financing could delay or prevent the IDI Project, which could have a material adverse effect on the Company. COST OF STEEL SCRAP AND OTHER RAW MATERIALS The Company's principal raw material is scrap metal derived from, among other sources, junked automobiles, industrial scrap, railroad cars and railroad track materials, agricultural machinery and demolition scrap from obsolete structures, containers and machines. The prices for scrap are subject to market forces largely beyond the control of the Company, including demand by U.S. and international steel producers, freight costs and speculation. The prices for scrap have varied significantly and may vary significantly in the future. In addition, the Company's operations require substantial amounts of other raw materials, including various types of pig iron, alloys, refractories, oxygen, natural gas and electricity, the price and availability of which are also subject to market conditions. The Company may not be able to adjust its product prices, especially in the short-term, to recover the costs of increases in scrap and other raw material prices. The Company's future profitability may be adversely affected to the extent it is unable to pass on higher raw material and energy costs to its customers. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business -- Steel Scrap and Scrap Substitute Resources" and "-- Energy Resources." CYCLICALITY OF STEEL INDUSTRY AND END USER MARKETS The steel industry is highly cyclical in nature and sensitive to general economic conditions. The financial condition and results of operations of companies in the steel industry are generally affected by macroeconomic fluctuations in the U.S. and global economies. The Company is particularly sensitive to trends in the automotive, oil and gas, gas transmission, construction, commercial equipment, rail transportation, agriculture and durable goods industries, because these industries are significant markets for the Company's products and are highly cyclical. In the early 1980s, U.S. integrated steel producers incurred significant restructuring charges associated with efforts to reduce excess capacity. Significant losses, and bankruptcies in certain cases, occurred as a result of a number of factors, including worldwide production overcapacity, increased U.S. and global competition, low levels of steel demand, substitution of alternative materials for steel, high labor costs, inefficient plants and the strength of the U.S. dollar relative to other currencies. In the late 1980s, earnings of U.S. steel producers benefitted from improved industry conditions. During the 1990 to 1992 downturn, substantial excess worldwide manufacturing capacity for steel products, combined with a worldwide economic slowdown, resulted in a substantial decrease in the demand for steel products, increased competition and a decline in financial performance for the steel industry. Although demand for steel products recovered and the profitability of the industry has improved recently, there can be no assurance that economic conditions will remain favorable to the steel industry. Future economic downturns, a stagnant economy or currency fluctuations may adversely affect the Company's business, results of operations and financial condition. COMPETITION Competition within the steel industry can be intense. The Company competes primarily on the basis of price, quality, and the ability to meet customers' product specifications and delivery schedules. Many of the Company's competitors are integrated steel producers which are larger, have substantially greater capital resources and experience, and, in some cases, have lower raw material costs than the Company. The Company also competes with other mini-mills which may have greater financial resources. The highly competitive nature of the industry, combined with excess production capacity in some products, may in the future exert downward pressure on prices for certain of the Company's products. In addition, in the case of certain product applications, steel competes with other materials, including plastics, aluminum, graphite composites, ceramics, glass, wood and concrete. There can be no assurance that the Company will be able to compete effectively in the future. U.S. The Company's products compete with many integrated steel producers, such as Rouge Steel Co. and National Steel Corp.'s Great Lakes Steel Division in the Detroit area, LTV Steel Co., Inc., Inland Steel Co., Bethlehem Steel Corp., U.S. Steel, Acme Steel Co. and Beta Steel Corp. in the northwest Indiana and 12 17 Chicago area, as well as a growing number of hot-rolled mini-mills, such as Nucor Corporation's ("Nucor's") Crawfordsville, Indiana and Hickman, Arkansas facilities and Gallatin Steel Company's mini-mill in Ghent, Kentucky, Delta Steel, the BHP/Northstar joint venture in Delta, Ohio, and TRICO Steel, the three-way joint venture in Alabama among LTV Steel Co., Inc., Sumitomo Metal USA Corp. and British Steel. Despite significant reductions in raw steel production capacity by major U.S. producers over the last decade, the U.S. industry continues to be adversely affected, from time to time, by excess world capacity. According to the American Iron and Steel Institute (the "AISI"), annual U.S. raw steel production capacity was reduced from approximately 154 million tons in 1982 to approximately 116 million tons in 1996. This reduction resulted in higher utilization rates. Average utilization of U.S. industry capacity improved from approximately 61% in the 1982 to 1986 period to approximately 83% in the 1987 to 1991 period, to approximately 89% in 1993, to 93% in 1994 and 1995, and to 91% in 1996. Recent improved production efficiencies also have begun to increase overall production capacity in the United States. Excess production capacity exists in certain product lines in U.S. markets and, to a greater extent, worldwide. Increased industry overcapacity, coupled with economic recession, would intensify an already competitive environment. Over the last decade, extensive downsizings have necessitated costly restructuring charges that, when combined with highly competitive market conditions, have resulted at times in substantial losses for some U.S. integrated steel producers. A number of U.S. integrated steel producers have gone through bankruptcy reorganization. These reorganizations have resulted in somewhat reduced capital costs for these producers and may permit them to price their steel products at levels below those that they could have otherwise maintained. An increasing number of mini-mills have entered or are expected to enter the EAF-based thin-slab/flat-rolled steel market in the next several years. These mini-mills have cost structures and management cultures more closely akin to those of the Company than to the integrated producers. Flat-rolled mini-mill production capacity increased from 4.0 million tons in 1994 to approximately 7.3 million tons in 1996, and industry sources expect this cumulative flat-rolled mini-mill capacity to reach 14.9 million tons in 1997 and up to 18.7 million tons in 1998. The Company's penetration into the flat-rolled steel market is limited by geographic considerations, to some extent by gauge and width of product specifications and by metallurgical and physical quality requirements. Based on product type and geographic location, the Company believes it will most closely compete with the following mini-mills: Nucor's Crawfordsville, Indiana facility, Gallatin Steel's Ghent, Kentucky facility, Delta Steel's Delta, Ohio facility, and, to a more limited extent, Nucor's Hickman, Arkansas facility, Nucor's Berkeley County, South Carolina facility, and TRICO Steel's facility in northern Alabama. Each of these mills produces hot-rolled product. However, an affiliate of Delta Steel is expected to produce hot-rolled galvanized product, and Nucor's Crawfordsville, Indiana facility produces cold-rolled and cold-rolled galvanized products. Non-U.S. U.S. steel producers face significant competition from certain non-U.S. steel producers who may have lower labor costs. In addition, U.S. steel producers may be adversely affected by fluctuations in the relationship between the U.S. dollar and non-U.S. currencies. Furthermore, some non-U.S. steel producers have been owned, controlled or subsidized by their governments, and their decisions with respect to production and sales may be, or may have been in the past, influenced more by political and economic policy considerations than by prevailing market conditions. Some non-U.S. producers of steel and steel products have continued to ship into the U.S. market despite decreasing profit margins or losses. If certain pending trade proceedings ultimately do not halt or otherwise provide relief from such trade practices, other relevant U.S. trade laws are weakened, world demand for steel eases or the U.S. dollar strengthens, an increase in the market share of imports may occur, which could adversely affect the pricing of the Company's products. The costs for current and future environmental compliance may place U.S. steel producers, including the Company, at a competitive disadvantage with respect to non-U.S. steel producers, which are not subject to environmental requirements as stringent as those in the U.S. RISKS RELATED TO SCRAP SUBSTITUTES The processes that the Company currently plans to use in the IDI Project to produce DRI and to further refine it into liquid pig iron (the "IDI Process") has not been previously used commercially for this purpose. 13 18 There are many alternative technologies available to produce commercially viable scrap substitute material, but only a small number have been commercially operated. The technologies that the Company intends to use in its IDI Project have not been previously combined into a steel scrap substitute production facility. There is a risk, therefore, that the IDI Process will not produce DRI or that the DRI will not be able to be further refined into liquid pig iron for a price that makes it commercially viable as a steel scrap substitute. If the IDI Process does not work as planned, the capital costs incurred in designing and building the facility may be largely unrecoverable, the planned 500,000 tonnes of low cost liquid pig iron that was intended to be available annually to help lower the Company's overall metallics costs might be unavailable or available at higher costs, the Company may be required under the terms of the IDI Financing to purchase all of IDI's scrap substitute output capacity, even if the material is substandard and/or overpriced relative to other available scrap substitutes or steel scrap, and the impact could be materially adverse to the Company. In addition, the Company does not have any experience in the production of DRI and there can be no assurance that the Company will be able to successfully design, construct and operate the IDI Project or that the expected production capacity will be achieved. Although the technologies to be employed by Qualitech to produce iron carbide in its Corpus Christi, Texas plant currently under construction have been used commercially, Qualitech is a start-up company, and there is no assurance that it will be able to successfully complete that project, or that the project, when completed, will produce commercially viable iron carbide. If this material were not available to the Company, the Company could be unable to secure a comparable amount of similar material or the cost to the Company could be materially higher, causing the Company to rely more heavily on potentially higher-priced steel scrap for a greater proportion of its melt mix. See "Business -- The Company's Steelmaking Equipment and Technology -- The IDI Project" and "-- Steel Scrap and Scrap Substitute Resources." RELIANCE ON MAJOR CUSTOMERS The Company has entered into long-term "off-take" contracts with Heidtman and with Preussag pursuant to which they have agreed to purchase an aggregate of at least 42,000, or 36%, of the Company's monthly output capacity. If the Company's actual output is less than its full capacity, sales to these customers increase as a percentage of the Company's total net sales. For the year ended December 31, 1996, these customers accounted for 36% and 12%, respectively, of the Company's total net sales, and the Company's top five customers accounted for approximately 65% of its total net sales. For the six months ended June 30, 1997, Heidtman and Preussag accounted for 32% and 10%, respectively, of the Company's total net sales, and the Company's top five customers accounted for approximately 63% of its total net sales. Although the Company expects to continue to depend upon certain customers for a significant percentage of its net sales, there can be no assurance that any of the Company's customers will continue to purchase its steel from the Company. A loss of one or more of them, or of a group of its next largest customers could have a material adverse effect on the Company's results of operations and financial condition. Heidtman is an affiliate of a stockholder of the Company. The President and Chief Executive Officer of Heidtman serves on the Company's Board of Directors. Preussag is a stockholder of the Company and a representative of Preussag serves on the Company's Board of Directors. If the terms of the "off-take" contracts are or become burdensome to these companies, or if a dispute arises over the contracts, either or both of the "off-take" providers could be viewed as having a conflict of interest between what they perceive to be best for their companies as "off-take" buyers and what is best for the Company as the product seller. POTENTIAL COSTS OF ENVIRONMENTAL COMPLIANCE U.S. steel producers, including the Company, are subject to stringent federal, state and local laws and regulations relating to, among other things, wastewater, air emissions, toxic use reduction and hazardous material disposal. The Company believes that its facility is in material compliance with these laws and regulations and does not believe that future compliance with such laws and regulations will have a material adverse effect on its results of operations or financial condition. The Company has made, and will continue to make, expenditures to comply with such provisions. The Company generates certain waste products, such as EAF dust, that are classified as hazardous waste and must be properly disposed of under applicable 14 19 environmental laws, which, despite the Company's due care, could result in the imposition of strict liability for the costs of clean-up of any landfills to which the waste may have been transported. Environmental legislation and regulations and related administrative policies have changed rapidly in recent years. It is likely that the Company will be subject to increasingly stringent environmental standards in the future (including those under the Clean Air Act Amendments of 1990, the Clean Water Act Amendments of 1990, stormwater permit program and toxic use reduction programs) and will be required to make additional expenditures, which could be significant, relating to environmental matters on an ongoing basis. In addition, due to the possibility of unanticipated regulatory or other developments, the amount and timing of future environmental expenditures may vary substantially from those currently anticipated. DEPENDENCE UPON KEY MANAGEMENT The Company's ability to maintain its competitive position is dependent to a large degree on the services of its senior management team, including Keith E. Busse, President and Chief Executive Officer, Mark D. Millett, Vice President of Melting and Casting, Richard P. Teets, Jr., Vice President of Rolling and Finishing, and Tracy L. Shellabarger, Vice President and Chief Financial Officer. Although these senior managers all have employment agreements with, and are substantial stockholders of, the Company, there can be no assurance that such individuals will remain with the Company. The loss of the services of any of these individuals or an inability to attract, retain and maintain additional senior management personnel could have a material adverse effect on the Company. There can be no assurance that the Company will be able to retain its existing senior management personnel or to attract additional qualified senior management personnel. See "Management." The Company maintains key man life insurance on Messrs. Busse, Millett, Teets and Shellabarger. RESTRICTIONS ON PAYMENT OF DIVIDENDS ON COMMON STOCK The Company has never paid any dividends on its Common Stock and does not anticipate paying dividends on its Common Stock in the foreseeable future. Under the Company's amended and restated Credit Agreement dated as of June 30, 1997 (the "Credit Agreement"), the Company may pay dividends in an aggregate cumulative amount not exceeding cumulative net income for the period from January 1, 1997 through the most recently completed fiscal quarter preceding such payment. See "Dividend Policy" and "Description of Certain Indebtedness." RESTRICTIVE COVENANTS The Credit Agreement restricts the Company's ability to incur additional indebtedness, make capital expenditures, make loans or advances to, or make an investment in other entities, and create liens on its properties. The Credit Agreement contains additional restrictive covenants, including among others, covenants restricting the Company and its subsidiary with respect to disposing of property or assets, paying dividends, entering into sale-leaseback transactions, providing guarantees, entering into transactions with affiliates, mergers and consolidations and the modification of certain agreements. In addition, the Credit Agreement requires the Company to meet certain financial tests. These restrictions may make it more difficult for the Company to operate in a manner that it deems necessary or appropriate to take advantage of opportunities, to adjust to operational difficulties, or to respond to other developments. See "Description of Certain Indebtedness." POSSIBLE VOLATILITY OF STOCK PRICES The market price for shares of the Common Stock may be significantly affected by such factors as the Company's net sales, earnings and cash flow, the difference between the Company's actual results and results expected by investors and analysts, news announcements including price reductions by the Company or its competitors or changes in general market conditions. In addition, broad market fluctuation and general economic conditions may adversely affect the market price of the Common Stock, regardless of the Company's actual performance. 15 20 SHARES ELIGIBLE FOR FUTURE SALE The future sale of a substantial number of shares of Common Stock in the public market following the offerings, or the perception that such sales could occur, could adversely affect the market price for the Common Stock and could make it more difficult for the Company to raise funds through equity offerings in the future. Upon completion of the offerings, the Company expects to have 49,122,294 shares of Common Stock outstanding including 27,997,931 restricted shares held by persons who may be deemed affiliates of the Company). The restricted shares may in the future be sold without registration under the Securities Act of 1933 to the extent permitted by Rule 144 under the Securities Act or any applicable exemption under the Securities Act. See "Shares Eligible for Future Sale." In connection with the offerings, the Company, its executive officers and directors, the Selling Stockholders, and certain other stockholders of the Company, have agreed that, subject to certain exceptions, they will not sell, offer or contract to sell any shares of Common Stock without the prior written consent of Morgan Stanley & Co. Incorporated, for a period of 90 days after the date of this Prospectus. Certain of the Company's existing stockholders also have registration rights with respect to their Common Stock. In addition, the Company has filed registration statements under the Securities Act to register shares of Common Stock reserved for issuance under the Company's 1994 and 1996 Incentive Stock Option Plans, thus permitting the resale of such shares by non-affiliates upon issuance in the public market without restriction under the Securities Act. As of June 30, 1997, options to purchase 885,784 shares were outstanding under these Plans. See "Management -- Employee Plans," "Description of Capital Stock -- The Registration Agreement," "Shares Eligible for Future Sale" and "Underwriters." ANTI-TAKEOVER PROVISIONS Certain provisions of the Indiana Business Corporation Law (the "BCL"), may have the effect of delaying or preventing transactions involving a change of control of the Company, including transactions in which stockholders might otherwise receive a substantial premium for their shares over then current market prices, may limit the ability of stockholders to approve transactions that they may deem to be in their best interests or may delay or frustrate the removal of incumbent directors. See "Description of Capital Stock -- Certain Provisions of Indiana Law Regarding Takeovers." DILUTION Investors in the Common Stock offered hereby will experience an immediate dilution of $19.24 per share in the net tangible book value of their shares of Common Stock. See "Dilution." FORWARD LOOKING STATEMENTS This Prospectus contains a number of statements regarding the Company's expectations, intent, or beliefs about future events. These statements are intended as "forward-looking statements" under the Private Securities Litigation Act of 1995. Where any such forward-looking statement is made, whether in the "Business" section, in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section, or elsewhere in this Prospectus, it is intended to convey the Company's good faith expectations about the subject, based upon its reasonable beliefs concerning the pertinent facts and assumptions. The Company cautions that, while it believes such facts or assumptions to be reasonable and makes them in good faith, assumed facts or expectations about future events may and often do vary from actual results, the differences between the assumptions and actual results can be material, and there can be no assurance that the forward-looking statement will be realized. The factors and considerations described in this section of the Prospectus as "Risk Factors" and throughout the Prospectus are intended to caution that any such forward-looking statements are subject, among other things, to the risks and uncertainties described in these "Risk Factors" and assumptions regarding future competitive, economic, technological and market conditions, the accurate prediction of which may be difficult and may involve the assessment of events beyond the Company's control. Actual achievements and events may differ materially from those expressed or implied in such forward-looking statements. 16 21 USE OF PROCEEDS The net proceeds to the Company from the offerings are estimated to be approximately $30.3 million (assuming an offering price of $25.625 per share), after deducting estimated underwriting discounts and commissions and estimated offering expenses. The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholders. The Company intends to use the net proceeds of the offerings for capital expenditures, including the addition of a seventh rolling mill stand to the Company's hot strip mill, and for general corporate purposes. Pending such use, the Company expects to pay down its revolving credit obligations (which obligations had an interest rate of 7.28% on July 24, 1997 and which mature in June 2002) or invest these funds in short-term, marketable, investment grade securities. See "Risk Factors -- Significant Capital Requirements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Company's Common Stock is traded in the over-the-counter market and since November 22, 1996 has been quoted on the Nasdaq National Market System (the "Nasdaq Stock Market") under the symbol "STLD." The following table sets forth for the periods indicated the high and low closing sale prices as reported by Nasdaq:
COMMON STOCK PRICE --------------- HIGH LOW ------ ---- YEAR ENDED DECEMBER 31, 1996: Fourth Quarter (beginning November 22, 1996)................ $21 $16 3/4 YEAR ENDING DECEMBER 31, 1997: First Quarter............................................... 25 3/8 17 3/8 Second Quarter.............................................. 26 3/8 16 1/2 Third Quarter (through July 24, 1997)....................... 28 3/4 24 3/4
A recent reported last sale price for the Company's Common Stock as reported on the Nasdaq Stock Market is set forth on the cover page of this Prospectus. On June 30, 1997, there were approximately 300 holders of record and approximately 6,250 beneficial owners of the Company's Common Stock. The Company has never declared or paid cash dividends on its Common Stock. The Company currently anticipates that all of its future earnings will be retained to finance the expansion of its business and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. Any determination to pay cash dividends in the future will be at the discretion of the Company's Board of Directors after taking into account various factors, including the Company's financial condition, results of operations, outstanding indebtedness, current and anticipated cash needs and plans for expansion. Under the terms of the Company's Credit Agreement, the Company may make stock payments, including payment of dividends, in an aggregate cumulative amount not exceeding cumulative net income for the period from January 1, 1997 through the most recently completed fiscal quarter preceding such payment. 17 22 DILUTION The net tangible book value of the Company as of June 30, 1997 was approximately $283.4 million or approximately $5.92 per share of Common Stock. Net tangible book value per share is determined by dividing the net tangible book value (total tangible assets less total liabilities) by the number of outstanding shares of Common Stock. After giving effect to the sale by the Company of 1,255,971 shares of Common Stock offered hereby (at an assumed public offering price of $25.625 per share) and the application of the net proceeds as set forth under "Use of Proceeds," the net tangible book value of the Company as of June 30, 1997, would have been approximately $313.7 million or $6.39 per share, representing an immediate increase in net tangible book value of $.47 per share to the existing stockholders and an immediate dilution to investors purchasing shares in the offerings of $19.24 per share. The following table illustrates the per share dilution: Assumed public offering price......................................... $ 25.625 ------- Net tangible book value per share at June 30, 1997.................. $5.92 ----- Increase per share attributable to sale of Common Stock in the offerings........................................................ .47 ----- Pro forma net tangible book value per share after the offerings....... 6.39 ------- Dilution per share to new investors................................... $ 19.24 =======
The foregoing table does not give effect to the exercise of options to purchase 885,784 shares of Common Stock outstanding on June 30, 1997, at a weighted average exercise price of $9.42 per share. If all such outstanding options were exercised, the dilution to new investors would be $19.19 per share. The following table sets forth on a pro forma basis as of June 30, 1997, the number of shares and percentage of total outstanding Common Stock purchased, the total consideration and percentage of total consideration paid and the weighted average price per share paid by existing stockholders and by investors purchasing the shares of Common Stock offered by the Company hereby.
SHARES PURCHASED TOTAL CONSIDERATION WEIGHTED ---------------------- ------------------------ AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ------------ ------- ------------- Existing stockholders(1)........ 47,866,323 97.4% $308,801,171 90.6% $ 6.45 New investors................... 1,255,971 2.6 32,184,257 9.4 25.625 ---------- ------ ------------ ----- Total................. 49,122,294 100.0% $340,985,428 100% ========== ====== ============ =====
- ------------ (1) Sales by the Selling Stockholders in the offerings will cause the number of shares held by existing stockholders to be reduced, and the number of shares held by new investors to be increased by 7,144,029. See "Principal and Selling Stockholders." 18 23 CAPITALIZATION The following table sets forth the actual cash and cash equivalents, current maturities of long-term debt and capitalization of the Company as of June 30, 1997, and as adjusted to give effect to the offerings (assuming a public offering price of $25.625). This information should be read in conjunction with "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements, including the notes thereto, appearing elsewhere in this Prospectus.
JUNE 30, 1997 --------------------- AS ACTUAL ADJUSTED -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE INFORMATION) Cash and cash equivalents.............................................. $ 22,293 $ 52,590 ======= ======= Current maturities of long-term debt................................... $ 5,931 $ 5,931 ======= ======= Long-term debt, excluding current maturities: Senior term loans.................................................... $150,000 $150,000 Other(1)............................................................. 49,530 49,530 ------- ------- Total long-term debt.............................................. $199,530 $199,530 Stockholders' equity: Common Stock, $.01 par value per share, 100,000,000 shares authorized, 47,866,323 shares outstanding, 49,122,294 shares issued and outstanding, as adjusted(2)............................ $ 479 $ 492 Additional paid-in capital............................................. 304,078 334,362 Accumulated deficit.................................................... (9,604) (9,604) ------- ------- Total stockholders' equity........................................ 294,953 325,250 ------- ------- Total capitalization......................................... $494,483 $524,780 ======= =======
- ------------ (1) For a description of other long-term debt, see Note 3 to the Company's consolidated financial statements appearing elsewhere in this Prospectus. (2) Excludes 885,784 shares of Common Stock issuable upon exercise of stock options outstanding on June 30, 1997 at a weighted average exercise price of $9.42 per share. 19 24 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated financial data of the Company for the dates and periods indicated. The selected consolidated financial data for the period from September 7, 1993 (date of inception) through December 31, 1993, as of December 31, 1993, 1994, 1995 and 1996, and for each of the three years in the period ended December 31, 1996, were derived from the Company's consolidated financial statements which have been audited by Deloitte & Touche LLP. The selected consolidated financial data as of and for the six months ended June 29, 1996 and June 30, 1997 are derived from the unaudited consolidated financial statements of the Company and, in the opinion of management, include all adjustments (consisting only of normal recurring accruals) necessary to present fairly such data. Operating results for interim periods are not necessarily indicative of a full year's operations. The information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus.
SEPTEMBER 7, 1993 (DATE OF INCEPTION) YEAR ENDED DECEMBER 31, SIX MONTHS ENDED THROUGH ----------------------------- ----------------------------- DECEMBER 31, 1993 1994 1995 1996 JUNE 29, 1996 JUNE 30, 1997 ------------------- ------- -------- -------- ------------- ------------- (UNAUDITED) (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Net sales........................... $ -- $ -- $ 137 $252,617 $ 98,662 $ 200,777 Cost of goods sold.................. -- -- 3,169 220,563 95,591 150,180 ------- ------- -------- -------- -------- -------- Gross profit (loss)............... -- -- (3,032) 32,054 3,071 50,597 Selling, general and administrative expenses.......................... 1,159 4,192 13,580 13,838 5,894 12,479 ------- ------- -------- -------- -------- -------- Income (loss) from operations..... (1,159) (4,192) (16,612) 18,216 (2,823) 38,118 Foreign currency gain (loss)........ -- (4,952) (3,272) 328 260 261 Interest expense(1)................. (2) (43) (564) (22,684) (12,128) (3,995) Interest income..................... 1 307 560 1,581 579 1,264 ------- ------- -------- -------- -------- -------- Income (loss) before income taxes and extraordinary loss............ (1,160) (8,880) (19,888) (2,559) (14,112) 35,648 Provision for income taxes.......... -- -- -- -- -- 5,494 ------- ------- -------- -------- -------- -------- Income (loss) before extraordinary loss.............................. (1,160) (8,880) (19,888) (2,559) (14,112) 30,154 Extraordinary loss(2)............... -- -- -- (7,271) -- -- ------- ------- -------- -------- -------- -------- Net income (loss)................. $(1,160) $(8,880) $(19,888) $ (9,830) $ (14,112) $ 30,154 ======= ======= ======== ======== ======== ======== Income (loss) per share before extraordinary loss(3)............. $ (0.07) $ (0.36) $ (0.62) $ (0.07) $ (0.41) $ 0.63 Per share effect of extraordinary loss.............................. -- -- -- (0.21) -- -- ------- ------- -------- -------- -------- -------- Net income (loss) per share(3).... $ (0.07) $ (0.36) $ (0.62) $ (0.28) $ (0.41) $ 0.63 ======= ======= ======== ======== ======== ======== Weighted average common shares outstanding(3).................... 15,931 24,679 31,975 34,571 34,695 47,851 BALANCE SHEET DATA (END OF PERIOD): Cash and cash equivalents........... $ 117 $28,108 $ 6,884 $ 57,460 $ 27,823 $ 22,293 Working capital (deficit)........... (29) 8,230 (14,488) 96,142 44,293 60,676 Property, plant and equipment, net............................... 200 54,566 274,197 339,263 277,463 410,272 Total assets........................ 521 94,618 320,679 522,291 389,484 552,603 Long-term debt (including current maturities)....................... 800 11,949 223,054 207,343 258,514 205,461 Stockholders' equity (deficiency)... (429) 62,536 62,972 264,566 93,961 294,953
(footnotes on following page) 20 25 - ------------ (1) Excludes interest capitalized during the construction of the mini-mill and cold mill related to costs that are considered to be assets qualifying for interest capitalization under Statement of Financial Accounting Standards ("SFAS") No. 34, Capitalization of Interest Cost. Capitalized interest for the years ended December 31, 1994, 1995 and 1996 was $.3 million, $10.1 million and $1.0 million, respectively. Capitalized interest for the six months ended June 29, 1996 and June 30, 1997 was $60,000 and $3.8 million, respectively. (2) Represents the loss on early retirement of the Company's subordinated notes of approximately $7.3 million in the fourth quarter of 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company will incur an extraordinary loss of approximately $7.6 million (net of tax benefit of $5.1 million) in the third quarter of 1997 as a result of the refinancing of the Company's Credit Agreement. See "Description of Certain Indebtedness." (3) Net income (loss) per share for the period from September 7, 1993 (date of inception) through December 31, 1993, for the years ended December 31, 1994 and 1995 and for the six months ended June 29, 1996 were calculated by dividing the net loss by the weighted average number of shares of common stock outstanding including the anti-dilutive effect of shares issued from September 23, 1995 through September 23, 1996 using the treasury stock method. Net loss per share for the year ended December 31, 1996 excludes the anti-dilutive effect of common stock equivalents. 21 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, the Company's consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Certain information contained below, including information with respect to the Company's plans with respect to the Cold Mill, IDI and Caster Projects, are forward-looking statements. See "Risk Factors" for a discussion of important factors which could cause actual results to differ materially from the forward- looking statements contained herein. OVERVIEW Steel Dynamics owns and operates a new, state-of-the-art flat-rolled steel mini-mill, which commenced operations in January 1996. The Company was founded in September 1993 by executives and managers who pioneered the development of thin-slab/flat-rolled compact strip production technology and directed the construction and operation of the world's first thin-slab/flat-rolled mini-mill. Building upon their past experience with CSP technology, management founded SDI to produce steel more efficiently, at a lower cost and of higher quality. Steel Dynamics' goal is to become the low cost producer of a broad range of high quality flat-rolled steel products, including hot-rolled, cold-rolled and galvanized sheet, as well as other specialty steel products, and to serve more markets than any other flat-rolled mini-mill. In addition, the Company intends to participate in the development and use of new technologies to produce a broad range of steel products. Pursuant to the Company's plan to develop downstream processing facilities to produce further value-added steel products, Steel Dynamics is currently constructing a cold mill contiguous to the mini-mill, with a 1.0 million ton annual capacity which is scheduled for completion during the fourth quarter of 1997. Steel Dynamics also plans to add a second melting furnace, a second caster and tunnel furnace, and an additional coiler to expand its annual production capacity of hot-rolled steel from 1.4 million tons to approximately 2.4 million tons. The Caster Project is expected to be completed in the first half of 1998. In addition, the Company intends to construct a 600,000 tonne annual capacity plant for the manufacture of DRI, which the Company expects to be completed in 1998. The DRI, after further refining into 500,000 tonnes of liquid pig iron, will be used in SDI's mini-mill as a steel scrap substitute. Management strategically located the Company's mini-mill within close proximity to its natural customer base, steel service centers and other end users, abundant supplies of automotive and other steel scrap, competitive sources of power, and numerous rail and truck transportation routes. Steel Dynamics believes that its strategic location provides it with sales and marketing as well as production cost advantages. The Company has secured a stable baseload of sales through long-term "off-take" contracts with two major steel consumers, a 30,000 ton per month sales contract with Heidtman, a major Midwest-based steel service center and distributor and an affiliate of one of the Company's stockholders, and a 12,000 ton per month sales contract with Preussag, a major German steel manufacturer and a stockholder of the Company, with affiliate distributors and steel service centers throughout the United States. The Company has also sought to assure itself of a secure supply of steel scrap and scrap substitute. To accomplish this objective, SDI has entered into a long-term scrap purchasing services contract with OmniSource, one of the largest scrap dealers in the Midwest and an affiliate of one of the Company's stockholders. In addition, the Company has also sought to assure itself of a secure supply of scrap substitute material for use as a lower cost complement to steel scrap as part of the Company's melt mix. SDI has entered into a long-term 300,000 tonne per year "off-take" contract to purchase iron carbide from Qualitech's iron carbide facility currently under construction in Corpus Christi, Texas, which is expected to be completed in 1998. Additional scrap substitute material is expected to be provided through the IDI Project. The Company's business strategy is to use advanced CSP hot-rolled steelmaking and cold-rolling technologies to produce high surface quality flat-rolled steel in a variety of value-added sizes, gauges and surface treatments, emphasizing low production costs, reliable product quality and excellent customer service. In addition, SDI intends to remain financially strong and competitive through the selective purchasing of scrap and scrap substitutes to offset the effects of cyclical cost/price imbalances. 22 27 The Company's operations are subject to the cyclical nature of the steel industry and the U.S. economy as a whole. U.S. steel industry production was approximately 105.3 million tons in 1996, an increase of 4% from an average during the prior three-year period of approximately 101.1 million tons. This increase was due primarily to an improvement of general economic conditions and increased demand for durable goods. Other factors which affect the performance of the Company include increasing competition from U.S. and international steel producers (both integrated mills and mini-mills), worldwide supply and demand for hot bands and the strength of the U.S. dollar relative to the currencies of other steel producing countries. The following table summarizes the annual raw steel capacity, raw steel production, utilization rates and finished shipments information for the U.S. steel industry (as reported by the AISI) for the years 1994 through 1996:
U.S. RAW STEEL U.S. RAW STEEL TOTAL U.S. YEAR CAPABILITY PRODUCTION UTILIZATION SHIPMENTS ------------------------------- -------------- ------------------- ----------- ---------- (THOUSANDS OF TONS) 1994........................... 108,200 100,579 93.0% 95,084 1995........................... 112,400 104,930 93.4 97,494 1996........................... 116,100 105,309 90.7 100,878
The Company believes that the current market for flat-rolled steel appears to be sufficiently strong to absorb the current capacity of integrated and mini-mill producers. In 1995, spot prices for hot band dropped significantly in the second and third quarters, by approximately $40 and $20 per ton, respectively, before recovering by $10 per ton in the fourth quarter. Since the first quarter of 1996 and through the second quarter of 1997, however, spot prices for hot bands recovered an additional $40 per ton. Although Steel Dynamics believes the immediate outlook for the U.S. economy remains positive, there can be no assurance that the level of net tons shipped in the industry and current price levels will continue or increase from present levels in view of the modest nature of the improvement in the U.S. economy to date, increasing worldwide competition within the steel industry and increasing steel production capacity. Net Sales. The Company's net sales are a function of net tons shipped, prices and mix of products. SDI has experienced continued net sales growth since start-up and expects that trend to continue due to increasing production and shipments as well as improving pricing. In addition, the Company's products are sold out through the end of the third quarter of 1997 (the latest date for which Steel Dynamics has accepted orders). SDI has not entered into any fixed-price, long-term (exceeding one calendar quarter) contracts for the sale of steel. Although fixed price contracts may reduce the risk of price declines, these contracts also limit the ability of the Company to take advantage of price increases. All of the Company's orders are taken at its announced pricing levels with price discounts for high volume purchases when appropriate. SDI is also able to charge premium prices for certain grades of steel, dimensions of product, or certain smaller volumes, based upon the cost of production. When the Cold Mill Project is completed in the fourth quarter of 1997, the Company will be able to manufacture more value-added products requiring more exacting tolerances, thinner gauges, finer surface conditions, and galvanized coatings, thereby enabling it to charge premium prices for those products. Of the Company's shipments through June 30, 1997, approximately 42% have been purchased by Heidtman and Preussag pursuant to long-term "off-take" contracts based upon market pricing. In addition to this stable baseload of demand, the Company is continually seeking to attract new customers for its products. The Company had 18 customers at the end of January 1996 and the number of the Company's customers was 81 at the end of June 1997. SDI is also continually seeking to enter new markets and believes that when the Cold Mill Project is completed, it will be able to broaden its customer base, diversify its product mix and access more profitable markets. See "Business -- The Flat-Rolled Market." Cost of Goods Sold. All direct and indirect manufacturing costs are included in costs of goods sold. The principal elements comprising Steel Dynamics' costs of goods sold are steel scrap and scrap substitutes, electricity, natural gas, oxygen and argon, electrodes, alloys, depreciation and direct and indirect labor and benefits. During the start up of the cold mill beginning in the fourth quarter of 1997, and prior to the Caster Project commencing production, the Company will purchase hot bands from third parties. The Company 23 28 expects that the price paid for such hot bands will likely be greater than the Company's cost to produce them once the Caster Project commences production. Steel scrap and scrap substitutes represent the most significant component of the Company's total cost of goods sold. Although SDI believes that there will be an ample supply of high quality, low residual scrap in the future, the Company recognizes that the construction of additional mini-mills has led to increased demand for, and higher prices of, steel scrap. The Company believes that, over the long-term, prices of steel scrap will continue to be volatile but its price ranges will likely increase. As a result, Steel Dynamics has pursued a three-part strategy to secure access to adequate supplies of steel scrap and lower cost steel scrap substitute materials. First, the Company has entered into a long-term steel scrap contract with OmniSource. Second, SDI has entered into an iron carbide "off-take" contract with Qualitech. Third, the Company is pursuing the IDI Project to produce DRI and liquid pig iron. The Company purchases its electricity from American Electric Power ("AEP"), pursuant to a contract which extends through 2005. The contract designates a portion of the Company's load as "firm" with the majority of the load designated as "interruptible." At full production, the blended rate under the contract is expected to be between $.024 and $.025 per kilowatt hour. The Company has a "primary firm" natural gas delivery contract on the Panhandle Eastern Pipeline that extends through May 2000 and an interruptible delivery contract with NIPSCO/NIFL/Crossroads that extends through December 2000. The Company's natural gas contract, at a cost of $1.91 per decatherm, expires at the end of July 1997, and the Company's current intention is to purchase its natural gas needs on the spot market thereafter until such time as it determines that extended term contracts are attractively priced. The Company maintains a liquid propane tank farm on-site with sufficient reserves to sustain operations for approximately two weeks in the event of an interruption in the natural gas supply. SDI purchases all of its requirements for oxygen and argon from Air Products and Chemicals, Inc. ("Air Products"), which built a large plant adjacent to the mini-mill. As a result, the Company has been able to buy its oxygen and argon at what SDI believes to be favorable prices. Steel Dynamics generally purchases its other raw materials, such as electrodes and alloys, from various sources and their availability and price are subject to market conditions. Air Products uses its plant to supply other customers as well as the Company. For manufacturing plant and equipment, the Company uses the units-of-production method of depreciation. The current work force of the Company consists of 359 employees as of June 30, 1997, of which 276 were employed in the hot strip mill, 79 were employed in connection with the Cold Mill Project, and four were employed by IDI. For the six months ended June 30, 1997, the Company's employment costs per ton shipped (excluding Cold Mill and IDI Project employees) were approximately $16. The Company has established certain incentive compensation programs specifically designed to reward employee teams for their productivity efforts. Production employees actively share in SDI's success through a production bonus, a conversion cost bonus and a profit sharing plan. The Company's employees are not represented by any labor unions. Selling, General & Administrative. Selling, general and administrative expenses are comprised of all costs associated with the sales, finance/accounting, materials and transportation, and administrative departments. These costs include labor and benefits, advertising, promotional materials, bad debt expenses and professional fees. These costs are not directly affected by sales volumes. SDI has established a Profit Sharing Plan for eligible employees under which a minimum of 5% of pretax profits are paid into a "profit sharing pool." The majority of the profit sharing pool is used to fund the Profit Sharing Plan, with the balance paid to employees as a cash bonus in March of each year. Selling, general and administrative expenses also include all non-capitalized start-up costs associated with the construction of the Cold Mill Project, including all labor and benefits, utilities and general supplies and services. The Company expects that these costs will increase through the construction and start-up of the Expansion Projects. Interest Expense. During the construction of the mini-mill, the cold mill and the second caster, the costs related to construction expenditures are considered to be assets qualifying for interest capitalization under SFAS No. 34, Capitalization of Interest Cost. Capitalized interest for the year ended December 31, 1994, 1995 and 1996 was $.3 million, $10.1 million, and $1.0 million, respectively. For the six months ended 24 29 June 30, 1997, capitalized interest was $3.8 million, compared to $60,000 for the six months ended June 29, 1996. Management expects that a majority of the interest on the indebtedness incurred to finance the construction of the Expansion Projects will be capitalized. Extraordinary Loss. The Company used a portion of the net proceeds from its initial public offering in November 1996 to prepay its subordinated notes. This prepayment resulted in an extraordinary loss of approximately $7.3 million for 1996, principally associated with the unamortized debt discount costs relating to the notes. The Company will incur an extraordinary loss of approximately $7.6 million (net of tax benefit of $5.1 million) in the third quarter of 1997 attributable to prepayment penalties and a write-off of financing costs relating to the refinancing of the Company's Credit Agreement. See "Description of Certain Indebtedness." RESULTS OF OPERATIONS Founded in September 1993, SDI commenced primary grade steel production in January 1996. Accordingly, the Company's historical results of operations are not indicative of results to be expected in the future. Net Sales. Net sales totaled approximately $252.6 million for 1996. SDI commenced primary grade steel production on January 2, 1996, and has continued to increase its net sales as its production of prime tons increased. As of the end of June 1997, the Company was operating at an annualized production rate of 1.2 million tons, or 85% of full capacity. In addition, the average sales price per prime ton increased from $302 for January 1996 to $357 for June 1997. For 1993, 1994 and 1995, during which time the mini-mill was under construction, Steel Dynamics had no net sales other than $137,000 in December 1995 from the sale of approximately 600 tons of secondary grade steel. For the six months ended June 29, 1996 and June 30, 1997, net sales were approximately $98.7 million and $200.8 million, respectively. Cost of Goods Sold. Cost of goods sold totaled approximately $220.6 million, or 87% of net sales, for 1996. For the six months ended June 29, 1996 and June 30, 1997, cost of goods sold were approximately $95.6 million and $150.2 million, respectively. As the Company continues to increase the number of prime tons sold, the Company expects that cost of goods sold will continue to increase but, as a percentage of net sales, the cost of goods sold will decrease. For 1995, cost of goods sold was $3.2 million. Selling, General and Administrative Expenses. Selling, general and administrative expenses were approximately $4.2 million, $13.6 million, and $13.8 million for 1994, 1995, and 1996, respectively. For the six months ended June 29, 1996 and June 30, 1997, selling, general, and administrative expense was approximately $5.9 million and $12.5 million, respectively. The increase in expenses for the first six months of 1997 was due primarily to approximately $3.2 million of start-up costs for the Cold Mill and Caster Projects and approximately $1.8 million of profit sharing expenses. Interest Expense. Interest expense totaled approximately $43,000, $564,000, and $22.7 million for 1994, 1995, and 1996, respectively. For the six months ended June 29, 1996 and June 30, 1997, interest expense was $12.1 million and $4.0 million, respectively. The low level of interest expense during 1994 and 1995 reflects the effect of capitalizing interest relating to construction costs. The lower interest expense for the first six months of 1997 was primarily due to lower debt levels resulting from the repayment of subordinated debt with the net proceeds from the initial public offering and, to a lesser extent, lower interest rates. Foreign Currency Gain (Loss). The foreign currency gains and losses represent transaction gains and losses incurred by the Company for purchases of equipment used within the Company's mini-mill. A portion of the purchase price, as stated within the contract to purchase the equipment, was denominated in German marks. The Company committed to purchase the equipment in December 1993 with settlement of the liability primarily occurring during the construction period of the mini-mill. No foreign currency financial instruments were entered into to hedge against foreign currency movements until the first quarter of 1997 when the Company purchased German marks forward contracts approximately equal to the unsettled liability. No commitments for equipment purchases denominated in a foreign currency existed as of June 30, 1997. Foreign currency loss totaled approximately $5.0 million and $3.3 million for 1994 and 1995, respectively. In 1996, the 25 30 foreign currency gain totaled $328,000. For the six months ended June 29, 1996 and June 30, 1997, foreign currency gains were $260,000 and $261,000, respectively. The Company's strategy for managing foreign currency risk will depend on facts and circumstances of the related transaction, and the Company will consider risk management strategies as appropriate. Interest Income. Interest income totaled approximately $307,000, $560,000, and $1.6 million for 1994, 1995, and 1996, respectively, and approximately $579,000 and $1.3 million for the six months ended June 29, 1996 and June 30, 1997, respectively. Extraordinary Loss. The Company used a portion of the net proceeds from its initial public offering in November 1996 to prepay its subordinated notes. This prepayment resulted in an extraordinary loss of approximately $7.3 million, principally associated with the unamortized debt discount costs relating to the notes. Taxes. At December 31, 1996, the Company had available net operating losses that can be carried forward for federal income tax purposes of approximately $49.4 million of which $200,000 expire in 2009, $2.3 million expire in 2010 and $46.9 million expire in 2011. Because of the Company's limited operating history, a valuation allowance has been established for a portion of the deferred tax asset. The Company will continually assess the need for a valuation allowance for the deferred tax asset based on expectations of future taxable income. For the six months ended June 29, 1996, the Company had a net deferred tax asset that was offset entirely by a valuation allowance. For the six months ended June 30, 1997, the Company has computed income taxes based upon the expected annual effective tax rate, which gives effect to the utilization of available net operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES Steel Dynamics' business is capital intensive and requires substantial expenditures for, among other things, the purchase and maintenance of equipment used in its steelmaking and finishing operations and compliance with environmental laws. See "Risk Factors -- Significant Capital Requirements" and "-- Potential Costs of Environmental Compliance." The Company's liquidity needs arise primarily from capital investments, working capital requirements and principal and interest payments on its indebtedness. Since its inception, SDI has met these liquidity requirements with cash provided by equity, long-term borrowings, state and local government grants and capital cost reimbursements. Net cash used in operating activities totaled approximately $22.7 million for 1993 through 1995. During 1996, the Company used net cash of approximately $51.6 million in operating activities. The use of cash in operating activities for 1996 primarily related to the build-up of raw material inventory as a result of favorable pricing and the substantial increase in accounts receivable as a result of sales increases. Net cash used in investing activities totaled approximately $246.4 million from 1993 through 1995 and approximately $83.1 million for 1996. Investing activities primarily consisted of capital expenditures of approximately $352.1 million through 1996 for the construction of the Company's existing facilities and the beginning of the Cold Mill Project. Cash provided by financing activities totaled approximately $276.0 million from 1993 through 1995 and approximately $185.3 million for 1996. The increase in cash provided by financing activities primarily relates to the approximately $140.2 million raised in November 1996 from the Company's initial public offering, and from private placements of the Company's common stock earlier in 1996. For the six months ended June 29, 1996, net cash used in operating activities amounted to $44.4 million, net cash used in investing activities was $18.2 million and cash provided by financing activities was $76.5 million. For the six months ended June 30, 1997, net cash provided by operating activities was $48.5 million, net cash used in investing activities was $81.5 million and cash used in financing activities was $2.2 million. The Company issued $55.0 million principal amount of subordinated notes (together with warrants to purchase common stock) to finance a portion of the construction of the mini-mill. The subordinated notes were repaid in full in November 1996 with a portion of the net proceeds from the Company's initial public offering. 