** **

**SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 
| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|------------|----------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                         |
| ** ** | ** ** | **For the fiscal quarter ended June 30, 2004.**                                               |
|       |       |                                                                                               |
| **OR**     |
|       |       |                                                                                               |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission file number: 1-7537**

 

**EARLE M. JORGENSEN COMPANY**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                                    | ** ** | **95-0886610**                         |
|-----------------------------------------------------------------|------------|----------------------------------------|
| (State or other jurisdiction of  incorporation or organization) | ** ** | (I.R.S. Employer   Identification No.) |
|                                                            | ** ** |                                   |
| **10650 Alameda, Lynwood, California**                          | ** ** | **90262**                              |
| (Address of principal executive  offices)                       | ** ** | (Zip Code)                             |

 

Registrant’s telephone number:                         **(323) 567-1122**

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period thatregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý   No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act). Yes o   No ý

 

State the aggregate market value of the voting stock held bynon-affiliates of the registrant.    None

 

Outstanding common stock, par value $.01 per share, at July 31,2004 - 128 shares

 

 

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**EARLE M. JORGENSEN COMPANY**

**TABLE OF CONTENTS**

 
| PART I     | -                                                                                                                                                           | FINANCIAL INFORMATION |   |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------|--------|
|       |                                                                                                                                                        |                  |
| Item 1.    | Financial Statements                                                                                                                                        |                  |
|       |                                                                                                                                                        |                  |
|       | Consolidated Condensed Balance Sheets at  June 30, 2004 (unaudited) and March 31,  2004                                                           |                  |
|       |                                                                                                                                                        |                  |
|       | Consolidated Condensed Statements of  Operations and Comprehensive Income for the  Three Months Ended June 30, 2004 and June 30, 2003 (unaudited) |                  |
|       |                                                                                                                                                        |                  |
|       | Consolidated Condensed Statements of Cash  Flows for the Three Months Ended  June 30, 2004 and June 30, 2003 (unaudited)                          |                  |
|       |                                                                                                                                                        |                  |
|       | Notes to Consolidated Condensed Financial  Statements (unaudited)                                                                                           |                  |
|       |                                                                                                                                                        |                  |
| Item 2.    | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                                 |                  |
|       |                                                                                                                                                        |                  |
| Item 3.    | Quantitative and Qualitative Disclosures  About Market Risk                                                                                                 |                  |
|       |                                                                                                                                                        |                  |
| Item 4.    | Controls and Procedures                                                                                                                                     |                  |
|       |                                                                                                                                                        |                  |
| PART II    | -                                                                                                                                                           | OTHER INFORMATION     |   |
|       |                                                                                                                                                        |                  |
| Item 1.    | Legal Proceedings                                                                                                                                           |                  |
|       |                                                                                                                                                        |                  |
| Item 5.    | Other Information                                                                                                                                           |                  |
|       |                                                                                                                                                        |                  |
| Item 6.    | Exhibits and Reports on Form 8-K                                                                                                                            |                  |
|       |                                                                                                                                                        |                  |
| SIGNATURES |                                                                                                                                                        |
|            |                                                                                                                                                             |                       |        |  |

 

1

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**PART  I****- FINANCIAL INFORMATION**

 

**Item1.**           **FINANCIAL STATEMENTS**

 

**EARLE M. JORGENSEN COMPANY**

**CONSOLIDATEDCONDENSED BALANCE SHEETS**

**(Dollars in thousands, except per share data)**

 
| ** **                                                                                                                                          | ** ** | **June 30, 2004** | ** ** | **March 31, 2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                          | ** ** | **(Unaudited)**        | ** ** | ** **              | ** ** |
|                                                                                                                                                |       |                   |       |                    |       |
| **ASSETS**                                                                                                                                          |       |                   |       |                    |       |
| Current assets:                                                                                                                                     |       |                   |       |                    |       |
| Cash                                                                                                                                                |       | $                      | 10,751     |                    | $          | 15,528 |   |
| Accounts receivable, less allowance for  doubtful accounts of $1,029 and $601 at June 30, 2004 and March 31,  2004, respectively          |       | 165,811                |       | 133,092                 |       |
| Inventories                                                                                                                                         |       | 266,430                |       | 225,248                 |       |
| Other current assets                                                                                                                                |       | 7,602                  |       | 7,655                   |       |
| Total current assets                                                                                                                                |       | 450,594                |       | 381,523                 |       |
|                                                                                                                                                |       |                   |       |                    |       |
| Property, plant and equipment, net of  accumulated depreciation of $79,695 and $76,868 at June 30, 2004 and  March 31, 2004, respectively |       | 116,513                |       | 112,190                 |       |
|                                                                                                                                                |       |                   |       |                    |       |
| Net cash surrender value of life insurance  policies                                                                                                |       | 40,285                 |       | 34,689                  |       |
| Debt issue costs, net of accumulated  amortization                                                                                                  |       | 6,579                  |       | 6,909                   |       |
| Other assets                                                                                                                                        |       | 1,673                  |       | 1,169                   |       |
| Total assets                                                                                                                                        |       | $                      | 615,644    |                    | $          | 536,480 |   |
|                                                                                                                                                |       |                   |       |                    |       |
| **LIABILITIES AND STOCKHOLDER’S EQUITY**                                                                                                       |       |                   |       |                    |       |
| Current liabilities:                                                                                                                                |       |                   |       |                    |       |
| Accounts payable                                                                                                                                    |       | $                      | 174,488    |                    | $          | 162,648 |   |
| Accrued employee compensation and related  taxes                                                                                                    |       | 14,822                 |       | 19,207                  |       |
| Accrued employee benefits                                                                                                                           |       | 13,435                 |       | 12,744                  |       |
| Accrued interest                                                                                                                                    |       | 16,626                 |       | 17,352                  |       |
| Other accrued liabilities                                                                                                                           |       | 13,267                 |       | 8,616                   |       |
| Deferred income taxes                                                                                                                               |       | 17,517                 |       | 17,517                  |       |
| Current portion of long-term debt                                                                                                                   |       | 3,676                  |       | 3,976                   |       |
| Total current liabilities                                                                                                                           |       | 253,831                |       | 242,060                 |       |
|                                                                                                                                                |       |                   |       |                    |       |
| Long-term debt                                                                                                                                      |       | 351,215                |       | 305,762                 |       |
| Deferred income taxes                                                                                                                               |       | 17,869                 |       | 17,869                  |       |
| Other long-term liabilities                                                                                                                         |       | 8,266                  |       | 8,148                   |       |
|                                                                                                                                                |       |                   |       |                    |       |
| Stockholder’s equity (deficit):                                                                                                                |       |                   |       |                    |       |
| Preferred stock, $.01 par value; 200 shares  authorized and unissued                                                                                |       | —                 |       | —                  |       |
| Common stock, $.01 par value; 2,800 shares  authorized; 128 shares issued and outstanding                                                           |       | —                 |       | —                  |       |
| Capital in excess of par value                                                                                                                      |       | 29,503                 |       | 29,503                  |       |
| Accumulated other comprehensive loss                                                                                                                |       |                   |       |                    |       |
| Foreign currency translation adjustment                                                                                                             |       | (208                   | )          | (73                     | )          |
| Additional minimum pension liability                                                                                                                |       | (2,625                 | )          | (2,625                  | )          |
| Accumulated deficit                                                                                                                                 |       | (42,207                | )          | (64,164                 | )          |
| Total stockholder’s equity (deficit)                                                                                                           |       | (15,537                | )          | (37,359                 | )          |
| Total liabilities and stockholder’s equity  (deficit)                                                                                          |       | $                      | 615,644    |                    | $          | 536,480 |   |

 

See accompanying notes to consolidated financial statements.

