| You should refer to the explanation of the qualifications and limitations on forward-looking statements set forth at the beginning of this Report |
| The value of your investment may be subject to sudden decreases due to the potential volatility of the price of our common stock |
| The market price of our common stock may be highly volatile and subject to wide fluctuations in response to various factors, including variations in our quarterly results of operations |
| Other factors may include matters discussed in other risk factors and the following factors: • changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors; • developments affecting our Company, our customers or our suppliers; • changes in the legal or regulatory environment affecting our business; • press releases, earnings releases or publicity relating to us or our competitors or relating to trends in the metals service center industry; • inability to meet securities analysts’ and investors’ quarterly or annual estimates or targets of our performance; • the operating and stock performance of other companies that investors may deem comparable; • sales of our common stock by large shareholders; • general domestic or international economic, market and political conditions |
| These factors may adversely affect the trading price of our common stock, regardless of our actual operating performance |
| In addition, the stock markets from time to time experience extreme price and volume fluctuations that may be unrelated or disproportionate to the operating performance of companies |
| In the past, some shareholders have brought securities class action lawsuits against companies following periods of volatility in the market price of their securities |
| We may in the future be the target of similar litigation |
| Securities litigation, regardless of whether our defense is ultimately successful, could result in substantial costs and divert management’s attention and resources |
| 11 _________________________________________________________________ [62]Table of Contents Our indebtedness could impair our financial condition and reduce the funds available to us for other purposes and our failure to comply with the covenants contained in our debt instruments could result in an event of default that could adversely affect our operating results |
| We have substantial debt service obligations |
| As of December 31, 2005, we had aggregate outstanding indebtedness of approximately dlra350dtta8 million |
| Upon successful completion of the EMJ merger, our indebtedness will increase |
| This indebtedness could adversely affect us in the following ways: • our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired; • a significant portion of our cash flow from operations must be dedicated to the payment of interest and principal on our debt, which reduces the funds available to us for our operations or other purposes; • some of our debt is, and will continue to be, at variable rates of interest, which may result in higher interest expense in the event of increases in interest rates; • because we may be more leveraged than some of our competitors, our debt may place us at a competitive disadvantage; • our leverage may increase our vulnerability to economic downturns and limit our ability to withstand adverse events in our business by limiting our financial alternatives; • after completion of the EMJ merger, EMJ’s noteholders or our lenders could require us to repurchase EMJ’s 9dtta75prca notes, which would limit our access to funds for growth initiatives; • our ability to capitalize on significant business opportunities, including potential acquisitions, and to plan for, or respond to, competition and changes in our business may be limited |
| Our debt agreements contain, and any agreements to refinance our debt likely would contain, financial and restrictive covenants that limit our ability to incur additional debt, including to finance future operations or other capital needs, and to engage in other activities that we may believe are in our long-term best interests, including to dispose of or acquire assets or other companies or to pay dividends to our shareholders |
| Our failure to comply with these covenants may result in an event of default which, if not cured or waived, could accelerate the maturity of our indebtedness or prevent us from accessing availability under our credit facility |
| If our indebtedness is accelerated, we may not have sufficient cash resources to satisfy our debt obligations and we may not be able to continue our operations as planned |
| We may not be able to generate sufficient cash flow to meet our debt service obligations |
| Our annual debt service obligations until June 11, 2010, when our revolving credit facility is expected to mature, will be primarily limited to interest and principal payments on our senior notes (with the principal payable only as and when they mature), on our credit facility, on our industrial revenue bonds and on any debt we assume in connection with the EMJ merger |
| Our ability to generate sufficient cash flow from operations to make scheduled payments on our debt obligations will depend on our future financial performance, which will be affected by a range of economic, competitive and business factors, many of which are outside of our control |
| For example, we may not generate sufficient cash flow from operations to repay our credit facility when it matures in 2010, or our senior notes when they mature on various dates between 2006 and 2013 or our industrial revenue bonds when they mature in 2009 and 2014 or the EMJ 9dtta75prca notes when they mature or are required to be repurchased |
| If we do not generate sufficient cash flow from operations to satisfy our debt obligations, we expect to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital |
| We may not be able to consummate any such transaction at all or on a timely basis or on terms, and for proceeds, that are acceptable to us |
| Furthermore, these transactions may not be permitted under the terms of our various debt instruments then in effect |
| Our inability to generate sufficient cash flow to satisfy our debt obligations, or to timely refinance our obligations on acceptable terms, could aversely affect our ability to serve our customers and could cause us to discontinue our operations as planned |
| Our credit facility is unsecured |
| 12 _________________________________________________________________ [63]Table of Contents The costs that we pay for metals may fluctuate due to a number of factors beyond our control, which, on a combined basis, could adversely affect our operating results if we cannot pass on higher metal prices to our customers |
| We purchase large quantities of carbon, alloy, stainless steel, aluminum and other metals, which we sell to a variety of end-users |
| In 2004 the costs for carbon steel increased significantly and rapidly from historic levels |
| Although these costs declined somewhat through mid-2005, the costs increased in the fourth quarter of 2005 and overall carbon steel costs remained at historically high levels |
| Costs for aerospace-related products have increased significantly beginning in late 2004 and continued to increase through all of 2005 |
| We attempt to pass these cost increases on to our customers with higher selling prices |
| The costs to us for these metals and the prices that we charge customers for our products may change depending on many factors outside of our control, including general economic conditions (both domestic and international), competition, production levels, customer demand levels, import duties and other trade restrictions, currency fluctuations and surcharges imposed by our suppliers |
| We maintain substantial inventories of metal to accommodate the short lead times and delivery requirements of our customers |
| Accordingly, we purchase metal in quantities we believe to be appropriate to satisfy the anticipated needs of our customers based on information derived from customers, market conditions, historic usage and industry research |
| Commitments for metal purchases are generally at prevailing market prices in effect at the time orders are placed or at the time of shipment |
| During periods of rising prices for metal, we may be negatively impacted by delays between the time of increases in the cost of metals to us and increases in the prices that we charge for our products if we are unable to pass these increased costs on to our customers |
| In addition, when metal prices decline, customer demands for lower prices could result in lower sale prices for our products and, as we use existing inventory that we purchased at higher metal prices, lower margins |
| Consequently, during periods in which we use this existing inventory, the effects of changing metal prices could adversely affect our operating results |
| The price of metals is subject to fluctuations in the supply and demand for metals worldwide and changes in the worldwide balance of supply and demand could negatively impact our revenues, gross profit and net income |
| Metal prices are volatile due to, among other things, fluctuations in foreign and domestic production capacity, raw material availability, metals consumption and foreign currency rates |
| For example, in the past few years, China has significantly increased its consumption of metals and metal products |
| This large and growing demand for metals has significantly affected the metals industry, diverting supply to China and contributing to the recent increase in metal prices |
| If, in the future, China experiences a downturn in general economic conditions or increases its internal production of metals, its demand for metals produced outside of China could decrease |
| Such a decrease could cause a reduction in metal prices globally, which could adversely affect our revenues, gross profit and net income |
| Additionally, significant currency fluctuations in the United States or abroad could negatively impact our cost of metals and the pricing of our products |
| Recently, the decline in the dollar relative to foreign currencies resulted in increased prices for metals and metal products in the United States as imported metals became relatively more expensive |
| If, in the future, the dollar increases in value relative to foreign currencies, the domestic market may be more attractive to foreign producers, resulting in increased supply that could cause decreased metal prices and adversely affect our revenues, gross profit and net income |
| We operate in an industry that is subject to cyclical fluctuations and any downturn in general economic conditions or our customers’ industries could negatively impact our revenues, gross profit and net income |
| The metals service center industry is cyclical, impacted by both market demand and metals supply |
| Periods of economic slowdown or recession in the United States or other countries, or the public perception that these may occur, could decrease the demand for our products and adversely affect our pricing |
| For example, the general slowing of the economy in 2001, 2002 and 2003 adversely impacted our product sales and pricing |
| While we experienced significantly improved pricing and healthy demand levels in 2004 and 2005, by comparison, this trend may not continue |
| Changing economic conditions could depress or delay demand for our products, which could adversely affect our revenues, gross profit and net income |
| We sell many products to industries that are cyclical, such as the construction, semiconductor and transportation industries, including aerospace |
| The demand for our products is directly related to, and quickly impacted by, demand for the finished goods manufactured by our customers in these industries, which may change as a result of the general US or worldwide economy, domestic exchange rates, energy prices or other factors beyond our control |
| If we are unable to accurately project the product needs of our customers over varying lead times or if there is a limited availability of products through allocation by the mills or otherwise, we may not have sufficient inventory to be able to provide products desired by our customers on a timely basis |
| In addition, if we are not able to increase sales of products to customers in other industries when one or more of the cyclical industries that we serve is experiencing a decline, our revenues, gross profit and net income may be adversely affected |
| 13 _________________________________________________________________ [64]Table of Contents We compete with a large number of companies in the metals service center industry, and, if we are unable to compete effectively, our revenues, gross profit and net income may decline |
| We compete with a large number of other general-line distributors and specialty distributors in the metals service center industry |
| Competition is based principally on price, inventory availability, timely delivery, customer service, quality and processing capabilities |
| Competition in the various markets in which we participate comes from companies of various sizes, some of which may have greater financial resources than we do and some of which could have more established brand names in the local markets that we serve |
| Accordingly, these competitors may be better able to withstand changes in conditions within our customers’ industries and may have greater operating and financial flexibility than we have |
| To compete for customer sales, we may lower prices or offer increased services at a higher cost, which could reduce our revenues, gross profit and net income |
| If we were to lose any of our primary suppliers or otherwise be unable to obtain sufficient amounts of necessary metals on a timely basis, we may not be able to meet our customers’ needs and may suffer reduced sales |
| We have few long-term contracts to purchase metals |
| Therefore, our primary suppliers of carbon steel, alloy steel, stainless steel, aluminum or other metals could curtail or discontinue their delivery of these metals to us in the quantities we need |
| Our ability to meet our customers’ needs and provide value-added inventory management services depends on our ability to maintain an uninterrupted supply of metal products from our suppliers |
| If our suppliers experience production problems, lack of capacity or transportation disruptions, the lead times for receiving our supply of metal products could be extended and the cost of our inventory may increase |
| If, in the future, we are unable to obtain sufficient amounts of the necessary metals at competitive prices and on a timely basis from our traditional suppliers, we may not be able to obtain these metals from acceptable alternative sources at competitive prices to meet our delivery schedules |
| Even if we do find acceptable alternative suppliers, the process of locating and securing these alternatives may be disruptive to our business, which could have an adverse impact on our ability to meet our customers’ needs and reduce our sales, gross profit and net income |
| In addition, if a significant domestic supply source is discontinued and we cannot find acceptable domestic alternatives, we may need to find a foreign source of supply |
| Dependence on foreign sources of supply could lead to longer lead times, increased price volatility, less favorable payment terms and certain tariffs and duties |
| If we do not successfully implement our acquisition growth strategy, our ability to grow our business could be impaired |
| We may not be able to identify suitable acquisition candidates or successfully complete any acquisitions or integrate any other businesses into our operations |
| If we cannot identify suitable acquisition candidates, we are unlikely to sustain our historical growth rates, and, if we cannot successfully integrate these businesses, we may incur increased or redundant expenses |
| Moreover, any additional indebtedness we incur to pay for these acquisitions could adversely affect our liquidity and financial strength |
| As a decentralized business, we depend on both senior management and our key operating employees; if we are unable to attract and retain these individuals, our ability to operate and grow our business may be adversely affected |
| Because of our decentralized operating style, we depend on the efforts of our senior management, including our chief executive officer, David H Hannah, our president and chief operating officer, Gregg J Mollins, and our executive vice president and chief financial officer, Karla Lewis, as well as other key operating employees |
| We may not be able to retain these individuals or attract and retain additional qualified personnel when needed |
| We do not have employment agreements with any of our officers or employees, which may mean they may have less of an incentive to stay with us when presented with alternative employment opportunities |
| In addition, our senior management and key operating employees hold stock options that have vested and hold common stock in our employee stock ownership plan |
| These individuals may, therefore, be more likely to leave Reliance if the shares of our common stock significantly appreciate in value |
| The loss of any key officer or employee will require remaining officers and employees to direct immediate and substantial attention to seeking a replacement |
| Our inability to retain members of our senior management or key operating employees or to find adequate replacements for any departing key officer or employee on a timely basis could adversely affect our ability to operate and grow our business |
| We are subject to various environmental and employee safety and health regulations, which could subject us to significant liabilities and compliance expenditures |
| We are subject to certain federal, state and local environmental laws and regulations concerning air emissions, wastewater discharges, underground storage tanks and solid and hazardous waste disposal at or from our facilities |
| Our operations are also subject to various employee safety and health laws and regulations, including those concerning occupational injury and illness, employee exposure to hazardous materials and employee complaints |
| Environmental and employee safety and health regulations are comprehensive, complex and frequently changing |
| Some of these laws and regulations are subject to varying and conflicting interpretations |
| 14 _________________________________________________________________ [65]Table of Contents We may be subject from time to time to administrative and/or judicial proceedings or investigations brought by private parties or governmental agencies with respect to environmental matters and employee safety and health issues |
| Currently, we have no material outstanding unresolved issues with environmental regulators |
| Proceedings and investigations with respect to environmental matters and any employee safety and health issues could result in substantial costs to us, divert our management’s attention and result in significant liabilities, fines or the suspension or interruption of our service center activities |
| 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 |
| Future events, such as changes in existing laws and regulations or their enforcement, new laws and regulations or the discovery of conditions not currently known to us, could create material compliance or remedial liabilities and costs which may constrain our operations or make such operations more costly |