26 31 As of June 30, 1997, the Company entered into the Credit Agreement, which replaced its previous $345.0 million credit facility. The Credit Agreement consists of a $450.0 million credit facility, composed of a $250.0 million five-year revolving credit facility (subject to a borrowing base), a $100.0 million 364-day revolving credit facility (subject to extension if approved by all of the lenders, or, if not, converted into a five-year term loan amortizable in equal quarterly installments during the final two years of the five-year term loan period), and a $100.0 million term loan amortizable in equal quarterly installments during the final two years of the term loan period, commencing September 30, 2002. The Credit Agreement is secured by substantially all of the Company's assets (other than as permitted to be excluded in order to secure the IDI Financing). In addition, the Company has received a proposed term sheet for the $60.0 million IDI Financing to finance a portion of the IDI Project. This anticipated credit facility would be secured by essentially all of the assets of IDI. The lending banks have also requested that Steel Dynamics cause to be provided an "Assurance Package," consisting of a package of coordinated completion and performance guarantees (including failure to achieve an agreed level of performance by a specified date), together with remedies, acceptable to the lenders, for up to 100% of the cost of the amount financed. While it is anticipated that IDI will receive a commitment for the IDI financing, there can be no assurance that such a commitment will be secured or, even if secured, that the IDI Financing will be consummated. See "Description of Certain Indebtedness -- The Credit Agreement" and "-- The IDI Financing." Borrowings under the Credit Agreement bear and anticipated borrowings under the IDI Financing will bear interest at floating rates. The Company entered into an interest rate swap agreement on a notional amount of $100 million pursuant to which the Company has agreed to make fixed rate payments at 6.935% and will receive LIBOR payments for the seven year term tranche of the Credit Agreement. The maturity date of the interest rate swap agreement is July 2, 2001. The counterparty has the right to extend the maturity date to July 1, 2004 at predetermined interest rates. As of June 30, 1997, the Company had $199.5 million of indebtedness outstanding, including $150.0 million under the Credit Agreement, $22.3 million of cash and cash equivalents, and $300.0 million of availability under the Credit Agreement (subject to borrowing base restrictions). The Company intends to use cash on hand, funds from operations and borrowings under the Credit Agreement and the IDI Financing, if and when consummated, to finance completion of the construction and start-up of the Expansion Projects ($200.0 million for the Cold Mill Project; $85.0 million for the Caster Project (exclusive of start-up expenses); and $95.0 million for the IDI Project.) See "Risk Factors -- Significant Capital Requirements." The Company intends to use the proceeds from the offerings to fund an addition to the hot strip mill of a seventh rolling stand, and will use the balance of the net proceeds for general corporate purposes. ENVIRONMENTAL EXPENDITURES AND OTHER CONTINGENCIES SDI has incurred and, in the future, will continue to incur capital expenditures and operating expenses for matters relating to environmental control, remediation, monitoring and compliance. Capital expenditures for environmental control for 1994, 1995 and 1996 were approximately $595,000, $15.9 million, and $790,000, respectively, and operating expenses relating to environmental matters were approximately $0, $30,000, and $3.1 million, for the same periods. The Company has planned expenditures relating to environmental matters of approximately $4.1 million and $4.8 million for 1997 and 1998, respectively, principally associated with the addition of equipment required in connection with the Expansion Projects. Steel Dynamics believes that compliance with current environmental laws and regulations is not likely to have a material adverse effect on the Company's financial condition, results of operations or liquidity. However, environmental laws and regulations have changed rapidly in recent years and SDI may become subject to more stringent environmental laws and regulations in the future. See "Risk Factors -- Potential Costs of Environmental Compliance." INFLATION SDI does not believe that inflation has had a material effect on its results of operations. 27 32 RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, SFAS No. 128, Earnings per Share, was issued which establishes new standards for computing and presenting earnings per share ("EPS"). Specifically, SFAS No. 128 replaces the presentation of primary EPS with a presentation of basic EPS, requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997; earlier application is not permitted. Management has determined that the adoption of SFAS No. 128 will not have a material effect on the Company's consolidated financial statements. In June 1997 SFAS No. 130, Comprehensive Income, was issued which becomes effective in 1998 and requires reclassification of earlier financial statements for comparative purposes. SFAS No. 130 requires that changes in the amounts of certain items, including foreign currency translation adjustments and gains and losses on certain securities be shown in the financial statements. SFAS No. 130 does not require a specific format for the financial statement in which comprehensive income is reported, but does require that an amount representing total comprehensive income be reported in that statement. Management has not yet determined the effect, if any, of SFAS No. 130 on the Company's consolidated financial statements. Also in June 1997, SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, was issued. This Statement will change the way public companies report information about segments of their business in their annual financial statements and requires them to report selected segment information in their quarterly reports issued to shareholders. It also requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues, and its major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. Management has not yet determined the effect, if any, of SFAS No. 131 on the Company's consolidated financial statements. 28 33 BUSINESS OVERVIEW Steel Dynamics owns and operates a new, state-of-the-art flat-rolled steel mini-mill, which commenced operations in January 1996. The Company was founded by executives and managers who pioneered the development of thin-slab/flat-rolled compact strip production technology and directed the construction and operation of the world's first thin-slab/flat-rolled mini-mill. Building upon their past experience with CSP technology, management founded SDI to produce steel more efficiently, at a lower cost and of higher quality. Steel Dynamics' goal is to be the low cost producer of a broad range of high quality flat-rolled steel products, including hot-rolled, cold-rolled and galvanized sheet, as well as other specialty steel products, and to serve more markets than any other flat-rolled mini-mill. In addition, the Company intends to participate in the development and use of new technologies to produce a broad range of steel products. The Company was founded in September 1993 by Keith E. Busse, Mark D. Millett and Richard P. Teets, Jr. In October 1994, Steel Dynamics commenced construction of the mini-mill and commissioned it in December 1995. The Company believes that this 14-month construction period is the fastest ever for this kind of facility. In addition, the Company believes that the approximately $275.7 million initial capital cost of its mini-mill is approximately $75.0 million, or approximately 20% less than the cost of comparable mini-mills currently operating. Actual production at the mini-mill of primary grade steel commenced on January 2, 1996. The mill achieved an annualized production rate of 1.2 million tons by the end of June 1997, or 85% of its capacity of 1.4 million tons, making the mini-mill's start-up and ramp-up the fastest to date in the industry. Pursuant to the Company's plan to develop downstream processing facilities to produce further value-added steel products, Steel Dynamics is currently constructing a cold mill, contiguous to the mini-mill, with a 1.0 million ton annual capacity, which is scheduled for completion during the fourth quarter of 1997. Steel Dynamics plans to add a second melting furnace, a second caster and tunnel furnace, and an additional coiler in 1998 to expand its annual production capacity of hot-rolled steel from 1.4 million tons to approximately 2.4 million tons. The Caster Project is expected to be completed in the first half of 1998. In addition, the Company's wholly-owned subsidiary, Iron Dynamics, intends to construct a 600,000 tonne annual capacity plant for the manufacture of direct reduced iron, which the Company expects to be completed in 1998. The DRI, after further refining into 500,000 tonnes of liquid pig iron, will be used in SDI's mini-mill as a steel scrap substitute. Management strategically located the Company's mini-mill within close proximity to its natural customer base, steel service centers and other end users, abundant supplies of automotive and other steel scrap (SDI's principal raw material), competitive sources of power, and numerous rail and truck transportation routes. Steel Dynamics believes that its strategic location provides it with sales and marketing as well as production cost advantages. The Company has secured a stable baseload of sales through long-term "off-take" contracts with two major steel consumers, a 30,000 ton per month sales contract with Heidtman, a major Midwest-based steel service center and distributor and an affiliate of one of the Company's stockholders, and a 12,000 ton per month sales contract with Preussag, a major German steel manufacturer and a stockholder of the Company, with affiliate distributors and steel service centers throughout the United States. The Company has sought to assure itself of a secure supply of both steel scrap and scrap substitute material. To accomplish this objective, SDI has entered into a long-term scrap purchasing services contract with OmniSource, one of the largest scrap dealers in the Midwest and an affiliate of one of the Company's stockholders. In addition, the Company has also sought to assure itself of a secure supply of scrap substitute material for use as a lower cost complement to steel scrap as part of the Company's melt mix. SDI has entered into a long-term 300,000 tonne per year "off-take" contract to purchase iron carbide from Qualitech's iron carbide facility currently under construction in Corpus Christi, Texas which is expected to be completed in 1998. The Company expects to produce additional scrap substitute material in 1998 upon completion of the IDI Project. 29 34 STRATEGY The Company's business strategy is to use advanced CSP hot-rolled steelmaking and cold-rolling technologies to produce high surface quality flat-rolled steel in a variety of value-added sizes, gauges and surface treatments, emphasizing low production costs, reliable product quality and excellent customer service. In addition, SDI intends to remain financially strong and competitive through the selective purchasing of scrap and scrap substitutes to offset the effects of cyclical cost/price imbalances. The principal elements of the Company's strategy include: - Achieve Lowest Conversion Costs in Industry. Steel Dynamics' electric arc furnace and its caster and rolling mill designs represent substantial improvements over earlier mini-mills using CSP technology. These improvements have been designed to speed the steelmaking process, to limit "power off time" and other non-productive time in the EAF, to reduce the per ton cost of consumables and to yield higher quality finished steel product. The Company believes that its per ton manufacturing costs are already among the lowest in the industry. - Emphasize Value-Added Products and Increase Product Breadth. Steel Dynamics has produced and believes that it will be able to consistently produce thinner gauge (down to .040") steel in hot-rolled form with better surface and edge characteristics than most other flat-rolled producers. The Company believes that its high quality, thinner hot-rolled products will compete favorably with certain more expensive cold-rolled (further processed) products, enabling it to obtain higher margins. In addition, with the anticipated completion of the Cold Mill Project, SDI expects to devote a substantial portion of its hot-rolled products to the production of higher value-added cold-rolled and galvanized products, as well as thinner gauges, down to .015". This increased product breadth should also allow the Company to further broaden its customer base. - Secure Reliable Sources of Low Cost Metallics. The principal raw material used in the Company's mini-mill is steel scrap, which represented approximately 58% of the Company's total manufacturing costs for the three months ended June 30, 1997. Steel Dynamics has pursued a three-part strategy to secure access to adequate low cost supplies of steel scrap and steel scrap substitute materials. First, the Company has entered into a long-term steel scrap contract with OmniSource. Second, SDI has entered into an iron carbide "off-take" contract with Qualitech. Third, Steel Dynamics is pursuing the IDI Project to produce DRI and after further refining, liquid pig iron, as another lower cost complement for use in the melt mix with steel scrap. - Secure a Solid Baseload of Hot Band Sales. In order to help ensure consistent and efficient plant utilization, SDI entered into "off-take" sales and distribution agreements with Heidtman and Preussag, through 2001, pursuant to which Heidtman has agreed to purchase at least 30,000 tons and Preussag has agreed to purchase at least an average of 12,000 tons of the Company's flat-rolled products per month, at the Company's market price, subject to certain volume and single run discounts. - Increase Unit Growth at Low Capital Cost. SDI seeks to continue to grow its production of flat-rolled steel coil at low capital and unit costs. The Company plans to invest approximately $85.0 million to finance its Caster Project. The Caster Project, which is expected to be completed in the first half of 1998, is expected to increase the annual production capacity of the Company's mini-mill from 1.4 to approximately 2.4 million tons of hot-rolled steel. In addition, management intends to continue to explore new production technologies to further lower its unit costs of production. - Incentivize Employees. In contrast to the high fixed labor costs of many of the Company's competitors, SDI has established certain incentive compensation programs specifically designed to reward employee teams for their efforts towards enhancing productivity, thereby encouraging a sense of ownership throughout Steel Dynamics. Production employees actively share in the Company's success through a "production" bonus and a "conversion cost" bonus. The production bonus is directly tied to the quantity and quality of products manufactured during a particular shift. The conversion cost bonus encourages employees to use materials and resources more efficiently. Steel Dynamics' employees' bonuses may equal or exceed their base hourly wage. 30 35 - Pursue Future Opportunities. Steel Dynamics believes that technology development and management's experience will provide significant opportunities for SDI in a broad range of markets, potentially including flat-rolled, non-flat-rolled, stainless and specialty steels. The Company plans to pursue opportunities through greenfield projects, strategic alliances or acquisitions to secure the long-term future growth and profitability of SDI. The Company is conducting certain preliminary engineering and feasibility analyses for a possible 750,000 ton capacity structural steel facility to manufacture wide flange beams and other structural shapes, utilizing near net shape casting technology in conjunction with a state-of-the-art bloom caster. There is no assurance, however, that such a facility will be approved by the Company for further development efforts once these preliminary studies have been completed, or, if further developed, that the facility will be able to be financed and built. Steel Dynamics will also seek to enter new steel markets and to produce new steel products using the latest technology, with the objective of being a low cost producer. In addition, the Company has a technology sharing agreement with Preussag which will provide SDI with Preussag's expertise and know-how in steel manufacturing, particularly steel finishing. INDUSTRY OVERVIEW The steel industry has historically been and continues to be highly cyclical in nature, influenced by a combination of factors including periods of economic growth or recession, strength or weakness of the U.S. dollar, worldwide production capacity, levels of steel imports and tariffs. The industry has also been affected by other company-specific factors such as failure to adapt to technological change, plant inefficiency, and high labor costs. As an industry, most U.S. steel producers suffered losses between 1982 and 1986, earned profits between 1987 and 1989, weakened again through the end of 1992, strengthened during 1993 and 1994, weakened again in 1995 and appear to be strengthening at the present time. Steel, regardless of product type, is a commodity that responds to forces of supply and demand, and prices have been volatile and have fluctuated in reaction to general and industry specific economic conditions. Under such conditions, a steel company must be a low cost, efficient producer and a quality manufacturer. There are generally two kinds of primary steel producers, "integrated" and "mini-mill." The following diagram illustrates the differences in production methodologies between the typical multi-step integrated mill production process and the typical continuous mini-mill melting-casting-rolling process. 31 36 DIAGRAM Steel manufacturing by an "integrated" producer involves a series of distinct but related processes, often separated in time and in plant geography. This process generally involves ironmaking followed by steelmaking, followed by billet or slab making, followed by reheating and further rolling into steel plate or bar, or flat-rolling into sheet steel or coil. These processes may, in turn, be followed by various finishing processes (including cold-rolling) or various coating processes (including galvanizing). In integrated producer steelmaking, coal is converted to coke in a coke oven, then combined in a blast furnace with iron ore (or pellets) and limestone to produce pig iron, and then combined with scrap in a "basic oxygen" or other furnace to produce raw or liquid steel. Once produced, the liquid steel is metallurgically refined and then either poured as ingots for later reheating and processing or transported to a continuous caster for casting into a billet or slab, which is then further shaped or rolled into its final form. Typically, though not always, and whether by design or as a result of downsizing or re-configuration, many of these processes take place in separate and remote facilities. In contrast, a mini-mill employs an electric arc furnace to directly melt scrap steel or steel scrap substitute, thus entirely eliminating the energy-intensive blast furnace. A mini-mill incorporates the melt shop, ladle metallurgical station, casting, and rolling into a unified continuous flow. The melting process begins with the charging of a furnace vessel with scrap steel, carbon, and lime, following which the vessel's top is swung into place and electrodes lowered into the scrap through holes in the top of the furnace. Electricity is then applied to melt the scrap. The liquid steel is then checked for chemistry and the necessary metallurgical 32 37 adjustments are made while the steel is still in the melting furnace or, if the plant has a separate staging area for that process (as SDI's does), the material is transported by a ladle to an area, commonly known as a ladle metallurgy station. From there, the liquid steel is transported by ladle to a turret at the continuous caster, wherein it is then transferred into a tundish, a kind of reservoir, which controls the flow of the liquid steel into a water-cooled copper-lined mold (collectively, the "caster") from which it exits as an externally solid billet or slab. After a billet is cast, it is then cut to length and either shipped as billets or stored until needed for further rolling or processing (which would involve reheating) or it may be sent directly into the rolling process, after which it may then be cut to length, straightened, or stacked and bundled. In the case of thin-slab casting, however, the slabs proceed directly into a tunnel furnace, which maintains and equalizes the slab's temperature, and then after descaling, into the first stand of the rolling mill operation. In this rolling process, the steel is progressively reduced in thickness. In the case of sheet steel, it is wound into coil and may be sold either directly to end users or to intermediate steel processors or service centers, where it may be pickled, cold-rolled, annealed, tempered, or galvanized. As a group, mini-mills are generally characterized by lower costs of production and higher productivity than the integrated steelmakers. This is due, in part, to the mini-mills' lower capital costs and to their lower operating costs resulting from their streamlined melting process and smaller, more efficient plant layouts. Moreover, mini-mills have tended to employ a management culture that emphasizes worker empowerment and flexible, incentive-oriented non-union labor practices. The smaller plant size of the mini-mill operation also permits greater flexibility in locating the facility to optimize access to scrap supply, attractive energy costs, infrastructure and markets. Furthermore, the mini-mill's more efficient plant size and layout, which incorporates the melt shop, metallurgical station, casting and rolling in a unified continuous flow under the same roof (as contrasted with integrated mills, which have typically been downsized and re-configured over time and thus may perform each of these functions in separate facilities), have reduced or eliminated costly re-handling and re-heating of partially finished product. Mini-mills, moreover, have tended to be more willing to adapt to newer, more innovative and aggressive management styles, featuring decentralized decision-making. They have also adapted more quickly to the use of newer, more cost effective and efficient machinery and equipment, translating technological advances in the industry into more efficient production more quickly than the integrated mills. EVOLUTION OF COMPACT STRIP PRODUCTION TECHNOLOGY Mini-mills have been producing steel since the early 1960s when EAFs and continuous casting were initially commercialized. For many of these years, the mini-mills focused almost exclusively on lower-quality, lower-priced "long products," including merchant shapes such as rebar, wire, rod, angles, and structurals, due to the mini-mill's relatively smaller size, initial quality limitations and early power and capacity limitations. In 1989, however, a mini-mill, using the world's first CSP machine employing a revolutionary mold design, directly cast a 2" slab that was less than 25% of the thickness of the typical 8" to 10" slabs cast by the integrated producers. The CSP technology was one of the most significant advances in steelmaking in the last forty years. The thinner slab greatly reduces costs, as less reduction is necessary in the hot-strip rolling mill to create hot-rolled bands or coils of steel, and there is substantially less re-heating required prior to rolling. Most important, the development of this thin-slab casting technology, with its lower capital cost requirement, allowed for the entry of the mini-mills into the flat-rolled segment of the steel market. THE FLAT-ROLLED MARKET The flat-rolled market represents the largest steel product group, accounting for approximately 61.9% of the total annual U.S. steel shipments in 1996. Flat-rolled products consist of hot-rolled, cold-rolled, and coated sheet and coil. Currently, the Company's products consist only of hot-rolled coil. This product group has been the fastest growing segment of the U.S. steel market over the last 40 years, amounting to approximately 62.5 million tons of shipments in 1996. The following table shows the U.S. flat-rolled shipments by hot-rolled, cold-rolled, and coated production (as reported by the AISI) for the last five years. 33 38
YEAR ENDED DECEMBER 31, ---------------------------------------- 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- (MILLIONS OF TONS) Hot-Rolled(1)........................................... 20.8 22.7 24.6 26.8 27.0 Cold-Rolled(2).......................................... 14.2 14.4 14.7 14.1 15.8 Coated(3)............................................... 15.6 18.3 20.2 19.9 19.7 ---- ---- ---- ---- ---- Total......................................... 50.6 55.4 59.5 60.8 62.5 ==== ==== ==== ==== ==== % Total Steel Shipments................................. 61.6% 62.3% 62.6% 62.4% 61.9%
- ------------ (1) Includes pipe/tube, sheet, strip and plate in coils. (2) Includes blackplate, sheet, strip and electrical. (3) Includes tin coated, hot dipped, galvanized, electrogalvanized and all other metallic coated. The following chart presents 1996 U.S. industry flat-rolled product shipments by market segment (as reported by the AISI): PIE CHART plot points in pcn 802 Hot-Rolled Products. All coiled flat-rolled steel is initially hot-rolled, a process that consists of passing an ingot or a cast slab through a multi-stand rolling mill to reduce its thickness to less than 1/2" and, in some mills, to less than 1/16". Hot-rolled steel is minimally processed steel coil that is used in the manufacture of various non-surface critical applications such as automobile suspension arms, frames, wheels, and other unexposed parts in auto and truck bodies, agricultural equipment, construction products, machinery, tubing, pipe, tools, lawn care products and guard rails. The U.S. market for hot-rolled steel in 1996 was approximately 27.0 million tons, excluding imports. This is a market segment that the Company's existing mini-mill currently serves. The following chart presents 1996 U.S. industry hot-rolled product shipments by market segment (as reported by the AISI): PIE CHART plot points in 802 Cold-Rolled Products. Cold-rolled steel is hot-rolled steel that has been further processed through a pickler and then successively passed through a rolling mill without reheating until the desired gauge (or thickness) and other physical properties have been achieved. Cold-rolling reduces gauge and hardens the steel and, when further processed through an annealing furnace and a temper mill, improves uniformity, ductility and formability. Cold-rolling can also impart various surface finishes and textures. Cold-rolled steel is used in 34 39 applications that demand higher quality or finish, such as exposed automobile and appliance panels. As a result, cold-rolled prices are typically higher than hot-rolled. The U.S. market for cold-rolled steel in 1996 was approximately 15.8 million tons, excluding imports. This is a market segment that the Company's cold mill will serve when completed in the fourth quarter of 1997. The following chart presents 1996 U.S. industry cold-rolled product shipments by market segment (as reported by the AISI): PIE CHART Plot points in pcn 801 Coated Products. Coated steel is usually cold-rolled sheet that has been coated with a non-ferrous metal to render it corrosion-resistant and to improve its paintability. Hot-dipped galvanized, electrogalvanized and aluminized products are types of coated steels. These are also the highest value-added sheet products because they require the greatest degree of processing and tend to have the strictest quality requirements. Coated steel is used in high volume applications such as automotive, household appliances, roofing and siding, heating and air conditioning equipment, air ducts, switch boxes, chimney flues, awnings, garbage cans and food containers. The use of coated steels in the U.S. has increased dramatically over the last 40 years. The U.S. market for coated steels in 1996 was approximately 19.7 million tons, excluding imports. This market segment will be served by SDI's cold mill when completed in the fourth quarter of 1997. The following chart presents 1996 U.S. industry coated product shipments by market segment (as reported by the AISI): PIE CHART plot points in pcn 801 THE COMPANY'S PRODUCTS AND APPLICATIONS The Company's current array of hot-rolled products includes a variety of high quality mild and medium carbon and high strength low alloy hot-rolled bands in 40" to 62" widths and in thicknesses from .500" down to .040" (1 mm). These products are suitable for mechanical and structural tubing, gas and fluid transmission piping, metal building systems, parts and components for automobiles, trucks, trailers, and recreational vehicles, rail cars, ships, barges, and other marine equipment, agricultural equipment and farm implements, lawn, garden, and recreational equipment, industrial machinery and shipping containers. SDI believes that, because of innovations made in its state-of-the-art caster, its basic production hot band has surface and edge quality characteristics that exceed those of the other thin-slab/flat-rolled mini-mills operating currently. The Company also believes that the surface and edge quality of its hot bands compares favorably with conventional mills. Steel Dynamics believes that it is able to access a substantial portion of the current U.S. shipped hot-rolled market of 27.0 million tons. Based on information from its customers, the following chart displays SDI's flat-rolled shipments for the first six months of 1997, by market classification of the ultimate end user, 35 40 regardless of whether the Company's hot band was further processed by a steel service center or other intermediate processor before being shipped to the end user.
END USER INDUSTRY PERCENTAGE TYPICAL APPLICATIONS ------------------------- ---------- ---------------------------------------------- Tubing................... 28% Structural tube, mechanical tube, conduit Automotive............... 27 Safety restraints, suspension, frame Commercial equipment..... 13 Racks, shelving, hardware Construction............. 9 Metal buildings, piling, safety grating Machinery................ 4 Construction equipment, machine tools Appliances............... 3 Liners, backs, brackets Residential equipment.... 3 Lawn equipment, garden implements, motion furniture Agriculture.............. 2 Farm equipment, feeders, bins Rail..................... 2 Rail car sides, tops, end caps Other.................... 9 Exercise and recreational equipment --- Total.................... 100% ===
After completion of the Cold Mill Project (expected to occur during the fourth quarter of 1997), SDI expects to produce a full range of hot-rolled, hot-rolled coated, cold-rolled and cold-rolled coated products. At that time, the Company expects to devote a substantial portion of its hot bands to the production of higher value added products, including galvanized coatings, as well as thinner gauge cold-rolled, down to .015". This increased product breadth should also allow SDI to broaden its direct customer base, so that many of the products required by end user consumers could be purchased directly from the Company, instead of through an intermediate processor or steel service center. The Company believes that upon completion of the Cold Mill Project it will be able to access a substantial portion of the current U.S. shipped flat-rolled market of 62.5 million tons. THE COMPANY'S CUSTOMERS AND MARKETS Intermediate Steel Processors and Steel Service Centers. The Company's customers currently are primarily intermediate steel processors and steel service centers. Of Steel Dynamics' total net sales in 1996 and for the six months ended June 30, 1997, 71% and 62%, respectively, were to steel processors or service centers. These steel processors and service centers typically act as intermediaries between primary steel producers, such as SDI, and the various end user manufacturers that require further processing of hot bands. The additional processing performed by the intermediate steel processors and service centers include pickling, galvanizing, cutting to length, slitting to size, leveling, blanking, shape correcting, edge rolling, shearing and stamping. After the completion of the Cold Mill Project, the Company expects to provide additional value-added cold-rolling and coating services. The Company expects, however, that its intermediate steel processor and service center customers will remain an integral part of its future customer base and plans to continue to sell its hot bands and other products to these customers after the Cold Mill Project is complete. The Company's largest customers, Heidtman and Preussag, accounted in the aggregate for approximately 36% and 12% of Steel Dynamics' total net sales during 1996, respectively, and 32% and 10% of the Company's total net sales for the six months ended June 30, 1997, respectively. While the loss of either Heidtman or Preussag as a customer, or a significant reduction in the business generated by Heidtman or Preussag, might have a material adverse effect on SDI's results of operations, the Company believes its relationships with these two companies have enabled it to baseload the mill, thus helping to ensure consistent and sufficient plant utilization. Heidtman and Preussag are the only two customers of SDI that have accounted, individually, for more than 10% of the Company's total net sales during 1996 and for six months ended June 30, 1997. Heidtman is an affiliate of one of the Company's stockholders and Preussag is a stockholder. See "Principal and Selling Stockholders." The Company's five largest customers in the aggregate accounted for approximately 65% and 63% of total net sales during 1996 and the six months ended June 30, 1997. See "Risk Factors -- Reliance on Major Customers." 36 41 SDI has a purchasing agreement with Heidtman for the purchase of at least 30,000 tons of the Company's hot band products per month through the end of 2001, at market prices, determined by reference to the lowest prices charged by other thin-slab mini-mills or conventional mills for the same products. The price at which the Company is required to sell 30,000 tons of steel coil to Heidtman cannot be higher than the lowest price at which SDI offers its products to any other customer. Heidtman is entitled to single run as well as certain volume discounts. In addition, Heidtman has priority purchase rights to the Company's secondary material and field claim material. The Company's aggregate sales to Heidtman (including its affiliated companies) during 1996 and the six months ended June 30, 1997, amounted to 279,000 tons and 188,138 tons, respectively. SDI also has a Purchasing, U.S. Sales and Export Distribution Agreement (the "Preussag Purchasing Agreement") with Preussag pursuant to which, and subject to the Company's obligations to fill Heidtman's orders, Preussag is obligated to purchase an average of at least 12,000 tons per month of the Company's available products through the end of 2001, at a market price determined by reference to the Company's price sheet and by reference to prevailing competitive market prices charged to large customers by other mills within the Company's typical marketing area. Preussag is entitled to single run and certain volume discounts. Under the Preussag Purchasing Agreement, the Company has also appointed Preussag as its preferred distributor for all sales to customers outside the United States, Canada and Mexico. See "-- International Sales." Preussag's affiliated companies include: Delta Steel, Inc., located in Houston, Texas; Feralloy Corporation, located in Chicago, Illinois; Feralloy North American Steel Co., LP, located in Melvindale, Michigan; Preussag Handel, Canada, located in Vancouver, British Columbia, Canada; Preussag Handel, GmbH, located in Mexico City, Mexico; and Preussag International Steel Corporation, located in Atlanta, Georgia. The Company's aggregate sales to Preussag (including its affiliated companies) during 1996 and the six months ended June 30, 1997, amounted to 85,800 tons and 56,230 tons, respectively. Direct Sales to End Users. The Company sells directly to end users, including manufacturers of cold-rolled strip, oil and gas transmission pipe, and mechanical and structural tubing. The Company employs a 10-person direct sales staff, consisting of a Manager of Sales and Marketing, three Field Sales Managers, a Manager of Secondary Sales, with the balance dedicated to inside sales and administration. Steel Dynamics plans on keeping its end user sales and support staff small and efficient, reflecting the Company's emphasis on cost-containment and productivity. Geographic Proximity to Customers. The following map illustrates the geographic proximity of certain of the more significant U.S. markets for flat-rolled sheet to the Company's mini-mill in Butler, Indiana. 37 42 CUSTOMER MAP Of the Company's total net sales during 1996 and the six months ended June 30, 1997, more than 80% and 75%, respectively, were to customers within 300 miles of SDI. In addition to its low production costs, the Company believes that it also enjoys a pricing advantage over most of its competitors due to freight savings to its customers to the north and east of SDI's mini-mill, where it sold more than 50% of its flat-rolled steel in 1996 and the six months ended June 30, 1997. International Sales. Of the Company's total net sales in 1996 and the six months ended June 30, 1997, sales outside the continental United States accounted for less than 5% and 10%, respectively. Pursuant to the Preussag Purchasing Agreement, the Company has appointed Preussag its preferred distributor for all sales to customers outside the United States, Canada and Mexico (the "Export Territory"). Under the Preussag Purchasing Agreement, if the Company wishes to sell in the Export Territory, it must notify Preussag of the products available for sale and the price of these products. Preussag must then use its best efforts to solicit these sales and to present the Company with any purchase orders for the product, which the Company may then accept or reject. Sales within the Export Territory are for Preussag's own account, regardless of whether Preussag is purchasing for its use or for resale. If the Company receives an unsolicited offer to purchase any products from a prospective customer in the Export Territory, the Company must notify Preussag of the terms and Preussag has a right of first refusal to effect the purchase. For sales in the Export Territory, Preussag is entitled to a sales commission in addition to any other applicable discounts or rebates. The Company has also entered into a "second look" export sales agreement for such international sales with Sumitomo Corporation of America ("Sumitomo"). Sumitomo is also a stockholder in the Company. THE COMPANY'S STEELMAKING EQUIPMENT AND TECHNOLOGY Steel Dynamics' thin-slab/flat-rolled steelmaking equipment represents the state-of-the-art in EAF melting and thin-slab casting and rolling technology and embodies advancements and improvements reflecting the combined design and operating experience with thin-slab steelmaking of the Company's three founders, Keith E. Busse, Mark D. Millett, and Richard P. Teets, Jr. The Company's existing equipment and technology, as well as the design criteria of the equipment and technology that will constitute the Cold Mill 38 43 Project and the Caster Project, are intended to improve steelmaking speed, efficiency and output, result in less "power off" and down time, require less maintenance, prolong equipment life and produce steel of better consistency and of better surface and edge qualities. The Existing Mill. The principal steelmaking equipment that comprises the existing thin-slab/flat-rolling plant that is currently producing the Company's hot bands consists of a melting furnace, a ladle metallurgy station, a turret, thin-slab caster and rolling mill. DIAGRAM The Electric Arc Furnace. The Company's EAF is a 165-ton capacity tap weight (195-ton gross weight with a 30-ton "hot heel") Fuchs AC-powered 120 MVA high reactance twin-shell EBT (eccentric bottom tap) furnace, consisting of two melting hearths working off of a single power source. Although such a large capacity furnace might have suggested the use of DC power, SDI purchased an AC-powered unit but with a reactor added to the electrical system on the primary side of the transformer. In addition to saving approximately 30% in the capital cost of the EAF (as compared to a DC-type unit), the AC-powered EAF is designed to use smaller electrodes, which are less expensive than those required by a DC-type EAF, and to consume a smaller amount of electrodes per pound of steel produced. With a large capacity EAF, such as Steel Dynamics' furnace, using a DC power source would require substantially larger (28" to 30" diameter) electrodes, which cost up to 30% more per pound than the smaller (24" diameter) electrodes required by the Company's AC-powered EAF. Furthermore, electrode consumption by the Company's EAF (a substantial operating cost component) is designed to be less than a DC-powered unit, approximately 3.2 pounds per ton versus 3.8 to 4.0 pounds per ton, a function of lower amperage to the electrode brought about by the reactor, which allows it to mimic the power characteristics of the DC EAF. SDI's twin-shell EAF design results in virtually continuous melting and reduces the tap-to-tap time (i.e. the length of time between successive melting cycles or "heats"). While melting is being done on one side, the other vessel can be tapped and then refilled with scrap and readied for the next melt. In a single EAF with a 60-minute tap-to-tap time, typically 10 to 15 minutes is taken to tap liquid metal, gun refractories onto the side walls of the furnace, re-sand and repair the tap hole, and recharge the vessel with scrap. Therefore, for a small incremental capital cost of a second vessel, there is an approximate 20% increase in productivity gained by reducing the tap-to-tap time. Preheating of the scrap will occur in the idle vessel with both oxygen and natural gas, at a fairly low cost, aided by the 30-ton "hot heel" of melted scrap remaining in the idle vessel after tapping. This design enables the Company to save the additional capital cost of competing technologies such as a shaft furnace with a scrap preheating feature. The Company believes that shaft furnaces do not work well with larger pieces of scrap, such as the industrial bundles which the Company purchases. An additional attractive feature of the twin-shell design is that if there is a maintenance problem requiring work on one vessel, melting can proceed in the other vessel without interruption. Electricity consumption in the EAF is approximately 350 to 375 kWh per ton. Ladle Metallurgy Station. The Company has a separate ladle metallurgy station, built by Fuchs, consisting of two small EAFs, each of which consumes approximately 25 kWh of electricity per ton of steel, and a desulfurization station. A separate ladle refining station, located apart from the primary melting furnace, allows metallurgical adjustments to be effected, while still maintaining the steel at a sufficiently high temperature during the refining stage. This maximizes the time that the primary furnace can be used for scrap melting, while enabling the molten steel to continue through metallurgical testing, stirring, alloying, desulfurization, reheating and other adjustments, on its way to the casting deck. There are two ladle stations, each of which receives molten steel from the primary furnaces after tapping. When the adjustment process has 39 44 been completed the refined metal is then transported by overhead crane to the casting deck. The ladles are placed on a turret, which rotates an empty ladle away from the top of the casting machine while simultaneously replacing it with a full ladle, allowing for a continuous process. The molten steel flows from the ladle to a tundish (a holding reservoir) and then directly into the mold of the casting machine. The Thin-Slab Caster. The state-of-the-art continuous thin-slab caster was built by SMS Schloemann-Siemag AG and SMS Concast and is equipped with Liquid Core Reduction ("LCR") which the Company has not yet activated. LCR enables the caster to perform as a typical thin slab caster producing 50 mm slabs for hot rolling, as well as allowing the flexibility to produce slabs from 40 mm to 80 mm thick by using a variable thickness mold and movable segments. This feature is designed to ensure greater quality and a more diversified product line for the Company by reducing turbulence in the mold; providing for "soft reduction" on segregation sensitive grades; improving hot rolling reduction ratios on thick gauge products and the reduction of hot rolling loads to produce light gauge products. The caster is also equipped with a newly designed submerged entry nozzle ("SEN"), with an improved geometry. This permits the walls of the SEN to be thicker, resulting in longer SEN life and, in turn, enables the Company to run a "string" of 12 heats before the SEN requires replacement (in contrast with 10 or less with a smaller SEN). These advantages are directly reflected in increased productivity. Within the newly designed SEN, SDI has incorporated a new baffle design to modify the fluid flow of molten steel into the mold cavity which slows and more evenly distributes the molten steel into the mold as compared to previous designs. This results in a quieter top surface of the liquid steel in the mold (at the meniscus), a more uniform solidification of the shell, and effectively eliminates sub-surface inclusions. The tundish design has been upgraded to include state-of-the-art baffle and other flow modification dividers which allow for maximum flotation and subsequent removal of inclusions prior to the molten steel entering the SEN. The Hot-Rolling Mill. The Company's rolling mill is a state-of-the-art, six-stand rolling mill built by SMS Schloemann-Siemag AG. The hot-rolling mill is equipped with a specially designed high pressure 6,000 psi water descaling system to remove the mill scale after the steel emerges from the Bricmont-supplied tunnel furnace just before entering the rolling mill. This system provides an exceptionally clean surface while minimizing the cooling of the 2,000 degreesF slab. The tunnel furnace restores heat lost during the casting process. The rolling mill is equipped with the latest electronic and hydraulic controls. Each rolling stand is driven by a high-powered 10,000 horsepower mill drive motor. The normal exit speed of light gauge steel, prior to coiling as it exits the last stand of the rolling mill, is approximately 10.5 meters per second. The Company's smaller more closely-spaced rolls on the run-out table will help prevent the steel strip from cobbling when rolling lighter gauges. When rolling to a thickness of 1 mm (.040"), the exit speed will remain the same until the sheet is captured in the down-coiler, at which point it will "zoom" the strip to a faster speed of 13.3 meters per second; which increases productivity. The last two stands of the rolling mill use specially designed work rolls to facilitate the Company's ability to roll to the thinnest gauge of any hot mill in the industry. Steel Dynamics' coiler is approximately 210 feet from the last stand of the rolling mill, and all necessary foundations and infrastructure have been pre-engineered and constructed to accommodate the second coiler that will be added as part of the Caster Project. Throughout the rolling process, laser optical measuring equipment and multiple x-ray devices measure all strip dimensions, allowing adjustments to occur continuously and providing feedback information to the mill process controls and computers. All positioning and control equipment used to adjust the rolling mill is hydraulically operated and regulated electronically to achieve a high degree of accuracy. The entire production process is monitored and controlled by both business and process computers. Production schedules are created based on order input information and transmitted to the mill computers by the plant business system. Mathematical models then determine the optimum settings for the tunnel furnace, the hot rolling mill and the strip cooling sprays. This information is then directly transmitted to the equipment controlling the rolling operations. As the material is processed, operating and quality data are gathered and stored for analysis of operating performance and for documentation of product parameters to the customer. The system then coordinates and monitors the shipping process, and prints all relevant paper work for shipping when the coil leaves the plant. 