 

2

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**EARLE M. JORGENSEN COMPANY**

**CONSOLIDATEDCONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME**

**(Dollars in thousands)**

 
| ** **                               | ** ** | **Three Months Ended**    | ** ** |
|------------------------------------------|------------|---------------------------|------------|
| ** **                               | ** ** | **June 30,****2004** | ** ** | **June 30, 2003** | ** ** |
| ** **                               | ** ** | **(Unaudited)**           | ** ** |
|                                     |       |                      |       |   |   |
| Revenues                                 |       | $                         | 361,636    |   | $ | 238,299 |   |
|                                     |       |                      |       |   |   |
| Cost of sales                            |       | 256,075                   |       | 171,437 |   |
|                                     |       |                      |       |   |   |
| Gross profit                             |       | 105,561                   |       | 66,862 |   |
|                                     |       |                      |       |   |   |
| Expenses:                                |       |                      |       |   |   |
| Warehouse and delivery                   |       | 38,073                    |       | 32,524 |   |
| Selling                                  |       | 13,390                    |       | 8,418 |   |
| General and administrative               |       | 14,432                    |       | 9,679 |   |
| Total expenses                           |       | 65,895                    |       | 50,621 |   |
|                                     |       |                      |       |   |   |
| Income from operations                   |       | 39,666                    |       | 16,241 |   |
|                                     |       |                      |       |   |   |
| Interest expense, net                    |       | 13,111                    |       | 12,628 |   |
|                                     |       |                      |       |   |   |
| Income before income taxes               |       | 26,555                    |       | 3,613 |   |
|                                     |       |                      |       |   |   |
| Income tax expense                       |       | 4,598                     |       | 819 |   |
|                                     |       |                      |       |   |   |
| Net income                               |       | 21,957                    |       | 2,794 |   |
|                                     |       |                      |       |   |   |
| Other  comprehensive income (loss)       |       |                      |       |   |   |
| Foreign  currency translation adjustment |       | (135                      | )          | 1,548 |   |
|                                     |       |                      |       |   |   |
| Comprehensive income                     |       | $                         | 21,822     |   | $ | 4,342 |   |

 

See accompanying notes to consolidated financial statements.

 

3

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**EARLE M. JORGENSEN COMPANY**

**CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOWS**

**(Dollars in thousands)**

 
| ** **                                                                     | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                     | ** ** | **June 30, 2004** | ** ** | **June 30, 2003** | ** ** |
| ** **                                                                     | ** ** | **(Unaudited)**        | ** ** |
| OPERATING ACTIVITIES:                                                          |       |                   |       |   |   |
| Net income                                                                     |       | $                      | 21,957     |   | $ | 2,794 |   |
| Adjustments to reconcile net income to net  cash used in operating activities: |       |                   |       |   |   |
| Depreciation and amortization                                                  |       | 2,851                  |       | 2,800 |   |
| Amortization of debt issue costs                                               |       | 330                    |       | 330 |   |
| Accrued postretirement benefits                                                |       | 188                    |       | 188 |   |
| Gain on sale of property, plant and  equipment                                 |       | (13                    | )          | (1,137 | ) |
| Provision for bad debts                                                        |       | 639                    |       | 574 |   |
| Increase in cash surrender value of life  insurance over premiums paid         |       | (5,256                 | )          | (5,318 | ) |
| Changes in operating assets and  liabilities:                                  |       |                   |       |   |   |
| Accounts receivable                                                            |       | (33,358                | )          | (7,350 | ) |
| Inventories                                                                    |       | (41,182                | )          | (14,155 | ) |
| Other current assets                                                           |       | (596                   | )          | (845 | ) |
| Accounts payable and accrued liabilities                                       |       | 12,071                 |       | (2,677 | ) |
| Non-trade receivable                                                           |       | 122                    |       | 331 |   |
| Other                                                                          |       | (145                   | )          | 1,392 |   |
| Net cash used in operating activities                                          |       | (42,392                | )          | (23,073 | ) |
|                                                                           |       |                   |       |   |   |
| INVESTING ACTIVITIES:                                                          |       |                   |       |   |   |
| Additions to property, plant and equipment                                     |       | (7,179                 | )          | (1,899 | ) |
| Proceeds from the sale of property, plant  and equipment                       |       | 6                      |       | 1,314 |   |
| Premiums paid on life insurance policies                                       |       | (464                   | )          | (1,198 | ) |
| Proceeds from redemption of life insurance  policies                           |       | 124                    |       | 708 |   |
| Net cash used in investing activities                                          |       | (7,513                 | )          | (1,075 | ) |
|                                                                           |       |                   |       |   |   |
| FINANCING ACTIVITIES:                                                          |       |                   |       |   |   |
| Net borrowings under revolving loan  agreements                                |       | 45,653                 |       | 18,612 |   |
| Payments on other debt                                                         |       | (500                   | )          | (500 | ) |
| Net cash provided by financing activities                                      |       | 45,153                 |       | 18,112 |   |
|                                                                           |       |                   |       |   |   |
| Effect of exchange rate changes on cash                                        |       | (25                    | )          | 15 |   |
|                                                                           |       |                   |       |   |   |
| NET DECREASE IN CASH                                                           |       | (4,777                 | )          | (6,021 | ) |
| Cash at beginning of period                                                    |       | 15,528                 |       | 20,030 |   |
|                                                                           |       |                   |       |   |   |
| CASH AT END OF PERIOD                                                          |       | $                      | 10,751     |   | $ | 14,009 |   |

 

See accompanying notes to consolidated financial statements.

 

4

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**EARLE M. JORGENSEN COMPANY**

**NOTES TOCONSOLIDATED CONDENSED FINANCIAL STATEMENTS (****Unaudited****)**

**JUNE 30, 2004**

 

1.                                       Basis ofPresentation and Consolidation

 

The Earle M. Jorgensen Company (the“Company”) is a wholly-owned subsidiary of Earle M. Jorgensen Holding Company,Inc. (“Holding”).

 

The accompanying unauditedconsolidated condensed financial statements include the accounts of the Companyand its wholly-owned subsidiaries, including Earle M. Jorgensen (Canada) Inc.and Stainless Insurance Ltd., a captive insurance subsidiary.  All significant intercompanyaccounts and transactions have been eliminated.

 

In the opinion of management, theaccompanying unaudited consolidated condensedfinancial statements have been prepared in accordance with the instructions toForm 10-Q and include all adjustments (consisting of normally recurringaccruals) and disclosures considered necessary for a fair presentation of theconsolidated financial position of the Company at June 30, 2004 and theconsolidated results of operations and comprehensive income and cash flows forthe three months ended June 30, 2004 and June 30, 2003. Theconsolidated results of operations and comprehensive income for the threemonths ended June 30, 2004 are not necessarily indicative of the resultsto be expected for the full year. For further information, refer to theconsolidated financial statements and footnotes included in the Company’sAnnual Report on Form 10-K for the year ended March 31, 2004.

