Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
---------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 1-13123
METALS USA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(State or other jurisdiction 76-0533626
of incorporation or organization) (I.R.S. Employer
Identification Number)
THREE RIVERWAY, SUITE 600
HOUSTON, TEXAS 77056
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (713) 965-0990
--------------------
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
--------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Based upon the March 15, 2000 New York Stock Exchange closing price of $7.38
per share, the aggregate market value of the Registrant's outstanding stock held
by non-affiliates was approximately $189.3 million.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of Registrant's definitive proxy statement, to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A not later than
120 days after the close of the Registrant's fiscal year, are incorporated by
reference under Part III.
================================================================================
THIS ANNUAL REPORT ON FORM 10-K CONTAINS STATEMENTS WHICH CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. THESE STATEMENTS APPEAR IN A NUMBER OF PLACES,
INCLUDING ITEM 1. "BUSINESS," ITEM 3. "LEGAL PROCEEDINGS" AND ITEM 7.
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." SUCH STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING
TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS," "MAY," "ESTIMATES," "WILL," "SHOULD,"
"PLANS" OR "ANTICIPATES" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR
COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY. READERS ARE CAUTIONED
THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND INVOLVE SIGNIFICANT RISKS AND UNCERTAINTIES, AND THAT ACTUAL
RESULTS MAY VARY MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS AS A
RESULT OF VARIOUS FACTORS. THESE FACTORS INCLUDE THE EFFECTIVENESS OF
MANAGEMENT'S STRATEGIES AND DECISIONS, GENERAL ECONOMIC AND BUSINESS CONDITIONS,
DEVELOPMENTS IN TECHNOLOGY, NEW OR MODIFIED STATUTORY OR REGULATORY REQUIREMENTS
AND CHANGING PRICES AND MARKET CONDITIONS. THIS REPORT IDENTIFIES OTHER FACTORS
THAT COULD CAUSE SUCH DIFFERENCES. NO ASSURANCE CAN BE GIVEN THAT THESE ARE ALL
OF THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO VARY MATERIALLY FROM THE
FORWARD-LOOKING STATEMENTS.
i
METALS USA, INC.
P A R T I
ITEM 1. BUSINESS
GENERAL
Metals USA, Inc. ("Metals USA") completed its initial public offering on July
11, 1997. Metals USA acquired, in separate merger transactions (collectively,
the "IPO") in exchange for cash and shares of its $.01 par value common stock
("Common Stock"), eight companies (each a "Founding Company" and, collectively,
the "Founding Companies"). Since that date, Metals USA has acquired numerous
additional metal processing and distribution companies and businesses (the
"Subsequent Acquisitions" and collectively with the Founding Companies, the
"Acquired Companies"). The Acquired Companies are engaged in value-added
processing and distribution of steel, aluminum and specialty metals, as well as
manufacturing metal components and, on average, have been in business for over
40 years. Unless otherwise indicated, all references to the "Company" herein
include the Acquired Companies and other entities wholly-owned by Metals USA,
and references herein to "Metals USA" mean Metals USA, Inc.
The Company purchases metal from primary producers who focus on large volume
sales of unprocessed metals in standard configurations and sizes. In most cases,
the Company performs the customized, value-added processing services required to
meet specifications provided by end-use customers. By providing these services,
as well as offering inventory management and just-in-time delivery services, the
Company enables its customers to reduce material costs, decrease capital
required for raw materials inventory and processing equipment and save time,
labor and other expenses. The Company believes that fostering the development of
long-term working relationships with key suppliers and customers enables it to
reduce its customers' overall cost of manufactured metal products. In addition
to its metals processing capabilities, the Company manufactures higher-value
finished building products.
The Company sells to over 60,000 customers in businesses such as the
machining, furniture, transportation equipment, power and process equipment,
industrial/commercial construction, consumer durables and electrical equipment
industries, and machinery and equipment manufacturers. The Company's broad
customer base and its wide array of metals processing capabilities, products and
services, coupled with its broad geographic coverage of the United States,
reduces its susceptibility to economic fluctuations affecting any one industry
or geographical area.
During 1998, the Company organized the Acquired Companies into the following
four operating segments: Heavy Carbon, Flat Rolled, Specialty Metals and
Building Products. Each segment is led by an experienced entrepreneurial-focused
executive, who is supported by a professional staff in finance, purchasing and
sales and marketing. This segment-oriented organizational structure facilitates
the efficient advancement of the Company's goals and objectives to achieve
operational synergies, focused capital investment and improved working capital
turnover.
HEAVY CARBON
Heavy Carbon has current annualized revenues of approximately $800 million
and forty-three locations throughout the United States, which makes it the
largest operating segment. This operating segment sells wide-flange beams,
plate, tubular, angles and other structural shapes. These products are available
in a number of alloy grades and sizes and generally undergo additional
processing prior to customer delivery. Processing services include cutting,
cambering/leveling, punching, bending, shearing, cut-to-length and T-splitting.
Heavy Carbon sells to over 27,000 individual customers predominantly in the
fabrication, construction, machinery and equipment, transportation and energy
industries.
FLAT ROLLED
Flat Rolled has current annualized revenues of approximately $725 million and
sixteen locations in the mid-west region of the United States. This operating
segment sells steel in a variety of alloy grades and sizes. Steel mills
generally ship steel in sizes less than a quarter of an inch in thickness in
continuous coils that typically weigh forty to fifty thousand pounds each. Few
customers can handle steel in this form. Accordingly, substantially all of the
material sold by Flat Rolled undergo additional processing prior to customer
delivery. Processing services include slitting, precision blanking, leveling,
cut-to-length, laser cutting, punching, bending and shearing.
1
METALS USA, INC.
ITEM 1. BUSINESS (CONTINUED)
Flat Rolled sells to over 3,000 individual customers in a variety of
industries, including the electrical manufacturing, fabrication, furniture,
appliance manufacturers, machinery and equipment and transportation industries.
SPECIALTY METALS
Specialty Metals has current annualized revenues of approximately $425
million and twenty-six locations throughout the United States. This operating
segment sells a diverse number of products including stainless steel, ductile
iron, brass, copper, aluminum, magnesium and titanium. These products are
available in a number of alloy grades and sizes and generally undergo additional
processing prior to customer delivery. Processing services include cutting,
leveling, punching, bending, shearing and cut-to-length. Specialty Metals sells
to over 19,000 individual customers in a number of industries, including the
fabrication, industrial machinery and equipment, aerospace and electronics
industries.
BUILDING PRODUCTS
Building Products has current annualized revenues of approximately $175
million and sixty-eight locations throughout the southeastern, southwest and
western regions of the United States. This operating segment sells a number of
finished products that are both cost and energy efficient for use in residential
applications such as sunrooms, roofing products, awnings and solariums.
Commercial uses of these products include large area covered canopies, awnings
and covered walkways. Building Products sells to over 8,000 individual customers
predominantly in construction, wholesale trade and building material industries.
For additional industry segment information, see Note 11 of Notes to
Consolidated Financial Statements in Item 8. "Financial Statements and
Supplementary Data."
INDUSTRY OVERVIEW
Companies operating in the metals industry can be generally characterized as:
(i) primary metals producers, (ii) metals processors/service centers or (iii)
end-users. The Company believes that both primary metals producers and end-users
are increasingly seeking to have their metals processing and inventory
management requirements met by value-added metals processors/service centers.
Primary metals producers, which manufacture and sell large volumes of steel,
aluminum and specialty metals in standard sizes and configurations, generally
sell only to those large end-users and metals processors/service centers who do
not require processing of the products and who can tolerate relatively long lead
times. Metals processors/service centers, which offer services ranging from
precision, value-added preproduction processing in accordance with specific
customer demands, to storage and distribution of unprocessed metal products,
function as intermediaries between primary metals producers and end-users, such
as contractors and original equipment manufacturers ("OEMs"). End-users
incorporate the processed metal into a product, in some cases without further
modification.
Historically, metals service centers provided few value-added services and
were little more than distribution centers, linking metals producers with all
but the largest end-users of metals. In the past two decades, however, the
metals service center business has evolved significantly, and the most
successful metals service centers have added processing capabilities, thereby
offering an increasingly broad range of value-added services and products both
to primary metals producers and end-users. This evolution has resulted from
changing trends in the primary metals industry as well as among end-users.
The current trend among primary metals producers is to focus on their core
competency of high-volume production of a limited number of standardized metal
products. This change in focus has been driven by their need to develop and
improve efficient, volume-driven production techniques in order to remain
competitive. As a result, during the past two decades, most of the primary
producers have sold their service centers. Accordingly, most end-users are no
longer able to obtain processed products directly from primary metals producers
and have recognized the economic advantages associated with outsourcing their
customized metals processing and inventory management requirements. Outsourcing
permits end-users to reduce total production cost by shifting the responsibility
for preproduction processing to value-added metals processors/service centers,
whose higher efficiencies in performing these processing services make the
ownership and operation of the necessary equipment more financially feasible.
2
METALS USA, INC.
ITEM 1. BUSINESS (CONTINUED)
Value-added metals processors/service centers have also benefited from
growing customer demand for inventory management and just-in-time delivery
services. These services, which are not normally available from primary metals
producers, enable end-users to reduce material costs, decrease capital required
for inventory and equipment and save time, labor and other expenses. In response
to customer expectations, the more sophisticated value-added metals
processors/service centers have acquired specialized and expensive equipment to
perform customized processing and have installed sophisticated computer systems
to automate order entry, inventory tracking, management sourcing and work-order
scheduling. Additionally, some value-added metals processors/service centers
have installed electronic data interchange ("EDI") between their computer
systems and those of their customers to facilitate order entry, timely delivery
and billing.
These trends have resulted in value-added metals processors/service centers
playing an increasingly important role in all segments of the metals industry.
Metals processors/service centers now serve the needs of over 300,000 OEMs and
fabricators nationwide.
INDUSTRY CONSOLIDATION
Based on industry data, the Company believes that the metals
processor/service center industry is highly fragmented, with as many as 3,500
participants. According to industry data, the metals processor/service center
industry generates over $75 billion in annual net sales.
The necessity for value-added metals processors/service centers to add
specialized processing equipment, manage inventory on behalf of their customers
and use sophisticated computer systems is requiring industry participants to
make substantial capital investments in order to remain competitive. In
addition, many customers are seeking to reduce their operating costs by limiting
the number of suppliers with whom they do business, often eliminating those
suppliers offering limited ranges of products and services. These trends have
placed the substantial number of small, owner-operated businesses at a
competitive disadvantage because they have limited access to the capital
resources necessary to increase their capabilities. As a result, smaller
companies are finding it increasingly difficult to compete as present industry
trends continue, and the Company believes these businesses represent potential
acquisition candidates.
STRATEGY
The Company's objective is to become a leading national value-added metals
processor/service center, to manufacture higher-value components from processed
metals. The principal components of the Company's growth plan are to improve
operating margins, accelerate internal sales growth and expand through
acquisitions. Management plans to achieve these objectives as described in the
following paragraphs.
IMPROVING OPERATING MARGINS
The Company believes there are significant opportunities to realize operating
efficiencies and increase the Company's profitability. The key components of
this strategy are:
INCREASE OPERATING EFFICIENCIES. The Company believes that its position in
the industry presents significant opportunities to achieve operating
efficiencies and cost savings. The Company intends to use its increased
purchasing power to gain volume discounts and to develop more effective
inventory management systems. The Company expects to obtain measurable cost
savings in such areas as vehicle leasing and maintenance, information systems
and purchasing through contractual relationships with key suppliers. Moreover,
the Company intends to review its operating and training programs at the local
and regional levels to identify those "best practices" that can be successfully
implemented throughout its operations. As primary metals producers and end-users
continue to follow the industry trend of outsourcing processing and distribution
services to value-added metals processors/services centers, the Company expects
to increase asset utilization, particularly of its metals processing machinery,
and realize increased efficiencies and economies of scale.
CENTRALIZE APPROPRIATE ADMINISTRATIVE FUNCTIONS. The Company believes that
there are significant opportunities to improve operating margins by
consolidating administrative functions such as finance, human resources,
information technology, marketing, insurance, employee benefits, accounting and
risk management.
3
METALS USA, INC.
ITEM 1. BUSINESS (CONTINUED)
ACCELERATING INTERNAL SALES GROWTH
A key component of the Company's strategy is to accelerate internal sales
growth at each processor/service center. The key elements of this internal
growth strategy are:
EXPAND PRODUCTS AND SERVICES TO EXISTING CUSTOMERS. The Company believes it
will be able to expand the products and services it offers to its existing
customers by leveraging the specialized and diverse product, processing and
marketing expertise among the existing processor/service centers. Additionally,
the Company believes that there are significant opportunities to accelerate
internal growth by making capital investments in areas such as inventory
management, logistics systems and processing equipment, thereby expanding the
range of processes and services offered by the Company. The Company continues to
develop and maintain long-term relationships with its customers in response to
their demand for shorter production cycles, outsourcing, just-in-time delivery
and other services that lower customers' total production costs.
ADD NEW CUSTOMERS. The Company believes that there are numerous OEMs not
currently served by the Company that could reduce their production costs by
taking advantage of the Company's processing, inventory management and other
services. Many of these OEMs currently perform in-house metals processing tasks
and maintain significant inventories of metal. During 1998, the Company
appointed three experienced industry professionals, Vice Presidents of the Flat
Rolled, Heavy Carbon and Specialty Metals product segments, to design and
implement a national program to attract significant new accounts and expand the
range of services provided to our larger customers. With their leadership and
the Company's existing well-trained, technically competent sales force, the
Company believes that it can demonstrate to these OEMs the cost savings
achievable through the Company's processing, inventory management and other
services. The Company also intends to implement a Company-wide marketing program
that will use professional marketing services and to adopt "best practices"
throughout its operations to identify, obtain and maintain new customers. In
addition, the Company intends to increase its visibility through trade shows,
associations, publications and telemarketing.
EXPANDING THROUGH ACQUISITIONS
The Company believes that the metals processor/service center industry is
highly fragmented and consolidating, with as many as 3,500 participants,
collectively generating over $75 billion in annual net sales. The key elements
of the Company's acquisition strategy are:
ENTER NEW GEOGRAPHIC MARKETS. The Company intends to expand into geographic
markets not currently served by the Acquired Companies by acquiring
well-established value-added metals processors/service centers that, like the
Acquired Companies, are leaders in their regional markets.
EXPAND WITHIN EXISTING GEOGRAPHIC MARKETS. The Company also plans to acquire
additional value-added metals processors/service centers in many of the markets
in which it currently operates in order to expand the volume and scope of the
Company's operations in a particular market. The Company also intends to pursue
"tuck-in" acquisitions of smaller operations to increase processing capabilities
at existing facilities, thereby improving operating efficiencies and increasing
asset utilization without a proportionate increase in administrative costs.
ENTER COMPLEMENTARY PROCESSING AND SERVICES MARKETS. The Company intends to
acquire companies offering complementary processes and services to those
industries currently served by the Company as well as new industries. This will
enable existing and future customers to obtain a broader range of value-added
processes and services from the Company. The Company also intends to leverage
its metals processing capabilities by acquiring leading companies who
manufacture higher-value components from processed metals.
OPERATING ON A DECENTRALIZED BASIS
The Company's product segment management teams, manage their businesses on a
decentralized basis, with local management retaining responsibility for
day-to-day operations, profitability and customer relationships.
4
METALS USA, INC.
ITEM 1. BUSINESS (CONTINUED)
ACQUISITION PROGRAM
The Company believes it will continue to be regarded by acquisition
candidates as an attractive acquiror because of: (i) the Company's strategy for
creating a national, comprehensive and professionally managed value-added metals
processor/service center company; (ii) the Company's decentralized operating
strategy which emphasizes an ongoing role for former owners, management and key
personnel of acquired businesses, (iii) the Company's access to financial
resources as a publicly-held company and (iv) the potential for increased
profitability due to purchasing economies, inventory management, centralization
of administrative functions, enhanced systems capabilities and access to
increased marketing resources.
As consideration for future acquisitions, the Company intends to use various
combinations of cash, notes and its Common Stock. The consideration for each
future acquisition will vary on a case-by-case basis, with the major factors in
establishing the purchase price being historical operating results, future
prospects of the target and the ability of the target to complement the services
offered by the Company.
PROCESSING SERVICES AND PRODUCTS
The Company engages in preproduction processing of steel, aluminum and
specialty metals and acts as an intermediary between primary metals producers
and end-users. The Company purchases metals from primary producers, maintains an
inventory of various metals to allow rapid fulfillment of customer orders and
performs customized processing services to the specifications provided by
end-users and other customers. By providing these services, as well as offering
inventory management and just-in-time delivery services, the Company enables its
customers to reduce overall production costs and decrease capital required for
raw materials inventory and metals processing equipment.
