FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

[X]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Fiscal Year Ended January 1, 2000

 

[   ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the Transition Period from	to

Commission File Number 333-29141

Part I

Item 1. Business

General

MMI Products, Inc. ("MMI"), a Delaware corporation and a wholly owned subsidiary of Merchants Metals Holding Company ("MMHC"), was organized in 1953. MMI was acquired by Citicorp Venture Capital, Ltd. and members of MMI's management in 1986.

MMI is a leading manufacturer and distributor of products used in the commercial, infrastructure, and residential construction industries. MMI has established leading market positions in the fence and concrete construction industries by combining efficient manufacturing, high quality and broad product offerings and extensive distribution capabilities. MMI employs a combination of state-of-the-art and traditional production methods to achieve cost efficiencies in its manufacturing processes. In addition, while MMI's manufacturing facilities are geared primarily toward high-volume, standardized production to promote efficiencies, many of MMI's manufacturing facilities are capable of producing customized products in response to specific customer requirements or applications that are unique to particular geographic regions of the United States. Consequently, each plant is configured to serve as both a high-volume producer of standard products and a job lot producer of specialty products. MMI also benefits from raw material purchasing efficiencies because the majority of manufactured products are produced from the same raw material.

MMI has developed an extensive and well-positioned distribution network, consisting of 82 company-operated distribution centers, located in 33 states. MMI's distribution network services over 5,000 customers, including construction contractors, fence wholesalers, industrial manufacturers, highway construction contractors and fabricators of concrete reinforcing bar. In addition to serving customers nationwide, distribution centers and production facilities are well positioned to serve areas of high population and construction growth. MMI currently has manufacturing or distribution facilities in each of the ten states with the largest projected increases in population through 2025. MMI manufactures its products from 23 principal manufacturing facilities strategically located throughout the United States.

Acquisitions

Historically, a significant portion of MMI's growth has been achieved through acquisitions. Since 1989, MMI has completed eighteen acquisitions, including eleven in the past four years, which have substantially increased MMI's net sales and EBITDA. MMI completed two acquisitions in 1999 and one acquisition early in 2000.

On June 7, 1999, MMI purchased certain assets of the wholesale fence division of National Wholesale Fence Supply, Inc. ("National Wholesale") for cash of approximately $13.2 million, which was funded by the revolving credit facility. The operations acquired include a manufacturer of ornamental iron fence products in San Fernando, California and distributors of fence products in California. MMI entered into subleases for the ornamental iron fence manufacturing plant and the four distribution locations. The acquisition was accounted for as a purchase. The excess of the purchase price over the preliminary estimate of the fair value of the assets acquired of $2.9 million is being amortized over 20 years. The consolidated financial statements include the results of the former National Wholesale operations from the date of the acquisition.

2

On December 30, 1999, MMI purchased certain assets of Reforce Steel and Wire Corporation for cash of approximately $3.4 million, which was funded by the revolving credit facility. The operations acquired include a manufacturer of concrete accessories parts in Brooklyn, New York. The acquisition was accounted for as a purchase. The excess of the purchase price over the preliminary estimate of the fair value of the assets acquired of $1.7 million is being amortized over 20 years.

On February 3, 2000, MMI purchased all of the issued and outstanding capital stock of Hallett Wire Products Company, a Minnesota corporation ("Hallett"). Hallett manufactured welded wire mesh at facilities located in St. Joseph, Missouri and Kingman, Arizona. Hallett had net sales of approximately $37 million for the year ended December 31, 1999. The total acquisition price was $40 million in cash and was funded by the Company's revolving credit facility. To facilitate the purchase, the revolving credit facility was increased from $48.5 million to $75 million on February 3, 2000.

Business Segments

MMI reports the results of its operations in two business segments. Financial information for each business segment is disclosed in Note 12 of Notes to Consolidated Financial Statements.

The Fence and Concrete Construction Products segments share common factors in relation to seasonality of business and raw materials.

Seasonality and Cyclicality. MMI's products are used in the residential, commercial and infrastructure construction industries. These industries are both cyclical and seasonal, and changes in demand for construction services have a material impact on sales and profitability. Although MMI believes that a cyclical downturn is inevitable, MMI has implemented the following strategies which it believes will mitigate the impact of any such downturn on its future operating results and liquidity:

· Increased the focus on products used in the commercial and infrastructure construction industries, which historically have been less cyclical than the residential construction industry.
· Positioned Concrete Construction Products segment to benefit from anticipated increases in infrastructure spending.
· Expanded distribution network to serve diverse areas of high population growth, as well as to limit the effects of any regional economic downturns.

As a result of seasonality, the highest level of sales and profitability occur during the times of the year when climatic conditions are most conducive to construction activity. Accordingly, sales will typically be higher in the second and third quarters.

Raw Materials. MMI's manufactured products are produced primarily from steel rod. Because both business segments require large quantities of the same raw material, MMI purchases steel rod in significantly larger quantities than would be the case if the business segments were part of separate stand-alone enterprises. Because of such large volume purchases, MMI believes that it typically purchases steel rod at a cost below industry standard. Since steel rod cost comprises a substantial portion of cost of goods sold (approximately 25% in fiscal year 1999), MMI believes such cost savings provide a significant competitive advantage.

3

Generally, 50% to 60% of annual steel rod purchased has been produced overseas. MMI purchases steel rod from several suppliers overseas and in the United States. The ample availability of steel rod provides MMI with many purchasing options and as such MMI is not reliant on any one supplier.