 

2.                                       OtherComprehensive Income

 

Other comprehensive income included foreigncurrency translation (loss) income of $(135,000) and $1,548,000 for the threemonths ended June 30, 2004 and June 30, 2003, respectively.

 

3.                                       Stock-BasedCompensation

 

Stock optionsgranted to directors, officers and other key employees of the Company underHolding’s stock option plan adopted in January 1997 are accounted for inaccordance with APB No. 25. As all stock option grants are made at fair valueon the date of grant, the Company recognizes no compensation cost.  Had compensation expense for stock optionsgranted been recorded based on the fair value method under SFAS No. 123, asamended by SFAS No. 148, *Accounting forStock-Based Compensation-Transition and Disclosure*, the effect onthe Company’s net income for the three months ended June 30, 2004 andJune 30, 2003 would have been as follows:

 
| ** **                                                                                                    | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                    | ** ** | **June 30, 2004** | ** ** | **June 30, 2003** | ** ** |
| Net income, as reported                                                                                       |       | $                      | 21,957,000 |   | $ | 2,794,000 |   |
| Deduct: total stock-based compensation  expense determined using fair value method for all awards, net of tax |       | (13,000                | )          | (31,000 | ) |
| Net income, as adjusted                                                                                       |       | $                      | 21,944,000 |   | $ | 2,763,000 |   |

 

4.                                       BenefitPlans

 

InDecember 2003, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 132 (revisedDecember 2003), *Employers’ Disclosuresabout Pensions and Other Postretirement Benefits (SFAS 132-R)*.This statement amends the disclosure requirements of SFAS 132 to require moredetails about retirement plan assets, benefit obligations, cash flows and otherrelevant information. SFAS 132-R is effective for years ending afterDecember 15, 2003, except certain benefit payment and international plandisclosures are effective for fiscal years after June 15, 2004. Theadoption of the disclosure provisions of SFAS 132-R did not have a materialeffect on the Company’s consolidated financial statements.

 

5

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Net periodicpension expense for continuing operations defined benefit pension plansincludes the following components:

 
| ** **                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------|------------|------------------------|------------|
| ** **                         | ** ** | **June 30, 2004** | ** ** | **June 30, 2003** | ** ** |
| Service cost                       |       | $                      | 148,000    |   | $ | 130,000 |   |
| Interest cost                      |       | 255,000                |       | 220,000 |   |
| Expected return on assets          |       | (254,000               | )          | (191,000 | ) |
| Amortization of prior service cost |       | (9,000                 | )          | (9,000 | ) |
| Recognized net loss                |       | 7,000                  |       | 67,000 |   |
| Net periodic pension expense       |       | $                      | 147,000    |   | $ | 217,000 |   |

 

The Companypreviously disclosed in its financial statements for the year endedMarch 31, 2004, included in its Form 10-K, that it expected to contribute$700,000 to its hourly employee pension plan in fiscal 2005. As ofJune 30, 2004 such contribution has been made.

 

Net periodic postretirement benefit cost for continuing operations defined benefit pension plansincludes the following components:

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **June 30, 2004** | ** ** | **June 30, 2003** | ** ** |
| Service cost                                  |       | $                      | 78,000     |   | $ | 73,000 |   |
| Interest cost                                 |       | 72,000                 |       | 68,000 |   |
| Recognized net loss                           |       | 40,000                 |       | 14,000 |   |
| Net periodic post retirement benefit  expense |       | $                      | 190,000    |   | $ | 155,000 |   |

 

5.                                       SubsequentEvents

 

OnJanuary 14, 2004, the Company announced that it had reached an agreementwith Holding’s principal security holders providing for a restructuring of thecombined capital structure.  Thefinancial restructuring was to be effected pursuant to an Agreement and Plan ofMerger and Reorganization dated as of December 18, 2003 (the “MergerAgreement”), among the Company, Holding and EMJ Metals LLC, a newly-formedwholly-owned subsidiary as well as, an Exchange Agreement dated as ofDecember 18, 2003 (the “Exchange Agreement”), among the Company, Holdingand Kelso Investment Associates IV, L.P. and certain of its affiliates(“Kelso”).  Among its provisions, theMerger Agreement provides that the Company or Holding may terminate the MergerAgreement if the merger shall not have been consummated by May 31, 2004.  Similarly, the Exchange Agreement providesthat the Exchange Agreement shall terminate upon the earlier to occur of (a)the effective date of the closing of the transactions contemplated by theMerger Agreement and (b) termination of the Merger Agreement.  The parties to the Merger Agreement executeda Termination of Merger Agreement and Exchange Agreement dated as of July 30,2004, terminating the Merger Agreement and the Exchange Agreement.  Notwithstanding such termination,representatives of Holding’s Special Committee, Kelso, the Company and theCompany’s Benefits Committee are continuing to evaluate an alternative transactionsimilar to the merger and other strategic alternatives.

 

6.                                       Impactof Recently Issued Accounting Standards

 

OnDecember 8, 2003, the Medicare Prescription Drug Improvement andModernization Act of 2003 (the “Act”) was signed into law. The impact of theAct is not reflected in any amounts disclosed in the financial statements oraccompanying notes. The Company is currently reviewing the effects the Act willhave on its plans and expects to complete that review during fiscal 2005. InJanuary 2004, the Financial Accounting Standards Board (“FASB”) issued aStaff Position document which acknowledged issues associated with measuring andrecognizing the effect of the Act and allowed companies to elect to deferaccounting for such effects until authoritative guidance on the accounting forthe federal subsidy was issued. In May 2004, the FASB issued Staff PositionFSAS No. 106-2 (“FSP 106-2”), *Accounting andDisclosure Requirements Related to Medicare Prescription Drug, Improvement andModernization Act of 2003.*FSP 106-2 provides guidance on theaccounting, disclosure, effective date and transition rules related to the Act.FSP 106-2 requires companies to account for the effect of the subsidy onbenefits attributed to past service as an actuarial experience gain and as areduction of the service cost component of net periodic health care costs forthe amounts attributable to current service, if the benefit provided is atleast actuarially

 

6

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equivalentto the Medicare benefit. FSP 106-2 is effective for periods beginning afterJune 15, 2004.

 

InDecember 2003, the FASB issued FASB Interpretation No. 46 (Revised), *Consolidation of Variable Interest Entities*(“FINNo. 46-R”)*.*FIN 46-R provides theprinciples to consider in determining when variable interest entities must beconsolidated in the financial statements of the primary beneficiary. Ingeneral, a variable interest entity used for business purposes that either (a)does not have equity investors with voting rights or(b) has equity investors that are not required to provide sufficient financialresources for the entity to support its activities without additionalsubordinated financial support. FIN 46-R requires a variable interest entity tobe consolidated by a company if that company is subject to a majority of therisk of loss from the variable interest entity’s activities or is entitled toreceive a majority of the entity’s residual returns or both. This statement didnot have an effect on the accompanying consolidated condensed financialstatements for the period ended June 30, 2004.

 

7.                                       IncomeTaxes

 

Income tax expensefor the first three months of fiscal 2005 and 2004 included provisions forstate franchise and foreign income taxes. Federal tax provisions for the first three months of fiscal 2005 were$2,313,000 and for the first three months of fiscal 2004 federal tax provisionswere offset by recognition of tax benefits associated with our loss carryforwards. While there was no federal income taxes paidin the first three months of fiscal 2005 due to the Company’s net operatingloss carryforwards, the Company expects to utilizeits remaining loss carryforward and to make incometax payments later in fiscal 2005. Income tax expense has been provided for thethree months ended June 30, 2004 based on the Company’s estimatedeffective tax rate for fiscal 2005.

 

### **Item 2.**           MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

### ** **

# **Forward-Looking Information**

# ** **

This Report on Form 10-Q includes both historical and forward-lookingstatements. We have based these forward-looking statements on our currentexpectations and projections about future results. When we use words in thisdocument, such as “anticipates,” “intends,” “plans,” “believes,” “estimates,”“expects,” “will,” “should,” and similar expressions, we do so to identifyforward-looking statements. Such statements are intended to operate as “forwardlooking statements” of the kind permitted by the Private Securities LitigationReform Act of 1995, incorporated in Section 27A of the Securities Act andSection 21E of the Securities Exchange Act of 1934, as amended. Thatlegislation protects such predictive statements by creating a “safe harbor”from liability in the event that a particular prediction does not turn out asanticipated.

 

While we always intend to express our best judgment when we makestatements about what we believe will occur in the future, and although we basethese statements on assumptions that we believe to be reasonable when made,these forward-looking statements are not a guarantee of performance, and youshould not place undue reliance on such statements. Forward-looking statementsare subject to many uncertainties and other variable circumstances, many of whichare outside of our control, that could cause ouractual results and experience to differ materially from those anticipated inthese forward-looking statements. These forward-looking statements are affectedby risks, uncertainties and assumptions that we make, which are more fullydiscussed in our Registration Statement on Form S-4 filed on July 3, 2002,and our other periodic reports filed with the Securities and ExchangeCommission. These risks and uncertainties include, but are not limited to, economic,competitive, legal and governmental factors over which Earle M. JorgensenCompany has no control.  Accordingly,there is no assurance that the expectations reflected in such forward-lookingstatements will be realized.  Weundertake no obligation to provide revisions to any forward-looking statementsshould circumstances change, except as otherwise required by securities andother applicable laws.

 

# **Overview**

 

After many quarters of weak industrialeconomic conditions in the United States, during calendar 2004 the metalservice center industry began to experience both growth in sales volume andincreases in prices.  Metals prices formost of calendar 2003 were volatile due to competitive pressures, changes inavailability of inventories held by service centers, and the availability ofmetals supplied by both domestic and foreign mills. Other factors affectingmetals prices and availability include increased industrial demand, favorableexchange rates for exporting companies (unfavorable exchange rates for importersof metals), continued low interest rates, added surcharges from mills becauseof higher raw material costs and higher capacity utilization. 

 

Pricing varies substantially across ourproduct lines. Both prices and surcharges have continued to rise since thebeginning of calendar 2004 due to raw material shortages and limitedavailability of certain products. For example, the price of cold finish carbonand alloy has continued to increase with the price per ton, includingsurcharges, at June 30, 2004 of $987 which increased from $872 per ton at March31, 2004 and $805 per ton at January 31, 2004. 

 

We believe that customer demand will continueto be strong and that the availability of steel will remain tight, which couldlead to disruptions in the Company’s ability to meet its customers’ materialrequirements. However, we believe that our well-balanced inventories,valued-added capabilities, aggressive marketing and unequaled customer servicehave differentiated, and will continue to differentiate, us in the marketplaceand will position us to grow our business as the economic recovery continues.

 

7

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Our tonnage shipped during the first quarter of fiscal 2005 was 27.5%higher compared to the same period in fiscal 2004, due to increasing demand andfrom success in our core products strategies and excellent customer service,and beginning in July 2002, from significant benefits realized from theexpansion and automation of our Chicago facility. We continue to focus onimproving business processes and reducing costs and believe our results reflectthe benefits realized from improved productivity and from our ability tomaintain cost structures that are aligned with the prevailing levels ofbusiness.  Our operating margin for thefirst three months of fiscal 2005 and fiscal 2004 was 11.0% and 6.8%,respectively. As of June 30, 2004, our total number of employees was 1,637compared to 1,616 as of March 31, 2004, and 1,653 as of June 30,2003.

 

Pricing for our products can have a more significant impact on ourresults of operations than customer demand levels. As pricing increases, so doour revenue dollars. Historically, we have been able to increase our prices asthe cost of our materials increases. We attempt to obtain the same gross profitpercentage on our sales, so if prices increase and we are successful inmaintaining the same gross profit percentage, we generate more gross profitdollars. Conversely, if pricing declines, we will typically generate lowerlevels of gross profit dollars. Because changes in pricing do not require us toadjust our expense structure, the impact of price changes on our results ofoperations is greater than the effect of volume changes. Average selling pricesin the first fiscal quarter of 2005 increased 22.7% from the first fiscalquarter of 2004.

 

We serve customers in a variety of industries. The following tableprovides a percentage breakdown of domestic sales to our ten largest industriesfor the three months ended June 30, 2004 and June 30, 2003. Prioryear comparisons may have changed due to customer reclassifications in certainindustries as reported.

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **June 30, 2004** | ** ** | **June 30, 2003** | ** ** |
|                                        |       |                   |       |   |   |
| Machine Tools                               |       | 28.9                   | %          | 26.6 | % |
| Industrial Equipment                        |       | 8.0                    |       | 7.9 |   |
| Metal Service Centers & Wholesale Trade |       | 6.3                    |       | 6.1 |   |
| Transportation                              |       | 6.9                    |       | 8.3 |   |
| Fabricated Metal                            |       | 6.2                    |       | 5.8 |   |
| Fluid Power                                 |       | 6.2                    |       | 5.9 |   |
| Construction/Farm Equipment                 |       | 5.6                    |       | 5.4 |   |
| Screw Machine Products                      |       | 5.3                    |       | 4.9 |   |
| Oil, Gas & Energy                       |       | 4.4                    |       | 6.3 |   |
| Power Transmission Equipment                |       | 3.7                    |       | 3.9 |   |
| All Other Industries                        |       | 18.5                   |       | 18.9 |   |
| Total                                       |       | 100                    | %          | 100 | % |

 

8

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## **Statement of Operations andOther Data**

## ** **

All information contained in the following table was derived from thehistorical financial statements for the three months ended June 30, 2004and June 30, 2003 included elsewhere herein.