40 45 The Cold Mill Project. The Cold Mill Project is under construction adjacent to and south of the existing hot mill and is expected to be completed in the fourth quarter of 1997. As the following diagram illustrates, the Cold Mill Project consists of a continuous pickle line, two hot dipped galvanizing lines, a semi-tandem two-stand reversing cold-rolling mill, batch annealing furnaces and a temper mill. The pickle line consists of a dual payoff system, scale breaker, shallow bath pickling section, rinsing section and recoiler built by Davy International; the hot dipped galvanizing lines consist of dual payoff, cleaning, annealing, coating, rolling, tension leveling, post-coating treatment, and recoiling systems built by Davy International and others; the semi-tandem two-stand reversing cold-rolling mill will consist of a payoff system, two take-up reels, two four-high stands, full instrumentation and quality controls, to be built by SMS Schloemann-Siemag AG; the batch annealing furnaces built by Ebner Furnaces consist of 18 bases and nine hydrogen annealing bells; and the temper mill consists of a single four-high stand built by SMS Schloemann-Siemag AG. All electric drives and controls have been supplied by the General Electric Corporation, a stockholder of SDI. One of the galvanizing lines will process primarily hot-rolled product, while the second galvanizing line will process primarily cold-rolled product. [DIAGRAM] The pickle line commenced production in June 1997 and the first of the two galvanizing lines to coat hot rolled steel began production in July 1997. The cold rolled hot dipped galvanizing line is expected to begin production and the annealing facilities and the temper mill are expected to be ready for commissioning in September 1997. The pickle line begins at the existing hot strip mill building, and delivers pickled product to a coil storage facility centrally located in the cold-rolling and processing facility. Configuring the facility in this manner eliminates the need for equipment to transfer coils to the cold-rolling facility. At the entry end of the pickle line, there are two reels to unwind coils and a welder to join the coils together. Coils are unwound on alternate reels and attached end to end by the welder, creating a continuous strip through the pickle tanks. The center section of the 700-foot pickle line consists of the scale breaker/tension leveler, the pickling tanks (where the strip moves through a bath of hydrochloric acid that thoroughly cleans the strip in preparation for galvanizing and rolling operations), and the rinse tanks. At the delivery end of the line there is a reel for recoiling the pickled product, and shearing facilities to separate the strip back into discrete coils. After recoiling, each coil is stored in the central coil storage facility. From the central coil storage area, coils can proceed in either of two directions. Some coils will be immediately galvanized on the hot-rolled galvanizing line. The ability of the hot-rolling mill to produce steel strip that is extremely thin by comparison will allow for immediate galvanizing without the need for further rolling in the cold-rolling mill. The hot-rolled galvanizing line is designed to efficiently handle this type of material. Hot-rolled coils that are not intended for immediate galvanizing, and which the Company intends to further process, will be processed on the cold-rolling mill. SDI's cold-rolling mill will be unique in that it will 41 46 be a semi-tandem two-stand reversing cold-rolling operation. This configuration provides considerably higher throughput than a conventional single-stand reversing mill, yet also takes advantage of considerably lower equipment costs than the conventional four to six-stand tandem cold-rolling mill. The rolling mill is configured with multiple x-ray gauges, hydraulic bending systems, rolling solution controls, gauge controls and strip flatness controls used to produce an extremely high level of product quality parameters. The cold-rolling mill will also use a process control computer using sophisticated mathematical models to optimize both quality and throughput. Cold-rolled product that requires galvanizing will proceed to the cold-rolled galvanizing line. There it will be annealed and coated. The cold-rolled galvanizing line is quite similar to the hot-rolled galvanizing line, but will have a more elaborate and larger strip heating furnace. This larger furnace is required to anneal cold-rolled product, which is not necessary on hot-rolled product. Designing the pickle line and the two galvanizing lines concurrently and procuring the equipment from the same manufacturer has allowed a high degree of commonality of parts between the three lines. This provides a high degree of flexibility and cost savings with regard to management of spare parts. Cold-rolled product that does not require galvanizing will then proceed to the batch annealing furnaces. The batch annealing furnaces heat and then cool the coils in a controlled manner to reduce the hardness of the steel that is created in the cold-rolling process. The batch annealing furnaces will heat the steel in a hydrogen environment that optimizes the efficiency of the heating process and produces a product that is superior to conventional batch annealing with regard to cleanliness and uniform metallurgical characteristics. The heating and cooling of the coils is regulated by means of computer models based on current knowledge of heat transfers and steel characteristics. Product from the annealing furnaces will then be temper-rolled. The temper-rolling facility is a single stand four-high rolling mill designed for relatively light reduction of the product. The temper mill introduces a small amount of hardness into the product and further ensures the overall flatness and surface quality of the product. The temper mill will also have an x-ray gauge to monitor strip thickness. This mill was purchased concurrently with the two-stand cold-rolling mill from the same manufacturer. This provides a high degree of flexibility and cost savings with regard to management of spare parts. Product from both galvanizing lines and the temper mill will be delivered directly from the processes to a common coil storage area, where they will then be shipped by either truck or rail. As in its hot mill, all facilities in the cold mill will be linked by means of business and process computers. Business systems will be expanded to comprehend order entry of the additional cold mill products and all line scheduling will be accomplished in the business computer systems, with schedules transmitted to the appropriate process related computers. Operating and quality data will also be collected for analysis and quality control purposes, and for reporting product data to customers. The Caster Project. The Caster Project, which the Company believes will enable it to increase its annual production capacity of hot-rolled steel from 1.4 million tons to approximately 2.4 million tons, primarily involves the design and construction of an additional hybrid EAF, a second thin-slab caster, a second tunnel furnace, a second coiler and minor modifications to the meltshop building. Construction began in June 1997, and is expected to be completed in the first half of 1998. The total cost of the Caster Project is estimated to be approximately $85.0 million. The following diagram shows the components of SDI's hot-mill upon completion of the Caster Project. 42 47 DIAGRAM - Depicting hot-mill production process upon completion of Caster Project The necessary foundations and infrastructure to house and support the second caster were pre-planned into the existing plant at the time of its design and construction. This should allow SDI to add additional annual capacity of 1.0 million tons of hot-rolled steel at an incrementally low capital cost. The Company believes that these additional tons will allow it to maximize its rolling and finishing capacity that its Cold Mill Project is expected to provide in the fourth quarter of 1997. The equipment that is being considered as a part of the Caster Project is similar in design and use to the equipment that constitutes the existing mini-mill facility. The IDI Project. The IDI Project consists of the design, construction, and operation of a facility for the manufacture of DRI and its further refinement into liquid pig iron for use by Steel Dynamics (or, when desired, for resale to others) as a steel scrap substitute. The Company has studied and considered many alternative methods of securing a low cost source of steel scrap substitute material. Some of these methods are in limited commercial use while others have not been tested commercially, either for their ability to successfully yield useable substitute iron units or, even if technologically successful, their ability to do so at a cost that makes its use as a scrap substitute commercially feasible. The existing commercial processes differ by the type of raw feedstock they employ and the type of reductant that is used to "reduce" the feedstock to useable or semi-finished iron units. The following diagram illustrates the sequence of steps in the IDI Process, during which iron ore fines will be processed into DRI and then further refined into liquid pig iron. DIAGRAM - Depicting IDI Process Background of Alternative Scrap Substitute Methodologies. DRI is a metallic product produced from iron ore that is used as an alternative or complementary feedstock in EAF steelmaking, blast furnaces and other iron and steelmaking applications. Of the approximately 33.3 million tonnes of DRI produced in 1996, 43 48 over 90% was produced by either the Midrex or HYL processes, both of which use lump form iron ore or pellets that are treated in a direct reduction shaft furnace with natural gases to reduce the iron oxide to metallic iron. Although these processes are proven to work commercially, iron ore pellets tend to command a premium over iron ore fines. There are a number of other processes that use iron ore fines with natural gas as a reductant. One of these has been selected by Qualitech in building its iron carbide production facility, with which the Company has a long-term 300,000 tonne per year "off-take" contract. The IDI Process. While the IDI Process has not yet been commercially employed, the Company believes that it has the technical capability to develop and implement the IDI Process. Moreover, the Company believes that the IDI Process, when combined with further refining, will produce a liquid pig iron with a richer iron content, at a lower cost, using readily available raw material and energy resources, than any other available process, given the location of SDI's mill. The IDI Process will begin with the use of low cost iron ore fines. In the first step of the IDI Process, the iron ore fines, which the Company expects to purchase under a long-term supply agreement, will be upgraded by processing to reduce the silica (i.e. sand) content of the fines, thereby minimizing the undesirable gangue content of the final DRI product. Then the upgraded iron ore fines and grounds, and the fines, together with ground coal, are mixed with additives and pelletized on a rotary disk. The resulting ball-like pellets or "green balls" will then be screened, so that a uniform pellet will proceed through the rest of the process and so that undersized and oversized pellets can be recovered and recycled. The correctly sized pellets will next be fed into a rotary dryer and then into a rotary hearth furnace, where the dry, sized green balls will be transferred to the top of the rotary hearth via a conveyor, at a controlled rate, and then distributed uniformly over the hearth. The material will be heated to 1,300 degrees for approximately 10 to 15 minutes, after which they will be removed to a refractory-lined container. At this stage, the DRI will be expected to have a metallic iron content of 88% to 92%. Although this product is commercially viable at this stage of the process and could be used in steelmaking, IDI intends to transport the DRI on site to a furnace and then to a desulfurization station where further impurities will be removed. This further refining will take DRI to approximately 96% metallic pig iron which could then be introduced by Steel Dynamics directly into its EAF charge mix. The hybrid EAF and desulphurization station will be located adjacent to the Company's existing melt shop in Butler, Indiana, and is included as part of the IDI Project. An added benefit which the Company expects to realize from the use of this process is that electricity consumption in Steel Dynamics' EAF can be lowered by the chemical energy available from the carbon, as well as from the fact that the liquid pig iron is expected to contain only minimal amounts of iron oxide (versus 6% iron oxide in most other available DRI), which would otherwise take additional energy to reduce. Furthermore, since the resulting liquid pig iron would already be molten at 2,400 degreesF, the electrical energy required in the Company's regular EAF would be substantially reduced when the liquid pig iron is introduced into the melt mix, resulting in not only an electrical consumption savings but a reduction in electrode consumption as well. The Company believes that there would be between a 15% to 20% productivity gain if pig iron produced by the IDI Process constituted 25% of the melt mix, and more if iron carbide (such as that which the Company anticipates receiving from Qualitech beginning in 1998) is also added into the melt mix. Steel Dynamics believes that the anticipated advantages of the IDI Process are that it permits the use of lower cost iron ore fines or concentrates, that pricing of the fines appears to be stable, and that coal as the reductant is abundantly available and not affected by shortages that sometimes affect gas availability and prices. Additionally, the IDI Process is expected to allow for the use, as additional raw materials, of EAF dust and mill scale, which the Company will generate and will be able to purchase from other area mills. At present, the Company generates 30,000 tons of EAF dust per year, which otherwise causes the Company to incur disposal costs in excess of $120 per ton. Steel Dynamics also believes that the liquid pig iron, which it expects IDI to begin producing in 1998, when combined into the melt mix with iron carbide to be manufactured by Qualitech, will enable the Company to use these steel scrap substitute materials for up to 40% of its metallics charge, thus reducing its dependency upon low residual scrap (the most expensive grade). 44 49 STEEL SCRAP AND SCRAP SUBSTITUTE RESOURCES Steel scrap is the single most important raw material used in the Company's steelmaking process, representing approximately 50% to 60% of the direct cost of a ton of finished steel. All steel scrap, however, is not the same. As it relates to final product quality, EAF flat-rolled producers, such as the Company, can only tolerate a maximum .2% level of "residuals" (i.e. non-ferrous metallic contamination such as copper, nickel, tin, chromium, and molybdenum, which, once having been dissolved into steel cannot be refined out). In order for the scrap melt to provide this level of quality under present circumstances (without the anticipated availability of future scrap substitute products), the mill must use approximately 60% of "low residual" steel scrap or an equivalent material. There are many grades of scrap (for example, Steel Dynamics maintains 10 to 12 separate grades of scrap in its 20-acre scrap holding yard on premises adjacent to the mini-mill), but scrap can be broadly categorized as either "obsolete scrap" or "prompt industrial scrap." Obsolete scrap, which is derived from discarded agricultural and construction equipment, consumer goods such as automobiles and appliances, container drums and building demolition scrap, generally contains residuals that exceed the tolerable maximums for EAF use (the only exception being old structural steel and rails that were made from Bessemer and open-hearth steel production process with high iron content, the supply of which is limited). Prompt industrial scrap, on the other hand, is produced as a by-product of various metalworking operations, such as steel fabricators, machine shops, automobile production and stamping plants, and is the most desirable for EAF steelmaking due to the traceability of its origins and to the fact that it is generally "low residual" scrap. Such low residual scrap generally takes the form of No. 1 Dealer Bundles, No. 1 Factory Bundles, busheling, and clips. Many variables impact scrap prices, the most critical of which is U.S. steel production. Generally, as steel demand increases, so does scrap demand (and resulting prices). Until 1989 when Nucor commenced flat-rolled production of steel in its Crawfordsville, Indiana mini-mill and the subsequent opening of additional thin-slab/flat-rolled mini-mills (including the Company's), the availability of low residual scrap kept pace with demand, indeed exceeded demand, enabling the United States to be a net exporter of low residual scrap. By 1994, however, the supply of low residual scrap became tighter, although the shortfall was made up by a combination of pig iron use, obsolete structural steel, and, to a limited extent, non-U.S. or imported DRI. This supply/demand pressure on the cost of low residual scrap is expected to continue, as more flat-rolled EAF production comes on-line, although this may be mitigated to some extent by the anticipated production of more steel scrap substitute material (such as the IDI Project or Qualitech's iron carbide production facility). The Company uses various grades of obsolete (and thus less expensive) scrap in its melt mix, which it blends with its low residual scrap to keep within final tolerances. To the extent that SDI will be able to introduce the relatively pure pig iron that it expects to obtain from IDI's DRI (commencing in 1998), or the Qualitech iron carbide which it expects to begin receiving in 1998, Steel Dynamics believes that it will be able to use greater amounts of lower-priced obsolete scrap in its melt and still remain within acceptable limits. There are several regions in the United States where scrap generation exceeds consumption within the region. One of these regions is in the Midwest. The Company believes that it enjoys freight savings versus other current mini-mill competitors for scrap generated near the mini-mill and made available to Steel Dynamics for use in its mini-mill. The Company believes that the demand for low residual steel scrap will rise more rapidly than the supply in the coming years. This belief has prompted SDI, as a means of maintaining a low metallics cost, to seek and secure both a strong and dependable source through which to purchase steel scrap of all grades, including low residual scrap, and a reliable source for lower cost steel scrap substitute resources. SDI has accomplished this through a long-term scrap purchase agreement with OmniSource, and, in addition to its own IDI Project, through a long-term purchase contract for iron carbide with Qualitech. Steel Scrap. The Company has entered into an Agreement To Provide Scrap Purchasing Services And Certain Priority Purchase Rights with OmniSource, an affiliate of Heavy Metal, L.C., a stockholder of the Company. See "Principal and Selling Stockholders." Pursuant to this agreement, OmniSource has agreed to act as the Company's exclusive scrap purchasing agent, through the end of 2001, and to use its best efforts to locate and secure for the Company's mini-mill such scrap supplies as SDI may from time-to-time wish to 45 50 purchase, at the lowest then available market prices for material of like grade, quantity and delivery dates. The cost to the Company of OmniSource-owned scrap is the price at which OmniSource, in bona fide market transactions, can actually sell material of like grade, quality and quantity. With respect to general market scrap, the cost to the Company is the price at which OmniSource can actually purchase that scrap in the market (without mark-up or any other additional cost). For its services, OmniSource receives a commission per gross ton of scrap received by Steel Dynamics at its mini-mill. All final decisions regarding scrap purchases belong to the Company, and SDI maintains the sole right to determine its periodic scrap needs, including the extent to which it may employ steel scrap substitutes in lieu of or in addition to steel scrap. No commission is payable to OmniSource for scrap substitutes purchased or manufactured by the Company. During 1996 and the six months ended June 30, 1997, the Company purchased 1,068,609 tons and 452,162 tons, respectively, of steel scrap from OmniSource, and expects to purchase an average of 125,000 to 150,000 tons of steel scrap per month at full production. Thereafter, although SDI expects that its total output in tons of flat-rolled steel coil will increase from 1.4 million to approximately 2.4 million after the completion of the Cold Mill and Caster Projects, the Company expects that its receipt of substantial quantities of steel scrap substitute material, both iron carbide from Qualitech and DRI from the IDI Project, will mitigate its continued dependency on low residual steel scrap. Steel Dynamics believes that its scrap purchasing relationship with OmniSource, an affiliate of one of the Company's stockholders, provides the Company with excellent access to available steel scrap within its primary scrap generation area. Steel Scrap Substitutes. In June 1996, the Company entered into an Iron Carbide Off-Take Agreement (the "Iron Carbide Agreement") with Qualitech, in whose parent SDI is a 4% stockholder. The Iron Carbide Agreement is for five years, running from the time that Qualitech begins commercial production of iron carbide, and is subject to renewal. Qualitech is building a 660,000 tonne annual capacity iron carbide facility in Corpus Christi, Texas, of which 300,000 tonnes annually is expected to be sold to Steel Dynamics at a formula purchase price based on various components of Qualitech's costs of production, which the Company believes is favorable, and with a ceiling price which SDI believes will be favorable relative to the price of steel scrap. The Company will also purchase iron carbide from Qualitech during Qualitech's ramp-up commencing as early as 1998, although the amount of iron carbide that SDI can anticipate receiving during that period is unknown. In addition to the Iron Carbide Agreement, the Company has formed IDI, which is constructing a 600,000 tonne capacity rotary hearth-based DRI production facility. See "Certain Transactions." ENERGY RESOURCES SDI believes that it has very favorable energy rates, both electricity and gas, as well as for oxygen. These rates are critical to the Company in maintaining its status as a low-cost provider of flat-rolled steel. Electricity. The plant operates at an average electrical power consumption level of 100 million watts, under an electric service contract with AEP that extends through 2005. The contract designates a capacity reservation of 150,000 kVa with provisions allowing for a total capacity increase of 80,000 kVa for new load connected within five years of the commencement date with a one-year notice of intent requirement. The contract designates a portion of the Company's load as "firm," which is billed under the applicable AEP retail tariff. All of the rest of the Company's load is designated as "interruptible service," which allows customers the option of accepting varying levels of risk of power interruption as a trade-off for discounted energy prices. With interruptible service, the Company is subject to risk of interruption at any time in the operation of the AEP System, as a result of an AEP annual peak demand, or even when AEP can receive a higher market price from an alternate buyer. Under such circumstances, the Company has the option of matching the market price of the alternate buyer in order to avoid interruption. The interruptible load is billed as either "base" energy or as "peak" energy. The base energy charge is derived monthly from a formula that includes a discounted demand component, an energy component, and a fuel component. A peak energy charge, or "real-time price," is calculated hourly for differing peak-period hours throughout the year. The real-time price is defined as AEP's incremental cost of supplying energy that otherwise would not have been incurred if such energy had not been supplied to the Company, plus a fixed cost increment. The Company's average price of electricity for the six months ended June 30, 1997, was $.027 per 46 51 kWh. The Company's negotiated rate with AEP, once it reaches full capacity, however, should be in the range of $.024 and $.025 per kWh, which SDI believes is relatively attractive. Electrical power to the plant site is supplied by AEP over its 14-mile, 345,000 volt transmission line directly to the Company's own electrical substation. The Company entered into a Transmission Facilities Agreement with AEP to pay "contributions in aid of construction" for the electric transmission lines, and these payments to AEP from the Company, pursuant to a $7.8 million 20-year note, at 8% interest, which commenced January 1, 1996, amounts to $65,400 per month. According to the Transmission Facilities Agreement, if any other users use these transmission lines, the amount owed by SDI would decrease. Additionally, the Company entered into a Substation Facilities Agreement with AEP whereby AEP provided the financing for Steel Dynamics' on-site substation and related facilities. This financing totaled $13.0 million as of January 1, 1996, and requires repayment, at 8% interest, commencing January 1, 1996, over a 15-year period, amounting to monthly payments of $125,000. Gas. The Company uses approximately 3,200 decatherms (equivalent to 1,000 BTUs or 1,000 cubic feet) of natural gas per day. The Company holds a "Primary Firm" delivery contract on the Panhandle Eastern Pipeline that extends through May 2000, costing the Company $.42 per decatherm, with a current fuel surcharge equal to 5.72% of the gas the Company flows. The Company also has an interruptible delivery contract with NIPSCO/NIFL/Crossroads ("LDC") that extends through December 2000, costing the Company $.20 per decatherm with a fuel surcharge of .2%. LDC takes the gas from the Panhandle Eastern Pipeline and delivers it to the mini-mill. The actual purchase of the gas itself is currently contracted through the end of July 1997 for $1.91 per decatherm, and, upon its expiration the Company expects to purchase its natural gas supply needs in the spot market until such time as it determines that long term contracts are at more attractive prices. The Company maintains a liquid propane tank farm on site with sufficient reserves to sustain operations for approximately two weeks in the event of an interruption in the natural gas supply. During February 1996, when severe weather conditions disrupted the flow of natural gas, the Company operated on liquid propane for a period of eight days. Oxygen. Steel Dynamics uses oxygen, as well as nitrogen and argon for production purposes, which it purchases from Air Products, which built a plant on land adjacent to the Butler, Indiana mill site. Air Products uses its plant not only to supply the Company, but also to provide oxygen and other gasses to other industrial customers. As a result, SDI has been able to effect very favorable oxygen and other gas purchase prices on the basis of Air Products' volume production. COMPETITION Competition within the steel industry can be intense. The Company competes primarily on the basis of price, quality, and the ability to meet customers' product specifications and delivery schedules. Many of the Company's competitors are integrated steel producers which are larger, have substantially greater capital resources and experience, and, in some cases, have lower raw material costs than the Company. The Company also competes with other mini-mills which may have greater financial resources. The highly competitive nature of the industry, combined with excess production capacity in some products, may in the future exert downward pressure on prices for certain of the Company's products. In addition, in the case of certain product applications, steel competes with other materials, including plastics, aluminum, graphite composites, ceramics, glass, wood and concrete. U.S. The Company's products compete with many integrated hot-rolled coil producers, such as Rouge Steel Co. and National Steel Corp.'s Great Lakes Steel Division in the Detroit area, LTV Steel Co., Inc., Inland Steel Co., Bethlehem Steel Corp., U.S. Steel, Acme Steel Co. and Beta Steel Corp. in the northwest Indiana and Chicago area, as well as a growing number of hot-rolled mini-mills, such as Nucor's Crawfordsville, Indiana and Hickman, Arkansas facilities and Gallatin Steel Company's mini-mill in Ghent, Kentucky, Delta Steel, the BHP/Northstar joint venture in Delta, Ohio, and TRICO Steel's mini-mill in Alabama. Despite significant reductions in raw steel production capacity by major U.S. producers over the last decade, the U.S. industry continues to be adversely affected, from time to time, by excess world capacity. 47 52 According to the AISI, annual U.S. raw steel production capacity was reduced from approximately 154 million tons in 1982 to approximately 116 million tons in 1996. This reduction resulted in higher utilization rates. Average utilization of U.S. industry capacity improved from approximately 61% in the 1982 to 1986 period to approximately 83% in the 1987 to 1991 period, was approximately 89% in 1993, 93% in 1994 and 1995, and 91% in 1996. Recent improved production efficiencies also have begun to increase overall production capacity in the United States. Excess production capacity exists in certain product lines in U.S. markets and, to a greater extent, worldwide. Increased industry overcapacity, coupled with economic recession, would intensify an already competitive environment. Over the last decade, extensive downsizings have necessitated costly restructuring charges that, when combined with highly competitive market conditions, have resulted at times in substantial losses for some U.S. integrated steel producers. A number of U.S. integrated steel producers have gone through bankruptcy reorganization. These reorganizations have resulted in somewhat reduced capital costs for these producers and may permit them to price their steel products at levels below those that they could have otherwise maintained. An increasing number of mini-mills have entered or are expected to enter the EAF-based thin-slab/flat-rolled steel market in the next several years. These mini-mills have cost structures and management cultures more closely akin to those of the Company than to the integrated producers. Flat-rolled mini-mill production capacity increased from 4.0 million tons in 1994 to approximately 7.3 million tons in 1996, and industry sources expect this cumulative flat-rolled mini-mill capacity to reach up to 14.9 million tons in 1997 and up to 18.7 million tons in 1998. The Company's penetration into the total flat-rolled steel market is limited by geographic considerations, to some extent by gauge and width of product specifications, and by metallurgical and physical quality requirements. Based on product type and geographic location, the Company believes it will most closely compete with the following mini-mills: Nucor's Crawfordsville, Indiana facility, Gallatin Steel's Ghent, Kentucky facility, Delta Steel's Delta, Ohio facility, and, to a more limited extent, Nucor's Hickman, Arkansas facility, Nucor's Berkeley County, South Carolina facility, and TRICO Steel's facility in northern Alabama. Of the anticipated 14.9 million tons of 1997 flat-rolled mini-mill capacity, the Company believes that it will most closely compete for approximately 4.6 million of those flat-rolled tons. Each of these mills will produce hot-rolled product. However, an affiliate of Delta Steel is expected to produce hot-rolled galvanized product, and Nucor's Crawfordsville, Indiana facility produces cold-rolled and cold-rolled galvanized products. Non-U.S. U.S. steel producers face significant competition from certain non-U.S. steel producers who may have lower labor costs. In addition, U.S. steel producers may be adversely affected by fluctuations in the relationship between the U.S. dollar and non-U.S. currencies. Furthermore, some non-U.S. steel producers have been owned, controlled or subsidized by their governments, and their decisions with respect to production and sales may be, or may have been in the past, influenced more by political and economic policy considerations than by prevailing market conditions. Some non-U.S. producers of steel and steel products have continued to ship into the U.S. market despite decreasing profit margins or losses. If certain pending trade proceedings ultimately do not halt or otherwise provide relief from such trade practices, other relevant U.S. trade laws are weakened, world demand for steel eases or the U.S. dollar strengthens, an increase in the market share of imports may occur, which could adversely affect the pricing of the Company's products. The costs for current and future environmental compliance may place U.S. steel producers, including the Company, at a competitive disadvantage with respect to non-U.S. steel producers, which are not subject to environmental requirements as stringent as those in the United States. BACKLOG The Company's hot-rolled steel coil backlog, reflecting orders through the end of the third quarter of 1997 (the latest date for which Steel Dynamics has accepted orders), amounted to approximately $100 million (277,967 tons) at June 30, 1997. 48 53 FACILITIES The Company's plant is located on a greenfield site of approximately 800 acres in DeKalb County, Indiana, strategically located within eight miles of Interstate 69 (north-south), twenty miles from the Indiana Toll Road System (east-west Interstate 80). In addition, a cross-country high pressure gas line is located three-quarters of a mile north of the plant, and a 14-mile, 345,000 volt transmission line brings electrical power to the Company's own electrical sub-station. In addition, two truck scales and one rail scale have been installed. The land was formerly farm land, and 67 acres are still being farmed. The site is served by the east-west rail lines of Conrail, the north-south lines of the Norfolk & Southern Railway, and the east-west lines of CSX. Railroad spurs and switching apparatus link the plant with all three railroads. Within the plant site, the Company has 10 1/2 miles of railroad track, serving both the plant and the on-site 20-acre scrap yard facility operated by the Company to receive, hold, and stage its scrap. Water is supplied by two 12" 2,500 gallon per minute wells which are located on site and which pump out of an aquifer, located between 160 and 190 feet down, into a 13.0 million gallon reservoir. Water from this reservoir is pumped to a service water piping system that links the reservoir to the various water treatment facilities that support the steelmaking processes. There are three main buildings that comprise the "hot" mill. They are the melt shop building, containing four bays totaling 103,740 square feet, the tunnel furnace building, which is 675 feet long and which is 54,511 square feet in area (connecting the melt shop to the hot strip mill), and the hot strip mill building, 283,558 square feet in size, consisting of two bays in width and is 1,146 feet in length. The tunnel furnace building is serviced by a 10-ton crane, and the hot mill building is serviced by three 80 ton cranes. Office buildings on site include a general administrative corporate headquarters building, consisting of 12,000 square feet, a building for the hot rolling, engineering and safety personnel, consisting of 6,000 square feet, a melt shop office, consisting of 2,000 square feet, and a shipping office of 1,000 square feet. There is an employee services building of 8,000 square feet that includes a shower and locker room facility, as well as the plant cafeteria. A 22,000 square foot warehouse has been constructed to receive, store, and manage necessary parts and materials to maintain the plant. The cold mill facility consists of a continuous pickle line, two hot-dipped galvanizing lines, a semi-tandem two-stand reversing mill, batch annealing furnaces, and a temper mill, all housed within a new 550,000 square foot facility contiguous to the hot strip mill building. Other support facilities include a bag house and a water treatment system with buildings located at various places in the plant. The bag house captures the gasses from the melting operation and cleans them to comply with all federal emissions standards. The bag house is capable of cleaning 1.5 million cubic feet per minute of these gasses. The water treatment system cleans, cools, and recirculates the water used by the plant in various processes at the overall rate of 100,000 gallons per minute. The Company considers its manufacturing and operating facilities adequate for its needs, including the Expansion Projects, and for the foreseeable future. Equipment failures at its plant could limit or shut down the Company's production. From its start-up through June 30, 1997, the Company experienced some equipment failures, none of which lasted more than two days. In order to reduce the risk of equipment failure, SDI follows a comprehensive maintenance and loss prevention program, has on-site maintenance and repair facilities, and maintains an inventory of spare parts and machinery. For example, the Company maintains a spare EAF transformer as well as spare caster parts, mechanical parts and electrical controls for its cranes and other tools. No assurance can be given, however, that material shutdowns will not occur in the future or that a shutdown would not have a material adverse affect on Steel Dynamics. In addition to equipment failures, the mill is also subject to the risk of catastrophic loss. The Company believes that it maintains adequate property damage insurance to provide for reconstruction of damaged equipment, as well as business interruption insurance to mitigate losses resulting from any production shutdown caused by an insured loss. The Company's executive offices are located at 4500 County Road 59, Butler, Indiana 46721 and its telephone number is (219) 868-8000. 49 54 ENVIRONMENTAL MATTERS The Company's operations are subject to substantial and evolving environmental laws and regulations concerning, among other things, emissions to the air, discharges to surface and ground water, noise control and the generation, handling, storage, transportation, treatment and disposal of toxic and hazardous substances. SDI believes that its facilities are in material compliance with all provisions of federal and state laws concerning the environment and does not believe that future compliance with such provisions will have a material adverse effect on its results of operations or financial conditions. Since environmental laws and regulations are becoming increasingly more stringent, the Company's environmental capital expenditures and costs for environmental compliance may increase in the future. In addition, due to the possibility of unanticipated regulatory or other developments, the amount and timing of future environmental expenditures may vary substantially from those currently anticipated. The cost for current and future environmental compliance may also place U.S. steel producers at a competitive disadvantage with respect to foreign steel producers, which may not be required to undertake equivalent costs in their operations. Under CERCLA, the Environmental Protection Agency ("EPA") has the authority to impose joint and several liability for the remediation of contaminated properties upon generators of waste, current and former site owners and operators, transporters and other potentially responsible parties, regardless of fault or the legality of the original disposal activity. Many other states, including Indiana, have statutes and regulatory authorities similar to CERCLA and to the EPA. Steel Dynamics has a hazardous waste hauling agreement with The Waste Management Company of Indiana, Inc. to properly dispose of its flue dust, ash, and other waste products of steelmaking, but there can be no assurance that, even through no fault of the Company, SDI may not still be cited as a waste generator by reason of an environmental clean up at a site to which its waste products were transported. EMPLOYEES SDI's work force consists of approximately 359 employees as of June 30, 1997, of which 294 are hourly and 65 are salaried personnel. Of this number, 79 are assigned to the Cold Mill and four to IDI. The Company's employees are not represented by labor unions. The Company believes that its relationship with its employees is good. Performance Based Incentive Compensation Program. The Company has established certain incentive compensation programs for its employees, designed to encourage them to be productive by paying bonuses to groups of employees, based on various measures of productivity. The programs are designed to reward employees for productivity efforts. It is not unusual for a significant amount of an employee's total compensation to consist of such bonuses. The productivity of the employees is measured by focusing on groups of employees and not individual performance. Three groups of employees participate in the bonus program: production, administrative and clerical, and department managers and officers. Each group of employees has its own bonus program or programs. See "Management -- Employee Plans" for a description of the department manager/officer incentive bonus. Production employees, consisting of those directly involved in the melting, casting and rolling processes, are eligible to participate in two cash bonus programs: the production bonus and the conversion cost bonus programs. The production bonus, if any, is based upon the quantity of quality product produced that week. The amount of the production bonus is determined for and allocated to each shift of employees. Depending upon the amount of quality product produced, the bonus may be equal to or greater than the base hourly wage paid to an employee. The conversion cost bonus is determined and paid on a monthly basis based on the costs for converting raw material into finished product. The program is intended to encourage employees to be efficient in converting the raw materials into finished steel. Costs of raw materials, over which the production employees have no control, are not considered. 50 55 The Company has also established a cash bonus plan for its non-production employees, including accountants, engineers, secretaries, accounting clerks and receptionists. Bonuses under the plan are based upon the Company's return on assets. The Company has also established the 1994 Stock Option Plan, 1996 Stock Option Plan, the Profit Sharing Plan and the Retirement Savings Plan for certain of its employees. See "Management -- Employee Plans." RESEARCH AND DEVELOPMENT At the present time, the Company engages in no substantial third-party research and development activities. Steel Dynamics, however, is continually working to improve the quality, efficiency and cost-effectiveness of its EAF-based thin-slab/flat-rolled CSP technology. The Company is also engaged in development efforts in connection with the IDI Project. PATENTS AND TRADEMARKS The Company filed an application with the U.S. Patent and Trademark Office to register the mark "SDI" and an accompanying design of a steel coil. The mark was published on September 3, 1996, in the Official Gazette and not opposed within 30 days. A notice of allowance is expected to be issued before year end. Iron Dynamics has submitted several process patent applications to the U.S. Patent and Trademark Office, relating to solid based production of low sulfur direct reduced iron. LEGAL PROCEEDINGS The Company is not a party to any lawsuit that, if adversely resolved, would individually or in the aggregate, have a material effect on the results of operations or on the financial condition of the Company. 51 56 MANAGEMENT The following table sets forth information concerning the executive officers and directors of the Company and its IDI subsidiary as of June 30, 1997. The Company's Board of Directors consists of ten directors. Directors and executive officers of the Company are elected to serve until they resign or are removed or are otherwise disqualified to serve or until their successors are elected and qualified. Directors of the Company are elected at the annual meeting of stockholders. The directors and executive officers of the Company, their ages as of June 30, 1997 and positions are as follows:
NAME AGE POSITION WITH THE COMPANY - ------------------------------------------ --- ------------------------------------------ Keith E. Busse............................ 54 President, Chief Executive Officer and Director Mark D. Millett........................... 38 Vice President of Melting and Casting and Director Richard P. Teets, Jr...................... 42 Vice President of Rolling and Finishing and Director Tracy L. Shellabarger..................... 40 Vice President of Finance, Chief Financial Officer and Director John W. Nolan............................. 45 Vice President of Sales and Marketing Larry J. Lehtinen......................... 42 Vice President and General Manager of IDI John C. Bates............................. 53 Director Leonard Rifkin............................ 66 Director Paul B. Edgerley(a)....................... 41 Director William D. Strittmatter................... 41 Director William Laverack, Jr.(a).................. 40 Director Dr. Jurgen Kolb........................... 54 Director