The Company buys steel and aluminum from integrated mills and mini-mills and
specialty metals from foundries. The Company purchases its raw materials in
anticipation of projected customer requirements based on interaction with, and
feedback from customers, market conditions, historical usage and industry
research. Primary producers typically find it more cost effective to focus on
large volume production and sale of steel, aluminum and specialty metals in
standard sizes and configurations to large volume purchasers. For example, flat
rolled steel is normally sold by mills in coils, typically weighing between
forty and fifty thousand pounds. The Company processes the metals to the precise
thickness, length, width, shape, temper and surface quality specified by its
customers. Value-added processes provided by the Company include:
o SHEARING AND CUTTING TO LENGTH -- the cutting of metals into pieces and
along the width of a coil to create sheets or plates.
o PRECISION BLANKING -- the process in which flat rolled metal is cut into
precise two dimensional shapes by passing it through a press employing a
blanking die.
o LASER, FLAME AND PLASMA CUTTING -- the cutting of metals to produce
various shapes according to customer-supplied drawings.
o LEVELING -- the flattening of metals to uniform tolerances for proper
machining.
o SLITTING -- the cutting of coiled metals to specified widths along the
length of the coil.
o SAWING -- the cutting to length of bars, tubular goods and beams.
o PICKLING -- a chemical treatment to improve surface quality by removing
the oxidation and scale which develops on the metal shortly after it is
hot-rolled.
o TEE-SPLITTING-- the splitting of metal beams.
5
METALS USA, INC.
ITEM 1. BUSINESS (CONTINUED)
o PLATE FORMING AND ROLLING -- the forming and bending of plates to
cylindrical or required specifications.
o EDGE TRIMMING -- a process which removes a specified portion of the
outside edges of coiled metal to produce uniform width and round or smooth
edges.
o CAMBERING -- the bending of structural steel to improve load-bearing
capabilities.
o METALLURGY -- the analysis and testing of the physical and chemical
composition of metals.
Additional capabilities of the Company include applications engineering and a
variety of other value-added processes such as blasting, painting and custom
machining. Using these capabilities, the Company uses processed metals to
manufacture higher-value components, such as finished building products, and
machines specialty metals into such items as bushings, pump parts and hydraulic
cylinder parts.
Once an order is received, the appropriate inventory is selected and
scheduled for processing in accordance with the customer's requirements and
specified delivery date. Orders are monitored by the Company's computer systems,
including, in certain locations, the use of bar coding to aid in and reduce the
cost of tracking material. The Company's computer systems record the source of
all metal shipped to customers. This enables the Company to identify the source
of any metal which later is shown not to meet industry standards or that fails
during or after manufacture. This capability is important to the Company's
customers as it allows them to assign responsibility for non-conforming or
defective metal to the mill or foundry that produced the metal. Many of the
products and services provided by the Company can be ordered and tracked through
EDI, a sophisticated electronic network that directly connects the Company's
computer system to those of its customers.
A majority of the Company's orders are filled within 24-48 hours. This is
accomplished through the Company's special inventory management programs which
permit the Company to deliver processed metals in accordance with the
just-in-time inventory programs of its customers. The Company is required to
carry sufficient inventory of raw materials to meet the short lead time and
just-in-time delivery requirements of its customers.
While the Company ships products throughout the United States, most of its
customers are located within a 250-mile radius of the Company's facilities, thus
enabling an efficient delivery system capable of handling a large number of
short lead-time orders. The Company transports most of its products directly to
its customers either through common or contract trucking companies or with its
own trucks for short-distance and/or multi-stop deliveries.
The Company has quality control systems to ensure product quality and
traceability throughout processing. Quality controls include periodic supplier
audits, customer approved quality standards, inspection criteria and metals
source traceability. Of the Company's facilities, 21 have International
Standards Organization ("ISO") 9002 certification, while several others are
actively working on their certification. Management believes that the Company's
emphasis on quality assurance is a distinct competitive advantage and is
increasingly important to customers seeking to establish relationships with
their key suppliers.
SOURCES OF SUPPLY
In recent years, steel and aluminum production in the United States has
fluctuated from period to period as mills attempt to match production to
projected demand. Periodically, this has resulted in shortages of, or increased
ordering lead times for, some steel or aluminum products, as well as
fluctuations in price. Typically, metals producers announce price changes with
sufficient advance notice to allow the Company to order additional products
prior to the effective date of a price increase, or to defer purchases until a
price decrease becomes effective. The Company's purchasing decisions are based
on its forecast of the availability of metal products, ordering lead times and
pricing, as well as its prediction of customer demand for specific products.
The Company purchases steel and aluminum from domestic and foreign integrated
mills and mini-mills and specialty metals from foundries. The Company's domestic
steel suppliers include Nucor Corp., LTV Steel Co., Bethlehem Steel Corp. and
National Steel Corp. Although most forms of steel and aluminum produced by mills
can be obtained from a number of integrated mills or mini-mills, both
domestically and internationally, there are a few
6
METALS USA, INC.
ITEM 1. BUSINESS (CONTINUED)
products that are available from only a limited number of producers. Since most
metals are shipped F.O.B., the mill and the transportation of metals is a
significant cost factor. The Company seeks to purchase metals to the extent
possible from the nearest mill, unless a more distant mill has a significantly
lower price. The Company believes that it can purchase raw materials in
sufficient quantities to permit it to realize purchasing economies and discounts
from its suppliers. The Company believes it is not materially dependent on any
one of its suppliers for raw materials and that its relationships with its
suppliers are good.
SALES AND MARKETING; CUSTOMERS
The Company believes that its commitment to consistent quality, service and
just-in-time delivery has enabled it to develop and maintain long-term
relationships with existing customers, while expanding its market penetration
through the use of its sales and marketing program. The Company's sales and
marketing program focuses on the identification of OEMs and other metals
end-users that could achieve significant cost savings through the use of the
Company's inventory management, processing, just-in-time delivery and other
services. The Company uses a variety of methods to identify potential customers,
including the use of databases, telemarketing, direct mail and participation in
manufacturers' trade shows. Customer referrals and the knowledge of the
Company's sales force about regional end-users also result in the identification
of potential customers. Once a potential customer is identified, the Company's
"outside" salespeople assume responsibility for visiting the appropriate
contact, typically the purchasing manager or manager of operations. The
Company's salesperson seeks to explain the potential cost savings achievable
through the Company's services and the Company's commitment to service and
quality.
The Company employs a sales force consisting of "inside" and "outside"
salespeople. "Inside" salespeople are primarily responsible for maintaining
customer relationships, receiving and soliciting individual orders and
responding to service and other inquiries by customers. Increasingly, these
"inside" salespeople have been given responsibility for telemarketing to
potential customers. The Company's "outside" sales force is primarily
responsible for identifying potential customers and calling on them to explain
the Company's services. The sales force is trained and knowledgeable about the
characteristics and applications of various metals and applications, as well as
the manufacturing methods employed by the Company's customers. The Company
believes that its high level of interaction with its customers provides it with
meaningful feedback and information about sales opportunities.
Nearly all sales by the Company are on a negotiated price basis. In some
cases, sales are the result of a competitive bid process where a customer sends
the Company and several competitors a list of products required and the Company
submits a bid on each product.
The Company has a diverse customer base of more than 60,000 customers, with
no single customer accounting for more than 1 1/2% of the Company's revenues in
1999. The Company believes that its long-term relationships with many of its
customers contribute significantly to its success.
COMPETITION
The Company is engaged in a highly-fragmented and competitive industry.
Competition is based on price, quality, service, timeliness and geographic
proximity. The Company competes with a large number of other metals
processors/service centers on a regional and local basis, some of which may have
greater financial resources than the Company, and several of which are
publicly-held companies. The Company also competes to a lesser extent with
primary metals producers, who typically sell directly to only very large
customers requiring regular shipments of large volumes of metals. The Company
may also face competition for acquisition candidates from these publicly-held
companies, most of whom have acquired a number of metals service center
businesses during the past decade. Other smaller metals processors/service
centers may also seek acquisitions from time to time.
The Company believes that it will be able to compete effectively because of
its significant number of locations, geographic dispersion, knowledgeable and
trained sales force, integrated computer systems, modern equipment, broad-based
inventory, combined purchasing volume and operational economies of scale. The
Company intends to seek to differentiate itself from its competition in terms of
service and quality by investing in systems and equipment, training and offering
a broad range of products and services, as well as through its entrepreneurial
culture and decentralized operating structure.
7
METALS USA, INC.
ITEM 1. BUSINESS (CONTINUED)
On March 1, 2000, the Company announced the formation of a new formed and
wholly owned subsidiary i-Solutions Direct, Inc. ("i-Solutions") to develop the
Company's integrated supply services and web-based e-commerce initiative.
i-Solutions will build on the web-based supply system it created to support the
Department of Defense contract obtained two years ago using technology from
Oracle Corp. to develop and implement an Internet based supply chain solution
for private sector companies. The Company believes the experience gained from
having successfully implemented the Department of Defense contract will further
assist its customers in reducing costs and errors in metal procurement
activities and will permit them to move closer to a true "just-in-time"
inventory management program.
During the past two years, the Company has recognized the development of a
number of different metal supply related e-commerce initiatives. Although the
Company has not joined any of these third party initiatives, it is actively
developing its own e-commerce initiative and continues to evaluate the
business-to-business internet marketplace for both raw materials and value-added
metals processing services. The Company is unable to predict the future impact
of web based e-commerce on its results of operations or financial position.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
The Company's operations are subject to a number of federal, state and local
regulations relating to the protection of the environment and to workplace
health and safety. In particular, the Company's operations are subject to
extensive federal, state and local laws and regulations governing waste
disposal, air and water emissions, the handling of hazardous substances,
environmental protection, remediation, workplace exposure and other matters.
Hazardous materials the Company uses in its operations include lubricants,
cleaning solvents and hydrochloric acid (used in pickling operations at two of
its facilities).
The Company's management believes that the Company is in substantial
compliance with all such laws and does not currently anticipate that the Company
will be required to expend any substantial amounts in the foreseeable future in
order to meet current environmental or workplace health and safety requirements.
However, some of the properties owned or leased by the Company are located in
areas with a history of heavy industrial use, of which are on or near sites
listed on the CERCLA National Priority List. The Company has a number of leased
properties located in or near industrial or light industrial use areas; and
accordingly, these properties may have been contaminated by pollutants which
would have migrated from neighboring facilities or have been deposited by prior
occupants. Furthermore, the Company is not aware of any notices from
authoritative agencies with respect to clean-up/remediation claims for
contamination at the leased properties. However, there can be no assurance that
the Company may subsequently be notified of such claims with respect to its
existing leased or owned properties in the future.
Prior to entering into any agreements with an acquisition target, the Company
evaluates the properties owned or leased by the target and engages an
independent environmental consulting firm to conduct or review assessments of
environmental conditions at each property. Although no environmental claims have
been made against the Company and it has not been named as a potentially
responsible party by the Environmental Protection Agency or any other party, it
is possible that the Company could be identified by the Environmental Protection
Agency, a state agency or one or more third parties as a potentially responsible
party under CERCLA or under analogous state laws. If so, the Company could incur
substantial litigation costs to prove that it is not responsible for the
environmental damage. The Company has obtained limited indemnities from the
former stockholders of the Acquired Companies whose facilities are located at or
near contaminated sites. The Company believes that these indemnities will be
adequate to protect it from a material adverse effect on its consolidated
financial condition, results of operations or liquidity, should the Company be
held responsible for a share of any clean-up costs. The limited indemnities are
subject to certain deductible amounts, however, and there can be no assurance
that these limited indemnities will fully protect the Company.
8
METALS USA, INC.
ITEM 1. BUSINESS (CONTINUED)
MANAGEMENT INFORMATION SYSTEMS
During 1998, the Company initiated a plan to reduce the disparity between the
management information systems used by its subsidiaries. The principal system
chosen for the Company's service centers is "Stelplan" which is a product
marketed and distributed by Invera, Inc. Stelplan is a completely integrated
system designed especially for the service center industry. Prior to their
acquisition, these companies had used a number of different systems, some of
which were not Year 2000 compliant. The Company placed a priority on the system
conversion projects for the non-Year 2000 compliant systems. Each of these
critical implementations were completed in 1999 and the Company experienced no
significant disruptions in any of its management information systems and
believes all such systems correctly reacted to the Year 2000 date change. Nine
of the Company's subsidiaries currently use EDI through which they offer
customers a paperless process with respect to order entry, shipment tracking,
billing, remittance processing and other routine activities. Additionally,
several of the subsidiaries also use computer aided drafting systems to directly
interface with computer controlled metal processing equipment.
The Company believes the investment in uniform management information systems
and computer aided manufacturing technology will permit management to respond
quickly and proactively to our customers' needs and service expectations. These
systems are able to exchange data regarding inventory status, order backlog, and
other critical operational information on a real-time basis. The Company expects
that substantially all of its service centers will be using Stelplan by December
31, 2000.
EMPLOYEES
The Company employs approximately 4,600 persons. As of December 31, 1999,
approximately 550 employees at 19 sites were members of one of six unions: the
United Steelworkers of America; the International Association of Bridge,
Structural, and Ornamental Ironworkers of America; the International Brotherhood
of Teamsters; Local 40 of the Glass, Molders, Pottery, Plastic & Allied Workers
International Union; United Auto Workers; and the International Brotherhood of
Boilermakers, Iron Ship Builders, Blacksmiths, Forgers and Helpers. The
Company's relationship with these unions generally has been satisfactory, but
occasional work stoppages have occurred. Within the last five years, one work
stoppage occurred at one facility, which involved 26 employees and lasted two
days. The Company is currently a party to 18 collective bargaining agreements
which expire at various times. Collective bargaining agreements expiring in
2000, 2001, 2002 and 2004, cover 84, 152, 286, and 23 employees, respectively.
Historically, the Company has succeeded in negotiating new collective bargaining
agreements without a strike.
From time to time, there are shortages of qualified operators of metals
processing equipment. In addition, turnover among less skilled workers is
relatively high. The Company intends to adopt "best practices" for its employee
benefits programs and human relations functions. The Company believes that its
relations with its employees are good.
VEHICLES
The Company operates a fleet of owned or leased trucks and trailers, as well
as forklifts and support vehicles. It believes these vehicles generally are
well-maintained and adequate for the Company's current operations. The Company
expects it will be able to purchase or lease vehicles at lower prices due to its
combined purchasing and leasing volume.
RISK MANAGEMENT, INSURANCE AND LITIGATION
The primary risks in the Company's operations are bodily injury, property
damage and injured workers' compensation. The Company maintains general
liability insurance and liability insurance for bodily injury and property
damage and workers' compensation coverage, which it considers sufficient to
insure against these risks.
From time to time, the Company is a party to litigation arising in the
ordinary course of its business, most of which involves claims for personal
injury or property damage incurred in connection with its operations. The
Company is not currently involved in any litigation that it believes will have a
material adverse effect on its consolidated financial condition, results of
operations or liquidity.
9
METALS USA, INC.
ITEM 1. BUSINESS (CONTINUED)
SAFETY
The Company intends to provide an accident-free workplace and is committed to
continuing and improving upon each facilities' focus and emphasis on safety in
the workplace. The Company currently has a number of safety programs in place,
which include regular weekly or monthly field safety meetings, bonuses based on
an employee's or a team's safety record and training sessions to teach proper
safe work procedures. The Company is actively developing a comprehensive "best
practices" safety program to be implemented throughout its operations to ensure
that all employees comply with safety standards established by the Company, its
insurance carriers and federal, state and local laws and regulations. This
program is being led by Mr. Mark Alper, a Vice President and Director of the
Company, with the assistance of each of the Company's product segment
presidents, executive officers and industry consultants with expertise in
workplace safety.
ITEM 2. PROPERTIES
The Company operates a number of metals processing facilities in the Heavy
Carbon, Flat Rolled and Specialty Metals Segments that are used to receive,
warehouse, process and ship metals. These facilities use various metals
processing and materials handling machinery and equipment. The Company's
Building Products Segment operates several facilities where it processes metals
into various building products. These service center facilities are as follows:
SQUARE OWNED/
LOCATION FOOTAGE LEASED
------------------------- -------- -------
HEAVY CARBON SEGMENT
Intsel ........................ Lafayette, Louisiana 32,000 Owned
Shreveport, Louisiana 109,000 Leased
Tulsa, Oklahoma 53,000 Leased
Dallas, Texas 104,000 Owned
Houston, Texas 216,000 Owned
San Antonio, Texas 89,000 Owned
Jeffreys ...................... Attalla, Alabama 53,000 Owned
Birmingham, Alabama 125,000 Owned
Mobile, Alabama 214,000 Owned
Mobile, Alabama 24,000 Leased
Muscle Shoals, Alabama 104,000 Owned
Jacksonville, Florida 60,000 Owned
Lakeland, Florida 120,000 Owned
Oakwood, Georgia 206,000 Owned
Kenner, Louisiana 61,000 Owned
Columbus, Mississippi 45,000 Owned
Greensboro, North Carolina* 115,000 Owned
High Point, North Carolina 43,000 Leased
High Point, North Carolina 19,000 Leased
Wilmington, North Carolina 178,000 Leased
Wilmington, North Carolina 45,000 Leased
Wilmington, North Carolina 6,000 Leased
Chesapeake, Virginia 62,000 Leased
Levinson ...................... Greenville, Kentucky 33,000 Owned
Baltimore, Maryland 65,000 Leased
Seekonk, Massachusetts 115,000 Owned
Camden, New Jersey 104,000 Leased
Newark, New Jersey 81,000 Leased
Ambridge, Pennsylvania 200,000 Leased
Leetsdale, Pennsylvania 144,000 Leased
Philadelphia, Pennsylvania 70,000 Leased
Philadelphia, Pennsylvania 120,000 Leased
York, Pennsylvania 109,000 Leased
10
METALS USA, INC.