 
| ** **                                       | ** ** | **Three  Months Ended** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|
| **(dollars  in thousands)**                      | ** ** | **June 30,  2004** | ** ** | **%** | ** ** | **June 30,  2003** | ** ** | **%** | ** ** |
| **Statement of  Operations Data:**               |       |                    |       |   |   |   |   |   |   |
| Revenues                                         |       | $                       | 361,636    |   | 100.0 | % | $ | 238,299 |   | 100.0 | % |
| Gross Profit                                     |       | 105,561                 |       | 29.2 | % | 66,862 |   | 28.1 | % |
| Operating expenses                               |       | 65,895                  |       | 18.2 | % | 50,621 |   | 21.2 | % |
| Income from operations                           |       | 39,666                  |       | 11.0 | % | 16,241 |   | 6.8 | % |
| Net interest expense                             |       | 13,111                  |       | 3.6 | % | 12,628 |   | 5.3 | % |
| Net income                                       |       | 21,957                  |       | 6.1 | % | 2,794 |   | 1.2 | % |
| **Other Data:**                                  |       |                    |       |   |   |   |   |   |   |
| EBITDA(1)                                        |       | $                       | 42,517     |   |   |   | $ | 19,041 |   |   |   |
| Capital expenditures                             |       | 7,179                   |       |   |   | 1,899 |   |   |   |
| Net cash flows used in operating activities      |       | (42,392                 | )          |   |   | (23,073 | ) |   |   |
| Net cash flows used in investing activities      |       | (7,513                  | )          |   |   | (1,075 | ) |   |   |
| Net cash flows provided by financing  activities |       | 45,153                  |       |   |   | 18,112 |   |   |   |

 

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(1)                                  (a)                                  “EBITDA”represents net income before net interest expense, provision for income taxesand depreciation and amortization.Consistent with Item 10(e) of Regulation S-K, our EBITDA has not been adjustedto exclude any other non-cash charges or liabilities, such as LIFO adjustmentsof $11,375 and none and accruals for postretirement benefits aggregating $188and $188 for the three months ended June 30, 2004 and June 30, 2003,respectively.  We believe that EBITDA iscommonly used as a measure of performance for companies in our industry and isfrequently used by analysts, investors, lenders and other interested parties toevaluate a company’s financial performance and its ability to incur and servicedebt.  Our EBITDA is used by managementas a performance measure to assess our financial results in connection withdetermining incentive compensation, and is also used by the independentappraisal firm in connection with its annual valuation of our equity.  EBITDA should not be considered as a measureof financial performance under accounting principles generally accepted in theUnited States.  The items excluded fromEBITDA are significant components in understanding and assessing financialperformance.  While providing usefulinformation, our EBITDA should not be considered in isolation or as asubstitute for consolidated statement of operations and cash flows dataprepared in accordance with accounting principles generally accepted in theUnited States, and should not be construed as an indication of a company’soperating performance or as a measure of liquidity.

 
| ** **                    | ** ** | **Three  Months Ended** | ** ** |
|-------------------------------|------------|-------------------------|------------|
| **(dollars  in thousands)**   | ** ** | **June 30,  2004** | ** ** | **June 30,  2003** | ** ** |
| Reconciliation of EBITDA:     |       |                    |       |   |   |
| Net Income                    |       | $                       | 21,957     |   | $ | 2,794 |   |
| Depreciation and amortization |       | 2,851                   |       | 2,800 |   |
| Net interest expense          |       | 13,111                  |       | 12,628 |   |
| Provision for income taxes    |       | 4,598                   |       | 819 |   |
|                          |       |                    |       |   |   |
| EBITDA                        |       | $                       | 42,517     |   | $ | 19,041 |   |

 

# **Resultsof Operations - Three Months Ended June 30, 2004 Compared To Three MonthsEnded June 30, 2003**

# ** **

*Revenues*.Revenues for the first quarter of fiscal 2005 increased 51.7% to $361.6million, from $238.3 million for the same period in fiscal 2004, reflecting a27.5% increase in tonnage shipped, 22.7% increase in average selling prices and1.5% related to other factors, when compared to the first quarter of fiscal2004. Revenues from our domestic operations increased 52.0% to $338.3 millionin the first quarter of fiscal 2005, from $222.6 million for the same period infiscal 2004. The increase was due to stronger demand for products sold tocustomers in certain key industries we serve, including machine tools,fabricated metal and screw machine products, offset by decreased shipments tocustomers in oil, gas and energy and transportation. Revenues from our Canadianoperations increased 48.4% to $23.3 million in the first quarter of fiscal 2005from $15.7 million in the same period in fiscal 2004, due to increased capacityand efficiencies from newer facilities, effective marketing of core productsand services and overall stronger economic conditions.

 

*GrossProfit*. Gross profit for the first quarter offiscal 2005 increased 57.9% to $105.6 million, from $66.9 million

 

9

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for the same period in fiscal 2004, whileconsolidated gross margins were 29.2% and 28.1%, respectively.  Our gross margins increased primarily due toour ability to increase our selling prices to our customers due to higher costsof our products, especially cold finish carbon and alloy.  Improved customer demand, along with limitedsupplies of many of the products we sell and our margin improvement initiativesallowed us to pass through increased pricing to our customers before wereceived the higher cost metal products in our inventory.  Our increased cost of metals resulted in aLIFO expense of $11.4 million in the first three months of fiscal 2005, therewas no LIFO adjustment in the same period in fiscal 2004.  Gross profit from our Canadian operations was$6.7 million and gross margin was 28.8% during the first quarter of fiscal2005, compared to $3.6 million and 22.9%, respectively, for the same period infiscal 2004. Exclusive of our Canadian operations and LIFO adjustments, grossmargin was 32.6% for the first quarter of fiscal 2005 versus 28.4% for the sameperiod in fiscal 2004.

 

*Expenses*.Total operating expenses for the first quarter of fiscal 2005 increased 30.2%to $65.9 million (18.2% of revenues), from $50.6 million (21.2% of revenues)for the same period in fiscal 2004.  Theincrease in operating expenses generally reflects the changes in variableexpenses impacted by higher tonnage shipped, rising prices for certain goodsand services, particularly fuel and shipping, higher compensation and benefitcosts, and an increase in professional services and insurance expenses. Theincrease in professional services expense was primarily attributable toaccounting, legal and financial advisory fees in connection with the proposedmerger and financial restructuring. These higher expenses were partially offset by benefits realized fromongoing cost reduction efforts and improved productivity.

 

Warehouse and delivery expenses for the first quarter of fiscal 2005increased 17.2% to $38.1 million (10.5% of revenues), from $32.5 million (13.6%of revenues) for the same period in fiscal 2004. The increase resultedprimarily from higher freight and shipping due to higher tonnage shipped,higher fuel prices, overtime and temporary labor resources and maintenanceexpenses. We recorded an adjustment of $1.1 million in the first fiscal quarterof 2005 to reserve for specialized equipment operating lease obligationsrelated to a parts fabrication contract that was terminated early by acustomer.

 

Selling expenses for the first quarter of fiscal 2005 increased 59.5%to $13.4 million (3.7% of revenues), from $8.4 million (3.5% of revenues) forthe same period in fiscal 2004. The increase resulted from higher incentiveaccruals and employee benefits due to record sales levels.

 

General and administrative expenses for the first quarter of fiscal2005 increased 48.5% to $14.4 million (4.0% of revenues), from $9.7 million(4.1% of revenues) for the same period in fiscal 2004. The increase resultedfrom higher compensation expense, professional services expense, general insurance and computer purchases, offset byincreased income attributable to our corporate-owned life insurance programs.The fiscal 2004 period includes a gain on sale of surplus real estate of $1.1million.