- ------------ (a) Member of the Audit Committee and member of the Company's Administrative Committee under the Company's 1994 Incentive Stock Option Plan. Keith E. Busse co-founded the Company in September 1993 and has been its President and Chief Executive Officer and a director since its inception. Mr. Busse is also the President and Chief Executive Officer and a director of IDI. Previously, for a period of 21 years, he worked for Nucor in a variety of positions, first as Division Controller and then as Vice President and General Manager of Nucor's Vulcraft Division, and then, additionally as the Vice President and General Manager of Nucor's Fastener Division. In 1987, he was given the responsibility to coordinate and direct the building in Crawfordsville, Indiana of the world's first thin-slab/flat-rolled mini-mill (the "Crawfordsville Mini-Mill"). Mr. Busse remained with Nucor's Crawfordsville Division as its Vice President and General Manager until his resignation in August 1993. Mr. Busse is a director of Qualitech Steel Holdings, Inc. Mark D. Millett co-founded the Company in September 1993 and has been its Vice President of Melting and Casting and a director since its inception. Previously, Mr. Millett worked for Nucor since 1982 as chief metallurgist at its Darlington, South Carolina facility and then as manager of its Hazelett thin-slab casting project in 1985. In 1987, Mr. Millett joined Mr. Busse's senior management team to help build the Crawfordsville Mini-Mill, and from 1987 until his resignation in August 1993, Mr. Millett served as the Melting and Casting Manager for the Crawfordsville Mini-Mill. Richard P. Teets, Jr. co-founded the Company in September 1993 and has been its Vice President of Rolling and Finishing and a director since its inception. Previously, Mr. Teets worked for LTV Steel Co., Inc., in its engineering, maintenance, and production areas, and in 1987, was hired by Nucor to be one of the senior managers to assist Messrs. Busse and Millett in the construction of the Crawfordsville Mini-Mill, overseeing the actual engineering and construction process, including its electrical, mechanical, and environmental aspects. In 1991, Mr. Teets assumed the responsibilities for the Crawfordsville Mini-Mill's cold-rolling and finishing operations as its Manager. 52 57 Tracy L. Shellabarger joined the Company as its Vice President of Finance and Chief Financial Officer and a director in July 1994. Previously, from 1987, Mr. Shellabarger worked for Nucor, first as its Manager of Internal Audit in its Charlotte, North Carolina home office, and, eight months later, as its Controller at the Crawfordsville Mini-Mill, where he also served as a member of the senior management team that constructed and operated that facility for Nucor. John W. Nolan joined the Company as its Manager of Sales and Marketing in December 1994 and was appointed Vice President of Sales and Marketing in January 1997. Prior to that, Mr. Nolan was employed by Bethlehem Steel Company as Manager of Marketing and by Inland Steel Industries as its Manager of Sales. Larry J. Lehtinen joined Iron Dynamics, Inc. as its Vice President and General Manager in January 1997. Prior to that, Mr. Lehtinen worked for Cleveland Cliffs Inc. where he was most recently Vice President of Operations for its North American iron ore partnerships. While with Cleveland Cliffs, Mr. Lehtinen also served as the General Manager for the Company's Empire Mining Partnership for a two-year period. Prior to 1994, Mr. Lehtinen was with Inland Steel Industries for 17 years, most recently serving as Vice President/General Manager of Inland Steel Mining Co. and Manager of Iron Ore. John C. Bates was elected a director of the Company in September 1994. Mr. Bates is the President and Chief Executive Officer of Heidtman, which he joined in 1963, and for which he has served as its President and Chief Executive Officer since 1969. Mr. Bates is also a director of Heidtman and of National City Bank, N.W. Leonard Rifkin was elected a director of the Company in November 1994. Mr. Rifkin has been the President and Chief Executive Officer of OmniSource since 1959 and since September 1996 has been Chairman of the Board. He is also a director of Qualitech Steel Holdings, Inc. Paul B. Edgerley was elected a director of the Company in September 1996. Mr. Edgerley has been a Managing Director of Bain Capital, Inc. since May 1993 and has been a general partner of Bain Venture Capital since 1990. Mr. Edgerley was a principal of Bain Capital Partners from 1988 through 1990. Mr. Edgerley is also a director of GS Industries, Inc. and AMF Group, Inc. William D. Strittmatter was elected a director of the Company in September 1994. Mr. Strittmatter is a Vice President and Senior Credit Officer of General Electric Capital Corporation, which he joined in 1982. Mr. Strittmatter is also Vice Chairman of Shanghai Zhadian Gas Turbine Power Generation Co., Ltd. William Laverack, Jr. was elected a director of the Company in September 1994. Mr. Laverack is a general partner of J.H. Whitney & Co., a private equity and mezzanine capital investment firm, which he joined in 1993. Prior to joining Whitney, he was with Gleacher & Co., a mergers and acquisitions advisory firm, from 1991 to 1993, and from 1985 to 1991 was employed by Morgan Stanley & Co. Incorporated in its Merchant Banking Group. Mr. Laverack is also a director of CRA Managed Care, Inc., The North Face, Inc. and Qualitech Steel Holdings, Inc. Dr. Jurgen Kolb was elected a director of the Company in April 1996. Dr. Kolb is a member of the Executive Board of Preussag Stahl AG, which he joined in 1986. Dr. Kolb is also a member of the Supervisory Board of Preussag Handel GmbH and of Ruhrkohle Bergbau A.G., is Chairman of the Supervisory Board of Universal GmbH and of Peiner Agrar and Huttenstoffe GmbH and is a director of Feralloy Corporation. Daniel M. Rifkin was elected as an alternate director of the Company in November 1994 to serve as director of the Company in Leonard Rifkin's absence or unavailability. Daniel M. Rifkin is the son of Leonard Rifkin. Mr. Rifkin is the President and Chief Operating Officer of OmniSource, which he joined in 1979. Robert C. Gay was elected as an alternate director of the Company in September 1996 to serve as director of the Company in Mr. Edgerley's absence or unavailability. Mr. Gay has been a managing director of Bain Capital, Inc. since 1996 and has been a general partner of Bain Venture Capital since 1989. From 1988 through 1989, Mr. Gay was a principal of Bain Venture Capital. Mr. Gay is a Vice Chairman of the Board of Directors of IHF Capital, Inc., parent of ICON Health & Fitness, Inc. In addition, Mr. Gay is a director of 53 58 Alliance Entertainment Corp., American Pad and Paper Company, GT Bicycles, Inc., GS Industries, Inc. and its subsidiary, GS Technologies Operating Co., Inc. and Physio-Control International Corporation. Molly Ferguson was elected as an alternate director of the Company in September 1994 to serve as director of the Company in Mr. Strittmatter's absence or unavailability. Ms. Ferguson is a Manager of Operations of General Electric Capital Corporation, which she joined in 1987. Michael L. Stone was elected as an alternate director of the Company in September, 1994 to serve as a director of the Company in Mr. Laverack's absence or unavailability. Mr. Stone is a general partner of J.H. Whitney & Co., a private equity and mezzanine capital investment firm, which he joined in 1989. Mr. Stone was an associate of the firm from 1989 through January 1992, at which time he became a general partner. Dr. Jorg Fuhrmann was elected as an alternate director of the Company in November 1994 to serve as a director of the Company in Dr. Kolb's absence or unavailability. Dr. Fuhrmann is a member of the Executive Board of Preussag Stahl AG, which he joined in 1995. EXECUTIVE COMPENSATION The following table sets forth certain information with respect to the compensation paid by the Company for services rendered for 1995 and 1996 for the Chief Executive Officer and the three other most highly compensated executive officers of the Company whose salary and bonus amounts exceeded $100,000 (collectively, the "Named Executive Officers"). The amounts shown include compensation for services rendered in all capacities. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION --------------------------------- AWARDS ANNUAL ----------------------- PAYOUTS COMPENSATION(1) RESTRICTED ------- --------------------- OTHER ANNUAL STOCK SECURITIES LTIP ALL OTHER NAME AND FISCAL SALARY BONUS COMPENSATION AWARDS UNDERLYING PAYOUTS COMPENSATION PRINCIPAL POSITION YEAR ($) ($) ($) ($) OPTIONS($) ($) ($)(1) - ---------------------------- ------ --------- --------- ------------ ---------- ---------- ------- ------------ Keith E. Busse, ............ 1996 $ 290,000 $ 219,000 $ -- $ -- $ 5,000 $ -- $ 1,164 President and Chief 1995 275,000 195,000 1,320 Executive Officer Mark D. Millett, ........... 1996 175,000 115,000 -- -- 3,750 -- 431 Vice President 1995 165,000 99,000 469 Richard P. Teets, Jr., ..... 1996 175,000 115,000 -- -- 3,750 -- 525 Vice President 1995 165,000 99,000 446 Tracy L. Shellabarger, ..... 1996 135,000 81,000 1,050,837(2) -- 3,750 -- 414 Vice President and 1995 120,000 72,000 87,882(3) 366 Chief Financial Officer
- ------------ (1) Represents matching contributions made by the Company under its Retirement Savings Plan and officer's life insurance premiums. (2) Represents forgiveness of indebtedness income to Mr. Shellabarger ($750,000) and amounts reimbursed to him for the payment of interest on the $750,000 promissory note and taxes on the forgiveness of indebtedness income ($300,837) in connection with the cancellation of the promissory note executed by Mr. Shellabarger for the purchase of SDI Common Stock at the time of his employment (the "Shellabarger Note") in connection with the November 21, 1996 initial public offering of the Company's Common Stock. (3) Amount reimbursed for the payment of interest and taxes thereon to Mr. Shellabarger for 1995 interest payments made by the Company on behalf of Mr. Shellabarger on the Shellabarger Note. 54 59 INCENTIVE STOCK OPTIONS OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE SECURITIES APPRECIATION FOR UNDERLYING % OF TOTAL OPTIONS EXERCISE OR OPTION TERM OPTIONS GRANTED GRANTED TO BASE PRICE EXPIRATION ----------------- NAME (# OF SHARES) EMPLOYEES IN 1996 ($/SH) DATE 5%($) 10%($) - -------------------------- --------------- ------------------ ----------- ---------- ------ ------ Keith E. Busse............ 5,000 5.3% 16.00 11-21-01 22,103 48,841 Mark D. Millett........... 3,750 4.0% 16.00 11-21-01 16,577 36,631 Richard P. Teets, Jr...... 3,750 4.0% 16.00 11-21-01 16,577 36,631 Tracy L. Shellabarger..... 3,750 4.0% 16.00 11-21-01 16,577 36,631
DIRECTOR COMPENSATION At present, no separate compensation or fees are payable to directors of the Company for their services, other than reimbursement of expenses incurred with respect to such services. The Company expects, however, that new directors that are not employed by or otherwise affiliated with the Company or its stockholders will be paid in a manner and at a level consistent with industry practice. COMMITTEES OF THE BOARD OF DIRECTORS In November 1996, the Board of Directors established an Audit Committee. The Audit Committee makes recommendations to the Board of Directors regarding the independent auditors to be nominated for election by the stockholders and reviews the independence of such auditors, approves the scope of the annual audit activities of the independent auditors, and reviews such audit results. Deloitte & Touche LLP presently serves as the independent auditors of the Company. The Board of Directors may also establish other committees to assist in the discharge of its responsibilities. The Board has appointed directors Paul B. Edgerley and William Laverack, Jr. as the Administrative Committee under the Company's 1994 Incentive Stock Option Plan. The Board of Directors, acting as a compensation committee, will provide a general review of the Company's compensation and benefit plans to ensure that they meet corporate objectives. In addition, the Board of Directors will review the Chief Executive Officer's recommendations on (i) compensation of all officers of the Company and (ii) adopting and changing major Company compensation policies and practices. EMPLOYMENT AGREEMENTS Effective as of June 24, 1994, the Company entered into an Employment Agreement with Mr. Busse for a term of five years, to serve as President and Chief Executive Officer. Mr. Busse received a Base Salary of $290,000 for 1996. Mr. Busse's Base Salary for 1997 is $310,000. The Employment Agreement provides for an annual bonus (an "Annual Bonus"). The bonus is determined by making an award among executive employees selected by the Board of Directors in proportion to their respective base salaries, out of an "Annual Bonus Pool" consisting of 4% of the Company's pre-tax earnings, less an amount equal to 10% of the "equity investment" in the Company, determined as of the beginning of the year. The Annual Bonus is subject to first, a maximum of 200% of Base Salary paid in cash, then, a maximum of 100% of Base Salary paid in restricted stock vesting ratably over four years. For the first five years of employment, the Annual Bonus is guaranteed at not less than 60% of Base Salary, regardless of the Company's profitability. In addition, Mr. Busse received an additional sum of $30,000 during 1995 and 1996, and will receive the same additional amount for 1997. In the event that Mr. Busse's employment is terminated by the Company for cause, Mr. Busse is entitled to compensation earned prior to the date of termination computed pro rata up to and including the date of termination and all further obligations of the Company will terminate. For purposes of Mr. Busse's Employment Agreement, "cause" is defined as Mr. Busse's willful and knowing commission of a criminal act 55 60 under applicable state or federal law. In the event that Mr. Busse's employment is terminated by the Company without "cause" or if he terminates his employment for certain specified reasons, Mr. Busse is entitled to all compensation set forth in his Employment Agreement, subject to Mr. Busse's reasonable duty to mitigate his damages, and provided that compensation payable to Mr. Busse will be reduced on a dollar for dollar basis to the extent of pre-tax compensation received by Mr. Busse from any competitor of the Company. In the event that Mr. Busse terminates his employment for any other reason, he will receive no further compensation under his employment agreement. Upon termination of Mr. Busse's employment due to his disability or death, the Company will continue paying to Mr. Busse or his estate, as the case may be, a base salary during the remainder of the five-year term; provided that in the case of disability, such payments will be reduced to the extent of any benefits paid by workers' compensation, or under any state disability benefit program or under any disability policy maintained by the Company. Effective June 24, 1994, the Company entered into five-year Employment Agreements with Mr. Millett and Mr. Teets, pursuant to which Mr. Millett, as Vice President of Melting and Casting, and Mr. Teets, as Vice President of Rolling and Finishing, received a Base Salary of $175,000 for 1996 and will receive a Base Salary of $187,000 for 1997. Both Mr. Millett and Mr. Teets are entitled to an Annual Bonus, calculated in the same manner and subject to the same limitations discussed above for Mr. Busse. The termination provisions contained in the Employment Agreements with Messrs. Millett and Teets are identical to those contained in the Employment Agreement with Mr. Busse. Effective July 7, 1994, the Company entered into a four-year Employment Agreement with Mr. Shellabarger, to serve as Chief Financial Officer, at a Base Salary for 1996 of $135,000 ($158,000 for 1997). Mr. Shellabarger is entitled to an Annual Bonus calculated in the same manner and subject to the same limitations discussed above for Mr. Busse. In addition, the Company sold to Mr. Shellabarger, at the commencement of his employment, 280,601 shares of its Common Stock, at an aggregate purchase price of $750,100, for which he executed the Shellabarger Note. Pursuant to the terms of his employment agreement the Shellabarger Note was forgiven in connection with the Company's initial public offering of its Common Stock in November 1996. See "Certain Transactions." The termination provisions contained in Mr. Shellabarger's Employment Agreement are substantially similar to those contained in the other Employment Agreements. For purposes of Mr. Shellabarger's Employment Agreement, "cause" is defined as (i) dishonesty with respect to the Company or any of its subsidiaries; (ii) the unexcused failure, neglect, or refusal to perform his duties and responsibilities, despite being apprised of such failure, neglect or refusal and given a reasonable period to correct such problem; (iii) willful misfeasance or nonfeasance of duty intended to injure or having the effects of injuring the business or business opportunities of the Company or any of its subsidiaries; or (iv) his conviction of a crime that materially adversely affects the business of the Company or any of its subsidiaries, or his ability to perform his duties and responsibilities as contemplated by the Employment Agreement. After the initial employment term expires, and although each of the foregoing Employment Agreements continues only on a month-to-month basis thereafter (unless renewed), Messrs. Busse, Millett, Teets, and Shellabarger are entitled to six months of severance pay, at their Base Salary, if employment is in fact not continued. All four Named Executive Officers receive major medical, long-term disability, and term life insurance equal to twice their Base Salaries. Effective January 2, 1997, IDI entered into a five year Employment Agreement with Larry J. Lehtinen as IDI's Vice President and General Manager, with responsibility to implement the development of the IDI Process, the design construction, start-up, and operation of the IDI production facility, and the development and supervision of IDI's sales, licensing, and sub-licensing activities. Mr. Lehtinen is to receive a base salary of $120,000, subject to increase on an annual review basis, plus an annual bonus in an amount not less than $78,000 per year for each of the first two years, and thereafter in accordance with Steel Dynamics' Bonus Plan (as defined) under the category of a "Manager." Mr. Lehtinen was granted a 33,672 share option, at fair market value, under the Steel Dynamics' 1994 Incentive Stock Option Plan, on the effective date of his Employment Agreement, and received an additional one-time cash payment of $10,670 to offset certain 56 61 expenses and/or anticipated losses, expected to be incurred by Mr. Lehtinen as a result of his change of employment. Mr. Lehtinen is also entitled to participate under Steel Dynamics' 1996 Incentive Stock Option Plan under the category of a "Vice President." EMPLOYEE PLANS Officer and Manager Cash and Stock Bonus Plan. In October 1996, the board of directors adopted and the stockholders approved an Officer and Manager Cash and Stock Bonus Plan (the "Bonus Plan"), which prescribes cash and stock bonus awards based upon the Company's profitability and the Officer's and Manager's relative base salaries. Under the Bonus Plan, 5% of an amount determined by subtracting from the Company's "Adjusted Pre-Tax Net Income" an amount equal to 10% of "Stockholder's Equity" as determined by the Company's audited Consolidated Balance Sheets, is placed into a "Distribution Pool," from which the bonus awards are made. Adjusted Pre-Tax Net Income for any of the Company's fiscal years, commencing January 1, 1997, is defined as the Company's net income before taxes, extraordinary items and bonuses payable to Participants under the Bonus Plan, as determined by the Company's outside auditors, except that, to the extent reasonably determinable, the effect upon Adjusted Pre-Tax Net Income of any income and start-up expenses associated with significant capital expenditures, for a period not to exceed twelve months following start-up, are to be excluded from and not taken into account in determining Adjusted Pre-Tax Net Income. "Participants" under the Bonus Plan include "Officers" and "Managers" selected from time to time to participate in the Bonus Plan by a committee of the Board which administers the Bonus Plan, consisting of at least two members of the Board, each of whom should be both a "non-employee director" (as defined in Rule 16(b)-3 under Section 16 of the Exchange Act) and an "outside director" as defined in Section 162 of the Code. The Board currently serves as the committee, in the absence of the appointment of a separate committee. At the present time, five Officers (the President and four Vice-Presidents) and five Managers have been selected to participate in the Bonus Plan. Once the Distribution Pool has been calculated, and if it is a positive number, the Participants are entitled to receive a bonus, payable in cash and, if the Distribution Pool is sufficient, in stock of the Company, up to the amount prescribed in the Bonus Plan's formula. Specifically, each Participant is entitled to receive a cash bonus in an amount determined by multiplying the amount in the Distribution Pool by the Participant's Bonus Percentage (as defined below), except that, with respect to an Officer, the cash bonus is not to exceed two times the Officer's base salary and, with respect to a Manager, the cash bonus is not to exceed the Manager's base salary. Inasmuch as Keith E. Busse, Mark D. Millett, Richard P. Teets, Jr. and Tracy L. Shellabarger, the four Officers currently covered by the Bonus Plan, have existing employment agreements which provide for the payment of a cash bonus, and in order to preclude duplication of bonus payments, the Bonus Plan provides that the amount of any cash bonus payable to those Officers under their existing employment agreements is to be deducted from the cash bonus, if any, payable to them under the Bonus Plan. The "Participant's Bonus Percentage" means, in any year with respect to a Participant, a fraction, the numerator of which is equal to either (i) with respect to an Officer, two (2) times the Officer's base salary or (ii) with respect to a Manager, the Manager's base salary (both (i) and (ii) are defined as the "Participant's Adjusted Base Salary"), and the denominator of which is equal to the sum of all the Participants' Adjusted Base Salaries. If there is any excess in the Distribution Pool over the sum of the aggregate cash bonuses payable under the Bonus Plan to all Participants and the amounts deducted from the cash bonuses otherwise payable to Messrs. Busse, Millett, Teets and Shellabarger because of bonuses already payable to them under their employment agreements (which sum is defined as the "Adjusted Distribution Pool"), the amount thereof is to be distributed to the Participants in the form of "Restricted Stock." Each Participant is to receive that number of shares of Restricted Stock having a fair market value, at the time of issuance, equal to the product of that Participant's Bonus Percentage and the Adjusted Distribution Pool, except that, with respect to an Officer, the aggregate fair market value of the Restricted Stock so issued is not to exceed the Officer's Base Salary, and, with respect to a Manager, the aggregate fair market value of the Restricted Stock so issued is not to exceed 50% of the Manager's Base Salary. The Bonus Plan provides that Restricted Stock will vest and become 57 62 nonforfeitable over a four year period. Commencing on January 1 following the year with respect to which the Restricted Stock was issued, the stock will vest and become nonforfeitable at the rate of 25% thereof for each full year following the year with respect to which the Restricted Stock was issued. Upon termination of a Participant's employment for any reason other than retirement, all shares of Restricted Stock of that Participant which were not vested at the time of termination of employment are required to be forfeited and returned to the Company (although the committee, in its discretion, may waive the forfeiture provisions). Until vested, Restricted Stock is not permitted to be transferred, assigned, sold, pledged, or otherwise disposed of in any manner, nor subject to levy, attachment or other legal process, and, while restricted, the stock certificates evidencing those shares are required to be legended and held by the Company. Subject to these limitations, however, and as long as a forfeiture has not occurred, the Participant is treated as the owner of the Restricted Stock with full dividend and voting rights. The total number of shares of Common Stock of the Company reserved for distribution pursuant to the Restricted Stock portion of the Bonus Plan is 450,000 shares, subject to adjustment in the event of any stock dividends, stock splits, combinations or exchanges of shares, recapitalizations or other changes in the capital structure of the Company, as well as any other corporate transaction or event having any effect similar to any of the foregoing. If any such event occurs, the aggregate number of shares reserved for issuance under the Bonus Plan would be adjusted to equitably reflect the effect of such changes. The Bonus Plan commenced with the Company's fiscal year beginning January 1, 1997, however, no cash or stock bonuses under this Bonus Plan will accrue until after the conclusion of the Company's 1997 fiscal year. The Company has also established other bonus plans for its employees. See "Business -- Employee." Stock Option Plans. The following general discussion of certain features of the Company's 1994 Incentive Stock Option Plan (the "1994 Plan") and the 1996 Incentive Stock Option Plan (the "1996 Plan") is subject to and qualified in its entirety by reference to the 1994 Plan and the 1996 Plan, copies of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part. 1994 Incentive Stock Option Plan. In December 1994, the Company adopted the 1994 Plan, which was approved by stockholders in March 1995. Under the 1994 Plan, the Company's Board of Directors, or a committee designated by the Board of Directors, grants to managers, supervisors and professionals of the Company incentive stock options ("ISOs") intended to qualify as such under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). However, to the extent that the aggregate fair market value (determined as of the time of the option grant) of all shares of Common Stock with respect to which ISOs are first exercisable by an individual optionee in any calendar year (under all plans of the Company and any parent or subsidiary) exceeds $100,000, the excess of the options over $100,000 will be issued as nonstatutory stock options, not qualifying as ISOs. In any fiscal year of the Company, no employee may be granted options to purchase more than 300,000 shares of the Company's Common Stock. The exercise price of an ISO granted to any participant is the fair market value at the time of the grant (110% of fair market value in the case of an ISO granted to a 10% stockholder). One-third of the ISOs granted to an employee under the 1994 Plan become exercisable six months after the date of grant, and two-thirds of the ISOs become exercisable on the fifth anniversary of the date of grant, or at such time and subject to such other terms and conditions as determined by the Board of Directors or the Administrative Committee. In no event will exercise be permitted after ten years from the date of grant (five years, in the case of an ISO granted to a 10% stockholder). If an option expires or terminates without having been exercised in full, the unpurchased shares will continue to be available for award under the 1994 Plan. An ISO may be exercised during the life of the participant solely by the participant or the participant's duly appointed guardian or personal representative. The total number of shares of Common Stock available for awards under the 1994 Plan is 1,102,765 shares, subject to adjustment for future stock splits, stock dividends and similar events. As of June 30, 1997, options for 763,236 shares of Common Stock had been issued under the 1994 Plan, of which options for 62,043 shares had been exercised. Awards under the 1994 Plan, through December 31, 1996, were determined by the Board of Directors, in its discretion. Effective January 1, 1997, awards under the 1994 Plan are determined by the Administrative Committee, consisting of two members of the Board each of whom is a "non-employee director," as defined in 58 63 Rule 16(b)-3 promulgated under Section 16 of the Securities Exchange Act of 1934 and an "outside director" as that term is used in Section 162 of the Code and the Regulations thereunder. On January 10, 1997, the Company filed a Registration Statement on Form S-8, to register, under the Securities Act of 1933, as amended, the issuance of all 1,102,765 shares of Common Stock available for awards under the 1994 Plan. 1996 Incentive Stock Option Plan. In October 1996, the Company adopted and the stockholders approved the 1996 Plan. The 1996 Plan covers all full-time employees of SDI (approximately 359 employees as of June 30, 1997) and its subsidiaries, including officers, department managers, supervisors, professional staff, and hourly employees, and provides for automatic semi-annual grants of stock options to all such employees, by position category, in the following amounts, based upon the fair market value of the Company's Common Stock on each semi-annual grant date, with an exercise price equal to the same fair market value on such date (110% of fair market value in the case of 10% stockholders):
GRANTS SEMI-ANNUAL POSITION PER YEAR GRANT VALUE ------------------------------------------------------- -------- ----------- President.............................................. 2 $80,000 Vice-President......................................... 2 60,000 Vice-President......................................... 2 45,000 Manager................................................ 2 30,000 Supervisors/Professionals Grade 3.............................................. 2 15,000 Grade 2.............................................. 2 12,500 Grade 1.............................................. 2 10,000 Hourly................................................. 2 2,500
The stock options are intended to qualify as ISOs under the Code, except that to the extent that the aggregate fair market value (determined as of the time of the option grant) of all shares of Common Stock with respect to which ISOs are first exercisable by an individual optionee in any calendar year (under all plans of the Company and any parent or subsidiary) exceeds $100,000, the excess of the options over $100,000 will be issued as nonstatutory stock options, not qualifying as ISOs. In any fiscal year of the Company, no employee may be granted options to purchase more than 300,000 shares of the Company's Common Stock. The 1996 Plan is a five-year plan, which terminates December 31, 2001. Options issued under the 1996 Plan become exercisable six months after the date of grant and must be exercised no later than five years thereafter. Subject to certain exceptions, the employee must remain in the continuous employment of the Company or any of its subsidiaries from the date of grant to and including the date of exercise. Options are not transferable, except by will or pursuant to a qualified domestic relations order, or as permitted under Section 422 of the Code or under applicable Securities and Exchange Commission rules, and may be exercised, during the optionee's lifetime, only by the optionee. No shares of Common Stock may be issued until full payment has been made, and an optionee has no right to any dividends or other rights of a stockholder with respect to shares subject to an option until such time as the stock has actually been issued in the optionee's name in accordance with the 1996 Plan. If an option expires or terminates without having been exercised in full, the unpurchased shares will continue to be available for award under the 1996 Plan. An Administrative Committee, when appointed by the Board of Directors, is to administer the 1996 Plan. Such Committee must consist of at least two members of the Board, each of whom must be both a "non-employee director," as defined in Rule 16(b)-3 promulgated under Section 16 of the Securities Exchange Act of 1934, and an "outside director" as that term is used in Section 162 of the Code and the regulations thereunder. Currently, however, in the absence of the appointment of a Committee by the Board, the Board is serving as the Committee. The Committee is required to administer the 1996 Plan so as to comply at all times with Rule 16(b)-3 of the Exchange Act and Sections 162, 421, 422, and 424 of the Code. The Board may amend, alter, or discontinue the 1996 Plan at any time and from time to time. The total number of shares of Common Stock available for award under the 1996 Plan is 1,403,000, subject to 59 64 adjustment for future stock splits, stock dividends and similar events. As of June 30, 1997, options for 185,896 shares of Common Stock have been issued under the 1996 Plan, of which 939 had been exercised. On May 21, 1997, the Company filed a Registration Statement on Form S-8, to register under the Securities Act, the issuance of all 1,403,000 shares of Common Stock available for awards under the 1996 Plan. Profit Sharing Plan. Steel Dynamics has also established a Profit Sharing Plan, for eligible employees. The plan is a "qualified plan" for federal income tax purposes. Under the Profit Sharing Plan, the Company allocates each year to a trust fund such sum, if any, as the Board of Directors determines, up to an amount equal to 15% of the wages paid to Profit Sharing Plan participants ("profit sharing pool"). The profit sharing pool is used to fund the Profit Sharing Plan as well as a separate cash profit sharing bonus which is paid to employees in March of the following year. The allocation between the Profit Sharing Plan contribution and the cash bonus amount is determined by the Board of Directors each year. Employees become eligible to participate in the Profit Sharing Plan after they have completed 30 days of employment with the Company. An employee is entitled to a Profit Sharing Plan allocation only if that employee has worked at least 1,000 hours during the year. An employee becomes fully vested over a period of seven years of service with the Company, subject to prior vesting in the event of retirement, death or disability. Contributions to the Profit Sharing Plan by Steel Dynamics are deductible by the Company and the contributions and the income earned thereon are not taxable to an employee until actually received by the employee at a later date. Retirement Savings Plan. SDI has also established a Retirement Savings Plan for eligible employees, which is also a "qualified plan" for federal income tax purposes. Employees become eligible to participate in the Retirement Savings Plan on the first day of the month following the date of employment with the Company. Contributions to the Retirement Savings Plan by the employees may be made on a pre-tax basis and the income earned on such contributions is not taxable to an employee until actually received at a later date. Generally, employees may contribute on a pre-tax basis up to 8% of their eligible compensation. SDI matches employee contributions in an amount equal to a minimum of 5% of the employee's pre-tax contribution, subject to certain applicable tax law limitations and to profitability levels of the Company. Employees are immediately 100% vested with respect to their pre-tax contributions and the Company's matching contributions. Contributions by Steel Dynamics are deductible by the Company and contributions and the income earned thereon are not taxable to the employee until actually received. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The full Board of Directors acts as a compensation committee. See "-- Committees of the Board of Directors." LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS. The Company's Amended and Restated Articles of Incorporation (the "Articles") limit the liability of directors by providing that the Company shall indemnify an individual made a party to a proceeding, because the individual is or was a director, against liability incurred in the proceeding if the individual's conduct was in good faith, and if the individual reasonably believed, in the case of "official conduct" with the Company, that the individual's conduct was in its best interests (or at least that the individual's conduct was not opposed to the Company's best interests), and, in the case of any criminal proceeding, that the individual either had reasonable cause to believe that his conduct was lawful, or had no reasonable cause to believe that his conduct was unlawful. These subsections prohibit indemnity if a director is found liable in a proceeding by the Company against the director (or a stockholder derivative action), or in connection with a proceeding in which the director has been adjudged liable for having improperly received a personal benefit in his capacity as a director. Further, in a direct action by the Company (or in a derivative action), indemnification is permitted but only to the extent of reasonable expenses incurred by the director in connection with the proceeding. The underlying statutory standard for director liability in Indiana, however, is broad, providing that a director is not liable for any action taken as a director, or any failure to take any action, unless the director has 60 65 breached or failed to perform the duties of the director's office, and the breach or failure to perform constitutes willful misconduct or recklessness. CERTAIN TRANSACTIONS In 1996 and the six months ended June 30, 1997, the Company has sold 279,000 tons and 188,138 tons, respectively, of its hot bands to Heidtman (and its affiliated companies) for $91.8 million and $66.1 million, respectively, pursuant to a six-year "off-take" agreement. See "Business -- The Company's Customers and Markets." John Bates is the President and Chief Executive Officer of Heidtman and is a member of Steel Dynamics' Board of Directors, designated by the Keylock Investments Limited stockholder in which Heidtman and Mr. Bates own a controlling interest, and by the Mazelina Anstalt stockholder (collectively, the owners of 5,823,097 shares of the Company's Common Stock, or 12.2% of the total outstanding shares prior to the offerings). Keylock Investments Limited was one of the Company's initial investors, becoming a stockholder in September 1993. Pursuant to the Company's off-take agreement with Heidtman, Heidtman has a 6-year obligation to purchase from the Company, and the Company is obligated to sell to Heidtman, at least 30,000 tons of the Company's hot band products per month. Heidtman also has priority purchase rights to the Company's secondary and field claim material. The Company's pricing to Heidtman is determined by reference to the lowest prices charged by other thin-slab mini-mills or conventional mills for the same products, and the Company cannot charge Heidtman higher prices than the lowest prices at which it offers its products to any other customer. In addition, in 1997 the Company sold approximately 32 unimproved acres of its plant site to Heidtman for $96,000, for the construction by Heidtman of a steel center processing and storage facility. See "Principal and Selling Stockholders." Pursuant to an "off-take" agreement, during 1996 and the six months ended June 30, 1997, the Company sold 85,800 tons and 56,230 tons, respectively, of its steel coil to Preussag for an aggregate of $29.9 million and $20.4 million, respectively. Under this agreement, the Company is obligated to sell to Preussag, and Preussag is required to purchase, not less than 12,000 tons per month of the Company's available products, for either domestic or export use or resale, at market prices determined by reference to the Company's price sheet and by reference to prevailing competitive market prices charged to large customers by other mills within the Company's marketing area. In addition, Preussag has been appointed as the Company's preferred distributor for all export sales to customers outside the United States, Canada and Mexico. See "Business -- The Company's Customers and Markets." Dr. Jurgen Kolb, a director of the Company, is a member of the Executive Board of Preussag and Preussag owns 6,089,865 shares of Common Stock, or 12.7% of the total outstanding shares prior to the offerings. See "Principal and Selling Stockholders." Pursuant to a scrap purchasing agreement with OmniSource, during 1996 and the six months ended June 30, 1997, the Company purchased an aggregate of 1,068,609 tons and 452,162 tons, respectively, of steel scrap for $145.5 million and $58.5 million, respectively, and paid OmniSource a total of $1.8 million and $0.8 million, respectively, in fees. See "Business -- Steel Scrap and Scrap Substitute Resources." Leonard Rifkin is the Chairman of the Board and Chief Executive Officer of OmniSource and is a member of Steel Dynamics' Board of Directors designated by the Heavy Metal, L.C. stockholder (the owner of 5,667,612 shares of the Company's Common Stock, or 11.8% of the total outstanding shares prior to the offerings). Leonard Rifkin, together with members of his family, and OmniSource collectively own a controlling interest in Heavy Metal, L.C. See "Principal and Selling Stockholders." Heavy Metal, L.C. was one of the Company's initial investors, becoming a stockholder in September 1993. Pursuant to the OmniSource scrap purchasing agreement, OmniSource acts as the exclusive scrap purchasing agent for the Company's steel scrap, which may involve sales of OmniSource's own scrap, at the prevailing market prices which OmniSource can get for the same product, or it may involve brokering of general market scrap, for which the Company pays whatever is the lowest market price for which OmniSource can purchase that product. OmniSource is paid a commission per gross ton of scrap received by the Company at its mini-mill. In addition, OmniSource maintains a scrap handling facility, with its own equipment and staff, on the Company's plant site. OmniSource does not pay rent for this facility. 61 66 The Company has entered into a five-year "off-take" agreement with Qualitech, pursuant to which the Company has agreed to purchase from Qualitech approximately 300,000 tonnes of iron carbide that Qualitech intends to produce commencing in 1998. See "Business -- Steel Scrap and Scrap Substitute Resources." Steel Dynamics owns approximately 4.0% of the common stock of Qualitech Steel Holdings, Inc. ("Holdings"), the parent company of Qualitech. In addition, Keith E. Busse, Leonard Rifkin, and William Laverack, directors of the Company, also serve on Holdings' 12-member board of directors. OmniSource and Leonard Rifkin, affiliates of Heavy Metal, L.C., one of the Company's stockholders, own approximately 6% of Holdings' common stock, Whitney Equity Partners, L.P., an affiliate of J.H. Whitney & Co., a stockholder of the Company (of which Mr. Laverack is a general partner) owns approximately 10% of Holdings' common stock and General Electric Capital Corporation, a stockholder of the Company, owns approximately 1.7% of Holdings' common stock. The Company's iron carbide supply contact with Qualitech represents approximately 45% of Qualitech's estimated plant capacity, and the contract was considered vital to Qualitech's successful financing of its iron carbide project, which is presently under construction. OmniSource also has an iron carbide off-take contract with Qualitech, for 120,000 tonnes of iron carbide annually. The Company has entered into a "second look" export sales agreement with Sumitomo. See "Business -- The Company's Customers and Markets." Sumitomo and its parent Sumitomo Corporation (Japan) own in the aggregate 1,284,197 shares of Common Stock or 2.6% of the total outstanding shares prior to the offerings. The export sales agreement applies if Preussag declines to handle the particular export sale. In addition, Sumitomo and IDI have entered into a Sale of Excess Product Agreement, pursuant to which Sumitomo will represent IDI, once it is producing DRI, in selling up to half of any of IDI's excess DRI that is not needed by the Company for its own use and consumption. No export sales have been made to date under this agreement. The Company's wholly owned subsidiary, IDI, has also entered into an agreement with Sumitomo, pursuant to which IDI has agreed to sell to or through Sumitomo up to 50% of any DRI that IDI manufactures starting in 1998 which Steel Dynamics does not retain for its own consumption. Such sales would be at the then prevailing market prices, either for Sumitomo's own account or on a sales commission basis for sale to third parties. In addition, IDI has entered into a license agreement with Sumitomo pursuant to which Sumitomo is authorized, on an exclusive worldwide basis, except for the United States and Canada, and except for additional plants that IDI may wish to construct for its own use or for SDI's use, to sublicense others or to use any proprietary know-how or other intellectual property that constitutes the IDI Process or is part of the IDI Project and which may be developed by IDI in connection with the manufacture of DRI, or by Steel Dynamics either in connection with the conversion of DRI into liquid pig iron or in connection with the use thereof in the steelmaking process. Such license rights contemplate that Sumitomo would build and construct plants using this technology for itself or for others within the licensed territory. IDI is entitled to receive a one-time license fee from Sumitomo, based upon each plant's rated production capacity, plus a negotiated royalty fee for the use of any IDI or SDI patents that may be acquired by IDI or SDI in connection with the enterprise. Any underlying royalties or fees that might have to be paid to third parties would be passed through to Sumitomo or to its sub-licensees. IDI has also agreed to afford Sumitomo an opportunity to provide its proposed DRI plant with its raw material and equipment supplies, on a competitive basis that is intended to secure for IDI the lowest and best prices for the supplies and products. In 1996, the Company sold Common Stock to certain of its existing shareholders or their affiliates for an aggregate purchase price of $11.9 million in two interrelated private placements of Common Stock, pursuant to agreements that were entered into during the first and second quarters of 1996. In February 1996, the Company accepted subscriptions from these stockholders, all "accredited" purchasers, for the purchase, at approximately $8.20 per share, of approximately $11.9 million of Common Stock, as part of the Company's efforts to place an aggregate of $25.0 million of Common Stock to be used in whole or in part to finance its IDI Project. In the exercise or waiver of their limited preemptive rights under the Stockholders Agreement stockholders, owning collectively (prior to the purchase) approximately 78.0% of the total then outstanding, agreed to purchase that amount. The purchase price was determined by reference to the arm's length Stock Purchase Agreement of December 1995 with Preussag, relating to the purchase by Preussag at that time of $50.0 million of Common Stock at approximately $8.55 per share, which contained a provision that contemplated the Company's sale to existing stockholders or to others of up to $10 million of its shares of 62 67 Common Stock at a purchase price of approximately $8.20 per share. Because of the interrelatedness of the Company's placement of the balance of approximately $13.0 million before the IDI Project could be undertaken, the approximately $11.9 million private placement was not closed until September 1996, at which time the Company also closed a $13.5 million private placement of its Common Stock with Sumitomo and Sumitomo Corporation (Japan), which was agreed to by the parties in April 1996, at a per share purchase price of approximately $10.51. This purchase price was determined at arm's length by the Company's Board of Directors, in negotiations with Sumitomo. During August and September 1996, in connection with its Cold Mill Project, the Company entered into two agreements with units of General Electric Company, of which General Electric Capital Corporation, the owner of 5,750,029 of the Company's shares of Common Stock, or 12.0% of the total outstanding shares prior to the offerings is a wholly-owned subsidiary, for the purchase of equipment for the Cold Mill Project in the aggregate amount of approximately $23.4 million. This contract was entered into as a result of a competitive bidding process conducted by the Company in the same manner that it has used in connection with the letting of other equipment and supply agreements for its existing mini mill and for its Cold Mill Project. In November 1996, the Company used a portion of the proceeds from its initial public offering to prepay all $55.0 million principal amount of certain subordinated notes, together with accrued interest thereon and a prepayment premium. General Electric Capital Corporation and Whitney Subordinated Debt Fund, L.P., which owned $14.7 million principal amount and $18.5 million principal amount, respectively, of such subordinated notes and were stockholders of the Company. In July 1994, the Company sold Mr. Shellabarger, the Chief Financial Officer and a director of the Company, 280,601 shares of Common Stock, and accepted the Shellabarger Note in partial payment of the purchase price. Pursuant to the terms of his employment agreement, the note was forgiven in connection with the offerings. See "Management -- Employment Agreements." THE REGISTRATION AGREEMENT Under a Registration Agreement dated as of June 30, 1994, as amended, between the Company and various stockholder groups identified therein as the "Bain Stockholders," "General Electrical Capital Corporation," "Heavy Metal, L.C.," the "Keylock Stockholders," the "Whitney Stockholders," the "Management Stockholders," "Preussag," and "Sumitomo" (collectively the "Stockholders"), the Stockholders were granted certain demand and piggyback registration rights. Demand Registrations. The Bain Stockholders and General Electric Capital Corporation are each entitled to request two demand registrations, and the Heavy Metal, L.C., Keylock Stockholders and Preussag are entitled to request one demand registration each. A demand registration must be for at least 50% of the total Company shares held by the Stockholder making the demand. In connection with the offerings, the Bain Stockholders will be deemed to have used one demand registration right each. Piggyback Registrations. Whenever the Company proposes to register any of its securities under the Securities Act (other than pursuant to a demand registration), the Company is required to notify all holders of "Registrable Securities" and will include all Registrable Securities requested to be included that may be prudently sold in the offering. All expenses incident to the Company's compliance with its obligations under the Registration Agreement will be paid by the Company, regardless of whether in connection with a demand registration or a piggyback registration, and the Company has agreed to reimburse the holders of Registrable Securities for the reasonable fees and disbursements of one legal counsel chosen by all of them in connection with a registration. The obligations under the Registration Agreement terminate on November 21, 2004, the seventh anniversary of a sale of the Company's Common Stock pursuant to an effective registration statement under the Securities Act, subject to extension for an additional six-month period under certain circumstances. 63 68 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of June 30, 1997, and as adjusted to reflect the sale of the Common Stock offered hereby, by (i) each person known by the Company to be the beneficial owner of more than 5% of the Common Stock, (ii) each director of the Company, (iii) each Named Executive Officer, (iv) each Selling Stockholder and (v) all executive officers and directors as a group. Unless otherwise indicated, each of the stockholders has sole voting and investment power with respect to the shares of Common Stock beneficially owned by them.