MMI will normally negotiate quantities and pricing on a quarterly basis for both domestic and foreign steel rod purchases. Because all agreements for the purchase of steel rod, whether foreign or domestic, are denominated in United States dollars, there is no exposure to significant risks of fluctuations in foreign currency exchange rates with respect to such agreements.

Fence Segment

The Fence segment is made up of three operating entities, Merchants Metals, Security Fence and Anchor Die Cast. Merchants Metals is headquartered in Houston, Texas with the operations segregated and managed by geographic divisions. Security Fence is a manufacturer and distributor of a variety of fence products and is located in Bladensburg, Maryland. Anchor Die Cast, a small manufacturer and distributor of fence fittings, is located in Harrison, Arkansas. The Fence segment contributed 56.3%, 49.7% and 51.2% of consolidated net sales in fiscal years 1999, 1998 and 1997, respectively.

Products. The Fence segment manufactures galvanized and vinyl coated chain link fence fabric, a full line of aluminum die cast and galvanized pressed steel fittings, and vinyl coated colored pipe, ornamental iron fence products, and vinyl fencing. These products are manufactured at ten principal facilities.

The segment also distributes a variety of fence products that it purchases from third parties. Such products include pipe, tubing, wood, vinyl, aluminum, and ornamental iron fence products, gates, hardware, and other related products. The segment also assembles wooden fence panels for residential fences at several of its facilities.

Fence products are used in a variety of applications. The chain link fence products primarily serve as security fencing at residential, commercial and governmental facilities, including manufacturing and other industrial facilities, warehouses, schools, airports, correctional institutions, military facilities, recreational facilities, swimming pools and dog kennels. PVC color coated wire, together with vinyl coated colored pipe, tubing and fittings, are used primarily for tennis courts and other residential applications. The segment also offers other fence products that are used primarily in the construction of wood, vinyl, aluminum or ornamental iron fence systems, and in the construction of all sizes and styles of fence gates for the residential and commercial markets.

In fiscal year 1999, approximately 50% of the Fence segment sales represented products manufactured by the segment. The remaining fence products were purchased as finished goods from third parties for distribution. Purchases of finished fence products are primarily from domestic manufacturers. MMI believes that its full line of fence products provides a competitive advantage by enabling it to provide "one-stop shopping" to its customers, thereby promoting customer loyalty.

4

Production Process. The chain link fence manufacturing process is virtually the same at each manufacturing facility. The dominant manufacturing process, which is known as "GAW" or "galvanized after weaving", involves three steps.

· The first step, wire drawing, transforms steel rod into steel wire, primarily ranging in thickness from 12.5 gauge (.095 inches) to 6.0 gauge (.192 inches).
· In the second step, the wire is woven into chain link fabric by automated fabric weaving machines pre-set to a specific width (which ranges from three to 20 feet) of chain link fence fabric and to a specific "diamond" size ranging from 3/8 inch to 2 3/8 inches.
· The third step consists of the galvanizing process which involves coating the surface of the steel wire with zinc to provide, among other things, corrosion protection.

The segment also produces other types of coated wire fabric, including polyvinyl chloride or "PVC" coated, aluminum coated, and galvanized before weaving ("GBW"). In addition, vinyl coatings are applied to the pipe, tubing, and fittings used with vinyl coated chain link fabric. Anchor Die Cast manufactures a full line of aluminum die cast and galvanized pressed steel fittings.

Sales and Marketing; Principal Customers. The Fence segment sells fence products principally to fence wholesalers and residential and commercial contractors. Although some sales of fence products are through home centers, such sales are not a primary focus of sales efforts. No one customer accounted for more than 10% of the Fence segment revenues in fiscal year 1999.

The segment's dedicated sales force consists of approximately 84 employees whose sales territories cover the 48 contiguous states. Sales generally are made through 56 regional distribution centers (nine of which are located at manufacturing facilities), which are located in 30 states. Because customer orders typically require rapid turn-around time, the distribution centers are strategically located near customers' facilities. The segment also distributes its fence products through a network of 363 authorized dealers located throughout the country.

Competition. The Fence segment's major national competitor is Master-Halco, Inc., which has a more extensive distribution network than MMI. MMI believes, however, that its more extensive fence manufacturing capabilities provide an advantage to some major accounts. The segment also competes with two strong regional competitors, one of which operates primarily on the East Coast, with particular emphasis on Florida, and one of which operates only manufacturing facilities (with no internal distribution network) primarily east of the Rocky Mountains. The remaining competitors are smaller regional manufacturers and wholesalers.

Although the ability to sell fence products at a competitive price is an important competitive factor, MMI believes that other factors, such as perceived quality of product and service and ability to deliver products to customers quickly, are also important to its fence customers. MMI believes that its reputation for quality and service and its ability to deliver product quickly due to the locations of its 56 fence distribution centers, enable MMI to obtain a slight premium in its sales price for fence products, as compared to its principal competitors.

5

Concrete Construction Products Segment

The Concrete Construction Products segment is made up of two operating entities, Ivy Steel and Wire and Meadow Burke Products. Ivy is headquartered in Houston, Texas and Meadow Burke is headquartered in Tampa, Florida. Both companies segregate their management and operations by geographic region. The Concrete Construction Products segment contributed 43.7%, 50.3% and 48.8% of consolidated net sales in fiscal years 1999, 1998 and 1997, respectively.

