ITEM 1. BUSINESS
Earle M. Jorgensen Company, a Delaware corporation (the "Company" or "EMJ") is one of the largest distributors of metal products in the United States. The Company was formed on May 3, 1990, when Kelso & Companies Inc. ("Kelso") and its affiliates acquired control of and combined two leading metals distributors, EMJ (founded in 1921) and Kilsby-Roberts Holding Co. ("Kilsby") (successor to C.A. Roberts Company, founded in 1915). In connection with the combination of EMJ and Kilsby, the Company became a wholly-owned subsidiary of Earle M. Jorgensen Holding Company, Inc. ("Holding").
EMJ carries over 30,000 different carbon, alloy, stainless and aluminum bar, tubing and pipe, and plate and sheet metal products, and provides value-added metals processing, such as cutting to length, burning, sawing, honing, shearing, grinding, polishing, and other similar services, to most of the metal products it sells. Our company conducts business through a network of 31 service centers, including two in Canada, four plate processing centers, one cutting center, and one tube honing facility that are supported by a national merchandising office and four regional credit offices.
We sell our products and value-added processing services to over 40,000 customers engaged in a wide variety of industries including machinery manufacturing, transportation, fabricated metal products, aerospace, oil tools, construction, shipbuilding, plastics, chemicals, petrochemicals, farm equipment, food processing, energy and environmental control. We accommodate our customers' demands by offering a reliable source of metal products and related services and by providing timely delivery of product, generally within 24 hours from receipt of an order. When needed, we will also provide our customers metals processing expertise and inventory management services.
INDUSTRY OVERVIEW AND COMPETITION
We believe that metals service centers provide valuable services that are needed by end users. Primary metals producers, which manufacture and sell large volumes of steel, aluminum and specialty metals in standard sizes and configurations, generally sell only to those large end users and metals service centers who do not require processing of the products and who can order in large quantities and tolerate relatively long lead times. Metals service centers, which sell products in smaller quantities and offer services ranging from pre-production processing in accordance with specific customer requirements to storage and distribution of unprocessed metal products, function as intermediaries between primary metals producers and end users.
The current trend among primary metals producers is to focus on their core competency of high-volume production of a limited number of standardized metal products. This trend has been driven by the need to develop and improve efficient, volume-driven production techniques in order to remain competitive.
At the same time, most end users have recognized the economic advantages associated with outsourcing their metal processing and inventory management requirements. Outsourcing permits end users to reduce total production cost by shifting the responsibility for pre-production processing to metals service centers, whose higher efficiencies in performing these processing services make the ownership and operation of the necessary equipment a better investment. Inventory management and just-in-time delivery services provided by metals service centers also enable end users to reduce material costs, decrease capital required for inventory and equipment and save time, labor and other expenses.
As a result of these trends, metals service centers play an increasingly important role in all segments of the metals industry. Metals service centers purchase and distribute about 30% of all carbon industrial products and nearly 45% of all
stainless steel products produced in the U.S. Metals service centers are the single largest customer group of the U.S. domestic steel industry and serve the metal supply needs of more than 300,000 manufacturers and fabricators through service center locations nationwide. The metals distribution and processing industry generated an estimated $45 billion in revenues in the U.S. in 1998. The Company believes that the metals service center industry will continue to increase its role as a valuable intermediary between primary metal producers and end users, primarily as a result of (i) the metal producers efforts to increase sales to larger volume purchasers in order to increase production efficiency and (ii) increased demand by end users for outsourced metals processing, just-in-time inventory management and the other value-added materials management services.
The metals service center industry is highly fragmented, consisting of a large number of small companies, which are limited as to product line, size of inventory and customers located within a specific geographic area, and a few relatively large companies. In addition, the industry includes both general-line distributors, which handle a wide range of metal products, and specialty distributors, which specialize in particular categories of metal products. Metals service centers range from nationwide to regional and local in geographic coverage. Generally, the metals service center industry competes on price and the ability to provide customers with value-added services such as product availability, timely delivery, reliability, quality and processing capability.
There has been a trend toward consolidation in the industry in recognition of the advantages of larger companies. According to industry sources, the number of steel processors and metals service center companies in the U.S. has been reduced from approximately 7,000 in 1980 to approximately 3,400 in 1997. Some of our larger competitors are actively engaged in acquisition activities as part of their overall growth strategies.
The larger and more sophisticated companies, such as EMJ, have certain advantages over smaller companies, such as obtaining higher discounts associated with volume purchases, the ability to service customers with operations in multiple locations and the use of more sophisticated information systems. Although the Company is one of the largest distributors of metals in the U.S., some of its competitors have greater financial resources and most of its competitors are less leveraged than the Company.
OPERATING AND GROWTH STRATEGY
During the past several years, we have realigned our operations and core competencies, and have improved our cost structure and profitability. This was accomplished through two restructuring programs implemented in fiscal 1996 and 1997, that included closing non-strategic domestic distribution centers, consolidating or discontinuing certain processing centers, selling unprofitable foreign operations, and reducing workforce. In addition, we wrote down or wrote off non-performing or impaired assets.
In fiscal 1998, we commenced several reengineering initiatives to focus on improving customer service, process improvements and profitability. Such initiatives included: (i) implementing direct sales capabilities, (ii) enhancing sales of product and value-added services to new and existing customers utilizing management information systems that provide improved customer and market data, (iii) developing order management systems and redesigning warehouse configurations to reduce inventory handling expenses and to improve on-time delivery, (iv) developing logistics programs to reduce transportation and freight costs, and (v) redeploying human resources to value-added activities. Effective fiscal 1998, we also instituted a new management incentive compensation plan to provide bonuses to branch and corporate managers based on the achievement of certain branch operating and corporate financial objectives. See "Item 11. Executive Compensation - Management Incentive Compensation Plan".
We believe that the restructuring programs and the reengineering initiatives have substantially reduced costs since their commencement and have resulted in, and will continue to contribute to, a downward trend in operating expense ratios. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - General".
Our primary business goal is to expand market share, increase services to customers and to improve operating profits and cash flows. Our growth and operating strategies consist of the following elements:
SATELLITE OPERATIONS. We believe a key aspect to growth in our industry is having a physical presence in those markets requiring our service. Accordingly, we have formalized a growth strategy to target those geographic areas where we can justify opening a "satellite" location. These locations will be run as small service center operations stocking only those
core commodities needed to support targeted industries and customers, with day to day activities managed by only local warehouse and delivery personnel, and marketed by outside salespeople. However, each satellite operation will be supported by inventory, inside salespeople and general management of a core district responsible for the satellite's results of operations. We opened our first satellite operation in Chattanooga, Tennessee during fiscal 2000 and will open several other locations during fiscal 2001.
LEVERAGING CORE COMMODITIES. We have historically been a major purchaser and distributor of various "long" products, namely cold finished carbon and alloy bars, mechanical tubing, stainless bars and shapes, aluminum bars, shapes and tubes, and hot-rolled carbon and alloy bars. These specialty core commodity products allow us to realize higher gross margins when compared to gross margins from other commodity-like products, such as flat-rolled steel and other sheet products. Although the Company continues to sell steel and aluminum sheet products, it does so primarily in niche markets or as complementary products to important customers that are significant purchasers of other higher gross margin products.
We believe we can significantly grow market share in our core commodities by refocusing our efforts on aggressive procurement and marketing strategies and inventory management. Leveraging our strength in core commodities will establish competitive advantages in all of our local markets as well as allow us to successfully compete for larger national programs with customers.
FOCUS ON HIGHER GROSS MARGIN VALUE-ADDED PRODUCTS AND SERVICES. The Company seeks to maintain its gross margins and to expand its market share by (i) making sales from inventory with value-added services as often as possible, since such sales generally generate higher gross margins, and (ii) providing inventory management and timely delivery services. We believe customers will continue to outsource certain processing activities, including those involving plate processing, cutting and honing operations. Accordingly, we will focus on increasing our efficiencies and capacities in these value-added operations and in aggressively marketing these services. In addition, we recognize the need by our customers to be assured of on-time delivery of high quality products and services. Accordingly, we will focus on developing the business systems that will allow us to offer customers "best in class" delivery service. We believe our focus on on-time delivery service will immediately and significantly differentiate us and our service capabilities from others in the industry who generally offer only "best efforts" and less reliable delivery service.
REALIZE EFFICIENCIES FROM MANAGEMENT INFORMATION SYSTEM INVESTMENTS. The Company has made and will continue to make investments in its management information systems to improve customer service, optimize inventory levels, achieve greater operational efficiencies, and to assist management in identifying additional areas for operational improvement. Planned improvements in the Company's management information system include: (i) a customer relationship management system to further improve customer satisfaction and sales productivity, (ii) additional functionality of our electronic commerce capabilities for sales and supply chain activities (iii) continued implementation of warehouse management information systems, including activity-based costing and management systems, and (iv) other system improvements to improve productivity and efficiency.
CONTINUE COST REDUCTIONS AND PRODUCTIVITY IMPROVEMENTS. The Company will continue to identify and implement initiatives to realize cost savings and to improve profitability and cash flows. The Company believes significant opportunities remain in the areas of delivery and inventory handling, procurement of goods and services and customer service. The Company seeks to increase asset and employee productivity and to further decrease unit costs through initiatives intended to increase volume, thereby taking advantage of economies of scale. We have already made significant progress in achieving these goals with development and implementation of radio frequency and bar-coding capabilities.
PRODUCTS AND SUPPLIERS
As a company, we have designated certain carbon and alloy, aluminum, and stainless products as core product offerings under our bar, tubing and pipe, plate, and sheet product lines. Each of our service centers stock a broad range of shapes and sizes of each of these products (unless there is no market for the product line at a particular location) in an effort to be a market leader in all of the core product lines in its geographic area.
Carbon steel bar products (hot-rolled and cold-finished) and carbon plate and sheet are used in construction equipment, farm equipment, automotive and truck manufacturing, shipbuilding and oil exploration as well as a wide range of other products. Stainless steel bar, plate and sheet are used widely in the chemical, petrochemical, and oil refining and biomedical industries where resistance to corrosion is important. Aluminum bar, plate and sheet are frequently used in aircraft and aerospace applications where weight is a factor. Different tubing products are appropriate for particular uses
based on different characteristics of the tubing materials, including strength, weight, resistance to corrosion and cost. Carbon tubing and pipe are used in general manufacturing. Alloy tubing is used primarily in the manufacturing of oil field equipment and farm equipment. Stainless steel tubing and pipe are used in applications requiring a high resistance to corrosion, such as food processing. Aluminum tubing and pipe are used in applications that put a premium on lightweight (such as aerospace manufacturing).
The majority of our procurement activities are handled by a centralized merchandising office in our Schaumburg, Illinois facility where specialists in major product lines make inventory purchases. The Company concentrates on developing close working relationships with high-quality suppliers to ensure quality and timely delivery.
The vast majority of our inventory purchases are made by purchase orders and we have no significant supply contracts with periods in excess of one year. We are not dependent on any single supplier for any product or for a significant portion of our purchases, and in fiscal year 2000 no single supplier represented more than 10% of our total purchases. We purchased less than 10% of our inventory requirements from foreign-based suppliers in fiscal 2000.
CUSTOMERS AND MARKETS
Our company provides metal products and pre-production processing services to over 40,000 active customers throughout the U.S. and Canada that do business in a wide variety of industries, including machinery manufacturing, transportation, fabricated metal products, aerospace, oil tools, construction, shipbuilding, plastics, chemicals, petrochemicals, farm equipment, food processing, energy and environmental control. We are not dependent on any single customer or industry, and during fiscal 2000 no single customer accounted for more than three percent of our total revenues.
The vast majority of our sales originate from individual purchase orders and are not subject to ongoing supply contracts; however, we sometimes enter into contracts to purchase and supply specific products over a period of a year or longer. Such contracts provide the customer with greater certainty as to timely delivery, price stability and continuity of supply, and sometimes satisfy particular processing or inventory management requirements. Such contracts have resulted in new customer relationships and increased sales volumes, but can have a slightly lower gross margin than our ordinary sales. We believe such contracts, in the aggregate, represented less than 15% of our total revenues in fiscal 2000.
Seasonal fluctuations in our business generally occur in the summer months and in November and December, when many customers' plants are closed for vacations. Order backlog is not a significant factor, as orders are generally filled within 24 hours.
During fiscal 2000, we processed approximately 7,700 sales transactions per business day generating an average revenue of approximately $487 per transaction. Approximately 89% of our total revenues in fiscal 2000 were from sales of stock inventory (generally our core product offerings). The balance of revenues represents special customer requirements that are met by arranging mill-direct sales and by making buy-outs from other distributors of inventory items we do not maintain as stock inventory. Such non-stock sales generally have lower gross margins than stock sales, but provide a valuable customer service.
The following table sets forth a percentage breakdown of domestic revenues generated from sales of inventory maintained by the Company (referred to as "stock sales" ) by product group for the fiscal years ended March 31, 2000, 1999 and 1998.