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 - ------------------------------------------ ---------- ------- ------------ ---------- ------- Heavy Metal, L.C.(1)...................... 6,233,926 13.0% -- 5,733,926 11.7% 1610 North Calhoun Street Fort Wayne, IN 46808 Preussag Stahl AG(2)...................... 6,089,865 12.7 550,000 5,539,865 11.3 Eisenhuttenstr. 99 D-38223 Salzgitter, Germany Bain Capital Entities(3).................. 4,043,732 8.4 -- 1,299,732 2.6 Two Copley Place Boston, MA 02116 General Electric Capital Corporation(4)... 5,750,029 12.0 1,440,029 4,310,000 8.8 1600 Summer Street, 5th Floor Stamford, CT 06927 Keylock Investments Limited(5)............ 3,017,139 6.3 -- 2,917,139 5.9 17 Dame Street Dublin 2, Ireland Mazelina Anstalt(6)....................... 2,805,958 5.9 100,000 2,705,958 5.5 c/o Lic. Gentrud Beck Stadtle 36 9490 Vaduz, Liechtenstein J.H. Whitney & Co.(7)..................... 1,753,591 3.7 1,450,000 303,591 .6 177 Broad Street, 15th Floor Stamford, CT 06961 Sumitomo Corporation of America........... 513,750 1.1 160,000 353,750 .7 5000 USX Tower 600 Grant Street Pittsburgh, PA 15219 Keith E. Busse(8)......................... 1,682,909 3.5 100,000 1,582,909 3.2 Richard P. Teets, Jr.(9).................. 1,126,156 2.4 -- 1,126,156 2.3 Mark D. Millett(10)....................... 1,067,707 2.2 -- 1,067,707 2.2 Tracy L. Shellabarger(11)................. 286,751 .6 -- 286,751 .6 Leonard Rifkin(12)........................ 6,239,926 13.0 -- 5,739,926 11.7 OmniSource Corporation(13)................ 1,716,525 3.6 450,000 1,266,525 2.6 1610 North Calhoun Street Fort Wayne, IN 46808 John C. Bates(14)......................... 3,017,139 6.3 -- 2,917,139 5.9 Heidtman Steel Products, Inc.(15)......... 3,017,139 6.3 -- 2,917,139 5.9 2401 Front Street Toledo, OH 43605 Paul B. Edgerley(16)...................... 4,043,732 8.4 -- 1,299,723 2.6 William D. Strittmatter(17)............... 5,750,029 12.0 -- 4,310,000 8.8 William Laverack, Jr.(18)................. 1,753,591 3.7 -- 303,591 .6 Dr. Jurgen Kolb(19)....................... 6,089,865 12.7 -- 5,539,865 11.3 Directors and Executive Officers as a Group (10 persons)(8)................... 31,057,805 64.9 100,000 24,173,767 49.2 Other Selling Stockholders(20)............ 2,894,000 6.1 2,894,000 -- -- (None of whom own more than 1% of the outstanding Common Stock, except as otherwise noted)
(footnotes on following page) 64 69 - --------------- (1) Prior to the offerings, Heavy Metal, L.C. will distribute 500,000 shares to two of its members, who will in turn sell those shares in the offerings. Of these shares, 450,000 will be distributed to and sold by OmniSource Corporation and are shown in the "Number of Shares Offered" column for OmniSource Corporation. The other 50,000 shares will be distributed to a person included in the category of "Other Selling Stockholders" and are included in the "Number of Shares Being Offered" column for the Other Selling Stockholders. If the U.S. Underwriters exercise their over-allotment option in full, Heavy Metal, L.C. will distribute another 266,525 shares to OmniSource Corporation and 33,475 shares to one of the Other Selling Stockholders, who will then sell those shares. If the U.S. Underwriters exercise their over-allotment option in full, the shares beneficially owned by Heavy Metal, L.C. after the offerings would be 5,433,926. (2) If the U.S. Underwriters exercise their over-allotment option in full, the shares beneficially owned by Preussag Stahl AG after the offerings would be 5,039,865. (3) Consists of 1,687,584 shares held of record by Bain Capital Fund IV, L.P., 1,931,272 shares held of record by Bain Capital Fund IV-B, L.P., 325,278 shares held of record by BCIP Associates, L.P., and 99,598 shares held of record by BCIP Trust Associates, L.P., in each case as of June 30, 1997. Immediately prior to the offerings, the Bain Capital Entities expect to distribute a portion of their shares of the Common Stock to their limited partners, certain of which have agreed in turn to sell an aggregate of 2,744,000 shares in the offerings upon consummation of such distribution. These shares so expected to be distributed are included in the "Number of Shares Being Offered" column for the Other Selling Stockholders. The aggregate number of shares expected to be distributed by each Bain Capital Entity to the limited partners thereof are expected to be distributed equally on a pro rata basis to all limited partners of such Bain Capital Entity. The 1,299,732 shares beneficially owned by the Bain Capital Entities after the distribution of the 2,744,000 shares to be sold by certain of the Other Selling Stockholders will be further reduced by the number of shares distributed by the Bain Capital Entities but not sold in the offerings. (4) Excludes such number of shares of Common Stock not in excess of approximately 90,000 shares expected to be distributed immediately prior to the offerings by Bain Capital Fund IV-B, L.P. to General Electric Capital Corporation as a limited partner thereof, as described in footnote (3) above, all of which are to be sold in the offerings upon consummation of such distribution. Including the maximum of these shares, General Electric Capital Corporation will beneficially own up to approximately 12.2% of the Common Stock outstanding prior to the offerings immediately prior to the offerings. (5) Prior to the offerings, Keylock Investments Limited will distribute 90,496 shares to HS Processing, Inc., an affiliate of Heidtman Steel Products, Inc., 8,415 shares to National Materials, Inc. and 1,089 to Centaur, Ltd., for a total of 100,000 shares, which will then be sold by these entities in the offerings. These shares are included in the "Number of Shares Being Offered" column for the Other Selling Stockholders. (6) If the U.S. Underwriters exercise their over-allotment option in full, the shares beneficially owned by Mazelina Anstalt after the offerings would be 2,455,958. (7) Consists of 961,060 shares held of record by Whitney 1990 Equity Fund, L.P. (139,510 after the offerings), 240,279 shares held of record by J.H. Whitney & Co. (72,846 after the offerings), and 552,252 shares held of record by the Whitney Subordinated Debt Fund (91,235 after the offerings). (8) Includes 300 shares of Common Stock held by Mr. Busse's minor son, with respect to which Mr. Busse disclaims beneficial ownership. Includes 5,000 shares subject to currently exercisable stock options or stock options exercisable within 60 days. If the U.S. Underwriters exercise their over-allotment option in full, the shares beneficially owned by Mr. Busse after the offerings would be 1,532,909. (9) Includes 3,750 shares subject to currently exercisable stock options or stock options exercisable within 60 days. (10) Includes 3,750 shares subject to currently exercisable stock options or stock options exercisable within 60 days. (11) Includes 3,750 shares subject to currently exercisable stock options or stock options exercisable within 60 days, and also includes 2,400 shares owned by Mr. Shellabarger's wife for the benefit of Mr. Shellabarger's minor children. (12) Includes 6,239,926 shares of Common Stock held of record for its members by Heavy Metal, L.C. that Mr. Rifkin may be deemed to beneficially own due to his relationship with other beneficial owners of that entity. It also includes 500,000 shares of Common Stock which Heavy Metal, L.C. intends to (footnotes continued on following page) 65 70 distribute to OmniSource Corporation and to one of the Other Selling Stockholders immediately prior to the offerings, which OmniSource Corporation and such Other Selling Stockholder will sell in the offerings. Mr. Rifkin disclaims beneficial ownership of all but 593,018 of these shares, none of which are being sold in the offerings. (13) Includes 1,716,525 shares of the 6,233,926 shares of Common Stock held of record for its members by Heavy Metal, L.C., 450,000 of which are intended to be distributed by Heavy Metal, L.C. to OmniSource Corporation immediately prior to the offerings and which OmniSource Corporation will sell in the offerings. If the U.S. Underwriters exercise their over-allotment option in full, Heavy Metal, L.C. will distribute an additional 266,525 shares to OmniSource Corporation which will then sell their shares. In that event, the shares beneficially owned by OmniSource Corporation after the offerings would be 1,000,000 shares. (14) Consists of all 3,017,139 shares of Common Stock held of record by Keylock Investments Limited that Mr. Bates may be deemed to beneficially own due to his relationship with that entity. Prior to the offerings, Keylock Investments Limited will distribute the shares noted in footnote (4) to the entities noted therein, and these shares are included in the "Number of Shares Being Offered" column for the Other Selling Stockholders. Mr. Bates may be deemed the beneficial owner of some of these shares. (15) Consists of all 3,017,139 shares of Common Stock held of record by Keylock Investments Limited that Heidtman may be deemed to beneficially own due to its relationship with Keylock Investments Limited. Heidtman and its President, John C. Bates, own a controlling interest in Keylock Investments Limited. Prior to the offerings, Keylock Investments Limited will distribute the shares noted in footnote (4) to the entities noted therein, and these shares are included in the shares shown in the "Number of Shares Being Offered" column for the Other Selling Stockholders. (16) Consists of all 4,043,732 shares of Common Stock held of record by the Bain Capital Entities that Mr. Edgerley may be deemed to beneficially own due to his relationship with those entities. Mr. Edgerley disclaims beneficial ownership of these shares. Prior to the offerings, 2,744,000 of these shares will be distributed by the Bain Capital Entities to certain of the limited partners and will be sold by such limited partners as Other Selling Stockholders, and these shares are included in the shares shown in the "Number of Shares Being Offered" column for the Other Selling Stockholders. (17) Consists of all 5,750,029 shares of Common Stock held of record by General Electric Capital Corporation that Mr. Strittmatter may be deemed to beneficially own due to his relationship with this entity. Excludes such number of shares of Common Stock not in excess of approximately 90,000 shares expected to be distributed by Bain Capital Fund IV-B, L.P. immediately prior to the offerings to General Electric Capital Corporation as a limited partner thereof, as described in footnote (4) above, which shares Mr. Strittmatter may be deemed to beneficially own upon consummation of such distribution due to his relationship with this entity. Mr. Strittmatter disclaims beneficial ownership of all of these shares. The shares that are being sold in the offerings by General Electric Capital Corporation are shown in the "Number of Shares Being Offered" column for General Electric Capital Corporation and are not being offered by Mr. Strittmatter. (18) Consists of all 1,753,591 shares held of record by J.H. Whitney & Co. and its affiliated entities noted in footnote (6) that Mr. Laverack may be deemed to beneficially own due to his relationship with those entities. Mr. Laverack disclaims beneficial ownership of these shares. The shares that are being sold in the offerings by J.H. Whitney & Co. and its affiliated entities are shown in the "Number of Shares Being Offered" column for J.H. Whitney & Co. and are not being offered by Mr. Laverack. (19) Consists of all 6,089,591 shares held of record by Preussag Stahl AG that Dr. Kolb may be deemed to beneficially own due to his relationship with this entity. Dr. Kolb disclaims beneficial ownership of the shares. The shares that are being sold in the offerings by Preussag Stahl AG are shown in the "Number of Shares Being Offered" column for Preussag Stahl AG and are not being offered by Dr. Kolb. (20) Consists of 2,744,000 shares expected to be distributed to certain of the Other Selling Stockholders immediately prior to the offerings by the Bain Capital Entities (including such shares of Common Stock expected to be distributed as described in footnote (4) above by Bain Capital Fund IV-B, L.P. to General Electric Capital Corporation (which is a beneficial owner of more than 1% of the outstanding Common Stock)), and 50,000 and 100,000 shares expected to be distributed immediately prior to the offerings by Heavy Metal, L.C. and Keylock Investments Limited, respectively. If the U.S. Underwriters exercise their over-allotment option in full, Heavy Metal, L.C. will distribute 33,475 shares to one of the Other Selling Stockholders who will then sell those shares. See footnotes (1) and (5) above. 66 71 DESCRIPTION OF CERTAIN INDEBTEDNESS The following is a brief description of the basic terms of the Company's Credit Agreement and the proposed indebtedness of its subsidiary, Iron Dynamics, Inc. The following discussion does not purport to be complete and is subject to, and is qualified in its entirety by reference to the instruments governing the respective indebtedness. The Credit Agreement is filed as an exhibit to the Registration Statement of which this Prospectus is a part. THE CREDIT AGREEMENT The Company entered into the Credit Agreement dated as of June 30, 1997, which amended and restated the Company's previous credit agreement, with Mellon Bank, N.A. (the "Agent") and the lenders party thereto (the "Lenders"), which provides for (i) a $250.0 million five-year revolving credit facility (the "Tranche 1 Facility") for working capital and general corporate purposes; (ii) a $100.0 million 364-day revolving credit facility (the "Tranche 2 Facility") for capital expenditures and general corporate purposes; and (iii) a $100.0 million term loan (the "Tranche 3 Facility"). Indebtedness outstanding under the Credit Agreement is secured by a first priority lien on substantially all of the assets of the Company. Borrowings under the Tranche 1 Facility are subject to a borrowing base consisting of specified percentages of depreciated book value of specified fixed assets, eligible inventory and receivables. Upon one week's notice from the Company and approval of all of the Lenders, all or a portion of the borrowings under the Tranche 2 Facility may be converted to Tranche 1 borrowings. The Tranche 1 Facility will mature on June 30, 2002, subject to the Company's option to extend this maturity date for an additional one year at the end of year three (June 30, 2000) and at the end of year four (June 30, 2001), provided that the Company's leverage ratio for the twelve month periods ending on June 30, 2000 and on June 30, 2001, respectively, shall be less than 3.0 to 1. The Tranche 2 Facility will mature on June 30, 1998, subject to 364-day extensions provided all of the Tranche 2 Facility lenders approve each such extension. In the event that a Company request for an extension of the Tranche 2 Facility is not approved by such lenders, the Tranche 2 Facility shall be converted to a five-year term loan with the principal amount of such five-year term loan to be amortized in equal quarterly installments during the final two years of the five-year term loan period. The Tranche 3 Facility will amortize in equal quarterly installments during the final two years of the Tranche 3 Facility term, commencing on September 30, 2002, with the final quarterly payment being due on June 30, 2004. Borrowings under the Tranche 1 Facility must be repaid to the extent such borrowings exceed the borrowing base. In addition, the Company is required to make prepayments under certain circumstances from asset sales, insurance proceeds and condemnation awards. Borrowings under the Tranche 1 Facility and the Tranche 2 Facility bear interest, at the option of the Company, at (i) the "Base Rate" plus an applicable margin ("Base Rate Option") or (ii) the "Euro-Rate" plus an applicable margin (the "Euro-Rate Option"). Borrowings under the Tranche 3 Facility bear interest at the Euro-Rate Option. The "Base Rate" for any day is defined as the greater of (A) the prime rate for such day or (B) .50% plus the federal funds effective rate for such day. The "Euro-Rate" for any day is defined as the rate for each funding segment determined by the Agent by dividing the rate of interest quoted on the Reuter's screen ISDA page to be the average of the rates per annum for deposits in dollars offered to major money center banks in the London interbank market two business days prior to the first day of the funding period in amounts comparable to the funding segment and with maturities comparable to such funding period by 1.00 minus the Euro-Rate Reserve Percentage. The Euro-Rate Reserve Percentage is the percentage as determined by the Agent which is in effect on such day as prescribed by the Board of Governors of the Federal Reserve System representing the maximum reserve requirement with respect to eurocurrency funding of a member bank. The Credit Agreement restricts the Company's ability to incur additional indebtedness, except (i) licensing or royalty fees payable to SMS Schloemann-Siemag AG; (ii) accounts payable to trade creditors arising out of purchases of goods or services in the ordinary course of business, (iii) certain indebtedness secured by purchase money liens; and (iv) unsecured indebtedness in an aggregate principal amount at any one time not greater than $10.0 million. In addition, the Credit Agreement prohibits the Company from 67 72 making capital expenditures in any fiscal year in excess of an aggregate amount of $50.0 million, unless the Company shall have furnished to the Agent projections satisfactory to a majority in committed dollar amount of the Lenders which demonstrate that the Company will satisfy the Financial Covenants (as defined below). The Company is also prohibited from making any loans or advances to, or making an investment in other entities except, among other things, (i) investments in subsidiaries, partnerships or other joint ventures related to the Company's steel production business which do not exceed (A) $50.0 million plus 35% of the cumulative annual change in net worth of the Company and its subsidiary in the case of investments in entities in which the Company or its subsidiary has an equity interest equal to or greater than 10% of the total equity interests in such entity, or (B) $10.0 million plus 25% of the cumulative annual change in net worth of the Company and its subsidiary in the case of other investments and (ii) an investment in IDI not exceeding $30.0 million and funded solely with the proceeds of the issuance of equity securities. The Credit Agreement also prohibits the Company from creating any liens on its properties except (i) liens created in connection with its indebtedness under the Credit Agreement and in connection with its existing indebtedness; (ii) liens created and/or deposits made in the ordinary course of business for taxes and assessments, workmen's compensation, unemployment insurance and other social security obligations, bids, surety and appeal bonds and the like; and (iii) purchase money liens on assets acquired in an aggregate amount not to exceed $5.0 million. The Credit Agreement contains additional restrictive covenants, including among others, covenants restricting the Company and its subsidiary with respect to entering into certain contracts, disposition of property or assets, payment of dividends, providing guarantees, entering into sale-leaseback transactions, entering into transactions with affiliates, mergers and consolidations and the modification of certain agreements. In addition, the Credit Agreement requires the Company to meet certain financial tests (the "Financial Covenants"), including maintaining (i) its leverage ratio at or below 5.0 to 1 for any period of four consecutive fiscal quarters; (ii) its tangible net worth at or above the sum of $187 million plus 50% of cumulative net income at such time; and (iii) its ratio of EBITDA to interest expense at not less than 2.0 to 1 for any period of four consecutive fiscal quarters. The failure of the Company to satisfy any of the covenants will constitute an event of default under the Credit Agreement, notwithstanding the Company's ability to meet its debt service obligations. The Credit Agreement also contains customary events of default, including the nonpayment of principal, interest, fees and other amounts, change of control, change of management and cross-defaults to certain other obligations of the Company and certain events including bankruptcy, reorganization and insolvency of the Company, Heidtman or OmniSource. THE IDI FINANCING IDI, the wholly owned subsidiary of the Company, expects to receive a commitment during the third quarter of 1997 for the $60.0 million senior secured financing facility, the IDI Financing, to finance a portion of the IDI Project. This anticipated credit facility, as currently being discussed with a group of lenders would include (i) a $50.0 million eight-year standby construction and term loan facility (the "IDI Term Facility") for the construction and start-up of a DRI production facility; and (ii) a $10.0 million eight-year revolving credit facility (the "IDI Revolving Facility") for working capital and letters of credit for import requirements. The IDI Term Facility and the IDI Revolving Facility will be ratably secured by substantially all of the assets of IDI, and will be further supported by a "take or pay" off-take supply agreement with the Company for all of IDI's DRI production with an agreement term 18 months longer than the maturity date of the IDI Financing, and with pricing of the DRI product tied to market prices of prompt industrial scrap with a ceiling and floor sufficient to provide for IDI's operating costs and debt service. The IDI Term Facility will amortize by semi-annual payments beginning in the year 2000 at 5% of the original principal amount, and increasing to 17.5% on the final maturity date. In addition, IDI will be required to make prepayments on the IDI Term Facility under certain circumstances from asset sales, insurance proceeds and condemnation awards. Borrowings under the IDI Revolving Facility, upon preliminary acceptance of the DRI production facility, will be subject to a borrowing base consisting of specified percentages of raw materials, finished DRI product and accounts receivables. Borrowings under the IDI Revolving Facility will be required to be repaid to the extent such borrowings exceed the borrowing base. 68 73 Borrowings under the IDI Financing will bear interest at floating rates tied to either the Base Rate (as defined above) or the Euro-Rate (as defined above), at the option of IDI. In addition to the "take or pay" off-take supply agreement with the Company, the lenders will require that the Company provide construction management services to IDI, as well as a package of coordinated completion and performance guarantees (including repayment of all amounts outstanding under the IDI Financing in the event the IDI Project fails to achieve a pre-determined level of performance by a date certain) (the "Assurance Package"). The Assurance Package will contain, at a minimum, (i) a coordination agreement among vendors and contractors enabling timely resolution of disputes; (ii) satisfactory retainages; (iii) payment schedules and payment support facilities; and (iv) liquidated damages for delay, performance failure and performance shortfall up to 100% of the contract price. While it is anticipated that IDI will receive a commitment for the IDI Financing substantially in accordance with the preceding terms, there can be no assurance that the commitment will be received or that the IDI Financing will be consummated. DESCRIPTION OF CAPITAL STOCK The following summary of certain provisions of the Common Stock does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of the Articles and Bylaws, copies of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part, as well as by the provisions of Indiana's law. The Company's authorized capital stock consists of 100,000,000 shares of Common Stock, par value $.01 per share. As of June 30, 1997, there were 47,866,323 shares of Common Stock issued and outstanding, that were beneficially owned by approximately 6,250 stockholders. As of June 30, 1997, 885,784 shares of Common Stock were reserved for issuance upon exercise of outstanding stock options. COMMON STOCK The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders, including the election of directors. The Articles do not provide for cumulative voting in the election of directors and, thus, holders of a majority of the shares of Common Stock may elect all of the directors standing for election. All holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors in its discretion from funds legally available therefor. Upon the liquidation, dissolution or winding-up of the Company, the holders of Common Stock are entitled to receive ratably the net assets of the Company that are available after the payment of all debts and liabilities. Holders of Common Stock have no preemptive rights or rights to convert their Common Stock into any other securities, nor are there any redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are, and the shares to be issued in the offerings will be, validly issued, fully paid, and non-assessable. CERTAIN PROVISIONS OF INDIANA LAW REGARDING TAKEOVERS As an Indiana corporation, the Company is subject to certain provisions of Indiana law which may discourage or render more difficult an unsolicited takeover of the Company. There are two principal statutes relating to this issue that constitute part of the BCL, the statute regulating "business combinations" and the statute regulating "control share acquisitions." Under Chapter 43 of the BCL relating to "business combinations" a corporation (with 100 or more stockholders) may not engage in any "business combination" with any "interested" stockholder for a period of five years following the interested stockholder's "share acquisition date" unless the business combination or the purchase of shares made by the interested stockholder was approved by the corporation's board of directors prior to the interested stockholder's share acquisition date. The term "business combination" is broadly 69 74 defined to apply to any merger or consolidation of the corporation and the interested stockholder, as well as any sale, lease, exchange, mortgage, pledge, transfer, or other disposition (in a single or a series of transactions) to or with the interested stockholder (or any affiliate or associate thereof) of any assets of the corporation if the transaction represents 10% or more of the corporation's assets, outstanding shares of stock, or consolidated net income of the corporation. Similarly, the issuance or transfer by the corporation of any of its (or its subsidiary's) stock that has an aggregate market value equal to 5% or more of all the outstanding shares of stock to the interested stockholder (or any affiliate or associate thereof) is a "business combination," except if it is in connection with the distribution of a dividend or the exercise of warrants paid or made pro rata to all stockholders. The term is applicable as well to the adoption of any plan of liquidation or dissolution proposed by or under any understanding with an interested stockholder (or an affiliate or associate thereof), and to any reclassification of securities, recapitalization, merger or consolidation with any subsidiary, or any other transaction proposed by or under any arrangement with the interested stockholder (or any affiliate or associate thereof) that has the "effect" of increasing the proportionate interest of the interested stockholder in the corporation. An "interested stockholder," as defined, is any person (other than the corporation or a subsidiary) that is the beneficial owner of 10% or more of the voting power, or an affiliate or associate of the corporation that at any time within the five prior years was the beneficial owner of 10% or more of the voting power. For purposes of the statute, the "share acquisition date" is the date upon which the person first becomes an interested stockholder of a corporation. So long as the board of directors does not approve of the business combination with the interested stockholder, the five year "blackout" period, in which the business combination is prohibited, applies, and the board of directors is required to render its decision within a 30-day period (or sooner if required by the Securities Exchange Act of 1934 (the "Exchange Act")). In addition to the absolute five-year business combination prohibition, the statute also requires that, any business combination between the corporation and an interested stockholder must satisfy additional statutory conditions. The board of directors must have approved of the business combination before the interested stockholder's share acquisition date, or a majority of the outstanding voting stock not beneficially owned by the interested stockholder must have approved the business combination at a meeting held no earlier than five years after the interested stockholder's share acquisition date, or the business combination transaction must meet certain per share values to all stockholders (keyed to the highest per share price paid by the interested stockholder within the prior five-year period). All consideration must also be paid either in cash or in the same form as the interested stockholder has used to acquire the largest number of shares acquired by it. Furthermore, the statute requires an interested stockholder to purchase all remaining shares of stock, if any are purchased, not just one class or series. Under Chapter 42 of the BCL, the "control share acquisition" statute, "control shares" (shares that, in the election of directors, could exercise or direct the exercise of voting power of one-fifth, one-third or a majority or more of all of the voting power) of any "issuing public corporation" (one hundred or more stockholders, principal office or place of business, or substantial assets within Indiana, or 10% of its stockholders resident in Indiana) that are acquired in a "control share acquisition" by an "acquiring person" will be accorded only such voting rights, after the acquisition, as are specifically conferred by the stockholders, voting as a group, excluding all "interested shares." If a person holding "interested shares" engages in a control share acquisition of control shares, and the stockholders have not acted to specifically grant those acquired shares the voting rights they had prior to the control share acquisition, the acquired shares lose their voting rights. A majority of the shares (excluding interested shares) must be voted to confer voting rights upon the acquiring person. The only exemption from this statute is if the corporation's articles of incorporation or its bylaws provide that this statute does not apply to control share acquisitions of the corporation's shares, and such provisions must exist prior to the occurrence of any "control share acquisition." However, the Company does not have such a provision in either its Articles or in its Bylaws. Furthermore, if the Articles or Bylaws so provide (and the Articles and Bylaws do not so provide at this time), control shares acquired in a control share acquisition with respect to which the shares have not been accorded full voting rights by the stockholders can be redeemed by the corporation at "fair value." But if in fact the stockholders of the corporation do vote to accord full voting rights to the acquiring person's control shares, and if the acquiring person has acquired 70 75 control with a majority or more of the voting power, all stockholders of the issuing public corporation are allowed to invoke dissenters' rights, providing "fair value" to them (defined as not less than the highest price paid per share by the acquiring person in the control share acquisition. In order to secure stockholder approval, as required, the acquiring person must deliver an acquiring person "statement" to the corporation, setting forth pertinent information concerning the identity of the acquiring person, the number of shares already owned, the range of voting power that the control share acquisition seeks, and the terms of the proposed acquisition. Thereafter, the directors for the issuing public corporation, within ten days, are required to call a special meeting of the stockholders to consider the voting rights issue, and the stockholders meeting must be held within 50 days after receipt of the statement by the issuing public corporation. The acquiring person can specifically request that the special stockholders meeting not be held sooner than thirty days after delivery of the acquiring person's statement to the issuing public corporation. The corporation's notice of the special stockholders meeting must be accompanied by the acquiring person's statement, as well as a statement by the Board of Directors of the corporation concerning its position or recommendation (or that it is taking no position or making no recommendation) with respect to the voting rights issue in the proposed control share acquisition. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is First Chicago Trust Company of New York. SHARES ELIGIBLE FOR FUTURE SALE The Company can make no predictions as to the effect, if any, that sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. Nevertheless, sales of significant amounts of the Common Stock in the public market, or the perception that such sales may occur, could adversely affect the market price of the Common Stock and could impair the Company's future ability to raise capital through an offering of its equity securities. See "Risk Factors -- Shares Eligible for Future Sale." Upon completion of the offerings, the Company will have a total of 49,122,294 shares of Common Stock outstanding. Of these shares, 27,997,931 shares, plus any such shares which may be acquired by an "affiliate" of the Company (an "Affiliate") as that term is defined in Rule 144 under the Securities Act, will be "restricted securities" as the term is defined by Rule 144 promulgated under the Securities Act. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this Prospectus, if a period of at least one year has elapsed since the later of the date the "restricted securities" were acquired from the Company and the date they were acquired from an Affiliate, then the holder of such restricted securities (including an Affiliate) is entitled to sell a number of shares within any three-month period that does not exceed the greater of 1% of the then outstanding shares of the Common Stock (approximately 491,223 shares immediately after the offerings) or the average weekly reported volume of trading of the Common Stock during the four calendar weeks preceding the filing of a Form 144 with respect to such sale with the Securities and Exchange Commission (the "Commission"). The holder may only sell such shares through unsolicited brokers' transactions. Sales under Rule 144 are also subject to certain requirements pertaining to the manner of such sales, notices of such sales, and the availability of current public information concerning the Company. Under Rule 144(k), if a period of at least two years has elapsed between the later of the date restricted securities were acquired from the Company and the date they were acquired from an Affiliate, as applicable, a holder of such restricted securities who is not an Affiliate at the time of the sale and has not been an Affiliate for at least three months prior to the sale would be entitled to sell the shares immediately without regard to the limitations described above. The Company, its directors and executive officers, the Selling Stockholders, and certain other stockholders of the Company have entered into "lock-up" agreements with the Underwriters, providing that they will not (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, or (ii) enter into any swap or other agreement that transfers to another, in whole or in part, 71 76 any of the economic consequences of ownership of such shares of Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise, for a period of 90 days after the date of this Prospectus without the prior written consent of Morgan Stanley & Co. Incorporated, other than (i) the sale to the Underwriters of the shares of Common Stock offered hereby, (ii) the issuance by the Company of shares of Common Stock upon the exercise of an option sold or granted pursuant to existing benefit plans of the Company and outstanding on the date of this Prospectus, or (iii) transactions relating to shares of Common Stock or other securities acquired in open market transactions after completion of the offerings. The preceding description does not include shares of Common Stock issuable upon the exercise of options granted under the Company's 1994 Plan or the 1996 Plan. The Company has registered on Form S-8 under the Securities Act approximately 2,505,765 shares of Common Stock issuable under options subject to the Company's 1994 Plan and 1996 Plan thus permitting, subject to the lock-up agreements described above, the resale of such shares by nonaffiliates upon issuance in the public market without restriction under the Securities Act. As of June 30, 1997, 1,102,765 shares had been reserved by the Company for issuance pursuant to options granted under the 1994 Plan, and 1,403,000 shares had been reserved for issuance pursuant to options granted under the 1996 Plan. CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES FOR NON-UNITED STATES HOLDERS GENERAL The following is a general discussion of certain United States federal income and estate tax consequences of the ownership and disposition of Common Stock by a Non-U.S. Holder. For this purpose, the term "Non-U.S. Holder" is defined as any person who is, for United States federal income tax purposes, a foreign corporation, a non-resident alien individual, a foreign partnership or a foreign estate or trust, as such terms are defined in the Code. This discussion does not address all aspects of United States federal income and estate taxes and does not deal with foreign, state and local consequences that may be relevant to such Non-U.S. Holders in light of their personal circumstances, or to certain types of Non-U.S. Holders which may be subject to special treatment under United States federal income tax laws (for example, insurance companies, tax-exempt organizations, financial institutions and broker-dealers). Furthermore, this discussion is based on provisions of the Code, existing and proposed regulations promulgated thereunder and administrative and judicial interpretations thereof, as of the date hereof, all of which are subject to change, possibly with retroactive effect. PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISERS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND NON-U.S. INCOME AND OTHER TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF SHARES OF COMMON STOCK. An individual may, subject to certain exceptions, be deemed to be a resident alien (as opposed to a nonresident alien) by virtue of being present in the United States for at least 31 days in the calendar year and for an aggregate of at least 183 days during a three-year period ending in the current calendar year (counting for such purposes all of the days present in the current year, one-third of the days present in the immediately preceding year, and one-sixth of the days present in the second preceding year). U.S. resident aliens are subject to U.S. federal tax as if they were U.S. citizens. DIVIDENDS The Company does not anticipate paying cash dividends on its capital stock in the foreseeable future. See "Dividend Policy." In the event, however, that dividends are paid on shares of Common Stock, dividends paid to a Non-U.S. Holder of Common Stock will be subject to withholding of United States federal income tax at a 30% rate or such lower rate as may be provided by an applicable income tax treaty between the United States and the country of which the Non-U.S. Holder is a tax resident, unless (i) the dividends are effectively connected with the conduct of a trade or business of the Non-U.S. Holder within the United States and the 72 77 Non-U.S. Holder provides the payor with proper documentation or (ii) if a tax treaty applies, the dividends are attributable to a U.S. permanent establishment maintained by the Non-U.S. Holder. In order to claim the benefit of an applicable tax treaty rate, a Non-U.S. Holder may have to file with the Company or its dividend paying agent an exemption or reduced treaty rate certificate or letter in accordance with the terms of such treaty. Dividends that are effectively connected with the conduct of a trade or business within the United States or, if a tax treaty applies, are attributable to such a United States permanent establishment, are subject to United States federal income tax on a net income basis (that is, after allowance for applicable deductions) at applicable graduated individual or corporate rates. Any such effectively connected dividends received by a foreign corporation may, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. Under current United States Treasury regulations, dividends paid to an address outside the United States are presumed to be paid to a resident of such country for purposes of the withholding discussed above (unless the payor has knowledge to the contrary) and, under the current interpretation of United States Treasury regulations, for purposes of determining the applicability of a tax treaty rate. However, under proposed United States Treasury regulations, in the case of dividends paid after December 31, 1997 (December 31, 1999 in the case of dividends paid to accounts in existence on or before the date that is 60 days after the proposed United States Treasury regulations are published as final regulations), a Non-U.S. Holder generally would be subject to United States withholding tax at a 31% rate under the backup withholding rules described below, rather than at a 30% rate or a reduced rate under an income tax treaty, unless certain certification procedures (or, in the case of payments made outside the United States with respect to an offshore account, certain documentary evidence procedures) are complied with, directly or through an intermediary. Certain certification and disclosure requirements must be complied with in order to be exempt from withholding under the effectively connected income exemption. A Non-U.S. Holder of Common Stock eligible for a reduced rate of United States withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the Internal Revenue Service (the "IRS"), provided that the required information is furnished to the IRS. GAIN ON DISPOSITION OF COMMON STOCK A Non-U.S. Holder generally will not be subject to United States federal income tax with respect to gain recognized on a sale or other disposition of Common Stock unless (i) (a) the gain is effectively connected with a trade or business conducted by the Non-U.S. Holder within the United States, or (b) if a tax treaty applies, the gain is attributable to a United States permanent establishment maintained by the Non-U.S. Holder, (ii) in the case of a Non-U.S. Holder who is an individual and holds the Common Stock as a capital asset, such holder is present in the United States for 183 or more days in the taxable year of the sale or other disposition and certain other conditions are met, (iii) the Non-U.S. Holder is subject to tax pursuant to certain provisions of the Code applicable to United States expatriates, or (iv) the Company is or has been a "U.S. real property holding corporation" for United States federal income tax purposes at any time within the shorter of the five-year period preceding such disposition or the period such Non-U.S. Holder held the Common Stock. If the Company were, or to become, a U.S. real property holding corporation, gains realized upon a disposition of Common Stock by a Non-U.S. Holder which did not directly or indirectly own more than 5% of the Common Stock during the shorter of the periods described above generally would not be subject to United States federal income tax so long as the Common Stock is "regularly traded" on an established securities market. The Company believes that it has not been, is not currently, and does not anticipate becoming, a "U.S. real property holding corporation" for United States federal income tax purposes. If a Non-U.S. Holder who is an individual falls under clause (i) above, such individual generally will be taxed on the net gain derived from a sale under regular graduated United States federal income tax rates. If an individual Non-U.S. Holder falls under clause (ii) above, such individual generally will be subject to a flat 30% tax on the gain derived from a sale, which may be offset by certain United States capital losses (notwithstanding the fact that such individual is not considered a resident alien of the United States). Thus, 73 78 individual Non-U.S. Holders who have spent (or expect to spend) more than a de minimis period of time in the United States in the taxable year in which they contemplate a sale of Common Stock are urged to consult their tax advisors prior to the sale as to the U.S. tax consequences of such sale. If a Non-U.S. Holder that is a foreign corporation falls under clause (i) above, it generally will be taxed on its net gain under regular graduated United States federal income tax rates and, in addition, will be subject to the branch profits tax equal to 30% of its "effectively connected earnings and profits" within the meaning of the Code for the taxable year, as adjusted for certain items, unless it qualifies for a lower rate under an applicable tax treaty. FEDERAL ESTATE TAX Common Stock owned or treated as owned by an individual who is neither a United States citizen nor a United States resident (as defined for United States federal estate tax purposes) at the time of death will be included in the individual's gross estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise and, therefore, may be subject to United States federal estate tax. INFORMATION REPORTING AND BACKUP WITHHOLDING TAX Under United States Treasury regulations, the Company must report annually to the IRS and to each Non-U.S. Holder the amount of dividends paid to such holder and the tax withheld with respect to such dividends. These information reporting requirements apply even if withholding was not required because the dividends were effectively connected with a trade or business in the United States of the Non-U.S. Holder or withholding was reduced or eliminated by an applicable income tax treaty. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the Non-U.S. Holder is a resident under the provisions of an applicable income tax treaty or agreement. United States backup withholding (which generally is a withholding tax imposed at the rate of 31% on certain payments to persons that fail to furnish certain information under the United States information reporting requirements) generally will not apply to (i) dividends paid to Non-U.S. Holders that are subject to the 30% withholding discussed above (or that are not so subject because a tax treaty applies that reduces or eliminates such 30% withholding) or (ii) under current law, dividends paid to a Non-U.S. Holder at an address outside of the United States. However, under proposed United States Treasury regulations, in the case of dividends paid after December 31, 1997 (December 31, 1999 in the case of dividends paid to accounts in existence on or before the date that is 60 days after the proposed United States Treasury regulations are published as final regulations), a Non-U.S. Holder generally would be subject to backup withholding at a 31% rate, unless certain certification procedures (or, in the case of payments made outside the United States with respect to an offshore account, certain documentary evidence procedures) are complied with, directly or through an intermediary. Backup withholding and information reporting generally will apply to dividends paid to addresses inside the United States on shares of Common Stock to beneficial owners that are not "exempt recipients" and that fail to provide in the manner required certain identifying information. In general, backup withholding and information reporting will not apply to a payment of the gross proceeds of a sale of Common Stock effected at a foreign office of a broker. If, however, such broker is, for United States federal income tax purposes, a U.S. person, a controlled foreign corporation or a foreign person, 50% or more of whose gross income for certain periods is derived from activities that are effectively connected with the conduct of a trade or business in the United States, such payments will not be subject to backup withholding but will be subject to information reporting, unless (i) such broker has documentary evidence in its records that the beneficial owner is a Non-U.S. Holder and certain other conditions are met, or (ii) the beneficial owner otherwise establishes an exemption. Temporary United States Treasury regulations provide that the Treasury is considering whether backup withholding should be required in such circumstances. Under proposed United States Treasury regulations not currently in effect, backup withholding will not apply to such payments absent actual knowledge that the payee is a United States person. The IRS recently proposed regulations addressing certain withholding, certification and information reporting rules (some of which have 74 79 been mentioned above) which could affect treatment of the payment of the proceeds discussed above. Non-U.S. Holders should consult their tax advisors regarding the application of these rules to their particular situations, the availability of an exemption therefrom, the procedure for obtaining such an exemption, if available, and the possible application of the proposed United States Treasury regulations addressing the withholding and the information reporting rules. Payment by a United States office of a broker of the proceeds of a sale of Common Stock is subject to both backup withholding and information reporting unless the beneficial owner certifies under penalties of perjury that it is a Non-U.S. Holder, or otherwise establishes an exemption. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against such holder's U.S. federal income tax liability provided the required information is furnished to the IRS. 75 80 UNDERWRITERS Under the terms and subject to the conditions in the Underwriting Agreement dated the date of this Prospectus (the "Underwriting Agreement"), the Company and the Selling Stockholders have agreed to sell 1,255,971 and 7,144,029 shares, respectively, of the Company's Common Stock and the U.S. Underwriters named below, for whom Morgan Stanley & Co. Incorporated, PaineWebber Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, McDonald & Company Securities, Inc. and Salomon Brothers Inc are serving as U.S. Representatives, have severally agreed to purchase, and the International Underwriters named below, for whom Morgan Stanley & Co. International Limited, PaineWebber International (U.K.) Ltd, Donaldson, Lufkin & Jenrette Securities Corporation, McDonald & Company Securities, Inc. and Salomon Brothers International Limited are serving as International Representatives, have severally agreed to purchase, the respective number of shares of Common Stock set forth opposite their names below:
NUMBER NAME OF SHARES -------------------------------------------------------------------------- ---------- U.S. Underwriters: Morgan Stanley & Co. Incorporated....................................... PaineWebber Incorporated................................................ Donaldson, Lufkin & Jenrette Securities Corporation..................... McDonald & Company Securities, Inc. .................................... Salomon Brothers Inc.................................................... ---------- Subtotal............................................................. 6,720,000 ---------- International Underwriters: Morgan Stanley & Co. International Limited.............................. PaineWebber International (U.K.) Ltd. .................................. Donaldson, Lufkin & Jenrette Securities Corporation..................... McDonald & Company Securities, Inc...................................... Salomon Brothers International Limited.................................. ---------- Subtotal............................................................. 1,680,000 ---------- Total........................................................... 8,400,000 ========
76 81 The U.S. Underwriters and the International Underwriters are collectively referred to as the "Underwriters." The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares of Common Stock offered hereby are subject to the approval of certain legal matters by their counsel and to certain other conditions. The Underwriters are obligated to take and pay for all of the shares of Common Stock offered hereby (other than those covered by the U.S. Underwriters' over-allotment option described below) if any such shares are taken. Pursuant to the Agreement Between U.S. and International Underwriters, each U.S. Underwriter has represented and agreed that, with certain exceptions, (a) it is not purchasing any U.S. Shares (as defined below) for the account of anyone other than a United States or Canadian Person (as defined below) and (b) it has not offered or sold, and will not offer or sell, directly or indirectly, any U.S. Shares or distribute any prospectus relating to the U.S. Shares outside the United States or Canada or to anyone other than a United States or Canadian Person. Pursuant to the Agreement Between U.S. and International Underwriters, each International Underwriter has represented and agreed that, with certain exceptions, (a) it is not purchasing any International Shares (as defined below) for the account of any United States or Canadian Person and (b) it has not offered or sold, and will not offer or sell, directly or indirectly, any International Shares or distribute any prospectus relating to the International Shares within the United States or Canada or to a United States or Canadian Person. The foregoing limitations do not apply to stabilization transactions or to certain other transactions specified in the Agreement Between U.S. and International Underwriters. As used herein, "United States or Canadian Person" means any national or resident of the United States or Canada, or any corporation, pension, profit-sharing or other trust or other entity organized under the laws of the United States or Canada or of any political subdivision thereof (other than a branch located outside the United States and Canada of any United States or Canadian Person) and includes any United States or Canadian branch of a person who is otherwise not a United States or Canadian Person. All shares of Common Stock to be purchased by the U.S. Underwriters and the International Underwriters under the Underwriting Agreement are referred to herein as the U.S. Shares and the International Shares, respectively. Pursuant to the Agreement Between U.S. and International Underwriters, sales may be made between the U.S. Underwriters and International Underwriters of any number of shares of Common Stock to be purchased pursuant to the Underwriting Agreement as may be mutually agreed. The per share price of any shares sold shall be the Price to Public set forth on the cover page hereof, in United States dollars, less an amount not greater than the per share amount of the concession to dealers set forth below. Pursuant to the Agreement Between U.S. and International Underwriters, each U.S. Underwriter has represented that it has not offered or sold, and has agreed not to offer or sell, any shares of Common Stock, directly or indirectly, in Canada in contravention of the securities laws of Canada or any province or territory thereof and has represented that any offer of shares of Common Stock in Canada will be made only pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada in which such offer is made. Each U.S. Underwriter has further agreed to send to any dealer who purchases from it any shares of Common Stock a notice stating in substance that, by purchasing such shares of Common Stock, such dealer represents and agrees that it has not offered or sold, and will not offer or sell, directly or indirectly, any of such shares of Common Stock in Canada or to, or for the benefit of, any resident of Canada in contravention of the securities laws of Canada or any province or territory thereof and that any offer of shares of Common Stock in Canada will be made only pursuant to an exemption from the requirement to file a prospectus in the province of Canada in which such offer is made, and that such dealer will deliver to any other dealer to whom it sells any of such shares of Common Stock a notice to the foregoing effect. Pursuant to the Agreement Between U.S. and International Underwriters, each International Underwriter has represented and, during the period of six months after the date hereof, agreed that (a) it has not offered or sold and will not offer or sell any shares of Common Stock in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purpose of their business or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations (1995) (the "Regulations"); (b) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 and the Regulations with respect to anything done by it in 77 82 relation to the shares of Common Stock offered hereby in, from or otherwise involving the United Kingdom; and (c) it has only issued or passed on and will only issue or pass on to any person in the United Kingdom any document received by it in connection with the issue of the shares of Common Stock if that person is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996, or is a person to whom such document may otherwise lawfully be issued or passed on. The Underwriters initially propose to offer part of the shares of Common Stock directly to the public at the Price to Public set forth on the cover page hereof and part to certain dealers at a price which represents a concession not in excess of $ per share under the Price to Public. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to other Underwriters or to certain dealers. After the initial offering of the shares of Common Stock, the offering price and other selling terms may from time to time be varied by the Underwriters. Pursuant to the Underwriting Agreement, the Company and certain of the Selling Stockholders have granted to the U.S. Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to 1,260,000 additional shares of Common Stock at the public offering price set forth on the cover page hereof, less underwriting discounts and commissions. The U.S. Underwriters may exercise such option to purchase solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of Common Stock offered hereby. To the extent such option is exercised, each U.S. Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares of Common Stock as the number set forth next to such U.S. Underwriter's name in the preceding table bears to the total number of shares of Common Stock offered by the U.S. Underwriters hereby. In order to facilitate the offering of the Common Stock, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriters may overallot in connection with the offering, creating a short position in the Common Stock for their own account. In addition, to cover overallotments or to stabilize the price of the Common Stock, the Underwriters may bid for, and purchase, shares of Common Stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the Common Stock in the offering, if the syndicate repurchases previously distributed Common Stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the Common Stock above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. The Company, its executive officers and directors, the Selling Stockholders, and certain other stockholders of the Company have agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated, they will not, for a period of 90 days after the date of this Prospectus, (a) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (b) enter into any swap or other agreement that transfers to another, in whole or in part, any of the economic consequences of ownership of such shares of Common Stock, whether any such transaction described in clause (a) or (b) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise, other than (i) the sale to the Underwriters of the shares of Common Stock offered hereby, (ii) the issuance by the Company of shares of Common Stock upon the exercise of an option sold or granted pursuant to existing benefit plans of the Company and outstanding on the date of this Prospectus or (iii) transactions relating to shares of Common Stock or other securities acquired in open market transactions after completion of the offerings. McDonald & Company Securities, Inc. ("McDonald & Company") has provided investment banking, financial advisory and other services to the Company for which it has received customary fees and reimbursement of its out-of-pocket expenses. McDonald & Company and its affiliates are stockholders of the Company. 78 83 General Electric Capital Services, Inc., which owns 100% of the outstanding common stock of General Electric Capital Corporation, owns 100% of the common stock of Kidder, Peabody Group Inc. which in turn owns 100% of the common stock of Kidder, Peabody & Co. Incorporated ("Kidder"). Kidder in turn owns approximately 22% of the issued and outstanding common stock of PaineWebber Group Inc. and Convertible Preferred Stock and Redeemable Preferred Stock of PaineWebber Group Inc. PaineWebber Incorporated, a member of the NASD and a subsidiary of PaineWebber Group Inc., will participate in the distribution of the Common Stock offered hereby. In addition, General Electric Capital Corporation owns 5,750,029 of the shares of Common Stock outstanding prior to the offerings. As a result the offering of the shares of Common Stock offered hereby are required to be made in accordance with the applicable provisions of Rule 2720 of the NASD. In compliance with Rule 2720, the public offering price can be no higher than that recommended by a "qualified independent underwriter." Morgan Stanley & Co. Incorporated is assuming the responsibilities of acting as qualified independent underwriter and the public offering price of the shares of Common Stock offered hereby will not be higher than the public offering price recommended by Morgan Stanley & Co. Incorporated. In connection with the offerings, Morgan Stanley & Co. Incorporated in its role as "qualified independent underwriter" has performed due diligence investigations and reviewed and participated in the preparation of the Registration Statement of which this Prospectus is a part. In addition, the underwriters may not confirm sales to any discretionary account without the prior written approval of the customer. The Company, the Selling Stockholders and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Barrett & McNagny, Fort Wayne, Indiana. Robert S. Walters, a partner at Barrett & McNagny, may be deemed to beneficially own 2.9% of the equity units in Heavy Metal, L.C., a stockholder of the Company. Mr. Walters disclaims beneficial ownership of all but 1.6% of such units. Certain legal matters will be passed upon for the Underwriters by Shearman & Sterling, New York, New York. EXPERTS The consolidated financial statements as of December 31, 1995 and 1996, and for each of the three years in the period ended December 31, 1996, included in this Prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and have been included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement (of which this Prospectus is a part and which term shall encompass all amendments, exhibits and schedules thereto) on Form S-1 under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement certain parts of which are omitted from the Prospectus in accordance with the rules and regulations of the Commission, and to which reference is made. For further information about the Company and the securities offered hereby, reference is made to the Registration Statement. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete, and, in each instance, reference is made to the copy of such contract, agreement or other document filed as an exhibit to the Registration Statement, each such statement being qualified in its entirety by such reference. The Company is subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith, is required to file reports, proxy statements and other information with the Commission. The Registration Statement, reports, proxy statements and other informa- 79 84 tion filed by the Company with the Commission, may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of such material also can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Such material may also be accessed electronically by means of the Commission's home page on the Internet at http://www.sec.gov. The Common Stock of the Company is traded on the Nasdaq Stock Market (Symbol: STLD), and such reports, proxy statements and other information concerning the Company also can be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006. 80 85 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report.......................................................... F-2 Consolidated Balance Sheets as of December 31, 1995 and 1996 and unaudited June 30, 1997................................................................................ F-3 Consolidated Statements of Operations for each of the three years in the period ended December 31, 1996 and the unaudited six-month periods ended June 29, 1996 and June 30, 1997............................................................................ F-4 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1996 and for the unaudited six-month period ended June 30, 1997................................................................................ F-5 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1996 and for the unaudited six-month periods ended June 29, 1996 and June 30, 1997....................................................................... F-6 Notes to Consolidated Financial Statements............................................ F-7