ITEM 2. PROPERTIES (CONTINUED)
Sierra Pacific ................ Haywood, California 64,000 Leased
Steel Manufacturing ........... Kansas City, Missouri* 126,000 Owned
Uni-Steel ..................... Enid, Oklahoma 112,000 Leased
Muskogee, Oklahoma 134,000 Leased
Wilkof ........................ Farmington Hills, Michigan 1,000 Leased
North Canton, Ohio 110,000 Leased
Williams ...................... Eagan, Minnesota 19,000 Leased
Milwaukee, Wisconsin 137,000 Leased
Milwaukee, Wisconsin 31,000 Leased
Schofield, Wisconsin 23,000 Leased
FLAT ROLLED SEGMENT
Affiliated .................... Granite City, Illinois 300,000 Leased
Madison, Illinois 150,000 Owned
Butler, Indiana 200,000 Owned
Forest ........................ Forest, Virginia 50,000 Leased
Fullerton ..................... Northbrook, Illinois 187,000 Owned
Brooklyn Center, Minnesota 19,000 Leased
MUI Texas ..................... Houston, Texas 207,000 Owned
Steel Service Systems ......... Horicon, Wisconsin* 103,000 Leased
Wayne ......................... Jeffersonville, Indiana* 90,000 Owned
Walker, Michigan 50,000 Owned
Randleman, North Carolina* 110,000 Owned
Springfield, Ohio 96,000 Owned
Wooster, Ohio* 140,000 Owned
Youngstown, Ohio 85,000 Leased
Wolf Brothers ................. Philadelphia, Pennsylvania 85,000 Owned
Philadelphia, Pennsylvania 45,000 Leased
SPECIALTY METALS SEGMENT
Aerospace Specification Metals East Granby, Connecticut 10,000 Leased
Fort Lauderdale, Florida 9,000 Leased
Federal Bronze ................ Newark, New Jersey 41,000 Leased
Flagg ......................... St. Louis, Missouri 19,000 Leased
Harvey ........................ Santa Monica, California 50,000 Leased
Santa Monica, California 6,000 Leased
Independent ................... Orlando, Florida 23,000 Leased
New Hope, Minnesota 19,000 Leased
Germantown, Wisconsin 90,000 Owned
Industrial .................... Mokena, Illinois 21,000 Leased
Meier ......................... Broadview, Illinois 61,000 Leased
Hazel Park, Michigan 73,000 Owned
Kentwood, Michigan 12,000 Leased
Greensboro, North Carolina 52,000 Leased
Cleveland, Ohio 12,000 Leased
Moraine, Ohio 21,000 Owned
Metalmart ..................... Whittier, California 42,000 Leased
Pacific ....................... Boise, Idaho 26,000 Leased
Billings, Montana 10,000 Leased
Eugene, Oregon 33,000 Owned
Portland, Oregon 111,000 Leased
Spokane, Washington 49,000 Owned
Seattle, Washington 80,000 Owned
Professional .................. Wichita, Kansas 24,000 Leased
Liberty, Missouri 84,000 Leased
11
METALS USA, INC.
ITEM 2. PROPERTIES (CONTINUED)
Southern Alloy ................ Salisbury, North Carolina 24,000 Leased
BUILDING PRODUCTS SEGMENT
ABS ........................... Jacksonville, Florida 17,000 Leased
Lakeland, Florida 12,000 Leased
Leesburg, Florida 102,000 Leased
Melbourne, Florida 12,000 Leased
Pensacola, Florida 48,000 Leased
Allmet Building Products ...... Hayward, California 13,000 Leased
Brea, California 46,000 Leased
Buena Park, California 73,000 Leased
Stone Mountain, Georgia 60,000 Leased
Baltimore, Maryland 7,000 Leased
Dallas, Texas 13,000 Leased
Mesquite, Texas 200,000 Leased
National ...................... Aurora, Colorado 18,000 Leased
Kansas City, Missouri 58,000 Leased
Springfield, Missouri 8,000 Leased
Royal ......................... Holly Hill, Florida 6,000 Leased
Leesburg, Florida 69,000 Owned
Leesburg, Florida 76,000 Leased
Irmo, South Carolina 38,000 Leased
Texas Aluminum/Cornerstone .... Tempe, Arizona 24,000 Leased
Ontario, California 11,000 Leased
Rancho Cordova, California 24,000 Leased
Las Vegas, Nevada 42,000 Leased
Houston, Texas 165,000 Owned
Houston, Texas 220,000 Leased
Valley ........................ Phoenix, Arizona 111,000 Leased
Las Vegas, Nevada 39,000 Leased
Western ....................... Pacific, Washington 35,000 Leased
- -----------
* These facilities are subject to liens with respect to certain debt agreements.
In addition to the service center facilities listed above, the Company's
Building Products Segment also operates 40 sales and distribution centers
throughout the western, southwestern and southeastern United States. These
facilities, which are all leased, range in size from 5,000 square feet to 10,000
square feet. Many of the Company's facilities are capable of being used at
higher capacities, if necessary. The Company believes that its facilities after
the planned expansions will be adequate for the expected needs of its existing
businesses over the next several years.
ITEM 3. LEGAL PROCEEDINGS
THIS SECTION CONTAINS STATEMENTS WHICH CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. SEE DISCLOSURE PRESENTED ON THE INSIDE OF THE FRONT COVER OF THIS
REPORT FOR CAUTIONARY INFORMATION WITH RESPECT TO SUCH FORWARD-LOOKING
STATEMENTS
The Company is involved in a variety of claims, lawsuits and other disputes
arising in the ordinary course of business. The Company believes the resolution
of these matters and the incurrence of their related costs and expenses should
not have a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
METALS USA, INC.
P A R T II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has traded on the New York Stock Exchange since
July 11, 1997. The following table sets forth the high and low sale prices for
the Common Stock for the period from July 11, 1997, the date of the IPO, through
March 15, 2000.
HIGH LOW
------- ------
1997:
July 11, 1997 to September 30, 1997 ........... $ 16.00 $10.00
October 1, 1997 to December 31, 1997 .......... $ 16.50 $13.38
1998:
January 1, 1998 to March 31, 1998 ............. $ 19.25 $14.00
April 1, 1998 to June 30, 1998 ................ $ 20.13 $16.50
July 1, 1998 to September 30, 1998 ............ $ 18.00 $ 8.75
October 1, 1998 to December 31, 1998 .......... $ 11.00 $ 6.56
1999:
January 1, 1999 to March 31, 1999 ............. $ 10.50 $ 8.00
April 1, 1999 to June 30, 1999 ................ $ 13.50 $ 8.13
July 1, 1999 to September 30, 1999 ........... $ 13.00 $ 9.00
October 1, 1999 to December 31, 1999 ........ $ 10.13 $ 7.44
2000:
January 1, 2000 to March 15, 2000 ............ $ 9.75 $ 6.50
The Company believes there are approximately 1,600 stockholders of record of
the Company's Common Stock, as of December 31, 1999.
The Company intends to retain the majority of its earnings, if any, to
finance the expansion of its business and for general corporate purposes,
including future acquisitions. On February 10, 2000, the Company announced its
first quarterly dividend of $.03 per share payable on April 10, 2000, to
stockholders of record on March 17, 2000. Both the revolving credit facility and
the indenture governing the Company's 8 5/8% Senior Subordinated Notes contain
restrictions as to the payment of dividends. Under the most restrictive of these
covenants, the Company had $14.8 million available for the payment of dividends
at December 31, 1999.
13
METALS USA, INC.
ITEM 6. SELECTED FINANCIAL DATA
The following historical consolidated financial information should be read in
conjunction with the audited historical Consolidated Financial Statements of
Metals USA, Inc. and Subsidiaries and the Notes thereto included in Item 8.
"Financial Statements and Supplementary Data." The historical consolidated
financial information for the fiscal years ended 1995 through 1998 reflects the
historical financial statements of Metals USA, restated for the effects of the
business combinations which were accounted for as "poolings-of-interests," and
the remaining Acquired Companies from their respective acquisition dates.
YEARS ENDED DECEMBER 31,(1)
-----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
STATEMENTS OF OPERATIONS DATA:
Net sales ................................... $ 1,745.4 $ 1,498.8 $ 537.6 $ 265.6 $ 260.9
Cost of sales ............................... 1,289.3 1,135.1 414.9 204.0 204.7
Operating and delivery ...................... 190.5 145.8 53.7 25.4 22.0
Selling, general and administrative ......... 128.4 104.7 41.1 21.4 15.6
Depreciation and amortization ............... 21.2 16.4 5.6 3.7 3.0
Integration charge .......................... 9.4 -- -- -- --
Operating income ............................ 106.6 96.8 22.3 11.1 15.6
Interest and securitization expense ......... 40.0 30.9 5.0 1.8 2.4
Other income ................................ (.7) (1.6) (.5) (.6) (.5)
Income before income taxes .................. 67.3 67.5 17.8 9.9 13.7
Net income .................................. 39.8 40.0 7.5 4.5 8.1
Earnings per share .......................... $ 1.04 $ 1.09 $ .33 $ .38 $ .86
Earnings per share -- assuming dilution ..... $ 1.04 $ 1.07 $ .33 $ .38 $ .86
Number of common shares used in the per share
Calculations:
Earnings per share ....................... 38.1 36.7 22.5 11.8 9.4
Earnings per share -- assuming dilution .. 38.4 37.3 22.9 11.8 9.4
YEARS ENDED DECEMBER 31,(1)
-----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
IN MILLIONS)
BALANCE SHEET DATA:
Working capital(2) .......................... $ 305.4 $ 414.3 $ 191.5 $ 51.6 $ 53.2
Total assets ................................ 1,049.3 1,026.4 479.1 107.3 100.1
Long-term debt, less current portion(2) ..... 434.7 502.6 167.1 24.6 31.4
Stockholders' equity ........................ 379.4 341.6 226.5 57.5 50.1
Dividends declared(3) ....................... -- -- -- -- --
- ----------
(1) As a result of the merger with Metals USA, Jeffreys changed its fiscal year
to December 31 beginning January 1, 1996, to conform to the fiscal periods
of Metals USA and the other Acquired Companies. The historical financial
information of Jeffreys for the year ended July 31, 1995 has been included
in the Company's consolidated financial statements for the year ended
December 31, 1995.
(2) The decrease in working capital and debt at December 31, 1999 compared to
December 31, 1998 is primarily attributable to the Company's Accounts
Receivable Securitization transaction, offset by borrowings to complete
acquisitions. See Note 6 of Notes to Consolidated Financial Statements in
Item 8. "Financial Statements and Supplementary Data."
(3) Exclusive of pre-acquisition distributions of S Corporations. On February
10, 2000, the Company announced its first quarterly dividend of $.03 per
share, payable on April 10, 2000 to stockholders of record on March 17,
2000.
14
METALS USA, INC.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BACKGROUND
THIS SECTION CONTAINS STATEMENTS WHICH CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. SEE DISCLOSURE PRESENTED ON THE INSIDE OF THE FRONT COVER OF THIS
REPORT FOR CAUTIONARY INFORMATION WITH RESPECT TO SUCH FORWARD-LOOKING
STATEMENTS.
The following discussion should be read in conjunction with Item 6.
"Selected Financial Data" and the Company's Consolidated Financial Statements
and related Notes thereto in Item 8. "Financial Statements and Supplementary
Data."
INTRODUCTION
The Company's net sales are derived from the processing and distribution of
steel, aluminum and other specialty metals and the use of processed metals to
manufacture high-value end-use products. Most of the metal sold by the Company
is processed in some form. The Company processes various metals to specified
thickness, length, width, shape and surface quality pursuant to specific
customer orders. Additionally, certain of the Acquired Companies manufacture
finished building products for commercial and residential applications and
machine certain specialty metals. See Item 1. "Business" for further discussion
of the Company's organization and business plan.
During the first half of 1997, the Company sold an aggregate of 985,500
shares of Common Stock to management of and consultants to the Company for $0.01
per share. Accordingly, the Company recorded a compensation charge of $6.0
million in the first half of 1997, representing the difference between the
amount paid for the shares and the estimated fair value of the shares on the
date of sale, as if the Founding Companies were combined, (the "Compensation
Charge"). The Compensation Charge has not been allocated to the Company's
segments.
INTEGRATION CHARGE
On September 8, 1999, the Company announced a comprehensive plan to reduce
operating costs and improve its operational efficiency by fully integrating
certain operations within a geographic area and consolidating certain
administrative and support functions. The Company recorded a charge to
operations of $9.4 million in respect of this plan (the "Integration Charge").
The principal components of the Integration Charge are $3.3 million for
termination of certain employment contracts, $2.1 million for severance costs
attributable to the consolidation of administrative and support functions and
$4.0 million for the costs of combining five processing facilities into others
within the same geographic region. These changes will affect less than 5% of the
Company's workforce. Through December 31, 1999, the Company has incurred costs
of $1.9 million pursuant to the integration plan.
The Company expects to incur approximately $1.0 million to $2.0 million
during each of the next three quarterly reporting periods with respect to
personnel related costs. Approximately $4.0 million of facility integration
costs will occur at various times over the next three quarterly reporting
periods of which approximately $3.0 million, attributable to Heavy Carbon and
Building Products, are expected to occur in the third quarter of 2000. The
Company expects to realize annualized savings of approximately $12.0 million
upon completion of the integration plan. The majority of these savings are
expected to be realized by the Heavy Carbon and Specialty Metals segments.
Although the foregoing estimates with respect to costs, timing and savings
reflect the best information available to management, there can be no assurance
that such costs will not exceed current expectations, that the timing of the
facility integration activities will not be delayed, or that the savings will
not be realized as anticipated.
15
METALS USA, INC.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
The following historical financial information reflects the historical
financial statements of Metals USA, restated for the effects of the business
combinations with Jeffreys, Wayne and Krohn accounted for as
"poolings-of-interests" and the remaining Acquired Companies from their
respective acquisition dates.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1999 % 1998 % 1997 %
-------- -------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PERCENTAGES)
Net sales ............................... $1,745.4 100.0% $1,498.8 100.0% $ 537.6 100.0%
Operating costs and expenses:
Cost of sales ..................... 1,289.3 73.9% 1,135.1 75.7% 414.9 77.2%
Operating and delivery ............ 190.5 10.9% 145.8 9.7% 53.7 10.0%
Selling, general and administrative 128.4 7.4% 104.7 7.0% 41.1 7.6%
Depreciation and amortization ..... 21.2 1.2% 16.4 1.1% 5.6 1.0%
Integration charge ................ 9.4 .5% -- -- -- --
-------- -------- -------- -------- -------- --------
Operating income ........................ 106.6 6.1% 96.8 6.5% 22.3 4.2%
Interest and securitization expense ..... 40.0 2.3% 30.9 2.1% 5.0 1.0%
Other income ............................ (.7) (.1)% (1.6) (.1)% (.5) (.1)%
-------- -------- -------- -------- -------- --------
Income before income taxes .............. $ 67.3 3.9% $ 67.5 4.5% $ 17.8 3.3%
======== ======== ======== ======== ======== ========
RESULTS FOR 1999 COMPARED TO 1998
NET SALES. Net sales increased $246.6 million, or 16.5%, from $1,498.8
million in 1998 to $1,745.4 million in 1999. The increase in net sales was due
to acquisitions, together with unit volume growth in the other subsidiaries.
Material shipments for steel products increased 31.1% and average realized
prices decreased in 1999 compared to 1998. Acquisitions accounted for the
substantial portion of the increase in material shipments. See "-- Segment
Results" for additional information.
COST OF SALES. Cost of sales increased $154.2 million, or 13.6%, from
$1,135.1 million in 1998 to $1,289.3 million in 1999. The increase in cost of
sales was principally due to the acquisitions described above. As a percentage
of net sales, cost of sales decreased from 75.7% in 1998 to 73.9% in 1999. This
percentage decrease was principally due to lower cost of raw materials.
OPERATING AND DELIVERY. Operating and delivery expenses increased $44.7
million, or 30.7%, from $145.8 million in 1998 to $190.5 million in 1999. The
increase in operating and delivery expenses was principally due to the
acquisitions described above. As a percentage of net sales, operating and
delivery expenses increased from 9.7% in 1998 to 10.9% in 1999. This percentage
increase was primarily due to lower average realized prices.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $23.7 million, or 22.6%, from $104.7 million in 1998 to
$128.4 million in 1999. This increase in selling, general and administrative
expenses was primarily attributable to the acquisitions described above. As a
percentage of net sales, selling, general and administrative expenses increased
from 7.0% in 1998 to 7.4% in 1999. Excluding the effect of the non-recurring
charge of $2.6 million attributable to the termination of the ESOP in 1998, as a
percentage of net sales, selling, general and administrative expenses increased
from 6.8% in 1998 to 7.4% in 1999. This percentage increase was primarily due to
lower average realized prices.
OPERATING INCOME. Operating income increased $9.8 million, or 10.1%, from
$96.8 million in 1998 to $106.6 million in 1999. The increase in operating
income was primarily attributable to the acquisitions described above, offset by
the $9.4 integration charge. Excluding the effect of the non-recurring charge of
$2.6 million attributable to the termination of the ESOP in 1998 and the effect
of the integration charge in 1999, as a percentage of net sales, operating
income was unchanged at 6.6% for both periods.