Products. Concrete construction products include various classes of wire mesh, which serve as a structural reinforcing grid for concrete construction, including concrete pipe, roads, bridges, runways and sewage and drainage projects. In addition, the segment produces over 2,000 specialized accessories used in concrete construction, including products used to position and install steel reinforcing bar and wire mesh reinforcing grid.

The segment manufactures three principal classes of wire mesh, consisting of commodity building mesh (Class B-2), pipe mesh (Class C), and structural mesh (Class D). The wire mesh is produced from wire that ranges in size from 1/8-inch diameter to 3/4-inch diameter, in both smooth and deformed patterns.

Class B-2 mesh is a commodity building mesh used in housing and light commercial construction, including driveways, slab foundations and concrete walls. Class C mesh is used to construct reinforced concrete pipe for, among other things, drainage and sewage systems and water treatment facilities. Ivy has been producing pipe mesh for over 40 years. Class D mesh is a structural wire mesh that is designed as an alternative to steel reinforcing bar for certain types of concrete construction, including roads, bridges and other heavy construction projects. Structural mesh is marketed as a cost-effective alternative to steel reinforcing bars. Although structural mesh has a higher initial cost to the customer than does steel reinforcing bar, MMI believes that the overall construction cost to the customer is generally lower if structural mesh is utilized. The segment also manufactures galvanized strand wire which is used by manufacturers and processors of all types of wire products, including shelving, household and automotive products.

The concrete accessory products include supports for steel reinforcing bars and wire mesh, form ties and related products, basket assemblies (including welded and loose dowel basket assemblies), anchors and inserts (including imbedded attachments and lifting devices, composite structural wire members and prestress strand hold down anchors) and bracing devices for holding in place tilt-up concrete walls. Although the segment manufactures most of its concrete accessories, certain products, such as plastic supports for steel reinforcing bar and certain types of form ties, are purchased from third parties for distribution by the segment. New products are continually introduced in an effort to provide a full line of concrete accessories to customers.

Concrete accessories are used in a variety of applications. Supports are used to position and install steel reinforcing bars and wire mesh in the construction of roads, bridges and other heavy construction projects. Welded and loose dowel basket assemblies are used to reinforce joints between concrete pieces in the paving of roads, highways, and runways. Anchors and inserts are used to fasten and lift precast panels and floor panels in the construction of, among other things, commercial buildings.

6

In fiscal year 1999, approximately 92% of the segments sales represented manufactured products. The remaining 8% of segment sales were purchased as finished goods for resale through 18 regional distribution facilities.

Production Process. The Concrete Construction Products segment manufactures its products at 14 principal facilities, which are strategically located throughout the United States. Wire mesh is manufactured with wire that ranges in size from 1/8-inch diameter to ¾-inch diameter, in both smooth and deformed patterns. The wire mesh is manufactured from low-carbon steel rod, which is cleaned by removing "mill scale" by passing the rod through a series of pulleys that mechanically descales the rod. The rod is then pulled through a die that reduces the area of the rod approximately 30 percent. This "cold working" process produces wire that is clean, uniform in diameter and nearly 100 percent stronger than the original rod. The wire is then processed into the finished product using automatic welding machines. This method of welding, known as electrical resistance welding, produces a very strong welded joint without weakening the steel as much as electrode welding.

Certain aspects of the production process vary depending on the class of mesh being produced. Commodity building mesh generally is produced in roll and sheet form and is made with small diameter wire. Pipe mesh generally is custom-made to customer specifications. Additional steps in the process of producing structural wire mesh often include bending the mesh to precise shapes, cutting the exact sizes and preparing the surface to allow for the application of special coatings.

The concrete accessory manufacturing process also consists of drawing steel rod into wire that is then fed into automatic forming and resistance welding machines which produce the finished product. Additional manufacturing processes include various punch press operations, threading, machining, painting and plastic and epoxy coating of products. In addition to steel rod, which is the primary raw material for concrete accessories, other raw materials are used such as round bar stock, slit steel coils, reinforcing steel bars and paints, plastisol and epoxy powder used for various coatings.

Sales and Marketing; Principal Customers. The segment sells its products principally to construction products distributors, industrial manufacturers (such as pre-casters of concrete products), large reinforcing bar fabricators, commercial building supply dealers and construction contractors.

The specialized sales force for the wire mesh product line consists of approximately 12 employees whose sales territories cover the 48 contiguous states. Members of the wire mesh sales force generally have engineering backgrounds which permit them to consult with customers regarding product specifications. Because orders for wire mesh products typically do not require the quick turn-around time that is required for concrete accessories, wire mesh products are shipped directly from one of the eight wire mesh manufacturing facilities to the customer, generally in truckload quantities. Most wire mesh production is in response to particular customer orders. Light wire mesh used for residential construction, however, is produced in standard patterns in anticipation of customer orders.

The dedicated sales force for concrete accessories consists of approximately 35 employees whose sales territories cover the 48 contiguous states. Concrete accessories are distributed primarily through 18 regional distribution centers (six of which are located at concrete accessories manufacturing facilities). Because orders for concrete accessories typically require rapid turn-around time, these distribution centers are strategically located near customers' facilities.

7

No one customer accounted for more than 10% of the Concrete Construction Products segment revenues in fiscal year 1999.

Competition. The segment's major competitor for wire mesh is Insteel Wire Products, Inc. The segment faces strong regional competitors in Midwestern, Southeastern, and Mid-Atlantic states. There is also competition from smaller regional manufacturers and wholesalers of wire mesh products.

