<PAGE>
FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION STATEMENT NO. 333-03235
$250,000,000
RYERSON TULL, INC.
LOGO
$150,000,000 8 1/2% NOTES DUE JULY 15, 2001
$100,000,000 9 1/8% NOTES DUE JULY 15, 2006
---------------
Interest on the Notes is payable on January 15 and July 15 of each year,
commencing January 15, 1997. Each series of the Notes may be redeemed at any
time at the option of Ryerson Tull, Inc. (the "Company"), in whole or in part,
at a redemption price equal to the greater of (i) 100% of the principal amount
to be redeemed or (ii) the sum of the present values of the remaining
scheduled payments of principal and interest on the Notes to be redeemed,
discounted to the date of redemption at the applicable discount rate as
described herein, plus in each case accrued and unpaid interest to the date of
redemption. The 8 1/2% Notes and the 9 1/8% Notes are unsecured obligations of
the Company and will rank pari passu with each other and with all other
unsecured and unsubordinated indebtedness of the Company. Each series of the
Notes will be represented by one or more global Notes registered in the name
of the nominee of The Depository Trust Company. Beneficial interests in the
global Notes will be shown on, and transfers thereof will be effected only
through, records maintained by The Depository Trust Company and its
participants. Except as described herein, Notes in definitive form will not be
issued. The Notes will be issued only in registered form in denominations of
$1,000 and integral multiples thereof.
As of March 31, 1996, after giving effect to the Common Stock Offerings by
the Company and the Offering and the application of the net proceeds
therefrom, the Company would have had no indebtedness outstanding that would
rank senior to the Notes and $50 million of indebtedness that would rank pari
passu with the Notes; however, the aggregate amount of indebtedness of or
guaranteed by the Company's subsidiaries to which the Notes would have been
effectively subordinated would have been approximately $23.1 million and
$110.8 million, respectively. The Indenture does not limit the ability of the
Company to incur additional unsecured indebtedness or the ability of the
Company's subsidiaries to incur additional indebtedness to which the Notes
would be effectively subordinated.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE NOTES.
---------------
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.
---------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE(1) DISCOUNT(2) COMPANY(3)
----------------- ------------ -----------
<S> <C> <C> <C>
Per 8 1/2% Note............................ 99.713% 1.875% 97.838%
Total...................................... $149,569,500 $2,812,500 $146,757,000
Per 9 1/8% Note............................ 99.444% 2.125% 97.319%
Total...................................... $ 99,444,000 $2,125,000 $ 97,319,000
</TABLE>
- -------
(1) Plus accrued interest, if any, from July 3, 1996.
(2) The Company and Inland Steel Industries, Inc. have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
(3) Before deducting estimated expenses of $1,100,000 payable by the Company.
---------------
The Notes offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that the
Notes will be ready for delivery in book-entry form only through the
facilities of The Depository Trust Company in New York, New York, on or about
July 3, 1996, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO. CS FIRST BOSTON
---------------
The date of this Prospectus is June 27, 1996.
<PAGE>
[PICTURES]
Page 2 Map of United States showing Ryerson Tull, Inc.'s
top facilities.
Caption: Ryerson Tull also owns 50% of Ryerson de
Mexico, a general line metals service center and
processor operating out of 18 facilities in Mexico.
Page 2 Photograph of warehouse interior, trucks loaded
bottom with metals and forklift.
Caption: Just-In-Time Deliveries
Ryerson Tull has a nationwide network of 52
facilities that place the Company within several
hundred miles of most of its customers. Information
technology integrates this network and generally
enables delivery of stock items to customers from
the most economical location within 24 hours.
Page 2A Photograph of computer screens illustrating
top electronic data interface for ordering products and
services.
Caption: Electonic Data Interfaces
All of Ryerson Tull's products and services can be
ordered by customers through EDI. Customers can
also transmit orders through other direct ordering
systems and can electronically transmit intricate
design specifications.
Page 2A Photograph of engineer viewing computer screen
Bottom Left illustration for part design.
Caption: Engineering and Cost Reduction Services
Ryerson Tull helps customers reduce their costs by
providing technical advice on part design.
Page 2A Photograph of metal rods and bars.
center Caption: Material Management Services
Ryerson Tull provides services such as material
selection and specification that help customers
find, purchase, inventory and take delivery of a
wide variety of industrial materials.
Page 2B Photograph of coil slitter in operation.
Top Left Caption: Material Processing Services
More than one-half of the material sold by Ryerson
Tull is processed. The Company uses techniques such
as sawing, slitting, pickling, cutting to length,
flame cutting, laser cutting, plate burning,
fabricating and grinding to process materials to
meet customer specifications.
Page 2B Photograph of Company employee marking parts for a
Top Right customer's inventory.
Caption: Outsourcing by Manufacturers
Ryerson Tull provides inventory management and
first stage processing and assembling for many
customers, allowing them to reduce capital and
respond more quickly to competition.
Page 2B Photograph of metals sawing process.
Bottom left
Bottom right Photograph of laser cutting process.
IN THIS PROSPECTUS, REFERENCE TO "DOLLARS" AND "$" ARE UNITED STATES DOLLARS.
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED
HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR
THE ACCOUNTS OF OTHERS IN THE NOTES PURSUANT TO EXEMPTIONS FROM RULES 10B-6,
10B-7 AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information appearing elsewhere in this Prospectus. Unless otherwise
indicated, all information contained in this Prospectus assumes that the over-
allotment options granted to the Underwriters in connection with the offerings
by the Company of an aggregate of 5,220,000 shares of its Class A Common Stock,
par value $1.00 per share (the "Class A Common Stock"), in the United States
and outside the United States (the "Common Stock Offerings"), which were
consummated on June 26, 1996, have not been exercised. In addition, unless the
context requires otherwise, (i) "Ryerson Tull" or "Company" refers to Ryerson
Tull, Inc. and its consolidated subsidiaries, (ii) "ISI" refers to Inland Steel
Industries, Inc. and its consolidated subsidiaries and (iii) "Offering" refers
to the offering of $150 million aggregate principal amount of the Company's 8
1/2% Notes due July 15, 2001 (the "8 1/2% Notes") and $100 million aggregate
principal amount of the Company's 9 1/8% Notes due July 15, 2006 (the "9 1/8%
Notes" and, together with the 8 1/2% Notes, the "Notes"). The Class A Common
Stock and the Company's Class B Common Stock, par value $1.00 per share (the
"Class B Common Stock"), are sometimes collectively referred to in this
Prospectus as the "Common Stock."
Unless otherwise noted, information set forth in this Prospectus assumes that
the recapitalization on June 10, 1996 (the "Recapitalization") pursuant to
which the two outstanding shares of the Company's common stock, par value $1.00
per share, were exchanged for 34,000,000 shares of Class B Common Stock was
effected on December 31, 1995.
THE COMPANY
The Company, through its wholly-owned operating subsidiaries, Joseph T.
Ryerson & Son, Inc. ("Ryerson") and J. M. Tull Metals Company, Inc. ("Tull"),
is a general line metals service center and processor of metals. The Company
believes that it is the largest metals service center in the United States
based on sales revenue, with 1995 sales of $2.5 billion and a current U.S.
market share of approximately 9%, more than twice the U.S. market share of its
nearest competitor, based on the Company's analysis of Steel Service Center
Institute (the "SSCI") data. The Company distributes and processes metals and
other materials throughout the continental United States and is among the
largest purchasers of steel in the United States. With 52 interconnected
facilities that place it within several hundred miles of most of its customers,
the Company is able to be responsive to specific customer requests and is
generally able to make deliveries of stock items within 24 hours of receipt of
a customer's order. Utilizing this network of facilities and the Company's
regionalized management systems, the Company believes it can be responsive to
individual customers while providing a broad range of products and services.
The Company also owns a 50% interest in Ryerson de Mexico, S.A. de C.V.
("Ryerson de Mexico"), a general line metals service center and processor with
18 facilities in Mexico.
Ryerson Tull was incorporated under the laws of the state of Delaware in
March 1986 as Inland Steel Services Holding, Inc., and its name was changed
from Inland Materials Distribution Group, Inc. to Ryerson Tull, Inc. in May
1996. Ryerson, the predecessor of the Company, was founded in 1842. The
Company's principal executive offices are located at 2621 West 15th Place,
Chicago, Illinois 60608, telephone number (312) 762-2121.
INDUSTRY OVERVIEW
The Company believes that the U.S. metals service center industry (the
"Industry") occupies a growing niche between primary producers of carbon, alloy
and stainless steels, aluminum and other metals and purchasers of those
products, including manufacturers and intermediate processors. Metals service
centers, including the Company, provide services not typically available from
primary producers, such as more reliable deliveries, smaller order sizes, the
convenience of dealing with a smaller number of suppliers, just-in-time
inventory management and customer-specific, value-added processing. The Company
believes that the role of metals service centers is expanding as a result of a
number of factors, including the increased outsourcing of inventory management
functions and
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metals processing operations by manufacturers and the lower cost and more
reliable service available from service centers as compared to primary
producers.
The Industry is cyclical (with periods of strong demand and higher prices
followed by periods of weaker demand and lower prices), principally due to the
cyclical nature of the industries in which the largest consumers of metals
operate. Any significant slowdown in one or more of those industries could have
a material adverse effect on the demand for metals, resulting in lower prices
for metals and reduced profitability for metals service centers, including the
Company. Metals prices and metals service center profitability improve as
metal-consuming industries experience recoveries following economic downturns.
OPERATIONS
The Company is organized along regional and product lines into five business
units: Ryerson East, Ryerson West, Ryerson Central, Tull/AFCO and Ryerson Coil
Processing. This structure enables the Company to centralize certain
administrative support services while maintaining local organizations that are
responsive to the needs of specific customers and markets.
Each of the Company's facilities maintains a wide variety of inventory that
varies depending on the facility's size and customer demand, including carbon,
alloy and stainless steels, aluminum, red metals (such as brass and copper),
nickel and plastics. The Company purchases inventories from a number of
producers, primarily domestic. The Company purchases the majority of its
inventories in the open market at prevailing market prices, although
occasionally the Company enters into long-term, fixed-price supply contracts in
order to minimize its financial exposure to long-term, fixed-price sales
contracts. Purchases are typically made in large lots and held in distribution
centers until sold, usually in smaller quantities. These materials are
inventoried in a number of shapes, including coils, sheets, rounds, hexagons,
square and flat bars, plate, structurals and tubing. The Company uses
techniques such as sawing, slitting, blanking, pickling, cutting to length,
levelling, flame cutting, laser cutting, edge trimming, edge rolling,
fabricating and grinding to process materials to specified thickness, length,
width, shape and surface quality pursuant to specific customer orders. More
than one-half of the material sold by the Company is processed. The Company's
services include special stocking programs, just-in-time delivery, inventory
management (which includes the placement of Company employees at customer
sites), kits ready for assembly, programs that provide customers at their
places of business with Company-owned material which can be used as needed by
the customer, technical advice on part design and material specification, and
early stage material processing and fabrication. The Company typically ships
inventory between its facilities and products to customers by Company trucks
and by common carrier.
BUSINESS STRATEGY
The Company's strategy is to expand its market leadership position as a
nationwide general line metals service center and processor of metals by
providing its customers with high quality products and services at competitive
prices. The Company believes that increasing its market share will be an
effective means of increasing its profitability. One of the Company's goals is
to enhance its competitive position through the aggressive pursuit of organic
growth, strategic acquisitions, ongoing unit cost reductions and increased
asset productivity, although there can be no assurance that the Company will
achieve this goal. As part of its overall business strategy, the Company has
made substantial investments in management information systems that link its
operations and enhance interactions between the Company and its customers and
suppliers. Based on its size, which leads to cost efficiencies, the trend
towards consolidation in the number of suppliers used by customers, strategic
plant locations, broad product and service offerings and management's
acquisition strategy, the Company believes that it is well positioned to take
advantage of the anticipated growth and consolidation in the Industry. See
"Business--Industry Overview."
4
<PAGE>
ORGANIC GROWTH
One of the Company's goals is to expand its market leadership position within
the Industry through competitive pricing, broad product and service offerings
and the use of technology to improve customer service. The Company's large
size, buying power and competitive cost structure enable it to negotiate
favorable prices for raw materials and to take advantage of producer economies
of scale resulting in lower costs of material purchased, allowing it to offer
its products and services at competitive prices. In addition, the Company's
broad product and service offerings provide customers one-stop shopping,
positioning the Company to capitalize on what it believes to be a continuing
trend towards consolidation in the number of suppliers used by customers. To
this end, the Company has initiated a national accounts program targeting
customers that purchase metal from a number of suppliers throughout the
country. The Company believes it can better serve these customers by providing
competitive pricing and superior delivery and quality. The Company's goal is to
differentiate itself from its competitors by providing materials and services
on a more timely basis and with fewer rejections than its competitors through
increased emphasis on quality control. The Company has received International
Standards Organization 9002 ("ISO 9002") certification for five facilities and
will seek certification for additional facilities in the future. ISO 9002 is a
series of international standards for quality management and assurance. The
Company believes that certain major customers seek suppliers with such
certification and that such certification helps differentiate it from its
competitors.
STRATEGIC ACQUISITIONS
The Company believes that the fragmented nature of the Industry, combined
with the Company's strong national reputation, nationwide operations, market
leadership position and experience in integrating facility operations, make the
Company well situated to become a strategic buyer of service center assets. The
Company will seek selective acquisitions of businesses that complement, or
strategically extend, the Company's existing businesses. Acquired companies can
be either integrated into the Company's network or, depending on the
circumstances, operated as stand-alone facilities. In either case, the Company
believes that such acquisitions could enable it to realize further economies of
scale (particularly in operating cost, asset utilization and purchasing
leverage) and could better utilize the Company's existing facilities and
systems capability. Although the Company from time to time discusses potential
acquisitions with other service center operators, the Company currently has no
understandings, agreements or commitments to make any acquisitions.
UNIT COST REDUCTIONS AND INCREASED PRODUCTIVITY
Another of the Company's goals is to decrease unit costs through initiatives
which include increasing volume, thereby taking advantage of economies of
scale, and increasing asset and employee productivity. The Company has made and
will continue to make investments in computer-based and automated systems that
track profitability by customer, product and cost of process, allowing the
Company to determine where changes can be made to reduce cost and increase
profitability. The Company intends to increase its emphasis on the use of
electronic links known as electronic data interfaces or "EDIs" with its
suppliers and customers to reduce the paperwork and administrative costs
associated with customer orders, shipment tracking, billing and remittance
processing. The Company continues to re-engineer its various work processes
through benchmarking analyses across its 52 facilities. Re-engineering enables
the Company to increase output without increasing its labor force by increasing
the efficiency with which work processes are performed.
COMPETITIVE STRENGTHS
The Company has a number of competitive strengths that it believes will
facilitate the implementation of the Company's strategy, including its market
leadership position and its management systems and practices.
5
<PAGE>
MARKET LEADERSHIP POSITION
ECONOMIES OF SCALE. Because of the Company's large size, its costs of
operations can be spread across a large base of sales, resulting in lower fixed
costs per ton sold. However, in times of decreasing sales, the Company's fixed
costs must be spread across a smaller base of sales resulting in higher fixed
costs per ton sold. The Company believes that available capacity at many of its
plants will allow it to achieve further economies of scale to the extent it
increases sales in the future. Of the Company's 52 facilities, six are
currently operating one shift, 31 are operating two shifts and 15 are operating
three shifts. In addition, the size of the Company's material purchases enables
its suppliers to realize economies of scale and thereby provide the Company
with competitive prices.
SCOPE OF PRODUCTS AND SERVICES. The Company's broad product and service
offerings provide customers one-stop shopping for most of their metals needs.
In addition, the Company believes that its 52 facilities located throughout the
continental United States, generally within one day's delivery time of almost
all U.S. manufacturing centers, position it to target national customers that
currently buy metals from a variety of suppliers in different locations. The
Company's ability to transfer inventory among facilities enables it to have
available specialized items at regional locations throughout its network and to
provide such inventory on a timely basis more profitably than if it were
required to maintain inventory of all products at each location.
RELATIONSHIPS WITH SUPPLIERS. The Company is among the largest purchasers of
steel in the United States and is also a significant purchaser of aluminum in
the United States. The Company buys from and has developed relationships with
many U.S. steel producers as well as other metal producers. The Company's
relationships with numerous metal producers provide it access to high quality
metals, timely delivery and new product and service ideas from many suppliers.
In addition, because the Company purchases large volumes of metals, it can
negotiate competitive prices from its suppliers. In part because of its buying
power, the Company has been able to secure product from primary manufacturers
during times of tight supply.
MANAGEMENT SYSTEMS AND PRACTICES
The Company's management information systems have allowed management to
develop an internal benchmarking system and to track profitability by customer,
product and cost of process. This detailed information enables management to
make continuous improvements such as reallocating slow-moving inventory to
different locations to increase inventory turns, improving purchasing,
targeting customers or changing suppliers as needed. The Company's 52
facilities provide it with a large base for testing, comparing and implementing
new management practices.
RELATIONSHIP WITH ISI
ISI beneficially owns all of the outstanding Class B Common Stock,
representing approximately 96.3% of the aggregate voting power of all of the
Company's Common Stock, and consequently controls the Company. ISI will retain
more than 50% of the voting control of the Company until the number of shares
of Class B Common Stock outstanding represents less than 50% of the total
number of shares of Class A Common Stock and Class B Common Stock outstanding,
at which time the outstanding Class B Common Stock will convert into an equal
number of shares of Class A Common Stock. ISI also owns Inland Steel Company
("ISC"), the sixth largest steel producer in the United States based upon the
number of tons shipped. The Company purchases steel from ISI and its
affiliates. The Company also purchases support functions from and has a tax
sharing arrangement with ISI. The Company intends to continue these
relationships after the Offering. Ryerson is the guarantor of an obligation of
the Inland Steel Industries Thrift Plan ESOP Trust (the "ESOP Trust"), and the
Company's employees participate in the employee benefit plans of ISI other than
the Inland Steel Industries Pension Plan (the "ISI Pension Plan"). Effective
April 30, 1996, that portion of the ISI Pension Plan covering the Company's
current and former employees was separated and became a new and separate plan
sponsored by the Company (the "Pension Plan"). See "Relationship with ISI."
6
<PAGE>
RATIONALE FOR THE OFFERING AND COMMON STOCK OFFERINGS
The Company and ISI consummated the Common Stock Offerings and are pursuing
the Offering to assist them in realizing the following strategic and financial
objectives that the managements of the Company and ISI have established for
their respective businesses. The Company has historically been dependent on
cash flow from operations, limited borrowings from third party lenders and
contributions from ISI to fund its growth. The Company believes that
consummation of the Common Stock Offerings and the Offering, which will
establish public trading markets for the Company's equity and debt securities,
should provide the Company with access to the public markets to raise
additional capital to fund its future growth. Consummation of the Offering and
the Common Stock Offerings will permit ISI to retire debt, which will reduce
ISI's interest expense and eliminate certain burdensome restrictive covenants
contained in indentures governing certain of ISI's and ISC's debt.
As a result of the transactions described below, ISI will receive all of the
net proceeds of the Common Stock Offerings and the Offering. On June 26, 1996,
in connection with the Common Stock Offerings, the Company paid a $77.1 million
cash dividend and a dividend consisting of a $293.8 million note payable to ISI
(the "Note Payable") maturing five years from the date of issuance and bearing
interest at a specified prime rate. The Note Payable may be prepaid without
penalty at the option of the Company. In addition, on June 20, 1996, the
Company declared a cash dividend in the amount of the net proceeds from any
exercise of the Underwriters' over-allotment options granted to the
Underwriters in connection with the Common Stock Offerings payable on the date
of closing of such exercise. The net proceeds from the Common Stock Offerings
were used to pay the $77.1 million cash dividend to ISI and are not available
to the Company. All of the net proceeds from the Offering, together with a
portion of the Company's available cash and/or borrowings under credit
facilities, will be used to discharge the Note Payable to ISI. On May 20, 1996,
the Company paid to ISI a dividend in the amount of $75 million in cash (the
"May 1996 Dividend" and, together with the dividends declared in connection
with the Common Stock Offerings, the "Dividends").
ISI used $63.2 million of the proceeds from the May 1996 Dividend to repay
intercompany indebtedness owed by ISI to the Company arising out of a
corporate-wide cash management program. After the repayment of such
indebtedness, the Company ceased participation in such program and the
Company's cash is not and will no longer be held in ISI's accounts. ISI has
informed the Company that ISI intends to use the remaining proceeds from the
Dividends to retire ISI and ISC indebtedness and for general corporate
purposes. See "Use of Proceeds."
In connection with the Common Stock Offerings, certain of the options to
purchase shares of ISI common stock and restricted shares of ISI common stock
held by the Company's employees will be converted into options to purchase
shares of Class A Common Stock and shares of restricted Class A Common Stock
having an aggregate value comparable to the value of their ISI options and
restricted stock. Employees, including employees of the Company who are also
employees of ISI, will also be eligible to receive future awards under the
Ryerson Tull 1996 Incentive Stock Plan. On June 10, 1996, the Company entered
into severance agreements with certain of its officers. In addition, the non-
employee Directors, including the non-employee Directors who are also Directors
of ISI, will receive fees from the Company for serving in their capacities as
Directors of the Company. See "Management--Directors' Compensation," "--
Employment and Change of Control Agreements" and "--Ryerson Tull 1996 Incentive
Stock Plan."
POTENTIAL DISTRIBUTION AND OTHER TRANSACTIONS
ISI beneficially owns all of the Class B Common Stock, representing
approximately 86.7% of the outstanding Common Stock of the Company. ISI has
advised the Company that, although it currently
7
<PAGE>
intends to hold such stock, it may in the future distribute all or part of such
stock (in the form of Class A Common Stock) to ISI's stockholders (a "Spin-
off") or may sell such stock (in the form of Class A Common Stock) to third
parties in one or more transactions. The completion of any such transaction
would be subject to a number of factors, including a determination by the Board
of Directors of ISI that the transaction would be in the best interests of its
stockholders and, in the case of a Spin-off, could be subject to the receipt of
a favorable ruling from the Internal Revenue Service (the "IRS") or an opinion
of counsel as to the tax-free nature of such transaction.
RISK FACTORS
Prospective purchasers of the Notes offered hereby should consider carefully
the information set forth under "Risk Factors," in addition to the other
information set forth in this Prospectus, before purchasing any of the Notes,
such as the risk factors set forth under the following headings: "Control by
Principal Stockholder," "Highly Competitive Industry," "Cyclical Nature of
Business," "Dividends to ISI and Resulting Indebtedness," "Labor Contracts;
Risk of Work Stoppage," "Potential for Interruption in Sources of Supply,"
"Volatile Price of Inventory," "Dependence On Computer-Based Systems,"
"Reliance On Acquisitions for Expansion," "Holding Company Structure; Reliance
On Dividends and Transfers from Subsidiaries," "Benefits of the Offering to the
Principal Stockholder," "Pension and Other Postretirement Benefits; Underfunded
Pension Plan," "Costs of Environmental Compliance," "Certain Relationships with
ISI" and "Absence of Public Market for the Notes."
THE OFFERING
Securities Offered.......... $150,000,000 aggregate principal amount of 8 1/2%
Notes due July 15, 2001 (the "8 1/2% Notes") and
$100,000,000 aggregate principal amount of 9 1/8%
Notes due July 15, 2006 (the "9 1/8% Notes" and,
together with the 8 1/2% Notes, the "Notes").
Interest.................... Interest on the 8 1/2% Notes and the 9 1/8% Notes
is payable semiannually on January 15 and July 15
of each year, commencing January 15, 1997, at an
annual rate of 8 1/2% for the 8 1/2% Notes and 9
1/8% for the 9 1/8% Notes.
Redemption.................. Each series of the Notes is subject to
redemption, in whole or in part, at the option of
the Company at any time at a redemption price
equal to the greater of (i) 100% of the principal
amount of the Notes to be redeemed or (ii) the
sum of the present values of the remaining
scheduled payments of principal and interest on
the Notes to be redeemed, discounted to the date
of redemption on a semiannual basis at the
Treasury Rate, plus 50 basis points, in the case
of the 8 1/2% Notes, or 62.5 basis points, in the
case of the 9 1/8% Notes, plus in each case
accrued interest to the date of redemption. The
Notes are not entitled to the benefit of any
sinking fund.
Ranking..................... The 8 1/2% Notes and the 9 1/8% Notes will be
unsecured obligations of the Company and will
rank pari passu with each other and with all
other unsecured and unsubordinated debt of
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<PAGE>
the Company. However, since all of the operations
of the Company are conducted through its
subsidiaries, all existing and future liabilities
of its subsidiaries will be effectively senior in
right of payment to the Notes. As of March 31,
1996, the Company's subsidiaries had outstanding
indebtedness aggregating $23.1 million and
guaranteed indebtedness aggregating $110.8
million that would in effect rank ahead of the
Notes. The Company is largely dependent on cash
from its subsidiaries for the payment of
principal and interest on the Notes and other
indebtedness. As a result of certain financial
covenants contained in subsidiaries' obligations,
the availability of cash from its subsidiaries in
the form of dividends, distributions and loans
was limited to approximately $200 million at
March 31, 1996 ($125 million after giving effect
to the May 1996 Dividend). This amount is subject
to change based on the financial performance of
each subsidiary. See "Management's Discussion and
Analysis of Financial Condition and Results of
Operations--Liquidity and Financing."
Certain Restrictive The Indenture under which each series of the
Covenants................... Notes is to be issued will contain covenants
regarding, among other things, the creation and
existence of additional secured indebtedness; the
declaration and payment of dividends and
distributions on the Company's capital stock; the
acquisition of the Company's capital stock by the
Company or its Subsidiaries; the acquisition or
retirement of any Debt of the Company which is
subordinate in right of payment to the Notes;
Sale and Leaseback Transactions; transactions
with certain Affiliates; and limitations on
mergers, consolidations and certain sales of
assets. See "Description of Notes."
Use of Proceeds............. All of the net proceeds from the sale of the
Notes, together with a portion of the Company's
available cash and/or borrowings under credit
facilities, will be used to discharge the Note
Payable that was issued to ISI in the form of a
dividend in connection with the Common Stock
Offerings. See "Use of Proceeds."
9
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------- ---------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- -----------
(IN MILLIONS, EXCEPT NUMBER OF EMPLOYEES AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Net sales............... $1,655.9 $1,716.6 $1,893.3 $2,197.5 $2,450.1 $ 652.3 $625.3
Operating costs......... 1,639.7 1,689.5 1,836.9 2,099.4 2,301.4 610.2 588.7
-------- -------- -------- -------- -------- -------- ------
Operating profit........ 16.2 27.1 56.4 98.1 148.7 42.1 36.6
General corporate
expense, net of income
items.................. 10.6 8.4 7.4 6.9 0.7 0.4 (0.7)
Interest and other ex-
pense on debt(1)....... 17.1 12.8 10.9 2.9 2.6 0.7 0.6
-------- -------- -------- -------- -------- -------- ------
Income or (loss) before
income taxes........... (11.5) 5.9 38.1 88.3 145.4 41.0 36.7
Provision for income
taxes.................. 2.3Cr. 2.6 11.4 35.0 56.9 16.5 14.3
-------- -------- -------- -------- -------- -------- ------
Income or (loss) before
cumulative
effect of changes in
accounting
principles............. (9.2) 3.3 26.7 53.3 88.5 24.5 22.4
Cumulative effect of
changes in accounting
principles(2).......... -- (84.1) -- -- -- -- --
-------- -------- -------- -------- -------- -------- ------
Net income or
(loss)(1).............. $ (9.2) $ (80.8) $ 26.7 $ 53.3 $ 88.5 $ 24.5 $ 22.4
======== ======== ======== ======== ======== ======== ======
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,1996
-------------------------------------------------- ---------------------
AS
1991 1992 1993 1994 1995 ACTUAL ADJUSTED(3)
-------- -------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET (END OF
PERIOD):
Operating working capi-
tal(4)................. $ 320.9 $ 296.9 $ 363.5 $ 366.7 $ 373.0 $ 423.3 $423.3
Total assets............ 748.1 765.4 842.3 891.3 972.6 1,010.9 942.9
Long-term debt.......... 31.0 25.7 28.2 23.6 18.9 18.4 268.4
Stockholder's equi-
ty(5).................. 430.7 350.0 526.7 580.0 668.5 690.9 322.1
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------- ---------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Tons shipped............ 1.74 1.87 2.08 2.33 2.35 .63 .64
Number of employees at
period end............. 5,224 5,040 5,093 5,158 4,993 5,206 4,965
Capital expenditures.... $ 9.8 $ 9.3 $ 19.3 $ 20.4 $ 19.3 $ 3.0 $ 3.0
Ratio of earnings to
fixed charges(6)....... 0.5x 1.3x 3.3x 11.8x 19.2x 21.5x 21.4x
EBITDA(7)............... $ 25.3 $ 38.8 $ 69.6 $ 112.4 $ 169.8 $ 47.1 $ 42.9
</TABLE>
- --------
(1) Assuming the issuance of $250 million of Notes in the Offering and the
borrowing of $50 million under credit facilities at a weighted average
interest rate of 8.35% and the application of the net proceeds therefrom to
discharge the Note Payable, as if each had occurred on January 1, 1995, the
pro forma effect of these transactions would have been to increase interest
and other expense on debt by $26.0 million for the year ended December 31,
1995, and by $6.5 million for the three months ended March 31, 1995 and
1996. Pro forma net income giving effect to these transactions for the year
ended December 31, 1995 and the three months ended March 31, 1995 and 1996
would have been $72.7 million, $20.6 million and $18.5 million,
respectively.
(2) The cumulative effect on prior years' results of operations of adopting,
effective January 1, 1992, Financial Accounting Standards Board ("FASB")
Statement No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," was $72.3 million and of adopting FASB Statement No. 109,
"Accounting for Income Taxes," was $11.8 million.
(3) Adjusted to reflect (a) the sale of the Notes in the Offering and (b) the
payment of $445.9 million to ISI in satisfaction of the Dividends,
including (i) application of $77.1 million of net proceeds from the Common
Stock Offerings, (ii) application of the estimated $243.0 million net
proceeds from the
10
<PAGE>
Offering together with $50 million borrowed under the Company's credit
facilities to discharge the Note Payable and (iii) payment of the May 1996
Dividend of $75 million cash.
(4) Includes trade receivables and inventories less trade accounts payable and
accrued current liabilities.
(5) During the year ended December 31, 1993, ISI made a $150 million capital
contribution to the Company.
(6) Earnings for the calculation of the ratio of earnings to fixed charges
consist of income before income taxes. Earnings are increased by fixed
charges and previously capitalized interest amortized during the period.
Fixed charges consist of total interest charges (including capitalized
interest), amortization of debt expense and an appropriate share of rental
expense. Giving effect to the Common Stock Offerings, the payment of the
Dividends and the issuance of $250 million of Notes in the Offering and
the borrowing of $50 million under credit facilities at a weighted average
interest rate of 8.35% and the application of the net proceeds therefrom,
as if each had occurred on January 1, 1995, the ratio of earnings to fixed
charges for the year ended December 31, 1995 and the three months ended
March 31, 1995 and 1996 would have been 4.5x, 5.1x and 4.6x, respectively.
(7) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
for any relevant period presented above represents operating profit less
general corporate expense, net of income items, plus depreciation and
amortization of goodwill and other intangibles. While EBITDA should not be
construed as a substitute for operating income or a better indicator of
liquidity than cash flow from operating activities, which are determined
in accordance with Generally Accepted Accounting Principles ("GAAP"), it
is included herein to provide additional information with respect to the
ability of the Company to meet its future debt service, capital
expenditure and working capital requirements. EBITDA is not necessarily a
measure of the Company's ability to fund its cash needs. See the Company's
Consolidated Financial Statements and the related notes thereto appearing
elsewhere in this Prospectus.
11
<PAGE>
RISK FACTORS
Prospective purchasers should carefully consider the following factors,
together with other information in this Prospectus, in evaluating an
investment in the Notes.
CONTROL BY PRINCIPAL STOCKHOLDER
ISI owns in the aggregate 34,000,000 shares of Class B Common Stock,
representing all of the outstanding shares of Class B Common Stock. Each share
of Class A Common Stock is entitled to one vote, while each share of Class B
Common Stock is entitled to four votes. Consequently, ISI controls
approximately 96.3% of the voting power of the Company and is able to elect
the entire Board of Directors, thereby controlling the management, policies
and conduct of the business of the Company, as well as matters submitted to a
vote of the Company's stockholders (other than matters that the Delaware
General Corporation Law ("Delaware GCL") entitles holders of Class A Common
Stock to vote on separately as a class), including decisions regarding the
acquisition or disposition of the Company's assets and future issuances of
securities of the Company. ISI will retain more than 50% of the voting control
of the Company until the number of shares of Class B Common Stock outstanding
represents less than 50% of the total number of shares of Class A Common Stock
and Class B Common Stock outstanding, at which time the outstanding Class B
Common Stock will convert into an equal number of shares of Class A Common
Stock. In addition, certain Directors and officers of the Company are also
Directors and officers of ISI. See "Relationship with ISI" and "Principal
Stockholder."
ISI has advised the Company that, although it currently intends to hold the
Class B Common Stock that it owns, it may in the future distribute all or part
of such stock (in the form of Class A Common Stock) to ISI's stockholders by
means of a Spin-off or may sell such stock (in the form of Class A Common
Stock) to third parties in one or more transactions. The completion of such a
transaction would be subject to a number of factors, including a determination
by the Board of Directors of ISI that the transaction would be in the best
interests of its stockholders and, in the case of a Spin-off, could be subject
to the receipt of a favorable ruling from the IRS or an opinion of counsel as
to the tax-free nature of such transaction.
HIGHLY COMPETITIVE INDUSTRY
The Company is engaged in a highly fragmented and competitive Industry. In
general, competition is based on quality, service, price and geographic
proximity. The Company competes with many other metals service centers on a
regional and local basis, some of which may have greater financial resources
and flexibility than the Company. To the extent that some of the Company's
competitors purchase a higher percentage of metals than the Company from
foreign steelmakers, such competitors may benefit from favorable exchange
rates or other economic or regulatory factors that may result in a competitive
advantage. This competitive advantage may be offset somewhat by higher
transportation costs associated with importing metals into the United States.
See "Business--Competition."
CYCLICAL NATURE OF BUSINESS
The Company's principal operations are cyclical due to its dependence on
customers in cyclical industries. During 1995, the Company shipped
approximately 38% of its product (by sales revenue) to machinery
manufacturers, 25% to metal producers and fabricators, 10% to transportation
equipment producers and 9% to electrical machinery producers, all of which
operate in cyclical industries. Any significant slowdown in any of these
industries could have a material adverse effect on the Company's results of
operations. See "Business--Customer Base."
12
<PAGE>
DIVIDENDS TO ISI AND RESULTING INDEBTEDNESS
On June 26, 1996, in connection with the Common Stock Offerings, the Company
paid to ISI a $77.1 million cash dividend and a dividend consisting of the
Note Payable. In addition, on June 20, 1996, the Company declared a cash
dividend in the amount of the net proceeds from any exercise of the
Underwriters' over-allotment options granted to the Underwriters in connection
with the Common Stock Offerings payable on the date of closing of such
exercise. The net proceeds from the Common Stock Offerings were used to pay
the $77.1 million cash dividend to ISI and are not available to the Company.
The Note Payable will be discharged from the net proceeds of the Offering,
together with a portion of the Company's available cash and/or borrowings
under credit facilities.
The payment of the Dividends to ISI and the associated indebtedness incurred
by the Company resulted in the Company having substantial indebtedness in
relation to its total invested capital. At March 31, 1996, on a pro forma
basis after giving effect to the Offering, the Common Stock Offerings and the
payment of the Dividends to ISI, the Company would have a ratio of long-term
debt to stockholders' equity of approximately 0.8 to 1. As a result, the
Company's ability to respond to changes in financial, business and economic
conditions may be limited. In addition, the Indenture governing the Notes will
contain covenants that may limit the Company's financial flexibility or
otherwise affect the conduct of the Company's future business. Although the
Company believes that the covenants will not materially impact the Company's
financial flexibility or future business, there can be no assurance that the
covenants will not have such an effect.
The Company has received a definitive commitment letter from its lead
commercial bank to provide a four year, $250 million revolving credit facility
(the "New Credit Facility"), subject to certain customary conditions. The New
Credit Facility is expected to contain customary restrictive covenants,
including, among other things, leverage, minimum net worth and fixed charge
coverage requirements, and limitations on restricted payments (including
dividends), the addition of subsidiary debt (except for debt of acquired
companies and up to $50 million of purchase money debt), new agreements that
limit upstreaming of cash from subsidiaries, transactions with affiliates, the
existence of liens, and mergers and sales of assets. In addition, the amount
of credit available under the New Credit Facility will be eliminated in the
event of a change of control (as defined) of ISI or the Company. Although the
Company believes that the covenants will not materially impact the Company's
financial flexibility or future business, such covenants may restrict the
Company's ability to raise capital for operating needs, capital expenditures
and acquisitions, and may result in the Company incurring greater costs of
capital than it would otherwise incur.
LABOR CONTRACTS; RISK OF WORK STOPPAGE
The Company has experienced only minor localized disruptions in operations
as a result of labor-related issues. A portion of the employees at ten of the
Company's 52 facilities are organized by the United Steelworkers of America
(the "United Steelworkers"), representing approximately 485 employees, and a
portion of the employees at ten facilities are organized by the International
Brotherhood of Teamsters, Chauffeurs, Warehousemen & Helpers (the
"Teamsters"), representing approximately 280 employees. The Company's labor
contracts expire on staggered dates. The next material labor contract to
expire is the contract with the United Steelworkers, relating to all United
Steelworkers-represented facilities and employees, which expires on July 31,
1996. During the next 12 months, labor contracts covering 652 employees at 15
facilities will expire. While management does not expect that work stoppages
will arise in connection with the renewal of labor agreements expiring in the
foreseeable future, no assurance can be given that work stoppages will not
occur. A widespread work stoppage could have a material adverse effect on the
Company's results of operations if it were to last for a significant period of
time. See "Business--Employees."
13
<PAGE>
POTENTIAL FOR INTERRUPTION IN SOURCES OF SUPPLY
The Company purchases its principal inventory, such as carbon steel,
stainless steel, alloy steel, aluminum and a variety of other metals and
plastics, from a number of producers, primarily domestic. Any interruption or
reduction in the supply of any of these materials may make it difficult or
impossible to satisfy customers' just-in-time delivery requirements, which
could have a material adverse effect on the Company's results of operations.
VOLATILE PRICE OF INVENTORY
The domestic metals and plastics industries are cyclical due to significant
excess capacity in times of reduced demand in the United States, labor costs,
foreign and domestic competition and other factors which can result in
volatile pricing of such metals and plastics. Because the Company maintains
substantial inventories of steel, other metals and plastics in order to meet
the just-in-time delivery requirements of its customers, price decreases of
such raw materials usually require the Company to lower its selling prices,
resulting in lower profit margins or, in some cases, losses. In addition, the
Company occasionally enters into fixed-price supply contracts to purchase
materials. If the market price of raw materials were to decline below the
fixed price set in such contracts, the Company could be required to lower its
selling prices, resulting in lower margins or, in some cases, losses. Any
long-term price decreases of materials, in light of the Company's large
inventories and fixed-price supply contracts, may have a material adverse
effect on the Company's results of operations. Further, during periods of
rapid price decreases of such materials, the Company may be unable to lower
its prices quickly enough to remain price competitive, which could have a
material adverse effect on sales. Since mid-1995, the Company has gradually
reduced selling prices as a result of softness in Industry selling prices,
which has resulted in reduced gross margins. The Company's gross margin during
the three months ended March 31, 1996 was $232 per ton and during May 1996 was
$223 per ton, compared to the Company's gross margin per ton of $245 during
1995. There can be no assurance that selling prices or gross margins will not
decline further. See "Business--Suppliers."
DEPENDENCE ON COMPUTER-BASED SYSTEMS
The Company depends to a significant degree on its computer-based systems in
the operation of its business and has taken customary precautions to protect
such systems. The destruction or the failure of any of such computer-based
systems for any significant period of time would have a material adverse
effect on the Company's results of operations. See "Business--Management
Information Systems."
RELIANCE ON ACQUISITIONS FOR EXPANSION
The Company seeks to pursue growth through acquisitions as well as through
joint ventures and expansions of its existing facilities. However, the Company
has not made any acquisitions since 1990 and there can be no assurance that
the Company will be able to negotiate and complete acquisitions, enter into
joint ventures or effectively expand its facilities in the future. Moreover,
the cost of acquisitions, joint ventures and expansions could adversely affect
the Company's results of operations, liquidity and financial stability as a
result of the incurrence of additional debt, start-up costs and
underutilization of new facilities during the start-up phase. Acquisitions and
joint ventures may result in unanticipated difficulties in integrating
acquired businesses with the Company's existing business and may absorb a
disproportionate amount of management time. Although the Company from time to
time discusses potential acquisitions with other service center operators, the
Company currently has no understandings, agreements or commitments to make any
acquisitions. In addition, while the Company has achieved profitable operation
of businesses acquired in the past, there can be no assurance that any future
acquisitions, if completed, would be profitable. See "Business--Business
Strategy--Strategic Acquisitions."
14
<PAGE>
HOLDING COMPANY STRUCTURE; RELIANCE ON DIVIDENDS AND TRANSFERS FROM
SUBSIDIARIES
Ryerson Tull, Inc. is a holding company and has no direct business
operations. As such, Ryerson Tull, Inc. is dependent on dividends or other
intercompany transfers of funds from its subsidiaries to enable it to pay the
principal of and interest on the Notes, and to meet its other obligations.
Certain debt instruments of Ryerson Tull, Inc.'s subsidiaries and the ESOP
Guarantee (as defined herein) permit the payment of dividends and advances to
Ryerson Tull, Inc. only if such subsidiaries are in compliance with financial
covenants contained in those instruments and such guarantee. As a result of
these covenants, the availability to Ryerson Tull, Inc. of cash from its
subsidiaries in the form of dividends, distributions and loans was limited to
approximately $200 million at March 31, 1996 ($125 million after giving effect
to the May 1996 Dividend). This amount is subject to change based on the
financial performance of each subsidiary. Claims of creditors of Ryerson Tull,
Inc.'s subsidiaries will generally have priority as to the assets of such
subsidiaries over Ryerson Tull, Inc. and the holders of Ryerson Tull, Inc.'s
indebtedness, including holders of the Notes. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations--Liquidity and
Financing."
The Indenture will, among other things, restrict the amount of secured debt
that may be incurred by Ryerson Tull, Inc. and certain of its subsidiaries,
but will not restrict the amount of otherwise permissible debt that may be
incurred at the subsidiary level. See "Description of Notes--Covenants."
BENEFITS OF THE OFFERING TO THE PRINCIPAL STOCKHOLDER
All of the net proceeds of the Offering, together with a portion of the
Company's available cash and/or borrowings under credit facilities, will be
paid to ISI to discharge the Note Payable. See "Use of Proceeds" and
"Capitalization."
PENSION AND OTHER POSTRETIREMENT BENEFITS; UNDERFUNDED PENSION PLAN
Prior to April 30, 1996, certain employees of the Company were eligible to
participate in the ISI Pension Plan. Effective April 30, 1996, that portion of
the ISI Pension Plan covering the Company's current and former employees was
separated and became the Pension Plan, a new and separate plan sponsored by
the Company. If the Pension Plan had been in existence at the September 30,
1995 valuation date of the ISI Pension Plan, the projected benefit obligation
thereunder would have been $266 million and the share of the assets allocable
to the Pension Plan would have been $249 million, resulting in an underfunding
of $17 million for financial reporting purposes under GAAP. For purposes of
calculating funding under the Employee Retirement Income Security Act
("ERISA"), there will be no required contribution in 1996 for the Pension
Plan. However, regulations resulting from recent federal legislation may
accelerate future funding requirements. In addition to pension benefits, the
Company provides health care and life insurance benefits to its eligible
employees and retirees. The pension benefits have been and will continue to be
funded through a pension trust, while health care and life insurance benefits
are paid as incurred.
Under GAAP, the ISI Pension Plan, with $1.92 billion in assets, had unfunded
liabilities of $127 million at September 30, 1995. On an annualized basis,
individual yearly returns earned in the ISI Pension Plan have been volatile,
with the plan earning less than 1% in 1994, compared with over 20% in 1995.
The average annual return on the ISI Pension Plan over the last ten years has
been approximately 11%. ISI was required to record a $102.6 million additional
pension liability, offset by an intangible pension asset, on its year-end 1995
balance sheet. In May 1995, ISI contributed 3.9 million shares of its common
stock with an aggregate value of $100 million to the ISI Pension Plan. Most of
such shares continue to be held by the ISI Pension Plan and the Pension Plan
in amounts proportional to the assets in such plans. Under ERISA standards,
which take a longer term view than GAAP in determining the interest rate to
use in valuing liabilities, no contribution will be required in 1996 for the
ISI Pension Plan. See "--Certain Relationships With ISI."
15
<PAGE>
Liabilities for health care and life insurance benefits are not funded. The
unfunded benefit liability reflected on the balance sheet of the Company as of
December 31, 1995 and March 31, 1996 was approximately $141.1 million and
$141.9 million (unaudited), respectively. The unfunded liability will continue
to grow as long as accrual-basis costs exceed cash benefit payments.
COSTS OF ENVIRONMENTAL COMPLIANCE
The Company's facilities and operations are subject to numerous federal,
state and local requirements relating to the protection of the environment,
including requirements governing air emissions, wastewater discharges,
hazardous materials handling and waste disposal. The Company has made and will
continue to make expenditures to comply with such provisions. Although the
Company believes that its facilities are presently in substantial compliance
with environmental laws and regulations, future events or regulatory
requirements could require the Company to make additional expenditures. While
the Company does not currently anticipate that costs of future compliance will
have a material adverse effect on the Company's results of operations or
financial condition, the amount and timing of future environmental
expenditures are subject to significant uncertainties and could vary
substantially from those presently anticipated and could have a material
adverse effect on the Company's financial condition. See "--Certain
Relationships With ISI" and "Business--Environmental, Health and Safety
Matters."
CERTAIN RELATIONSHIPS WITH ISI
Ryerson is the guarantor of the ESOP Trust's obligation to repay the
principal amount of indebtedness incurred by the ESOP Trust, amounting to
$110.8 million as of March 31, 1996, plus interest. In addition, for purposes
of the ISI Pension Plan, the Company is a member of a "control group of
companies," which includes ISI and ISC, as determined by regulations
promulgated by the Pension Benefit Guaranty Corporation. The Company is also
part of ISI's consolidated group for tax purposes. As a result of these and
other relationships, under certain circumstances the Company could be jointly
and severally liable for certain of ISI's and ISC's ESOP Trust, pension,
environmental or tax liabilities.
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Notes are a new issue of securities for which there is currently no
market. If the Notes are traded after their initial issuance, they may trade
at a discount from their initial offering price, depending upon prevailing
interest rates, the market for similar securities and other factors. The
Underwriters have informed the Company that, subject to applicable laws and
regulations, they currently intend to make a market in the Notes. However, the
Underwriters are not obligated to do so, and any such market making may be
discontinued at any time without notice. Therefore, no assurance can be given
as to whether an active trading market will develop for the Notes or, if such
market develops, whether it will continue. The Company does not intend to
apply for listing of the Notes on any securities exchange or on the National
Association of Securities Dealers, Inc. automated quotation system. See
"Underwriting."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes offered hereby
are estimated to be approximately $243.0 million, after deducting underwriting
discounts and commissions and estimated expenses of the Offering payable by
the Company. All of the net proceeds of the Offering, together with a portion
of the Company's available cash and/or borrowings under credit facilities,
will be used to discharge the Note Payable that was declared as a dividend in
connection with the Common Stock Offerings.
16
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of March 31, 1996 and the capitalization of the Company as of such date (i) as
adjusted to give effect to the Recapitalization and the declaration of the
Dividends, (ii) as further adjusted to give effect to the Common Stock
Offerings and (iii) as further adjusted to give effect to the sale of the
Notes in the Offering and the application of the estimated net proceeds
therefrom, together with borrowings under credit facilities of $50 million, to
discharge the Note Payable as set forth under "Use of Proceeds." This table
should be read in conjunction with the Company's Consolidated Financial
Statements and the related notes thereto included elsewhere in this
Prospectus. See "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------------------------------------
AS ADJUSTED FOR
---------------------------------------------------
DIVIDENDS,
DIVIDENDS, RECAPITALIZATION,
RECAPITALIZATION COMMON
DIVIDENDS AND AND COMMON STOCK OFFERINGS
ACTUAL RECAPITALIZATION STOCK OFFERINGS AND OFFERING
------ ---------------- ---------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
SHORT-TERM DEBT:
Short-term borrowings
under credit facility.. $ -- $ -- $ -- $ 50.0
Long-term debt due
within one year........ 4.7 4.7 4.7 4.7
------ ------ ------ ------
Total short-term debt.. $ 4.7 $ 4.7 $ 4.7 $ 54.7
====== ====== ====== ======
LONG-TERM DEBT:
8 1/2% Notes due 2001... $ -- $ -- $ -- $150.0
9 1/8% Notes due 2006... -- -- -- 100.0
Note Payable............ -- 293.8 293.8 --
Other................... 18.4 18.4 18.4 18.4
------ ------ ------ ------
Total long-term debt... 18.4 312.2 312.2 268.4
------ ------ ------ ------
STOCKHOLDERS' EQUITY:
Common Stock, $1.00 par
value, 3,000 shares
authorized, 1 share
issued actual; no
shares authorized as
adjusted............... -- -- -- --
Class A Common Stock,
$1.00 par value, no
shares authorized
actual; 100,000,000
shares authorized,
5,220,000 shares issued
and outstanding as
adjusted(1)............ -- -- 5.2 5.2
Class B Common Stock,
$1.00 par value, no
shares authorized
actual; 34,000,000
shares authorized,
34,000,000 shares
issued and outstanding
as adjusted............ -- 34.0 34.0 34.0
Preferred Stock, $1.00
par value, no shares
authorized actual;
16,000,000 shares
authorized, no shares
issued or outstanding
as adjusted............ -- -- -- --
Additional paid-in
capital................ 494.6 211.0 282.9 282.9
Earnings reinvested in
the business........... 196.3 -- -- --
------ ------ ------ ------
Total stockholders' eq-
uity.................. 690.9 245.0 322.1 322.1
------ ------ ------ ------
Total capitalization.. $709.3 $557.2 $634.3 $590.5
====== ====== ====== ======
</TABLE>
- --------
(1) Excludes an aggregate of 2,400,000 shares of Class A Common Stock that has
been reserved for issuance under the Incentive Stock Plan (as defined
herein) and the Directors' Compensation Plan (as defined herein),
including shares of Class A Common Stock to be issued in the form of
restricted stock and shares of Class A Common Stock reserved for issuance
upon exercise of options, as described below. The outstanding shares of
restricted ISI common stock and options to purchase shares of ISI common
stock held by the Company's employees will be converted into shares of
restricted Class A Common Stock and options to purchase shares of Class A
Common Stock, provided that the Compensation Committee may determine that
any employee may receive restricted shares of Class A Common Stock or
options to purchase shares of Class A Common Stock with respect to less
than all of his or her shares of restricted ISI common stock or options
17
<PAGE>
to purchase ISI common stock. The number of shares of Class A Common Stock
that will be issued as restricted stock or subject to options will vary
depending on the relative value of a share of ISI common stock and a share
of Class A Common Stock at the applicable valuation date. Assuming that as
of the applicable valuation date the value of a share of ISI common stock
is $19.875 (the last reported sales price on the NYSE on June 26, 1996),
that the value of a share of Class A Common Stock is $16.00 (the last
reported sales price on the NYSE on June 26, 1996), and that no shares of
restricted ISI common stock or options to purchase ISI common stock held by
Company officers who are also ISI officers will be converted into shares of
restricted Class A Common Stock or options to purchase shares of Class A
Common Stock, 37,204 shares of Class A Common Stock would be issued in the
form of restricted stock and 827,621 shares of Class A Common Stock would
be reserved for issuance upon exercise of options outstanding upon
consummation of the Common Stock Offerings. See "Management--Directors'
Compensation" and "--Ryerson Tull 1996 Incentive Stock Plan."
18
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data presents the consolidated results of
operations for the five years ended December 31, 1995 and the three-month
periods ended March 31, 1995 and 1996, and should be read in conjunction with
the Company's Consolidated Financial Statements and the related notes thereto
appearing elsewhere in this Prospectus. The summary for each of the years in
the three-year period ended December 31, 1995 has been derived from the
Company's Consolidated Financial Statements and related notes thereto
appearing elsewhere in this Prospectus, which have been audited by Price
Waterhouse LLP, the Company's independent accountants. The summary for each of
the years in the two-year period ended December 31, 1992 has been derived from
separate audited Consolidated Financial Statements of the Company.
The summary for the three-month periods ended March 31, 1995 and 1996 has
been derived from the Company's unaudited consolidated financial statements
appearing elsewhere in this Prospectus. The information for interim periods is
unaudited, but, in the opinion of the Company, reflects all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the results of operations and financial condition for such
periods. Results for interim periods should not be considered as indicative of
results for any other periods or for the year. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- ------ --------
(IN MILLIONS, EXCEPT NUMBER OF EMPLOYEES AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Net sales............... $1,655.9 $1,716.6 $1,893.3 $2,197.5 $2,450.1 $652.3 $ 625.3
Operating costs......... 1,639.7 1,689.5 1,836.9 2,099.4 2,301.4 610.2 588.7
-------- -------- -------- -------- -------- ------ --------
Operating profit........ 16.2 27.1 56.4 98.1 148.7 42.1 36.6
General corporate
expense, net of income
items.................. 10.6 8.4 7.4 6.9 0.7 0.4 (0.7)
Interest expense and
other expense on debt.. 17.1 12.8 10.9 2.9 2.6 0.7 0.6
-------- -------- -------- -------- -------- ------ --------
Income or (loss) before
income taxes........... (11.5) 5.9 38.1 88.3 145.4 41.0 36.7
Provision for income
taxes.................. 2.3Cr. 2.6 11.4 35.0 56.9 16.5 14.3
-------- -------- -------- -------- -------- ------ --------
Income or (loss) before
cumulative effect of
changes in accounting
principles............. (9.2) 3.3 26.7 53.3 88.5 24.5 22.4
Cumulative effect of
changes in accounting
principles(1).......... -- (84.1) -- -- -- -- --
-------- -------- -------- -------- -------- ------ --------
Net income or (loss).... $ (9.2) $ (80.8) $ 26.7 $ 53.3 $ 88.5 $ 24.5 $ 22.4
======== ======== ======== ======== ======== ====== ========
BALANCE SHEET (END OF
PERIOD):
Operating working capi-
tal(2)................. $ 320.9 $ 296.9 $ 363.5 $ 366.7 $ 373.0 $425.9 $ 423.3
Total assets............ 748.1 765.4 842.3 891.3 972.6 924.0 1,010.9
Long-term debt.......... 31.0 25.7 28.2 23.6 18.9 23.0 18.4
Stockholder's equi-
ty(3).................. 430.7 350.0 526.7 580.0 668.5 604.5 690.9
OPERATING DATA:
Tons shipped............ 1.74 1.87 2.08 2.33 2.35 .63 .64
Number of employees at
period end............. 5,224 5,040 5,093 5,158 4,993 5,206 4,965
Capital expenditures.... $ 9.8 $ 9.3 $ 19.3 $ 20.4 $ 19.3 $ 3.0 $ 3.0
Ratio of earnings to
fixed charges(4)....... 0.5x 1.3x 3.3x 11.8x 19.2x 21.5x 21.4x
EBITDA(5)............... $ 25.3 $ 38.8 $ 69.6 $ 112.4 $ 169.8 $ 47.1 $ 42.9
</TABLE>
- --------
(1) The cumulative effect on prior years' results of operations of adopting,
effective January 1, 1992, FASB Statement No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions" was $72.3 million and for
adopting FASB Statement No. 109, "Accounting for Income Taxes" was $11.8
million.
(2) Includes trade accounts receivable and inventories less trade accounts
payable and accrued current liabilities.
(3) During the year ended December 31, 1993, ISI made a $150 million capital
contribution to the Company.
19
<PAGE>
(4) Earnings for the calculation of the ratio of earnings to fixed charges
consist of income before taxes. Earnings are increased by fixed charges
and previously capitalized interest amortized during the period. Fixed
charges consist of total interest charges (including capitalized
interest), amortization of debt expense and an appropriate share of rental
expense.
(5) EBITDA for any relevant period presented above represents operating profit
less general corporate expense, net of income items, plus depreciation and
amortization of goodwill and other intangibles. While EBITDA should not be
construed as a substitute for operating income or a better indicator of
liquidity than cash flow from operating activities, which are determined
in accordance with GAAP, it is included herein to provide additional
information with respect to the ability of the Company to meet its future
debt service, capital expenditure and working capital requirements. EBITDA
is not necessarily a measure of the Company's ability to fund its cash
needs. See the Company's Consolidated Financial Statements and the related
notes thereto appearing elsewhere in this Prospectus.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's net sales increased 48% to $2.5 billion in 1995 from $1.7
billion in 1991. During that same period, operating profit increased to 6.1%
of sales, totalling $148.7 million in 1995, from 1% of sales, totalling $16.2
million in 1991, and the number of tons shipped by the Company increased 36%
while the number of the Company's employees declined 4.4%. The Company
attributes the increase in its net sales, operating profit and tons shipped
and the decrease in the number of its employees to an improved economic
environment, an increased emphasis on cost control and productivity
improvements and marketing and sales programs targeted at sales of products
with higher profit margins.
Beginning in 1990, the Company instituted a number of initiatives intended
to reduce costs and improve asset utilization. The Company reorganized its
operations into five business units along product and geographic lines,
providing each business unit with the flexibility to meet customer needs while
making each business unit fully accountable for its results of operations. The
Company upgraded, and intends to continue upgrading, its computer-based
inventory and management information systems to measure and improve
productivity for each of its facilities and each of its processes. See "--
Capital Expenditures and Investments in Joint Venture." Since the fourth
quarter of 1994, the number of the Company's employees has decreased 4%
(mostly through attrition), while daily shipment levels have increased 6%.
During the same period, the Company successfully integrated the operations of
under-performing facilities in Jersey City and Boston into existing plants in
Philadelphia and Wallingford, Connecticut. The Company has also updated its
inventory measurement system and made significant changes in compensation,
recruiting and career management processes to better align employee goals with
the Company's objectives. The Company believes that these initiatives have
contributed significantly to the decline in the Company's operating costs (as
a percentage of sales) since 1991.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain income
statement data of the Company expressed as a percentage of net sales.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- --------------
1993 1994 1995 1995 1996
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Net sales....................... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating costs................. 97.0 95.5 93.9 93.5 94.1
------- ------- ------- ------ ------
Operating profit................ 3.0 4.5 6.1 6.5 5.9
General corporate expense, net
of income items................ 0.4 0.3 0.0 0.1 (0.1)
Interest expense and other
expense on debt................ 0.6 0.2 0.2 0.1 0.1
------- ------- ------- ------ ------
Income before income taxes...... 2.0 4.0 5.9 6.3 5.9
Provision for income taxes...... 0.6 1.6 2.3 2.5 2.3
------- ------- ------- ------ ------
Net income...................... 1.4% 2.4% 3.6% 3.8% 3.6%
======= ======= ======= ====== ======
</TABLE>
The breakdown of the Company's sales revenue by product line has not varied
significantly over the last three years. See "Business--Products and
Services." The Company's gross profit as a percentage of net sales for its
product lines are all within a relatively small range and the Company's gross
profit as a percentage of net sales for its product lines have not varied
significantly over the last three years.
21
<PAGE>
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
NET SALES. Net sales decreased 4.1% to $625.3 million for the three months
ended March 31, 1996 ("First Quarter 1996") from $652.3 million for the three
months ended March 31, 1995 ("First Quarter 1995"). Tons shipped increased
1.8% in First Quarter 1996 from First Quarter 1995, while selling prices per
ton declined 5.9%. The demand for metals and the U.S. economy were not as
strong in First Quarter 1996 as in First Quarter 1995. According to the SSCI,
the number of tons of steel shipped in the U.S. market by the Industry
decreased 6.9% in First Quarter 1996 from the year earlier quarter. However,
the Company was able to increase its number of tons shipped by increasing its
market share in First Quarter 1996 from First Quarter 1995, based on the
Company's analysis of SSCI data. The relative weakness in demand in First
Quarter 1996 caused selling prices per ton to decline 5.9% to $979 in First
Quarter 1996 from $1,040 in First Quarter 1995. Although the Company cannot
predict Industry demand, SSCI anticipates that demand in 1996 will remain
sluggish. There can, however, be no assurance as to the future level of
demand.
OPERATING COSTS. Operating costs decreased 3.5% to $588.7 million in First
Quarter 1996 from $610.2 million in First Quarter 1995. The Company's
operating costs consist of material purchases and other operating costs.
Material purchases decreased 4.3% to $477.2 million in First Quarter 1996 from
$498.4 million in First Quarter 1995. Material purchases per ton decreased 6%
or $48 to $747 in First Quarter 1996 from $795 in First Quarter 1995 due to
falling prices as demand weakened.
Other operating costs decreased 0.3% to $111.5 million in First Quarter 1996
from $111.8 million in First Quarter 1995. These costs include such expenses
as plant and office employee-related costs (e.g., wages, salaries, benefits,
incentive pay), freight expenses, plant supplies and maintenance, systems
costs, depreciation and state and local taxes. Since tons shipped increased
1.8% in First Quarter 1996 from First Quarter 1995, the decline in operating
costs is attributable to a reduction in other operating costs per ton of $3 to
$175 in First Quarter 1996 from $178 in the year earlier quarter. The total
number of Company employees declined 4.6% to 4,965 at March 31, 1996 from
5,206 at March 31, 1995 as tons shipped increased over the same period.
OPERATING PROFIT. Operating profit decreased 13.1% to $36.6 million in First
Quarter 1996 from $42.1 million in First Quarter 1995 as lower demand resulted
in reduced selling prices and lower gross profit per ton, partly offset by
lower expenses. Since selling prices per ton declined $61 in First Quarter
1996 from First Quarter 1995 and material purchases per ton fell $48 over that
period, gross profit per ton decreased $13 to $232 in First Quarter 1996 from
$245 in First Quarter 1995. Gross profit per ton for May 1996 was $223. The
Company expects that operating profit for the three months ended June 30, 1996
will be lower than operating profit for First Quarter 1996 as a result of a
reduction in gross profit per ton, partly offset by a reduction in other
operating costs per ton.
GENERAL CORPORATE EXPENSE, NET OF INCOME ITEMS. General corporate expense,
which represents the charge from ISI for services rendered to the Company,
decreased slightly to $1.7 million in First Quarter 1996 from $1.8 million in
First Quarter 1995. Other revenue, principally interest income from
investments in short-term marketable securities and from intercompany loans to
ISI, increased to $2.4 million in First Quarter 1996 from $1.4 million in
First Quarter 1995, primarily due to increased cash flow generated in 1995.
INTEREST EXPENSE AND OTHER EXPENSE ON DEBT. Interest expense and other
expense on debt decreased slightly to $0.6 million in the First Quarter 1996
from $0.7 million in the First Quarter 1995 due to reduced debt levels.
INCOME BEFORE INCOME TAXES. Income before income taxes decreased to 5.9% of
net sales in the First Quarter 1996 from 6.3% in the First Quarter 1995 for
the reasons discussed above.
22
<PAGE>
PROVISION FOR INCOME TAXES. Provision for income taxes decreased 13.3% to
$14.3 million in the First Quarter 1996 from $16.5 million in the First
Quarter 1995 due primarily to the decrease in taxable income and to a slight
reduction in the effective tax rate, which decreased to 39.0% in the First
Quarter 1996 from 40.2% in the First Quarter 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
NET SALES. Net sales increased 11.5% to $2.5 billion in 1995 from $2.2
billion in 1994. Tons shipped rose 0.8% in 1995 from 1994, while selling
prices per ton increased 10.6% over the same period. Tons shipped increased
due to a slight improvement in demand, which according to SSCI increased by 1%
in 1995 compared to 1994. Based on the Company's analysis of SSCI data, the
Company's market share remained relatively constant from 1994 to 1995. The
Company's selling prices per ton increased $100 to $1,044 in 1995 from $944 in
1994, primarily due to higher prices in the Industry.
OPERATING COSTS. Operating costs increased 9.6% to $2.3 billion in 1995 from
$2.1 billion in 1994. Material purchases increased 11.4% to $1.9 billion in
1995 from $1.7 billion in 1994. Material purchases per ton increased 10.4% or
$75 to $798 in 1995 from $723 in 1994, as a result of higher market prices.
Other operating costs increased 2.6% to $428 million in 1995 from $417
million in 1994 and increased 1.7% on a per ton basis to $182 in 1995 from
$179 in 1994. The increase in other operating costs is partly attributable to
the 0.8% increase in tons shipped in 1995 compared to 1994. The increase in
other operating costs on a per ton basis resulted from higher incentive pay
due to improved profits, recognition of costs associated with the Company's
closing of its facility located in New Jersey, higher spending for systems-
related activities and inflation. The Company's total number of employees
declined 3.2% to 4,993 at the end of 1995 from 5,158 at the end of 1994 as
tons shipped increased over the same period.
OPERATING PROFIT. Operating profit increased 51.6% to $148.7 million in 1995
from $98.1 million in 1994, primarily due to improved gross profit per ton and
a modest increase in the volume of tons shipped. Since selling prices per ton
increased by $100 in 1995 compared to 1994, and material purchases per ton
rose $75, gross profit per ton for the Company increased by $25 to $246 in
1995 from $221 in 1994.
GENERAL CORPORATE EXPENSE, NET OF INCOME ITEMS. General corporate expense
decreased slightly to $6.8 million in 1995 from $7.4 million in 1994 because
of continued cost reduction efforts at ISI. Other revenue, principally
interest income, increased to $6.1 million in 1995 from $0.5 million in 1994.
This improvement in interest income was primarily the result of increased
average balances on intercompany loans to ISI and short-term marketable
securities in 1995 compared to 1994.
INTEREST EXPENSE AND OTHER EXPENSE ON DEBT. Interest expense and other
expense on debt decreased 10.3% to $2.6 million in 1995 from $2.9 million in
1994, principally due to reduced debt levels.
INCOME BEFORE INCOME TAXES. Income before income taxes increased to 5.9% of
net sales in 1995 from 4.0% in 1994 for the reasons discussed above.
PROVISION FOR INCOME TAXES. Provision for income taxes increased 62.6% to
$56.9 million in 1995 from $35.0 million in 1994 due to the increase in
taxable income as the effective tax rate remained virtually unchanged at 39.1%
in 1995 compared to 39.6% in 1994.
23
<PAGE>
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
NET SALES. Net sales increased 16.1% to $2.2 billion in 1994 from $1.9
billion in 1993. Tons shipped increased 12.0% in 1994 from 1993, while selling
prices per ton increased 3.6% over the same period. Based on the Company's
analysis of SSCI data, the increase in tons shipped was due both to greater
demand and a modest increase in the Company's market share. The Company's
selling prices per ton increased $33 to $944 in 1994 from $911 in 1993.
OPERATING COSTS. Operating costs increased 14.3% to $2.1 billion in 1994
from $1.8 billion in 1993. Material purchases increased 17.2% to $1.7 billion
in 1994 from $1.4 billion in 1993. Material purchases per ton increased 4.6%
or $32 to $723 in 1994 from $691 in 1993.
Other operating costs increased 3.8% to $417 million in 1994 from $401
million in 1993. Since tons shipped rose 12.0% in 1994 compared to 1993, and
other operating costs increased only 3.8% over the same period, these costs on
a per ton basis declined $14 to $179 in 1994 from $193 in 1993. The Company's
total number of employees increased only 1.3% to 5,158 at the end of 1994 from
5,093 at the end of 1993, despite the significant increase in tons shipped in
1994 compared to 1993. This productivity improvement, along with other cost
reduction initiatives, contributed to the reduction in other operating costs
per ton.
OPERATING PROFIT. Operating profit increased by 73.9% to $98.1 million in
1994 from $56.4 million in 1993, primarily due to increased volume of tons
shipped and reduced other operating costs per ton. Since selling prices per
ton increased by $33 in 1994 compared to 1993, and material purchases per ton
rose $32, gross profit per ton for the Company increased by $1 to $221 in 1994
from $220 in 1993.
GENERAL CORPORATE EXPENSE, NET OF INCOME ITEMS. General corporate expense
was unchanged at $7.4 million. Other revenue, principally interest income, was
$0.5 million in 1994 compared to zero in 1993.
INTEREST EXPENSE AND OTHER EXPENSE ON DEBT. Interest expense and other
expense on debt decreased 73.4% to $2.9 million in 1994 from $10.9 million in
1993. Interest expense on intercompany loans from ISI was zero in 1994
compared to $7.7 million in 1993. This reduction resulted from the Company's
repayment late in 1993 of its loan balance due to ISI with funds received from
an ISI capital contribution.
INCOME BEFORE INCOME TAXES. Income before income taxes increased to 4.0% of
net sales in 1994 from 2.0% in 1993 for the reasons discussed above.
PROVISION FOR INCOME TAXES. Provision for income taxes increased to $35.0
million in 1994 from $11.4 million in 1993. This increase in 1994 income taxes
was primarily the result of improved pre-tax earnings. In addition, 1993
income taxes were reduced by credits of $3.2 million representing prior year
adjustments and a change in the statutory income tax rate. These credits
resulted in an effective tax rate of 29.9% in 1993 compared to 39.6% in 1994.
LIQUIDITY AND FINANCING
The Company has historically financed its operations and growth primarily
through net cash provided by operating activities, limited borrowings from
third parties and capital contributions from ISI. The Company believes that
the New Credit Facility, if entered into, should provide the Company with
access to an additional source of capital to fund its future growth. Net cash
provided from (used for) operating activities amounted to $(25.3) million,
$79.7 million and $84.4 million for the years ended December 31, 1993, 1994
and 1995, respectively, and $(24.3) million and $(20.3) million for the three
months ended March 31, 1995 and 1996, respectively. Cash flow from operating
activities in 1995
24
<PAGE>
improved only $5 million over 1994 despite an increase of $35 million of net
income due to a $13 million pension contribution and increased operating
working capital levels in 1995. The $105 million improvement in cash flow from
operating activities in 1994 compared to 1993 resulted primarily from
increased net income of $27 million and an increase in operating working
capital of $67 million in 1993 compared to only a $3 million increase in 1994.
The negative cash flow from operating activities of $(24.3) million and
$(20.3) million in the first quarter of 1995 and 1996, respectively, reflects
the seasonal build-up of operating working capital as increases in receivables
and inventories exceeded the income reported for those quarters.
During 1995, the total committed credit facilities of the Company's
subsidiaries increased to $225 million. Ryerson increased its $100 million
unsecured revolving credit facility (the "Ryerson Credit Facility") to $200
million and negotiated an extension of its term to March 31, 2000. The $25
million unsecured revolving credit facility (the "Tull Credit Facility")
expires on December 15, 1997. There was no borrowing under either of these
facilities during 1995 or the first three months of 1996. The Ryerson Credit
Facility and the Tull Credit Facility each require compliance with various
financial covenants including minimum net worth and leverage ratio tests. The
covenants also limit the amount of cash (or equivalents) that each of Ryerson
and Tull and its subsidiaries can transfer to the Company or ISI in the form
of dividends and advances. As of December 31, 1995 and March 31, 1996, Ryerson
and Tull were each in compliance with all of the covenants under its
respective credit facility. The interest rates on borrowing under the Ryerson
Credit Facility and the Tull Credit Facility are, at the Company's option,
based on Eurodollar, certificates of deposit, or the greater of federal funds
or prime rate. At year-end, the highest rate option for borrowing under either
of these credit agreements was the applicable prime rate.
As of March 31, 1996, Ryerson was also the guarantor of $110.8 million of
the Inland Steel Industries Thrift Plan ESOP notes (the "ESOP Guarantee"). The
ESOP notes are payable in installments through July 2004. The ESOP Guarantee
requires compliance with various financial covenants including minimum net
worth and leverage ratio tests and also limits Ryerson's ability to advance
funds or make dividend payments to the Company.
At March 31, 1996, approximately $200 million in the aggregate would have
been available for payment of dividends and advances to the Company under the
covenants contained in the Tull Credit Facility, the Ryerson Credit Facility,
the ESOP Guarantee and other debt agreements of the Company. This availability
was reduced on May 20, 1996 after a $75 million dividend was paid from Ryerson
to the Company. At March 31, 1996, after adjusting for this dividend,
approximately $125 million in the aggregate would have been available for
payment of dividends and advances to the Company under these agreements.
With respect to Ryerson's ability to advance funds or make dividend payments
to the Company, the most restrictive covenants on March 31, 1996 were
contained in the ESOP Guarantee. Under these covenants, Ryerson's ability to
dividend or advance funds to the Company at any time is limited to $30 million
(i) plus 80% of net income (decreased by 100% of net losses) earned by Ryerson
since December 31, 1989, (ii) minus the dollar amount of dividends paid and
capital stock repurchased and the balance of any advances outstanding and
(iii) plus capital contributions to Ryerson and the proceeds from the issuance
of any capital stock or certain other investments during such period. At March
31, 1996, approximately $145 million was available for making advances and
paying dividends to the Company under the ESOP Guarantee. At March 31, 1996,
after adjusting for the dividend referred to above, Ryerson's ability to
advance funds or make further dividend payments to the Company would have been
$70 million.
With respect to Tull's ability to advance funds or pay dividends to the
Company, the Tull Credit Facility and its senior notes contained the most
restrictive covenants on March 31, 1996. Under the Tull Credit Facility,
Tull's ability to pay dividends is limited by minimum tangible net worth and
net income requirements. The required minimum tangible net worth increases by
40% of net income each
25
<PAGE>
quarter, but is not reduced in the event of a net loss. Under the terms of the
senior notes, advances outstanding can be no more than 15% of tangible net
worth. At March 31, 1996, approximately $55 million was available for making
advances and paying dividends to the Company under Tull's debt agreements.
Other covenants which could restrict dividends or advances to the Company
include tangible net worth and leverage tests at Ryerson and cumulative
earnings, leverage and working capital tests at Tull.
The Company has received a definitive commitment letter from its lead
commercial bank with respect to the New Credit Facility. Borrowings under the
New Credit Facility will rank pari passu with the Notes. The commitment is
subject to certain conditions, including among other things, that the Ryerson
Credit Facility and the Tull Credit Facility be terminated. Management
estimates that the initial borrowing under the New Credit Facility will be up
to $50 million, with a remaining availability of $200 million or more.
The New Credit Facility is expected to contain customary restrictive
covenants, including, among other things, leverage, minimum net worth and
fixed charge coverage requirements, and limitations on restricted payments
(including dividends), the addition of subsidiary debt (except for debt of
acquired companies and up to $50 million of purchase money debt), new
agreements that limit upstreaming of cash from subsidiaries, transactions with
affiliates, the existence of liens, and mergers and sales of assets. In
addition, the amount of credit available under the New Credit Facility will be
eliminated in the event of a change of control (as defined) of ISI or the
Company. Although the Company believes that the covenants will not materially
impact the Company's financial flexibility or future business, such covenants
may restrict the Company's ability to raise capital for operating needs,
capital expenditures and acquisitions and may result in the Company incurring
greater costs of capital than it would otherwise incur. The New Credit
Facility will expire in June 2000.
The Indenture governing the Notes will contain covenants that may limit the
Company's financial flexibility and that may affect the Company's conduct of
future business, although the Company believes that the covenants will not
materially impact its financial flexibility or future business. Such covenants
include limitations or prohibitions with respect to (i) the incurrence of
certain secured indebtedness, (ii) certain sale and leaseback transactions,
(iii) the payment of dividends, the repurchase of capital stock and the
prepayment of subordinated debt, (iv) transactions with affiliates and (v)
mergers, consolidations and certain sales of assets. See "Description of the
Notes."
The Company believes that available borrowings under its credit facilities
and anticipated cash flow from operations will provide sufficient liquidity to
meet its scheduled debt retirements, fund its capital program and meet any
operating cash requirements that may arise for at least the next 12 months.
In 1993, ISI made a $150 million capital contribution to the Company.
Proceeds from this capital contribution, along with cash generated internally
over the three-year period ended December 31, 1995 (after subtracting
increased working capital requirements resulting from increased activity
levels and funding capital projects), were used to repay borrowings from ISI
and subsequently to lend funds to ISI. At December 31, 1992, the Company owed
$108 million to ISI. Between December 31, 1992 and March 31, 1996, the Company
advanced an aggregate of $162 million to ISI, leaving a balance owed to the
Company at March 31, 1996 of $54 million.
On May 20, 1996, Ryerson paid a dividend of $75 million in cash to the
Company. The Company used the proceeds of this dividend to pay the May 1996
Dividend to ISI on May 20, 1996. ISI used $63.2 million of the proceeds from
the May 1996 Dividend to repay intercompany indebtedness owed to the Company
arising out of a corporate-wide cash management program. Following the
repayment of such indebtedness, the Company ceased participation in such
program and the Company's cash is not and will no longer be held in ISI's
accounts. With the May 20, 1996 dividend payments and
26
<PAGE>
repayment of intercompany indebtedness, all outstanding indebtedness for
borrowed money between ISI and the Company (including the Company's
subsidiaries) was discharged.
On June 26, 1996, in connection with the Common Stock Offerings, the Company
paid a $77.1 million cash dividend and a dividend consisting of the $293.8
million Note Payable to ISI. The Note Payable matures five years from its date
of issuance and bears interest at a specified prime rate. The Note Payable may
be prepaid, without penalty, at the option of the Company. In addition, on
June 20, 1996, the Company declared a cash dividend in the amount of the net
proceeds from any exercise of the Underwriters' over-allotment options granted
to the Underwriters in connection with the Common Stock Offerings payable on
the date of closing of such exercise. The net proceeds of the Common Stock
Offerings were used to pay the $77.1 million cash dividend to ISI and are not
available to the Company. All of the net proceeds of the Offering, together
with a portion of the Company's available cash and/or borrowings under credit
facilities, will be used to discharge the Note Payable to ISI. See "Use of
Proceeds."
CAPITAL EXPENDITURES AND INVESTMENTS IN JOINT VENTURE
Capital expenditures for 1993, 1994 and 1995 were $19.3 million, $20.4
million and $19.3 million, respectively. Capital expenditures were primarily
used for buildings, machinery and equipment. In 1996, the Company anticipates
making capital expenditures of approximately $45 million to upgrade and expand
facilities and equipment, including approximately $3 million to upgrade its
computer-based inventory and management information systems. No assurance can
be given, however, that anticipated capital spending will occur. The Company
expects that its depreciation and amortization expense in future periods will
increase due to its anticipated capital investments.
In addition to the $45 million of planned capital expenditures in 1996 to
update and expand facilities, the Company expects to invest approximately $15
million in a previously announced joint venture with Geneva Steel. The Geneva
Steel joint venture, if completed, will own or lease and operate a coil plate
processing facility in the Chicago area. No assurance can be given that the
joint venture will be completed.
Most of the Company's assets are in working capital. At year-end 1995, the
Company had $409 million in inventory measured at current or approximate
replacement cost versus a book value of $263 million, $244 million in accounts
receivable and $107 million in accounts payable. The Company turned inventory
4.2 times during 1995 and averaged 40 days' sales outstanding in receivables
during 1995, both better than industry averages according to information
provided by the SSCI. For 1994 and 1993, inventory turnover was 4.1 times and
3.8 times, respectively, and the number of days' sales outstanding averaged 39
days and 40 days, respectively. The Company utilizes sophisticated inventory
management and profitability systems to monitor whether all working capital
assets remain current and profitable and to make changes when appropriate.
SUBSEQUENT EVENT
Effective June 1, 1996, ISI transferred to the Company its 50% interest in
Ryerson de Mexico, a joint venture with Altos Hornos de Mexico, S.A. de C.V.,
an integrated steel mill operating in Mexico. Ryerson de Mexico, which was
formed in 1994, is a general line metals service center and processor with 18
facilities in Mexico. As of April 30, 1996, ISI's investment in Ryerson de
Mexico totalled approximately $18 million. The impact of Ryerson de Mexico on
the Company's results of operations has not been material.
27
<PAGE>
BUSINESS
GENERAL
The Company, through its wholly-owned operating subsidiaries, Ryerson and
Tull, is a general line metals service center and processor of metals. The
Company believes that it is the largest metals service center in the United
States based on sales revenue, with 1995 sales of $2.5 billion and a current
U.S. market share of approximately 9%, more than twice the U.S. market share
of its nearest competitor, based on the Company's analysis of SSCI data. The
Company distributes and processes metals and other material throughout the
continental United States, and is among the largest purchasers of steel in the
United States. With 52 interconnected facilities that place it within several
hundred miles of most of its customers, the Company is able to be responsive
to specific customer requests and is generally able to make deliveries of
stock items within 24 hours of receipt of a customer's order. Utilizing this
network of facilities and the Company's regionalized management systems, the
Company believes it can be responsive to individual customers while providing
a broad range of products and services. The Company also owns a 50% interest
in Ryerson de Mexico, a general line metals service center and processer with
18 facilities in Mexico.
Ryerson, the predecessor of the Company, was founded in 1842 by Joseph T.
Ryerson. Between 1986 and 1990, the Company implemented a strategy of growth
through acquisitions, expanding its geographic coverage by purchasing five
service center companies with 26 facilities for approximately $210 million,
plus assumed debt of $63 million. The Company acquired Tull, AFCO Metals, Inc.
and Southern Metals Corporation in 1986, 1988 and 1989, respectively,
establishing the Company's presence in the southeastern United States. The
Company's acquisition in 1989 of Processed Metals, Inc. (doing business under
the "Keelor Steel" and "Select Steel" names) expanded the Company's processing
capability in the midwestern United States, adding facilities in Minneapolis,
Minnesota and Marshalltown, Iowa. In 1990, the Company acquired the Metra
division of Schnitzer Steel, Inc., with facilities in Portland, Oregon,
Phoenix, Arizona and Salt Lake City, Utah, expanding the Company's presence in
the western United States.
The Company is divided into five operating business units along regional and
product lines with the following operations and locations:
<TABLE>
<CAPTION>
BUSINESS UNIT DESCRIPTION LOCATIONS
------------- ----------- ---------
<C> <S> <C>
Ryerson East Primarily general line service Buffalo, NY
centers Charlotte, NC
with substantial processing Chattanooga, TN
capabilities Cleveland, OH
Philadelphia, PA
Pittsburgh, PA
Wallingford, CT
Ryerson West Primarily general line service Denver, CO
centers Los Angeles, CA
with substantial processing Phoenix, AZ
capabilities Portland, OR
Salt Lake City, UT
San Francisco, CA
Seattle, WA
Spokane, WA
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
BUSINESS UNIT DESCRIPTION LOCATIONS
- ------------- ----------- ---------
<S> <C> <C>
Ryerson Central Primarily general line service Chicago, IL
centers with substantial processing Cincinnati, OH
capabilities Dallas, TX
Des Moines, IA
Detroit, MI
Houston, TX
Indianapolis, IN
Kansas City, MO
Milwaukee, WI
Minneapolis, MN
Omaha, NE
St. Louis, MO
Tulsa, OK
Tull/AFCO General line service centers Atlanta, GA
with some processing capabilities Baton Rouge, LA
Birmingham, AL
Charlotte, NC
Columbia, SC
Fort Smith, AR
Greensboro, NC
Greenville, SC
Jackson, MS
Jacksonville, FL
Little Rock, AR
Miami, FL
New Orleans, LA
Oklahoma City, OK
Richmond, VA
Shreveport, LA
Tampa, FL
West Memphis, AR
Wichita, KS
Ryerson Coil Processors Chicago, IL (two
Processing facilities)
Marshalltown, IA
Minneapolis, MN (two
facilities)
</TABLE>
The Company also owns a 50% interest in Ryerson de Mexico, a general line
metals service center and processor with 18 facilities located in Mexico. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Subsequent Event."
INDUSTRY OVERVIEW
Primary steel producers typically sell steel in the form of standard-sized
coils, sheets, plate, structurals, bars and tubes and generally sell in large
volumes with long lead times for production and delivery. Other primary metal
producers, such as producers of stainless steel and aluminum, also typically
sell their products in large volumes with long lead times for production and
delivery. However, many customers seek to purchase metals with customized
specifications, including value-added processing, in smaller volumes, on
shorter lead times and with more reliable delivery than primary metal
producers are able to provide. Metal service centers act as intermediaries
between primary metal producers and customers by purchasing metals in a
variety of shapes and sizes from primary metal producers in large volumes,
allowing metal service centers to take advantage of producer economies of
scale resulting in lower costs of material purchased, and engaging in a
variety of distribution and value-added processing operations to meet the
demands of specific customers.
29
<PAGE>
Because metal service centers purchase metals from a number of primary
producers, they can maintain a consistent supply of various types of metal
used by their customers. Most importantly, however, metal service centers
generally have lower fixed costs than primary metal producers. By purchasing
products from metal service centers, customers may be able to lower their
inventory levels, decrease the time between the placement of an order and
receipt of materials and reduce internal expenses, thereby lowering their
total cost of raw materials. The Company believes that the increased
prevalence of just-in-time inventory needs of manufacturers and intermediate
processors has made and will continue to make the value-added inventory,
processing and delivery functions performed by metal service centers more
important in the metals market.
The Industry is cyclical (with periods of strong demand and higher prices
followed by periods of weaker demand and lower prices), principally due to the
cyclical nature of the industries in which the largest consumers of metals
operate. Any significant slowdown in one or more of those industries could
have a material adverse effect on the demand for metals, resulting in lower
prices for metals and reduced profitability for metals service centers,
including the Company. Metals prices and metals service center profitability
improve as metal-consuming industries experience recoveries following economic
downturns.
The Industry is comprised of many companies, the majority of which have
operations limited as to product line and size of inventory and with customers
located in a specific geographic area. Based on SSCI data, the Company
believes that the Industry is comprised of between 750 and 1,000 service
centers, operating out of approximately 2,000 locations and servicing
approximately 300,000 customers. The Industry is highly fragmented, consisting
of a large number of small companies and a few relatively large companies.
Based on the Company's analysis of SSCI data, the Industry handled
approximately 27 million tons or approximately 25% of the metals distributed
in the United States in 1995.
The Industry is divided into three major groups: general line service
centers, specialized service centers and processing centers, each of which
targets different market segments. General line service centers handle a broad
line of metal products and tend to concentrate on distribution rather than
processing. General line service centers range in size from one location to a
nationwide network of locations. For general line service centers, individual
order size in terms of dollars and tons tends to be small relative to
processing centers, while the total number of orders is typically very high.
Specialized service centers focus their activities on a narrower range of
product and service offerings than general line companies. Such service
centers provide a narrower range of services to their customers and emphasize
product expertise and lower operating costs, while maintaining a moderate
level of investment in processing equipment. Processing centers typically
process large quantities of steel purchased from primary producers for resale
to large industrial customers, such as the automotive industry. Because orders
are typically large, operation of a processing center requires a significant
investment in processing equipment.
Because of the difficulty of differentiating commodity-like products, many
service centers attempt to differentiate themselves through the use of
sophisticated information systems and unique processing services, which
facilitate the provision of enhanced services at reduced cost. To varying
degrees at all service centers, but particularly at the larger, more
sophisticated companies, elaborate computer-based systems are used to automate
tasks such as order entry, material tracking, work-order scheduling and
processing, inventory management, billing and accounts payable and receivable
tracking. Some companies are creating and enhancing EDIs between themselves
and their suppliers and customers. The introduction and development of these
systems have increased the quality of products and services provided by
service centers.
Management believes that, in recent years, there has been a trend towards
increased outsourcing by manufacturers of certain operations and the
production of component parts, with manufacturers
30
<PAGE>
concentrating on producing finished products. Many industrial companies have
been unwilling or unable to invest the significant amount of capital in the
space, technology and equipment necessary to store and process metals required
for their operations. By outsourcing certain operations, including inventory
management, processing, blanking and precision burning, many manufacturers are
able to accommodate shorter production runs and changeover times. This
increased flexibility allows them to better respond to competitive pressures.
Moreover, many manufacturers find it beneficial, from a cost and quality
standpoint, to outsource many of the component parts that are utilized in the
production of their products. At the same time, manufacturers have been
reducing the number of suppliers that they rely on in order to reduce the
administrative cost of dealing with multiple suppliers and to take advantage
of volume discounts.
Management believes that, in recent years, there has also been a trend in
the Industry towards consolidation, which the Company believes will continue
as long as the introduction of sophisticated operational and computer-based
systems continues to create economies of scale. Based on the Company's
analysis of SSCI data, the Industry has increased its share of metals
distributed in the United States from approximately 17% in 1980 to
approximately 25% in 1995. The Company believes that it is well positioned to
take advantage of acquisition opportunities that may arise from consolidation
in the Industry because of its capital resources, acquisition experience and
nationwide presence.
BUSINESS STRATEGY
The Company's strategy is to expand its market leadership position as a
nationwide general line metals service center and processor of metals by
providing its customers with high quality products and services at competitive
prices. The Company believes that increasing its market share will be an
effective means of increasing its profitability. One of the Company's goals is
to enhance its competitive position through the aggressive pursuit of organic
growth, strategic acquisitions, ongoing unit cost reductions and increased
asset productivity, although there can be no assurance that the Company will
achieve this goal. As part of its overall business strategy, the Company has
made substantial investments in management information systems that link its
operations and enhance interactions between the Company and its customers and
suppliers. Based on its size, which leads to cost efficiencies, the trend
towards consolidation in the number of suppliers used by customers, strategic
plant locations, broad product and service offerings and management's
acquisition strategy, the Company believes that it is well positioned to take
advantage of the anticipated growth and consolidation in the Industry. See "--
Industry Overview."
ORGANIC GROWTH
The Company believes that it can benefit from both the anticipated growth of
the Industry and the growth of its market share within the Industry.
The Company believes that the Industry occupies a growing niche between
primary producers of carbon, alloy and stainless steel, aluminum and other
metals and purchasers of those products, including manufacturers and
intermediate processors. Metals service centers, including the Company,
provide services not typically available from primary producers, such as more
reliable deliveries, smaller order sizes, the convenience of dealing with a
smaller number of suppliers, just-in-time inventory management and customer-
specific, value-added processing. The Company believes that the role of metals
service centers is expanding as a result of a number of factors, including the
increased outsourcing of inventory management functions and metals processing
operations by manufacturers and the lower cost and more reliable service
available from service centers as compared to primary producers.
One of the Company's goals is to expand its market leadership position
within the Industry through competitive pricing, broad product and service
offerings and the use of technology to improve customer service. The Company's
large size, buying power and competitive cost structure enable it to negotiate
31
<PAGE>
favorable prices for raw materials and to take advantage of producer economies
of scale resulting in lower costs of materials purchased, allowing it to offer
its products and services at competitive prices. In addition, the Company's
broad product and service offerings provide customers one-stop shopping,
positioning the Company to capitalize on what it believes to be a continuing
trend towards consolidation in the number of suppliers used by customers. To
this end, the Company has initiated a national accounts program targeting
customers that purchase metal from a number of suppliers throughout the
country. The Company believes it can better serve these customers by providing
competitive pricing and superior delivery and quality. One of the Company's
goals is to differentiate itself from its competitors by providing materials
and services on a more timely basis and with fewer rejections than its
competitors through increased emphasis on quality control. The Company has
received ISO 9002 certification for five facilities and will seek
certification for additional facilities in the future. ISO 9002 is a series of
international standards for quality management and assurance. The Company
believes that certain major customers seek suppliers with such certification
and that such certification helps differentiate it from its competitors.
STRATEGIC ACQUISITIONS
The Company believes that the fragmented nature of the Industry, combined
with the Company's strong national reputation, nationwide operations, market
leadership position and experience in integrating facility operations make the
Company well situated to become a strategic buyer of service center assets.
The Company will seek selective acquisitions of businesses that complement, or
strategically extend, the Company's existing businesses. Acquired companies
can be either integrated into the Company's network or, depending on the
circumstances, operated as stand-alone facilities. In either case, the Company
believes that such acquisitions could enable it to realize further economies
of scale (particularly in operating cost, asset utilization and purchasing
leverage) and could better utilize the Company's existing facilities and
systems capability. Although the Company from time to time discusses potential
acquisitions with other service center operators, the Company currently has no
understandings, agreements or commitments to make any acquisitions.
The Company believes that its ability to integrate acquired operations into
its existing facility operations will be critical to the ongoing success of
its acquisition strategy. Although the Company has not acquired any operations
since 1990, the Company believes that management's experience in successfully
integrating existing operations has provided it with experience relevant to
integrating acquired businesses. During 1994 and 1995, the Company closed two
low-profit facilities in Boston and Jersey City, integrating these operations
with plants in Wallingford, Connecticut and Philadelphia. These consolidations
resulted in a high level of customer retention, increased profitability, a
significantly lower cost and asset base and, the Company believes, a
comparable level of customer service. While the Company has achieved
profitable operations of businesses acquired in the past, there can be no
assurance that any future acquisitions, if completed, would be profitable.
UNIT COST REDUCTIONS AND INCREASED PRODUCTIVITY
Another of the Company's goals is to decrease unit costs through initiatives
which include increasing volume, thereby taking advantage of economies of
scale, and increasing asset and employee productivity. The Company has made
and will continue to make investments in computer-based and automated systems
that track profitability by customer, product and cost of process, allowing
the Company to determine where changes can be made to reduce cost and increase
profitability. The Company intends to increase its emphasis on the use of EDI
with its suppliers and customers to reduce the paperwork and administrative
costs associated with customer orders, shipment tracking, billing and
remittance processing. The Company continues to re-engineer its various work
processes through benchmarking analyses across its 52 facilities. Re-
engineering enables the Company to increase output without increasing its
labor force by increasing the efficiency with which work processes are
performed.
32
<PAGE>
Finally, the Company has continued to improve its inventory management
systems and processes. Management believes improved forecasting and aggressive
supplier management should increase asset productivity. Also, to the extent
that sales grow, the Company believes that it can improve inventory management
and reduce total inventory per dollar of sales. The Company has installed
computer-based systems to enable it to more accurately measure and control the
appropriate inventory level.
COMPETITIVE STRENGTHS
The Company has a number of competitive strengths that it believes will
facilitate the implementation of the Company's strategy, including its market
leadership position and its management systems and practices.
MARKET LEADERSHIP POSITION
With $2.5 billion of sales in 1995, the Company has a U.S. market share of
approximately 9%, more than twice the U.S. market share of the next largest
competitor, based on the Company's analysis of SSCI data. The Company sells
its products through 52 facilities located throughout the United States.
ECONOMIES OF SCALE. Because of the Company's large size, its costs of
operations can be spread across a large base of sales, resulting in lower
fixed costs per ton sold. However, in times of decreasing sales, the Company's
fixed costs must be spread across a smaller base of sales, resulting in higher
fixed costs per ton sold. The Company believes that available capacity at many
of its plants will allow it to achieve further economies of scale to the
extent it increases sales in the future. Of the Company's 52 facilities, six
are currently operating one shift, 31 are operating two shifts and 15 are
operating three shifts. In addition, the size of the Company's material
purchases enables its suppliers to realize economies of scale and thereby
provide the Company with competitive prices.
SCOPE OF PRODUCTS AND SERVICES. The Company's broad product and service
offerings provide customers one-stop shopping for most of their metals needs.
In addition, the Company believes that its 52 facilities located throughout
the continental United States, generally within one day's delivery time of
almost all U.S. manufacturing centers, position it to target national
customers that currently buy metals from a variety of suppliers in different
locations. The Company's ability to transfer inventory among facilities
enables it to have available specialized items at regional locations
throughout its network and to provide such inventory on a timely basis more
profitably than if it were required to maintain inventory of all products at
each location.
RELATIONSHIPS WITH SUPPLIERS. The Company is among the largest purchasers of
steel in the United States and is also a significant purchaser of aluminum in
the United States. The Company buys from and has developed relationships with
many U.S. steel producers as well as other metal producers. The Company's
relationships with numerous metal producers provide it access to high quality
metals, timely delivery and new product and service ideas from many suppliers.
In addition, because the Company purchases large volumes of metals, it can
negotiate competitive prices from its suppliers. In part because of its buying
power, the Company has been able to secure product from primary manufacturers
during times of tight supply.
DIVERSE CUSTOMER BASE. The Company's diverse customer base, consisting of
over 50,000 customers, reduces its exposure to the failure of a single
customer's business or a downturn in a particular industry. No customer
accounted for more than 2% of 1995 sales and the top ten customers accounted
for approximately 10% of 1995 sales. The Company sells to customers in most of
the metal-consuming industries, including machinery manufacturers, metal
producers and fabricators, transportation equipment producers and electrical
machinery producers.
33
<PAGE>
MANAGEMENT SYSTEMS AND PRACTICES
The Company's management information systems have allowed management to
develop an internal benchmarking system and to track profitability by
customer, product and cost of process. This detailed information enables
management to make adjustments such as reallocating slow-moving inventory to
different locations to increase inventory turns, improving purchasing,
targeting customers or changing suppliers as needed. The Company's 52
facilities provide it with a large base for testing, comparing and
implementing new management practices.
The Company has spent $40 million to maintain and improve its management
information systems over the last three years. The Company operates data
processing systems that, among other functions, are used to purchase, monitor
and allocate inventory throughout its interconnected production facilities.
The Company believes that this monitoring has enabled it to effectively manage
inventory costs and achieve improved turnover rates. These systems also
include computerized order entry, sales analysis, inventory and work-in-
process status, invoicing and payment, and are designed to improve
productivity for both the Company and its customers. The Company also uses
EDI, which offers customers a paperless process for shipment tracking,
billing, remittance processing and other routine matters.
PRODUCTS AND SERVICES
The Company carries a full line of carbon steel, stainless steel and
aluminum, and a limited line of alloy steel, nickel, red metals and plastics.
These materials are inventoried in a number of shapes, including coils,
sheets, rounds, hexagons, square and flat bars, plate, structurals and tubing.
The following table sets forth the Company's shipments (by sales revenue)
for 1993, 1994 and 1995 for each of the Company's product lines.
<TABLE>
<CAPTION>
PERCENTAGE OF
SALES REVENUE
----------------
PRODUCT LINE 1993 1994 1995
- ------------ ---- ---- ----
<S> <C> <C> <C>
Stainless and aluminum........................................ 23% 23% 27%
Carbon flat rolled............................................ 28 28 24
Bars, tubing and structurals.................................. 23 23 22
Fabrication and carbon plate.................................. 19 19 20
Other......................................................... 7 7 7
--- --- ---
Total....................................................... 100% 100% 100%
=== === ===
</TABLE>
More than one-half of the material sold by the Company is processed. The
Company uses techniques such as sawing, slitting, blanking, pickling, cutting
to length, levelling, flame cutting, laser cutting, edge trimming, edge
rolling, fabricating and grinding to process materials to specified thickness,
length, width, shape and surface quality pursuant to specific customer orders.
Among the most common processing techniques used by the Company are pickling,
a chemical process using an acidic solution to remove surface oxide, commonly
called "scale," from steel which develops after the steel is hot rolled;
slitting, which is cutting coiled metals to specified widths along the length
of the coil; levelling, which is flattening metals and cutting them to exact
lengths; and edge rolling, a process which imparts round or smooth edges.
Although the Company often uses third party fabricators to outsource certain
limited processes that the Company is not able to perform internally,
outsourcing these processes does not affect a significant part of the
Company's operations or constitute a significant part of the Company's
operating costs and expenses.
The plate burning and fabrication processes are particularly important to
the Company. These processes require sophisticated and expensive processing
equipment. As a result, rather than making
34
<PAGE>
investments in such equipment, manufacturers have increasingly outsourced
these processes to material service centers. The Company has flame and laser
cutting capacity in 41 of its 52 facilities.
The Company also provides services and technical advice to its customers as
an integral part of providing products to its customers. The Company does not
charge customers separately for such services or advice, but rather includes
the costs of such services and advice in the price of products sold to such
customers.
The Company's services include: just-in-time delivery, production of kits
containing multiple products for ease of assembly by the customer, the
provision of Company-owned material to the customer and the placement of
Company employees at the customer's site for inventory management, production
and technical assistance. The Company also provides special stocking programs
where products that would not otherwise be stocked by the Company are held in
inventory to meet certain customers' needs. The foregoing services are
designed to reduce customers' costs by minimizing their investment in
inventory and improving their production efficiency.
The Company provides customers with technical advice on part design and
material specification and early stage material processing and fabrication.
Early stage material processing and fabrication by the Company can benefit
customers that cannot economically perform such processes at their own plants.
Technical advice and early stage processing functions are intended to reduce a
customer's material cost and ultimately its finished product cost.
All of the Company's products and services can be ordered through EDI, a
sophisticated electronic network that connects the Company's plants, as well
as certain of the Company's vendors and customers. Orders can also be
transmitted through direct ordering systems. Intricate design specifications
for particular jobs also can be electronically transmitted. Order entry
through scheduling, processing and shipping are monitored by the Company's
computer system and bar coding is available to aid in, and reduce the cost of,
tracking material at customer sites.
CUSTOMER BASE
The Company's customer base is diverse, numbering over 50,000. No customer
accounted for more than 2% of the Company's sales in 1995 and the top ten
customers accounted for approximately 10% of the Company's sales in 1995. The
Company's customer base includes most metal-consuming industries, most of
which are cyclical. The Company's shipments (by sales revenue) for 1993, 1994
and 1995 for each class of the Company's customers were as set forth in the
table below.
<TABLE>
<CAPTION>
PERCENTAGE OF
SALES REVENUE
----------------
CLASS OF CUSTOMER 1993 1994 1995
- ----------------- ---- ---- ----
<S> <C> <C> <C>
Machinery manufacturers....................................... 35% 36% 38%
Metal producers and fabricators............................... 25 25 25
Transportation equipment producers............................ 9 10 10
Electrical machinery producers................................ 10 9 9
Wholesale distributors........................................ 4 3 3
Construction-related purchasers............................... 5 4 3
Metal mills and foundries..................................... 3 3 3
Other......................................................... 9 10 9
--- --- ---
Total....................................................... 100% 100% 100%
=== === ===
</TABLE>
The Company believes it is particularly well suited to service regional or
national customers that value the Company's nationwide network of facilities,
broad product and service offerings, technical expertise and emphasis on
customer service. The Company believes that many of these customers value the
technical capability and single sourcing of most or all of their multiple
product needs that the Company is able to provide.
35
<PAGE>
The Company's flat rolled processing business unit, Ryerson Coil Processing
("Ryerson Coil"), generally serves a customer base that differs from the
Company's general line service center business. A large portion of Ryerson
Coil's customers have long-term supply contracts with Ryerson Coil. These
contracts are typically at fixed prices and are generally from three months to
one year in duration, although Ryerson Coil has a small number of arrangements
with large customers that extend beyond one year. Ryerson Coil attempts to
limit its financial exposure on these fixed-price sales arrangements by
entering into fixed-price supply arrangements with one or more suppliers for
comparable periods of time. Ryerson Coil's customers often seek large
quantities of carbon sheet product that have undergone one or more of the
following processes: pickling, cutting to length, slitting, tension levelling,
texturing or blanking. Many of Ryerson Coil's approximately 625 customers are
in the transportation, appliance, office furniture or cabinetry businesses.
SUPPLIERS
In 1995, the Company purchased in excess of 2.3 million tons of material
from many suppliers, including approximately 400,000 tons from ISC, a wholly-
owned subsidiary of ISI. The Company expects to continue purchasing
significant amounts of steel from ISC in the future, although there can be no
assurance that such purchases will continue. See "Relationship with ISI--
Supply Arrangements." Excluding ISC, the Company's top 25 suppliers accounted
for approximately 50% of 1995 purchases.
The Company purchases the majority of its inventories in the open market at
prevailing market prices. However, occasionally the Company enters into long-
term, fixed-price supply contracts to offset its long-term, fixed-price sales
contracts in order to minimize its financial exposure.
Because the Company uses many suppliers and because there is a substantial
overlap of product offerings from these suppliers, the Company believes it
will be able to meet its materials requirements for the foreseeable future.
The Company works with and monitors its suppliers in order to obtain
improvements in price, quality, service, delivery and performance. The Company
believes it has good relationships with most of its suppliers.
SALES AND MARKETING
Each of the Company's business units maintains its own sales and marketing
force. In addition to its office sales staff, the Company markets and sells
its products through the use of its field sales force that has extensive
product and customer knowledge and through a comprehensive catalog of the
Company's products. The Company's office and field sales staffs, which
together consist of approximately 800 employees, include technical and
metallurgical personnel. In addition, the Company's technically-oriented
marketing department develops advertising materials and maintains product
expertise for each of the various types of materials sold and industries
serviced by the Company.
During 1995, the Company began a number of sales and marketing programs
which it believes will enhance its ability to grow. As part of this effort,
the Company appointed a national sales director to market its products and
services to customers with a national presence. These customers typically
place orders from each of their plants with local suppliers, resulting in
national customers having multiple suppliers for similar products. The Company
believes that it can better serve these customers by providing competitive
pricing and superior delivery and quality. The Company believes that no
competitor of the Company currently has as broad a national coverage as the
Company.
In addition, the Company recently began a sales territory market analysis to
improve sales force productivity. One of the primary goals of the analysis is
to determine what products can be sold to metal-consuming manufacturers and
processors with whom the Company currently does little or no business.
36
<PAGE>
DISTRIBUTION
The Company has a nationwide distribution network and management information
systems that generally enable delivery of a customer's order from the most
economic plant location within 24 hours. The Company's management information
systems create an integrated network of plants and distribution facilities
that has contributed to a reduction in inventory levels and lower overall
product delivery costs while improving customer service. The Company typically
ships inventory between its facilities and products to customers by Company
trucks and by common carrier.
MANAGEMENT INFORMATION SYSTEMS
The Company operates data processing systems that, among other functions,
are used to purchase, monitor and allocate inventory throughout its production
facilities. The Company believes that this monitoring enables it to
effectively manage inventory costs and achieve improved turnover rates. These
systems also include computerized order entry, sales analysis, inventory
status, work-in-process status, invoicing and payment. The systems are
designed to improve productivity for both the Company and its customers. The
Company also uses EDI, which has the advantage of offering customers with EDI
capability a paperless process for shipment tracking, customer billing,
remittance processing and other routine matters. In addition, an activity-
based costing system is available to help the Company measure profitability
and facilitate changes in process when needed.
PROPERTIES
The Company's headquarters are located in Chicago, Illinois. Of the
Company's 52 facilities, 45 are owned, five are leased and two are owned in
part and leased in part. Additionally, two of the five regional offices are
leased. Most leases have initial terms of more than one year and include
options to renew. While some of the Company's leases expire in the near term,
the Company does not believe that it will have difficulty either renewing such
leases or finding alternative sites. The Company's facilities are capable of
being utilized at higher capacities, if necessary. The Company believes that
its facilities are adequate for the purposes for which they are presently
used.
EMPLOYEES
As of March 31, 1996, the Company employed 4,965 persons. Of these
employees, 2,327 were salaried employees and 2,638 were hourly employees.
Approximately 40% of the hourly employees were members of various unions,
including the United Steelworkers and the Teamsters. The Company's
relationship with the various unions generally has been good, but occasional
work stoppages have occurred. Over the last five years, work stoppages have
occurred at two facilities (approximately 4% of the total), have involved an
average of 46 employees and have lasted an average of eight days. During the
next 12 months, labor contracts covering 652 employees at 15 facilities will
expire. The current agreement with the United Steelworkers will expire on July
31, 1996, and agreements with the Teamsters expire on various dates during the
period beginning June 30, 1996 and ending May 15, 1999. Excluding these
agreements with the United Steelworkers and the Teamsters, one contract
covering 27 employees is due to expire in 1996, and four contracts covering 83
employees are due to expire in 1997. While the Company's management does not
expect any unresolvable issues to arise in connection with the renewal of any
of these contracts, no assurances can be given that any of these contracts
will be extended prior to their expiration.
Prior to April 30, 1996, certain of the Company's employees were eligible to
participate in the ISI Pension Plan, a noncontributory defined benefit pension
plan. Effective April 30, 1996, that portion of the ISI Pension Plan covering
the Company's current and former employees was separated and became the
Pension Plan. See "Management--Pension Benefits" and "Relationship with ISI."
Almost all employees are covered by Company-provided life insurance and a
health benefits plan which
37
<PAGE>
provides broad health coverage for employees and their families. Premiums for
this health coverage are shared between the Company and its employees. The
Company believes that its salary and benefits structure is competitive in the
Industry.
COMPETITION
The Company is engaged in a highly fragmented and competitive Industry. In
general, competition is based on quality, service, price and geographic
proximity. Based on SSCI data, the Company believes that the Industry is
comprised of between 750 and 1,000 service centers, operating out of
approximately 2,000 locations. The Company competes with many other general
line service centers, specialized service centers and processing centers on a
regional and local basis, some of which may have greater financial resources
and flexibility than the Company. The Company also competes to a lesser extent
with primary steel producers. Primary steel producers typically sell to very
large customers that require regular shipments of large volumes of steel.
Although these large customers sometimes use metals service centers to supply
a portion of their metals needs, metals service center customers (including
the Company's customers) typically are consumers of smaller volumes of metals
than customers of primary steel producers. To the extent that some of the
Company's competitors purchase a higher percentage of metals than the Company
from foreign steelmakers, such competitors may benefit from favorable exchange
rates or other economic or regulatory factors that may result in a competitive
advantage. This competitive advantage may be offset somewhat by higher
transportation costs associated with importing metals into the United States.
Industry demand, in general, has weakened since mid-1995. As a result, the
Company has been reducing its prices since mid-1995 to remain competitive.
The Company believes that it is well positioned in the Industry because of
its large number of locations, highly trained technical sales force,
sophisticated computer systems, modern equipment, broad-based inventory and
the economies of scale provided by its highly interconnected network of
facilities. In addition, the Company believes that it is strong in processing
materials, particularly in cutting materials to length, slitting, sawing,
plate burning and fabrication. Based upon Industry data, the Company believes
that it is the largest general line metals service center in the United States
based on sales revenues.
The Company intends to differentiate itself from the competition based on
improved service and quality through investments in systems, equipment,
product and service offerings and by attaining a low-cost position compared to
many of its competitors. The Company believes that it has initiatives in place
that will produce results in these areas and that it is well positioned
operationally and financially to make advantageous capital investments and
acquisitions.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
The Company's operations are subject to many federal, state and local
regulations relating to the protection of the environment and to workplace
health and safety. In particular, the Company's operations are subject to
extensive federal, state and local laws and regulations governing waste
disposal, air and water emissions, the handling of hazardous substances,
environmental protection, remediation, workplace exposure and other matters.
The Company's management believes that the Company is presently in substantial
compliance with all such laws and does not currently anticipate that the
Company will be required to expend any substantial amounts in the foreseeable
future in order to meet current environmental, workplace health or safety
requirements. However, additional costs and liabilities may be incurred to
comply with current and future requirements, which costs and liabilities could
have a material adverse effect on the Company's results of operations or
financial condition.
There are no known pending remedial actions or claims relating to
environmental matters that are expected to have a material effect on the
Company's financial position or results of operations. Some
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<PAGE>
of the properties owned or leased by the Company, however, are located in
industrial areas or have a history of heavy industrial use. These properties
may potentially incur environmental liabilities in the future that could have
a material adverse effect on the Company's financial condition or results of
operations.
RYERSON DE MEXICO
The Company also owns a 50% interest in Ryerson de Mexico, a joint venture
with Altos Hornos de Mexico, S.A. de C.V., an integrated steel mill operating
in Mexico. Ryerson de Mexico, which was formed in 1994, is a general line
metals service center and processor with 18 facilities in Mexico. As of April
30, 1996, the Company's investment in Ryerson de Mexico totalled approximately
$18 million. The impact of Ryerson de Mexico on the Company's results of
operations has not been material.
PATENTS AND TRADEMARKS
The Company owns several U.S. patents and U.S. and foreign trademarks,
service marks and copyrights. Certain of the trademarks are registered with
the U.S. Patent and Trademark Office and, in certain circumstances, with the
trademark offices of various foreign countries. The Company's patents expire
over various periods of time beginning in 2011. The Company believes that the
expiration of its patents will not materially adversely affect its business.
The Company considers certain other information owned by it to be trade
secrets. The Company protects its trade secrets by, among other things,
entering into confidentiality agreements with its employees regarding such
matters and implementing measures to restrict access to sensitive data and
computer software source code on a need-to-know basis. The Company believes
that these safeguards adequately protect its proprietary rights and the
Company vigorously defends these rights.
The Company's operating subsidiaries own or have obtained licenses for
various trademarks, service marks, trade names, copyrights, inventions, know-
how, trade secrets, confidential information and other intellectual property
that are necessary for the conduct of its businesses (collectively,
"Intellectual Property"). Neither the Company nor its operating subsidiaries
is aware of any claim (or of any facts that would reasonably be expected to
result in any such claim) or challenge by any third party that would
significantly limit the rights of the Company or its operating subsidiaries
with respect to any such Intellectual Property or to challenge the validity or
scope of any such Intellectual Property. The Company has no pending claim
against a third party with respect to the infringement by such third party to
any such Intellectual Property that, if determined adversely to the Company,
would individually or in the aggregate have a material adverse effect on the
Company's financial condition or results of operations. While the Company
considers all of its intellectual property rights as a whole to be important,
the Company does not consider any single right to be essential to its
operations as a whole.
LEGAL PROCEEDINGS
From time to time the Company is named as a defendant in legal actions
arising in the ordinary course of its business. The Company is not a party to
any pending legal proceedings other than routine litigation incidental to its
business. Management does not believe that the resolution of these claims will
have a material adverse effect on the Company's financial condition or results
of operations.
39
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's Directors and executive officers and their ages as of June 10,
1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert J. Darnall............... 58 Chairman and Director
President, Chief Executive Officer and
Neil S. Novich.................. 41 Director
Jay M. Gratz.................... 44 Vice President, Finance and Chief Financial
Officer
Stephen E. Makarewicz........... 49 President, Tull
Carl G. Lusted.................. 60 President, Ryerson Central
Gary J. Niederpruem............. 44 President, Ryerson East
Thomas S. Cygan................. 51 President, Ryerson West
Timothy L. LaPerre.............. 50 President, Ryerson Coil
William Korda................... 48 Vice President, Human Resources
Darell R. Zerbe................. 53 Vice President, Information Technology
Lily L. May..................... 46 Controller
Vicki L. Avril.................. 41 Treasurer
Charles B. Salowitz............. 47 Secretary
James A. Henderson.............. 61 Director
Donald S. Perkins............... 69 Director
Jean-Pierre Rosso............... 55 Director
</TABLE>
Robert J. Darnall has been Chairman of the Company and Chairman and Chief
Executive Officer of Ryerson since April 1995. He formerly was Chairman of the
Company from November 1990 to June 1994. He has been President, Chief
Executive Officer and a Director of ISI since April 1986 and became Chairman
of ISI in 1992. He is also Chairman, President and Chief Executive Officer of
ISC and has been a Director of ISC since 1983. He joined ISC in 1962, has
served as its Chairman since 1992, as its Chief Executive Officer from 1992 to
1995 and since April 1996 and as its President from 1984 to 1986, 1987 to 1992
and since April 1996. Mr. Darnall is also a Director of Cummins Engine
Company, Inc. and Household International, Inc. Although Mr. Darnall devotes a
substantial portion of his time to the Company, most of his time is devoted to
ISI and its other subsidiaries.
Neil S. Novich has been President, Chief Executive Officer and Chief
Operating Officer of the Company, President of Ryerson and Chairman of Tull
since June 1994. Mr. Novich was also appointed a Director of the Company in
June 1994. He served as Chairman of Ryerson from June 1994 to April 1995. He
was a Senior Vice President of ISI from January 1995 to May 1996 and served as
a Vice President of ISI from June 1994 to January 1995. Prior to joining ISI
in 1994, he led the Distribution and Logistics Practice at Bain & Company
("Bain"), an international management consulting firm, from 1987 and was
employed by Bain beginning in 1981.
Jay M. Gratz has been Vice President, Finance of the Company since September
1994 and Vice President, Finance and Chief Financial Officer of ISI since May
1996. He was Vice President, Finance of ISC from March 1993 to September 1994
and Vice President, Finance of the Inland Steel Flat Products Company division
of ISC from November 1991 to March 1993. Mr. Gratz also served as General
Manager of Financial Planning and Analysis of ISI from December 1989 to
November 1990 and Manager of Financial Planning and Analysis of ISI from July
1986 to December 1989. Mr. Gratz joined ISC in August 1975.
Stephen E. Makarewicz has been President, Chief Executive Officer and Chief
Operating Officer of Tull since October 1994. Mr. Makarewicz was Vice
President and General Manager of Ryerson Chicago from April 1992 to October
1994, Vice President and General Manager of Tull from June 1990
40
<PAGE>
to April 1992 and District Manager for Tull's Charlotte facility from June
1988 to June 1990. Mr. Makarewicz originally joined Tull in September 1983.
Carl G. Lusted has been President of the Ryerson Central division of Ryerson
since August 1990. Mr. Lusted was Vice President and General Manager of Tull
from August 1984 to August 1990, Vice President, Merchandising of Tull from
January 1983 until August 1984, Vice President, Marketing of Tull from
September 1979 to January 1983 and Corporate Secretary of Tull from April 1979
to September 1979. Mr. Lusted originally joined Tull in January 1968.
Gary J. Niederpruem has been President of Ryerson East since January 1993.
He served as General Manager of Ryerson's Buffalo location from August 1985 to
January 1993 and General Order Manager of Ryerson's Minneapolis location from
November 1980 to August 1985. Mr. Niederpruem joined Ryerson in May 1973.
Thomas S. Cygan has been President of Ryerson West since November 1994. He
served as General Manager of Ryerson's Kansas City location from May 1981 to
November 1994. He also served as Inside Sales Manager for Ryerson-Detroit from
August 1976 to May 1981 and Inside Sales Manager for Ryerson's Machinery
Division from January 1973 to August 1976. Mr. Cygan joined Ryerson in
February 1966.
Timothy L. LaPerre has been President of Ryerson Coil since January 1993. He
served as Vice President and General Manager of Ryerson Coil from March 1990
to January 1993. He also served as Executive Vice President and General
Manager of Keelor Steel from March 1987 to March 1990. Mr. LaPerre originally
joined Keelor in April 1972.
William Korda has been Vice President of Human Resources of the Company
since October 1993. He served as the Company's Manager of Human Resources from
August 1992 to October 1993 and as Manager of Benefits and Salary
Administration for the Company from January 1991 to August 1992. He also
served as a Human Resources Manager for Ryerson from January 1986 to January
1991, Manager of Human Resources Development of ISC from April 1985 to January
1986 and Personnel Manager of ISC from September 1982 to April 1985. Mr. Korda
joined ISC in June 1969.
Darell R. Zerbe has been Vice President, Information Technology and Chief
Information Officer of the Company since February 1996. He served as Senior
Vice President, Management Information Systems, for Venture Stores, Inc. from
1988 to February 1996. Mr. Zerbe has also been employed by PepsiCo., Inc., Dr.
Pepper, Inc., Baxter International, Inc. and Procter & Gamble Co.
Lily L. May has been Controller of the Company since May 1996. She was Vice
President, Finance and Purchasing, and Controller of ISC from January 1995
through May 1996. Prior to that, she was Director of Purchases and Energy of
the Inland Steel Flat Products Company division of ISC from November 1993 to
January 1995. She also served as Director of Internal Auditing of ISI from
February 1992 to November 1993, Director of Corporate Accounting of ISI from
February 1991 to February 1992 and Manager of Pension Investment's of ISI from
September 1990 to February 1991. Ms. May joined ISC in December 1973.
Vicki L. Avril has been Treasurer of the Company since February 1994. She
has also been Treasurer of Ryerson and Tull since February 1994 and of ISI and
ISC since January 1994 and Director-Corporate Planning of ISI since January
1995. In addition, she was Director of Pension Investments and Administration
of ISI from June 1991 to January 1995, Assistant Treasurer of ISI from May
1993 to January 1994 and Manager of Distribution Business Development-
Corporate Planning and Development from February 1990 to June 1991. Ms. Avril
joined ISC in September 1976. Although Ms. Avril devotes a substantial portion
of her time to the Company, most of her time is devoted to ISI and its other
subsidiaries.
41
<PAGE>
Charles B. Salowitz has been Secretary of the Company since April 1996.
Since September 1995 he has been Secretary of ISI and ISC. He has also been
Associate General Counsel of ISI since January 1995. He was an Assistant
General Counsel of ISI from July 1989 and Assistant Secretary from July 1989
to September 1995. Mr. Salowitz joined ISC in September 1983. Although Mr.
Salowitz devotes a substantial portion of his time to the Company, most of his
time is devoted to ISI and its other subsidiaries.
James A. Henderson has been a Director of the Company since May 1996. Mr.
Henderson is Chairman and Chief Executive Officer of Cummins Engine Company,
Inc. ("Cummins Engine"), a manufacturer of diesel engines. He joined Cummins
Engine in 1964, was elected Executive Vice President in 1971, and was elected
Executive Vice President and Chief Operating Officer in 1975. In 1977, he was
elected President and Chief Operating Officer of Cummins Engine, was elected
President and Chief Executive Officer in 1994 and assumed his present position
in 1995. Mr. Henderson is also a Director of ISI, ISC, Cummins Engine,
Ameritech Corporation and Rohm and Haas Company.
Donald S. Perkins has been a Director of the Company since May 1996. Mr.
Perkins was Chairman of Jewel Companies, Inc., a diversified retailer, prior
to his retirement in 1980. Mr. Perkins is also a Director of ISI, ISC, Aon
Corporation, Lucent Technologies Inc., Cummins Engine, Illinova Corporation,
LaSalle Street Fund Incorporated, the Putnam Funds, Springs Industries, Inc.
and Time Warner Inc.
Jean-Pierre Rosso has been a Director of the Company since May 1996. Mr.
Rosso is Chairman, President and Chief Executive Officer of Case Corporation,
a worldwide designer, manufacturer and distributor of farm and construction
machinery, and was President and Chief Executive Officer of that company from
April 1994 to March 1996. Prior to joining Case Corporation, he was President
of the Home and Building Control Division of Honeywell Inc., a producer of
advanced technology products, from 1991 to 1994 and President of Honeywell
Europe from 1987 until 1991. He is also a Director of ISI, ISC, Case
Corporation, ADC Telecommunications Inc. and the Principal Financial Group.
The Certificate of Incorporation requires that after the date 60 days after
the consummation of the Common Stock Offerings, when any shares of Class A
Common Stock are outstanding, at least one-third of the members of the Board
of Directors be Independent Directors (as defined in the Certificate of
Incorporation), except under specific limited circumstances. The Certificate
of Incorporation also requires that the Board of Directors be divided into
three classes, with the Independent Directors allocated as evenly as possible
among the classes. Within 60 days of the consummation of the Common Stock
Offerings, the Company intends to increase the number of Directors to a total
of eight, including three Independent Directors, and to appoint the three
Independent Directors. Mr. Rosso serves in the class of Directors whose terms
expire at the annual meeting of stockholders in 1997. Messrs. Henderson and
Novich serve in the class of Directors whose terms expire at the annual
meeting of stockholders in 1998. Messrs. Darnall and Perkins serve in the
class of Directors whose terms expire at the annual meeting of stockholders in
1999. Upon the expiration of the term of each class of Directors, the
Directors comprising such class will be elected for a three-year term at the
annual meeting of stockholders in the year in which such term expires. All
officers serve at the discretion of the Board of Directors.
DIRECTORS' COMPENSATION
Prior to the consummation of the Common Stock Offerings, the Directors were
not compensated for their services in such capacity. Pursuant to the terms of
the Directors' Compensation Plan, each Director who is not an employee of the
Company or any of its subsidiaries or affiliates, will receive an annual
retainer of $40,000, which will be paid 50% in shares of Class A Common Stock
and 50% in cash, provided that a Director may elect to receive all or any
portion of the cash portion of such retainer
42
<PAGE>
in shares of Class A Common Stock. Such Directors will also receive $1,000 for
each special meeting of the Board of Directors, and for each special committee
meeting not held in conjunction with a regular or special meeting of the Board
of Directors, attended by them. No fees will be paid for any meeting of the
Executive Committee and membership on the Compensation and Nominating
Committees is regarded as membership on only one committee for purposes of
payment of fees for special meetings. Each Director who serves as chairman of
a standing committee of the Board of Directors will receive an additional
annual retainer of $4,000. Pursuant to the terms of the Directors'
Compensation Plan, each such Director may also elect, prior to January 1 of
each year, to defer payment of all or any portion of the retainer and fees to
which he or she would otherwise become entitled during such year as a Director
of the Company. If a Director becomes a Director during a calendar year, the
deferral election may be made within 30 days after he or she becomes a
Director and will be effective for the remainder of that year subsequent to
the election. Deferred amounts will be distributed in a lump sum or
installments in cash or shares of Class A Common Stock, all as elected by the
Director at the time of the deferral. Interest on cash deferrals will be
credited at the prime rate in effect from time to time at The First National
Bank of Chicago (or its successor). Stock deferrals will be credited with
dividends paid on shares of Class A Common Stock from time to time. A total of
100,000 shares of Class A Common Stock has been reserved for issuance under
the Directors' Compensation Plan, subject to adjustment for certain corporate
transactions affecting the number or type of outstanding shares. The
Directors' Compensation Plan has been approved by ISI as the sole stockholder
of the Company. The Company also pays the premiums on a business accident
insurance policy insuring each non-employee Director for amounts up to
$500,000.
EXECUTIVE COMPENSATION
The following table presents the compensation for 1995 paid to the chief
executive officer and the four other most highly compensated executive
officers of the Company (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------------ -------------------------
SECURITIES
RESTRICTED UNDERLYING
NAME AND OTHER ANNUAL STOCK STOCK ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION AWARDS(1) OPTIONS (#)(4) COMPENSATION(2)
------------------ -------- -------- ------------ ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Robert J. Darnall(3).... $192,778 $143,908 $ 0 $47,291 8,370 $ 9,430
Chairman and Director
Neil S. Novich.......... 387,113 400,400 0 84,750 14,000 18,788
President, Chief
Executive Officer and
Director
Jay M. Gratz............ 173,752 109,200 0 28,250 4,000 8,696
Vice President, Finance
and Chief Financial
Officer
Carl G. Lusted.......... 223,384 206,250 0 39,550 7,000 11,181
President,
Ryerson Central
Stephen E. Makarewicz... 167,504 125,500 13,333(5) 33,900 6,000 2,533
President, Tull
</TABLE>
- --------
(1) Awards consist of restricted ISI common stock and are valued at the
aggregate market value as of the date of grant, based on the closing
market price of ISI's common stock on such date. Dividends are paid on
such shares to the extent paid on the ISI common stock. The vesting
43
<PAGE>
schedule for the restricted stock awards made in 1995 to the executives
identified in the table provides that all shares will vest at the end of a
three-year period beginning May 24, 1995. However, vesting may be
accelerated at the discretion of ISI's Compensation Committee in the event
of exceptional individual performance and/or significant progress by ISI or
the appropriate business unit in meeting its operating and financial
objectives. The number and value of the aggregate restricted stock holdings
at December 31, 1995, based on the closing market price of the ISI common
stock on December 29, 1995, were: Mr. Darnall, 6,696 shares/$168,237;
Mr. Novich, 10,800 shares/$271,350; Mr. Gratz, 5,000 shares/$125,625; Mr.
Lusted, 5,800 shares/$145,725; and Mr. Makarewicz, 4,700 shares/$118,088.
The outstanding shares of restricted ISI common stock held by the Company's
employees will be converted into shares of restricted Class A Common Stock,
provided that the Compensation Committee may determine that any employee
may receive restricted Class A Common Stock with respect to less than all
of his or her restricted ISI common stock. See "--Ryerson Tull 1996
Incentive Stock Plan."
(2) Amounts represent the value of vested and unvested employer contributions
and allocations to the Inland Steel Industries Thrift Plan and the Inland
Steel Industries Non-Qualified Thrift Plan (the "Non-Qualified Thrift
Plan") (or, in the case of Mr. Makarewicz, the J. M. Tull Metals Company,
Inc. Employees' Profit Sharing Plan).
(3) Amounts shown for Mr. Darnall represent 27.9% of Mr. Darnall's total
compensation for 1995. Such percentage is based on the ratio of the
Company's operating assets to ISI's consolidated operating assets and was
used to determine the percentage of ISI's overhead expenses allocable to
the Company for 1995. All of Mr. Darnall's 1995 compensation was paid by
ISI.
(4) All options are for ISI common stock. The options for ISI common stock
held by the Company's officers and employees will be converted into
options for Class A Common Stock, provided that the Compensation Committee
may determine that any employee may receive options to purchase shares of
Class A Common Stock for less than all of his or her options to purchase
ISI common stock. See "--Ryerson Tull 1996 Incentive Stock Plan."
(5) Represents reimbursement of relocation expenses and related tax gross-up.
EMPLOYMENT AND CHANGE IN CONTROL AGREEMENTS
ISI entered into an agreement with Mr. Novich, dated April 8, 1994,
providing that he would serve as Vice President of ISI, Chief Operating
Officer of the Company and President of Ryerson. Pursuant to the agreement,
Mr. Novich received a base annualized salary for calendar year 1994 of
$330,000 and an award of $112,900 under the Inland Steel Industries, Inc.
Annual Incentive Plan (the "AIP"). In 1994, under the agreement, Mr. Novich
received a restricted stock award of 5,000 shares of ISI common stock and a
grant of options to purchase 20,000 shares of ISI common stock, each of which
vests over a three-year period. ISI also reimbursed Mr. Novich for moving
expenses from West Newton Hill, Massachusetts to the Chicago area, including
the amount by which the purchase price, plus the cost of capital improvements,
as defined by the IRS, of Mr. Novich's home in West Newton Hill exceeded the
sales price of such home and an amount sufficient to pay all taxes on the
reimbursement such that he would have no after tax cost or loss. This
reimbursement totaled $94,034. In addition, Mr. Novich was paid a bonus of
$100,000 upon signing the agreement.
ISI also entered into a severance agreement with Mr. Novich, dated April 8,
1994 (the "1994 Severance Agreement"), providing that, in the event of
termination of his employment for any reason other than malfeasance or
voluntary termination prior to the third anniversary of his employment with
the Company, the Company will pay the present value of (i) his monthly base
salary in effect at the time of such termination times the number of months
remaining in the 36-month period, plus (ii) 1/12th of the average annual award
paid to him under the AIP or a successor plan times the number of months
remaining in the 36-month period. In addition, all of his restricted stock
will become fully vested, all options will become fully exercisable and ISI
will continue life insurance, disability insurance
44
<PAGE>
and dental and health care coverage for Mr. Novich and his immediate family
until the third anniversary of his date of hire upon terms consistent with
such coverages for active employees until such date.
ISI entered into an agreement with Mr. Lusted, dated June 27, 1990,
providing that upon Mr. Lusted reaching age 62 or at any other mutually
agreeable time, ISI will reimburse Mr. Lusted for his reasonable moving
expenses from the Chicago area to the Atlanta area, or to any other mutually
agreeable location. In connection with such a relocation, ISI has agreed to
pay Mr. Lusted the amount, if any, by which the lesser of Mr. Lusted's
purchase price or the appraised value of his home in the Chicago area exceeds
the net sales price of such home.
On March 27, 1996, ISI entered into agreements (the "ISI Agreements") with
each of the Named Executive Officers, the present terms of which expire on
December 31, 1996, but are automatically extended for additional one-year
periods thereafter unless ISI gives prior notice that it does not wish to
extend such agreements for another year or unless a change in control (as
defined below) of ISI or certain other limited events occur. ISI has not given
notice of non-renewal. For purposes of the ISI Agreements, a change in control
will generally be deemed to have occurred if: (i) with certain limited
exceptions, any person becomes the beneficial owner of 40% or more of the
combined voting power of ISI's then outstanding securities; (ii) during any
two-year period, the majority of the membership of the ISI Board of Directors
changes without the approval of two-thirds of the Directors who either were
Directors at the beginning of the period or whose election was previously so
approved; (iii) the ISI stockholders approve a merger or consolidation of ISI
with another company in which ISI's voting securities, in combination with
voting securities held by any trustee or fiduciary under any ISI employee
benefit plan, do not continue to represent at least 60% of the combined voting
power of the voting securities of the surviving entity (excepting certain
recapitalizations of ISI); (iv) the ISI stockholders approve a plan of
complete liquidation of ISI or an agreement for the sale or disposition by ISI
of all or substantially all of its assets; or (v) there occurs with respect to
a Related Company (defined below) a sale or disposition of securities
representing 50% or more of the combined voting power of the Related Company's
securities, or a merger or consolidation of a Related Company with another
company in which a majority-owned direct or indirect subsidiary of ISI does
not own at least 50% of the combined voting power of the voting securities of
the surviving entity or a sale or disposition of all or substantially all of
the assets of a Related Company to a person other than a majority-owned direct
or indirect subsidiary of ISI. A "Related Company" is a covered employee's
employer (or any direct or indirect parent company of such employer, or
subsidiary of such employer that is a significant subsidiary (within the
meaning of Rule 405 of the Securities Act) of ISI). A change in control of ISI
shall not be deemed to have occurred with respect to any employee, however, if
the sale or other transaction includes or involves a sale to the public or a
distribution to the stockholders of ISI of more than 50% of the voting
securities of the employee's employer or a direct or indirect parent of his or
her employer and the employee's employer (or a direct or indirect parent of
the employee's employer) agrees to become a successor to ISI under the
employee's ISI Agreement.
The ISI Agreements provide that if a covered executive's employment is
terminated within two years after a change in control of ISI either (i) by ISI
other than for "cause" or other than as a consequence of death, disability or
retirement (all as defined in such agreements), or (ii) by such executive for
"good reason," generally relating to a diminution of responsibilities,
compensation or benefits or significant relocation of his or her principal
office, the executive will receive: (i) a lump-sum payment equal to two times
the sum of (a) the executive's current annual base salary plus (b) the
executive's average incentive bonus paid for the five years preceding
termination of employment; (ii) an amount in cash in lieu of any allocations,
unpaid awards or rights under ISI's annual or other incentive compensation
plans; (iii) an amount in cash equal to the value of outstanding stock options
granted under ISI's stock option plans at specified prices; (iv) an amount in
cash equal to the value of shares of common stock awarded or issuable as
performance and/or restricted shares under ISI's incentive stock plans; (v)
life, disability, accident and health insurance as provided in ISI's insurance
45
<PAGE>
programs and financial advisory and outplacement services for a period of 24
months after termination of employment; (vi) an amount in cash in lieu of two
years of additional accrued benefits under ISI's pension plan and (vii) legal
fees and expenses incurred as a result of such termination. In addition to the
foregoing, Mr. Novich's ISI Agreement provides that payments thereunder will
not limit or reduce any benefits that he may be entitled to receive pursuant
to his 1994 Severance Agreement with ISI (discussed above) but that his
benefits under his ISI Agreement are reduced by benefits he receives under any
other agreement upon a change in control of ISI. Each ISI Agreement contains
an excise tax "gross-up" provision pursuant to which the executive will be
paid an additional amount upon the imposition of any excise tax. While this
provision will preserve the benefits receivable under the agreement for the
executive, ISI will not be entitled to a federal income tax deduction for a
portion of the severance payments provided thereunder.
The ISI Agreements provide benefits in the event the employee is terminated
by ISI for reasons other than cause within 12 months after the occurrence of a
"potential change in control" of ISI if a change in control of ISI or certain
other limited events occur within 6 months after his or her termination. A
"potential change in control" shall be deemed to have occurred for purposes of
the agreements if (i) ISI enters into an agreement, the consummation of which
would result in the occurrence of a change in control of ISI, (ii) any person
(including ISI) publicly announces an intention to take or to consider taking
actions which, if consummated, would constitute a change in control, (iii)
with certain limited exceptions, any person who is or becomes the owner of
securities of ISI representing 9.5% or more of the combined voting power of
ISI's then outstanding securities increases such person's beneficial ownership
of such securities by 5% or more over the percentage so owned on the date of
the agreement, or (iv) the Board of Directors of ISI adopts a resolution that
a potential change in control of ISI has occurred for purposes of the ISI
Agreements. The Common Stock Offerings did not, and the Company and ISI
anticipate that a Spin-off will not, constitute a change in control or
potential change in control for purposes of the ISI Agreements with respect to
employees of the Company. In the event of a Spin-off, employees of the Company
will no longer be entitled to benefits under the ISI Agreements.
On June 10, 1996, the Company entered into agreements (the "Company
Agreements") with each of the Named Executive Officers which provide benefits
substantially similar to those provided under the ISI Agreements in the event
that the executive's employment with the Company is terminated following a
change in control of the Company (defined to include events with respect to
the Company similar to those which constitute a change in control under the
ISI Agreements with respect to ISI). In addition, Mr. Novich's Company
Agreement provides that payments under the agreement will not limit or reduce
any benefits that he may be entitled to receive pursuant to his 1994 Severance
Agreement with ISI. To the extent that an executive becomes entitled to
benefits under a Company Agreement and an ISI Agreement upon a change of
control, benefits payable under the ISI Agreement will be reduced by the
amount of benefits payable under the Company Agreement. Other than as set
forth in the preceding sentence, in no event shall an executive be entitled to
benefits under both an ISI Agreement and a Company Agreement on account of the
same events constituting a change in control. The Common Stock Offerings did
not, and the Company and ISI anticipate that a Spin-off will not, constitute a
change in control for purposes of the Company Agreements.
PENSION BENEFITS
Prior to April 30, 1996, certain employees of the Company were eligible to
participate in the ISI Pension Plan. Effective April 30, 1996, that portion of
the ISI Pension Plan covering the Company's current and former employees was
separated and became the Pension Plan. Employees covered by the Pension Plan
will be credited with the number of years of service credited to them under
the ISI Pension Plan as of the separation date. The following table shows the
maximum annual pension benefits payable on a straight life annuity basis to
employees in various earnings classifications upon retirement at age 65. All
benefit amounts shown in such table are subject to offset based upon Social
46
<PAGE>
Security earnings. Pension benefits are provided to eligible salaried
employees of Tull under a separate benefit schedule of the Pension Plan, as
discussed below.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
EARNINGS FOR
HE APPLICABLET
YEAR-OF- ANNUAL PENSION BENEFITS FOR YEARS OF SERVICE SHOWN
SERVICE --------------------------------------------------------------
PERIOD 5 YEARS 10 YEARS 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
- -------------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 200,000.............. $ 17,000 $ 34,000 $ 51,000 $ 68,000 $ 85,000 $102,000 $119,000
400,000.............. 34,000 68,000 102,000 136,000 170,000 204,000 238,000
600,000.............. 51,000 102,000 153,000 204,000 255,000 306,000 357,000
800,000.............. 68,000 136,000 204,000 272,000 340,000 408,000 476,000
1,000,000.............. 85,000 170,000 255,000 340,000 425,000 510,000 595,000
1,200,000.............. 102,000 204,000 306,000 408,000 510,000 612,000 714,000
1,400,000.............. 119,000 238,000 357,000 476,000 595,000 714,000 833,000
1,600,000.............. 136,000 272,000 408,000 544,000 680,000 816,000 952,000
</TABLE>
As of April 1, 1996, the Named Executive Officers were credited with the
following years of service under the appropriate plan: Robert J. Darnall--33
years; Neil S. Novich--1 year; Jay M. Gratz--20 years; Carl G. Lusted--28
years; and Stephen E. Makarewicz--12 years.
Pensions are provided under the Pension Plan to eligible employees
(including employees who are Directors or officers) who, at retirement, have
met certain service or service and age requirements. In general for salaried
employees, benefits are based on years of service and individual earnings for
the highest consecutive 36-month period of earnings during the last ten 12-
month periods of service prior to retirement. For this purpose, earnings
generally consist of salary compensation plus bonus compensation as reported
in the Summary Compensation Table.
The Company has established the Ryerson Tull, Inc. Supplemental Retirement
Plan for Covered Employees (the "Supplemental Plan"), which provides
supplemental pension benefits to employees of the Company and its affiliates
who participate in the Pension Plan and whose benefits under that plan are
limited by the provisions of Sections 415 and 401(a)(17) of the Internal
Revenue Code of 1986, as amended (the "Code"). Generally, the amount of the
benefit provided is equal to the difference between the benefit that would
have been payable under the Pension Plan had the applicable Code limitations
not applied and the benefit actually paid under the Pension Plan. The
Supplemental Plan is non-contributory and benefits payable under the
Supplemental Plan are paid from the general assets of the Company. Benefits
under the Supplemental Plan are generally paid at the same time and in the
same form as the corresponding benefits under the Pension Plan; provided
however, the Supplemental Plan provides that, for any officer or employee with
at least five years of service, with annual compensation in excess of $150,000
and who is age 55 or older, the Company may elect to satisfy its obligations
for benefits payable upon retirement at age 65 by (i) the purchase of an
annuity contract either prior to or at the time of retirement (and a tax
gross-up payment to the officer or employee at the time of purchase) or (ii)
the payment of a lump sum amount at the time of retirement. Prior to
establishing the Supplemental Plan, certain employees of the Company
participated in the Inland Steel Industries Supplemental Retirement Plan for
Covered Employees and the Inland Steel Industries Special Retirement Benefit
Plan for Covered Employees (collectively, the "ISI Supplemental Plans"). The
ISI Supplemental Plans provided benefits similar to the Supplemental Plan. The
Company has assumed ISI's liabilities under the ISI Supplemental Plans with
respect to current and former employees of the Company.
All accrued benefits under the Pension Plan vest, and all benefits accrued
under the Supplemental Plan will become fully and irrevocably vested and
distributable to participants as provided by the terms of such plans then in
effect, in the event of a change in control (as defined in those plans) of the
47
<PAGE>
Company. Any surplus assets under the Pension Plan are to be used to provide
additional benefits in the event of a termination, merger or consolidation of
the Pension Plan, or a transfer of assets to another plan, within three years
of such a change in control, and limitations have been placed on amendments to
the Pension Plan within such three-year period. The Common Stock Offerings did
not, and the Company and ISI anticipate that a Spin-off will not, constitute a
change in control under the Pension Plan or the Supplemental Plan.
Pension benefits are provided to eligible salaried employees of Tull under a
separate benefit schedule of the Pension Plan. The maximum annual pension
benefits payable under such schedule are approximately 3% higher than those
shown in the above table for comparable earnings and service. Stephen E.
Makarewicz is the only executive officer of the Company covered by the Tull
benefit schedule and he is credited with 10 years of service under the Tull
benefit schedule under the Pension Plan.
INLAND STEEL INDUSTRIES NONQUALIFIED THRIFT PLAN
The Company also participates in the Nonqualified Thrift Plan, which
provides supplemental benefits to employees of ISI and its affiliates who are
eligible to participate in the Inland Steel Industries Thrift Plan (the "ISI
Thrift Plan") and whose salary reduction contributions to the ISI Thrift Plan
are limited by the Code provision which generally restricts the amount of
compensation that can be taken into account under the ISI Thrift Plan. Under
the Nonqualified Thrift Plan, eligible employees can elect to defer, on a pre-
tax basis, between 1% and 10% of their salary. ISI will match 100% of the
deferral, up to 5% of the participant's salary. All amounts contributed
pursuant to the Nonqualified Thrift Plan are credited to a bookkeeping account
and are credited with hypothetical earnings at the rate of interest earned by
the assets in the Stable Value Fixed Income Fund (as defined) under the ISI
Thrift Plan. Upon termination of a participant's employment, all amounts
credited to his account under the Nonqualified Thrift Plan will be paid in a
lump sum from the general assets of ISI within 60 days after the first
anniversary of his termination of employment. If a participant terminates
employment prior to completing five years of service with ISI (other than on
account of certain limited events), he will not be entitled to any of the ISI
contributions relating to the two-year period prior to the termination of
employment. Special payment rules may apply if the participant terminates
employment on account of disability or retirement. Interim distributions may
be permitted on account of hardship. All benefits under the Nonqualified
Thrift Plan become fully vested upon a change in control (as defined) of ISI.
The Common Stock Offerings did not, and the Company and ISI anticipate that a
Spin-off will not, constitute a change in control for purposes of the
Nonqualified Thrift Plan.
INDIVIDUAL OPTION GRANTS IN 1995
The following table presents information with respect to (i) individual
grants of options for ISI's common stock that were made during 1995 under the
Inland 1995 Incentive Stock Plan to the Named Executive Officers and (ii) the
grant date present value of such options.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE GRANT DATE
OPTIONS EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME GRANTED(1) FISCAL YEAR ($/SHARE)(2) DATE VALUE(3)
- ---- ---------- ------------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Robert J. Darnall....... 30,000 6.4% $28.50 May 23, 2005 $376,200
Neil S. Novich.......... 14,000 3.0 28.50 May 23, 2005 175,560
Jay M. Gratz............ 4,000 0.8 28.50 May 23, 2005 50,160
Carl G. Lusted.......... 7,000 1.5 28.50 May 23, 2005 87,780
Stephen E. Makarewicz... 6,000 1.3 28.50 May 23, 2005 75,240
</TABLE>
- --------
(1) All options are for ISI common stock and were granted on May 24, 1995.
They became exercisable with respect to 50% of the shares on May 24, 1996
and will be fully exercisable after
48
<PAGE>
May 24, 1997. Options granted in 1995 to each of these executives are
transferable, with the advance written consent of ISI's Compensation
Committee of the Board of Directors, to (i) a spouse or descendants, (ii)
to a trust for the benefit of the optionee, his spouse or descendants or
(iii) as a charitable contribution. See "--Employment and Change in Control
Agreements" for provisions relating to payout of options upon a change in
control of ISI or the Company. The options for ISI common stock held by the
Company's officers and employees will be substituted with options for Class
A Common Stock in accordance with the methodology described in Section 424
of the Code and regulations thereunder, provided that the Compensation
Committee may determine that any employee may receive Substitute Options
with respect to less than all of his or her options on ISI common stock.
See "--Ryerson Tull 1996 Incentive Stock Plan."
(2) The exercise price is equal to the average of the high and low price of
ISI's common stock on the NYSE Composite Transactions on the date of
grant. The exercise price may be paid by delivery of already-owned shares
and an optionee may elect to have ISI withhold shares of ISI common stock
(or accept already-owned shares) to satisfy tax withholding obligations
with respect to option exercises or payments.
(3) In accordance with Commission rules, the Black-Scholes option pricing
model was chosen to estimate the grant date present value of the options
granted during 1995. Use of this model should not be construed as an
endorsement of the model's accuracy at valuing options. The following
assumptions were made for purposes of calculating the present value of the
options as of the grant date: the option term is ten years, the volatility
of ISI's common stock is 35.215% (calculated using daily stock prices for
the one-year period prior to the grant date), the ten-year risk-free
interest rate is 6.63%, the annualized dividend rate is $0.20 per share
and a reduction of approximately 20.16% reflects the probability of (i)
forfeiture due to termination prior to vesting and (ii) a shortened option
term due to termination of employment prior to the option expiration date.
The value of the options granted in 1995 depends upon the actual
performance of ISI's common stock during the applicable period; the actual
value, if any, that an optionee will realize upon exercise of an option
will depend on the excess of the market value of ISI's common stock over
the exercise price on the date the option is exercised.
AGGREGATED OPTION EXERCISES IN 1995 AND YEAR-END OPTION/SAR VALUES
The following table presents the number of securities underlying the
option/SAR holdings of the Named Executive Officers at the end of 1995 and the
value of such holdings. No options for shares of ISI common stock or SARs were
exercised by the Named Executive Officers during 1995.
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS/SARS AT
OPTIONS/SARS AT FISCAL FISCAL YEAR-END(1)
YEAR-END (EXERCISABLE/ (EXERCISABLE/
UNEXERCISABLE) UNEXERCISABLE)
---------------------- ------------------
<S> <C> <C>
Robert J. Darnall..................... 125,667/58,333 $101,250/$0
Neil S. Novich........................ 17,000/31,000 0/0
Jay M.Gratz........................... 15,467/8,333 0/0
Carl G. Lusted........................ 18,300/14,500 0/0
Stephen E. Makarewicz................. 13,750/7,750 0/0
</TABLE>
- --------
(1) All such options are for ISI common stock; value is based on the closing
price of ISI's common stock on the NYSE Composite Transactions on December
29, 1995.
RYERSON TULL 1996 INCENTIVE STOCK PLAN
The Company has adopted, and ISI has approved, the Incentive Stock Plan.
Long-term incentive compensation grants may be made by the Compensation
Committee under the Incentive Stock Plan.
49
<PAGE>
These grants and awards may consist of stock options (both incentive and
nonqualified), stock appreciation rights, restricted stock awards and
performance awards, or combinations thereof. Stock options and stock
appreciation rights may be granted at not less than 100% of the fair market
value of the Class A Common Stock on the date of grant and are generally
exercisable for a period not exceeding ten years. Restricted stock awards,
consisting of shares of Class A Common Stock, are contingent on continuing
employment with the Company for specified periods, and performance awards,
payable in shares of Class A Common Stock or cash, are contingent on the
achievement over specified periods of such performance objectives as shall be
established by the Compensation Committee. Restricted stock awards may also be
contingent upon the achievement of performance measures. Grants and awards
made by the Compensation Committee under the Plan are intended to provide
executive officers not only with additional incentives for outstanding
individual performance but also with the opportunity to acquire an ownership
stake in the Company, thereby more closely aligning their interests with those
of the stockholders. Upon a change in control (as defined below) of the
Company, with certain exceptions: (i) the value of all outstanding stock
options, stock appreciation rights and restricted stock awards (whether or not
then fully exercisable or vested) will be cashed out at specified prices as of
the date of the change in control, except that (a) any stock options or stock
appreciation rights outstanding for less than six months will not be cashed
out until six months after the applicable date of grant and (b) the
Compensation Committee may provide for immediate vesting instead of cashing
out of restricted stock awards and (ii) all outstanding performance awards
will be cashed out in the amounts and manner determined by the Compensation
Committee.
For purposes of the Incentive Stock Plan, a change in control of the Company
shall generally be defined in the same manner as under the Company Agreements.
The Common Stock Offerings did not, and the Company and ISI anticipate that a
Spin-off will not, constitute a change in control of the Company for purposes
of the Incentive Stock Plan.
Generally, a participant who is granted a stock option will not be subject
to federal income tax at the time of grant and the Company will not be
entitled to a tax deduction by reason of such grant. Upon exercise of a
nonqualified option, generally the difference between the option price and the
fair market value of the Class A Common Stock on the date of exercise will be
considered ordinary income to the participant and generally the Company will
be entitled to a corresponding tax deduction.
Upon exercise of an incentive stock option, no taxable income will be
recognized by the participant and the Company is not entitled to a tax
deduction by reason of such exercise. However, if Class A Common Stock
purchased pursuant to the exercise of an incentive stock option is sold within
two years from the date of grant or within one year after the transfer of such
Class A Common Stock to the participant, then the difference, with certain
adjustments, between the fair market value of the Class A Common Stock at the
date of exercise and the option price will be considered ordinary income to
the participant and generally the Company will be entitled to a corresponding
tax deduction. If the participant disposes of the Class A Common Stock after
such holding periods, any gain or loss upon such disposition will be treated
as a capital gain or loss and the Company will not be entitled to a deduction.
The maximum number of shares of Class A Common Stock reserved for issuance
under the Incentive Stock Plan is 2,300,000, subject to adjustment as provided
in the Incentive Stock Plan to reflect certain corporate transactions
affecting the number or type of outstanding shares.
NEW PLAN BENEFITS
It is currently estimated that approximately 100 Company employees will be
eligible to participate in the Incentive Stock Plan. No determinations have
been made concerning the issuance of awards under the Incentive Stock Plan,
other than the issuances of shares of restricted Class A Common Stock and
options to purchase shares of Class A Common Stock in exchange for certain
outstanding restricted shares of ISI common stock and options to purchase ISI
common stock, as described below.
50
<PAGE>
Shares of restricted stock under the Incentive Stock Plan will be
substituted for outstanding shares of restricted stock that were granted to
employees of the Company under the Inland 1995 Incentive Stock Plan and prior
ISI plans (collectively, the "ISI Incentive Plans"). Generally, the number of
restricted shares of Class A Common Stock to be substituted shall bear the
same ratio to the number of restricted shares of ISI common stock held by the
employee as the average value (defined below) of a share of ISI common stock
bears to the average value of a share of Class A Common Stock. Average value
with respect to a share of ISI common stock or Class A Common Stock means the
average closing price of such stock for the first ten trading days following
the substitution. Similarly, options granted under the Incentive Stock Plan
("Substitute Options") will be substituted for outstanding options for ISI
common stock granted to employees of the Company under the ISI Incentive
Plans, with the number of shares of Common Stock that will be subject to the
Substitute Options and the exercise price thereof determined in accordance
with Section 424 of the Code and regulations thereunder. The Compensation
Committee may determine, however, that any employee may receive restricted
shares of Class A Common Stock or Substitute Options with respect to less than
all of his or her outstanding restricted stock or options under the ISI
Incentive Plans.
The following table sets forth the number of shares of restricted Class A
Common Stock and the number of shares of Class A Common Stock subject to
options to be substituted for restricted shares of ISI common stock and
options to purchase ISI common stock (assuming that as of the applicable
valuation date the value of a share of ISI common stock is $19.875 (the last
reported sales price on the NYSE on June 26, 1996), that the value of a share
of Class A Common Stock is $16.00 (the last reported sales price on the NYSE
on June 26, 1996)) and that no shares of ISI common stock or options to
purchase shares of ISI common stock held by Company officers who are also ISI
officers will be converted into shares of restricted Class A Common Stock or
options to purchase shares of Class A Common Stock for (i) the Named Executive
Officers, (ii) the Company's executive officers, as a group, and (iii) all
employees, including all current officers who are not executive officers of
the Company, as a group.
RYERSON TULL 1996 INCENTIVE STOCK PLAN
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES
NAME AND POSITION OF RESTRICTED STOCK(1) SUBJECT TO OPTIONS(1)
----------------- ---------------------- ---------------------
<S> <C> <C>
Robert J. Darnall.................. 0 0
Chairman and Director
Neil S. Novich..................... 13,416 111,797
President, Chief Executive Officer
and Director
Jay M. Gratz....................... 0 0
Vice President, Finance and Chief
Financial Officer
Carl G. Lusted..................... 3,478 66,830
President, Ryerson Central
Stephen E. Makarewicz.............. 2,733 49,066
President, Tull
Executive Group.................... 30,061 397,842
Non-Executive Officer Employee
Group............................. 7,143 429,779
</TABLE>
- --------
(1) Assumes that no shares of restricted ISI common stock or options to
purchase shares of ISI common stock held by Company officers who are also
ISI officers will be converted into shares of restricted Class A Common
Stock or options to purchase shares of Class A Common Stock.
RELATIONSHIP WITH ISI
DIVIDENDS
On June 26, 1996, in connection with the Common Stock Offerings, the Company
paid a $77.1 million cash dividend to ISI and a dividend consisting of the
Note Payable. In addition, on June 20,
51
<PAGE>
1996 the Company declared a cash dividend in the amount of the net proceeds
from any exercise of the Underwriters' over-allotment options granted to the
Underwriters in connection with the Common Stock Offerings payable on the date
of closing of such exercise. The net proceeds of the Common Stock Offerings
were used to pay the $77.1 million cash dividend and are not available to the
Company. The net proceeds of the Offering, together with a portion of the
Company's available cash and/or borrowings under credit facilities, will be
used to discharge the Note Payable. On May 20, 1996, the Company also paid the
May 1996 Dividend.
SHARED MANAGEMENT
Mr. Darnall, Chairman of the Board and a Director, Mr. Gratz, Vice
President, Finance and Chief Financial Officer, Ms. Avril, Treasurer, and Mr.
Salowitz, Secretary, are also executive officers of ISI. The Company and ISI
also have four common Directors. The Company expects that such arrangements
will continue for the foreseeable future. Until May 1996, Mr. Novich,
President, Chief Executive Officer and a Director, was also an executive
officer of ISI. See "Management--Executive Officers and Directors."
POTENTIAL DISTRIBUTION AND OTHER TRANSACTIONS
The Company is controlled by ISI, which beneficially owns all of the
outstanding Class B Common Stock, representing approximately 96.3% of the
aggregate voting power of all of the Company's outstanding Common Stock (95.8%
if the over-allotment options granted to the Underwriters in the Common Stock
Offerings are exercised in full). ISI has advised the Company that, although
it currently intends to hold such stock, it may in the future distribute all
or a part of such stock (in the form of Class A Common Stock) to ISI's
stockholders by means of a Spin-off or may sell such stock (in the form of
Class A Common Stock) to third parties in one or more transactions, although
it has no commitments or understandings to do any of the foregoing. The
completion of any such transaction would be subject to a number of factors,
including a determination by the Board of Directors of ISI that such a
transaction would be in the best interest of its stockholders, and in the case
of a Spin-off, could be subject to the receipt of a favorable ruling from the
IRS or an opinion of counsel as to the tax-free nature of such transaction.
SUPPLY ARRANGEMENTS
During 1995, the Company purchased approximately 400,000 tons of steel
having a value of $177 million from ISC, a wholly-owned subsidiary of ISI.
Purchases of steel from ISC amounted to $174 million in 1993 and $184 million
in 1994. The terms of these arrangements were negotiated between the Company
and ISC and are similar to other large supply arrangements the Company has
with other suppliers. The Company expects to continue purchasing significant
amounts of material from ISC, although there can be no assurances that such
purchases will continue. All future transactions, if any, will continue to be
on an arm's length basis. ISC also buys material from the Company, which
purchases amounted to approximately $11 million in each of 1993 and 1994 and
approximately $12 million in 1995, and may continue to buy material from the
Company in the future.
SUPPORT SERVICES; INDEMNIFICATION AND CORPORATE SEPARATENESS
Concurrent with the consummation of the Common Stock Offerings, the Company
and ISI entered into a corporate separation agreement (the "Corporate
Separation Agreement") relating to, among other things, the provision of
support services by ISI to the Company, participation in a joint marketing
program, indemnification by and between the Company and ISI, and procedures
intended to maintain separation between the Company and ISI.
In the past, ISI has provided certain support services to the Company in the
following areas: finance (including tax administration, cash management,
pension and employee benefit plan administration, auditing and corporate
communications), legal (including public affairs and corporate
52
<PAGE>
secretary), human resources and information technology, as well as senior
management services. Charges by ISI to the Company for these services amounted
to $7.4 million in each of 1993 and 1994 and $6.8 million in 1995. The
Corporate Separation Agreement provides that ISI will continue to provide
these services to the Company for a period of five years, cancellable by
either party upon 60 days written notice to the other party or immediately by
mutual consent of the parties. The Corporate Separation Agreement provides
that, consistent with past practice, specific distinguishable costs incurred
by ISI in providing services to the Company will be charged to the Company and
that other support costs not specifically allocated to ISI or other ISI
subsidiaries will be allocated to the Company based on the percentage of ISI
consolidated operating assets attributable to the Company. The percentage of
ISI consolidated assets attributable to the Company is expected to fluctuate
from one period to another. During 1995, such percentage was 27.9%.
The Corporate Separation Agreement provides that the Company and ISI and its
subsidiaries will cooperate in joint marketing efforts currently referred to
as the "red diamond program." The red diamond program involves a team approach
to maximizing customer satisfaction by involving personnel from both the
Company and ISI with various areas of expertise to provide an integrated
solution to a customer's needs. The obligations of the Company and ISI to
cooperate in the joint marketing efforts will continue for a period of five
years, cancellable by either party upon 60 days written notice to the other
party or immediately by mutual consent of the parties.
The Corporate Separation Agreement also provides that the Company on the one
hand, and ISI and its other subsidiaries on the other, will indemnify each
other for losses, claims and damages that they may suffer or for which they
may become liable, including those relating to tax, environmental, ERISA and
pension liabilities, that arise out of the relationship of the parties prior
to the Common Stock Offerings or as a result of ISI's control of the Company.
Provisions intended to maintain the existence of the Company and ISI as
separate corporate entities also are included in the Corporate Separation
Agreement. Such provisions provide that, among other things: other than the
Company's Chairman and Chief Executive Officer, no more than one-half of the
Company's executive officers will be officers or employees of ISI or any of
its other subsidiaries; the Company and ISI each will maintain its assets
separate from those of the other and the other's subsidiaries; the Company and
ISI each will account for and manage its liabilities separately from those of
the other and the other's subsidiaries; the Company will maintain offices
separate from the offices of ISI and ISI's other subsidiaries; and, other than
the ESOP Guarantee and certain ISI guarantees of the Company's equipment
leases, neither the Company nor ISI will pledge its assets for the benefit of,
or grant guarantees or otherwise hold out its credit as being available to
satisfy the obligations of, the other or any of the other's subsidiaries.
These provisions automatically terminate at any time that the number of
outstanding shares of Class B Common Stock represents less than 50% of the
total number of outstanding shares of Class A Common Stock and Class B Common
Stock.
TAX SHARING ARRANGEMENTS
Concurrent with the consummation of the Common Stock Offerings, the Company
and ISI entered into a tax-sharing agreement under which current and deferred
federal income tax provisions are determined for each company in the ISI group
on a stand-alone basis. Any current tax liability for any member of the ISI
group, including the Company, is paid to ISI. If the Company is unable to use
all of its allocated tax attributes (net operating loss and tax credit
carryforwards) in a given year but other companies in the consolidated group
are able to utilize them, then ISI will pay the Company for the use of such
tax attributes. The agreement also contains state tax sharing arrangements,
similar to the arrangements described above with respect to federal taxes for
those states in which the consolidated group is charged state taxes on a
unitary or combined basis.
CROSS-LICENSE AGREEMENT
Concurrent with the consummation of the Common Stock Offerings, the Company
and ISI entered into a cross-license agreement (the "Cross-License Agreement")
pursuant to which the Company
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licensed on a royalty-free basis its "Ryerson" name and know-how for use by
ISI and its affiliates outside North America and pursuant to which ISI
licensed on a royalty-free basis its "red diamond" trademark for use by the
Company. Pursuant to the Cross-License Agreement, the Company and ISI are each
required to reimburse the other for the reasonable costs incurred by the other
in providing its respective licensed property. The Cross-License Agreement
terminates automatically at any time that the number of outstanding shares of
Class B Common Stock represents less than 50% of the total number of
outstanding shares of Class A Common Stock and Class B Common Stock. The
Cross-License Agreement may also be terminated by either party upon 60 days
written notice to the other party or immediately by mutual consent of Ryerson
Tull and ISI. The Cross-License Agreement provides that following termination
of the agreement, the Company and ISI each has a right to a license (which may
be exclusive) of any part of the other's property that is then the subject of
the agreement for a transition period of up to two years at a fair market
value license fee and upon such other terms as may be mutually agreed upon by
the Company and ISI. Upon a failure to mutually agree upon a license fee and
other terms, provision is made for determination by a qualified independent
expert.
GUARANTOR ARRANGEMENT
Ryerson is the guarantor of the ESOP Trust's obligation to repay principal
amounting to $110.8 million as of March 31, 1996 plus accrued interest. The
notes are payable in installments through July 2004 and bear interest rates
ranging from 7.96% to 8.80%. Ryerson could be required to make payments
pursuant to the guarantee after a failure by ISI to provide funds to cover any
deficiency in the ESOP Trust. There have been no deficiencies in the ESOP
Trust.
PENSIONS
Prior to April 30, 1996, certain Company employees were eligible to
participate in the ISI Pension Plan. In 1995, ISI elected to change the
measurement date for pension plan assets and liabilities from December 31 to
September 30 in order to provide for more timely information and to achieve
administrative efficiencies in the collection of data. The change in the
measurement date had no effect on 1995 pension expense and had an immaterial
impact on the 1995 funded status. At September 30, 1995, the market value of
the ISI Pension Plan assets totaled $1.92 billion. The ISI Pension Plan's
accumulated benefit obligation as of such date was $1.96 billion and the
projected benefit obligation as of such date was $2.05 billion. For financial
reporting purposes, the funded status of the ISI Pension Plan has appeared
very volatile over the past several years. This volatility is due to
significant fluctuations in the interest rate on high-grade fixed-income
obligations that must be used for valuing pension liabilities. This rate
increased from 7.25% in 1993, a twenty year low, to 8.8% in 1994 and decreased
to 7.75% in 1995. ISI was required to record a $102.6 million additional
pension liability, offset by an intangible pension asset, on its year-end 1995
balance sheet. In 1995, ISI contributed 3.9 million shares of its common stock
with an estimated aggregate value of $100 million to the ISI Pension Plan.
This contribution, ISI's first since 1984, strengthened the plan's funded
status. In 1995, the Company paid $13.1 million to ISI for its share of this
contribution.
Effective April 30, 1996, that portion of the ISI Pension Plan covering the
Company's current and former employees was separated and became the Pension
Plan. The Pension Plan assumed the liabilities of the ISI Pension Plan
attributed to current and former Company employees and a corresponding
percentage of the assets. If the Pension Plan had been in existence at the
September 30, 1995 valuation date of the ISI Pension Plan, the Company's
projected benefit obligation would have been $266 million and the Company's
share of the Pension Plan assets would have been $249 million, resulting in an
under-funding of $17 million for financial reporting purposes. However, under
ERISA funding guidelines, which take a longer term view in determining the
interest rate to use in valuing liabilities, no contribution will be required
for the ISI Pension Plan or the Pension Plan in 1996. The separation will not
have a material impact on the financial statements of the Company.
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PRINCIPAL STOCKHOLDER
ISI owns 100% of the Class B Common Stock and, accordingly, owns Common
Stock representing approximately 86.7% of the economic interest in the Company
(85% if the Underwriters' over-allotment options in the Common Stock Offerings
are exercised in full) and representing approximately 96.3% of the combined
voting power of the Company's outstanding Common Stock (95.8% if such
Underwriters over-allotment options in the Common Stock Offerings are
exercised in full). ISI will retain more than 50% of combined voting power of
the Company until the number of shares of Class B Common Stock outstanding
represents less than 50% of the total number of shares of Class A Common Stock
and Class B Common Stock outstanding, at which time the outstanding shares of
Class B Common Stock will convert into an equal number of shares of Class A
Common Stock. The address of ISI is 30 West Monroe Street, Chicago, Illinois
60603.
OWNERSHIP OF ISI STOCK
The following table presents, as of June 5, 1996, the ISI equity securities
beneficially owned (as that term is defined by the Commission) by all
Directors of the Company, the Named Executive Officers and the Directors and
executive officers as a group, in each case, except as indicated, with sole
voting and investment power. ISI common stock, in each case, includes ISI
preferred stock purchase rights distributed in 1987 to holders of ISI common
stock. The shares of ISI Series E ESOP Convertible Preferred Stock (the "ISI
Series E ESOP Preferred Stock") shown as beneficially owned by the executive
officers are held for their respective accounts in the ISI Thrift Plan and
could be converted upon retirement or other termination of employment into an
equal number of shares of ISI common stock (subject to adjustment in certain
events). Excluded from the number of shares of ISI Series E ESOP Preferred
Stock listed as beneficially owned are allocated shares of ISI Series E ESOP
Preferred Stock that the ESOP Trustee is required to vote or dispose of in the
manner and proportion in which allocated shares are directed to be voted or
disposed of.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
AMOUNT AND NATURE OF OF BENEFICIAL
BENEFICIAL OWNERSHIP OWNERSHIP OF ISI SERIES E
OF ISI COMMON STOCK(1) ESOP PREFERRED STOCK(2)
---------------------- -------------------------
<S> <C> <C>
Robert J. Darnall............ 230,106 1,796
Neil S. Novich............... 51,899 340
Jay M. Gratz................. 29,200 1,089
Carl G. Lusted............... 34,968 1,253
Stephen E. Makarewicz........ 22,699 435
James A. Henderson........... 1,985 0
Donald S. Perkins............ 3,485 0
Jean-Pierre Rosso............ 500 0
All Directors and Executive
Officers as a Group
(16 persons)................ 494,949 11,411
</TABLE>
- --------
(1) Excludes shares of ISI common stock into which ISI Series E ESOP Preferred
Stock may be converted. No Director or Named Executive Officer
individually owns 1% or more of the outstanding ISI common stock; all
Directors and executive officers as a group own 1.0% of the outstanding
ISI common stock. Includes shares held jointly with other persons, as
follows--Mr. Darnall-290 and all Directors and executive officers as a
group-1,281; shares which the following have the right to acquire under
options exercisable within 60 days of May 1, 1996--Mr. Darnall-169,000,
Mr. Novich-41,000, Mr. Gratz-21,800, Mr. Lusted-29,300, Mr. Makarewicz-
18,500, and all Directors and executive officers as a group-377,035; and
shares of ISI common stock held under restricted stock awards as follows--
Mr. Darnall-12,000, Mr. Novich-10,800, Mr. Gratz-4,400, Mr. Lusted-2,800,
Mr. Makarewicz-2,200, and all Directors and executive officers as a group-
44,600. Also includes 250 shares of ISI common stock held by the spouse of
an executive officer, for which beneficial ownership is disclaimed.
(2) Each Director and Named Executive Officer individually owns, and all
Directors and executive officers as a group collectively own, less than 1%
of the ISI Series E ESOP Preferred Stock.
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DESCRIPTION OF NOTES
GENERAL
The Notes are to be issued under an indenture dated as of July 1, 1996 (the
"Indenture") between the Company and The Bank of New York, as trustee (the
"Trustee").
The terms of the Notes include those stated in the Indenture and those made
part of the Indenture by the Trust Indenture Act of 1939, as amended. The
following is a summary of the material provisions of the Indenture, a copy of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. Wherever particular sections, articles or defined terms
of the Indenture are referred to herein, such sections, articles or defined
terms shall be as specified in the Indenture. Capitalized terms not otherwise
defined below or elsewhere in this Prospectus shall have the respective
meanings given such terms in the Indenture.
The 8 1/2% Notes and the 9 1/8% Notes are unsecured obligations of the
Company and will rank pari passu with each other and with all other unsecured
and unsubordinated indebtedness of the Company, including borrowings under the
New Credit Facility. As of March 31, 1996, the Company had no indebtedness
outstanding that would rank ahead of the Notes. As of such date, however, the
Company's subsidiaries had outstanding indebtedness aggregating $23.1 million,
and had guaranteed indebtedness aggregating $110.8 million, that would in
effect rank ahead of the Notes. The Indenture does not limit the aggregate
principal amount of securities that can be issued thereunder and provides that
debt securities may be issued thereunder from time to time in one or more
series.
The 8 1/2% Notes and the 9 1/8% Notes will bear interest from July 3, 1996
(or from the most recent Interest Payment Date to which interest has been paid
or provided for) at the rates per annum shown on the cover page of this
Prospectus, payable semiannually on January 15 and July 15 of each year (each
an "Interest Payment Date"), commencing January 15, 1997, to the Holders
listed in the Security Register at the close of business on the preceding
January 1 or July 1, as the case may be, next preceding such Interest Payment
Date (each, a "Regular Record Date"). Interest shall be computed on the basis
of a 360-day year comprised of twelve 30-day months. The Notes will be issued
in fully registered form, without coupons, in denominations of $1,000 and
integral multiples thereof. Principal and interest will be payable at the
office or agency of the Company in the Borough of Manhattan, City of New York,
and the principal office of the Trustee in the City of New York. In addition,
with respect to the Notes of either series, unless the Notes of such series
are in registered global form, payment of interest may, at the option of the
Company, be made by check mailed to the address of the holder as it appears in
the Security Register on the Regular Record Date. No service charge will be
made for any registration, transfer or exchange of Notes, but the Company may
require payment of a sum sufficient to cover any tax or other government
charge payable in connection with certain transfers or exchanges.
If any Interest Payment Date or Stated Maturity falls on a day that is not a
Business Day, the required payment shall be made on the next Business Day as
if it were made on the date such payment was due, and no interest shall accrue
on the amount so payable for the period from and after such Interest Payment
Date or Stated Maturity, as the case may be. "Business Day" means each Monday,
Tuesday, Wednesday, Thursday and Friday which is not a day on which banking
institutions in the place of payment are authorized or obligated by law or
executive order to close.
BOOK-ENTRY SYSTEM
The 8 1/2% Notes and the 9 1/8% Notes will be issued in the form of one or
more fully registered global notes (collectively, the "Global Notes"), which
will be deposited with, or on behalf of, The Depository Trust Company, New
York, New York (the "Depositary") and registered in the name of the
Depositary's nominee. Except as set forth below, the Global Notes of either
series may be transferred, in whole and not in part, only to the Depositary or
another nominee of the Depositary.
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The Depositary has advised the Company as follows: the Depositary is a
limited-purpose trust company organized under the laws of the State of New
York, a "banking organization" within the meaning of the New York Banking Law,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Depositary was
created to hold securities of institutions that have accounts with the
Depositary ("participants") and to facilitate the clearance and settlement of
securities transactions among its participants in such securities through
electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. The
Depositary's participants include securities brokers and dealers (including
the Underwriters), banks, trust companies, clearing corporations and certain
other organizations, some of whom (and/or their representatives) own the
Depositary. Access to the Depositary's book-entry system is also available to
others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly. The Depositary agrees with and represents to its participants that
it will administer its book-entry system in accordance with its rules and
bylaws and requirements of law.
Upon the issuance of the Global Notes, the Depositary will credit, on its
book-entry registration and transfer system, the respective principal amounts
of the Notes represented by such Global Notes to the accounts of participants.
The accounts to be credited shall be designated by the Underwriters. Ownership
of beneficial interests in the Global Notes will be limited to participants or
persons that may hold interests through participants. Ownership of interests
in the Global Notes will be shown on, and the transfer of those ownership
interests will be effected only through, records maintained by the Depositary
(with respect to participants' interests) and such participants (with respect
to the owners of beneficial interest in the Global Notes through such
participants). The laws of some jurisdictions may require that certain
purchasers of securities take physical delivery of such securities in
definitive form. Such limits and laws may impair the ability to transfer
beneficial interests in the Global Notes.
So long as the Depositary, or its nominee, is the registered holder and
owner of the Global Notes, the Depositary or such nominee, as the case may be,
will be considered the sole owner and holder thereof for all purposes of such
Notes and under the Indenture. Except as set forth below, owners of beneficial
interests in the Global Notes will not be entitled to have the Notes
represented by such Global Notes registered in their names, will not receive
or be entitled to receive physical delivery of certificated Notes in
definitive form and will not be considered to be the owners or holders of any
Notes under the Indenture. Accordingly, each person owning a beneficial
interest in the Global Notes must rely on the procedures of the Depositary
and, if such person is not a participant, on the procedures of the participant
through which such person owns its interest, to exercise any rights of a
holder of Notes under the Indenture or the Global Notes. The Company
understands that under existing industry practice, in the event the Company
requests any action of holders of Notes or an owner of a beneficial interest
in the Global Notes desires to take any action that the Depositary, as the
holder of the Global Notes, is entitled to take, the Depositary would
authorize the participants to take such action, and that the participants
would authorize beneficial owners owning through such participants to take
such action or would otherwise act upon the instructions of beneficial owners
owning through them.
Payment of principal of and interest on Notes represented by the Global
Notes registered in the name of or held by the Depositary or its nominee will
be made to the Depositary or its nominee, as the case may be, as the
registered owner and holder of the Global Notes.
The Company expects that the Depositary, upon receipt of any payment of
principal or interest in respect of the Global Notes of either series, will
credit immediately participants' accounts with payment in amounts
proportionate to their respective beneficial interests in the principal amount
of the Global Notes of such series as shown on the records of the Depositary.
The Company also expects that payments by participants to owners of beneficial
interests in the Global Notes held through such
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<PAGE>
participants will be governed by standing instructions and customary
practices, as is the case with securities held for the accounts of customers
in bearer form or registered in "street name," and will be the responsibility
of such participants. None of the Company, the Trustee or any agent of the
Company or the Trustee will have any responsibility or liability for any
aspect of the records relating to, or payments made on account of, beneficial
ownership interests in the Global Notes or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests or for
any other aspect of the relationship between the Depositary and its
participants or the relationship between such participants and the owners of
beneficial interests in the Global Notes owning through such participants.
Unless and until they are exchanged in whole or in part for certificated
Notes in definitive form, the Global Notes may not be transferred except as a
whole by the Depositary to a nominee of such Depositary or by a nominee of
such Depositary to such Depositary or another nominee of such Depositary.
The Notes represented by the Global Notes are exchangeable for certificated
Notes in definitive registered form in denominations of $1,000 and in any
greater amount that is an integral multiple thereof if (i) the Depositary
notifies the Company that it is unwilling or unable to continue as Depositary
for the Global Notes or if at any time the Depositary ceases to be a clearing
agency registered under the Exchange Act, (ii) the Company in its discretion
at any time determines not to have all of the Notes represented by the Global
Notes and notifies the Trustee thereof or (iii) an Event of Default with
respect to the Notes has occurred and is continuing. Any Notes that are
exchangeable pursuant to the preceding sentence are exchangeable for
certificated Notes issuable in authorized denominations and registered in such
names as the Depositary shall direct. Subject to the foregoing, the Global
Notes of either series are not exchangeable except for the Global Note or
Global Notes of the same series and the same aggregate denominations to be
registered in the name of the Depositary or its nominee.
REDEMPTION
Each series of Notes will be subject to redemption, in whole or in part, at
any time or from time to time, at the option of the Company on at least 30
days' prior notice by mail at a redemption price equal to the greater of (i)
100% of the principal amount of the Notes to be redeemed or (ii) the sum of
the present values of the remaining scheduled payments of principal and
interest thereon discounted to the date of redemption on a semiannual basis
(assuming a 360-day year consisting of twelve 30-day months) at the Treasury
Rate plus 50 basis points in the case of the 8 1/2% Notes, or 62.5 basis
points in the case of the 9 1/8% Notes, plus in each case accrued but unpaid
interest to the date of redemption. On and after the date of redemption,
interest will cease to accrue on the Notes or portions of Notes called for
redemption on such date. The 8 1/2% Notes and the 9 1/8% Notes may be redeemed
in part but only in integral multiples of $1,000.
"Treasury Rate" means, with respect to any redemption date and with respect
to either series of Notes, the rate per annum equal to the semiannual
equivalent yield to maturity of the Comparable Treasury Issue, assuming a
price for such Comparable Treasury Issue (expressed as a percentage of its
principal amount) equal to the Comparable Treasury Price for such redemption
date.
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable
to the remaining term of the Notes of the relevant series that would be
utilized, at the time of selection and in accordance with customary financial
practice, in pricing new issues of corporate debt securities of comparable
maturity to the remaining term of such Notes. "Independent Investment Banker"
means one of the Reference Treasury Dealers appointed by the Trustee after
consultation with the Company.
"Comparable Treasury Price" means, with respect to any redemption date, (i)
the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of
58
<PAGE>
its principal amount) on the third business day preceding such redemption
date, as set forth in the daily statistical release (or any successor release)
published by the Federal Reserve Bank of New York and designated "Composite
3:30 p.m. Quotations for U.S. Government Securities" or (ii) if such release
(or any successor release) is not published or does not contain such prices on
such business day, (A) the average of the Reference Treasury Dealer Quotations
for such redemption date, after excluding the highest and lowest such
Reference Treasury Dealer Quotations, or (B) if the Trustee obtains fewer than
three such Reference Treasury Dealer Quotations, the average of all such
Quotations.
"Reference Treasury Dealer" means Goldman, Sachs & Co. and CS First Boston
Corporation, and their respective successors; provided, however, that if any
of the foregoing shall cease to be a primary U.S. Government securities dealer
in New York City (a "Primary Treasury Dealer") the Company shall substitute
therefor another Primary Treasury Dealer.
"Reference Treasury Dealer Quotations" means, with respect to each Reference
Treasury Dealer and any redemption date, the average, as determined by the
Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the
third business day preceding such redemption date.
Any notice to the Holders of the 8 1/2% Notes or the 9 1/8% Notes of such a
redemption need not set forth the redemption price of such Notes but need only
set forth the calculation thereof as described in the first paragraph of this
section entitled "Redemption." The redemption price, calculated as aforesaid,
shall be set forth in an Officers' Certificate delivered to the Trustee no
later than two business days prior to the redemption date.
No sinking fund shall be established for the benefit of the 8 1/2% Notes or
the 9 1/8% Notes.
CERTAIN COVENANTS OF THE COMPANY
Unless otherwise specified below, all accounting terms used herein are to be
interpreted, all accounting determinations under the Indenture are to be made,
and all financial statements required thereunder are to be prepared (except
for changes concurred in by the Company's independent public accountants) in
accordance with generally accepted accounting principles applied on a basis
consistent with the audited consolidated financial statements of the Company
as of December 31, 1995; provided that, if the Company or any Restricted
Subsidiary has adopted since such date or adopts at any time after the date of
the Indenture a change in accounting principles from those used in preparing
such consolidated financial statements that affects in any material respect
the computation of or compliance with any of the covenants contained in the
Indenture, then, unless the Indenture shall have been amended to modify the
covenants in the Indenture to take account of such change in accounting
principles, the Company shall continue to compute all financial restrictions
and ratios contained in such covenants based on accounting principles in
effect prior to the adoption of such change.
LIMITATION ON SECURED DEBT
The Company may not, nor may it permit any Restricted Subsidiary to, Incur
any Debt secured by a Lien on any (i) Principal Property or any part thereof,
(ii) Capital Stock of a Restricted Subsidiary now owned or hereafter acquired
by the Company or by any Restricted Subsidiary or (iii) Debt of a Restricted
Subsidiary owed to the Company or to any Restricted Subsidiary, without in any
such case under clause (i), (ii) or (iii) effectively providing that the Notes
are secured equally and ratably with (or, at the Company's option, prior to)
such secured Debt and any other Debt required to be so secured, unless the
aggregate amount of all such secured Debt outstanding at such time, plus all
Attributable Debt of the Company and its Restricted Subsidiaries with respect
to Sale and Leaseback Transactions involving Principal Properties outstanding
at such time (with the exception of such transactions that are excluded as
described under "Limitation on Sale and Leaseback Transactions" below), would
not exceed 10% of Consolidated Net Tangible Assets.
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The restriction in the foregoing paragraph shall not apply to, and there
will be excluded from Debt in any computation under such restriction, (i) Debt
secured by a Lien in favor of the Company or a Restricted Subsidiary, (ii)
Debt secured by a Lien in favor of governmental bodies to secure progress or
advance payments or payments pursuant to contracts or statute, (iii) Debt
secured by a Lien on property, Capital Stock or Debt existing at the time of
acquisition thereof (including acquisition through merger, consolidation or
otherwise) and not Incurred in anticipation thereof, (iv) Debt Incurred or
Guaranteed to finance the acquisition of property, Capital Stock or Debt, or
to finance construction on, or improvement or expansion of, property, which
Debt is incurred within 180 days of such acquisition or completion of
construction, improvement or expansion, and is secured solely by a Lien on the
property, Capital Stock or Debt acquired, constructed, improved or expanded,
(v) Debt consisting of industrial revenue or pollution control bonds or
similar financing secured solely by a Lien on the property the subject
thereof, (vi) secured Debt outstanding on the date of the Indenture or (vii)
any extension, renewal, refunding or replacement of any Debt referred to in
clauses (iii), (iv) and (vi) above.
LIMITATION ON SALE AND LEASEBACK TRANSACTIONS
Neither the Company nor any Restricted Subsidiary may enter into any Sale
and Leaseback Transaction involving any Principal Property or any part thereof
after the date of original issuance of the Notes unless the aggregate amount
of all Attributable Debt of the Company and its Restricted Subsidiaries with
respect to such transactions outstanding at such time, plus all secured Debt
outstanding at such time to which the restriction described under "Limitation
on Secured Debt" above applies, would not exceed 10% of Consolidated Net
Tangible Assets.
The restriction in the foregoing paragraph shall not apply to, and there
shall be excluded from Attributable Debt in any computation under such
restriction, any Sale and Leaseback Transaction if (i) the lease is for a
period of not in excess of three years, including renewal rights, (ii) the
lease secures or relates to industrial revenue or pollution control bonds or
similar financing, (iii) the transaction is between the Company and a
Restricted Subsidiary or between Restricted Subsidiaries, or (iv) the Company
or such Restricted Subsidiary, within 270 days after the sale is completed,
applies an amount equal to the greater of (a) the net proceeds of the sale of
the Principal Property or part thereof leased or (b) the fair market value of
the Principal Property or part thereof leased (as determined by the President
and Chief Executive Officer or the Treasurer) either to (1) the retirement (or
open market purchase) of Notes, other Funded Debt of the Company ranking on a
parity with or senior to the Notes or Funded Debt of a Restricted Subsidiary
or (2) the purchase by the Company or any Restricted Subsidiary of other
property, plant or equipment related to the business of the Company or any
Restricted Subsidiary having a value at least equal to the value of the
Principal Property or part thereof leased.
LIMITATIONS ON RESTRICTED PAYMENTS
The Company may not, nor will it permit any Restricted Subsidiary to,
directly or indirectly (i) declare or pay any dividend or make any
distribution on account of the Company's Capital Stock (other than dividends
or distributions payable in Capital Stock (other than Disqualified Stock) of
the Company or dividends or distributions payable to the Company or any
Wholly-Owned Restricted Subsidiary of the Company), (ii) purchase, redeem or
otherwise acquire or retire for value any Capital Stock of the Company other
than any such Capital Stock owned by the Company or any Wholly-Owned
Restricted Subsidiary of the Company or (iii) redeem, defease (including, but
not limited to, legal or covenant defeasance), repurchase, retire or otherwise
acquire or retire for value prior to any scheduled maturity, repayment or
sinking fund payment, Debt of the Company (other than the Notes) that is
subordinate in right of payment to the Notes (all such payments and other
actions set forth in clauses (i), (ii) and (iii) above being collectively
referred to as "Restricted Payments"), unless, at the time of such Restricted
Payment:
(a) no Event of Default or event that with the passing of time or the
giving of notice, or both, would constitute an Event of Default shall have
occurred and be continuing or would occur as a consequence thereof; and
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(b) upon giving effect to such Restricted Payment on a pro forma basis
(the value of any such payment, if other than cash, being determined by the
Board of Directors of the Company and evidenced by a resolution set forth
in an Officers' Certificate delivered to the Trustee) the Consolidated Net
Worth of the Company would exceed:
(I) if the long-term unsecured Debt of the Company is not rated
Investment Grade by each of Moody's and S&P, the sum of (x)
$250,000,000 and (y) an amount equal to the greater of zero and 50% of
cumulative Consolidated Net Income of the Company since June 30, 1996;
or
(II) if the long-term unsecured Debt of the Company is rated
Investment Grade by each of Moody's and S&P, the amount produced
pursuant to clause (I) above as of the last day of the most recent
fiscal quarter prior to the date on which such debt became so rated by
each of Moody's and S&P.
The foregoing covenant will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture, (ii) the redemption, repurchase, retirement or other acquisition of
any Capital Stock of the Company in exchange for, or out of the proceeds of,
the substantially concurrent sale (other than to a Restricted Subsidiary of
the Company) of other Capital Stock of the Company (other than any
Disqualified Stock), (iii) the repurchase, redemption or other acquisition or
retirement for value of any Capital Stock of the Company held by any member of
the Company's (or any of its Restricted Subsidiaries') management or any
Director of the Company pursuant to any management equity subscription
agreement, stock option agreement or other employee benefit plan or program,
(iv) payments not exceeding $15 million in the aggregate in any twelve month
period with respect to dividends on any series of preferred stock of the
Company (other than Disqualified Stock) issued after the date of the
Indenture, (v) any redemption by the Company of any series of preferred stock
of the Company or Debt of the Company which is convertible into common stock
of the Company if at the time of such redemption the Company has an
underwriting commitment on customary terms from a nationally recognized
broker-dealer to purchase all shares of such series of preferred stock or
convertible Debt (or shares of common stock into which such preferred stock or
convertible Debt is convertible) which are not converted as of the redemption
date and (vi) any Restricted Payment made in connection with any merger,
consolidation or sale permitted under the caption "Limitation on Mergers,
Consolidations and Certain Sales of Assets" below, provided that in the case
of any transaction under clause (iii) or (iv) above, no Event of Default or
event that with the passing of time or the giving of notice, or both, would
constitute an Event of Default shall have occurred and be continuing
immediately after such transaction.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
The Company will not, nor will it permit any Restricted Subsidiary to, sell,
lease, transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make any contract,
agreement, understanding, loan, advance or guarantee with or for the benefit
of, any Affiliate unless (i) such transaction or series of transactions is on
terms that are no less favorable to the Company or such Restricted Subsidiary,
as the case may be, than would be available in a comparable transaction with
an unrelated third party and (ii) the Company delivers to the Trustee, except
with respect to the purchase or sale of products from or to ISI or any of its
Affiliates, (a) with respect to a transaction or series of transactions
involving aggregate payments in excess of 1% of Consolidated Net Tangible
Assets, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such transaction complies with clause (i) above
and has been approved by a majority of the independent members of the Board of
Directors, and (b) with respect to a transaction or series of transactions
involving aggregate payments equal to or greater than 4% of Consolidated Net
Tangible Assets, the Company receives a written opinion from a nationally
recognized expert that such transaction or series of transactions is fair to
the Company from a financial point of view, provided
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that (i) employment agreements, (ii) transactions between or among the Company
and its Restricted
Subsidiaries or between or among its Restricted Subsidiaries, (iii)
transactions permitted by the covenant described above under the caption
"Limitations on Restricted Payments" and (iv) arrangements with Affiliates in
effect as of the date of the Indenture, including any renewal, restructuring,
amendment, refinancing or modification of any such arrangement which does not
materially adversely affect the interests of the holders of the Notes in the
reasonable judgment of the Company, in each case, will not be subject to this
covenant.
LIMITATION ON MERGERS, CONSOLIDATIONS AND CERTAIN SALES OF ASSETS
The Company may not, in a single transaction or a series of related
transactions, consolidate with or merge with or into any other Person or sell,
assign, convey, transfer or lease or otherwise dispose of all or substantially
all of its properties and assets to any Person or group of affiliated Persons,
or permit any of its Restricted Subsidiaries to enter into any such
transaction or transactions and the Company shall not permit any Person to
consolidate with or merge into the Company or convey, transfer or lease its
properties and assets substantially as an entirety to the Company, unless (i)
in a transaction in which the Company does not survive or in which the Company
sells, leases or otherwise disposes of all or substantially all of its assets,
the successor entity to the Company is organized under the laws of the United
States of America or any State thereof or the District of Columbia and shall
expressly assume, by a supplemental indenture executed and delivered to the
Trustee in form satisfactory to the Trustee, all of the Company's obligations
under the Indenture and the Notes, (ii) immediately before and after giving
effect to such transaction and treating any Debt that becomes an obligation of
the Company or a Restricted Subsidiary as a result of such transaction as
having been Incurred by the Company or such Restricted Subsidiary at the time
of the transaction, no Event of Default or event that with the passing of time
or the giving of notice, or both, would constitute an Event of Default shall
have occurred and be continuing and (iii) the Company or the successor entity
to the Company shall have secured each series of Notes as required by the
provisions of the Indenture under "Limitation on Secured Debt" described above
if, as a result of any such transaction, property or assets of the Company or
any Restricted Subsidiary would become subject to a Lien prohibited by said
covenant.
Although there is a developing body of case law interpreting the phrase
"substantially all," as used in Section 909 of the New York Business
Corporation Law, there is no precise established definition of the phrase as
used in indentures under applicable New York law. Accordingly, the
circumstances under which a holder of Notes would be able to prove a violation
of the foregoing covenant as a result of a sale, conveyance, transfer or lease
or other disposition of less than all of the assets of the Company and its
Restricted Subsidiaries to another Person are uncertain.
PROVISION OF FINANCIAL INFORMATION
So long as any of the Notes of a series are outstanding, the Company shall
file with the Commission, and shall provide the Trustee, and upon written
request, Holders of such Notes and prospective holders of such Notes with
copies of, the annual reports, quarterly reports and other information,
documents and reports that are or would be required to be filed with the
Commission pursuant to Sections 13(a) or 15(d) of the Exchange Act, without
cost to the Trustee, such Holders or such prospective holders. In the event
the Company is not permitted to file such documents with the Commission, the
Company shall file such documents with the Trustee and, upon written request,
provide Holders of such Notes and prospective holders of such Notes copies
thereof, without cost to such Holders or prospective holders.
DEFEASANCE AND COVENANT DEFEASANCE
DEFEASANCE AND DISCHARGE
The Indenture provides that under certain conditions, at the Company's
option, the Company will be discharged from all its obligations with respect
to either series of the Notes (except for certain
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obligations to exchange or register the transfer of Notes, to replace stolen,
lost or mutilated Notes, to maintain paying agencies and to hold moneys for
payment in trust) upon the deposit in trust for the benefit of the Holders of
such Notes of money or U.S. Government Obligations, or both, which, through
the payment of principal and interest in respect thereof in accordance with
their terms, will provide money in an amount sufficient to pay the principal
of and interest on such series of Notes on the dates such payments are due in
accordance with the terms of the Indenture and such Notes. Such defeasance or
discharge may occur only if, among other things, the Company has delivered to
the Trustee an Opinion of Counsel to the effect that the Company has received
from, or there has been published by, the IRS a ruling, or there has been a
change in tax law, in either case to the effect that Holders of such series of
Notes will not recognize gain or loss for federal income tax purposes as a
result of such deposit, defeasance and discharge and will be subject to
federal income tax on the same amount, in the same manner and at the same
times as would have been the case if such deposit, defeasance and discharge
were not to occur.
DEFEASANCE OF CERTAIN COVENANTS
The Indenture provides that under certain conditions, at the Company's
option, the Company may, with respect to either series of the Notes, omit to
comply with the covenants described in "Certain Covenants of the Company"
described above. The Company, in order to exercise such option, will be
required to deposit, in trust for the benefit of the Holders of such series of
Notes, money or U.S. Government Obligations, or both, which, through the
payment of principal and interest in respect thereof in accordance with their
terms, will provide money in an amount sufficient to pay the principal of and
interest on such Notes on the dates such payments are due in accordance with
the terms of the Indenture and such Notes. The Company will also be required,
among other things, to deliver to the Trustee an Opinion of Counsel to the
effect that Holders of such Notes will not recognize gain or loss for federal
income tax purposes as a result of such deposit and defeasance of certain
obligations and will be subject to federal income tax on the same amount, in
the same manner and at the same times as would have been the case if such
deposit and defeasance were not to occur. In the event the Company exercised
this option with respect to a series of the Notes and such Notes were declared
due and payable because of the occurrence of any Event of Default, the amount
of money and U.S. Government Obligations so deposited in trust would be
sufficient to pay the principal of and interest on such Notes at the time such
payments would have been due but may not be sufficient to pay amounts due on
such Notes upon any acceleration resulting from such Event of Default. In such
case, the Company would remain liable for such payments.
GOVERNING LAW
The Indenture will be governed by the laws of the State of New York.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with any specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Asset Disposition" by the Company or any of its Restricted Subsidiaries
means any sale, lease, conveyance, transfer or other disposition (including,
without limitation, by way of a merger,
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consolidation, spin-off, sale of Capital Stock or otherwise) of (i) the shares
of Capital Stock of a Restricted Subsidiary of the Company (other than
directors' qualifying shares), (ii) substantially all of the assets
representing a division or line of the business of the Company or any of its
Restricted Subsidiaries or (iii) other assets of the Company or any of its
Restricted Subsidiaries outside of the ordinary course of business (each
referred to for the purposes of this definition as a "disposition"), in each
case by the Company or any of its Restricted Subsidiaries (other than a
disposition by such a Restricted Subsidiary to the Company or by the Company
to a Restricted Subsidiary or by a Restricted Subsidiary to another Restricted
Subsidiary).
"Attributable Debt" means, with respect to a lease in a Sale and Leaseback
Transaction, the total net amount of rent required to be paid during the
remaining primary term of such lease, discounted at a rate per annum equal to
the interest rate implicit in such lease, calculated in accordance with
generally accepted accounting practices. The net amount of rent required to be
paid under any such lease for any such period shall be the aggregate amount of
rent payable by the lessee with respect to such period after excluding amounts
required to be paid on account of maintenance, repairs, insurance, taxes,
assessments, utility, operating and labor costs and similar charges.
"Capital Lease Obligations" of any Person means the obligations to pay rent
or other amounts under a lease of (or other Debt arrangements conveying the
right to use) real or personal property of such Person that are required to be
classified and accounted for as a capital lease or a liability on the face of
a balance sheet of such Person in accordance with generally accepted
accounting principles, and the amount of such obligations shall be the
capitalized amount thereof in accordance with generally accepted accounting
principles and the stated maturity thereof shall be the date of the last
payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of
a penalty.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock or
other equity participation, including partnership interests, whether general
or limited, of such Person.
"Consolidated Net Income" of the Company means for any period the
consolidated net income (or loss) of the Company and its Restricted
Subsidiaries for such period determined on a consolidated basis in accordance
with generally accepted accounting principles, provided that there shall be
excluded therefrom (i) the net income (or loss) of any Person acquired by the
Company or a Restricted Subsidiary in a pooling-of-interests transaction for
any period prior to the date of such transaction, (ii) the net income (but not
net loss) of any Restricted Subsidiary which is subject to restrictions which
prevent the payment of dividends or the making of distributions to the Company
to the extent of such restrictions, (iii) the net income (or loss) of any
Person that is not a Restricted Subsidiary except to the extent of the amount
of dividends or other distributions actually paid to the Company by such
Person during such period, (iv) gains or losses on Asset Dispositions by the
Company or its Restricted Subsidiaries and (v) all extraordinary gains and
extraordinary losses.
"Consolidated Net Tangible Assets" means the aggregate amount of assets of
the Company and its Restricted Subsidiaries after deducting (i) all current
liabilities other than commercial paper, short-term bank debt and current
maturities of long-term debt and (ii) all goodwill and other intangibles.
"Consolidated Net Worth" means the consolidated stockholders' equity of the
Company and its Restricted Subsidiaries, less amounts attributable to
Disqualified Stock.
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person and whether or
not contingent, (i) every obligation of such Person for money borrowed, (ii)
every obligation of such Person evidenced by bonds, debentures, notes or other
similar instruments, including obligations Incurred in connection with the
acquisition of property, assets or businesses, (iii) every reimbursement
obligation of such Person with respect to letters of
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credit, bankers' acceptances or similar facilities issued for the account of
such Person, (iv) every obligation of such Person issued or assumed as the
deferred purchase price of property or services (but excluding trade accounts
payable or accrued liabilities arising in the ordinary course of business that
are not overdue by more than 90 days or that are being contested in good
faith), (v) every Capital Lease Obligation of such Person, (vi) the maximum
fixed redemption or repurchase price of Disqualified Stock of such Person,
(vii) every obligation of such Person under interest rate swap or similar
agreements, or foreign currency or commodity hedge, exchange or similar
agreements of such Person, (viii) the Attributable Debt with respect to any
Sale and Leaseback Transaction to which such Person is a party and (ix) every
obligation of the type referred to in clauses (i) through (viii) of another
Person and all dividends of another Person the payment of which, in either
case, such Person has Guaranteed or is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable in cash, pursuant to a sinking fund obligation or otherwise, or is
redeemable in cash at the option of the holder thereof, in whole or in part,
on or prior to the date on which the Notes mature; provided, however, that
Disqualified Stock shall not include any Capital Stock held by or issued in
connection with any employee benefit plan or program in which employees or
Directors of the Company or any subsidiary of the Company participate.
"Funded Debt" means (i) all Debt having a maturity of more than 12 months
from the date as of which the determination is made or having a maturity of 12
months or less but by its terms being renewable or extendible beyond 12 months
from such date at the option of any obligor thereon and (ii) Capital Lease
Obligations payable more than 12 months from such date (such Capital Lease
Obligations to be included as Funded Debt at the amount so capitalized at the
date of such computation and to be included for the purposes of the definition
of Consolidated Net Tangible Assets both as an asset and as Funded Debt at the
amount so capitalized).
"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person guaranteeing any Debt of any other Person (the "primary obligor")
in any manner, whether directly or indirectly, and including, without
limitation, any obligation of such Person, directly or indirectly (i) to
purchase or pay (or advance or supply funds for the purchase or payment of)
such Debt or to purchase (or to advance or supply funds for the purchase of)
any interest in or security for the payment of such Debt, (ii) to purchase
property, securities or services for the purpose of assuring the holder of
such Debt of the payment of such Debt or (iii) to maintain working capital,
equity capital or other financial statement condition or liquidity of the
primary obligor so as to enable the primary obligor to pay such Debt (and
"Guaranteed" and "Guaranteeing" shall have meanings correlative to the
foregoing); provided, however, that a Guarantee by any Person shall not
include endorsements by such Person for collection or deposit, in either case,
in the ordinary course of business; and provided, further, that the term
"Guarantee" shall not include contracts made in the ordinary course of
business of the Company and its Restricted Subsidiaries for the purchase of
utilities, services and raw materials that require payment to be made to the
provider of utilities, services or raw materials regardless of whether
delivery is ever made of such utilities, services or raw materials so long as
the quantities of utilities, services or raw materials purchased under each
such contract do not exceed the Company's or its contracting Restricted
Subsidiary's reasonably anticipated consumption thereof on the date of the
contract. The amount of a Guarantee shall be equal to the amount of the
obligation covered thereby.
"Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Debt or other
obligation or the recording, as required pursuant to generally accepted
accounting principles or otherwise, of any such Debt or other obligation on
the balance sheet of any such Person (and "Incurrence," "Incurred,"
"Incurrable" and "Incurring" shall have meanings correlative to the
foregoing); provided, however, that a change in generally accepted accounting
principles that results
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in an obligation of such Person that exists at such time becoming Debt shall
not be deemed an Incurrence of such Debt, and "Incur" means with respect to
any Lien, to create, incur or assume such Lien on any asset or property (and
"Incurrence," "Incurred," "Incurrable" and "Incurring" shall have meanings
correlative to the foregoing).
"Investment Grade" means Baa3 or better in the case of a rating from Moody's
and BBB- or better in the case of a rating from S&P.
"Lien" means, with respect to any property or assets, any mortgage or deed
of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement (other than any easement not materially
impairing usefulness or marketability), encumbrance, preference, priority or
other security agreement, or any equivalent of any of the foregoing under the
laws of any applicable jurisdiction, on or with respect to such property or
assets (including, without limitation, any conditional sale or other title
retention agreement having substantially the same economic effect as any of
the foregoing); provided, however, that Lien shall not include a Permitted
Lien.
"Moody's" means Moody's Investors Service, Inc. or any successor thereto.
"Permitted Liens" means (i) deposits, liens or pledges of personal property
to enable the Company or a Restricted Subsidiary to exercise any privilege or
license, or to secure payments of worker's compensation, unemployment
insurance or social security obligations, or to secure the performance of
contracts or leases to which the Company or a Restricted Subsidiary is a
party, or to secure public or statutory obligations of the Company or a
Restricted Subsidiary, or other similar
deposits, liens, or pledges of personal property made in the ordinary course
of business, (ii) mechanics', workmen's, repairmen's or carriers' liens, or
other similar liens arising in the ordinary course of business, or deposits,
liens or pledges of personal property to obtain the release of any such liens,
(iii) liens for taxes, assessments and other governmental charges not
delinquent or the payment of which is being contested by the Company or a
Restricted Subsidiary in good faith and (iv) bankers' liens and rights of
setoff arising in the ordinary course of business of the Company or any
Restricted Subsidiary under common law or by statute.
"Principal Property" means any facility owned by the Company or any
Subsidiary the gross book value of which (including related land,
improvements, machinery and equipment so owned, without deduction of any
depreciation reserves) on the date as of which the determination is being made
exceeds 2% of Consolidated Net Tangible Assets.
"Restricted Subsidiary" means any Subsidiary which owns a Principal Property
and any other Subsidiary designated as a Restricted Subsidiary by the Board of
Directors of the Company.
"S&P" means Standard & Poor's Ratings Services, a division of The McGraw
Hill Companies, Inc., or any successor thereto.
"Sale and Leaseback Transaction" means an arrangement with any lender or
investor or to which any lender or investor is a party providing for the
leasing by such Person of any property or asset of such Person that has been
or is being sold or transferred by such Person more than 180 days after the
acquisition thereof or the completion of construction or commencement of
operation thereof to such lender or investor or to any person to whom funds
have been or are to be advanced by such lender or investor on the security of
such property or asset. The stated maturity of such arrangement shall be the
date of the last payment of rent or any other amount due under such
arrangement prior to the first date on which such arrangement may be
terminated by the lessee without payment of a penalty.
"Subsidiary" of any Person means (i) a corporation more than 50% of the
outstanding Voting Stock of which is owned, directly or indirectly, by such
Person or by one or more other Subsidiaries of such Person or by such Person
and one or more Subsidiaries thereof or (ii) any other Person (other
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than a corporation) in which such Person, or one or more other Subsidiaries of
such Person or such Person and one or more other Subsidiaries thereof,
directly or indirectly, has at least a majority ownership and power to direct
the policies, management and affairs thereof.
"U.S. Government Obligation" means (x) any security that is (i) a direct
obligation of the United States of America for the payment of which the full
faith and credit of the United States of America is pledged or (ii) an
obligation of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the payment of which is
unconditionally guaranteed as a full faith and credit obligation of the United
States of America, that, in either case (i) or (ii), is not callable or
redeemable at the option of the issuer thereof, and (y) any depositary receipt
issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as
custodian with respect to any U.S. Government Obligation that is specified in
clause (x) above and held by such bank for the account of the holder of such
depositary receipt, or for the account of the holder of such depositary
receipt, or with respect to any specific payment of principal of or interest
on any U.S. Government Obligation that is so specified and held, provided that
(except as required by law) such custodian is not authorized to make any
deduction from the amount payable to the holder of such depositary receipt
from any amount received by the custodian in respect of the U.S. Government
Obligation or the specific payment of principal or interest evidenced by such
depositary receipt.
"Voting Stock" means Capital Stock which ordinarily has voting power for the
election of directors (or persons performing similar functions), whether at
all times or only so long as no senior class of securities has such voting
power by reason of any contingency.
"Wholly-Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock of which (other
than directors' qualifying shares) shall at the time be owned by such Person
or by one or more Wholly-Owned Restricted Subsidiaries of such Person or by
such Person and one or more Wholly-Owned Restricted Subsidiaries of such
Person.
EVENTS OF DEFAULT
The following will be Events of Default with respect to either series of
Notes under the Indenture: (i) failure to pay any interest on any Note of such
series when due, continued for 30 days, (ii) failure to pay principal of (or
premium, if any, on) any Note of such series when due, (iii) failure to
perform or comply with the provisions described under "Limitation on Mergers,
Consolidations and Certain Sales of Assets", (iv) failure to perform, or
breach of, any other covenant or warranty of the Company in the Indenture,
continued for 60 days after written notice as provided in the Indenture, (v) a
default or defaults under any bonds, debentures, notes or other evidences of,
or obligations constituting, Debt of the Company or any Restricted Subsidiary
(other than the Notes of such series) or under any mortgages, indentures,
instruments or agreements under which there may be issued or existing or by
which there may be secured or evidenced any Debt of the Company or any
Restricted Subsidiary, in any such case with a principal or similar amount
then outstanding, individually or in the aggregate, in excess of $25,000,000,
whether such Debt now exists or is hereafter created, which default or
defaults constitute a failure to pay any portion of the principal or similar
amount of such Debt when due and payable or which would enable the holder
thereof to cause such Debt to become due and payable prior to the date on
which it would otherwise have become due and payable, (vi) the rendering of a
final judgment or judgments (not subject to appeal) against the Company or any
of its Restricted Subsidiaries individually or in the aggregate, in excess of
$25,000,000, which remains unstayed, undischarged or unbonded for a period of
60 days thereafter and (vii) certain events of bankruptcy, insolvency or
reorganization affecting the Company or any Restricted Subsidiary.
If an Event of Default (other than an Event of Default of the type described
in clause (vii) above) shall occur and be continuing with respect to either
series of Notes, either the Trustee or the Holders of at least 25% in
aggregate principal amount of the outstanding Notes of such series may
accelerate
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the maturity of all Notes of such series, and if an Event of Default of the
type described in clause (vii) above shall occur, the principal, premium, if
any and accrued interest on the Notes of such series then Outstanding shall
become immediately due and payable; provided, however, that after such
acceleration, but before a judgment or decree based on acceleration, the
Holders of a majority in aggregate principal amount of outstanding 8 1/2%
Notes or 9 1/8% Notes, as the case may be, may, under certain circumstances,
rescind and annul such acceleration if all Events of Default with respect to
such series of Notes, other than the non-payment of accelerated principal of
the Notes of such series, have been cured or waived as provided in the
Indenture. For information as to waiver of defaults, see "Modification and
Waiver."
No Holder of any Note of either series will have any right to institute any
proceeding with respect to the Indenture or for any remedy thereunder, unless
such Holder shall have previously given the Trustee written notice of a
continuing Event of Default with respect to such series of Notes and unless
also the Holders of at least 25% in aggregate principal amount of the
outstanding Notes of such series shall have made written request, and offered
reasonable indemnity, to the Trustee to institute such proceeding as Trustee,
and the Trustee shall not have received from the Holders of a majority in
aggregate principal amount of the outstanding Notes of such series a direction
inconsistent with such request and shall have failed to institute such
proceeding within 60 days. However, such limitations do not apply to a suit
instituted by a Holder of a Note for enforcement of payment of the principal,
premium, if any, or interest on such Note on or after the respective due dates
expressed in such Note.
The Company will be required to furnish to the Trustee annually a statement
as to the performance by the Company of certain of its obligations under the
Indenture and as to any default in such performance.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture with respect to either series
of Notes may be made by the Company and the Trustee with the consent of the
Holders of a majority in aggregate principal amount of the outstanding Notes
of such series; provided, however, that no such modification or amendment may,
without the consent of the Holder of each outstanding Note of a series
affected thereby, (i) change the Stated Maturity of the principal of, or any
installment of interest on, any Note of such series, (ii) reduce the principal
amount, premium, if any, or interest on, any Note of such series, (iii) change
the place or currency of payment of principal, premium, if any, or interest on
any Note of such series, (iv) impair the right to institute suit for the
enforcement of any payment on or with respect to any Note of such series, (v)
reduce the above-stated percentage of outstanding Notes of such series
necessary to modify or amend the Indenture, (vi) reduce the percentage of
aggregate principal amount of outstanding Notes of such series necessary for
waiver of compliance with certain provisions of the Indenture or for waiver of
certain defaults, or (vii) modify any provisions of the Indenture relating to
the modification and amendment of the Indenture or the waiver of past defaults
or covenants, except as otherwise specified, in a manner adverse to the
Holders of such series of Notes.
The Holders of a majority in aggregate principal amount of the outstanding
Notes of either series may waive compliance by the Company with certain
restrictive provisions of the Indenture with respect to such series. The
Holders of a majority in aggregate principal amount of the outstanding Notes
of either series may waive any past default with respect to such series under
the Indenture, except a default in the payment of principal, premium, if any,
or interest.
CONCERNING THE TRUSTEE
The Bank of New York is the Trustee with respect to both series of Notes
under the Indenture. The Trustee has been invited to participate in the New
Credit Facility. In addition, the Trustee performs banking services for ISI
and its subsidiaries, other than the Company, in the ordinary course of their
businesses.
68
<PAGE>
VALIDITY OF THE NOTES
The validity of the Notes being offered hereby and certain other legal
matters will be passed upon for the Company by Mayer, Brown & Platt, Chicago,
Illinois. Certain legal matters will be passed upon for the Underwriters by
Sullivan & Cromwell, New York, New York. George A. Ranney, Jr., Vice President
and General Counsel of ISI, is a partner in the law firm of Mayer, Brown &
Platt. As of June 1, 1996, Mr. Ranney owned 7,300 shares of ISI's common stock
and also held options to purchase 48,000 shares of ISI's common stock, of
which none are currently exercisable.
EXPERTS
The consolidated financial statements as of December 31, 1994 and 1995, and
for each of the three years in the period ended December 31, 1995 included in
this Prospectus and the financial statement schedules in the registration
statement have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts
in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to
the Notes offered hereby. For the purposes hereof, the term "Registration
Statement" means the original Registration Statement and any and all
amendments thereto. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules
thereto. For further information with respect to the Company and such Notes,
reference is hereby made to the Registration Statement, exhibits and
schedules, which may be inspected and copied at the public reference
facilities maintained by the Commission at its principal office at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at
certain regional offices of the Commission located at Citicorp Center, 500
West Madison Street, Chicago, Illinois 60661 and at Seven World Trade Center,
New York, New York 10048. Copies of the Registration Statement can be obtained
at prescribed rates from the Public Reference Section of the Commission at its
principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549.
69
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF RYERSON TULL, INC. AND SUBSIDIARY COMPANIES
(A WHOLLY-OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)
<TABLE>
<CAPTION>
ITEM PAGE
---- ----
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated Statements of Operations and Reinvested Earnings for the
three years ended December 31, 1995 and (unaudited) for the three months
ended March 31, 1995 and 1996............................................ F-3
Consolidated Statement of Cash Flows for the three years ended December
31, 1995 and (unaudited) for the three months ended March 31, 1995 and
1996..................................................................... F-4
Consolidated Balance Sheet at December 31, 1994 and 1995 and (unaudited)
March 31, 1996........................................................... F-5
Statement of Accounting and Financial Policies............................ F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of Ryerson Tull, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing on page F-1 present fairly, in all material respects, the financial
position of Ryerson Tull, Inc. (formerly Inland Materials Distribution Group,
Inc.) (a wholly-owned subsidiary of Inland Steel Industries, Inc.) and
Subsidiary Companies at December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
Price Waterhouse LLP
Chicago, Illinois
February 19, 1996
F-2
<PAGE>
RYERSON TULL, INC. AND SUBSIDIARY COMPANIES
(A WHOLLY-OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS AND REINVESTED EARNINGS
DOLLARS IN MILLIONS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------- -------------
1993 1994 1995 1995 1996
-------- -------- -------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
Net sales............................ $1,893.3 $2,197.5 $2,450.1 $652.3 $625.3
-------- -------- -------- ------ ------
Operating costs and expenses:
Cost of goods sold (excluding
depreciation)..................... 1,663.8 1,927.7 2,118.1 563.5 541.6
Selling, general and administrative
expenses.......................... 144.4 142.1 153.2 39.1 39.5
Depreciation and amortization...... 20.6 21.2 21.8 5.4 5.6
State, local and miscellaneous
taxes............................. 8.1 8.4 8.3 2.2 2.0
-------- -------- -------- ------ ------
Total............................ 1,836.9 2,099.4 2,301.4 610.2 588.7
-------- -------- -------- ------ ------
Operating profit..................... 56.4 98.1 148.7 42.1 36.6
Other expense:
General corporate expense, net of
income items...................... 7.4 6.9 .7 .4 (.7)
Interest and other expense on
debt.............................. 10.9 2.9 2.6 .7 .6
-------- -------- -------- ------ ------
Income before income taxes........... 38.1 88.3 145.4 41.0 36.7
Provision for income taxes (Note 7).. 11.4 35.0 56.9 16.5 14.3
-------- -------- -------- ------ ------
Net income........................... $ 26.7 $ 53.3 $ 88.5 $ 24.5 $ 22.4
======== ======== ======== ====== ======
CONSOLIDATED STATEMENT OF REINVESTED EARNINGS
Balance at beginning of year......... $ 5.4 $ 32.1 $ 85.4 $ 85.4 $173.9
Net income for the year.............. 26.7 53.3 88.5 24.5 22.4
-------- -------- -------- ------ ------
Reinvested earnings at end of year... $ 32.1 $ 85.4 $ 173.9 $109.9 $196.3
======== ======== ======== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
RYERSON TULL, INC. AND SUBSIDIARY COMPANIES
(A WHOLLY-OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)
CONSOLIDATED STATEMENT OF CASH FLOWS
DOLLARS IN MILLIONS
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH
--------------------------------------------
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- --------------
1993 1994 1995 1995 1996
-------- -------- -------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................... $ 26.7 $ 53.3 $ 88.5 $ 24.5 $ 22.4
-------- -------- -------- ------ ------
Adjustments to reconcile net in-
come to net cash provided from
(used for) operating activi-
ties:
Depreciation and
amortization................. 20.6 21.2 21.8 5.4 5.6
Net gain on sales of assets... (.1) (.5) (.2) -- --
Deferred employee benefit
cost......................... 3.9 3.9 (14.4) (1.1) .9
Deferred income taxes......... (8.3) .7 .5 1.1 1.7
Change in:
Receivables.................. (22.8) (31.1) (16.7) (63.7) (30.8)
Inventories.................. (18.2) 5.7 10.4 (12.0) (34.5)
Other assets................. -- (1.6) (2.3) (.6) (.6)
Accounts payable............. (31.5) 22.6 (7.0) 13.0 21.4
Payables to related
companies................... 1.7 5.8 (.4) 13.8 .9
Accrued liabilities.......... 2.7 (.3) 4.2 (4.7) (7.3)
-------- -------- -------- ------ ------
Net adjustments............. (52.0) 26.4 (4.1) (48.8) (42.7)
-------- -------- -------- ------ ------
Net cash provided from (used
for) operating activities.. (25.3) 79.7 84.4 (24.3) (20.3)
-------- -------- -------- ------ ------
INVESTING ACTIVITIES
Capital expenditures............ (19.3) (20.4) (19.3) (3.0) (3.0)
Proceeds from sales of assets... .9 5.8 1.9 .3 1.2
-------- -------- -------- ------ ------
Net cash used for investing
activities................. (18.4) (14.6) (17.4) (2.7) (1.8)
-------- -------- -------- ------ ------
FINANCING ACTIVITIES
Long-term debt issued........... 7.5 -- -- -- --
Long-term debt retired.......... (5.3) (4.9) (4.7) (.6) (.5)
Capital contribution from Inland
Steel Industries............... 150.0 -- -- -- --
Change in notes to and from re-
lated companies................ (79.0) (87.2) (11.2) 41.9 14.4
-------- -------- -------- ------ ------
Net cash provided from (used
for) financing activities.. 73.2 (92.1) (15.9) 41.3 13.9
-------- -------- -------- ------ ------
Net increase (decrease) in cash
and cash equivalents........... 29.5 (27.0) 51.1 14.3 (8.2)
Cash and cash equivalents--be-
ginning of period............ -- 29.5 2.5 2.5 53.6
-------- -------- -------- ------ ------
Cash and cash equivalents--end
of period.................... $ 29.5 $ 2.5 $ 53.6 $ 16.8 $ 45.4
======== ======== ======== ====== ======
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest, net of amount capi-
talized...................... $ 11.3 $ 2.9 $ 3.0 $ .8 $ .6
Income taxes, net............. 22.6 30.5 56.4 9.4 12.5
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
RYERSON TULL, INC. AND SUBSIDIARY COMPANIES
(A WHOLLY-OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)
CONSOLIDATED BALANCE SHEET
DOLLARS IN MILLIONS
<TABLE>
<CAPTION>
PRO FORMA
AT DECEMBER 31, AT MARCH 31,
--------------- AT MARCH 31, 1996
1994 1995 1996 (NOTE 10)
------- ------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 2.5 $ 53.6 $ 45.4 $ 24.8
Receivables less provision for
allowances, claims and doubtful
accounts of $6.3, $6.4 and $6.7
(unaudited) respectively........... 227.1 243.8 274.6 274.6
Inventories (Note 2)................ 273.2 262.8 297.3 297.3
Notes receivable from related
companies.......................... 57.6 68.8 54.4 --
Deferred income taxes (Note 7)...... 13.0 15.6 13.0 13.0
------- ------- -------- -------
Total current assets............. 573.4 644.6 684.7 609.7
------- ------- -------- -------
Property, plant and equipment, at
cost:
Buildings, machinery and equipment.. 433.9 448.2 448.8 448.8
Land and land improvements.......... 27.7 28.0 28.0 28.0
------- ------- -------- -------
461.6 476.2 476.8 476.8
Less accumulated depreciation....... 209.1 226.5 230.6 230.6
------- ------- -------- -------
252.5 249.7 246.2 246.2
------- ------- -------- -------
Prepaid pension costs (Note 6)....... 12.2 27.3 27.8 27.8
Excess of cost over net assets
acquired, net of accumulated
amortization........................ 25.0 23.6 23.3 23.3
Deferred income taxes (Note 7)....... 26.6 23.5 24.4 24.4
Other assets......................... 1.6 3.9 4.5 4.5
------- ------- -------- -------
Total assets..................... $891.3 $972.6 $1,010.9 $ 935.9
======= ======= ======== =======
LIABILITIES
Current liabilities:
Accounts payable.................... $ 99.8 $ 92.8 $ 114.2 $ 114.2
Dividend payable.................... -- -- -- 77.1
Payables to related companies....... 14.8 14.4 15.3 15.3
Accrued liabilities:
Salaries and wages................. 17.6 20.0 13.2 13.2
Taxes other than federal income
taxes............................. 7.4 8.9 8.9 8.9
Other.............................. 3.3 3.6 3.1 3.1
Long-term debt due within one year.. 4.7 4.7 4.7 4.7
------- ------- -------- -------
Total current liabilities........ 147.6 144.4 159.4 236.5
------- ------- -------- -------
Long-term debt (Note 4).............. 23.6 18.9 18.4 18.4
Note payable to related company...... -- -- -- 293.8
Deferred employee benefits and other
liabilities (Note 6)................ 140.1 140.8 142.2 142.2
------- ------- -------- -------
Total liabilities................ 311.3 304.1 320.0 690.9
------- ------- -------- -------
STOCKHOLDER'S EQUITY
Common stock, par value $1.00; 3,000
shares authorized; one share
issued.............................. -- -- -- --
Additional paid-in capital (Note 8).. 494.6 494.6 494.6 245.0
Earnings reinvested in the business.. 85.4 173.9 196.3 --
------- ------- -------- -------
Total stockholder's equity....... 580.0 668.5 690.9 245.0
------- ------- -------- -------
Total liabilities and
stockholder's equity............ $891.3 $972.6 $1,010.9 $ 935.9
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
RYERSON TULL, INC. AND SUBSIDIARY COMPANIES
(A WHOLLY-OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)
STATEMENT OF ACCOUNTING AND FINANCIAL POLICIES
The following briefly describes the Company's principal accounting and
financial policies.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Joseph T. Ryerson & Son, Inc., and J. M. Tull Metals Company, Inc., which are
wholly-owned subsidiaries of the Company. The accounts of J. M. Tull Metals
Company, Inc. are consolidated with its wholly-owned subsidiary, AFCO Metals,
Inc.
INVENTORY VALUATION
Inventories are valued at cost which is not in excess of market. Cost is
determined principally by the last-in, first-out (LIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is depreciated, for financial reporting
purposes, using the straight-line method over the estimated useful lives of
the assets. Expenditures for normal repair and maintenance are charged against
income in the period incurred.
EXCESS OF COST OVER NET ASSETS ACQUIRED
The excess of cost over fair value of net assets of businesses acquired
(goodwill) is amortized on the straight-line method over a 25-year period.
Accumulated amortization of goodwill totaled $8.8 million at December 31,
1994, $10.2 million at December 31, 1995 and (unaudited) $10.5 million at
March 31, 1996.
BENEFITS FOR RETIRED EMPLOYEES
Effective April 30, 1996, that portion of the Inland Steel Industries
Pension Plan (the "Industries Pension Plan") covering the Company's current
and former employees was separated and became the Ryerson Tull Pension Plan
(the "Ryerson Tull Pension Plan"). Pension benefits are provided by the
Company to substantially all employees under such trusteed noncontributory
plan. Life insurance and certain medical benefits are provided for
substantially all retired employees.
The estimated costs of pension, medical, and life insurance benefits are
determined annually by consulting actuaries. The cost of these benefits for
retirees is accrued during their term of employment (see Note 6). Pensions are
funded in accordance with ERISA requirements in a trust established under the
Industries Pension Plan and Ryerson Tull Pension Plan. Costs for retired
employee medical benefits are funded when claims are submitted.
CASH EQUIVALENTS
Cash equivalents are highly liquid, short-term investments with maturities
of three months or less.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and related notes to financial statements. Changes in such
estimates may affect amounts reported in future periods.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
In 1995, the Company adopted Financial Accounting Standards Board ("FASB")
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Adoption of this Statement had no
material impact on the results of operations or financial position of the
Company.
F-6
<PAGE>
RYERSON TULL, INC. AND SUBSIDIARY COMPANIES
(A WHOLLY-OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1/FINANCIAL STATEMENTS
Results of operations for any interim period are not necessarily indicative
of results for any other periods or for the year. The financial statements as
of March 31, 1996 and for the three-month periods ended March 31, 1995 and
1996 are unaudited, but in the opinion of management include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of results for such periods.
NOTE 2/INVENTORIES
The Company's inventories consist principally of finished steel, nonferrous
metals and industrial plastic products for sale at service center locations.
The difference between LIFO values and approximate replacement costs for the
LIFO inventories was $132.6 million at December 31, 1994 and $146.4 million at
December 31, 1995 and (unaudited) $145.1 million at March 31, 1996.
During 1994 and 1995, various inventory quantities were reduced, resulting
in liquidations of LIFO inventory quantities carried at costs prevailing in
prior years that were different from current year costs. The effect on cost of
goods sold of LIFO liquidations in 1993, 1994 and 1995 was not material.
NOTE 3/BORROWING ARRANGEMENTS
At December 31, 1995 and March 31, 1996, the Company's subsidiaries had
available two unused credit facilities totalling $225 million. Each facility,
as well as the Inland Steel Industries Thrift Plan ESOP notes guarantee (the
"ESOP Guarantee") and certain other debt agreements, requires compliance with
various financial covenants including minimum net worth and leverage ratio
tests. The covenants also limit the amount of cash that the subsidiaries can
transfer to the Company in the form of dividends and other advances to $180
million at year-end 1995 and (unaudited) $200 million at March 31, 1996.
A $200 million unsecured credit agreement between Joseph T. Ryerson & Son,
Inc. and a group of banks provides a revolving credit facility to March 31,
2000.
J. M. Tull Metals Company, Inc. has a $25 million unsecured revolving credit
agreement with other banks, which extends to December 15, 1997 (the "Tull
Credit Facility").
With respect to Joseph T. Ryerson & Son, Inc.'s ability to advance funds or
make dividend payments to the Company, the most restrictive covenants on March
31, 1996 were contained in the ESOP Guarantee. Under these covenants, Joseph
T. Ryerson & Son, Inc.'s ability to dividend or advance funds to the Company
at any time is limited to $30 million (i) plus 80% of net income (decreased by
100% of net losses) earned by Joseph T. Ryerson & Son, Inc. since December 31,
1989, (ii) minus the dollar amount of dividends paid and capital stock
repurchased and the balance of any advances outstanding and (iii) plus capital
contributions to Joseph T. Ryerson & Son, Inc. and the proceeds from the
issuance of any capital stock or certain other investments during such period.
At December 31, 1995, approximately $128 million was available for making
advances and paying dividends to the Company under the ESOP Guarantee. At
March 31, 1996 such limitation was approximately $145 million (unaudited).
With respect to J.M. Tull Metals Company, Inc.'s ability to advance funds or
pay dividends to the Company, the Tull Credit Facility and its senior notes
contained the most restrictive covenants on March 31, 1996. Under the Tull
Credit Facility, J.M. Tull Metals Company, Inc.'s ability to pay dividends is
limited by minimum tangible net worth and net income requirements. The
required minimum tangible net worth increases by 40% of net income each
quarter, but is not reduced in the event of a net loss.
F-7
<PAGE>
RYERSON TULL, INC. AND SUBSIDIARY COMPANIES
(A WHOLLY-OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the terms of the senior notes, advances outstanding can be no more than
15% of tangible net worth. At December 31, 1995, approximately $52 million was
available for making advances and paying dividends to the Company under J.M.
Tull Metals Company, Inc.'s debt agreements. At March 31, 1996, such
limitation was approximately $55 million (unaudited). Other covenants which
could restrict dividends or advances to the Company include tangible net worth
and leverage tests at Joseph T. Ryerson & Son, Inc. and cumulative earnings,
leverage and working capital tests at J.M. Tull Metals Company, Inc.
NOTE 4/LONG-TERM DEBT
The Company's long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1994 1995 1996
------ ------ -----------
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Joseph T. Ryerson & Son, Inc.
Industrial Revenue Bond, floating interest rate set
weekly based on 13-week Treasury bills, due
November 1, 2007.................................. $ 7.0 $ 7.0 $ 7.0
Other long-term debt, 10.25%, due through November
30, 1997.......................................... 1.8 1.6 1.6
J. M. Tull Metals Company, Inc.
Senior Notes, 9.43%, due through July 29, 1997..... 10.7 7.1 7.1
Term note ("Tull Term Note"), LIBOR plus 62.5 basis
points per annum, due through August 17, 1998..... 7.1 6.8 6.8
Industrial Revenue Bonds, interest rates ranging
from 6.5% to 65% of the prime rate, due through
January 1, 1997................................... 1.4 .9 .5
Other.............................................. .3 .2 .1
------ ------ -----
28.3 23.6 23.1
Less maturities due within one year................ 4.7 4.7 4.7
------ ------ -----
Long-term debt................................... $23.6 $18.9 $18.4
====== ====== =====
</TABLE>
At year-end 1995, maturities of long-term debt are: $4.7 million in 1996,
$5.6 million in 1997, $6.3 million in 1998, and $7.0 million in 2007.
Under the provisions of certain loan agreements, the Company's subsidiaries
are required to maintain specified amounts of working capital and net worth
and meet leverage tests, as outlined in the agreements, and are restricted as
to loans or dividends that may be paid to the Company.
Property with a net recorded carrying value of approximately $13.5 million
at December 31, 1995 is pledged as collateral on the industrial revenue bonds
and mortgage loans.
NOTE 5/DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
DERIVATIVES
The Company has only limited involvement with derivative financial
instruments and does not use them for speculative or trading purposes. The
Company has entered into an interest rate swap agreement to reduce the effects
of changes in interest rates on the Tull Term Note. At December 31, 1995, the
Company had outstanding an interest rate swap agreement with a bank having a
notional
F-8
<PAGE>
RYERSON TULL, INC. AND SUBSIDIARY COMPANIES
(A WHOLLY-OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
principal amount equal to the outstanding principal of the Tull Term Note.
This agreement effectively changes the Company's interest rate exposure on the
Tull Term Note from LIBOR plus 0.625% (a floating rate) to a fixed rate of
5.925%. This interest rate swap matures on August 17, 1998. Gains and losses
associated with this hedging transaction will be reported as part of the
interest expense of the Tull Term Note. The Company is exposed to potential
credit loss in the event of nonperformance by the bank; however, the Company
does not anticipate such nonperformance. This interest rate swap has not had a
material impact on the results of operations or financial position of the
Company.
CASH AND CASH EQUIVALENTS
The carrying amount of cash equivalents approximates fair value because of
the short maturity of those instruments.
LONG-TERM DEBT
The estimated fair value of the Company's long-term debt (including current
portions thereof) using quoted market prices of Company debt securities
recently traded and market-based prices of similar securities for those
securities not recently traded was $27.4 million at December 31, 1994 and
$23.6 million at December 31, 1995, as compared with the carrying value of
$28.3 million and $23.6 million included in the balance sheet at year-end 1994
and 1995, respectively.
NOTE 6/RETIREMENT BENEFITS
In 1995, the measurement date for pensions and benefits other than pensions
was changed from December 31 to September 30 in order to provide for more
timely information and to achieve administrative efficiencies in the
collection of data. The change in the measurement date had no effect on 1995
expense and had an immaterial impact on the 1995 funded status of the pension
plan.
PENSIONS
The Industries Pension Plan covers certain employees, retirees and their
beneficiaries of Industries and its subsidiaries, including the Company. The
Industries Pension Plan is a noncontributory defined benefit plan that
provides benefits based on final pay and years of service for all salaried
employees and certain wage employees, and years of service and a fixed rate
(in most instances based on frozen pay level or on job class) for all other
wage employees, including employees under collective bargaining agreements.
Because the fair value of pension plan assets pertains to all participants in
the Industries Pension Plan, no separate determination of the fair value of
such assets is made solely with respect to the Company.
The actuarial present value of benefits for service rendered to date and the
fair value of plan assets available for benefits for the Industries
consolidated group were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1994 1995
------------ -------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Fair value of plan assets....................... $1,652 $1,919
Actuarial present value of benefits for service
rendered to date:
Accumulated Benefit Obligation based on
compensation to date......................... 1,641 1,956
Additional benefits based on estimated future
compensation levels.......................... 98 90
------ ------
Projected Benefit Obligation.................. 1,739 2,046
------ ------
Plan asset shortfall to Projected Benefit
Obligation..................................... $ (87) $ (127)
====== ======
</TABLE>
F-9
<PAGE>
RYERSON TULL, INC. AND SUBSIDIARY COMPANIES
(A WHOLLY-OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At September 30, 1995, Industries Pension Plan assets included 3.9 million
shares of Industries common stock with a fair value of $88 million. From May
1995, when the stock was contributed to the Industries Pension Plan, to
September 30, 1995, the pension fund received $.2 million of dividends on
these shares.
In 1995, Inland Steel Industries, Inc. ("Industries") recorded an additional
minimum pension liability of $102.6 million representing the excess of the
unfunded Accumulated Benefit Obligation over previously accrued pension costs.
A corresponding intangible asset was recorded as an offset to this additional
liability as prescribed. Neither was required in 1994.
The calculation of benefit obligations was based on a discount (settlement)
rate of 8.8% in 1994 and 7.75% in 1995; a rate of compensation increase of
5.0% in 1994 and 4.0% in 1995; and a rate of return on plan assets of 9.5% in
both 1994 and 1995.
The Company recorded a pension charge of $.1 million in 1993 and $1.8
million in 1994, and a credit of $2.3 million in 1995. In 1995, the Company
paid $13.1 million to Industries for its share of a contribution to the
Industries Plan trust.
The cost of other industry welfare and retirement funds, for bargaining unit
employees, was $2.9 million in 1993, $2.6 million in 1994 and $3.3 million in
1995.
Effective April 30, 1996, the Ryerson Tull portion of the Industries Pension
Plan was separated and became the Ryerson Tull Pension Plan. The Ryerson Tull
Pension Plan assumed the liabilities of the Industries Pension Plan attributed
to active and retired Ryerson Tull employees and a corresponding percentage of
the assets. If the Ryerson Tull Pension Plan had been in existence at the
September 30, 1995 valuation date of the Industries Pension Plan, the Ryerson
Tull's projected benefit obligation would have been $266 million (unaudited)
and Ryerson Tull's share of the Pension Plan assets would have been $249
million (unaudited), resulting in an under-funding of $17 million (unaudited)
for financial reporting purposes. There is no ERISA-required funding for
either the Industries Pension Plan or the Ryerson Tull Pension Plan in 1996,
nor will there be funding as a result of the separation. The separation will
not have a material impact on the financial statements of Ryerson Tull.
Benefits Other Than Pensions
Substantially all of the Company's employees are covered under
postretirement life insurance and medical benefit plans that involve
deductible and co-insurance requirements. The postretirement life insurance
benefit formula used in the determination of postretirement benefit cost is
primarily based on applicable annual earnings at retirement for salaried
employees and specific amounts for hourly employees. The Company does not
prefund any of these postretirement benefits.
The amount of net periodic postretirement benefit cost for 1993, 1994 and
1995 is composed of the following:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Service cost..................................... $ 3.2 $ 2.7 $ 2.2
Interest cost.................................... 8.0 7.3 8.4
Net amortization and deferral.................... (1.9) (2.0) (3.4)
------- ------- -------
Total net periodic postretirement benefit
cost.......................................... $ 9.3 $ 8.0 $ 7.2
======= ======= =======
</TABLE>
F-10
<PAGE>
RYERSON TULL, INC. AND SUBSIDIARY COMPANIES
(A WHOLLY-OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth components of the accumulated postretirement
benefit obligation:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1994 1995
------------ -------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation
attributable to:
Retirees...................................... $ 44.4 $ 59.5
Fully eligible plan participants.............. 15.9 17.6
Other active plan participants................ 24.9 28.2
------ ------
Accumulated postretirement benefit
obligation................................... 85.2 105.3
Unrecognized net gain........................... 33.7 16.7
Unrecognized prior service credit............... 20.3 18.9
------ ------
Accrued postretirement benefit obligation....... $139.2 140.9
======
Expense net of benefits provided, October
through December 1995.......................... .2
------
Accrued postretirement benefit obligation at
December 31, 1995.............................. $141.1
======
</TABLE>
Any net gain or loss in excess of 10% of the accumulated postretirement
benefit obligation is amortized over the remaining service period of active
plan participants.
The assumptions used to determine the plan's accumulated postretirement
obligation are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1994 1995
------------ -------------
<S> <C> <C>
Discount Rate..................................... 8.8% 7.75%
Rate of Compensation increase..................... 5.0% 4.0%
Medical cost trend rate........................... 6%-5% 4.5%
Year ultimate rate reached........................ 1996 1996
</TABLE>
A one percentage point increase in the assumed health care cost trend rates
for each future year increases annual periodic postretirement benefit cost and
the accumulated postretirement benefit obligation as of September 30, 1995 by
$2.7 million and $12.2 million, respectively.
NOTE 7/TAXES ON INCOME
The Company participates in a tax-sharing arrangement under which current
and deferred federal income tax provisions are determined for each company in
the Industries group on a stand-alone basis. Any current liability is paid to
Industries. If the Company is unable to use all of its allocated tax
attributes (net operating loss and tax credit carryforwards) in a given year
but other companies in the consolidated group are able to utilize them, then
the Company will be paid by Industries for the use of its attributes. Net
operating loss ("NOL") and tax credit carryforwards are allocated to each
company in accordance with applicable tax regulations as if a company were to
leave the consolidated group. Companies with taxable losses record current
income tax credits not to exceed current income tax charges recorded by
profitable companies. If Industries uses NOL carryforwards, the Company will
use the appropriate portion of that year's carryforward previously allocated
to it, if any.
F-11
<PAGE>
RYERSON TULL, INC. AND SUBSIDIARY COMPANIES
(A WHOLLY-OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A state tax sharing arrangement, similar to the arrangement described above
with respect to federal taxes, also exists with Industries for those states in
which the consolidated group is charged state taxes on a unitary or combined
basis.
The elements of the provision for income taxes for the periods indicated
below are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------- -------------
1993 1994 1995 1995 1996
-------- -------- -------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current income taxes:
Federal...................... $17.3 $30.4 $49.7 $12.7 $10.9
State and local.............. 2.6 3.9 6.7 2.7 1.7
-------- -------- -------- ------ ------
19.9 34.3 56.4 15.4 12.6
Deferred income taxes.......... 8.5Cr. .7 .5 1.1 1.7
-------- -------- -------- ------ ------
Total provision for income tax-
es............................ $11.4 $35.0 $56.9 $16.5 $14.3
======== ======== ======== ====== ======
</TABLE>
- --------
Cr. = Credit
In accordance with FASB Statement No. 109, the Company adjusted its deferred
tax assets and liabilities for the effect of the change in the corporate
federal income tax rate from 34 percent to 35 percent, effective January 1,
1993. A credit to income of $.6 million, which includes the effect of the rate
change on deferred tax asset and liability balances as of January 1, 1993 as
well as the effect on 1993 tax benefits recorded by the Company prior to the
enactment date of August 10, 1993, was recorded in the third quarter of 1993.
The components of the deferred income tax assets and liabilities arising
under FASB Statement No. 109 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
---------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Deferred tax assets (excluding postretirement
benefits other than pensions):
Net operating loss and tax credit
carryforwards.................................. $15.1 $ 16.2
Other deductible temporary differences.......... 29.0 27.9
---------- -----------
44.1 44.1
---------- -----------
Deferred tax liabilities:
Fixed asset basis difference.................... 39.7 37.2
Other taxable temporary differences............. 14.0 17.2
---------- -----------
53.7 54.4
---------- -----------
Net deferred tax liability (excluding
postretirement benefits other than pensions)..... (9.6) (10.3)
FASB Statement No. 106 impact (post retirement
benefits other than pensions).................... 49.2 49.4
---------- -----------
Net deferred tax asset............................ $39.6 $ 39.1
========== ===========
</TABLE>
F-12
<PAGE>
RYERSON TULL, INC. AND SUBSIDIARY COMPANIES
(A WHOLLY-OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For tax purposes, the Company had available, at December 31, 1995,
approximately $43 million of NOL carryforwards available for regular federal
income tax purposes, expiring as follows: $8 million in 2005, $21 million in
2006, $7 million in 2007, $6 million in 2008 and $1 million in 2009.
Additionally, in conjunction with the Alternative Minimum Tax ("AMT") rules,
the Company had available AMT credit carryforwards for tax purposes of
approximately $1.1 million, which may be used indefinitely to reduce regular
federal income taxes.
The Company believes that it is more likely than not that all of the NOL
carryforwards will be utilized prior to their expiration. This belief is based
upon the factors discussed below.
The NOL carryforwards and existing deductible temporary differences
(excluding those relating to FASB Statement No. 106) are offset by existing
taxable temporary differences reversing within the carryforward period.
Furthermore, any such recorded tax benefits which would not be so offset are
expected to be realized by continuing to achieve future profitable operations.
Subsequent to the adoption of FASB Statement No. 109, the Company adopted
FASB Statement No. 106 and recognized the entire transition obligation at
January 1, 1992 as a cumulative effect charge in 1992. At December 31, 1995,
the deferred tax asset related to the Company's FASB Statement No. 106
obligation was $49.4 million. To the extent that future annual charges under
FASB Statement No. 106 continue to exceed deductible amounts, this deferred
tax asset will continue to grow. Thereafter, even if the Company should have a
tax loss in any year in which the deductible amount would exceed the financial
statement expense, the tax law provides for a 15-year carryforward period of
that loss. Because of the extremely long period that is available to realize
these future tax benefits, a valuation allowance for this deferred tax asset
is not necessary.
Total income taxes reflected in the Consolidated Statement of Operations
differ from the amounts computed by applying the federal tax rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Federal income tax provision computed at
statutory tax rate
of 35%...................................... $13.4 $30.9 $50.9
Additional taxes or credits from:
State and local income taxes, net of
federal income tax effect............... 1.7 2.5 4.5
Change in federal statutory rate......... .6Cr. -- --
All other, net........................... 3.1Cr. 1.6 1.5
-------- -------- --------
Total income tax provision............. $11.4 $35.0 $56.9
======== ======== ========
</TABLE>
- --------
Cr. = Credit
F-13
<PAGE>
RYERSON TULL, INC. AND SUBSIDIARY COMPANIES
(A WHOLLY-OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8/RELATED PARTY TRANSACTIONS
The Company sells products to and purchases products from related companies
at prevailing market prices. These transactions were as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------- -------------
1993 1994 1995 1995 1996
-------- -------- -------- ------ ------
(DOLLARS IN MILLIONS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net product sales................... $ 10.7 $ 10.7 $ 15.7 $ 3.4 $ 5.2
Net product purchases............... $174.2 $184.1 $176.6 $44.5 $57.7
</TABLE>
Administrative expenses covering management, financial and legal services
provided to the Company were charged to the Company by Industries. Such
charges totaled $7.4 million in 1993 and 1994 and $6.8 million in 1995.
Cash management activities are performed by Industries and cash is
periodically transferred to Industries. Funds transferred to Industries are
supported by interest-bearing notes receivable. Interest, at prevailing prime
market rates, is charged on all intercompany loans within the Industries
consolidated group. There was $7.7 million of net intercompany interest
expense in 1993, no net intercompany interest expense in 1994 and $3.9 million
of net intercompany interest income in 1995.
In December 1993, Industries made a capital contribution of $150 million to
the Company. The capital contribution has been recorded as "additional paid-in
capital."
NOTE 9/COMMITMENTS AND CONTINGENCIES
The Company has noncancellable operating leases for which future minimum
rental commitments are estimated to total $38.3 million, including
approximately $8.6 million in 1996, $8.0 million in 1997, $7.0 million in
1998, $6.1 million in 1999, $4.8 million in 2000 and $3.8 million thereafter.
Rental expense under operating leases totaled $16.8 million in 1993 and
$15.9 million in 1994 and 1995.
Ryerson is the guarantor of $115.2 million at year-end 1995 and $110.8
million at March 31, 1996 (unaudited) of the Inland Steel Industries Thrift
Plan ESOP notes. The notes are payable in installments through July 2004.
There are various claims and pending actions against the Company. The amount
of liability, if any, for these claims and actions at December 31, 1995 is not
determinable but, in the opinion of management, such liability, if any, will
not have a materially adverse effect on the Company's financial position or
results of operations.
NOTE 10/PRO FORMA BALANCE SHEET (UNAUDITED)
On May 20, 1996, the Company paid to Industries a cash dividend in the
amount of $75 million. Industries used a portion of the proceeds from this
dividend to repay the amount owed to the Company under an intercompany note.
On June 26, 1996, the Company paid a cash dividend of $77.1 million and a
dividend consisting of a $293.8 million note payable to Industries maturing
five years from its date of issuance and bearing interest at a specified prime
rate. In addition on June 20, 1996, the Company declared a cash dividend in
the amount of the net proceeds from any exercise of the Underwriters' over-
allotment options granted to the Underwriters in connection with the sale by
the Company of up to 6,000,000 shares of its Class A Common Stock (including
780,000 shares of Class A Common Stock subject to the Underwriters' over-
allotment options) payable on the date of closing of such exercise. The pro
forma balance sheet as of March 31, 1996 gives effect to the above
transactions (other than the dividend in connection with any exercise of the
Underwriters' over-allotment options as discussed above) as if they had
occurred on March 31, 1996.
F-14
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each
of such Underwriters has severally agreed to purchase, the principal amount of
the Notes set forth opposite its name below:
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL
AMOUNT 8 AMOUNT 9
1/2% NOTES 1/8% NOTES
UNDERWRITER DUE 2001 DUE 2006
----------- ------------ ------------
<S> <C> <C>
Goldman, Sachs & Co............................... $ 75,000,000 $ 50,000,000
CS First Boston Corporation....................... 75,000,000 50,000,000
------------ ------------
Total........................................... $150,000,000 $100,000,000
============ ============
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the Notes, if any are
taken.
The Underwriters propose to offer the Notes in part directly to the public
at the initial public offering price set forth on the cover page of this
Prospectus and in part to certain securities dealers at such price less a
concession of 0.70% and 0.80% of the principal amount of the 8 1/2% Notes and
the 9 1/8% Notes, respectively. The Underwriters may allow, and such dealers
may reallow, a concession not to exceed 0.25% and 0.25% of the principal
amount of the 8 1/2% Notes and the 9 1/8% Notes, respectively, to certain
brokers and dealers. After the Notes are released for sale to the public, the
offering price and other selling terms may from time to time be varied by the
representatives.
The Notes are a new issue of securities with no established trading market.
The Company has been advised by the Underwriters that the Underwriters intend
to make a market in the Notes but are not obligated to do so and may
discontinue market making at any time without notice. No assurance can be
given as to the liquidity of the trading market for the Notes.
The Company and ISI have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act.
ISI has agreed to pay Goldman, Sachs & Co. a fee for financial advisory
services rendered to ISI.
U-1
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES DE-
SCRIBED IN THIS PROSPECTUS OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITA-
TION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 12
Use of Proceeds.......................................................... 16
Capitalization........................................................... 17
Selected Financial Data.................................................. 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 28
Management............................................................... 40
Relationship with ISI.................................................... 51
Principal Stockholder.................................................... 55
Ownership of ISI Stock................................................... 55
Description of Notes..................................................... 56
Validity of the Notes.................................................... 69
Experts.................................................................. 69
Additional Information................................................... 69
Index to Consolidated Financial Statements............................... F-1
Underwriting............................................................. U-1
</TABLE>
THROUGH AND INCLUDING AUGUST 6, 1996 (THE 40TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$250,000,000
RYERSON TULL, INC.
$150,000,000
8 1/2% NOTES DUE 2001
$100,000,000
9 1/8% NOTES DUE 2006
------------
LOGO
------------
GOLDMAN, SACHS & CO.
CS FIRST BOSTON
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
