5,900,000 SHARES
[LOGO] METALS USA, INC.
COMMON STOCK
------------------
All of the 5,900,000 shares of Common Stock offered hereby are being
offered by Metals USA, Inc. Prior to this offering, there has been no public
market for the Common Stock of the Company. See "Underwriting" for a
discussion of the factors considered in determining the initial public offering
price. The Common Stock has been approved for listing on The New York Stock
Exchange under the symbol "MUI."
------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 10 HEREOF.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
===============================================================================
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS COMPANY(1)
- -------------------------------------------------------------------------------
Per share.... $10.00 $.70 $9.30
- -------------------------------------------------------------------------------
Total(2)..... $59,000,000 $4,130,000 $54,870,000
===============================================================================
(1) Before deducting expenses of the offering payable by the Company, estimated
at $4,000,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
885,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public as shown above. If such
option is exercised in full, the total Price to Public, Underwriting
Discount and Commissions and Proceeds to Company will be $67,850,000,
$4,749,500 and $63,100,500, respectively. See "Underwriting."
------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, subject to the
right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about July 16,
1997.
ALEX. BROWN & SONS
INCORPORATED
BEAR, STEARNS & CO. INC.
SANDERS MORRIS MUNDY
The date of this Prospectus is July 11, 1997.
<PAGE>
The Company
Metals USA was formed in 1996 to become a leading national processor of
value-added metals and manufacturer of higher-value metal components while
pursuing an aggressive consolidation of the highly-fragmented metals processing
industry. Metals USA has entered into agreements to purchase eight companies
(the founding companies) with $387 million in 1996 pro forma sales and an
average of 40 years in business as the first step in the consolidation process.
The acquisitions will be completed simultaneously with the closing of this
offering. From this base, the company intends to become a leader in the
consolidation of the $75 billion industry by combining a broad-based group of
metals processing and manufacturing companies. The company's strategy includes
expanding through acquisitions, a decentralized operating philosophy,
accelerating internal growth and improving operating margins.
[Map of the United States identifying the location of the Founding Companies]
The Company intends to furnish its stockholders with annual reports containing
financial statements audited by independent certified public accountants and
with quarterly reports containing unaudited summary financial information for
each of the first three quarters of each fiscal year.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
Metals Industry
PRODUCERS METALS PROCESSING END USERS
o There are three primary segments of the U.S. metals industry: producers,
processors and end users. Metals USA participates in the $75 billion
processing segment, in which there are approximately 3,500 participants.
o Both producers and end users are seeking to reduce their overall costs and
improve quality. To accomplish these goals, producers are focusing on
producing large volumes of standardized products, while end users are
reducing inventory levels and outsourcing their processing requirements.
o These trends have resulted in value-added metals processors playing an
increasingly important role in the metals industry. The amount of steel sold
through processors and service centers has more than doubled in the last 15
years.
o In recent years, the processing segment has grown at approximately 8 percent
annually. Metals USA expects to exceed the industry growth rate by executing
its strategy.
[Photographs of certain Founding Company products]
Steel plate supplied by Interstate used in the construction of a turbine at the
Grand Coulee Dam.
Metal components for covered walkway at San Antonio International Airport
manufactured by Texas Aluminum.
Founding Companies
[Charts showing the 1996 proforma sales of the Founding Companies
and industry diversity by revenue]
With proforma combined 1996 sales of nearly $400 million, ranging from $11
million to more than $80 million, each of the founding companies contributes
substantially to the sales of Metals USA.
The founding companies serve customers in a broad range of industries. With no
industry comprising more than twenty-two percent and no customer responsible for
more than four percent of 1996 sales, the company is not dependent on any one
customer or industry segment.
[Photographs of certain Founding Companies facilities]
Shearing steel plate to customer specifications at Queensboro.
Customer delivery sequencing at Steel Service Systems.
Flame cutting at Uni-Steel.
<TABLE>
<CAPTION>
Number of
Founded In Headquarters Service Centers Primary Industries Served
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Affiliated Metals 1979 Granite City, IL 2 consumer durables,commercial transportation equipment,
appliances and furniture
Interstate Steel Supply 1949 Philadelphia, PA 3 structural steel fabricators of buildings and bridges,
shipbuilding, railroad and electrical power generation
Queensboro Steel 1952 Wilmington, NC 3 transportation, construction, pulp and paper,
shipbuilding, and chemical
Southern Alloy 1977 Salisbury, NC 1 fluid power, machine tool, pump and valve, power
transmission and textile machinery
Steel Service Systems 1990 Horicon, WI 1 manufacturers of lawn and garden equipment, outdoor
recreational vehicles and furniture
Texas Aluminum 1949 Houston, TX 5 aluminum and steel building products, including windows,
doors, wall panels, canopies and awnings, for comercial
and residential applications
Uni-Steel 1907 Enid, OK 2 equipment manufacturing, oil and gas, transportation and
mining
Williams Steel & Supply 1944 Milwaukee, WI 1 construction, original equipment manufacturers and
fabricators
</TABLE>
2
<PAGE>
PROSPECTUS SUMMARY
SIMULTANEOUSLY WITH AND AS A CONDITION TO THE CONSUMMATION OF THE OFFERING
MADE BY THIS PROSPECTUS (THIS "OFFERING"), METALS USA, INC. WILL ACQUIRE, IN
SEPARATE MERGER TRANSACTIONS (THE "MERGERS") IN EXCHANGE FOR CASH AND SHARES
OF ITS COMMON STOCK, EIGHT COMPANIES (EACH A "FOUNDING COMPANY" AND,
COLLECTIVELY, THE "FOUNDING COMPANIES") ENGAGED IN THE VALUE-ADDED PROCESSING
OF STEEL, ALUMINUM AND SPECIALTY METALS AS WELL AS THE MANUFACTURE OF METAL
COMPONENTS. UNLESS OTHERWISE INDICATED, ALL REFERENCES TO THE "COMPANY" HEREIN
INCLUDE THE FOUNDING COMPANIES AND OTHER ENTITIES WHOLLY-OWNED BY METALS USA,
AND REFERENCES HEREIN TO "METALS USA" MEAN METALS USA, INC. PRIOR TO THE
CONSUMMATION OF THE MERGERS.
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE PRO FORMA COMBINED
AND INDIVIDUAL HISTORICAL FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, (i) ALL
SHARE, PER SHARE AND FINANCIAL INFORMATION SET FORTH HEREIN (a) HAVE BEEN
ADJUSTED TO GIVE EFFECT TO ALL OF THE MERGERS; AND (b) ASSUME NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION; AND (ii)ALL REFERENCES TO COMMON STOCK
INCLUDE BOTH COMMON STOCK, $0.01 PAR VALUE, AND RESTRICTED VOTING COMMON STOCK,
$0.01 PAR VALUE (THE "RESTRICTED COMMON STOCK"), OF THE COMPANY.
THE COMPANY
Metals USA was founded in 1996 to become a leading national value-added
metals processor/service center, to manufacture higher-value components from
processed metals and to pursue aggressively the consolidation of the
highly-fragmented metals processing industry. The Company believes that the
metals processor/service center industry in the United States is consolidating
and currently has as many as 3,500 participants collectively generating over $75
billion in annual revenues. The Company intends to play a major role in the
consolidation of this industry by combining a broad-based group of metals
processing and manufacturing companies. To be a leader in the consolidation of
the metals processing industry, the Company will be required to acquire and
deploy the capital-intensive equipment and technology necessary to meet rapidly
changing customer requirements. Upon consummation of this Offering, Metals USA
will acquire the eight Founding Companies, which have been in business an
average of 40 years and had 1996 pro forma combined net sales of $387 million.
Net sales were $105 million for the first quarter of 1997.
The Company engages in the preproduction processing of steel, aluminum and
specialty metals and intends to capitalize on trends occurring among both
primary metals producers and end-users of processed metals. In order to remain
competitive, primary metals producers are focusing on their core competencies of
high-volume production of a limited number of standardized metal products, and
are limiting or eliminating their processing services. At the same time, most
end-user customers are increasingly outsourcing their metals processing and
inventory management requirements to reduce materials costs, decrease capital
required for raw materials inventory and processing equipment and save time,
labor and other expenses. Additionally, end-user customers are seeking to reduce
costs by limiting the number of processors/service centers with whom they do
business, often eliminating those suppliers offering limited ranges of products
and services. The Company intends to provide just-in-time inventory management
with a view to reducing its customers' overall cost of their manufactured metal
products. In addition to its metals processing capabilities, the Company
manufactures higher-value components from processed metals, such as finished
building products, and produces a number of finished components machined from
specialty metals, such as bushings, pump parts and hydraulic cylinders. The
Company intends to continue its focus on the metal building products industry,
the single fastest growing segment of the metals processing industry.
The eight Founding Companies sell to over 10,000 customers in industries
such as the furniture, transportation equipment, power and process equipment,
industrial/commercial construction, consumer durables and electrical equipment
industries. The Company believes that its broad customer base and wide array of
metals processing capabilities, products and services, coupled with its
geographic coverage across the United States, reduce the Company's
susceptibility to economic fluctuations affecting any one industry or
geographical area.
3
<PAGE>
To date, the primary acquirors in the metals processor/service center
industry have been a few large metals service center companies that have
acquired businesses on a service center-by-service center basis. Following an
acquisition, these acquirors typically install their operating systems,
procedures and management and eliminate the acquired service center's separate
identity, thereby effectively converting the business into a branch office. The
Company believes that the sale of well-established businesses to these acquirors
is not an attractive alternative for many owners, particularly those who do not
wish to retire from the business. The Company, therefore, believes significant
acquisition opportunities exist for a well-capitalized, national value-added
metals processor/service center that employs a decentralized operating strategy
and preserves the identity of the acquired businesses. The Company believes that
this operating strategy and the highly-fragmented nature of the metals industry
should allow it to be a leader in the industry's consolidation.
Key elements of the Company's strategy to achieve its objectives are:
o EXPANDING THROUGH ACQUISITIONS. The Company believes that the metals
processor/service center industry is highly fragmented and consolidating. The
Company intends to pursue aggressively this consolidation through its
acquisition program, the key elements of which are: to enter new geographic
markets, expand within existing geographic markets, and enter complementary
processing and service markets. The Company believes there are significant
opportunities to expand through acquisition in geographic markets where the
Company does not currently have a strong presence by acquiring companies that
are leaders in their regional markets. The Company also plans to improve its
market share in existing geographic markets by pursuing "tuck-in" acquisitions
as well as acquisitions of companies that expand its range of products and
services.
o OPERATING ON A DECENTRALIZED BASIS. The Company intends to manage the
Founding Companies and subsequently acquired companies on a decentralized basis,
with local management retaining responsibility for day-to-day operations,
profitability and growth of the business and the flexibility to capitalize on
the considerable regional market knowledge, name recognition and customer
relationships.
o ACCELERATING INTERNAL SALES GROWTH. A key component of the Company's
strategy is to accelerate internal sales growth at each Founding Company and at
each subsequently acquired business. The key elements of this internal growth
strategy are: to expand products and services to existing customers and to add
new customers. 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 also intends to implement a Company-wide marketing program which will
utilize professional marketing sources and to adopt "best-practices" among
Founding Companies to demonstrate to the numerous customers not currently served
by the Company that they could reduce their production costs by taking advantage
of the Company's processing, inventory management and other services.
o IMPROVING OPERATING MARGINS. The Company believes that the
combination of the Founding Companies will provide significant opportunities to
realize purchasing economies and increase the Company's profitability. The key
components of this strategy are: to increase operating efficiencies and to
centralize appropriate admininistrative functions. The Company intends to use
its increased purchasing power to gain volume discounts and to develop more
effective inventory management systems. The Company expects measureable cost
savings in such areas as vehicle leasing and maintenance, information systems
and other purchases. The Company also believes there are significant
opportunities to improve operating margins by consolidating administrative
functions such as financing, insurance and employee benefits.
The Company's executive offices are located at 4801 Woodway, Suite 300E,
Houston, Texas 77056, and its toll free telephone number is (888) 871-8701.
4
<PAGE>
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
THE OFFERING
Common Stock offered by the
Company............................ 5,900,000 shares
Common Stock to be outstanding after
the Offering....................... 20,782,023 shares(1)(2)
Use of Proceeds...................... To pay the cash portion of the
purchase price for the Founding
Companies, to repay expenses incurred
in connection with the organization
of Metals USA and the Offering and
for general corporate purposes,
including future acquisitions. See
"Use of Proceeds."
NYSE symbol.......................... MUI
- ------------
(1) Includes 10,128,609 shares of Common Stock to be issued in connection with
the Mergers, but excludes 2,171,024 shares of Common Stock subject to
options to be granted in connection with this Offering at an exercise price
equal to the initial public offering price. See "Management -- 1997
Long-Term Incentive Plan" and "-- 1997 Non-Employee Directors' Stock
Plan."
(2) Includes 3,122,914 shares of Restricted Common Stock held by Notre Capital
Ventures II, L.L.C. ("Notre"). Each share of Restricted Common Stock is
entitled to 0.55 of one vote on all matters submitted to stockholders.
Restricted Common Stock is convertible into Common Stock under certain
circumstances. See "Description of Capital Stock -- Common Stock and
Restricted Common Stock."
RECENT DEVELOPMENTS
During 1996 and 1997, members of the management team and certain
consultants were assembled by Notre to pursue the consolidation of the Founding
Companies. Notre, a consolidater of highly-fragmented industries, provided the
Company with expertise regarding the consolidation process and advanced the
Company the capital needed to pay organizational and Offering expenses.
In connection therewith, during 1996 and the first and second quarters of
1997, Metals USA sold an aggregate of 1,385,500 shares of Common Stock to
management of and consultants to the Company for $0.01 per share. As a result,
the Company has recorded non-recurring, non-cash compensation charges of $3.6
million in 1996 and $2.8 million and $4.7 million in the first and second
quarters of 1997, respectively, 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. In addition, the second
quarter reflects a reduction in compensation expense of $1.5 million
representing a revision of the estimated fair value of the shares sold to
management and consultants in 1996 and the first quarter of 1997.
The aggregate consideration to be paid by Metals USA in the Mergers
consists of approximately $27.8 million in cash and 10,128,609 shares of Common
Stock, plus the assumption of $96.0 million of existing debt of the Founding
Companies. Prior to the Mergers, the Founding Companies that are S Corporations
will distribute an aggregate of $18.6 million to their stockholders,
representing substantially all of the previously taxed undistributed earnings
and tax payments on current earnings of such Founding Companies (the "S
Corporation Distributions"). In order to fund the S Corporation Distributions,
the Founding Companies will borrow the $18.6 million from existing sources,
which borrowings are included in the debt to be assumed by Metals USA. The
consideration to be paid by Metals USA for each Founding Company was determined
by negotiations between Metals USA and representatives of each Founding Company
and was based primarily upon the pro forma adjusted net income of each Founding
Company. For a more detailed description of these transactions, see "Certain
Transactions -- Organization of the Company."
5
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Metals USA will acquire the Founding Companies simultaneously with and as a
condition to the consummation of this Offering. The following table presents
summary pro forma combined financial data for the Company, as adjusted for (i)
the effects of the Mergers, (ii) the effects of certain pro forma adjustments to
the historical financial statements described below, and (iii) the consummation
of this Offering and the application of the net proceeds therefrom. See
"Selected Financial Data," the Unaudited Pro Forma Combined Financial
Statements and the Notes thereto and the historical Financial Statements of the
Founding Companies and the Notes thereto included elsewhere in this Prospectus.
PRO FORMA COMBINED
-----------------------------------
TWELVE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- --------------
STATEMENTS OF OPERATIONS DATA(1):
Net sales.......................... $387,038 $105,383
Cost of sales...................... 295,501 81,250
Operating and delivery(2).......... 41,157 11,657
Selling, general and administrative
expenses(2)...................... 24,042 6,204
Depreciation and amortization(3)... 5,595 1,490
Operating income................... 20,743 4,782
Interest and other expense,
net(4)........................... 4,265 1,200
Income before income taxes......... 16,478 3,582
Net income(5)...................... 8,996 1,936
Net income per share............... $ .46 $ .10
Shares used in computing pro forma
net income per share(6).......... 19,468,323 19,468,323
MARCH 31, 1997
------------------------------
PRO FORMA
COMBINED(7) AS ADJUSTED(8)
----------- --------------
BALANCE SHEET DATA:
Working capital(4)................. $ 67,455(9) $108,383
Total assets....................... 247,072 258,583
Long-term debt, net of current
maturities(4)..................... 96,026 85,670
Stockholders' equity(4)............ 81,078 131,914
- ------------
(1) The pro forma combined statements of operations data assume that the Mergers
and the Offering were closed on January 1, 1996 and are not necessarily
indicative of the results the Company would have obtained had these events
actually then occurred or of the Company's future results. The historical
combined net sales for the Founding Companies for the twelve months ended
December 31, 1996 and the three months ended March 31, 1997 were $375.8
million and $105.0 million, respectively.
(2) The pro forma combined statements of operations data reflect (a) in selling,
general and administrative expenses, an aggregate of approximately $3.6
million and $0.8 million for the twelve months ended December 31, 1996 and
the three months ended March 31, 1997, respectively, in pro forma reductions
in salary, bonuses and benefits to the owners of the Founding Companies to
which they have agreed prospectively (the "Compensation Differential"),
(b) in operating and delivery, a $0.5 million and $0.1 million for the
twelve months ended December 31, 1996 and the three months ended March 31,
1997, respectively, reduction in lease expense pursuant to the renegotiation
of certain leases (the "Rent Differential"), and (c) selling, general and
administrative expenses do not include the non-recurring portion of the
non-cash compensation charge ("Compensation Charge") of $3.6 million and
$2.8 million for the twelve months ended December 31, 1996 and the three
months ended March 31, 1997, respectively.
(3) Includes $2.1 million and $0.5 million for the twelve months ended December
31, 1996 and the three months ended March 31, 1997, respectively, of
amortization on the $85.4 million of goodwill to be recorded as a result of
the Mergers computed on the basis described in Notes to the Unaudited Pro
Forma Combined Financial Statements.
(4) Several of the Founding Companies are S Corporations. Prior to the Mergers,
these Founding Companies will make the S Corporation Distributions to their
stockholders totaling $18.6 million. In order to fund the S Corporation
Distributions, the Founding Companies will borrow $18.6 million from
existing sources, $10.4 million of which will be repaid from the proceeds of
this Offering. Additionally, prior to the Mergers, certain of the Founding
Companies will distribute to their stockholders certain real estate and
non-operating assets and liabilities having a net book value of $4.1
million. Accordingly, pro forma interest expense has been increased by $0.7
million and $0.1 million for the twelve months ended December 31, 1996 and
the three months ended March 31, 1997, respectively and pro forma working
capital has been reduced by $10.4 million, pro forma long-term debt has been
increased by $8.2 million and pro forma stockholders' equity has been
reduced by $22.7 million at March 31, 1997.
(5) Assumes all income is subject to a corporate tax rate of 40% and all
goodwill and the Compensation Charge are non-deductible.
(6) Includes (i) 10,128,609 shares to be issued to owners of the Founding
Companies, (ii) 1,385,500 shares issued to the management of and consultants
to Metals USA, (iii) 3,367,914 shares issued to Notre and, (iv) 4,586,300 of
the 5,900,000 shares sold in the Offering necessary to pay the cash portion
of the Merger consideration, retire certain indebtedness relating to the S
Corporation Distributions and pay expenses of this Offering. Excludes
options to purchase 2,171,024 shares to be granted upon consummation of this
Offering.
(7) The pro forma combined balance sheet data assumes that the Mergers were
consummated on March 31, 1997.
(8) Adjusted for the sale of 5,900,000 shares of Common Stock offered hereby and
the application of the net proceeds therefrom. See "Use of Proceeds."
(9) Includes a $27.8 million payable, representing the cash portion of the
Merger consideration to be paid from a portion of the net proceeds of this
Offering.
6
<PAGE>
SUMMARY INDIVIDUAL FOUNDING COMPANY FINANCIAL DATA
The following table presents summary financial data for each of the
individual Founding Companies for each of their three most recent years. Income
from operations has not been adjusted for the anticipated increase in income
attributable to the Compensation Differential or the Rent Differential or to
take into account increased costs associated with the Company's new corporate
management and with being a public company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Introduction."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS(1) MARCH 31,
------------------------------- ---------------------
1994 1995 1996 1996 1997
--------- --------- --------- ---------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
TEXAS ALUMINUM/CORNERSTONE:
Net sales....................... $ 26,105 $ 34,706 $ 40,651 $ 7,620 $ 9,685
Operating income (loss)......... 493 1,623 3,012 (55) 521
INTERSTATE:
Net sales....................... 49,299 61,375 66,806 15,673 16,137
Operating income................ 1,149 2,751 4,720 1,233 803
QUEENSBORO:
Net sales....................... 50,795 60,322 54,996 14,778 15,302
Operating income................ 1,366 2,096 3,454 770 739
AFFILIATED:
Net sales....................... 63,046 78,976 81,002 20,308 26,710
Operating income................ 1,474 2,319 3,476 1,177 673
SOUTHERN ALLOY:
Net sales....................... 9,463 12,018 10,815 3,076 2,671
Operating income (loss)......... 409 533 46 (70) 60
UNI-STEEL:
Net sales....................... 42,711 47,662 54,620 13,543 16,671
Operating income................ 1,334 1,694 2,361 618 772
WILLIAMS(2):
Net sales....................... 27,449 30,422 25,451 2,542 7,958
Operating income................ 694 1,518 1,425 162 346
SERVICE SYSTEMS:
Net sales....................... 28,214 31,062 35,750 9,745 9,854
Operating income................ 1,392 1,017 818 527 653
</TABLE>
- ------------
(1) The financial data are presented on a historical basis for the Founding
Companies' respective fiscal year ends. The fiscal periods presented are as
follows: Texas Aluminum/Cornerstone is comprised of Texas Aluminum with the
fiscal years ended June 30, 1994, 1995 and December 1996 and Cornerstone
with the nine months ended December 31, 1995 (founded in 1995), and fiscal
year ended December 31, 1996; Uni-Steel -- the fiscal years ended September
30, 1994, 1995 and 1996; Affiliated -- the fiscal years ended September 3,
1994, September 2, 1995 and August 31, 1996; Southern Alloy, Interstate,
Queensboro, and Service Systems -- years ended December 31, 1994, 1995 and
1996; and Williams -- ten months ended December 1996.
(2) Williams was purchased by its current owners effective March 1, 1996. The
March 31, 1996 financial data are for the one month ended March 31, 1996.
The financial data for the predecessor entity, prior to the acquisition by
its current owners, are presented for 1994 and 1995. For the two months
ended February 29, 1996, the predecessor entity had $5,258 and $320 of net
sales and operating income, respectively.
7
<PAGE>
THE COMPANY
Metals USA was founded in 1996 to become a leading national value-added
metals processor/service center, to manufacture higher-value components from
processed metals and to pursue aggressively the consolidation of the
highly-fragmented metals processing industry. Metals USA has entered into
agreements to acquire the Founding Companies simultaneously with and as a
condition to the consummation of this Offering. In 1996, the Founding Companies,
which have been in business an average of 40 years, had pro forma combined net
sales of $387.0 million, servicing over 10,000 customers. For a description of
the transactions pursuant to which these businesses will be acquired, see
"Certain Transactions -- Organization of the Company." The following is a
description of the Founding Companies:
TEXAS ALUMINUM INDUSTRIES, INC./THE CORNERSTONE GROUP -- Texas Aluminum
Industries, Inc. ("Texas Aluminum"), headquartered in Houston, Texas, was
founded in 1949 by Gene C. Elkins. The Cornerstone Group ("Cornerstone")
includes four entities founded in 1995, 1996 and 1997 by Michael E. Christopher
and Mark Elkins, who are the principal stockholders of Texas Aluminum (Texas
Aluminum and Cornerstone being collectively referred to herein as "Texas
Aluminum/Cornerstone"). Texas Aluminum/Cornerstone operates through five
manufacturing plants and 36 service centers and distribution facilities
primarily in the Sunbelt. Texas Aluminum/Cornerstone produces and distributes
aluminum and steel building products consisting of windows, doors, insulated
wall panels, canopies and awnings primarily for the commercial and residential
building products industries. Texas Aluminum/Cornerstone had fiscal 1996 and
first quarter 1997 net sales of $40.6 million and $9.7 million, respectively,
operating income of $3.0 million and $0.5 million, respectively, and currently
has 260 employees. Michael E. Christopher, the Executive Vice President of Texas
Aluminum and President of Cornerstone, has been employed by Texas Aluminum for
ten years, will sign a five-year employment agreement with Texas
Aluminum/Cornerstone to become President of Texas Aluminum/Cornerstone following
consummation of this Offering and will become a Senior Vice President and a
director of the Company.
INTERSTATE STEEL SUPPLY CO. -- Interstate Steel Supply Co.
("Interstate"), headquartered in Philadelphia, Pennsylvania, was founded in
1949 and operates primarily in the northeast and mid-Atlantic regions of the
United States. Interstate operates service centers in Philadelphia and
Pittsburgh, Pennsylvania and Baltimore, Maryland and is a value-added metals
processor/service center providing products and services primarily to structural
steel fabricators of buildings and bridges and to the shipbuilding, railroad and
electric power generation industries. Interstate had fiscal 1996 and first
quarter 1997 net sales of $66.8 million and $16.1 million, respectively,
operating income of $4.7 million and $0.8 million, respectively, and currently
has 180 employees. Arnold W. Bradburd, the Chairman of the Board and Chief
Executive Officer of Interstate, has been employed by Interstate for 23 years,
will sign a five-year employment agreement with Interstate to continue in those
capacities following consummation of this Offering and will become Vice-Chairman
of the Board of the Company.
QUEENSBORO STEEL CORPORATION -- Queensboro Steel Corporation
("Queensboro"), headquartered in Wilmington, North Carolina, was founded in
1952 by George and Seymour Alper and operates primarily in the southeastern
region of the United States. Queensboro operates service centers in Wilmington
and Greensboro, North Carolina and Norfolk, Virginia and is a value-added metals
processor/service center and fabricator, providing products and services
primarily to the shipbuilding, transportation, construction, pulp and paper and
chemical industries. Queensboro had fiscal 1996 and first quarter 1997 net sales
of $55.0 million and $15.3 million, respectively, operating income of $3.5
million and $0.7 million, respectively, and currently has 200 employees. Mark
Alper, the President of Queensboro has been employed by Queensboro for 26 years,
will sign a five-year employment agreement with Queensboro to continue his
present position following consummation of this Offering and will become Vice
President -- Development and a director of the Company.
AFFILIATED METALS, INC. -- Affiliated Metals Company ("Affiliated"),
headquartered in Granite City, Illinois, was founded in 1979 and operates
primarily in the midwestern region of the United States. Affiliated operates
service centers in Granite City, Illinois and a newly constructed facility in
Butler, Indiana and is a value-added metals processor/service center providing
products and services primarily to
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manufacturers of consumer durables, commercial transportation equipment,
appliances and furniture. Affiliated had fiscal 1996 and first quarter 1997 net
sales of $81.0 million and $26.7 million, respectively, operating income of $3.5
million and $0.7 million, respectively, and currently has 130 employees. Patrick
A. Notestine, the President of Affiliated, has been employed by Affiliated for
nine years, will sign a five-year employment agreement with Affiliated to
continue his present position following consummation of this Offering and will
become a director of the Company.
SOUTHERN ALLOY OF AMERICA, INC. -- Southern Alloy of America, Inc.
("Southern Alloy"), headquartered in Salisbury, North Carolina, was founded in
1977 and operates primarily in the southeastern region of the United States.
Southern Alloy operates a plant in Salisbury, North Carolina and is a specialty
metals processor, providing products and services primarily to the fluid power,
machine tools, pump and valve, power transmission and textile machinery
industries. Southern Alloy had fiscal 1996 and first quarter 1997 net sales of
$10.8 million and $2.7 million, respectively, operating income of less than $0.1
million and $0.1 million, respectively, and currently has 30 employees. William
B. Edge, the President of Southern Alloy, has been employed by Southern Alloy
for 16 years, will sign a five-year employment agreement with Southern Alloy to
continue his present position following consummation of this Offering and will
become a director of the Company.
UNI-STEEL, INC. -- Uni-Steel, Inc. ("Uni-Steel"), headquartered in Enid,
Oklahoma, was founded in 1987 as a result of the merger of two companies which
began operations in 1907 and 1924, and operates primarily in the southwestern
and midwestern regions of the United States. Uni-Steel operates service centers
in Enid, Muskogee and the Port of Muskogee, Oklahoma and is a value-added metals
processor/service center providing products and services primarily to customers
in the oil and gas, transportation, mining and manufacturing industries.
Uni-Steel had fiscal 1996 and first quarter 1997 net sales of $54.6 million and
$16.7 million, respectively, operating income of $2.4 million and $0.8 million,
respectively, and currently has 130 employees. Richard A. Singer, the Chief
Executive Officer of Uni-Steel, has been employed by Uni-Steel for 32 years,
will sign a five-year employment agreement with Uni-Steel to continue in such
capacities following consummation of this Offering and will become a Senior Vice
President and a director of the Company.
WILLIAMS STEEL & SUPPLY CO., INC. -- Williams Steel & Supply Co., Inc.
("Williams"), headquartered in Milwaukee, Wisconsin, was founded in 1944 and
operates primarily in the midwest region of the United States. Williams operates
a service center in Milwaukee, Wisconsin and is a value-added metals
processor/service center, providing products and services primarily to the
construction industry, original equipiment manufacturers ("OEMs") and
fabricators. Williams had fiscal 1996 and first quarter 1997 net sales of $25.5
million and $8.0 million, respectively, operating income of $1.4 million and
$0.3 million, respectively, and currently has 80 employees. Lester G. Peterson,
the President of Williams, has been employed by Williams for 27 years, will sign
a five-year employment agreement with Williams to continue his present position
following consummation of this Offering and will become a director of the
Company.
STEEL SERVICE SYSTEMS, INC. -- Steel Service Systems, Inc. ("Service
Systems"), headquartered in Horicon, Wisconsin was founded in 1990 and operates
primarily in the midwestern region of the United States. Service Systems
operates a service center in Horicon, Wisconsin and is a value-added metals
processor/service center providing products and services primarily for
manufacturers of lawn and garden equipment, outdoor recreation vehicles and
furniture. Service Systems had fiscal 1996 and first quarter 1997 net sales of
$35.8 million and $9.9 million, respectively, operating income of $0.8 million
and $0.7 million, respectively, and currently has 75 employees. Craig R.
Doveala, the President of Service Systems, has been employed by Service Systems
since its founding, will sign a five-year employment agreement with Service
Systems to continue his present position following consummation of this Offering
and will become a director of the Company.
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RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS
INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION IN THIS
PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN
EVALUATING AN INVESTMENT IN THE COMMON STOCK. THIS PROSPECTUS CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF ANY NUMBER OF
FACTORS, INCLUDING THE RISK FACTORS SET FORTH BELOW AND ELSEWHERE IN THIS
PROSPECTUS.
ABSENCE OF COMBINED OPERATING HISTORY; RISKS OF INTEGRATING FOUNDING
COMPANIES. Metals USA was founded in 1996 but has conducted no operations and
generated no net sales to date. Metals USA has entered into definitive
agreements to acquire the Founding Companies simultaneously with, and as a
condition to, the closing of this Offering. The Founding Companies have been
operating as separate independent entities, and there can be no assurance that
the Company will be able to integrate the operations of these businesses
successfully or to institute the necessary systems and procedures, including
accounting and financial reporting systems, to manage the combined enterprise on
a profitable basis. The Company's management group has been assembled only
recently, and there can be no assurance that the management group will be able
to manage the combined entity or to implement effectively the Company's
acquisition and internal growth operating strategies. The pro forma combined
historical financial results of the Founding Companies cover periods when the
Founding Companies and Metals USA were not under common control or management
and may not be indicative of the Company's future financial or operating
results. The inability of the Company to integrate the Founding Companies
successfully would have a material adverse effect on the Company's business,
financial condition and results of operations and would make it unlikely that
the Company's acquisition program will be successful. See
"Business -- Strategy" and "Management."
POSSIBLE IMPACT OF VARYING METAL PRICES. The principal raw materials used
by the Company are steel, aluminum and various specialty metals. The metals
industry as a whole is cyclical, and at times pricing and availability of raw
materials in the metals industry can be volatile due to numerous factors beyond
the control of the Company, including general, domestic and international
economic conditions, labor costs, production levels, competition, import duties
and tariffs and currency exchange rates. This volatility can significantly
affect the availability and cost of raw materials for the Company, and may,
therefore, adversely affect the Company's net sales, operating margin and net
income. During the last five years, carbon steel prices for the Founding
Companies have increased an average of 2.7% per year. Aluminum prices have
declined approximately 7% per year for the past two years. While the overall
trend of steel and aluminum prices has been relatively stable, prices have
fluctuated approximately 10% up or down during interim periods. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company's service centers maintain substantial inventories of
metal to accommodate the short lead times and just-in-time delivery requirements
of its customers. Accordingly, the Company purchases metal in an effort to
maintain its inventory at levels that it believes to be appropriate to satisfy
the anticipated needs of its customers based on information derived from
customers, market conditions, historic usage and industry research. The
Company's commitments for metal purchases are generally at prevailing market
prices in effect at the time the Company places its orders. The Company has no
long-term, fixed-price purchase contracts. During periods of rising raw
materials pricing, there can be no assurance the Company will be able to pass
any portion of such increases on to customers. When raw material prices decline,
customer demands for lower prices could result in lower sale prices and, as the
Company uses existing inventory, lower margins. Changing metal prices could
adversely affect the Company's operating margin and net income.
CYCLICALITY OF DEMAND. Many of the Company's products are sold to
industries that experience significant fluctuations in demand based on economic
conditions, energy prices, consumer demand and other factors beyond the control
of the Company. No assurance can be given that the Company will be able to
increase or maintain its level of sales in periods of economic stagnation or
downturn.
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RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY. The Company intends
to grow significantly through the acquisition of additional value-added metals
processors/service centers and manufacturers. The Company expects to face
competition for acquisition candidates, which may limit the number of
acquisition opportunities and may lead to higher acquisition prices. There can
be no assurance that the Company will be able to identify, acquire or manage
profitably additional businesses or to integrate successfully any acquired
businesses into the Company without substantial costs, delays or other
operational or financial difficulties. Further, acquisitions involve a number of
special risks, including failure of the acquired business to achieve expected
results, diversion of management's attention, failure to retain key personnel of
the acquired business and risks associated with unanticipated events or
liabilities, some or all of which could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
there can be no assurance that the Founding Companies or other businesses
acquired in the future will achieve anticipated net sales and earnings. See
"Business -- Strategy."
RISKS RELATED TO ACQUISITION FINANCING. The timing, size and success of
the Company's acquisition efforts and the associated capital commitments cannot
be readily predicted. The Company currently intends to finance future
acquisitions by using shares of its Common Stock for all or a substantial
portion of the consideration to be paid. If the Common Stock does not maintain a
sufficient market value, or if potential acquisition candidates are otherwise
unwilling to accept Common Stock as part of the consideration for the sale of
their businesses, the Company may be required to utilize more of its cash
resources, if available, in order to initiate and maintain its acquisition
program. Upon consummation of this Offering, the Company will have $13.1 million
of net proceeds remaining for future acquisitions and working capital after
payment of Merger and Offering expenses and the cash portion of the purchase
price for the Founding Companies. If the Company does not have sufficient cash
resources, its growth could be limited unless it is able to obtain additional
capital through debt or equity financings. Upon consummation of this Offering,
the Company has obtained a commitment for a bank line of credit of $150.0
million for working capital and acquisitions. However, there can be no assurance
that the Company will be able to obtain additional financing it may need for its
acquisition program on terms that the Company deems acceptable. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Combined liquidity and capital resources."
RISKS RELATED TO INTERNAL GROWTH AND OPERATING STRATEGIES. Key elements of
the Company's strategy are to improve the profitability of the Founding
Companies and subsequently acquired businesses and to continue to expand the net
sales of the Founding Companies and any subsequently acquired businesses.
Although the Company intends to seek to improve the profitability of the
Founding Companies and any subsequently acquired businesses by various means,
including realizing overhead and purchasing efficiencies, there can be no
assurances that the Company will be able to do so. The Company's ability to
increase the net sales of the Founding Companies and any subsequently acquired
businesses will be affected by various factors, including demand for metals,
pricing and availability of raw materials, the Company's ability to expand the
range of products and services offered by each Founding Company and any
subsequently acquired businesses and the Company's ability to successfully enter
new markets. Many of these factors are beyond the control of the Company, and
there can be no assurance that the Company's strategies will be successful or
that it will be able to generate cash flow adequate for its operations and to
support internal growth. A key component of the Company's strategy is to operate
the Founding Companies and subsequently acquired businesses on a decentralized
basis, with local management retaining responsibility for day-to-day operations,
profitability and the growth of the business. If proper overall business
controls are not implemented, this decentralized operating strategy could result
in inconsistent operating and financial practices at the Founding Companies and
subsequently acquired businesses and the Company's overall profitability could
be adversely affected. See "Business -- Strategy -- Operating on a
Decentralized Basis."
COMPETITION. The Company is engaged in a highly-fragmented and competitive
industry. The Company competes with a large number of other value-added 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 public
companies. The Company also competes to a lesser extent with primary metals
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producers, who typically sell to very large customers requiring regular
shipments of large volumes of metals. The Company may also face competition for
acquisition candidates from those public companies that 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.
Increased competition could have a material adverse effect on the Company's net
sales and profitability. See "Business -- Competition."
REGULATION. 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,
environment protection, remediation, workplace exposure and other matters.
Hazardous materials the Company uses in its operations primarily include
lubricants, cleaning solvents and hydrochloric acid used in its pickling
operations at two facilities.
Some of the properties owned or leased by the Company are located in
industrial areas close to properties with histories of heavy industrial use,
three of which are on or near sites listed on the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA") National Priority
List. The Company believes that as many as three of the properties leased by
Founding Companies have been contaminated by pollutants which have migrated from
neighboring facilities or have been deposited by prior occupants.
Prior to entering into the agreements relating to the Mergers, the Company
evaluated the properties owned or leased by the Founding Companies and engaged
an independent environmental consulting firm to conduct or review assessments of
environmental conditions at these properties. 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 it is not responsible for the
environmental damage. The Company has obtained limited indemnities from the
stockholders of the Founding Companies (ranging from approximately $50,000 to
$7.6 million per Founding Company) whose facilities are located at the
contaminated sites. The Company believes that these indemnities will be adequate
to protect it from a material adverse effect on its financial condition should
the Company be found to be responsible for a share of the clean-up costs. The
limited indemnities are subject to certain deductible amounts, however, and
there can be no assurance that the limited indemnities will fully protect the
Company. See "Business -- Governmental Regulation and Environmental Matters."
RELIANCE ON KEY PERSONNEL. Due in part to the Company's decentralized
operating strategy, the Company will be highly dependent on the continuing
efforts of its executive officers and the senior management of the Founding
Companies, and the Company likely will depend on the senior management of any
significant business it acquires in the future. The business or prospects of the
Company could be affected adversely if any of these persons does not continue in
his management role until the Company is able to attract and retain qualified
replacements. See "Management."
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS. Following the
consummation of the Mergers and this Offering, the Company's executive officers
and directors, former stockholders of the Founding Companies and entities
affiliated with them will beneficially own approximately 71.6% of the
outstanding shares of Common Stock (68.7% if the Underwriters' over-allotment
option is exercised in full), of which Notre, management of and consultants to
Metals USA will own 4,753,414 shares of Common Stock, representing 22.9% of all
shares of Common Stock outstanding, for which they paid $.01 per share. Of these
shares of Common Stock, 3,122,914 shares are Restricted Common Stock, which are
entitled to elect one member of the Company's Board of Directors and to 0.55 of
one vote for each share held on all other matters on which they are entitled to
vote. Holders of Restricted Common Stock are not entitled to vote on the
election of any other directors. These holders of Common Stock will control in
the aggregate 17.3% of
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the votes of all shares of Common Stock, and, if acting in concert, will be able
to exercise control over the Company's affairs, to elect the entire Board of
Directors and to control the outcome of any matter submitted to a vote of
stockholders. See "Principal Stockholders."
SUBSTANTIAL PROCEEDS OF OFFERING PAYABLE TO AFFILIATES OF FOUNDING
COMPANIES. Of the net proceeds of this Offering, $27.8 million, or 54.7% will
be paid as the cash portion of the purchase price for the Founding Companies.
Certain of the Founding Companies have incurred indebtedness which has been
personally guaranteed by their stockholders or by entities controlled by its
stockholders. Some of the recipients of these funds will become directors of the
Company or holders of more than 5% of the Common Stock. At March 31, 1997, the
aggregate amount of indebtedness of these Founding Companies that was subject to
personal guarantees was approximately $40.7 million. After March 31, 1997, the
Founding Companies borrowed $18.6 million to fund the S Corporation
Distributions. The Company intends to use the net proceeds from this Offering,
together with borrowings available from the Company's revolving credit facility
(see "Use of Proceeds"), to repay substantially all of the indebtedness of the
Founding Companies. Additionally, Notre has agreed to advance to Metals USA
until the consummation of the Mergers and the Offering such funds as are
necessary to effect the Mergers and this Offering and will be reimbursed from
the proceeds of this Offering in respect of such expenses. As of March 31, 1997,
Notre had advanced the Company $1.1 million for such expenses. In 1997, 985,500
shares of Common Stock have been issued to management and certain consultants to
the Company at a price of $0.01 per share. See "Certain Transactions."
BENEFITS TO NOTRE AND MANAGEMENT. Notre, management and certain
consultants to the Company own in the aggregate 4,753,414 shares of Common
Stock. These stockholders acquired their Common Stock at a price of $0.01 per
share. These parties will own, in the aggregate, appproximately 22.9% of the
outstanding Common Stock following the consummation of this Offering, which have
a value of approximately $47.5 million. Of these shares of Common Stock,
3,122,914 shares are Restricted Common Stock, which are entitled to elect one
member of the Company's Board of Directors and to 0.55 of one vote for each
share held on all other matters on which they are entitled to vote. Holders of
Restricted Common Stock are not entitled to vote on the election of any other
directors and will control in the aggregate 8.9% of the votes of all shares of
Common Stock. See "Principal Stockholders."
NO PRIOR PUBLIC MARKET AND DETERMINATION OF OFFERING PRICE. Prior to this
Offering, there has been no public market for the Common Stock. Therefore, the
initial public offering price for the Common Stock was determined by negotiation
between the Company and the Representatives of the Underwriters and may bear no
relationship to the price at which the Common Stock will trade after the
Offering. See "Underwriting" for the factors considered in determining the
initial public offering price. The Common Stock has been approved for quotation
on The New York Stock Exchange. However, there can be no assurance that an
active trading market will develop subsequent to this Offering or, if developed,
that it will be sustained. After this Offering, the market price of the Common
Stock may be subject to significant fluctuations in response to numerous
factors, including the timing of any acquisitions by the Company, variations in
the Company's annual or quarterly financial results or those of its competitors,
changes by financial research analysts in their estimates of the future earnings
of the Company, conditions in the economy in general or in the Company's
industry in particular, unfavorable publicity or changes in applicable laws and
regulations (or judicial or administrative interpretations thereof) affecting
the Company or the metals industry. From time to time, the stock market
experiences significant price and volume volatility, which may affect the market
price of the Common Stock for reasons unrelated to the Company's performance.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON
STOCK. Upon consummation of the Mergers and this Offering, 20,782,023 shares of
Common Stock will be outstanding. The 5,900,000 shares sold in this Offering
(other than shares that may be purchased by affiliates of the Company) will be
freely tradable. The remaining outstanding shares may be resold publicly only
following their registration under the Securities Act of 1933, as amended (the
"Securities Act"), or pursuant to an available exemption from registration
(such as provided by Rule 144 following a one year holding period for previously
unregistered shares). The holders of these remaining shares have certain demand
rights to have their shares
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registered in the future under the Securities Act, but may not exercise such
demand registration rights, and have agreed with the Company that they will not
sell, transfer or otherwise dispose of any of their shares, for one year
following the consummation of this Offering. On completion of this Offering, the
Company also will have outstanding options to purchase up to a total of
2,171,024 shares of Common Stock. The Company intends to register all the shares
subject to these options under the Securities Act for public resale. The Company
intends to register 8,000,000 additional shares of Common Stock under the
Securities Act within 90 days after completion of this Offering for issuance in
connection with future acquisitions. These shares generally will be freely
tradeable after their issuance by persons not affiliated with the Company unless
the Company contractually restricts their resale. Sales, or the availability for
sale of, substantial amounts of the Common Stock in the public market could
adversely affect prevailing market prices and the future ability of the Company
to raise equity capital and complete any additional acquisitions for Common
Stock. See "Shares Eligible for Future Sale."
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS. Metals USA's
Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") authorizes the Board of Directors to issue, without stockholder
approval, one or more series of preferred stock having such preferences, powers
and relative, participating, optional and other rights (including preferences
over the Common Stock respecting dividends and distributions and voting rights)
as the Board of Directors may determine. The issuance of this "blank-check"
preferred stock could render more difficult or discourage an attempt to obtain
control of the Company by means of a tender offer, merger, proxy contest or
otherwise. In addition, the Certificate of Incorporation provides for a
classified Board of Directors, which may also have the effect of inhibiting or
delaying a change in control of the Company. Certain provisions of the Delaware
General Corporation Law may also discourage takeover attempts that have not been
approved by the Board of Directors. See "Description of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of Common Stock in this
Offering will experience immediate, substantial dilution in the net tangible
book value of their stock of $7.76 per share and may experience further dilution
in that value from issuances of Common Stock in connection with future
acquisitions. See "Dilution."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 5,900,000 shares of
Common Stock offered hereby, after deducting underwriting discounts and
commissions and estimated Offering and Merger expenses, are estimated to be
$50.9 million ($59.1 million if the Underwriters' over-allotment option is
exercised in full).
Of the net proceeds, $27.8 million will be used to pay the cash portion of
the purchase price for the Founding Companies, some of which will be paid to
former stockholders who will become officers, directors, or holders of more than
5% of the Common Stock.
The remaining net proceeds from this Offering, which is estimated to be
approximately $23.1 million, (excluding the net proceeds resulting from any
over-allotment option as may be exercised by the underwriters) will be used,
together with borrowings available from the Company's revolving credit facility
discussed below, to repay substantially all of the $96.0 million of indebtedness
of the Founding Companies. The majority of the Founding Companies' indebtedness
is comprised of revolving credit facilities, which mature at various dates
through 1999 and bear interest at rates ranging from a particular bank's prime
rate to prime plus 1%. The current revolving credit facilities of the Founding
Companies were used to refinance previous credit facilities and for current
working capital and general corporate purposes. A portion of the outstanding
Founding Company debt incurred during the past year was used to fund the S
Corporation Distributions described elsewhere in this Prospectus. The Company
will use the remaining portion of the revolving credit facility for general
corporate purposes, working capital requirements and the cash portion of
acquisitions. The Company currently has no binding or non-binding agreements to
effect any future acquisitions.
The Company has obtained a commitment for a five-year unsecured revolving
credit facility of $150.0 million, which will be available upon the closing of
this Offering. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Results of Operations -- Combined."
DIVIDEND POLICY
The Company intends to retain all of its earnings, if any, to finance the
expansion of its business and for general corporate purposes, including future
acquisitions, and does not anticipate paying any cash dividends on its Common
Stock for the foreseeable future. In addition, in the event the Company is
successful in obtaining one or more lines of credit, it is likely that any such
facility will include restrictions on the ability of the Company to pay
dividends without the consent of the lender.
Prior to the Mergers, certain of the Founding Companies will make S
Corporation Distributions aggregating $18.6 million and other distributions of
non-operating assets in the amount of $4.1 million to their former stockholders.
In order to fund these distributions, the Founding Companies will borrow
approximately $18.6 million from existing sources.
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CAPITALIZATION
The following table sets forth the current maturities of long-term
obligations and capitalization at March 31, 1997 (i) of Metals USA on a pro
forma combined basis to give effect to the issuance of 676,000 shares of Common
Stock to management of and consultants to Metals USA after March 31, 1997, the
Mergers and the S Corporation Distributions, the distribution of certain real
estate and non-operating assets and liabilities and the refinancing of
outstanding indebtedness; and (ii) of Metals USA, pro forma combined, as
adjusted to give effect to the Mergers, the issuance of the 676,000 shares of
Common Stock to management of and consultants to the Company, the S Corporation
Distributions, this Offering and the application of a portion of the estimated
net proceeds therefrom. This table should be read in conjunction with the
Unaudited Pro Forma Combined Financial Statements of the Company and the Notes
thereto included elsewhere in this Prospectus.
MARCH 31, 1997
--------------------------
PRO
FORMA
COMBINED AS ADJUSTED
-------- -----------
(IN THOUSANDS OF DOLLARS)
Current maturities of long-term debt
obligations(1)........................ $ 27,826(2) $ --
======== ===========
Long-term obligations, less current
maturities(1)......................... $ 96,026(3) $ 85,670
Stockholders' equity:
Preferred Stock: $0.01 par value,
5,000,000 shares authorized; none
issued or outstanding............ -- --
Common Stock: $0.01 par value,
53,122,914 shares authorized;
14,882,023 issued and outstanding
pro forma combined; and
20,782,023 shares issued and
outstanding, pro forma as
adjusted(4)...................... 149 208
Additional paid-in capital......... 90,614 141,391
Retained deficit(5)................ (9,685) (9,685)
-------- -----------
Total stockholders' equity.... 81,078 131,914
-------- -----------
Total capitalization....... $177,104 $ 217,584
======== ===========
- ------------
(1) For a description of the Company's debt, see the Notes to Unaudited Pro
Forma Combined Financial Statements and Notes to the Founding Companies'
Financial Statements.
(2) Represents the cash portion of the Merger consideration to be paid from a
portion of the net proceeds of this Offering.
(3) Several of the Founding Companies are S Corporations. Prior to the Mergers,
these Founding Companies will make S Corporation Distributions to their
stockholders totaling $18.6 million. In order to fund the S Corporation
Distributions, the Founding Companies will borrow $18.6 million from
existing sources, $10.4 million of which will be repaid from the proceeds of
the Offering. Additionally, prior to the Mergers, certain of the Founding
Companies will distribute to their stockholders certain real estate and
non-operating assets and liabilities having a net book value of $4.1
million. Accordingly, pro forma long-term debt has been increased by $8.2
million and pro forma stockholders' equity has been reduced by $22.7
million.
(4) Excludes 2,171,024 shares of Common Stock subject to options to be granted
upon consummation of this Offering with an exercise price equal to the
initial public offering price. See "Management -- 1997 Long-Term Incentive
Plan" and " -- 1997 Non-Employee Directors' Stock Plan."
(5) Results from the Compensation Charge associated with 1,385,500 shares issued
to management of and consultants to the Company.
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DILUTION
The deficit in pro forma net tangible book value of the Company at March
31, 1997 was approximately $4.3 million, or $.29 per share of Common Stock. The
deficit in net tangible book value per share represents the amount of the
Company's stockholders' equity, less intangible assets, divided by the number of
shares of Common Stock issued and outstanding after giving effect to the
Mergers. Net tangible book value dilution per share represents the difference
between the amount per share paid by purchasers of shares of Common Stock in the
Offering and the pro forma net tangible book value per share of Common Stock
immediately after completion of the Offering. After giving effect to the sale of
5,900,000 shares of Common Stock by the Company in the Offering and the
application of the estimated net proceeds therefrom, the pro forma net tangible
book value of the Company as of March 31, 1997 would have been $46.5 million or
$2.24 per share. This represents an immediate increase in pro forma net tangible
book value of $2.53 per share to stockholders as of March 31, 1997, and an
immediate dilution in pro forma net tangible book value of $7.76 per share to
purchasers of Common Stock in the Offering. The following table illustrates the
dilution per share:
Initial public offering price per
share................................. $ 10.00
Pro forma deficit in net tangible
book value per share before the
Offering......................... $ (.29)
Increase in pro forma net tangible
book value per share attributable
to new investors................. 2.53
---------
Pro forma net tangible book value per
share after the Offering.............. 2.24
---------
Dilution per share to new investors..... $ 7.76
=========
The following table sets forth, on a pro forma basis to give effect to the
Mergers as of March 31, 1997, the number of shares of Common Stock purchased
from the Company, the aggregate cash consideration paid and the average price
per share paid to the Company:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION(1) AVERAGE
--------------------- ---------------- PRICE
NUMBER PERCENT AMOUNT PER SHARE
---------- ------- ---------------- ---------
<S> <C> <C> <C> <C>
Existing stockholders.............. 14,882,023 71.6% $ (4,321,000) $ (.29)
New investors...................... 5,900,000 28.4 59,000,000 $ 10.00
---------- ------- ----------------
Total......................... 20,782,023 100.0% $ 54,679,000
========== ======= ================
</TABLE>
- ------------
(1) Total consideration paid by existing stockholders represents the combined
stockholders' equity of the Founding Companies before this Offering, reduced
to reflect: (i) the cash portion of the consideration payable to the
stockholders of the Founding Companies in connection with the Mergers; (ii)
S Corporation Distributions of $18.6 million; and (iii) the distribution of
certain real estate and non-operating assets and liabilities having a net
book value of $4.1 million.
17
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Metals USA will acquire the Founding Companies simultaneously with and as a
condition to the consummation of this Offering. For financial statement
presentation purposes, Metals USA has been identified as the "accounting
acquiror." The following selected financial data for Metals USA as of December
31, 1996 and for the period from inception to December 31, 1996 has been derived
from audited financial statements of Metals USA. The selected historical
financial data as of and for the three months ended March 31, 1997 has been
derived from unaudited financial statements of Metals USA, which have been
prepared on the same basis as the audited financial statements and, in the
opinion of Metals USA, reflect all adjustments consisting of normal recurring
adjustments, necessary for a fair presentation of such data. The selected
unaudited pro forma combined financial data present data for the Company,
adjusted for (i) the effects of the Mergers, (ii) the effects of certain pro
forma adjustments to the historical financial statements described below and
(iii) the consummation of this Offering and the application of the net proceeds
therefrom. See the Unaudited Pro Forma Combined Financial Statements and the
Notes thereto and the historical Financial Statements of Metals USA and certain
of the Founding Companies and the Notes thereto included elsewhere in this
Prospectus.
PERIOD FROM
INCEPTION
(JULY 3, 1996) THREE MONTHS
THROUGH ENDED
DECEMBER 31, MARCH 31,
1996 1997
-------------- -------------
STATEMENT OF OPERATIONS DATA:
METALS USA
Revenues........................... $ -- $ --
Selling, general and administrative
expenses.......................... 3,636 2,813
-------------- -------------
Loss before income taxes........... (3,636) (2,813)
Income tax expense................. -- --
-------------- -------------
Net loss........................... $ (3,636) $ (2,813)
============== =============
PRO FORMA COMBINED(1):
Net sales.......................... $ 387,038 $ 105,383
Cost of sales...................... 295,501 81,250
Operating and delivery(2).......... 41,157 11,657
Selling, general and administrative
expenses(2)....................... 24,042 6,204
Depreciation and amortization(3)... 5,595 1,490
Operating income................... 20,743 4,782
Interest and other expense,
net(4)............................ 4,265 1,200
Income before tax.................. 16,478 3,582
Net income(5)...................... 8,996 1,936
Net income per share............... $ .46 $ .10
Shares used in computing pro forma
net income per share(6)........... 19,468,323 19,468,323
<TABLE>
<CAPTION>
COMBINED COMPANIES
METALS USA -----------------------------
------------------------- MARCH 31, 1997
DECEMBER 31, MARCH 31, -----------------------------
------------ --------- PRO FORMA
1996 1997 COMBINED(7) AS ADJUSTED(8)
------------ --------- ----------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)(4)....... $ (44) $(1,135) $ 67,455(9) $108,383
Total assets....................... 88 1,185 247,072 258,583
Long-term debt, net of current
maturities(4).................... -- -- 96,026 85,670
Stockholders' equity(4)............ 39 42 81,078 131,914
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
18
<PAGE>
- ------------
(1) The pro forma combined statements of operations data assume that the
Mergers, the Offering and all acquisitions by the Founding Companies were
closed on January 1, 1996 and are not necessarily indicative of the results
the Company would have obtained had these events actually then occurred or
of the Company's future results. The historical combined net sales for the
Founding Companies for the twelve months ended December 31, 1996 and the
three months ended March 31, 1997 were $375.8 million and $105.0 million,
respectively.
(2) The pro forma combined statements of operations data reflect the
Compensation Differential of $3.6 million and $0.8 million included in
selling, general and administrative expenses, the Rent Differential of $0.5
million and $0.1 million included in operating and delivery for the twelve
months ended December 31, 1996 and for the three months ended March 31,
1997, respectively, and selling, general and administrative expenses do not
include the nonrecurring portion of the Compensation Charge.
(3) Includes $2.1 million and $0.5 million of amortization for the twelve months
ended December 31, 1996 and for the three months ended March 31, 1997,
respectively, on the $85.4 million of goodwill to be recorded as a result of
the Mergers computed on the basis described in Notes to the Unaudited Pro
Forma Combined Financial Statements.
(4) Several of the Founding Companies are S Corporations. Prior to the Mergers,
these Founding Companies will make S Corporation Distributions to their
stockholders totaling $18.6 million. In order to fund the S Corporation
Distributions, the Founding Companies will borrow $18.6 million from
existing sources, $10.4 million of which will be repaid from the proceeds of
the Offering. Additionally, prior to the Mergers, certain of the Founding
Companies will distribute to their stockholders certain real estate and
non-operating assets and liabilities having a net book value of $4.1
million. Accordingly, pro forma interest expense has been increased by $0.7
million and $0.1 million for the twelve months ended December 31, 1996 and
for the three months ended March 31, 1997, respectively and pro forma
working capital has been reduced by $10.4 million, pro forma long-term debt
has been increased by $8.2 million and pro forma stockholders' equity has
been reduced by $22.7 million at March 31, 1997.
(5) Assumes all income is subject to a corporate tax rate of 40% and all
goodwill and the Compensation Charge are non-deductible.
(6) Includes (i) 10,128,609 shares to be issued to owners of the Founding
Companies, (ii) 1,385,500 shares issued to the management of and consultants
to Metals USA, (iii) 3,367,914 shares issued to Notre and, (iv) 4,586,300 of
the 5,900,000 shares sold in the Offering necessary to pay the cash portion
of the Merger consideration, retire certain indebtedness relating to the S
Corporation Distributions and pay expenses of this Offering. Excludes
options to purchase 2,171,024 shares to be granted upon consummation of this
Offering.
(7) The pro forma combined balance sheet data assumes that the Mergers were
consummated on March 31, 1997.
(8) Adjusted for the sale of 5,900,000 shares of Common Stock offered hereby and
the application of the net proceeds therefrom.
(9) Includes a $27.8 million payable representing the cash portion of the Merger
consideration to be paid from a portion of the net proceeds of this
Offering.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Data" and the Founding Companies' Financial Statements and related
Notes thereto appearing elsewhere in this Prospectus.
INTRODUCTION
The Company's net sales are derived from the processing of steel, aluminum
and other specialty metals and the use of processed metals to manufacture
high-value end-use products. The majority of the metals sold by the Company are
processed by the Company. The Company processes various metals to specified
thickness, length, width, shape and surface quality pursuant to specific
customer orders. Additionally, certain of the Founding Companies manufacture
finished building products for commercial and residential applications and
machine certain specialty metals.
The Founding Companies have operated throughout the periods presented as
privately-owned entities and their results of operations reflect varying tax
structures ("S Corporations" or "C Corporations") which have influenced the
historical level of owners' compensation. Accordingly, selling, general and
administrative expenses as a percentage of net sales may not be comparable among
the individual Founding Companies. The owners of the Founding Companies have
contractually agreed to certain reductions in both their compensation and
benefits and in certain cases lease payments for their respective facilities in
connection with the Mergers. The Compensation Differential for 1996 and for the
three months ended March 31, 1997 of $3.6 million and $0.8 million,
respectively, and the Rent Differential of $0.5 million and $0.1 million,
respectively, have been reflected as pro forma adjustments in the Unaudited Pro
Forma Combined Statement of Operations presented elsewhere in this Prospectus.
The Company anticipates that following the Mergers, it will realize savings
from: (i) greater volume discounts from raw materials and other suppliers and
(ii) consolidation of insurance, employee benefit programs and other general and
administrative costs. It is anticipated that these savings will be offset by
costs related to the Company's new corporate management and by the costs
attributable to being a public company, at least until the Company's cost
savings program can be fully implemented. However, because these savings and
costs cannot be accurately quantified at this time, they have not been included
in the pro forma financial information included herein.
During 1996 and the first and second quarters of 1997, the Company sold an
aggregate of 1,385,500 shares of Common Stock to management of and consultants
to the Company for $0.01 per share. Accordingly, the Company has recorded a
Compensation Charge of $3.6 million in 1996, and $2.8 million and $4.7 million
in the first and second quarters of 1997, respectively, 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.
In addition, the second quarter reflects a reduction in compensation expense of
$1.5 million representing a revision of the estimated fair value of the shares
sold to management and consultants in 1996 and the first quarter of 1997.
In July 1996, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 97 ("SAB 97") relating to business combinations
immediately prior to an initial public offering. SAB 97 requires that these
combinations be accounted for using the purchase method of acquisition
accounting. Under SAB 97, the company receiving the largest voting position from
the shares issued in connection with the Mergers must be designated as the
accounting acquiror. Accordingly, Metals USA is the company that has been
designated as the "accounting acquiror." The excess of the fair value of the
Merger consideration paid of $108.9 million, exclusive of debt assumed, over the
fair value of the net assets acquired for the Founding Companies will be
recorded as "goodwill." Generally accepted accounting principles require the
amortization of goodwill over its useful life, not to exceed 40 years. The
amortization of goodwill is a non-cash charge to operating income. The pro forma
impact of this amortization expense, which is non-deductible for tax purposes,
is expected to be approximately $2.1 million per year. The amount of goodwill to
be recorded and the related amortization expense will depend in part on the
actual Offering price. See
20
<PAGE>
"Certain Transactions -- Organization of the Company." Prior to the issuance
of SAB 97, most business combinations similar to the Mergers were accounted for
by combining the historical financial statements of the respective companies
without the revaluation of acquired assets and liabilities and, therefore, did
not result in the creation of "goodwill."
The accounting classifications used by the Company to present the combined
results of operations for the Founding Companies generally conform to the
conventions established by the Steel Service Center Institute ("SSCI") and the
National Association of Aluminum Distributors. Depreciation and amortization
expenses are shown separately as management believes certain investors find the
information beneficial. Brief descriptions of the classifications are as
follows:
NET SALES. Net sales include sales of materials, processing and
fabrication, less sales returns, allowances and cash discounts. Net sales also
exclude any sales and use taxes collected.
COST OF SALES. Cost of sales include the cost of material and freight and
all processing services purchased from unaffiliated third parties, less any
applicable purchase discounts realized. The Company carries a substantial
quantity of raw material inventories and five of the eight Founding Companies
use the last-in first-out ("LIFO") method of accounting. The LIFO method of
accounting generally matches current costs more closely with current sales.
However, variations in inventory quantities and/or prices may have a significant
impact on cost of sales.
OPERATING AND DELIVERY EXPENSE. Operating and delivery expenses consist of
labor, utilities, rent, repairs and maintenance expenses attributable to
material processing operations, warehouse facilities and delivery operations,
including the cost of freight attributable to product shipments.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expenses include the cost of personnel conducting sales and
administrative activities (including commissions and other forms of incentive
compensation), advertising and marketing expenses, rent, utilities, repairs and
maintenance costs for non-warehouse facilities, professional fees, property
taxes and other costs not included in the preceding classifications that are
directly attributable to operations.
RESULTS OF OPERATIONS -- COMBINED
The combined results of operations of the Founding Companies for the
periods presented do not represent combined results of operations presented in
accordance with generally accepted accounting principles, but are only a
summation of the net sales, cost of sales, operating and delivery expenses.
selling, general and administrative expenses and depreciation and amortization
expenses of the individual Founding Companies on a historical basis. The
combined results of operations include the results of Williams from March 1,
1996, the effective date of acquisition of the business by its current owners,
and the results of businesses acquired by Texas Aluminum/Cornerstone in 1995 and
1996 only from their respective dates of acquisition. The combined results also
exclude the effect of pro forma adjustments and, therefore, may not be
indicative of the Company's post-combination results of operations for a number
of reasons, including the following: (i) the Founding Companies were not under
common control or management during the periods presented, (ii) the Founding
Companies used different tax structures ("S Corporations" or "C
Corporations") during the periods presented, (iii) the Company will incur
incremental costs related to its new corporate management and the costs of being
a public company, (iv) the Company will use the purchase method of accounting to
record the Mergers, resulting in the recording and amortization of goodwill and
(v) the combined data do not reflect the Compensation Differential, the Rent
Differential or the potential benefits and cost savings the Company expects to
realize once Metals USA and the Founding Companies begin operating as a combined
entity.
Approximately 12.5% of the net sales of the Founding Companies are derived
from some aspect of the construction industry. The construction industry is
cyclical and is influenced by seasonal factors, as those activities are usually
lower during winter months than other periods. The Founding Companies have a
broad geographic product and customer mix, which in large measure has served to
mitigate cyclical and seasonal trends; however, there can be no assurance that
period-to-period differences will not occur in the future or that cyclical or
seasonal patterns will not emerge. Further, the results of operations for any
interim period
21
<PAGE>
(on a combined basis and for each of the Founding Companies) are not necessarily
indicative of the results for the full year. Inflation has not had any
significant impact on the results of operations for any of the Founding
Companies during any of the periods presented herein.
The following table sets forth the combined results of operations of the
Founding Companies on a historical basis. The results of operations for Metals
USA after its formation in July 1996, including compensation charges of $3.6
million and $2.8 million for the fiscal year 1996 and the three months ended
March 31, 1997, respectively, are not included.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED MARCH 31,
----------------------------------------------------------------- -------------------
1994(1) % 1995(1) % 1996(2) % 1996 %
------------------- ------------------- ------------------- -------------------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................... $269.6 100.0% $326.1 100.0% $375.8 100.0% $87.3 100.0%
Costs and expenses:
Cost of sales....................... 210.5 78.1 254.2 78.0 288.1 76.7 66.3 75.9
Operating and delivery expenses..... 31.0 11.5 35.3 10.8 41.2 11.0 9.9 11.3
Selling, general and administrative
expenses.......................... 18.2 6.8 21.8 6.7 25.3 6.7 6.0 6.9
Depreciation and amortization....... 2.3 .8 2.8 .8 3.0 .8 .7 .9
------- --------- ------- --------- ------- --------- ------- ---------
Operating income........................ 7.6 2.8 12.0 3.7 18.2 4.8 4.4 5.0
</TABLE>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 %
-------------------
Net sales............................... $105.0 100.0%
Costs and expenses:
Cost of sales....................... 81.0 77.1
Operating and delivery expenses..... 11.8 11.2
Selling, general and administrative
expenses.......................... 6.8 6.5
Depreciation and amortization....... .9 .9
------- ---------
Operating income........................ 4.5 4.3
- ------------
(1) The financial data are presented on a historical basis for the Founding
Companies' respective fiscal year ends. The fiscal years presented are as
follows: Texas Aluminum/Cornerstone -- June 30, 1994 and 1995;
Affiliated -- Fifty-two weeks ended September 3, 1994 and September 2, 1995;
Uni-Steel -- September 30, 1994 and 1995. All other Founding Companies'
fiscal years end December 31. Does not include results of operations of
Williams, which was acquired by its present owners in March 1996.
(2) Reflects results of operations for all of the Founding Companies (except
Williams) for the twelve months ended December 31, 1996. Results of
operations for Williams are for the ten months ended December 31, 1996.
COMBINED RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 1996
NET SALES. Combined net sales increased $17.7 million, or 20.3%, from
$87.3 million for the three months ended March 31, 1996 to $105.0 million for
the three months ended March 31, 1997. The increase in combined net sales was
principally due to increased shipments from Affiliated's new Butler facility,
Uni-Steel's expanded plate steel products line, and business acquisitions by
Williams and Texas Aluminum/Cornerstone. The acquisition of Williams, which was
acquired by its current owners on March 1, 1996, accounted for $5.4 million of
the increase in combined net sales and an acquisition by Texas
Aluminum/Cornerstone in February 1997 accounted for $0.5 million in additional
combined net sales.
COST OF SALES. Combined cost of sales increased $14.7 million, or 22.2%,
from $66.3 million for the three months ended March 31, 1996 to $81.0 million
for the three months ended March 31, 1997. The increase in combined cost of
sales was principally due to the increased shipments described above. As a
percentage of combined net sales, combined cost of sales increased from 75.9%
for the three months ended March 31, 1996 to 77.1% for the three months ended
March 31, 1997. This percentage increase was due to higher cost of raw
materials.
OPERATING AND DELIVERY EXPENSES. Combined operating and delivery expenses
increased $1.9 million, or 19.2%, from $9.9 million for the three months ended
March 31, 1996 to $11.8 million for the three months ended March 31, 1997. As a
percentage of combined net sales, combined operating and delivery expenses
decreased from 11.3% for the three months ended March 31, 1996 to 11.2% for the
three months ended March 31, 1997. This decrease was primarily due to spreading
of fixed operating costs over a higher volume of combined net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general
and administrative expenses increased $0.8 million, or 13.3%, from $6.0 million
for the three months ended March 31, 1996 to $6.8 million for the three months
ended March 31, 1997. This increase in combined selling, general and
administrative expenses was primarily attributable to expenses associated with
increased net sales and costs
22
<PAGE>
attributable to the acquisition of Cornerstone Aluminum. As a percentage of
combined net sales, combined selling, general and administrative expenses
decreased from 6.9% for the three months ended March 31, 1996 to 6.5% for the
three months ended March 31, 1997. This percentage decrease was primarily due to
spreading of these expenses over a higher volume of combined net sales.
OPERATING INCOME. Combined operating income increased $0.1 million, or
2.3%, from $4.4 million for the three months ended March 31, 1996 to $4.5
million for the three months ended March 31, 1997. The increase in combined
operating income was attributable to the factors discussed above. As a
percentage of combined net sales, combined operating income decreased from 5.0%
for the three months ended March 31, 1996 to 4.3% for the three months ended
March 31, 1997.
COMBINED RESULTS FOR 1996 COMPARED TO 1995
NET SALES. Combined net sales increased approximately $49.7 million, or
15.2%, from $326.1 million in 1995 to $375.8 million in 1996. The increase in
combined net sales was principally due to the acquisition of Williams, which was
acquired by its current owners on March 1, 1996, and accounted for $25.5 million
of the increase. The balance of the increase in combined net sales was caused by
increased volumes at five of the seven Founding Companies, particularly at Texas
Aluminum/Cornerstone and Uni-Steel, partially offset by declines at two Founding
Companies.
COST OF SALES. Combined cost of sales increased approximately $33.9
million, or 13.3%, from $254.2 million in 1995 to $288.1 million in 1996. The
increase in combined cost of sales was primarily attributable to the acquisition
of Williams, which accounted for approximately $20.2 million of the increase. As
a percentage of combined net sales, combined cost of sales decreased from 78.0%
in 1995 to 76.7% in 1996 due primarily to a decline in the cost of raw
materials.
OPERATING AND DELIVERY EXPENSES. Combined operating and delivery expenses
increased approximately $5.9 million, or 16.7%, from $35.3 million in 1995 to
$41.2 million in 1996. This increase was attributable to the Williams
acquisition and increased shipments at most of the Founding Companies. As a
percentage of combined net sales, combined operating and delivery expenses
increased from 10.8% in 1995 to 11.0% in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general
and administrative expenses increased approximately $3.5 million, or 16.1%, from
$21.8 million in 1995 to $25.3 million in 1996. The increase in combined
selling, general and administrative expenses was primarily due to the Williams
acquisition and increased shipments at most of the Founding Companies. As a
percentage of combined net sales, combined selling, general and administrative
expenses were unchanged at 6.7% in 1995 and 1996.
OPERATING INCOME. Combined operating income increased approximately $6.2
million, or 51.7%, from $12.0 million in 1995 to $18.2 million in 1996. The
increase in combined operating income was attributable to the factors discussed
above. As a percentage of combined net sales, combined operating income
increased from 3.7% in 1995 to 4.8% in 1996.
COMBINED RESULTS FOR 1995 COMPARED TO 1994
NET SALES. Combined net sales increased approximately $56.5 million, or
21.0%, from $269.6 million in 1994 to $326.1 million in 1995. All of the
Founding Companies contributed to the increase in combined net sales. The most
significant increases were at Affiliated, Interstate, Queensboro and Uni-Steel
which were primarily due to increased shipments. The formation of Cornerstone by
Texas Aluminum effective March 31, 1995 accounted for $5.5 million of the
increase.
COST OF SALES. Combined cost of sales increased approximately $43.7
million, or 20.8%, from $210.5 million in 1994 to $254.2 million in 1995. The
increase in combined cost of sales was principally due to the increase in
combined net sales. As a percentage of combined net sales, combined cost of
sales decreased from 78.1% in 1994 to 78.0% in 1995.
OPERATING AND DELIVERY EXPENSES. Combined operating and delivery expenses
increased approximately $4.3 million, or 13.9%, from $31.0 million in 1994 to
$35.3 million in 1995. The increase in
23
<PAGE>
combined operating and delivery expenses was primarily due to the increase in
product shipments at Interstate, Affiliated and Queensboro. As a percentage of
combined net sales, combined operating and delivery expenses decreased from
11.5% in 1994 to 10.8% in 1995, principally due to the ability to spread fixed
operating costs over higher sales volumes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general
and administrative expenses increased approximately $3.6 million, or 19.8%, from
$18.2 million in 1994 to $21.8 million in 1995. The increase in combined
selling, general and administrative expenses was primarily at Texas
Aluminum/Cornerstone, Interstate and Affiliated. The increase at Texas
Aluminum/Cornerstone was primarily attributable to the addition of distribution
centers. As a percentage of combined net sales, combined selling, general and
administrative expenses decreased from 6.8% in 1994 to 6.7% in 1995.
OPERATING INCOME. Combined operating income increased approximately $4.4
million, or 57.9%, from $7.6 million in 1994 to $12.0 million in 1995. The
increase in combined operating income was attributable to the factors discussed
above. As a percentage of combined net sales, combined operating income
increased from 2.8% in 1994 to 3.7% in 1995.
COMBINED LIQUIDITY AND CAPITAL RESOURCES
On a combined basis, the Founding Companies generated $7.7 million of net
cash from operating activities during fiscal 1996 and used $5.4 million in net
cash from operating activities for the three months ended March 31, 1997
primarily for working capital requirements for accounts receivable, inventories
and accounts payable. Net cash used in investing activities was $8.0 million and
$2.1 million on a combined basis for fiscal 1996 and for the three months ended
March 31, 1997, respectively, primarily for the construction of a new facility
during 1996 by Affiliated in Butler, Indiana and for equipment purchases by the
Founding Companies. Net cash provided by financing activities was $0.1 million
for fiscal 1996 and $7.6 million for the three months ended March 31, 1997,
respectively, the most significant components of which were distributions to
stockholders of $2.6 million and $2.7 million during fiscal 1996 and for the
three months ended March 31, 1997, respectively, and $9.8 million provided by
lines of credit for working capital for the three months ended March 31, 1997.
At December 31, 1996, the combined Founding Companies had cash of $1.3 million,
working capital of $35.9 million and total debt of $66.9 million ($42.7 million
of which was classified as current). At March 31, 1997, the combined Founding
Companies had cash of $1.3 million, working capital of $58.0 million and total
debt of $78.2 million ($30.7 million of which was classified as current). On a
pro forma basis, after giving effect to the S Corporation Distributions, the
Mergers, the refinancing of the Founding Companies' existing notes payable with
funds drawn from the Company's bank credit facility (described below) and the
application of the net proceeds from this Offering, the Company and the Founding
Companies would have had, on a combined basis, a cash balance of approximately
$14.4 million, working capital of approximately $108.4 million and total debt of
approximately $85.7 million, all of which would be classified as long-term as a
result of the acquisition of the Credit Facility described below. Prior to the
Mergers, the Founding Companies collectively borrowed approximately $18.6
million to fund S Corporation Distributions.
The Company has obtained a commitment for a five-year unsecured revolving
credit facility of $150.0 million (the "Credit Facility") which will be
available upon the closing of this Offering. The Credit Facility will be used to
fund acquisitions, make capital expenditures, refinance debt of the Founding
Companies and working capital requirements. The Credit Facility will require 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, and (iv)
obtaining the lenders' consent with respect to individual acquisitions involving
cash consideration over a specified amount. The Credit Facility is subject to
the completion of customary loan documentation.
The Company intends to pursue acquisition opportunities actively. 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
24
<PAGE>
necessary by borrowings from the Credit 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 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.
RESULTS OF OPERATIONS -- TEXAS ALUMINUM/CORNERSTONE
Texas Aluminum/Cornerstone produces and distributes aluminum and steel
building products, consisting of windows, doors, insulated wall panels, canopies
and awnings primarily for the commercial and residential building products
industries. Texas Aluminum/Cornerstone's products are produced in five
manufacturing plants. The products are marketed and sold to contractors,
architects and wholesale distributors through 36 sales and distribution
facilities across the United States, primarily in the Sunbelt. Texas
Aluminum/Cornerstone has a broad geographic and customer mix. Texas
Aluminum/Cornerstone generally experiences lower sales during the first calendar
quarter of each year, due largely to the general decline in construction-related
activity during the winter months.
The following table sets forth the historical results of operations for
Texas Aluminum/Cornerstone.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31, MARCH 31,
------------------------------------------ -------------------- --------------------
1994 % 1995 % 1996 % 1996 %
-------------------- -------------------- -------------------- --------------------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................... $ 26.1 100.0% $ 34.7 100.0% $ 40.6 100.0% $ 7.6 100.0%
Costs and expenses:
Cost of sales....................... 18.0 69.0 23.9 68.9 27.1 66.7 5.3 69.7
Operating and delivery.............. 5.6 21.5 5.9 17.0 6.4 15.8 1.4 18.4
Selling, general and administrative
expenses.......................... 1.7 6.5 2.8 8.1 3.5 8.6 .9 11.8
Depreciation and amortization....... .3 1.1 .5 1.4 .6 1.5 .1 1.4
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income (loss)................. .5 1.9 1.6 4.6 3.0 7.4 (.1) (1.3)
</TABLE>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 %
--------------------
Net sales............................... $ 9.7 100.0%
Costs and expenses:
Cost of sales....................... 6.3 64.9
Operating and delivery.............. 1.4 14.4
Selling, general and administrative
expenses.......................... 1.3 13.4
Depreciation and amortization....... .2 2.1
--------- ---------
Operating income (loss)................. .5 5.2
TEXAS ALUMINUM/CORNERSTONE RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1997
COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1996
NET SALES. Net sales increased $2.1 million, or 27.6%, from $7.6 million
for the three months ended March 31, 1996 to $9.7 million for the three months
ended March 31, 1997. This increase was due to increased shipments from existing
distribution facilities as well as an acquisition in February 1997, which
accounted for $0.5 million in additional net sales.
COST OF SALES. Cost of sales increased $1.0 million, or 18.9%, from $5.3
million for the three months ended March 31, 1996 to $6.3 million for the three
months ended March 31, 1997. As a percentage of net sales, cost of sales
decreased from 69.7% for the three months ended March 31, 1996 to 64.9% for the
three months ended March 31, 1997. The decrease in the cost of sales percentage
was principally due to increased sales of higher margin products.
OPERATING AND DELIVERY EXPENSES. Operating and delivery expenses were
essentially unchanged for the three months ended March 31, 1996 compared to the
three months ended March 31, 1997. As a percentage of net sales, operating and
delivery expenses decreased from 18.4% for the three months ended March 31, 1996
to 14.4% for the three months ended March 31, 1997. This decrease was primarily
due to spreading of fixed operating costs over a higher volume of net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.4 million, or 44.4%, from $0.9 million for
the three months ended March 31, 1996 to $1.3 million for the three months ended
March 31, 1997. This increase was primarily attributable to expenses associated
with increased net sales, costs attributable to an acquisition and increased
owners' compensation. As a percentage of net sales, selling, general and
administrative expenses increased from 11.8% for the three
25
<PAGE>
months ended March 31, 1996 to 13.4% for the three months ended March 31, 1997.
This percentage increase was primarily due to costs attributable to an
acquisition and increased owners' compensation.
OPERATING INCOME (LOSS). Operating income increased $0.6 million, or
600.0%, from a loss of $0.1 million for the three months ended March 31, 1996 to
income of $0.5 million for the three months ended March 31, 1997. The increase
in operating income was attributable to the factors discussed above. As a
percentage of net sales, operating income increased to 5.2% for the three months
ended March 31, 1997.
TEXAS ALUMINUM/CORNERSTONE RESULTS FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED
TO THE FISCAL YEAR ENDED JUNE 30, 1995
NET SALES. Net sales increased $5.9 million, or 17.0%, from $34.7 million
in 1995 to $40.6 million in 1996. This increase was primarily due to the
acquisition of Cornerstone during 1995, establishing new distribution
facilities, and increased shipments to both existing and newly established
distribution facilities. The net sales increases attributable to Cornerstone and
to newly established distribution facilities were $2.7 million and $2.9 million,
respectively.
COST OF SALES. Cost of sales increased $3.2 million, or 13.4%, from $23.9
million in 1995 to $27.1 million in 1996. As a percentage of net sales, cost of
sales decreased from 68.9% in 1995 to 66.7% in 1996. The decrease was primarily
due to an increase in sales of products with a higher profit margin, partially
offset by inventory write-downs attributable to discontinued product lines.
OPERATING AND DELIVERY EXPENSES. Operating and delivery expenses increased
$0.5 million, or 8.5%, from $5.9 million in 1995 to $6.4 million in 1996. As a
percentage of net sales, operating and delivery expenses decreased from 17.0% in
1995 to 15.8% in 1996. This decrease was primarily due to spreading of fixed
operating costs over a higher volume of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.7 million, or 25.0%, from $2.8 million in
1995 to $3.5 million in 1996. This increase was primarily attributable to
increases in owners' compensation and sales and marketing expenses necessary to
support the increased level of sales. As a percentage of net sales, selling,
general and administrative expenses increased from 8.1% in 1995 to 8.6% in 1996.
This percentage increase was primarily attributable to increased owners'
compensation.
OPERATING INCOME. Operating income increased $1.4 million, or 87.5%, from
$1.6 million in 1995 to $3.0 million in 1996. The increase in operating income
was attributable to the factors discussed above. As a percentage of net sales,
operating income increased from 4.6% in 1995 to 7.4% in 1996.
TEXAS ALUMINUM/CORNERSTONE RESULTS FOR FISCAL YEAR ENDED JUNE 30, 1995 COMPARED
TO FISCAL YEAR ENDED JUNE 30, 1994
NET SALES. Net sales increased $8.6 million, or 33.0%, from $26.1 million
in 1994 to $34.7 million in 1995. This increase was due to the acquisition of
Cornerstone, which accounts for $5.5 million of the increase, and the
introduction of new product lines and geographical expansion through additional
distribution outlets.
COST OF SALES. Cost of sales increased $5.9 million, or 32.8%, from $18.0
million in 1994 to $23.9 million in 1995. The increase in cost of sales was a
direct result of the increase in net sales. As a percentage of net sales, cost
of sales decreased from 69.0% in 1994 to 68.9% in 1995 due to increased sales of
higher margin products.
OPERATING AND DELIVERY EXPENSES. Operating and delivery expenses increased
$0.3 million, or 5.4%, from $5.6 million in 1994 to $5.9 million in 1995 as a
result of the increase in net sales. As a percentage of net sales, operating and
delivery expenses decreased from 21.5% in 1994 to 17.0% in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.1 million, or 64.7%, from $1.7 million in
1994 to $2.8 million in 1995. This increase was primarily attributable to
increases in owners' compensation and sales and marketing expenses necessary to
support the increased level of sales. As a percentage of net sales, selling,
general and administrative expenses
26
<PAGE>
increased from 6.5% in 1994 to 8.1% in 1995. This percentage increase was
primarily attributable to increased owners' compensation.
OPERATING INCOME. Operating income increased $1.1 million, or 220.0%, from
$0.5 million in 1994 to $1.6 million in 1995. The increase in operating income
was attributable to the factors discussed above. As a percentage of net sales,
operating income increased from 1.9% in 1994 to 4.6% in 1995.
TEXAS ALUMINUM/CORNERSTONE LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, Texas Aluminum/Cornerstone's working capital was $11.5
million, compared to $8.3 million and $7.4 million, at December 31, 1996 and
June 30, 1995, respectively. Texas Aluminum/Cornerstone's principal capital
requirements are to fund its working capital and the purchase and improvement of
facilities, machinery and equipment. Historically, these requirements have been
met by income generated from operations and borrowings under bank credit
facilities.
Net cash provided by (used for) operating activities for the fiscal years
ended June 30, 1994 and 1995, the year ended December 31, 1996 and the three
months ended March 31, 1997 was $(0.2) million, $0.6 million, $1.8 million and
$(1.5) million, respectively. These changes were principally due to funding
Texas Aluminum/Cornerstone's working capital requirements for accounts and notes
receivable, inventories and accrued liabilities.
Net cash provided by (used for) investing activities for the fiscal years
ended June 30, 1994 and 1995, the year ended December 31, 1996 and the three
months ended March 31, 1997 was $(0.2) million, $(2.9) million, $0.2 million and
$(1.4) million, respectively. Investing activities included $2.5 million and
$1.3 million used for business acquisitions during 1995 and the three months
ended March 31, 1997, respectively, with the remaining amount used for capital
expenditures offset by collections on notes receivable.
Net cash provided by (used for) financing activities for the fiscal years
ended June 30, 1994 and 1995, the year ended December 31, 1996 and the three
months ended March 31, 1997 was $0.2 million, $2.4 million, $(2.2) million and
$3.6 million, respectively. Borrowings during 1995 were made to fund business
acquisitions. Credit facility repayments constituted the majority of cash used
for financing activities during 1996. Borrowings during the three months ended
March 31, 1997 were made to fund business acquisitions and working capital
requirements for accounts payable and accrued liabilities. Prior to the Merger,
Texas Aluminum/Cornerstone will borrow approximately $2.0 million to fund its
portion of the S Corporation Distributions.
Texas Aluminum/Cornerstone has revolving bank credit facilities, secured by
inventories, accounts receivable, equipment and the guarantees of certain
stockholders, which expire on various dates during 1998. The amounts available
under these credit facilities were increased from $6.0 million to $10.0 million
in February 1997. At March 31, 1997, approximately $2.9 million of the $10.0
million revolving credit facilities was available. Texas Aluminum/Cornerstone
believes its cash flows from operations, the bank credit facility and other
available sources of financing, will be sufficient to fund its working capital
and capital expenditure requirements for the next several years.
RESULTS OF OPERATIONS -- INTERSTATE
Interstate is a carbon structural steel service center with operations in
Philadelphia and Pittsburgh, Pennsylvania and Baltimore, Maryland. Interstate
services customers primarily in the northeast and mid-Atlantic United States,
ranging from Virginia to Maine and west through eastern Ohio. Interstate is a
value-added metals processor/service center providing products and services
primarily to structural steel fabricators of buildings and bridges and to the
shipbuilding, railroad and electric power generation industries. Approximately
one-half of net sales includes value-added processing services such as saw
cutting, shearing, flame cutting, cambering and tee-splitting. Interstate has a
broad geographic and customer mix and has not experienced any significant
seasonal trends.
27
<PAGE>
The following table sets forth the historical results of operations for
Interstate.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------- --------------------
1994 % 1995 % 1996 % 1996 %
-------------------- -------------------- -------------------- --------------------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................... $ 49.3 100.0% $ 61.4 100.0% $ 66.8 100.0% $ 15.7 100.0%
Costs and expenses:
Cost of sales....................... 37.3 75.7 44.9 73.1 47.9 71.7 11.0 70.1
Operating and delivery expenses..... 6.2 12.6 7.9 12.9 8.2 12.3 2.0 12.7
Selling, general and administrative
expenses.......................... 4.2 8.5 5.2 8.5 5.4 8.1 1.3 8.3
Depreciation and amortization....... .5 1.0 .6 .9 .6 .9 .2 1.3
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income........................ 1.1 2.2 2.8 4.6 4.7 7.0 1.2 7.6
</TABLE>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 %
--------------------
Net sales............................... $ 16.1 100.0%
Costs and expenses:
Cost of sales....................... 11.8 73.3
Operating and delivery expenses..... 2.1 13.0
Selling, general and administrative
expenses.......................... 1.3 8.1
Depreciation and amortization....... .1 .6
--------- ---------
Operating income........................ .8 5.0
INTERSTATE RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1996
NET SALES. Net sales increased $0.4 million, or 2.5%, from $15.7 million
for the three months ended March 31, 1996 to $16.1 million for the three months
ended March 31, 1997. This increase was due to a 7% increase in shipments
partially offset by a decline in average realized prices of 4%.
COST OF SALES. Cost of sales increased $0.8 million, or 7.3% from $11.0
million for the three months ended March 31, 1996 to $11.8 million for the three
months ended March 31, 1997. The increase in the cost of sales was principally
due to the increased quantity of raw material sold and a 1% increase in the cost
of purchased steel. As a percentage of net sales, cost of sales increased from
70.1% for the three months ended March 31, 1996 to 73.3% for the three months
ended March 31, 1997.
OPERATING AND DELIVERY EXPENSES. Operating and delivery expenses increased
$0.1 million, or 5.0%, for the three months ended March 31, 1996 compared to the
three months ended March 31, 1997. As a percentage of net sales, operating and
delivery expenses increased from 12.7% for the three months ended March 31, 1996
to 13.0% for the three months ended March 31, 1997. This percentage increase was
primarily due to a temporary reduction in workers compensation expense in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were essentially unchanged for the three months ended
March 31, 1996 compared to the three months ended March 31, 1997. As a
percentage of net sales, selling, general and administrative expenses decreased
from 8.3% for the three months ended March 31, 1996 to 8.1% for the three months
ended March 31, 1997. This decrease was primarily due to spreading of these
expenses over a higher volume of net sales.
OPERATING INCOME. Operating income decreased $0.4 million, or 33.3%, from
$1.2 million for the three months ended March 31, 1996 to $0.8 million for the
three months ended March 31, 1997. The decrease in operating income was
attributable to the factors discussed above. As a percentage of net sales,
operating income decreased from 7.6% for the three months ended March 31, 1996
to 5.0% for the three months ended March 31, 1997.
INTERSTATE RESULTS FOR YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED
DECEMBER 31, 1995
NET SALES. Net sales increased $5.4 million, or 8.8%, from $61.4 million
in 1995 to $66.8 million in 1996. The increase in net sales was primarily due to
a $6.0 million contract for value-added steel products associated with the
construction of a shopping mall.
COST OF SALES. Cost of sales increased $3.0 million, or 6.7%, from $44.9
million in 1995 to $47.9 million in 1996. The increase in cost of goods sold was
primarily due to a 5.6% increase in quantity of raw material sold, partially
offset by a 2.8% decline in the average cost of purchased steel. As a percentage
of net sales, cost of sales decreased from 73.1% in 1995 to 71.7% in 1996.
OPERATING AND DELIVERY EXPENSES. Operating and delivery expenses increased
$0.3 million, or 3.8%, from $7.9 million in 1995 to $8.2 million in 1996. As a
percentage of net sales, operating and delivery
28
<PAGE>
expenses decreased from 12.9% in 1995 to 12.3% in 1996, primarily due to a
reduction in workers compensation expense in the amount of $0.2 million in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.2 million, or 3.8%, from $5.2 million in
1995 to $5.4 million in 1996. As a percentage of net sales, selling, general and
administrative expenses decreased from 8.5% in 1995 to 8.1% in 1996. This
percentage decrease was primarily due to the increase in net sales without a
commensurate increase in overhead.
OPERATING INCOME. Operating income increased $1.9 million, or 67.9%, from
$2.8 million in 1995 to $4.7 million in 1996. The increase in operating income
was attributable to the factors discussed above. As a percentage of net sales,
operating income increased from 4.6% in 1995 to 7.0% in 1996.
INTERSTATE RESULTS FOR YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED
DECEMBER 31, 1994
NET SALES. Net sales increased $12.1 million, or 24.5%, from $49.3 million
in 1994 to $61.4 million in 1995. Shipments increased by approximately 15.5%
from 1994 to 1995, primarily due to a $6.0 million increase in sales of
value-added products to the construction industry, principally from its recently
opened Pittsburgh facility, and an increase in sales of approximately $3.4
million of value-added products to various governmental agencies.
COST OF SALES. Cost of sales increased $7.6 million, or 20.4%, from $37.3
million in 1994 to $44.9 million in 1995, primarily as a result of the 15.5%
increase in shipments. Average purchase prices for steel were essentially
unchanged from 1994 levels. As a percentage of net sales, cost of sales
decreased from 75.7% in 1994 to 73.1% in 1995, primarily due to increased
shipments of value-added products.
OPERATING AND DELIVERY EXPENSES. Operating and delivery expenses increased
$1.7 million, or 27.4%, from $6.2 million in 1994 to $7.9 million in 1995. The
increase in operating and delivery expenses was primarily due to increased
activity at the Pittsburgh facility where freight and delivery costs are
generally greater than Interstate's other facilities which serve smaller
geographic areas. As a percentage of net sales, operating and delivery expenses
increased from 12.6% in 1994 to 12.9% in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.0 million, or 23.8%, from $4.2 million in
1994 to $5.2 million in 1995. This increase was primarily attributable to
increases in sales and marketing expenses necessary to support the increased
level of sales. As a percentage of net sales, selling, general and
administrative expenses remained constant at 8.5% for both periods.
OPERATING INCOME. Operating income increased $1.7 million, or 154.5%, from
$1.1 million in 1994 to $2.8 million in 1995. The increase in operating income
was attributable to the factors discussed above. As a percentage of net sales,
operating income increased from 2.2% in 1994 to 4.6% in 1995.
INTERSTATE LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, Interstate's working capital was $5.8 million, compared
to $5.5 million and $3.2 million, at December 31, 1996 and 1995, respectively.
Interstate's principal capital requirements are to fund its working capital and
the purchase and improvement of facilities, machinery and equipment.
Historically, these requirements have been met by income generated from
operations and borrowings under bank credit facilities.
Net cash provided by (used for) operating activities for 1994, 1995, 1996
and the three months ended March 31, 1997 was $(1.1) million, $0.3 million, $3.0
million and $(0.9) million, respectively. These changes were principally due to
increased earnings, partially offset by funding Interstate's working capital
requirements for accounts receivable, inventories and accounts payable.
Net cash used for investing activities was primarily attributable to
capital expenditures and for 1994, 1995, 1996 and the three months ended March
31, 1997 was $0.6 million, $0.5 million, $0.4 million and $0.1 million,
respectively. The individual components of these capital expenditures were not
significant.
Net cash provided by (used for) financing activities for 1994, 1995, 1996
and the three months ended March 31, 1997 was $1.6 million, $0.2 million, $(2.5)
million and $1.2 million, respectively. Interstate paid
29
<PAGE>
dividends (including distributions to partners) in 1994, 1995, 1996 and the
first quarter of 1997 of $0.3 million, $0.6 million, $1.4 million and $0.2
million, respectively. Borrowings in 1994 were primarily made to fund working
capital requirements for accounts receivable, inventories and accounts payable.
Interstate received a capital contribution from its stockholders in 1995 of $0.3
million. During 1996, Interstate repaid a portion of the borrowings outstanding
under its revolving bank credit facility. Borrowings during the three months
ended March 31, 1997 were made to fund working capital requirements for
inventories, accounts payable and accrued liabilities. Prior to the Merger,
Interstate will borrow $6.4 million to fund its portion of the S Corporation
Distributions.
Interstate has two unsecured bank credit facilities. One facility provides
for borrowings of up to $12.5 million and expires on May 31, 1997. The second
facility provides for borrowings of up to $10.0 million and expires July 31,
1997. Interstate has agreed to limit its aggregate borrowings from the two
credit facilities to a maximum amount outstanding at any time of $14.5 million.
At March 31, 1997, approximately $2.9 million was available for borrowings from
the two credit facilities. Interstate anticipates that its cash flows from
operations will be sufficient to meet its working capital and debt service
requirements for the next several years. Capital expenditure requirements are
expected to be funded from cash provided by operations and supplemented as
necessary with borrowings from banks or other lenders.
RESULTS OF OPERATIONS -- QUEENSBORO
Queensboro is a carbon steel service center and structural fabricator, with
operations in Wilmington and Greensboro, North Carolina and Norfolk, Virginia,
and markets its products primarily in the southeast region of the United States.
Queensboro is a value-added metals processor/service center, providing products
and services primarily to the shipbuilding, transportation, construction, pulp
and paper and chemical industries. Queensboro has a broad geographic and
customer mix, and has not experienced any significant seasonal trends.
The following table sets forth the historical results of operations for
Queensboro.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------- --------------------
1994 % 1995 % 1996 % 1996 %
-------------------- -------------------- -------------------- --------------------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................... $ 50.8 100.0% $ 60.3 100.0% $ 55.0 100.0% $ 14.8 100.0%
Costs and expenses:
Cost of sales....................... 38.0 74.8 45.9 76.1 38.9 70.7 11.0 74.3
Operating and delivery expenses..... 7.4 14.6 8.1 13.4 8.3 15.1 2.0 13.5
Selling, general and administrative
expenses.......................... 3.6 7.1 3.8 6.3 3.9 7.1 .9 6.1
Depreciation and amortization....... .4 .7 .4 .7 .4 .7 .1 .7
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income........................ 1.4 2.8 2.1 3.5 3.5 6.4 .8 5.4
</TABLE>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 %
--------------------
Net sales............................... $ 15.3 100.0%
Costs and expenses:
Cost of sales....................... 11.2 73.2
Operating and delivery expenses..... 2.2 14.4
Selling, general and administrative
expenses.......................... 1.0 6.5
Depreciation and amortization....... .2 1.3
--------- ---------
Operating income........................ .7 4.6
QUEENSBORO RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1996
NET SALES. Net sales increased $0.5 million, or 3.4%, from $14.8 million
for the three months ended March 31, 1996 to $15.3 million for the three months
ended March 31, 1997. This increase was due to an 11.5% increase in shipments,
partially offset by lower average realized prices.
COST OF SALES. Cost of sales increased $0.2 million, or 1.8%, from $11.0
million for the three months ended March 31, 1996 to $11.2 million for the three
months ended March 31, 1997. The increase in cost of sales was principally due
to the increased quantity of raw material purchased. As a percentage of net
sales, cost of sales decreased from 74.3% for the three months ended March 31,
1996 to 73.2% for the three months ended March 31, 1997. This percentage
decrease is principally due to lower raw material costs.
OPERATING AND DELIVERY EXPENSES. Operating and delivery expenses increased
$0.2 million, or 10.0%, from $2.0 million for the three months ended March 31,
1996 to $2.2 million for the three months ended March 31, 1997. This increase
was attributable to sales expansion into new territories. As a percentage of
30
<PAGE>
net sales, operating and delivery expenses increased from 13.5% for the three
months ended March 31, 1996 to 14.4% for the three months ended March 31, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.1 million, or 11.1%, from $0.9 million for
the three months ended March 31, 1996 to $1.0 million for the three months ended
March 31, 1997. As a percentage of net sales, selling, general and
administrative expenses increased from 6.1% for the three months ended March 31,
1996 to 6.5% for the three months ended March 31, 1997. This percentage increase
was primarily due to sales and marketing costs associated with the expansion
into new territories.
OPERATING INCOME. Operating income decreased $0.1 million, or 12.5%, from
$0.8 million for the three months ended March 31, 1996 to $0.7 million for the
three months ended March 31, 1997. The decrease in operating income was
attributable to the factors discussed above. As a percentage of net sales,
operating income decreased from 5.4% for the three months ended March 31, 1996
to 4.6% for the three months ended March 31, 1997.
QUEENSBORO RESULTS FOR YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED
DECEMBER 31, 1995
NET SALES. Net sales declined $5.3 million, or 8.8%, from $60.3 million in
1995 to $55.0 million in 1996 primarily due to a 7% decrease in tons shipped and
lower average realized prices. Decreased shipments to one of Queensboro's larger
manufacturing customers accounted for approximately $1.5 million of the decline
in net sales.
COST OF SALES. Cost of sales decreased $7.0 million, or 15.3%, from $45.9
million in 1995 to $38.9 million in 1996. This decrease was primarily due to the
decrease in net sales. As a percentage of net sales, cost of sales decreased
from 76.1% in 1995 to 70.7% in 1996, primarily due to lower raw material costs.
OPERATING AND DELIVERY EXPENSES. Operating and delivery expenses increased
$0.2 million, or 2.5%, from $8.1 million in 1995 to $8.3 million in 1996. As a
percentage of net sales, operating and delivery expenses increased from 13.4% in
1995 to 15.1% in 1996, primarily due to the decline in net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.1 million, or 2.6%, from $3.8 million in
1995 to $3.9 million in 1996. As a percentage of net sales, selling, general and
administrative expenses increased from 6.3% in 1995 to 7.1% in 1996. This
percentage increase was the result of lower net sales in 1996.
OPERATING INCOME. Operating income increased $1.4 million, or 66.7%, from
$2.1 million in 1995 to $3.5 million in 1996. The increase in operating income
was attributable to the factors discussed above. As a percentage of net sales,
operating income increased from 3.5% in 1995 to 6.4% in 1996.
QUEENSBORO RESULTS FOR YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED
DECEMBER 31, 1994
NET SALES. Net sales increased $9.5 million, or 18.7%, from $50.8 million
in 1994 to $60.3 million in 1995. This increase was primarily due to a 7%
increase in tonnage shipped and higher average realized prices.
COST OF SALES. Cost of sales increased $7.9 million, or 20.8%, from $38.0
million in 1994 to $45.9 million in 1995. The increase in cost of sales was a
result of the increase in net sales. As a percentage of net sales, cost of sales
increased from 74.8% in 1994 to 76.1% in 1995, primarily due to higher raw
material costs.
OPERATING AND DELIVERY EXPENSES. Operating and delivery expenses increased
$0.7 million, or 9.5%, from $7.4 million in 1994 to $8.1 million in 1995. The
increase in operating and delivery expenses was a result of the increase in
shipments. As a percentage of net sales, operating and delivery expenses
decreased from 14.6% in 1994 to 13.4% in 1995, principally due to the ability to
spread fixed operating costs over higher sales volumes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.2 million, or 5.6%, from $3.6 million in
1994 to $3.8 million in 1995. As a percentage of net sales,
31
<PAGE>
selling, general and administrative expenses decreased from 7.1% in 1994 to 6.3%
in 1995. This percentage decrease was a result of the increase in net sales
without a commensurate increase in administrative costs.
OPERATING INCOME. Operating income increased $0.7 million, or 50.0%, from
$1.4 million in 1994 to $2.1 million in 1995. The increase in operating income
was attributable to the factors discussed above. As a percentage of net sales,
operating income increased from 2.8% in 1994 to 3.5% in 1995.
QUEENSBORO LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, Queensboro's working capital was $15.6 million, compared
to $13.8 million and $13.6 million, at December 31, 1996 and 1995, respectively.
Queensboro's principal capital requirements are to fund its working capital and
the purchase and improvement of facilities, machinery and equipment.
Historically, these requirements have been met by income generated from
operations and borrowings under bank credit facilities.
Net cash provided by (used for) operating activities in 1994, 1995, 1996
and the three months ended March 31, 1997 was $(0.5) million, $0.6 million, $3.2
million and $(0.9) million, respectively. These changes were principally due to
increased earnings, partially offset by Queensboro's increased working capital
requirements for accounts receivable, inventories and accounts payable.
Net cash used for investing activities was primarily attributable to
capital expenditures and for 1994, 1995, 1996 and the three months ended March
31, 1997 was $0.9 million, $1.5 million, $2.0 million and $0.1 million,
respectively. The individual components of these capital expenditures were not
significant.
Net cash provided by (used for) financing activities for 1994, 1995, 1996
and the three months ended March 31, 1997 was $1.4 million, $1.0 million, $(1.2)
million and $1.0 million, respectively. Queensboro paid dividends in 1994, 1995,
1996 and first quarter 1997 of $0.1 million, $0.9 million, $0.8 million and $0.2
million, respectively. Borrowings in 1994, 1995 and first quarter 1997 were
primarily made to fund capital expenditures and working capital requirements for
accounts receivable, inventories and accounts payable. During 1996, Queensboro
repaid a portion of the borrowings outstanding under its revolving bank credit
facility. Prior to the Merger, Queensboro will borrow approximately $6.1 million
to fund its portion of the S Corporation Distributions.
Queensboro has a $10.0 million bank credit facility, secured by inventories
and accounts receivable, which expires on June 30, 1998. At March 31, 1997,
approximately $4.2 million of this revolving credit facility was available.
Queensboro anticipates that its cash flows from operations will be sufficient to
meet its working capital and debt service requirements for the next several
years. Capital expenditure requirements are expected to be funded from cash
provided by operations and supplemented as necessary with borrowings from banks
or other lenders.
RESULTS OF OPERATIONS -- AFFILIATED
Affiliated is a high-volume flat rolled steel processor, with operations in
Granite City, Illinois and a newly-constructed facility in Butler, Indiana.
These facilities are strategically located near primary steel producers.
Affiliated purchases wide, coiled hot rolled, cold rolled and galvanized flat
rolled steel from primary producers and pickles (hot rolled) and slits coils to
narrower widths. Principal customers include manufacturers of consumer durables,
commercial transportation equipment, appliances and furniture. Service areas
include Missouri, Kansas, Texas, Oklahoma, Tennessee, Kentucky, Indiana,
Mississippi, Alabama, Georgia, Iowa, Illinois and Nebraska. Affiliated has a
broad geographic and customer mix, and has not experienced any significant
seasonal trends.
32
<PAGE>
The following table sets forth the historical results of operations for
Affiliated.
<TABLE>
<CAPTION>
FIFTY-TWO WEEKS ENDED
--------------------------------------------------------------------------
SEPTEMBER 3, SEPTEMBER 2, AUGUST 31,
1994 % 1995 % 1996 %
------------------------ ------------------------ ----------------------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Net sales............................ $ 63.0 100.0% $ 79.0 100.0% $ 81.0 100.0%
Costs and expenses:
Cost of sales.................... 54.6 86.7 68.5 86.7 67.9 83.8
Operating and delivery expenses.. 4.3 6.8 5.1 6.5 5.9 7.3
Selling, general and adminis-
trative expenses............... 2.3 3.7 2.8 3.5 3.4 4.2
Depreciation and amortization.... .3 .4 .3 .4 .3 .4
------------ --------- ------------ --------- ---------- ---------
Operating income..................... 1.5 2.4 2.3 2.9 3.5 4.3
</TABLE>
TWENTY-SIX WEEKS ENDED
------------------------------------------
MARCH 2, MARCH 1,
1996 % 1997 %
-------------------- --------------------
Net sales........................... $ 39.8 100.0% $ 46.8 100.0%
Costs and expenses:
Cost of sales................... 32.4 81.4 40.0 85.5
Operating and delivery expenses. 3.3 8.3 4.4 9.4
Selling, general and adminis-
trative expenses.............. 1.5 3.8 1.5 3.2
Depreciation and amortization... .2 .5 .3 .6
--------- -------- -------- ---------
Operating income.................... 2.4 6.0 .6 1.3
The results of operations for the interim periods are unaudited and are not
necessarily indicative of the results for the full year.
AFFILIATED RESULTS FOR THE TWENTY-SIX WEEKS ENDED MARCH 1, 1997 COMPARED TO THE
TWENTY-SIX WEEKS ENDED MARCH 2, 1996
NET SALES. Net sales increased $7.0 million, or 17.6%, from $39.8 million
for the twenty-six weeks ended March 2, 1996 to $46.8 million for the twenty-six
weeks ended March 1, 1997. This increase was primarily attributable to increased
shipments from the new Butler facility, partially offset by a 2.0% decrease in
average realized prices.
COST OF SALES. Cost of sales increased $7.6 million, or 23.5%, from $32.4
million for the twenty-six weeks ended March 2, 1996 to $40.0 million for the
twenty-six weeks ended March 1, 1997. As a percentage of net sales, cost of
sales increased from 81.4% for the twenty-six weeks ended March 2, 1996 to 85.5%
for the twenty-six weeks ended March 1, 1997. Cost of sales increased primarily
because of the increased shipments as described above and to a lesser extent
because of a 2.9% increase in average purchase prices.
OPERATING AND DELIVERY EXPENSES. Operating and delivery expenses increased
$1.1 million, or 33.3%, from $3.3 million for the twenty-six weeks ended March
2, 1996 to $4.4 million for the twenty-six weeks ended March 1, 1997. As a
percentage of net sales, operating and delivery expenses increased from 8.3% for
the twenty-six weeks ended March 2, 1996 to 9.4% for the twenty-six weeks ended
March 1, 1997. These increases on a dollar and percentage basis were principally
due to the start-up and additional costs attributable to the new Butler
facility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were essentially unchanged from the twenty-six weeks
ended March 2, 1996 to the twenty-six weeks ended March 1, 1997. As a percentage
of net sales, selling, general and administrative expenses decreased from 3.8%
for the twenty-six weeks ended March 2, 1996 to 3.2% for the twenty-six weeks
ended March 1, 1997. This percentage decrease was primarily attributable to the
ability to generate additional net sales by the Butler facility without a
commensurate increase in administrative costs.
33
<PAGE>
OPERATING INCOME. Operating income decreased $1.8 million, or 75.0%, from
$2.4 million for the twenty-six weeks ended March 2, 1996 to $0.6 million for
the twenty-six weeks ended March 1, 1997. As a percentage of net sales,
operating income decreased from 6.0% for the twenty-six weeks ended March 2,
1996 to 1.3% for the twenty-six weeks ended March 1, 1997. The decrease in
operating income was attributable to the decline in average realized prices and
increased cost of raw materials and, to a lesser extent, the start-up expenses
associated with the Butler facility. During the twenty-six weeks ended March 2,
1996, Affiliated enjoyed a period of higher operating income than any prior
twenty-six week period in its history. The increased operating income, both in
amount and as a percentage of sales, was due to the combination of a favorable
short-term raw material purchasing environment coupled with stable sales prices.
AFFILIATED RESULTS FOR THE FIFTY-TWO WEEKS ENDED AUGUST 31, 1996 COMPARED TO THE
FIFTY-TWO WEEKS ENDED SEPTEMBER 2, 1995
NET SALES. Net sales increased $2.0 million, or 2.5%, from $79.0 million
in 1995 to $81.0 million in 1996. Shipments increased 11% from 1995 to 1996,
primarily due to the addition of a significant new customer in 1996.
COST OF SALES. Cost of sales decreased $0.6 million, or 0.9%, from $68.5
million in 1995 to $67.9 million in 1996. Cost of sales decreased primarily due
to an 11% decrease in average cost of raw materials, partially offset by the
increased shipments. As a percentage of net sales, cost of sales decreased from
86.7% in 1995 to 83.8% in 1996.
OPERATING AND DELIVERY EXPENSES. Operating and delivery expenses increased
$0.8 million, or 15.7%, from $5.1 million in 1995 to $5.9 million in 1996. As a
percentage of net sales, operating and delivery expenses increased from 6.5% in
1995 to 7.3% in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.6 million, or 21.4%, from $2.8 million in
1995 to $3.4 million in 1996. As a percentage of net sales, selling, general and
administrative expenses increased from 3.5% for 1995 to 4.2% 1996. This
percentage increase was primarily attributable to higher incentive compensation
paid to management and certain key employees.
OPERATING INCOME. Operating income increased $1.2 million, or 52.2%, from
$2.3 million in 1995 to $3.5 million in 1996. The increase in operating income
was attributable to the factors discussed above. As a percentage of net sales,
operating income increased from 2.9% in 1995 to 4.3% in 1996.
AFFILIATED RESULTS FOR THE FIFTY-TWO WEEKS ENDED SEPTEMBER 2, 1995 COMPARED TO
THE FIFTY-TWO WEEKS ENDED SEPTEMBER 3, 1994
NET SALES. Net sales increased $16.0 million, or 25.4%, from $63.0 million
in 1994 to $79.0 million in 1995. Shipments increased by 20.2% and average
realized sales prices increased by 4.6%. Increased shipments to two customers
accounted for approximately one-half of the increased shipment volumes.
COST OF SALES. Cost of sales increased $13.9 million, or 25.5%, from $54.6
million in 1994 to $68.5 million in 1995. The increase in cost of sales was a
direct result of the increase in product shipments and a 1.3% increase in the
average cost of raw materials compared to 1994 costs. As a percentage of net
sales, cost of sales remained constant at 86.7% for both periods.
OPERATING AND DELIVERY EXPENSES. Operating and delivery expenses increased
$0.8 million, or 18.6%, from $4.3 million in 1994 to $5.1 million in 1995. The
increase in operating and delivery expenses was a direct result of the increase
in product shipments. As a percentage of net sales, operating and delivery
expenses declined from 6.8% in 1994 to 6.5% in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.5 million, or 21.7%, from $2.3 million in
1994 to $2.8 million in 1995. This increase was primarily attributable to higher
incentive compensation paid to management and certain key employees. As a
34
<PAGE>
percentage of net sales, selling, general and administrative expenses decreased
from 3.7% in 1994 to 3.5% in 1995.
OPERATING INCOME. Operating income increased $0.8 million, or 53.3%, from
$1.5 million in 1994 to $2.3 million in 1995. The increase in operating income
was attributable to the factors discussed above. As a percentage of net sales,
operating income increased from 2.4% in 1994 to 2.9% in 1995.
AFFILIATED LIQUIDITY AND CAPITAL RESOURCES
At March 1, 1997, Affiliated's working capital was $15.3 million, compared
to a deficit of $0.3 million at August 31, 1996. The increase in working capital
is principally due to the reclassification of Affiliated's revolving credit
facility from current to long-term. Absent such reclassification, the working
capital deficit would have been $0.3 million. Affiliated operated with minimal
levels of working capital during 1996. Affiliated's principal capital
requirements are to fund its working capital and the purchase and improvement of
facilities, machinery and equipment. Historically, these requirements have been
met by cash flow generated from operations and borrowings under bank credit
facilities. During the year ended August 31, 1996, Affiliated incurred capital
expenditures of $5.6 million, primarily associated with the construction of its
new facility at Butler, Indiana. Construction financing for the facility was
provided by a bank loan bearing interest at one percent over the bank's prime
rate and is secured by the facility.
Net cash provided by (used for) operating activities for the fifty-two
weeks ended September 3, 1994, September 2, 1995 and August 31, 1996 was $(1.1)
million, $2.1 million and $(0.9) million, respectively. Net cash provided by
(used for) operating activities for the twenty-six weeks ended March 2, 1996 and
March 1, 1997 was $(3.4) million and $(7.7) million, respectively. These changes
were principally due to funding Affiliated's working capital requirements for
accounts receivable, inventories and accounts payable.
Net cash used for investing activities was primarily attributable to
capital expenditures and for the fifty-two weeks ended September 3, 1994,
September 2, 1995 and August 31, 1996 was $0.3 million, $0.6 million and $5.5
million, respectively. Net cash used for investing activities was primarily
attributable to capital expenditures and for the twenty-six weeks ended March 2,
1996 and March 1, 1997 was $2.5 million and $0.2 million, respectively. Capital
expenditures during the 1996 periods were primarily due to the construction of
the Butler facility.
Net cash provided by (used for) financing activities for the fifty-two
weeks ended September 3, 1994, September 2, 1995 and August 31, 1996 was $1.4
million, $(1.5) million and $6.4 million, respectively. Net cash provided by
financing activities for the twenty-six weeks ended March 2, and March 1, 1997
was $5.9 million and $7.9 million, respectively. Affiliated redeemed $0.5
million of its redeemable preferred stock during the fifty-two weeks ended
September 3, 1994. Borrowings during the 1996 periods were to fund the capital
expenditure requirements attributable to the construction of the Butler
facility. Affiliated funds its working capital requirements for accounts
receivable, inventories and accounts payable primarily through borrowings
(repayments) under existing revolving bank credit facilities.
Affiliated has a $16.0 million bank credit facility, secured by
inventories, accounts receivable, equipment and the guarantees of certain
stockholders, which expires August 31, 1998. At March 1, 1997, approximately
$0.5 million was available for borrowings. Affiliated anticipates that its cash
flows from operations will be sufficient to meet its working capital and debt
service requirements for the next several years. Capital expenditure
requirements are expected to be funded from cash provided by operations and
supplemented as necessary with borrowings from banks or other lenders.
RESULTS OF OPERATIONS -- SOUTHERN ALLOY
Southern Alloy is a specialty metal processor located in Salisbury, North
Carolina, specializing in ferrous and non-ferrous continuous, centrifugal and
static cast bar stock. Southern Alloy performs a number of metal processing
services, including precision saw cutting, precision and semi-finished
machining, drilling and milling operations. Southern Alloy provides products and
services primarily to the fluid power, machine tools, pump and valve, power
transmission and textile machinery industries. The market for
35
<PAGE>
Southern Alloy's products and services is principally the southeastern United
States. Southern Alloy has a broad customer mix, and has not experienced any
significant seasonal trends.
The following table sets forth the historical results of operations for
Southern Alloy.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ ------------------------------------------
1995 % 1996 % 1996 % 1997 %
-------------------- -------------------- -------------------- --------------------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................... $ 12.0 100.0% $ 10.8 100.0% $ 3.1 100.0% $ 2.7 100.0%
Costs and expenses:
Cost of sales....................... 7.7 64.2 7.1 65.7 2.0 64.5 1.7 63.0
Operating and delivery.............. .9 7.5 .7 6.5 .2 6.5 .2 7.4
Selling, general and administrative
expenses.......................... 2.8 23.3 2.9 26.9 .9 29.0 .7 25.9
Depreciation and amortization....... .1 .8 .1 .9 .1 3.2 -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income (loss)................. .5 4.2 -- -- (.1) (3.2) .1 3.7
</TABLE>
SOUTHERN ALLOY RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1996
NET SALES. Net sales decreased $0.4 million, or 12.9%, from $3.1 million
for the three months ended March 31, 1996 to $2.7 million for the three months
ended March 31, 1997. This decrease resulted from a decline in value-added
processing outsourced to Southern Alloy. Customers who were having capacity
constraints in 1996 requested Southern Alloy to temporarily perform value-added
processing. Customers began returning this processing to their respective
internal operations in late 1996 and continuing into first quarter 1997
resulting in the work done by Southern Alloy returning to normal levels.
COST OF SALES. Cost of sales decreased $0.3 million, or 15.0%, from $2.0
million for the three months ended March 31, 1996 to $1.7 million for the three
months ended March 31, 1997. The decrease in cost of sales was principally due
to the decrease in net sales as described above. As a percentage of net sales,
cost of sales decreased from 64.5% for the three months ended March 31, 1996 to
63.0% for the three months ended March 31, 1997.
OPERATING AND DELIVERY EXPENSES. Operating and delivery expenses were
essentially unchanged for the three months ended March 31, 1996 compared to the
three months ended March 31, 1997. As a percentage of net sales, operating and
delivery expenses increased from 6.5% for the three months ended March 31, 1996
to 7.4% for the three months ended March 31, 1997. This percentage increase was
primarily due to spreading of fixed operating costs over a lower volume of net
sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $0.2 million, or 22.2%, from $0.9 million for
the three months ended March 31, 1996 to $0.7 million for the three months ended
March 31, 1997. The decrease was due to a $0.2 million non-recurring non-cash
charge for stock options granted during the three months ended March 31, 1996.
As a percentage of net sales, selling, general and administrative expenses
decreased from 29.0% for the three months ended March 31, 1996 to 25.9% for the
three months ended March 31, 1997.
OPERATING INCOME (LOSS). Operating income increased $0.2 million, or
200.0%, from a loss of $0.1 million for the three months ended March 31, 1996 to
income of $0.1 million for the three months ended March 31, 1997. The increase
in operating income was attributable to the factors discussed above. As a
percentage of net sales, operating income increased to 3.7% for the three months
ended March 31, 1997.
SOUTHERN ALLOY RESULTS FOR YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED
DECEMBER 31, 1995
NET SALES. Net sales declined $1.2 million, or 10.0%, from $12.0 million
in 1995 to $10.8 million in 1996. This decrease was expected as a significant
portion of 1995 net sales was the result of temporary outsourcing of value-added
processing by certain customers with short-term capacity constraints. In 1996,
these customers returned this processing to their respective internal
operations. Additionally, average
36
<PAGE>
realized sales prices for copper-based metals declined 8% from 1995 to 1996 due
to significant competitive pressure.
COST OF SALES. Cost of sales decreased $0.6 million, or 7.8%, from $7.7
million in 1995 to $7.1 million in 1996. This decrease was primarily due to the
decrease in sales as described above. As a percentage of net sales, cost of
sales increased from 64.2% in 1995 to 65.7% in 1996.
OPERATING AND DELIVERY EXPENSES. Operating and delivery expenses decreased
$0.2 million, or 22.2%, from $0.9 million in 1995 to $0.7 million in 1996. This
decrease was primarily due to a reduction in the workforce to meet expected
sales levels. As a percentage of net sales, operating and delivery expense
decreased from 7.5% in 1995 to 6.5% in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.1 million, or 3.6%, from $2.8 million in
1995 to $2.9 million in 1996. Reductions in incentive compensation of $0.2
million in 1996 were offset by a $0.2 million non-cash charge attributable to
stock options granted during 1996. As a percentage of net sales, selling,
general and administrative expenses increased from 23.3% in 1995 to 26.9% in
1996. This percentage increase was due to the decline in net sales.
OPERATING INCOME. Operating income declined $0.5 million, or 100.0%, from
$0.5 million in 1995 to break-even in 1996. The decrease in operating income was
attributable to the factors discussed above.
SOUTHERN ALLOY LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, Southern Alloy's working capital deficit was $(0.4)
million, compared to working capital of $0.3 million and $0.4 million, at
December 31, 1996 and 1995, respectively. Southern Alloy's principal capital
requirements are to fund its working capital and the purchase and improvement of
facilities, machinery and equipment. Historically, these requirements have been
met by income generated from operations and borrowings under bank credit
facilities.
Net cash provided by operating activities for 1995 and 1996 was $0.8
million and $0.3 million, respectively. These changes were principally due to
increased earnings, partially offset by funding Southern Alloy's working capital
requirements for accounts receivable, inventories and accounts payable. Net cash
provided by operating activities for the three months ended March 31, 1997 was
insignificant.
Net cash used for financing activities for 1995 and 1996 was $0.7 million
and $0.4 million, respectively. Southern Alloy paid dividends in 1995 and 1996
of $0.2 million and $0.1 million, respectively. Additionally, during 1996
Southern Alloy repurchased $0.2 million of its common stock. During 1995
Southern Alloy loaned $0.5 million to affiliates. Net cash provided by financing
activities for the first three months ended March 31, 1997 was insignificant,
with dividends paid of $0.8 million offset by borrowings repaid by affiliates of
$0.8 million.
Southern Alloy has a $2.0 million bank credit facility, secured by
inventories, accounts receivable, equipment and the guarantees of certain
stockholders, which expires on July 31, 1997. At March 31, 1997, approximately
$0.2 million of this revolving credit facility was available for borrowing.
Southern Alloy anticipates that its cash flows from operations will be
sufficient to meet its working capital and debt service requirements for the
next several years. Capital expenditure requirements are expected to be funded
from cash provided by operations and supplemented as necessary with borrowings
from banks or other lenders.
RESULTS OF OPERATIONS -- UNI-STEEL
Uni-Steel is a value-added metals processor/service center with three
locations in Oklahoma. Uni-Steel's products include carbon structural, pressure
vessel, high strength low alloy and alloy grades of steel sold to customers in
Oklahoma, Missouri, Arkansas, Texas, New Mexico, Colorado and Kansas. Uni-Steel
provides value-added metals processing products, and services including
cutting-to-length, leveling, flame cutting, plasma cutting, shearing and sawing.
Uni-Steel services customers in a wide variety of industries, including oil and
gas, truck trailer, mining and construction industries. Uni-Steel has a broad
geographic and customer mix, and has not experienced any significant seasonal
trends.
37
<PAGE>
The following table sets forth the historical results of operations for
Uni-Steel.
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
------------------------------------------ ------------------------------------------
1995 % 1996 % 1996 % 1997 %
-------------------- -------------------- -------------------- --------------------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................... $ 47.7 100.0% $ 54.6 100.0% $ 25.8 100.0% $ 31.0 100.0%
Costs and expenses:
Cost of sales....................... 38.0 79.7 43.4 79.5 20.5 79.5 24.7 79.7
Operating and delivery.............. 4.7 9.9 5.4 9.9 2.5 9.7 3.1 10.0
Selling, general and administrative
expenses.......................... 2.8 5.9 2.9 5.3 1.4 5.4 1.6 5.2
Depreciation and amortization....... .5 .9 .5 .9 .3 1.1 .3 .9
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income........................ 1.7 3.6 2.4 4.4 1.1 4.3 1.3 4.2
</TABLE>
The results of operations for 1995 and the interim periods are unaudited.
The results of operations for the interim periods are not necessarily indicative
of the results for the full year.
UNI-STEEL RESULTS FOR SIX MONTHS ENDED MARCH 31, 1997 COMPARED TO THE SIX MONTHS
ENDED MARCH 31, 1996
NET SALES. Net sales increased $5.2 million, or 20.2%, from $25.8 million
for the six months ended March 31, 1996 to $31.0 million for the six months
ended March 31, 1997. This increase was primarily the result of expanding the
plate steel product line in response to customer demand.
COST OF SALES. Cost of sales increased $4.2 million, or 20.5%, from $20.5
million for the six months ended March 31, 1996 to $24.7 million for the six
months ended March 31, 1997. This increase was primarily the result of the
increased sales level. As a percentage of net sales, cost of sales increased
from 79.5% for the six months ended March 31, 1996 to 79.7% for the six months
ended March 31, 1997.
OPERATING AND DELIVERY EXPENSES. Operating and delivery expenses increased
$0.6 million, or 24.0%, from $2.5 million for the six months ended March 31,
1996 to $3.1 million for the six months ended March 31, 1997. This increase was
primarily attributable to the increased costs for additional warehouse space and
personnel to accommodate the increased sales level. As a percentage of net
sales, operating and delivery expenses increased from 9.7% for the six months
ended March 31, 1996 to 10.0% for the six months ended March 31, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.2 million, or 14.3%, from $1.4 million for
the six months ended March 31, 1996 to $1.6 million for the six months ended
March 31, 1997. This increase was primarily attributable to increases in sales
and marketing expenses necessary to support the increased level of sales. As a
percentage of net sales, selling, general and administrative expenses decreased
from 5.4% for the six months ended March 31, 1996 to 5.2% for the six months
ended March 31, 1997.
OPERATING INCOME. Operating income increased $0.2 million, or 18.2%, from
$1.1 million for the six months ended March 31, 1996 to $1.3 million for the six
months ended March 31, 1997. This increase in operating income was attributable
to the factors discussed above. As a percentage of net sales, operating income
decreased from 4.3% for the six months ended March 31, 1996 to 4.2% for the six
months ended March 31, 1997.
UNI-STEEL RESULTS FOR YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO THE YEAR ENDED
SEPTEMBER 30,
1995
NET SALES. Net sales increased $6.9 million, or 14.5%, from $47.7 million
in 1995 to $54.6 million in 1996. This increase was primarily the result of
expanding the plate steel product line in response to customer demand.
COST OF SALES. Cost of sales increased $5.4 million, or 14.2%, from $38.0
million in 1995 to $43.4 million in 1996. This increase was due to the increase
in net sales. As a percentage of net sales, cost of sales decreased from 79.7%
in 1995 to 79.5% in 1996.
OPERATING AND DELIVERY EXPENSES. Operating and delivery expenses increased
$0.7 million, or 14.9%, from $4.7 million in 1995 to $5.4 million in 1996. This
increase was primarily attributable to the increase in
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<PAGE>
net sales. As a percentage of net sales, operating and delivery expenses
remained constant at 9.9% for both periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.1 million, or 3.6%, from $2.8 million in
1995 to $2.9 million in 1996. As a percentage of net sales, selling, general and
administrative expenses decreased from 5.9% in 1995 to 5.3% in 1996. This
percentage decrease was primarily due to the increase in net sales without a
commensurate increase in administrative costs.
OPERATING INCOME. Operating income increased $0.7 million, or 41.2%, from
$1.7 million in 1995 to $2.4 million in 1996. The increase in operating income
was attributable to the factors discussed above. As a percentage of net sales,
operating income increased from 3.6% in 1995 to 4.4% in 1996.
UNI-STEEL LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, Uni-Steel's working capital was $7.3 million, compared
to $6.1 million at September 30, 1996. Uni-Steel's principal capital
requirements are to fund its working capital and the purchase and improvement of
facilities, machinery and equipment. Historically, these requirements have been
met by income generated from operations and borrowings under bank credit
facilities.
Net cash provided by (used in) operating activities for the year ended
September 30, 1996 and for the six months ended March 31, 1996 and 1997 was $0.2
million, $0.3 million and $(2.0) million, respectively. These changes were
principally due to increased earnings, partially offset by funding Uni-Steel's
working capital requirements for accounts receivable, inventories and accounts
payable.
Net cash used for investing activities, primarily for capital expenditures,
for the year ended September 30, 1996 and for the six months ended March 31,
1996 and 1997 was $0.3 million, $0.1 million and $0.2 million, respectively.
Net cash provided by (used for) financing activities for the year ended
September 30, 1996 and for the six months ended March 31, 1996 and 1997 was $0.1
million, $(0.4) million and $2.0 million, respectively. During the year ended
September 30, 1996, Uni-Steel repurchased $0.2 million of its capital stock,
borrowed an additional $0.8 million under its revolving credit facility and
repaid $0.4 million of long-term debt. During the six months ended March 31,
1996, Uni-Steel repurchased $0.2 million of its capital stock and repaid $0.2
million of long-term debt. During the six months ended March 31, 1997, Uni-Steel
borrowed an additional $1.1 million under its revolving credit facility and $1.0
million in long-term debt.
Uni-Steel has a $10.0 million revolving bank credit facility, secured by
inventories and accounts receivable, which expires April 30, 1999. At March 31,
1997, $1.8 million was available for borrowings. Uni-Steel anticipates that its
cash flows from operations will be sufficient to meet its working capital and
debt service requirements for the next several years. Capital expenditure
requirements are expected to be funded from cash provided by operations and
supplemented as necessary with borrowings from banks or other lenders.
39
<PAGE>
BUSINESS
Metals USA was founded to become a leading national value-added metals
processor/service center, to manufacture higher-value components from processed
metals and to pursue aggressively the consolidation of the highly-fragmented
metals processing industry. The Company believes that the metals
processor/service center industry in the United States is consolidating and
currently has as many as 3,500 participants collectively generating over $75
billion in annual revenues. The Company intends to play a major role in the
consolidation of this industry by combining a broad-based group of metals
processing and manufacturing companies. To be a leader in the consolidation of
the metals processing industry, the Company will be required to acquire and
deploy the capital-intensive equipment and technology necessary to meet rapidly
changing customer requirements. Upon consummation of this Offering, Metals USA
will acquire the eight Founding Companies, which have been in business an
average of 40 years and had 1996 pro forma combined net sales of $387.0 million.
The Company intends to capitalize on the trend of both primary metals
producers and end-users of metal products to reduce in-house processing and
outsource processing and inventory management requirements. The Company's metals
processing business purchases metals from primary producers, who focus on large
volume sales of unprocessed metals, and in most cases performs customized
processing services 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, enhance quality, decrease capital required for raw materials
inventory and processing equipment and save time, labor and other expenses. The
Company believes that these "partnering" relationships with suppliers and
customers enable it to reduce its customers' overall cost of their manufactured
metal products. In addition to its metals processing capabilities, the Company
manufactures higher-value components from processed metals, such as finished
building products, and produces a number of finished components machined from
specialty metals, such as bushings, pump parts and hydraulic cylinder parts. The
Company intends to continue its focus on the metal building products industry,
the single fastest growing segment of the metals processing industry.
The eight Founding Companies sell to over 10,000 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
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.
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 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
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<PAGE>
value-added services and products both to primary metals producers and
end-users. This evolution has resulted from several trends in the primary metals
industry as well as trends 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, many of which are now independently
owned, including several of the Founding Companies.
At the same time, 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.
Value-added metals processors/service centers have also benefitted 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 and 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.
For example, the percentage of total flat-rolled steel shipments sold by service
centers in the United States increased from approximately one-quarter in 1975 to
approximately one-half in 1995. 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. The Company believes that this industry is consolidating and that
most companies are small, owner-operated businesses with limited access to
capital for modernization and expansion. These owners traditionally have not had
a viable exit strategy, leaving them with few attractive liquidity options.
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 utilize 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 their operations are limited as to product
line, processing equipment, inventory and service area, and they have limited
access to the capital resources necessary to increase their capabilities. As a
result, smaller companies without access to capital for expansion and
modernization are finding it increasingly difficult to compete as present
industry trends continue, and the Company believes these businesses are
potential acquisition candidates.
To date, the primary acquirors in the metals processor/service center
industry have been a few large metals service center companies that have
acquired businesses on a service center-by-service center basis. Following an
acquisition, the acquiror typically installs its operating systems, procedures
and management
41
<PAGE>
and eliminates the acquired service center's separate identity, thereby
effectively converting the business into a branch office. The Company believes
that the sale of well-established businesses to these acquirors is not an
attractive alternative for many owners, particularly those who do not wish to
retire from the business. The Company, therefore, believes significant
acquisition opportunities exist for a well-capitalized, national value-added
metals processor/service center that employs a decentralized operating strategy
and preserves the identity of the acquired businesses. The Company believes that
this operating strategy and the highly fragmented nature of the metals industry
should allow it to be a leader in the industry's consolidation.
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 and to pursue aggressively the consolidation of the highly fragmented
metals processing industry. Management plans to achieve this goal by:
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 Founding Companies by
acquiring well-established value-added metals processors/service centers
that, like the Founding 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 utilization at existing facilities, thereby improving operating
efficiencies and more effectively using its capital 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 intends to manage the
Founding Companies and subsequently acquired companies on a decentralized basis,
with local management retaining responsibility for day-to-day operations,
profitability and growth of the business. The Company believes that, while
maintaining strong operating and financial controls, a decentralized structure
will retain the entrepreneurial culture present in each of the Founding
Companies and will allow the Company to capitalize on the considerable local and
regional market knowledge, goodwill, name recognition and customer relationships
possessed by each Founding Company and subsequently acquired businesses.
ACCELERATING INTERNAL SALES GROWTH. A key component of the Company's
strategy is to accelerate internal sales growth at each Founding Company and at
each subsequently acquired business. 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 of individual Founding Companies.
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 intends to develop and maintain long-term
"partnering" relationships with customers in response to their demand for
shorter production cycles, outsourcing, just-in-time delivery and other
services that lower customers' total production costs.
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<PAGE>
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. Through its
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
utilize professional marketing services and to adopt "best practices"
among the Founding Companies to identify, obtain and maintain new
customers. In addition, the Company intends to increase its visibility
through trade shows, associations, publications and telemarketing.
IMPROVING OPERATING MARGINS. The Company believes that the combination of
the Founding Companies will provide significant opportunities to realize
purchasing economies and increase the Company's profitability. The key
components of this strategy are:
INCREASE OPERATING EFFICIENCIES. The Company believes that the
combination of the Founding Companies 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 measurable cost
savings in such areas as vehicle leasing and maintenance, information
systems and 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 financing, marketing,
insurance, employee benefits, accounting and risk management.
ACQUISITION PROGRAM
The Company believes it will 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 owners, management and key
personnel of acquired businesses, as well as meaningful equity positions for
these individuals which will enable them to participate in the Company's growth;
(iii) the Company's increased visibility and access to financial resources as a
public company; and (iv) the potential for increased profitability of the
acquired company due to purchasing economies, centralization of administrative
functions, enhanced systems capabilities and access to increased marketing
resources.
The Company believes management of the Founding Companies will be
instrumental in identifying and completing future acquisitions. Some of the
Founding Companies have recently completed acquisitions, which have given them
valuable acquisition experience. Moreover, several of the principals of the
Founding Companies currently have leadership roles in industry trade
associations, which has enabled these individuals to become personally
acquainted with the owners of numerous acquisition targets across the country.
The Company expects that the visibility of these individuals and the Company
within the industry will increase the awareness of, and interest of acquisition
candidates in, the Company and its acquisition program. Within the past several
months, the Company has contacted the owners of a number of acquisition
candidates, several of whom have expressed interest in having their businesses
acquired by the Company. The Company currently has no agreements to effect any
acquisitions other than the Founding Companies.
As consideration for future acquisitions, the Company intends to use
various combinations of its Common Stock, cash and notes. The consideration for
each future acquisition will vary on a case-by-case
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<PAGE>
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. Within 90 days
following the completion of this Offering, the Company intends to register
8,000,000 additional shares of Common Stock under the Securities Act for its use
in connection with future acquisitions. The Company believes that it can
structure acquisitions as tax-free reorganizations by using its Common Stock as
consideration, which will be attractive to those targeted business owners with a
low tax basis in the stock of their businesses.
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 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
40,000 and 50,000 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 METALLURGY -- the analysis and testing of the physical and chemical
composition of metals.
o 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 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 PICKLING -- a chemical treatment to improve surface quality by
removing the surface oxidation and scale which develops on the metal
shortly after it is hot-rolled.
o TEE-SPLITTING -- the splitting of metal beams.
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.
Additional capabilities of the Company include precision roll forming (the
process by which metals are bent and stretched into various shapes), machining
and applications engineering. 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
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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 that 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 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 200-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 through
its own trucks for short-distance and/or multi-stop deliveries.
The following table sets forth information on processing and other services
offered by each Founding Company:
<TABLE>
<CAPTION>
TEXAS SOUTHERN
ALUM. INTERSTATE QUEENSBORO AFFILIATED ALLOY UNI-STEEL WILLIAMS
----- ---------- ---------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Shearing and cutting to length.......... X X X X X X X
Metallurgy and traceability............. X X X X X X X
Blanking................................ X X X X
Shearing/sawing......................... X X X X X
Flame/plasma cutting.................... X X X X
Leveling................................ X X
Slitting................................ X X
Pickling................................ X
Tee-splitting........................... X X X
Edge trimming........................... X X
Cambering............................... X X X
Bar coding.............................. X
EDI..................................... X X X
Just-in-time............................ X X X X X X X
</TABLE>
SERVICE
SYSTEMS
-------
Shearing and cutting to length.......... X
Metallurgy and traceability............. X
Blanking................................ X
Shearing/sawing.........................
Flame/plasma cutting....................
Leveling................................ X
Slitting................................ X
Pickling................................
Tee-splitting...........................
Edge trimming........................... X
Cambering...............................
Bar coding.............................. X
EDI..................................... X
Just-in-time............................ X
The following two case studies are examples of the types of value-added
processes and services provided by two of the Founding Companies for their
customers:
Uni-Steel's largest customer is one of the world's largest elevator
and escalator manufacturers. Uni-Steel sells a variety of steel products to
this customer in customized lengths and performs the majority of its
preproduction processing and just-in-time inventory management. Uni-Steel
saws, shears, flame cuts, forms, punches and drills holes in the metal
parts and delivers the product within 24 hours of ordering.
Affiliated achieved substantial total production cost savings for a
major manufacturer of electrical components. Until the fall of 1995, the
customer bought all its steel directly from an integrated mill which
required this customer to carry substantial amounts of inventory as well as
its own processing equipment. Affiliated explained the benefits of its
inventory management, processing, just-in-time delivery and other services.
As an Affiliated customer, its steel inventory dropped from approximately
two months' supply to an approximately three days' supply, and the customer
realized a significant cash flow savings.
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The following table sets forth information with respect to the Founding
Companies' 1996 and three months ended March 31, 1997 combined net sales by
metals type:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
--------------------- ---------------------
NET SALES % NET SALES %
--------- --------- --------- ---------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Steel:
Structural......................... $ 73.7 19.6% $ 18.3 17.4%
Plate.............................. 54.1 14.4 15.8 15.1
Bar................................ 30.4 8.1 6.1 5.8
Hot-rolled sheet/coil.............. 85.7 22.8 32.5 31.0
Cold-rolled sheet/coil............. 30.1 8.0 4.8 4.6
Galvanized sheet/coil.............. 7.9 2.1 1.1 1.0
Tubing............................. 16.9 4.5 5.3 5.0
Fabricated products................ 15.0 4.0 6.5 6.2
Other.............................. 6.4 1.7 1.6 1.6
--------- --------- --------- ---------
Total......................... 320.2 85.2 92.0 87.7
--------- --------- --------- ---------
Stainless steel, alloys and specialty
metals................................ 15.4 4.1 3.3 3.1
Metal building products................. 40.2 10.7 9.7 9.2
--------- --------- --------- ---------
Total......................... $ 375.8 100.0% $ 105.0 100.0%
========= ========= ========= =========
</TABLE>
The Founding Companies have 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. Three of the Founding Companies'
facilities are currently seeking ISO (International Standards Organization) 9002
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 "partnering" relationships with their key
suppliers.
SOURCES OF SUPPLY
In recent years, steel and aluminum production in the United States has
varied 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 only once or twice per
year, often sufficiently in advance to allow the Company to order additional
products prior to the effective date of a price increase or to defer purchases
until effectiveness of a price decrease. 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 principal domestic steel suppliers are 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 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, following the Mergers, it will 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.
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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 typical target customer carries a significant inventory of
unprocessed metal and performs most of its own processing. The Company uses a
variety of methods to identify these target customers, including the utilization
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 target customers.
Once a target customer is identified, the Company's "outside" salespeople
assume responsibility for visiting the appropriate person at the target,
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
target customers. The Company's "outside" sales force is primarily responsible
for identifying target 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. For example, Southern Alloy has shown
customers that a component of a machine (such as hydraulic cylinder parts) would
be less expensive and more effective if manufactured from Dura-Bar , a
continuous cast iron product which is a registered trademark of Wells
Manufacturing Company, Dura-Bar Division, because Dura-Bar has greater
machinability and improved application performance characteristics.
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 10,000 customers, with
no single customer accounting for more than 4% of the Company's pro forma
combined revenues in 1996. The Company believes that its long-term relationships
with many of its customers contribute significantly to its success.
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The following table sets forth information with respect to the Founding
Companies' 1996 and three months ended March 31, 1997 combined net sales by
end-user industry base:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
--------------------- ---------------------
NET SALES % NET SALES %
--------- --------- --------- ---------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Machinists and fabricators.............. $ 83.8 22.3% $ 22.6 21.5%
Wholesale distributors.................. 57.5 15.3 9.4 8.9
Machinery and equipment manufacturers... 53.0 14.1 17.4 16.6
Industrial/commercial contractors....... 46.9 12.5 13.1 12.5
Consumer durables and electrical
equipment manufacturers............... 38.3 10.2 15.3 14.6
Transportation equipment
manufacturers......................... 31.9 8.5 8.1 7.7
Furniture manufacturers................. 27.4 7.3 6.2 5.9
Power and process equipment
manufacturers......................... 12.8 3.4 7.0 6.7
Other................................... 24.2 6.4 5.9 5.6
--------- --------- --------- ---------
Total.............................. $ 375.8 100.0% $ 105.0 100.0%
========= ========= ========= =========
</TABLE>
COMPETITION
The Company is engaged in a highly-fragmented and competitive industry.
Competition is based primarily 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 public
companies. The Company also competes to a lesser extent with primary metals
producers, who typically sell directly only to very large customers requiring
regular shipments of large volumes of metals. The Company may also face
competition for acquisition candidates from these public 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 and by offering a
broad range of products and services as well as through its entrepreneurial
culture and decentralized operating structure.
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 its pickling operations at two
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 histories of heavy industrial use, three of which are on or near
sites listed on the CERCLA National Priority List. The Company believes that as
many as three of the properties leased by the Founding Companies have been
contaminated by pollutants which have migrated from neighboring facilities or
have been deposited by prior occupants.
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<PAGE>
Prior to entering into the agreements relating to the Mergers, the Company
evaluated the properties owned or leased by the Founding Companies and engaged
an independent environmental consulting firm to conduct or review assessments of
environmental conditions at these properties. 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
stockholders of the Founding Companies (ranging from approximately $50,000 to
$7.6 million per Founding Company) whose facilities are located at the
contaminated sites. The Company believes that these indemnities will be adequate
to protect it from a material adverse effect on its financial condition should
the Company be found to be responsible for a share of the 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.
MANAGEMENT INFORMATION SYSTEMS
Each of the Founding Companies operates a management information system
that is used to purchase, monitor and allocate inventory throughout its
production facilities. The Company believes that these systems enable it to
manage inventory costs effectively and to achieve appropriate inventory turnover
rates. Many of these systems also include computerized order entry, sales
analysis, inventory status, work-in-process status, bar-code tracking, invoicing
and payment. These systems are designed to improve productivity for both the
Company and its customers. Four of the Founding Companies use EDI, through which
they offer their customers a paperless process for order entry, shipment
tracking, customer billing, remittance processing and other routine matters. In
addition, several of the Founding Companies have computer-aided drafting systems
that control equipment used to perform some metals processing functions.
EMPLOYEES
As of December 31, 1996, the Founding Companies employed a total of 1,071
persons. Of these employees, 176 were in administration, 238 were in sales and
distribution and 657 were in processing and warehousing. Approximately 175
employees at three sites were members of one of four unions: the United
Steelworkers of America; the International Association of Bridge, Structural,
and Ornamental Ironworkers of America; the International Brotherhood of
Teamsters; or 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 28 employees and lasted 10 days. The Company currently is a party to
four collective bargaining agreements which expire at various times. Collective
bargaining agreements expiring in 1997, 1998 and 1999 cover 38, 126 and nine
employees, respectively. Historically, the Founding Companies have 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. Following the Mergers, the Company intends to adopt "best
practices" for its employee benefits programs and human relations functions.
FACILITIES AND VEHICLES
The Company operates 13 metal processing facilities that are used to
receive, warehouse, process and ship metals, only one of which is owned. These
facilities utilize various metals processing and materials handling machinery.
Texas Aluminum/Cornerstone operates four facilities where it processes metals
into building products and operates 36 sales and distribution centers throughout
the western, southwestern and southeastern United States. Southern Alloy has one
facility located in Salisbury, North Carolina which has the capability of
machining various specialty metals, such as continuous cast iron and bronze
alloys, into components for manufacturing machinery and equipment. Many of the
Company's facilities are capable of being utilized at higher capacities, if
necessary. The Company is planning to expand three of its existing facilities
over the next 12 months, with one expansion already under construction. The
Company believes that its facilities after the planned expansions will be
adequate for its expected needs over the next several years. See "Certain
Transactions."
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The Company operates a fleet of owned or leased trucks and trailers as well
as fork lifts 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. Upon completion of this Offering, the
Company intends to obtain and maintain liability insurance for bodily injury and
third-party property damage and workers' compensation coverage which it
considers sufficient to insure against these risks, subject to self-insured
amounts.
The Company is, from time to time, 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 the Company believes
will have a material adverse effect on its financial condition or results of
operations.
SAFETY
The Company is committed to continuing the Founding Companies' focus and
emphasis on safety in the workplace. The Founding Companies currently have a
variety of safety programs in place, which may 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 safety work procedures. The Company plans
to establish "best practices" 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. In addition, the
Company intends to continue to promote the Founding Companies' emphasis on an
accident-free workplace.
50
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the Company's
directors and executive officers upon completion of this Offering.
NAME AGE POSITION
- --------------------------------- --- -------------------------------------
Arthur L. French................. 57 Chairman of the Board, Chief
Executive Officer and President
Arnold W. Bradburd............... 72 Vice-Chairman of the Board, Chairman
and Chief Executive Officer of
Interstate*
J. Michael Kirksey............... 41 Senior Vice President, Chief
Financial Officer and Director
Stephen R. Baur.................. 31 Senior Vice President and Chief
Development Officer+
John A. Hageman.................. 43 Senior Vice President, General
Counsel and Secretary
Terry L. Freeman................. 46 Vice President and Corporate
Controller
Keith E. St. Clair............... 40 Vice President and Treasurer
Mark Alper....................... 52 Vice President -- Development+,
President of Queensboro, Director*
Michael E. Christopher........... 36 Senior Vice President+, President of
Texas Aluminum/Cornerstone, Director*
Craig R. Doveala................. 45 President of Service Systems,
Director*
William B. Edge.................. 38 President of Southern Alloy,
Director*
Patrick A. Notestine............. 49 President of Affiliated, Director*
Lester G. Peterson............... 55 President of Williams, Director*
Richard A. Singer................ 51 Senior Vice President+, Chief
Executive Officer of
Uni-Steel, Director*
Steven S. Harter................. 35 Director
Tommy E. Knight.................. 58 Director*
Richard H. Kristinik............. 57 Director*
T. William Porter................ 55 Director*
- ------------
* Election as a director of the Company effective as of the consummation of this
Offering.
+ Effective as of the consummation of this Offering.
Arthur L. French has served as Chairman of the Board, Chief Executive
Officer and President of the Company since December 1996 and has been involved
in the organization of the Company, the acquisition of the Founding Companies
and this Offering. From 1989 through 1996, Mr. French served as Executive Vice
President and a director of Keystone International, Inc. ("Keystone"), a
publicly-traded manufacturer of industrial valves and controls, with
responsibility for domestic and international operations. From 1966 to 1989, Mr.
French held various positions with Fisher Controls International, Inc., a
control valve and instrumentation manufacturer, and served as its President and
Chief Operating Officer and a director prior to joining Keystone.
Arnold W. Bradburd will become Vice-Chairman of the Board of the Company
upon consummation of this Offering. He has been employed by Interstate since
1974, serving as Chairman of the Board and Chief Executive Officer since 1979,
and will continue in that capacity after consummation of this Offering. Mr.
Bradburd has served as National Secretary of the Association of Steel
Distributors and as Chairman of SSCI.
J. Michael Kirksey has served as Senior Vice President and Chief Financial
Officer and a director of the Company since March 1997. From 1995 through
February 1997, Mr. Kirksey was Director -- Business Development and Acquisitions
of Keystone. From 1993 to 1995, Mr. Kirksey was Vice President of Finance of
Keystone for European operations based in Brussels, Belgium, and from 1989 to
1993, he was
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<PAGE>
Vice President and Controller of Keystone. From 1976 to 1989, Mr. Kirksey was a
certified public accountant with Arthur Andersen LLP.
Stephen R. Baur will become Senior Vice President and Chief Development
Officer of the Company upon consummation of this Offering. Since July 1996, Mr.
Baur has been a Senior Vice President of Notre. From November 1995 to June 1996,
he was a consultant to a venture capital firm. From July 1988 through September
1995, he was a certified public accountant with Arthur Andersen LLP.
John A. Hageman has served as Vice President, General Counsel and Secretary
of the Company since April 1997. From 1987 through March 1997, Mr. Hageman was
Senior Vice President of Legal Affairs, General Counsel and Secretary of
Physician Corporation of America, a publicly-traded health maintenance
organization. From 1981 to 1987, Mr. Hageman was a partner with Klenda,
Mitchell, Austerman & Zuercher, a law firm in Wichita, Kansas.
Terry L. Freeman has served as Vice President and Corporate Controller of
the Company since April 1997. From February 1997 through March 1997, Mr. Freeman
served as Controller of Maxxam Inc. ("Maxxam"), a publicly-traded aluminum,
forest products operations and real estate investment and development company.
From May 1994 to February 1997, he was Assistant Controller of Maxxam, and from
June 1990 to May 1994, he was Director -- Financial Reporting of Maxxam. From
December 1984 to June 1990, he was a certified public accountant with Deloitte &
Touche LLP. From August 1980 to December 1984, Mr. Freeman was a certified
public accountant with Arthur Andersen LLP.
Keith E. St. Clair has served as Vice President and Treasurer of the
Company since April 1997. From 1987 through March 1997, he served as Corporate
Controller of Gundle/SLT Environmental, Inc.
("Gundle/SLT"), a publicly-traded manufacturer and installer of synthetic
lining systems. From 1980 through 1986, Mr. St. Clair was a certified public
accountant with Arthur Andersen LLP.
Mark Alper will become Vice President -- Development and a director of the
Company upon consummation of this Offering. He has been an employee of
Queensboro since 1971 and President since 1995. Mr. Alper will continue in that
capacity after consummation of this Offering.
Michael E. Christopher will become a Senior Vice President and a director
of the Company upon consummation of this Offering. He has been Executive Vice
President of Texas Aluminum since 1987 and President of Cornerstone since 1995,
and will become President of Texas Aluminum/Cornerstone upon consummation of
this Offering. Mr. Christopher currently serves as Vice President of the Board
of Directors of the National Patio Enclosure Association.
Craig R. Doveala will become a director of the Company upon consummation of
this Offering. He has been President of Service Systems since 1990, and will
continue in that capacity after consummation of this Offering.
William B. Edge will become a director of the Company upon consummation of
this Offering. He has been President of Southern Alloy since 1990, and will
continue in that capacity after consummation of this Offering.
Patrick A. Notestine will become a director of the Company upon
consummation of this Offering. He has been President of Affiliated since 1988,
and will continue in that capacity after consummation of this Offering.
Lester G. Peterson will become a director of the Company upon consummation
of this Offering. He has been President of Williams since 1981, and will
continue in that capacity after consummation of this Offering. Mr. Peterson is a
member of the Wisconsin Board of the SSCI.
Richard A. Singer will become Senior Vice President and a director of the
Company upon consummation of this Offering. He has been President and Chief
Executive Officer of Uni-Steel since 1972, and will continue as Chief Executive
Officer after consummation of this Offering.
Steven S. Harter has been a director of the Company since July 1996. Mr.
Harter is the President of Notre. Prior to becoming the President of Notre, Mr.
Harter was Senior Vice President of Notre Capital Ventures, Ltd. From April 1989
to June 1993, Mr. Harter was Director of Mergers and Acquisitions for
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<PAGE>
Allwaste, Inc., a publicly-traded environmental services company. From May 1984
to April 1989, Mr. Harter was a certified public accountant with Arthur Andersen
LLP. Mr. Harter also serves as a director of Coach USA, Inc. and Comfort Systems
USA, Inc.
Tommy E. Knight will become a director of the Company upon consummation of
this Offering. Mr. Knight was President and Chief Executive Officer of Brown and
Root, Inc., a subsidiary of Halliburton Company, and one of the largest
international construction firms in the world, from June 1992 until his
retirement in December 1996. Prior to that time, he served in a variety of other
capacities with Brown and Root, Inc. since joining Brown and Root, Inc. in 1964.
Richard H. Kristinik will become a director upon consummation of this
Offering. Mr. Kristinik is the Chairman of the Board of Directors and Chief
Executive Officer of Coach USA, Inc. and has served in that capacity since March
1996. Prior to that time, Mr. Kristinik was a partner with Arthur Andersen LLP
from 1973 to March 1996, serving in its Houston office for all those years,
except for the period from 1979 to 1984, when he served as Managing Partner of
the Tulsa office, and the period from 1985 to 1989, when he served as Managing
Partner of the Denver office.
T. William Porter will become a director of the Company upon consummation
of this Offering. Mr. Porter has been a partner with Porter & Hedges, L.L.P., a
law firm, since 1981 and currently serves as a director of Gundle/SLT and ITEQ,
Inc., a manufacturer of specialized process equipment.
Effective upon consummation of this Offering, the Board of Directors will
be divided into three classes of five, five and four directors, respectively,
with directors serving staggered three-year terms, expiring at the annual
meeting of stockholders in 1998, 1999 and 2000, respectively. At each annual
meeting of stockholders, one class of directors will be elected for a full term
of three years to succeed that class of directors whose terms are expiring. The
Company's Certificate of Incorporation permits the holders of the Restricted
Common Stock to elect one director. Mr. Harter is the director elected by the
holders of the Restricted Common Stock. All officers serve at the discretion of
the Board of Directors.
The Board of Directors has established an Audit Committee, a Compensation
Committee, a Nominating Committee and an Executive Committee. Effective upon
consummation of this Offering, the members of the Audit Committee will be
Messrs. Harter, Kristinik and Knight and the members of the Compensation
Committee will be Messrs. Knight, Harter and Porter. The members of the
Executive Committee and the Nominating Committee will be selected following the
consummation of this Offering. The Executive Committee will include at least one
outside director and the Nominating Committee will include three members, two of
whom will be directors from the Founding Companies.
DIRECTORS COMPENSATION
Directors who are also employees of the Company or one of its subsidiaries
will not receive additional compensation for serving as directors. Each director
who is not an employee of the Company or one of its subsidiaries will receive a
fee of $2,000 for attendance at each Board of Directors' meeting and $1,000 for
each committee meeting (unless held on the same day as a Board of Directors'
meeting). In addition, under the Company's 1997 Non-Employee Directors' Stock
Plan, each non-employee director will automatically be granted an option to
acquire 10,000 shares of Common Stock upon such person's initial election as a
director, and an annual option to acquire 5,000 shares at each annual meeting of
the Company's stockholders thereafter at which 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. Each non-employee director also
may elect to receive shares of Common Stock or credits representing "deferred
shares" in lieu of cash directors' fees. See " -- 1997 Non-Employee Directors'
Stock Plan." Directors are also reimbursed for out-of-pocket expenses incurred
in attending meetings of the Board of Directors or committees thereof.
EXECUTIVE COMPENSATION; EMPLOYMENT AGREEMENTS; COVENANTS-NOT-TO-COMPETE
The Company was incorporated in July 1996, has conducted no operations,
other than those associated with this Offering, and generated no net sales to
date and will not pay any of its executive officers any compensation prior to
the consummation of this Offering. The Company anticipates that during 1997 its
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<PAGE>
most highly compensated executive officers (other than those employed by a
Founding Company) will be Messrs. French, Kirksey, Baur and Hageman.
Each of Messrs. French and Kirksey will enter into an employment agreement
with the Company upon consummation of this Offering providing for an annual base
salary of $150,000. Messrs. Hageman and Baur will enter into employment
agreements with the Company upon consummation of this Offering providing for an
annual base salary of $130,000 and $100,000, respectively. Each employment
agreement will be for a term of three years, and unless terminated or not
renewed by the Company or not renewed by the employee, the term will continue
thereafter on a year-to-year basis on the same terms and conditions existing at
the time of renewal. Each of these agreements will provide that, in the event of
a termination of employment by the Company without cause, the employee will be
entitled to receive from the Company an amount equal to one year's salary,
payable in one lump sum on the effective date of termination. In the event of a
change in control of the Company (as defined in the agreement) during the
initial three-year term, if the employee is not given at least five days' notice
of such change in control, the employee may elect to terminate his employment
and receive in one lump sum three times the amount he would receive pursuant to
a termination without cause during such initial term. The non-competition
provisions of the employment agreement do not apply to a termination without
such notice. In the event the employee is given at least five days' notice of
such change in control, the employee may elect to terminate his employment and
receive in one lump sum two times the amount he would receive pursuant to a
termination without cause during such initial term. In such event, the
non-competition provisions of the employment agreement would apply for two years
from the effective date of termination. Each employment agreement contains a
covenant not to compete with the Company for a period of two years immediately
following termination of employment or, in the case of a termination by the
Company without cause in the absence of a change in control, for a period of one
year following termination of employment.
Each of Messrs. Bradburd, Christopher, Alper, Doveala, Edge, Notestine,
Peterson and Singer will enter into an employment agreement with his Founding
Company providing for an annual base salary of $150,000. Each employment
agreement will be for a term of five years, and unless terminated or not renewed
by the Founding Company or not renewed by the employee, the term will continue
thereafter on a year-to-year basis on the same terms and conditions existing at
the time of renewal. Each of these agreements will provide that, in the event of
a termination of employment by the Founding Company without cause during the
first three years of the employment term (the "Initial Term"), the employee
will be entitled to receive from the Founding Company an amount equal to his
then current salary for the remainder of the Initial Term or for one year,
whichever is greater. In the event of a termination of employment with cause
during the final two years of the initial five-year term of the employment
agreement, the employee will be entitled to receive an amount equal to his then
current salary for one year. In either case, payment is due in one lump sum on
the effective date of termination. In the event of a change in control of the
Company (as defined in the agreement) during the Initial Term, if the employee
is not given at least five days' notice of such change in control, the employee
may elect to terminate his employment and receive in one lump sum three times
the amount he would receive pursuant to a termination without cause during the
Initial Term. The non-competition provisions of the employment agreement do not
apply to a termination without such notice. In the event the employee is given
at least five days' notice of such change in control, the employee may elect to
terminate his employment agreement and receive in one lump sum two times the
amount he would receive pursuant to a termination without cause during the
Initial Term. In such event, the non-competition provisions of the employment
agreement would apply for two years from the effective date of termination. Each
employment agreement contains a covenant not to compete with the Company for a
period of two years immediately following termination of employment or, in the
case of a termination by the Company without cause in the absence of a change in
control, for a period of one year following termination of employment.
1997 LONG-TERM INCENTIVE PLAN
No stock options were granted to, or exercised by or held by any executive
officer in 1996. In April 1997, the Board of Directors and the Company's
stockholders approved the Company's 1997 Long-Term
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<PAGE>
Incentive Plan (the "Plan"). The purpose of the Plan is to provide directors,
officers, key employees, consultants and other service providers with additional
incentives by increasing their ownership interests in the Company. Individual
awards under the Plan may take the form of one or more of: (i) either incentive
stock options or non-qualified stock options ("NQSOs"), (ii) stock
appreciation rights; (iii) restricted or deferred stock, (iv) dividend
equivalents and (v) other awards not otherwise provided for, the value of which
is based in whole or in part upon the value of the Common Stock.
The Compensation Committee will administer the Plan and select the
individuals who will receive awards and establish the terms and conditions of
those awards. The maximum number of shares of Common Stock that may be subject
to outstanding awards, determined immediately after the grant of any award, may
not exceed the greater of 2,500,000 shares or 13% of the aggregate number of
shares of Common Stock outstanding. Shares of Common Stock which are
attributable to awards which have expired, terminated or been canceled or
forfeited are available for issuance or use in connection with future awards.
The Plan will remain in effect until terminated by the Board of Directors.
The Plan may be amended by the Board of Directors without the consent of the
stockholders of the Company, except that any amendment, although effective when
made, will be subject to stockholder approval if required by any federal or
state law or regulation or by the rules of any stock exchange or automated
quotation system on which the Common Stock may then be listed or quoted.
At the closing of this Offering, NQSOs to purchase a total of 705,000
shares of Common Stock will be granted as follows: 200,000 shares to Mr. French,
100,000 shares to Mr. Kirksey, 100,000 shares to Mr. Baur, 75,000 shares to Mr.
Hageman, 50,000 shares to Mr. Freeman, 50,000 shares to Mr. St. Clair and
130,000 shares to other key employees of the Company. In addition, at the
consummation of this Offering, options to purchase 1,426,024 shares will be
granted to the employees of the Founding Companies. Each of the foregoing
options will have an exercise price equal to the initial public offering price
per share. These options will vest at the rate of 20% per year, commencing on
the first anniversary of this Offering and will expire at the earlier of ten
years from the date of grant or three months following termination of
employment.
1997 NON-EMPLOYEE DIRECTORS' STOCK PLAN
The Company's 1997 Non-Employee Directors' Stock Plan (the "Directors'
Plan"), which was adopted by the Board of Directors and approved by the
Company's stockholders in April 1997, provides for (i) the automatic grant to
each non-employee director serving at the consummation of this Offering 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 to each non-employee
director of an option to purchase 5,000 shares at each annual meeting of
stockholders thereafter at which 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.
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<PAGE>
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
In connection with the formation of the Company, Metals USA issued to Notre
a total of 3,367,914 shares of Common Stock for an aggregate cash consideration
of $35,375. Mr. Harter is the President of Notre and a director of the Company.
In April 1997, Notre exchanged 3,122,914 shares of Common Stock for 3,122,914
shares of Restricted Common Stock. See "Description of Capital Stock." Notre
has agreed to advance whatever funds are necessary to effect the Mergers and
this Offering. As of March 31, 1997, Notre had incurred expenses on behalf of
the Company in the aggregate amount of $1.1 million, all of which is on a
non-interest-bearing basis. All of Notre's advances will be repaid from the net
proceeds of this Offering.
From December 1996 through April 1997, the Company issued a total of
695,000 shares of Common Stock (as adjusted for a 135.81-to-one stock split) at
$.01 per share to various members of management, as follows: Mr.
French -- 260,000 shares, Mr. Kirksey -- 120,000 shares, Mr. Baur -- 120,000
shares, Mr. Freeman -- 60,000 shares, Mr. St. Clair -- 60,000 shares and Mr.
Hageman -- 75,000 shares. The Company also issued 690,500 shares of Common Stock
at $0.01 per share to other employees of and consultants to the Company,
including a total of 405,000 shares of Common Stock to persons who will become
directors of the Company upon consummation of this Offering. The Company also
granted options to purchase 10,000 shares of Common Stock under the Directors'
Plan, effective upon the consummation of this Offering, to Mr. Harter, a
director of the Company, and to Messrs. Knight, Kristinik and Porter, who will
become directors of the Company upon the closing of this Offering.
Simultaneously with the closing of this Offering, Metals USA will acquire
by merger all of the issued and outstanding stock of the Founding Companies, at
which time each Founding Company will become a wholly-owned subsidiary of the
Company. The aggregate consideration to be paid by Metals USA in the Mergers
consists of $27.8 million in cash and 10,128,609 shares of Common Stock. In
addition, prior to the Mergers certain of the Founding Companies will make the S
Corporation Distributions of $18.6 million and distribute certain real estate
and non-operating assets and liabilities having a net book value of $4.1
million.
The consummation of each Merger is subject to customary conditions. These
conditions include, among others, the continuing accuracy on the closing date of
the Mergers of the representations and warranties of the Founding Companies and
the principal stockholders thereof and of Metals USA, the performance by each of
them of all covenants included in the agreements relating to the Mergers and the
nonexistence of a material adverse change in the results of operations,
financial condition or business of each Founding Company.
There can be no assurance that the conditions to closing of the Mergers
will be satisfied or waived or that the acquisition agreements will not be
terminated prior to consummation. If any of the Mergers is terminated for any
reason, the Company does not intend to consummate this Offering on the terms
described herein.
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The following table sets forth the consideration to be paid by Metals USA
for each of the Founding Companies. These amounts do not include any S
Corporation Distributions or other distributions of real estate and
non-operating assets and liabilities. (In thousands of dollars, except share
amounts.)
SHARES OF
CASH COMMON STOCK
--------- ------------
Texas Aluminum/Cornerstone...... $ 8,203 2,383,874
Interstate...................... 1,143 1,917,814
Queensboro...................... 1,765 1,587,810
Affiliated...................... 4,381 1,022,230
Uni-Steel....................... 6,170 1,112,988
Southern Alloy.................. 2,527 648,525
Williams........................ 1,984 712,574
Service Systems................. 1,653 742,794
--------- ------------
Total...................... $ 27,826 10,128,609
========= ============
In connection with the Mergers, and as consideration for their interests in
the Founding Companies, certain officers, directors and holders of more than 5%
of the outstanding shares of the Company, together with trusts for which they
act as trustees, will receive cash and shares of Common Stock of the Company as
follows. These amounts do not include any S Corporation Distributions or other
distributions of real estate and non-operating assets and liabilities. (In
thousands of dollars, except share amounts.)
SHARES OF
NAME CASH COMMON STOCK
- ------------------------------------- --------- ------------
Michael E. Christopher.......... $ 1,776 598,837
Arnold W. Bradburd.............. 1,143 1,917,814
Mark Alper...................... 407 366,137
Patrick A. Notestine............ 1,494 348,703
Richard A. Singer............... 2,426 437,706
William B. Edge................. 35 66,997
Lester G. Peterson.............. 1,190 427,544
Craig R. Doveala................ 689 309,497
--------- ------------
Total...................... $ 9,160 4,473,235
========= ============
Pursuant to the agreements to be entered into in connection with the
Mergers, the stockholders of the Founding Companies have agreed not to compete
with the Company for five years, commencing on the date of consummation of this
Offering.
Certain of the Founding Companies have incurred indebtedness which has been
personally guaranteed by their stockholders or by entities controlled by its
stockholders. At March 31, 1997, the aggregate amount of indebtedness of these
Founding Companies that was subject to personal guarantees was approximately
$40.7 million. The Company intends to use the net proceeds from this Offering,
together with borrowings available from the Company's revolving credit facility
(see "Use of Proceeds"), to repay substantially all of the indebtedness of the
Founding Companies.
LEASES OF REAL PROPERTY BY FOUNDING COMPANIES
Following the Mergers, Interstate will lease the facilities located in
Philadelphia, Pennsylvania and Baltimore, Maryland from Warehouse Real Estate
Associates ("WREA"), a partnership controlled by Mr. Bradburd, who will become
Vice-Chairman of the Company upon consummation of this Offering, and his wife.
The leases are for an initial term of ten years and provide for a total annual
rental of $234,000 during the initial five years, to be adjusted to an
applicable current market rate during the second five years. At the conclusion
of the initial lease term, Interstate has agreed to purchase the real estate
from WREA at a price to be determined by averaging two or more independent
appraisals. Additionally, Interstate will pay
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all utility, taxes and insurance costs on the leased premises. The Company
believes that the rent to be paid under the lease does not exceed fair market
value.
Following the Mergers, Queensboro will lease two adjacent tracts of real
property located in Wilmington, North Carolina from The Alper Company, a
partnership of which Mr. Alper, who will become a director of the Company upon
the consummation of the Offering, is a controlling person. The lease on one
tract of real property is for a term of 20 years, expires in 2017 and provides
for an annual rental of $40,000. The rent will be adjusted every five years in
accordance with the Consumer Price Index ("CPI"). At the conclusion of the
tenth year of the lease, Queensboro has the option to purchase the real property
from The Alper Company for an amount equal to the average of three independent
appraisals. If Queensboro does not exercise its option, the annual rental will
be adjusted to reflect a ten year amortization of the fair market value of the
property. The lease on the other tract of real property is for a term of 20
years, expires in 2017 and provides for an annual rental of $137,200. The rent
will be adjusted every five years in accordance with the CPI. Queensboro will
pay for all utilities, taxes and insurance on the leased properties. The Company
believes that the rent for the properties does not exceed fair market value.
Following the Mergers, Service Systems will lease certain real property
located in Horicon, Wisconsin from an entity owned in part by Mr. Doveala, who
will become a director of the Company upon consummation of this Offering. The
lease for the real property expires in 2011 and provides for an annual rental of
$420,000. The rental rate will be adjusted every three years in accordance with
the CPI and will increase or decrease with changes in the prime rate.
Additionally, Service Systems will pay for all utilities, taxes and insurance on
the leased premises. The Company believes that the rent for the property does
not exceed fair market value. The purchase of the real property, the
construction of improvements and the purchase of equipment was financed by the
issuance of $5.0 million of industrial revenue bonds. Following the closing of
the Mergers, Service Systems will remain obligated to pay trust industrial
revenue bonds.
Following the Mergers, Texas Aluminum will lease certain real property
located in Jackson, Mississippi from an entity controlled by Mr. Christopher,
who will become a Senior Vice President and director of the Company upon
consummation of this Offering. The lease for the real property expires in 2012
and provides for rental of $3,500 per month. The rent will be adjusted every
three years in accordance with the CPI. Additionally, Texas Aluminum will pay
for all utilities, taxes and insurance on the leased premises. Texas Aluminum
will also continue to lease from a number of entities owned by Mr. Christopher
and/or related affiliates the following facilities, which are used for
manufacturing and distribution services: (i) a warehouse in Lafayette, Louisiana
for a term of 15 years at an annual rental of $24,000, (ii) three warehouses in
Houston, Texas, each for terms of 15 years and an aggregate monthly rental of
$27,280, (iii) a facility in Las Vegas, Nevada for $16,500 per month for a term
of 15 years, (iv) a facility in Atlanta, Georgia for $6,000 per month for a term
of 15 years, (v) a facility in Beaumont, Texas for $2,500 per month for a term
of 15 years, (vi) a building in Weslaco, Texas for $2,500 per month for a term
of 15 years, and (vii) a building in Oklahoma City, Oklahoma for $7,000 per
month for a term of 15 years. The Company believes that the rent for each of
these properties does not exceed fair market value.
Following the Mergers, Uni-Steel will lease certain real property located
in Enid, Oklahoma from Garfield Development, LLC, an entity owned in part by Mr.
Singer, who will become a director of the Company upon consummation of this
Offering. The lease for the real property has a ten-year term and provides for
an annual rental of $115,000. The rent rate will be adjusted every five years in
accordance with the CPI. The Company believes that the rent for the properties
does not exceed fair market value.
Following the Mergers, Williams will continue to lease certain real
property located in Milwaukee, Wisconsin from PP&W, L.L.C., an entity owned in
part by Mr. Peterson, who will become a director of the Company upon the
consummation of the Offering. The lease for the rental property expires on
December 31, 2011, and provides for an annual rental of $278,050, which rental
shall increase to $458,950 upon completion of improvements currently underway.
The rent will be adjusted every five years in accordance with the CPI.
Additionally, Williams will pay for all utilities, taxes and insurance on the
leased premises. The Company believes that the rent for the properties does not
exceed fair market value.
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OTHER TRANSACTIONS
Upon consummation of this Offering, Interstate will purchase certain
equipment from WREA for $530,000. WREA is controlled by Mr. Bradburd, who will
become Vice-Chairman of the Company upon consummation of this Offering. The
Company believes that the purchase price for the equipment does not exceed the
fair market value thereof. Interstate has guaranteed bank loans to WREA. The
balance of the loans guaranteed was $769,000 and $694,000 at December 31, 1995
and 1996, respectively. These guarantees will be released prior to the
consummation of this Offering.
Queensboro provides administrative services to Southern Metals Recycling,
Inc. ("Southern"), an entity owned in part by Mr. Alper, who is to become a
director of the Company upon the consummation of the Offering. In its last
fiscal year, Queensboro provided services and billed Southern $344,000 for these
services. The Company believes that the fees charged for such services represent
the fair market value of such services. Queensboro will continue to charge
market-based fees for providing administrative services to Southern following
the Offering.
An entity owned in part by Mr. Christopher leases equipment to Texas
Aluminum/Cornerstone under several leases totaling $96,000 per year. The leases
expire December 31, 2011. Mr. Christopher will become a director of the Company
upon the consummation of this Offering.
Texas Aluminum/Cornerstone holds two promissory notes from EmC Industries,
LLC ("EmC") having balances as of December 31, 1996, in the amounts of
$128,884 and $330,000, which are payable monthly and are due on May 1, 2001, and
March 1, 2007, respectively. In November 1996, Texas Aluminum/Cornerstone sold
certain machinery and equipment to EmC resulting in a gain of $242,000. Texas
Aluminum/Cornerstone is leasing this machinery from EmC for $72,000 per year
through December 2001. EmC is owned in part by Mr. Christopher, who will become
a director and officer of the Company upon consummation of this Offering. The
indebtedness was in each case incurred in connection with the sale of equipment
to EmC. The largest aggregate amount of indebtedness in each case at any time in
the past three fiscal years on the notes is $142,795 and $330,000, respectively.
The rates of interest charged on the loans are 8% and 7.5%, respectively. Texas
Aluminum/Cornerstone holds a promissory note in the original principal amount of
$120,279 from EmC issued June 1, 1996. The note was issued in connection with
the sale of equipment to EmC and earns interest at a rate of 8%. The note is
payable monthly and matures on May 1, 2001. The largest aggregate amount of
indebtedness outstanding on the note at any time in the past three fiscal years
is $120,279 and the amount outstanding as of December 31, 1996 was $108,866.
Additionally, Texas Aluminum/Cornerstone leases certain roll-former machines
from EmC for a monthly rental of $14,000.
COMPANY POLICY
Any future transactions with directors, officers, employees or affiliates
of the Company are anticipated to be minimal, and must be approved in advance by
a majority of disinterested members of the Board of Directors.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Common Stock, after giving effect to the Mergers and this
Offering, by (i) each person known to own beneficially more than 5% of the
outstanding shares of Common Stock; (ii) each Company director and person who
has consented to be named as a director ("named directors"); (iii) each named
executive officer; and (iv) all executive officers, directors and named
directors as a group. All persons listed have an address c/o the Company's
principal executive offices and have sole voting and investment power with
respect to their shares unless otherwise indicated.
SHARES BENEFICIALLY
OWNED AFTER OFFERING
---------------------
NUMBER PERCENT
----------- -------
Notre Capital Ventures II, L.L.C..... 3,367,914 16.2%
Steven S. Harter(1).................. 3,377,914 16.3
Arnold W. Bradburd................... 1,967,814 9.5
Michael E. Christopher............... 648,837 3.1
Mark Alper........................... 416,137 2.0
Patrick A. Notestine................. 398,703 1.9
Richard A. Singer.................... 487,706 2.3
Lester G. Peterson................... 477,544 2.3
Craig R. Doveala..................... 334,497 1.6
Arthur L. French(2).................. 223,846 1.1
J. Michael Kirksey(3)................ 120,000 *
Stephen R. Baur(4)................... 120,000 *
William B. Edge...................... 116,997 *
John A. Hageman(5)................... 75,000 *
Terry L. Freeman..................... 60,000 *
Keith E. St. Clair(6)................ 60,000 *
Richard H. Kristinik(7)(8)........... 27,692 *
T. William Porter(2)(7).............. 23,846 *
Tommy E. Knight(7)................... 20,000 *
All executive officers, directors and
named directors as a group
(18 persons)....................... 8,956,533 43.1%
- ------------
* Less than 1%
(1) Includes 10,000 shares of Common Stock issuable upon the exercise of options
granted under the Directors' Plan and 3,367,914 shares of Common Stock
issued to Notre. Mr. Harter is the President of Notre.
(2) Includes 3,846 shares of Common Stock issuable on conversion of a
convertible note issued by Notre which is convertible into Common Stock of
the Company owned by Notre.
(3) Includes 12,000 shares of Common Stock held by Mr. Kirksey's minor children
and of which he is custodian.
(4) Includes 10,000 shares of Common Stock held by Mr. Baur's minor children and
of which he is custodian.
(5) Includes 15,000 shares of Common Stock held by Mr. Hageman's minor children
and of which he is custodian.
(6) Includes 4,000 shares of Common Stock held by Mr. St. Clair's minor children
and of which he is custodian.
(7) Includes 10,000 shares of Common Stock issuable upon the exercise of options
granted under the Directors' Plan.
(8) Includes 7,692 shares of Common Stock issuable on conversion of a
convertible note issued by Notre which is convertible into Common Stock of
the Company owned by Notre.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 58,122,914 shares
of capital stock, consisting of 50,000,000 shares of Common Stock, 3,122,914
shares of Restricted Common Stock and 5,000,000 shares of Preferred Stock
("Preferred Stock"). Upon completion of the Mergers and this Offering, the
Company will have outstanding 20,782,023 shares of Common Stock, including
3,122,914 shares of Restricted Common Stock and no shares of Preferred Stock.
The following discussion is qualified in its entirety by reference to the
Restated Certificate of Incorporation of Metals USA, which is included as an
exhibit to the Registration Statement of which this Prospectus is a part.
COMMON STOCK AND RESTRICTED COMMON STOCK
The holders of Common Stock are each entitled to one vote for each share
held on all matters to which they are entitled to vote, including the election
of directors. The holders of Restricted Common Stock, voting together as a
single class, are entitled to elect one member of the Company's Board of
Directors and to 0.55 of one vote for each share held on all other matters on
which they are entitled to vote. Holders of Restricted Common Stock are not
entitled to vote on the election of any other directors. Upon consummation of
this Offering, the Board of Directors will be classified into three classes as
nearly equal in number as possible, with the term of each class expiring on a
staggered basis. The classification of the Board of Directors may make it more
difficult to change the composition of the Board of Directors and thereby may
discourage or make more difficult an attempt by a person or group to obtain
control of the Company. Cumulative voting for the election of directors is not
permitted. Any director, or the entire Board of Directors, may be removed at any
time, with cause, by a majority of the aggregate number of votes which may be
cast by the holders of outstanding shares of Common Stock and Restricted Common
Stock entitled to vote for the election of directors, provided, however, that
only the holders of the Restricted Common Stock may remove the director such
holders are entitled to elect.
Subject to the rights of any then outstanding shares of Preferred Stock,
holders of Common Stock and Restricted Common Stock are entitled to participate
pro rata in such dividends as may be declared in the discretion of the Board of
Directors out of funds legally available therefor. Holders of Common Stock and
Restricted Common Stock are entitled to share ratably in the net assets of the
Company upon liquidation after payment or provision for all liabilities and any
preferential liquidation rights of any Preferred Stock then outstanding. Holders
of Common Stock and holders of Restricted Common Stock have no preemptive rights
to purchase shares of stock of the Company. Shares of Common Stock are not
subject to any redemption provisions and are not convertible into any other
securities of the Company. Shares of Restricted Common Stock are not subject to
any redemption provisions but are convertible into Common Stock, on the
occurrence of certain events. All outstanding shares of Common Stock and
Restricted Common Stock are, and the shares of Common Stock to be issued
pursuant to this Offering and the Mergers will be upon payment therefor, fully
paid and non-assessable.
Each share of Restricted Common Stock will automatically convert to Common
Stock on a share-for-share basis (i) in the event of a disposition of such share
of Restricted Common Stock by the holder thereof (other than a distribution
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 in Sections 267, 707, 318
and/or 4946 of the Internal Revenue Code of 1986, as amended)), (ii) in the
event any person acquires beneficial ownership of 15% or more of the outstanding
shares of Common Stock, or (iii) 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, the Board of Directors may elect to convert any outstanding shares of
Restricted Common Stock into shares of Common Stock in the event 80% or more of
the originally outstanding shares of Restricted Common Stock have been
previously converted into shares of Common Stock.
The Common Stock has been approved for listing on The New York Stock
Exchange under the symbol "MUI." The Restricted Common Stock will not be
listed on any exchange.
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PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors in one or more series. Subject to the provisions of the Company's
Certificate of Incorporation and limitations prescribed by law, the Board of
Directors is expressly authorized to adopt resolutions to issue the shares, to
fix the number of shares and to change the number of shares constituting any
series and to provide for or change the voting powers, designations, preferences
and relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereof, including dividend rights (including
whether dividends are cumulative), dividend rates, terms of redemption
(including sinking fund provisions), redemption prices, conversion rights and
liquidation preferences of the shares constituting any series of the Preferred
Stock, in each case without any further action or vote by the stockholders. The
Company has no current plans to issue any shares of Preferred Stock.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock issued by the Company may
rank prior to the Common Stock and Restricted Common Stock as to dividend
rights, liquidation preference or both, may have full or limited voting rights
and may be convertible into shares of Common Stock. Accordingly, the issuance of
shares of Preferred Stock may discourage bids for the Common Stock or may
otherwise adversely affect the market price of the Common Stock.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to Section 203 of the DGCL which, with certain
exceptions, prohibits a Delaware corporation from engaging in any of a broad
range of business combinations with any "interested stockholder" for a period
of three years following the date that such stockholder became an interested
stockholder, unless: (i) prior to such date, the Board of Directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (a) by persons who are directors and officers and
(b) by employee stock plans in which employee participants do not have the right
to determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer, or (iii) on or after such date, the
business combination is approved by the Board of Directors and authorized at an
annual or special meeting of stockholders by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. An "interested stockholder" is defined as any person that is (a)
the owner of 15% or more of the outstanding voting stock of the corporation or
(b) an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
Pursuant to the Company's Certificate of Incorporation and as permitted by
Delaware law, directors of the Company are not liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty, except for
liability in connection with a breach of duty of loyalty, for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, for dividend payments or stock repurchases illegal under Delaware law or
any transaction in which a director has derived an improper personal benefit.
Additionally, the Certificate of Incorporation of the Company provides that
directors and officers of the Company shall be, and at the discretion of the
Board of Directors non-officer employees and agents may be, indemnified by the
Company to the fullest extent authorized by Delaware law, as it now exists or
may in
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the future be amended, against all expenses and liabilities actually and
reasonably incurred in connection with service for or on behalf of the Company,
and further permits the advancing of expenses incurred in defense of claims.
The Certificate of Incorporation also provides that any action required or
permitted to be taken by the stockholders of the Company at an annual or special
meeting of stockholders must be effected at a duly called meeting and may not be
taken or effected by a written consent of stockholders in lieu thereof. The
Company's Bylaws provide that a special meeting of stockholders may be called
only by the Chief Executive Officer, by a majority of the Board of Directors or
by a majority of the Executive Committee of the Board of Directors. The Bylaws
provide that only those matters set forth in the notice of the special meeting
may be considered or acted upon at that special meeting. To amend or repeal the
Company's Bylaws, an amendment or repeal thereof must first be approved by the
Board of Directors or by affirmative vote of the holders of at least 66 2/3% of
the total votes eligible to be cast by holders of voting stock with respect to
such amendment or repeal.
The Company's Bylaws establish an advance notice procedure with regard to
the nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as directors (the "Nomination
Procedure") and with regard to other matters to be brought by stockholders
before an annual meeting of stockholders of the Company (the "Business
Procedure"). The Nomination Procedure requires that a stockholder give prior
written notice, in proper form, of a planned nomination for the Board of
Directors to the Secretary of the Company. The requirements as to the form and
timing of that notice are specified in the Company's Bylaws. If the Chairman of
the Board of Directors determines that a person was not nominated in accordance
with the Nomination Procedure, such person will not be eligible for election as
a director. Under the Business Procedure, a stockholder seeking to have any
business conducted at an annual meeting must give prior written notice, in
proper form, to the Secretary of the Company. The requirements as to the form
and timing of that notice are specified in the Company's Bylaws. If the Chairman
of the Board of Directors determines that the other business was not properly
brought before such meeting in accordance with the Business Procedure, such
business will not be conducted at such meeting.
Although the Company's Bylaws do not give the Board of Directors any power
to approve or disapprove stockholder nominations for the election of directors
or of any other business desired by stockholders to be conducted at an annual or
any other meeting, the Company's Bylaws (i) may have the effect of precluding a
nomination for the election of directors or precluding the conduct of business
at a particular meeting if the proper procedures are not followed or (ii) may
discourage or deter a third party from conducting a solicitation of proxies to
elect its own slate of directors or otherwise attempting to obtain control of
the Company, even if the conduct of such solicitation or such attempt might be
beneficial to the Company and its stockholders.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is First Chicago
Trust Company of New York, 525 Washington Blvd., Jersey City, New Jersey 07303.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Mergers and completion of this Offering, the
Company will have outstanding 20,782,023 shares of Common Stock. The 5,900,000
shares sold in this Offering (plus any additional shares sold upon exercise of
the Underwriters' over-allotment option) will be freely tradeable without
restriction unless acquired by affiliates of the Company. None of the remaining
outstanding shares of Common Stock or Restricted Common Stock have been
registered under the Securities Act, which means that they may be resold
publicly only upon registration under the Securities Act or in compliance with
an exemption from the registration requirements of the Securities Act, including
the exemption provided by Rule 144 thereunder.
In general, under Rule 144, if a period of at least one year has elapsed
between the later of the date on which restricted securities were acquired from
the Company or the date on which they were acquired from an affiliate, the
holder of such restricted securities (including an affiliate) is entitled to
sell a number of shares within any three-month period that does not exceed the
greater of (i) one percent of the then outstanding shares of the Common Stock
(approximately 207,820 shares upon completion of this Offering) or (ii) the
average weekly reported volume of trading of the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain requirements pertaining to the manner of such sales, notices of such
sales and the availability of current public information concerning the Company.
Affiliates may sell shares not constituting restricted securities in accordance
with the foregoing volume limitations and other requirements but without regard
to the one year holding period. Under Rule 144(k), if a period of at least two
years has elapsed between the later of the date on which restricted securities
were acquired from the Company and the date on which they were acquired from an
affiliate, a holder of such restricted securities who is not an affiliate at the
time of the sale and has not been an affiliate for a least three months prior to
the sale is entitled to sell the shares immediately without regard to the volume
limitations and other conditions described above.
The Company and its officers, directors and certain stockholders who
beneficially own 14,882,023 shares in the aggregate have agreed not to sell or
otherwise dispose of any shares of Common Stock for a period of 180 days after
the date of this Prospectus without the prior written consent of Alex. Brown &
Sons Incorporated, except that the Company may issue Common Stock in connection
with acquisitions or in connection with the Plan and the Directors' Plan (the
"Plans") or upon conversion of shares of the Restricted Common Stock. See
"Underwriting." In addition, all of the stockholders of the Founding Companies
and the Company's officers, certain directors and certain stockholders, which
beneficially own 14,882,023 shares of Common Stock, have agreed with the Company
that they will not sell any of their shares for a period of one year after the
closing of this Offering. These stockholders, however, have the right, in the
event the Company proposes to register under the Securities Act any Common Stock
for its own account or for the account of others, subject to certain exceptions,
to require the Company to include their shares in the registration, subject to
the right of the Company to exclude some or all of the shares in the offering
upon the advice of the managing underwriter. In addition, certain of such
stockholders have certain limited demand registration rights to require the
Company to register shares held by them following the second anniversary of the
closing of this Offering.
Within 90 days after the closing of this Offering, the Company intends to
register 8,000,000 shares of its Common Stock under the Securities Act for use
by the Company in connection with future acquisitions. Upon such registration,
these shares will generally be freely tradeable after their issuance. In some
instances, however, the Company may contractually restrict the sale of shares
issued in connection with future acquisitions. The piggyback registration rights
described above do not apply to the registration statement relating to these
8,000,000 shares.
Prior to this Offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, that the sale of
shares or the availability of shares for sale will have on the market price for
the Common Stock prevailing from time to time. Nevertheless, sales, or the
availability for sale of, substantial amounts of the Common Stock in the public
market could adversely affect prevailing market prices and the future ability of
the Company to raise equity capital and complete any additional acquisitions for
Common Stock.
64
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), through their representatives,
Alex. Brown & Sons Incorporated, Bear, Stearns & Co. Inc. and Sanders Morris
Mundy Inc. (together, the "Representatives"), have severally agreed to
purchase from the Company the following respective number of shares of Common
Stock at the initial public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus:
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------- ----------
Alex. Brown & Sons Incorporated...... 1,340,000
Bear, Stearns & Co. Inc. ............ 1,340,000
Sanders Morris Mundy Inc............. 1,340,000
Goldman, Sachs & Co.................. 120,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated....................... 120,000
Montgomery Securities................ 120,000
Morgan Stanley & Co., Incorporated... 120,000
Oppenheimer & Co., Inc............... 120,000
PaineWebber Incorporated............. 120,000
Prudential Securities Incorporated... 120,000
Arnhold and S. Bleichroeder, Inc..... 80,000
Dain Bosworth Incorporated........... 80,000
Equitable Securities Corporation..... 80,000
L.H. Friend, Weinress, Frankson &
Presson, Inc....................... 80,000
Harris, Webb & Garrison, Inc......... 80,000
Janney Montgomery Scott Inc.......... 80,000
C.L. King & Associates, Inc.......... 80,000
Principal Financial Securities,
Inc................................ 80,000
Rauscher Pierce Refsnes, Inc......... 80,000
The Robinson-Humphrey Company,
Inc................................ 80,000
The Seidler Companies Incorporated... 80,000
Stifel, Nicolaus & Company,
Incorporated....................... 80,000
Wheat First Butcher Singer........... 80,000
----------
Total........................... 5,900,000
==========
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the shares of Common Stock offered hereby if
any of such shares are purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $0.40 per share. The
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $0.10 per share to certain other dealers. After commencement of the
initial public offering, the offering price and other selling terms may be
changed by the Representatives.
The Company has granted the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 885,000
additional shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it in the above table bears to 5,900,000, and the Company will be obligated,
pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise
65
<PAGE>
such option only to cover over-allotments made in connection with the sale of
the Common Stock offered hereby. If purchased, the Underwriters will offer such
additional shares on the same terms as those on which the 5,900,000 shares are
being offered.
The Underwriting Agreement contains covenants of indemnity and contribution
between the Underwriters and the Company regarding certain liabilities,
including liabilities under the Securities Act.
To facilitate the Offering of the Common Stock, the Underwriters may engage
in transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock. Specifically, the Underwriters may over-allot shares of the
Common Stock in connection with this Offering, thereby creating a short position
in the Underwriters' syndicate account. Additionally, to cover such
over-allotments or to stabilize the market price of the Common Stock, the
Underwriters may bid for, and purchase, shares of the Common Stock in the open
market. Any of these activities may maintain the market price of the Common
Stock at a level above that which might otherwise prevail in the open market.
The Underwriters are not required to engage in these activities, and, if
commenced, any such activities may be discontinued at any time. The
Representatives, on behalf of the Underwriters, also may reclaim selling
concessions allowed to an Underwriter or dealer, if the syndicate repurchases
shares distributed by that Underwriter or dealer.
The Company has agreed that it will not sell or offer any shares of Common
Stock or options, rights or warrants to acquire any Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent of
Alex. Brown & Sons Incorporated, except for shares issued (i) in connection with
acquisitions, (ii) pursuant to the exercise of options granted under the Plans,
and (iii) upon conversion of shares of Restricted Common Stock. Further, the
Company's directors, officers and certain stockholders who beneficially own
14,882,023 shares in the aggregate have agreed not to directly or indirectly
sell or offer for sale or otherwise dispose of any Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent of
Alex. Brown & Sons Incorporated.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
A principal of Sanders Morris Mundy Inc., one of the Representatives, is an
investor in Notre. In April 1997, that principal purchased a note from Notre
which is convertible into shares of Common Stock upon consummation of this
Offering. The shares of Common Stock beneficially owned by that principal
represent less than 1% of the Common Stock to be outstanding after the
consummation of this Offering.
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock has
been determined by negotiations between the Company and the Representatives.
Among the factors considered in such negotiations were prevailing market
conditions, the results of operations of the Founding Companies in recent
periods, the market capitalization and stages of development of other companies
which the Company and the Representatives believed to be comparable to the
Company, estimates of the business potential of the Company, the present state
of the Company's development and other factors deemed relevant by the Company
and the Representatives.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed on for the
Company by Bracewell & Patterson, L.L.P., Houston, Texas. Certain legal matters
related to this Offering will be passed on for the Underwriters by Piper &
Marbury, L.L.P., Baltimore, Maryland.
EXPERTS
The financial statements of Metals USA, Texas Aluminum/Cornerstone,
Uni-Steel, and Southern Alloy included elsewhere in this Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports. The financial
statements of Affiliated at August 31, 1996, and for the fifty-two weeks then
ended, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, and at September 2, 1995, and for
each of the
66
<PAGE>
two fifty-two week periods then ended, by Rubin, Brown, Gornstein & Co. LLP,
independent auditors, as set forth in their respective reports thereon appearing
elsewhere herein, and are included in reliance upon such reports given upon the
authority of such firms as experts in accounting and auditing. The financial
statements of Interstate as of December 31, 1996 and for each of the three years
in the period ended December 31, 1996 included in this Prospectus have been
audited by Deloitte & Touche LLP, independent public accountants, as stated in
their report which is included herein, and have been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing. The financial statements of Queensboro included elsewhere in this
Prospectus have been audited by McGladrey & Pullen, LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
report.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement (which term
shall encompass any and all amendments thereto) on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Common Stock offered hereby. This Prospectus, which
is part of the Registration Statement, does not contain all the information set
forth in the Registration Statement and the exhibits and schedules thereto,
certain items of which are omitted in accordance with the rules and regulations
of the SEC. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is hereby made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference. For further
information with respect to the Company, reference is hereby made to the
Registration Statement and such exhibits and schedules filed as a part thereof,
which may be inspected, without charge, at the Public Reference Section of the
SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the SEC located at Seven World Trade
Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. The SEC maintains a web
site that contains reports, proxy and information statements regarding
registrants that file electronically with the SEC. The address of this web site
is (http://www.sec.gov). Copies of all or any portion of the Registration
Statement may be obtained from the Public Reference Section of the SEC, upon
payment of the prescribed fees.
67
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
METALS USA, INC. UNAUDITED PRO FORMA
Introduction to Unaudited Pro Forma Combined Financial Statements .. F-2
Unaudited Pro Forma Combined Balance Sheet ......................... F-3
Unaudited Pro Forma Combined Statement of Operations ............... F-4
Notes to Unaudited Pro Forma Combined Financial Statements ......... F-6
METALS USA, INC
Report of Independent Public Accountants ........................... F-11
Balance Sheets ..................................................... F-12
Statements of Operations ........................................... F-13
Statements of Stockholders' Equity ................................. F-14
Statements of Cash Flows ........................................... F-15
Notes to Financial Statements ...................................... F-16
FOUNDING COMPANIES
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
Report of Independent Public Accountants ........................... F-19
Combined Balance Sheets ............................................ F-20
Combined Statements of Income ...................................... F-21
Combined Statements of Stockholders' Equity and Members' Equity .... F-22
Combined Statements of Cash Flows .................................. F-23
Notes to Combined Financial Statements ............................. F-24
INTERSTATE STEEL SUPPLY CO. AND AFFILIATES
Independent Auditors' Report ....................................... F-35
Combined Balance Sheets ............................................ F-36
Combined Statements of Income ...................................... F-37
Combined Statements of Stockholders' Equity and Partners' Capital .. F-38
Combined Statements of Cash Flows .................................. F-39
Notes to Combined Financial Statements ............................. F-40
QUEENSBORO STEEL CORPORATION
Independent Auditors' Report ....................................... F-44
Balance Sheets ..................................................... F-45
Statements of Income ............................................... F-46
Statements of Stockholders' Equity ................................. F-47
Statements of Cash Flows ........................................... F-48
Notes to Financial Statements ...................................... F-49
AFFILIATED METALS COMPANY
Report of Independent Auditors ..................................... F-55
Report of Independent Auditors ..................................... F-56
Balance Sheets ..................................................... F-57
Statements of Operations ........................................... F-58
Statements of Stockholders' Equity ................................. F-59
Statements of Cash Flows ........................................... F-60
Notes to Financial Statements ...................................... F-61
F-1
<PAGE>
PAGE
----
SOUTHERN ALLOY OF AMERICA, INC
Report of Independent Public Accountants ........................... F-67
Balance Sheets ..................................................... F-68
Statements of Operations ........................................... F-69
Statements of Stockholders' Equity ................................. F-70
Statements of Cash Flows ........................................... F-71
Notes to Financial Statements ...................................... F-72
UNI-STEEL, INC
Report of Independent Public Accountants ........................... F-77
Balance Sheets ..................................................... F-78
Statements of Income ............................................... F-79
Statements of Stockholders' Equity ................................. F-80
Statements of Cash Flows ........................................... F-81
Notes to Financial Statements ...................................... F-82
F-1(a)
<PAGE>
METALS USA, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give effect
to the acquisitions by Metals USA, Inc. ("Metals USA") of the outstanding
capital stock of Affiliated, Interstate, Texas Aluminum/Cornerstone, Queensboro,
Southern Alloy, Uni-Steel, Service Systems and Williams (together, the
"Founding Companies"). These acquisitions (the "Mergers") will occur
simultaneously with and as a condition to the consummation of Metals USA's
initial public offering (the "Offering") and will be accounted for using the
purchase method of accounting.
The unaudited pro forma combined balance sheet gives effect to the Mergers
and the Offering as if they had occurred on March 31, 1997. The unaudited pro
forma combined statements of operations give effect to the Mergers and the
Offering as if they had occurred on January 1, 1996.
Metals USA has preliminarily analyzed the savings that it expects to be
realized from reductions in salaries and certain benefits to the owners and
reductions in lease cost resulting from renegotiations of certain leases. To the
extent the owners of the Founding Companies have agreed prospectively to
reductions in salary, bonuses and benefits and the reduction in lease cost has
been confirmed by lease agreements, these reductions have been reflected in the
pro forma combined statement of operations. In addition, the Company has a
five-year revolving credit facility of $150.0 million which will be available
upon the closing of the Offering. Based on terms of the Credit Facility, the
Company believes that its interest expense will be reduced. This reduction in
interest expense has been reflected in the pro forma combined statements of
operations. The refinancing of outstanding indebtedness with the new credit
facility has been reflected in the pro forma combined balance sheet. With
respect to other potential cost savings, Metals USA has not and cannot quantify
these savings until completion of the combination of the Founding Companies. It
is anticipated that these savings will be offset by costs related to Metals
USA's new corporate management and by the costs associated with being a public
company. However, because these costs cannot be accurately quantified at this
time, they have not been included in the pro forma financial information of
Metals USA.
The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised as additional information becomes
available. The pro forma financial data do not purport to represent what Metals
USA's financial position or results of operations would actually have been if
such transactions had in fact occurred on those dates and are not necessarily
representative of Metals USA's financial position or results of operations of
Metals USA for any future period. Since the Founding Companies were not under
common control or management, historical combined results may not be comparable
to, or indicative of, future performance. The unaudited pro forma combined
financial statements should be read in conjunction with the other financial
statements and notes thereto included elsewhere in this Prospectus. See "Risk
Factors" included elsewhere herein.
F-2
<PAGE>
METALS USA, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TEXAS OTHER
AIUMINUM/ SOUTHERN FOUNDING
AFFILIATED INTERSTATE CORNERSTONE QUEENSBORO ALLOY UNI-STEEL COMPANIES
---------- ---------- ------------ ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash................................. $ -- $ 384 $ 884 $ 6 $-- $ 7 $ 1
Accounts receivable.................. 11,772 6,662 4,782 8,681 1,409 7,935 7,263
Inventory............................ 13,077 12,920 11,998 8,897 1,137 11,349 10,849
Prepaid expenses..................... 316 176 30 166 124 38 157
Deferred income taxes................ 22 -- 836 -- -- 123 --
Other................................ 23 -- -- 1,092 168 17 --
---------- ---------- ------------ ---------- -------- --------- ---------
Total current assets.............. 25,210 20,142 18,530 18,842 2,838 19,469 18,270
Property & equipment, net............ 7,884 3,331 4,442 4,641 324 3,137 4,264
Goodwill............................. -- -- 1,634 -- -- 339 --
Other................................ 79 1,111 1,673 222 36 1,662 95
---------- ---------- ------------ ---------- -------- --------- ---------
Total assets...................... $ 33,173 $ 24,584 $ 26,279 $ 23,705 $3,198 $24,607 $22,629
========== ========== ============ ========== ======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable..................... $ 9,261 $ 2,146 $ 4,242 $ 2,421 $1,624 $ 3,089 $ 7,532
Accrued liabilities.................. 377 487 1,098 410 72 363 441
Income taxes payable................. -- -- 424 -- -- 77 --
Notes payable........................ -- 11,600 -- -- 1,504 8,200 2,552
Current portion of long-term debt.... 371 93 1,264 -- 38 365 4,761
Payable to stockholders.............. -- -- -- -- -- -- --
Other................................ -- -- -- 425 -- 36 --
---------- ---------- ------------ ---------- -------- --------- ---------
Total current liabilities......... 10,009 14,326 7,028 3,256 3,238 12,130 15,286
Long-term debt....................... 19,927 700 13,648 9,790 37 1,116 2,281
Deferred income taxes................ -- -- 181 -- -- 762 --
Other................................ -- -- 273 424 -- -- 330
---------- ---------- ------------ ---------- -------- --------- ---------
Total liabilities................. 29,936 15,026 21,130 13,470 3,275 14,008 17,897
Stockholders' equity:
Preferred stock..................... 178 -- 369 -- -- -- --
Common stock........................ -- 38 1,506 974 20 100 362
Additional paid-in capital.......... 50 72 189 870 608 5,268 842
Retained earnings (deficit)......... 3,154 11,101 3,369 8,391 (705) 6,392 3,528
Treasury stock...................... (145) (1,653) (284) -- -- (1,161) --
---------- ---------- ------------ ---------- -------- --------- ---------
Total stockholders' equity........ 3,237 9,558 5,149 10,235 (77) 10,599 4,732
---------- ---------- ------------ ---------- -------- --------- ---------
Total liabilities and stockholders'
equity.............................. $ 33,173 $ 24,584 $ 26,279 $ 23,705 $3,198 $24,607 $22,629
========== ========== ============ ========== ======== ========= =========
<CAPTION>
POST
METALS PRO FORMA MERGER AS
USA ADJUSTMENTS PRO FORMA ADJUSTMENTS ADJUSTED
------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash................................. $ 8 $ (14) $ 1,276 $ 13,136 $14,412
Accounts receivable.................. -- (224) 48,280 -- 48,280
Inventory............................ -- 6,696 76,923 -- 76,923
Prepaid expenses..................... -- -- 1,007 -- 1,007
Deferred income taxes................ -- -- 981 -- 981
Other................................ 1,177 -- 2,477 (1,177) 1,300
------- ----------- --------- ----------- --------
Total current assets.............. 1,185 6,458 130,944 11,959 142,903
Property & equipment, net............ -- (1,070) 26,953 -- 26,953
Goodwill............................. -- 83,426 85,399 -- 85,399
Other................................ -- (1,102) 3,776 (448) 3,328
------- ----------- --------- ----------- --------
Total assets...................... $ 1,185 $ 87,712 $247,072 $ 11,511 $258,583
======= =========== ========= =========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable..................... $ -- $ (34) $ 30,281 $ -- $30,281
Accrued liabilities.................. 1,143 29 4,420 (1,143) 3,277
Income taxes payable................. -- -- 501 -- 501
Notes payable........................ -- (23,856) -- -- --
Current portion of long-term debt.... -- (6,892) -- -- --
Payable to stockholders.............. -- 27,826 27,826 (27,826) --
Other................................ -- -- 461 -- 461
------- ----------- --------- ----------- --------
Total current liabilities......... 1,143 (2,927) 63,489 (28,969) 34,520
Long-term debt....................... -- 48,527 96,026 (10,356) 85,670
Deferred income taxes................ -- 4,509 5,452 -- 5,452
Other................................ -- -- 1,027 -- 1,027
------- ----------- --------- ----------- --------
Total liabilities................. 1,143 50,109 165,994 (39,325) 126,669
Stockholders' equity:
Preferred stock..................... -- (547) -- -- --
Common stock........................ 41 (2,892) 149 59 208
Additional paid-in capital.......... 6,450 76,265 90,614 50,777 141,391
Retained earnings (deficit)......... (6,449) (38,466) (9,685 ) -- (9,685 )
Treasury stock...................... -- 3,243 -- -- --
------- ----------- --------- ----------- --------
Total stockholders' equity........ 42 37,603 81,078 50,836 131,914
------- ----------- --------- ----------- --------
Total liabilities and stockholders'
equity.............................. $ 1,185 $ 87,712 $247,072 $ 11,511 $258,583
======= =========== ========= =========== ========
</TABLE>
F-3
<PAGE>
METALS USA, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TEXAS OTHER
ALUMINUM/ SOUTHERN FOUNDING
AFFILIATED INTERSTATE CORNERSTONE QUEENSBORO ALLOY UNI-STEEL COMPANIES
---------- ---------- ------------ ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................ $ 84,587 $ 66,806 $ 40,651 $ 54,996 $10,815 $56,726 $61,201
Costs and expenses:
Cost of sales..................... 72,952 47,902 27,146 38,912 7,084 45,069 48,999
Operating and delivery............ 5,604 8,243 6,386 8,355 709 5,696 6,178
Selling, general & administrative
expenses........................ 3,296 5,391 3,539 3,870 2,850 3,018 3,361
Depreciation and amortization..... 417 550 568 405 126 535 421
---------- ---------- ------------ ---------- -------- --------- ---------
Operating income..................... 2,318 4,720 3,012 3,454 46 2,408 2,242
Interest expense..................... 1,164 936 682 587 168 561 753
Other................................ 78 10 (8) (77) (108 ) (193) (15)
---------- ---------- ------------ ---------- -------- --------- ---------
Income before tax.................... 1,076 3,774 2,338 2,944 (14 ) 2,040 1,504
Taxes................................ 402 -- 456 -- -- 770 --
---------- ---------- ------------ ---------- -------- --------- ---------
Net income........................... $ 674 $ 3,774 $ 1,882 $ 2,944 $ (14 ) $ 1,270 $ 1,504
========== ========== ============ ========== ======== ========= =========
Earnings per share...................
Shares used in computing pro forma
earnings per share(1)...............
</TABLE>
METALS PRO FORMA PRO FORMA
USA ADJUSTMENTS 1996
--------- ------------ ----------
Net sales............................ $ -- $ 11,256 $ 387,038
Costs and expenses:
Cost of sales..................... -- 7,437 295,501
Operating and delivery............ -- (14) 41,157
Selling, general & administrative
expenses........................ 3,636 (4,919) 24,042
Depreciation and amortization..... -- 2,573 5,595
--------- ------------ ----------
Operating income..................... (3,636) 6,179 20,743
Interest expense..................... -- (148) 4,703
Other................................ -- (125) (438 )
--------- ------------ ----------
Income before tax.................... (3,636) 6,452 16,478
Taxes................................ -- 5,854 7,482
--------- ------------ ----------
Net income........................... $ (3,636) $ 598 $ 8,996
========= ============ ==========
Earnings per share................... .46
==========
Shares used in computing pro forma
earnings per share(1)............... 19,468,323
==========
(1) Includes (i) 3,367,914 shares issued to Notre, (ii) 1,385,500 shares
issued to management of and consultants to Metals USA, (iii)
10,128,609 shares issued to owners of the Founding Companies and (iv)
4,586,300 of the 5,900,000 shares sold in the Offering necessary to
pay the $27,826 cash portion of the Merger consideration, retire
$10,356 of outstanding indebtedness and pay the $4,000 of estimated
Offering expenses. The 1,313,700 shares excluded reflects the net cash
proceeds to Metals USA.
F-4
<PAGE>
METALS USA, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TEXAS OTHER
ALUMINUM/ SOUTHERN FOUNDING
AFFILIATED INTERSTATE CORNERSTONE QUEENSBORO ALLOY UNI-STEEL COMPANIES
---------- ---------- ------------ ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................ $ 26,710 $ 16,137 $ 9,685 $ 15,302 $ 2,671 $16,671 $17,812
Costs and expenses:
Cost of sales..................... 22,632 11,770 6,288 11,166 1,735 13,315 14,072
Operating and delivery............ 2,533 2,116 1,411 2,248 176 1,623 1,674
Selling, general & administrative
expenses........................ 698 1,353 1,268 1,029 657 840 929
Depreciation and amortization..... 174 95 197 120 43 121 138
---------- ---------- ------------ ---------- -------- --------- ---------
Operating income..................... 673 803 521 739 60 772 999
Interest expense..................... 437 195 242 99 17 177 217
Other................................ 2 (2) (38) -- -- (38) 4
---------- ---------- ------------ ---------- -------- --------- ---------
Income before tax.................... 234 610 317 640 43 633 778
Taxes................................ 90 -- 108 -- -- 263 --
---------- ---------- ------------ ---------- -------- --------- ---------
Net income........................... $ 144 $ 610 $ 209 $ 640 $ 43 $ 370 $ 778
========== ========== ============ ========== ======== ========= =========
Earnings per share...................
Shares used in computing pro forma
earnings per share(1)...............
</TABLE>
METALS PRO FORMA
USA ADJUSTMENTS PRO FORMA
--------- ------------ ----------
Net sales............................ $ -- $ 395 $ 105,383
Costs and expenses:
Cost of sales..................... -- 272 81,250
Operating and delivery............ -- (124) 11,657
Selling, general & administrative
expenses........................ 2,813 (3,383) 6,204
Depreciation and amortization..... -- 602 1,490
--------- ------------ ----------
Operating income..................... (2,813) 3,028 4,782
Interest expense..................... -- (112) 1,272
Other................................ -- -- (72 )
--------- ------------ ----------
Income before tax.................... (2,813) 3,140 3,582
Taxes................................ -- 1,185 1,646
--------- ------------ ----------
Net income........................... $ (2,813) $ 1,955 $ 1,936
========= ============ ==========
Earnings per share................... $ .10
==========
Shares used in computing pro forma
earnings per share(1)............... 19,468,323
==========
(1) Includes (i) 3,367,914 shares issued to Notre, (ii) 1,385,500 shares
issued to management of and consultants to Metals USA, (iii)
10,128,609 shares issued to owners of the Founding Companies and (iv)
4,586,300 of the 5,900,000 shares sold in the Offering necessary to
pay the $27,826 cash portion of the Merger consideration, retire
$10,356 of outstanding indebtedness and pay the $4,000 of estimated
Offering expenses. The 1,313,700 shares excluded reflects the net cash
proceeds to Metals USA.
F-5
<PAGE>
METALS USA, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1. GENERAL:
Metals USA, Inc. ("Metals USA") was founded to become a leading national
value-added metals processor/service center, to manufacture higher-value
components from processed metals and to pursue aggressively the consolidation of
the highly-fragmented metals processing industry. Metals USA has conducted no
operations to date and will acquire the Founding Companies concurrently with and
as a condition to consummation of this Offering.
The historical financial statements reflect the financial position and
results of operations of the Founding Companies and were derived from the
respective Founding Companies' financial statements where indicated. The periods
included in these financial statements for the individual Founding Companies are
as of and for the three months ended March 31, 1997 and for the twelve months
ended December 31, 1996. The audited historical financial statements included
elsewhere herein have been included in accordance with Securities and Exchange
Commission ("SEC") Staff Accounting Bulletin No. 80.
2. ACQUISITION OF FOUNDING COMPANIES:
Concurrently with and as a condition to the consummation of this Offering,
Metals USA will acquire all of the outstanding capital stock of the Founding
Companies. The acquisitions will be accounted for using the purchase method of
accounting.
The following table sets forth the consideration to be paid (a) in cash and
(b) in shares of Common Stock to the common stockholders of each of the Founding
Companies. For purposes of computing the estimated purchase price for accounting
purposes, the value of the shares is determined using an estimate of the fair
value. The estimated purchase price for the acquisitions and related allocations
of the excess purchase price are based upon preliminary estimates and are
subject to certain purchase price adjustments at and following closing. The
table does not reflect the distributions totaling $18,572 from the Founding
Companies that are S Corporations that represent substantially all of the
previously taxed undistributed earnings and tax payments on current earnings of
such Founding Companies ("S Corporation Distributions") or $4,123 of other
distributions of real estate and non-operating assets and liabilities. However,
these amounts are reflected in the pro forma adjustments as further described in
Note 3.
SHARES
CASH OF COMMON STOCK
--------- ---------------
Texas Aluminum/Cornerstone........... $ 8,203 2,383,874
Interstate........................... 1,143 1,917,814
Queensboro........................... 1,765 1,587,810
Affiliated........................... 4,381 1,022,230
Uni-Steel............................ 6,170 1,112,988
Southern Alloy....................... 2,527 648,525
Williams............................. 1,984 712,574
Service Systems...................... 1,653 742,794
--------- ---------------
Total........................... $ 27,826 10,128,609
========= ===============
F-6
<PAGE>
METALS USA, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
THROW THIS PAGE AWAY
<PAGE>
METALS USA, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS AS OF MARCH 31, 1997:
(a) Records the borrowings assumed to be required to fund the S
Corporation Distributions of $18,572.
(b) Records the distribution of real estate and nonoperating assets and
liabilities in connection with the Mergers.
(c) Records the purchase of the Founding Companies by Metals USA
consisting of $27.8 million in cash and 10,128,609 shares of
Common Stock valued at $8.00 per share (or $81.0 million) for a
total estimated purchase price of $108.9 million resulting in
excess purchase price over the fair value of assets acquired of
$85.4 million, the issuance of 676,000 shares of Common Stock to
management and consultants and the refinancing of the outstanding
indebtedness. See Note 2.
(d) Records the deferred income tax liability attributable to the
temporary differences between the financial reporting and tax
basis of assets and liabilities held in S Corporations.
(e) Records the net cash proceeds of $50.9 million from the issuance
of shares of Common Stock net of estimated offering costs of $8.1
million (based on an initial public offering price of $10 per
share and includes the payment of accrued offering costs of $1.1
million incurred through March 31, 1997). Offering costs primarily
consist of underwriting discounts and commissions, accounting
fees, legal fees and printing expenses.
(f) Records the cash portion of the consideration to be paid to the
stockholders of the Founding Companies in connection with the
Mergers and the reduction of certain debt obligations with the
proceeds from this Offering.
The following table summarizes unaudited pro forma combined balance sheet
adjustments:
<TABLE>
<CAPTION>
ADJUSTMENT
------------------------------------------ PRO FORMA
(A) (B) (C) (D) ADJUSTMENTS
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents............... $ -- $ (21) $ 7 $ -- $ (14)
Accounts receivable..................... -- (224) -- -- (224)
Inventory............................... -- (4) 6,700 -- 6,696
--------- --------- --------- --------- -----------
Total current assets................ -- (249) 6,707 -- 6,458
Property & equipment, net............... -- (3,570) 2,500 -- (1,070)
Goodwill, net........................... -- -- 82,597 829 83,426
Other................................... -- (1,102) -- -- (1,102)
--------- --------- --------- --------- -----------
Total assets............................ $ -- $ (4,921) $ 91,804 $ 829 $ 87,712
========= ========= ========= ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable........................ $ -- $ (34) $ -- $ -- $ (34)
Accrued liabilities..................... -- 29 -- -- 29
Income taxes payable.................... -- -- -- -- --
Notes payable........................... -- (793) (23,063) -- (23,856)
Current maturities of long-term debt.... -- -- (6,892) -- (6,892)
Payable to stockholder.................. -- -- 27,826 -- 27,826
--------- --------- --------- --------- -----------
Total current liabilities........... -- (798) (2,129) -- (2,927)
Long-term debt, net of current
maturities............................ 18,572 -- 29,955 -- 48,527
Deferred income taxes................... -- -- 3,680 829 4,509
--------- --------- --------- --------- -----------
Total liabilities................... 18,572 (798) 31,506 829 50,109
Stockholders' equity:
Preferred Stock..................... -- -- (547) -- (547)
Common stock........................ -- (1,751) (1,141) -- (2,892)
Additional paid-in capital.......... -- -- 76,265 -- 76,265
Retained earnings................... (18,572) (2,527) (17,367) -- (38,466)
Treasury stock...................... -- 155 3,088 -- 3,243
--------- --------- --------- --------- -----------
Total stockholders' equity...... (18,572) (4,123) 60,298 -- 37,603
--------- --------- --------- --------- -----------
Total liabilities and stockholders'
equity................................ $ -- $ (4,921) $ 91,804 $ 829 $ 87,712
========= ========= ========= ========= ===========
</TABLE>
POST MERGER
(E) (F) ADJUSTMENTS
--------- --------- -----------
ASSETS
Cash and cash equivalents............... $ 50,870 $ (37,734) $ 13,136
Other................................... (1,177) -- (1,177)
--------- --------- -----------
Total current assets................ 49,693 (37,734) 11,959
Property & equipment, net............... -- -- --
Other................................... -- (448) (448)
--------- --------- -----------
Total assets............................ $ 49,693 $ (38,182) $ 11,511
========= ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued liabilities..................... $ (1,143) $ -- $ (1,143)
Payable to stockholder.................. -- (27,826) (27,826)
--------- --------- -----------
Total current liabilities........... (1,143) (27,826) (28,969)
Long-term debt, net of current
maturities............................ -- (10,356) (10,356)
--------- --------- -----------
Total liabilities................... (1,143) (38,182) (39,325)
Stockholders' equity:
Common stock........................ 59 -- 59
Additional paid-in capital.......... 50,777 -- 50,777
Retained earnings................... -- -- --
Treasury stock...................... -- -- --
--------- --------- -----------
Total stockholders' equity...... 50,836 -- 50,836
--------- --------- -----------
Total liabilities and stockholders'
equity................................ $ 49,693 $ (38,182) $ 11,511
========= ========= ===========
F-7
<PAGE>
METALS USA, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
4. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS:
TWELVE MONTHS ENDED DECEMBER 31, 1996
(a) Reflects the reduction in certain related party rental and lease
expenses which has been agreed prospectively.
(b) Reflects the $3,558 reduction in salaries, bonuses and benefits to
the owners of the Founding Companies to which they have agreed
prospectively and the reversal of the $3,636 non-cash compensation
charge related to the issuance of 400,000 shares of common stock
to management of and consultants to the Company offset by a $400
charge for recurring salary expenses of management.
(c) Reflects the amortization of goodwill to be recorded as a result
of these Mergers over a 40-year estimated life plus additional
depreciation expense due to the allocation of a portion of the
excess purchase price to property and equipment.
(d) Reflects the anticipated reduction in interest expense of $1,010
due to refinancing of the outstanding indebtedness in conjunction
with the Mergers, net of the additional interest expense of $656
on the borrowings required to fund the S Corporation
Distributions.
(e) Reflects the pre-acquisition results of operations for Cornerstone
Patio (acquired August 1996), Cornerstone Aluminum (acquired
February 1997) and Williams (acquired March 1996) as if the
acquisitions were completed as of January 1, 1996.
(f) Reflects the incremental provision for federal and state income
taxes for all entities being combined and other statements of
operations adjustments.
The following table summarizes unaudited pro forma combined statements of
operations adjustments:
<TABLE>
<CAPTION>
PRO FORMA
(A) (B) (C) (D) (E) (F) ADJUSTMENTS
--------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................ $ -- $ -- $ -- $ -- $ 11,256 $ -- $ 11,256
Costs and expenses:
Cost of sales........................ -- -- -- -- 7,437 -- 7,437
Operating and delivery............... (514) -- -- -- 500 -- (14)
Selling, general and
administrative..................... -- (6,794) -- -- 1,875 -- (4,919)
Depreciation and amortization........ -- -- 2,376 -- 197 -- 2,573
--------- --------- --------- --------- --------- --------- -----------
Income from operations............... 514 6,794 (2,376) -- 1,247 -- 6,179
Other (income) expense:
Interest (income) expense........ -- -- -- (354) 206 -- (148)
Other (income) expense........... -- -- -- -- (125) -- (125)
--------- --------- --------- --------- --------- --------- -----------
Income before income taxes........... 514 6,794 (2,376) 354 1,166 -- 6,452
Provision for income taxes........... -- -- -- -- 459 5,395 5,854
--------- --------- --------- --------- --------- --------- -----------
Net income........................... $ 514 $ 6,794 $ (2,376) $ 354 $ 707 $ (5,395) $ 598
========= ========= ========= ========= ========= ========= ===========
</TABLE>
F-8
<PAGE>
METALS USA, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
4. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS
(CONTINUED):
THREE MONTHS ENDED MARCH 31, 1997
(a) Reflects the reduction in certain related party rental and lease
expenses which has been agreed prospectively.
(b) Reflects the $813 reduction in salaries, bonuses and benefits to
the owners of the Founding Companies to which they have agreed
prospectively and the reversal of the $2,813 non-cash compensation
charge related to the issuance of 309,500 shares of common stock
to management of and consultants to the Company offset by a $175
charge for recurring salary expenses of management.
(c) Reflects the amortization of goodwill to be recorded as a result
of these Mergers over a 40-year estimated life plus additional
depreciation expense due to the allocation of a portion of the
excess purchase price to property and equipment.
(d) Reflects the anticipated reduction in interest expense of $276 due
to refinancing of the outstanding indebtedness in conjunction with
the Mergers, net of the additional interest expense of $134 on the
borrowings required to fund the S Corporation Distributions and
the borrowings required to fund the Cornerstone Aluminum
acquisition.
(e) Reflects the pre-acquisition results of Cornerstone Aluminum
(acquired February 1997) as if the acquisition was completed as of
January 1, 1997.
(f) Reflects the incremental provision for federal and state income
taxes for all entities being combined and other statements of
operations adjustments.
The following table summarizes unaudited pro forma combined statements of
operations adjustments:
<TABLE>
<CAPTION>
PRO FORMA
(A) (B) (C) (D) (E) (F) ADJUSTMENTS
--------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................ $ -- $ -- $ -- $ -- $ 395 $ -- $ 395
Costs and expenses:
Cost of sales........................ -- -- -- -- 272 -- 272
Operating and delivery............... (140) -- 16 -- (124)
Selling, general and
administrative..................... -- (3,451) -- -- 68 -- (3,383)
Depreciation and amortization........ -- -- 571 -- 31 -- 602
--------- --------- --------- --------- --------- --------- -----------
Income from operations............... 140 3,451 (571) -- 8 -- 3,028
Other (income) expense:
Interest (income) expense........ -- -- -- (142) 30 -- (112)
Other (income) expense........... -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- -----------
Income before income taxes........... 140 3,451 (571) 142 (22) -- 3,140
Provision for income taxes........... -- -- -- -- -- 1,185 1,185
--------- --------- --------- --------- --------- --------- -----------
Net income........................... $ 140 $ 3,451 $ (571) $ 142 $ (22) $ (1,185) $ 1,955
========= ========= ========= ========= ========= ========= ===========
</TABLE>
F-9
<PAGE>
METALS USA, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
5. SUBSEQUENT EVENTS:
COMMON STOCK
During the second quarter of 1997, the Company issued a total of 676,000
shares of Common Stock to management of and consultants to the Company at a
price of $.01 per share. As a result, the Company has recorded a non-recurring,
non-cash compensation charge of $4,725 in the second quarter 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 companies were
combined. In addition, the second quarter reflects a reduction in compensation
expense of $1,490 representing a revision of the estimated fair value of the
shares sold to management and consultants in 1996 and the first quarter of 1997.
Due to the non-recurring nature of these items, these amounts have been excluded
from the pro forma combined statement of operations.
NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128") which
simplifies the standards required under current accounting rules for computing
earnings per share and replaces the presentation of primary earnings per share
and fully diluted earnings per share with a presentation of basic earnings per
share ("basic EPS") and diluted earnings per share ("diluted EPS"). Basic
EPS excludes dilution and is determined by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted EPS reflects the potential dilution that could occur if
securities and other contracts to issue common stock were exercised or converted
into common stock. Diluted EPS is computed similarly to fully diluted earnings
per share under current accounting rules.
The implementation of SFAS No. 128 in 1997 is not expected to have a
material effect on the Company's earnings per share as determined under current
accounting rules.
F-10
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Metals USA, Inc.
We have audited the accompanying balance sheet of Metals USA, Inc. as of
December 31, 1996 and the related statements of operations, stockholders' equity
and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether these 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Metals USA, Inc. as of
December 31, 1996, and the results of its operations and cash flows for the year
then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 2, 1997
F-11
<PAGE>
METALS USA, INC.
BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, MARCH 31,
1996 1997
------------- -------------
(UNAUDITED)
ASSETS
CASH AND CASH EQUIVALENTS............... $ 5 $ 8
DEFERRED OFFERING COSTS................. 83 1,177
------------- -------------
Total assets.................. $ 88 $ 1,185
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
ACCRUED LIABILITIES AND AMOUNTS DUE TO
STOCKHOLDER........................... $ 49 $ 1,143
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par,
5,000,000 authorized, none issued
and outstanding................... -- --
Common stock, $.01 par, 53,122,914
shares authorized, 3,767,914 and
4,077,414 shares issued and
outstanding at December 31, 1996
and March 31, 1997,
respectively...................... 38 41
Additional paid in capital......... 3,637 6,450
Retained deficit................... (3,636) (6,449)
------------- -------------
Total stockholders' equity.... 39 42
------------- -------------
Total liabilities and
stockholders' equity...... $ 88 $ 1,185
============= =============
Reflects a 135.81-for-one stock split effective on April 21, 1997.
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
METALS USA, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
FOR THE PERIOD
FROM INCEPTION THREE MONTHS
(JULY 3, 1996) THROUGH ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------------- --------------
(UNAUDITED)
REVENUES............................ $ -- $ --
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.......................... 3,636 2,813
----------------------- --------------
LOSS BEFORE INCOME TAXES............ (3,636) (2,813)
INCOME TAX EXPENSE.................. -- --
----------------------- --------------
NET LOSS............................ $(3,636) $ (2,813)
======================= ==============
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
METALS USA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Initial Capitalization (July 3, 1996)... 135,810 $ 1 $-- $ -- $ 1
Issuance of Notre Shares........... 3,232,104 33 1 -- 34
Issuance of Management Shares...... 400,000 4 3,636 -- 3,640
Net loss........................... -- -- -- (3,636) (3,636)
--------- ------ ---------- -------- -------------
BALANCE, December 31, 1996.............. 3,767,914 38 3,637 (3,636) 39
Issuance of Management Shares
(unaudited)...................... 309,500 3 2,813 -- 2,816
Net loss (unaudited)............... -- -- -- (2,813) (2,813)
--------- ------ ---------- -------- -------------
BALANCE, March 31, 1997 (unaudited)..... 4,077,414 $ 41 $6,450 $ (6,449) $ 42
========= ====== ========== ======== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
METALS USA, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
FOR THE PERIOD
FROM INCEPTION THREE MONTHS
(JULY 3, 1996) THROUGH ENDED
DECEMBER 31, 1996 MARCH 31, 1997
---------------------- --------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................. $ (3,636) $ (2,813)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating
activities --
Compensation expense related to
issuance of management
shares........................ 3,636 2,813
---------------------- --------------
Net cash provided by (used
in) operating
activities.............. -- --
---------------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock............... 5 3
---------------------- --------------
Net cash provided by
financing activities.... 5 3
---------------------- --------------
NET INCREASE IN CASH................. 5 3
CASH, beginning of period............ -- 5
---------------------- --------------
CASH, end of period.................. $ 5 $ 8
====================== ==============
Supplemental Cash Flow Information:
Contribution of services in exchange
for stock............................ $ 34 $--
====================== ==============
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE>
METALS USA, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BUSINESS AND ORGANIZATION
Metals USA, Inc., a Delaware corporation, ("Metals" or the "Company")
was founded in July 1996 to become a leading national value-added metals
processor service center to manufacture higher-value components from processed
metals and to pursue aggressively the consolidation of the highly fragmented
metals processing industry. Metals intends to acquire eight businesses (the
"Mergers"), complete an initial public offering (the "Offering") of its
common stock and, subsequent to the Offering, continue to acquire through merger
or purchase, similar companies to expand its national operations.
Metals has not conducted any operations, and all activities to date have
related to the Offering and the Mergers. Cash of $5 was generated from the
initial capitalization of the Company and subsequent sales of common stock to
certain members of management (see Note 3). All expenditures to date have been
funded by Notre Capital Ventures II, L.L.C. ("Notre") on behalf of the
Company. As of December 31, 1996 and March 31, 1997, costs of approximately $83
and $1,177, respectively, have been incurred by Notre in connection with the
Offering. Metals has treated these costs as deferred offering costs. Metals is
dependent upon the Offering to execute the pending Mergers and to repay Notre.
There is no assurance that the pending Mergers discussed below will be completed
or that Metals will be able to generate future operating revenues.
2. INTERIM FINANCIAL INFORMATION
The interim financial statements included herein are unaudited; however,
they include all adjustments of a normal recurring nature, which, in the opinion
of management, are necessary to present fairly the financial position of Metals
USA at March 31, 1997, and the results of its operations and cash flows for the
three months ended March 31, 1997. Accounting measurements at interim dates
inherently involve greater reliance on estimates than at year end. The results
of operations for the interim periods presented are not necessarily indicative
of the results to be expected for the entire year.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. STOCKHOLDERS' EQUITY
Common Stock and Preferred Stock
Metals effected a 135.81-for-one stock split on April 21, 1997 for each
share of common stock ("Common Stock") then outstanding. In addition, the
Company increased the number of authorized shares of Common Stock to 50,000,000
and the authorized shares of Restricted Common Stock to 3,122,914. The Company
also authorized 5,000,000 shares of $.01 par value preferred stock, which may be
designated in the future. The effects of the Common Stock split and the increase
in the shares of authorized Common Stock have been retroactively reflected on
the balance sheet and in the accompanying notes.
In connection with the organization and initial capitalization of Metals,
the Company issued 135,810 shares of Common Stock at $.01 per share to Notre.
Notre incurred $34 of expenses on behalf of the Company for which the Company
issued 3,232,104 additional shares to Notre in December 1996.
In December 1996, 400,000 shares of Common Stock were sold to management at
$.01 per share. During the first and second quarters of 1997, the Company issued
a total of 985,500 shares of Common Stock to management of and consultants to
the Company at a price of $.01 per share. As a result, the Company has recorded
a non-recurring, non-cash compensation charge of $3,636 in 1996 and $2,813 and
F-16
<PAGE>
METALS USA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
$4,725 in the first and second quarters of 1997, respectively, 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 companies were combined. The second
quarter of 1997 also includes a reduction in compensation expense of $1,490
representing a revision of the estimated fair value of the shares sold to
management and consultants in 1996 and the first quarter of 1997.
Restricted Common Stock
In April 1997, Notre 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 the Company's Board of Directors and to 0.55 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 of the Company, 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, the Corporation 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.
Long-Term Incentive Plan
In April 1997, the Company'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, stock appreciation rights,
restricted or deferred stock, dividend equivalents and other incentive awards to
directors, officers, key employees and consultants to the Company. The number of
shares authorized and reserved for issuance under the Plan is the greater of
2,500,000 shares or 13% of the aggregate number of shares of Common Stock
outstanding. The terms of the option awards will be established by the
Compensation Committee of the Company's Board of Directors. The Company intends
to file a registration statement on Form S-8 under the Securities Act
registering the issuance of shares upon exercise of options granted under this
Plan. The Company expects to grant non-qualified stock options to purchase a
total of 705,000 shares of Common Stock to key employees of the Company at the
initial public offering price upon consummation of the Offering. In addition,
the Company expects to grant options to purchase a total of 1,426,024 shares of
Common Stock to certain employees of the Founding Companies at the initial
public offering price per share. These options will vest at the rate of 20% per
year, commencing on the first anniversary of the Offering and will expire ten
years from the date of grant or three months following termination of
employment.
Non-Employee Directors Stock Plan
The Company's 1997 Non-Employee Directors' Stock Plan (the "Director's
Plan"), which was adopted by the Board of Directors and approved by the
Company's stockholders in April 1997, provides for (i) the automatic grant to
each non-employee director serving at the consummation of this Offering 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 to each non-employee
director of an option to purchase 5,000 shares at each annual meeting of
stockholders thereafter at which 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
F-17
<PAGE>
METALS USA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
and expire on the earlier of ten years from the date of grant or one year after
termination of service as a director. The Director's 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.
4. NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," allows entities to choose between a
new fair value based method of accounting for employee stock options or similar
equity instruments and the current intrinsic, value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25").
Entities electing to remain with the accounting in APB Opinion No. 25 must make
pro forma disclosures of net income and earnings per share as if the fair value
method of accounting had been applied. The Company will provide pro forma
disclosure of net income and earnings per share, as applicable, in the notes to
future consolidated financial statements.
In February 1997, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128"). For the
Company, SFAS No. 128 will be effective for the year ended December 31, 1997.
SFAS No. 128 simplifies the standards required under current accounting rules
for computing earnings per share and replaces the presentation of primary
earnings per share and fully diluted earnings per share with a presentation of
basic earnings per share ("basic EPS") and diluted earnings per share
("diluted EPS"). Basic EPS excludes dilution and is determined by dividing
income available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted EPS reflects the potential
dilution that could occur if securities and other contracts to issue common
stock were exercised or converted into common stock. Diluted EPS is computed
similarly to fully diluted earnings per share under current accounting rules.
The implementation of SFAS No. 128 is not expected to have a material effect on
the Company's earnings per share as determined under current accounting rules.
5. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED)
Wholly-owned subsidiaries of Metals USA have signed definitive agreements
to acquire by merger eight companies ("Founding Companies") to be effective
with the Offering. The companies to be acquired are Texas Aluminum/Cornerstone
group of companies, Interstate Steel Supply Co., Queensboro Steel Corporation,
Affiliated Metals Company, Uni-Steel Incorporated, Southern Alloy of America,
Inc., Williams Steel & Supply Co., Inc. and Steel Service Systems, Inc. The
aggregate consideration that will be paid by Metals to acquire the Founding
Companies is approximately $27,826 in cash and 10,128,609 shares of Common
Stock.
The Company has obtained a commitment for an unsecured $150,000 revolving
credit facility which will be available upon the closing of the Offering. The
facility is intended to be used for working capital, acquisitions, capital
expenditures and refinancing of debt not paid out of the proceeds of this
Offering.
On May 7, 1997, Metals filed a registration statement on Form S-1 for the
sale of its Common Stock. An investment in shares of Common Stock offered by
this Prospectus involves a high degree of risk, including, among others, absence
of a combined operating history, risks relating to the Company's acquisition
strategy, risks relating to acquisition financing, reliance on key personnel and
a substantial portion of the proceeds from the offering payable to affiliates of
the Founding Companies. For a more thorough discussion of risk factors, see
"Risk Factors" included elsewhere in this Prospectus.
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Texas Aluminum Industries, Inc.:
We have audited the accompanying combined balance sheets of Texas Aluminum
Industries, Inc., and the affiliated Cornerstone Companies (collectively the
Companies), as of June 30, 1995 and December 31, 1996, and the related combined
statements of income, stockholders' equity and members' equity and cash flows
for the years ended June 30, 1994 and 1995, and December 31, 1996. These
combined financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Texas
Aluminum Industries, Inc. and the affiliated Cornerstone Companies as of June
30, 1995 and December 31, 1996, and the results of their combined operations and
their combined cash flows for the years ended June 30, 1994 and 1995, and
December 31, 1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
April 18, 1997
F-19
<PAGE>
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
JUNE 30, DECEMBER 31, MARCH 31,
1995 1996 1997
-------- ------------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash............................ $ 359 $ 156 $ 884
Accounts and notes receivable,
net of allowance of
$519, $677 and $851........... 3,432 4,221 4,675
Accounts and notes receivable
from affiliates............... 993 81 107
Inventory....................... 8,193 10,878 11,998
Prepaid expenses................ 47 38 30
Deferred income taxes........... 591 754 836
-------- ------------- -----------
Total current assets....... 13,615 16,128 18,530
Property and equipment, net.......... 3,712 4,058 4,442
Notes receivable from affiliates..... -- 465 446
Other assets......................... 715 576 1,227
Goodwill............................. 690 822 1,634
-------- ------------- -----------
Total assets.......... $ 18,732 $22,049 $26,279
======== ============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes
payable....................... $ 593 $ 683 $ 1,199
Current portion of notes payable
and capital lease obligations
to affiliates................. 54 77 65
Accounts payable................ 3,882 5,540 4,242
Income taxes payable............ 269 396 424
Accrued liabilities............. 1,416 1,158 1,098
-------- ------------- -----------
Total current
liabilities............. 6,214 7,854 7,028
Notes payable, less current
portion............................ 7,879 6,004 11,183
Notes payable and capital lease
obligations payable to affiliates,
less current portion............... 368 1,419 2,465
Deferred income taxes................ 249 163 181
Other long-term liabilities.......... 41 274 273
-------- ------------- -----------
Total liabilities..... 14,751 15,714 21,130
-------- ------------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock................. 379 369 369
Common stock.................... 1,517 1,501 1,506
Members' equity................. -- 1 1
Additional paid-in capital...... 198 188 188
Retained earnings............... 2,199 4,560 3,369
Less: treasury stock, at
cost.................... (312) (284) (284)
-------- ------------- -----------
Total stockholders'
equity.................. 3,981 6,335 5,149
-------- ------------- -----------
Total liabilities and
stockholders'
equity............. $ 18,732 $22,049 $26,279
======== ============= ===========
The accompanying notes are an integral part of these combined financial
statements.
F-20
<PAGE>
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, YEAR ENDED MARCH 31,
-------------------- DECEMBER 31, --------------------
1994 1995 1996 1996 1997
--------- --------- ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................ $ 26,105 $ 34,706 $ 40,651 $ 7,620 $ 9,685
Costs and expenses:
Cost of sales................... 17,991 23,893 27,146 5,261 6,288
Operating and delivery.......... 5,621 5,863 6,386 1,417 1,411
Selling, general and
administrative................ 1,654 2,810 3,539 855 1,268
Depreciation and amortization... 346 517 568 142 197
--------- --------- ------------ --------- ---------
Operating income (loss).............. 493 1,623 3,012 (55) 521
Other (income) expense:
Interest expense................ 444 837 682 184 242
Other income.................... (169) (143) (8) (30) (38)
--------- --------- ------------ --------- ---------
Income (loss) before income taxes.... 218 929 2,338 (209) 317
Provision (benefit) for income
taxes.............................. 93 277 456 (102) 108
--------- --------- ------------ --------- ---------
Net income (loss).................... $ 125 $ 652 $ 1,882 $ (107) $ 209
========= ========= ============ ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-21
<PAGE>
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY AND MEMBERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------- CORNERSTONE MEMBERS' PREFERRED PAID-IN RETAINED TREASURY
CLASS A CLASS B COMMON EQUITY STOCK CAPITAL EARNINGS STOCK
-------- -------- ----------- -------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993............... $363 $1,239 $-- $-- $414 $254 $ 1,422 $(315)
Purchase of 6,757 shares of Class
B common stock at $16 per
share.......................... -- -- -- -- -- -- -- (108)
Purchase of 315 shares of
preferred stock at $100 per
share.......................... -- -- -- -- -- -- -- (31)
Cancellation of treasury stock... -- (74) -- -- (21) (44) -- 139
Net income....................... -- -- -- -- -- -- 125 --
-------- -------- ----------- -------- ---------- -------- --------- ---------
Balance, June 30, 1994............... 363 1,165 -- -- 393 210 1,547 (315)
Purchase of 2,142 shares of Class
B common stock at $16 per
share.......................... -- -- -- -- -- -- -- (34)
Purchase of 97 shares of
preferred stock at $100 per
share.......................... -- -- -- -- -- -- -- (10)
Cancellation of treasury stock... -- (21) -- -- (14) (12) -- 47
Issuance of Cornerstone Metals
Corporation common stock....... -- -- 5 -- -- -- -- --
Issuance of Cornerstone Building
Products, Inc. common stock.... -- -- 5 -- -- -- -- --
Net income....................... -- -- -- -- -- -- 652 --
-------- -------- ----------- -------- ---------- -------- --------- ---------
Balance, June 30, 1995............... 363 1,144 10 -- 379 198 2,199 (312)
Purchase of 249 shares of Class B
common stock at $16 per
share.......................... -- -- -- -- -- -- -- (4)
Purchase of 37 shares of
preferred stock at $100 per
share.......................... -- -- -- -- -- -- -- (4)
Issuance of Cornerstone Patio
Concepts L.L.C. members'
equity......................... -- -- -- 1 -- -- -- --
Cancellation of treasury stock... -- (16) -- -- (10) (10) -- 36
Adjustment to conform fiscal year
ends........................... -- -- -- -- -- -- 579 --
Distributions to stockholders.... -- -- -- -- -- -- (100) --
Net income....................... -- -- -- -- -- -- 1,882 --
-------- -------- ----------- -------- ---------- -------- --------- ---------
Balance, December 31, 1996........... 363 1,128 10 1 369 188 4,560 (284)
Issuance of Cornerstone Aluminum
Company, Inc. common stock
(unaudited).................... -- -- 5 -- -- -- -- --
Distributions to stockholders
(unaudited).................... -- -- -- -- -- -- (1,400) --
Net income (unaudited)........... -- -- -- -- -- -- 209 --
-------- -------- ----------- -------- ---------- -------- --------- ---------
Balance, March 31, 1997
(unaudited)........................ $363 $1,128 $ 15 $ 1 $369 $188 $ 3,369 $(284)
======== ======== =========== ======== ========== ======== ========= =========
</TABLE>
TOTAL
---------
Balance, June 30, 1993............... $ 3,377
Purchase of 6,757 shares of Class
B common stock at $16 per
share.......................... (108)
Purchase of 315 shares of
preferred stock at $100 per
share.......................... (31)
Cancellation of treasury stock... --
Net income....................... 125
---------
Balance, June 30, 1994............... 3,363
Purchase of 2,142 shares of Class
B common stock at $16 per
share.......................... (34)
Purchase of 97 shares of
preferred stock at $100 per
share.......................... (10)
Cancellation of treasury stock... --
Issuance of Cornerstone Metals
Corporation common stock....... 5
Issuance of Cornerstone Building
Products, Inc. common stock.... 5
Net income....................... 652
---------
Balance, June 30, 1995............... 3,981
Purchase of 249 shares of Class B
common stock at $16 per
share.......................... (4)
Purchase of 37 shares of
preferred stock at $100 per
share.......................... (4)
Issuance of Cornerstone Patio
Concepts L.L.C. members'
equity......................... 1
Cancellation of treasury stock... --
Adjustment to conform fiscal year
ends........................... 579
Distributions to stockholders.... (100)
Net income....................... 1,882
---------
Balance, December 31, 1996........... 6,335
Issuance of Cornerstone Aluminum
Company, Inc. common stock
(unaudited).................... 5
Distributions to stockholders
(unaudited).................... (1,400)
Net income (unaudited)........... 209
---------
Balance, March 31, 1997
(unaudited)........................ $ 5,149
=========
The accompanying notes are an integral part of these combined financial
statements.
F-22
<PAGE>
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED YEAR ENDED
JUNE 30, DECEMBER 31, MARCH 31,
-------------------- ------------ --------------------
1994 1995 1996 1996 1997
--------- --------- ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ 125 $ 652 $ 1,882 $ (107) $ 209
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Adjustment to conform fiscal year
ends........................... -- -- 579 -- --
Provision for bad debts.......... 456 501 718 90 97
Depreciation and amortization.... 346 517 763 142 197
(Gain) loss on sale of property
and equipment.................. (11) 11 (266) 1 (2)
Deferred income taxes............ (95) (111) (249) (108) (64)
Changes in operating assets and
liabilities, net of business
acquisitions --
Accounts and notes
receivable.................. (1,196) (100) (783) 280 (209)
Accounts and notes receivable
from affiliates............. 124 (654) (167) -- (26)
Inventory...................... (341) (1,166) (1,970) (164) (285)
Other assets................... (17) (82) (29) (27) (42)
Accounts payable............... 39 393 1,476 96 (1,300)
Accounts payable to
affiliates.................. 11 161 -- -- --
Income taxes payable........... (18) 171 127 (123) 28
Accrued liabilities............ 373 309 (269) (89) (60)
--------- --------- ------------ --------- ---------
Net cash provided by (used
in) operating activities.. (204) 602 1,812 (9) (1,457)
--------- --------- ------------ --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets....... 104 71 611 -- --
Purchases of property.............. (438) (606) (739) (74) (121)
Collections on notes receivable.... 129 109 445 114 5
Purchase of businesses, net of
acquired cash.................... -- (2,500) (150) -- (1,300)
--------- --------- ------------ --------- ---------
Net cash provided by (used
in) investing activities.. (205) (2,926) 167 40 (1,416)
--------- --------- ------------ --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable........ 2,566 2,518 -- -- --
Principal payments on notes payable
and capital leases............... (1,745) (322) (746) (98) (157)
Borrowings on revolving credit
facility......................... 5,498 1,403 3,692 1,120 5,214
Payments on revolving credit
facility......................... (6,005) (1,299) (5,160) (948) (1,100)
Payments made to former ESOP
members.......................... (92) (63) (89) (12) (11)
Borrowings on notes payable to
affiliates....................... -- 650 1,020 100 1,400
Principal payments on notes payable
to affiliates.................... -- (452) (800) (100) (350)
Issuance of common stock and
members' equity.................. -- 10 1 -- 5
Distribution to stockholders....... -- -- (100) -- (1,400)
--------- --------- ------------ --------- ---------
Net cash provided by (used
in) financing activities.. 222 2,445 (2,182) 62 3,601
--------- --------- ------------ --------- ---------
NET INCREASE (DECREASE) IN CASH...... (187) 121 (203) 93 728
CASH, BEGINNING OF PERIOD............ 425 238 359 147 156
--------- --------- ------------ --------- ---------
CASH, END OF PERIOD.................. $ 238 $ 359 $ 156 $ 240 $ 884
========= ========= ============ ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest........................... $ 441 $ 526 $ 699 $ 186 $ 190
Income taxes....................... 207 217 584 78 166
Non-cash investing and financing
activities:
Purchase of assets through
assumption of debt............... $ -- $ 19 $ 820 $ -- $ 1,700
Purchase of treasury stock through
assumption of debt............... 102 35 32 4 --
Sale of assets by issuing note
receivable....................... -- -- 330 -- --
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-23
<PAGE>
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying combined financial statements include the accounts of
Texas Aluminum Industries, Inc. ("Texas Aluminum"), a Texas corporation,
Cornerstone Metals Corporation ("CMC"), a Nevada Corporation, Cornerstone
Building Products, Inc. ("CBP"), a Nevada corporation, and Cornerstone Patio
Concepts, L.L.C. ("CPC"), a Nevada limited liability corporation. CMC, CBP and
CPC are collectively referred to herein as "Cornerstone". Texas Aluminum and
Cornerstone are under common control and ownership and are presented herein on a
combined basis. Texas Aluminum and Cornerstone are collectively referred to as
"Texas Aluminum/Cornerstone." Texas Aluminum/Cornerstone produces and
distributes aluminum and steel building products consisting of windows, doors,
insulated wall panels, canopies and awnings. These products are used by
commercial and residential contractors in the construction of sun rooms,
solariums, walkways, canopies and coverings, aluminum support structures, as
well as for facia coverings for retail buildings. Texas Aluminum/Cornerstone's
products are produced in five manufacturing plants. The products are marketed
and sold to contractors, architects and wholesale distributors through 36 sales
and distribution outlets across the United States, primarily concentrated in the
Sunbelt.
Texas Aluminum has historically reported on a June 30 fiscal year end,
whereas Cornerstone has historically reported on a December 31 year end. For
purposes of combined presentation, Texas Aluminum began reporting on a calendar
year end basis effective January 1, 1996. Cornerstone began operations on April
1, 1995 as further discussed below. Accordingly, the year ended June 30, 1994
includes the operations of Texas Aluminum, the year ended June 30, 1995 includes
the operations of Texas Aluminum for the twelve months ended June 30, 1995
combined with the operations of Cornerstone for the nine months ended December
31, 1995, and the year ended December 31, 1996 includes Texas Aluminum and
Cornerstone for the twelve months ended December 31, 1996. The net sales and net
income of Texas Aluminum for the period from July 1, 1995 through December 31,
1995 were $15,547 and $579, respectively. The net sales and net income of
Cornerstone for the period from July 1, 1995 through December 31, 1995 were
$3,671 and $165, respectively. The net income of Texas Aluminum for this
transition period is included in the accompanying statements of stockholders'
equity as an adjustment to retained earnings in order to conform the fiscal
years of these combined companies.
Intercompany transactions and ending balances among Texas Aluminum, CMC,
CBP and CPC have been eliminated except for certain transactions and balances
for the year ended June 30, 1995 which could not be eliminated due to the
combining of year ends (See Note 12).
Texas Aluminum/Cornerstone and its stockholders expect to enter into a
definitive merger agreement with Metals USA, Inc. ("Metals USA") pursuant to
which all of the Companies' outstanding shares of capital stock will be
exchanged for cash and shares of Metals USA common stock concurrently with the
consummation of the initial public offering (the "Offering") of Metals USA
common stock.
BUSINESS COMBINATIONS
CMC and CBP are both S Corporations, as defined by the Internal Revenue
Code, and were acquired April 1, 1995. Accordingly, the financial statements for
1995 include the nine-month period from the date of acquisition through December
31, 1995. CPC, a Limited Liability Corporation, was acquired in August, 1996.
The aggregate consideration paid for CMC and CBP was $2,500 in cash and $828 in
notes payable to the seller. The consideration paid for CPC was $150 in cash and
$415 in notes payable to the seller. The accompanying combined balance sheet as
of December 31, 1996, includes allocations of the respective purchase prices
which resulted in goodwill recognized of $887.
F-24
<PAGE>
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The following summarizes the assets acquired and liabilities assumed.
JUNE 30, DECEMBER 31,
1995 1996
--------- -------------
Fair value of assets acquired, net of
cash acquired...................... $ 2,615 $ 607
Goodwill and other intangibles....... 713 174
Liabilities assumed.................. -- (216)
Notes issued to sellers.............. (828) (415)
--------- -------------
Cash paid, net of cash acquired...... $ 2,500 $ 150
========= =============
The results of operations for CPC are included in the combined income
statement from the date of acquisition.
The following presents the unaudited results of operations for Texas
Aluminum/Cornerstone for the years ended June 30, 1995 and December 31, 1996, as
if CPC had been acquired as of April 1, 1995, the effective date Cornerstone
began operations.
JUNE 30, DECEMBER 31,
1995 1996
-------- ------------
Unaudited pro forma sales............ $ 36,503 $ 42,041
Unaudited pro forma income before
income taxes....................... 734 1,957
In February 1997, the owners of Cornerstone, through a newly formed
corporation, Cornerstone Aluminum Company, Inc. ("CAC"), acquired the business
and assets of Amalgamated Building Components, Inc. CAC paid $1,300 in cash and
issued $1,700 in notes payable to the former owner. CAC is headquartered in
Tucson, Arizona with three additional locations in the western and southwestern
United States.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
INTERIM FINANCIAL INFORMATION
The interim financial statements included herein are unaudited; however,
they include all adjustments of a normal recurring nature, which, in the opinion
of management, are necessary to present fairly the financial position of Texas
Aluminum/Cornerstone at March 31, 1997, and the results of its operations and
cash flows for the three months ended March 31, 1996 and 1997. Accounting
measurements at interim dates inherently involve greater reliance on estimates
than at year end. The results of operations for the interim periods presented
are not necessarily indicative of the results to be expected for the entire
year.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Cash equivalents consist of highly liquid money market instruments with
original maturities of three months or less.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the last-in, first-out ("LIFO") method for Texas Aluminum and the
first-in, first-out ("FIFO") method for Cornerstone.
F-25
<PAGE>
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, net of accumulated depreciation.
Depreciation is computed utilizing the straight-line method at rates based upon
the estimated useful lives of the various classes of assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash equivalents approximate their fair value. The
carrying amount of notes receivable approximates fair value at the applicable
balance sheet dates. The fair value of such notes receivable was based on
expected cash flows discounted using current rates at which similar loans would
be made to borrowers with similar credit ratings. The fair value of the notes
payable is estimated based on interest rates for the same or similar debt
offered to Texas Aluminum/Cornerstone having the same or similar remaining
maturities and collateral requirements. The carrying amounts of notes payable
approximate fair value at the applicable balance sheet dates.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject Texas Aluminum/Cornerstone
to concentrations of credit risk, consist principally of cash deposits and,
trade accounts and notes receivable. Texas Aluminum/Cornerstone places its cash
with several financial institutions limiting the amount of credit exposure to
any one financial institution. Concentrations of credit risk with respect to
trade accounts and notes receivable are within the home improvement and general
construction industry. Credit is extended once appropriate credit history and
references have been obtained. Adjustments to the allowance for doubtful
accounts are made periodically (as circumstances warrant) based upon the
expected collectibility of all such accounts. Texas Aluminum/Cornerstone
periodically reviews the credit history of its customers and generally does not
require collateral for the extension of credit.
INCOME TAXES
Texas Aluminum accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES ("SFAS
109"). Under SFAS 109, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. The principal items resulting
in the differences are different depreciation methods, use of the allowance
method for bad debts, and different inventory capitalization methods. Valuation
allowances are established when necessary to reduce deferred assets to the
amount to be realized. Income tax expense is the tax payable for the year and
the change during the year in deferred tax assets and liabilities.
Cornerstone, with the consent of its stockholders, elected to be taxed
under sections of the federal and state income tax laws which provide that, in
lieu of corporate income taxes, the stockholders separately account for
Cornerstone's items of income, deductions, losses and credits on their
individual income tax returns. The financial statements will not include a
provision for income taxes (credits) as long as the S Corporation election
remains in effect. As long as Cornerstone's S Corporation income tax election
remains in effect, Cornerstone may, from time to time, pay dividends to its
stockholders in amounts sufficient to enable the stockholders to pay the taxes
due on their share of Cornerstone's items of income, deductions, losses, and
credits which have been allocated to them for reporting on their individual
income tax returns.
GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess of the consideration paid over the fair
market value of assets acquired and is being amortized on the straight-line
method over 40 years. Other intangibles include covenants not to
F-26
<PAGE>
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
compete, trademarks, patents and consulting agreements, which are being
amortized over their respective lives ranging from 5-15 years. Accumulated
amortization totaled $23 and $65 as of June 30, 1995 and December 31, 1996,
respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF ("SFAS 121") in March 1995. SFAS
121 requires that long-lived assets and certain intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Texas Aluminum/Cornerstone adopted SFAS No. 121 on January 1, 1996.
The impact of adopting this standard did not have a material impact on the
results of operations.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
ESTIMATED JUNE 30, DECEMBER 31,
USEFUL LIVES 1995 1996
-------------- -------- ------------
Land............................. $ 423 $ 410
Buildings and improvements....... 5 - 30 years 1,645 1,835
Machinery and equipment.......... 7 - 10 years 6,102 6,162
Automobiles and trucks........... 3 - 10 years 643 643
-------- ------------
8,813 9,050
Less: accumulated depreciation... (5,101) (4,992)
-------- ------------
Total....................... $ 3,712 $ 4,058
======== ============
F-27
<PAGE>
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
3. SUMMARY OF LONG-TERM FINANCING ARRANGEMENTS
Notes payable to non-affiliates consist of the following:
JUNE 30, DECEMBER 31, MARCH 31,
1995 1996 1997
-------- ------------ ------------
(UNAUDITED)
Revolving credit facility with
interest at prime plus .25%
maturing on October 29, 1998,
secured by inventory, trade
accounts and notes receivable, and
equipment and personally guaranteed
by stockholders.................... $ 3,128 $ 2,753 $ 4,678
Revolving credit facility with
interest at prime plus .5%,
maturing on May 15, 1998, secured
by inventory, trade accounts
receivable and equipment, and
personally guaranteed by
stockholders....................... 1,405 311 2,470
Term loan payable to a bank in
quarterly installments of $63 plus
monthly payments of interest at
7.86%, due October 29, 1998,
secured by inventory, trade
accounts and notes receivable, and
equipment and personally guaranteed
by stockholders.................... 2,175 1,800 1,738
Term loan payable to a bank in
monthly installments of $17 plus
monthly payments of interest at
prime plus .5%, due June 30, 2000,
secured by inventory, trade
accounts and notes receivable and
equipment, and personally
guaranteed by stockholders......... 900 700 650
Notes payable to individuals in
annual installments of $240 plus
accrued interest, beginning
February 10, 1997 and maturing on
February 10, 2002, secured by
certain property................... -- -- 1,689
Note payable to individuals in
monthly installments of $13
including interest, maturing on
July 1, 1998, at which time the
note can be extended 20 months at
prime plus 2%...................... 795 701 737
Note payable to individual in annual
installments of $100 plus accrued
interest at 8%, beginning August 5,
1997 and maturing on August 5,
2000, unsecured.................... -- 314 314
Note payable to individuals in annual
installments of $25 including
interest, beginning August 5, 1997
and maturing on August 5, 2000,
unsecured.......................... -- 100 100
Other long-term debt................. 69 8 6
-------- ------------ ------------
8,472 6,687 12,382
Less: current portion................ (593) (683) (1,199)
-------- ------------ ------------
$ 7,879 $ 6,004 $ 11,183
======== ============ ============
The maximum credit available under the Texas Aluminum revolving credit
facility was increased from $4,000 to $7,000 in February 1997 and the due dates
of the revolver and the term loan were extended to October 29, 1998. The maximum
credit available under the Cornerstone revolving credit facility was increased
from $2,000 to $3,000 in February 1997 and the due dates of the revolver and the
term loan were extended to May 15, 1998 and June 30, 2000, respectively. The
terms of the loan agreements, which provide the revolvers and the term loans to
Texas Aluminum/Cornerstone, include certain restrictive covenants of which Texas
Aluminum/Cornerstone was in compliance as of December 31, 1996. The prime rate
of interest at June 30, 1995 and December 31, 1996 was 9% and 8.25%,
respectively.
F-28
<PAGE>
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Notes payable and capital lease obligations to affiliates consists of the
following:
JUNE 30, DECEMBER 31, MARCH 31,
1995 1996 1997
-------- ------------ -----------
(UNAUDITED)
Notes payable to former employee
stock ownership plan and trust
members payable in annual
installments including interest at
7% and 9%, through October 1999,
secured by treasury stock (See Note
7)................................. $ 172 $ 90 $ 80
Capital lease obligation to an
affiliated company with monthly
installments payable through
December 2011 (See Note 12)........ -- 806 800
Note payable to an affiliated company
in monthly installments of interest
only at 8%, maturing on July 31,
2000, unsecured.................... 100 -- --
Note payable to stockholders,
accruing interest at prime, due
October 31, 1998 and February 25,
1999, unsecured.................... 150 250 1,650
Note payable to an affiliated
corporation in monthly installments
of interest only at 8.5%, paid in
the first quarter 1997,
unsecured.......................... -- 350 --
-------- ------------ -----------
422 1,496 2,530
Less: current portion................ (54) (77) (65)
-------- ------------ -----------
$ 368 $ 1,419 $ 2,465
======== ============ ===========
Texas Aluminum/Cornerstone's long-term notes payable and capital lease
obligations are subject to mandatory redemption as follows:
AFFILIATES
YEAR ENDING NON- --------------------------------
DECEMBER 31, AFFILIATES NOTES PAYABLE CAPITAL LEASE
------------- ----------- -------------- -------------
1997........................ $ 683 $ 49 $ 96
1998........................ 5,541 191 96
1999........................ 325 100 96
2000........................ 138 -- 96
2001........................ -- 350 96
Thereafter.................. -- -- 960
----------- -------------- -------------
$ 6,687 $ 690 $ 1,440
=========== ==============
Less: amounts representing
interest...................... (634)
-------------
Present value of capital lease
obligations................. $ 806
=============
4. INVENTORIES
Inventories consist of the following:
JUNE 30, DECEMBER 31,
1995 1996
-------- ------------
Aluminum coil and roll-formed
aluminum............................ $ 2,325 $ 3,430
Aluminum extrusions.................. 2,246 3,163
Steel coil and roll-formed steel..... 242 358
Miscellaneous purchased and
manufactured goods.................. 3,380 3,927
-------- ------------
$ 8,193 $ 10,878
======== ============
F-29
<PAGE>
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The replacement cost of Texas Aluminum's inventory exceeds the historical
cost of the inventory, computed using the LIFO method of valuation, as reported
in the accompanying financial statements. If the FIFO method had been used for
all inventories, their carrying value would have been $11,818 and $14,314 at
June 30, 1995 and December 31, 1996, respectively. Additionally, net income
would have been $286, $1,219 and $1,837 for the years ended June 30, 1994 and
1995 and December 31, 1996, respectively.
5. DETAIL OF ACCRUED LIABILITIES
Accrued liabilities consist of the following:
JUNE 30, DECEMBER 31,
1995 1996
-------- ------------
Accrued salaries and benefits........ $ 683 $ 425
Accrued ad valorem and sales taxes... 337 447
Other................................ 396 286
-------- ------------
$ 1,416 $ 1,158
======== ============
6. INCOME TAXES
The components of the provision for income taxes are as follows:
YEAR ENDED
---------------------------------------
JUNE 30,
---------------------- DECEMBER 31,
1994 1995 1996
---------- ---------- ------------
Federal:
Current......................... $ 165 $ 338 $ 578
Deferred........................ (84) (99) (196)
---------- ---------- ------------
81 239 382
---------- ---------- ------------
State:
Current......................... 23 50 107
Deferred........................ (11) (12) (33)
---------- ---------- ------------
12 38 74
---------- ---------- ------------
Total provision............ $ 93 $ 277 $ 456
========== ========== ============
The provision for income taxes differs from an amount computed at the
statutory rates as follows:
YEAR ENDED
--------------------------------------
JUNE 30,
---------------------- DECEMBER 31,
1994 1995 1996
---------- ---------- ------------
Federal income tax at statutory
rates.............................. $ 76 $ 325 $ 818
State income taxes................... 12 38 74
Effect of S Corporation income....... -- (89) (454)
Nondeductible expenses (mainly meals
and entertainment)................. 5 3 18
---------- ---------- ------------
$ 93 $ 277 $ 456
========== ========== ============
F-30
<PAGE>
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The significant items giving rise to the deferred tax assets and
(liabilities) as of June 30, 1995 and December 31, 1996 are as follows:
JUNE 30, DECEMBER 31,
1995 1996
-------- ------------
Deferred tax assets --
Allowance for doubtful
accounts...................... $ 199 $ 220
UNICAP inventory................ 380 402
Other accrued expenses.......... 82 197
-------- ------------
Total deferred tax
assets.................. 661 819
-------- ------------
Deferred tax liabilities --
Bases differences in property
and equipment................. (249) (163)
Other........................... (70) (65)
-------- ------------
Total deferred income tax
liabilities............. (319) (228)
-------- ------------
Net deferred tax assets.... $ 342 $ 591
======== ============
7. COMPANY STOCK
Texas Aluminum has three classes of stock which include Class A voting
common stock, Class B non-voting common stock and cumulative, participating
preferred stock. The cumulative, participating preferred stock includes a
conversion right which can be exercised by the holder in the event of the sale
or transfer of more than fifty percent of the common stock or assets of the
corporation or the consolidation, merger or other reorganization or similar
transfer of a majority of the corporation's assets or common stock. The
conversion option allows the holder to convert a preferred share into two shares
of Class A voting common stock.
Texas Aluminum and Cornerstone's capital structure consists of:
JUNE 30, DECEMBER 31,
1995 1996
-------- ------------
Texas Aluminum:
Preferred stock, cumulative and
participating, authorized
100,000 shares, $100 par
value; 3,790 and 3,693 shares
issued and outstanding........ $ 379 $ 369
Common stock Class A voting,
authorized 5,000,000 shares,
no par value; 159,570 shares
issued and outstanding........ 363 363
Common stock Class B non-voting,
authorized 5,000,000 shares,
$10 par value; 114,441 and
112,827 shares issued and
outstanding................... 1,144 1,128
Treasury stock, 15,326 and
13,961 shares of Class B
common stock, respectively,
and 667 and 608 shares of
preferred stock shares,
respectively.................. (312) (284)
Cornerstone:
CMC common stock, authorized
1,000 shares, no par value;
1,000 shares issued and
outstanding................... 5 5
CBP common stock, authorized
1,000 shares, no par value;
1,000 shares issued and
outstanding................... 5 5
CPC members' equity............. -- 1
F-31
<PAGE>
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Treasury stock transactions are a result of employees exercising their put
options on shares awarded through the employee stock ownership plan. Texas
Aluminum cancels treasury stock and the corresponding Class B common stock or
preferred stock when the related note payable is fully paid (See Note 8).
8. EMPLOYEE BENEFIT PLANS
401(K) DEFERRED PROFIT SHARING PLAN AND TRUST
Texas Aluminum adopted a 401(k) salary deferral/savings plan effective July
1, 1989, for the benefit of all its employees. Employees electing to participate
in the plan may contribute up to 15% of annual compensation, limited to the
maximum amount that can be deducted for income tax purposes each year.
Texas Aluminum, at its discretion, has the option to match the employee's
contribution each plan year. Texas Aluminum elected to make contributions of
$24, $23 and $22 for the years ended June 30, 1994 and 1995 and December 31,
1996, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
Texas Aluminum had an employee stock ownership plan and trust. Under the
provisions of this plan, Texas Aluminum made annual contributions to the plan
which were invested in stock and other qualifying securities of Texas Aluminum
for the benefit of Texas Aluminum's employees. Effective July 1, 1989, the ESOP
was frozen. As a result, all participants' accounts became fully vested on that
date.
Under the provisions of the plan, employees received a put option which
required Texas Aluminum to purchase their shares at fair market value.
Additionally, Texas Aluminum had the right of first refusal for any shares sold
by the employee. The plan provided for Texas Aluminum purchases of employee
shares to be paid in cash and with the issuance of a note payable.
In January 1997, Texas Aluminum terminated the plan and gave its employees
the option to receive a cash distribution, roll their account balances into an
IRA account, or have the account distributed in Texas Aluminum stock.
Texas Aluminum's practice has generally been to purchase shares from
employees at $16 per share for the Class B non-voting common stock and $100 per
share for the cumulative, participating preferred stock. The distribution under
the termination is based on these prices. Management believes that these prices
approximate fair value and has obtained valuations from independent appraisers
to assist them in their determination. In March 1997, Gene C. Elkins, a
shareholder of Texas Aluminum, purchased the shares tendered by employees who
opted for a cash distribution. The remaining employees received shares of Texas
Aluminum stock. The put options were terminated upon the execution of these
transactions.
9. COMMITMENTS
OPERATING LEASE AGREEMENTS
Texas Aluminum/Cornerstone is obligated under certain long-term
non-cancelable lease agreements for office space, warehouse space and equipment
as summarized below:
YEAR ENDING
DECEMBER 31,
- -------------
1997................................. $ 1,706
1998................................. 1,358
1999................................. 1,044
2000................................. 480
2001 and thereafter.................. 322
---------
$ 4,910
=========
F-32
<PAGE>
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Texas Aluminum/Cornerstone paid approximately $1,300, $1,700 and $1,700 in
rent expense during the years ended June 30, 1994 and 1995 and December 31,
1996, respectively, under operating leases. Certain of these leases are with
affiliated individuals and companies (see Note 12).
10. DIVESTITURE OF A RETAIL DIVISION
On June 30, 1993, Texas Aluminum divested its retail division under a
licensing agreement, whereby the Company transferred certain assets and existing
sales in exchange for $100 and the licensing agreement. The license grants the
licensee the right to sell certain proprietary products under the name of Air
Vent and/or Air Vent Awning Company. In accordance with the agreement, Texas
Aluminum is entitled to receive monthly license fees of $9 beginning on August
1, 1993, and continuing for a five-year period. These fees are included in other
income in the accompanying statements of income.
Under the terms of the agreement, the licensee has agreed to purchase the
merchandise used to market and install the products exclusively from Texas
Aluminum. During the term of the agreement, Texas Aluminum has agreed not to
compete with the licensee in the retail market in the state of Texas.
As part of the license agreement, Texas Aluminum granted an option for the
sale of the stock of Air Vent Awning Company for a purchase price of $100. This
option has a one year term and is extendable up to four successive one-year
terms. Consideration for these options is $5 per quarter which shall be applied
towards the purchase price.
11. LICENSING AGREEMENT
Texas Aluminum entered into a licensing agreement in July 1992, whereby it
is required to pay licensing fees to a third party on the sale of certain
products. Texas Aluminum has capitalized $94 in costs incurred in connection
with obtaining the licensing agreement which are being amortized over the life
of the agreement. The unamortized balance of capitalized licensing costs was $78
and $66 as of June 30, 1995 and December 31, 1996, respectively. Total licensing
fees paid for the years ended June 30, 1994 and 1995, and December 31, 1996 were
$36, $43 and $64, respectively.
12. RELATED-PARTY TRANSACTIONS
Texas Aluminum/Cornerstone has various transactions with affiliated
individuals and companies as follows:
FACILITY AND EQUIPMENT LEASES
Texas Aluminum/Cornerstone leases certain facilities and equipment from
affiliated individuals and companies. Lease payments made to these affiliated
individuals and companies during the years ended June 30, 1994 and 1995 and
December 31, 1996 were $306, $541 and $697, respectively.
In June 1996, Texas Aluminum sold certain equipment with a net book value
of $143 to an affiliated company. This equipment is being leased to Cornerstone
for $48 per year through December 2011. Also in June 1996, Cornerstone sold
certain equipment with a net book value of $120 to the same affiliated company.
This equipment is being leased to Texas Aluminum for $48 per year through
December 2011. These leases are being accounted for as capital leases. In
November 1996, Texas Aluminum sold certain machinery and equipment to this
affiliated company resulting in a gain of $242. Texas Aluminum is leasing this
machinery from the affiliated company for $72 per year through December 2001.
The resulting gain has been deferred and will be recognized over the term of the
lease.
NOTES RECEIVABLE
Texas Aluminum/Cornerstone has unsecured notes receivable from an
affiliated corporation of $546 as of December 31, 1996, which is included in
accounts and notes receivable from affiliates. This note accrues interest at 8%
and is due June 1, 2001.
Texas Aluminum/Cornerstone believes the related party transactions are on
terms no more or less favorable than what could have been obtained from third
parties.
F-33
<PAGE>
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
INTERCOMPANY ELIMINATIONS
The balance sheet as of June 30, 1995 and the statement of income for the
year ended June 30, 1995, include certain intercompany balances and transactions
between Texas Aluminum and Cornerstone which have not been eliminated due to the
conforming of year ends, as follows:
Affiliated receivables............... $ 993
Affiliated management fee expense.... $ 60
13. SUBSEQUENT EVENTS (UNAUDITED)
In May 1997, Texas Aluminum/Cornerstone and its shareholders entered into a
definitive agreement with a wholly-owned subsidiary of Metals USA, which, among
other things, calls for the merger of Texas Aluminum/Cornerstone with the Metals
USA subsidiary.
Prior to the merger, Cornerstone will make cash distributions of
approximately $2,000 which represents Cornerstone's estimated S Corporation
accumulated adjustment account. Cornerstone expects to fund this $2,000
distribution through short-term borrowings.
Certain transactions occurred subsequent to year end as follows:
i) Texas Aluminum/Cornerstone made a cash distribution of $1,400 to
its stockholders to cover their tax liabilities due to Cornerstone's S
Corporation status.
ii) Discretionary bonuses totalling $1,600 were made to stockholders.
iii) A stockholder and an affiliated entity purchased the shares of
Texas Aluminum's common and preferred stock which were tendered by the
Company's employees upon termination of the ESOP plan (See Note 8).
iv) Two stockholders made loans to the Company totalling $1,400 to
help fund potential future acquisitions.
F-34
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Interstate Steel Supply Company and Affiliates
We have audited the accompanying combined balance sheets of Interstate
Steel Supply Company and Affiliates as of December 31, 1996 and 1995 and the
related statements of income, stockholders' equity and partners' capital and
cash flows for each of the three years in the period ended December 31, 1996.
The individual companies and partnership which comprise the Company are under
common ownership and common management (see Note 1). 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the combined financial position of Interstate Steel Company and
Affiliates at December 31, 1996 and 1995, and the combined results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
April 11, 1997
Philadelphia, Pennsylvania
F-35
<PAGE>
INTERSTATE STEEL SUPPLY CO. AND AFFILIATES
COMBINED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
-------------------- MARCH 31,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents....... $ 83 $ 168 $ 384
Accounts receivable -- trade,
less allowance of $225, $300
and $351...................... 7,864 6,821 6,662
Inventories..................... 8,755 11,403 12,920
Prepaid expenses and other
current assets................ 69 191 176
--------- --------- -----------
Total current assets....... 16,771 18,583 20,142
Property and equipment, net.......... 3,447 3,325 3,331
Other assets......................... 987 1,116 1,111
--------- --------- -----------
Total assets............... $ 21,205 $ 23,024 $24,584
========= ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................ $ 1,401 $ 1,866 $ 2,146
Accrued liabilities............. 941 1,051 487
Lines of credit................. 11,100 10,100 11,600
Current portion of long-term
debt.......................... 93 94 93
--------- --------- -----------
Total current
liabilities............. 13,535 13,111 14,326
Long-term debt....................... 817 723 700
--------- --------- -----------
Total liabilities.......... 14,352 13,834 15,026
--------- --------- -----------
Stockholders' equity:
Common stock; 200,000 shares,
$1.00 par value authorized,
35,500 issued and
outstanding................... 36 36 36
Common stock; 2,000 shares, no
par value authorized, 2,000
issued and outstanding........ 2 2 2
Additional paid-in capital...... 72 72 72
Retained earnings............... 6,739 9,072 9,350
Partners' capital............... 1,502 1,506 1,596
Treasury stock.................. (1,498) (1,498) (1,498)
--------- --------- -----------
Total stockholders'
equity.................. 6,853 9,190 9,558
--------- --------- -----------
Total liabilities and
stockholders' equity.... $ 21,205 $ 23,024 $24,584
========= ========= ===========
The accompanying notes are an integral part of these combined financial
statements.
F-36
<PAGE>
INTERSTATE STEEL SUPPLY CO. AND AFFILIATES
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................ $ 49,299 $ 61,375 $ 66,806 $ 15,673 $ 16,137
Costs and expenses:
Cost of sales................... 37,283 44,868 47,902 10,967 11,770
Operating and delivery.......... 6,197 7,916 8,243 2,032 2,116
Selling, general and
administrative expenses....... 4,187 5,279 5,391 1,306 1,353
Depreciation and amortization... 483 561 550 135 95
--------- --------- --------- --------- ---------
Operating income................ 1,149 2,751 4,720 1,233 803
Other (income) expense:
Interest expense, net........... 792 908 936 220 195
Other, net...................... (1) 1 10 -- (2)
--------- --------- --------- --------- ---------
Income before income taxes........... 358 1,842 3,774 1,013 610
Provision for income taxes........... -- -- -- -- --
--------- --------- --------- --------- ---------
Net income........................... $ 358 $ 1,842 $ 3,774 $ 1,013 $ 610
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-37
<PAGE>
INTERSTATE STEEL SUPPLY CO. AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------ ADDITIONAL
$1 PAR NO PAR PAID-IN RETAINED TREASURY PARTNERS'
VALUE VALUE CAPITAL EARNINGS STOCK CAPITAL TOTAL
------- ------- ----------- --------- --------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
January 1, 1994......................... $ 36 $ 2 $ 72 $ 5,688 $(1,498) $1,116 $5,416
Dividends and distributions............. -- -- -- (228) -- (80) (308)
Net income.............................. -- -- -- 239 -- 119 358
------- ------- ----------- --------- --------- -------- ------
Balance, December 31, 1994.............. 36 2 72 5,699 (1,498) 1,155 5,466
Dividends and distributions............. -- -- -- (705) -- -- (705)
Contributions........................... -- -- -- -- -- 250 250
Net income.............................. -- -- -- 1,745 -- 97 1,842
------- ------- ----------- --------- --------- -------- ------
Balance, December 31, 1995.............. 36 2 72 6,739 (1,498) 1,502 6,853
Dividends and distributions............. -- -- -- (1,437) -- -- (1,437)
Net income.............................. -- -- -- 3,770 -- 4 3,774
------- ------- ----------- --------- --------- -------- ------
Balance, December 31, 1996.............. 36 2 72 9,072 (1,498) 1,506 9,190
Dividends and distributions
(unaudited)........................... -- -- -- (242) -- -- (242)
Net income (unaudited).................. -- -- -- 520 -- 90 610
------- ------- ----------- --------- --------- -------- ------
Balance, March 31, 1997 (unaudited)..... $ 36 $ 2 $ 72 $ 9,350 $(1,498) $1,596 $9,558
======= ======= =========== ========= ========= ======== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-38
<PAGE>
INTERSTATE STEEL SUPPLY CO. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................... $ 358 $ 1,842 $ 3,774 $ 1,013 $ 610
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and
amortization................. 483 561 550 135 95
Loss (gain) on sale of
assets....................... 2 10 -- -- (6)
Changes in operating assets and
liabilities:
Accounts receivable, net... (695) (768) 1,041 428 159
Inventories................ (1,272) (1,315) (2,648) (4,542) (1,517)
Prepaid expenses and other
assets................... 112 6 (121) (81) 15
Accounts payable and
accrued liabilities...... (3) 158 575 1,829 (284)
Other assets............... (119) (178) (129) 5 5
--------- --------- --------- --------- ---------
Net cash provided by (used
in) operating
activities............... (1,134) 316 3,042 (1,213) (923)
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment......................... (571) (533) (428) (34) (95)
Proceeds from sales of property and
equipment......................... 10 6 -- -- --
Other, net.......................... 11 -- -- -- --
--------- --------- --------- --------- ---------
Net cash used in investing
activities............... (550) (527) (428) (34) (95)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) on
line-of-credit.................... 1,225 750 (1,000) 1,493 1,500
Principal payments on long-term
obligations....................... (239) (259) (93) (116) (24)
Proceeds from issuance of long-term
obligations....................... 900 -- -- -- --
Distributions to shareholders and
partners.......................... (308) (564) (1,436) (45) (242)
Capital contributions............... -- 250 -- -- --
--------- --------- --------- --------- ---------
Net cash provided by (used
in) financing
activities............... 1,578 177 (2,529) 1,332 1,234
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... (106) (34) 85 85 216
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD................................ 223 117 83 83 168
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF
PERIOD................................ $ 117 $ 83 $ 168 $ 168 $ 384
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest.............. $ 847 $ 964 $ 930 $ 185 $ 189
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-39
<PAGE>
INTERSTATE STEEL SUPPLY CO. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Interstate Steel Supply Company and Affiliates ("Interstate") is
comprised of the following companies under common control and ownership;
Interstate Steel Supply Company (a Pennsylvania Subchapter "S" corporation)
and its affiliates, Interstate Steel Supply Company of Pittsburgh (a
Pennsylvania Subchapter "S" corporation), Interstate Steel Processing Company
(a Pennsylvania Subchapter "S" corporation), Interstate Steel Supply Company
of Maryland (a Maryland Subchapter "S" corporation) and Warehouse Real Estate
Associates (a Pennsylvania partnership). All intercompany transactions and
balances have been eliminated in the accompanying combined financial statements.
Interstate is a carbon structural steel service center with operations in
Baltimore, MD, Philadelphia and Pittsburgh, PA. Interstate services customers
primarily in the Northeast and Midatlantic regions of United States, ranging
from Virginia to Maine and west through Eastern Ohio. Interstate supplies
structural steel for steel buildings, bridges, shopping malls, shipbuilding,
railroad switch and gear manufacturers and electric power generating plants.
Approximately one-half of net sales include value-added processing services such
as saw cutting, shearing, flame cutting, cambering and tee-splitting.
Interstate (exclusive of Warehouse Real Estate Associates, see Note 8) and
its shareholders expect to enter into a definitive merger agreement with Metals
USA, Inc. ("Metals USA") pursuant to which all of Interstate's outstanding
shares of capital stock will be exchanged for cash and shares of Metals USA
common stock concurrently with the consummation of the initial public offering
(the "Offering") of Metals USA common stock.
RECLASSIFICATIONS
Certain amounts in the 1994 and 1995 financial statements have been
reclassified to conform to the 1996 presentation. These reclassifications have
no effect on previously reported net income or stockholders' equity.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INTERIM FINANCIAL INFORMATION
The interim financial statements included herein are unaudited; however,
they include all adjustments of a normal recurring nature, which, in the opinion
of management, are necessary to present fairly the financial position of
Interstate at March 31, 1997, and the result of its operations and cash flows
for the three months ended March 31, 1996, and 1997. Accounting measurements at
interim dates inherently involve greater reliance on estimates than at year end.
The results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the entire year.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Cash equivalents consist of highly liquid money market instruments with
original maturities of three months or less.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is primarily
determined using the last-in, first-out ("LIFO") method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, net of accumulated depreciation.
Depreciation for buildings and equipment are based upon the estimated useful
lives of the various classes of assets, using the straight-
F-40
<PAGE>
INTERSTATE STEEL SUPPLY CO. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
line and the declining balance method, respectively. Leasehold improvements are
amortized over the shorter of their useful lives or the term of the lease using
the straight-line method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash equivalents approximate their fair value. The
fair value of the line-of-credit facilities and long-term debt are estimated
based on interest rates for the same or similar debt offered to Interstate
having the same or similar remaining maturities and collateral requirements. The
carrying amounts of the line-of-credit facility and long-term debt approximates
their fair value at the applicable balance sheet dates.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject Interstate to
concentrations of credit risk, consist principally of cash deposits and, trade
account and note receivables. Concentrations of credit risk with respect to
trade accounts receivable are within the Northeast and Midatlantic United
States. Credit is extended once appropriate credit history and references have
been obtained. Adjustments to the allowance for doubtful accounts are made
periodically (as circumstances warrant) based upon the expected collectibility
of all such accounts. Interstate periodically reviews the credit history of its
customers and generally does not require collateral for the extension of credit.
INCOME TAXES
Interstate elected to be taxed under sections of the federal and state
income tax laws which provide that, in lieu of corporation income taxes, the
stockholders separately account for Interstate's items of income, deductions,
losses and credits on their individual income tax returns. The financial
statements will not include a provision for income taxes (credits) as long as
the S Corporation election remains in effect. As long as Interstate's S
Corporation income tax election remains in effect, Interstate may, from
time-to-time, pay dividends to its stockholders in amounts sufficient to enable
the stockholders to pay the taxes due on their share of Interstate's items of
income, deductions, losses, and credits which has been allocated to them for
reporting on their individual income tax returns. Taxes on partnership income
accrue to the partners and, accordingly, are not reflected in the financial
statements.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF ("SFAS 121") in March 1995. SFAS
121 requires that long-lived assets and certain intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Interstate adopted SFAS No. 121 on January 1, 1996. The impact of
adopting this standard did not have a material impact on the results of
operations.
2. INVENTORIES
Interstate utilizes the LIFO method of inventory accounting. If the
first-in first-out, ("FIFO") method had been used for all inventories, their
carrying value would have been $11,466 and $13,487 at December 31, 1995 and
1996, respectively. Additionally, net income would have been $1,030, $2,475 and
$3,146 for the years ended December 31, 1994, 1995 and 1996, respectively.
During the years ended December 31, 1994 and 1996, Interstate recorded favorable
adjustments to cost of goods sold of approximately $90 and $627, respectively.
The adjustments were due to the lower costs associated with the reduced
quantities (for certain items) that prevailed in prior periods compared to the
cost prevailing in 1994 and 1996.
F-41
<PAGE>
INTERSTATE STEEL SUPPLY CO. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
ESTIMATED --------------------
USEFUL LIVES 1995 1996
------------ --------- ---------
Land................................. -- $ 488 $ 488
Buildings............................ 40 years 3,694 3,725
Machinery and equipment.............. 5-25 years 2,539 2,753
Automobiles and trucks............... 3-7 years 1,034 1,105
Office equipment and furniture....... 3-10 years 678 739
Leasehold improvements............... 3-10 years 333 333
--------- ---------
8,766 9,143
Less: accumulated amortization....... (5,319) (5,818)
--------- ---------
$ 3,447 $ 3,325
========= =========
4. LINE-OF-CREDIT
Interstate has unsecured $14,500 demand line-of-credit facilities with two
banks. The line-of-credit facilities bear interest at rates between 6.75% and
8.25% at December 31, 1996. The line-of-credit agreements require Interstate to
meet and maintain certain nonfinancial covenants, including the maintenance of
life insurance policies on the sole stockholder of Interstate Steel Supply
Company in the amount of $3,000, with Interstate Steel Supply Company as the
designated beneficiary.
5. LONG-TERM DEBT
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Note payable to bank, interest at
prime plus 0.25% (8.50% at
December 31, 1996), payable in
monthly installments of $6
(plus interest); matures in 2006;
secured by certain buildings and
equipment.......................... $ 769 $ 694
Note payable to PIDC, interest at
7.0%, payable in installments of
$2; matures in 2006................ 141 123
--------- ---------
910 817
Less: current maturities............. (93) (94)
--------- ---------
$ 817 $ 723
========= =========
Long-term debt consists of notes payable issued by Warehouse Real Estate
Associates to purchase premises and equipment and to make improvements at the
facilities leased to the two operating companies; the buildings and equipment
are collateral. At December 31, 1996, future principal payments of long-term
debt are as follows:
1997................................. $ 94
1998................................. 95
1999................................. 97
2000................................. 98
2001................................. 100
Thereafter........................... 333
---------
$ 817
=========
6. EMPLOYEE BENEFIT PLANS
Interstate maintains profit-sharing plans which provide for voluntary
Company contributions at the discretion of the Board of Directors of up to 15%
of the salaries of eligible employees. Contributions of $260, $405 and $472 have
been charged to operations for the years ended December 31, 1994, 1995 and 1996,
respectively.
F-42
<PAGE>
INTERSTATE STEEL SUPPLY CO. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
7. MAJOR CUSTOMERS AND SUPPLIERS
During 1996, Interstate had two customers, each of which accounted for
approximately 10% of net sales. Interstate did not have any major customers that
accounted for more than 10% of net sales in 1995 or 1994.
Interstate primarily acquires structural and plate steel, its most
significant inventory, from three suppliers. Those suppliers made up 19%, 17%,
and 10%, respectively, in purchases for the fiscal year ending December 31,
1996. The same suppliers accounted for 10%, 13.5%, and 20%, respectively, in
total steel purchased for the year ended December 31, 1995.
8. SUBSEQUENT EVENT (UNAUDITED)
In May 1997, Interstate and its shareholders entered into a definitive
agreement with a wholly-owned subsidiary of Metals USA., which among other
things calls for the merger of Interstate with the Metals USA subsidiary.
Prior to the merger, Interstate will make a cash distribution of
approximately $5,250 which represents Interstate's estimated S Corporation
accumulated adjustment account. Had these distributions been made at December
31, 1996, the effect on Interstate's balance sheet would have been to increase
liabilities by $5,250, and decrease stockholder's equity by $5,250. Interstate
anticipates funding this distribution by using its existing credit facilities or
issuing a note payable to the stockholder.
As described in Note 1, Warehouse Real Estate Associates will not be a
party to the merger. Following the sale of equipment described below,
approximately $1,800 of property and equipment, debt of $817 and other
obligations of approximately $133 which are included in the combined balance
sheet at December 31, 1996 will remain with Warehouse Real Estate Associates.
Concurrent with the merger, Interstate will enter into agreements with Warehouse
Real Estate Associates to purchase certain equipment from Interstate Steel
Supply Company in exchange for an existing note receivable, having a carrying
value of $530 at December 31, 1996. The value of the equipment approximates the
value of the note. Additionally, Interstate will enter into a 10 year lease with
Warehouse Real Estate Associates where Interstate will lease certain real
property for an annual lease payment of $233. This annual lease amount will
remain in effect for five years. At the end of year five the annual rental will
be redetermined. Interstate has agreed to purchase the real estate at the end of
year ten for the then appraised fair market value of such property.
Interstate Steel Supply Company will dividend a life insurance policy to
its sole stockholder, which had a book value at December 31, 1996 of
approximately $1,060.
F-43
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Queensboro Steel Corporation
Wilmington, North Carolina
We have audited the accompanying balance sheets of Queensboro Steel
Corporation as of December 31, 1996 and 1995, and the related statements of
income, stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1996. 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 generally accepted auditing
standards. 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 financial position of Queensboro Steel Corporation
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
McGladrey & Pullen, LLP
Wilmington, North Carolina
February 25, 1997, except for Note 11 as to
which the date is April 18, 1997
F-44
<PAGE>
QUEENSBORO STEEL CORPORATION
BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
-------------------- MARCH 31,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash............................ $ 5 $ 5 $ 6
Accounts receivable:
Trade, less allowance of
$20, $20 and $20........ 10,249 8,390 8,538
Other...................... 108 173 143
Inventories..................... 6,217 8,574 8,897
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... 406 971 1,092
Prepaid expenses and other
current assets................ 184 165 166
--------- --------- -----------
Total current assets....... 17,169 18,278 18,842
Property and equipment, net.......... 3,085 4,638 4,641
Other assets......................... 281 307 222
--------- --------- -----------
Total assets............... $ 20,535 $ 23,223 $23,705
========= ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................ $ 2,857 $ 3,007 $ 2,421
Accrued liabilities............. 517 625 410
Billings in excess of costs and
estimated earnings on
uncompleted contracts......... 228 842 425
Current portion of long-term
debt.......................... 10 -- --
--------- --------- -----------
Total current
liabilities............. 3,612 4,474 3,256
Long-term debt....................... 8,884 8,551 9,790
Deferred compensation................ 359 410 424
--------- --------- -----------
Total liabilities.......... 12,855 13,435 13,470
--------- --------- -----------
Stockholders' equity:
Capital stock, 200,000 shares
authorized:
Class A voting, $10 par value,
18,666 shares issued and
outstanding................ 187 187 187
Class B non-voting, $10 par
value, 78,666 shares issued
and outstanding............ 787 787 787
Additional paid-in capital...... 870 870 870
Retained earnings............... 5,758 7,944 8,391
Unrealized gain on securities... 78 -- --
--------- --------- -----------
Total stockholders'
equity.................. 7,680 9,788 10,235
--------- --------- -----------
Total liabilities and
stockholders' equity.... $ 20,535 $ 23,223 $23,705
========= ========= ===========
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
QUEENSBORO STEEL CORPORATION
STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................ $ 50,795 $ 60,322 $ 54,996 $ 14,778 $ 15,302
Costs and expenses:
Cost of sales................... 37,996 45,945 38,912 10,979 11,166
Operating and delivery.......... 7,408 8,080 8,355 2,001 2,248
Selling, general and
administrative expenses....... 3,656 3,839 3,870 941 1,029
Depreciation and amortization... 369 362 405 87 120
--------- --------- --------- --------- ---------
Operating income................ 1,366 2,096 3,454 770 739
Other (income) expense:
Interest expense................ 465 612 587 125 108
Other income.................... (63) (67) (77) (11) (9)
--------- --------- --------- --------- ---------
Net income........................... $ 964 $ 1,551 $ 2,944 $ 656 $ 640
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
QUEENSBORO STEEL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL GAIN ON TOTAL
-------------------- PAID-IN RETAINED INVESTMENT STOCKHOLDERS'
CLASS A CLASS B CAPITAL EARNINGS SECURITIES EQUITY
-------- -------- ----------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993........... $ 187 $ 787 $ 870 $ 4,290 $-- $ 6,134
Net income...................... -- -- -- 964 -- 964
Dividends....................... -- -- -- (138) -- (138)
-------- -------- ----------- --------- ----------- -------------
Balance, December 31, 1994........... 187 787 870 5,116 -- 6,960
Net income...................... -- -- -- 1,551 -- 1,551
Dividends....................... -- -- -- (909) -- (909)
Investment securities received
from insurance cooperative.... -- -- -- -- 78 78
-------- -------- ----------- --------- ----------- -------------
Balance, December 31, 1995........... 187 787 870 5,758 78 7,680
Net income...................... -- -- -- 2,944 -- 2,944
Dividends....................... -- -- -- (758) -- (758)
Donation of investment
securities received from
insurance cooperative......... -- -- -- -- (78) (78)
-------- -------- ----------- --------- ----------- -------------
Balance, December 31, 1996........... 187 787 870 7,944 -- 9,788
Net income (unaudited).......... -- -- -- 640 -- 640
Dividends (unaudited)........... -- -- -- (193) -- (193)
-------- -------- ----------- --------- ----------- -------------
Balance, March 31, 1997
(unaudited)........................ $ 187 $ 787 $ 870 $ 8,391 $-- $10,235
======== ======== =========== ========= =========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE>
QUEENSBORO STEEL CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 964 $ 1,551 $ 2,944 $ 656 $ 640
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization.... 369 362 405 87 120
Loss (gain) on sale of assets.... (1) 2 4 -- --
Increase in deferred
compensation................... 54 40 51 13 14
Changes in operating assets and
liabilities:
Accounts receivable, net....... (1,225) (2,930) 1,702 1,042 (118)
Inventories.................... (2,241) 1,552 (2,358) (177) (323)
Prepaid expenses and other
assets...................... (69) (63) 99 140 84
Accounts payable and accrued
liabilities................. 925 (173) 258 (448) (801)
Billings related to cost and
estimated earnings on
uncompleted contracts....... 721 212 49 (541) (538)
--------- --------- --------- --------- ---------
Net cash provided by (used
in) operating activities.. (503) 553 3,154 772 (922)
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment...................... (896) (1,519) (1,962) (408) (123)
Proceeds from sales of property
and equipment.................. 2 16 7 -- --
Other, net....................... (7) (1) 2 -- --
--------- --------- --------- --------- ---------
Net cash used in investing
activities................ (901) (1,504) (1,953) (408) (123)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on revolving
line-of-credit................. (61,087) (40,844) (43,543) (16,616) (12,650)
Borrowings on revolving
line-of-credit................. 62,755 42,829 40,210 16,632 13,889
Borrowings on long-term debt..... -- -- 3,000 -- --
Financing costs.................. -- -- (100) -- --
Principal payments on long-term
debt........................... (125) (125) (10) -- --
Dividends paid................... (138) (909) (758) (380) (193)
--------- --------- --------- --------- ---------
Net cash provided by (used
in) financing activities.. 1,405 951 (1,201) (364) 1,046
--------- --------- --------- --------- ---------
NET INCREASE IN CASH................. 1 -- -- -- 1
CASH BEGINNING OF PERIOD............. 4 5 5 5 5
--------- --------- --------- --------- ---------
CASH END OF PERIOD................... $ 5 $ 5 $ 5 $ 5 $ 6
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest........... $ 466 $ 601 $ 559 $ 116 $ 127
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Investment securities received
(donated)...................... $ -- $ (78) $ 78 $ -- $ --
Note received in settlement of an
account receivable............. -- -- 156 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE>
QUEENSBORO STEEL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Queensboro Steel Corporation ("Queensboro") is a heavy carbon steel
service center and structural fabricator with operations in Wilmington and
Greensboro, North Carolina and Norfolk, Virginia. Queensboro markets its
products primarily in the Southeast region of the United States. Sales consist
principally of beams, angles, channels, sheet, plate, bar, tubing and fabricated
steel for buildings. Value-added processing includes shearing, bending,
drilling, tee-splitting, rolling, cambering, burning and coil processing.
Queensboro's diversified customer base includes shipbuilding, transportation,
building construction, pulp and paper mills, chemical, public utility, farm
equipment, crane manufacturing, plant maintenance and other industries.
Queensboro and its shareholders expect to enter into a definitive merger
agreement with Metals USA, Inc. ("Metals USA") pursuant to which all of
Queensboro's outstanding shares of capital stock will be exchanged for cash and
shares of Metals USA common stock concurrently with the consummation of the
initial public offering (the "Offering") of Metals USA common stock.
RECLASSIFICATIONS
Certain amounts in the 1994 and 1995 financial statements have been
reclassified to conform to the 1996 presentation. These reclassifications have
no effect on previously reported net income or stockholders' equity.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INTERIM FINANCIAL INFORMATION
The interim financial statements included herein are unaudited; however,
they include all adjustments of a normal recurring nature, which, in the opinion
of managment, are necessary to present fairly the financial position of
Queensboro at March 31, 1997, and the results of its operations and cash flows
for the three months ended March 31, 1996 and 1997. Accounting measurements at
interim dates inherently involve greater reliance on estimates than at year end.
The results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the entire year.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is primarily
determined using the last-in, first-out ("LIFO") method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, net of accumulated depreciation.
Depreciation is computed utilizing the straight-line method at rates based upon
the estimated useful lives of the various classes of assets.
F-49
<PAGE>
QUEENSBORO STEEL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
LONG-TERM CONTRACTS
Sales are recorded at the time products and materials are shipped or as
services are provided. Income from fabrication contracts are recognized by
applying estimated percentages-of-completion to the total estimated profit for
the respective contracts, commencing at the time the contracts are at least
one-tenth complete. The percentage-of-completion is determined by relating the
actual cost of work performed through year end to the total estimated cost of
the respective contracts. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, and estimated profitability, including those
arising from contract penalty provisions, and final contract settlements may
result in revisions to costs and income, and are recognized in the period in
which the revisions are determined. Contract costs include direct materials,
direct labor and related overhead.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the long-term debt is estimated based on interest rates
for the same or similar debt offered to Queensboro having the same or similar
remaining maturities and collateral requirements. The carrying amounts of
long-term debt approximates fair value at the applicable balance sheet dates.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject Queensboro to
concentrations of credit risk, consist principally of trade account receivables.
Concentrations of credit risk with respect to trade accounts receivable are
within the Southeast region of the United States. Credit is extended once
appropriate credit history and references have been obtained. Adjustments to the
allowance for doubtful accounts are made periodically (as circumstances warrant)
based upon the expected collectibility of all such accounts. Queensboro
periodically reviews the credit history of its customers and generally does not
require collateral for the extension of credit.
INCOME TAXES
Queensboro, with the consent of its stockholders, elected to be taxed under
sections of the federal and state income tax laws which provide that, in lieu of
corporation income taxes, the stockholders separately account for Queensboro's
items of income, deductions, losses and credits on their individual income tax
returns. The financial statements will not include a provision for income taxes
(credits) as long as the S Corporation election remains in effect. As long as
Queensboro's S Corporation income tax election remains in effect, Queensboro
may, from time-to-time, pay dividends to its stockholders in amounts sufficient
to enable the stockholders to pay the taxes due on their share of Queensboro's
items of income, deductions, losses, and credits which has been allocated to
them for reporting on their individual income tax returns.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF ("SFAS 121") in March 1995. SFAS
121 requires that long-lived assets and certain intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Queensboro adopted SFAS No. 121 on January 1, 1996. The impact of
adopting this standard did not have a material impact on the results of
operations.
F-50
<PAGE>
QUEENSBORO STEEL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
2. TRADE RECEIVABLES
Trade receivables consist of the following:
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Steel service center:
Trade receivables............... $ 4,686 $ 4,016
Fabrication division:
Contract receivables:
Contracts in progress...... 4,325 2,656
Completed contracts........ 324 732
Retained................... 914 986
--------- ---------
$ 10,249 $ 8,390
========= =========
3. INVENTORIES
Inventories of the steel service center consist primarily of unprocessed
steel and are carried at the lower of cost or market using the last-in,
first-out (LIFO) method. Inventories of the fabrication division ($340 and $366
at December 31, 1995 and 1996, respectively) approximate the lower of cost or
market using the first-in, first-out (FIFO) method. If the FIFO cost method of
inventory valuation had been used for all inventories at December 31, 1995 and
1996, inventories would have been $8,086 and $9,776 and net income for the years
ended December 31, 1994, 1995 and 1996, would have been $1,324, $1,882 and
$2,279, respectively.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
ESTIMATED --------------------
USEFUL LIVES 1995 1996
------------ --------- ---------
Land................................. -- $ 120 $ 120
Buildings............................ 40 years 2,315 3,608
Machinery and equipment.............. 5-12 years 3,639 5,266
Automobiles, trucks and trailers..... 3- 5 years 800 872
Construction in progress............. -- 1,227 --
--------- ---------
8,101 9,866
Less: accumulated depreciation....... (5,016) (5,228)
--------- ---------
$ 3,085 $ 4,638
========= =========
F-51
<PAGE>
QUEENSBORO STEEL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
5. CONTRACTS IN PROCESS
Information with respect to contracts in process is as follows:
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Costs incurred on uncompleted
contracts.......................... $ 21,397 $ 17,550
Estimated earnings................... 1,962 2,934
--------- ---------
23,359 20,484
Less: billings to date............... 23,181 20,355
--------- ---------
$ 178 $ 129
========= =========
Included in accompanying balance
sheets under the following
captions:
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... $ 406 $ 971
Billings in excess of costs and
estimated earnings on
uncompleted contracts......... (228) (842)
--------- ---------
$ 178 $ 129
========= =========
6. LONG-TERM DEBT
Long-term obligations consist of the following:
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Revolving line-of-credit, interest at
prime plus 0.125%, interest payable
monthly, principal and unpaid
interest due June 30, 1998; secured
by accounts receivable and
inventory.......................... $ 8,884 $ 5,551
Industrial revenue bonds............. -- 3,000
Industrial revenue bond, interest at
65% of commercial prime borrowing
rates ranging from 6.5% to 11%,
payable in monthly installments of
$10 (plus interest); matured in
January 1996....................... 10 --
--------- ---------
8,894 8,551
Less: current maturities............. (10) --
--------- ---------
$ 8,884 $ 8,551
========= =========
REVOLVING LINE-OF-CREDIT
Queensboro has a $10,000 committed revolving line-of-credit facility with a
bank whereby Queensboro may borrow the lesser of (i) $10,000 or (ii) 80% of
eligible accounts receivable plus 60% of inventories. The agreement provides,
among other things, for restrictions on additional borrowings, capital
expenditures, investing, and the payment of dividends. The agreement also
requires the maintenance of certain working capital and debt-to-equity ratios,
minimum net worth, and furnishing periodic financial statements.
Additionally, Queensboro's cash accounts are tied directly to the revolving
line-of-credit such that the line is increased automatically when checks
presented to the bank for payment exceed the funds available in Queensboro's
bank accounts. At December 31, 1995 and 1996, outstanding checks approximating
$1,507 and $604, respectively, have been classified as long-term debt on the
balance sheet.
F-52
<PAGE>
QUEENSBORO STEEL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
INDUSTRIAL REVENUE BONDS
Queensboro secured financing for the construction and equipping of its
current steel processing facility located in Greensboro, North Carolina with
industrial revenue bonds. These industrial revenue bonds were issued by Guilford
County Industrial Facilities and Pollution Control Financing Authority and the
proceeds loaned to Queensboro on identical terms. As required by the terms of
the bond agreement, Queensboro has provided an irrevocable bank letter-of-credit
for up to $3,043 as security for the industrial revenue bonds, which expires May
15, 1997. The future maturities of the industrial revenue bonds have been
classified in accordance with established sinking fund requirements in
anticipation that the letter-of-credit will be renewed at the expiration date.
Queensboro has the option to have interest determined on a weekly, flexible
or fixed rate basis. The bonds were issued and have remained on a weekly rate
basis. The rate at December 31, 1996 was 4.45%. Interest is payable in arrears
on May 1, and November 1. Beginning May 1, 1998, the bond sinking fund
requirements will be payable in annual installments of $300 through May 1, 2008,
except for 1998, 2002 and 2006, for which years the installments will be $200.
Additional conditional mandatory redemption features exist for such items as
taxability of the bonds and expiration of the letter-of-credit agreement.
Optional prepayment features also exist.
This letter of credit agreement, as amended, contains various covenant
requirements similar to those of the revolving line-of-credit described above
and is collateralized by accounts receivable, inventory and equipment.
The prime rate at December 31, 1996, was 8.25%.
At December 31, 1996, future principal payments of long-term debt are as
follows:
1997................................. $ --
1998................................. 5,751
1999................................. 300
2000................................. 300
2001................................. 300
Thereafter........................... 1,900
---------
$ 8,551
=========
7. EMPLOYEE BENEFIT PLANS
Queensboro participates in a multi-employer 401(k) profit-sharing plan with
a related corporation, which covers all employees at least twenty-one years of
age who have completed at least 1,000 hours of service in a twelve-month period
subsequent to employment. The Plan allows for employee contributions through
salary reduction of up to 15% of total compensation. The employer will match
these contributions at rate of 25%, up to 4% of the employees' total
compensation. Employer matching contributions were $37, $39 and $40 for 1994,
1995 and 1996, respectively. The discretionary profit-sharing contributions were
$50, $65 and $25 in 1994, 1995 and 1996, respectively.
8. DEFERRED COMPENSATION AND LIFE INSURANCE
In connection with a deferred compensation plan between Queensboro and
certain key employees, provision has been made for the future compensation which
is payable upon their death or retirement. At December 31, 1995 and 1996, $242
and $239, respectively, has been accrued under these contracts.
The deferred compensation is to be paid to the individuals or their
beneficiaries over a period of ten years commencing with the first business day
of the calendar month following the month of retirement or death.
F-53
<PAGE>
QUEENSBORO STEEL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The employment agreements with the employees mentioned in the preceding
paragraphs also provide that death benefits totaling $335 at December 31, 1996,
will be paid to their beneficiaries in the event these employees should die
while they are employees of Queensboro. Queensboro is the owner and beneficiary
of life insurance policies with a total face value of $853 on these employees.
In the event that a death benefit related to the employees mentioned above
should become payable, such benefit shall be in lieu of all deferred
compensation.
Queensboro also entered into a salary continuation agreement during 1992
which provides 50% salary continuation payments for up to ten years to the wife
of an officer upon death of that officer. The liability accrued for these
payments is $117 and $171 at December 31, 1995 and 1996, respectively.
9. LEASE COMMITMENTS
Queensboro has leased facilities and equipment under non-cancelable
long-term agreements, which have initial or remaining non-cancelable terms in
excess of one year as of December 31, 1996. Total rent expense related to such
leases aggregated $499, $417, and $417 for the years ended December 31, 1994,
1995 and 1996, respectively.
The future minimum rental commitments at December 31, 1996, under the
leases described above are due in future years as follows: 1997--$280;
1998--$93.
10. RELATED PARTY TRANSACTIONS
At December 31, 1995 and 1996, Queensboro had a receivable from a
corporation related through common ownership of $32 and $34, respectively.
Queensboro provides certain administrative services to the affiliated
corporation, for which it billed $274 in 1994, $370 in 1995 and $344 in 1996.
Queensboro leases fabrication shop facilities from an affiliated
partnership under operating lease terms (see Note 9). Lease expense was $137 in
1994, 1995 and 1996.
11. SUBSEQUENT EVENT
On April 4, 1997, Queensboro further amended its bank line-of-credit
agreement (see Note 6) to extend the termination date to June 30, 1998. The debt
is classified as noncurrent as a result of this extension.
Queensboro made a cash distribution on April 11, 1997, of approximately
$5,040 which represents Queensboro's estimated S corporation accumulated
adjustment account. To affect this transaction, Queensboro also entered into a
ninety-day, $3,000 bank loan collateralized by the accounts receivable and
inventory and personal guarantees of certain shareholders. Had these
transactions been made at December 31, 1996, the effect on Queensboro's balance
sheet would have been to increase liabilities by $5,040 and decrease
stockholders' equity by $5,040. These transactions caused covenant violations
with respect to the debt disclosed in Note 6. On April 18, 1997, the bank waived
these covenants through July 11, 1997. Queensboro expects, on or before July 11,
1997, the above mentioned merger will have been consummated or the guarantors
will satisfy the $3,000 debt.
12. SUBSEQUENT EVENTS (UNAUDITED)
In May 1997, Queensboro and its shareholders entered into a definitive
agreement with a wholly-owned subsidiary of Metals USA., which among other
things calls for the merger of Queensboro with the Metals USA subsidiary.
Queensboro will dividend its Wilmington facility to its stockholders
concurrently with the Merger, and enter into a long-term lease for the facility
which calls for annual lease payments of $40. At December 31, 1996 the carrying
value of the facility was approximately $601. Additionally, immediately prior to
the Merger, Queensboro will transfer the salary continuation agreement described
in the last paragraph of Note 8 to an entity that will not be a party to the
Merger.
F-54
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Affiliated Metals Company
We have audited the accompanying balance sheet of Affiliated Metals Company
as of August 31, 1996 and the related statements of operations, stockholders'
equity and cash flows for the fifty-two weeks then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Affiliated Metals Company at
August 31, 1996 and the results of its operations and its cash flows for the
fifty-two weeks then ended in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
St. Louis, Missouri
October 4, 1996
F-55
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Affiliated Metals Company
Granite City, Illinois
We have audited the accompanying balance sheet of Affiliated Metals Company
as of September 2, 1995 and the related statements of operations, stockholder's
equity and cash flows for the fifty-two weeks ended September 3, 1994 and
September 2, 1995. 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 generally accepted auditing
standards. 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 financial position of Affiliated Metals Company as
of September 2, 1995 and the results of its operations and its cash flows for
the fifty-two weeks ended September 3, 1994 and September 2, 1995 in conformity
with generally accepted accounting principles.
RUBIN, BROWN, GORNSTEIN & CO. L.L.P.
St. Louis, Missouri
October 19, 1995
F-56
<PAGE>
AFFILIATED METALS COMPANY
BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 2, AUGUST 31, MARCH 1,
1995 1996 1997
------------ ---------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash............................ $ 2 $ 10 $ --
Accounts receivable, less
allowances for doubtful
accounts of $30 at
September 2, 1995,
August 31, 1996 and
March 1, 1997................. 7,013 7,074 10,644
Inventories..................... 6,810 10,658 15,302
Prepaid expenses and other
current assets................ 125 130 525
------------ ---------- ------------
Total current assets....... 13,950 17,872 26,471
Property and equipment, net.......... 2,699 7,940 7,715
Other assets......................... 705 649 668
------------ ---------- ------------
Total assets............... $ 17,354 $ 26,461 $ 34,854
============ ========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft.................. $ 23 $ 143 $ 2,161
Accounts payable................ 5,860 7,154 7,959
Accrued liabilities............. 494 529 364
Current portion of long-term
debt.......................... 407 10,358 729
------------ ---------- ------------
Total current
liabilities............. 6,784 18,184 11,213
Long-term debt....................... 8,018 4,337 19,879
Deferred income taxes................ 622 599 587
Redeemable preferred stock, $119.048
par value; 1,680 shares authorized;
840, 600 and 480 shares issued and
outstanding at September 2, 1995,
August 31, 1996 and March 1, 1997,
respectively....................... 100 71 57
Common stock purchase warrant........ -- -- --
Stockholders' equity:
Common stock, $0.01 par value;
100,000 authorized;
6,000 shares issued and
outstanding................... -- -- --
Additional paid-in capital...... 50 50 50
Retained earnings............... 1,780 3,220 3,068
------------ ---------- ------------
Total stockholders'
equity.................. 1,830 3,270 3,118
------------ ---------- ------------
Total liabilities and
stockholders'
equity............. $ 17,354 $ 26,461 $ 34,854
============ ========== ============
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE>
AFFILIATED METALS COMPANY
STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS
FIFTY-TWO WEEKS ENDED ENDED
------------------------------------------ --------------------
SEPTEMBER 3, SEPTEMBER 2, AUGUST 31, MARCH 2, MARCH 1,
1994 1995 1996 1996 1997
------------ ------------ ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................ $ 63,046 $ 78,976 $ 81,002 $ 39,782 $ 46,805
Costs and expenses:
Cost of sales................... 54,600 68,481 67,924 32,402 40,001
Operating and delivery
expenses...................... 4,316 5,060 5,871 3,346 4,419
Selling, general and
administrative expenses....... 2,352 2,803 3,431 1,479 1,439
Depreciation and amortization... 304 313 300 171 346
------------ ------------ ---------- -------- --------
Operating income..................... 1,474 2,319 3,476 2,384 600
Other expense:
Interest expense................ 735 1,058 1,011 501 766
Other, net...................... 37 22 38 51 95
------------ ------------ ---------- -------- --------
Income (loss) before income taxes.... 702 1,239 2,427 1,832 (261)
Credit (provision) for income
taxes.............................. (297) (497) (979) (726) 112
------------ ------------ ---------- -------- --------
Net income (loss).................... $ 405 $ 742 $ 1,448 $ 1,106 $ (149)
============ ============ ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE>
AFFILIATED METALS COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance, August 31, 1993............. 6,000 $ -- $ 50 $ 665 $ 715
Dividends paid, redeemable
preferred..................... -- -- -- (21) (21)
Net income...................... -- -- -- 405 405
------ ------ --- --------- -------------
Balance, September 3, 1994........... 6,000 -- 50 1,049 1,099
Dividends paid, redeemable
preferred..................... -- -- -- (11) (11)
Net income...................... -- -- -- 742 742
------ ------ --- --------- -------------
Balance, September 2, 1995........... 6,000 -- 50 1,780 1,830
Dividends paid, redeemable
preferred..................... -- -- -- (8) (8)
Net income...................... -- -- -- 1,448 1,448
------ ------ --- --------- -------------
Balance, August 31, 1996............. 6,000 -- 50 3,220 3,270
Dividends paid, redeemable
preferred (unaudited)......... -- -- -- (3) (3)
Net loss (unaudited)............ -- -- -- (149) (149)
------ ------ --- --------- -------------
Balance, March 1, 1997 (unaudited)... 6,000 $ -- $ 50 $ 3,068 $ 3,118
====== ====== === ========= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE>
AFFILIATED METALS COMPANY
STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS
FIFTY-TWO WEEKS ENDED ENDED
-------------------------------------------- --------------------
SEPTEMBER 3, SEPTEMBER 2, AUGUST 31, MARCH 2, MARCH 1,
1994 1995 1996 1996 1997
------------- ------------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ 405 $ 742 $ 1,448 $ 1,106 $ (149)
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and
amortization................ 304 313 300 171 346
Loss on sale of assets......... 3 -- 10 -- 87
Deferred tax provision
(benefit)................... (20) (45) (1) (12 ) (12)
Changes in operating assets and
liabilities:
Accounts receivable,
net..................... (890) (2,020) (61) (327 ) (3,570)
Inventories............... (190) 61 (3,848) (2,598 ) (4,644)
Prepaid expenses and other
assets.................. (116) 54 (27) (81 ) (414)
Accounts payable.......... (525) 2,786 1,293 (1,852 ) 805
Accrued liabilities....... (70) 245 35 181 (165)
Other..................... (7) (22) -- -- --
------------- ------------- ---------- -------- --------
Net cash provided by
(used in) operating
activities............ (1,106) 2,114 (851) (3,412 ) (7,716)
------------- ------------- ---------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment........................ (310) (615) (5,553) (2,476) (498)
Proceeds from sales of property and
equipment........................ 5 -- 58 -- 290
Other, net......................... (36) -- -- -- --
------------- ------------- ---------- -------- --------
Net cash used in
investing
activities............ (341) (615) (5,495) (2,476) (208)
------------- ------------- ---------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) on bank
overdraft........................ 783 (1,259) 120 865 2,018
Principal payments on long-term
debt............................. (198) (523) (668) (317) (335)
Proceeds from issuance of long-term
debt............................. 1,412 325 6,939 5,378 6,248
Purchase of redeemable preferred
stock............................ (529) (29) (29) (29) (14)
Dividends paid on redeemable
preferred stock.................. (21) (11) (8) (11) (3)
------------- ------------- ---------- -------- --------
Net cash provided by
(used in) financing
activities............ 1,447 (1,497) 6,354 5,886 7,914
------------- ------------- ---------- -------- --------
NET INCREASE (DECREASE) IN CASH...... -- 2 8 (2) (10)
CASH BEGINNING OF PERIOD............. -- -- 2 2 10
------------- ------------- ---------- -------- --------
CASH END OF PERIOD................... $-- $ 2 $ 10 $ -- $ --
============= ============= ========== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest (net of
amount capitalized of $153 in
1996)............................ $ 784 $ 1,054 $ 991 $ 497 $ 724
Cash paid for income taxes......... 389 370 1,083 579 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
AFFILIATED METALS COMPANY
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Affiliated Metals Company ("Affiliated") is a high-volume flat rolled
steel processor, with operations in Granite City, Illinois and a newly
constructed facility in Butler, Indiana. The operating plants are strategically
located near primary steel producers. Affiliated purchases wide, coiled hot
rolled, cold rolled and galvanized flat rolled steel from primary producers and
pickles (hot rolled) and slits coils to narrower widths. Principal customers
include; consumer durable goods manufacturers, commercial transportation,
appliance, furniture, pallet rack, and automotive industries as well as
independent stamping operations. Service areas include Missouri, Kansas, Texas,
Oklahoma, Tennessee, Kentucky, Indiana, Mississippi, Alabama, Georgia, Iowa,
Illinois and Nebraska.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
ACCOUNTING PERIOD
Affiliated's fiscal year is the fifty-two or fifty-three week period ending
the Saturday nearest to August 31. The results of operations and cash flows
include fifty-two weeks of activity for the periods ended August 31, 1996,
September 2, 1995, and September 3, 1994.
INTERIM FINANCIAL INFORMATION
The interim financial statements included herein are unaudited; however,
they include all adjustments of a normal recurring nature which, in the opinion
of management, are necessary to present fairly the financial position of the
Affiliated at March 1, 1997, the results of its operations and cash flows for
the twenty-six weeks ended March 2, 1996 and March 1, 1997. Accounting
measurements at interim dates inherently involve greater reliance on estimates
than at year end. The results of operations for the interim periods presented
are not necessarily indicative of the results to be expected for the entire
year.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is primarily
determined using the specific identification method. Raw materials generally
represent 80% to 90% of Affiliated's inventories.
PROPERTY AND EQUIPMENT
Property and equipment, including capitalized interest, is stated at cost,
net of accumulated depreciation. Depreciation is computed utilizing the
straight-line and accelerated methods at rates based upon the estimated useful
lives of the various classes of assets.
OTHER ASSETS
Other assets consists primarily of goodwill, net of accumulated
amortization. Goodwill is being amortized over a thirty year period using the
straight line method. Affiliated periodically evaluates the propriety of the
carrying amount of goodwill using expected undiscounted cash flows. At September
2, 1995 and August 31, 1996 goodwill, net of accumulated amortization was $622
and $599, respectively.
F-61
<PAGE>
AFFILIATED METALS COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the long-term debt is estimated based on interest rates
for the same or similar debt offered to Affiliated having the same or similar
remaining maturities and collateral requirements. The carrying amounts of
long-term debt approximate fair value at the applicable balance sheet dates.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject Affiliated to
concentrations of credit risk, consist principally of cash deposits and, trade
account receivables. Affiliated places its cash with several financial
institutions limiting the amount of credit exposure to any one financial
institution. Concentrations of credit risk with respect to trade accounts
receivable are within the midwest and Great Lakes regions of the United States.
Affiliated had a credit risk concentration since two customers accounted for
approximately 27% of accounts receivable at August 31, 1996. For the fifty-two
weeks ended September 3, 1994, three customers accounted for 16.3%, 17.2%, and
11.1% of sales, respectively. For the fifty-two weeks ended September 2, 1995
and August 31, 1996 two of the same three customers accounted for 16.9% and
20.2%, and 14.5% and 14.0% of sales, respectively. Management performs ongoing
credit evaluations of its customers and provides allowances as deemed necessary.