The concrete accessories product line faces competition from several significant competitors. Dayton-Superior Corporation is the leading full line national participant in the concrete accessories market, with a market share greater than that of MMI. The segment also faces strong full line competition from a regional competitor and from two other significant competitors, who offer a more limited number of products.

MMI believes that its ability to produce a greater variety of wire mesh products in a wider geographical area provides an advantage to major accounts. MMI believes that its willingness and ability to provide custom-made products that fit its customers' individual needs provide a competitive advantage. For concrete accessories, MMI believes that price, extensive product selection and ability to deliver product quickly are the principal competitive factors.

MMI believes that its raw material costs (which MMI believes are lower than many of its competitors) enhance the segment's ability to compete effectively with respect to product price in the concrete construction market.

Regulation

Environmental Regulation. MMI is subject to extensive and changing federal, state and local Environmental Laws including laws and regulations (i) that relate to air and water quality, (ii) impose limitations on the discharge of pollutants into the environment, and (iii) establish standards for the treatment, storage, and disposal of toxic and hazardous wastes. Stringent fines and penalties may be imposed for non-compliance with these Environmental Laws. In addition, Environmental Laws could impose liability for costs associated with investigating and remediating contamination at MMI's facilities or at third-party facilities at which MMI has arranged for the disposal treatment of hazardous materials.

Although no assurances can be given, MMI believes that MMI and its operations are in compliance in all material respects with all Environmental Laws and MMI is not aware of any non-compliance or obligation to investigate or remediate contamination that could reasonably be expected to result in material liability. This being said, Environmental Laws continue to be amended and revised to impose stricter obligations. MMI cannot predict the effect such future requirements, if enacted, would have on MMI although MMI believes that such regulations would be enacted over time and would affect the industry as a whole.

Health and Safety Matters. MMI's facilities and operations are governed by laws and regulations, including the federal Occupational Safety and Health Act, relating to worker health and workplace safety. MMI believes that appropriate precautions are taken to protect employees and others from workplace injuries and harmful exposure to materials handled and managed at its facilities. While it is not anticipated that MMI will be required in the near future to expend material amounts by reason of such health and safety laws and regulations, MMI is unable to predict the ultimate cost of compliance with these changing regulations.

8

Employees

As of March 30, 2000, MMI had approximately 2,700 full time employees. MMI is a party to seven collective bargaining agreements with five unions, of which a total of 307 employees are members. Such collective bargaining agreements cover employees of the Baltimore, Maryland; Tampa, Florida; Whittier, California; Hackensack, New Jersey; Chicago, Illinois; and Oregon, Ohio facilities. MMI considers its relations with its employees to be good.

Available Information

MMI files annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any reports, statements and other information filed by MMI at the SEC's public reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call (800) SEC-0330 for further information on the public reference rooms. MMI's filings are also available to the public from commercial document retrieval services and at the web site maintained by the SEC at http://www.sec.gov/.

Item 2. Properties

MMI's principal executive offices are located in approximately 13,000 square feet of leased space in Houston, Texas.

The operating facilities of MMI can be broken down into two categories, manufacturing plants and distribution centers. The majority of the manufacturing plants are owned by MMI. The majority of the distribution centers are leased from third parties. The following table sets forth the facilities general information by operating segment:

(1) Does not include square footage of outside storage and other outdoor areas.
(2) The majority of distribution centers are leased properties.

9

Item 3. Legal Proceedings

MMI is involved in various claims and lawsuits incidental to its business. MMI does not believe that these claims and lawsuits in the aggregate will have a material adverse affect on MMI's business, financial condition and results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

Not applicable.

10

Item 6. Selected Financial Data

The following table sets forth selected historical financial data derived from MMI's audited consolidated financial statements and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes thereto, included elsewhere herein.

(1) In fiscal year 1996, MMI recorded non-recurring expenses resulting from the modification of stock options granted in previous years as part of the 1996 Recapitalization of MMI and Merchants Metals Holding Company ("MMHC"). In 1999 all outstanding stock options were redeemed in connection with the 1999 Recapitalization of MMHC resulting in a non-recurring compensation charge for MMI employees. See Note 2 to the audited consolidated financial statements included elsewhere herein.
(2) EBITDA is defined as the sum of income before interest expense, income taxes, depreciation and amortization, and certain non-recurring expenses (see note (1) above). EBITDA is presented because it is a widely accepted financial indicator of a company's ability to service and incur debt. EBITDA should not be considered in isolation from or as a substitute for net income or cash flow measures prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity.
(3) In fiscal year 1997, $57.1 million was distributed to MMHC for the redemption by MMHC of certain of its equity interests. In fiscal year 1998, $1.3 million was distributed to MMHC to finalize the 1997 redemption of certain of its equity interests.

11

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following is an analysis of the financial condition and results of operations of MMI. This analysis should be read in conjunction with MMI's Consolidated Financial Statements and Notes thereto, appearing elsewhere herein.

General

MMI is a leading manufacturer and distributor of products used in the commercial, infrastructure and residential construction industries. Earnings were as follows:

(1) Corporate represents only amortization of intangible assets and non-recurring charges. Corporate general and administrative expenses are allocated to the segments based upon proportional net sales.

Acquisitions increased consolidated earnings before interest and income taxes $4.5 million, $5.0 million, and $2.1 million in 1999, 1998, and 1997, respectively.