16
METALS USA, INC.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
INTEREST AND SECURITIZATION EXPENSE. Interest and securitization expense
increased $9.1 million, or 29.4%, from $30.9 million in 1998 to $40.0 million in
1999. The increase was due to increased borrowings in connection with the
acquisitions described above and the Company's 8 5/8% $200.0 Senior Subordinated
Notes due 2008 (the "Notes"). See "--Liquidity and Capital Resources - Financing
Activities."
PROVISION FOR INCOME TAXES. The Company's provision for income taxes differs
from the federal statutory rate principally due to state income taxes (net of
federal income tax benefit) and the non-deductibility of the amortization of
goodwill attributable to certain acquisitions.
RESULTS FOR 1998 COMPARED TO 1997
NET SALES. Net sales increased $961.2 million, or 178.8%, from $537.6 million
in 1997 to $1,498.8 million in 1998. The increase in net sales was principally
due to acquisitions. Average realized prices for steel products increased in
1998 compared to 1997. See "-- Segment Results" for additional information.
COST OF SALES. Cost of sales increased $720.2 million, or 173.6%, from $414.9
million in 1997 to $1,135.1 million in 1998. The increase in cost of sales was
principally due to the acquisitions described above. As a percentage of net
sales, cost of sales decreased from 77.2% in 1997 to 75.7% in 1998. This
percentage decrease was principally due to lower cost of raw materials.
OPERATING AND DELIVERY. Operating and delivery expenses increased $92.1
million, or 171.5%, from $53.7 million in 1997 to $145.8 million in 1998. The
increase in operating and delivery expenses was principally due to the
acquisitions described above. As a percentage of net sales, operating and
delivery expenses decreased from 10.0% in 1997 to 9.7% in 1998. This percentage
decrease was primarily due to the allocation of fixed costs over a higher volume
of net sales.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $63.6 million, or 154.7%, from $41.1 million in 1997 to
$104.7 million in 1998. This increase in selling, general and administrative
expenses was primarily attributable to the acquisitions described above. As a
percentage of net sales, selling, general and administrative expenses decreased
from 7.6% in 1997 to 7.0% in 1998. Excluding the effect of the non-recurring,
non-cash Compensation Charge of $6.0 million in 1997 and the non-recurring
charge of $2.6 million attributable to the termination of the ESOP in 1998, as a
percentage of net sales, selling, general and administration expenses increased
from 6.5% in 1997 to 6.8% in 1998. This percentage increase was primarily due to
higher average realized prices.
OPERATING INCOME. Operating income increased $74.5 million, or 334.1%, from
$22.3 million in 1997 to $96.8 million in 1998. The increase in operating income
was primarily attributable to the acquisitions described above, offset by the
$6.0 million Compensation Charge described in the preceding paragraph. Excluding
the effect of the non-recurring, non-cash Compensation Charge of $6.0 million in
1997 and the non-recurring charge of $2.6 million attributable to the
termination of the ESOP in 1998, as a percentage of net sales, operating income
increased from 5.3% in 1997 to 6.6% in 1998.
INTEREST AND SECURITIZATION EXPENSE. Interest expense increased $25.9
million, from $5.0 million in 1997 to $30.9 million in 1998. The increase in
interest expense was due to increased borrowings in connection with the
acquisitions described above and the increased interest expense associated with
the Notes.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes differs
from the federal statutory rate principally due to state income taxes (net of
federal income tax benefit) and the non-deductibility of the amortization of
goodwill attributable to certain acquisitions.
17
METALS USA, INC.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
SEGMENT RESULTS
FISCAL YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
OPERATING OPERATING
NET COSTS AND INCOME CAPITAL
SALES % EXPENSES % (LOSS) % EXPENDITURES %
-------- -------- -------- -------- -------- -------- ------------ --------
1999: (IN MILLIONS, EXCEPT PERCENTAGES)
Heavy Carbon .................... $ 680.6 39.0% $ 629.6 38.4% $ 51.0 47.8% $ 15.4 43.7%
Flat Rolled ..................... 591.0 33.9% 552.7 33.7% 38.3 35.9% 11.8 33.5%
Specialty Metals ................ 383.7 22.0% 366.1 22.3% 17.6 16.5% 4.5 12.8%
Building Products ............... 126.7 7.3% 116.3 7.1% 10.4 9.8% 2.6 7.4%
Corporate, eliminations and other (36.6) (2.2)% (25.9) (1.5)% (10.7) (10.0)% .9 2.6%
-------- -------- -------- -------- -------- -------- -------- --------
Total ........................ $1,745.4 100.0% $1,638.8 100.0% $ 106.6 100.0% $ 35.2 100.0%
======== ======== ======== ======== ======== ======== ======== ========
1998:
Heavy Carbon .................... $ 598.8 40.0% $ 552.7 39.5% $ 46.1 47.6% $ 11.9 47.1%
Flat Rolled ..................... 445.4 29.7% 419.6 29.9% 25.8 26.7% 8.2 32.4%
Specialty Metals ................ 371.2 24.8% 343.9 24.5% 27.3 28.2% 3.4 13.4%
Building Products ............... 93.4 6.2% 84.1 6.0% 9.3 9.6% 1.7 6.7%
Corporate, eliminations and other (10.0) (.7)% 1.7 .1% (11.7) (12.1)% .1 .4%
-------- -------- -------- -------- -------- -------- -------- --------
Total ........................ $1,498.8 100.0% $1,402.0 100.0% $ 96.8 100.0% $ 25.3 100.0%
======== ======== ======== ======== ======== ======== ======== ========
1997:
Heavy Carbon .................... $ 234.2 43.6% $ 221.2 42.9% $ 13.0 58.3% $ 4.8 25.7%
Flat Rolled ..................... 237.8 44.2% 223.9 43.5% 13.9 62.3% 12.1 64.7%
Specialty Metals ................ 41.5 7.7% 37.8 7.3% 3.7 16.6% 1.0 5.3%
Building Products ............... 24.1 4.5% 21.7 4.2% 2.4 10.8% .5 2.7%
Corporate, eliminations and other -- --% 10.7 2.1% (10.7) (48.0)% .3 1.6%
-------- -------- -------- -------- -------- -------- -------- --------
Total ........................ $ 537.6 100.0% $ 515.3 100.0% $ 22.3 100.0% $ 18.7 100.0%
======== ======== ======== ======== ======== ======== ======== ========
SEGMENT RESULTS -- 1999 COMPARED TO 1998
HEAVY CARBON. Net sales increased $81.8 million, or 13.7%, from $598.8
million in 1998 to $680.6 million in 1999. The increase in net sales is due to
acquisitions together with unit volume growth in the other subsidiaries.
Material shipments increased 25.4% in 1999 compared to 1998, offset by lower
average realized prices, which decreased approximately 9.4% in 1999 compared to
1998. Operating costs and expenses increased $76.9 million, or 13.9%, from
$552.7 million in 1998 to $629.6 million in 1999. Operating costs and expenses
as a percentage of net sales increased marginally, from 92.3% in 1998 to 92.5%
in 1999. Operating income increased by $4.9 million, or 10.6%, from $46.1
million in 1998 to $51.0 million in 1999. Operating income as a percentage of
net sales decreased from 7.7% in 1998 to 7.5% in 1999, primarily due to lower
average realized prices.
FLAT ROLLED. Net sales increased $145.6 million, or 32.7%, from $445.4
million in 1998 to $591.0 million in 1999. The increase in net sales is
principally due to acquisitions. Material shipments increased 37.0% in 1999
compared to 1998, offset by lower average realized prices for steel products
which decreased approximately 3.2% in 1999 compared to 1998. Operating costs and
expenses increased $133.1 million, or 31.7%, from $419.6 million in 1998 to
$552.7 million in 1999. Operating costs and expenses as a percentage of net
sales decreased marginally, from 94.2% in 1998 to 93.5% in 1999. Operating
income increased by $12.5 million, or 48.4%, from $25.8 million in 1998 to $38.3
million in 1999. Operating income as a percentage of net sales increased from
5.8% in 1998 to 6.5% in 1999, primarily due to lower average cost of raw
materials.
SPECIALTY METALS. Net sales increased $12.5 million, or 3.4%, from $371.2
million in 1998 to $383.7 million in 1999. Operating costs and expenses
increased $22.2 million, or 6.5%, from $343.9 million in 1998 to $366.1 million
in 1999. Operating costs and expenses as a percentage of net sales increased
from 92.6% in 1998 to 95.4% in 1999. This percentage increase was primarily due
to lower average realized prices for most products. Operating income decreased
by $9.7 million, or 35.5%, from $27.3 million in 1998 to $17.6 million in 1999.
This decrease was principally due to
18
METALS USA, INC.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
the decline in the Company's sales to the Aerospace industry. The decline in
sales to the Aerospace industry accounted for $31.6 million in net sales and
$8.6 million of operating income. Operating income as a percentage of net sales
decreased from 7.4% in 1998 to 4.6% in 1999.
BUILDING PRODUCTS. Net sales increased $33.3 million, or 35.7%, from $93.4
million in 1998 to $126.7 million in 1999. The increase in net sales is
attributable to the increased demand for the Company's manufactured products and
acquisitions. Operating costs and expenses increased $32.2 million, or 38.3%,
from $84.1 million in 1998 to $116.3 million in 1999. Operating costs and
expenses as a percentage of net sales increased from 90.0% in 1998 to 91.8% in
1999. This percentage increase was due to higher cost of raw materials and
expansion of distribution facilities. Operating income increased by $1.1
million, or 11.8%, from $9.3 million in 1998 to $10.4 million in 1999. This
increase was principally due to 1999 being a full year of operations for the
1998 acquired companies. Operating income as a percentage of net sales decreased
from 10.0% in 1998 to 8.2% in 1999.
CORPORATE AND OTHER. This category reflects certain administrative costs and
expenses management has not allocated to its industry segments. The negative net
sales amount represents the elimination of intercompany sales. Operating loss
decreased by $1.0 million, or 8.5%, from $11.7 million in 1998 to $10.7 million
in 1999. This decrease was principally due to lower incentive compensation
expense.
SEGMENT RESULTS -- 1998 COMPARED TO 1997
HEAVY CARBON. Net sales increased $364.6 million, or 155.7%, from $234.2
million in 1997 to $598.8 million in 1998. The net sales attributable to the
1998 acquisitions contributed $199.7 million of the increase. Average realized
prices for steel products increased approximately 1.0% in 1998 compared to 1997.
Material shipments increased 153.3% in 1998 compared to 1997. Acquisitions
completed during 1998 accounted for 56.9% of the increase. Operating costs and
expenses increased $331.5 million, or 149.9%, from $221.2 million in 1997 to
$552.7 million in 1998. Operating costs and expenses as a percentage of net
sales decreased from 94.4% in 1997 to 92.3% in 1998. This percentage decrease
was primarily the allocation of fixed costs over a higher volume of net sales.
Operating income increased by $33.1 million, or 254.6%, from $13.0 million in
1997 to $46.1 million in 1998. Operating income as a percentage of net sales
increased from 5.6% in 1997 to 7.7% in 1998. This percentage increase was due to
higher average realized prices and the allocation of fixed costs over a higher
volume of net sales.
FLAT ROLLED. Net sales increased $207.6 million, or 87.3%, from $237.8
million in 1997 to $445.4 million in 1998. The net sales attributable to the
1998 acquisitions contributed $88.7 million of the increase. Average realized
prices for steel products increased approximately 2.6% in 1998 compared to 1997.
Material shipments increased 82.3% in 1998 compared to 1997. Acquisitions
completed during 1998 accounted for 29.6% of the increase. Operating costs and
expenses increased $195.7 million, or 87.4%, from $223.9 million in 1997 to
$419.6 million in 1998. Operating costs and expenses, as a percentage of net
sales, was unchanged at 94.2% for both periods. Operating income increased by
$11.9 million, or 85.6%, from $13.9 million in 1997 to $25.8 million in 1998.
Operating income as a percentage of net sales was unchanged at 5.8% for both
periods.
SPECIALTY METALS. Net sales increased $329.7 million, or 794.5%, from $41.5
million in 1997 to $371.2 million in 1998. The net sales attributable to the
1998 acquisitions contributed $202.9 million of the increase. Operating costs
and expenses increased $306.1 million, or 809.8%, from $37.8 million in 1997 to
$343.9 million in 1998. Operating costs and expenses as a percentage of net
sales increased from 91.1% in 1997 to 92.6% in 1998. This percentage increase
was primarily due to lower realized prices for most products. Operating income
increased by $23.6 million, or 637.8%, from $3.7 million in 1997 to $27.3
million in 1998. This increase was principally due to the majority of the 1998
acquisitions having been acquired during the first half of the year. Operating
income as a percentage of net sales decreased from 8.9% in 1997 to 7.4% in 1998.
This percentage decrease was due to lower average realized prices for most
products.
BUILDING PRODUCTS. Net sales increased $69.3 million, or 287.6%, from $24.1
million in 1997 to $93.4 million in 1998. The increase in net sales is
principally due to the 1998 Acquisitions. Operating costs and expenses increased
$62.4 million, or 287.6%, from $21.7 million in 1997 to $84.1 million in 1998.
Operating costs and expenses as a percentage of net sales was unchanged at 90.0%
for both periods. Operating income increased by $6.9 million, or
19
METALS USA, INC.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
287.5%, from $2.4 million in 1997 to $9.3 million in 1998. This increase was
principally due to 1998 Acquisitions and to 1998 being a full year of operations
for the 1997 acquired companies. Operating income as a percentage of net sales
was unchanged at 10.0% for both periods.
CORPORATE AND OTHER. This category reflects certain administrative costs and
expenses management has not allocated to its industry segments. The negative net
sales amount represents the elimination of intercompany sales. Operating loss
increased by $1.0 million, from $10.7 million in 1997 to $11.7 million in 1998.
This increase was principally due to a full year of costs and the $2.6 million
non-recurring charge associated with the termination of the Jeffrey's Employee
Stock Ownership Plan ("ESOP") in 1998, offset by the $6.0 million Compensation
Charge the Company incurred in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Beginning with the IPO on July 11, 1997, and through January 31, 1999, the
Company completed a number of financing transactions designed to enhance the
Company's liquidity, reduce incremental interest expense and extend debt
maturities. The transactions included a public equity offering of Common Stock
which resulted in net proceeds of $58.3 million, the sale of $200.0 million
aggregate principal amount of 8 5/8% Senior Subordinated Notes due 2008 (the
"Notes"), the establishment of a $350.0 million revolving credit facility with a
group of commercial banks (the "Credit Facility") and a $100.0 million trade
receivable securitization facility, pursuant to a three-year agreement with a
commercial bank (the "Receivable Securitization Facility.") See "--Financing
Activities."
At December 31, 1999, the Company had cash of $4.7 million, working capital
of $305.4 million and total debt of $440.8 million. At December 31, 1998, the
Company had cash of $9.3 million, working capital of $414.3 million and total
debt of $506.6 million. The decrease in working capital and debt at December 31,
1999 compared to December 31, 1998 is primarily attributable to the Company's
Receivable Securitization Facility. At December 31, 1999, the proceeds for
receivables sold through the facility was $90.0 million. As of December 31, 1999
and March 29, 2000, the Company had $154.0 million and $73.5 million,
respectively, of borrowing availability under the Credit Facility. Increased
borrowings during this period were used to fund the Company's increased working
capital requirements. The Company anticipates that its cash flow from operations
will be sufficient to meet the Company's normal working capital and debt service
requirements for at least the next several years, exclusive of acquisition
requirements. The Company intends to retain the majority of its earnings to
finance the expansion of its business and for general corporate purposes,
including future acquisitions. On February 10, 2000, the Company announced its
first quarterly dividend of $.03 per share, payable on April 10, 2000 to
stockholders of record on March 17, 2000.
The Company provided $98.6 million and used $10.8 million in net cash from
operating activities for 1999 and 1998, respectively. Net cash used in investing
activities was $15.6 million and $211.2 million for 1999 and 1998, respectively.
The principal use of cash during 1999 and 1998 was to fund the cash portion of
the acquisitions and capital expenditures. Net cash used in financing activities
during 1999 was $87.6 million which was used primarily to repay borrowings on
the Credit Facility, primarily from the proceeds of the Receivable
Securitization Facility. Net cash provided by financing activities was $224.0
million for 1998. The cash provided by financing activities in 1998 consisted
primarily of the net proceeds from the sale of the Notes of $200.0 million.
INVESTING ACTIVITIES
During 1999, the Company's principal acquisitions were Southwest Steel Supply
Company, Wolf Brothers Steel Service Center and Allmet Building Products.
Additionally, the Company acquired the net assets of certain other businesses.
The aggregate consideration paid in connection with these acquisitions was
approximately $78.0 million in cash, 317,283 shares of Common Stock, convertible
notes of approximately $4.0 million and the assumption of indebtedness of
approximately $12.9 million.
The Company intends to continue to actively pursue acquisition opportunities.
The Company expects to fund future acquisitions through the issuance of
additional Common Stock, borrowings, including use of amounts available under
its Credit Facility and cash flow from operations. Capital expenditures for
equipment and expansion of facilities are expected to be funded from cash flow
from operations and supplemented as necessary by borrowings from the Credit
20
METALS USA, INC.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Facility or other sources of financing. To the extent the Company funds a
significant portion of the consideration for future acquisitions with cash, it
may have to increase the amount of the Credit Facility or obtain other sources
of financing.
The Company has an effective Shelf Registration Statement relating to the
issuance of up to 10,000,000 shares of common stock to be issued in connection
with future acquisitions. As of December 31, 1999, approximately 6,914,140
shares are available under this registration statement for use in connection
with future acquisitions.
FINANCING ACTIVITIES
On January 21, 1999, the Company established the Receivable Securitization
Facility to sell, on a revolving basis, through its wholly-owned subsidiary,
Metals Receivables Corporation ("MRC"), an undivided interest in a designated
pool of its trade accounts receivable to a commercial bank ("Purchaser"). The
maximum undivided interest in MRC's receivable portfolio that may be purchased
pursuant to this agreement is $100.0 million. The Company, as agent for
Purchaser, retains collection and administrative responsibilities for the
participating interests sold. As collections reduce the receivables included in
MRC's receivable portfolio, the Company may sell additional undivided interests
in new receivables to the Purchaser. The amount of the undivided interest in
MRC's receivable portfolio that is sold typically will change monthly depending
upon the level of defined eligible receivables available for sale each month
adjusted by certain defined ratios. The unpurchased portion of the MRC
receivable portfolio is a restricted asset and is effectively collateral for the
benefit of the Purchaser. At December 31, 1999, the unpurchased portion of the
MRC portfolio was $37.2 million. The Company used the proceeds from the sale of
the receivable portfolio to repay borrowings on the Credit Facility.
On April 22, 1999, the Company announced that the Board of Directors had
approved the use of up to $25.0 million to repurchase shares of the Company's
Common Stock. The shares may be purchased, from time to time, in open market or
in privately negotiated transactions. During the period ended December 31, 1999,
the Company had repurchased 461,450 shares at an average price of $9.77 per
share, including fees and commissions. During the period from January 1, 2000 to
March 15, 2000, the Company repurchased 1,014,800 shares at an average price of
$7.49 per share including fees and commissions.
YEAR 2000
The Company did not experience any significant operational difficulties, nor
are we aware of any of our suppliers, customers or service providers
experiencing any significant operational difficulties as a result of Year 2000
issues. The Company will continue to monitor all critical systems for any
incidents of delayed complications or disruptions and problems encountered
through third parties with whom the Company deals, so that they may be timely
addressed. We estimate that our total costs to prevent Year 2000 issues have
been $.4 million.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
was issued in June 1998. It establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. In June 1999, SFAS No. 137, DEFERRAL OF THE EFFECTIVE DATE OF FASB
STATEMENT NO. 133, was issued and defers the adoption date to fiscal years
beginning after June 15, 2000. Management does not believe that the adoption of
this statement will have a material impact on the financial position or results
of operations of the Company.
21
METALS USA, INC.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is exposed to market risk,
primarily from changes in interest rates. The Company continually monitors
exposure to market risk and develops appropriate strategies to manage this risk.
Accordingly, the Company may enter into certain derivative financial instruments
such as interest rate swap agreements. The Company does not use derivative
financial instruments for trading or to speculate on changes in interest rates.
INTEREST RATE EXPOSURE
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's Credit Facility. Approximately 44.5% ($196.0 million)
and 53.3% ($270.0 million) of the Credit Facility was subject to variable
interest rates as of December 31, 1999 and 1998, respectively. The Company
entered into two interest rate swap agreements in 1998 to reduce exposure to
interest rate changes. These agreements fixed interest rates for two years on
$125.0 million of the variable interest Credit Facility. The detrimental effect
of a hypothetical 100 basis point increase in interest rates would be to reduce
income before taxes by $.7 million and $1.5 million at December 31, 1999 and
1998, respectively. As of December 31, 1999 and 1998, the fair value of the
Company's fixed rate debt was approximately $224.8 million and $226.7 million,
respectively, based upon discounted future cash flows using current market
prices. The fair value of the interest rate swap agreements was $1.5 million and
$.2 million at December 31, 1999 and 1998, respectively.
22
METALS USA, INC. AND SUBSIDIARIES
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Public Accountants........................... 24
Consolidated Balance Sheets........................................ 25
Consolidated Statements of Operations.............................. 26
Consolidated Statements of Stockholders' Equity.................... 27
Consolidated Statements of Cash Flows.............................. 28
Notes to Consolidated Financial Statements......................... 29
23
METALS USA, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Metals USA, Inc.:
We have audited the accompanying consolidated balance sheets of Metals USA, Inc.
(a Delaware corporation) and subsidiaries (the "Company") as of December 31,
1999 and 1998, and the related consolidated statements of operations, cash flows
and stockholders' equity for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Metals
USA, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
February 10, 2000
24
METALS USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
---------------------
1999 1998
-------- --------
ASSETS
Current assets:
Cash .................................................. $ 4.7 $ 9.3
Accounts receivable, net of allowance of $6.2 and $7.1,
respectively ........................................ 128.9 189.8
Inventories ........................................... 350.5 343.7
Prepaid expenses and other ............................ 15.4 16.2
Deferred income taxes ................................. 6.4 6.9
-------- --------
Total current assets ................................ 505.9 565.9
Property and equipment, net ............................... 223.0 173.2
Goodwill, net ............................................. 305.4 267.2
Other assets, net ......................................... 15.0 20.1
-------- --------
Total assets .................................... $1,049.3 $1,026.4
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 145.5 $ 107.5
Accrued liabilities ................................... 48.9 40.1
Current portion of long-term debt ..................... 6.1 4.0
-------- --------
Total current liabilities ........................... 200.5 151.6
Long-term debt, less current portion ...................... 434.7 502.6
Deferred income taxes ..................................... 29.5 22.7
Other long-term liabilities ............................... 5.2 7.9
-------- --------
Total liabilities ................................... 669.9 684.8
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued ............................. -- --
Common stock, $.01 par value, 203,122,914 shares
authorized, 38,516,415 and 38,156,404 shares issued,
respectively ........................................ .4 .4
Additional paid-in capital ............................ 263.7 261.2
Retained earnings ..................................... 119.8 80.0
Treasury stock -- 461,450 shares, at cost ............. (4.5) --
-------- --------
Total stockholders' equity .......................... 379.4 341.6
-------- --------
Total liabilities and stockholders' equity ...... $1,049.3 $1,026.4
======== ========
The accompanying notes are an integral part
of these consolidated financial statements.
25
METALS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------------
1999 1998 1997
--------- --------- ---------
Net sales ................................ $ 1,745.4 $ 1,498.8 $ 537.6
Operating costs and expenses:
Cost of sales ........................ 1,289.3 1,135.1 414.9
Operating and delivery ............... 190.5 145.8 53.7
Selling, general and administrative .. 128.4 104.7 41.1
Depreciation and amortization ........ 21.2 16.4 5.6
Integration charge ................... 9.4 -- --
--------- --------- ---------
Operating income ......................... 106.6 96.8 22.3
Other (income) expense:
Interest and securitization expense .. 40.0 30.9 5.0
Other income ......................... (.7) (1.6) (.5)
--------- --------- ---------
Income before income taxes ............... 67.3 67.5 17.8
Provision for income taxes ............... 27.5 27.5 10.3
--------- --------- ---------
Net income ............................... $ 39.8 $ 40.0 $ 7.5
========= ========= =========
Earnings per share ....................... $ 1.04 $ 1.09 $ .33
========= ========= =========
Earnings per share -- assuming dilution .. $ 1.04 $ 1.07 $ .33
========= ========= =========
Number of common shares used in the per
share calculations:
Earnings per share ................... 38.1 36.7 22.5
========= ========= =========
Earnings per share -- assuming dilution 38.4 37.3 22.9
========= ========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
26
METALS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN MILLIONS)
ADDITIONAL
COMMON PAID-IN UNEARNED RETAINED TREASURY
STOCK CAPITAL COMPENSATION EARNINGS STOCK, AT COST TOTAL
------ ------- ------------ -------- -------------- ------
BALANCE, December 31, 1996 ...................... $ .1 $ 17.3 $ (1.8) $ 41.9 $-- $ 57.5
Shares issued to members of management ...... -- 6.0 -- -- -- 6.0
Shares sold in connection with the IPO ...... .1 58.2 -- -- -- 58.3
Shares issued in connection with the
Acquisition of the Founding Companies ... .1 80.1 -- -- -- 80.2
Shares issued in connection with the 1997
Subsequent Acquisitions ................. -- 18.6 -- -- -- 18.6
Shares released under leveraged ESOP Plan ... -- .1 .3 -- -- .4
Other adjustments ........................... -- .3 -- -- -- .3
Capital contributions attributable to deemed
tax payments of S Corporations .......... -- 4.0 -- -- -- 4.0
Distributions by pooled companies prior
to acquisition .......................... -- -- -- (6.3) -- (6.3)
Net income .................................. -- -- -- 7.5 -- 7.5
------ ------ ------ ------ ------ ------
BALANCE, December 31, 1997 ...................... .3 184.6 (1.5) 43.1 -- 226.5
Shares issued in connection with the
1998 Acquisitions ....................... .1 73.8 -- -- -- 73.9
Shares released under leveraged ESOP Plan ... -- 2.1 1.5 -- -- 3.6
Stock options exercised and other adjustments -- .2 -- -- -- .2
Capital contributions attributable to deemed
tax payments of S Corporations .......... -- .5 -- -- -- .5
Distributions by pooled companies prior
to acquisition .......................... -- -- -- (3.1) -- (3.1)
Net income .................................. -- -- -- 40.0 -- 40.0
------ ------ ------ ------ ------ ------
BALANCE, December 31, 1998 ...................... .4 261.2 -- 80.0 -- 341.6
Shares issued in connection with the 1999
Acquisitions ............................ -- 2.1 -- -- -- 2.1
Stock options exercised and other adjustments -- .4 -- -- -- .4
Shares repurchased .......................... -- -- -- -- (4.5) (4.5)
Net income .................................. -- -- -- 39.8 -- 39.8
------ ------ ------ ------ ------ ------
BALANCE, December 31, 1999 ...................... $ .4 $263.7 $ -- $119.8 $ (4.5) $379.4
====== ====== ====== ====== ====== ======
The accompanying notes are an integral part of
these consolidated financial statements.
27
METALS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1999 1998 1997
------ ------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................................... $ 39.8 $ 40.0 $ 7.5
Adjustments to reconcile net income to net cash provided by (used in) operating
activities--
Capital contributions attributable to deemed tax payments of S Corporations -- .5 4.0
Provision for bad debts .................................................... 1.4 1.7 .6
Depreciation and amortization .............................................. 21.2 16.4 5.6
Deferred income taxes ...................................................... 9.9 4.3 .7
Compensation expense -- non-cash ........................................... -- 2.6 6.4
Changes in operating assets and liabilities, net of acquisitions
and non-cash transactions--
Accounts receivable .................................................... (16.2) (2.7) 1.3
Inventories ............................................................ 19.0 (49.0) (7.4)
Prepaid expenses and other assets ...................................... .6 (11.8) (.3)
Accounts payable and accrued liabilities ............................... 27.6 (6.4) (14.0)
Income taxes payable ................................................... (6.2) (7.7) .4
Other operating ............................................................ 1.5 1.3 (.5)
------ ------ ------
Net cash provided by (used in) operating activities .................... 98.6 (10.8) 4.3
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of acquired cash .................................. (74.1) (186.2) (68.6)
Purchase of property and equipment ............................................ (35.2) (25.3) (18.7)
Proceeds from securitization of receivables ................................... 90.0 -- --
Other investing ............................................................... 3.7 .3 1.4
------ ------ ------
Net cash used in investing activities ................................... (15.6) (211.2) (85.9)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on revolving credit facilities .................... (79.0) 34.7 39.7
Issuance of 8 5/8% Senior Subordinated Notes .................................. -- 200.0 --
Net borrowings (repayments) on long-term debt ................................. (3.8) .6 (4.0)
Issuance (repurchases) of stock ............................................... (4.5) .3 58.3
Deferred financing costs incurred ............................................. (.6) (7.9) (1.0)
Distributions by pooled companies prior to acquisition ........................ -- (3.1) (6.3)
Other financing ............................................................... .3 (.6) (.2)
------ ------ ------
Net cash (used in) provided by financing activities ..................... (87.6) 224.0 86.5
------ ------ ------
NET INCREASE (DECREASE) IN CASH ....................................................... (4.6) 2.0 4.9
CASH, beginning of year ............................................................... 9.3 7.3 2.4
------ ------ ------
CASH, end of year ..................................................................... $ 4.7 $ 9.3 $ 7.3
====== ====== ======
The accompanying notes are an integral part of
these consolidated financial statements.
28
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Metals USA, Inc., a Delaware corporation, ("Metals USA") was founded on July
3, 1996 to become a leading national value-added metals processor and
distributor, to manufacture higher-value components from processed metals and to
pursue the consolidation of the highly fragmented metals processing industry.
Prior to its initial public offering ("IPO"), Metals USA had conducted no
operations. Concurrent with the consummation of its IPO on July 11, 1997, Metals
USA acquired, in separate transactions (the "Mergers") eight companies (the
"Founding Companies") engaged in the processing of steel, aluminum and specialty
metals, as well as the manufacture of metal components. Following the IPO and
through December 31, 1999, Metals USA acquired numerous additional metal
processing companies and businesses (See Note 2). Certain of the companies
acquired after the IPO were accounted for using the "pooling-of-interests"
method, resulting in a restatement of the Company's financial statements for all
periods presented (See Note 2). References herein to the "Company" include
Metals USA and its subsidiaries.
The Company sells to businesses such as the machining, furniture,
transportation equipment, power and process equipment, industrial/commercial
construction, consumer durables and electrical equipment industries, and
machinery and equipment manufacturers. The Company believes that its broad
customer base and its wide array of metals processing capabilities, products and
services, coupled with its broad geographic coverage of the United States,
reduce the Company's susceptibility to economic fluctuations affecting any one
industry or geographical area.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect (i) the reported amounts of assets and liabilities, (ii) the disclosure
of contingent assets and liabilities known to exist as of the date the financial
statements are published and (iii) the reported amount of revenues and expenses
recognized during the periods presented. The Company reviews all significant
estimates affecting its consolidated financial statements on a recurring basis
and records the effect of any necessary adjustments prior to their publication.
Adjustments made with respect to the use of estimates often relate to improved
information not previously available. Uncertainties with respect to such
estimates and assumptions are inherent in the preparation of financial
statements.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include
the accounts of Metals USA and its subsidiaries. All intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
Certain reclassifications have been made to prior years' financial statements to
be consistent with the current year's presentation.
INVENTORIES -- Inventories are stated at the lower of cost or market. Certain
of the Company's subsidiaries use the last-in, first-out ("LIFO") method of
accounting for inventories and other subsidiaries use a variety of methods
including specific identification, average cost and the first-in first-out
("FIFO") method of accounting. As of December 31, 1999 and 1998, approximately
20.1% and 29.5%, respectively, of the consolidated inventories were accounted
for using the LIFO method of accounting.
PROPERTY AND EQUIPMENT -- Property and equipment is stated at cost, net of
accumulated depreciation. Depreciation is computed using the straight-line
method at rates based upon the estimated useful lives of the various classes of
assets.
29
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
OTHER LONG-LIVED ASSETS -- Goodwill represents the excess of cost over the
estimated fair value of identifiable assets of the businesses acquired using the
"purchase" method of accounting. Goodwill is stated at cost, net of accumulated
amortization, and is being amortized over a forty-year life using the
straight-line method. Other long-lived assets include deferred financing costs
and other intangible assets, which are being amortized over the estimated useful
life of the related borrowing or intangible asset. The Company reviews the
recoverability of goodwill and other long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may be impaired. The Company has not recorded any impairment losses with
respect to goodwill or other long-lived assets to date. The accumulated
amortization of goodwill totaled $13.7 and $6.8 as of December 31, 1999 and
1998, respectively. Accumulated amortization of other assets totaled $4.1 and
$2.4 as of December 31, 1999 and 1998, respectively. Amortization expense for
the years ended December 31, 1999, 1998 and 1997 was $7.3, $5.9, and $1.5,
respectively. Amortization of deferred financing costs for the years ended
December 31, 1999, 1998 and 1997 was $1.3, $.9, and $.1, respectively, and is
included in the interest and securitization expense on the accompanying
consolidated statements of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying values of cash, accounts
receivable and accounts payable approximate fair value. The fair value of the
long-term debt is estimated based on interest rates for the same or similar debt
offered to the Company having the same or similar remaining maturities and
collateral requirements. At December 31, 1999, the fair value of the Company's
fixed rate long-term debt of $244.8 was $224.8. The carrying amount of the
Company's variable rate long-term debt of $196.0 approximates fair value.
INTEREST RATE SWAP AGREEMENTS -- The Company has entered into interest rate
swap agreements to fix interest rates on variable rate debt and reduce exposure
to interest rate fluctuations. Such agreements involve the exchange of amounts
based on fixed interest rates for amounts based on variable interest rates over
the life of the agreement without an exchange of the notional amount upon which
payments are based. The differential to be paid or received as interest rates
change is accounted for on the accrual method of accounting. The related amount
payable or receivable from counterparties is included as an adjustment to
accrued interest in other accrued liabilities. In the event of early
extinguishment, any gain or loss would be recognized in income at the time of
extinguishment. At December 31, 1999, the fair value of the interest rate swap
agreements was $1.5.
CONCENTRATION OF CREDIT RISK -- Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist principally of
cash deposits, trade accounts and notes receivable. Concentrations of credit
risk with respect to trade accounts are within the machining, furniture,
transportation equipment, power and process equipment, industrial/commercial
construction, consumer durables and electrical equipment industries, and
machinery and equipment manufacturers. Generally, credit is extended once
appropriate credit history and references have been obtained. Provisions to the
allowance for doubtful accounts are made monthly and adjustments are made
periodically (as circumstances warrant) based upon the expected collectibility
of all such accounts. Additionally, the Company periodically reviews the credit
history of its customers and generally does not require collateral for the
extension of credit.
INCOME TAXES -- The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"), ACCOUNTING
FOR INCOME TAXEs. Under SFAS No. 109, deferred income taxes are recognized for
the future tax consequences of differences between the tax bases of assets and
liabilities and their financial reporting amounts based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Provision for income taxes represents the amount of taxes payable and the
applicable changes in deferred tax assets and liabilities.
30
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
EARNINGS PER SHARE -- The Company computes earnings per share in accordance
with Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"),
EARNINGS PER SHARE. SFAS No. 128 requires presentation of basic earnings per
share ("Earnings per Share") and diluted earnings per share ("Earnings per Share
- -- Assuming Dilution"). Earnings per Share excludes dilution and is determined
by dividing income available to common stockholders by the weighted average
number of common shares outstanding during the period. Earnings per Share --
Assuming Dilution reflects the potential dilution that could occur if securities
and other contracts to issue common stock were exercised or converted into
common stock. Earnings per Share -- Assuming Dilution is computed similarly to
fully diluted earnings per share under previous accounting rules.
The number of shares used in the per share calculations consists of the
following:
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)
Number of shares used in computing earnings per share
(weighted average shares) .......................... 38.1 36.7 22.5
Effect of dilutive securities:
Stock options ...................................... .1 .5 .4
Convertible securities ............................. .2 .1 --
---- ---- ----
Number of shares used in computing earnings per share
--assuming dilution (weighted average shares) ...... 38.4 37.3 22.9
==== ==== ====
NEW ACCOUNTING PRONOUNCEMENTS - SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, was issued in June 1998. It establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. In June 1999, SFAS No. 137, DEFERRAL
OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133, was issued and defers the
adoption date to fiscal years beginning after June 15, 2000. Management does not
believe that the adoption of this statement will have a material impact on the
financial position or results of operations of the Company.
2. BUSINESS COMBINATIONS
POOLING TRANSACTIONS
During 1997, Metals USA completed the acquisition of all the capital stock of
Jeffreys Steel Company, Inc. ("Jeffreys") and Wayne Steel, Inc. ("Wayne") in
business combinations accounted for as "pooling-of-interests" transactions in
accordance with the requirements of Accounting Principles Board Opinion No. 16
("APB No. 16"), BUSINESS COMBINATIONS. Jeffreys is headquartered in Mobile,
Alabama, and is engaged in the processing and distribution of steel. Wayne
operates as a processor and distributor of flat rolled steel and aluminum
products and is headquartered in Wooster, Ohio.
During 1998, Metals USA completed the acquisition of all the capital stock of
Krohn Steel Service Center, Inc. ("Krohn") in a business combination accounted
for as a "pooling-of-interests" transaction in accordance with the requirements
of APB No. 16. Krohn is a processor of flat rolled steel and is headquartered in
Springfield, Ohio.
31
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. BUSINESS COMBINATIONS (CONTINUED)
Prior to the acquisition by Metals USA, the shareholders of Wayne and Krohn
had elected to be taxed as S Corporations; accordingly, any federal income tax
liabilities for the periods prior to the acquisition dates were the
responsibility of the respective stockholders. For the purposes of these
consolidated financial statements, federal income taxes have been provided as if
Wayne and Krohn had filed C Corporation tax returns for the pre-acquisition
periods, with the current income tax provisions reflected in the consolidated
financial statements as increases to additional paid-in capital. Collectively,
Metals USA issued 9,490,458 shares of common stock in exchange for all of the
capital stock of Jeffreys, Wayne and Krohn. The unaudited aggregate
pre-acquisition net sales and net income for Jeffreys, Wayne and Krohn during
1997 were $239.9 and $8.9, respectively. The unaudited aggregate pre-acquisition
net sales and net income for Krohn during 1998 were $13.5 and $.9, respectively.
There were no transactions between Metals USA, Jeffreys, Wayne or Krohn during
periods prior to these business combinations.
PURCHASE TRANSACTIONS
Concurrent with the completion of its IPO on July 11, 1997, Metals USA
acquired the eight Founding Companies, which are in the metal processing and
distribution business. The acquisition of each of the Founding Companies was
accounted for using the "purchase" method of accounting. The aggregate
consideration paid by Metals USA to acquire the Founding Companies was
approximately $27.8 in cash, 10,128,609 shares of common stock and the
assumption of $92.6 of debt.
Subsequent to the IPO and prior to December 31, 1997, Metals USA acquired
several additional companies using the "purchase" method of accounting. The
aggregate consideration paid by Metals USA for these additional 1997
acquisitions was approximately $46.0 in cash, 1,564,890 shares of common stock
and the assumption of indebtedness of approximately $19.0.
During the year ended December 31, 1998, the Company acquired a number of
additional metal processing companies and businesses using the "purchase" method
of accounting. The most significant of the 1998 acquisitions (those with 1997
annual revenues in excess of $50.0) are as follows: Independent Metals Co., Inc.
("Independent"), Pacific Metal Company ("Pacific"), The Levinson Steel Company
("Levinson"), Fullerton Industries, Inc. ("Fullerton") and Intsel Southwest
Limited Partnership ("Intsel"). The aggregate consideration paid by Metals USA
for the 1998 acquisitions was approximately $198.3 in cash, 5,458,641 shares of
common stock, the issuance of notes of approximately $3.6 and the assumption of
indebtedness of approximately $90.1.
During 1999, the Company's principal acquisitions were Southwest Steel Supply
Company, Wolf Brothers Steel Service Center and Allmet Building Products.
Additionally, the Company acquired the net assets of certain other businesses.
The aggregate consideration paid in connection with these acquisitions was
approximately $78.0 in cash, 317,283 shares of Common Stock, convertible notes
of approximately $4.0 and the assumption of indebtedness of approximately $12.9.
The Company has recorded the excess of the purchase price over the estimated
fair value of identifiable assets acquired in the transactions accounted for
using the "purchase" method of accounting as "goodwill" in the accompanying
consolidated balance sheets.
32
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. BUSINESS COMBINATIONS (CONTINUED)
The following summarized unaudited pro forma financial information adjusts
the historical financial information by assuming the acquisitions completed
during 1998 and 1999 and the issuance of the Notes (as defined in Note 6)
occurred on January 1, 1998.
YEARS ENDED DECEMBER 31,
--------------------------
1999 1998
--------- ---------
(UNAUDITED)
Net sales ................................ $ 1,818.4 $ 1,927.0
Operating costs and expenses:
Cost of sales ......................... 1,337.2 1,453.2
Operating and delivery ................ 200.5 186.3
Selling, general and administrative ... 134.9 131.6
Depreciation and amortization ......... 22.5 21.7
Integration charge .................... 9.4 --
--------- ---------
Operating income ......................... 113.9 134.2
Interest expense ......................... 42.2 43.4
Other income ............................. (.7) (1.7)
--------- ---------
Income before income taxes ............... 72.4 92.5
Provision for income taxes ............... 31.0 37.7
--------- ---------
Net income ............................... $ 41.4 $ 54.8
========= =========
Earnings per share ....................... $ 1.09 $ 1.42
========= =========
Earnings per share -- assuming dilution .. $ 1.08 $ 1.40
========= =========
Number of common shares used in the per share
calculations (in millions):
Earnings per share .......................... 38.1 38.5
========= =========
Earnings per share -- assuming dilution ..... 38.4 39.1
========= =========
The preceding pro forma amounts reflect the results of operations of Metals
USA and acquisitions completed during 1998 and 1999, assuming the transactions
were completed on January 1, 1998. Additionally, the amounts shown in the table
reflect (a) the reduction in certain related party lease expenses and management
compensation, which has been agreed to prospectively; (b) the amortization of
goodwill recorded over a forty-year estimated life, plus additional depreciation
expense due to the allocation of a portion of the excess purchase price to
property and equipment; (c) the assumed reductions in interest expense due to
the refinancing of the outstanding indebtedness in conjunction with the
acquisitions, offset by an assumed increase in interest expense incurred in
connection with financing the acquisitions; (d) a charge eliminating the gains
recorded as historical LIFO adjustments to cost of sales as a result of the
restatement of base year LIFO costs to the appropriate replacement costs, as if
the acquisitions occurred on January 1, 1998; (e) certain other nonrecurring
expenses with respect to the acquisitions, such as expenses associated with
compensation plans which were terminated in conjunction with the respective
acquisitions; (f) the incremental interest expense and amortization of deferred
financing costs incurred as a result of the issuance of the Notes and the Credit
Facility (as defined in Note 6), net of the repayment of outstanding
indebtedness of the Company and (g) the adjustment to the provision for federal
and state income taxes for all entities being combined relating to the entries
noted above and as if all entities were C Corporations.
33
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. INVENTORIES
Inventories consist of the following:
DECEMBER 31,
------------------
1999 1998
------ ------
Raw materials --
Heavy Carbon .............................. $113.0 $156.3
Flat Rolled ............................... 89.8 69.4
Specialty Metals .......................... 78.5 68.2
Building Products ......................... 17.8 12.3
------ ------
Total raw materials .................... 299.1 306.2
------ ------
Work-in-process and finished goods--
Heavy Carbon .............................. .6 .4
Flat Rolled ............................... 22.4 17.7
Specialty Metals .......................... 2.7 3.5
Building Products ......................... 25.7 16.8
------ ------
Total work-in-process and finished goods 51.4 38.4
------ ------
Less -- LIFO reserve .......................... -- (.9)
------ ------
Total .................................. $350.5 $343.7
====== ======
The replacement cost of the Company's inventory exceeded the historical cost
of the inventory in 1998 and 1997, computed using the LIFO method of valuation.
If the FIFO method had been used for all inventories, the carrying value would
have been $344.6 at December 31, 1998. Additionally, net income would have been
$39.3, $39.4, and $7.5 for the years ended December 31, 1999, 1998 and 1997,
respectively.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
ESTIMATED DECEMBER 31,
USEFUL -------------------
LIVES 1999 1998
---------- ------ ------
Land .......................... -- $ 12.5 $ 10.8
Building and improvements ..... 5-40 years 79.2 63.5
Machinery and equipment ....... 7-25 years 147.4 114.0
Automobiles and trucks ........ 3-12 years 9.7 10.4
Construction in progress ...... -- 16.7 5.5
------ ------
265.5 204.2
Less-- Accumulated depreciation (42.5) (31.0)
------ ------
Total ..................... $223.0 $173.2
====== ======
Depreciation expense for the years ended December 31, 1999, 1998 and 1997 was
$13.9, $10.5 and $4.1, respectively. Additionally, following the acquisitions of
Wayne and Jeffreys, the Company revised the estimated useful lives of the
depreciable assets of Wayne and Jeffreys to conform to the conventions adopted
by the Founding Companies.
34
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 31,
----------------
1999 1998
----- -----
Accrued salaries and employee benefits ................. $13.3 $11.4
Accrued taxes, other than income ....................... 3.7 2.8
Accrued interest ....................................... 8.2 7.2
Accrued insurance ...................................... 2.7 6.2
Accrued profit sharing ................................. 1.5 2.2
Accrued integration .................................... 7.5 --
Accrued escrow ......................................... 2.0 2.1
Accrued professional fees .............................. .6 .6
Other .................................................. 9.4 7.6
----- -----
Total .............................................. $48.9 $40.1
===== =====
6. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
---------------------
1999 1998
------ ------
Borrowings under the Credit Facility ............. $196.0 $270.0
8 5/8% Senior Subordinated Notes ................. 200.0 200.0
Various issues of Industrial Revenue Bonds ....... 24.3 26.1
Obligations under capital leases and other ....... 20.5 10.5
------ ------
440.8 506.6
Less -- Current portion .......................... (6.1) (4.0)
------ ------
Total ........................................ $434.7 $502.6
====== ======
Scheduled maturities of long-term debt for the years ending December 31 are
as follows: 2000 -- $6.1; 2001 -- $11.5; 2002 -- $4.7; 2003 -- $202.3; 2004 --
$2.9; thereafter -- $213.3.
BORROWINGS UNDER THE CREDIT FACILITY
Concurrent with the IPO, the Company obtained an initial $150.0 unsecured
revolving credit facility (the "Original Credit Facility") which was used to
fund acquisitions, refinance certain indebtedness of the acquired companies and
for general corporate and working capital requirements. In January 1998, the
Company obtained a $50.0 unsecured revolving credit facility (the "Interim
Credit Facility") to meet its acquisition related cash requirements pending the
completion of an extension and modification of the Original Credit Facility to
provide for up to $300.0 of borrowing availability. The closing of the extension
and modification of the $300.0 credit facility (the "Credit Facility") on
February 11, 1998 stipulated the termination of the Interim Credit Facility. On
November 25, 1998 the Company further amended the Credit Facility to provide for
borrowings of up to $350.0. As of December 31, 1999, the Company had $154.0 of
borrowing availability under the Credit Facility.
The Credit Facility matures in February 2003, bears interest at the bank's
prime rate or LIBOR, at Metals USA's option, plus an applicable margin based on
the ratio of funded debt to cash flows (as defined). An annual commitment fee is
payable on any unused portion of the Credit Facility. The commitment fee varies
between 1/2% and 1/4% per annum, based on certain leverage ratios as defined in
the agreement. The Company uses the Credit Facility to fund acquisitions, make
capital expenditures, refinance debt of the companies acquired and for general
working capital requirements. Borrowings under the Credit Facility are
guaranteed by each of the Company's material subsidiaries (as defined) and
secured by the pledge of all of the capital stock of such subsidiaries.
35
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. LONG-TERM DEBT (CONTINUED)
The Credit Facility requires the Company to comply with various affirmative
and negative covenants including: (i) the maintenance of certain financial
ratios, (ii) restrictions on additional indebtedness, (iii) restrictions on
liens, guarantees and dividends, (iv) obtaining the lenders' consent with
respect to certain individual acquisitions, and (v) maintenance of a specified
level of consolidated net worth. At December 31, 1999, the Company had $14.8
available for the payment of dividends under the terms of the Credit Facility.
The Company has entered into two interest rate swap agreements designed as a
partial hedge to the Company's variable rate borrowings under the Credit
Facility. The purpose of these swap agreements is to fix interest rates on a
portion of its borrowings under the Credit Facility, thereby reducing exposure
to interest rate fluctuations. At December 31, 1999, the Company had interest
rate swap agreements with a notional amount of $125.0 compared to the total
borrowings under the Credit Facility of $196.0. Under these agreements, the
Company will pay the counterparties interest at a weighted average fixed rate of
5.08% and the counterparties will pay the Company interest at a variable rate
equal to LIBOR. The weighted average LIBOR rate applicable to these agreements
was 6.11% at December 31, 1999. The notional amounts do not represent amounts
exchanged by the parties, and thus are not a measure of exposure of the Company.
The weighted average variable rates are subject to change over time based on
fluctuations in the 90 day LIBOR rate. Terms for the agreements expire on
November 30, 2000 and December 4, 2000.
Neither the Company nor the counterparties, which are prominent financial
institutions, are required to collateralize their respective obligations under
these agreements. The Company is exposed to loss if one or both of the
counterparties default. At December 31, 1999, the Company had no exposure to
credit loss on the interest rate swaps. The Company does not believe that any
reasonably likely change in interest rates would have a material adverse effect
on the financial position, results of operations or cash flows of the Company.
8 5/8% SENIOR SUBORDINATED NOTES
On February 11, 1998, the Company completed the sale of $200.0 aggregate
principal amount of the Company's 8 5/8% Senior Subordinated Notes due 2008 (the
"Notes"). The Company received $194.5 of net cash proceeds (before expenses of
$.8 at closing). The Company used $179.3 of such proceeds to repay all the
borrowings outstanding under the Original Credit Facility and Interim Credit
Facility on February 11, 1998.
The Notes call for semi-annual interest payments on February 15 and August 15
of each year, beginning August 15, 1998 and mature on February 15, 2008. The
Notes are redeemable at the option of the Company, in whole or in part, at any
time on or after February 15, 2003, at the following redemption prices: 2003 --
104.313%; 2004 -- 102.875%; 2005 -- 101.438%; thereafter -- 100.00%, together
with accrued and unpaid interest to the date of redemption. Notwithstanding the
foregoing, at any time on or prior to February 15, 2001, the Company may redeem
up to 35% of the aggregate principal amount of the Notes originally issued with
the net proceeds of one or more offerings of the common stock of the Company, at
a redemption price equal to 108.625% of the principal amount thereof, plus
accrued and unpaid interest to the date of such redemption; provided that at
least 65% of the aggregate principal amount of Notes originally issued remains
outstanding immediately after such redemption. The Notes are guaranteed by
substantially all of the Company's current and future subsidiaries.
Additionally, the indenture governing the Notes contains customary restrictions
relating to additional indebtedness, liens, transactions with affiliates, asset
sales, investments, restricted payments and mergers and acquisitions of
subsidiaries. The Notes are subordinate to borrowings under the Credit Facility
and will rank PARI PASSU in right of payment with all other future subordinated
debt of the Company and will rank senior to other indebtedness that expressly
provides that it is subordinated in right of payment to the Notes.
VARIOUS ISSUES OF INDUSTRIAL REVENUE BONDS
The Industrial Revenue Bonds (the "IRBs") are payable in installments ranging
from monthly to annual with variable interest ranging from 5.50% to 6.60% per
annum at December 31, 1999 and mature from March 1, 2001 to May 1, 2023. The
IRBs are secured by real estate and equipment acquired with proceeds from these
bonds with a net book value of $28.5 at December 31, 1999. The IRBs place
various restrictions on certain of the Company's subsidiaries, including but not
limited to maintenance of required insurance coverage, maintenance of certain
financial
36
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. LONG-TERM DEBT (CONTINUED)
ratios, limits on capital expenditures and maintenance of tangible net worth and
are supported by letters of credit.
ACCOUNTS RECEIVABLE SECURITIZATION FACILITY
In January 1999, the Company entered into a three-year agreement (the
"Receivable Securitization Facility") to sell, on a revolving basis, through its
wholly-owned subsidiary, Metals Receivables Corporation ("MRC"), an undivided
interest in a designated pool of its trade accounts receivable to a commercial
bank ("Purchaser"). The maximum undivided interest in MRC's receivable portfolio
that may be purchased pursuant to this agreement is $100.0. At December 31,
1999, the Company had received $90.0 from this facility. The Company, as agent
for Purchaser, retains collection and administrative responsibilities for the
participating interests sold. As collections reduce the receivables included in
MRC's receivable portfolio, the Company may sell additional undivided interests
in new receivables to the Purchaser. The amount of the undivided interest in
MRC's receivable portfolio that is sold typically will change monthly depending
upon the level of defined eligible receivables available for sale each month
adjusted by certain defined ratios. The unpurchased portion of the MRC
receivable portfolio is a restricted asset and effectively collateral for the
benefit of the Purchaser. At December 31, 1999, the unpurchased portion of the
MRC receivable portfolio was $37.2 and is included in accounts receivable on the
consolidated balance sheet.
The Company recorded $4.9 of expense attributable to the Receivable
Securitization Facility for the year ended December 31, 1999, which is included
in interest and securitization expense on the consolidated statements of
operations.
7. INCOME TAXES
The components of the provision for income taxes are as follows:
YEARS ENDED DECEMBER 31,
-------------------------
1999 1998 1997
----- ----- -----
Federal--
Current ..................................... $16.4 $21.4 $ 8.7
Deferred .................................... 7.7 3.1 (.2)
----- ----- -----
24.1 24.5 8.5
State--
Current ..................................... 1.2 1.3 1.9
Deferred .................................... 2.2 1.2 (.1)
----- ----- -----
3.4 2.5 1.8
Foreign--
Current ..................................... -- .5 --
Deferred .................................... -- -- --
----- ----- -----
-- .5 --
----- ----- -----
Total provision ....................... $27.5 $27.5 $10.3
===== ===== =====
The provision for income taxes differs from an amount computed at the
statutory rates as follows:
YEARS ENDED DECEMBER 31,
-------------------------
1999 1998 1997
----- ----- -----
Federal income tax at statutory rates ............ $23.6 $23.6 $ 6.2
State income taxes, net of federal income
tax benefit .................................... 2.2 2.2 1.2
Nondeductible expenses:
Stock compensation ........................... -- .3 2.1
Amortization of goodwill ..................... 1.5 1.4 .4
Other ........................................ .2 -- .4
----- ----- -----
$27.5 $27.5 $10.3
===== ===== =====
37
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
7. INCOME TAXES (CONTINUED)
The significant items giving rise to the deferred tax assets (liabilities) are
as follows:
DECEMBER 31,
-------------------
1999 1998
------ ------
Deferred tax assets--
Accounts receivable .............................. $ .8 $ 1.5
Inventories ...................................... .3 1.3
Accrued liabilities .............................. 3.8 2.4
Net operating loss carryforward .................. 1.4 1.6
Deferred compensation and other .................. .1 .1
------ ------
Total deferred tax assets ..................... 6.4 6.9
------ ------
Deferred tax liabilities--
Property and equipment ........................... (26.1) (20.7)
Foreign investments .............................. (1.7) (1.0)
Other ............................................ (1.1) (.7)
------ ------
Total deferred tax liabilities ................ (28.9) (22.4)
Valuation allowance .................................. (.6) (.3)
------ ------
Net deferred tax assets (liabilities) ......... $(23.1) $(15.8)
====== ======
A subsidiary of the Company has a net operating loss carryforward which is
available to reduce the Company's future federal income taxes payable and
expires in 2005. A valuation allowance has been established to offset the
portion of the deferred tax asset related to the loss carryforward expected to
expire before their utilization and for other deferred tax assets which the
Company does not expect to realize through future operations.
8. STOCKHOLDERS' EQUITY
COMMON STOCK AND PREFERRED STOCK
During the first and second quarters of 1997, Metals USA issued a total of
985,500 shares of Common Stock to management of and consultants to Metals USA at
a price of $.01 per share. As a result, Metals USA has recorded a non-recurring,
non-cash compensation charge of $6.0 in 1997, representing the difference
between the amount paid for the shares and the estimated fair value of the
shares on the date of sale, as if the Founding Companies were combined.
On February 10, 2000, the Company announced its first quarterly dividend of
$.03 per share, payable on April 10, 2000 to stockholders of record on March 17,
2000.
RESTRICTED COMMON STOCK
In April 1997, Notre Capital Ventures II, L.L.C. exchanged 3,122,914 shares
of Common Stock for an equal number of shares of restricted voting common stock
("Restricted Common Stock"). The holder of Restricted Common Stock is entitled
to elect one member of Metals USA's Board of Directors and to .55 of one vote
for each share held on all other matters on which they are entitled to vote.
Each share of Restricted Common Stock will automatically convert into Common
Stock on a share-for-share basis (a) in the event of a disposition of such share
of Restricted Common Stock by the holder thereof (other than a disposition which
is a distribution by a holder to its partners or beneficial owners or a transfer
to a related party of such holder (as defined)), (b) in the event any person
acquires beneficial ownership of 15% or more of the outstanding shares of Common
Stock, or (c) in the event any person offers to acquire 15% or more of the total
number of outstanding shares of Common Stock.
After July 1, 1998, Metals USA may elect to convert any outstanding shares of
Restricted Common Stock into shares of Common Stock in the event 80% or more of
the outstanding shares of Restricted Common Stock have been converted into
shares of Common Stock.
38
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
8. STOCKHOLDERS' EQUITY (CONTINUED)
INITIAL PUBLIC OFFERING
On July 11, 1997 the Company completed its IPO, issuing to the public
5,900,000 shares of its common stock at a price of $10.00 per share, resulting
in net proceeds to the Company of $50.1 after deducting underwriting commissions
and discounts. On August 12, 1997, the Company sold 885,000 shares of Common
Stock pursuant to the over-allotment option granted to the underwriters. The
Company realized net proceeds from the sale of $8.2.
9. STOCK BASED COMPENSATION
LONG-TERM INCENTIVE PLAN
In April 1997, Metals USA's stockholders approved the Company's 1997
Long-Term Incentive Plan (the "Plan"), which provides for the granting or
awarding of incentive or non-qualified stock options ("NQSOs"), stock
appreciation rights, restricted or deferred stock, dividend equivalents and
other incentive awards to officers, key employees and consultants to Metals USA.
The number of shares authorized and reserved for issuance under the Plan is
limited to 13% of the aggregate number of shares of Common Stock outstanding.
These options will vest at the rate of 20% per year, commencing on the first
anniversary of date of grant and will expire ten years from the date of grant or
three months following termination of employment. The Company did not issue any
stock options prior to January 1, 1996. Options granted in 1996 were
attributable to an acquired company that was accounted for as a
"pooling-of-interest" business combination. Those options were converted at the
applicable share conversion ratio specified in the merger agreement and
exchanged for Company options issued under the Plan.
NON-EMPLOYEE DIRECTORS' STOCK PLAN
Metals USA's 1997 Non-Employee Directors' Stock Plan (the "Directors' Plan"),
which was adopted by the Board of Directors and approved by Metals USA's
stockholders in April 1997, provides for (i) the automatic grant to each
non-employee director serving at the consummation of the IPO of an option to
purchase 10,000 shares, (ii) the automatic grant to each non-employee director
of an option to purchase 10,000 shares upon such person's initial election as a
director and (iii) an automatic annual grant at each annual meeting of
stockholders thereafter of an option to purchase 5,000 shares to each
non-employee director at which meeting such director is re-elected or remains a
director, unless such annual meeting is held within three months of such
person's initial election as a director. All options will have an exercise price
per share equal to the fair market value of the Common Stock on the date of
grant and are immediately vested and expire on the earlier of ten years from the
date of grant or one year after termination of service as a director. The
Directors' Plan also permits non-employee directors to elect to receive, in lieu
of cash directors' fees, shares or credits representing "deferred shares" at
future settlement dates, as selected by the director. The number of shares or
deferred shares received will equal the number of shares of Common Stock which,
at the date the fees would otherwise be payable, will have an aggregate fair
market value equal to the amount of such fees.
39
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
9. STOCK BASED COMPENSATION (CONTINUED)
The following is a summary of stock option activity:
WEIGHTED
AVERAGE
"FAIR VALUE" OPTIONS FOR
PER SHARE WEIGHTED SHARES OF
OF OPTIONS AVERAGE PRICE COMMON
GRANTED PER SHARE STOCK
---------- ------------- ----------
Balance, January 1, 1997 ......... 130,551
Granted in connection with the IPO $ 6.30 $ 10.00 2,131,024
Granted to directors ............. 6.30 10.00 40,000
Granted .......................... 8.22 14.41 952,683
Exercised ........................ --
Canceled or expired .............. --
----------
Balance, December 31, 1997........ 3,254,258
Granted to directors ............. 13.08 19.25 20,000
Granted .......................... 10.26 15.50 843,464
Exercised ........................ 6.30 10.00 (25,392)
Canceled or expired .............. 7.16 11.66 (123,680)
----------
Balance, December 31, 1998........ 3,968,650
Granted to directors ............. 6.56 10.81 40,000
Granted .......................... 5.71 9.49 701,500
Exercised ........................ 6.55 8.45 (31,539)
Canceled or expired .............. 9.39 14.30 (305,199)
----------
Balance, December 31, 1999 ....... 4,373,412
==========
At December 31, 1999, exercisable options for shares of Common Stock were
1,550,441 at a weighted average price of $11.49 per share.
The Company used the Black-Scholes model to calculate the estimated
"fair-value" of stock options and similar awards. The model requires the use of
a number of subjective assumptions including: (i) risk free rate of return, (ii)
expected price volatility of the Common Stock, (iii) expected dividend yield and
(iv) estimated life of the option. Principal assumptions used in estimating the
"fair-value" of the Company's stock options using the Black-Scholes model were
as follows:
DECEMBER 31,
----------------
1999 1998
------- -------
Risk free rate of return ............. 6.21% 5.91%
Expected price volatility ............ 48.06% 46.06%
Expected dividend yield .............. -- --
Expected life of the option (in years) 7.5 7.5
The Company applies APB No. 25 and related interpretations in accounting for
its stock option plans. Had compensation cost for the Company's stock option
plans been determined based upon the fair value at the grant rate, consistent
with the methodology prescribed under the SFAS No. 123, the Company's net income
and earnings per share would have been reduced by the amortization of the
estimated fair value of stock options over the applicable vesting period of such
awards. The following pro forma disclosures may not be representative of similar
future disclosures because: (i) additional options may be granted in future
years and (ii) the computations used to estimate the "fair value" of the stock
options are subject to significant subjective assumptions, any one or all of
which may differ in material respects from actual amounts.
40
9. STOCK BASED COMPENSATION (CONTINUED)
YEARS ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
Net income as reported .................................................. $ 39.8 $ 40.0 $ 7.5
Estimated "fair value" of stock options vesting during the period, net of
federal income tax benefit .......................................... (3.3) (3.4) (1.1)
------ ------ ------
Adjusted net income ..................................................... $ 36.5 $ 36.6 $ 6.4
====== ====== ======
Adjusted earnings per share ............................................. $ .96 $ 1.00 $ .28
====== ====== ======
Adjusted earnings per share-- assuming dilution ......................... $ .95 $ .98 $ .28
====== ====== ======
Number of common shares used in the per share calculations:
Adjusted earnings per share ..................................... 38.1 36.7 22.5
====== ====== ======
Adjusted earnings per share-- assuming dilution ................. 38.4 37.3 22.9
====== ====== ======
10. INTEGRATION CHARGE
On September 8, 1999, the Company announced a comprehensive plan to reduce
operating costs and improve its operational efficiency by fully integrating
certain operations within a geographic area and consolidating certain
administrative and support functions. The Company recorded a charge to
operations of $9.4 in respect of this plan (the "Integration Charge"). The
principal components of the Integration Charge are $3.3 for termination of
certain employment contracts, $2.1 for severance costs attributable to the
consolidation of administrative and support functions, and $4.0 for the costs of
combining five processing facilities into others within the same geographic
region. These changes will affect less than 5% of the Company's workforce. The
following schedule sets forth by segment the Integration Charge recorded in the
third quarter and the incurred costs as of December 31,1999.
INTEGRATION COSTS
CHARGE INCURRED
----------- --------
Heavy Carbon ................................. $3.0 $ .4
Flat Rolled .................................. .8 --
Specialty Metals ............................. 3.0 1.4
Building Products ............................ 2.6 .1
---- ----
Total ...................................... $9.4 $1.9
==== ====
The Company expects to incur approximately $1.0 to $2.0 during each of the
next three quarterly reporting periods with respect to the personnel related
costs. Approximately $4.0 of facility integration costs will occur at various
times over the next three quarterly reporting periods of which, approximately
$3.0, attributable to Heavy Carbon and Building Products, are expected to occur
during the third quarter of 2000. Although the foregoing estimates with respect
to both costs and timing reflect the best information available to management,
there can be no assurance that such costs will not exceed current expectations
or that the timing of the facility integration activities will not be delayed.
In aggregate, adjustments for estimates for costs incurred through December 31,
1999 were less than $.1. Approximately $1.0 of the costs incurred result from
negotiated settlements with respect to certain employment contracts that are to
be paid over a three to five year period. These amounts were reclassified from
the Integration Charge to other accrued liabilities at December 31, 1999.
11. SEGMENT AND RELATED INFORMATION
The Company has four reportable segments with each segment processing and
distributing distinct products for different customer bases. Each segment is
managed by a product segment team focused on improving and expanding segment
operations. The four segments are: Heavy Carbon, Flat Rolled, Specialty Metals
and Building Products.
- - HEAVY CARBON consists of forty-three facilities that maintain an inventory
focusing on carbon products such as structural plate, beams, bars and tubing
and provide processing services to their customers, such as cutting,
cambering/leveling, punching, bending, shearing, cut-to-length and
T-splitting.
41
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
11. SEGMENT AND RELATED INFORMATION (CONTINUED)
- - FLAT ROLLED consists of sixteen facilities that maintain an inventory of cold
rolled and hot rolled steel products and provide processing services for
their customers such as slitting, precision blanking, leveling,
cut-to-length, laser cutting, punching, bending and shearing.
- - SPECIALTY METALS consists of twenty-six facilities that concentrate on
specialty metals such as aluminum, stainless steel, titanium, copper, nickel
and tool steels. Processing services provided to customers include cutting,
leveling, punching, bending, shearing and cut-to-length.
- - BUILDING PRODUCTS consists of sixty-eight facilities that produce and
distribute aluminum and steel building products consisting of covered
canopies and walkways, awnings, sunrooms, solariums and other products
primarily for the commercial and residential building products industries.
The accounting policies of the reportable segments are the same as those
described in Note 1 of "Notes to Consolidated Financial Statements." The Company
evaluates the performance of its operating segments based on operating income.
The following table shows summarized financial information concerning the
Company's reportable segments.
AS OF AND FOR THE FISCAL YEARS ENDED
DECEMBER 31,
----------------------------------------------------------------
CORPORATE,
HEAVY SPECIALTY BUILDING ELIMINATIONS
CARBON FLAT ROLLED METALS PRODUCTS AND OTHER TOTAL
-------- ----------- --------- -------- ------------ --------
1999:
Net sales ................... $ 680.6 $ 591.0 $ 383.7 $ 126.7 $ (36.6) $1,745.4
Operating income (loss) ..... 51.0 38.3 17.6 10.4 (10.7) 106.6
Total assets ................ 280.9 256.5 152.1 118.0 241.8 1,049.3
Capital expenditures ........ 15.4 11.8 4.5 2.6 .9 35.2
Depreciation and amortization 7.8 4.3 2.7 2.0 4.4 21.2
1998:
Net sales ................... $ 598.8 $ 445.4 $ 371.2 $ 93.4 $ (10.0) $1,498.8
Operating income (loss) ..... 46.1 25.8 27.3 9.3 (11.7) 96.8
Total assets ................ 367.9 214.1 168.9 82.7 192.8 1,026.4
Capital expenditures ........ 11.9 8.2 3.4 1.7 .1 25.3
Depreciation and amortization 5.6 2.8 2.4 1.4 4.2 16.4
1997:
Net sales ................... $ 234.2 $ 237.8 $ 41.5 $ 24.1 $ -- $ 537.6
Operating income (loss) ..... 13.0 13.9 3.7 2.4 (10.7) 22.3
Total assets ................ 133.1 120.7 75.5 35.2 114.6 479.1
Capital expenditures ........ 4.8 12.1 1.0 .5 .3 18.7
Depreciation and amortization 2.6 1.2 .4 .3 1.1 5.6
The amounts shown as an operating loss under the column heading "Corporate,
Eliminations and Other" consist primarily of general and administrative costs
that are not allocated to the segments and the amortization of goodwill
associated with certain of the Company's acquisitions. Assets not specifically
associated with a specific segment consist primarily of goodwill.