COMPETITIVE STRENGTHS
We believe that the following factors contribute to our success in the metals distribution industry:
MARKET POSITION. We are among the largest distributors of metal products in the U.S. and believe that our broad product offerings, with a specialization in higher margin bar and tubing (as compared to flat-rolled products), along with our value-added processing capabilities have enabled us to maintain our position among the market leaders and achieve gross margins that are among the highest for comparable publicly-traded metals distribution companies. Because of our significant purchasing volume and long-term relationships developed with numerous metals producers, we believe we can realize economies of scale and have access to a wide variety of metals and new product and service opportunities. Furthermore, we believe that our salesforce is among the most experienced in the industry.
NETWORK OF STRATEGICALLY LOCATED FACILITIES. Our service centers and processing operations are strategically located, generally within one day's delivery time to almost all U.S. manufacturing centers, which thereby gives us the capability of increasing sales to national customers that currently buy metals from various suppliers in different locations. Through these facilities, we serve more than 40,000 customers, with no single customer accounting for more than three percent of our total revenues. Such diversification reduces our vulnerability to the financial or economic weakness of particular customers, industries or regions.
SERVICE AND PRODUCT SELECTION. We specialize in higher gross margin bar and tubing products that are not commonly sold directly by steel and aluminum producers in small quantities. We serve the needs of our customers by carrying a broad range of shapes and sizes in core products in large quantities, which allows the Company to deliver orders to customers typically within 24 hours from receipt of an order. Each of our service centers strives to be a market leader in our core product lines in their geographic area. Our company benefits from an excellent reputation for quality and service built over its 79 years in operation and has received numerous quality and service awards from its customers. EMJ was among the first in the metals distribution industry to receive multi-site ISO 9002 certification and had the first metals service center to receive QS 9000 certification established by the automobile industry.
MANAGEMENT INFORMATION SYSTEMS. We have invested and will continue to invest significant resources to upgrade or enhance our management information systems. Such information systems have been designed to be fully integrated with various application programs and can provide comprehensive databases and reporting capabilities to assist management in
their efforts to assess business conditions, monitor results of operations, purchase more effectively, optimize inventory among different locations, allocate resources and improve customer service through better order and product reference data. We believe our information systems are among the best in our industry and provide a competitive advantage.
EXPERIENCED MANAGEMENT WITH EQUITY OWNERSHIP. Executives and other members of our management group have substantial experience in the metals industry. In addition, our employees directly, and indirectly through the Jorgensen Employee Stock Ownership Plan (the "ESOP"), own in the aggregate approximately 29.2% (21.2% on a diluted basis) of the outstanding Holding Common Stock as of March 31, 2000.
IMPROVED COST STRUCTURES. We believe that our efforts to realign operations and core competencies, which included the closure or sale of underperforming operations and assets and reductions in workforce, as well as other restructuring and reengineering initiatives we have undertaken in recent years have dramatically improved our cost structure and operating leverage. We believe such initiatives and their impact on cost structures have enabled our company to maintain historically high operating margins, greater than most of our competitors, even during periods of general weakness in the metals industry and specific weakness in key industries that we serve. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - General".
MANAGEMENT INFORMATION SYSTEMS
Our management information systems are designed to provide a competitive advantage in managing activities affecting vendors, products, customers and value-added services and to assist management in identifying additional areas for operational improvement. The systems enhance our ability to utilize electronic commerce in dealing with customers and suppliers, including the use of bar coding, document imaging and other tools that can result in greater efficiencies and increased productivity for all users. Planned improvements in our management information systems include (i) a customer relationship management system to further improve customer satisfaction and sales productivity, (ii) additional functionality of our electronic commerce capabilities for sales and supply chain activities, (iii) continued implementation of warehouse management information systems, including activity-based costing and management systems, and (iv) other system improvements to improve productivity and efficiency.
EMPLOYEES
As of March 31, 2000, EMJ employed approximately 1,920 persons, of whom approximately 1,150 were employed in production or shipping, 420 were employed in sales and 350 served in executive, administrative or district office capacities. Three different unions represented approximately 720 of our employees from 15 locations. Our collective bargaining agreements expire on staggered dates between August 31, 2000 and March 31, 2004. In March 2000, we negotiated a new four-year agreement for the bargained employees in our Schaumburg, Illinois facility, thus ending a two-week strike. We are currently renegotiating several other agreements that have already expired and expect to have such agreements signed by September 2000. We believe we have a good overall relationship with our employees.
FOREIGN OPERATIONS
We maintain two service centers in Canada operating through a wholly-owned subsidiary, Earle M. Jorgensen (Canada) Inc., a Canadian limited liability company. On September 8, 1997, we sold our operations in Mexico, and on January 29, 1998, we sold our operations in the United Kingdom as part of our 1997 restructuring plan. Refer to Note 4 to Consolidated Financial Statements for further information on the sale of foreign subsidiaries. For the fiscal years ended March 31, 2000, 1999 and 1998, revenues from our foreign operations totaled $38.6 million, $31.1 million and $53.6 million, respectively.
ENVIRONMENTAL MATTERS
Our company is subject to extensive and changing federal, state, local and foreign laws and regulations designed to protect the environment and human health and safety, including those relating to the use, handling, storage, discharge and
disposal of hazardous substances and the remediation of environmental contamination. As a result, we are from time to time involved in administrative and judicial proceedings and inquiries relating to environmental matters.
During fiscal years 2000, 1999 and 1998, expenditures made in connection with environmental matters totaled approximately $0.3 million, $2.8 million and $0.4 million, respectively, principally for settlement of claims, and monitoring, remediation and investigation activities at sites with contaminated soil and/or groundwater. As of March 31, 2000, we had accrued approximately $0.3 million for future monitoring, investigation and remediation expenditures that could be reasonably estimated for the following pending environmental matters.
ALAMEDA STREET (LOS ANGELES). In February 1998, we were notified that our company had potential responsibility for the lead and copper soil contamination of an undeveloped parcel that is adjacent to its Alameda Street property. In March 2000, we completed an approved remediation plan and are awaiting a closure letter from the appropriate governmental agencies.
FORGE (SEATTLE/KENT, WA). We indemnified the purchasers of our former Forge facility for remediation of certain conditions at the facility and at an off-site disposal site existing or subsequently determined to be existing at the date of sale. No such claims were made within the timetables allowed under the indemnification agreement. In November 1998, we paid $2.2 million to the current owner of the Forge property as a settlement for any and all remaining or future liabilities related to the remediation of the facility. We continue to monitor the disposal site for environmental conditions in accordance with a consent decree requiring such monitoring through 2001.
UNION (NEW JERSEY). During fiscal 1994, we were notified by the current owner that our company has potential responsibility for the environmental contamination of this property formerly owned by a subsidiary and disposed of by such subsidiary prior to its acquisition by EMJ. The prior owner of such subsidiary has also been notified of its potential responsibility. On March 27, 1997, the current owner of the property informed us that it estimated the cost of investigation and cleanup of the property at $0.9 million and requested contribution to such costs from EMJ and the prior owner. We have contested responsibility and commented on the proposed cleanup plan and have not received any further demands or notifications. We do not have sufficient information to determine what potential liability EMJ has, if any.
Although it is possible that new information or future developments could require our company to reassess its potential exposure relating to all pending environmental matters, we believe that, based upon all currently available information, the resolution of such environmental matters will not have a material adverse effect on our financial condition, results of operations or liquidity. The possibility exists, however, that new environmental legislation and/or environmental regulations may be adopted, or other environmental conditions may be found to exist, that may require expenditures not currently anticipated and that may be material. See Note 9 to Consolidated Financial Statements.
INTELLECTUAL PROPERTY AND LICENSES
EMJ-Registered Trademark- is a registered trademark and service mark in the U.S. and in other countries where we do or expect to do business. We consider certain information owned by us to be trade secrets, and we take measures to protect the confidentiality and control the disclosure of such information. We believe that these safeguards adequately protect our proprietary rights. While we consider all of our intellectual property rights as a whole to be important, we do not consider any single right to be essential to our operations.
ITEM 2.
ITEM 2. PROPERTIES
Our service centers and value-added processing operations conduct business at various locations throughout North America. The Company's facilities are in good condition and are equipped to provide efficient processing of customer orders. The Company's facilities generally are capable of being utilized at higher capacities, if necessary. Most leased
facilities have initial terms of more than one year and include renewal options. While some of the leases expire in the near term, the Company does not believe that it will have difficulty renewing such leases or finding alternative sites.
Set forth below is a table summarizing certain information with respect to the Company's facilities.
- ---------------- (a) These locations are considered satellite operations. (b) Plans have been approved to relocate the Toronto operations to a new and larger leased facility during fiscal 2001.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are occasionally involved in ordinary, routine litigation incidental to their normal course of business, none of which we believe to be material to our financial condition or results of operations. We maintain various liability insurance coverages to protect our assets from losses arising out of or involving activities associated with ongoing and normal business operations. See also "Item 1. Business -- Environmental Matters".
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
We have 128 shares of common stock par value $.01 per share outstanding, all of which are owned by Holding. For each of fiscal years ended March 31, 2000, 1999 and 1998, we paid cash dividends totaling $13,372,000, $17,701,000
and $11,469,000, respectively, to Holding in connection with the repurchase of its capital stock from employees of EMJ whose employment had terminated, as required by the terms of Holding's Stockholders Agreement and the ESOP. In addition, in fiscal 1998, we paid cash dividends of $45,419,000 to Holding in connection with the series of refinancing transactions. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Refinancing Transactions".
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
All information contained in the following table was derived from the audited consolidated financial statements of the Company and should be read in conjunction with "Item 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Item 6. Selected Financial Data" and the consolidated financial statements of the Company, and the notes related thereto appearing elsewhere in this Form 10-K.
GENERAL
The Company was formed in May 1990 when Kelso and its affiliates acquired control of and combined two leading metals distributors, EMJ (founded in 1921) and Kilsby-Roberts Holding Co. (founded in 1915). Through our network of 37 service centers and value-added processing operations strategically located throughout North America, we distribute a broad line of bar, tubing and pipe, and plate and sheet metal products to over 40,000 customers.
During the past several years, our company has undergone substantial changes. In fiscal 1996 and 1997, we implemented two restructuring programs designed to realign our operations and core competencies and to improve operating earnings and cash flows, which included selling two foreign subsidiaries, closing four domestic distribution centers, discontinuing a flat-rolled processing center, consolidating two honing operations, and reducing workforce. In addition, fiscal 1997 included a write-off of certain costs related to our management information and reporting system.
In fiscal 1998, we commenced several reengineering initiatives to focus on improving customer service, process improvements and profitability. Such initiatives included: (i) implementing direct sales capabilities, (ii) enhancing sales of product and value-added services to new and existing customers utilizing management information systems that provide improved customer and market data, (iii) developing order management systems and redesigning warehouse configurations to reduce inventory handling expenses and to improve on-time delivery, (iv) developing logistics programs to reduce transportation and freight costs, and (v) eliminating non value-added activities.
We also addressed operational efficiencies and improvements in customer service by: (i) providing incentives for our service center managers and salespersons based on branch operating achievements and corporate financial objectives, and (ii) repositioning faster moving inventory from facilities designated as depots to those service centers requiring such inventory.
We believe that the restructuring programs and the reengineering initiatives have substantially reduced costs since their commencement and have resulted in, and will continue to contribute to, a downward trend in operating expense ratios. Our income from operations before restructuring and other non-recurring charges was $67.4 million in fiscal 2000, $67.2 million in fiscal 1999 and $69.6 million in fiscal 1998. The number of employees decreased from approximately 2,600 on December 31, 1996 to approximately 1,920 on March 31, 2000, including the elimination of a number of corporate managerial positions.
The metals service center industry has been historically cyclical (with periods of strong demand and higher prices followed by periods of weaker demand and lower prices), principally due to the nature of the industries in which the largest consumers of metals operate. We believe our results have been less sensitive to economic trends than some of our competitors due to our customer base, product mix and the variety of industries served.
REFINANCING TRANSACTIONS
On March 24, 1998, we refinanced our indebtedness by: (i) consummating the issuance and sale (the "Offering") of $105.0 million in aggregate principal amount of 9 1/2% Senior Notes due 2005 (the "9 1/2% Senior Notes"), (ii) replacing our existing revolving credit facility with an amended and restated revolving credit facility (prior to and after such amendment and restatement, the "Revolving Credit Facility"), and (iii) borrowing $100.0 million in aggregate principal amount under a variable rate term loan (the "Term Loan"). The net proceeds of the Offering, the Term Loan and the Revolving Credit Facility were used to (i) redeem $155.0 million in aggregate principal amount of outstanding 10 3/4% Senior Notes (the "10 3/4% Notes" and together with the 9 1/2% Senior Notes, the "Senior Notes") together with premium and accrued interest thereon to the date of redemption, (ii) prepay approximately $5.1 million in aggregate principal amount of purchase money indebtedness, including premium and accrued interest thereon, and (iii) pay a dividend to Holding in the amount of approximately $45.4 million used by Holding to (x) redeem $40.0 million in principal amount of its senior indebtedness (the "Holding Notes"), and (y) pay approximately $5.4 million of interest accrued as of March 24, 1998 on the Holding Notes (collectively, the "Holding Prepayment"). The Holding Notes are owned by an affiliate of Kelso.
