424B1: Prospectus [Rule 424(b)(1)]
Published on
This filing is made pursuant
to Rule 424(b)(1) under
the Securities Act of
1933 in connection with
Registration No. 333-62276
5,500,000 Shares
RELIANCE STEEL & ALUMINUM CO.
Common Stock
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Our common stock is listed on The New York Stock Exchange under the symbol
"RS." The last reported sale price of the common stock on June 28, 2001 was
$25.65 per share.
The underwriters have an option to purchase a maximum of 825,000 additional
shares to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 6.
Delivery of the shares of common stock will be made on or about July 5,
2001.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
BEAR, STEARNS & CO. INC.
MCDONALD INVESTMENTS INC.
SALOMON SMITH BARNEY
The date of this prospectus is June 28, 2001.
[RELIANCE LOGO]
[MAP SHOWING LOCATIONS OF FACILITIES FOR 1994 AND BEFORE AND 1995 AND AFTER]
NET INCOME
(GRAPH)
NET SALES
(GRAPH)
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TABLE OF CONTENTS
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
(i)
FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated in this prospectus by
reference contain forward-looking statements. You should read carefully any
statements containing the words "expect," "believe," "anticipate," "project,"
"estimate," "predict," "intend," "should," "could," "may," "might," or similar
expressions or the negative of any of these terms.
Forward-looking statements involve known and unknown risks and
uncertainties. Various factors, such as those listed under "Risk Factors," may
cause our actual results, performance or achievements to be materially different
from those expressed or implied by any forward-looking statements. Among the
factors that could cause our results to differ are the following:
- the volatility of the industries that we serve;
- a broad downturn in the economy in general;
- our increased leverage as a result of our acquisitions;
- changes in our interest rates on our debt and our ability to refinance
our credit facility;
- changes in foreign currency exchange rates, which could affect the price
we pay for metals and the results of our foreign operations; and
- the failure of our acquisitions to perform as we anticipate.
Although we believe the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future performance or results. We
are not obligated to update or revise any forward-looking statements, whether as
a result of new information, future events or otherwise. You should consider
these risks when reading any forward-looking statements.
(ii)
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere or incorporated by
reference in this prospectus. Because this is a summary, it is not complete and
does not contain all the information that may be important to you. You should
read the entire prospectus carefully, including the information under "Risk
Factors" and the consolidated financial statements and the related notes
included elsewhere in this prospectus before making an investment decision.
Unless the context requires otherwise, references to "we," "us" or "our" refer
collectively to Reliance Steel & Aluminum Co. and its subsidiaries. Unless
otherwise stated, the information contained in this prospectus (1) assumes that
the underwriters do not exercise the over-allotment option and (2) gives effect
to the 3-for-2 stock splits in June 1997 and in September 1999.
OUR COMPANY
OVERVIEW
We are one of the five largest metals service center companies in the
United States. We provide value-added metals processing services and distribute
a full line of metal products, including aluminum, brass, copper, galvanized,
hot-rolled and cold-finished carbon steel, stainless steel, titanium, alloy
steel, and specialty steel. We sell metal products to more than 70,000 customers
in a broad range of industries. We serve our customers through a network of 80
metals service centers throughout the United States and in France and South
Korea. We operate two additional metals service centers in the Pacific Northwest
through our 50%-owned affiliate American Steel, L.L.C.
We purchase metals in bulk quantities from primary producers and sell these
metals in smaller quantities to a variety of end-users. We process approximately
50% of the carbon steel, aluminum, stainless steel, and other metals we sell to
meet customer specifications, using techniques such as blanking, leveling (or
cutting-to-length), sawing, shape cutting, and shearing. These services save our
customers time, labor, and expense and reduce their overall manufacturing costs.
During 2000, we handled approximately 7,380 transactions per business day at an
average price of $940 per order. Our computerized order entry system and
flexible production scheduling enable us to deliver orders within 24 hours of
receipt, thereby facilitating our ability to provide the quick turnaround
required for these small orders.
Our operating methods and growth strategy have enabled us to outperform
most of our competitors in the metals service center industry. We have reported
eight consecutive years of record net income and sales, over which time our net
income has increased at a compound annual growth rate of approximately 30% on a
compound annual sales growth rate of 22%. In 2000, net sales grew to over $1.7
billion and net income to $62.3 million, and we were named to the 2000 Forbes
Platinum 400 List of America's Best Big Companies.
METALS SERVICE CENTER INDUSTRY
Industry sources estimate that in 2000 the entire United States metals
distribution industry (steel and other metals), consisting of about 3,400
intermediate steel processors and metals service centers, had over $75 billion
in revenues (up from $40 billion in 1996). In 2000, intermediate steel
processors and metals service centers sold:
- approximately 30% of carbon industrial steel products produced in the
United States;
- approximately 45% of all stainless steel produced in the United States;
and
- approximately 36% of the aluminum sold in the mill/distributor shared
markets (which excludes that sold for aluminum cans, among other things).
Intermediate steel processors and metals service centers represented the
largest category of customers of domestic steel and other metals producers. We
believe that the metals service center industry will continue to increase its
role as a valuable intermediary between primary metal producers and end-users.
Metal producers tend to focus their sales efforts on larger end-users to
increase production efficiency. The smaller end-users that are our primary
customers, on the other hand, have increased their demand for
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outsourced metals processing, just-in-time inventory management, and other
value-added services of metals distributors.
COMPETITIVE STRENGTHS
We believe that the following operating strengths and organizational
characteristics have enabled us to achieve our strong competitive position and
financial results and should serve as a basis for future growth, profitability
and enhancement of shareholder value.
- ENTREPRENEURIAL ENVIRONMENT. We have a decentralized management and
operational structure that emphasizes a high degree of autonomy for each
of our diverse operations and contributes significantly to our
profitability. We encourage managers to run their operations with a sense
of ownership and tie a significant portion of their annual compensation
to the financial performance of their particular units. We believe this
management and operational structure provides incentives to division and
subsidiary managers to pursue profitable growth opportunities, attain
high financial objectives, and deliver superior customer service.
- CUSTOMER, PRODUCT AND GEOGRAPHIC DIVERSITY. We process and distribute
more than 80,000 metal products (up from 20,000 in 1996) to more than
70,000 customers in 23 states and in France and South Korea, thereby
offering a more diverse product mix to a greater number of customers than
most of our competitors. In 2000, our average order size was
approximately $940, and no customer represented more than 1% of our
sales. We focus on small orders with a quick turnaround at higher gross
profit margins than many of our peers. The geographic and product
expansion we have achieved over the last seven years reduces our exposure
to the financial or economic volatility of any particular customer group
or geographic region.
- SUPERIOR SERVICE AND PRODUCTS. Our reputation for integrity and the
quality and timeliness of our service has increased the loyalty of our
customers and has assisted our marketing efforts to new customers. Our
speed and range of services and the size and variety of our inventory
distinguish us from our competitors. Because local managers have
significant operational control, our metals service centers can react
quickly to changes in local market and customer demands. We tailor our
inventory and processing services at each service center to support
customer requirements of the market that facility serves. According to a
prominent industry survey, we have been ranked #1 among service centers
in the United States in overall customer satisfaction for four
consecutive years.
- SUCCESSFUL INTEGRATION OF ACCRETIVE ACQUISITIONS. We have a strong track
record of growth through strategic acquisitions. As one of the most
active acquirors in the industry, we are offered many opportunities that
our competitors do not receive. Historically, we have been very
successful at improving the sales and profitability of our acquired
companies by applying our purchasing power, access to lower-cost capital,
and operating knowledge. We typically retain the acquired company's
management team to preserve existing customer relationships, ensure a
seamless transition of the business and encourage its further expansion.
Our reputation is also advantageous in seeking growth opportunities, as
we are seen by many smaller service centers as the "acquiror of choice."
- INVENTORY MANAGEMENT. In 2000, our inventory turned approximately five
times, compared to an industry average of less than four per year. This
advantage is due to careful monitoring of all inventories in our system
and the ability of local management teams to accurately judge their own
inventory requirements. Our above-average inventory turns have allowed us
to react more quickly to changing metal prices and demand conditions,
thereby more efficiently managing our working capital.
- STRONG SUPPLIER RELATIONSHIPS. Our large purchasing volumes make us a
valued customer of our key suppliers and enable us to purchase materials
on attractive terms, including price. We meet regularly with our
suppliers to communicate our customers' goals and evaluate methods to
mutually provide the best service and products to our customers.
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BUSINESS STRATEGY
Our objective is to enhance operating results by profitably expanding
existing operations and making accretive strategic acquisitions. We also strive
to be the leader in customer service and quality, which enhance margins and
shareholder value. This strategy and our proven operating methods have enabled
us to outperform most of our competitors in the metals service center industry.
- PROFITABLY EXPAND EXISTING OPERATIONS. We continually evaluate
opportunities to expand our existing operations by opening facilities in
new locations and expanding product and service offerings at existing
facilities. Our entrepreneurial approach to management encourages local
managers to identify opportunities within their markets to add value
through increased product and service offerings.
- IDENTIFY AND ACQUIRE COMPLEMENTARY BUSINESSES. Our senior management team
seeks businesses and strategic asset purchases that will be immediately
accretive to earnings and are strategically positioned to diversify or
enhance our customer base, product availability, or geographic coverage.
We believe that we can continue to grow through acquisitions because of
the highly fragmented nature of the industry, which consists of many
small, privately-owned businesses that lack our diversity, experience,
access to lower-cost capital, and successful operating techniques.
- USE ADVANCED SYSTEMS TO MANAGE OUR OPERATIONS. We recognize that
efficient systems, in addition to efficient equipment, increase
productivity, and we continually evaluate technological changes that may
facilitate our distribution business and enhance profitability. We
believe our systems enable sales and marketing personnel to respond to
customers' inquiries more efficiently and more effectively than our
competitors.
RECENT ACQUISITIONS
Since our initial public offering in 1994, we have invested approximately
$670 million to complete more than 20 acquisitions. These acquisitions serve
customers through more than 50 locations in 21 different states. In 2001 to
date, we have acquired the companies described below:
- ALUMINUM AND STAINLESS, INC. In January 2001, we acquired all of the
outstanding capital stock of Aluminum and Stainless, Inc. At the time of
the acquisition, Aluminum and Stainless operated one metals service
center based in Lafayette, Louisiana. In March 2001, we opened a branch
operation of Aluminum and Stainless in New Orleans, Louisiana, by
purchasing assets of another metals service center. Aluminum and
Stainless provides non-ferrous products primarily related to the marine
industry for use in the production of large commercial vessels servicing
offshore oil rigs. In 2000 Aluminum and Stainless had revenues of
approximately $22 million.
- VIKING MATERIALS, INC. In January 2001, we purchased all of the
outstanding capital stock of Viking Materials, Inc., based in
Minneapolis, Minnesota, and of a related company, Viking Materials of
Illinois, Inc., based near Chicago, Illinois, which operates as a
wholly-owned subsidiary of Viking. Viking provides primarily carbon steel
flat-rolled products to customers in the Midwestern United States. In
2000 Viking and Viking Illinois had combined revenues of approximately
$90 million.
On May 18, 2001, we agreed to purchase substantially all of the assets and
assume certain liabilities of the steel service centers division of Pitt-Des
Moines, Inc., subject to our due diligence and regulatory approval. We cannot
assure you that we will complete the acquisition, but, if we do, we expect that
the closing will occur on or after July 2, 2001, and we will add seven new
service centers to our network and expand our presence into two new
states -- Iowa and Nevada. The service centers operations of Pitt-Des Moines had
revenues of approximately $216 million in 2000.
CORPORATE INFORMATION
Our principal executive offices are located at 350 South Grand Avenue,
Suite 5100, Los Angeles, California 90071-3406, and our telephone number is
(213) 687-7700. Our Web site address is www.rsac.com. The information on our Web
site is not part of this prospectus.
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THE OFFERING
Common shares offered........... 5,500,000
Common stock to be outstanding
after this offering............. 30,727,726
Use of proceeds................. We will use the proceeds to repay
approximately $130 million of our debt,
including debt related to the proposed
acquisition of assets of PDM, if completed,
and debt related to other completed
acquisitions, capital expenditures and
general working capital. See "Use of
Proceeds."
Dividend policy................. We intend to continue to pay regular cash
dividends on a quarterly basis at the current
annual rate of $0.24 per share, so long as
funds are available to do so and are not
required for the business.
NYSE symbol..................... RS
Risk factors.................... See the section entitled "Risk Factors" on
page 6 for a discussion of factors you should
consider carefully before deciding to buy our
common stock.
The number of shares of common stock outstanding after this offering is
based on the actual number of shares outstanding as of May 31, 2001, and
excludes:
- 1,300,825 shares of common stock issuable upon exercise of options
outstanding as of May 31, 2001, at a weighted average exercise price of
$21.19 per share; and
- 1,491,175 shares of common stock available for future grant under our
stock option plans.
The number of shares of common stock offered and outstanding also assumes
that the underwriters' over-allotment is not exercised. If the over-allotment
option is exercised in full, we will issue and sell an additional 825,000 shares
and have 31,552,726 shares outstanding after the offering.
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SUMMARY CONSOLIDATED FINANCIAL DATA
We derived the following summary financial and operating data for the years
ended December 31, 1996 through 2000, from our audited financial statements. The
financial data for the three months ended March 31, 2000 and 2001 are unaudited.
We believe the unaudited financial data include all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of that data.
You should read this information together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements, including the related notes, appearing elsewhere in this
prospectus.
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(1) Does not include revenues for American Steel, L.L.C. because we account for
our 50% investment by the equity method, and therefore include 50% of
American Steel's earnings in our net income and earnings per share amounts.
(2) Amounts have been retroactively adjusted to reflect the June 1997 3-for-2
stock split and the September 1999 3-for-2 stock split.
(3) The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128, Earnings
Per Share.
(4) EBITDA is defined as the sum of income before income taxes, interest
expense, depreciation expense, and amortization of intangibles (including
goodwill). EBITDA is commonly used as an analytical indicator and also
serves as a measure of leverage capacity and debt servicing ability. EBITDA
should not be considered as a measure of financial performance under
accounting principles generally accepted in the United States. The items
excluded from EBITDA are significant components in understanding and
assessing financial performance. EBITDA should not be considered in
isolation or as an alternative to net income, cash flows generated by
operating, investing or financing activities or other financial statement
data presented in the consolidated financial statements as an indicator of
financial performance or liquidity. EBITDA as measured in this prospectus is
not necessarily comparable with similarly titled measures for other
companies.
5
RISK FACTORS
You should carefully consider the following risks and uncertainties and all
other information contained in this prospectus, or incorporated by reference,
before you decide whether to purchase our common stock. Any of the following
risks, if they materialize, could adversely affect our business, financial
condition, or operating results. As a result, the trading price of our common
stock could decline, and you could lose all or part of your investment.
OUR FUTURE OPERATING RESULTS DEPEND ON A NUMBER OF FACTORS BEYOND OUR CONTROL,
SUCH AS THE PRICES FOR METALS, WHICH COULD CAUSE OUR RESULTS TO FLUCTUATE OVER
TIME.
The prices we pay for raw materials and the prices we charge for products
may change depending on many factors not in our control, including general
economic conditions (both domestic and international), competition, production
levels, import duties and other trade restrictions, and currency fluctuations.
To the extent metals prices decline, this generally would mean lower sales and
possibly lower net income, depending on the timing of the price changes. To the
extent we are not able to pass on to our customers any increases in our raw
materials prices, our results of operations may be adversely affected.
WE SERVICE INDUSTRIES THAT ARE HIGHLY CYCLICAL, AND ANY DOWNTURN IN OUR
CUSTOMERS' INDUSTRIES COULD REDUCE OUR REVENUE AND PROFITABILITY.
We sell many products to industries that are cyclical, such as the
aerospace and semiconductor industries. Accordingly, their demand for our
products may change as a result of economic conditions, energy prices, or other
factors beyond our control. For example, we experienced strong demand from the
semiconductor industry for our products throughout 2000, following a significant
slowdown in 1998 and the first half of 1999. This demand has slowed during 2001
to date, impacting our 2001 operating results. The demand from the aerospace
industry, on the other hand, which had slowed during 1999 and most of 2000,
increased in the fourth quarter of 2000 and has remained strong thus far in
2001. As a result of the volatility of the industries we serve, we may have
difficulty increasing or maintaining our level of sales or profitability if we
are not able to divert sales of our products to customers in other industries,
when one or more of our customers' industries is experiencing a decline.
THE SUCCESS OF OUR BUSINESS IS AFFECTED BY GENERAL ECONOMIC CONDITIONS, AND,
ACCORDINGLY, OUR BUSINESS COULD BE ADVERSELY IMPACTED BY AN ECONOMIC SLOWDOWN OR
RECESSION.
Periods of economic slowdown or recession in the United States or other
countries, or the public perception that one may occur, could decrease the
demand for our products, affect the availability and cost of our products and
adversely impact our business. In 2000, for example, we were somewhat impacted
by the general slowing in the economy. That impact has continued, and in the
first quarter of 2001 broadened and became more significant to our operations.
We did not maintain the same level of sales or profitability as in the first
quarter of 2000. We do not anticipate that we will achieve the same level of
sales volumes and net income in 2001 (excluding the impact of any acquisitions
that we may make during 2001) as we have achieved in recent years.
OUR BUSINESS IS VERY COMPETITIVE AND INCREASED COMPETITION COULD REDUCE OUR
GROSS MARGINS AND NET INCOME.
The principal markets that we serve are highly competitive. Competition is
based principally on price, service, quality, production capabilities, inventory
availability, and timely delivery. Competition in the various markets in which
we participate comes from companies of various sizes, some of which have greater
financial resources than we do and some of which have more established brand
names in the local markets we serve. Increased competition could force us to
lower our prices or to offer increased services at a higher cost to us, which
could reduce our gross margins and net income.
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PRODUCTION TIME AND THE COST OF OUR PRODUCTS COULD INCREASE IF WE WERE TO LOSE
ONE OF OUR PRIMARY SUPPLIERS.
If, for any reason, our primary suppliers of aluminum, carbon steel,
stainless steel or other metals should curtail or discontinue their delivery of
such raw materials to us in the quantities we need and at prices that are
competitive, our business could suffer since we have no long-term contracts to
purchase metals. If, in the future, we are unable to obtain sufficient amounts
of the necessary raw materials at competitive prices and on a timely basis from
our traditional suppliers, we may not be able to obtain such raw materials from
alternative sources at competitive prices to meet our delivery schedules, which
could have an adverse impact on our revenues and profitability.
AS A DECENTRALIZED BUSINESS, WE DEPEND ON BOTH SENIOR MANAGEMENT AND OUR
OPERATING EMPLOYEES; IF WE ARE UNABLE TO ATTRACT AND RETAIN THESE INDIVIDUALS,
OUR RESULTS OF OPERATIONS MAY DECLINE.
Because of our decentralized operating style, the loss of any key officers
or employees could have an adverse impact on our operations or financial
condition. We cannot assure you that we will be able to attract and retain
additional qualified personnel when needed. We do not have employment agreements
with any of these persons, which may mean they may have less of an incentive to
stay with us when presented with alternative employment opportunities.
WE MAY NOT BE ABLE TO CONSUMMATE THE PITT-DES MOINES ACQUISITION OR OTHER FUTURE
ACQUISITIONS, AND THOSE ACQUISITIONS WHICH WE DO COMPLETE MAY BE DIFFICULT TO
INTEGRATE INTO OUR BUSINESS.
We may not be able to complete the purchase of the assets and liabilities
of the steel service centers division of Pitt-Des Moines, Inc., even though the
waiting period has expired and we have completed substantially all of our due
diligence. If we do not complete this purchase, we will not be able to realize
the benefits we expect to receive from the acquisition, and we will not be able
to expand our operations in the areas served by that division as quickly as we
would if we were able to complete the acquisition. If we complete the purchase
before we complete this offering, the additional indebtedness we will incur to
pay for the acquisition could affect our liquidity. Furthermore, this
acquisition would be our largest acquisition to date, and we may not be able to
integrate the operations of those service centers into our other operations.
We may not be able to identify suitable acquisition candidates or
successfully complete any acquisitions or integrate any other businesses into
our operations. If we cannot identify suitable acquisition candidates, we are
unlikely to sustain our historical growth rates, and, if we cannot successfully
integrate these businesses, we may incur increased or redundant expenses.
Moreover, any additional indebtedness we incur to pay for these acquisitions
could adversely affect our liquidity and financial strength.
WE CONDUCT A SUBSTANTIAL PORTION OF OUR BUSINESS IN CALIFORNIA AND OTHER AREAS
WHERE OPERATIONS MAY BE ADVERSELY AFFECTED BY THE CURRENT ENERGY CRISIS.
California, one of our principal markets, is currently experiencing an
energy crisis resulting in high energy costs and rolling blackouts. Other parts
of the country, such as the Midwest, also have been affected by increased energy
costs. We may not necessarily be able to pass on to our customers increased
operating expenses resulting from higher energy costs. Moreover, it is possible
that we could experience a slackening in demand for our products if our
customers are impacted by higher energy costs, which they are not able to pass
on to their customers. Similarly, we anticipate that rolling blackouts may
temporarily disrupt our operations, and any such disruption could have a
temporary adverse effect on our operations. If the energy crisis escalates and
electricity is unavailable for long periods of time, or if electricity costs
increase significantly and we are not successful in passing those costs on to
our customers, we could experience a material adverse effect on our operations.
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WE ARE SUBJECT TO VARIOUS ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATIONS WHICH
MAY REQUIRE US TO EXPEND SIGNIFICANT CAPITAL AND INCUR SUBSTANTIAL COSTS.
Our operations are subject to federal, state, local and foreign
environmental, health and safety, and other laws and regulations. Environmental
and other regulatory requirements may change in the future, which may result in
significant constraints upon our operations or make such operations
prohibitively expensive or physically impossible to carry out.
EXISTING SHAREHOLDERS MAY SELL THEIR SHARES WHICH COULD DEPRESS THE MARKET PRICE
OF OUR COMMON STOCK.
Immediately following this offering, our officers, directors and principal
shareholders will own 7.0 million shares of common stock that would be eligible,
following the expiration of the 90-day lock-up agreements that they have signed
with Credit Suisse First Boston Corporation, to be resold into the public market
pursuant to Rule 144 or Rule 701 under the Securities Act. If these shareholders
sell a large number of these shares, the market price of our common stock could
decline, as these sales could be viewed by the public as an indication of
unfavorable prospects for our operations.
PRINCIPAL SHAREHOLDERS WHO OWN A SIGNIFICANT NUMBER OF SHARES MAY HAVE INTERESTS
THAT CONFLICT WITH YOURS.
After giving effect to this offering (but without giving effect to the
exercise of any options, including the over-allotment option), the Gimbel Trust
will own 4.2% of the outstanding shares of common stock and Florence Neilan, who
is the aunt of the Trustees of the Gimbel Trust, will own 13.7% of the
outstanding shares of common stock. As a result, these shareholders may have the
ability to control matters requiring shareholder approval. In deciding how to
vote on such matters, these shareholders may be influenced by interests that
conflict with yours.
WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS THAT MAY ADVERSELY IMPACT YOUR
RIGHTS AS A HOLDER OF OUR COMMON STOCK.
We are authorized to issue 5,000,000 shares of preferred stock, no par
value, with the rights, preferences, privileges and restrictions of such stock
to be determined by our Board of Directors, without a vote of the holders of
common stock. The Board of Directors could grant rights to holders of preferred
stock to reduce the attractiveness of our company as a potential takeover
target, or make the removal of management more difficult. Any of these actions
could adversely impact your rights as a holder of our common stock and could
cause the price of our common stock to decline.
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USE OF PROCEEDS
We expect to receive net proceeds of approximately $130 million from the
offering of the common stock ($150 million if the underwriters exercise the
over-allotment option in full), after deducting underwriting discounts,
commissions and estimated offering expenses, based on the offering price to the
public of $25.00 per share.
We intend to use the net proceeds to repay debt, including debt related to
the purchase of assets and liabilities of the steel service centers division of
Pitt-Des Moines, Inc., if completed, and debt related to other acquisitions,
capital expenditures, and general working capital needs.
We will pay down approximately $130 million of our revolving bank line of
credit outstanding. Our credit facilities provide up to $250 million to us.
After giving effect to this offering and assuming completion of our acquisition
of assets from Pitt-Des Moines, Inc., we expect to have drawn down approximately
$142 million under our credit facilities. The debt bears interest at variable
rates based on the bank's reference rate, the rate payable on certificates of
deposit or an offshore rate, depending on what we elect. The current interest
rates that we pay on outstanding borrowings on this line of credit range from
4.4% to 4.9%. We expect to refinance our syndicated credit facilities, which
mature on October 22, 2002, to increase our borrowing limit to support our
future financing requirements.
On May 18, 2001, we agreed to purchase substantially all of the assets and
assume certain liabilities of the steel service centers division of Pitt-Des
Moines, Inc. The purchase price is $97.5 million. We paid $3 million as a
deposit when we signed the agreement and will pay approximately one-half of the
balance at the closing and approximately one-half with a promissory note due on
or before September 30, 2001, except that the promissory note becomes
immediately due and payable if we complete this offering or refinance our credit
facilities before that date. The purchase price is subject to adjustment under
certain circumstances. We expect, but cannot guarantee, that this acquisition
will close no earlier than July 2, 2001. If this transaction closes, we will pay
from the proceeds of this offering the promissory note and bank debt incurred in
connection with financing this transaction.
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CAPITALIZATION
The following table shows our capitalization as of March 31, 2001. You
should read this table together with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements, including the related notes, included elsewhere in this prospectus.
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(1) Adjusted to reflect the balance sheet impact of our acquisition of the
assets and assumption of the liabilities of the steel service centers
division of Pitt-Des Moines, Inc. as if we had acquired it as of March 31,
2001.
(2) Adjusted to reflect the sale of 5,500,000 shares of common stock offered in
this prospectus at the public offering price of $25.00 per share and the
anticipated use of estimated net proceeds from the offering.
(3) Our credit facilities provide up to $250 million to us. The current interest
rates that we pay on outstanding borrowings on this line of credit range
from 4.4% to 4.9%. We are currently in the process of refinancing our
syndicated credit facilities to increase our borrowing limit to support our
future operations and expected growth opportunities.
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PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is listed on The New York Stock Exchange under the symbol
"RS." The following table sets forth the high and low reported closing sale
prices of the common stock on the NYSE Composite Tape for the stated calendar
quarters. Prices and dividends have been adjusted to reflect the 3-for-2 stock
split in September 1999.
On June 28, 2001, the last selling price of the common stock as reported on
the NYSE was $25.65 per share. As of May 31, 2001, there were 288 holders of
record of the common stock.
We have paid quarterly cash dividends on our common stock for approximately
40 years. The Board of Directors may reconsider or revise this policy from time
to time based on conditions then existing, including our earnings, financial
condition, and capital requirements, or other factors the Board may deem
relevant. We expect to continue to declare and pay dividends in the future, if
earnings are available to pay dividends, but we also intend to continue to
retain a portion of earnings for reinvestment in our operations and the
expansion of our business. We cannot assure you that either cash or stock
dividends will be paid in the future, or that, if paid, the dividends will be at
the same amount or frequency as paid in the past.
The private placement debt agreements for our unsecured senior notes
contain covenants which, among other things, require us to maintain a minimum
net worth which may restrict our ability to pay dividends. Since our initial
public offering in September 1994, we have paid between 6% and 10% of earnings
to our shareholders as dividends.
11
SELECTED CONSOLIDATED FINANCIAL DATA
We have derived the following selected summary financial and operating data
for the years ended December 31, 1996 through 2000 from our audited financial
statements. The financial data for the three months ended March 31, 2000 and
2001 are unaudited. We believe that the unaudited interim financial data include
all adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of such data. You should read the information below with our
Consolidated Financial Statements, including the notes related thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," appearing in this prospectus.
- ---------------
(1) Does not include revenues for American Steel, L.L.C. because we account for
our 50% investment by the equity method, and therefore we include 50% of
American Steel's earnings in our net income and earnings per share amounts.
(2) Operating expenses include warehouse, delivery, selling, general and
administrative expenses and depreciation expense.
(3) Amounts have been retroactively adjusted to reflect the June 1997 3-for-2
stock split and the September 1999 3-for-2 stock split.
(4) The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128, Earnings
Per Share.
12
(5) EBITDA is defined as the sum of income before income taxes, interest
expense, depreciation expense, and amortization of intangibles (including
goodwill). EBITDA is commonly used as an analytical indicator and also
serves as a measure of leverage capacity and debt servicing ability. EBITDA
should not be considered as a measure of financial performance under
accounting principles generally accepted in the United States. The items
excluded from EBITDA are significant components in understanding and
assessing financial performance. EBITDA should not be considered in
isolation or as an alternative to net income, cash flows generated by
operating, investing or financing activities or other financial statement
data presented in the consolidated financial statements as an indicator of
financial performance or liquidity. EBITDA as measured in this prospectus is
not necessarily comparable with similarly titled measures for other
companies.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We achieved record sales and earnings results in 2000, principally because
we included the sales and earnings from the companies we acquired in 2000 and
1999, and because our customer and product diversity and effective sales and
gross profit management reduced the impact of the U.S. economic downturn on us.
Pricing for most of our products increased slightly early in 2000, but then fell
steadily throughout the remainder of 2000 and in the first quarter of 2001.
Sales to the semiconductor, electronics, and related industries were strong
during 2000, but have declined significantly thus far in 2001. Sales to the
aerospace industry improved during the fourth quarter of 2000 and remained
fairly strong in the first quarter of 2001. Strong sales to both the
semiconductor and aerospace industries during 2000 offset, in part, steep
declines in the railcar and truck trailer markets experienced during 2000. In
addition, sales of basic carbon steel products began to decline in the second
half of 2000, primarily in the Midwest and Southeast regions of the United
States. This trend continued into 2001 and migrated to the West Coast late in
the first quarter of 2001, and currently encompasses most products we sell
except for those sold to companies in the aerospace industry.
Beginning in the second half of 2000, many of our peers were significantly
impacted by the general economic downturn in the United States. Although we were
impacted by the general downturn in certain product lines and geographic areas,
our customer, product, and geographic diversity allowed us to achieve record
financial results for 2000. We believe our results have been less susceptible to
the economic trends affecting the industry because our operations are
geographically diversified, we have a wide range of products, and our customer
base and the industries to which we sell are highly diversified.
The metals service center industry is currently faced with a difficult
operating environment that began in the second half of 2000 and carried over
into 2001. We believe our performance in the first quarter of 2001 confirms that
we are less cyclical than others in our industry. Net income for our first
quarter of 2001 was down 21% from the first quarter of 2000, but the first
quarter of 2000 represented the second-best quarterly results in our history.
Although overall demand for metal products continued to slow down in the first
quarter of 2001, sales for that period were up 0.5% from the 2000 first quarter
and 5.3% from the 2000 fourth quarter because we included sales from our 2001
and 2000 acquisitions. In addition, our gross profit margin during the first
quarter of 2001 increased to 27.8%, compared to 27.2% in the first quarter of
2000.
Our diversification and financial performance have benefited from several
significant acquisitions during the reported periods. Additionally, our
successful efforts to continue to expand through strategic acquisitions and to
increase our efficiencies and physical capacities through capital expenditure
programs have lessened the impact of regional economic recessions on the overall
results of our operations. We believe that we are positioned to take full
advantage of improved economic environments, while at the same time we are
poised to operate efficiently in less favorable economies because of our tight
cost controls, high inventory turnover, and diversification. We do not, however,
anticipate that we will achieve the same level of sales volumes and net income
returns in 2001 as we have achieved in recent years (excluding the impact of any
acquisitions that we may make during 2001) due to the current general economic
conditions and the volatility of metal costs.
RECENT DEVELOPMENTS
On May 18, 2001, we agreed to purchase the assets and assume certain
liabilities of the steel service centers division of Pitt-Des Moines, Inc. for
$97.5 million. If completed, this will be our largest acquisition to date. We
would acquire assets and facilities in Stockton, Fresno and Santa Clara,
California; Sparks, Nevada; Spanish Fork, Utah; and Cedar Rapids, Iowa; and the
stock of General Steel Corporation which has a facility in Woodland, Washington.
These metals service centers process and distribute carbon steel products
consisting primarily of heavy structurals and plate for customers mostly in the
capital goods and
14
construction industries. Sales for these service centers in 2000 were
approximately $216 million. We cannot assure you that we will complete this
acquisition, but we expect the transaction to close, if at all, on or after July
2, 2001.
We completed four acquisitions and a strategic asset purchase during 2000,
and we have completed two acquisitions and a strategic asset purchase in 2001.
Through these acquisitions, we entered two new geographic markets, expanded our
presence in the Midwest and Southeast markets of the United States and gained
new customers serving the oil and gas sector. In addition, we expanded our
aerospace product offerings and customer base with the purchase of our first
facility that provides value-added processed titanium products. Further, our
majority-owned joint venture in South Korea began operations in the second half
of 2000.
In January 2001, we acquired all of the outstanding stock of Aluminum and
Stainless, Inc. Aluminum and Stainless operates a metals service center based in
Lafayette, Louisiana that provides non-ferrous products primarily to companies
serving the oil and gas industry for use in the production of large commercial
vessels that service offshore oil rigs. Aluminum and Stainless had revenues in
2000 of approximately $22 million. In March 2001, Aluminum and Stainless opened
a branch in New Orleans, Louisiana, by purchasing certain assets of an existing
metals service center.
In January 2001, we also purchased all of the stock of Viking Materials,
Inc., based in Minneapolis, Minnesota, and a related company, Viking Materials
of Illinois, Inc., based near Chicago, Illinois. Viking provides primarily
carbon steel flat-rolled products to our customers in the Midwest region of the
United States. Viking Illinois is now operating as a wholly-owned subsidiary of
Viking. In 2000, Viking and Viking Illinois had combined revenues of
approximately $90 million.
In December 2000, we acquired all of the outstanding stock of East
Tennessee Steel Supply, Inc., a metals service center based in Morristown,
Tennessee, which now operates as a wholly-owned subsidiary of Siskin Steel &
Supply Company, Inc. East Tennessee Steel Supply provides our customers in the
Southeast with value-added processing and distribution of carbon steel plate,
bar and structurals. Net sales of East Tennessee Steel Supply were approximately
$6 million for the twelve months ended June 30, 2000.
In August 2000, we purchased the net assets and business of the Aircraft
Division of United Alloys, Inc., which now operates as United Alloys Aircraft
Metals, Inc., a wholly-owned subsidiary of Service Steel Aerospace Corp. United
Alloys Aircraft Metals, Inc. is located in Vernon, California, and provides our
customers with value-added processed titanium, nickel base and stainless steel
products used primarily in the aerospace industry. The Aircraft Division of
United Alloys, Inc. had 1999 sales of approximately $18 million.
In June 2000, we acquired all of the outstanding stock of Toma Metals,
Inc., a privately-held metals service center based in Johnstown, Pennsylvania.
Toma processes and distributes primarily stainless steel flat-rolled products
and had sales of approximately $10 million for the six months ended March 31,
2000.
In February 2000, we purchased the net assets and business of the metals
service center division of Hagerty Brothers Company, located in Peoria,
Illinois. Hagerty Steel & Aluminum Company processes and distributes primarily
carbon steel products, and operates as a wholly-owned subsidiary of Liebovich
Bros., Inc. Net sales of the metals service center business of Hagerty Brothers
Company were approximately $30 million in 1999.
We opened a satellite operation near Seattle, Washington, of our Bralco
Metals division during 2000, by purchasing certain assets of an existing metals
service center.
We expanded our foreign presence in 1999 by forming a joint venture in
South Korea, Valex Korea Co., Ltd., that is 66.5%-owned by Valex Corp., our
97%-owned subsidiary. Valex Korea, which is based near Seoul, South Korea, began
operations in the second half of 2000, providing electropolished stainless steel
tubing and fittings primarily to the semiconductor and related industries in
South Korea and other parts of Asia.
15
RESULTS OF OPERATIONS
The following table sets forth certain income statement data for each of
the periods indicated (dollars are shown in thousands and certain amounts may
not calculate due to rounding):
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
Net Sales. In the three months ended March 31, 2001, consolidated net sales
increased 0.5% to $432.9 million compared to the first three months of 2000.
Tons sold decreased 3.0% and average sales price per ton increased 4.1%.
The decrease in tons sold was primarily due to the continued general
economic slowing, but was somewhat offset by including the sales of the
companies we acquired since the beginning of 2000. We experienced this slowdown
in business activity in all areas, except for sales to the aerospace industry.
Our sales to the aerospace industry on a tons sold basis increased 12.9% in the
2001 first quarter as compared to the 2000 first quarter. The average selling
price increased for the 2001 period primarily due to increased sales to the
aerospace industry, as selling prices of the products sold into the aerospace
market are typically higher than most other products we sell.
Same-store sales (excluding sales of the businesses we acquired since the
beginning of 2000) decreased $32.2 million, or 7.5%, in the three months ended
March 31, 2001. The 2001 period same-store tons sold decreased by 11.6%, and the
same-store average selling price per ton increased by 4.6% from the 2000 period.
The decrease in tons sold resulted from the continued general downturn in the
economy. Our sales were affected by this downturn in all areas except aerospace.
The average selling price increased mainly due to the increased sales to the
aerospace industry. We also experienced a sudden slowdown in the 2001 first
quarter in the semiconductor and electronics industries as compared to the late
2000 levels.
Gross Profit. Total gross profit increased 2.9% to $120.3 million for the
first three months of 2001 compared to $117.0 million in the first three months
of 2000. The first quarter of 2001 includes the gross profit on sales from the
businesses we acquired after the 2000 first quarter. As a percentage of sales,
gross profit increased to 27.8% in the three months ended March 31, 2001, from
27.2% in the three months ended March 31, 2000. The improved gross profit
percentage is consistent with the 2000 fourth quarter gross profit percentage of
28.0% and resulted primarily from a shift in product mix to a greater portion of
sales to the semiconductor, electronics, and aerospace markets than in the first
quarter of 2000.
Sales of carbon steel products as a percentage of total sales decreased
4.6% in the first quarter of 2001 as compared to the first quarter of 2000, and
were replaced by sales of higher priced aluminum and stainless steel products
that typically produce greater gross profit dollars.
Expenses. SG&A expenses increased $5.6 million, or 7.0%, in the first three
months of 2001 compared to the corresponding period of 2000 and amounted to
19.6% of sales in the first three months of 2001 compared to 18.4% of sales in
the corresponding period of 2000. The dollar increase in expenses includes the
expenses of the businesses we acquired after the 2000 first quarter. The 2001
operating expense as a percent of sales is consistent with the fourth quarter of
2000 level of 19.5%. The 2001 first quarter increase was primarily due to the
effect of lower sales volumes on a consistent fixed cost component. Our variable
costs are mainly related to payroll, and we have reduced our workforce by 5%
since December 31, 2000, to offset our lower sales volume.
16
Depreciation and amortization expense increased $0.8 million during the
three months ended March 31, 2001 compared to the corresponding period of 2000.
This increase is primarily because we included depreciation expense related to
the assets of the businesses we acquired after the 2000 first quarter, along
with the amortization of goodwill resulting from the businesses we acquired
after the 2000 first quarter.
Interest expense increased by 36.0% to $7.6 million in the first quarter of
2001 compared to the first quarter of 2000, mainly because we increased our
borrowings to fund the businesses we acquired after the 2000 first quarter and
to fund the October 2000 common stock repurchase of $43.9 million.
Equity Earnings. Equity in earnings of 50%-owned company decreased $0.7
million in the 2001 period compared to the 2000 period due to the continued
weakness in the Pacific Northwest region, mainly related to the truck trailer
and railcar markets serviced by American Steel, L.L.C.
Income Tax Rate. Our effective income tax rate decreased to 39.2% for the
first quarter of 2001, compared to 40.0% for the first quarter of 2000,
primarily due to shifts in our geographic composition and the implementation of
certain tax planning strategies during 2000.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Net Sales. Consolidated net sales were a record $1.7 billion, which
represented a 14.3% increase from 1999, and reflects a 7.4% increase in tons
sold and a 6.5% increase in the average selling price per ton.
We increased the tons sold during 2000 primarily because we included twelve
months of sales from our 1999 acquisitions along with sales from our 2000
acquisitions. Tons sold in 2000 experienced shifts in product mix, as compared
to 1999, due to increased sales to the semiconductor, electronics and related
industries throughout 2000 and increased sales to the aerospace industry during
the fourth quarter of 2000.
Due to the general economic slowing during the second half of 2000, we
experienced a decline in sales volume in certain of our markets, primarily for
carbon steel products in the Southeast and Midwest regions of the United States.
This shift in product mix resulted in a 6.5% increase in the average selling
price in 2000 as compared to 1999. The stainless steel, aluminum and titanium
products sold to the semiconductor, electronics, and aerospace industries are
among the highest priced products that we sell.
Same-store sales (excluding sales of businesses we acquired in 1999 and
2000) increased $111.3 million, or 7.9%, in 2000. The tons sold in year 2000
remained flat as compared to 1999, although the average selling price per ton
increased by 8.4%. The increase in the average selling price was due to the
shift in product mix with increased sales of the highest priced products
discussed above.
Gross Profit. Total gross profit increased 13.6% to $469.7 million in 2000
compared to $413.6 million in 1999, mainly due to the additional gross profit
generated by the businesses we acquired in 1999 and 2000. As a percentage of
sales, gross profit remained fairly consistent at 27.2% in 2000 compared to
27.4% in 1999. Gross profit percentages declined somewhat in 2000 for sales of
most carbon steel products due to a more competitive environment for these
products (from reduced costs that resulted in lower selling prices), but the
shift in product mix to higher priced products offset these declines.
A greater portion of our products was sold to the semiconductor,
electronics, and aerospace markets that typically produce higher gross margins
than other products that we sell, and the gross profit percentages we achieved
on sales of these products increased in 2000 as compared to 1999. Further,
certain of the companies that we acquired typically operate at higher gross
margin percentages than we have historically operated at on a consolidated
basis, contributing to our ability to substantially maintain our record 1999
gross margin percentage in 2000.
Expenses. SG&A expenses for 2000 increased $40.1 million, or 14.4%, from
1999, consistent with the 14.3% increase in sales. These expenses represented
18.5% of sales in 2000 and 18.4% of sales in 1999.
17
Depreciation and amortization expense increased 9.7% for 2000 compared to
1999, because of the additional depreciation expense and amortization of
goodwill related to our acquisitions, along with depreciation expense on current
year capital expenditures.
Interest expense increased by 11.9% to $26.1 million in 2000 compared to
1999, due to an increase in our average debt outstanding. We used our 2000
borrowings primarily to fund $41.1 million of businesses we acquired in 2000 and
$56.3 million of stock repurchases during 2000.
Operating Income. Income from operations, calculated as gross profit less
S,G&A expenses and depreciation expense, remained fairly consistent as a
percentage of sales at 7.5% in 2000 compared to 7.7% in 1999. The slight decline
is consistent with the change in gross profit percentages for the periods.
Equity Earnings. Equity earnings from our 50%-owned company decreased by
$1.6 million, or 40.3%, in 2000 as compared to 1999. This decrease occurred
primarily in the second half of 2000 due to the weakness in demand experienced
in the Pacific Northwest related mainly to the truck trailer and railcar markets
serviced by American Steel, L.L.C.
Income Tax Rate. Our effective income tax rate decreased from 40.2% in 1999
to 39.2% in 2000, mainly due to shifts in our geographic composition and the
implementation of certain tax planning strategies.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net Sales. Consolidated net sales increased $158.3 million, or 11.7%, for
the year 1999 compared to 1998. This increase reflects an increase in tons sold
of 35.1% and a decrease in the average selling price per ton of 17.4%.
The increase in sales volume during 1999 was primarily because we included
twelve months of sales from our 1998 acquisitions along with sales from our 1999
acquisitions. The increased sales volume was somewhat offset by a decrease of
approximately 17.1% in tons sold to the aerospace market during 1999.
The average selling price for 1999 decreased 17.4% from the 1998 average
selling price due to lower costs of material for most of our products and a
shift in product mix. Most of the businesses we acquired during 1999 and 1998
sell primarily carbon steel products. These products generally have a lower
selling price than other products that we sell. The shift in our product mix
contributed to lower average selling prices. Reduced aerospace sales volume also
contributed to the lower average selling price, as the heat-treated aluminum
products sold to the aerospace industry are among the highest priced products we
sell. In addition, prices of heat treated aluminum products decreased during
1999, which also lowered the average selling price.
Same-store sales (excluding sales of the businesses we acquired in 1998 and
1999) declined $110.6 million primarily due to lower selling prices and changes
in product mix. The lower sales amount includes a 2.4% increase in same-store
tons sold, which was primarily due to general economic improvements, especially
in the semiconductor and electronics industries. The same-store average selling
price decreased by 12.4% in 1999 as compared to 1998, primarily due to reduced
selling prices of most of our products, a greater shift toward carbon steel
products, and reduced sales to the aerospace market in 1999.
SERP Gain. We recorded a one-time net gain of $2.3 million from a life
insurance policy, which was not taxable to us, in connection with our
Supplemental Executive Retirement Plan ("SERP") during 1999. The life insurance
proceeds related to the death of our former chief financial officer in January
1999 and was recorded net of the amount to be paid to his beneficiary under the
terms of the SERP.
Gross Profit. Total gross profit increased to $413.6 million in 1999,
compared to $328.6 million in 1998, an increase of 25.9%, due mainly to the
additional gross profit generated by our 1998 and 1999 acquisitions.
18
Expressed as a percentage of sales, gross profit increased to 27.4% for
1999, compared to 24.3% in 1998. This increase was primarily due to costs of raw
materials declining at a more rapid rate than selling prices for most of our
products during most of 1999. Also, in the latter half of 1999, when suppliers
announced price increases for many of our materials, our sales force was able to
increase selling prices to our customers before the increased costs became
effective. This allowed us to expand our gross margin percentage during this
period of changing prices. In addition, certain of our recent acquisitions
typically operate at higher gross margin percentages than we have operated
historically at on a consolidated basis. This positively contributed to the
improvement in gross margin as a percentage of sales in 1999.
Expenses. SG&A expenses increased $58.3 million, or 26.5%, for 1999 due to
the increased sales volume primarily from our 1998 and 1999 acquisitions. These
expenses represented 18.4% of sales in 1999 and 16.3% of sales in 1998. The
increase in expenses as a percentage of sales was primarily due to lower selling
prices during 1999, and the typically higher expense levels of certain of our
1999 acquisitions than those that we have experienced historically on a
consolidated basis. These acquired companies also operate at higher gross margin
levels, as discussed above. Excluding the businesses we acquired in 1998 and
1999, these expenses decreased by $1.3 million in 1999 compared to 1998 on an
increased sales volume of 2.4%. This illustrates the impact of lower selling
prices on these expenses expressed as a percentage of sales.
Depreciation and amortization expense increased $6.2 million for 1999
compared to 1998. The increase was primarily due to the inclusion of both the
depreciation expense and the amortization of goodwill related to our 1998 and
1999 acquisitions.
Interest expense increased by 32.5% in 1999 compared to 1998 due to an
increase in the average debt outstanding to fund primarily businesses we
acquired in the second half of 1998. These acquisitions increased the 1999
beginning debt outstanding, which was then reduced slightly during the year.
Operating Income. Income from operations increased to $116.3 million in
1999 from $93.6 million in 1998. The increase was mainly attributable to
increased gross profit margins and the operating income from our 1998 and 1999
acquisitions.
Income Tax Rate. Our effective income tax rate decreased from 40.6% in 1998
to 40.2% in 1999, mainly due to our receipt of tax-free life insurance proceeds
during 1999. The effect of this benefit was somewhat offset by increased
non-deductible amortization of goodwill for certain of our 1998 and 1999
acquisitions.
Net Income. Included in pretax income for 1999 was a one-time net gain of
$2.3 million from life insurance proceeds discussed above. This resulted in net
income of $0.05 per diluted share in the 1999 period.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001, working capital amounted to $381.8 million compared to
$347.7 million at December 31, 2000. The increase was primarily due to the
additional working capital from our 2001 acquisitions and slight increases in
receivables and inventory. The sudden slowdown in the semiconductor and
electronics industries late in the 2001 first quarter caused these increases.
Our capital requirements are primarily for working capital, acquisitions, and
capital expenditures for continued improvements in plant capacities and material
handling and processing equipment.
At December 31, 2000, working capital was $347.7 million, compared to
$273.0 million at December 31, 1999. The increase in working capital was
primarily caused by including working capital from our acquisitions and
increasing our inventory and accounts receivable balances to support our
increased sales levels. Cash flow from operations decreased in 2000 compared to
1999 mainly due to an increase in our working capital to support our increased
sales activity. This increased sales activity included a greater portion of
higher priced products and higher average selling prices at December 31, 2000
compared to December 31, 1999. Our inventory turnover rate remained at just
under five times, consistent with 1999. The accounts receivable days sales
outstanding rate increased somewhat at December 31, 2000,
19
primarily due to increased sales to customer markets that typically receive
longer payment terms than most other customer markets that we serve, such as the
semiconductor and aerospace markets.
Our primary sources of liquidity are generally from internally generated
funds from operations and our revolving line of credit. Our current bank
facilities allow for an aggregate of $250 million in borrowings. After giving
effect to the acquisition of the assets and assumption of liabilities of the
steel service centers division of Pitt-Des Moines, Inc. and to this offering and
the application of the proceeds therefrom, we expect to have approximately $142
million outstanding.
Our syndicated credit facility has a borrowing limit of $200 million. At
March 31, 2001, $175 million was outstanding under this credit facility,
compared to $85 million outstanding as of December 31, 2000. The purchases of
Aluminum and Stainless and Viking Materials were funded with borrowings on this
line of credit. We expect to reduce the amount outstanding with the proceeds
from this offering. We are currently in the process of refinancing our existing
$200 million line of credit to increase the amount to support our future
operations and expected growth opportunities. We have engaged Bank of America,
lead agent under the syndicated facility, to assist with this refinancing.
We also have a credit facility allowing us to issue letters of credit in an
amount not to exceed $10 million, which we amended in October 2000 to provide
for cash advances of up to $50 million to allow us to meet our short-term
requirements until the refinancing of the syndicated credit facility is
completed. At December 31, 2000, $43.9 million was outstanding under this cash
advance facility; however, in February 2001, the cash advance was paid off
through an exchange of debt using our syndicated credit facility. As of March
31, 2001, no amounts were outstanding under the cash advance facility. In April
2001, this facility was extended through December 31, 2001.
We also have senior unsecured notes outstanding in the aggregate amount of
$290 million. The senior notes have maturity dates ranging from 2002 to 2010,
with an average life of 9.6 years. The senior notes bear interest at an average
fixed rate of 6.83% per annum.
Our operations provided cash of $11.9 million in the three months ended
March 31, 2001, as compared to $4.0 million of cash used in operations during
the corresponding period of 2000, primarily due to the lower working capital
level necessary to support the lower sales volume experienced during the 2001
period.
Our capital expenditures, excluding acquisitions, were $8.5 million for the
three months ended March 31, 2001. Our 2000 net capital expenditures, excluding
acquisitions, were $30.4 million. We had no material commitments for capital
expenditures as of March 31, 2001, but we expect our capital expenditures in
2001 to be consistent with our expenditures in 2000.
Our Stock Repurchase Plan allows us to repurchase up to a total of
6,000,000 shares. Since the inception of the Stock Repurchase Plan in 1994, we
have purchased a total of 5,538,275 shares of our common stock, at an average
purchase price of $14.94 per share, as of March 31, 2001, all of which are
authorized but unissued shares. We did not repurchase any shares during 1999. In
2000, we repurchased 2,865,950 shares of our common stock at an average purchase
price of $19.64 per share, for a total of $56.3 million. Our largest purchase of
stock in 2000 was the purchase of 2,270,000 shares in a single private
transaction from the Gimbel Trust for $43.9 million. Thomas W. Gimbel, one of
our directors, is a co-trustee of the Gimbel Trust. Certain resale restrictions
on the shares made a purchase unattractive to financial institutions, but the
Gimbel Trust desired to sell the shares to meet estate tax obligations. No
shares have been repurchased thus far in 2001. We believe such repurchases
enhance shareholder value and reflect our confidence in the long-term growth
potential of our stock.
Our sources of liquidity, as discussed above, were sufficient for 2000
operations and to fund our acquisitions and stock repurchases. In 2000, we paid
approximately $41.1 million for our acquisitions and $56.3 million to repurchase
our stock. Thus far in 2001, we have paid approximately $43.2 million for our
completed acquisitions and have entered into an agreement to pay $97.5 million
for a pending acquisition, if completed. We have not repurchased any stock thus
far in 2001.
20
After giving effect to the net proceeds received from this offering, we
anticipate that funds generated from operations and funds available under our
line of credit will be sufficient to meet our working capital needs for the
foreseeable future and to allow us to make acquisitions in the future, including
the pending acquisition of certain assets and liabilities of Pitt-Des Moines,
Inc.
INFLATION
Our operations have not been, and we do not expect them to be, materially
affected by general inflation. Historically, we have been successful in
adjusting prices to our customers to reflect changes in metal prices.
SEASONALITY
Some of our customers may be in seasonal businesses, especially customers
in the construction industry. As a result of our geographic, product, and
customer diversity, however, our operations have not shown any material seasonal
trends. Revenues in the months of November and December traditionally have been
lower than in other months because of a reduced number of working days for
shipments of our products and holiday closures for some of our customers. We
cannot assure you that period-to-period fluctuations will not occur in the
future. Results of any one or more quarters are therefore not necessarily
indicative of annual results.
GOODWILL
Goodwill, which represents the excess of cost over the fair value of net
assets acquired, amounted to $253.7 million at March 31, 2001, or approximately
23.8% of total assets or 61.3% of consolidated shareholders' equity. The
amortization of goodwill in the first quarter of 2001 was $1.7 million, or
approximately 8.2% of pretax income. We consider our estimate of the useful life
of goodwill of 40 years to be appropriate due to the long-term nature of our
business, including our customers, supply sources, and longevity of operations.
The risk associated with the carrying value of goodwill is whether future
operating income (before amortization of goodwill) will be sufficient on an
undiscounted basis to recover the carrying value. We review the recoverability
of goodwill whenever significant events or changes occur which might impair the
recovery of recorded costs. The measurement of possible impairment is based on
either significant losses of an entity or the ability to recover the balance of
the long-lived asset from expected future operating cash flows on an
undiscounted basis. If an impairment exists, the amount of such impairment would
be calculated based upon the discounted cash flows or the market values as
compared to the recorded costs. We believe the recorded amounts for goodwill are
recoverable and no impairment exists at March 31, 2001. However, any significant
change in our estimate of the useful lives of goodwill, or any changes to
accounting for goodwill as new accounting standards are issued in the future,
could have a material adverse effect on the future results of our operations and
financial condition.
MARKET RISK
In the ordinary course of business, we are exposed to various market risk
factors, including changes in general economic conditions, domestic and foreign
competition, foreign currency exchange rates, and metal pricing and
availability. Additionally, we are exposed to market risk primarily related to
our fixed rate long-term debt. Market risk is the potential loss arising from
adverse changes in market rates and prices, such as interest rates. Decreases in
interest rates may affect our market value of fixed rate debt. Under our current
policies, we do not use interest rate derivative instruments to manage exposure
to interest rate changes. Based on our debt, we do not consider the exposure to
interest rate risk to be material. Our fixed rate debt obligations are not
callable until maturity.
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METALS SERVICE CENTER INDUSTRY
Metals service centers acquire products from primary metals producers and
then process carbon steel, aluminum, stainless steel, and other metals to meet
customer specifications, using techniques such as blanking, leveling (or
cutting-to-length), sawing, shape cutting, and shearing. These processing
services save our customers time, labor, and expense and reduce their overall
manufacturing costs. Specialized equipment used to process the metals requires
high-volume production to be cost effective. Many manufacturers are not able or
willing to invest in the necessary technology, equipment, and inventory to
process the metals for their own manufacturing operations. Accordingly, industry
dynamics have created a niche in the market. Metals service centers purchase,
process, and deliver metals to end-users in a more efficient and cost-effective
manner than the end-user could achieve by dealing directly with the primary
producer or with an intermediate steel processor. Industry analysts estimate
that, historically in the United States, based on tonnage, metals service
centers and processors annually purchase and distribute approximately:
- 30% of all carbon industrial steel products produced in the United
States;
- 45% of all stainless steel produced in the United States; and
- 36% of all aluminum sold in the mill/distributor shared markets (which
excludes that sold for aluminum cans, among other things).
These percentages have not changed significantly in the last five years.
The metals distribution industry is currently estimated to generate more than
$75 billion in revenues in the United States, up from approximately $40 billion
in revenues in 1996.
The metals service center industry is highly fragmented and intensely
competitive within localized areas or regions. Many of our competitors operate
single stand-alone service centers. According to industry sources, the number of
intermediate steel processors and metals service center facilities in the United
States has decreased from approximately 7,000 in 1980 to approximately 3,400 in
2000. This consolidation trend should create new opportunities for us to make
acquisitions.
Metals service centers are less susceptible to market cycles than producers
of the metals, because service centers are generally able to pass on all or a
portion of price increases to their customers. Service centers with the most
rapid inventory turnover are generally the least vulnerable to changing metals
prices.
Customers purchase from service centers to obtain value-added metals
processing, readily available inventory, reliable and timely delivery, flexible
minimum order size, and quality control. Many customers deal exclusively with
service centers because the quantities of metal products that they purchase are
smaller than the minimum orders specified by mills or because those customers
require intermittent deliveries over long or irregular periods. Metals service
centers respond to a niche market created because of the focus of the capital
goods and related industries on just-in-time inventory management and materials
management outsourcing, and because integrated mills have reduced in-house
direct sales efforts to small sporadic purchasers to enhance their production
efficiency.
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BUSINESS
OVERVIEW
We are one of the five largest metals service center companies in the
United States. Our network of 24 divisions and 15 subsidiaries (not including
American Steel, L.L.C.) operates 80 metals service centers in 23 states, France
and South Korea. Through this network, we provide metals processing services and
distribute a full line of metal products, including aluminum, brass, copper,
carbon steel, titanium, stainless steel, alloy, and specialty steel products, to
more than 70,000 customers in a broad range of industries.
Our primary business strategy is to enhance our operating results through
strategic acquisitions and expansion of our existing operations. This strategy
and our proven operating methods have enabled us to outperform most of our
competitors in the metals service center industry. We have reported eight
consecutive years of record net income and sales, over which time, our net
income has increased at a compound annual growth rate of approximately 30% on a
compound annual sales growth rate of 22%. In 2000, we had net sales of over $1.7
billion and net income of $62.3 million.
HISTORY OF RELIANCE
Reliance Steel & Aluminum Co. was organized as a California corporation on
February 3, 1939, and commenced business in Los Angeles, California fabricating
steel reinforcing bar. Within ten years, we had become a full-line distributor
of steel and aluminum, operating a single metals service center in Los Angeles.
In the early 1950's, we automated our materials handling operations and began to
provide processing services to meet our customers' requirements. In the 1960's,
we began to acquire other companies and to establish additional service centers,
expanding into other geographic areas.
In the mid-1970's, we began to establish specialty metals centers stocked
with inventories of selected metals such as aluminum, stainless steel, brass,
and copper, and equipped with automated materials handling and precision cutting
equipment. We recently formed RSAC Management Corp., a California corporation,
to operate as a holding company for all of our subsidiaries and to provide
administrative and management services to all of our metals service centers.
COMPETITIVE STRENGTHS
We have generally outperformed our peer group since becoming a public
company. As a result, shareholders' equity has increased dramatically, from
approximately $150 million in 1994 (just after our initial public offering) to
approximately $403 million in 2000. We believe that we are well positioned to
further enhance shareholder value by increasing earnings and dividends and
focusing on our competitive strengths, including:
ENTREPRENEURIAL ENVIRONMENT. Our decentralized management and
operational structure provides a high degree of autonomy for each of our
operations and contributes significantly to our profitability. We encourage
managers to run their operations with a sense of ownership.
Corporate management focuses on our overall performance, establishes
and maintains financial controls, and provides financial, information
systems, and administrative assistance to 24 separate operating divisions
and 15 subsidiaries. Corporate management also develops our business
strategy, goals, and general operating guidelines, maintains strong
relationships with our suppliers, and oversees the operating managers.
Our division and subsidiary managers are responsible for the
profitability and growth of their particular operating units. A significant
portion of their annual compensation is tied to the financial performance
of their operating units. These managers purchase, market, price, process,
and deliver the products and seek to maintain good relationships and
communication with their customers in order to anticipate their customers'
needs and requirements. Our management and operational structure provides
incentives to division and subsidiary managers to pursue profitable growth
opportunities, attain financial objectives, and deliver superior customer
service.
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CUSTOMER, PRODUCT AND GEOGRAPHIC DIVERSITY. Many flat-roll processors
specialize in serving a limited number of customers with a large volume of
processed carbon steel sheet or coil. By contrast, we process and
distribute a wide variety of metal products to more than 70,000 customers
from our facilities in 23 states and in France and South Korea, thereby
offering a more diverse product mix to a greater number of customers than
most of our competitors. Our products include aluminum, brass, copper,
galvanized, hot-rolled and cold-finished carbon steel, titanium, stainless
steel, alloy, and specialty steel. In 2000, our average order size was
approximately $940, and no customer represented more than 1% of our sales.
We focus on these small orders with a quick turnaround. Since our initial
public offering in 1994, we have greatly expanded our geographic presence
and now serve customers throughout the United States and internationally
from our facilities in France and South Korea. Such diversification reduces
our exposure to the financial or economic variability of any particular
customer group or geographic region. We further increased our diversity in
January 2001 by acquiring Aluminum and Stainless, which adds customers
serving the oil and gas industry of the U.S. Gulf Coast, and Viking
Materials which is based in Minneapolis, Minnesota.
SUPERIOR SERVICE AND PRODUCTS. Our reputation for integrity and the
quality and timeliness of our service has enhanced the loyalty of our
customers to us and has assisted our marketing efforts to new customers.
Our speed and range of service and the size and variety of our inventory
distinguish us from our competition. We offer a full line of more than
80,000 metal products to fill a wide variety of customer needs. Because
local managers have significant operational control, our metals service
centers are able to react quickly to changes in local market and customer
demands. In 2000, we delivered 50% of our orders within 24 hours after
receiving them. This quick turnaround allows us to report higher gross
margins than many of our peers. We have developed strong relationships with
our customers to identify their needs early so we can respond to the short
lead time and just-in-time delivery requirements common in the industry.
According to a prominent industry survey, we have been ranked #1 among
service centers in the United States in overall customer satisfaction for
four consecutive years.
SUCCESSFUL INTEGRATION OF ACCRETIVE ACQUISITIONS. We have a strong
track record of supplementing our internal earnings growth through
strategic acquisitions. As one of the most active and able acquirors in the
industry, we are offered many opportunities that our competitors do not
receive. Historically, we have been very successful at improving the sales
and profitability of our acquired companies by applying our purchasing
power, access to lower-cost capital, and operating knowledge. We typically
retain the acquired company's management team to preserve existing customer
relationships and ensure a seamless transition of the business. Our
reputation is also of benefit in seeking growth opportunities, as we are
seen by many smaller service centers as the "acquiror of choice."
INVENTORY MANAGEMENT. We carefully monitor our inventory, both
in-house and in-transit, to avoid unnecessary commitments of working
capital but to maintain an adequate supply to respond quickly to customer
orders. We maintain in inventory products with a broad range of shapes,
sizes, and metals to speed delivery to customers. We tailor our inventory
and processing services at each service center to customer requirements in
the market that facility serves. By monitoring inventories, our local
management is able to accurately judge their own inventory requirements.
This has allowed us to react more quickly than many of our peers to
changing metals prices and to better manage our working capital. We
establish minimum inventory turnover rates for divisions and subsidiaries.
Under our bonus plan, division and subsidiary managers directly benefit if
they maintain efficient levels of inventory and accounts receivable. In
2000, our inventory turned about five times a year, compared to the
industry average of less than four times a year.
STRONG SUPPLIER RELATIONSHIPS. We have consistently maintained good
relationships with high-quality suppliers and seek to retain our status as
a valued customer to each of these suppliers. Our large purchasing volumes
enable us to purchase materials on attractive terms, including price. We
meet regularly with our suppliers to gain an understanding of their
capabilities and products and to
24
communicate our own customers' requirements and strategic goals and to
evaluate methods to mutually provide the best service and products to our
customers.
BUSINESS STRATEGY
Traditionally, metals service centers have been small, privately-owned
businesses. We believe that we have greater diversity, more experience, better
access to lower-cost capital, greater materials purchasing power, and more
successful operating techniques than most of these businesses. These businesses
from time to time become candidates for acquisition or consolidation. We have
expanded both through acquisitions and internal growth.
Our long history of success is a direct result of our proven operating and
management policies. Our corporate officers maintain financial controls and
establish general policies and operating guidelines. Our division and subsidiary
managers have virtual autonomy with respect to day-to-day operations. This
balanced, yet entrepreneurial management style improves the productivity and
profitability both of our acquired businesses and of our own expanded
operations. We award successful division and subsidiary managers and other
management personnel incentive compensation. This incentive compensation is
based in part on the profitability of their particular operating unit as
determined by the rate of return on assets.
We have adopted a long-term business strategy to increase our profitability
by expanding our existing operations and acquiring businesses. We seek
acquisitions that are strategically located or positioned to diversify our
customer base, product range, and geographic accessibility. We have developed an
excellent reputation in the industry for our integrity and the quality and
timeliness of our service to customers. The following describe key elements of
our strategy for future growth:
PROFITABLY EXPAND EXISTING OPERATIONS. We seek to maximize our
internal growth by maintaining state of the art facilities, machinery and
equipment and adding new products or new processes to existing operations.
We consistently seek to increase our market share. We continually evaluate
opportunities to expand our existing operations by opening facilities in
new locations and expanding product and service offerings at existing
facilities. Our entrepreneurial approach to management encourages local
managers to identify opportunities within their markets to add value
through increased product and service offerings.
IDENTIFY AND ACQUIRE COMPLEMENTARY BUSINESSES. Our senior management
team seeks businesses or strategic asset purchases that will be immediately
accretive to earnings and strategically positioned to diversify or enhance
our customer base, product availability, or geographic coverage. We believe
that we can continue to grow through acquisitions because of the highly
fragmented nature of the industry, which still consists of many small,
privately-owned businesses that lack our diversity, experience, access to
lower-cost capital, and successful operating techniques.
USE ADVANCED SYSTEMS TO MANAGE OUR OPERATIONS. We recognize that
efficient systems, in addition to efficient equipment, increase
productivity, and we continually evaluate technological changes that may
facilitate our distribution business and enhance profitability. We are a
low-cost producer in part because of our heavy capital investment in
equipment. We also have developed materials handling and processing
systems. We believe our systems enable sales and marketing personnel to
respond to customers' inquiries more efficiently and more effectively than
our competitors.
RECENT ACQUISITIONS
Our disciplined acquisition strategy has proven successful over time, but
that may not be indicative of future results. Since our initial public offering
in 1994, we have invested approximately $670 million to acquire businesses, and
we have successfully completed and integrated more than 20 acquisitions. These
acquisitions serve customers through more than 50 locations in 21 different
states.
25
In 2001 to date, we acquired the businesses described below:
- ALUMINUM AND STAINLESS, INC. Effective January 19, 2001, we acquired all
of the outstanding capital stock of Aluminum and Stainless, Inc. At the
time of the acquisition, Aluminum and Stainless operated one metals
service center based in Lafayette, Louisiana. In March 2001, we opened a
branch operation of Aluminum and Stainless in New Orleans, Louisiana, by
purchasing assets of another metals service center. Aluminum and
Stainless provides non-ferrous products primarily related to the marine
industry for use in the production of large commercial vessels servicing
offshore oil rigs. Aluminum and Stainless had revenues in 2000 of
approximately $22 million.
- VIKING MATERIALS, INC. Effective January 18, 2001, we purchased all of
the outstanding capital stock of Viking Materials, Inc., based in
Minneapolis, Minnesota, and a related company, Viking Materials of
Illinois, Inc., based near Chicago, Illinois, which operates as a
wholly-owned subsidiary of Viking Materials. Viking Materials provides
primarily carbon steel flat-rolled products to our customers in the
Midwestern United States. In 2000, Viking and Viking Illinois had
combined revenues of approximately $90 million.
On May 18, 2001, we agreed to purchase substantially all of the assets and
liabilities of the metals service centers division of Pitt-Des Moines, Inc. for
$97.5 million. This business consists of seven metals service centers in
Stockton, Fresno and Santa Clara, California; Sparks, Nevada; Spanish Fork,
Utah; Cedar Rapids, Iowa; and the General Steel Corporation facility in
Woodland, Washington. The 2000 sales for this business were approximately $216
million. These metals service centers process and distribute carbon steel
products consisting primarily of heavy structurals and plate for customers
mostly in the capital goods and construction industries. We expect to close this
transaction no earlier than July 2, 2001, but we cannot assure you that we will
complete this acquisition.
INTERNAL GROWTH
We continue to expand the product lines and increase the capacities and
market share of our existing metals service centers while pursuing new
acquisitions. Recently, we have expanded our existing operations as described
below:
Through our 97%-owned subsidiary Valex Corp., we formed our first foreign
subsidiary and opened an international distribution center in 1999 in Fuveau,
France. Valex also formed a joint venture, Valex Korea Co., Ltd., in 1999. Valex
owns 66.5% of the joint venture, and the individual who owned another company
that had been an independent distributor of Valex's products in South Korea owns
the remaining 33.5%. Valex Korea constructed a facility near Seoul, South Korea
and began operations in this new facility during the second half of 2000. Valex
Korea is the only ultra high-purity stainless steel tubing and fittings
manufacturing plant in South Korea and services the Asian semiconductor
industry. Valex purchased certain of the assets of one of our domestic
competitors for use in this new facility.
During 2000, we purchased certain assets of an existing metals service
center and opened a satellite operation of our Bralco Metals division near
Seattle, Washington. This facility serves the growing metals processing needs of
our customers in the Pacific Northwest market. Bralco Metals processes and
distributes primarily aluminum, brass, copper, and stainless steel products to
our customers.
Also in 2000, our subsidiary Service Steel Aerospace Corp. established a
local presence in Wichita, Kansas to service our growing customer base. Service
Steel Aerospace Corp. uses a portion of the existing Reliance Metalcenter
facility in Wichita for its operations. Reliance Metalcenter is one of our
divisions. Service Steel Aerospace Corp., through its subsidiary United Alloys
Aircraft Metals, Inc., acquired assets of the metals service center division of
United Alloys, Inc. in August 2000. In 2000, Service Steel Aerospace Corp. also
combined two California facilities by moving its Long Beach facility into the
facility of United Alloys Aircraft Metals in Vernon.
We also built an 82,000 square-foot facility in Tampa, Florida for our
subsidiary Phoenix Corporation. The new facility replaces a much smaller
facility in Tampa and has a more efficient layout and material
26
flow and a new 72-inch wide Red Bud leveling line. This metals service center
processes and distributes precision cut blanks and sheets of mostly flat-rolled
aluminum, stainless steel, and coated carbon steel products.
Our wholly-owned subsidiary, AMI Metals, Inc., recently introduced its
first blanking line in its Fort Worth, Texas facility to provide cut-to-size
processing of aluminum sheet primarily for the aerospace market.
OUR TRADE NAMES
We currently operate metals service centers under the following trade
names:
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CYCLICALITY
We distribute metal products to customers in a variety of industries,
including manufacturing, construction, transportation, aerospace, and
semiconductor fabrication. Many of the industries in which our customers compete
are cyclical in nature and are subject to changes in demand based on general
economic conditions. Because we sell to a wide variety of customers in several
industries, we believe that the effect of such changes on us is significantly
reduced. We cannot assure you, however, that we will be able to increase or
maintain our level of sales in periods of economic downturn. The U.S. economy
began to experience a general slowing in the second half of 2000 that has
continued into 2001. We were somewhat impacted by the economic downturn in 2000.
This slowing is currently affecting us in all areas of the country and for all
products except those sold for the aerospace market and has negatively affected
our 2001 financial results to date.
We are also subject to fluctuations in the costs of our materials, which
affect the prices we can charge to our customers. Selling a diverse product mix
partially offsets fluctuations in the costs of our materials. However, during
1998 and through the first half of 1999, metals costs of most products reached
their lowest levels in the past fifty years. This occurred due to overcapacity
at the producer level in both domestic and foreign markets and historically high
import levels of primarily carbon and stainless steel products into the United
States. Continued strong demand allowed domestic producers to announce increases
in metals costs for most of our products that began to take effect in late 1999
and continued into 2000. However, these increases were short-lived, as costs for
most metals began to decline in response to decreased demand caused by a slowing
economy in the second quarter of 2000. In 2001 to date, costs have remained at
these lower levels, with the exception of certain heat treated aluminum
products. We are typically able to pass the increases in metals costs on to our
customers; however, we cannot guarantee that the spread between our metals costs
and selling prices will continue at the levels experienced during 2000 and 1999.