 

*NetInterest Expense*. Net interest expense was$13.1 million during the first quarter of fiscal 2005 and $12.6 million duringthe same period in fiscal 2004.  Suchamounts include interest related to our long-term debt and borrowings againstthe cash surrender value of corporate-owned life insurance policies wemaintain, and the amortization of debt issue costs.

 

Interest expense and amortization of debt issue costs related to ouroutstanding indebtedness (excluding interest on borrowings against the cashsurrender value of our corporate-owned life insurance policies) totaled $7.7million for the first quarter of fiscal 2005 and fiscal 2004. Our averageoutstanding indebtedness, excluding borrowings against the cash surrender valueof our corporate-owned life insurance policies, during the first quarter offiscal 2005 was $359.1 million, compared to $358.0 million for the same periodin fiscal 2004. The weighted average interest rate on our indebtedness was8.01% during the first quarter of fiscal 2005 versus 8.06% during the sameperiod in fiscal 2004.

 

Interest expense associated with borrowings against the cash surrendervalue of corporate-owned life insurance policies we maintain was $5.4 millionduring the first quarter of fiscal 2005, compared to $4.9 million for the sameperiod in fiscal 2004.

 

The interest rates on our existing senior secured notes and on theborrowings under the corporate-owned life insurance policies are fixed at 9.75%and 11.76%, respectively.  The interestrate on our credit facility is floating (3.81% as of June 30, 2004).

 

*IncomeTaxes*. Income tax expense for the first quarterof fiscal 2005 and 2004 included provisions for state franchise and foreignincome taxes.  Federal tax provisions forthe first three months of fiscal 2005 were $2,313,000, and for the first threemonths of fiscal 2004, federal tax provisions were offset by recognition of taxbenefits associated with our loss carryforwards.While no federal income taxes were paid in the first three months of fiscal2005 due to the Company’s net operating loss carryforwards,we will utilize our remaining loss carryforwards andstart making federal income tax payments later in fiscal 2005 if currentprofitability levels continue through the remainder of the fiscal year.

 

10

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# **Liquidityand Capital Resources**

 

Working capital increased to $196.8 million atJune 30, 2004 from $139.5 million at March 31, 2004. The increase wasattributable to an increase in inventories of $41.2 million and an increase innet accounts receivable of $32.7 million, partially offset by an increase inaccounts payable and accrued liabilities. During the first three months offiscal 2005, our primary source of cash consisted of borrowings under ourcredit facility, which increased by $45.7 million from $53.5 million at March31, 2004 to $99.2 million at June 30, 2004. Our primary uses of cash included funding operating actvities, $42.4million, and capital expenditures, $7.2 million.

 

Cash used in operating activities was $42.4 million inthe first three months of fiscal 2005, compared to $23.1 million in the sameperiod of fiscal 2004. The change was primarily attributable to the increase ininventory to support sales growth and to higher prices for metal products.Additionally, increased sales resulted in higher accounts receivable.

 

For fiscal 2005, we haveplanned approximately $20.8 million of capital expenditures to be financed frominternally generated funds and borrowings under our credit facility.Approximately $12.8 million is for facility improvements and expansions, $6.5million is for routine replacement of machinery and equipment, and $1.5 millionis for further additions and enhancements to our management informationsystems. Planned capital expenditures in fiscal 2005 include commitments of$9.5 million that consist of a consolidation project in our Cleveland, Ohiofacilities, relocation to a replacement facility in Houston, Texas, a newfacility in Birmingham, Alabama and an expanded facility in Wrightsville,Pennsylvania. During the first three months of fiscal 2005, we spent $7.2million for planned capital expenditures.

 

As of June 30, 2004, we were in compliance with all covenantsunder our credit facility. However, based on our current expectations for theremainder of fiscal 2005, our capital expenditures will exceed the covenantlimitations on capital expenditures. We have received a consent agreement fromour bank syndicate to cover planned expenditures exceeding the covenantlimitations on capital expenditures for fiscal 2005.

 

As of June 30, 2004, our primary sources of liquidity wereavailable borrowings of $95.2 million under our credit facility, availableborrowings of approximately $15.2 million against certain life insurancepolicies we maintain and internally generated funds.  Borrowings under our credit facility aresecured by domestic inventory and accounts receivable. The availability ofborrowings under our credit facility is determined by the prevailing levels ofthose assets.  Our 9 3/4% seniorsecured notes are secured by a first priority lien (subject to permitted liens)on substantially all of our current and future acquired unencumbered realproperty, plant and equipment.  The lifeinsurance policy loans are secured by the cash surrender value of the policies,are non-recourse, and bear interest at a rate 0.5% greater than the dividendincome rate on the policies.  For thefirst three months of fiscal 2005, dividend income earned under the policiestotaled $4.8 million, compared to $3.6 million for the same period in fiscalyear 2004 and is reported as an offset to general and administrative expensesin the accompanying statements of operations. As of June 30, 2004, therewas approximately $40.3 million of cash surrender value in all life insurancepolicies we maintain, net of borrowings.

 

In addition, our Canadian subsidiary has available its own creditfacilities of up to CAD$9.0 million, including a revolving credit facility ofCAD$5.5 million, a term financial instruments facility of CAD$3.0 million to beused for hedging foreign currency and rate fluctuations, and a special creditfacility of CAD$0.5 million for letters of guaranty in connection with a leasefor our facility in Toronto. As of June 30, 2004, CAD$2.1 million (USD$1.6million) was outstanding under the revolving credit facility and a letter ofguaranty for CAD$0.5 million (USD$0.4 million) was issued.  None of the term financial instrumentsfacility was used as of June 30, 2004.

 

Our ongoing cash requirements for debt service and related obligationsare expected to consist primarily of interest payments under our creditfacility, interest payments on our senior secured notes, dividend payments toHolding in connection with the required repurchase of its capital stock fromdeparting stockholders pursuant to Holding’s Stockholders’ Agreement and ourstock bonus plan, capital expenditures and principal and interest payments onour industrial revenue bonds.  As ofJune 30, 2004, principal payments required by our outstanding industrialrevenue bond indebtedness amounted to $1.6 million in fiscal year 2005, $1.2million in fiscal year 2006, $0.7 million in fiscal years 2007, 2008 and 2009and $0.7 million in the aggregate thereafter through fiscal year 2011. Ourcredit facility will mature in April 2006 and we will not be required tomake any principal payments on our senior secured notes until their maturity infiscal year 2013.

 

Excluding the changes in borrowings under our credit facility, ourcommitments and contractual obligations as of June 30, 2004 did notmaterially change from those disclosed in our Annual Report on Form 10-K forthe year ended March 31, 2004.