The Offering, borrowings under the Term Loan, the refinancing of the Revolving Credit Facility and the Holding Prepayment are referred to collectively as the "Refinancing Transactions." See Note 6 to Consolidated Financial Statements.
STATEMENT OF OPERATIONS INFORMATION
The following table sets forth certain consolidated statement of operations data for the Company. The historical consolidated financial data for the fiscal years ended March 31, 2000, 1999 and 1998 are derived from the historical consolidated financial statements included elsewhere herein.
RESULTS OF OPERATIONS -- YEAR ENDED MARCH 31, 2000 COMPARED TO YEAR ENDED MARCH 31, 1999
REVENUES. Revenues for fiscal 2000 increased 2.5% to $938.3 million, compared to $915.8 million in fiscal 1999. Revenues from our domestic operations increased 1.7% to $899.7 million in fiscal 2000, compared to $884.7 million in fiscal 1999 and reflect a 10% increase in tonnage shipped offset by an 8% reduction in average selling prices (material costs declined 7%) when compared to fiscal 1999 levels. Our domestic operations continued to be impacted by weaker demand in certain core products and in key industries that we serve, particularly agricultural equipment and aerospace, caused in part by global economic conditions arising in connection with the Asian crisis in 1998. Revenues from our international operations increased 24.1% to $38.6 million compared to $31.1 million in fiscal 1999 as the result of strong local economic conditions.
GROSS PROFIT. Gross profit increased 3.6% to $275.5 million in fiscal 2000, compared to $266.0 million in fiscal 1999. Gross margin improved to 29.4% when compared to 29.0% in fiscal 1999. Fiscal 2000 included a LIFO credit of $9.0 million compared to a corresponding LIFO credit of $2.9 million in fiscal 1999. Gross profit and gross margin from foreign operations was $8.7 million and 22.5% in fiscal 2000, compared to $6.8 million and 22.0% in fiscal 1999. Exclusive of foreign operations and LIFO, gross margin was 28.6% in fiscal 2000, compared to 29.0% in fiscal 1999.
EXPENSES. Total operating expenses in fiscal 2000 were $208.1 million compared to $198.8 million in fiscal 1999. As a percent of revenues, total operating expenses were 22.2% in fiscal 2000 and 21.7% in fiscal 1999.
Warehouse and delivery expenses increased $2.9 million (2.4%) to $123.6 million in fiscal 2000, compared to $120.7 million in fiscal 1999. As a percent of revenues, warehouse and delivery expenses were 13.2% in fiscal 2000, unchanged from fiscal 1999. The increase in these expenses was attributable to higher compensation, lease, depreciation and other production expenses caused by the increase in tonnage shipped and from added capacity and services. In addition, fiscal 2000 included approximately $1.0 million of expenses incurred as the result of a two-week strike impacting our Schaumburg, Illinois facility in March 2000.
Selling, general and administrative expenses increased $6.4 million (8.2%) to $84.5 million in fiscal 2000 compared to $78.1 million in fiscal 1999. Selling expenses increased $0.3 million (0.9%) to $34.2 million in fiscal 2000, compared to $33.9 million in fiscal 1999, and decreased as a percent of revenues to 3.6% from 3.7% in fiscal 1999. General and administrative expenses, excluding gains or losses from the sale of fixed assets, increased $1.4 million (3.0%) to $48.0 million in fiscal 2000, compared to $46.6 million in fiscal 1999. As a percentage of revenues, these expenses were 5.1% in fiscal years 2000 and 1999. The increase in general and administrative expenses was primarily due to increased incentive compensation, lower income earned on life insurance redemptions, higher provisions for bad debt, and higher expenses related to outsourced logistics services, partially offset by higher income recognized from growth in cash surrender value of life insurance policies. Losses from sale of fixed assets, including our Hawaiian operations, totaled $2.3 million in fiscal 2000, compared to gains of $2.4 million in fiscal 1999.
NET INTEREST EXPENSE. Net interest expense was $41.6 million in fiscal 2000 and $41.2 million in fiscal 1999. Such amounts include interest on the Revolving Credit Facility, Senior Notes, Term Loan, and borrowings against the cash surrender value of certain life insurance policies and the amortization of debt issue costs ($1.5 million in fiscal 2000 and in fiscal 1999).
During fiscal 2000 the average outstanding indebtedness (excluding borrowings against the cash surrender value of certain life insurance policies) was $313.5 million versus $331.7 million in fiscal 1999. The weighted-average interest rate on such indebtedness during fiscal 2000 was 8.54% versus 8.61% in fiscal 1999. The average borrowings under the Revolving Credit Facility decreased to $98.1 million from $114.7 million in fiscal 1999, and the average interest rate decreased to 7.42% in fiscal 2000 from 7.43% in fiscal 1999.
The outstanding borrowings against the cash surrender value of life insurance policies were $116.5 million at March 31, 2000 and $101.7 million at March 31, 1999, and the total interest expense on such borrowings increased to $12.6 million in fiscal 2000 compared to $10.9 million in fiscal 1999. Such increases resulted from net borrowings of $14.8 million against the increased cash surrender value of life insurance policies in November 1999 to pay annual premiums on such policies and to pay interest on previous borrowings (see "---Liquidity and Capital Resources"). As specified in the
terms of the insurance policies, the rates for dividends payable on the policies correspondingly increase when borrowings are outstanding under the policies. This increase in dividends is greater than the increase in the incremental borrowing rate. Dividend income earned under the policies was $14.0 million in fiscal 2000, $10.9 million in fiscal 1999 and $10.3 million in fiscal 1998 and is reported as an offset to general and administrative expenses in the consolidated statements of operations.
The interest rates on the Senior Notes and on the life insurance policy borrowings are fixed at 9.50% and 11.76%, respectively. The interest rates on the Revolving Credit Facility and the Term Loan are floating rates (7.82% and 9.44%, respectively, as of March 31, 2000). Pursuant to an interest rate swap agreement we entered with Bankers Trust Company in June 1998, the interest rate on the Term Loan was fixed at approximately 9.05% through June 2003 (the "Fixed Rate"). Such agreement requires Bankers Trust Company to make payments to our company each quarter in an amount equal to the product of the notional amount of $95 million and the difference between the sum of the three month London Interbank Offered Rate plus 3.25% ("Floating LIBOR") and the Fixed Rate, if the Floating LIBOR is greater than the Fixed Rate, on a per diem basis. If Floating LIBOR is lower than the Fixed Rate, we are required to pay Bankers Trust Company an amount equal to the product of the notional amount and the difference between the Fixed Rate and Floating LIBOR on a per diem basis. During fiscal 2000, we paid Bankers Trust Company $0.4 million and Bankers Trust Company paid us $0.1 million of interest as calculated under the provisions described above. Since inception of the interest rate swap agreement, we have paid Bankers Trust Company a net amount of $0.5 million through March 31, 2000.
RESULTS OF OPERATIONS -- YEAR ENDED MARCH 31, 1999 COMPARED TO YEAR ENDED MARCH 31, 1998
REVENUES. Revenues for fiscal 1999 decreased 12.8% to $915.8 million, compared to $1,050.0 million in fiscal 1998. Revenues from our domestic operations for fiscal 1999 decreased 11.2% to $884.7 million, compared to $996.4 million in fiscal 1998. In general, fiscal 1999 revenues were adversely impacted by weakened product demand in significant industries that we serve, including agricultural equipment, oil services and aerospace, each suffering from global economic uncertainty caused in part by the Asian crisis, and by general decreases in metal commodity prices. Overall, fiscal 1999 revenues were primarily impacted by a 7% decrease in tonnage shipped and a 5% reduction in average selling price (material costs declined 3%) when compared to fiscal 1998. Revenues from our international operations decreased 42.0% to $31.1 million compared to $53.6 million in fiscal 1998 due to the sale of the U.K. and Mexican subsidiaries in fiscal 1998 (see Note 4 to Consolidated Financial Statements).
GROSS PROFIT. Gross profit decreased 9.7% to $266.0 million in fiscal 1999, compared to $294.6 million in fiscal 1998. Gross margin improved to 29.0% when compared to 28.1% in fiscal 1998. Fiscal 1999 included a LIFO credit of $2.9 million compared to a corresponding LIFO charge of $0.3 million in fiscal 1998. Gross profit and gross margin from foreign operations was $6.8 million and 22.0% in fiscal 1999, compared to $11.4 million and 21.3% in fiscal 1998. Exclusive of foreign operations and LIFO, gross margin improved to 29.0% for fiscal 1999, compared to 28.5% in fiscal 1998 primarily as the result of higher contributions to gross profit from value-added products and services and improved inventory management.
EXPENSES. Total operating expenses in fiscal 1999 were $198.8 million compared to $227.9 million in fiscal 1998. As a percent of revenues, total operating expenses were 21.7% in fiscal 1999 and fiscal 1998. Fiscal 1998 included a restructuring charge of $2.8 million representing the loss on sale of the U.K. and Mexican operations (see Note 4 to Consolidated Financial Statements). Excluding such charges, operating expenses in fiscal 1998 would have been $225.1 million, or 21.4% of revenues.
Warehouse and delivery expenses decreased $7.8 million (6.1%) to $120.7 million in fiscal 1999 compared to $128.5 million in fiscal 1998. As a percent of revenues, warehouse and delivery expenses were 13.2% in 1999 and 12.2% in fiscal 1998. The decrease in expenses was primarily due to a 6% reduction in compensation and related expenses resulting
from a reduction in the number of employees caused in part by our reengineering and restructuring efforts, including the sale of the Mexican and U.K. subsidiaries in fiscal 1998, and a reduction in freight expenses attributable to the decrease in tonnage volume shipped.
Selling, general and administrative expenses decreased $18.4 million (19.1%) to $78.1 million in fiscal 1999 compared to $96.5 million in fiscal 1998. In fiscal 1999, selling expenses decreased $3.2 million (8.6%) to $33.9 million, compared to $37.1 million in fiscal 1998, and increased as a percent of revenues to 3.7% from 3.5% in fiscal 1998. General and administrative expenses decreased by $15.2 million (25.6%) to $44.2 million in fiscal 1999 compared to $59.4 million in fiscal 1998, and to 4.8% of revenues from 5.7% in fiscal 1998. The decreases in selling expenses and general and administrative expenses were primarily due to a 10% and 13% reduction, respectively, in compensation and related expenses resulting primarily from lower sales and lower incentive payments and a reduction in headcount caused in part by our reengineering and restructuring efforts, including the sale of the Mexican and U.K. subsidiaries in fiscal 1998. General and administrative expenses in fiscal 1999 were also impacted by lower expenses for professional services including consulting charges incurred in connection with the reengineering projects implemented in fiscal 1998, higher income recognized from life insurance proceeds and growth in cash surrender value of life insurance policies, offset by lower income realized on cash discounts taken on vendor payments.
NET INTEREST EXPENSE. Net interest expense was $41.2 million in fiscal 1999 and $41.1 million in fiscal 1998. Such amounts include interest on the Revolving Credit Facility, Senior Notes, Term Loan, and borrowings against the cash surrender value of certain life insurance policies and the amortization of debt issue costs ($1.5 million in fiscal 1999 and $1.8 million in fiscal 1998).
During fiscal 1999 the average outstanding indebtedness (excluding borrowings against the cash surrender value of certain life insurance policies) was $331.7 million versus $303.9 million in fiscal 1998. The weighted-average interest rate on such indebtedness during fiscal 1999 was 8.61% versus 9.68% in fiscal 1998. The changes in the average outstanding indebtedness and the average interest rate was attributable to the borrowings under our Revolving Credit Facility and the impact of the Refinancing Transactions consummated in March 1998 (see also "---Liquidity and Capital Resources"). The average borrowings under the Revolving Credit Facility decreased to $114.7 million from $127.3 million in fiscal 1998, and the average interest rate decreased to 7.43% in fiscal 1999 from 8.65% in fiscal 1998.
The outstanding borrowings against the cash surrender value of life insurance policies were $101.7 million at March 31, 1999 and $88.9 million at March 31, 1998, and the total interest expense on such borrowings increased to $10.9 million in fiscal 1999 compared to $9.4 million in fiscal 1998. Such increases resulted from net borrowings of $12.8 million against the increased cash surrender value of life insurance policies in November 1998 to pay annual premiums on such policies and to pay interest on previous borrowings (see "---Liquidity and Capital Resources"). As specified in the terms of the insurance policies, the rates for dividends payable on the policies correspondingly increase when borrowings are outstanding under the policies. This increase in dividends is greater than the increase in the incremental borrowing rate. Dividend income earned under the policies was $10.9 million in fiscal 1999, $10.3 million in fiscal 1998 and $7.8 million in fiscal 1997 and is reported as an offset to general and administrative expenses in the consolidated statements of operations.