F-1 86 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Steel Dynamics, Inc. We have audited the accompanying consolidated balance sheets of Steel Dynamics, Inc. (the "Company") as of December 31, 1995 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Steel Dynamics, Inc. as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Indianapolis, Indiana January 17, 1997 F-2 87 STEEL DYNAMICS, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, --------------------- JUNE 30, 1995 1996 1997 -------- -------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents............................... $6,884... $ 57,460 $ 22,293 Accounts receivable, net of allowance for doubtful accounts of $628, $628 and $563 as of December 31, 1995 and 1996, and June 30, 1997, respectively....... 125 14,600 22,413 Accounts receivable -- related parties.................. -- 17,860 14,576 Inventories............................................. 13,580.. 65,911 56,829 Other current assets.................................... 1,634 1,599 1,217 -------- -------- -------- Total current assets............................ 22,223 157,430 117,328 PROPERTY, PLANT, AND EQUIPMENT, NET....................... 274,197 339,263 410,272 DEBT ISSUANCE COSTS, less accumulated amortization of $32, $1,548, and $2,372 as of December 31, 1995 and 1996, and June 30, 1997, respectively............................. 12,211 12,405 11,591 RESTRICTED CASH........................................... 2,666 2,827 3,456 OTHER ASSETS.............................................. 9,382 10,366 9,956 -------- -------- -------- TOTAL ASSETS.................................... $320,679 $522,291 $ 552,603 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable........................................ $ 24,478 $ 28,968 $ 20,378 Accounts payable-related parties........................ 3,424 12,218 18,004 Accrued interest........................................ 2,660 338 1,216 Accrued foreign currency loss........................... 1,013 261 -- Other accrued expenses.................................. 3,078 8,597 11,123 Current maturities of long-term debt.................... 2,058 11,175 5,931 -------- -------- -------- Total current liabilities....................... 36,711 61,557 56,652 LONG-TERM DEBT, less current maturities................... 220,996 196,168 199,530 DEFERRED TAXES............................................ -- -- 1,468 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Class A common stock voting, $.01 par value; 100,000,000 shares authorized; 28,644,722, 47,803,341 and 47,866,323 shares issued and outstanding as of December 31, 1995 and 1996, and June 30, 1997, respectively......................................... 286 478 479 Additional paid-in capital.............................. 93,083 303,846 304,078 Amounts due from stockholders........................... (469) -- -- Accumulated deficit..................................... (29,928) (39,758) (9,604) -------- -------- -------- Total stockholders' equity...................... 62,972 264,566 294,953 -------- -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...... $320,679 $522,291 $ 552,603 ======== ======== ========
See notes to consolidated financial statements. F-3 88 STEEL DYNAMICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, --------------------------- ---------------------------------- JUNE 29, JUNE 30, 1994 1995 1996 1996 1997 -------- -------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) NET SALES: Unrelated parties............... $ -- $ 137 $130,886 $ 49,474 $ 114,290 Related parties................. -- -- 121,731 49,188 86,487 ------- -------- -------- -------- -------- Total net sales......... -- 137 252,617 98,662 200,777 Cost of goods sold................ -- 3,169 220,563 95,591 150,180 ------- -------- -------- -------- -------- GROSS PROFIT (LOSS)............... -- (3,032) 32,054 3,071 50,597 Selling, general and administrative expenses......... 4,192 13,580 13,838 5,894 12,479 ------- -------- -------- -------- -------- OPERATING INCOME (LOSS)........... (4,192) (16,612) 18,216 (2,823) 38,118 Foreign currency gain (loss)...... (4,952) (3,272) 328 260 261 Interest expense.................. (43) (564) (22,684) (12,128) (3,995) Interest income................... 307 560 1,581 579 1,264 ------- -------- -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY LOSS.......... (8,880) (19,888) (2,559) (14,112) 35,648 Income taxes...................... -- -- -- -- 5,494 ------- -------- -------- -------- -------- INCOME (LOSS) BEFORE EXTRAORDINARY LOSS............................ (8,880) (19,888) (2,559) (14,112) 30,154 Extraordinary loss................ -- -- (7,271) -- -- ------- -------- -------- -------- -------- NET INCOME (LOSS)................. $ (8,880) $(19,888) $ (9,830) $ (14,112) $ 30,154 ======= ======== ======== ======== ======== INCOME (LOSS) PER SHARE BEFORE EXTRAORDINARY LOSS.............. $ (.36) $ (.62) $ (.07) $ (.41) $ .63 Per share effect of extraordinary loss............................ -- -- (.21) -- -- ------- -------- -------- -------- -------- NET INCOME (LOSS) PER SHARE....... $ (.36) $ (.62) $ (.28) $ (.41) $ .63 ======= ======== ======== ======== ======== WEIGHTED AVERAGE SHARES OUTSTANDING..................... 24,679 31,975 34,571 34,695 47,851 ======= ======== ======== ======== ========
See notes to consolidated financial statements. F-4 89 STEEL DYNAMICS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS)
COMMON STOCK ADDITIONAL AMOUNTS TOTAL --------------- PAID-IN DUE FROM ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT EQUITY ------ ------ ---------- ------------ ----------- ------------- Balances at January 1, 1994....... 13,436 $134 $ 597 -- $ (1,160) $ (429) Issuance of shares................ 14,624 146 81,042 $(10,750) -- 70,438 Issuance of common stock warrants........................ -- -- 1,407 -- -- 1,407 Net loss.......................... -- -- -- -- (8,880) (8,880) ------ ---- -------- -------- -------- -------- Balances at December 31, 1994....................... 28,060 280 83,046 (10,750) (10,040) 62,536 Issuance of shares................ 585 6 4,994 -- -- 5,000 Issuance of common stock warrants........................ -- -- 5,043 -- -- 5,043 Collection of amounts due from stockholders.................... -- -- -- 10,000 -- 10,000 Amortization of amount due from officer......................... -- -- -- 281 -- 281 Net loss.......................... -- -- -- -- (19,888) (19,888) ------ ---- -------- -------- -------- -------- Balances at December 31, 1995....................... 28,645 286 93,083 (469) (29,928) 62,972 Exercise of common stock warrants........................ 1,791 18 382 -- -- 400 Issuance of shares, net of expenses........................ 17,367 174 210,381 -- -- 210,555 Amortization of amount due from officer......................... -- -- -- 469 -- 469 Net loss.......................... -- -- -- -- (9,830) (9,830) ------ ---- -------- -------- -------- -------- Balances at December 31, 1996....................... 47,803 478 303,846 -- (39,758) 264,566 Issuance of shares, net of expenses (unaudited)............ 63 1 232 -- -- 233 Net income (unaudited)............ -- -- -- -- 30,154 30,154 ------ ---- -------- -------- -------- -------- Balances at June 30, 1997 (unaudited)................ 47,866 $479 $ 304,078 $ -- $ (9,604) $ 294,953 ====== ==== ======== ======== ======== ========
See notes to consolidated financial statements. F-5 90 STEEL DYNAMICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, -------------------------- --------------------------------- JUNE 29, JUNE 30, 1994 1995 1996 1996 1997 -------- --------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) OPERATING ACTIVITIES: Net income (loss)........................... $ (8,880) $ (19,888) $ (9,830) $ (14,112) $ 30,154 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization............. 13 876 19,403 8,793 11,607 Foreign currency loss (gain).............. 4,952 3,272 (328) (260) (261) Deferred taxes............................ -- -- -- -- 1,468 Extraordinary loss........................ -- -- 7,271 -- -- Changes in certain assets and liabilities: Accounts receivable.................... -- (125) (32,335) (28,020) (4,529) Inventories............................ (13,580) (52,331) (12,399) 9,082 Other assets........................... (251) (788) 35 (986) 382 Accounts payable....................... 691 6,441 13,284 1,036 (2,804) Accrued expenses....................... 796 4,822 3,197 1,582 3,406 -------- --------- -------- -------- -------- Net cash (used) provided in operating activities......................... (2,679) (18,970) (51,634) (44,366) 48,505 -------- --------- -------- -------- -------- INVESTING ACTIVITIES: Purchases of property, plant, and equipment................................. (43,709) (224,449) (83,720) (12,062) (81,524) Proceeds from government grants............. 2,878 21,188 1,558 1,467 -- Purchase of short-term investments.......... -- -- (7,000) (7,000) -- Maturities of short-term investments........ -- -- 7,000 -- -- Other....................................... (549) (1,602) (984) (571) 56 -------- --------- -------- -------- -------- Net cash used in investing activities......................... (41,380) (204,863) (83,146) (18,166) (81,468) -------- --------- -------- -------- -------- FINANCING ACTIVITIES: Repayment of vendor/customer advances....... (800) Issuance of long-term debt.................. 13,352 188,430 35,411 35,411 -- Repayments of long-term debt................ -- -- (57,927) (493) (2,426) Issuance of common stock, net of expenses... 70,488 15,281 211,424 45,095 233 Debt issuance costs......................... (10,990) (1,102) (3,552) (3,542) (11) -------- --------- -------- -------- -------- Net cash (used) provided in financing activities......................... 72,050 202,609 185,356 76,471 (2,204) -------- --------- -------- -------- -------- Increase (decrease) in cash and cash equivalents................................. 27,991 (21,224) 50,576 13,939 (35,167) Cash and cash equivalents at beginning of period...................................... 117 28,108 6,884 6,884 57,460 -------- --------- -------- -------- -------- Cash and cash equivalents at end of period.... $ 28,108 $ 6,884 $ 57,460 $ 20,823 $ 22,293 ======== ========= ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest...................... $ 14 $ 8,000 $ 26,030 $ 11,813 $ 3,797 ======== ========= ======== ======== ======== Cash paid for taxes......................... $ -- $ -- $ -- $ -- $ 3,675 ======== ========= ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION: Electric utility transmission facility loan and other equipment obligation............ $ -- $ 24,349 $ -- $ -- $ -- ======== ========= ======== ======== ========
See notes to consolidated financial statements. F-6 91 STEEL DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Interim financial information as of June 30, 1997 and for the six months ended June 30, 1997 and June 29, 1996 is unaudited. The unaudited interim consolidated financial statements reflect all adjustments consisting of normal recurring accruals which are, in the opinion of management, necessary to a fair statement of the results for the interim periods.) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements include the accounts of the Company and Iron Dynamics, Inc., a wholly-owned subsidiary. All significant intercompany transactions have been eliminated. The Company operated on a four week, four week, five week accounting cycle for 1996. Accordingly, the Company's interim periods ended on the last day of the fourth or fifth week within the month. The Company, effective January 1997, operates on a calendar month accounting cycle. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company records sales upon shipment and provides an allowance for estimated costs associated with returns. Business The Company, formed on September 7, 1993, operates in one industry segment and operates a thin-slab cast steel mini-mill in the Midwest, with the capacity to produce 1.4 million tons annually of hot-rolled steel coils. The Company's products are sold primarily to the automotive, tubing, construction and commercial equipment industries. Cash The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Restricted cash consists of cash held by a trustee in a debt service fund for the repayment of principal and interest on the Company's municipal bond. Inventories Inventories consist of approximately 97%, 91% and 94% of raw materials and supplies, and 3%, 9% and 6% of finished products as of December 31, 1995 and 1996, and June 30, 1997, respectively. Inventories are stated at the lower of cost (first-in, first-out method) or market. Property, Plant, and Equipment Property, plant, and equipment are stated at cost of acquisition which includes capitalized interest on construction-in-progress of approximately $10.1 million, $1.0 million and $4.9 million in 1995, 1996 and June 30, 1997, respectively. Depreciation is provided using the units-of-production method for manufacturing plant and equipment and using the straight-line method for non-manufacturing equipment over the estimated useful lives of the assets ranging from 12 years to 30 years. Repairs and maintenance are expensed as incurred. The Company recorded proceeds received from state and local government grants and other capital cost reimbursements as reductions of the related capital assets. Grants and reimbursements recorded as reductions of the related capital cost, net of accumulated depreciation, totaled $24.0 million as of December 31, 1995 and 1996. F-7 92 STEEL DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, among other things, requires entities to review long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Adoption of this standard had no effect on the Company's financial position, results of operations or cash flows in 1996. Debt Issuance Costs The costs related to the issuance of debt are deferred and amortized to interest expense using the effective interest method over the terms of the related debt. Income Taxes Deferred tax assets and liabilities are computed based on differences between the financial statement and income tax bases of assets and liabilities using enacted income tax rates. Deferred income tax expense or benefit is based on the change in deferred tax assets and liabilities from period to period, subject to an ongoing assessment of realization of deferred tax assets. Concentrations of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, short-term investments and accounts receivable. The Company places its cash with high quality financial institutions and limits the amount of credit exposure from any one institution. Generally, the Company does not require collateral or other security to support customer receivables. Foreign Currency Transactions Transaction gains and losses incurred by the Company for equipment purchases denominated in a foreign currency are recorded in results of operations currently. Net Loss Per Share Net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding using the treasury stock method. The anti-dilutive effect of shares issued from September 23, 1995 through September 23, 1996 are included in the weighted average number of shares of common stock outstanding for the years ended December 31, 1994 and 1995 and the six months ended June 29, 1996. The anti-dilutive effect of common stock equivalents is excluded from the calculation for all periods presented. Derivatives The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. The Company uses such instruments to manage certain of its interest rate and foreign currency risks and accounts for them under the accrual method. New Pronouncements In February 1997, SFAS No. 128, Earnings per Share, was issued which establishes new standards for computing and presenting earnings per share ("EPS"). Specifically, SFAS No. 128 replaces the presentation of primary EPS with a presentation of basic EPS, requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997; earlier application is not permitted. Management has determined that the adoption of SFAS No. 128 will not have a material effect on the accompanying consolidated financial statements. F-8 93 STEEL DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In June 1997, SFAS No. 130, Comprehensive Income, was issued and becomes effective in 1998 and requires reclassification of earlier financial statements for comparative purposes. SFAS No. 130 requires that changes in the amounts of certain items, including foreign currency translation adjustments and gains and losses on certain securities be shown in the financial statements. SFAS No. 130 does not require a specific format for the financial statement in which comprehensive income is reported, but does require that an amount representing total comprehensive income be reported in that statement. Management has not yet determined the effect, if any, of SFAS No. 130 on the consolidated financial statements. Also in June 1997, SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, was issued. This Statement will change the way public companies report information about segments of their business in their annual financial statements and requires them to report selected segment information in their quarterly reports issued to shareholders. It also requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues, and its major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. Management has not yet determined the effect, if any, of SFAS No. 131 on the consolidated financial statements. 2. PROPERTY, PLANT, AND EQUIPMENT (IN THOUSANDS)
DECEMBER 31, --------------------- JUNE 30, 1995 1996 1997 -------- -------- ----------- (UNAUDITED) Land and improvements............................. $ 5,309 $ 4,757 $ 4,641 Buildings and improvements........................ 24,849 27,059 27,066 Plant, machinery and equipment.................... 242,690 246,023 243,653 Construction-in-progress.......................... 1,499 78,247 162,250 -------- -------- -------- 274,347 356,086 437,610 Less accumulated depreciation..................... 150 16,823 27,338 -------- -------- -------- Property, plant, and equipment, net............. $274,197 $339,263 $ 410,272 ======== ======== ========
F-9 94 STEEL DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. DEBT Debt consists of the following (in thousands):
DECEMBER 31, --------------------- JUNE 30, 1995 1996 1997 -------- -------- ----------- (UNAUDITED) Senior secured notes payable, principal and interest due semi-annually beginning in 1997 through 2002, interest is variable (including the effect of the interest rate cap, the weighted average rate was 8.6%, 8.0% and 6.9% as of December 31, 1995 and 1996 and June 30, 1997, respectively)................................... $115,000 $150,000 $ 150,000 8.01% municipal bond, principal and interest due monthly through 2015............................ 21,400 21,100 21,100 Electric utility, transmission facility and other equipment obligation at interest rates ranging from 7% to 8%, collateralized by on-site substation and related equipment, principal and interest due monthly or quarterly through 2015............................................ 37,397 36,243 34,361 11% senior subordinated promissory notes.......... 49,257 -- -- -------- -------- -------- Total debt...................................... 223,054 207,343 205,461 Less current maturities........................... 2,058 11,175 5,931 -------- -------- -------- Long-term debt.................................. $220,996 $196,168 $ 199,530 ======== ======== ========
The Company entered into a credit agreement, as amended, with a syndicate bank group, on June 30, 1994. Subject to the terms and conditions of the credit agreement, borrowings of $150 million under senior secured notes were used to fund the construction of the steel mini-mill; $150 million was designated and remains available at June 30, 1997 for construction of the cold mill, and $45 million of revolving credit is available for working capital purposes. At December 31, 1995 and 1996 there were no amounts outstanding under the revolving credit facility. The senior secured notes and revolving credit facility are collateralized by substantially all assets of the Company other than certain property, plant, and equipment securing the electric utility loan. The Company is required to pay a commitment fee equal to a percentage ranging from 0.125% to 0.50% annually depending upon the principal amount of the unused borrowing capacity under the senior secured notes and the unused revolving credit facility. In 1995 the Company borrowed $21.4 million through a state government municipal bond program, of which $2.7 million and $2.8 million as of December 31, 1995 and 1996, respectively, is held by a trustee in a debt service reserve fund and is recorded as restricted cash. At December 31, 1996, a stand-by letter of credit of $22.0 million relating to the municipal bonds was outstanding. The electric utility transmission facility loan of $7.8 million and $7.7 million at December 31, 1995 and 1996, respectively, represents the Company's portion of the cost of the transmission facilities constructed by the utility to service the Company's site. The corresponding cost is included in other assets and is being amortized over twenty years on the straight-line basis. The electric utility loan of $13.0 million and $13.1 million at December 31, 1995 and 1996, respectively, represents the Company's portion of the cost of the Company's substation constructed on-site. Interest and principal payments are made equally on a monthly basis in an amount necessary to repay the loan fifteen years from the date of commencement of operations. The credit agreement, electric utility loan and transmission facility loan require the Company to maintain certain covenants, the most restrictive of which are requirements to maintain tangible net worth of at least $45 F-10 95 STEEL DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) million plus 50% of cumulative net income, a minimum current ratio, a maximum leverage ratio and a minimum fixed charge coverage ratio. The credit agreement also limits indebtedness of the Company and the amount of capital expenditures and prohibits the payment of dividends. The other equipment obligation represents deferred payments for the purchase of certain equipment. The obligation is non-interest bearing and was discounted at 7% over a term of five years. The Company in June 1994 entered into an agreement with respect to senior subordinated promissory notes ("Subordinated Notes") in the aggregate principal amount of $55 million and warrants to purchase up to 1,641,827 shares of Class A common stock (warrants for the purchase of 29,851 shares per $1 million of Subordinated Notes) at an exercise price which was less than $0.01 per share. The proceeds received from the issuance of the Subordinated Notes and warrants were allocated to the Subordinated Notes and warrants based upon their estimated fair values. The Subordinated Notes were repaid in November 1996 with a portion of the proceeds from the initial public offering. An extraordinary loss on the prepayment of the Subordinated Notes in the amount of $7.3 million was recorded in 1996 and was comprised of the write-off of the unamortized discount, write-off of the financing costs associated with the Subordinated Notes and a prepayment penalty. If the retirement of the Subordinated Notes had occurred on January 1, 1996, income per share before extraordinary loss would have been $.11; the per share effect of extraordinary loss would have been $.24 and the net loss per share would have been $.13. Maturities of outstanding debt as of December 31, 1996 are as follows (in thousands):
AMOUNT -------- 1997.............................................. $ 11,175 1998.............................................. 41,376 1999.............................................. 47,934 2000.............................................. 56,597 2001.............................................. 12,112 Thereafter........................................ 38,149 -------- $207,343 ========
4. INCOME TAXES The effective income tax rate differs from the statutory federal income tax rate for the years ended December 31, 1994, 1995 and 1996 because of the valuation allowances recorded. F-11 96 STEEL DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of deferred tax assets and liabilities are as follows (in thousands):
DECEMBER 31, -------------------- 1995 1996 ------- -------- JUNE 30, 1997 ----------- (UNAUDITED) Deferred tax assets: Net operating loss and credit carryforwards...... $ 1,002 $ 19,752 $ 13,827 Tax assets expensed for books.................... 7,221 8,628 9,288 Other accrued expenses........................... 2,236 3,824 5,338 ------- -------- -------- Total deferred tax assets.......................... 10,459 32,204 28,453 Less valuation allowance........................... (8,071) (11,937) (4,360) ------- -------- -------- Net deferred tax assets............................ 2,388 20,267 24,093 Deferred tax liabilities: Depreciable assets............................... (2,026) (19,348) (24,311) Amortization of fees............................. (41) (435) (662) Other............................................ (321) (484) (588) ------- -------- -------- Total deferred tax liabilities..................... (2,388) (20,267) (25,561) ------- -------- -------- Net deferred tax liabilities....................... $ -- $ -- $ (1,468) ======= ======== ========
As of December 31, 1996, the Company had available net operating loss carryforwards of approximately $49.4 million for federal income tax purposes. The carryforwards expire $200,000 in 2009, $2.3 million in 2010 and $46.9 million in 2011. Because of the Company's limited operating history, a valuation allowance has been established for a portion of the deferred tax asset. The Company will continually assess the need for a valuation allowance for the deferred tax asset based upon expectations of future taxable income. For the six months ended June 29, 1996, the Company had a net deferred tax asset that was offset entirely by a valuation allowance. For the six months ended June 30, 1997, the Company has computed income taxes based upon the expected annual effective tax rate which gives effect to the utilization of available net operating loss carryforwards. 5. COMMON STOCK On November 21, 1996, the Company completed an initial public offering. The Company issued 9,375,000 shares at a net offering price of $15.08 per share. The Company received approximately $140.2 million in net proceeds. Existing shareholders sold 468,750 shares, and the over-allotment was exercised by the underwriting group, which allowed existing shareholders to sell an additional 1,476,562 shares. The Company's Common Stock currently trades on the Nasdaq National Market under the STLD symbol. Warrants related to the Subordinated Notes for 1,641,827 shares of the Company's Common Stock were exercised in the fourth quarter of 1996. In addition, other warrants for 149,645 shares were exercised in the fourth quarter of 1996. On October 28, 1996, the board of directors approved a 28.06 for one-stock split. Share and per share data has been restated to give effect to the stock split for all periods presented. 1994 Incentive Stock Option Plan The Company adopted the 1994 Incentive Stock Option Plan ("1994 Plan") for certain key employees who are responsible for management of the Company. A total of 611,712, 1,102,765 and 1,102,765 shares of Class A common stock have been reserved for issuance under the 1994 Plan as of December 31, 1995 and 1996, and June 30, 1997, respectively. Eligible individuals under the 1994 Plan may be granted options to F-12 97 STEEL DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) purchase the Company's Class A common stock at an exercise price per share of at least 100% of fair market value at the date of grant. Effective January 10, 1997, options under the 1994 Plan vest one-third six months after the date of grant and two-thirds five years after the date of grant. The options have a maximum term of ten years. As of June 30, 1997, options for 62,043 shares had been exercised. 1996 Incentive Stock Option Plan The Company on October 28, 1996 adopted the 1996 Incentive Stock Option Plan ("1996 Plan") for all employees of the Company. A total of 1,403,000 shares of common stock have been reserved for issuance under the 1996 Plan. Eligible employees under the 1996 Plan may be granted options to purchase the Company's common stock at an exercise price per share of at least 100% of fair market value at the grant of date. Options under the 1996 Plan vest 100% six months after the date of grant and have a maximum term of five years. As of June 30, 1997, options for 939 shares had been exercised.
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, --------------------------------------- --------------------------------------- JUNE 29, 1996 JUNE 30, 1997 ------------------ ------------------ 1995 1996 ------------------ ------------------ (UNAUDITED) (UNAUDITED) WEIGHTED WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE ------- -------- ------- -------- ------- -------- ------- -------- 1994 PLAN - ------------------------ Outstanding at beginning of period............. 241,319 $3 572,427 $ 3 572,427 $ 3 645,383 $ 4 Granted................. 331,108 5 81,374 11 16,836 10 117,853 19 Forfeited............... -- -- 8,418 3 8,418 3 -- -- Exercised............... -- -- -- -- -- -- 62,043 4 Outstanding at end of period................ 572,427 3 645,383 4 580,845 3 701,193 7 Options exercisable at end of period......... -- -- -- -- -- -- 153,085 5 1996 PLAN - ------------------------ Outstanding at beginning of period............. -- -- -- -- -- -- 94,408 16 Granted................. -- -- 94,408 16 -- -- 92,273 21 Forfeited............... -- -- -- -- -- -- 1,151 17 Exercised............... -- -- -- -- -- -- 939 16 Outstanding at end of period................ -- -- 94,408 16 -- -- 184,591 18 Options exercisable at end of period......... -- -- -- -- -- -- 92,684 16
The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for the plans. No compensation cost has been recognized for the plans because the stock option price is equal to fair value at the grant date. Had compensation cost for the plans been determined based on the fair value at the grant dates for awards under the plan consistent with the fair value method of SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net income (loss) and F-13 98 STEEL DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) net income (loss) per share would change to the pro forma amounts indicated below (in thousands, except per share data):
YEARS ENDED DECEMBER SIX MONTHS ENDED 31, --------------------------- --------------------- JUNE 29, JUNE 30, 1995 1996 1996 1997 -------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) Net income (loss): As reported......................... $(19,888) $ (9,830) $ (14,112) $30,154 Pro forma........................... (19,972) (10,274) (14,285) 29,576 Net income (loss) per share: As reported......................... $ (.62) $ (.28) $ (.41) $ .63 Pro forma........................... (.63) (.30) (.41) .62
At December 31, 1996, the fair value of the option grants are estimated on the date of grant using an option pricing model with the following assumptions: no dividend yield, risk-free interest rates of 5.7% to 7.1%, expected volatility of 30% and expected lives of one and one-half to eight years. The pro forma amounts are not representative of the effects on reported net income for future years. 6. COMMITMENTS The Company has executed a raw material supply contract with OmniSource Corporation ("OmniSource") for the purchase of steel scrap resources (see Note 8). Under the terms of the contract, OmniSource will locate and secure at the lowest then-available market price steel scrap for the Company in grades and quantities sufficient for the Company to meet substantially all of its production requirements. The initial term of the contract is through October 2001. The Company retains the right to acquire scrap from other sources if certain business conditions are present. The Company has executed finished goods off-take contracts with Heidtman Steel Products ("Heidtman") and Preussag Stahl, AG ("Preussag") (see Note 8). Under the terms of the contracts, the Company retains the right to sell its hot-rolled coils in the open market; however, the Company is required to sell and Heidtman and Preussag are required to purchase a minimum of 30,000 and 12,000 tons, respectively, each month at the then-current market price the Company is charging for similar products. The Company is required to provide Heidtman and Preussag with a volume discount for all tons purchased each month in which Heidtman and Preussag purchase the minimum tons from the Company. The initial term of the contracts for Heidtman and Preussag are through December 2001. The Company purchases its electricity pursuant to a contract which extends through 2005. Under the contract the Company is subject to a monthly minimum charge. At December 31, 1996, the Company's fixed and determinable purchase obligations for electricity are $7.5 million annually from 1997 through 2001. The Company began construction of its cold mill in August 1996 and has construction related commitments of approximately $132.0 million as of December 31, 1996. The Company also began construction of its second caster project in June 1997 and has construction related commitments of approximately $15 million as of June 30, 1997. 7. LEGAL PROCEEDINGS The Company, from time to time, is subject to claims relating to the conduct of its business. In the opinion of management, any such matters presently outstanding will not have a material adverse effect upon the Company's financial position, cash flows or future results of operations. F-14 99 STEEL DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. TRANSACTIONS WITH AFFILIATED COMPANIES The Company sells hot-rolled coils to Heidtman and affiliates of Preussag and purchases steel scrap resources from OmniSource. Heidtman, Preussag and OmniSource are stockholders of the Company. During 1996, sales to Heidtman and Preussag represented 36% and 12%, respectively, and during 1997, sales to Heidtman and Preussag represented 32% and 10%, respectively, of the Company's total net sales. The Company had sales of $91.8 million and $29.9 million during the year ended December 31, 1996 to Heidtman and affiliates of Preussag, respectively. The Company as of December 31, 1996 had outstanding accounts receivable of $15.3 million and $2.6 million from Heidtman and affiliates of Preussag, respectively. The Company had purchases (including fees) of approximately $7.2 million and $145.5 million from OmniSource in 1995 and 1996, respectively. The Company as of December 31, 1995 and 1996 had accounts payable to OmniSource of approximately $3.4 million and $12.0 million, respectively. In 1995, the Company sold approximately 32 unimproved acres of its plant site to Heidtman for $96,000, for the construction by Heidtman of a steel processing and storage facility. In addition, the Company permits OmniSource to maintain a scrap handling facility, with its own equipment and staff, on the Company's plant site. OmniSource does not pay rent for this facility. The on-site substation was purchased by the Company for approximately $12.8 million in 1995 from General Electric Corporation, the parent of General Electric Capital Corporation, a stockholder of the Company. The Company has commitments to purchase additional equipment from General Electric Corporation for approximately $23.4 million. 9. FINANCIAL INSTRUMENTS The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable and accounts payable approximated fair value as of December 31, 1995 and 1996, because of the relatively short maturity of these instruments. The carrying value of long-term debt, including the current portion, approximated fair value as of December 31, 1995 and 1996, respectively. The fair values of the Company's long-term debt are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates. As required by the credit agreement, in August 1994 the Company entered into an interest rate cap agreement with the agent bank whereby the maximum base rate on fifty percent of the principal amount, up to $75 million, of the Company's projected outstanding senior term loans during the period from June 30, 1995 through December 31, 1996 was 7.0%. The premium paid for the interest rate cap agreement was included in other current assets, as of December 31, 1995 and amortized to interest expense during 1996. 10. RETIREMENT PLANS The Company sponsors a 401(k) retirement savings plan ("401(k) Plan") for all eligible employees of the Company under which they may elect to contribute on a pre-tax basis up to 8% of their eligible compensation. The Company provides matching contributions equal to 5% of the participants' contributions to the savings plan. Employer contributions are not significant for any periods presented. The 401(k) Plan was amended effective in 1997 to provide for a matching contribution that will be dependent upon the Company's return on assets. In no event will the match be less than 5% or greater than 50% of employee contributions. The Company has also established a Profit Sharing Plan ("Profit Sharing Plan") for eligible employees. The Profit Sharing Plan is a "qualified plan" for federal income tax purposes. Each year, the Company allocates to a trust fund such sum, if any, as the Board of Directors determines, up to an amount equal to 15% of the wages paid to Profit Sharing Plan participants ("profit sharing pool"). The profit sharing pool is used to fund the Profit Sharing Plan as well as a separate cash profit sharing bonus which is paid to employees in F-15 100 STEEL DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) March of the following year. The allocation between the Profit Sharing Plan contribution and the cash bonus amount is determined by the Board of Directors each year. 11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) FISCAL YEAR 1997: Net sales.................................... $ 98,059 $ 102,178 $ -- $ -- Gross profit................................. 24,149 26,448 -- -- Income from operations....................... 18,810 19,308 -- -- Net income................................... 14,585 15,569 -- -- Net income per share......................... .30 .33 -- -- FISCAL YEAR 1996: Net sales.................................... $ 32,287 $ 66,375 $75,957 $77,998 Gross profit (loss).......................... (2,898) 5,967 13,293 15,692 Income (loss) from operations................ (5,707) 2,883 9,839 11,200 Extraordinary loss........................... -- -- -- 7,271 Net income (loss)............................ (11,296) (2,816) 4,295 (13) Net income (loss) per share.................. (.35) (.08) .11 -- FISCAL YEAR 1995: Net sales.................................... $ -- $ -- $ -- $ 137 Gross profit (loss).......................... -- -- -- (3,032) Loss from operations......................... (1,695) (2,408) (6,871) (8,914) Net loss..................................... (1,695) (2,408) (6,871) (8,914) Net loss per share........................... (.05) (.08) (.22) (.28)
Per share amounts are computed independently for each of the quarters presented. Therefore, the sum of the quarterly per share amounts may not equal the total for the year. 12. SUBSEQUENT EVENTS (UNAUDITED) On July 9, 1997, the Company amended its credit facility which increased the amount committed to the Company from $345 million to $450 million, changed the maturities of the tranches, revised the covenants and lowered the effective interest rate charged by the bank group. As a result of the substantial modifications with this amendment, the Company will incur an extraordinary loss of approximately $10.5 million (net of tax benefit of $2.2 million) related to prepayment penalties and the write-off of the financing costs associated with the original credit facility. Effective July 1, 1997, the Company entered into an interest rate swap agreement with The First National Bank of Chicago ("First Chicago") to make fixed rate payments at 6.935% and to receive variable rate payments at LIBOR on a notional amount of $100 million. The interest rate swap agreement was entered into as an anticipatory hedge of the seven year term tranche of the new credit facility. The maturity date of the interest rate swap agreement is July 2, 2001; however, on June 28, 2001, First Chicago has the right to extend the maturity date to July 1, 2004 at predetermined interest rates. The interest rate swap agreement will be accounted for on an accrual basis. The Company is exposed to credit loss in the event of nonperformance by the counterparty for the net interest differential when variable rates exceed the fixed rate. However, the Company does not anticipate nonperformance by the counterparty. F-16 101 [Photographs of plant and production process] [SDI Logo] 102 [SDI Logo] 2 103 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS (Subject to Completion) Issued August 8, 1997 8,400,000 Shares Steel Dynamics, Inc. COMMON STOCK ------------------------ OF THE 8,400,000 SHARES OF COMMON STOCK BEING OFFERED HEREBY, 1,255,971 SHARES ARE BEING SOLD BY THE COMPANY AND 7,144,029 SHARES ARE BEING SOLD BY THE SELLING STOCKHOLDERS. SEE "PRINCIPAL AND SELLING STOCKHOLDERS." THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF THE SHARES OF COMMON STOCK BY THE SELLING STOCKHOLDERS. OF THE 8,400,000 SHARES OF COMMON STOCK BEING OFFERED, 1,680,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS AND 6,720,000 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. SEE "UNDERWRITERS." THE COMMON STOCK IS TRADED ON THE NASDAQ STOCK MARKET, UNDER THE SYMBOL "STLD." ON JULY 24, 1997, THE REPORTED LAST SALE PRICE OF THE COMMON STOCK ON THE NASDAQ STOCK MARKET WAS $25 5/8 PER SHARE. ------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ PRICE $ A SHARE ------------------------
UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS ------------------------------------------------------------------------ Per Share............... $ $ $ $ Total(3)................ $ $ $ $
- ------------ (1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriters." (2) Before deducting expenses payable by the Company estimated at $600,000. (3) The Company and certain of the Selling Stockholders have granted the U.S. Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 1,260,000 additional Shares of Common Stock at the price to public less underwriting discounts and commissions, for the purpose of covering over-allotments, if any. If the U.S. Underwriters exercise such option in full, the total price to public, underwriting discounts and commissions, proceeds to Company and proceeds to Selling Stockholders will be $ , $ , $ and $ , respectively. See "Underwriters." ------------------------ The Shares are offered, subject to prior sale, when, as and if accepted by the Underwriters named herein and subject to approval of certain legal matters by Shearman & Sterling, counsel for the Underwriters. It is expected that delivery of the Shares will be made on or about , 1997, at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in immediately available funds. ------------------------ MORGAN STANLEY DEAN WITTER PAINEWEBBER INTERNATIONAL DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION McDONALD & COMPANY SECURITIES, INC. SALOMON BROTHERS INTERNATIONAL LIMITED , 1997 104 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Registrant in connection with the sale of Common Stock being registered. All amounts are estimates, except the SEC registration fee, the NASD filing fee and the Nasdaq National Market listing fee. SEC registration fee...................................................... $ 77,024 NASD filing fee........................................................... 25,918 Nasdaq National Market listing fee........................................ 17,500 Printing and engraving expenses........................................... 200,000 Blue Sky qualification fees and expenses.................................. 12,000 Legal fees and expenses................................................... 100,000 Accounting fees and expenses.............................................. 100,000 Transfer Agent and Registrar fees......................................... 2,500 Miscellaneous expenses and administrative costs........................... 65,058 -------- Total........................................................... $600,000 ========
ITEM 14 INDEMNIFICATION OF DIRECTORS AND OFFICERS As permitted by Chapter 37 of the Indiana Business Corporation Law ("BCL"), Article IX of the Registrant's Amended and Restated Articles of Incorporation provides that the Company shall indemnify a director or officer against liability (which includes 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 of the Company (or, at the Company's 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 reasonable belief (in connection with the individual's "official capacity") that the conduct was in the Company's best interests, or (in all other cases) that the conduct was at least not opposed to the Company's 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 the Company's best interests. The Company may advance or reimburse for reasonable expenses incurred by a person entitled to indemnification, in advance of final disposition, if the individual furnishes the Company 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. In all cases, whether in connection with advancement of expenses during a proceeding, or afterward, the Company 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 the Company's 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 provided 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 II-1 105 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. The Company may purchase and maintain insurance on behalf of a director, officer, employee, or agent of the Company, insuring that individual against liability arising from his or her status as a director, officer, employee, or agent, whether or not the Company would have the power to indemnify the individual against the same liability under Article IX. Article IX does not preclude the Company to provide indemnification in any other manner. Reference is hereby made to Section 9 of the Underwriting Agreement between the Company, the Selling Stockholders and the Underwriters, a form of which has been filed as Exhibit 1.1 to this Registration Statement, for a description of indemnification arrangements between the Company, the Selling Stockholders and the Underwriters. The indemnification provisions set forth in Article IX of the Amended and Restated Articles of Incorporation, as well as the authority vested in the Board of Directors by Chapter 37 of the BCL to grant indemnification beyond that which is described in Article IX, may be sufficiently broad to provide indemnification of the Registrant's directors and officers for liabilities arising under the Securities Act. ITEM 15 RECENT SALES OF UNREGISTERED SECURITIES The Registrant issued and sold the following securities (without giving effect to the 28.06:1 stock split of the Registrant's Common Stock effected immediately prior to the Company's initial public offering in November 1996): 1. At the time of incorporation in September 1993, Registrant issued and sold an aggregate of 150,000 shares of Common Stock to its founding stockholders Keith E. Busse, Mark D. Millett, and Richard P. Teets, Jr., at a purchase price of $0.30 per share, for an aggregate purchase price of $45,000, pursuant to restricted stock purchase agreements. 2. In September 1993, Registrant issued and sold an aggregate of 20,000 shares of Common Stock to Steelink Co., of which Peter Brickfield, Esq., a consultant and advisor to the Company, is a partner, at a purchase price of $0.30 per share, for an aggregate purchase price of $6,000, pursuant to a restricted stock purchase agreement. 3. In September 1993, Registrant issued and sold an aggregate of 308,820 shares of Common Stock to "seed money" accredited investors, at a purchase price of $2.20 per share, for an aggregate purchase price of $680,000. Heavy Metal, L.C. purchased $340,000, Keylock Investments Limited purchased $170,850, and Mazelina Anstalt purchased $169,150 (the latter two aggregating $340,000, the same as Heavy Metal, L.C.). All three were sophisticated, accredited investors. There was no formal stock purchase agreement for this initial transaction. 4. On June 30, 1994, Registrant issued and sold an aggregate of 511,180 shares of Common Stock to accredited financial investors, for a total of $55,379,292. The purchasers consisted of Bain Capital Fund IV, L.P., Bain Capital Fund IV-B, L.P., BCIP Associates (Bain), and BCIP Trust Associates, L.P. (Bain), which together purchased 180,609 shares for $19,906,948, for a per share purchase price of $110.22; General Electric Capital Corporation, which purchased 180,610 shares for $19,906,948, for the same per share purchase price of $110.22 as Bain; J.H. Whitney & Co., which purchased 7,258 shares for $800,000 and Whitney 1990 Equity Fund, L.P., which purchased 29,033 shares for $3,200,000, for a per share purchase price of $110.22; Low Cost Limited Partnership, which purchased 5,000 shares for which it paid $551,104, a per share purchase price of the same $110.22; and Klans Associates, which purchased 907 shares for $100,000, for a per share purchase price of $110.25. In addition, Heavy Metal, L.C. purchased 61,173 shares for $6,742,157, for a per share purchase price of $90.61 and Keylock Investments Limited and Mazelina Anstalt purchased 46,590 shares, for which it paid $4,172,135, for a per share purchase price of $89.55. In total, 511,180 shares were purchased for $55,379,292, for a per share average purchase price of $108.34. II-2 106 5. On June 30, 1994, Registrant issued and sold $55,000,000 aggregate principal amount of senior subordinated promissory notes and warrants to purchase up to 58,511 shares of Common Stock at an exercise price of $.01 per share to Whitney Subordinated Debt Fund, General Electric Capital Corporation, Sumitomo Corporation of America, SDI Limited Partnership, Lincoln National Life Insurance Company, Lincoln National Income Fund, Inc. and LDI, Ltd. for an aggregate purchase price of $55,000,000. 6. In connection with a June 30, 1994 credit agreement, Registrant issued warrants to purchase 5,333 shares of Common Stock at an exercise price of $75 per share to APT Holdings Corporation. 7. On July 26, 1994, pursuant to an Employment Agreement of even date entered into between the Company and Tracy L. Shellabarger, the Company sold 10,000 of its shares of Common Stock to Mr. Shellabarger for a purchase price of $75.01 per share, for an aggregate purchase price of $750,100. Mr. Shellabarger paid cash of $100 and executed a promissory note for $750,000, with interest only payable at 7% percent per annum. Pursuant to the terms of the Employment Agreement, the principal amount of the promissory note was forgiven concurrently with the Company's initial public offering. 8. On December 14, 1995 and March 11 and April 22, 1996, Registrant issued and sold an aggregate of 208,333 shares of Common Stock to Preussag Stahl, AG, a German steelmaker, and an accredited investor, at a purchase price of $240.00 per share, for an aggregate purchase price of $50 million, pursuant to a restricted stock purchase agreement. 9. On September 10, 1996, pursuant to subscriptions made in December 1995 (and accepted by the Company in February 1996), the Company issued and sold an aggregate of 51,558 shares of Common Stock to existing stockholders or their affiliates, pursuant to exercise of their limited pre-emptive rights under a June 30, 1994 agreement between the Company's stockholders at that time, at a purchase price of $230.00 per share, for an aggregate purchase price of $11,858,400; and, as part of the same equity financing, issued and sold to Sumitomo Corporation (Japan) and Sumitomo Corporation of America, an accredited investor, pursuant to a commitment entered into in April 1996, an aggregate of 45,763 shares of Common Stock, at a purchase price of $295.00 per share, for an aggregate purchase price of $13,500,085, pursuant to a stock purchase agreement. 10. On October 30, 1996, all of the outstanding warrants were converted into 63,844 shares of Common Stock for an aggregate price of $400,560. The issuances described in this Item 15 were deemed exempt from registration under the Securities Act of 1933, as amended (the "Act"), in reliance upon Section 4(2) of the Act as transactions by an issuer not involving any public offering. In addition, the recipients of securities in each such transaction were accredited investors, mostly institutional investors, and each represented its intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the stock certificates issued in each such transaction. All recipients had adequate access, through their relationships with the Registrant, to information about the Registrant. II-3 107 ITEM 16 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits: The following exhibits are filed as a part of this Registration Statement:
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------------------------------------------------------------------- 1.1* Form of Underwriting Agreement. 3.1a Amended and Restatement Articles of Incorporation of Steel Dynamics, Inc. Filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1, SEC File No. 333-12521, effective November 21, 1996 ("1996 Form S-1") and incorporated by reference herein. 3.1b Articles of Incorporation of Iron Dynamics, Inc. Filed as Exhibit 3.1b to the Registrant's 1996 Annual Report on Form 10-K, SEC File No. 0-21719 ("1996 Form 10-K"), filed March 31, 1997, and incorporated by reference herein. 3.2a Bylaws of Steel Dynamics, Inc. Filed as Exhibit 3.2 to the Registrant's 1996 Form S-1 and incorporated by reference herein. 5.1 Legal Opinion of Barrett & McNagny. 10.1a Amended and Restated Credit Agreement between Steel Dynamics, Inc. and Mellon Bank, N.A., et al., dated July 9, 1997. 10.2 Loan Agreement between Indiana Development Finance Authority and Steel Dynamics, Inc. re Taxable Economic Development Revenue bonds, Trust Indenture between Indiana Development Finance Authority and NBD Bank, N.A., as Trustee re Loan Agreement between Indiana Development Finance Authority and Steel Dynamics, Inc. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.3 Contract for electric service between Steel Dynamics, Inc. and American Electric Power Company. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.4 Industrial Gasses Supply Agreement Between Steel Dynamics, Inc. and Air Products and Chemicals, Inc. dated August 5, 1994. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.5 Interruptible Gas Supply Contract between Steel Dynamics, Inc. and Northern Indiana Trading Co. dated February 27, 1995. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.6 Gas Services Agreement between Steel Dynamics, Inc. and Northern Indiana Fuel & Light Company, Inc. dated April 3, 1995. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.7 Gas Services Agreement between Steel Dynamics, Inc. and Northern Indiana Trading Co. dated April 3, 1995. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.8 Gas Services Agreement between Steel Dynamics, Inc. and Crossroads Pipeline Company dated April 3, 1995. Filed as the identically numbered exhibit to the Company's 1996 Form S-1 and incorporated by reference herein. 10.9 Panhandle Eastern Pipeline Agreement dated July 22, 1996. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.10 Natural Gas Purchase Agreement between Steel Dynamics, Inc. and PanEnergy Trading and Market Services, Inc. dated August 8, 1996. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.11 Agreement for Wastewater Services between the City of Butler, Indiana and Steel Dynamics, Inc. dated September 5, 1995. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein.
II-4 108
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------------------------------------------------------------------- 10.12 Slag Processing Agreement between Steel Dynamics, Inc. and Butler Mill Service Company dated February 3, 1995. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.13 Agreement to provide Scrap Purchasing Services between Steel Dynamics, Inc. and OmniSource Corporation dated October 29, 1993. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.14 Purchasing Agreement between Steel Dynamics, Inc. and Heidtman Steel Products, Inc. dated October 29, 1993. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.15 Iron Carbide Off Take Agreement between Steel Dynamics, Inc. and Qualitech Steel Corporation dated June 29, 1996. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.16 Purchasing, Domestic Sales and Export Distribution Agreement between Steel Dynamics, Inc. and Preussag Stahl AG dated December 14, 1995. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.17 Reciprocal Patent and Technical Information Transfer and License Agreement between Steel Dynamics, Inc. and Preussag Stahl AG dated December 14, 1995. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.18 1994 Incentive Stock Option Agreement, as needed. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.19 1996 Incentive Stock Option Agreement. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.20 Employment Agreement between Steel Dynamics, Inc. and Keith Busse. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.21 Employment Agreement between Steel Dynamics, Inc. and Mark D. Millett. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.22 Employment Agreement between Steel Dynamics, Inc. and Richard P. Teets, Jr. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.23 1996 Officer and Manager Cash and Stock Bonus Plan. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.24 Employment Agreement between Steel Dynamics, Inc. and Tracy L. Shellabarger. Tracy L. Shellabarger Promissory Note and Stock Pledge Agreement. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.25 "Second Look" Export Distribution Agreement between Steel Dynamics, Inc. and Sumitomo Corporation of America. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.26 Sale of Excess Product Agreement between Iron Dynamics, Inc. and Sumitomo Corporation of America. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.31 Registration Agreement dated June 30, 1994. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.32 Amendment No. 1 to Registration Agreement. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.33 Amendment No. 2 to Registration Agreement. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein.
II-5 109
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------------------------------------------------------------------- 10.34 Amendment No. 3 to Registration Agreement. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.35 Stock Purchase Agreement with Preussag Stahl AG dated December 14, 1995. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.36 Stock Purchase Agreement with Sumitomo Corporation of America and Sumitomo Corporation dated September 10, 1996. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.37 Stock Purchase Agreement with Bain Capital, General Electric Capital Corporation, Heavy Metal, L.C., Keylock Investments Limited, Mazelina Anstalt, et. al. dated June 30, 1994. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. 10.38 Employment Agreement between Iron Dynamics, Inc. and Larry J. Lehtinen. Filed as Exhibit 10.38 to the Registrant's 1996 Form 10-K and incorporated by reference herein. 10.39*++ License Agreement between Iron Dynamics, Inc. and Sumitomo Corporation and Sumitomo Corporation, dated June 5, 1997. 11.1 Statement re: Computation of Per Share Earnings. 21.1 List of Registrant's Subsidiaries. 23.1 Consent of Barrett & McNagny (included in Exhibit 5.1). 23.2* Consent of Deloitte & Touche LLP. 24.1 Power of Attorney (included in signature pages). 27.1 Financial Data Schedule.
- --------------- * Filed herewith. ++ Confidential treatment has been requested for a portion of this document, which portion has been deleted in the filed copy of the exhibit. The confidential portion of this document has been filed separately with the Securities and Exchange Commission pursuant to a pending application for confidential treatment. (b) Financial Statement Schedules: All schedules are omitted because they are either not applicable or the required information is included in the consolidated financial statements or notes thereto. ITEM 17 UNDERTAKINGS (a) The undersigned Registrant hereby undertakes to provide to the Underwriters, at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the BCL, the Registrant's Amended and Restated Articles of Incorporation, or any other provision, 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 such action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, 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-6 110 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Butler, Indiana, on this 8th day of August, 1997. STEEL DYNAMICS, INC. By: /s/ TRACY L. SHELLABARGER ------------------------------------ Tracy L. Shellabarger Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE - ------------------------------------------ -------------------------------- ----------------- * President & Chief Executive August 8, 1997 - ------------------------------------------ Officer and Director (Principal Keith E. Busse Executive Officer) /s/ TRACY L. SHELLABARGER Vice President & Chief Financial August 8, 1997 - ------------------------------------------ Officer and Director (Principal Tracy L. Shellabarger Financial and Accounting Officer) * Vice President of Melting and August 8, 1997 - ------------------------------------------ Casting and Director Mark D. Millett * Vice President of Rolling and August 8, 1997 - ------------------------------------------ Finishing and Director Richard P. Teets, Jr. Director - ------------------------------------------ Paul B. Edgerley Director - ------------------------------------------ William D. Strittmatter * Director August 8, 1997 - ------------------------------------------ Leonard Rifkin * Director August 8, 1997 - ------------------------------------------ John C. Bates Director - ------------------------------------------ William Laverack, Jr. Director - ------------------------------------------ Jurgen Kolb
* By: /s/ TRACY L. SHELLABARGER -------------------------------------------------- Tracy L. Shellabarger Attorney-in-Fact II-7 111 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO. - ----------- ------------------------------------------------------------------------- -------- 1.1* Form of Underwriting Agreement. ......................................... 3.1a Amended and Restatement Articles of Incorporation of Steel Dynamics, Inc. Filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1, SEC File No. 333-12521, effective November 21, 1996 ("1996 Form S-1") and incorporated by reference herein. ....................................... 3.1b Articles of Incorporation of Iron Dynamics, Inc. Filed as Exhibit 3.1b to the Registrant's 1996 Annual Report on Form 10-K, SEC File No. 0-21719 ("1996 Form 10-K"), filed March 31, 1997, and incorporated by reference herein. ................................................................. 3.2a Bylaws of Steel Dynamics, Inc. Filed as Exhibit 3.2 to the Registrant's 1996 Form S-1 and incorporated by reference herein. ..................... 5.1 Legal Opinion of Barrett & McNagny. ..................................... 10.1a Amended and Restated Credit Agreement between Steel Dynamics, Inc. and Mellon Bank, N.A., et al., dated July 9, 1997. .......................... 10.2 Loan Agreement between Indiana Development Finance Authority and Steel Dynamics, Inc. re Taxable Economic Development Revenue bonds, Trust Indenture between Indiana Development Finance Authority and NBD Bank, N.A., as Trustee re Loan Agreement between Indiana Development Finance Authority and Steel Dynamics, Inc. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ................................................................. 10.3 Contract for electric service between Steel Dynamics, Inc. and American Electric Power Company. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ........ 10.4 Industrial Gasses Supply Agreement Between Steel Dynamics, Inc. and Air Products and Chemicals, Inc. dated August 5, 1994. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ....................................... 10.5 Interruptible Gas Supply Contract between Steel Dynamics, Inc. and Northern Indiana Trading Co. dated February 27, 1995. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ....................................... 10.6 Gas Services Agreement between Steel Dynamics, Inc. and Northern Indiana Fuel & Light Company, Inc. dated April 3, 1995. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ....................................................... 10.7 Gas Services Agreement between Steel Dynamics, Inc. and Northern Indiana Trading Co. dated April 3, 1995. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ................................................................. 10.8 Gas Services Agreement between Steel Dynamics, Inc. and Crossroads Pipeline Company dated April 3, 1995. Filed as the identically numbered exhibit to the Company's 1996 Form S-1 and incorporated by reference herein. ................................................................. 10.9 Panhandle Eastern Pipeline Agreement dated July 22, 1996. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ....................................... 10.10 Natural Gas Purchase Agreement between Steel Dynamics, Inc. and PanEnergy Trading and Market Services, Inc. dated August 8, 1996. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. .......................................
112
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO. - ----------- ------------------------------------------------------------------------- -------- 10.11 Agreement for Wastewater Services between the City of Butler, Indiana and Steel Dynamics, Inc. dated September 5, 1995. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ....................................................... 10.12 Slag Processing Agreement between Steel Dynamics, Inc. and Butler Mill Service Company dated February 3, 1995. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ................................................................. 10.13 Agreement to provide Scrap Purchasing Services between Steel Dynamics, Inc. and OmniSource Corporation dated October 29, 1993. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ....................................... 10.14 Purchasing Agreement between Steel Dynamics, Inc. and Heidtman Steel Products, Inc. dated October 29, 1993. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ................................................................. 10.15 Iron Carbide Off Take Agreement between Steel Dynamics, Inc. and Qualitech Steel Corporation dated June 29, 1996. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ....................................................... 10.16 Purchasing, Domestic Sales and Export Distribution Agreement between Steel Dynamics, Inc. and Preussag Stahl AG dated December 14, 1995. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ....................................... 10.17 Reciprocal Patent and Technical Information Transfer and License Agreement between Steel Dynamics, Inc. and Preussag Stahl AG dated December 14, 1995. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ........ 10.18 1994 Incentive Stock Option Agreement, as needed. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ....................................... 10.19 1996 Incentive Stock Option Agreement. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ................................................................. 10.20 Employment Agreement between Steel Dynamics, Inc. and Keith Busse. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ....................................... 10.21 Employment Agreement between Steel Dynamics, Inc. and Mark D. Millett. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ............................... 10.22 Employment Agreement between Steel Dynamics, Inc. and Richard P. Teets, Jr. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. .......................... 10.23 1996 Officer and Manager Cash and Stock Bonus Plan. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ....................................... 10.24 Employment Agreement between Steel Dynamics, Inc. and Tracy L. Shellabarger. Tracy L. Shellabarger Promissory Note and Stock Pledge Agreement. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ..................... 10.25 "Second Look" Export Distribution Agreement between Steel Dynamics, Inc. and Sumitomo Corporation of America. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. .................................................................
113
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO. - ----------- ------------------------------------------------------------------------- -------- 10.26 Sale of Excess Product Agreement between Iron Dynamics, Inc. and Sumitomo Corporation of America. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ........ 10.31 Registration Agreement dated June 30, 1994. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ....................................................... 10.32 Amendment No. 1 to Registration Agreement. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ....................................................... 10.33 Amendment No. 2 to Registration Agreement. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ....................................................... 10.34 Amendment No. 3 to Registration Agreement. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ....................................................... 10.35 Stock Purchase Agreement with Preussag Stahl AG dated December 14, 1995. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ............................... 10.36 Stock Purchase Agreement with Sumitomo Corporation of America and Sumitomo Corporation dated September 10, 1996. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ....................................................... 10.37 Stock Purchase Agreement with Bain Capital, General Electric Capital Corporation, Heavy Metal, L.C., Keylock Investments Limited, Mazelina Anstalt, et. al. dated June 30, 1994. Filed as the identically numbered exhibit to the Registrant's 1996 Form S-1 and incorporated by reference herein. ................................................................. 10.38 Employment Agreement between Iron Dynamics, Inc. and Larry J. Lehtinen. Filed as Exhibit 10.38 to the Registrant's 1996 Form 10-K and incorporated by reference herein. ....................................... 10.39*++ License Agreement between Iron Dynamics, Inc. and Sumitomo Corporation and Sumitomo Corporation, dated June 5, 1997. ........................... 11.1 Statement re: Computation of Per Share Earnings. ........................ 21.1 List of Registrant's Subsidiaries. ...................................... 23.1 Consent of Barrett & McNagny (included in Exhibit 5.1). ................. 23.2* Consent of Deloitte & Touche LLP. ....................................... 24.1 Power of Attorney (included in signature pages). ........................ 27.1 Financial Data Schedule. ................................................
- --------------- * Filed herewith. ++ Confidential treatment has been requested for a portion of this document, which portion has been deleted in the filed copy of the exhibit. The confidential portion of this document has been filed separately with the Securities and Exchange Commission pursuant to a pending application for confidential treatment. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 Exhibit 1.1 8,400,000 Shares STEEL DYNAMICS, INC. Common Stock (par value $.01 per share) UNDERWRITING AGREEMENT [_________], 1997 2 [_________], 1997 Morgan Stanley & Co. Incorporated PaineWebber Incorporated Donaldson, Lufkin & Jenrette Securities Corporation McDonald & Company Securities, Inc. Salomon Brothers Inc c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, New York 10036 Morgan Stanley & Co. International Limited PaineWebber International (U.K.) Ltd. Donaldson, Lufkin & Jenrette Securities Corporation McDonald & Company Securities, Inc. Salomon Brothers International Limited c/o Morgan Stanley & Co. International Limited 25 Cabot Square Canary Wharf London E14 4QA England Dear Sirs: Steel Dynamics, Inc., an Indiana corporation (the "Company"), proposes to issue and sell to the several Underwriters named in Schedules I and II hereto (the "Underwriters"), and certain shareholders of the Company (the "Firm Selling Shareholders") named in Schedule III hereto severally propose to sell to the several Underwriters, an aggregate of 8,400,000 shares of the Common Stock (par value $.01 per share) of the Company (the "Firm Shares") of which 1,255,971 shares are to be issued and sold by the Company (the "Company Shares") and 7,144,029 shares are to be sold by the Firm Selling Shareholders, each Firm Selling Shareholder selling the amount set forth opposite such Firm Selling Shareholder's name in Schedule III hereto. The Company and the Firm Selling Shareholders are hereinafter collectively referred to as the "Firm Sellers". It is understood that, subject to the conditions hereinafter stated, 6,720,000 Firm Shares (the "U.S. Firm Shares") will be sold to the several U.S. Underwriters named in Schedule I hereto (the "U.S. Underwriters") in connection with the offering and sale of such U.S. Firm Shares in the United States and Canada to United States and Canadian Persons (as such terms are defined in the Agreement Between U.S. and International Underwriters of even date herewith), and 1,680,000 Firm Shares (the "International Shares") 3 2 will be sold to the several International Underwriters named in Schedule II hereto (the "International Underwriters") in connection with the offering and sale of such International Shares outside the United States and Canada to persons other than United States and Canadian Persons. Morgan Stanley & Co. Incorporated, PaineWebber Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, McDonald & Company Securities, Inc. and Salomon Brothers Inc shall act as representatives (the "U.S. Representatives") of the several U.S. Underwriters, and Morgan Stanley & Co. International Limited, PaineWebber International (U.K.) Ltd., Donaldson, Lufkin & Jenrette Securities Corporation, McDonald & Company Securities, Inc. and Salomon Brothers International Limited shall act as representatives (the "International Representatives") of the several International Underwriters. The U.S. Underwriters and the International Underwriters are hereinafter collectively referred to as the "Underwriters". In addition, the Company and certain shareholders of the Company named in Schedule IV hereto (the "Option Selling Shareholders") severally propose to sell to the several U.S. Underwriters not more than an additional aggregate of 1,260,000 shares of Common Stock (par value $.01 per share) of the Company (the "Additional Shares") if and to the extent that the U.S. Representatives shall have determined to exercise, on behalf of the U.S. Underwriters, the right to purchase such shares of Common Stock granted to the U.S. Underwriters in Section 3 hereof. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the "Shares". The shares of Common Stock (par value $.01 per share) of the Company to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the "Common Stock". The Firm Selling Shareholders and the Option Selling Shareholders are hereinafter collectively referred to as the "Selling Shareholders". The Company and the Selling Shareholders are hereinafter collectively referred to as the "Sellers". The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement relating to the Shares. The registration statement contains two prospectuses to be used in connection with the offering and sale of the Shares: the U.S. prospectus, to be used in connection with the offering and sale of Shares in the United States and Canada to United States and Canadian Persons, and the international prospectus, to be used in connection with the offering and sale of Shares outside the United States and Canada to persons other than United States and Canadian Persons. The international prospectus is identical to the U.S. prospectus except for the outside front cover page. The registration statement as amended at the time it becomes effective, including the exhibits thereto and the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Securities Act of 1933, as amended (the "Securities Act"), is hereinafter referred to as the "Original Registration Statement"; any registration statement filed pursuant to Rule 462(b) under the Securities Act is hereinafter referred to as the "Rule 462(b) Registration Statement"; the Original Registration Statement and any Rule 462(b) Registration Statement are hereinafter referred to collectively as the "Registration Statement"; the U.S. prospectus and the international 4 3 prospectus in the respective forms first used to confirm sales of Shares are hereinafter collectively referred to as the "Prospectus". 1. Representations and Warranties of the Company. The Company represents and warrants to each of the Underwriters and the Selling Shareholders that: (a) The Original Registration Statement has become effective, and if the Company has elected to rely upon Rule 462(b) under the Securities Act, the Rule 462(b) Registration Statement shall have become effective not later than the earlier of (i) 10:00 p.m. Eastern time on the date hereof and (ii) the time confirmations are sent or given, as specified by Rule 462(b) under the Securities Act; no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or threatened by the Commission. (b) (i) The Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder, (ii) each part of the Registration Statement, when such part became effective, did not contain and each such part, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (iii) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this Section 1(b) do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (c) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. (d) Each subsidiary of the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its 5 4 business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. (e) The authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus. (f) The shares of Common Stock (including the Shares to be sold by the Selling Shareholders) outstanding prior to the issuance of the Shares have been duly authorized and are validly issued, fully paid and non-assessable. (g) The Company Shares and the Additional Shares to be sold by the Company have been duly authorized and, when issued and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights. (h) This Agreement and each of the Irrevocable Power of Attorney and Custody Agreements (collectively, the "Power of Attorney and Custody Agreements"), each dated the date hereof, by each Selling Shareholder and the Company as Custodian (the "Custodian"), appointing certain individuals as the Selling Shareholders' attorneys-in-fact to the extent set forth therein relating to the transactions contemplated hereby and by the Registration Statement have been duly authorized, executed and delivered by the Company. (i) The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement and the Power of Attorney and Custody Agreements, and the issuance and delivery of the Company Shares and the Additional Shares to be sold by the Company will not contravene any provision of applicable law or the articles of incorporation or by-laws of the Company or any agreement or other instrument binding upon the Company or any of its subsidiaries that is material to the Company and its subsidiaries, taken as a whole, or any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company or any subsidiary, and no consent, approval, authorization or order of or qualification with any governmental body or agency is required for the performance by the Company of its obligations under this Agreement, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares. (j) There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement). 6 5 (k) There are no legal or governmental proceedings pending or threatened to which the Company or any of its subsidiaries is a party or to which any of the properties of the Company or any of its subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and are not so described or any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required. (l) Each of the Company and its subsidiaries has all necessary consents, authorizations, approvals, orders, certificates and permits of and from, and has made all declarations and filings with, all federal, state, local and other governmental authorities, all self-regulatory organizations and all courts and other tribunals, to own, lease, license and use its properties and assets and to conduct its business in the manner described in the Prospectus, except to the extent that the failure to obtain such consents, authorizations, approvals, orders, certificates and permits or make such declarations and filings would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. Neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such consent, authorization, approval, order, certificate or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a material adverse change in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, except as described in or contemplated by the Prospectus. (m) Each preliminary prospectus filed as part of the registration statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Securities Act or incorporated by reference into or filed as part of the Rule 462(b) Registration Statement, complied when so filed in all material respects with the Securities Act and the rules and regulations of the Commission thereunder. (n) The Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (o) The Company and its subsidiaries are (i) in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such 7 6 permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole. (p) In the ordinary course of its business, the Company conducts a periodic review of the effect of Environmental Laws on the business, operations and properties of the Company and its subsidiaries, in the course of which it identifies and evaluates associated costs and liabilities (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties). On the basis of such review, the Company has reasonably concluded that such associated costs and liabilities would not, singly or in the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole. (q) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, (1) the Company and its subsidiaries have not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction not in the ordinary course of business; (2) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock; and (3) there has not been any material change in the capital stock, short-term debt or long-term debt of the Company and its consolidated subsidiaries, except in each case as described in or contemplated by the Prospectus. (r) The Company and its subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its subsidiaries, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries, in each case except as described in or contemplated by the Prospectus. (s) The Company and its subsidiaries own or possess, or can acquire on reasonable terms, all material patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names currently employed by them in connection with the business now operated by them, and neither the Company nor any of its subsidiaries has received any notice of infringement of or conflict with asserted rights of others with 8 7 respect to any of the foregoing which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in any material adverse change in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole. (t) No material labor dispute with the employees of the Company or any of its subsidiaries exists, except as described in or contemplated by the Prospectus, or, to the knowledge of the Company, is imminent; and the Company is not aware of any existing, threatened or imminent labor disturbance by the employees of any of its principal suppliers, manufacturers or contractors that could result in any material adverse change in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole. (u) The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which they are engaged; neither the Company nor any such subsidiary has been refused any insurance coverage sought or applied for; and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition, financial or otherwise, or the earnings, business or operations of the Company and its subsidiaries, taken as a whole, except as described in or contemplated by the Prospectus. (v) The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (1) transactions are executed in accordance with management's general or specific authorizations; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (3) access to assets is permitted only in accordance with management's general or specific authorization; and (4) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (w) There are no holders of securities (debt or equity) of the Company or any of its subsidiaries, or holders of rights, options, or warrants to obtain securities of the Company or any of its subsidiaries, who have the right, during the 90 day period after the date of this Agreement to require the Company to register securities held by them under the Securities Act, other than holders who have waived such right for the 90 day period after the date of the public offering of the Shares and have waived their rights with respect to the inclusion of their securities in the Registration Statement. 9 8 2. Representations and Warranties of the Selling Shareholders. Each of the Selling Shareholders severally and not jointly represents and warrants to and agrees with each of the Underwriters that: (a) This Agreement has been duly authorized, executed and delivered by or on behalf of such Selling Shareholder. (b) The execution and delivery by such Selling Shareholder of, and the performance by such Selling Shareholder of its obligations under, this Agreement and its Power of Attorney and Custody Agreement will not contravene any provision of applicable law, or the certificate of incorporation or by-laws of such Selling Shareholder (if such Selling Shareholder is a corporation), or the limited partnership agreement (if such Selling Shareholder is a limited partnership) or any agreement or other instrument binding upon such Selling Shareholder or any judgment, order or decree of any governmental body, agency or court having jurisdiction over such Selling Shareholder, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by such Selling Shareholder of its obligations under this Agreement or the Power of Attorney and Custody Agreement of such Selling Shareholder, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares. (c) Such Selling Shareholder has, and on the Closing Date (as defined below), in the case of a Firm Selling Shareholder, or the Option Closing Date (as defined below), in the case of an Option Selling Shareholder, will have, valid title to the Shares to be sold by such Selling Shareholder and the legal right and power, and all required authorizations and approvals to enter into this Agreement and its Power of Attorney and Custody Agreement and to sell, transfer and deliver the Shares to be sold by such Selling Shareholder. (d) The Power of Attorney and Custody Agreement of such Selling Shareholder has been duly authorized, executed and delivered by such Selling Shareholder and is a valid and binding agreement of such Selling Shareholder, enforceable in accordance with its terms, except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (ii) the availability of equitable remedies may be limited by equitable principles of general applicability. (e) Delivery of the Shares to be sold by such Selling Shareholder pursuant to this Agreement will pass valid title to such Shares free and clear of any security interests, claims, liens, equities and other encumbrances. (f) The information which relates specifically to such Selling Shareholder, as set forth under the caption "Principal and Selling Stockholders" (including the 10 9 notes thereto), in the Registration Statement and Prospectus is, and on the Closing Date (as defined below), in the case of a Firm Selling Shareholder, or the Option Closing Date (as defined below), in the case of an Option Selling Shareholder, will be, true, correct and complete, and does not, and on the Closing Date, in the case of a Firm Selling Shareholder, or the Option Closing Date, in the case of an Option Selling Shareholder, will not, contain any untrue statement of material fact or omit to state any material fact necessary to make such information not misleading. 3. Agreements to Sell and Purchase. Each Firm Seller, severally and not jointly, hereby agrees to sell to the several Underwriters, and each Underwriter, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agrees, severally and not jointly, to purchase from such Firm Seller at U.S.$[_______] a share (the "Purchase Price") the number of Firm Shares (subject to such adjustments to eliminate fractional shares as you may determine) that bears the same proportion to the number of Firm Shares to be sold by such Firm Seller as the number of Firm Shares set forth in Schedules I and II hereto opposite the name of such Underwriter bears to the total number of Firm Shares. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company and the Option Selling Shareholders severally agree to sell to the U.S. Underwriters the Additional Shares, and the U.S. Underwriters shall have a one-time right to purchase, severally and not jointly, up to 1,260,000 Additional Shares at the Purchase Price. If you, on behalf of the U.S. Underwriters, elect to exercise such option, you shall so notify the Company and the Option Selling Shareholders in writing not later than 30 days after the date of this Agreement, which notice shall specify the number of Additional Shares to be purchased by the U.S. Underwriters and the date on which such shares are to be purchased. Such date may be the same as the Closing Date (as defined below) but not earlier than the Closing Date nor later than ten business days after the date of such notice. Additional Shares may be purchased as provided in Section 5 hereof solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. If any Additional Shares are to be purchased, each U.S. Underwriter agrees, severally and not jointly, to purchase the number of Additional Shares (subject to such adjustments to eliminate fractional shares as the U.S. Representatives may determine) that bears the same proportion to the total number of Additional Shares to be purchased as the number of U.S. Firm Shares set forth in Schedule I hereto opposite the name of such U.S. Underwriter bears to the total number of U.S. Firm Shares. Each Seller hereby agrees that, without the prior written consent of Morgan Stanley & Co. Incorporated ("Morgan Stanley"), it will not, for a period of 90 days after the date of the Prospectus, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common 11 10 Stock, or (ii) enter into any swap or other arrangement 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 (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise, other than (a) the sale of the Shares to the Underwriters pursuant to this Agreement, (b) transactions relating to shares of Common Stock or other securities acquired in open market transactions after the completion of the public offering of the Common Stock hereunder or (c) the issuance by the Company of shares of Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof of which the Underwriters have been advised in writing. In addition, each Selling Shareholder agrees that, without the prior written consent of Morgan Stanley on behalf of the Underwriters, it will not, for a period of 90 days after the date of the Prospectus, make any demand for or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock. 4. Terms of Public Offering. The Sellers are advised by you that the Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Original Registration Statement and this Agreement have become effective as in your judgment is advisable. The Sellers are further advised by you that the Shares are to be offered to the public initially at U.S.$[____] a share (the "Public Offering Price") and to certain dealers selected by you at a price that represents a concession not in excess of U.S.$[__] a share under the Public Offering Price, and that any Underwriter may allow, and such dealers may reallow, a concession, not in excess of U.S.$[__] a share, to any Underwriter or to certain other dealers. Each U.S. Underwriter hereby makes to and with the Company and each Selling Shareholder the representations and agreements of such U.S. Underwriter contained in the fifth and sixth paragraphs of Article III of the Agreement Between U.S. and International Underwriters of even date herewith. Each International Underwriter hereby makes to and with the Company and each Selling Shareholder the representations and agreements of such International Underwriter contained in the seventh, eighth, ninth and tenth paragraphs of Article III of such Agreement. 5. Payment and Delivery. Payment for the Firm Shares to be sold by each Firm Seller shall be made by wire transfers to the Company's account and the Custodian's account (for the benefit of the Firm Selling Shareholders) in federal funds or other funds immediately available in New York City against delivery of such Firm Shares for the respective accounts of the several Underwriters at the office of Shearman & Sterling, 599 Lexington Avenue, New York, New York 10022 at 9:00 a.m., New York City time, on [___________], 1997, or at such other time on the same or such other date, not later than [___________], 1997, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the "Closing Date". 12 11 Payment for any Additional Shares shall be made by wire transfer payable to the Company's and the Custodian's account (for the benefit of the Option Selling Shareholders) in federal funds or other funds immediately available in New York City against delivery of such Additional Shares for the respective accounts of the several U.S. Underwriters at the office of Shearman & Sterling, 599 Lexington Avenue, New York, New York 10022 at 9:00 a.m., New York City time, on the date specified in the notice described in Section 3 or on such other date, in any event not later than [____________], 1997, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the "Option Closing Date". Certificates for the Firm Shares and Additional Shares shall be in definitive form and registered in such names and in such denominations as you shall request in writing not later than one full business day prior to the Closing Date or the Option Closing Date, as the case may be. The certificates evidencing the Firm Shares and Additional Shares shall be delivered to you on the Closing Date or the Option Closing Date, as the case may be, for the respective accounts of the several Underwriters, with any transfer taxes payable in connection with the transfer of the Shares to the Underwriters duly paid, against payment of the Purchase Price therefor. 6. Conditions to the Underwriters' Obligations. The obligations of the Sellers and the several obligations of the Underwriters hereunder are subject to the condition that the Registration Statement shall have become effective not later than the date hereof. The several obligations of the Underwriters hereunder are subject to the following further conditions: (a) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date: (i) there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate the direction of the possible change, in the rating accorded any of the Company's securities by any "nationally recognized statistical rating organization" as such term is defined for purposes of Rule 436(g)(2) under the Securities Act, and (ii) there shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings, business or operations, of the Company and its subsidiaries, taken as a whole, from that set forth in the Registration Statement, that, in your judgment, is material and adverse and makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement). 13 12 (b) The Underwriters shall have received on the Closing Date a certificate, dated the Closing Date and signed by an executive officer of the Company, to the effect set forth in clause (a)(i) above and to the effect that the representations and warranties of the Company contained in this Agreement are true and correct as of the Closing Date and that the Company has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date. The officer signing and delivering such certificate may rely upon the best of his knowledge as to proceedings threatened. (c) No stop order suspending the effectiveness of the Registration Statement shall be in effect and no proceedings for such purpose shall be pending before or, to the knowledge of the Company or the Underwriters, threatened by the Commission. (d) You shall have received on the Closing Date an opinion of Barrett & McNagny, counsel for the Company, dated the Closing Date, in the form attached hereto as Exhibit A. The opinion of Barrett & McNagny shall be rendered to you at the request of the Company and shall so state therein. (e) You shall have received on the Closing Date an opinion of each of [Names of counsel], counsel for the Selling Shareholders, dated the Closing Date, in the form attached hereto as Exhibits B-1 through B-7, respectively. The opinions of [Names of counsel], shall be rendered to the Underwriters at the request of the Selling Shareholders and shall so state therein. (f) You shall have received on the Closing Date an opinion of Shearman & Sterling, counsel for the Underwriters, dated the Closing Date, with respect to the Registration Statement and the Prospectus and such other related matters as you may reasonably request, and such counsel shall have received such documents and information as they may reasonably request to enable them to pass upon such matters. (g) You shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof and the Closing Date, as the case may be, in form and substance satisfactory to you, from Deloitte & Touche LLP, independent public accountants, containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus; provided that the letter delivered on the Closing Date shall use a "cut-off date" not earlier than the date hereof. 14 13 (h) The "lock-up" agreements, each substantially in the form of Exhibit C hereto between you, certain shareholders, officers and directors of the Company relating to sales and certain other dispositions of shares of Common Stock or any securities convertible into or exercisable or exchangeable for such Common Stock, delivered to you on or before the date hereof, shall be in full force and effect on the Closing Date. (i) You shall have received on the Closing Date certificates dated the Closing Date and signed by the Selling Shareholders or by attorneys-in-fact of the Selling Shareholders, to the effect that the representations and warranties of each such Selling Shareholder contained in this Agreement are true and correct as of the Closing Date and that each such Selling Shareholder has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date. (j) The Company shall have complied with the provisions of Section 7(a) hereof with respect to the furnishing of Prospectuses on the business day next succeeding the date of this Agreement, in such quantities as you shall have reasonably requested. (k) The Shares shall have been approved for quotation on the Nasdaq National Market System by the National Association of Securities Dealers, Inc. (the "NASD"). (l) You shall have received such other documents and certificates as are reasonably requested by you or your counsel. The several obligations of the U.S. Underwriters to purchase Additional Shares hereunder are subject to the delivery to the U.S. Representatives on the Option Closing Date of such documents as you may reasonably request with respect to the good standing of the Company, the due authorization and issuance of the Additional Shares and other matters related to the issuance of the Additional Shares. 7. Covenants of the Company. In further consideration of the agreements of the Underwriters herein contained, the Company covenants with each Underwriter as follows: (a) To furnish to you, without charge, five signed copies of the Registration Statement (including exhibits thereto) and for delivery to each other Underwriter a conformed copy of the Registration Statement (without exhibits thereto) and, during the period mentioned in Section 7(c) below, as many copies of the Prospectus and any supplements and amendments thereto or to the Registration Statement as you may reasonably request. In the case of the Prospectus, to furnish copies of the Prospectus in New York City, prior to 10:00 a.m., New York City 15 14 time, on the business day following the date of this Agreement, in such quantities as you reasonably request. (b) Before amending or supplementing the Registration Statement or the Prospectus, to furnish to you a copy of each such proposed amendment or supplement and not to file any such proposed amendment or supplement to which you reasonably object; and to file with the Commission within the applicable period specified in Rule 424(b) under the Securities Act any prospectus required to be filed pursuant to such Rule. (c) If, during such period after the first date of the public offering of the Shares as in the opinion of your counsel the Prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of your counsel, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to the dealers (whose names and addresses you will furnish to the Company) to which Shares may have been sold by you on behalf of the Underwriters and to any other dealers upon request, either amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with law. (d) To endeavor to qualify the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as you shall reasonably request and to pay all expenses (including fees and disbursements of counsel) in connection with such qualification and in connection with any review of the offering of the Shares by the NASD. (e) If the Company elects to rely on Rule 462(b) under the Securities Act, the Company shall file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) under the Securities Act no later than the earlier of (i) 10:00 p.m. Eastern time on the date hereof and (ii) the time confirmations are sent or given, as specified by Rule 462(b)(2) under the Securities Act, and shall pay the applicable fees in accordance with Rule 111 under the Securities Act. (f) To make generally available to the Company's security holders and to you as soon as practicable, but no later than 60 days after the end of the twelve-month period beginning at the end of the Company's fiscal quarter during which the effective date of the Original Registration Statement occurs, an earnings statement of the Company covering such twelve-month period that satisfies the provisions of 16 15 Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder. (g) To use the net proceeds received by the Company from the sale of the Shares hereunder in the manner specified in the Prospectus under the caption "Use of Proceeds". (h) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all expenses incident to the performance of its and the Selling Shareholders (except to the extent set forth in Section 8(a) below) obligations under this Agreement, including: (i) the fees, disbursements and expenses of the Company's counsel and the Company's accountants in connection with the registration and delivery of the Shares under the Securities Act and all other fees or expenses in connection with the preparation and filing of the Registration Statement, any preliminary prospectus, the Prospectus and amendments and supplements to any of the foregoing, including all printing costs associated therewith, and the mailing and delivering of copies thereof to the Underwriters and dealers, in the quantities hereinabove specified, (ii) all costs and expenses related to the transfer and delivery of the Shares to the Underwriters, including any transfer or other taxes payable thereon, (iii) the cost of printing or producing any preliminary or supplementary Blue Sky memorandum in connection with the offer and sale of the Shares under state securities laws and all expenses in connection with the qualification of the Shares for offer and sale under state securities laws as provided in Section 7(d) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with any preliminary or supplementary Blue Sky memorandum, (iv) all filing fees and disbursements of counsel to the Underwriters incurred in connection with the review and qualification of the offering of the Shares by the NASD, (v) all fees of counsel incurred on behalf of or disbursements by Morgan Stanley in its capacity as "qualified independent underwriter" within the meaning of Rule 2720 of the NASD's Conduct Rules ("QIU"), (vi) all fees and expenses in connection with the preparation and filing of the registration statement on Form 8-A relating to the Common Stock and all costs and expenses incident to quoting the Shares on the Nasdaq National Market System, (vii) the cost of printing certificates representing the Shares, (viii) the costs and charges of any transfer agent, registrar or depositary, (ix) the costs and expenses of the Company relating to investor presentations on any "road show" undertaken in connection with the marketing of the offering of the Shares, including, without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior approval of the Company, travel and lodging expenses of the representatives and officers of the Company and any such consultants, and the cost of any aircraft chartered in connection with the road show, and (x) all other costs and expenses incident to the performance of the obligations of the Company hereunder for which 17 16 provision is not otherwise made in this Section. It is understood, however, that except as provided in this Section, Section 9 and the last paragraph of Section 11 below, the Underwriters will pay all of their costs and expenses, including fees and disbursements of their counsel, stock transfer taxes payable on resale of any of the Shares by them, and any advertising expenses connected with any offers they may make. 8. Covenants of the Selling Shareholders. In further consideration of the agreements of the Underwriters herein contained, each of the Selling Shareholders severally and not jointly covenants as follows: (a) Whether or not the transactions contemplated hereby are consummated or this Agreement is terminated, to pay or cause to be paid (i) all taxes, if any, on the transfer and sale of the Shares being sold by such Selling Shareholder and (ii) all expenses incident to the delivery of the Shares and the fees and expenses of counsel and accountants for such Selling Shareholder; provided that the provisions of this Section 8(a) and Section 7(h) shall not in any way affect any agreement between the Company and the Selling Shareholders with respect to the payment of expenses. (b) Such Selling Shareholder has carefully reviewed the Registration Statement and will carefully review, promptly upon receipt, each amendment thereto provided to such Selling Shareholder. At any time during the period from the date hereof through the Closing Date or the Option Closing Date, in the case of an Option Selling Shareholder, if there is any change in the information in the Registration Statement as set forth under the caption "Principal and Selling Shareholders" (including the notes thereto) that specifically relate to such Selling Shareholder, such Selling Shareholder will immediately notify the Company of such change. (c) Such Selling Shareholder shall cooperate fully with the Company in supplying such information relating to such Selling Shareholder and the Shares as the Company may reasonably request for use in preparation of the Registration Statement and all other documents reasonably necessary or desirable in connection with the offering of Shares. In addition, such Selling Shareholder shall furnish to the Company (or, at the Company's request, to the Underwriters or other parties) such further certificates and documents confirming the representations and warranties contained herein, or with respect to related matters, as the Company may reasonably request. 