Consolidated MMI net income increased 70.2% in 1999 and 41.3% in 1998. These increases are predominately the result of increased sales activity and lower raw material costs at the business segments.

Corporate costs have increased $2.9 million in 1999 and $.4 million in 1998. The majority of the 1999 increase was a $2.4 million non-recurring expense for the redemption of incentive stock options. These options were redeemed as part of a recapitalization of MMHC in November 1999. See Note 2 to the consolidated audited financial statements. The remaining increase in 1999 and all of the 1998 increase is due to goodwill amortization resulting from recent acquisitions. Goodwill amortization increased $.4 million in both 1999 and 1998.

Interest expense increased $2.1 million in 1999 and $4.3 million in 1998. Interest expense increased in 1998 due to a full twelve months of interest on the $120 million issuance of senior subordinated debentures in April 1997 and higher levels of senior borrowings to accommodate the 1998 acquisitions of The Burke Group LLC (the "Burke Group") and Security Fence. In 1999 interest expense increased primarily due to the additional issuance of $30 million senior subordinated debentures. The higher level of borrowings to finance acquisitions and the increased mix of the "high-yield" debentures (11.25% coupon) in MMI's debt structure both contributed to the increase in interest expense.

The effective income tax rate has increased slightly in 1999 and 1998 primarily as a result of non-deductible goodwill associated with recent acquisitions.

12

Fence Segment

Net Sales. Net sales increased 30.1% in 1999 and 17.2% in 1998. These increases are primarily due to acquisitions and the opening of new distribution centers. The National Wholesale Fence acquisition in second quarter 1999 contributed net sales of $13.1 million in 1999. The Security Fence acquisition in fourth quarter 1998 contributed net sales of $32.8 million and $7.3 million in 1999 and 1998, respectively. New distribution centers generally take up to two years to become established in their regional areas. As such, "new distribution centers" represent openings or small acquisitions over the last two years. New centers in 1999 and 1998 increased net sales $10.5 million and $8.9 million, respectively.

Gross Profit. The fence segment's gross profit margin percentage increased .8% in 1999 and .5% in 1998. These increases were primarily due to higher margin products introduced from the Security Fence and National Wholesale Fence acquisitions. In addition, 1999 benefited from lower steel rod and tubing costs partially offset by higher zinc costs.

SG&A and other expense. SG&A and other expense ("SG&A") increased 35.7% in 1999 and 18.9% in 1998. SG&A as a percentage of sales was 8.4%, 8.1%, and 8.0% for 1999, 1998, and 1997, respectively. The increase in expense in 1999 and 1998 was principally due to business acquisitions and the opening of distribution centers. In 1999 SG&A, as a percentage of sales, increased primarily due to higher bad debt expense resulting from a number of customers experiencing financial difficulties and bankruptcy.

13

Concrete Construction Products Segment

Net Sales. Net sales remained flat in 1999 and increased 24.2% in 1998. Sales stabilized in 1999 primarily due to no new acquisitions during the year and the plants working at capacity to meet the current demands. In 1998, the Burke Group acquisition contributed $23.9 million, a 14.1% increase in net sales. Also impacting 1998 was increased sales to the segment's largest customer, a company which had also grown through acquisitions.

Gross Profit. Gross profit increased 38.5% in 1999 and 43.5% in 1998. Gross profit margin percentage increased to 24.1% in 1999 from 17.4% in 1998. The increase in 1999 was primarily the result of lower raw material costs. The 1998 increase in gross profit was primarily due to the increase in mix of higher margin concrete accessories.

SG&A and other expense. SG&A expenses increased 8.5% in 1999 and 35.6% in 1998. As a percentage of sales, SG&A expense was 7.3%, 6.7% and 6.2% in 1999, 1998, and 1997, respectively. SG&A expense increased in 1999 as a result of three infrequent events. Bad debt expense increased $.5 million due to a number of customers with large balances having financial difficulties, some of which were caused by the customers' loss of large contracts. Also in 1999 there were increased writedowns of fixed assets ($.4 million) and a casualty loss at a manufacturing facility ($.2 million). The increase in SG&A expenses in 1998 was primarily due to the growth in sales and higher selling costs related to the Burke Group acquisition. SG&A expense as a percentage of sales increased in 1999 and 1998 as a result of the infrequent events in 1999 and higher selling costs for Burke Group concrete accessories in 1998.

Liquidity and Capital Resources

Operating activities including the payment of interest and income taxes and changes in working capital generated $18.7 million of cash in 1999 compared with $15.2 million and $2.4 million in 1998 and 1997, respectively. Net income, adjusted for non-cash items, such as depreciation, amortization, and other non-cash charges provided $31.6 million, $18.6 million and $16.2 million in 1999, 1998, and 1997, respectively. Excluding working capital increases resulting from a particular year's business acquisitions, MMI utilized $12.9 million, $3.4 million, and $13.8 million of cash in 1999, 1998, and 1997, respectively to grow its working capital as the volume of its sales increased. The working capital increase was smaller in 1998 as MMI's conversion to a new accounts payable software encountered problems which caused a delay in year-end payments. In 1999, these delayed payments were made and accounts payable balances declined to more normal levels.