 

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The following table summarizes our contractual cash obligations as ofJune 30, 2004. Certain of these contractual obligations are reflected onour balance sheet, while others are disclosed as future obligations.

 
| ** **                      | ** ** | **Payments Due By Period** | ** ** |
|---------------------------------|------------|----------------------------|------------|
| **Contractual  Obligations**    | ** ** | **Total**                  | ** ** | **Remainder  of Fiscal  2005** | ** ** | **Fiscal  2006** | ** ** | **Fiscal  2007** | ** ** | **Fiscal  2008** | ** ** | **Fiscal  2009** | ** ** | **Thereafter** | ** ** |
|                            |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total debt                      |       | $                          | 354,891    |   | $ | 3,176 |   | $ | 1,215 |   | $ | 98,345 |   | $ | 715 |   | $ | 715 |   | $ | 250,725 |   |
| Capital lease obligations       |       | —                     |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Operating leases (a)            |       | 95,257                     |       | 13,535 |   | 14,374 |   | 10,370 |   | 7,350 |   | 5,718 |   | 43,910 |   |
| Purchase obligations            |       | —                     |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Other long-term liabilities (b) |       | 7,728                      |       | 175 |   | 900 |   | 925 |   | 950 |   | 675 |   | 4,103 |   |
| Total                           |       | $                          | 457,876    |   | $ | 16,886 |   | $ | 16,489 |   | $ | 109,640 |   | $ | 9,015 |   | $ | 7,108 |   | $ | 298,738 |   |

 

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(a)                                  Excludes subleaseincome of $7,792, $543, $816, $828, $840, $845 and $3,920 for the aboveperiods, respectively.

(b)                                 Includes estimated annual payments basedon prior years trended amounts for postretirement benefits and estimated annualpayments of $700 over each of the next three years and a total of $700thereafter to meet ERISA minimum pension funding requirements beginning infiscal 2004. A payment of $700 was made in the first quarter of fiscal 2005.

 

We believe our sources of liquidity and capital resources aresufficient to meet all currently anticipated operating cash requirements,including debt service payments on our credit facility and 9 3/4% seniorsecured notes prior to their scheduled maturities in fiscal years 2007 and2013, respectively; however, we anticipate that it will be necessary to replaceor to refinance all or a portion of our credit facility and the senior securednotes prior to their respective maturities, although there can be no assuranceon what terms, if any, we would be able to obtain such refinancing oradditional financing. We will need to replace or extend our credit facility inearly fiscal 2006. Our ability to make interest payments on our credit facilityand the senior secured notes will be dependent on maintaining the level ofperformance reflected in the last twelve months, which will be dependent on anumber of factors, many of which are beyond our control, and the continuedavailability of revolving credit borrowings.

 

**Critical Accounting Policies**

 

Management’s Discussionand Analysis of Financial Position and Results of Operations discusses ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States for interimfinancial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X. The preparation of these financialstatements requires management to make estimates and judgments that affect thereported amounts of assets, liabilities, revenues and expenses and relateddisclosure of contingent assets and liabilities.  Actual results could differ significantlyfrom those estimates and judgments under different assumptions and conditions.  Management believes the critical accountingpolicies and areas that require the most significant judgments and estimates tobe used in the preparation of the consolidated financial statements are revenuerecognition, allowance for doubtful accounts, inventory reserves, pension and otherpostretirement benefits, insurance reserves, incentive compensation,contingencies and income tax accounting. These critical accounting policies, which are fully discussed in ourAnnual Report on Form 10-K for the year ended March 31, 2004, have beenconsistently applied to the consolidated condensed financial statementsincluded herein. There have been no material changes made to the criticalaccounting policies during the periods presented in the accompanyingconsolidated condensed financial statements.

 

**Item 3.****  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

In the ordinary course of business, we are exposed to various marketrisk factors caused by changes in commodity prices, interest rates and foreigncurrency exchange rates.  We do not usefinancial instruments or enter into hedging transactions for speculative ortrading purposes with respect to managing these market risks.  However, we have used and will continue toevaluate the use of financial instruments to reduce our exposure to higherinterest costs during periods of rising interest rates.

 

12

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At June 30, 2004 and March 31, 2004, no such financialinstruments existed.  Our exposure tochanging interest rates is limited to our revolving credit facility such thatour results of operations and cash flows during the first three months offiscal 2005 would have been impacted by approximately $1.0 million for each 1%increase or decrease in the applicable interest rate.

 

Since late calendar 2003, metal producers have significantly increasedprices and have imposed significant material surcharges. In addition, there hasbeen a very tight supply of metal in 2004. Raw material price increases havetranslated into higher prices for the Company’s products and as the Companyutilizes existing metal inventories, it has resulted in higher gross profitdollars and margins. We expect raw material prices for our products to continueat the current pricing levels. Although we have generally been successful inpassing the increased costs and surcharges on to our customers, it is possiblethat we may not be able to obtain all the material required by our customers orpass the increased material costs fully to our customers due to the competitivenature of our business. Changing metal prices could adversely affect our netsales, gross profit and net income.

 

Our exposure to market risk for changes in foreign currency exchangerates is limited to our Canadian operations and the Canadian dollar.  Changes in the exchange rate of the Canadiandollar have not and are not expected to have a material impact on our resultsof operations and cash flows.  Weestimate that a 10% change in the average exchange rate of the Canadian dollarduring the first three months of fiscal 2005 would have impacted our results ofoperations by approximately $0.2 million.

 

**Item 4.****  CONTROLS AND PROCEDURES**

 

As of the end of the period covered by this report, an evaluation wascarried out by our Chief Executive Officer and Chief Financial Officer, withthe assistance of other members of management, of the effectiveness ofdisclosure controls and procedures (as defined in Rule 15d-14(c) under theSecurities Exchange Act of 1934). Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that, as of the periodcovered by this report, the disclosure controls and procedures were effectivein ensuring that all material information required to be disclosed by theCompany in the reports filed or furnished by us under the Securities ExchangeAct of 1934, as amended, was gathered, analyzed and reported or otherwise madeknown to them and other members of management, as appropriate to allow timelydecisions regarding required disclosure.

 

There have been no significant changes in our internal controls, or inother factors that could significantly affect these controls, subsequent to thedate the evaluation was completed.

 

Notwithstanding the foregoing, the Company has engaged an independentcontractor to review its systems of disclosure controls and procedures,including internal control over financial reporting, in preparation formanagement’s assessment and the independent auditor’s attestation regarding theeffectiveness of our internal control over financial reporting, as required bySection 404 of the Sarbanes-Oxley Act of 2002.  Such review is ongoing and the work of thecontractor is being reviewed and monitored by the Audit Committee of our Boardof Directors. In addition, the Company has engaged an independent contractor toreview its information security policies, standards, and vulnerabilityassessment. Upon completion of the initial phase, the independent contractorwill conduct semi-annual reviews.

 

We have adopted a code of ethics for our Chief Executive Officer, asprincipal executive officer, and our Chief Financial Officer as our seniorfinancial officer pursuant to Section 406 of the Sarbanes–Oxley Act of2002.  We filed such code of ethicsdocument as Exhibit 10.22 to our Annual Report on Form 10-K for the fiscal yearended March 31, 2003 and will provide a copy to any person without chargeupon written request to our Secretary. We have also established a confidential hotline to allow persons toreport, without fear of retaliation, any inappropriate acts or omissionsaffecting our financial statements, internal controls and accounting policiesor practices.

 

# **PART II - OTHER INFORMATION**

# ** **

**Item1.****  LEGALPROCEEDINGS**

 

We are occasionally involved in ordinary, routine litigation incidentalto our normal course of business, none of which we believe to be material toour financial condition or results of operations. We maintain various liabilityinsurance coverages to protect our assets from lossesarising out of or involving activities associated with ongoing and normalbusiness operations.