The interest rates on the Senior Notes and on the life insurance policy borrowings are fixed at 9.50% and 11.76%, respectively. The interest rates on the Revolving Credit Facility and the Term Loan are floating rates (6.69% and 8.22%, respectively, as of March 31, 1999). In June 1998, we entered into an interest rate swap agreement with Bankers Trust Company that effectively fixed the interest rate on the Term Loans at approximately 9.05% through June 2003 (the "Fixed Rate"). Such agreement requires Bankers Trust Company to make payments our company each quarter in an amount equal to the product of the notional amount of $95 million and the difference between the sum of the three month London Interbank Offered Rate plus 3.25% ("Floating LIBOR") and the Fixed Rate, if the Floating LIBOR is greater than the Fixed Rate, on a per diem basis. If Floating LIBOR is lower than the Fixed Rate, we are required to pay Bankers Trust Company an amount equal to the product of the notional amount and the difference between the Fixed Rate and Floating LIBOR on a per diem basis. During fiscal 1999, we paid Bankers Trust Company $0.2 million of interest as calculated under the provisions described above.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $165.1 million at March 31, 2000 when compared to $156.7 million at March 31, 1999. Primary sources of cash in fiscal 2000 consisted of: (i) funds provided by operations, $33.1 million; and (ii) proceeds from the sale of fixed assets, including our Hawaiian operations, $6.6 million. Primary uses of cash in fiscal 2000 consisted of: (i) dividends to Holding, $13.4 million; (ii) payments under revolving loan agreements, $9.7 million,; and (iii) capital expenditures, $9.5 million.
Cash generated from operating activities was $33.1 million (3.5% of revenues) in fiscal 2000 compared to $36.0 million (3.9% of revenues) in fiscal 1999 and $36.6 million (3.5% of revenues) in fiscal 1998.
During fiscal 2000, we redeemed $13.4 million of our capital stock from retiring and terminated employees, as required by the terms of our ESOP and by Holding's Stockholders' Agreement. The amount of redemptions in fiscal 2000 was higher than usual due to payments to a former executive officer with relatively large stock holdings. We expect that such redemptions for fiscal 2001 will be lower than those paid in fiscal 2000, although the amount or timing of such expenditures is not within our control and there can be no assurance in this regard.
Capital expenditures were $9.5 million in fiscal 2000, $9.0 million in fiscal 1999 and $7.3 million in fiscal 1998. Capital expenditures in fiscal 2000 were primarily for routine replacement of machinery and equipment, facility improvements and expansions, and the purchase of computer hardware and software. For fiscal 2001, we have planned approximately $11.9 million of capital expenditures to be financed from internally generated funds. Approximately $9.0 million is for routine replacement of machinery and equipment and facility improvements and expansions, and $2.9 million is for further additions and enhancements to our management information systems.
Ongoing debt service obligations primarily consist of interest payments under our Revolving Credit Facility, interest and principal payments on the Term Loan, interest payments on the 9 1/2% Senior Notes and principal and interest payments on industrial revenue bonds. As of March 31, 2000, annual principal payments required by our outstanding industrial revenue bonds indebtedness amount to $1.4 million in fiscal years 2001 through 2004, $2.1 in fiscal year 2005 and $4.1 million in the aggregate thereafter through 2011. We will not be required to make any principal payments in respect of the 9 1/2% Senior Notes until 2005. The Revolving Credit Facility will mature in 2003 and the Term Loan will mature in 2004. The Term Loan requires principal payments to be made in equal quarterly installments of $250,000. The final installment due at maturity will repay in full all outstanding principal. The Revolving Credit Facility, the Term Loan and 9 1/2% Senior Notes have covenants in respect of maintenance of minimum working capital and a fixed charge coverage ratio; and although compliance with such covenants in the future is largely dependent on the future performance of our company and general economic conditions, for which there can be no assurance, we expect to be in compliance with all of our debt covenants for the foreseeable future.
As of March 31, 2000, our primary sources of liquidity were available borrowings of approximately $120.2 million under the Revolving Credit Facility, available borrowings of approximately $6.4 million against certain life insurance policies and internally generated funds. Borrowings under the Revolving Credit Facility are secured by our domestic inventory and accounts receivable, and future availability under the facility is determined by prevailing levels of such accounts receivable and inventory. The Term Loan is secured by a first priority lien on a substantial portion of our current and future acquired unencumbered property, plant and equipment. The life insurance policy loans are secured by the cash surrender value of the policies and are non-recourse. The interest rate on the life insurance policy loans is 0.5% greater than the dividend income rate on the policies. As of March 31, 2000, there was approximately $22.9 million of cash surrender value in all life insurance policies maintained, net of borrowings. In addition, our Canadian subsidiary has available its own credit facilities of up to CND$11.75 million, including a revolving credit facility of CND$6.0 million, a financial credit facility of CND$5.0 million, to be used for hedging foreign currency and rate fluctuations, and a special credit facility of CND$0.75 million for letters of guarantee in connection with a lease for a newly constructed facility in Toronto. As of March 31, 2000, CND$296,000 (USD$204,000) was outstanding under the revolving credit facility and the letter of guarantee for CND$0.75 million was issued.
For fiscal 2000, EBITDA totaled $71.4 million (7.6% of revenues), compared to $77.8 million (8.5% of revenues) in fiscal 1999. EBITDA, which represents income from operations before net interest expense, taxes, depreciation, amortization, LIFO adjustments, and certain other non-cash expenses, including ESOP and post-retirement accruals, is
provided as an important measure of our ability to service debt. However, EBITDA should not be considered in isolation or as a substitute for consolidated results of operations and cash flows data presented in the accompanying consolidated financial statements.
We believe our sources of liquidity and capital resources are sufficient to meet all currently anticipated operating cash requirements, including debt service payments on the Revolving Credit Facility, the Term Loan and the 9 1/2% Senior Notes prior to their maturities in 2003, 2004 and 2005, respectively; however, we anticipate that it will be necessary to replace or to refinance all or a portion of the Revolving Credit Facility, the Term Loan and the 9 1/2% Senior Notes prior to their respective maturities, although there can be no assurance on what terms, if any, our company would be able to obtain such refinancing or additional financing. Our ability to make interest payments on the Revolving Credit Facility and the 9 1/2% Senior Notes and principal and interest payments on the Term Loan will be dependent on maintaining the level of performance reflected in the fiscal 2000 results, which will be dependent on a number of factors, many of which are beyond our control, and the continued availability of revolving credit borrowings. Our earnings were sufficient to cover fixed charges for fiscal years 2000, 1999 and 1998.
ENVIRONMENTAL CONTINGENCIES
There is currently remediation and/or investigation activities at several former facilities where soil and/or groundwater contamination is present. As of March 31, 2000, we have established reserves totaling $0.3 million to cover those future environmental costs that are known or can be reasonably estimated. See Note 9 to Consolidated Financial Statements included elsewhere herein for a more detailed discussion of specific environmental contingencies.
Our service centers are subject to many federal, state and local requirements relating to the protection of the environment, including hazardous waste disposal and underground storage tank regulations. We believe that we are in material compliance with all applicable environmental laws and that our products and processes do not present any unusual environmental concerns. We do not anticipate any material expenditures or material recurring costs in the near future in connection with pollution control.
Some of our properties owned or leased are located in industrial areas with histories of heavy industrial use. Although the location of these properties may require us to incur expenditures and to establish environmental liabilities for costs that arise from causes other than our operations, we do not expect that any such liabilities will have a material adverse impact on our results of operations, financial condition or liquidity. We do not carry environmental insurance coverage.
Our operations are also governed by laws and regulations relating to workplace safety and worker health, principally the Occupational Safety and Health Act and regulations thereunder, which, among other requirements, establish noise, dust and safety standards. We believe that 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 the results of operations or financial condition of our company.
Although it is possible that new information or future developments could require us to reassess our potential exposure relating to all pending environmental matters, we believe that, based upon all currently available information, the resolution of such environmental matters will not have a material adverse effect on our financial condition, results of operations or liquidity. The possibility exists, however, that new environmental legislation and/or environmental regulations may be adopted, or other environmental conditions may be found to exist, that may require expenditures not currently anticipated and that may be material. See "Item 1. Business--Environmental Matters".
FOREIGN EXCHANGE EXPOSURE
The functional currency for our foreign subsidiaries is the applicable local currency. Exchange adjustments resulting from foreign currency transactions are recognized in net earnings, whereas adjustments resulting from the translation of financial statements are included in accumulated other comprehensive income (loss) within stockholder's equity. We do not expect to hedge our exposure to foreign currency fluctuations in the foreseeable future. Net foreign currency transaction gains or losses have not been material in any of the years presented.
YEAR 2000 COMPLIANCE
During fiscal 2000, we completed a Year 2000 compliance initiative designed to identify, assess, remediate, test, implement, and plan for contingencies related to Year 2000 issues. Our Year 2000 compliance initiative covered risk assessment, remediation and contingency planning for our internal IT and non-IT systems, and for those parties with whom we have a material business relationship. We determined that our "reasonable likely worst case scenario" would have involved a partial failure in one or more of our systems, or systems maintained by principal suppliers, service providers or other parties with whom we have a material business relationship, which would require particular transactions or processes to be handled manually, thereby causing delays and resulting in additional costs being incurred until the problem is corrected. Furthermore, the price of metal products purchased by us may have increased if primary suppliers could not provide product and we were forced to purchase from alternative sources. In addition, interruptions in telecommunications, energy and transportation services could also have had an adverse impact on our results of operations or financial position.
As of the date of this filing, we have not been affected by Year 2000 related failures that have had a significant negative impact on our business operations.
As of March 31, 2000, we have spent approximately $500,000 to address our Year 2000 issues. This amount included all costs to upgrade Year 2000 deficient business information systems and infrastructure components, such as time and attendance applications and phone systems.
INFLATION
The Company's operations have not been, nor are they expected to be, materially affected by inflation.
ITEM 7a.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates, foreign currency exchange rates and commodity prices is not considered material based on the nature and extent of its financial instruments, foreign operations and related activities and normal business cycles. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations -- Year Ended March 31, 2000 Compared to Year Ended March 31, 1999".
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data required by this Item 8 are set forth as indicated in Item 14(a)(1) and (2) below.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age (at March 31, 2000), principal occupation and business experience during the last five years of each of the directors and executive officers of the Company and Holding. The directors and executive officers of the Company and Holding are identical. The executive officers serve at the pleasure of the Board of Directors of the Company and Holding, respectively.
Each member of the Board of Directors of the Company and of Holding holds office until the next annual meeting of the stockholders thereof or until his successor is elected and qualified. The election of directors of Holding is subject to the provisions of a Stockholders' Agreement described below.
There are no family relationships among directors and executive officers of the Company and Holding. For information regarding the stock ownership of Holding by the Company's and Holding's directors and executive officers, see "Item 12. Security Ownership of Certain Beneficial Owners and Management."
Prior to January 1, 1998, non-officer directors, other than Messrs. Schuchert and Nickell, were paid an annual retainer of $25,000 plus $1,000 for each board meeting attended. Effective January 1, 1998, January 1, 1999 and January 1, 2000, each of such non-officer directors was granted options to purchase 10,000 shares of Holding Common Stock at their fair market value as established by the most recent appraisal available at the date of grant. Such options will vest in four equal increments at the end of each calendar quarter. Effective April 1, 1997, April 1, 1998, April 1, 1999 and April 1, 2000, in consideration for his service as a director, Chairman of the Executive Committee and Chairman of the Board, Mr. Roderick was granted options to purchase 20,000 shares of Holding Common Stock, in each case at their fair market value as established by the most recent appraisal available at the date of the grant. Such options are fully vested. The Company expects to continue the practice of paying director's fees with grants of stock options.
In addition, all non-officer directors are reimbursed for all approved out-of-pocket expenses related to meetings attended. The directors receive no additional compensation for their services as directors of Holding. Officers of the Company and Holding who serve as directors do not receive compensation for their services as directors other than the compensation they receive as officers of the Company and Holding.
DAVID M. RODERICK. Mr. Roderick became Chairman of the Board of the Company and Holding on January 21, 1998. Mr. Roderick has also served as Chairman of the Executive Committee of the Company and Holding since February 1, 1997. Mr. Roderick has been a director of the Company and Holding since January 1994. Mr. Roderick also serves as director of American Standard Companies Inc., Baron Enterprises and Kelso & Companies, Inc. Previously, Mr. Roderick served as Director, Chairman, and Chief Executive Officer of the USX Corporation. Mr. Roderick joined USX in 1959, was Chairman of USX Finance Committee and a Director from 1973 to 1975, was President and Director from 1975 until 1979 and was Chief Executive Officer and Chairman from 1979 to 1989.
MAURICE S. NELSON, JR. Mr. Nelson was elected President, Chief Executive Officer and Chief Operating Officer and a director of the Company and Holding effective February 1, 1997. Before that, Mr. Nelson served as President, Chief Executive Officer and Chief Operating Officer of Inland Steel Company from 1992 until April 1996. Before that, Mr. Nelson
was the President of the Aerospace and Commercial division of the Aluminum Company of America (Alcoa) from 1987 to 1992.
WILLIAM S. JOHNSON. Mr. Johnson has been the Company's Vice President and Chief Financial Officer and Secretary since January 1999. Before that, Mr. Johnson was the Company's Controller since February 1995 and was the Company's Assistant Controller since February 1994. Prior to that, Mr. Johnson was the Corporate Finance Manager for Severin Montres, Ltd. since 1991. Severin Montres, Ltd., owned by Gucci Group N.V., is the manufacturer and distributor of Gucci watches.
FRANK D. TRAVETTO. Mr. Travetto has been the Company's Vice President Merchandising since March 1997. Before that, Mr. Travetto was the Company's Vice President Western Region since 1996, the Company's Vice President Eastern Region from 1992 to 1996, and the Company's Division President, Canadian Operations from 1990 to 1992.
KENNETH L. HENRY. Mr. Henry has been the Company's Vice President Chicago Region and has been responsible for operations of the Company's Chicago facility since January 1998. Before that, Mr. Henry was the Company's Vice President Central Region since October 1995. Before that, Mr. Henry was the Company's Vice President Southern Region since 1994, and Vice President of the Kilsby-Roberts Division of EMJ from April 1992 to 1994.
JAMES D. HOFFMAN. Mr. Hoffman has been the Company's Vice President Eastern Region since July 1996. Before that, Mr. Hoffman was District Manager for the Company's Cleveland and Buffalo operations since June 1992.
R. NEIL MCCAFFERY. Mr. McCaffery has been the Company's Vice President Western Region since March 1997. Before that, Mr. McCaffery was the Company's Vice President Southern Region since April 1996, and was District Manager for the Company's Los Angeles operations from 1991 to 1996.
MARK R. MCWHIRTER. Mr. McWhirter has been Vice President and Chief Information Officer of the Company since February 1995. Before that, Mr. McWhirter was an Account Manager at Electronic Data Systems since March 1988.
JOSEPH S. SCHUCHERT. Mr. Schuchert has been Chairman and a director of Kelso & Companies, Inc. since March 1989 and was Chief Executive Officer from March 1989 to August 1997. Kelso & Companies, Inc. is the general partner of Kelso, a Delaware limited partnership. Before the formation of Kelso & Companies, Inc. in 1989, Mr. Schuchert was Managing General Partner of Kelso. Mr. Schuchert is a director of American Standard Companies Inc. Mr. Schuchert has been a director of the Company since March 1990, and a director of Holding since May 1990.
WILLIAM A. MARQUARD. Mr. Marquard has been a director of the Company since March 1990, and a director of Holding since May 1990. Mr. Marquard also serves as a director and Chairman of the Board of Arkansas Best Corporation and Mosler, Inc., and as a director of Kelso & Companies, Inc., Treadco, Inc. and EarthShell Container Corporation.
FRANK T. NICKELL. Mr. Nickell has served as director of the Company and Holding since August 1993. He has been President and a director of Kelso & Companies, Inc. since March 1989 and Chief Executive Officer of Kelso & Companies, Inc. since September 1997. Kelso & Companies, Inc. is the general partner of Kelso, a Delaware limited partnership. Before the formation of Kelso & Companies, Inc., from 1984 to 1989, Mr. Nickell was a general partner of Kelso. He is also a director of Peebles Inc., The Bear Stearns Companies and BlackRock, Inc.
JOHN RUTLEDGE. Dr. Rutledge has been a director of the Company and Holding since June 1992. Dr. Rutledge is the founder of Rutledge & Company, Inc., a merchant banking firm, and has been Chairman since January 1991. He is the founder of Claremont Economics Institute, and has been Chairman since January 1979. Dr. Rutledge is also a director of Amerindo Investment Advisers, Inc., Lazard Freres Funds, Fluidrive Inc., United Refrigerated Services, Inc., Adobe Air Inc. and CST Office Products, and is a consultant to Kelso and StairMaster Sports/Medical Products, Inc.
G. ROBERT DURHAM. Mr. Durham has been a director of the Company and Holding since January 1999. Mr. Durham retired from Walters Industries, Inc. in May 1996, after serving as chairman and chief executive officer since October 1995, and president and chief executive officer from June 1991. Mr. Durham also serves as a director of The FINOVA Group Inc., Amphenol Corporation and The MONY Group Inc.
STOCKHOLDERS' AGREEMENT
The Company's By-laws provide for one to ten directors. The Board of Directors of the Company currently consists of seven directors. Certain of Holding's shareholders have agreed, pursuant to the Stockholders' Agreement, dated as of September 14, 1990, as amended (the "Stockholders' Agreement"), that two directors shall be designated by the Management Stockholders (as defined in the Stockholders' Agreement), so long as they are reasonably acceptable to Kelso, and that at least five directors shall be designated by Kelso. Mr. Nelson has been designated by the Management Stockholders and the remaining directors were designated by Kelso. The holders of Series A Preferred Stock of Holding are entitled to designate one director pursuant to the terms of the Series A Preferred Stock and they have designated Mr. Durham. The Stockholders' Agreement also provides that in the event of termination of employment, under certain circumstances, each Management Stockholder is entitled to sell, and Holding can require such a Management Stockholder to sell, their shares of Holding Common Stock to Holding at their appraised Fair Market Value (as defined therein). The Board of Directors of the Company has approved an extension of the term of the Stockholders' Agreement to March 24, 2008.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Set forth below is information concerning the compensation levels for the executive officers of Holding and the Company serving as of March 31, 2000. Officers of the Company receive no additional compensation for their services as officers of Holding.
CASH COMPENSATION. The following table sets forth compensation for the three fiscal years ended March 31, 2000 for the Chief Executive Officer and the four most highly compensated executive officers of the Company as of March 31, 2000.
SUMMARY OF COMPENSATION TABLE
- --------------
(1) Amounts reflect cash compensation earned by executive officers in each of the fiscal years presented, including amounts received after fiscal year end, or deferred at the election of those officers. Bonus amounts include (i) a cash bonus payable pursuant to the Company's Management Incentive Compensation Plan, which became effective April 1, 1997, and (ii) a cash bonus payable each
year to all management investors pursuant to the Company's Management Stock Bonus Plan in proportion to their ownership of Holding Common Stock. The following bonuses were paid to Messrs. Nelson, Travetto, Henry, McCaffery and Hoffman, under the Company's Management Incentive Compensation Plan (a) in fiscal 2000: $393,264, $134,316, $127,920, $121,524 and $121,524, respectively, (b) in fiscal 1999: $352,013, $115,920, $112,009, $76,003 and $106,404, respectively, (c) in fiscal 1998: $591,111, $183,997, $150,050, $146,859 and $142,108, respectively.
(2) Holding has granted executive officers options to purchase shares of Holding Common Stock at their fair market value on the date of grant. Mr. Nelson's options have an exercise price of $5.41 per share; options granted to Messrs. Travetto, Henry, McCaffery and Hoffman in fiscal years 2000, 1999 and 1998 have an exercise price of $5.51, $7.73 and $3.34 per share, respectively. See "Holding Stock Option Plan" and "Stock Option Grants Table" below for further information.
(3) Amounts shown include allocations to the accounts of each of the named officers of contributions made by the Company to the ESOP and to the Company's 401(a)(17) Supplemental Contribution Plan ("401(a)(17) Plan") and of premiums paid by the Company for long-term disability and life insurance policies. The following allocations were made in fiscal 2000 for Messrs. Nelson, Travetto, Henry, McCaffery and Hoffman, respectively (i) ESOP --$8,000, $8,000, $8,000, $8,000, and $8,000; (ii) 401(a)(17) Plan --$39,164, $9,531, $8,696, $7,861 and $7,861; (iii) long term disability--$4,509, none, $6,779, none and none; (iv) life insurance--$1,493, $2,794, $2,717, $989 and $594. The following allocations were made in fiscal 1999 for Messrs. Nelson, Travetto, Henry, McCaffery and Hoffman, respectively (i) ESOP --$8,000, $8,000, $8,000, $8,000, and $8,000; (ii) 401(a)(17) Plan --$37,102, $8,171, $7,303, $5,572 and $6,923; (iii) long term disability--$7,285, none, $5,908, none and none; (iv) life insurance--$793, $1,618, $1,574, $573 and $344. In fiscal 1998 to Messrs. Nelson, Travetto, Henry, McCaffery and Hoffman, respectively: (i) ESOP--$8,000, $8,000, $7,875, $7,575 and $7,481; (ii) 401(a)(17) Plan--$49,057, $10,710, $7,376, $6,918 and $6,587; (iii) long term disability--$7,285, $3,745, $5,908, none, and none; and (iv) life insurance--$582, $1,401, $1,362, $496 and $298. The amounts in respect of life insurance represent the estimated value of the premiums paid by the Company on certain disability and life insurance policies covering each executive. Some of the policies are managed on a split-dollar basis and the Company will receive the premiums it has paid from the proceeds of such insurance. In such cases the amount of the other compensation attributed to the executive was calculated by treating the premiums paid by the Company as a demand loan, and the amount of compensation is equal to the imputed interest expense on the cumulative outstanding premiums paid by the Company, assuming an interest rate equal to the short-term federal funds rate, from time to time. Amounts shown also include a relocation payment of $38,452 to Mr. Henry in fiscal 1998.
HOLDING STOCK OPTION PLAN
In fiscal 1998, Holding adopted the Earle M. Jorgensen Holding Company, Inc. Stock Option Plan, as amended (the "Stock Option Plan"). The Executive Committee of the Board of Directors is authorized to grant options under the Stock Option Plan. Stock options may be granted at not less than 100% of the fair market value of Holding Common Stock on the date of grant and are generally exercisable for a period not exceeding ten years. Option grants or the vesting of options may be contingent upon such terms and conditions, such as the achievement of performance measures or upon the passage of time, as the Executive Committee determines. The Executive Committee will make grants under the Stock Option Plan to provide executive officers and certain other managers of the Company with additional incentives for outstanding individual performance and the opportunity to acquire an ownership stake in the Company, thereby more closely aligning their interests with those of the stockholders.
The Executive Committee has the right, if the holders of options agree, to grant replacement options which may contain terms more favorable than the options they replace, such as a lower exercise price, and cancel the replaced options.
The aggregate number of shares of Holding Common Stock available for grants or subject to outstanding options, and the respective prices and/or vesting criteria applicable to outstanding options will be proportionately adjusted to reflect any stock dividend on the Holding Common Stock, or any recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase the Holding Common Stock at a price substantially below its fair market value. To the extent deemed appropriate by the Executive Committee, subject to any required action by the stockholders, in any merger, consolidation, reorganization, liquidation, dissolution, or other similar transaction, any option granted under the Stock Option Plan shall pertain to the securities and any other property to which a holder of the number of shares of Common Stock covered by the option would have been entitled to receive in connection with such event.
Upon a Change of Control of Holding, with certain exceptions, all outstanding stock options (whether or not then fully exercisable or vested) will be cashed out at specified prices as of the date of the Change of Control, except that any stock options outstanding for less than six months will not be cashed out until six months after the applicable date of grant.
Generally, a participant who is granted a stock option will not be subject to federal income tax at the time of grant and the Company will not be entitled to a tax deduction by reason of such grant. Upon exercise of a nonqualified option, generally the difference between the option price and the fair market value of the Holding Common Stock on the date of exercise will be considered ordinary income to the participant and generally the Company will be entitled to a corresponding tax deduction.
Upon exercise of an incentive stock option, no taxable income will be recognized by the participant and the Company is not entitled to a tax deduction by reason of such exercise. However, if Holding Common Stock purchased pursuant to the exercise of an incentive stock is sold within two years from the date of grant or within one year after the transfer of such Holding Common Stock to the participant, then the difference, with certain adjustments, between the fair market value of the Holding Common Stock at the date of exercise and the option price will be considered ordinary income to the participant and generally the Company will be entitled to a corresponding tax deduction. If the participant disposes of the Holding Common Stock after such holding periods, any gain or loss upon such disposition will be treated as a capital gain or loss and the Company will not be entitled to a deduction.
The maximum number of shares of Holding Common Stock reserved for issuance under the Stock Option Plan is 2,100,000, subject to adjustment as provided in the Stock Option Plan to reflect certain corporate transactions affecting the number or type of outstanding shares.
STOCK OPTION GRANTS TABLE
The following table sets forth certain information concerning stock options granted during fiscal 2000 by Holding to the Chief Executive Officer and the next four most highly compensated executive officers of the Company. In addition, there are shown hypothetical gains that could be realized for the respective options, based on assumed rates of annual compound price appreciation of 5% and 10% from the date the options are granted over the ten-year term of the options. The actual gain, if any, realized upon exercise of the options will depend upon the market price of Holding's Common Stock relative to the exercise price of the option at the time the option is exercised. There is no assurance that the amounts reflected in this table will be realized.
- --------------- (1) Holding has not granted any stock appreciation rights. All the options shown above become exercisable on August 1, 2001. All outstanding stock options shall become fully exercisable and shall be cancelled and exchanged for cash in an amount equal to the excess of the Change in Control Price (as defined in the Stock Option Plan as defined below) over the exercise price, in the event of any transaction or series of transactions, other than a public offering, where a person or a group, excluding Holding, any of its subsidiaries and Kelso and its affiliates, is or becomes the beneficial owner, directly or indirectly, of securities representing 35% or more of the voting power of Holding's then outstanding securities (an "SOP Change of Control"), unless the Executive Committee
determines prior to the occurrence of such SOP Change of Control that such options shall be honored, or assumed or new rights (having substantially equivalent or better rights, terms and conditions and economic value) substituted therefor.
AGGREGATED STOCK OPTION EXERCISES AND FISCAL YEAR-END STOCK OPTION VALUE TABLE
The following table sets forth certain information concerning stock options exercised during fiscal 2000 by the Chief Executive Officer and the next four most highly compensated executive officers of the Company, and the value of their unexercised stock options as of March 31, 2000.
- ---------------- (1) Holding is a private company and its stock is not publicly traded. The fair market value of Holding's common stock underlying the options shown above is determined annually by a third party appraiser. The value of in-the-money options shown above was calculated using the most recent appraisal available which was as of March 31, 1999.
THE ESOP
Our company maintains an employee stock ownership plan (the "ESOP") in respect of nonunion employees who meet certain service requirements. The amount of annual contributions to the ESOP are calculated as a percentage (as determined by the Board of Directors based on the achievement of Company performance objectives) of total cash compensation (as defined in the ESOP) and may be made by the Company in cash or by Holding in shares of Holding capital stock. Participants become 20% vested in their account balances after one year of continuous service. Participants vest an additional 20% for each year of service thereafter and become fully vested at age 65 or upon completion of five years of service, retirement, disability or death. Following the occurrence of a participant's termination of service (as defined in the ESOP), retirement, disability, or death, the ESOP is required to either distribute the vested balance in stock or cash. If stock is distributed, it is accompanied by a put option to Holding under terms defined in the ESOP. At March 31, 2000, shares of Holding's Series A and Series B Preferred Stock and Holding Common Stock owned by the ESOP totaled 60,901, 24,956, 3,632,990 shares, respectively. For the fiscal years ended March 31, 2000, 1999, and 1998, contributions payable to the ESOP totaled $2,638,000, $2,994,000 and $2,788,000, respectively, and have been or will be paid in the form of Holding Common Stock.
Although Holding has not expressed any intent to terminate the ESOP, it has the right to terminate or amend the provisions of the ESOP at any time. In the event of any termination, participants become fully vested to the extent of the balances in their separate accounts and receive put options with respect to Holding stock allocated to their accounts.
In 1984, 1985 and 1986, Kilsby purchased life insurance policies to provide, among other things, a separate source for funds to repurchase capital stock, including capital stock distributed by the ESOP, from departing employees. Certain of these policies allow our company to borrow against the cash surrender value of such policies. As of March 31, 2000, we have borrowed $116.5 million against the cash surrender value of such policies to fund renewal premiums, accrued interest on previous borrowings and working capital needs. The net cash surrender value available for future borrowings was approximately $6.4 million as of March 31, 2000. Our Revolving Credit Facility and other resources are also available, subject to certain limitations, to satisfy stock repurchase obligations as they arise. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations---Liquidity and Capital Resources".
The Internal Revenue Service (the "IRS") conducted an audit of the ESOP for the fiscal years ended March 31, 1992 through March 31, 1996 and issued a preliminary report to the Company in which the IRS asserted that certain contributions of stock by Holding to the ESOP violated provisions of the Internal Revenue Code. The U.S. Department of Labor (the "DOL") is investigating the same transactions involving the ESOP and has come to conclusions similar to those reached by the IRS. We believe the assertions of the IRS and the DOL are incorrect and have responded accordingly. In accordance with its investigation, the DOL and its advisors have also reviewed the valuation of Holding's common and preferred stock prepared for the ESOP for fiscal 1997. We do not have sufficient information to estimate our potential liability; however, we believe that the IRS and DOL investigations will be resolved in a manner that will not result in a material liability to the Company.
SUPPLEMENTAL ESOP
In fiscal 1996, our company adopted a supplemental ESOP contribution plan ("Supplemental ESOP") for contributions not allowed under the ESOP pursuant to limitations of Sections 401(a)(17) and 415 of the Internal Revenue Code of 1986, as amended. Participants in the Supplemental Plan include certain highly compensated employees and other employees who are not eligible to participate in the ESOP. Contributions payable, vesting and distributions under the Supplemental Plan are comparable with those under the ESOP. Contributions under the Supplemental Plan are made in cash and are held in an irrevocable trust. For the fiscal years ended March 31, 2000, 1999, and 1998, contributions payable totaled $93,000, $99,000 and $119,000, respectively.
MANAGEMENT INCENTIVE COMPENSATION PLAN
Effective April 1, 1997, the Company adopted a new Management Incentive Compensation Plan (the "Incentive Plan"). The Incentive Plan provides for payment of cash bonuses to senior executives and other key management employees based on the achievement of certain operating profit and cash flow objectives determined by the Board of Directors or the Executive Committee. Bonuses awarded are determined on a sliding scale based on the percentage of the objectives achieved. No bonus is payable unless at least 80% of the objectives are achieved, and the maximum bonus would be awarded for achievement of 150% or more of the established objectives. In addition, the Company's Chief Executive Officer may award bonuses from a discretionary pool for exemplary service. The Board of Directors ratified bonuses pursuant to the Incentive Plan aggregating $5.4 million in fiscal 2000, $4.6 million in fiscal 1999 and $6.9 million in fiscal 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
David M. Roderick, Frank T. Nickell and Maurice S. Nelson, Jr. are members of the Executive Committee, which succeeded the functions of the Management and Compensation Committee of Holding and the Company on January 30, 1997.
Kelso affiliates beneficially own shares of the capital stock of Holding as described under "Item 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMMON STOCK OF THE COMPANY
All of the issued and outstanding voting stock of the Company, consisting of 128 shares of common stock, is owned by Holding.
CAPITAL STOCK OF HOLDING
The following table sets forth information with respect to the beneficial ownership of shares of Holding Common Stock and Series A Preferred Stock as of March 31, 2000, by all stockholders of Holding known to be beneficial owners of more than 5% of any such class, by each director, by each executive officer of the Company named in the Summary Compensation Table and by all directors and executive officers as a group as determined in accordance with Rule 13d-3(i) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As of March 31, 2000, 26,791 shares of Series B Preferred Stock of Holding have been issued, of which 24,956 were owned by the ESOP and 1,827 were owned by Holding.
- ------------- (a) The percentage of shares of Holding Common Stock outstanding for KIA IV, and Messrs. Schuchert, Nickell, Wall, Matelich, Goldberg, Wahrhaftig and Bynum was calculated assuming the total outstanding shares of Holding Common Stock was 15,369,402, (i) including shares of Holding Common Stock which would be outstanding assuming KIA IV exercised the two Warrants referred to in note (d) below in succession and there had been no other dilution events prior to such exercise, (ii) excluding 1,217,999 shares subject to stock options referred to in note (l) below. The percentage of shares of Holding Common Stock outstanding for all other holders was calculated assuming the total outstanding shares of Holding Common Stock was 12,431,487, excluding shares subject to stock options and shares issuable upon the exercise of the Warrants held by KIA IV as of March 31, 2000.
(b) The percentage of shares of Series A Preferred Stock outstanding was calculated assuming the total outstanding shares of Series A Preferred Stock was 93,253, excluding 154,293 shares of Series A Preferred Stock held in the Holding treasury as of March 31, 2000.
(c) The business address for such person(s) is c/o Kelso & Company, 320 Park Avenue, 24th Floor, New York, New York, 10022. Kelso & Company is a private investment firm.
(d) Includes 2,937,915 shares of the Holding Common Stock that KIA IV is entitled to purchase pursuant to two Warrants issued to KIA IV. Each Warrant entitles the holder to purchase up to 10% of the Holding Common Stock on a fully-diluted basis at an exercise price of $.01 per share.
(e) Messrs. Schuchert, Nickell, Wall, Matelich, Goldberg, Wahrhaftig and Bynum may be deemed to share beneficial ownership of shares of Holding Common Stock owned of record by (i) KIA IV and an affiliated entity by virtue of their status as general partners of KP IV, the general partner of KIA IV, and such affiliate, and (ii) except Mr. Goldberg, KIA III-EMJ by virtue of their status as general partners of KP III, the general partner of KIA III-EMJ. Messrs. Schuchert, Nickell, Wall, Matelich, Goldberg, Wahrhaftig and Bynum share investment and voting power with respect to securities owned by the Kelso affiliates of which they are general partners. Messrs. Nickell, Wall, Matelich, Goldberg, Wahrhaftig and Bynum disclaim beneficial ownership of the shares of Holding Common Stock owned by the Kelso affiliates.
(f) Messrs. Schuchert, Nickell, Wall and Matelich may be deemed to share beneficial ownership of shares of Series A Preferred Stock owned of record by KIA I by virtue of their status as general partners of KP I, the general partner of KIA I. Messrs. Schuchert, Nickell, Wall and Matelich disclaim beneficial ownership of the shares of Series A Preferred Stock owned by KIA I.
(g) The business address of such person(s) or entity is 3050 East Birch Street, Brea, California, 92821.
(h) The business address for Dr. Rutledge is One Greenwich Office Park, Greenwich, Connecticut, 06831.
(i) Excludes 31,362 shares of Holding Common Stock and 1,140 shares of Series A Preferred Stock held by the ESOP in directed accounts that are deemed to be beneficially owned by any of the directors or executive officers or other employees of the Company.
(j) Excludes (i) 11,167,215 shares of Holding Common Stock held by Kelso affiliates that may be deemed to be beneficially owned by Mr. Schuchert and Mr. Nickell, and (ii) shares held by the ESOP, except for shares held in directed accounts that may be deemed to be beneficially owned by any of the directors and executive officers of the Company.
(k) Excludes (i) 24,519 shares of Series A Preferred Stock held by KIA I that may be deemed to be beneficially owned by Mr. Schuchert and Mr. Nickell, and (ii) shares held by the ESOP, except for shares held in directed accounts that may be deemed to be beneficially owned by any of the directors or executive officers of the Company.
(l) Includes shares subject to stock options vested and exercisable as of March 31, 2000.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Kelso affiliates beneficially own shares of the capital stock of Holding as described under "Item 12. Security Ownership of Certain Beneficial Owners and Management." Messrs. Schuchert, Nickell, Wall, Matelich, Goldberg, Wahrhaftig and Bynum are indirect stockholders of Kelso and general partners of KP I (other than Messrs. Goldberg, Bynum and Wahrhaftig), KP III (other than Mr. Goldberg) and KP IV. KP I, KP III and KP IV are the general partners of
KIA I, KIA III-EMJ and KIA IV, respectively. Messrs. Schuchert and Nickell are directors of Holding and the Company. See "Item 12. Security Ownership of Certain Beneficial Owners and Management."
The Company, Holding and Kelso and its affiliates entered into certain agreements in connection with the Acquisition. Such agreements and transactions are described under "Item 11. Executive Compensation---Compensation Committee Interlocks and Insider Participation."
KIA IV is the holder of two Holding warrants, which are described under "Item 11. Executive Compensation---Compensation Committee Interlocks and Insider Participation."
Mr. McWhirter borrowed $92,300 in fiscal 1995 from Holding by issuing a note to Holding in payment for 10,000 shares of Holding Common Stock. In February 1999, the Company and Mr. McWhirter agreed to adjust the original purchase price of the shares to the current fair market value and to surrender these shares in consideration for the note issued to Holding.
On April 1, 1998, April 1, 1999 and April 1, 2000, in consideration for his service as a director, Chairman of the Company's Executive Committee and Chairman of the Board, the Company granted Mr. Roderick options to purchase 20,000 shares of Holding Common Stock at their fair market value as established by the most recent appraisal available at the date of grant.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS.
See "Index to Financial Statements" (page).
(a)(2) FINANCIAL STATEMENT SCHEDULES.
Schedule II - Valuation and Qualifying Accounts and Reserves
All other schedules have been omitted because the information is not applicable or is not material or because the information required is set forth in the financial statements or the notes thereto.
(a)(3) EXHIBITS.
See "Index to Exhibits" for listing of those exhibits included in this filing.
- --------------
* Previously filed. ** Included in this filing.
(b) Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Brea, State of California, on the 26th of June, 2000.
EARLE M. JORGENSEN COMPANY
By /s/ William S. Johnson ------------------------------------------ William S. Johnson Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) and Secretary
Pursuant to the requirements of the Securities and Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated.
FINANCIAL STATEMENTS
Report of Independent Auditors
The Board of Directors and Stockholder Earle M. Jorgensen Company
We have audited the accompanying consolidated balance sheets of Earle M. Jorgensen Company as of March 31, 2000 and 1999, and the related consolidated statements of operations and comprehensive income, stockholder's equity, and cash flows for each of the three years in the period ended March 31, 2000. Our audits also included the financial statement schedule listed in the index at item 14(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 Earle M. Jorgensen Company at March 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 2000 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Orange County, California April 27, 2000
Earle M. Jorgensen Company Consolidated Balance Sheets (dollars in thousands, except share and per share data)
SEE ACCOMPANYING NOTES.
Earle M. Jorgensen Company Consolidated Statements of Operations and Comprehensive Income (dollars in thousands)
SEE ACCOMPANYING NOTES.
Earle M. Jorgensen Company Consolidated Statements of Stockholder's Equity (dollars in thousands, except share data)
SEE ACCOMPANYING NOTES.
Earle M. Jorgensen Company Consolidated Statements of Cash Flows (dollars in thousands)
SEE ACCOMPANYING NOTES.