Investing activities utilized $22.3 million, $47.9 million and $5.0 million in 1999, 1998 and 1997, respectively. In 1999 and 1998 the majority of this cash was used for acquisitions. Acquisitions utilized $15.8 million and $37.7 million in 1999 and 1998, respectively. Capital expenditures for expansion, improvement and replacement of property plant and equipment was $6.6 million, $10.2 million and $4.6 million in 1999, 1998 and 1997, respectively. Capital expenditures in 1998 included $3.2 million for a wire mesh plant facility which replaced a previously leased building, and $1.9 million for rental equipment, a new product line resulting from the Burke acquisition.

Financing activities provided $4.1 million in 1999 compared to $31.2 million and $5.9 million in 1998 and 1997, respectively. In 1999 cash flow from financing was relatively flat compared to prior years, due to growth in operating cash flow and the need to fund only one significant acquisition, National Wholesale Fence. The increase in 1998 was due primarily to the funding the Burke Group and Security Fence acquisitions.

14

Although EBITDA should not be considered in isolation from or as a substitute for cash flow measures prepared in accordance with generally accepted accounting principles or as a measure of a company's liquidity, it is a widely accepted financial indicator of a company's ability to incur and service debt. EBITDA is defined as the sum of income before interest expense, income taxes, depreciation and amortization, and non-recurring expenses. EBITDA was $62.5 million, $42.8 million and $31.4 million in 1999, 1998, and 1997, respectively. The increase in EBITDA is primarily from the result of net sales and gross profit resulting from acquisitions and other changes as discussed in the segment analysis above.

Senior Subordinated Notes. On February 12, 1999, MMI issued $30 million of a new series of the 11.25% Senior Subordinated Notes in a private offering. The net proceeds of approximately $31.1 million, including original issuance premium, after fees and expenses, were used to reduce its borrowings under the revolving credit facility. The effective interest rate of the Notes is 10.5%. Interest expense in 1999 was $2.8 million higher than in the previous year due to this issue.

On April 30, 1999, MMI exchanged the $30 million Senior Subordinated Notes issued on February 12, 1999 for Registered Senior Subordinated Notes. These notes have the same form and terms as the February 12, 1999 notes and the $120 million Registered Senior Subordinated Notes issued on April 16, 1997.

On April 16, 1997, MMI issued $120 million of 11.25% senior subordinated notes due 2007 (the "Senior Subordinated Notes"). The net proceeds of $116.0 million, after fees and expenses, were used (i) to distribute $57.1 million to MMHC for the redemption by MMHC of certain of its equity interests, (ii) to repay the entire $10 million principal amount, plus accrued interest, on a senior subordinated secured note payable, (iii) to repay MMI's remaining indebtedness under a term loan facility of $11.4 million and (iv) to reduce MMI's indebtedness under the revolving credit facility.

Credit Facility. MMI's revolving credit facility provides for maximum borrowings of $75.0 million, due December 2001. The revolver balance fluctuates throughout the year based on sales and purchasing volume, capital expenditures, and acquisitions. Borrowing availability is subject to a borrowing base calculation. The weighted average balance outstanding under this credit facility was $20.3 million and $26.2 million in 1999 and 1998, respectively. Borrowings under the credit facility bear interest, at the option of MMI, at either the bank's base rate plus 0.25 percent or Eurodollar plus 1.5 percent. Borrowings bearing interest at a Eurodollar rate plus 1.5 percent are denominated in short-term obligations of U.S. LIBOR with 30 to 180 day maturities. On January 1, 2000 the portion of the outstanding borrowings under U.S. LIBOR was approximately $4.0 million which would mature on January 18, 2000.

On February 3, 2000 the revolving credit facility was increased from $48.5 million to $75 million. The increase was used to fund the acquisition of the capital stock of Hallett Wire Products Company, a manufacturer of welded wire mesh with plant facilities located in St. Joseph, Missouri and Kingman, Arizona. Hallett had net sales of approximately $37 million for the year ended December 31, 1999. The total acquisition price was $40 million in cash. Subsequent to this acquisition, MMI has approximately $19.9 million availability for future borrowings under its revolving credit facility.

15

MMI's capital expenditure budget for fiscal year 2000 is $9.8 million and will be funded by the revolving credit facility.

MMI expects that cash flows from operations and the borrowing availability under its bank revolving credit facility will provide sufficient liquidity to meet its normal operating requirements, capital expenditure plans, existing debt service, and business acquisition strategy over the near term.

MMI has pursued and intends to continue to pursue a strategy of business acquisitions that will broaden its distribution network, complement or extend its existing product lines or increase its production capacity. The borrowing availability under its bank revolving credit facility is also expected to be available to finance such acquisitions. It is possible that, depending upon MMI's future operating cash flows and the size of potential acquisitions, MMI will seek additional sources of financing subject to limitations set forth in its senior subordinated notes indenture.

Effect of Inflation

The impact of inflation on MMI's operations has not been significant in recent years. There can be no assurance, however, that a high rate of inflation in the future will not have an adverse effect on MMI's operating results.

Impact of Year 2000

In prior years, MMI discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, MMI completed its remediation and testing of systems. As a result of those planning and implementation efforts, MMI experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to Year 2000 date change. MMI expensed approximately $81,500 during 1999 in connection with remediating its systems. MMI is not aware of any material problems resulting from Year 2000 issues, either with our products, or internal systems, or the products and services of third parties. MMI will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly.