9. Indemnity and Contribution. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred by any Underwriter or any such controlling person in 18 17 connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein; provided, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter from whom the person asserting such losses, claims, damages or liabilities purchased Shares, or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such losses, claims, damages or liabilities. (b) Each Selling Shareholder agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement, each Underwriter and each person, if any, who controls the Company or any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only with reference to information relating to such Selling Shareholder, as set forth under the caption "Principal and Selling Stockholders" (including the notes thereto) in the Prospectus and Registration Statement or any amendment or supplement thereto; provided, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter from whom the person asserting such losses, claims, damages or liabilities purchased Shares, or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such losses, claims, damages or liabilities; provided, further, that with respect to any amount due an indemnified 19 18 person under this paragraph (b), each Selling Shareholder shall be liable only to the extent of the net proceeds received by such Selling Shareholder from the sale of such Selling Shareholder's Shares. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement, the Selling Shareholders and each person, if any, who controls the Company or any Selling Shareholder within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only with reference to information relating to such Underwriter furnished to the Company in writing by such Underwriter through you expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus or any amendments or supplements thereto. (d) The Company also agrees to indemnify and hold harmless Morgan Stanley and each person, if any, who controls Morgan Stanley within the meaning of either Section 15 of the Securities Act, or Section 20 of the Exchange Act, from and against any and all losses, claims, damages, liabilities and judgments incurred as a result of Morgan Stanley's participation as a QIU in connection with the offering of the Common Stock, except for any losses, claims, damages, liabilities, and judgments resulting from Morgan Stanley's, or such controlling person's, willful misconduct. (e) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to subsection (a), (b), (c) or (d) of this Section 9, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related 20 19 proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for (i) all Underwriters and all persons, if any, who control any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, (ii) the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either such Section and (iii) all Selling Shareholders and all persons, if any, who control any Selling Shareholder within the meaning of either such Section, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Underwriters and such control persons of Underwriters, such firm shall be designated in writing by Morgan Stanley. In the case of any such separate firm for the Company, and such directors, officers and control persons of the Company, such firm shall be designated in writing by the Company. In the case of any such separate firm for the Selling Shareholders and such controlling persons of Selling Shareholders, such firm shall be designated in writing by the Selling Shareholders selling a majority of the Selling Shareholders' Shares hereunder. Notwithstanding anything contained herein to the contrary, if indemnity may be sought pursuant to subsection (d) of this Section 9 in respect of such action or proceeding, then in addition to such separate firm for the indemnified parties, the indemnifying party shall be liable for the reasonable fees and expenses of not more than one separate firm (in addition to any local counsel) for Morgan Stanley in its capacity as a QIU and all persons, if any, who control Morgan Stanley within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second and third sentences of this subsection, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid, request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (f) To the extent the indemnification provided for in subsection (a), (b), (c) or (d) of this Section 9 is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party under such subsection, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits 21 20 received by the indemnifying party or parties on the one hand and the indemnified party or parties on the other hand from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Sellers on the one hand and the Underwriters on the other hand in connection with the offering of the Shares shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Shares (before deducting expenses) received by each Seller and the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate Public Offering Price of the Shares. The relative fault of a Seller and of the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such Seller or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Underwriters' respective obligations to contribute pursuant to this Section 9 are several in proportion to the respective number of Shares they have purchased hereunder, and not joint. In no event shall the liability of a Selling Shareholder under this Section 9(f) exceed the amount that such Selling Shareholder would have been required to pay under Section 9(b) had such indemnification been held to be available thereunder. (g) The Sellers and the Underwriters agree that it would not be just or equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in subsection (f) of this Section 9. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in subsection (f) of this Section 9 shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 9 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. 22 21 (h) The indemnity and contribution provisions contained in this Section 9 and the representations and warranties and other statements of the Company and the Selling Shareholders contained in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, any Selling Shareholder or any person controlling any Selling Shareholder, or the Company, its officers or directors or any person controlling the Company and (iii) acceptance of and payment for any of the Shares. 10. Termination. This Agreement shall be subject to termination by notice given by you to the Company, if (a) after the execution and delivery of this Agreement and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on or by, as the case may be, any of the New York Stock Exchange, the American Stock Exchange, the NASD, the Chicago Board of Options Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any securities of the Company shall have been suspended on any exchange or in any over-the-counter market, (iii) a general moratorium on commercial banking activities in New York shall have been declared by either federal or New York State authorities or (iv) there shall have occurred any outbreak or escalation of hostilities or any change in financial markets or any calamity or crisis that, in your judgment, is material and adverse and (b) in the case of any of the events specified in clauses (a)(i) through (iv), such event singly or together with any other such event makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. 11. Effectiveness; Defaulting Underwriters. This Agreement shall become effective upon the later of (x) execution and delivery hereof by the parties hereto and (y) release of notification of the effectiveness of the Original Registration Statement by the Commission. If, on the Closing Date or the Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares that it or they have agreed to purchase hereunder on such date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated severally in the proportions that the number of Firm Shares set forth opposite their respective names in Schedule I or Schedule II bears to the aggregate number of Firm Shares set forth opposite the names of all such nondefaulting Underwriters, or in such other proportions as you may specify, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; provided that in no event shall the number of Shares that any Underwriter has agreed to purchase pursuant to this Agreement be increased pursuant to this Section 11 by an amount in excess of one-ninth of such number of Shares without the written consent of such Underwriter. If, on the Closing Date or the Option Closing Date, as the case may be, any Underwriter or Underwriters shall fail or refuse to purchase Shares and the aggregate number 23 22 of Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Shares to be purchased on such date, and arrangements satisfactory to you and the Company for the purchase of such Shares are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter or the Company. In any such case either you or the Company shall have the right to postpone the Closing Date or the Option Closing Date, as the case may be, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and in the Prospectus or in any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. If this Agreement shall be terminated by the Underwriters, or any of them, because of any failure or refusal on the part of any Seller to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason any Seller shall be unable to perform its obligations under this Agreement, the Company will reimburse the Underwriters or such Underwriters as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the fees and disbursements of their counsel) reasonably incurred by such Underwriters in connection with this Agreement or the offering contemplated hereunder. 12. Counterparts. This Agreement may be signed in two or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 13. Applicable Law. This Agreement shall be governed by the laws of the State of New York. 24 23 14. Headings. The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this Agreement. Very truly yours, STEEL DYNAMICS, INC. By __________________________________ Name: Title: The Selling Shareholders named in Schedules III and IV hereto, acting severally By __________________________________ Attorney-in-Fact Name: Title: 25 24 Accepted as of the date hereof MORGAN STANLEY & CO. INCORPORATED PAINEWEBBER INCORPORATED DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION MCDONALD & COMPANY SECURITIES, INC. SALOMON BROTHERS INC Acting severally on behalf of themselves and the several U.S. Underwriters named in Schedule I hereto. By Morgan Stanley & Co. Incorporated By_____________________________________ Name: Title: MORGAN STANLEY & CO. INTERNATIONAL LIMITED PAINEWEBBER INTERNATIONAL (U.K.) LTD. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION MCDONALD & COMPANY SECURITIES, INC. SALOMON BROTHERS INTERNATIONAL LIMITED Acting severally on behalf of themselves and the several International Underwriters named in Schedule II hereto. By Morgan Stanley & Co. International Limited By_____________________________________ Name: Title: 26 SCHEDULE I U.S. Underwriters Number of Firm Shares Underwriter To Be Purchased - ----------- --------------- Morgan Stanley & Co. Incorporated PaineWebber Incorporated Donaldson, Lufkin & Jenrette Securities Corporation McDonald & Company Securities, Inc. Salomon Brothers Inc -------------- Total U.S. Firm Shares ============== 27 SCHEDULE II International Underwriters Number of Firm Shares Underwriter To Be Purchased ----------- --------------- Morgan Stanley & Co. International Limited PaineWebber International (U.K.) Ltd. Donaldson, Lufkin & Jenrette Securities Corporation McDonald & Company Securities, Inc. Salomon Brothers International Limited --------------- Total International Firm Shares................................. =============== 28 SCHEDULE III Firm Selling Shareholders Number of Firm Shares Firm Selling Shareholder To Be Sold - ------------------------ ---------- ---------- Total............................................................. ========== 29 SCHEDULE IV Option Selling Shareholders Number of Additional Option Selling Shareholder Shares To Be Sold - -------------------------- ----------------- ------------ Total........................................................ ============ 30 EXHIBIT A Pursuant to Section 6(d) of the Underwriting Agreement, Barrett & McNagny, counsel for the Company, shall furnish an opinion to the effect that: (i) the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries taken as a whole; (ii) each subsidiary of the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries taken as a whole; (iii) the authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus; (iv) the shares of Common Stock (including the Shares to be sold by the Selling Shareholders) outstanding prior to the issuance of the Company Shares have been duly authorized and are validly issued, fully paid and non-assessable; (v) the Company Shares and the Additional Shares to be sold by the Company have been duly authorized and, when issued and delivered in accordance with the terms of the Underwriting Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights; (vi) the Underwriting Agreement and each of the Irrevocable Power of Attorney and Custody Agreements (collectively, the "Power of Attorney and Custody Agreements"), each dated the date hereof, by each Selling Shareholder and the Company as Custodian, appointing certain individuals as the Selling Shareholders' attorneys-in-fact to the extent set forth therein relating to the transactions contemplated hereby and by the Registration Statement have been duly authorized, executed and delivered by the Company; 31 A-2 (vii) the execution and delivery by the Company of, and the performance by the Company of its obligations under, the Underwriting Agreement, the Power of Attorney and Custody Agreements, and the issuance and delivery of the Company Shares and the Additional Shares to be sold by the Company will not contravene any provision of applicable law or the articles of incorporation or by-laws of the Company or, to the best of such counsel's knowledge, any agreement or other instrument binding upon the Company or any of its subsidiaries that is material to the Company and its subsidiaries, taken as a whole, or, to the best of such counsel's knowledge, any judgment, or decree of any governmental body, agency or court having jurisdiction over the Company or any subsidiary, and no consent, approval, authorization or order of or qualification with any governmental body or agency is required for the performance by the Company of its obligations under the Underwriting Agreement, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares; (viii) the statements (1) in the Prospectus under the captions "Certain Transactions", "Description of Certain Indebtedness", "Description of Capital Stock," "Certain United States Federal Tax Consequences For Non-United States Holders" and "Underwriters" and (2) in the Registration Statement in Items 14 and 15, in each case insofar as such statements constitute summaries of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings and fairly summarize the matters referred to therein; (ix) after due inquiry, such counsel does not know of any legal or governmental proceedings pending or threatened to which the Company or any of its subsidiaries is a party or to which any of the properties of the Company or any of its subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and are not so described or of any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required; (x) the Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as such term is defined in the Investment Company Act of 1940, as amended; (xi) such counsel (1) is of the opinion that the Registration Statement and Prospectus (except for financial statements and schedules included therein as to which such counsel need not express any opinion) comply as to form in all material respects with the Securities Act and the rules and regulations of the Commission thereunder, (2) has no reason to believe that (except for financial statements and schedules as to which such counsel need not express any belief) the Registration Statement and the 32 A-3 prospectus included therein at the time the Registration Statement became effective contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (3) has no reason to believe that (except for financial statements and schedules as to which such counsel need not express any belief) the Prospectus contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (xii) each of the Company and its subsidiaries has all necessary certificates, orders, permits, licenses, authorizations, consents and approvals of and from, and has made all declarations and filings with, all federal, state and local governmental authorities, all self-regulatory organizations and all courts and tribunals, to own, lease, license and use its properties and assets and to conduct its business in the manner described in the Prospectus, and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to revocation or modification of any such certificates, orders, permits, licenses, authorizations, consents or approvals, nor is the Company or any of its subsidiaries in violation of, or in default under, any federal, state and local law, regulation, rule, decree, order or judgment applicable to the Company or any of its subsidiaries the effect of which, singly or in the aggregate, would have a material adverse effect on the prospects, condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, except as described in the Prospectus. With respect to subsection (xi) above, such counsel may state that their opinion and belief are based upon their participation in the preparation of the Registration Statement and Prospectus and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification, except as specified. EX-10.39 3 LICENSE AGREEMENT 1 LICENSE AGREEMENT This License Agreement (the "Agreement") is entered into as of this 5th day of June, 1997 (the "Effective Date"), by and between Iron Dynamics, Inc. ("IDI" or "Licensor"), an Indiana corporation and a wholly-owned subsidiary of Steel Dynamics, Inc. ("SDI"), and Sumitomo Corporation of America ("SCOA"), a company incorporated under the laws of the State of New York, and Sumitomo Corporation ("SC"), a corporation organized and existing under the laws of Japan (collectively, "Licensee"). In consideration of the mutual covenants set forth herein, the parties, intending to be legally bound hereby, agree as follows: I. DEFINITIONS. Capitalized terms used in this Agreement shall have the meanings given in the Schedule of Definitions attached as Exhibit A hereto and deemed incorporated herein. II. LICENSE RIGHTS REGARDING THE PROCESS AND THE PRODUCT. 2.1 THE PROCESS. Subject to the terms and conditions of this Agreement, IDI hereby grants to Licensee, and Licensee hereby accepts, an exclusive license, throughout the Territory, for the term described in Article VI, to sub-license others (including entities in which Licensee holds an equity interest) to use the Process, including all Confidential Information and Technical Information relating to the Process, as contemplated herein, for the manufacture, use and/or resale of the Product. 2.2 LICENSE RIGHTS REGARDING THE PRODUCT. Subject to the terms and conditions of this Agreement, IDI hereby grants to Licensee, and Licensee hereby accepts, an exclusive license, throughout the Territory, for the term described in Article VI, to sub-license others (including entities in which Licensee holds an equity interest), to manufacture, use and/or resell the Product, through use of the Process including all Confidential Information and Technical Information relating to the Process. 2.3 SCOPE OF LICENSE. 2.3(a) WARRANTIES AND LIMITATIONS. The parties acknowledge that, although IDI agrees that it will act in good faith and use its best efforts to develop and promote the Process, IDI does not at this time have a specifically defined Process to manufacture the Product, nor shall IDI be deemed hereby, expressly or by implication, to Licensee or to any sub-licensee, to have represented or warranted that it will successfully develop a usable or marketable Process for the manufacture, in whole or in part, of a usable, commercially viable, and marketable Product. Accordingly, as more fully set forth in Article IV, the license rights granted by IDI to 2 Licensee for sub-license hereunder shall consist solely of all Process know-how necessary for operation of the Process at IDI's Facility, except for any patent rights or rights to any Licensable Improvements (which may be separately licensed hereunder), which IDI currently possesses or may develop or acquire in connection with the Process or the manufacture of the Product, and which IDI is entitled to license or sub-license to Licensee, and Licensee shall neither make nor imply any contrary representations or warranties to its actual or prospective sub-licensees. 2.3(b) RESERVATION OF RIGHTS. IDI reserves to itself and/or to its Affiliates (i) the sole and unfettered right to establish and operate Supply Facilities for itself or any of its Affiliates, anywhere throughout the world (including the Territory),but without the right to sublicense others, or to establish and operate Commercial Facilities for itself or any of its Affiliates, but without the right to sublicense others, and (ii) the right to license one or more Supply Facilities to Preussag Stahl AG or any of its Affiliates ("Preussag"), for use in their own European steelmaking operations, but without the right to sublicense others. If any Supply Facility owned or operated by IDI or an Affiliate of IDI has excess capacity or if there is otherwise excess Product which is from time to time not needed for steelmaking operations, subject to applicable consents by others to whom SDI may have conflicting obligations, Licensee would be engaged by IDI to market and sell Fifty percent (50%) of IDI's excess Product, if any, under terms and conditions no less favorable to IDI than those available to IDI from its other sales agencies or vendees. For purposes of this paragraph, the term "excess Product" shall mean Product that is not needed from time to time for SDI's (including its Affiliates') own internal consumption and which is made available for sale by IDI. If a Supply Facility owned or operated by Preussag under this Section 2.3(b) has excess capacity or if there is otherwise excess Product which is from time to time not needed for its own steelmaking operations, such excess Product may be sold to others, provided that in Preussag's case Preussag first provide Licensee with a commercially reasonable opportunity to purchase such excess Product from Preussag, at prices and on terms to be negotiated between the parties, or, at Preussag's election, to permit Licensee to sell such excess Product for Preussag's account on a commission basis. If IDI wishes to establish or to license its Affiliate to establish one or more Commercial Facilities within the Territory, IDI will first negotiate in good faith with Licensee to determine whether and, if so, the terms under which they may mutually agree to operate that Commercial Facility, directly or indirectly, as a joint venture or through some comparable ownership or operating structure; 2 3 provided, however, that this agreement to negotiate in good faith shall not be deemed in any manner to require IDI to reach any final agreement or to come to any arrangement with Licensee that IDI, in the exercise of its unfettered discretion, does not seem to be in its best interest. Licensee will have the right to establish for itself and/or its Affiliates one or more Supply Facilities in the Territory without the payment to IDI of any royalties or fees. Should Licensee desire to establish for itself and/or its Affiliates and/or a sublicensee one or more Supply Facilities and/or Commercial Facilities in the Excluded Territory, IDI agrees to consider such a request for an individual Facility license on a case by case basis. III. DELIVERY AND USE OF TECHNICAL INFORMATION: CONFIDENTIALITY OBLIGATIONS. IDI agrees to make available to Licensee all Technical Information relating to the Process, which IDI now has or may develop or acquire regarding the Process, during the term of this Agreement, for use only in accordance herewith. Licensee agrees that all Technical Information will be deemed to be and will be received by Licensee solely for the purposes contemplated by this Agreement and, unless otherwise provided, solely for purposes of operating the licensed and sublicensed Facilities. Licensee further agrees that it will use such Information only for the purposes and in the manner contemplated by, and for the term specified in this Agreement. Licensee will make such Confidential Information available to its officers, agents, employees, consultants or advisors, to any juridical entity (and/or to its officers, agents, employees, participants, consultants or advisors) to which, pursuant to any authorizations granted under Article VIII, some or all of Licensee's rights hereunder may be assigned, or to its sub-licensees and their officers, agents, employees, consultants or advisors only after securing from each such person or sublicensee binding agreements and commitments, as set forth in Exhibit C, to indemnify and hold IDI harmless from and against any loss, cost or expense in the event that a claim is asserted by any other person in connection with any of sublicensee's activities hereunder, and agreement, as set forth in Exhibit C, that such indemnification obligation of the sublicensee will be enforceable against the sublicensee in the forum described in Section 9.8. Licensee agrees to secure from each such person or sublicensee binding agreements and commitments, as set forth in Exhibit C, regarding such rights to sublicensee's improvements to the Product or Process consistent with the Licensee's own obligations and rights to Licensee's improvements to the Product or Process. At the conclusion or termination of this Agreement, Licensee will refrain from continuing to sub-license all Confidential Information. It is agreed that IDI's obligations hereunder are to Licensee and not to any of Licensee's sub-licensees. At the conclusion or termination of this Agreement, IDI shall be under no continuing obligation to provide Licensee with Technical Information on an ongoing basis, with respect either to the Process or the Product, and any continuing obligations to sub-licensees that may have been undertaken by Licensee shall be and remain the responsibility of Licensee alone; provided, however, that IDI will continue to make Technical Information available to Licensee as required, for a period not to exceed twelve (12) months subsequent to such conclusion or termination, with respect to each Facility sub-licensed within the prior twelve (12) 3 4 month period. The parties agree that the primary purpose of IDI's provision of Technical Information to Licensee hereunder is to enable Licensee to acquire and then become capable of using such information and/or imparting such information to its sub-licensees through training in the use of the Process to manufacture the Product effectively and efficiently, in light of the information known to IDI at the time of its delivery to Licensee. IDI shall make available to Licensee during the term hereof, at IDI's Facility and during reasonable business hours, subject to reimbursement of IDI's reasonable costs and expenses, appropriate IDI personnel, or others, as reasonably required to provide Licensee with necessary set-up and operating advice, to provide Licensee with reasonable training in the use of the Process, in the operation of a Facility, and in the manufacturing of the Product, and with the ability to itself train to work with its own sub-licensees, and will further provide Licensee with reasonable amounts of general consultation, correspondence, and telephonic advice, technical bulletins or advisories, and the like, and reasonable access to IDI's Facility by Licensee and sublicensee.. In addition, IDI, for additional consideration (together with a reimbursement of its costs and expenses) to be agreed upon between the parties at such time, shall provide Licensee with a reasonable amount of initial on-site training, as well as start-up assistance and reasonable support services, it being understood, however, that Licensee will be expected to ultimately maintain its own staffing for such purposes and that the primary purpose of this IDI undertaking will be to "train the trainer." IDI will also provide Licensee with a manual of IDI's "Standard Operating Procedures," which Licensee shall treat as Confidential Information hereunder and which Licensee shall be entitled to use, in accordance herewith, in order to develop its own manuals, instructions, or technical bulletins for its own use or the use of its sub-licensees (subject, however, to Licensee's protection of the Confidential Information contained therein in the hands of its sub-licensees). IDI's obligation to provide Licensee with Technical Information hereunder shall include all improvements to the Process developed or acquired by IDI during the term hereof, for use in connection herewith, subject to the requirements of Article IV, but, unless mutually agreed with respect to any patent rights or Licensable Improvements, shall not include any such patent rights or Licensable Improvements. Subject to Licensee's obligations to preserve Confidential Information and to IDI's determination that there are adequate safeguards to prevent unauthorized disclosure or use, IDI shall, however, disclose to Licensee any such patents and/or Licensable Improvements for the purposes of enabling Licensee to determine the extent of its or any of its sub-licenses' interest therein, if any, and to negotiate such rights therein as it may wish to secure. IV. PATENTS, OTHER INTELLECTUAL PROPERTY, AND TRADEMARKS. IDI has made no representations or warranties to Licensee that it currently owns or possesses any patent rights regarding the Process or the manufacture of the Product, or that it possesses or will develop all of the other intellectual property or know-how needed for the proper development and use of the Process or for the manufacture of the Product. IDI may or may not be compelled to or may find it necessary or desirable to acquire rights to use and/or sub-license others to use one or more patents or other intellectual property rights in connection with its development of the Process or 4 5 the manufacture of the Product, and, although there can be no assurance that IDI will be successful in doing so on terms acceptable to IDI, if and to the extent that IDI can and does acquire such rights, Licensee's right to use or to sub-license others to use any such patents, patent rights, intellectual property, or know-how shall be specifically conditioned upon Licensee's (or, at the holder's election, the sub-licensee's) entering into a separate license or royalty agreement with the holder of such rights (whether IDI or others), including Licensee's (or the sub-licensee's) agreement to pay any patent, patent-related, or other intellectual property or know-how royalty or license fees prescribed by the holder thereof, directly or on a pass-through basis (as the holder thereof may require). In this regard, Licensee is expected and agrees to independently assess and make its own determinations with regard to the extent of its own rights to engage in the activities and to grant the sub-license rights contemplated by this Agreement, and neither IDI nor any Affiliate of IDI will indemnify or hold Licensee or any sub-licensee harmless from and against any loss, cost, or expense in the event that a claim of infringement or other violation of rights is asserted by any other person in connection with Licensee's or any sub-licensee's activities hereunder; provided, however, that IDI will use its best efforts to cooperate with Licensee in Licensee's defense of any such claims and IDI will use its best efforts to assist Licensee to negotiate reasonable terms and conditions, including any applicable royalties, with respect to any such patents, patent rights, know-how, technical information, or technologies as and when the need therefor arises, whether before or after an alleged infringement related to the Process has occurred or a claim otherwise asserted for Licensee's plants and sub-licensees' plants. Licensee and sub-licensees agree to be responsible for payment of any fees or royalties for their own plants. Each party agrees not to register or use any trademark or trade name of the other or of any trademark or trade name confusingly similar thereto in sound, appearance, or meaning without first obtaining the written consent of the other, together with such other written agreements or undertakings as the trademark or trade name holder may require in order to assure proper protection and policing of its trademark or trade name. Licensee shall have exclusive ownership rights to all improvements to the Process or to the Product developed solely by Licensee during the term hereof, but Licensee hereby agrees to grant IDI the right to use such patented improvements for its own use or the use of any of its Affiliates, but not for sub-license to others, during the term hereof and thereafter. Licensee and IDI agree to negotiate in good faith a royalty payment based upon such considerations as (but not limited to) the patent's impact upon Product quality, chemistry, yield, metallization, capital cost, and costs of production. Such royalty payment by IDI to Licensee for use of said patent rights shall in no event be greater than 50% of the minimum royalty rate or royalty payment amount (whichever is greater) received by Licensee, at that time or at any time thereafter, from other licensees under said patent rights. If, however, for whatever reason and without regard to fault, IDI and Licensee cannot agree upon such terms and conditions, IDI and its Affiliates shall be entitled to the use of such patent rights for the above-described royalty rate or royalty payment. All improvements to the Process developed by IDI shall remain the property of IDI and, except for patent rights and Licensable Improvements, as described herein, shall be included within the scope of the license granted to Licensee hereunder. 5 6 V. PAYMENTS AND FEES. For all of IDI's know-how and other rights granted to Licensee hereunder, but not including any additional fees that may be or become payable to IDI or to others by reason of any Licensable Improvements (including (but not limited to) future patents or patent rights which Licensee acquires or is otherwise required to obtain in connection with the Process), Licensee will pay to IDI a one-time net license fee, in cash, in connection with each sub-licensed Facility, at the earlier of Licensee's actual receipt thereof from its sub-licensee, or 10% at the time of execution of the sub-license agreement, 45% on or before the first anniversary thereof, and the balance payable on or before the second anniversary thereof or Facility start-up (whichever first occurs), of [ * ], payable in U.S. dollars, based upon each Facility's rated annual Product capacity. All payments of fees shall be the responsibility of Licensee, regardless of whether Licensee receives payment in whole or in part, from its sub-licensee. With respect to any IDI patents or patent rights that Licensee may wish to obtain, for its own use or for use by any sub-licensee in connection with the Process, or in connection with the right to any Licensable Improvements which Licensee may wish to develop or obtain, Licensee agrees to negotiate in good faith with IDI for the right to use such rights, based upon such considerations as (but not limited to) the patent's or the Licensable Improvement's impact upon Product quality, chemistry, yield, metallization, capital cost and costs of production. If, however, for whatever reason and without regard to fault, IDI and Licensee cannot agree upon such terms and conditions, neither Licensee nor any of its sub-licensees shall be entitled to the use of such rights. With respect to any fees or royalties which IDI is required to pay to any third party, either by contract or otherwise, for the rights to utilize any patents, patent rights, know-how, technical information, or technologies that are necessary in order to utilize the Process or to manufacture the Product, and if the Process cannot reasonably be used nor the Product manufactured without the use of such rights,IDI agrees to pay such fees or royalties as may be required in order to obtain such rights for IDI's own plants. IDI will use best efforts to negotiate reasonable terms and conditions, including any applicable royalties, with respect to any such patents, patent rights, know-how, technical information, or technologies as and when the need therefor arises, whether before or after an alleged infringement related to the Process has occurred or a claim otherwise asserted for Licensee's plants and sub-licensees' plants. Licensee and sub-licensees agree to be responsible for payment of any fees or royalties for their own plants. VI. TERM OF AGREEMENT. This Agreement shall commence on the date set forth above and shall terminate on December 31, 2007, subject to the fulfillment and performance of all contract and obligations in connection with Facilities sub-licensed as of such termination date. Any continuation of this Agreement after the term hereof, absent a new written agreement signed by both parties hereto, shall be deemed only an extension at will, on a day-to-day basis, but shall not entitle Licensee to grant any further sub-licenses or to establish any additional Facilities. * Material has been redacted pursuant to a Request for Confidential Treatment dated July 28, 1997. The portion for which confidentiality has been requested has been filed separately with the Commission. 6 7 VII. NOTICES. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement will be in writing and will be deemed to have been given when personally delivered or received by certified mail, postage prepaid and return receipt requested, or sent by guaranteed overnight courier service, charges prepaid. Notices, demand and communications will be sent to Licensee at the address indicated below: Notices to Licensee: Sumitomo Corporation of America 5000 USX Tower 600 Grant Street Pittsburgh, PA 15219-2751 Attention: Mr. Taro Kusumoto, Assistant General Manager and Director Telephone: 412-391-9679 Fax: 412-391-9750 Sumitomo Corporation Josuikai Building 2-1-1 Hitotsubashi Chiyoda-ku, Tokyo 101 JAPAN Attention: Mr. Mitsuhiko Yamada Telephone: 011-81-3-3237-3140 Fax: 011-81-3-3237-3179 Notices to IDI: Iron Dynamics, Inc. 4500 County Road 59 Butler, IN 46721 Attention: Mr. Keith E. Busse Telephone: 219-868-8000 Fax: 219-868-8055 or to such other address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party. VIII. ASSIGNMENT. The rights granted herein may not be assigned by either party, by their respective acts or by operation of law, without the prior written consent of the other party hereto. 7 8 IX. MISCELLANEOUS. 9.1. Each party shall cooperate with the other in achieving and fulfilling the terms of this Agreement and, to that end, each party shall give all consents and information and execute all such documents as may be reasonably necessary in connection herewith. 9.2 This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same Agreement. 9.3 While nothing herein requires Licensee, through its sub-licensing activities, to achieve any particular level of Process or Product use, or to sub-license any specific number of Facilities, IDI and Licensee agree that it is understood to be a condition of this Agreement that Licensee will in fact use its best efforts in good faith to market sub-licenses and to enter into sub-license agreements to meet the demand for the Process and for the manufacture of the Product within the Territory, in light of all pertinent facts and circumstances existing from time to time in connection herewith. In the event that Licensee fails to continue to meet this condition after notification by IDI of such failure and a reasonable period of time to correct such failures, IDI shall be entitled to bring an action before an arbitration panel comprised of three persons, one to be selected by IDI and one to be selected by the Licensee and the third selected by the first two arbitrators, and request that the arbitration panel declare the exclusivity of the Licensee's rights hereunder terminated. The arbitrators shall be persons involved in and familiar with licensing and technology transfer. The arbitration panel will make a ruling on IDI's request after a review of the conduct of both parties to the Agreement and hearing testimony about the intentions of the parties and the level of Process and Product use by IDI and sublicensees. There shall be no appeal from an arbitration's unanimous decision. In the event of a majority decision by the arbitration panel, a dissatisfied party may appeal to the American Arbitration Association (AAA) for an independent binding decision. [9.4] [Omitted] 9.5 Licensee agrees that IDI shall be entitled, during reasonable business hours, to inspect Licensee's or any sub-licensee's plans, specifications, construction activity, installation work, or operation of any Facility, and to inspect and/or audit (itself or through its designated representatives) Licensee's or any sub-licensee's books and records, to verify compliance with Licensee's obligations hereunder or with any sub-licensee's obligations to IDI or in Licensee, as it may pertain to this Agreement; and Licensee will cooperate with IDI and will cause its sub-licensees to cooperate with IDI in connection herewith. 8 9 9.6 This Agreement shall not be deemed to constitute a partnership, joint venture, or any profit-sharing or revenue-sharing agreement between IDI and Licensee or between IDI and any sub-licensee of Licensee, nor shall Licensee make any statement or representations nor take any actions, with respect to any sub-licensee or otherwise, that state or imply anything to the contrary. 9.7 This Agreement constitutes the entire understanding between the parties with respect to the subject matter hereof and may be amended or modified only by a document in writing. Any modification, renewal, extension, or waiver of this Agreement or any of its provisions shall not be binding unless in writing and signed by both parties. 9.8 This Agreement shall be interpreted and construed, and all legal relationships created hereunder shall be determined in accordance with the domestic laws of the State of Indiana and the federal laws of the United States. The parties agree that any disputes arising under or by reason of this Agreement between IDI and Licensee shall be adjudicated, if at all, solely in any state court in DeKalb County, Indiana, or in the United States District Court for the Northern District of Indiana, but that any disputes arising under or by reason of this Agreement between IDI and any sublicensee will be settled by arbitration pursuant to the Rules of Conciliation and Arbitration of the International Chamber of Commerce, with the arbitration proceedings to be held in London, in the English language by a sole arbitrator to be appointed by the President of the International Chamber of Commerce. Such appointment shall be binding on the parties. 9 10 IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date first above written. "LICENSOR" IRON DYNAMICS, INC. By _______________________________ Its____________________________ "LICENSEE" SUMITOMO CORPORATION OF AMERICA By _______________________________ Its____________________________ "LICENSEE" SUMITOMO CORPORATION By _______________________________ Its____________________________ 10 11 EXHIBIT A SCHEDULE OF DEFINITIONS An "AFFILIATE" of, or entity "affiliated" with a specified entity, is an entity that directly or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the entity specified, and, for purposes of this definition, "control" shall be deemed to contemplate actual voting control, including ownership of not less than Fifty-one Percent (51%) of the entity's equity. "CONFIDENTIAL INFORMATION" shall include but shall not be limited to information, in any form, that would constitute a "trade secret" under the Indiana Uniform Trade Secrets Act (IC Section 24-2-3-2) and shall extend to engineering, design, construction, set-up, operating, and production information relating to the Process or to the Product, as well as to the Facility within which the operations are to be housed, regardless of whether a trade secret, and shall include business and financial information not generally available to persons outside IDI or SDI, and shall include Process, Product, and Facility information and know-how not generally known or readily ascertainable by proper means by persons outside IDI and SDI. For purposes of this definition, a "trade secret" is information, including a formula, pattern, compilation, program, device, method, technique, or process, that derives independent economic value, actual or potential, from not being generally known to and not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use, and is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. All disclosures of information shall be deemed to be nonconfidential unless specifically designated at the time of the disclosure as including Confidential Information of the disclosing party. The designation will include an appropriate legend in writing (including information recorded in a medium such as a computer diskette), such as "Confidential." Confidential information shall not include information that (1) is or becomes publicly known through no fault of the Licensee or sublicensee, or (2) is already known by Licensee or sublicensee, or (3) is learned by Licensee or sublicensee from a third party as a matter of right. "EXCLUDED TERRITORY" shall mean the United States of America and Canada. "FACILITY" shall mean a plant or any other structure or location within or at which the Confidential Information and/or the Process is utilized, in whole or in part, to manufacture the Product. A "SUPPLY FACILITY" shall mean a Facility that a party, or its Affiliate, operates to produce Product that has its primary use as a scrap substitute raw material for the party's own, or for its Affiliate's own, steelmaking operations. A "COMMERCIAL FACILITY" shall mean a Facility that a party, or its Affiliate, operates primarily for the manufacture and resale of the Product. "LICENSABLE IMPROVEMENTS" shall mean the up to six distinctive process improvements described in Exhibit B, but shall not include (1) publicly known information, (2) information previously known to Licensee or sublicensee (in each individual sublicensee's case) prior to disclosure by IDI and SDI, (3) information received by Licensee from a third party as a matter of 11 12 right, or (4) any technology patented by others. "PROCESS" shall mean the technology, know-how, and procedures necessary for operation of the Process at IDI's Facility, except for Licensable Improvements and patent rights as limited hereto, employed from time to time in all or any portion of the manufacture of the Product for use as a scrap substitute raw material in steelmaking, using iron oxide fines and solid carbon reductant, including (but not limited to) the agglomeration of the iron oxide and reductant, the utilization of a rotary hearth furnace for production of Direct Reduced Iron ("DRI") from the agglomerates, utilization of IDI's selected furnace for producing liquid pig iron from the DRI, and may include the utilization of a desulfurizing facility and to prepare and charge the liquid pig iron into an electric arc furnace in actual steelmaking. "PRODUCT" shall mean the final DRI to be charged into IDI's selected furnace, as well as the DRI or liquid pig iron or pig iron or any other intermediate or final product or products produced in connection with the Process. "TECHNICAL INFORMATION" shall mean all technical information and know-how developed, owned, or otherwise acquired by IDI, and licensable or otherwise disclosable by IDI in connection with its development, use, and operation of the Process or the manufacture and use of the Product, as well as the design, construction, set-up, and maintenance of a Facility, and shall include information in whatever form it occurs, including computer software, whether written, oral, or electronically or magnetically stored. Technical Information shall not include information that (1) is or becomes publicly known through no fault of the Licensee or sublicensee, or (2) is already known by Licensee or sublicensee, or (3) is learned by Licensee or sublicensee from a third party as a matter of right. "TERRITORY" shall mean any and all countries throughout the world except for the Excluded Territory. A "TONNE" shall mean a metric tonne, consisting of 2,204.6 pounds. 12 13 EXHIBIT B LICENSABLE IMPROVEMENTS "LICENSABLE IMPROVEMENTS" shall mean (1) the unique iron production process and (2) the use of beneficial additives in connection therewith, both as described in and contemplated by IDI's U.S. Patent Application filed April 22, 1997, as it may be amended or supplemented from time to time, (3) methodologies to facilitate the use of a smelting vessel to complete reduction, reduce costs, and separate slag from iron, (4) methodologies involving the pre-treatment of iron ore to enhance reduction and minimize grinding costs, (5) methodologies to beneficiate iron ore, and (6) the employment of innovative technique to produce lower sulfur DRI sponge iron, all as heretofore or hereafter acknowledged and agreed to by the parties. 13 14 EXHIBIT C Licensee agrees to secure from each sublicensee in connection with each sublicense, among other things, the following binding agreements and commitments: 1. Non-disclosure and confidentiality commitments consistent with Licensee's non-disclosure and confidentiality obligations under the Agreement. Such non-disclosure and confidentiality obligations will be enforceable against such sublicensee by Licensee or at IDI's option, directly by IDI, in the forum described in Section 9.8 of the Agreement. 2. Agreements and commitments granting IDI rights to sublicensee's improvements to the Product or Process consistent with Licensee's own obligations to IDI and rights of IDI to Licensee's own improvements to the Product or Process. 3. Agreements and commitments to indemnify and hold IDI harmless from and against any loss, cost or expense in the event that a claim is asserted by any other person in connection with any of sublicensee's activities under the sublicense, and agreement that such indemnification obligation of the sublicensee will be enforceable against the sublicensee in the forum described in Section 9.8 of the Agreement. 4. Sublicensees are prohibited from making any license, assignment, or other transfer of their sublicense rights without written permission of both Licensee and IDI. 14 EX-23.2 4 CONSENT OF DELOITTE AND TOUCHE LLP 1 Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 3 to Registration Statement No. 333-31735 of Steel Dynamics, Inc. of our report dated January 17, 1997 appearing in the Prospectus, which is a part of such Registration Statement, and to the reference to us under the headings "Selected Consolidated Financial Data" and "Experts" in such Prospectus. DELOITTE & TOUCHE LLP Indianapolis, Indiana August 7, 1997 -----END PRIVACY-ENHANCED MESSAGE-----