If our costs increase as a result of increased energy costs, we intend to pass
these increases on to our customers. If we are able to pass on any increased
metals and other costs to our customers, we should be able to record increased
revenue and gross margin dollars on a consistent volume basis.
CUSTOMERS
We have more than 70,000 metals service center customers. In 2000, no
single customer accounted for more than 1% of our sales, and more than 90% of
our orders were from repeat customers. Our customers are manufacturers and
end-users in the general manufacturing, construction (both commercial and
residential), transportation (rail, truck and auto after-market), semiconductor
fabrication, and aerospace industries. Our metals service centers wrote and
delivered over 1.8 million orders during 2000. Most of the metals service center
customers are located within a 150-mile radius of the metals service centers.
The proximity of our centers to our customers helps us provide just-in-time
delivery to our customers. With our own fleet of 533 trucks (some of which are
leased) we are able to service many
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smaller customers. Moreover, our computerized order entry system and flexible
production scheduling enable us to meet customer requirements for short lead
times and just-in-time delivery. Approximately 2% of our sales were to
international customers in 2000, with almost half of these sales from Valex,
which has facilities serving the European and Asian markets.
We serve our customers primarily by providing quick delivery, metals
processing and inventory management services. We purchase a variety of metals
from primary producers and sell these products in smaller quantities. For
approximately 50% of our sales, we provide first-stage metals processing
services before distributing the products to manufacturers and other end-users.
For orders that do not require extensive or customized processing, products
generally are shipped within 24 hours from receipt of an order. We provide
metals processing services to meet our customer specifications, including bar
turning, bending, blanking, deburring, electropolishing, fabricating, forming,
grinding, leveling, machining, pipe threading, precision plate sawing, punching,
sawing, shape cutting, shearing, skin milling, slitting, tee splitting and
straightening, twin milling, welding and wheelabrating. These services save
time, labor, and expense for customers and reduce customers' overall
manufacturing costs. During 2000, we handled approximately 7,380 transactions
per business day (up from 3,100 in 1996), with an average revenue of
approximately $940 per transaction. Our total revenues for 2000 were over $1.7
billion.
We believe that our long-term relationships with many of our customers
significantly contribute to the success of our business. Providing prompt and
efficient services and quality products at reasonable prices are important
factors in maintaining these relationships.
Historically, California has been our largest market, but we are less
dependent on that market now than we were previously. California represented 33%
of our 2000 sales, which was a significant decrease from 45% of our 1997 sales.
The Southeast region of the U.S. represented 30% of 2000 sales compared to 18%
of 1997 sales. We expect California to continue to be our largest market, but we
have significantly expanded our facilities geographically by making strategic
acquisitions and increasing our physical capabilities through capital
expenditures to decrease our dependence on this market.
SUPPLIERS
We purchase our inventory from the major metals mills, both domestic and
foreign, and have multiple suppliers for all of our product lines. Our major
suppliers of domestic carbon steel products include California Steel Industries,
Hanna Steel, Huntco Steel, Northwestern Steel & Wire, Nucor and USS-POSCO
Industries. Allegheny Technologies, Handy & Harman, International Stainless
Steel Co., Mexinox U.S.A., North American Stainless and Plymouth Tube supply
stainless steel products. We are a recognized distributor for various major
aluminum companies, including Alcoa, Alcan, Commonwealth Aluminum, Kaiser
Aluminum, McCook Metals, Ormet Aluminum Mill Products and Pechiney Rolled
Products. We also maintain relationships with international suppliers of our
various products. Because of our total volume of purchases, we expect that we
are able to purchase inventory at the best prices offered by the suppliers,
given the order size. The supply of certain heat treated aluminum products in
early 2001 was limited because of the increase in aerospace demand in late 2000
and the closures of certain aluminum mill plants caused by high energy costs.
This caused costs of these metals to increase in late 2000 and early 2001. We
believe that we are not dependent on any one of our suppliers for metals and
that our relationships with our suppliers are very strong. We have worked
closely with our suppliers in order to become an important customer for each
major supplier of our metals for our core product lines.
PRODUCTS AND PROCESSING SERVICES
We provide a wide variety of processing services to each customer's
specifications and deliver the products to manufacturers and other end users. We
maintain a wide variety of products in inventory. For orders other than those
requiring extensive or specialized processing, we generally deliver products to
the
29
customer within 24 hours after receiving the order. The following chart shows
the approximate percentages of our sales in 2000, by product.
[GRAPH]
We do not depend on any particular customer group or industry because we
process a variety of metals. Because of this diversity of product type and
material, we are less exposed to fluctuations or other weaknesses in the
financial or economic stability of particular customers or industries. We also
are less dependent on particular suppliers.
For our largest product type (sheet and coil), we purchase coiled metal
from primary producers in the form of a continuous sheet, typically 36 to 60
inches wide, between 0.015 and 0.25 inches thick, and rolled into 3 to 20 ton
coils. The size and weight of these coils require specialized equipment to move
and process the coils into smaller sizes and various products. Few of our
customers have the capability of processing the metal into the desired products.
After receiving an order, we enter it into our computerized order entry
system, select appropriate inventory and schedule the processing to meet the
specified delivery date. About half of the orders specify delivery within 24
hours. We attempt to maximize the yield from the various metals that we process
by combining customer orders to use each purchased product to the fullest extent
practicable.
Few metals service centers offer the full scope of processing services and
metals that we provide. Our primary processing services are described below.
- Bar turning involves machining a metal bar into a smaller diameter.
- Bending is the forming of metals into various angles.
- Blanking is the cutting of metals into close tolerance square or
rectangular shapes.
- Deburring is the process used to smooth the sharp, jagged edges of a cut
piece of metal.
- Electropolishing is the process used on stainless steel tubing and
fittings to simultaneously smooth, brighten, clean, and passivate the
interior surfaces of these components. Electropolishing is an
electrochemical removal process that selectively removes a thin layer of
metal, including surface
30
flaws and imbedded impurities. Electropolishing is a required surface
treatment process for all ultra high-purity components used in the gas
distribution systems of semiconductor manufacturers worldwide and many
sterile water distribution systems of pharmaceutical and biotechnology
companies.
- Fabricating includes performing second and/or third stage processing per
customer specifications, typically to provide a part, casing or kit,
which is used in the customer's end product.
- Forming involves bending and forming plate or sheet products into
customer specified shapes and sizes with press brakes.
- Grinding or blanchard grinding involves grinding the top and/or bottom of
carbon or alloy steel plate or bars into close tolerance.
- Leveling (cutting-to-length) involves cutting metal along the width of a
coil into specified lengths of sheets or plates.
- Machining refers to performing multiple processes to a piece of metal to
produce a customer specified component part.
- Pipe threading refers to the cutting of threads around the circumference
of the pipe.
- Precision plate sawing involves sawing plate (primarily aluminum plate
products) into square or rectangular shapes to tolerances as close as
0.003 of an inch.
- Punching is the cutting of holes into carbon steel beams or plates by
pressing or welding per customer specifications.
- Sawing involves cutting metal into customer specified lengths, shapes or
sizes.
- Shape cutting, or burning, can produce various shapes according to
customer-supplied drawings through the use of CNC controlled machinery.
This procedure can include the use of oxy-fuel, plasma, high-definition
plasma, laser burning or water jet cutting for carbon, aluminum and
stainless steel sheet and plate. Routing for aluminum plate is also
performed.
- Shearing cuts the metal into small precise pieces.
- Skin milling grinds the top and/or bottom of a large aluminum plate into
close tolerance.
- Slitting involves cutting metal to specified widths along the length of
the coil.
- Tee splitting involves splitting metal beams. Tee straightening is the
process of straightening split beams.
- Twin milling grinds one or all six sides of a small square or rectangular
piece of aluminum plate into close tolerance.
- Welding is the joining of two or more pieces of metal.
- Wheelabrating, shotblasting and bead blasting involve pressure blasting
metal grid into carbon steel products to remove rust and scale from the
surface.
We generally process specific metals to non-standard sizes only at the
request of customers pursuant to purchase orders. We do not maintain an
inventory of finished products, but we carry a wide range of metals to meet the
short lead time and just-in-time delivery requirements of our customers. Each of
our metals service centers maintains inventory and equipment selected to meet
the needs of that facility's customers.
MARKETING
Our more than 650 sales personnel are located in 30 states, France, and
South Korea and provide marketing services throughout each of those locations.
The sales personnel are organized by division or
31
subsidiary among our profit centers and are divided into two groups. Those sales
personnel who travel throughout a specified geographic territory maintain
relationships with our existing customers and develop new customers; we consider
them our outside sales personnel. Those who remain at the facilities to write
and price orders are our inside sales personnel. The inside sales personnel
generally receive incentive compensation, in addition to their base salary,
based on the gross profit or pretax profit of their particular profit center.
The outside sales personnel generally receive incentive compensation based on
the gross profit from their particular geographic territories.
50%-OWNED COMPANY
Since July 1, 1995, we have owned 50% and had operational control of
American Steel, L.L.C., a limited liability company. American Steel operates
metals service centers in Portland, Oregon and Kent, Washington. American
Industries, Inc. owns the other 50% of American Steel. We are entitled to
purchase the remaining 50% of American Steel during the three years following
the earlier of the death of the owner of American Industries or December 31,
2005. We account for this 50% investment in American Steel by the equity method,
and we include 50% of American Steel's earnings in our net income and earnings
per share amounts. American Metals, which operates three metals service centers
located in the Central Valley of California, was a wholly-owned subsidiary of
American Steel, until October 1, 1998, when we acquired all of the stock of
American Metals.
QUALITY CONTROL
Procuring high quality metal from suppliers on a consistent basis is
critical to our business. We have instituted strict quality control measures to
assure that the quality of purchased raw materials will enable us to meet our
customers' specifications and to reduce the costs of production interruptions.
We perform physical and chemical analyses on selected raw materials to verify
that their mechanical and dimensional properties, cleanliness, and surface
characteristics meet our requirements. We conduct similar analyses on selected
processed metal before delivery to the customer. We believe that maintaining
high standards for accepting metals ultimately results in reduced return rates
from our customers.
We established a program to obtain certification for most of our divisions
and certain of our subsidiaries under the ISO 9002 internationally-accepted
quality standard. We have obtained ISO 9002 certification at all of the
specified locations. We believe that such certification is beneficial for our
business and operations and that this certification provides us with access to
additional customers. We expect that additional locations will obtain this
certification.
SYSTEMS
We have converted our Reliance divisions and certain of our subsidiaries
from various software programs to the Stelplan(TM) manufacturing and
distribution information system. Stelplan(TM) is a registered trademark of
Invera Inc. Stelplan is an integrated business application system with functions
ranging from order entry to the generation of financial statements. Stelplan was
developed specifically for the metals service center and processor industry.
Stelplan also provides information in real time, such as inventory availability,
location, and cost. With this information, our marketing and sales personnel can
respond to the customer's needs more efficiently and more effectively and
quickly provide a product price.
During 1999, e-commerce was introduced to the steel industry. We have
considered a few different approaches to e-commerce. First, we have joined
certain e-commerce metals exchanges which list us as a supplier, and we respond
to inquiries placed by customers over the Internet. These exchanges may provide
us access to new customers and new geographic markets. Second, the Stelplan
vendor is developing an e-commerce package that directly interfaces with
Stelplan. We believe this package will allow existing customers to place orders,
inquire as to order status, and verify account balances directly over the
Internet. Finally, our Web site allows customers, both existing and potential,
to obtain general information about us and each of our locations, and to submit
a credit application or order inquiry directly. Although we are
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developing multiple e-commerce approaches, we do not know what future effect
e-commerce might have on our results of operations or financial position.
PROPERTIES
We maintain 80 metals service center processing and distribution facilities
(not including American Steel) in 23 states, France and South Korea, plus our
corporate headquarters. All of our service center facilities are in good or
excellent condition and are adequate for our existing operations. These
facilities generally operate at about 60% of capacity, with each location
averaging slightly less than two shifts operating at full capacity for a
five-day work week. Thirty-two of these facilities are leased. In addition, we
lease our corporate headquarters in Los Angeles, California. Siskin leases a
portion of its facilities in Chattanooga, Tennessee. Liebovich also leases a
portion of its facilities in Rockford, Illinois, and Chatham leases a portion of
its facilities in Jacksonville, Florida. In addition, Durrett leases off-site
space near its facility in Baltimore, Maryland. AMI Metals leases its corporate
office space in Brentwood, Tennessee. The lease terms expire at various times
through 2013, and the aggregate monthly rent is approximately $0.6 million. We
own all other properties. In early 2001, Phoenix Metals relocated its Tampa,
Florida operation into its newly-constructed facility. We are constructing a
new, larger facility for our Reliance Metalcenter operation in Phoenix, Arizona
that we expect to complete in 2001. The following table sets forth certain
information with respect to each facility:
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34
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* Leased. All other facilities owned.
EMPLOYEES
As of April 30, 2001, we had a total of approximately 4,200 employees.
Approximately 685 employees are covered by collective bargaining agreements,
which expire at various times over the next three years. We have entered into
collective bargaining agreements with fourteen different union locals at fifteen
of our locations. These collective bargaining agreements have not had a material
impact either favorably or unfavorably on our revenues or profitability at our
various locations. We have always maintained excellent relations with our
employees and have never experienced a significant work stoppage.
GOVERNMENT REGULATION
Our metals service centers are subject to many federal, state, and local
requirements to protect the environment, including hazardous waste disposal and
underground storage tank regulations. The only hazardous wastes that we use in
our operations are lubricants and cleaning solvents. We frequently examine ways
to minimize any impact on the environment and to effect cost savings relating to
35
environmental compliance. We pay state certified private companies to haul and
dispose of our hazardous waste.
Our operations are also subject to laws and regulations relating to
workplace safety and worker health, principally the Occupational Health and
Safety Act and related regulations, which, among other requirements, establish
noise, dust and safety standards. We have a very strict safety policy, which we
believe is one of the best in the industry. We are in material compliance with
applicable laws and regulations and do not anticipate that future compliance
with such laws and regulations will have a material adverse effect on our
results of operations or financial condition.
ENVIRONMENTAL
We have no outstanding unresolved issues with environmental regulators, and
our products and processes present no unusual environmental concerns. We do not
expect any material expenditures to meet environmental requirements. Some of the
properties we own or lease are located in industrial areas, however, with
histories of heavy industrial use. We may incur some environmental liabilities
because of the locations of these properties. Any such liabilities would arise
from causes other than our operations, but we do not expect that these
liabilities would have a material adverse impact on our results of operations,
financial condition, or liquidity.
BACKLOG
Because of the just-in-time delivery policy and the short lead time nature
of our business, we do not believe the information on backlog of orders is
material to an understanding of our metals service center business.
LEGAL PROCEEDINGS
From time to time, we are named as a defendant in legal actions. Generally
these actions arise out of our normal course of business. We are not a party to
any pending legal proceedings other than routine litigation incidental to the
business. We expect that these matters will be resolved without having a
material adverse effect on our results of operations or financial condition. We
maintain liability insurance against risks arising out of our normal course of
business.
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MANAGEMENT
We attribute much of our success to the quality and depth of our
management. In addition to the principal corporate officers identified below,
our management team includes a talented group of division managers and
subsidiary officers. This management team has substantial experience in the
metals service center industry. The following are our senior corporate officers
and directors:
David H. Hannah, 49, has been the President of Reliance since November 1995
and became the Chief Executive Officer in January 1999. From January 1992 until
he became the President, Mr. Hannah was our Executive Vice President and Chief
Financial Officer. Mr. Hannah became a director in 1992. Mr. Hannah had served
as Vice President and Chief Financial Officer from 1990 to 1992 and Vice
President and Division Manager of our Los Angeles Reliance Steel Company
division, from 1989 to 1990. From January 1, 1987 to July 1, 1989, Mr. Hannah
was our Vice President and Chief Financial Officer, and, from 1981 to 1987, he
was Chief Financial Officer. Mr. Hannah also serves as a director of American
Steel, L.L.C. For eight years before joining us in 1981, Mr. Hannah, a certified
public accountant, was employed by Ernst & Whinney (predecessor of Ernst & Young
LLP, our auditor) in various professional staff positions.
Gregg J. Mollins, 46, became Executive Vice President and Chief Operating
Officer in November 1995. In September 1997, Mr. Mollins became a director. Mr.
Mollins was Vice President and Chief Operating Officer from May 1994 to November
1995 and Vice President from 1992 to 1994. Prior to that time he had been with
us for six years as Division Manager of the Santa Clara division. For ten years
before joining us in 1986, Mr. Mollins was employed by certain of our
competitors in various sales and sales management positions.
Karla R. McDowell, 35, became Senior Vice President and Chief Financial
Officer in February 2000. Ms. McDowell served as our Vice President and Chief
Financial Officer from January 1999 to February 2000 and as Vice President and
Controller from November 1995 to January 1999. From 1992 to 1995, Ms. McDowell
was Corporate Controller. For four years before joining us, Ms. McDowell, a
certified public accountant, was employed by Ernst & Young in various
professional staff positions.
James P. MacBeth, 53, became Vice President, Carbon Steel Operations in
July 1998. From September 1995 to June 1998, Mr. MacBeth served as Division
Manager of our Los Angeles Reliance Steel Company division. From December 1991
to September 1995, Mr. MacBeth was Vice President and Division Manager of
Feralloy Reliance Company, L.P., a joint venture owned 50% by us. Until 1991,
Mr. MacBeth held various sales and management positions after joining us in
1969.
William K. Sales, Jr., 43, joined us as Vice President, Non-Ferrous
Operations in September 1997. From 1981 to September 1997, Mr. Sales served in
various sales and management positions with Kaiser Aluminum & Chemical Corp., a
producer of aluminum products and one of our suppliers.
Kevin M. Dempsey, 39, joined us in January 2001 as Chief Information
Officer. Before joining us, Mr. Dempsey served as Co-Founder, President and
Chief Executive Officer of VALUSTEEL, INC., a business-to-business, e-commerce
Internet site that focused on the asset recovery segment of the steel industry.
Prior to that, he served as Vice President of one of our competitors in Carson,
California, and held several other management positions at that company over a
period of 15 years.
Donna Newton, 48, became Vice President, Human Resources in January 2001.
Ms. Newton joined us as Director of Employee Benefits and Human Resources in
February 1999. Before joining us, she was director of sales and service for the
Los Angeles office of Aetna U.S. Healthcare and also held various management
positions at Aetna (one of our service providers) over a 20-year period.
Kay Rustand, 53, joined us as Vice President and General Counsel in January
2001. Ms. Rustand was a partner at the law firm of Arter & Hadden LLP (our
counsel) in Los Angeles, California, specializing in corporate and securities
law from 1989 to December 2000. Ms. Rustand served as a law clerk for the
Honorable Herbert Y.C. Choy, of the U.S. Court of Appeals, 9th Circuit from 1979
to 1980.
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Joe D. Crider, 71, became our Chairman of the Board in February 1997. Mr.
Crider was our Chief Executive Officer from May 1994 until his retirement in
January 1999. Before becoming the Chief Executive Officer, Mr. Crider was
President and Chief Operating Officer from 1987 to November 1995. Mr. Crider has
been a director since 1987. From 1975 to 1987, Mr. Crider was Executive Vice
President and Chief Operating Officer. Mr. Crider also serves as a director of
American Steel, L.L.C.
Thomas W. Gimbel, 49, was appointed a director in January 1999. Since 1984,
Mr. Gimbel has been the President of Advanced Systems Group, which is an
independent computer consulting firm servicing human resource and payroll
systems requirements for diverse businesses of various sizes. From 1975 to 1984,
Mr. Gimbel was employed by Dun & Bradstreet.
Douglas M. Hayes, 56, became a director in September 1997. Mr. Hayes
retired from Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), where
he was Managing Director of Investment Banking from 1986 to May 1997. After his
retirement from DLJ, he established his own investment banking firm, Hayes
Capital Corporation, located in Los Angeles, California. DLJ was an underwriter
in our 1997 public equity offering and in our initial public offering in 1994
and is a predecessor of Credit Suisse First Boston (one of the underwriters).
Robert Henigson, 75, has been a director since 1964. Mr. Henigson is a
retired attorney, having been a partner of Lawler, Felix & Hall (predecessor of
Arter & Hadden LLP, our counsel) prior to his retirement in 1986.
Karl H. Loring, 77, has been a director since 1984. Mr. Loring is retired,
but continues to provide tax consulting services to certain of his former
clients, other than us, from time to time. From 1983 to January 1992, Mr. Loring
was an officer of Knapp Communications Corporation, a publishing company. For
more than five years prior to his retirement in 1983, Mr. Loring, a certified
public accountant, was a tax partner for Ernst & Whinney (predecessor of Ernst &
Young LLP, our auditor).
William I. Rumer, 74, has been a director since 1957. Mr. Rumer retired
from Allied Aerospace where he was an aerospace engineer from 1961 to 1985.
Leslie A. Waite, 55, has been a director since 1977. Mr. Waite is an
investment advisor and has been a principal of Waite & Associates since its
formation in 1977.
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PRINCIPAL SHAREHOLDERS
The following table shows, as of May 31, 2001, the beneficial ownership of
our common stock by (i) each person known to us who owns beneficially or of
record more than five percent (5%) of our common stock, (ii) each director,
(iii) each executive officer, and (iv) all directors and executive officers as a
group. The information is based on 25,227,726 shares outstanding.
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* Less than 1%.
(1) Unless otherwise indicated, the address of each beneficial owner is 350
South Grand Avenue, Suite 5100, Los Angeles, California 90071.
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(2) We have been advised that the named shareholders have the sole power to
vote and to dispose of the shares set forth after their names, except as
noted.
(3) A Schedule 13-G was filed on behalf of Franklin Resources, Inc., parent
holding company; Charles B. Johnson, principal shareholder of parent
holding company; Rupert H. Johnson, principal shareholder of parent holding
company; and Franklin Advisers, Inc., investment adviser, all of which
disclaim beneficial ownership of the shares, which securities are reported
to be beneficially owned by one or more open or closed-end investment
companies or other managed accounts which are advised by direct and
indirect investment advisory subsidiaries of Franklin Resources, Inc. Of
the reported shares, 1,622,000 shares are owned by Franklin Advisers, Inc.,
296,996 shares are owned by Franklin Management, Inc. and 70,500 shares are
owned by Franklin Advisory Services, LLC.
(4) Excludes 319,613 shares which are held in the Gimbel Family Trust for the
benefit of Mr. Gimbel. See (6) below.
(5) These shares are held by Mr. Crider as a Co-Trustee of the Crider Family
Trust, with his wife. Includes 12,750 shares issuable upon the exercise of
options held by Mr. Crider, with exercise prices from $18.04 to $18.83 per
share.
(6) Includes 12,750 shares issuable upon the exercise of options held by Mr.
Gimbel, with exercise prices from $18.58 to $18.83 per share and 750 shares
which are owned jointly with Mr. Gimbel's wife. Includes 319,613 shares
which are held in the Gimbel Family Trust for the benefit of Mr. Gimbel,
but not shares held by the Gimbel Family Trust for the benefit of other
beneficiaries, with respect to which Mr. Gimbel is a Co-Trustee. Excludes
13,204 shares to which Mr. Gimbel may be entitled from his parents'
estates.
(7) Includes 40,000 shares issuable upon the exercise of options held by Mr.
Hannah, with exercise prices of $18.83 to $25.46 per share. All of the
shares are owned jointly with Mr. Hannah's wife. Excludes 12,641 shares
with respect to which Mr. Hannah has a vested right and shared voting power
pursuant to our Employee Stock Ownership Plan ("ESOP").
(8) Includes 14,625 shares issuable upon the exercise of options held by Mr.
Hayes, with exercise prices from $18.83 to $26.08 per share.
(9) Includes 11,025 shares issuable upon the exercise of options held by Mr.
Henigson, with exercise prices from $18.83 to $26.08 per share.
(10) These shares are held by Mr. Loring as Trustee of The Loring Family Trust.
Includes 13,125 shares issuable upon the exercise of options held by Mr.
Loring, with exercise prices from $18.83 to $26.08 per share.
(11) Includes 40,000 shares issuable upon the exercise of options held by Mr.
Mollins, with an exercise price of $18.83 to $25.46 per share. Excludes
4,955 shares with respect to which Mr. Mollins has a vested right and
shared voting power pursuant to our ESOP.
(12) These shares are held by Mr. Rumer as Trustee of the Rumer Family Trust.
Includes 14,625 shares issuable upon the exercise of options held by Mr.
Rumer, with exercise prices from $18.83 to $26.08 per share. Excludes
shares held by Mr. Rumer's wife and adult children as to which he disclaims
beneficial ownership. Includes 1,500 shares held in Mr. Rumer's I.R.A.
(13) Includes 14,625 shares issuable upon the exercise of options held by Mr.
Waite, with exercise prices from $18.83 to $26.08 per share.
(14) Includes 17,500 shares issuable upon the exercise of options held by Ms.
McDowell, with exercise prices from $18.83 to $22.00 per share. Excludes
1,509 shares with respect to which Ms. McDowell has a vested right and
shared voting power pursuant to our ESOP.
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(15) Includes 24,563 shares issuable upon the exercise of options held by Mr.
MacBeth, with exercise prices from $18.83 to $24.67 per share. Excludes
4,464 shares with respect to which Mr. MacBeth has a vested right and
shared voting power pursuant to our ESOP.
(16) Includes 27,938 shares issuable upon the exercise of options held by Mr.
Sales, with exercise prices from $18.83 to $19.50 per share.
(17) See notes 5 through 16.
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DESCRIPTION OF CAPITAL STOCK
Our common stock is listed for trading on the NYSE under the symbol "RS"
and was first traded on September 16, 1994. Under our Restated Articles of
Incorporation, we are authorized to issue up to 100,000,000 shares of common
stock, no par value, and 5,000,000 shares of preferred stock. As of May 31,
2001, there were 288 record owners of our common stock and 25,227,726 shares of
common stock outstanding.
CERTAIN U.S. FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS
The following is a general discussion of material U.S. federal tax
consequences relating to the ownership and disposition of common stock by a
Non-U.S. Holder. This discussion is based on the Internal Revenue Code of 1986,
as amended (the "Code"), the Treasury Regulations issued under the Code and
administrative and judicial interpretations of the Code and Treasury
Regulations, each as in effect and available on the date of this prospectus. The
Code, Treasury Regulations and interpretations, however, may change at any time,
possibly on a retroactive basis.
For the purposes of this discussion, a "Non-U.S. Holder" is:
- an individual that is a nonresident alien;
- a corporation or entity taxable as a corporation for U.S. federal income
tax purposes created under non-U.S. law; or
- an estate or trust that is not taxable in the U.S. on its worldwide
income.
We do not address all of the tax consequences that may be relevant to a
holder of common stock. Except as specifically noted, this description addresses
only U.S. federal tax considerations to Non-U.S. Holders that are initial
purchasers of common stock and that will hold common stock as capital assets, as
defined in the Code. We do not address any tax consequences to:
- holders of common stock that may be subject to special tax treatment such
as partnerships, financial institutions, real estate investment trusts,
tax-exempt organizations, regulated investment companies, insurance
companies, and brokers and dealers or traders in securities or
currencies;
- persons who acquired common stock through an exercise of employee stock
options or rights or otherwise as compensation;
- persons whose functional currency is not the U.S. dollar; and
- persons who hold or will hold common stock as part of a position in a
straddle or as part of a hedging or conversion transaction.
Further, we do not address any state, local or foreign tax consequences
relating to the ownership and disposition of common stock.
You should consult with your own tax advisors regarding the U.S. federal
tax consequences relating to the ownership and disposition of the common stock
as well as the effect of any state, local or foreign tax laws.
DISTRIBUTIONS
Generally, dividends paid to a Non-U.S. Holder will be subject to
withholding tax at a 30% rate or whatever lower rate as may be specified by an
applicable tax treaty. A Non-U.S. Holder must file the appropriate forms to
obtain the benefit of an applicable tax treaty. In general, a Non-U.S. Holder
that is eligible for a reduced rate of United States withholding tax under an
income tax treaty may obtain a refund of any excess amounts withheld by filing
an appropriate claim for a refund with the United States Internal Revenue
Service.
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Except as may be otherwise provided in an applicable tax treaty, a Non-U.S.
Holder will be taxed at ordinary federal income tax rates, on a net income
basis, on dividends that are effectively connected with the conduct of a trade
or business of that Non-U.S. Holder within the United States and these dividends
will not be subject to the withholding tax described above. If the Non-U.S.
Holder is a foreign corporation, it may also be subject to a branch profits tax
at a 30% rate unless it qualifies for a lower rate under an applicable tax
treaty. Non-U.S. Holders are required to file prescribed forms with the
withholding agent in order to establish an exemption from withholding based on
income being effectively connected with a U.S. trade or business.
SALE OR EXCHANGE OF COMMON STOCK
Generally, a Non-U.S. Holder will not be subject to U.S. federal income tax
on any gain realized on the sale or exchange of our common stock unless:
- the gain is effectively connected with a trade or business conducted by
the Non-U.S. Holder within the United States, in which case, the branch
profits tax described above under "Distributions" may also apply if the
holder is a foreign corporation;
- the Non-U.S. Holder is an individual who is present in the United States
for 183 days or more in the taxable year of the sale or exchange and
meets other necessary conditions;
- the Non-U.S. Holder is subject to tax under the provisions of the U.S.
federal tax law applicable to some U.S. expatriates; or
- we are or have been during some periods a "U.S. real property holding
corporation" for federal income tax purposes and, assuming the common
stock is "regularly traded on an established securities market" for tax
purposes, the Non-U.S. Holder held, directly or indirectly, at any time
during the five-year period on the date of the disposition, or any
shorter period that shares were held, more than 5% of our common stock.
We believe that we will not be treated as a U.S. real property holding
corporation.
FEDERAL ESTATE TAXES
Unless an applicable estate tax treaty provides otherwise, common stock
that is held by an individual who at the time of death is not a citizen or
resident of the United States generally will be included in the individual's
gross estate for U.S. federal estate tax purposes and may be subject to estate
tax.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING REQUIREMENTS
Under the United States information reporting rules, when a holder of
common stock receives dividends or proceeds from the sale of common stock, the
appropriate intermediary must report to the Internal Revenue Service and to the
holder the amount of the dividends or sale proceeds. Some holders, including all
corporations, are exempt from these rules.
In addition, a nonexempt holder must provide the intermediary with certain
identifying information. If this information is not supplied, or if the
intermediary knows or has reason to know that it is not true, dividends or sale
proceeds are subject to "backup withholding" at a rate of 31%. Backup
withholding is not an additional tax, and the holder may use the tax as a credit
against the tax it otherwise owes.
Generally, dividends paid to Non-U.S. Holders that are subject to the 30%
or treaty-reduced rate of withholding tax will be exempt from backup
withholding. However, payments within the United States are subject to both
backup withholding and information reporting unless the holder certifies under
penalties of perjury to the payor or in the manner required as to its non-United
States person status or otherwise establishes an exemption.
Prospective investors are urged to consult their tax advisors concerning
information reporting and backup withholding.
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The above description is not intended to constitute a complete analysis of
all tax consequences to a Non-U.S. Holder relating to the ownership and
disposition of common stock. Prospective purchasers of common stock are urged to
consult their own tax advisors regarding the application of the U.S. federal tax
laws to their particular situations, as well as any tax consequences which may
arise under the laws of any foreign, state, local or other taxing jurisdiction.
44
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated June 28, 2001, we have agreed to sell to the underwriters named
below, for which Credit Suisse First Boston Corporation, Bear, Stearns & Co.
Inc., McDonald Investments Inc. and Salomon Smith Barney Inc. are acting as
representatives, the following respective numbers of shares of common stock:
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 825,000 additional shares from us at the public offering price
less the underwriting discounts and commissions. The option may be exercised
only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a selling concession of $0.75 per share. The
underwriters and selling group members may allow a discount of $0.10 per share
on sales to other broker/dealers. After the public offering, the representatives
may change the public offering price and concession and discount to
broker/dealers.
The following table summarizes the compensation and estimated expenses we
will pay:
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any offer, sale, pledge, disposition or filing,
without the prior written consent of Credit Suisse First Boston
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Corporation for a period of 90 days after the date of this prospectus, except
issuances of shares of common stock or grants or options to purchase shares of
common stock under employee benefit plans existing on the date of this
prospectus, issuances of shares of common stock pursuant to the exercise of
options outstanding on the date of this prospectus.
Our officers and directors and various shareholders who will continue to
own shares or options to purchase shares of our common stock upon completion of
this offering, have agreed that they will not, except for certain permitted
transfers, offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, any shares of our common stock or securities convertible
into or exchangeable or exercisable for any shares of our common stock, enter
into a transaction that would have the same effect, or enter into any swap,
hedge or other arrangement that transfers, in whole or in part, any of the
economic consequences of ownership of our common stock, whether any of these
transactions are to be settled by delivery of our common stock or other
securities, in cash or otherwise, or publicly disclose the intention to make any
offer, sale, pledge or disposition, or to enter into any transaction, swap,
hedge or other arrangement, without the prior written consent of Credit Suisse
First Boston Corporation for a period of 90 days after the date of this
prospectus.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments that the underwriters may be required
to make in that respect.
Some of the underwriters and their affiliates have provided, and may
provide in the future, investment banking and other financial services for us in
the ordinary course of business for which they have received and would receive
customary compensation.
The representatives on behalf of the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the
over-allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may close out any short position by either
exercising their over-allotment option and/or purchasing shares in the
open market.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of shares to
close out the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. If the underwriters sell more shares than could be
covered by the over-allotment option, a naked short position, the
position can only be closed out by buying shares in the open market. A
naked short position is more likely to be created if the underwriters are
concerned that there could be downward pressure on the price of the
shares in the open market after pricing that could adversely affect
investors who purchase in the offering.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may have the effect of raising or maintaining the market price of our common
stock or preventing or retarding a decline in the market price of the common
stock. As a result, the price of our common stock may be higher than the
46
price that might otherwise exist in the open market. These transactions may be
effected on The New York Stock Exchange or otherwise and, if commenced, may be
discontinued at any time.
A prospectus in electronic form may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders. Internet distributions will be
allocated by the underwriters that will make Internet distributions on the same
basis as other allocations. Credit Suisse First Boston Corporation may effect an
on-line distribution through its affiliate, CSFBdirect Inc., an on-line
broker/dealer, as a selling group member.
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NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are made. Any resale of the common stock in Canada must
be made under applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made under available
statutory exemptions or under a discretionary exemption granted by the
applicable Canadian securities regulatory authority. Purchasers are advised to
seek legal advice prior to any resale of the common stock.
REPRESENTATIONS OF PURCHASERS
By purchasing common stock in Canada and accepting a purchase confirmation
a purchaser is representing to us and the dealer from whom the purchase
confirmation is received that:
- the purchaser is entitled under applicable provincial securities laws to
purchase the common stock without the benefit of a prospectus qualified
under those securities laws,
- where required by law, that the purchaser is purchasing as principal and
not as agent, and
- the purchaser has reviewed the text above under Resale Restrictions.
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against the issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser in this offering. The report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one report must be filed
for common stock acquired on the same date and under the same prospectus
exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and about the eligibility of the common
stock for investment by the purchaser under relevant Canadian legislation.
48
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Arter & Hadden LLP, Los Angeles, California. Cravath, Swaine &
Moore, New York, New York, has represented the underwriters.
EXPERTS
The consolidated financial statements (and the schedule incorporated by
reference) of Reliance Steel & Aluminum Co. at December 31, 2000 and 1999 and
for each of the three years in the period ended December 31, 2000, appearing in
this prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing and
incorporated by reference elsewhere herein and are included in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
We are subject to the reporting requirements of the Securities Exchange Act
of 1934, as amended, and file reports and other information with the Securities
and Exchange Commission. We have also filed with the SEC a registration
statement on Form S-3, including exhibits and schedules, under the Securities
Act with respect to the common stock offered by this prospectus. This prospectus
is part of the registration statement, but does not contain all of the
information included in the registration statement or the exhibits and
schedules. The registration statement and all annual and quarterly reports,
proxy statements and other information filed by us with the SEC can be inspected
and copied at the SEC's public reference facilities at:
You can obtain copies of such materials, at prescribed rates, by writing to
the SEC. You may obtain information by calling the SEC at 1-800-SEC-0330. The
SEC maintains an Internet site that contains reports, proxy, and information
statements and other information regarding issuers that file electronically with
the SEC (http://www.sec.gov).
Our common stock is listed on The New York Stock Exchange and reports,
proxy and information statements and other information concerning us can be
inspected at the NYSE located at 20 Broad Street, New York, New York 10005.
INCORPORATION BY REFERENCE
The SEC allows us to incorporate by reference into this prospectus
information that we file with the SEC. This means that:
- we can disclose important information to you by referring to other
documents that contain that information;
- the information incorporated by reference is considered to be part of
this prospectus; and
- any information that we file with the SEC in the future is automatically
incorporated into this prospectus and updates and supersedes previously
filed information.
We incorporate by reference into this prospectus:
- our Annual Report on Form 10-K for the year ended December 31, 2000; and
- our Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
49
We also incorporate in this prospectus by reference all documents filed by
us pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date of this prospectus and prior to the termination of this offering, and such
documents shall be a part of this prospectus from the respective dates of filing
of such documents. We will provide copies of all documents which are
incorporated by reference without charge to anyone to whom this prospectus is
delivered upon a written or oral request to Reliance Steel & Aluminum Co., 350
South Grand Avenue, Suite 5100, Los Angeles, California 90071-3406; Telephone:
(213) 687-7700.
If we have incorporated by reference any statement or information in this
prospectus and we subsequently modify that statement or information, the
statement or information incorporated in this prospectus is also modified or
superseded in the same manner. This prospectus incorporates by reference any
subsequently filed document.
50
RELIANCE STEEL & ALUMINUM CO.
AUDITED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Reliance Steel & Aluminum Co.
We have audited the accompanying consolidated balance sheets of Reliance
Steel & Aluminum Co. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Reliance Steel
& Aluminum Co. and subsidiaries at December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Long Beach, California
February 9, 2001
F-2
RELIANCE STEEL & ALUMINUM CO.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
See accompanying notes to consolidated financial statements.
F-3
RELIANCE STEEL & ALUMINUM CO.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
See accompanying notes to consolidated financial statements.
F-4
RELIANCE STEEL & ALUMINUM CO.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
See accompanying notes to consolidated financial statements.
F-5
RELIANCE STEEL & ALUMINUM CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
See accompanying notes to consolidated financial statements.
F-6
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Reliance Steel & Aluminum Co. and its wholly-owned subsidiaries, which include
Allegheny Steel Distributors, Inc., American Metals Corporation, AMI Metals,
Inc., CCC Steel, Inc., Chatham Steel Corporation, Durrett Sheppard Steel Co.,
Inc., Engbar Pipe & Steel Co. (merged into Reliance effective January 1, 2000),
Liebovich Bros., Inc., Lusk Metals, Phoenix Corporation, RSAC Management Corp.,
Service Steel Aerospace Corp., Siskin Steel & Supply Company, Inc., Toma Metals,
Inc. and 97%-owned Valex Corp., on a consolidated basis ("Reliance" or "the
Company"). All subsidiaries of Reliance are held by RSAC Management Corp. All
significant intercompany transactions have been eliminated in consolidation. The
Company accounts for its 50% investment in American Steel, L.L.C. on the equity
method of accounting. The Company accounts for its 66.5% interest in Valex Korea
Co., Ltd., on a consolidated basis, reporting the remaining 33.5% as minority
interest, which is included in accrued liabilities.
Business
In 2000, the Company operated a metals service center network of 76
processing and distribution facilities (not including American Steel, L.L.C.) in
21 states, France and South Korea which provided value-added metals processing
services and distributed a full line of more than 75,000 metal products.
Accounting Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash, cash equivalents and
trade receivables. The Company maintains cash and cash equivalents with
high-credit, quality financial institutions. The Company, by policy, limits the
amount of credit exposure to any one financial institution. At times, cash
balances held at financial institutions were in excess of federally insured
limits. Concentrations of credit risk with respect to trade receivables are
limited due to the geographically diverse customer base and various industries
into which the Company's products are sold. Credit is generally extended based
upon an evaluation of each customer's financial condition, with terms consistent
in the industry and no collateral required. Losses from credit sales are
provided for in the financial statements and consistently have been within the
allowance provided. As a result of the above factors, the Company does not
consider itself to have any significant concentrations of credit risk.
Fair Values of Financial Instruments
Fair values of cash and cash equivalents and the current portion of
long-term debt approximate cost due to the short period of time to maturity.
Fair values of long-term debt, which have been determined based on borrowing
rates currently available to the Company for loans with similar terms or
maturity, approximate the carrying amounts in the consolidated financial
statements.
F-7
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash Equivalents
The Company considers all highly liquid instruments with an original
maturity of three months or less when purchased to be cash equivalents. Cash and
cash equivalents are held by major financial institutions.
Long-Lived Assets
The provision for depreciation of property, plant and equipment is
generally computed on the straight-line method at rates designed to distribute
the cost of assets over the useful lives, estimated as follows:
Goodwill, representing the excess of the purchase price over the fair
values of the net assets of acquired entities, is being amortized on a
straight-line basis over the period of expected benefit of 40 years. Covenants
not to compete and other intangible assets are being amortized over the period
of expected benefit, generally five years.
The Company reviews the recoverability of its long-lived assets, including
goodwill as required by Statement of Financial Accounting Standards ("SFAS") No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of whenever significant events or changes occur which
might impair the recovery of recorded costs. The measurement of possible
impairment is either based upon significant losses of an entity or on the
inability to recover the balance of the long-lived asset from expected future
operating cash flows on an undiscounted basis. If an impairment exists, the
amount of such impairment is calculated based upon the discounted cash flows or
the market values as compared to the recorded costs. In management's opinion, no
impairment existed at December 31, 2000.
Revenue Recognition
The Company recognizes revenue from product sales at the time of shipment.
Provisions are made currently for estimated returns.
Stock-Based Compensation
The Company grants stock options with an exercise price equal to the fair
value of the stock at the date of grant. The Company elected to continue to
account for stock-based compensation plans using the intrinsic value-based
method of accounting prescribed by Accounting Principles Board Opinion ("APB")
No. 25, Accounting for Stock Issued to Employees and related interpretations.
Under APB No. 25, because the exercise price of the Company's employee stock
options equals the market price of the underlying stock at the date of grant, no
compensation expense is recognized.
Environmental Remediation Costs
The Company accrues for losses associated with environmental remediation
obligations when such losses are probable and reasonably estimatable. Accruals
for estimated losses from environmental remediation obligations generally are
recognized no later than completion of the remediation feasibility study. Such
accruals are adjusted as further information develops or circumstances change.
Recoveries of environmental remediation costs from other parties are recorded as
assets when their receipt is deemed probable. The Company's management is not
aware of any environmental remediation obligations which would materially affect
the operations, financial position or cash flows of the Company.
F-8
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign Currencies
The currency effects of translating the financial statements of those
foreign subsidiaries of the Company which operate in local currency environments
are included in the "accumulated other comprehensive loss" component of
shareholders' equity for 2000. Such effects were not material in 1999 or 1998.
Gains and losses resulting from foreign currency transactions are included in
results of operations and were not material in each of the three years in the
period ended December 31, 2000.
Impact of Recently Issued Accounting Standards
In January 2000, the Financial Accounting Standards Board ("FASB") issued
Emerging Issue Task Force ("EITF") No. 00-02: Accounting for Web Site
Development Costs, which discusses how an entity should account for costs
incurred to develop a Web site. EITF No. 00-02 is effective for Web site
development costs incurred for fiscal quarters beginning after June 30, 2000.
The Company adopted EITF No. 00-02 in 2000, which did not have a significant
impact on the Company's results of operations.
In the current year, the Company adopted EITF No. 00-10: Accounting for
Shipping and Handling Fees and Costs, effective for fiscal years beginning after
December 15, 1999. EITF No. 00-10 requires that the amounts billed related to
shipping and handling be classified as revenue and that the classification of
shipping and handling costs is an accounting policy decision that should be
disclosed. The adoption of this EITF has no impact on the Company's results of
operations.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (as amended by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
SFAS No. 133 and by SFAS No. 138, Accounting for Certain Hedging Activities).
SFAS No. 133 requires all derivatives to be measured at fair value and
recognized as either assets or liabilities on the balance sheet. Changes in such
fair values are required to be recognized immediately in net income (loss) to
the extent the derivatives are not effective as hedges. SFAS No. 137 delayed the
effective date to fiscal years beginning after June 15, 2000, and is effective
for interim periods in the initial year of adoption. SFAS No. 138 was issued in
June 2000 to amend the accounting and reporting standard of SFAS No. 133 for
certain derivative instruments and certain hedging activities. At the present
time, the Company does not expect SFAS No. 133, as amended, to have any effect
on the Company's financial position, results of operations, or cash flows
because the Company does not presently use derivatives or engage in hedging
activities.
2. ACQUISITIONS
On December 1, 2000, through its wholly-owned subsidiary Siskin Steel &
Supply Company, Inc. ("Siskin"), the Company acquired the outstanding stock of
East Tennessee Steel Supply, Inc. ("East Tennessee"), a privately-held metals
service center located in Morristown, Tennessee. East Tennessee provides its
customers in the Southeast region of the country with value-added processing and
distribution of carbon steel plate, bar and structurals and had sales of
approximately $6,600,000 for the year ended June 30, 2000. East Tennessee is
operating as a wholly-owned subsidiary of Siskin. The purchase of East Tennessee
was funded with cash generated from operations.
On August 7, 2000, through its newly-formed company, United Alloys Aircraft
Metals, Inc. ("United"), the Company purchased the net assets and business of
the Aircraft Division of United Alloys, Inc. United is located in Vernon (Los
Angeles), California ("CA"), and provides its customers with value-added
processed titanium products. The Aircraft Division of United Alloys, Inc. had
sales of approximately $18,000,000 for the twelve months ended December 31,
1999. United operates as a wholly-owned subsidiary of Service Steel Aerospace
Corp., a wholly-owned subsidiary of the Company. The purchase of United was
funded with borrowings under the Company's line of credit.
F-9
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On June 1, 2000, the Company acquired 100% of the outstanding stock of Toma
Metals, Inc. ("Toma"), a privately-held metals service center based in
Johnstown, Pennsylvania. Toma processes and distributes primarily stainless
steel flat-rolled products and had sales of approximately $10,000,000 for the
six months ended March 31, 2000. Toma operates as a wholly-owned subsidiary of
the Company. The acquisition of Toma was funded with borrowings under the
Company's line of credit.
On February 5, 2000, through its newly-formed company, Hagerty Steel &
Aluminum Company ("Hagerty"), the Company purchased the net assets and business
of the metals service center division of Hagerty Brothers Company, located in
Peoria, Illinois. Hagerty processes and distributes primarily carbon steel
products. Net sales of the metals service center business of Hagerty Brothers
Company were approximately $30,000,000 for the twelve months ended December 31,
1999. Hagerty operates as a wholly-owned subsidiary of Liebovich Bros., Inc., a
wholly-owned subsidiary of the Company. The Hagerty assets were acquired with
funds from borrowings under the Company's line of credit.
On October 1, 1999, the Company purchased the assets and business of Arrow
Metals, a division of Arrow Smelters, Inc. The privately-held metals service
center business is based in Garland (Dallas), Texas, with additional facilities
in Houston and San Antonio. Arrow Metals specializes in non-ferrous metals
processing and distribution of mainly aluminum plate and bar products. The Arrow
Metals locations are operating as divisions of the Company, with the Houston
location operating under the Reliance Metalcenter name. Arrow Metals was
acquired with cash generated from operations.
On September 3, 1999, the Company acquired 100% of the stock of Allegheny
Steel Distributors, Inc. ("Allegheny"), a privately-held metals service center.
Allegheny is based in Indianola (Pittsburgh), Pennsylvania and specializes in
cutting-to-length and blanking primarily carbon steel flat-rolled products.
Allegheny operates as a wholly-owned subsidiary of the Company. Allegheny was
acquired with funds from borrowings under the Company's line of credit.
On March 1, 1999, the Company acquired 100% of the outstanding shares of
Liebovich Bros., Inc. ("Liebovich"), for approximately $60,000,000 in cash.
Liebovich was a privately-held metals service center company with one full-line
metals service center and two metals fabrication facilities in Rockford,
Illinois, and a metals service center in Wyoming (Grand Rapids), Michigan.
Liebovich operates as a wholly-owned subsidiary of the Company. The purchase of
Liebovich was funded with cash generated from operations and with borrowings on
the Company's line of credit.
On October 5, 1998, the Company acquired 100% of the outstanding stock of
Engbar Pipe & Steel Co. ("Engbar"), a privately-held metals service center
company located in Denver, Colorado. Engbar operated as a wholly-owned
subsidiary of the Company, until its merger into the Company effective January
1, 2000. Engbar now operates as a division of Reliance. The purchase of Engbar
was funded with borrowings under the Company's line of credit.
On October 1, 1998, Phoenix Corporation ("Phoenix Metals"), which is a
wholly-owned subsidiary of the Company, acquired 100% of the outstanding stock
of Steel Bar Corporation ("Steel Bar"), a privately-held metals service center
in Greensboro, North Carolina. Steel Bar operated as a wholly-owned subsidiary
of Phoenix Metals, until its merger into Phoenix Metals effective October 1,
2000. Steel Bar now operates as a division of Phoenix Metals. The purchase of
Steel Bar was funded with borrowings under the Company's line of credit.
Also effective October 1, 1998, American Steel, L.L.C. ("American Steel")
distributed equally to its members, the Company and American Industries, Inc.
("Industries"), 100% of the outstanding stock of its wholly-owned subsidiary,
American Metals Corporation ("American Metals"). Simultaneously with the
distribution, American Metals redeemed the stock owned by Industries in exchange
for real property of approximately $6,670,000 and cash of $1,800,000. The real
property is being leased back to American
F-10
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Metals. American Metals is based in West Sacramento, CA, with additional service
centers in Fresno and Redding, CA. American Metals operates as a wholly-owned
subsidiary of the Company.
On September 18, 1998, the Company acquired 100% of the stock of Lusk
Metals, a privately-held metals service center in Hayward (San Francisco), CA,
for approximately $22,000,000 in cash. Lusk Metals is operating as a
wholly-owned subsidiary of the Company. The purchase of Lusk Metals was funded
with borrowings under the Company's line of credit.
Effective July 1, 1998, the Company acquired 100% of the stock of Chatham
Steel Corporation ("Chatham"), a privately-held metals service center company
headquartered in Savannah, Georgia for approximately $68,000,000 in cash.
Chatham has additional facilities in Birmingham, Alabama; Jacksonville and
Orlando, Florida; Durham, North Carolina; and Columbia, South Carolina. Chatham
is operating as a wholly-owned subsidiary of the Company. The purchase of
Chatham was funded with borrowings under the Company's line of credit.
On January 30, 1998, the Company acquired 100% of the outstanding capital
stock of Phoenix Corporation, doing business as Phoenix Metals Company ("Phoenix
Metals"), for approximately $21,000,000 in cash. Phoenix Metals is headquartered
in Norcross (Atlanta), Georgia, with additional metals service centers in
Birmingham, Alabama; Tampa, Florida; and Charlotte, North Carolina. Phoenix
Metals is operating as a wholly-owned subsidiary of the Company. The purchase of
Phoenix Metals was funded with a portion of the proceeds from the 1997 equity
offering and borrowings under the Company's line of credit.
Also on January 30, 1998, the Company purchased the assets and business of
Durrett-Sheppard Steel Co., L.L.C. and its subsidiary, Durrett-Sheppard Steel of
Pennsylvania, Inc., through its newly-formed subsidiary, Durrett Sheppard Steel
Co., Inc. ("Durrett"), for approximately $30,500,000 in cash. Durrett is a
metals service center located in Baltimore, Maryland, which is operating as a
wholly-owned subsidiary of the Company. This purchase was funded with a portion
of the proceeds from the 1997 equity offering and borrowings under the Company's
line of credit.
These transactions were accounted for by the purchase method of accounting
and, accordingly, the purchase price has been allocated to the assets acquired
and the liabilities assumed based on the estimated fair values at the date of
the acquisition. The excess of purchase price over the estimated fair values of
the net assets acquired has been recorded as goodwill, resulting in goodwill
additions of $22,998,000 and $44,094,000 for the years ended December 31, 2000
and 1999, respectively. Amortization expense for goodwill and other intangible
assets amounted to approximately $7,411,000, $6,804,000 and $4,636,000 for the
years ended December 31, 2000, 1999, and 1998, respectively.
The operating results of these acquisitions are included in the Company's
consolidated results of operations from the date of each acquisition. The
following unaudited proforma summary presents the consolidated results of
operations as if the acquisitions had occurred at the beginning of the year of
acquisition and the year immediately preceding, after the effect of certain
adjustments, including amortization of goodwill, interest expense on the
acquisition debt and related income tax effects. These proforma results have
been presented for comparative purposes only and are not indicative of what
would
F-11
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
have occurred had the acquisitions been made as of January 1, 2000, 1999 or
1998, appropriately, or of any potential results which may occur in the future.
3. INVENTORIES
Inventories of the Company have primarily been stated on the last-in,
first-out ("LIFO") method, which is not in excess of market. The Company uses
the LIFO method of inventory valuation because it results in a better matching
of costs and revenues. At December 31, 2000 and 1999, cost on the first-in,
first-out ("FIFO") method exceeds the LIFO value of inventories by $17,906,000
and $13,664,000, respectively. Inventories of $81,046,000 and $47,775,000 at
December 31, 2000 and 1999, respectively, were stated on the FIFO method, which
is not in excess of market.
4. INVESTMENT IN 50%-OWNED COMPANY
The Company maintains a 50% interest in the Membership Units of American
Steel, which operates metals service centers in Portland, Oregon and Kent
(Seattle), Washington. Industries owns the other 50% interest in American Steel.
The Operating Agreement ("Agreement") provides that the Company may purchase the
remaining 50% of American Steel during a term of three years following the
earlier of the death of the owner of Industries or December 31, 2005. The price
shall be the greater of Industries' current capital account or 50% of the fair
market value of American Steel. The Agreement gives the Company operating
control over the assets and operations of American Steel. However, due to the
existence of super-majority veto rights, the Company is required to account for
this investment under the equity method and records its share of earnings based
upon the terms of the Agreement. Additionally, until October 1, 1998, American
Steel owned 100% of American Metals, which was previously a joint venture
between the Company and Industries. As discussed in Note 2 to the consolidated
financial statements, the Company now owns 100% of the stock of American Metals.