Credit is extended once appropriate credit history and references have been
obtained. Adjustments to the allowance for doubtful accounts are made
periodically (as circumstances warrant) based upon the expected collectibility
of all such accounts. Affiliated periodically reviews the credit history of its
customers and generally does not require collateral for the extension of credit.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF ("SFAS 121") in March 1995. SFAS
121 requires that long-lived assets and certain intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Affiliated adopted SFAS No. 121 on September 1, 1997. The impact of
adopting this standard did not have a material impact on the results of
operations.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
ESTIMATED SEPTEMBER 2, AUGUST 31,
USEFUL LIVES 1995 1996
------------- ------------ ----------
Land............................... -- $ 46 $ 561
Buildings.......................... 39 years -- 2,350
Machinery and equipment............ 10-30 years 2,897 5,407
Automobiles and trucks............. 7 years 151 148
Office equipment and furniture..... 5-7 years 299 373
Leasehold improvements............. 7-39 years 105 109
------------ ----------
3,498 8,948
Less: accumulated depreciation and
amortization..................... (799) (1,008)
------------ ----------
Total......................... $ 2,699 $ 7,940
============ ==========
F-62
<PAGE>
AFFILIATED METALS COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
3. LONG-TERM DEBT
Long-term debt consists of the following:
SEPTEMBER 2, AUGUST 31,
1995 1996
------------ ----------
Note payable, interest at 8.75%,
payable in monthly installments of
$30 (plus interest) commencing
September 1996; matures August
2001; secured by certain machinery
and equipment and personal
guarantees of common
stockholders....................... $ -- $ 1,770
Note payable, interest at prime plus
1.0%, payable in 59 monthly
installments of $25 (plus
interest), matures November, 1999;
secured by accounts receivable,
inventories, machinery and
equipment, assignment of life
insurance proceeds on officers'
policies, and personal guarantees
of common stockholders............. 1,250 905
Construction note payable, interest
at prime plus 1.0%, interest
payable monthly, principal payment
due March, 1997; secured by certain
machinery and equipment, certain
land, building, and personal
guarantees of common
stockholders....................... -- 2,432
Note payable, interest at 9.75%,
payable in monthly installments of
$5 (plus interest); secured by
certain machinery and equipment;
refinanced in February, 1996....... 244 --
Revolving line-of-credit, interest at
prime plus 0.5%, interest payable
monthly, expires August, 1997
secured by substantially all assets
of Affiliated, assignment of life
insurance proceeds on officers'
policies, and personal guarantees
of common stockholders............. 6,747 9,421
Notes payable to estate of former
stockholder, interest at prime plus
1.0%, payable in monthly
installments of $2 (plus interest),
principal payment due March 1999;
secured by personal guarantees of
common stockholders................ 102 74
Notes payable, interest at rates
ranging from 7.5% to 10.25%,
payable in monthly installments
ranging from $0.3 to $0.8, through
July, 1999......................... 82 93
------------ ----------
8,425 14,695
Less: current maturities............. (407) (10,358)
------------ ----------
$ 8,018 $ 4,337
============ ==========
Affiliated has obtained financing agreements from its lender that will
convert the construction note to a term loan note payable and a Small Business
Administration ("SBA") note payable in amounts up to $1,600 and $1,000,
respectively. The new notes will be secured by certain machinery and equipment,
certain land and building, and personal guarantees of common stockholders. The
term loan note payable will bear interest at a fixed rate based on prime plus
0.5% at closing during the first five years and will adjust after year five and
will be payable in monthly installments of principal and interest over a
ten-year period from the date of conversion. The SBA note payable will bear
interest at a rate yet to be determined and will be payable in monthly
installments of principal and interest over a 20-year period from the date of
conversion. Because Affiliated had the intent and ability to convert the
construction note payable on a long-term basis, the August 31, 1996
classification and future maturities have been presented under the terms of the
new agreements.
F-63
<PAGE>
AFFILIATED METALS COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Affiliated's revolving line of credit provides for borrowings up to $12,000
(limited to a borrowing base defined in the agreement as a percentage of
eligible accounts receivable and inventories). The revolving line of credit
agreement requires that all cash receipts of Affiliated be deposited directly
into a lockbox account and applied against the line of credit. Funds are then
drawn from the line of credit as checks are disbursed. Additionally, the
agreement requires, among other things, that Affiliated maintain certain minimum
ratios, including net income, tangible net worth, leverage, cash flow coverage,
and limits on capital expenditures. At August 31, 1996, future principal
payments of long-term debt, as adjusted to reflect the financing agreements, are
as follows:
1997................................. $ 10,358
1998................................. 928
1999................................. 905
2000................................. 573
2001................................. 538
Thereafter........................... 1,393
----------
$ 14,695
==========
4. REDEEMABLE PREFERRED STOCK
Redeemable preferred stock consists of 1,680 shares of authorized at a par
value of $119.048 per share. Shares issued and outstanding at August 31, 1996
and September 2, 1995, were 600 and 840 respectively. The stock is subject to
mandatory redemption of 20 shares per month beginning in March 1992 and
continuing for 84 months. In both fiscal 1996 and fiscal 1995, 240 shares were
redeemed at a price of $119.048 per share. Dividends are calculated cumulatively
(but not compounded) on a daily basis at the rate of 1% over prime. Dividends
are paid on each redemption date.
5. COMMON STOCK PURCHASE WARRANT
In March 1992, in connection with a Securities Purchase Agreement related
to the purchase of Affiliated, Affiliated issued one warrant to an investor in
consideration for $100. The warrant is exercisable at an exercise price of $.01
per share into 34.4% or 3,146 shares of Affiliated's common stock on a fully
diluted basis. The holder of the warrant also may put the warrant or a portion
thereof to Affiliated through November 1999, unless it would cause Affiliated to
be in default of its debt covenants. The put price is determined by the
ownership percentage of the warrants multiplied by the greater of either fair
value of Affiliated, a multiple of earnings before income taxes, interest, and
depreciation and amortization, and book value, all as defined in the agreement.
In addition, the agreement provides the holder of the warrant with certain
registration rights under the Securities Act of 1933 (the "Securities Act") to
cause Affiliated to register the shares of common stock to be received from the
exercise of the warrant. The agreement also provides the holder of the warrant
with certain "piggyback" registration rights which allow the holder of the
warrant to register his common stock in the event Affiliated files a
registration statement under the Securities Act.
F-64
<PAGE>
AFFILIATED METALS COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
6. INCOME TAXES
Affiliated has implemented Statement of Financial Accounting Standards No.
109, ACCOUNTING FOR INCOME TAXES ("SFAS 109"), which provides for a liability
approach to accounting for income taxes.
The provisions for federal and state income taxes are as follows:
FIFTY-TWO WEEKS ENDED
------------------------------------------
SEPTEMBER 3, SEPTEMBER 2, AUGUST 31,
1994 1995 1996
------------ ------------ ----------
Federal:
Current...................... $ 260 $ 442 $ 796
Deferred..................... (16) (37) (1)
------------ ------------ ----------
244 405 795
State:............................
Current...................... 57 100 184
Deferred..................... (4) (8) --
------------ ------------ ----------
53 92 184
------------ ------------ ----------
Total provision................... $ 297 $ 497 $ 979
============ ============ ==========
The components of deferred income tax liabilities and assets are as
follows:
SEPTEMBER 3, AUGUST 31,
1995 1996
------------ ----------
Deferred income tax liabilities:
Property and equipment.......... $ 634 $ 666
------------ ----------
Total deferred income tax
liabilities............. 634 666
------------ ----------
Deferred income tax assets:
Allowance for doubtful
accounts...................... 12 12
Other, net...................... 44 77
------------ ----------
Total deferred income tax
assets.................. 56 89
------------ ----------
Net deferred tax liabilities......... $ 578 $ 577
============ ==========
A reconciliation of the difference between the federal statutory tax rates
and the effective tax rates as a percentage of net income is as follows:
FIFTY-TWO WEEKS ENDED
------------------------------------------
SEPTEMBER 2, SEPTEMBER 3, AUGUST 31,
1994 1995 1996
------------ ------------ ----------
U.S. federal statutory rate....... 34.0% 34.0% 34.0%
State income taxes, net of Federal
tax benefit..................... 4.8 4.8 5.0
Other............................. 3.5 1.3 1.3
------------ ------------ ----------
42.3% 40.1% 40.3%
============ ============ ==========
F-65
<PAGE>
AFFILIATED METALS COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
7. EMPLOYEE BENEFIT PLANS
Affiliated sponsors a qualified contributory profit sharing plan and 401(k)
plan. The plan covers substantially all full-time employees who have met certain
eligibility requirements. The plan may be amended or terminated at any time by
the Board of Directors. Affiliated, although not required to, has provided
contributions to the plan during each of the fifty-two weeks ended September 3,
1994, September 2, 1995 and August 31, 1996, of $89, $100 and $141,
respectively.
8. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Affiliated leases its corporate office and one of its production
facilities. The lease expires on May 31, 1998 and calls for a monthly rental
payment of $9. The lease also provides for an additional five-year renewal
option.
Rent expense for all operating leases for the fifty-two weeks ended
September 3, 1994, September 2, 1995 and August 31, 1996 was $126, $125 and
$128, respectively.
9. SUBSEQUENT EVENT (UNAUDITED)
In May 1997, Affiliated and its stockholders entered into a definitive
agreement with a wholly-owned subsidiary of Metals USA, which among other things
calls for the merger of Affiliated with the Metals USA subsidiary.
In February 1997, Affiliated amended its revolving credit facility, which
reduced the interest to prime, increased the available borrowing up to $16,000
and extended the maturity to August 31, 1998. Additionally, Affiliated also
entered into an agreement to extend until September 1997 the financing
agreements discussed in Note 3 related to the construction loan payable.
F-66
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Southern Alloy of America, Inc.
We have audited the accompanying balance sheets of Southern Alloy of
America, Inc. as of December 31, 1996 and 1995, and the related statements of
operations, stockholders' equity and cash flows for the years then ended. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial position of Southern Alloy of America,
Inc. as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Charlotte, North Carolina
April 30, 1997.
F-67
<PAGE>
SOUTHERN ALLOY OF AMERICA, INC.
BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
-------------------- MARCH 31,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents....... $ 57 $ -- $--
Accounts receivable:
Trade, less allowances of
$18, $13 and $11........ 1,483 1,262 1,409
Affiliates................. 1,020 945 168
Inventories..................... 1,050 1,063 1,137
Prepaid expenses and other
current assets................. 22 63 124
--------- --------- -----------
Total current assets....... 3,632 3,333 2,838
Property and equipment, net.......... 456 353 324
Other assets......................... 84 68 36
--------- --------- -----------
Total assets............... $ 4,172 $ 3,754 $ 3,198
========= ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable................ $ 1,602 $ 1,450 $ 1,624
Accrued liabilities............. 97 68 72
Revolving line-of-credit........ 1,424 1,424 1,369
Notes payable................... -- -- 135
Current portion of obligations
under capital lease............ 68 25 25
Current portion of long-term
debt........................... 38 24 13
--------- --------- -----------
Total current
liabilities................ 3,229 2,991 3,238
Obligations under capital lease, less
current portion.................... 69 44 37
Long-term debt, less current
portion............................. 24 -- --
--------- --------- -----------
Total liabilities.......... 3,322 3,035 3,275
--------- --------- -----------
Stockholders' equity (deficit):
Common stock 100,000 shares
authorized; 19,500, 17,200 and
19,500 shares issued and
outstanding at December 31,
1995 and 1996 and March 31,
1997, respectively............ 20 17 20
Additional paid-in capital...... 410 608 608
Retained earnings (deficit)..... 420 94 (705)
--------- --------- -----------
Total stockholders' equity
(deficit)................. 850 719 (77)
--------- --------- -----------
Total liabilities and
stockholders'
equity............. $ 4,172 $ 3,754 $ 3,198
========= ========= ===========
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE>
SOUTHERN ALLOY OF AMERICA, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------- --------------------
1995 1996 1996 1997
--------- --------- --------- ---------
(UNAUDITED)
Net sales........................... $ 12,018 $ 10,815 $ 3,076 $ 2,671
Costs and expenses:
Cost of sales.................. 7,669 7,084 2,017 1,735
Operating and delivery......... 902 709 203 176
Selling, general and
administrative expenses...... 2,806 2,850 895 657
Depreciation and amortization.. 108 126 31 43
--------- --------- --------- ---------
Operating income (loss)............. 533 46 (70) 60
Other (income) expense:
Interest expense............... 252 168 42 33
Interest income................ (146) (108) (33) (16)
--------- --------- --------- ---------
Income (loss) before income taxes... 427 (14) (79) 43
Provision (benefit) for income
taxes.............................. -- -- -- --
--------- --------- --------- ---------
Net income (loss)................... $ 427 $ (14) $ (79) $ 43
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-69
<PAGE>
SOUTHERN ALLOY OF AMERICA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS'
------------------ PAID-IN EARNINGS EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT)
------- ------ ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995............. 19,500 $ 20 $ 410 $ 183 $ 613
Distributions to owners......... -- -- -- (190) (190)
Net income...................... -- -- -- 427 427
------- ------ ----------- --------- -------------
Balance, December 31, 1995........... 19,500 20 410 420 850
Purchase of common stock........ (2,300) (3) (48) (197) (248)
Distributions to owners......... -- -- -- (115) (115)
Stock options................... -- -- 246 -- 246
Net loss........................ -- -- -- (14) (14)
------- ------ ----------- --------- -------------
Balance, December 31, 1996........... 17,200 17 608 94 719
Sale of common stock
(unaudited)................... 2,300 3 -- -- 3
Distributions to owners
(unaudited)................... -- -- -- (842) (842)
Net income (unaudited).......... -- -- -- 43 43
------- ------ ----------- --------- -------------
Balance, March 31, 1997
(unaudited)........................ 19,500 $ 20 $ 608 $ (705) $ (77)
======= ====== =========== ========= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-70
<PAGE>
SOUTHERN ALLOY OF AMERICA, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------- --------------------
1995 1996 1996 1997
--------- --------- --------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................$ 427 $ (14) $ (79) $ 43
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation.................... 108 125 31 43
Grant of stock option........... -- 246 246 --
Gain on sale of assets.......... (9) (71) -- --
Changes in operating assets and
liabilities:
Accounts receivable, net...... (113) 221 5 (147)
Inventories................... (90) (13) (39) (74)
Prepaid expenses and other
assets..................... (10) (41) (103) (61)
Other long-term assets........ 25 17 (16) 32
Accounts payable.............. 529 (152) 213 174
Accrued liabilities........... (57) (29) (55) 4
------- --------- --------- ---------
Net cash provided by
operating activities.... 810 289 203 14
------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment..................... (99) (23) (14) (14)
Proceeds from sales of property
and equipment................. 8 71 -- --
------- --------- --------- ---------
Net cash provided by (used
in) investing
activities.............. (91) 48 (14) (14)
------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase on revolving
line-of-credit................ 156 -- (76) (55)
Net increase (decrease) in notes
payable....................... -- -- 202 135
Net advances (to) from officers
and affiliates................ (535) 75 (97) 777
Payments on capital lease
obligations................... (63) (68) (18) (7)
Principal payments on long-term
obligations................... (30) (38) (9) (11)
Redemption of common stock...... -- (248) (248) --
Sale of common stock............ -- -- -- 3
Dividends paid.................. (190) (115) -- (842)
------- --------- --------- ---------
Net cash used in financing
activities.............. (662) (394) (246) --
------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 57 (57) (57) --
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD.......................... -- 57 57 --
------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF
PERIOD.............................$ 57 $ -- $ -- $ --
======= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest..........$ 26 $ 159 $ 42 $ 33
The accompanying notes are an integral part of these financial statements.
F-71
<PAGE>
SOUTHERN ALLOY OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Southern Alloy of America, Inc. ("Southern Alloy"), a North Carolina
corporation, is a specialty metal service center located in Salisbury, North
Carolina specializing in ferrous and non-ferrous continuous, centrifugal and
static cast bar stock. Southern Alloy performs a number of metal processing
services, including precision saw cutting, precision and semi-finished
machining, drilling and milling operations. Southern Alloy's customers are
comprised of original equipment manufacturers and machine shops servicing the
fluid power, power transmission, material handling and textile machinery
industries. Market areas are principally located in the Southeastern United
States.
Southern Alloy and its shareholders expect to enter into a definitive
merger agreement with Metals USA, Inc. ("Metals USA") pursuant to which all of
Southern Alloy's outstanding shares of capital stock will be exchanged for cash
and shares of Metals USA common stock concurrently with the consummation of the
initial public offering (the "Offering") of Metals USA common stock.
RECLASSIFICATIONS
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 presentation. These reclassifications have no effect on
previously reported net income or stockholders' equity.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INTERIM FINANCIAL INFORMATION
The interim financial statements included herein are unaudited; however,
they include all adjustments of a normal recurring nature, which, in the opinion
of management, are necessary to present fairly the financial position of
Southern Alloy at March 31, 1997, and the results of its operations and cash
flows for the three months ended March 31, 1996 and 1997. Accounting
measurements at interim dates inherently involve greater reliance on estimates
than at year end. The results of operations for the interim periods presented
are not necessarily indicative of the results to be expected for the entire
year.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is primarily
determined using the specific identification method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, net of accumulated depreciation.
Depreciation is computed utilizing the straight-line method at rates based upon
the estimated useful lives of the various classes of assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash surrender value of life insurance policies
approximate their fair value. The fair value of the long-term debt is estimated
based on interest rates for the same or similar debt offered
F-72
<PAGE>
SOUTHERN ALLOY OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
to Southern Alloy having the same or similar remaining maturities and collateral
requirements. The carrying amounts of long-term debt approximate fair value at
the applicable balance sheet dates.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject Southern Alloy to
concentrations of credit risk, consist principally of cash deposits and, trade
account and note receivables. Concentrations of credit risk with respect to
trade accounts receivable are within the Southeastern United States.
Additionally, Southern Alloy has one customer that accounts for approximately
10% of net sales. Credit is extended once appropriate credit history and
references have been obtained. Adjustments to the allowance for doubtful
accounts are made periodically (as circumstances warrant) based upon the
expected collectibility of all such accounts. Southern Alloy periodically
reviews the credit history of its customers and generally does not require
collateral for the extension of credit.
INCOME TAXES
Southern Alloy, with the consent of its stockholders, elected to be taxed
under sections of the federal and state income tax laws which provide that, in
lieu of corporation income taxes, the stockholders separately account for
Southern Alloy's items of income, deductions, losses and credits on their
individual income tax returns. The financial statements will not include a
provision for income taxes (credits) as long as the S Corporation election
remains in effect. As long as Southern Alloy's S Corporation income tax election
remains in effect, Southern Alloy may, from time-to-time, pay dividends to its
stockholders in amounts sufficient to enable the stockholders to pay the taxes
due on their share of Southern Alloy's items of income, deductions, losses, and
credits which has been allocated to them for reporting on their individual
income tax returns.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF ("SFAS 121") in March 1995. SFAS
121 requires that long-lived assets and certain intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Southern Alloy adopted SFAS No. 121 on January 1, 1996. The impact
of adopting this standard did not have a material impact on the results of
operations.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
ESTIMATED --------------------
USEFUL LIVES 1995 1996
------------- --------- ---------
Machinery and equipment.............. 3-7 years $ 1,112 $ 962
Furniture and fixtures............... 3-7 years 173 176
Leasehold improvements............... 5 years 85 85
--------- ---------
1,370 1,223
Less: accumulated depreciation....... (914) (870)
--------- ---------
$ 456 $ 353
========= =========
F-73
<PAGE>
SOUTHERN ALLOY OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
3. LINE OF CREDIT
At December 31, 1995, Southern Alloy had a line of credit with Freemont
Financial Corporation. On January 3, 1996, Southern Alloy entered into an
agreement with NationsBank of Georgia, N.A. which was to expire on January 1,
1997. The original agreement was terminated and Southern Alloy entered into a
new line-of-credit agreement with NationsBank N.A. ("NationsBank"), which
expires on July 31, 1997. This agreement provides a maximum borrowing limit of
$2,000 with interest payable monthly at the bank's prime rate (8.25% at December
31, 1996). The borrowing base under the new NationsBank line of credit is
limited to 80% of eligible receivables as defined by the agreement plus 50% of
the eligible inventory. Southern Alloy had $75 of unused availability under the
line-of-credit at December 31, 1996. The line is secured by accounts receivable,
inventory, equipment and guarantees of Southern Investments, The Development
Group, Inc. (both of which are affiliates of Southern Alloy) and stockholders of
Southern Alloy.
The new NationsBank agreement contains restrictive covenants which, among
other things, require Southern Alloy to maintain certain financial ratios, limit
capital expenditures and bonuses and restrict future indebtedness. At December
31, 1996, Southern Alloy was in compliance with, or had obtained all necessary
waivers regarding instances of non-compliance with the terms of the loan
agreement.
4. LONG-TERM DEBT
Long-term obligations consist of three notes payable to Amada Cutting
Technologies, Inc. The notes bear interest at rates ranging from 9.0% to 9.4%
and are payable in monthly installments totaling $4 through April 1997, and $1
from May 1997 to December 1997. The notes are secured by related equipment.
5. OBLIGATIONS UNDER CAPITAL LEASE
Southern Alloy leases certain shop equipment under capital leases through
1999, which bear interest at rates ranging from 9.0% to 11.27%.
Future minimum payments under capital leases as of December 31, 1996, are
as follows:
1997................................. $ 30
1998................................. 30
1999 and thereafter.................. 18
---------
78
Less: interest portion............... 9
---------
Capital lease obligation............. 69
Less: current portion................ 25
---------
$ 44
=========
The cost of equipment under capital leases amounted to approximately $256
and $135 at December 31, 1995 and 1996, respectively. Accumulated amortization
amounted to $107 and $65 at December 31, 1995 and 1996, respectively.
6. EMPLOYEE BENEFIT PLANS
Southern Alloy sponsors a defined contribution 401(k) profit-sharing plan
for employees who have attained at least 21 years of age and one year of
service. Company contributions to the plan, which are determined annually at the
discretion of the Board of Directors, amounted to $12 and $16 in 1995 and 1996,
respectively.
F-74
<PAGE>
SOUTHERN ALLOY OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
7. COMMITMENTS AND CONTINGENCIES
GUARANTEE
Southern Alloy had guaranteed a line-of-credit agreement for SOMAR, Inc.
(an affiliate of Southern Alloy). The outstanding balance under this agreement
amounted to approximately $1,200 at December 31, 1995. As of August 12, 1996,
Southern Alloy was no longer a guarantor on this line of credit.
8. STOCK OPTIONS
In February 1996, Southern Alloy purchased 2,300 shares from a primary
stockholder of Southern Alloy for $248.
In September 1996, 2,300 stock options were issued to two directors of
Southern Alloy (one of which also serves as an officer) at an option price of
$1.00 per share. The options were exercisable at any time through September
2001. The deemed value for accounting purposes at the date of grant was $108.00
per share. Accordingly, $246 of compensation expense was recorded at the date of
grant.
In January 1997, the directors exercised their options and purchased 2,300
shares of Southern Alloy for $2.
9. RELATED-PARTY TRANSACTIONS
Southern Investments (a partnership), The Development Group, Inc. and
Engineered Machine Technologies, Inc. are affiliated with Southern Alloy through
common ownership. SOMAR, Inc. was affiliated with Southern Alloy through common
ownership through August 12, 1996. On that date, SOMAR, Inc. was sold to an
unaffiliated company.
Southern Alloy leases commercial real estate from Southern Investments
under a non-cancelable operating lease. Rent expense related to this lease
amounted to $130 and $103 in 1995 and 1996, respectively.
Southern Alloy leases certain automobiles and operating equipment from
Southern Investments on a month-to-month basis. Rent expense related to these
leases amounted to $136 and $198 for 1995 and 1996, respectively.
During the years ended December 31, 1995 and 1996, Southern Alloy made
loans to or borrowed from SOMAR, Inc., Southern Investments, The Development
Group, Inc., Engineered Machine Technologies, Inc. and officers. Following is a
schedule of net receivable balances due from or payable to affiliated companies
at December 31, 1995 and 1996:
DUE FROM
(PAYABLE TO)
--------------------
1995 1996
--------- ---------
SOMAR, Inc........................... $ 563 $ --
Engineered Machine Technologies,
Inc................................ 334 640
Southern Investments................. 125 130
The Development Group, Inc........... (16) 7
Officers and affiliates.............. 14 168
--------- ---------
$ 1,020 $ 945
========= =========
F-75
<PAGE>
SOUTHERN ALLOY OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Following is a summary of interest income from affiliated companies for the
years ending December 31:
1995 1996
--------- ---------
SOMAR, Inc........................... $ 109 $ 57
Engineered Machine Technologies,
Inc................................ 37 51
--------- ---------
$ 146 $ 108
========= =========
Southern Alloy leases certain office space and equipment under
non-cancelable operating leases with initial or remaining lease terms in excess
of one year. Certain office and equipment leases contain renewal options and
purchase options at fair market value at the end of the lease term. Following is
a schedule of future minimum lease payments under non-cancelable leases as of
December 31, 1996:
RELATED
PARTIES OTHERS TOTAL
-------- ------- ------
1997................................. $ 193 $ 7 $ 200
1998................................. 128 7 135
1999................................. 77 4 81
2000................................. 77 4 81
2001................................. 77 1 78
Thereafter........................... 77 -- 77
-------- ------- ------
$ 629 $ 23 $ 652
======== ======= ======
10. SUBSEQUENT EVENTS (UNAUDITED)
In May 1997, Southern Alloy and its shareholders entered into a definitive
agreement with a wholly-owned subsidiary of Metals USA, which among other
things, calls for the merger of Southern Alloy with the Metals USA subsidiary.
Prior to the merger, Southern Alloy will make a distribution of a
receivable from an affiliate with a carrying value of approximately $842. This
distribution exceeded Southern Alloy's estimated S Corporation accumulated
adjustment account.
Concurrent with the Merger, Southern Alloy will enter into an agreement
with a related party to lease certain real property for an annual lease payment
of $48. This lease runs through 2012, and provides for periodic increases in the
annual lease payment every five years equal to the cumulative change in the
Consumer Price Index. Additionally, Southern Alloy will lease certain equipment
from a related party on a month to month basis for $4 per month. Southern Alloy
believes these lease arrangements are no less favorable than could be obtained
from unaffiliated third parties.
F-76
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Uni-Steel, Inc.:
We have audited the accompanying balance sheet of Uni-Steel, Inc., an
Oklahoma Corporation, as of September 30, 1996, and the related statement of
income, stockholders' equity and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Uni-Steel, Inc. as of
September 30, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 28, 1997
F-77
<PAGE>
UNI-STEEL, INC.
BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, MARCH 31,
1996 1997
------------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents....... $ 203 $ 7
Accounts receivable, less
allowance of $122 and $250..... 6,586 7,670
Accounts receivable --
affiliates..................... 261 265
Inventories..................... 9,947 11,349
Current portion of note
receivable..................... 25 17
Deferred income taxes........... 127 123
Prepaid expenses and other
current assets................. 22 38
------------- -----------
Total current assets....... 17,171 19,469
Property and equipment, net.......... 3,176 3,137
Notes receivable, net of current
portion............................ 1,212 1,178
Other assets......................... 355 484
Goodwill............................. 344 339
------------- -----------
Total assets............... $22,258 $24,607
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................ $ 3,165 $ 2,997
Accounts payable --
affiliates..................... 121 92
Accrued liabilities............. 419 363
Note payable to shareholders.... 36 36
Line of credit.................. 7,100 8,200
Current portion of long-term
debt........................... 174 365
Income taxes payable............ 92 77
------------- -----------
Total current
liabilities............. 11,107 12,130
Long-term debt, net of current
portion............................ 413 1,116
Deferred income taxes................ 788 762
------------- -----------
Total liabilities.......... 12,308 14,008
------------- -----------
Commitments and contingencies
Redemption value of 36,533 shares of
common stock $1.00 par value
subject to mandatory redemption.... 4,201 4,475
Stockholders' equity:
Common stock $1.00 par value,
500,000 shares authorized,
63,467 shares issued (net of
36,533 shares subject to
redemption).................... 63 63
Additional paid-in capital...... 1,104 830
Retained earnings............... 5,743 6,392
Less: treasury stock, at cost... (1,161) (1,161)
------------- -----------
Total stockholders' equity...... 5,749 6,124
------------- -----------
Total liabilities and
stockholders' equity.... $22,258 $24,607
============= ===========
The accompanying notes are an integral part of these financial statements.
F-78
<PAGE>
UNI-STEEL, INC.
STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS)
SIX MONTHS ENDED
YEAR ENDED MARCH 31,
SEPTEMBER 30, --------------------
1996 1996 1997
------------- --------- ---------
(UNAUDITED)
Net sales............................ $54,620 $ 25,773 $ 31,007
Operating costs and expenses:
Cost of sales................... 43,445 20,481 24,657
Operating and delivery.......... 5,355 2,524 3,149
Selling, general and
administrative................ 2,917 1,396 1,642
Depreciation and amortization... 542 257 243
--------- --------- ---------
Operating income..................... 2,361 1,115 1,316
Other (income) expense:
Interest expense................ 575 297 313
Interest income................. (179) (76) (80)
Other, net...................... (4) (2) (2)
--------- --------- ---------
392 219 231
--------- --------- ---------
Income before income taxes........... 1,969 896 1,085
Provision for income taxes........... 741 335 436
--------- --------- ---------
Net income........................... $ 1,228 $ 561 $ 649
========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-79
<PAGE>
UNI-STEEL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ TREASURY PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT STOCK CAPITAL EARNINGS EQUITY
------- ------- --------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1995.......... 63,467 $ 63 $ (969) $ 1,432 $ 4,515 $ 5,041
Purchase of 1,901 shares of
common stock.................. -- -- (192) -- -- (192)
Increase in redemption value of
common stock subject to
mandatory redemption.......... -- -- -- (328) -- (328)
Net income...................... -- -- -- -- 1,228 1,228
------- ------- --------- ----------- --------- -------------
Balance, September 30, 1996.......... 63,467 63 (1,161) 1,104 5,743 5,749
Increase in redemption value of
common stock subject to
mandatory redemption
(unaudited)................... -- -- -- (274) -- (274)
Net income (unaudited).......... -- -- -- -- 649 649
------- ------- --------- ----------- --------- -------------
Balance, March 31, 1997
(unaudited)........................ 63,467 $ 63 $ (1,161) $ 830 $ 6,392 $ 6,124
======= ======= ========= =========== ========= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-80
<PAGE>
UNI-STEEL, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
SIX MONTHS ENDED
YEAR ENDED MARCH 31,
SEPTEMBER 30, --------------------
1996 1996 1997
------------- --------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 1,228 $ 561 $ 649
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities:
Depreciation and
amortization............... 542 257 243
Deferred tax provision
(benefit).................. (36) (16) (22)
Increases in cash surrender
values of life insurance... (56) (23) (23)
Changes in operating assets
and liabilities:
Accounts receivable, net... 181 272 (1,088)
Inventories................ (1,748) (1,134) (1,402)
Prepaid expenses and other
assets.................. (4) (93) (95)
Accounts payable and
accrued liabilities..... 233 592 (253)
Income tax payable......... (131) (71) (14)
------------- --------- ---------
Net cash provided by
(used in) operating
activities............ 209 345 (2,005)
------------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment....................... (362) (118) (199)
Principal collected on notes....... 13 15 15
------------- --------- ---------
Net cash used in
investing activities.. (349) (103) (184)
------------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase on revolving
line-of-credit.................. 800 -- 1,100
Principal payments on shareholder
debt............................ (95) -- --
Principal payments on long-term
obligations..................... (445) (222) (107)
Principal borrowings on long-term
obligations..................... -- -- 1,000
Purchase of treasury stock......... (192) (192) --
------------- --------- ---------
Net cash provided by
(used in) financing
activities............ 68 (414) 1,993
------------- --------- ---------
NET DECREASE IN CASH AND CASH
EQUIVALENTS........................ (72) (172) (196)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD.......................... 275 275 203
------------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF
PERIOD............................. $ 203 $ 103 $ 7
============= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest.......... $ 568 $ 299 $ 306
Cash paid for income taxes...... 909 421 472
The accompanying notes are an integral part of these financial statements.
F-81
<PAGE>
UNI-STEEL, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Uni-Steel, Inc. ("Uni-Steel") is a structural steel service center with
three locations in Oklahoma. Uni-Steel's products include carbon structural,
pressure vessel, high strength low alloy and alloy grades of steel sold to
customers in Oklahoma, Missouri, Arkansas, Texas, New Mexico, Colorado and
Kansas. Value added processing services include cut-to-length, leveling, flame
cutting, plasma cutting, shearing, and sawing and press brake forming. Uni-Steel
services customers in a wide variety of industries including oil and gas, truck
trailer, construction equipment, mining machinery, elevators, wholesale trade
and the construction industries.
Uni-Steel and its shareholders expect to enter into a definitive merger
agreement with Metals USA, Inc. ("Metals USA") pursuant to which all of
Uni-Steel's outstanding shares of capital stock will be exchanged for cash and
shares of Metals USA common stock concurrent with the consummation of the
initial public offering (the "Offering") of Metals USA common stock.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INTERIM FINANCIAL INFORMATION
The interim financial statements included herein are unaudited; however,
they include all adjustments of a normal recurring nature, which, in the opinion
of management, are necessary to present fairly the financial position of
Uni-Steel at March 31, 1997, and the results of its operations and cash flows
for the six months ended March 31, 1996 and 1997. Accounting measurements at
interim dates inherently involve greater reliance on estimates than at year end.
The results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the entire year.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Cash equivalents consist of highly liquid money market instruments with
original maturities of three months or less.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is primarily
determined using the last-in, first-out ("LIFO") method.
PROPERTY AND EQUIPMENT
Property and equipment, including capitalized interest, is stated at cost,
net of accumulated depreciation. Depreciation is computed utilizing the
straight-line method at rates based upon the estimated useful lives of the
various classes of assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash equivalents approximate their fair value. The
carrying amount of notes receivable approximate fair value at the applicable
balance sheet dates. The fair value of such notes receivable was based on
expected cash flows discounted using current rates at which similar loans would
be
F-82
<PAGE>
UNI-STEEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
made to borrowers with similar credit ratings. The fair value of the long-term
debt is estimated based on interest rates for the same or similar debt offered
to Uni-Steel having the same or similar remaining maturities and collateral
requirements. The carrying amounts of long-term debt approximate fair value at
the applicable balance sheet dates.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject Uni-Steel to
concentrations of credit risk, consist principally of cash deposits, trade
accounts and note receivables. Concentrations of credit risk with respect to
trade accounts receivable are within the southwest region of the United States.
Credit is extended once appropriate credit history and references have been
obtained. Adjustments to the allowance for doubtful accounts are made
periodically (as circumstances warrant) based upon the expected collectibility
of all such accounts. Uni-Steel periodically reviews the credit history of its
customers and generally does not require collateral for the extension of credit.
INCOME TAXES
Uni-Steel accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES ("SFAS
109"). Under SFAS 109, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the period in which the
differences are expected to affect taxable income. The principal items resulting
in the differences are different depreciation methods, use of the allowance
method for bad debts, and different inventory capitalization methods. Valuation
allowances are established when necessary to reduce deferred assets to the
amount to be realized. Income tax expense is the tax payable for the year and
the change during the year in deferred tax assets and liabilities.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF ("SFAS 121") in March 1995. SFAS
121 requires that long-lived assets and certain intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Uni-Steel adopted SFAS No. 121 on January 1, 1996. The impact of
adopting this standard did not have a material impact on the results of
operations.
2. NOTE RECEIVABLE
Uni-Steel has a note receivable with a balance of $1,208 at September 30,
1996. The note bears interest at 8% and is due in monthly installments of
principal and interest totaling $9 with a balloon payment of the remaining
balance due in September 2002. This note is secured by a mortgage on real estate
in Fountain, Colorado.
F-83
<PAGE>
UNI-STEEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
ESTIMATED SEPTEMBER 30,
USEFUL LIVES 1996
-------------- -------------
Land................................. $ 32
Buildings and improvements........... 5 - 33 years 2,452
Yard equipment....................... 3 - 10 years 544
Shop equipment....................... 3 - 10 years 2,408
Autos and trucks..................... 3 - 5 years 17
Office equipment..................... 4 - 8 years 476
Computer software.................... 3 - 6 years 291
-------------
6,220
Less: accumulated depreciation....... (3,044)
-------------
Total........................... $ 3,176
=============
4. INVENTORIES
Inventories consist of the following:
SEPTEMBER 30,
1996
-------------
Steel products....................... $ 9,482
Work in process...................... 372
Other................................ 93
-------------
Totals.......................... $ 9,947
=============
Net realizable value approximates cost on the first-in, first-out method.
In 1996, LIFO cost exceeded market value by $54. This 1996 amount was recorded
as a reduction of inventory and an increase in cost of sales. Management has
determined that lower of LIFO cost or market is the valuation method that most
accurately reflects the results of operations in accordance with generally
acceptable accounting principles. Had the statements of income been prepared on
the lower of FIFO cost or market basis, inventories would have been $9,947 and
net income for the year ended September 30, 1996 would have been $1,165.
5. LINE OF CREDIT
At September 30, 1996, Uni-Steel had drawn $7,100 against its $7,500 line
of credit at a bank. Interest is computed at prime (8.25% at September 30,
1996). Payments of interest are due monthly and the principal balance was due
February 28, 1997. This line of credit was amended in February 1997 to increase
the maximum borrowings under the facility to $10,000 and extend the maturity
date to April 30, 1999. Interest is computed at prime or Uni-Steel may elect for
interest to be computed at LIBOR plus 2.5%. This election must be made in
borrowing increments of $1,000 and no more than two such LIBOR advances may be
outstanding at one time.
Concurrently with the renewal of the line of credit, Uni-Steel also
obtained a $1,000 working capital term loan from its principal bank. Payments of
principal and interest are payable in equal monthly installments with final
maturity on February 28, 2002. Interest is also computed at Uni-Steel's option
at prime or LIBOR plus 2.5%. The line of credit and working capital term loan
include certain covenants which, among other things, restrict future borrowings
and set certain ratio, cash flow and net worth
F-84
<PAGE>
UNI-STEEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
requirements. Uni-Steel was in compliance as of December 31, 1996. These loans
are secured by a primary security interest in the inventory and accounts
receivable of Uni-Steel.
6. LONG-TERM DEBT
Long-term debt consists of the following:
SEPTEMBER 30,
1996
-------------
Notes payable to bank, interest at
prime (8.25% at September 30, 1996,
payable in monthly installments of
$13 (plus interest) through April
2000; secured by equipment......... $ 567
Note payable to a supplier, interest
at 10.0%, payable in monthly
installments of $1 (including
interest) through May 1998; secured
by equipment....................... 13
Notes payable to bank, interest at
prime (8.25% at September 30,
1996), payable in monthly
installments of $12 (plus interest)
through July 1997; secured by
equipment.......................... 7
-------------
587
Less: current maturities............. (174)
-------------
$ 413
=============
The prime rate was 8.25% at September 30, 1996.
At September 30, 1996, future principal payments of long-term debt are as
follows:
1997................................. $ 174
1998................................. 164
1999................................. 158
2000................................. 91
2001................................. --
---------
$ 587
=========
Uni-Steel also has a note payable due to a shareholder which pays interest
at prime and is payable on demand. The outstanding balance at September 30, 1996
was $36.
7. INCOME TAXES
Income tax expense for the year ended September 30, 1996 is comprised of
the following:
Current tax expense:
Federal......................... $ 693
State........................... 84
Deferred tax expense:
Federal......................... (34)
State........................... (2)
---------
Total tax provision.................. $ 741
=========
F-85
<PAGE>
UNI-STEEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The significant items giving rise to the deferred tax (assets) and
liabilities as of September 30, 1996 are as follows:
Deferred tax liabilities:
Bases differences in property
and equipment................. $ 592
Installment sales accounting.... 246
---------
Total deferred tax
liabilities............. 838
Deferred tax assets:
Allowance for doubtful
accounts...................... (49)
Inventory bases differences..... (85)
Other........................... (43)
---------
Total deferred tax
assets.................. (177)
---------
Net deferred tax liabilities......... $ 661
=========
The provision for income taxes differs from an amount computed at the
statutory rates as follows:
Income tax expense at the statutory
rate............................... $ 670
State taxes.......................... 54
Meals and entertainment.............. 17
---------
$ 741
=========
8. EMPLOYEE BENEFIT PLANS
Uni-Steel has a qualified profit sharing plan covering substantially all
employees. Employer contributions to the plan are made at the Board of
Directors' discretion. On July 1, 1990, the plan was amended to include a
deferred compensation 401(k) provision which allows employees to defer up to 15%
of their salaries and provides for employer matching of the first 4%. The total
employer contribution and match made to the plan was $290 for the year ended
September 30, 1996.
9. COMMITMENTS AND CONTINGENCIES
STOCK PURCHASE AGREEMENTS
Uni-Steel has an agreement with certain common stockholders which
effectively restricts trading of their common stock. The agreement also requires
Uni-Steel to repurchase this stock from certain stockholders who are terminated
from employment, becomes totally disabled, or die. The price is determined
pursuant to agreements between the parties and is subject to revision annually.
In January 1996, Uni-Steel repurchased 1,901 shares from a retired stockholder
for $192. At September 30, 1996, there are 2,501 (2.9%) shares of common stock
remaining under this agreement. Uni-Steel also has an agreement with Richard A.
Singer, an officer and stockholder, which restricts trading of 34,031 shares
(39%) of its common stock. The agreement requires Uni-Steel to purchase Mr.
Singer's stock in the event of his death, permanent disability or retirement.
The purchase price is to be determined pursuant to the agreement and is subject
to revision annually. Uni-Steel has committed certain life insurance policies to
fund this agreement. Uni-Steel's obligations under this agreement have been
guaranteed by its other major shareholder, Yaffe Iron and Metal Company, Inc. As
these shares are subject to mandatory redemption, they have not been classified
as a component of permanent equity in the accompanying balance sheets.
OPERATING LEASES
Uni-Steel leases warehouse space under an operating lease expiring in
September 1998. Minimum future rental payments under this non-cancelable
operating lease as of September 30, 1996, are as follows:
1997................................. $ 24
1998................................. 24
1999................................. 2
---------
$ 50
=========
F-86
<PAGE>
UNI-STEEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Following is a summary of rental expense under non-cancelable operating
leases:
Minimum rentals...................... $ 24
Contingent rentals................... 191
---------
Total........................... $ 215
=========
The contingent rentals are based on inventory levels in excess of a
specified minimum.
PURCHASE COMMITMENTS
During the normal course of business, Uni-Steel enters into commitments to
purchase raw materials from steel mills. These commitments are made for
purchases of up to nine months into the future. In certain cases, prices paid
are calculated at the time the commitment is entered into. In other cases, they
are calculated at time of shipment. Uni-Steel estimates outstanding purchase
commitments at September 30, 1996 to be approximately $11,500.
10. RELATED PARTY TRANSACTIONS
A summary of transactions with Yaffe Iron and Metal Company, Inc., a
shareholder of Uni-Steel and other affiliated companies or individuals follows:
SEPTEMBER 30,
1996
-------------
Sales to related companies........... $ 2,807
=============
Shipping provided by a related
company (Included in operating and
delivery expenses in the
accompanying statements of
income)............................ $ 1,227
=============
Warehouse rent paid to related entity
under a one-year lease with seven
one-year options remaining.
(Included in operating and delivery
expenses in the accompanying
statements of income).............. $ 145
=============
11. SUBSEQUENT EVENTS (UNAUDITED)
In May 1997, Uni-Steel and its stockholders entered into a definitive
agreement with a wholly-owned subsidiary of Metals USA, which among other things
calls for the merger of Uni-Steel with the Metals USA subsidiary.
Concurrent with the merger Uni-Steel will enter into an agreement with a
related party to lease certain real property for an annual lease payment of
$115. This lease runs through 2027, and provides for periodic increases in the
annual lease payment every five years equal to the cumulative change in the
Consumer Price Index.
The parties to the stock purchase agreements discussed in Note 9 intend for
such agreements to be waived if the Merger is undertaken.
F-87
<PAGE>
Product/Service Applications
Customer: John Deere
Company: Steel Service Systems, Horicon, Wisconsin
[Photographs of Founding Company processes and end-users]
Steel Service Systems provides John Deere with an integrated metals inventory
and processing solution. Steel Service Systems purchases rolled sheet steel,
receives orders electronically, processes the metal to customer specifications,
and delivers within 4-8 hours to the point of use inside Deere's plant.
Product: Building Components
Company: Texas Aluminum, Houston, Texas
[Photographs of Founding Company processes and end-users]
Texas Aluminum participates in one of the most rapidly growing segments of the
metals industry. The company provides a wide range of building components for
both commercial and residential builders, including roofing components, awnings
and patio covers. Texas Aluminum distributes its products nationally through 36
locations.
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary......................................................................................... 3
The Company................................................................................................ 8
Risk Factors............................................................................................... 10
Use of Proceeds............................................................................................ 15
Dividend Policy............................................................................................ 15
Capitalization............................................................................................. 16
Dilution................................................................................................... 17
Selected Financial Data.................................................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 20
Business................................................................................................... 40
Management................................................................................................. 51
Certain Transactions....................................................................................... 56
Principal Stockholders..................................................................................... 60
Description of Capital Stock............................................................................... 61
Shares Eligible for Future Sale............................................................................ 64
Underwriting............................................................................................... 65
Legal Matters.............................................................................................. 66
Experts.................................................................................................... 66
Additional Information..................................................................................... 67
Index to Financial Statements.............................................................................. F-1
</TABLE>
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UNTIL AUGUST 5, 1997 (25 DAYS AFTER THE DATE HEREOF), ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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5,900,000 SHARES
[LOGO]
METALS USA, INC.
COMMON STOCK
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PROSPECTUS
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ALEX. BROWN & SONS
INCORPORATED
BEAR, STEARNS & CO. INC.
SANDERS MORRIS MUNDY
July 11, 1997