16

Forward Looking Information

The statements contained in this report which are not historical facts, including, but not limited to, statements found under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" above, are forward looking statements that involve a number of risks and uncertainties. The actual results of the future events described in such forward looking statements in this report could differ materially from those contemplated by such forward looking statements. Among the factors that could cause actual results to differ materially are the risks and uncertainties discussed in the report, including without limitations, the portions of such statements under the caption referenced above, and the uncertainties set forth from time to time in MMI's other public reports and filings and public statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

MMI is subject to market risk exposure related to changes in interest rates on its revolving credit facility and its senior subordinated notes. Borrowings under the credit facility bear interest, at the option of MMI, at either the bank's base rate plus 0.25 percent or Eurodollar rate plus 1.5 percent. For fiscal year 1999, the weighted average balance outstanding under this credit facility was $20.3 million. Based on this balance, a one percent change in the interest rate would cause a change in interest expense of approximately $203,000. MMI is exposed to changes in the fair value of its $150 million in 1999 and $120 million in 1998 11.25% fixed rate senior subordinated notes. At January 1, 2000, the fair value of the notes was approximately 103% of par, or $154.5 million. At January 2, 1999, the fair value of the notes was approximately 108% of par, or $129.6 million. The variation in fair value is a function of market interest rate changes and the investor perception of the investment quality of the senior subordinated notes.

MMI also has exposure to price fluctuations associated with steel rod, its primary raw material. MMI negotiates purchase commitments from one to nine months in advance to limit its exposure to price fluctuation and ensure availability of the materials. Generally, 50% to 60% of steel rod is purchased from foreign sources.

17

Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Consolidated Financial Statements and Notes	Page
Report of Independent Auditors	19
Consolidated Balance Sheet at fiscal year end 1999 and 1998	20
Consolidated Statement of Income for fiscal years 1999, 1998, and 1997	21
Consolidated Statement of Stockholder's Equity (Deficit) for fiscal years 1999, 1998, and 1997	22
Consolidated Statement of Cash Flows for fiscal years 1999, 1998, and 1997	23
Notes to Consolidated Financial Statements	24 - 38

18

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholder of
MMI Products, Inc.

We have audited the accompanying consolidated balance sheets of MMI Products, Inc. as of January 1, 2000 and January 2, 1999, and the related consolidated statements of income, stockholder's equity (deficit) and cash flows for each of the three fiscal years in the period ended January 1, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MMI Products, Inc. at January 1, 2000 and January 2, 1999, and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended January 1, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ ERNST & YOUNG LLP

Houston, Texas
February 25, 2000

19

MMI PRODUCTS, INC.

CONSOLIDATED BALANCE SHEET

20

MMI PRODUCTS, INC.

CONSOLIDATED STATEMENT OF INCOME

The accompanying notes are an integral part of the consolidated financial statements.

21

MMI PRODUCTS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)

																		Total
						Additional				Retained				Other				Stockholder's
		Common				Paid-In				Earnings				Comprehensive				Equity
		Stock				Capital				(Deficit)				Income				(Deficit)
		(In thousands)
Balance at December 28, 1996		$	252			$	14,599			$	13,683			$	-			$	28,534
Net income			-				-				7,737				-				7,737
Additional minimum pension liability			-				-				-				(151	)			(151	)
Comprehensive income			-				-				-				-				7,586
Contribution of capital
	-stock options		-				112				-				-				112
Distribution to MMHC			-				-				(57,105	)			-				(57,105	)
Balance at January 3, 1998			252				14,711				(35,685	)			(151	)			(20,873	)
Net income			-				-				10,930				-				10,930
Additional minimum pension liability			-				-				-				(70	)			(70	)
Comprehensive income			-				-				-				-				10,860
Adjustment to 1996 Contribution of capital (Note 1)			-				(1,702	)			-				-				(1,702	)
Dividend to MMHC (Note 1)			-				-				(1,292	)			-				(1,292	)
Balance at January 2, 1999			252				13,009				(26,047	)			(221	)			(13,007	)
Net income			-				-				18,600				-				18,600
Additional minimum pension liability			-				-				-				272				272
Comprehensive income			-				-				-				-				18,872
Contribution of capital
	-stock options (Note 2)		-				2,441				-				-				2,441
Balance at January 1, 2000		$	252			$	15,450			$	(7,447	)		$	51			$	8,306

The accompanying notes are an integral part of the consolidated financial statements.

22

MMI PRODUCTS, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

				Fiscal Years Ended
												January 3,
				January 1,				January 2,
				2000				1999				1998
				(In thousands)
Operating activities:
Net income				$	18,600			$	10,930			$	7,737
Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			9,033				7,187				5,507
		Amortization of bond premium			(234)				-				-
		Nonrecurring expenses- stock compensation			2,441				-				-
		Provision for losses on accounts receivable			1,471				234				-
		Deferred income taxes			92				340				2,886
		(Gain) loss on sale of equipment			225				(81)				(22)
		Other			-				-				112
Changes in operating assets and liabilities, net of effects of acquired businesses:
		Increase in accounts receivable			(633)				(12,914)				(3,139)
		Increase in inventories			(5,193)				(7,546)				(7,029)
		Decrease in prepaid expenses and other assets			526				333				272
		Increase (decrease) in accounts payable and accrued liabilities			(8,428)				17,701				1,109
		Increase (decrease) in income taxes payable			24				2,629				(2,800)
		Increase (decrease) in due to MMHC			823				(3,652)				(2,237)
Net cash provided by operating activities					18,747				15,161				2,396
Investing activities:
		Capital expenditures			(6,631)				(10,226)				(4,560)
		Proceeds from sale of equipment			48				52				101
		Acquisitions, net of cash acquired			(15,764)				(37,721)				(552)
		Other			-				9				35
Net cash used in investing activities					(22,347)				(47,886)				(4,976)
Financing activities:
		Proceeds from long-term obligations			174,008				187,316				157,854
		Payments on long-term obligations			(168,892)				(153,127)				(90,943)
		Adjustment to 1996 contribution of capital from MMHC			-				(1,702)				-
		Dividend to MMHC			-				(1,292)				-
		Distribution to MMHC			-				-				(57,105)
		Debt offering costs			(1,065)				-				(3,951)
Net cash provided by financing activities					4,051				31,195				5,855
Net change in cash and cash equivalents					451				(1,530)				3,275
Cash and cash equivalents, beginning of period					1,979				3,509				234
Cash and cash equivalents, end of period				$	2,430			$	1,979			$	3,509
Supplemental Cash Flow Information:
		Supplemental disclosure of noncash investing activities
		Issuance of capital lease obligations for capital expenditures		$	2,790			$	1,385			$	1,678
		Cash paid for interest		$	18,625			$	16,721			$	10,441
		Cash paid for income taxes		$	13,075			$	4,371			$	4,822