The reconciliation from total operating income to the Company's income before
income taxes is shown on the accompanying consolidated statement of operations.
42
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
11. SEGMENT AND RELATED INFORMATION (CONTINUED)
The Company's areas of operations are principally in the United States. No
single foreign country or geographic area is significant to the consolidated
operations. Foreign sales represent less than 2% of consolidated sales and the
Company has no long-lived assets in any foreign country.
The Company has a broad customer base within the United States with no single
customer being significant to consolidated operations.
12. EMPLOYEE BENEFIT PLANS
PROFIT-SHARING PLANS
The Company established the Metals USA, Inc. 401(k) Plan on June 1, 1998 to
provide a standardized defined contributions savings plan (the "Plan") for
employees. Participants are eligible for the Plan after completing six full
calendar months of service. Participants' employer contributions vest at varying
rates, ranging from full vesting upon participation to vesting that begins after
one year of service and are fully vested after four years. The Company's
contributions consist of a matching contribution of 50%, up to 6% of the
eligible employee's contribution. The Plan allows the employee to contribute up
to 15% of their eligible compensation.
The Company established the Metals USA, Inc. Union 401(k) Plan on October 1,
1998 to provide a standard defined contributions savings plan for all employees
covered under the terms of a collective bargaining agreement (the "Union Plan").
The employer is not obligated by the Union Plan to make contributions, unless
required by the operative collective bargaining agreement. These contributions
will generally vest from four to seven years, as specified by the terms of the
applicable collective bargaining agreement. The Union Plan allows the employee
to contribute up to 15% of their eligible compensation.
Certain subsidiaries provided various defined contributions plans for their
employees prior to being acquired by Metals USA, Inc. Contributions for the
profit-sharing portion of these plans, prior to the inception of the Plan and
the Union Plan, were at the discretion of the individual subsidiaries' board of
directors. The benefit plans of acquired companies are merged into the Plan as
soon as practicable.
The aggregate contributions to the Plans were $3.4, $2.8, and $.9 for the
years ended December 31, 1999, 1998 and 1997, respectively.
LEVERAGED ESOP ARRANGEMENT
Under the provisions of an employee stock ownership plan ("ESOP") and its
related trust, Jeffreys made annual contributions to the ESOP which were
invested in stock of Jeffreys and other qualifying securities for the benefit of
Jeffreys' employees. The ESOP provided for Jeffreys' purchases of employee
shares to be paid in cash and with the issuance of a note payable. Effective
September 26, 1997, the participation was frozen. Concurrent with the merger
with Metals USA, ESOP shares were exchanged for shares of Metals USA common
stock. The following reflects the equivalent shares of Metals USA common stock
that were issued in connection with the acquisition of Jeffreys.
Jeffreys' ESOP held 434,616 shares of stock prior to the purchase of 735,384
shares of outstanding stock from a majority stockholder for $5.31 per share. The
ESOP borrowed the funds to purchase such stock and Jeffreys guaranteed the
repayment of this loan. Jeffreys repaid this loan, plus interest, through
deductible contributions to the plan. As Jeffreys made contributions to the
plan, which reduced the principal on the note, the plan released the
corresponding shares related to the reduction in the note principal. At the
point when these shares were no longer specifically secured by the note payable,
they were allocated to the individual participants of the plan and considered
earned by those employees at that time. Jeffreys accounted for its ESOP in
accordance with Statement of Position 93-6 ("SOP 93-6"), EMPLOYERS' ACCOUNTING
FOR EMPLOYEE STOCK OWNERSHIP PLANS. Accordingly, the debt of the ESOP was
recorded as long-term debt and the shares pledged as collateral were reported as
unearned compensation. As shares were released from collateral, Jeffreys
reported compensation expense equal to estimated market price of the shares at
that time. ESOP share compensation expense was $2.6 and $.4 for the years ended
December 31, 1998 and 1997, respectively.
43
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
12. EMPLOYEE BENEFIT PLANS (CONTINUED)
Since the obligation was secured by the shares purchased and the note was
guaranteed by Jeffreys, all amounts relating to this transaction were considered
unearned compensation of the employees until such time as the note was repaid
and the corresponding shares are released to the individual participants of the
plan. With the termination of the ESOP in August 1998, subsequent to the payment
of the note to Jeffreys and the distribution of the ESOP shares to the
individual participants, all unearned compensation was charged to expense in
1998.
The activity relating to the ESOP shares was as follows:
YEARS ENDED DECEMBER 31,
------------------------
1998 1997
---------- ----------
Allocated shares at beginning of year 882,804 795,639
Shares deemed released for the period 287,196 87,165
Shares sold ......................... (125,000) --
Shares distributed to employees ..... (1,045,000) --
Unallocated shares .................. -- 287,196
---------- ----------
Total ESOP shares ............... -- 1,170,000
========== ==========
In accordance with SOP 93-6, additional paid-in capital was adjusted whenever
the market value of the shares released was more or less than the cost of the
shares released. The increase in additional paid-in capital attributable to this
difference in market value and cost was $2.1 for the year ended December 31,
1998.
13. SUPPLEMENTAL CASH FLOW INFORMATION
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
------ ------ ------
Supplemental cash flow information:
Cash paid for interest ................... $ 38.0 $ 23.7 $ 5.1
Cash paid for income taxes ............... 24.3 29.7 5.5
Non-cash investing and financing activities:
Acquisition of businesses:
Fair value of assets acquired ............ $124.2 $465.3 $364.3
Consideration given:
Cash paid .............................. 77.9 198.3 73.8
Stock issued ........................... 2.1 73.5 98.7
Notes issued ........................... 4.0 3.6 --
------ ------ ------
Liabilities assumed ...................... $ 40.2 $189.9 $191.8
====== ====== ======
14. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE AGREEMENTS
The Company's minimum lease obligations under certain long-term
non-cancelable lease agreements for office space, warehouse space and equipment
are as follows: 2000 -- $14.2; 2001 -- $12.4; 2002 -- $9.1; 2003 -- $7.0; 2004
- -- $5.4; thereafter -- $23.7.
The Company recorded approximately $15.8, $10.1, and $3.2 in rent expense
during the years ended December 31, 1999, 1998 and 1997, respectively, under
operating leases. Certain of these leases are with affiliated individuals and
companies (see Note 15).
44
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONTINGENCIES
The Company and its subsidiaries are involved in a variety of claims,
lawsuits and other disputes arising in the ordinary course of business. The
Company believes the resolution of these matters and the incurrence of their
related costs and expenses should not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
15. RELATED-PARTY TRANSACTIONS
Transactions with directors, executive officers, principal shareholders or
affiliates of the Company must be at terms that are no less favorable to the
Company than those available from third parties and must be approved in advance
by a majority of disinterested members of the Board of Directors.
In connection with the Mergers and certain of the subsequent acquisitions,
subsidiaries of the Company have entered into a number of lease arrangements for
facilities and equipment. These lease arrangements are for periods ranging from
10 to 20 years. Payments under these lease arrangements with respect to years
ended December 31, 1999, 1998 and 1997 were $3.2, $3.1, and $1.4, respectively.
Future commitments in respect of these leases are included in the schedule of
minimum lease payments in Note 14.
At December 31, 1999 and 1998 the aggregate principal amount of related-party
notes receivable held by the Company were $.6 and $.7, respectively. Interest
accrues on the notes at rates ranging from 7.5% to 8.0% per annum. The notes
call for regular periodic payments of principal and interest and mature at
varying dates through March 1, 2007. The notes are secured by liens on specific
assets of the affiliates and personal guarantees of the individuals. As of
December 31, 1999, the notes were current as to payment terms.
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for the years ended December 31,
1999 and 1998 is as follows:
THREE MONTHS ENDED
----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
1999:
Net sales ........................ $ 422.4 $ 435.7 $ 444.0 $ 443.3
Operating income ................. 27.6 29.1 21.2 28.7
Net income ....................... 10.7 11.8 6.6 10.7
Earnings per share -- assuming
dilution (1) ................... .28 .31 .17 .28
1998:
Net sales ........................ $ 278.5 $ 377.2 $ 438.4 $ 404.7
Operating income ................. 16.8 25.3 27.2 27.5
Net income ....................... 7.2 12.2 10.4 10.2
Earnings per share -- assuming
dilution (1) ................... .21 .32 .27 .27
- -------
(1) Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share may not
equal the total computed for the year.
45
METALS USA, INC.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
P A R T III
Information required under Part III (Items 10, 11, 12 and 13) has been
omitted from this report, since the Company intends to file with the Securities
and Exchange Commission, not later than 120 days after the close of its fiscal
year, a definitive proxy statement pursuant to Regulation 14A which involves the
election of directors.
P A R T IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) INDEX TO FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS (INCLUDED UNDER ITEM 8):
The Index to the Financial Statements is included on page 23 of this
report and is incorporated herein by reference.
2. FINANCIAL STATEMENT SCHEDULES:
Report of Independent Public Accountants on Supplementary Data.
Schedule II -- Valuation and Qualifying Accounts.
All other schedules have been omitted since the required information
is not significant or is included in the Consolidated Financial
Statements or notes thereto or is not applicable.
(b) REPORTS ON FORM 8-K
None.
(c) EXHIBITS
Reference is made to the Index of Exhibits immediately preceding the
exhibits hereto (beginning on page 48), which index is incorporated herein
by reference.
46
METALS USA, INC.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTARY DATA
To Metals USA, Inc.:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Metals USA, Inc. and
subsidiaries included in this Annual Report on Form 10-K and have issued our
report thereon dated February 10, 2000, in which we expressed an unqualified
opinion. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Valuation and Qualifying Accounts
Schedule (Schedule II) listed in the index at Item 14(a) is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This information has been subjected
to the auditing procedures applied in our audits of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
February 10, 2000
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
UTILIZATION
BALANCE AMOUNT OF
AT CHARGED RESERVE BALANCE
BEGINNING TO (NET OF AT END
DESCRIPTION OF YEAR EXPENSE RECOVERIES) OTHER OF YEAR
- -----------------------------------------------------------------------------------
Year Ended December 31, 1999
Allowance for doubtful
accounts ................... $7.1 $1.4 $(2.9) $ .6 (1) $6.2
Integration Charge ........... -- 9.4 (.9) (1.0)(2) 7.5
Year Ended December 31, 1998
Allowance for doubtful
accounts ................... 3.6 1.7 (.5) 2.3 (1) 7.1
Year Ended December 1997
Allowance for doubtful
accounts ................... .3 .6 -- 2.7 (1) 3.6
(1) Represents aggregate increase in the beginning balances arising from
acquired businesses during the year.
(2) Reclassifications resulting from negotiated settlements with respect to
certain employment contracts that are to be paid over a three to five
year period. These amounts were reclassified from the Integration Charge
accrual to other accrued liabilities at December 31, 1999.
47
METALS USA, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 30, 2000.
METALS USA, INC.
By: /s/ J. MICHAEL KIRKSEY
---------------------------
J. Michael Kirksey,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 30, 2000.
SIGNATURE TITLE
/s/ J. MICHAEL KIRKSEY Chief Executive Officer, President and
- ------------------------------------ Director
J. Michael Kirksey
/s/ KEITH E. ST. CLAIR Senior Vice President and Chief Financial
- ------------------------------------ Officer
Keith E. St. Clair
/s/ TERRY L. FREEMAN Vice President, Corporate Controller and
- ------------------------------------ Chief Accounting Officer
Terry L. Freeman
STEVEN S. HARTER* Director
ARNOLD W. BRADBURD* Chairman of the Board and Director
MARK ALPER* Director
A. LEON JEFFREYS* Director
PATRICK A. NOTESTINE* Director
THOMAS J. SHAPIRO* Director
RICHARD A. SINGER* Director
LESTER G. PETERSON* Director
CRAIG R. DOVEALA* Director
T. WILLIAM PORTER* Director
RICHARD H. KRISTINIK* Director
TOMMY E. KNIGHT* Director
FRANKLIN MYERS* Director
WILLIAM L. TRANSIER* Director
*By: /s/ J. MICHAEL KIRKSEY Director
-------------------------------
J. Michael Kirksey
Attorney-in-Fact
48
INDEX OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 -- Amended and Restated Certificate of Incorporation of
Metals USA, Inc. (the "Company"), as amended, incorporated
by reference to the Company's registration statement on
Form S-1, Registration No. 333-26601 dated June 17, 1997.
3.2 -- Bylaws of the Company, as amended, incorporated by
reference to the Company's registration statement on Form
S-1, Registration No. 333-26601 dated May 7, 1997.
4.1 -- Form of certificate evidencing ownership of Common
Stock of the Company, incorporated by reference to the
Company's registration statement on Form S-1, Registration
No. 333-26601 dated July 9, 1997.
4.2 -- Indenture, dated February 11, 1998, by and among the
Company as issuer and the Guarantors named therein, and
U.S. Trust Company of California, N.A., as Trustee
regarding the Company's 8 5/8% Senior Subordinated Notes
due 2008, incorporated by reference to the Company's
registration statement on Form S-1, Registration No.
333-35575 dated February 20, 1998.
10.1 -- The Company's 1997 Long-Term Incentive Plan,
incorporated by reference to the Company's registration
statement on Form S-1, Registration No. 333-26601 dated
May 7, 1997.
10.2 -- The Company's 1997 Non-Employee Directors' Stock Plan,
incorporated by reference to the Company's registration
statement on Form S-1, Registration No. 333-26601 dated
May 7, 1997.
10.3 -- Form of Employment Agreement between the Company and J.
Michael Kirksey, incorporated by reference to the
Company's registration statement on Form S-1, Registration
No. 333-26601 dated July 9, 1997.
10.4 -- Form of Employment Agreement between the Company and
John A. Hageman, incorporated by reference to the
Company's registration statement on Form S-1, Registration
No. 333-26601 dated July 9, 1997.
10.5 -- Form of Employment Agreement between the Company and
Terry L. Freeman, incorporated by reference to the
Company's registration statement on Form S-1, Registration
No. 333-26601 dated July 9, 1997.
10.6 -- Form of Employment Agreement between the Company and
Keith E. St. Clair, incorporated by reference to the
Company's registration statement on Form S-1, Registration
No. 333-26601 dated July 9, 1997.
10.7 -- Form of Founders' Employment Agreement between
Interstate Steel Supply Company of Maryland and Interstate
Steel Processing Company and Arnold W. Bradburd,
incorporated by reference to the Company's registration
statement on Form S-1, Registration No. 333-26601 dated
June 17, 1997.
10.8 -- Form of Founders' Employment Agreement between Steel
Service Systems, Inc. and Craig R. Doveala, incorporated
by reference to the Company's registration statement on
Form S-1, Registration No. 333-26601 dated June 17, 1997.
49
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.9 -- Form of Founders' Employment Agreement between
Queensboro Steel Corporation and Mark Alper, incorporated
by reference to the Company's registration statement on
Form S-1, Registration No. 333-26601 dated June 17, 1997.
10.10 -- Form of Founders' Employment Agreement between
Uni-Steel, Inc. and Richard A. Singer, incorporated by
reference to the Company's registration statement on Form
S-1, Registration No. 333-26601 dated June 17, 1997.
10.11 -- Form of Founders' Employment Agreement between Williams
Steel & Supply Co., Inc. and Lester G. Peterson,
incorporated by reference to the Company's registration
statement on Form S-1, Registration No. 333-26601 dated
June 17, 1997.
10.12 -- Form of Founders' Employment Agreement between
Affiliated Metals Company and Patrick A. Notestine,
incorporated by reference to the Company's registration
statement on Form S-1, Registration No. 333-26601 dated
June 17, 1997.
10.13 -- Form of Employment Agreement between Jeffreys Steel
Company, Inc. and Leon Jeffreys, Incorporated by reference
to the Company's registration statement on Form S-1,
Registration No. 333-35575 dated February 20, 1998.
10.14 -- Amended and Restated Credit Agreement dated February
11, 1998, by and among the Company and The First National
Bank of Chicago, as agent, (the "Credit Facility")
incorporated by reference to the Company's registration
statement on Form S-1, Registration No. 333-35575 dated
February 20, 1998.
10.15 -- Receivables Purchase Agreement dated January 21, 1999,
by and among Metals Receivables Corporation, (a wholly
owned subsidiary of the Company) and Falcon Asset
Securitization Corporation and The First National Bank of
Chicago as agent incorporated by reference to the
Company's Annual Report on Form 10-K dated March 29, 1999.
10.16 -- Amendment No. 1 to the Credit Facility dated November
25, 1998, by and among the Company and The First National
Bank of Chicago as agent incorporated by reference to the
Company's Annual Report on Form 10-K dated March 29, 1999.
21+ -- List of subsidiaries of the Company
23.1+ -- Consent of Arthur Andersen LLP
27+ -- Financial Data Schedule
- ---------
+ Included with this filing.