Earle M. Jorgensen Company Consolidated Statements of Cash Flows (continued) (dollars in thousands)
SEE ACCOMPANYING NOTES.
Earle M. Jorgensen Company Notes to Consolidated Financial Statements
March 31, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION---The Company became a wholly-owned subsidiary of Earle M. Jorgensen Holding Company, Inc. (the Parent) as the result of a series of business combinations and mergers effective April 1, 1990.
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries including Earle M. Jorgensen (U.K.) Ltd (EMJ (UK)), Kilsby Jorgensen Steel & Aluminum S.A. de C.V. (EMJ (Mexico)), and Earle M. Jorgensen (Canada) Inc. (EMJ (Canada)) and Stainless Insurance Ltd., a captive insurance subsidiary (EMJ (Bermuda)) operating in the United Kingdom, Mexico, Canada and Bermuda, respectively. Excluding EMJ (Bermuda), net income from foreign operations totaled $574,500 and $4,600 in fiscal 2000 and 1999, respectively. In fiscal 1998, such foreign operations generated net losses of $95,000. In fiscal 2000, 1999 and 1998, EMJ (Bermuda) generated $333,300, $602,000 and $155,000 of net income, respectively, from investment income and intercompany fees. In fiscal 1998, the Company sold its operations in the United Kingdom and Mexico (see Note 4). All significant intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES---The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION---The Company recognizes revenue when products are shipped.
CONCENTRATION OF CREDIT RISK---The Company sells the majority of its products throughout the United States and Canada. Sales to the Company's recurring customers are generally made on open account terms while sales to occasional customers are made on a C.O.D. basis. The Company performs periodic credit evaluations of its ongoing customers and generally does not require collateral. The Company establishes an allowance for potential credit losses based upon factors surrounding the credit risk for specific customers, historical trends and other information; such losses have been within management's expectations. The Company's allowance for doubtful accounts at March 31, 2000 and 1999 was $416,000 and $335,000, respectively. Management believes there are no significant concentrations of credit risk as of March 31, 2000.
RESTRUCTURING---In March 1997, the Company approved a plan to restructure its operations and recorded a restructuring charge of $15,638,000. The plan's major actions included selling the Company's foreign operations in the United Kingdom and Mexico, closing four domestic distribution centers whose sales territories are now serviced from other nearby facilities, and reducing the Company's workforce by approximately 10%. During fiscal 1998, the restructuring plan was substantially completed, including the sale of foreign operations in the United Kingdom and Mexico (see Note 4) and the closure of three domestic facilities. As of March 31, 2000, no accrued restructuring costs remain in the Company's consolidated balance sheet.
PROPERTY, PLANT AND EQUIPMENT---Property, plant and equipment is recorded at cost. Additions, renewals and betterments are capitalized; maintenance and repairs, which do not extend useful lives, are expensed as incurred. Gains or losses from disposals are reflected in income and the related costs and accumulated depreciation are removed from the accounts. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of 10 to 40 years for buildings and improvements and three to 20 years for machinery and equipment. Leasehold improvements are amortized over the terms of the respective leases.
Earle M. Jorgensen Company Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company reviews its long-lived assets pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which requires impairment losses to be recorded on long-lived assets used in operations or are expected to be disposed of, when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets. There were no impairment losses recorded in fiscal 2000, 1999 and 1998.
In fiscal 1999, the Company adopted SOP-98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", which requires certain costs incurred during the development of software to be capitalized and amortized over the estimated useful lives. Accordingly, the Company capitalized $945,000 and $876,000 of such costs in fiscal 2000 and 1999, respectively.
DEBT ISSUE COSTS---Debt issue costs are deferred and amortized to interest expense over the life of the underlying indebtedness. In March 1998, the Company incurred $8,517,000 of costs related to the issuance of indebtedness and wrote-off $2,966,000 of unamortized debt issue costs related to retired debt in connection with a series of refinancing transactions (see Note 6). For the fiscal years ended March 31, 2000, 1999 and 1998, amortization of debt issue costs aggregated $1,482,000, $1,481,000 and $1,757,000, respectively. Accumulated amortization of debt issue costs was $3,018,000 and $1,536,000 at March 31, 2000 and 1999, respectively.
INCOME TAXES--- The Company is included in the consolidated tax returns of Holding and calculates its tax provision as though it files on a separate basis. The consolidated tax liability of the Company and Parent is allocated to each of these entities pursuant to a Tax Allocation Agreement between the Company and Parent ("Tax Allocation Agreement"). Under the Tax Allocation Agreement, Parent pays all taxes and is reimbursed by the Company for the lesser of (i) the Company's allocated portion of the taxes due, or (ii) the tax that would be payable if the Company filed its own returns.
The Company records deferred taxes based upon differences between the financial statement and tax basis of assets and liabilities pursuant to SFAS No. 109, "Accounting for Income Taxes", as though it files on a separate basis. Any differences in deferred taxes determined on a separate basis and the actual payments made or received under the Tax Allocation Agreement are accounted for as an equity adjustment between the Company and Parent. There were no such differences in fiscal 2000. Deferred taxes are also recorded for the future benefit of Federal and state tax losses and tax credit carryforwards. Consistent with SFAS No. 109, a valuation allowance has been recognized for certain deferred tax assets, which management believes are not likely to be realized.
FOREIGN CURRENCY TRANSLATION---The financial statements of foreign subsidiaries have been translated in U.S. dollars in accordance with SFAS No. 52, "Foreign Currency Translation". All balance sheet accounts have been translated into U.S. dollars using the year-end exchange rates. Income statement amounts have been translated at average exchange rates for each year. Adjustments resulting from translation of foreign currency financial statements are included in accumulated other comprehensive income (loss) in stockholder's equity. Exchange gains and losses from foreign currency transactions are included in the consolidated statements of operations in the period in which they occur.
CASH AND STATEMENTS OF CASH FLOWS---Cash includes disbursements and deposits not yet funded by or applied to the Company's Revolving Credit Facility as of a balance sheet date and $6,990,000 of cash and cash equivalents held by EMJ (Bermuda) in connection with providing insurance to the Company. The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
For the years ended March 31, 2000, 1999 and 1998 cash paid for interest on borrowings was $43,649,000, $40,689,000 and $39,993,000, and cash paid for income taxes was $1,247,000, $141,000 and $360,000, respectively.
Earle M. Jorgensen Company Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME---Effective April 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income", which establishes rules for the reporting and disclosure of comprehensive income and its components. Components of the Company's comprehensive income include foreign currency translation adjustments and additional minimum pension liability. Prior to the adoption of SFAS No. 130, the Company's foreign currency translation adjustments were reported separately in stockholder's equity. The adoption of SFAS No. 130 had no impact on the Company's net income or stockholder's equity.
SEGMENT INFORMATION---The Company has adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information". The Company has determined it currently operates in one reportable segment.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". The statement will require the Company to recognize all derivatives on the balance sheet at fair value, offsets against the change in fair value must be adjusted through income. The Company will adopt this standard in fiscal 2002 and is in the process of assessing what impact, if any, this standard will have on its consolidated financial statements.
2. INVENTORIES
Substantially all inventories are held for sale at the Company's service center locations and are valued at the lower of cost (using the last-in, first-out (LIFO) method) or market. If the Company had used the first-in, first-out (FIFO) method of inventory valuation, inventories would have been lower by $9,909,000 and $887,000 at March 31, 2000 and March 31, 1999, respectively.
In fiscal 1999, a reduction of LIFO inventory quantities carried at costs lower or higher than costs prevailing in prior years occurred but did not have a significant impact on the Company's gross profit. There were no such reductions in fiscal years 2000 and 1998.
3. NET PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment and accumulated depreciation at March 31, 2000 and 1999 consisted of the following:
Earle M. Jorgensen Company Notes to Consolidated Financial Statements (continued)
4. SALE OF FOREIGN OPERATIONS
In March 1997, the Company approved a plan to sell its foreign operations in the United Kingdom and Mexico and accordingly recorded a charge of $7,027,000 for the estimated loss on the sales, including the recognition of deferred foreign currency translation losses. The Company sold its Mexican operations in August 1997 and sold its United Kingdom operations in January 1998. As a result of such sales, the Company recognized a loss of $2,838,000 in fiscal 1998 that is reflected as a restructuring charge in the accompanying statements of operations.
For the fiscal year ended March 31, 1998, combined revenues from these foreign operations were $23,417,000; and combined losses from operations were $233,000.
5. CASH SURRENDER VALUE OF LIFE INSURANCE
The Company is the owner and beneficiary of life insurance policies on all former nonunion employees of a predecessor company including certain current employees of the Company and its Parent. The Company is also the owner and beneficiary of key man life insurance policies on certain current and former executives of the Company and predecessor companies. These policies are designed to provide cash to the Company to repurchase shares held by employees in the ESOP and shares held individually by employees upon the termination of their employment. Cash surrender value of the life insurance policies increase by a portion of the amount of premiums paid and by dividend income earned under the policies. Dividend income earned under the policies totaled $14,029,000 in fiscal 2000, $10,878,000 in fiscal 1999 and $10,274,000 in fiscal 1998 and is recorded as an offset to general and administrative expense in the accompanying statements of operations.
The Company has borrowed against the cash surrender value of certain policies to pay a portion of the premiums and accrued interest on those policies and to fund working capital needs. Interest rates on borrowings under the life insurance policies are fixed at 11.76%. As of March 31, 2000, approximately $6,400,000 was available for future borrowings.
Interest on cash surrender value borrowings totaled $12,645,000, $10,905,000 and $9,354,000 in fiscal 2000, 1999 and 1998, respectively, and is included in net interest expense in the accompanying statements of operations.
Earle M. Jorgensen Company Notes to Consolidated Financial Statements (continued)
6. LONG-TERM DEBT
Long-term debt at March 31, 2000 and 1999 consisted of the following:
Aggregate maturities of long-term debt are as follows: $2,604,000 in 2001; $2,400,000 in 2002; $72,943,000 in 2003; $96,400,000 in fiscal 2004; $2,115,000 in fiscal 2005 and $109,085,000 thereafter.
The fair value of the Company's Senior Notes and Term Loans at March 31, 2000 was $96,600,000 and $97,510,000, respectively, based on the quoted market prices as of that date. The carrying values of all other long-term debt and other financial instruments at March 31, 2000 approximate fair value.
On March 24, 1998, the Company consummated a series of refinancing transactions, including the issuance of 9 1/2% Senior Notes totaling $105,000,000, borrowing of $100,000,000 under a variable rate Term Loan, and the replacement of its revolving credit facility. The proceeds from such transactions were used to redeem $155,000,000 of 10 3/4% senior notes, plus call premium and accrued interest, and to prepay $5,084,000 of purchase money indebtedness, including call premium and accrued interest. Accordingly, the Company recorded an extraordinary loss of $9,075,000 consisting of call premiums paid and other expenses incurred, and the write-off of deferred financing costs, related to the early retirement of debt.
CREDIT AGREEMENTS
Effective March 24, 1998, the Company entered into an amended and restated revolving credit facility ("Credit Agreement"), which allows maximum borrowings of $220 million, including letters of credit ($350,000 outstanding at March 31, 2000). Borrowings under the Credit Agreement bear interest at a base rate (generally defined as the bank's prime lending rate plus 0.5% or LIBOR plus 1.75%). At March 31, 2000, the bank's prime lending rate was 9.0% and LIBOR was 6.13%. In addition, borrowings under the revolving loans are limited to an amount equal to 85% of eligible trade receivables plus 55% of eligible inventories (as defined). Unused available borrowings under the revolving loans totaled $120,151,000 at March 31, 2000. The revolving loans mature on March 24, 2003 and are secured by a lien on all domestic inventory and accounts receivable of the Company.
Under the Credit Agreement the Company is obligated to pay certain fees including an unused commitment fee of 3/8%, payable quarterly in arrears, and letter of credit fees of 1 3/4% per annum of the maximum amount available to be drawn under each letter of credit, payable quarterly in arrears, plus issuance, fronting, amendment and other standard fees. The Company paid loan commitment fees totaling $478,000 in fiscal 2000, $314,000 in 1999 and $257,000 in 1998.
Earle M. Jorgensen Company Notes to Consolidated Financial Statements (continued)
6. LONG-TERM DEBT (CONTINUED)
CREDIT AGREEMENTS (CONTINUED)
The Credit Agreement contains financial covenants in respect of maintenance of minimum working capital and a fixed charge coverage ratio (as defined). The Credit Agreement also limits, among other things, the incurrence of liens and other indebtedness, mergers, consolidations, the sale of assets, annual capital expenditures, advances, investments and loans by the Company and its subsidiaries, dividends and other restricted payments by the Company and its subsidiaries in respect to their capital stock, and certain transactions with affiliates.
On November 16, 1999, the Company's Canadian subsidiary entered into a credit facility (the "Canadian Facility") totaling CND$11,750,000, including (i) a revolving credit facility of CND$6,000,000, (ii) a financial credit facility of CND$5,000,000 for hedging foreign currency and rate fluctuations (unused as of March 31, 2000), and (iii) a special credit facility for the issuance of a letter of guarantee up to CND$750,000 in connection with a lease for a newly constructed facility in Toronto. Borrowings under the revolving credit facility are limited to an amount equal to 80% of eligible trade receivables plus 40% of eligible inventories (as defined) and are repayable on demand. Borrowings under the revolving credit facility bear interest at the bank's annual prime lending rate plus 0.50%. At March 31, 2000, the interest rate on the revolving credit facility was 7.50%.
9 1/2% SENIOR NOTES AND VARIABLE RATE TERM LOAN
On March 24, 1998, the Company refinanced $155 million of 10 3/4% Senior Notes by issuing $105 million of 9 1/2% Senior Notes and borrowing $100 million under a variable rate Term Loan. The 9 1/2% Senior Notes were issued at par and interest is payable each April 1 and October 1, commencing October 1, 1998. The 9 1/2% Senior Notes are unsecured obligations of the Company and may be redeemed by the Company under certain conditions and with certain restrictions at varying redemption prices. The Indenture to the 9 1/2% Senior Notes contains certain covenants which limit, among other things, the incurrence of liens and other indebtedness, mergers, consolidations, the sale of assets, investments and loans, dividends and other distributions, and certain transactions with affiliates. The Term Loan bears interest at either an Alternative Base Rate (as defined) plus 2.0% or at LIBOR plus 3.25%.
In June 1998, the Company entered into an interest rate swap agreement with Bankers Trust Company that effectively fixed the interest rate on the Term Loan at approximately 9.05% through June 2003 (the "Fixed Rate"). Such agreement requires Bankers Trust Company to make payments to the Company each quarter in an amount equal to the product of the notional amount of $95 million and the difference between the three month London Interbank Offered Rate and 3.25% ("Floating LIBOR") and the Fixed Rate, if the Floating LIBOR is greater than the Fixed Rate on a per diem basis. If Floating LIBOR is lower than the Fixed Rate, the Company is required to pay Bankers Trust Company an amount equal to the product of the notional amount and the difference between the Fixed Rate and Floating LIBOR on a per diem basis. During fiscal 2000 and 1999, net interest expense of $331,000 and $231,000, respectively, was paid to Bankers Trust Company as calculated under the provisions described above.
Excluding the effects of the interest rate swap agreement, the effective interest rate under the Term Loan was 9.44% as of March 31, 2000. Amounts outstanding under the Term Loan are secured by a first priority lien on substantially all the existing and future acquired unencumbered property, plant and equipment of the Company. Principal payments are required to be paid quarterly in amounts equal to $250,000, commencing on June 30, 1998. The Term Loan may be prepaid, subject to declining call premiums through fiscal 2001 and is subject to prepayments at the option of the holder upon a Change in Control (as defined) and with 100% of net proceeds from asset sales, as permitted. Covenants under the Term Loan are similar to those under the 9 1/2% Senior Notes.
Earle M. Jorgensen Company Notes to Consolidated Financial Statements (continued)
6. LONG-TERM DEBT (CONTINUED)
OTHER
The Company's industrial revenue development bonds were issued in connection with significant facility improvements or construction projects. In fiscal 1995 the Company obtained purchase money financing under a loan agreement which provided up to $7.5 million for the expansion or acquisition of facilities and purchase of equipment. This loan was repaid on March 24, 1998.
7. INCOME TAXES
Significant components of the provision for income taxes attributable to continuing operations for the years ended March 31, 2000, 1999 and 1998 were as follows:
The reconciliation of the income tax provision differs from that which would result from applying the U.S. statutory rate as follows:
The change of $3,333,000 in the valuation allowance for deferred tax assets as of March 31, 2000 was due primarily to the utilization of the tax loss carryforward.
Income before taxes consists primarily of income from the Company's domestic operations and also includes pre-tax income of $1,248,000, $619,000 and $60,000 from the Company's foreign operations for fiscal 2000, 1999 and 1998, respectively.
Earle M. Jorgensen Company Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred income tax assets and liabilities at March 31, 2000 and 1999 were as follows:
At March 31, 2000, the Company had net operating loss carryforwards of $52,100,000 for Federal income tax purposes. These carryforwards resulted from the Company's losses during 1993 and 1996, and expire in years 2008 and 2011, respectively. The ultimate realization of the benefits of these loss carryforwards is dependent on future profitable operations. In addition, use of the Company's net operating loss carryforwards and other tax attributes may be substantially limited if a cumulative change in ownership of more than 50% occurs within any three year period subsequent to a loss year.
8. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN
The Company and its Parent have an Employee Stock Ownership Plan (ESOP) which covers nonunion employees of the Company who meet certain service requirements. The cost of the ESOP is borne by the Company through annual contributions to an Employee Stock Ownership Trust (ESOT) in amounts determined by the Board of Directors. Contributions may be made in cash or shares of the Parent's stock as the Parent's Board of Directors may from time to time determine. Participants vest at a rate of 20% per year of service and become fully vested at age 65 or upon retirement, disability or death. Upon the occurrence of a participant's termination (as defined), retirement, disability, or death, the ESOP is required, by the terms of the ESOP, to either distribute the vested balance in stock or to repurchase the vested balance for cash (as determined by the Benefits Committee). If stock is distributed, it is accompanied by a put option to the Parent under terms defined in the ESOP. Shares of the Parent's Series A and B preferred and common stock owned by the ESOP totaled 60,901, 24,956 and 3,632,990 at March 31, 2000, respectively. For fiscal years ended March 31, 2000, 1999 and 1998, contributions payable to the ESOT totaled $2,638,000, $2,994,000 and $2,788,000, which represented 5% of eligible compensation for each of the respective years. Such contributions have been or will be paid in the form of Holding's common stock.
Although the Parent has not expressed any intent to terminate or amend the plan, it has the right to do so at any time. In the event of any termination, participants become fully vested to the extent of the balances in their separate accounts and come under the put options as previously discussed.
Earle M. Jorgensen Company Notes to Consolidated Financial Statements (continued)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
PENSION PLANS
The Company maintains a noncontributory defined benefit pension plan covering substantially all hourly union employees (the "Hourly Plan"). Benefits under the Hourly Plan are vested after five years and are determined based on years of service and a benefit rate that is negotiated with each union. The assets of the Hourly Plan for participants are held in trust and consist of bonds, equity securities and insurance contracts. The Company contributes at least the minimum required annually under ERISA. The Company also maintains an unfunded supplemental pension plan, which provides benefits to highly compensated employees; this plan has been frozen to include only existing participants (the "Supplemental Plan").
Components of net pension benefit cost associated with the Company's pension plans for fiscal years 2000, 1999 and 1998 are as follows:
The following provides a reconciliation of the changes in the benefit obligation and fair value of plan assets, and the funded (unfunded) status of the pension plans for the years ended March 31, 2000 and 1999.
Earle M. Jorgensen Company Notes to Consolidated Financial Statements (continued)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
PENSION PLANS (CONTINUED)
Effective January 1, 1998, benefit obligations and plan assets of another defined benefit plan were merged with the Hourly Plan; and the benefits of the other plan were increased via an amendment to the Hourly Plan. Effective January 1, 1999, the Hourly Plan was amended to change the benefit rates from a pay related formula to a flat rate. The effect of these amendments was to reduce the plan's benefit obligation by $1,348,000 as of March 31, 1999.
In accordance with union agreements, the Company also contributes to multi-employer defined benefit retirement plans covering substantially all union employees of the Company. Expenses incurred in connection with these plans totaled $941,000, $1,633,000 and $1,615,000 in fiscal years 2000, 1999 and 1998, respectively.
POSTRETIREMENT BENEFIT PLAN
In addition to the Company's defined benefit pension plans, the Company sponsors a defined benefit health care plan that provides postretirement medical and dental benefits to eligible full time employees and their dependents (the "Postretirement Plan"). The Postretirement Plan is fully insured, with retirees paying a percentage of the annual premium. Such premiums are adjusted annually based on age and length of service of active and retired participants. The Postretirement Plan contains other cost-sharing features such as deductibles and coinsurance. The Company recognizes the cost of future benefits earned by participants during their working careers, as determined using actuarial assumptions. Gains and losses realized from the remeasurement of the plan's benefit obligation are amortized to income over three years.
Components of the net benefit cost associated with the Company's Postretirement Plan for fiscal years 2000, 1999 and 1998 are as follows:
Earle M. Jorgensen Company Notes to Consolidated Financial Statements (continued)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
POSTRETIREMENT BENEFIT PLAN (CONTINUED)
The following tables provide a reconciliation of the changes in the benefit obligation and the unfunded status of the Postretirement Plan for the years ended March 31, 2000 and 1999.
The healthcare cost trend rate of 7.50% used in the calculation of net benefit cost of the Postretirement Plan is assumed to decrease gradually to 5.5% by March 2004.
Assumed healthcare trend rates have a significant effect on the amounts reported for the Company's Postretirement Plan. A one-percentage-point change in assumed healthcare cost trend rates would have the following effects:
9. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases, under several agreements with varying terms, certain office and warehouse facilities, equipment and vehicles. Rent expense totaled $16,572,000, $16,142,000 and $17,412,000 for the years ended March 31, 2000, 1999 and 1998, respectively. Minimum rentals of certain leases escalate from time to time based on certain indices.
Earle M. Jorgensen Company Notes to Consolidated Financial Statements (continued)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASE COMMITMENTS (CONTINUED)
At March 31, 2000 the Company was obligated under noncancellable operating leases for future minimum rentals as follows:
OTHER COMMITMENTS
In connection with the 1990 merger, the Company agreed to pay Kelso & Companies, Inc. (Kelso), affiliates of which own the majority of Parent's common stock, an annual fee of $1,250,000 each year for financial advisory services and to reimburse it for out-of-pocket expenses incurred in connection with rendering such services. The Company also agreed to indemnify Kelso and its affiliates against certain claims, losses, damages, liabilities, and expenses that may arise in connection with the merger. The agreement for advisory services was amended in September 1997 to provide such services at an annual fee of $625,000 for each of the fiscal years ending March 31, 1998 and 1999. There was no annual fee payable for fiscal year 2000. Fees and expenses paid to Kelso in connection with these agreements totaled $13,000, $668,000 and $687,000 during the years ended March 31, 2000, 1999 and 1998, respectively.
ENVIRONMENTAL CONTINGENCIES
The Company is subject to extensive and changing federal, state, local and foreign laws and regulations designed to protect the environment and human health and safety, including those relating to the use, handling, storage, discharge and disposal of hazardous substances and the remediation of environmental contamination. As a result, the Company is from time to time involved in administrative and judicial proceedings and inquiries relating to environmental matters.
During fiscal years 2000, 1999 and 1998, expenditures made in connection with environmental matters totaled $295,000, $2,799,000 and $388,000, respectively, principally for settlement of claims, and monitoring, remediation and investigation activities at sites with contaminated soil and/or groundwater, including the sites discussed below. As of March 31, 2000, the Company had accrued approximately $300,000 for future investigation and remediation expenditures that could be reasonably estimated related to the following pending environmental matters.
ALAMEDA STREET (LOS ANGELES). In February 1998 the Company was notified that it had potential responsibility for the lead and copper soil contamination of an undeveloped parcel that is adjacent to its Alameda Street property. In March 2000, the Company completed an approved remediation plan and is awaiting a closure letter from the appropriate local governmental agencies.
FORGE (SEATTLE/KENT, WA). The Company indemnified the purchasers of its former Forge facility for remediation of certain conditions at the facility and at an off-site disposal site existing or subsequently determined to be existing at the date of sale. No such claims were made within the timetables allowed under the indemnification agreement. In November 1998 the Company paid $2,250,000 to the current owner of the Forge property as a settlement for any and all remaining or future liabilities related to the remediation of the facility. The Company continues to monitor the disposal site for environmental conditions in accordance with a consent decree requiring such monitoring through 2001.
Earle M. Jorgensen Company Notes to Consolidated Financial Statements (continued)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
ENVIRONMENTAL CONTINGENCIES (CONTINUED)
UNION (NEW JERSEY). During fiscal 1994, the Company was notified by the current owner that it has potential responsibility for the environmental contamination of a property formerly owned by a subsidiary and disposed of by such subsidiary prior to its acquisition by the Company. The prior owner of such subsidiary has also been notified of its potential responsibility. On March 27, 1997, the current owner of the property informed the Company that it estimated the cost of investigation and cleanup of the property at $875,000 and requested contribution to such costs from the Company and the prior owner. The Company has contested responsibility and commented on the cleanup plan and has not received any further demands or notifications. The Company does not have sufficient information to determine what potential liability it has, if any.
Although it is possible that new information or future developments could require the Company to reassess its potential exposure relating to all pending environmental matters, management believes that, based upon all currently available information, the resolution of such environmental matters will not have a material adverse effect on the Company's financial condition, results of operations or liquidity. The possibility exists, however, that new environmental legislation and/or environmental regulations may be adopted, or other environmental conditions may be found to exist, that may require expenditures not currently anticipated and that may be material.
OTHER
The Company is involved in litigation in the normal course of business. In the opinion of management, these matters will be resolved without a material impact on the Company's financial position or results of operations.
INDEX TO FINANCIAL STATEMENT SCHEDULES
- ---------------
* All other schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.
S-1
EARLE M. JORGENSEN COMPANY
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
S-2