The consolidated retained earnings of the Company includes the
undistributed earnings of American Steel. The Company's share of undistributed
earnings included in consolidated retained earnings amounted to $3,485,000 and
$3,800,000 as of December 31, 2000 and 1999, respectively.
F-12
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of the following:
The Company has a syndicated credit agreement with four banks for an
unsecured revolving line of credit with a borrowing limit of $200,000,000. The
syndicated credit agreement allows the Company to use up to $175,000,000 of the
revolving line of credit for acquisitions. The Company is currently in the
process of refinancing its existing $200,000,000 line of credit to an increased
amount to support its future operations and expected growth opportunities. This
new line will be long-term and will replace the current syndicated line and
letter of credit agreement. The Company has $290,000,000 of outstanding senior
unsecured notes issued in private placements of debt. These notes bear interest
at an average fixed rate of 6.83% and have an average life of 9.1 years,
maturing from 2002 to 2010. The Company also entered into a credit agreement
that allows the Company to issue and have outstanding up to a maximum of
$10,000,000 of letters of credit. On October 20, 2000, the Company executed an
amendment to this credit agreement, providing a cash advance facility of
$50,000,000 due April 20, 2001. This amendment has a term of six months, as the
incremental financing agreement was provided to allow the Company to meet its
anticipated short-term financing requirements until the refinancing of its
existing syndicated facility (discussed above) is completed. In February 2001,
the cash advance was paid down through an exchange of debt using the Company's
revolving line of credit, which is due in October 2002. As such, the cash
advance line of $50,000,000 has been recorded as long-term in the Company's
consolidated financial statements.
The Company's long-term loan agreements require the maintenance of a
minimum net worth and include certain restrictions on the amount of cash
dividends payable, among other things. The syndicated credit facility includes a
commitment fee on the unused portion at an annual rate of 0.125%.
F-13
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of aggregate maturities of long-term debt for
each of the next five years (in thousands):
6. INCOME TAXES
Deferred income taxes are computed using the liability method and reflect
the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial statement purposes and the amounts used for
income tax purposes. The provision for income taxes reflects the taxes to be
paid for the period and the change during the period in the deferred tax assets
and liabilities. Significant components of the Company's deferred tax assets and
liabilities are as follows:
F-14
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the provision for income taxes are as follows:
The reconciliation of income tax at the U.S. federal statutory tax rates to
income tax expense is as follows:
7. STOCK OPTION PLANS
In 1994, the Board of Directors of the Company adopted an Incentive and
Non-Qualified Stock Option Plan (the "1994 Plan"). There are 1,687,500 shares of
common stock reserved for issuance under the 1994 Plan. The 1994 Plan provides
for granting of stock options that may be either "incentive stock options"
within the meaning of Section 422A of the Internal Revenue Code of 1986 (the
"Code") or "non-qualified stock options," which do not satisfy the provisions of
Section 422A of the Code. Options are required to be granted at an option price
per share equal to the fair market value of common stock on the date of grant,
except that the exercise price of incentive stock options granted to any
employee who owns (or, under pertinent Code provisions, is deemed to own) more
than 10% of the outstanding common stock of the Company, must equal at least
110% of fair market value on the date of grant. Stock options may not be granted
longer than 10 years from the date of the 1994 Plan. All options granted have
five year terms and vest at the rate of 25% per year, commencing one year from
the date of grant.
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RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Transactions under the 1994 Plan are as follows:
In May 1998, the shareholders approved the adoption of a Directors Stock
Option Plan for non-employee directors (the "Directors Plan"), which provides
for automatic grants of options to non-employee directors. There are 300,000
shares of the Company's common stock reserved for issuance under the Directors
Plan. In February 1999, the Directors Plan was amended to allow the Board of
Directors of the Company (the "Board") authority to grant options to acquire the
Company's common stock to non-employee directors. Options under the Directors
Plan are non-qualified stock options, with an exercise price at fair market
value at the date of grant. All options granted expire five years from the date
of grant. None of the stock options become exercisable until one year after the
date of grant, unless specifically approved by the Board. In each of the
following four years, 25% of the options become exercisable on a cumulative
basis. Of the 105,000 options granted in March 1999, 20% were immediately
exercisable upon grant, with 20% becoming exercisable in each of the following
four years, as specifically approved by the Board.
Transactions under the Directors Plan are as follows:
F-16
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tabulation summarizes certain information concerning
outstanding and exercisable options at December 31, 2000:
If the Company had elected to recognize compensation cost based on the fair
value of the options granted at the grant date as prescribed by SFAS No. 123,
net income and earnings per share would have been reduced to the proforma
amounts shown below:
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model using the following weighted
average assumptions:
8. EMPLOYEE BENEFITS
The Company has an employee stock ownership plan ("the ESOP") and trust
that has been approved by the Internal Revenue Service as a qualified plan. The
ESOP is a noncontributory plan that covers salaried and certain hourly employees
of the Company. The amount of the annual contribution is at the discretion of
the Board, except that the minimum amount must be sufficient to enable the ESOP
trust to meet its current obligations.
Various 401(k) and profit sharing plans were maintained by the Company and
its subsidiaries. Effective in 1998, the Reliance Steel & Aluminum Co. Master
401(k) Plan (the "Master Plan") was established, which combined several of the
various 401(k) and profit sharing plans of the Company and its subsidiaries into
one plan. Salaried and certain hourly employees of the Company and its
participating subsidiaries are covered under the Master Plan. The Master Plan
will continue to allow each subsidiary's Board to determine independently the
annual matching percentage and maximum compensation limits or annual profit
sharing contribution. Eligibility occurs after three months of service, and the
Company contribution vests at 25% per year, commencing one year after the
employee enters the Master Plan. Other 401(k) and profit sharing plans exist as
certain subsidiaries have not yet combined their plans into the
F-17
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Master Plan as of December 31, 2000. During 2000, the 401(k) benefit plans
acquired as a result of the acquisitions of Chatham Steel Corporation and
Liebovich Bros., Inc. were merged into the Master Plan, resulting in additional
contribution expense during the 2000 year of approximately $1,210,000.
Effective January 1996, the Company adopted a Supplemental Executive
Retirement Plan ("SERP"), which is a nonqualified pension plan that provides
post-retirement benefits to key officers of the Company. The SERP is
administered by the Compensation and Stock Option Committee ("Committee") of the
Board. Benefits are based upon the employees' earnings. Life insurance policies
were purchased for most individuals covered by the SERP and are funded by the
Company. The Company recorded a one-time net gain of $2,341,000 due to life
insurance proceeds related to the death of one of its executives in January
1999. This gain is net of the death benefit to be received by the deceased
executive's beneficiary, under the terms of the SERP. The proceeds from the life
insurance claim will be used to fund the death benefit and other payments under
the SERP. The proceeds are recorded in other current assets, and the liability
for the death benefit is recorded in current liabilities. The SERP does not
maintain its own plan assets, therefore plan assets and related disclosures have
been omitted. However, the Company does maintain on its balance sheet assets to
fund the SERP with a value of $6,906,000 and $5,834,000 at December 31, 2000 and
1999, respectively. A separate SERP plan exists for one of the companies
acquired during 1998, which provides post-retirement benefits to its key
employees.
The net periodic pension costs for both SERP plans were as follows:
F-18
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the status of the funding of the SERP plans:
In determining the actuarial present value of projected benefit obligations
for the Company's SERP plans, the assumptions were as follows:
The Company's contribution expense for Company sponsored retirement plans
was as follows:
The Company participates in various multi-employer pension plans covering
certain employees not covered under the Company's benefit plans pursuant to
agreements between the Company and collective bargaining units who are members
of such plans. The Company is unable to determine its relative position with
regard to defined benefit plans to which contributions are made as a result of
collective bargaining agreements.
The Company has a "Key-Man Incentive Plan" (the "Incentive Plan") for
division managers and officers, which is administered by the Compensation and
Stock Option Committee of the Board. For 2000, 1999 and 1998, this incentive
compensation bonus was payable 75% in cash and 25% in the Company's
F-19
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock, with the exception of the bonus to officers, which may be paid
100% in cash at the discretion of the individual. The Company accrued
$2,371,000, $2,031,000 and $1,993,000 under the Incentive Plan as of December
31, 2000, 1999 and 1998, respectively. In March 2000 and 1999, the Company
issued 10,854 and 10,836 shares of common stock to employees under the incentive
bonus plan for the years ended December 31, 1999 and 1998, respectively.
9. SHAREHOLDERS' EQUITY
On October 30, 2000, the Company purchased 2,270,000 shares of its common
stock at a cost of $19.35 per share under its Stock Repurchase Plan in a private
transaction. The stock was purchased from the trust of one of the Company's
largest shareholders. Thomas W. Gimbel, a member of the Board, is a co-trustee
of the trust from which the shares were acquired. The purchase was financed
under an existing credit facility, which was amended to increase the Company's
borrowing capacity by $50,000,000.
The Board authorized a 3-for-2 common stock split effected in the form of a
50% stock dividend distributed on September 24, 1999, to shareholders of record
on September 2, 1999. All references in the financial statements to number of
shares and per share amounts have been retroactively adjusted to reflect this
stock split.
In August 1998, the Board approved the purchase of up to an additional
3,750,000 shares of the Company's outstanding common stock through its Stock
Repurchase Plan ("Repurchase Plan"), for a total of up to 6,000,000 shares. The
Repurchase Plan was initially established in December 1994 and authorizes the
Company to purchase shares of its common stock from time to time in the open
market or in privately-negotiated transactions. Repurchased shares are redeemed
and treated as authorized but unissued shares. As of December 31, 2000, the
Company had repurchased a total of 5,538,275 shares of its common stock under
the Repurchase Plan, at an average cost of $14.94 per share. During 2000,
2,865,950 shares were repurchased by the Company, including those purchased in
the private transaction discussed above, at an average price of $19.64 per
share. In 1999, the Company did not repurchase any shares.
10. COMMITMENTS AND CONTINGENCIES
The Company leases land, buildings and equipment under noncancelable
operating leases expiring in various years through 2013. Several of the leases
have renewal options providing for additional lease periods. Future minimum
payments, by year and in the aggregate, under the noncancelable leases with
initial or remaining terms of one year or more, consisted of the following at
December 31, 2000 (in thousands):
Total rental expense amounted to $12,273,000, $9,992,000 and $7,563,000 for
2000, 1999 and 1998, respectively.
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. Although occasional adverse decisions or
settlements may occur, the Company believes that the final disposition of such
matters will not have a material adverse effect on the financial position,
results of operations or cash flow of the Company.
F-20
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. EARNINGS PER SHARE
The Company calculates basic and diluted earnings per share as required by
SFAS No. 128, Earnings Per Share. Basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is calculated including the dilutive effects of warrants, options, and
convertible securities, if any. The following table sets forth the computation
of basic and diluted earnings per share:
All weighted shares and per-share amounts have been adjusted for the
3-for-2 common stock split that occurred in September 1999. The computations of
earnings per share for 2000, 1999 and 1998 do not include 385,000, 243,000 and
190,000 shares, respectively, of stock options because their inclusion would
have been anti-dilutive.
12. SHIPPING AND HANDLING FEES AND COSTS
Shipping and handling fees are included as revenue in net sales. Costs
related to shipping and handling are included in cost of sales or operating
expenses. For the twelve month periods ended December 31, 2000, 1999 and 1998,
shipping and handling costs of approximately $53,231,000, $40,084,000 and
$30,372,000, respectively, were included in "warehouse, delivery, selling,
general and administrative expenses."
13. SUBSEQUENT EVENTS
On January 19, 2001, the Company acquired Aluminum and Stainless, Inc.
("A&S"), a privately-held metals service center in Lafayette, Louisiana. A&S
processes and distributes primarily aluminum sheet, plate and bar products and
had sales of approximately $22,000,000 for the year ended December 31, 2000. A&S
will operate as a wholly-owned subsidiary of the Company. The acquisition of A&S
was funded with borrowings under the Company's line of credit.
On January 18, 2001, the Company acquired Viking Materials, Inc.
("Viking"), a privately-held metals service center in Minneapolis, Minnesota,
and a related company, Viking Materials of Illinois, Inc. ("Viking Illinois"),
near Chicago, Illinois. Viking provides value-added processing and distribution
of primarily carbon steel flat-rolled products and had combined sales of
approximately $90,000,000 for the year ended December 31, 2000. Viking Illinois
will operate as a wholly-owned subsidiary of Viking, and Viking will operate as
a wholly-owned subsidiary of the Company. The acquisition of Viking and Viking
Illinois was funded with borrowings under the Company's line of credit.
F-21
RELIANCE STEEL & ALUMINUM CO.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 2000, 1999 and 1998:
Quarterly and year-to-date computations of per share amounts are made
independently. Therefore, the sum of per share amounts for the quarters may not
agree with per share amounts for the year shown elsewhere in the Annual Report
on Form 10-K. All per share amounts have been adjusted for the September 1999
3-for-2 common stock split.
F-22
RELIANCE STEEL & ALUMINUM CO.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
See accompanying notes to consolidated financial statements.
F-23
RELIANCE STEEL & ALUMINUM CO.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
See accompanying notes to consolidated financial statements.
F-24
RELIANCE STEEL & ALUMINUM CO.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
See accompanying notes to consolidated financial statements.
F-25
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions of
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments, consisting only of normal recurring adjustments,
necessary for fair presentation, with respect to the interim financial
statements have been included. The results of operations for the three months in
the period ended March 31, 2001 are not necessarily indicative of the results
for the full year ending December 31, 2001. For further information, refer to
the consolidated financial statements and footnotes thereto for the year ended
December 31, 2000, included in the Reliance Steel & Aluminum Co. Form 10-K.
2. ACQUISITIONS
On January 19, 2001, the Company acquired Aluminum and Stainless, Inc.
("A&S"), a privately-held metals service center in Lafayette, Louisiana. A&S
processes and distributes primarily aluminum sheet, plate and bar products and
had sales of approximately $22,000,000 for the year ended December 31, 2000. A&S
operates as a wholly-owned subsidiary of the Company. The acquisition of A&S was
funded with borrowings under the Company's line of credit. In March 2001, A&S
opened a branch in New Orleans, Louisiana, established by the purchase of
certain assets of an existing metals service center.
On January 18, 2001, the Company acquired Viking Materials, Inc.
("Viking"), a privately-held metals service center in Minneapolis, Minnesota,
and a related company, Viking Materials of Illinois, Inc. ("Viking Illinois"),
near Chicago, Illinois. Viking provides value-added processing and distribution
of primarily carbon steel flat-rolled products and with Viking Illinois, had
combined sales of approximately $90,000,000 for the year ended December 31,
2000. Viking Illinois operates as a wholly-owned subsidiary of Viking, and
Viking operates as a wholly-owned subsidiary of the Company. The acquisition of
Viking and Viking Illinois was funded with borrowings under the Company's line
of credit.
These transactions have been accounted for under the purchase method of
accounting. Accordingly, the accompanying consolidated statements of income
include the revenues and expenses of each acquisition since its respective
acquisition date. The consolidated financial statements reflect the preliminary
allocation of the purchase price. The allocations of purchase price were based
upon the preliminary fair values of the net assets purchased.
F-26
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
3. LONG-TERM DEBT
Long-term debt consists of the following:
The Company has a syndicated credit agreement with four banks for an
unsecured revolving line of credit with a borrowing limit of $200,000,000. The
syndicated credit agreement allows the Company to use up to $175,000,000 of the
revolving line of credit for acquisitions. The Company is currently in the
process of refinancing its existing $200,000,000 line of credit to an increased
amount to support its future operations and expected growth opportunities. The
Company has $290,000,000 of outstanding senior unsecured notes issued in private
placements of debt. These notes bear interest at an average fixed rate of 6.83%
and have an average life of 9.6 years, maturing from 2002 to 2010. The Company
also has a credit agreement that allows the Company to issue and have
outstanding up to a maximum of $10,000,000 of letters of credit. On October 20,
2000, the Company executed an amendment to this credit agreement, providing a
cash advance facility of $50,000,000 due April 20, 2001. In February 2001, the
cash advance was paid off through an exchange of debt using the Company's
revolving line of credit. As of March 31, 2001, there were no borrowings
outstanding under the cash advance facility. An additional amendment was
executed in April 2001, extending the $50,000,000 cash advance facility to
December 31, 2001. This incremental financing agreement was provided to allow
the Company to meet its anticipated short-term financing requirements until the
refinancing of its existing syndicated facility (discussed above) is completed.
The Company's long-term loan agreements require the maintenance of a
minimum net worth and include certain restrictions on the amount of cash
dividends payable, among other things.
F-27
RELIANCE STEEL & ALUMINUM CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
4. SHAREHOLDERS' EQUITY
In March 2001, 8,334 shares of common stock were issued to division
managers of the Company under the Key-Man Incentive Plan for 2000.
On October 30, 2000, the Company purchased 2,270,000 shares of its common
stock at a cost of $19.35 per share under its Stock Repurchase Plan in a private
transaction. The stock was purchased from a trust, which is one of the Company's
largest shareholders. Thomas W. Gimbel, a member of the Board, is a co-trustee
of the trust from which the shares were acquired. The Stock Repurchase Plan
allows the Company to purchase up to 6,000,000 shares of its common stock from
time to time in the open market or in privately-negotiated transactions.
Repurchased shares are redeemed and treated as authorized but unissued shares.
As of March 31, 2001, the Company had repurchased a total of 5,538,275 shares of
its common stock under the Stock Repurchase Plan, at an average cost of $14.94
per share. The Company did not repurchase any shares during the three months
ended March 31, 2001.
Accumulated other comprehensive loss of $1,381,000 and $308,000 at March
31, 2001 and December 31, 2000, respectively, consists of foreign currency
translation adjustments.
5. EARNINGS PER SHARE
The Company calculates basic and diluted earnings per share as required by
SFAS No. 128, Earnings Per Share. Basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is calculated including the dilutive effects of warrants, options, and
convertible securities, if any. The following table sets forth the computation
of basic and diluted earnings per share:
The computations of earnings per share for the three months ended March 31,
2001 and 2000 do not include 37,500 and 388,000 shares, respectively, of stock
options because their inclusion would have been anti-dilutive.
F-28
[RELIANCE LOGO]