| Our operating results have fluctuated, and are expected to continue fluctuating, depending on the season, and such fluctuations may adversely affect our stock price |
| Many of our customers are in seasonal businesses, including customers in the construction and related industries |
| In addition, our revenues in the months of July, November and December traditionally have been lower than in other months because of increased vacation days and holiday closures for various customers |
| Consequently, you should not rely on our results of operations during any particular quarter as an indication of our results for a full year or any other quarter |
| In addition, if analysts and investors inaccurately estimate our results of operations in one or more future quarters and our operating results fall below expectations, our stock price may decline |
| Ongoing tax audits may result in additional taxes |
| Reliance and EMJ are undergoing various tax audits |
| These tax audits could result in additional taxes, plus interest and penalties being assessed against either or both companies |
| The acquisition of EMJ is our largest and first public company acquisition and there may be additional risks of which we are not aware or existing risks may change over time |
| The EMJ acquisition is our largest acquisition and our first acquisition of a public company |
| There may be additional risks associated with this acquisition that we are not aware of at the present time because we have not previously integrated a business of this size |
| After the acquisition, customers may choose to diversify their metals suppliers to reduce their dependence on a single supplier of the majority of their metals needs |
| We may not be able to retain all of the Reliance and EMJ customers, and any loss of customers and the business that they bring to us could have an adverse effect on our operating results |
| We have agreed to assume liability for EMJ’s various retirement and pension plans |
| The actual costs for the benefits to be provided to EMJ’s employees may exceed those projected, and further actuarial assessments of the extent of those costs may exceed the current assessment |
| Any adjustments that are required to be made to the recorded liability for these benefits could have an adverse effect on our operating results and financial condition |
| In addition, we may be required to make cash payments in excess or in addition to those that have been projected, which could have an adverse effect on cash flow |
| We expect that we will record a significant amount of goodwill related to our acquisition of EMJ If EMJ does not perform as anticipated, this could result in an impairment charge that could be material |
| Our business could be adversely affected by economic downturns |
| A decline in economic activity in the US and other markets in which we operate could materially affect our financial condition and results of operation |
| Damage to our computer infrastructure and software systems could harm our business |
| The unavailability of any of our information management systems for any significant period of time could have an adverse effect on our operations |
| In particular, our ability to deliver products to our customers when needed, collect our receivables and manage inventory levels successfully largely depends on the efficient operation of our computer hardware and software systems |
| Through information management systems, we provide inventory availability to our sales and operating personnel, improve customer service through better order and product reference data and monitor operating results |
| Difficulties associated with upgrades, installations of major software or hardware, and integration with new systems could lead to business interruptions that could harm our reputation, increase our operating costs and decrease our profitability |
| In addition, these systems are vulnerable to, among other things, damage or interruption from power loss, computer system and network failures, loss of telecommunications services, operator negligence, physical and electronic loss of data, or security breaches and computer viruses |
| 15 _________________________________________________________________ [66]Table of Contents We have contracted with a third-party service provider that provides us with backup systems in the event that our information management systems are damaged |
| It is possible that the backup facilities and other protective measures we take could prove to be inadequate |
| Principal shareholders who own a significant number of shares may have interests that conflict with yours |
| Florence Neilan, our largest shareholder, owns 12dtta7prca of the outstanding shares of our common stock and may have the ability to significantly influence matters requiring shareholder approval |
| Upon successful completion of the EMJ merger, certain EMJ stockholders will own a significant percentage of Reliance outstanding common stock |
| In deciding how to vote on such matters, these shareholders may be influenced by interests that conflict with yours |
| We have implemented anti-takeover provisions that may adversely impact your rights as a holder of Reliance common stock |
| Our articles of incorporation and our bylaws could delay, defer or prevent a third party from acquiring us, despite the possible benefit to our shareholders, or otherwise adversely affect the price of our common stock and the rights of our shareholders |
| We are authorized to issue 5cmam000cmam000 shares of preferred stock, no par value, with the rights, preferences, privileges and restrictions of such stock to be determined by our board of directors, without a vote of the holders of common stock |
| Our board of directors could grant rights to holders of preferred stock to reduce the attractiveness of Reliance as a potential takeover target or make the removal of management more difficult |
| In addition, our articles of incorporation and bylaws (1) impose advance notice requirements for shareholder proposals and nominations of directors to be considered at shareholder meetings and (2) establish a staggered or classified board of directors |
| These provisions may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock |
| These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors other than the candidates nominated by our board of directors |
| In addition, our credit facility and the provisions of our senior notes contain limitations on our ability to enter into change of control transactions |