 

13

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In 1996, the Department of Labor, or the “DOL,” initiated aninvestigation into our employee stock ownership plan, or the “Plan,” andCompany contributions to the Plan for fiscal years commencing March 31,1992.  In the course of itsinvestigation, the DOL and its advisors reviewed the valuations of Holding’scommon and preferred stock prepared for the Plan and challenged the methodologyused in preparing the valuations.

 

On March 8, 2002, the DOL sued us, Holding, our Plan and formermembers of our benefits committee in the federal district court for the CentralDistrict of California. The DOL claimed that the valuations of Holding’s commonstock used to make annual contributions to our Plan in each of the years 1994through 2000 contained significant errors that resulted in the common stockbeing overvalued, and that the failure of the members of our benefits committeeto detect and correct the errors was a breach of their fiduciary duty underERISA. As a result of the alleged overvaluations, the DOL contended that thecontributions to our Plan were prohibited transactions under ERISA. OnJanuary 27, 2003, we signed a consent order and settlement agreement withthe DOL in connection with their lawsuit. The key provisions of the agreement are as follows: (i)we are not required to make any payments under the agreement at this time; (ii)we are prohibited to make further common stock contributions to the stock bonusplan; (iii) we will continue to obtain annual appraisals of Holding stock usingmethodology consistent with prior appraisals, and use that appraised value asthe purchase price for repurchases of common stock as we have done in the past,and; (iv) if the annual appraisal of our common stock is less than $4.25 pershare, we shall pay a floor price of $4.25 per share in connection with therepurchase of common stock from departing employees for shares that wereoriginally contributed to the stock bonus plan for the plan years 1994 through2000.

 

If we pay the floor price in connection with the repurchase of commonstock from departing employees, the agreement also allows the DOL to assess theCompany a penalty equal to 20% of the amount calculated by multiplying thedifference between the appraised value and the floor price by the number ofshares repurchased at the floor price.

 

We do not believe the DOL settlement will have a material impact on ourfinancial condition or future results of operations, and we believe paymentsunder the settlement, if any, will most likely be paid in immaterial amountswhich will be spread over many years.

 

In December 2003, we entered into agreements with Holding, asubsidiary and the principal stockholders of Holdingproviding for a merger and financial restructuring.  Prior to approval of the transaction, the DOLinitiated a review of the procedures followed by our benefits committee inconnection with evaluation of the proposed transaction and other strategicalternatives available to Holding and an assessment of whether or not theproposed transaction complied with the terms of the consent order and the legalrequirements applicable to the stock bonus plan.  Such review resulted in delays that, combinedwith other transactional requirements, precluded the consummation of the mergerand financial restructuring on the terms originally proposed.

 

The agreements providing for the financial restructuring wereterminated on July 29, 2004. We are considering changes to the proposedtransaction that will achieve the objectives of the original restructuringtransaction, while meeting the concerns expressed by the DOL.  Holding intends to review any proposedtransaction with the DOL in advance under their compliance assistance programto ensure compliance with the terms of the consent order and applicablelaw.  There can be no assurance that arevised transaction will be agreed upon, approved by the Holding stockholdersand consummated.

 

On April 22, 2002, we were sued by Champagne Metals, a smallmetals service center distributing aluminum coil products in Oklahoma, allegingthat we had conspired with other metal service centers to induce or coercealuminum suppliers to refuse to designate Champagne Metals as a distributor,which resulted in unspecified damages. EMJ and the other defendants filed motions for summary judgment, and onJune 15, 2004, the federal District Court for the Western District ofOklahoma entered an order granting the motions for summary judgment of each ofthe defendants including EMJ and dismissed the case.  The plaintiff filed notice of appeal onJuly 13, 2004.

 

# **Item 5.**  OTHER INFORMATION

# ** **

On January 14, 2004,the Company announced that it had reached an agreement with Holding’s principalsecurity holdings providing for a restructuring of the combined capitalstructure.  The financial restructuringwas to be effected pursuant to an Agreement and Plan of Merger andReorganization dated as of December 18, 2003 (the “Merger Agreement”),among the Company, Holding and EMJ Metals LLC, a newly-formed wholly-ownedsubsidiary as well as, an Exchange Agreement dated as of December 18, 2003(the “Exchange Agreement”), among the Company, Holding and Kelso InvestmentAssociates IV, L.P. and certain of its affiliates (“Kelso”).  Among its provisions, the Merger

 

14

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Agreement provides, that the Company orHolding may terminate the Merger Agreement if the merger shall not have beenconsummated by May 31, 2004.  Similarly,the Exchange Agreement provides that the Exchange Agreement shall terminateupon the earlier to occur of (a) the effective date of the closing of thetransactions contemplated by the Merger Agreement and (b) termination of theMerger Agreement.  The parties to theMerger Agreement executed Termination of Merger Agreement and ExchangeAgreement dated as of July 30, 2004, terminating the Merger Agreement andthe Exchange Agreement.  Notwithstandingsuch termination, representatives of Holding’s Special Committee, Kelso, the Companyand the Company’s Benefits Committee are continuing to evaluate an alternativetransaction similar to the merger and other strategic alternatives.

 

**Item 6.****           EXHIBITS AND REPORTS ONFORM 8-K**

 

(a) Exhibits
| 4.18  | Consent to Increase Capital Expenditures, dated June 30, 2004,  by and among Earle M. Jorgensen Holding Company, Inc., EMJ, the banks and  other financial institutions signatory thereto and Deutsche Bank Trust  Company Americas, as Agent. |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.25 | Termination of Merger Agreement and Exchange Agreement, dated  July 29, 2004, by and among Earle M. Jorgensen Company, Earle M.  Jorgensen Holding Company, Inc. and EMJ Metals, LLC.                                                          |
| 31.1  | Certification of Financial Reports by Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                      |
| 31.2  | Certification of Financial Reports by Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                      |
| 32.1  | Certification of Financial Reports by Chief Executive Officer and  Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                         |

 

(b)         Reports on Form 8-K

We furnished a report on Form 8-K on August 4,2004, under Item 12 announcing our results of operations and financial positionas of and for the three month period ended June 30, 2004.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned hereunto duly authorized.

 
|                       | EARLE M. JORGENSEN COMPANY                                                                          |   |
|----------------------------|-----------------------------------------------------------------------------------------------------|--------|
|                       |                                                                                                |
|                       |                                                                                                |
|                       | /s/ Maurice S. Nelson, Jr.                                                                          |   |
| Date: August 13, 2004 | Maurice S. Nelson, Jr.                                                                              |
|                       | President, Chief Executive Officer and  Chief Operating Officer                                     |   |
|                       |                                                                                                |
|                       |                                                                                                |   |
|                       |                                                                                                |   |
|                       | /s/ William S. Johnson                                                                              |   |
| Date: August 13, 2004 | William S. Johnson                                                                                  |   |
|                       | Vice President, Chief Financial Officer and  Secretary (Principal Financial and Accounting Officer) |
|                       |
|                            |                                                                                                     |        |  |

 

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