The accompanying notes are an integral part of the consolidated financial statements.

23

MMI PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. Intangible Assets

Intangible assets consisted of the following:

Intangible assets are amortized on a straight-line basis over their respective estimated lives (the period when benefits are expected to be derived). Total amortization expense for fiscal years 1999, 1998 and 1997 was $1,199,000, $764,000 and $354,000, respectively.

6. Accrued Liabilities

Accrued liabilities consisted of the following:

28

7. Long-Term Obligations

Long-term debt, including capital lease obligations, consisted of the following:

Revolving Credit Facility

MMI's revolving credit facility provides for maximum borrowings of $75.0 million (due December 2001) with interest payable at the bank's base rate plus 0.25 percent or Eurodollar rate plus 1.5 percent. Borrowings bearing interest at a Eurodollar rate plus 1.5 percent are denominated in short-term obligations of U.S. LIBOR with 30 to 180 day maturities. On January 1, 2000 the portion of the outstanding borrowings under U.S. LIBOR was approximately $4.0 million which would mature on January 18, 2000. As of January 1, 2000, the average interest rate was 7.01 percent. MMI is required to pay a commitment fee of ½ of 1.0 percent of the unused portion of the credit facility on a monthly basis. The revolving credit facility is secured by all the assets and stock of MMI and guaranteed by MMHC. Borrowing availability under the revolving credit facility at January 1, 2000, after taking into account borrowing base restrictions and outstanding letters of credit, was approximately $35.3 million. The borrowing availability at year-end was based on a maximum borrowing limit of $48.5 million. The maximum borrowing limit was increased to $75.0 million on February 3, 2000 in connection with the funding of the Hallett Wire Products Company acquisition. See Note 14. MMI had outstanding letters of credit (which cannot exceed $20 million) totaling $2.6 million and $2.4 million at January 1, 2000 and January 2, 1999, respectively.

The terms of the revolving credit facility contain, among other provisions, affirmative and negative covenants that require MMI to maintain certain financial ratios, limit the amount of additional indebtedness, limit the creation or existence of liens and set certain restrictions on acquisitions, mergers and sales of assets. MMI's distribution of dividends to MMHC is only permitted under the revolving credit facility if certain tests as set forth in the loan agreement are met.

29

11.25% Senior Subordinated Notes

On April 16, 1997, MMI issued $120 million of senior subordinated notes due 2007. The net proceeds of $116.0 million, after fees and expenses, were used to (i) distribute $57.1 million to MMHC for the redemption by MMHC of certain of its equity interests, (ii) repay the entire $10.0 million principal amount, plus accrued interest, on a senior subordinated secured note payable, (iii) repay MMI's remaining indebtedness under a term loan facility of $11.4 million and (iv) reduce MMI's indebtedness under the revolving credit facility. The senior subordinated notes are general unsecured obligations of MMI and are subordinated to MMI's revolving credit facility.

On February 12, 1999, MMI issued $30 million of 11.25% senior subordinated notes due 2007 in a private offering. The net proceeds of approximately $31.1 million, which include the original issuance premium, after fees and expenses, were used to reduce the borrowings under the revolving credit facility. The effective interest rate of these notes is 10.5%.

On April 30, 1999, MMI exchanged the $30 million Senior Subordinated Notes issued on February 12, 1999 for Registered Senior Subordinated Notes. These notes have the same form and terms as the February 12, 1999 notes and the $120 million Registered Senior Subordinated Notes issued on April 16, 1997.

On or prior to April 15, 2000, MMI may, at its option, redeem at any time or from time to time up to 35% of the aggregate original principal amount of the senior subordinated notes issued at a redemption price equal to 111.25% of the principal amount thereof, plus accrued and unpaid interest and liquidated damages, if any, thereon to the redemption date, with the net cash proceeds of one or more public equity offerings; provided, however, that at least $78.0 million in aggregate principal amount of the senior subordinated notes remain outstanding following each such redemption and such redemption shall occur not later than 60 days after the date of the closing of any such public equity offering.

The senior subordinated notes may be redeemable at the option of MMI, in whole or in part, at any time on or after April 15, 2002 at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and liquidated damages, if any, thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on April 15 of the years indicated below:

Scheduled maturities of long-term debt, including capital lease obligations, are as follows: