FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission File Number 1-13123
METALS USA, INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE 76-0533626
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
THREE RIVERWAY, SUITE 600
HOUSTON, TEXAS 77056
(Address of Principal Executive Offices) (Zip Code)
------------------
Registrant's telephone number, including area code: (713) 965-0990
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Number of shares of common stock outstanding at August 14, 1998: 37,955,256
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------
1998 1997 1998 1997
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales ............................... $ 377.2 $ 186.7 $ 655.7 $ 364.1
Operating costs and expenses:
Cost of sales ......................... 289.3 144.4 503.9 281.1
Operating and delivery ................ 34.2 19.4 60.2 37.9
Selling, general and administrative ... 24.7 10.2 42.8 20.4
Depreciation and amortization ......... 3.7 2.1 6.7 4.3
------- ------- ------- -------
Operating income ........................ 25.3 10.6 42.1 20.4
Other (income) expense:
Interest expense ...................... 6.2 1.7 11.0 3.5
Other (income) expense, net ........... (1.6) .1 (1.7) (.1)
------- ------- ------- -------
Income before income taxes .............. 20.7 8.8 32.8 17.0
Provision for income taxes .............. 8.5 3.8 13.4 7.2
------- ------- ------- -------
Net income .............................. $ 12.2 $ 5.0 $ 19.4 $ 9.8
======= ======= ======= =======
Earnings per share ...................... $ .33 $ .16 $ .55 $ .31
======= ======= ======= =======
Earnings per share -- assuming dilution . $ .32 $ .16 $ .54 $ .31
======= ======= ======= =======
Number of common shares used in the
per share calculations:
Earnings per share .................... 36.7 31.2 35.2 31.2
======= ======= ======= =======
Earnings per share -- assuming dilution 37.6 31.2 36.0 31.2
======= ======= ======= =======
</TABLE>
The unaudited pro forma combined statements of operations are presented
herein because the Company believes certain investors find the information
useful. This statement should be read in conjunction with the Company's
historical unaudited financial statements and notes thereto included under Part
I, Item 1 of the Form 10-Q for the quarterly reporting period ended June 30,
1998. The preceding schedule differs from the historical results of operations
for the three and six months ended June 30, 1997 in that it gives effect to the
acquisition of the Founding Companies and the IPO as if they had occurred on
January 1, 1997. All of the other companies acquired are included in the
unaudited pro forma combined statements of operations exactly as they are in the
Company's historical financial statements. The unaudited pro forma combined
statements of operations for the 1997 periods do not purport to represent what
the Company's consolidated results of operations would actually have been if
such transactions had in fact occurred on the dates indicated below and are not
necessarily representative of the Company's results of operations for any future
period. Since the companies acquired were not under common control or
management, the unaudited pro forma combined results for the 1997 periods may
not be comparable to, or indicative of, future performance. The results of
operations for interim periods are not necessarily indicative of the results to
be expected for the entire year.
To the extent the former owners of the companies acquired agreed
prospectively to reductions in salary, bonuses and benefits and certain
reductions in lease costs (which have been conformed to the amounts stated in
the operative lease agreements), these reductions have been reflected in the
unaudited pro forma combined statements of operations. The foregoing pro forma
adjustments, together with certain other pro forma adjustments, are based on
estimates, available information and certain assumptions, which may be revised
as additional information becomes available. With respect to other potential
cost savings, the Company has not and cannot quantify such savings; however, it
is anticipated that a portion of such savings will be offset by costs related to
additional overhead attributable to the Company's corporate staff and by the
costs associated with being a public company. However, because these savings
cannot be accurately quantified, they have not been included in the unaudited
pro forma combined financial information of the Company.
(i)
<PAGE>
METALS USA, INC.
INDEX
PART I. - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets of Metals
USA, Inc. and Subsidiaries at
June 30, 1998 (Unaudited)
and December 31, 1997 ..................................... 2
Unaudited Consolidated Statements
of Operations of Metals USA, Inc.
and Subsidiaries for the three
and six months ended June 30, 1998 and 1997 .............. 3
Unaudited Consolidated Statements of
Cash Flows of Metals USA, Inc. and
Subsidiaries for the six months ended
June 30, 1998 and 1997 ................................... 4
Condensed Notes to Unaudited Consolidated
Financial Statements ..................................... 5
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations ............................... 12
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings .................................... 18
Item 4. Submission of Matters to a Vote of Security Holders .. 18
Item 5. Other Information .................................... 18
Item 6. Exhibits and Reports on Form 8-K ..................... 18
Signatures ................................................... 19
1
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- --------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash .................................................. $ 19.7 $ 7.3
Accounts receivable, net of allowance of $6.0 and $3.6 188.2 95.1
Inventories ........................................... 275.4 159.4
Prepaid expenses and other ............................ 8.8 5.6
-------- --------
Total current assets ................................ 492.1 267.4
Property and equipment, net ............................. 134.9 86.5
Goodwill, net ........................................... 212.0 120.1
Other assets, net ....................................... 21.8 6.6
-------- --------
Total assets ........................................ $ 860.8 $ 480.6
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 104.1 $ 52.5
Accrued liabilities ................................... 29.2 13.1
Current portion of long-term debt ..................... 7.9 7.2
Income taxes payable .................................. 2.2 1.6
-------- --------
Total current liabilities ........................... 143.4 74.4
Long-term debt, less current portion .................... 387.8 167.1
Deferred income tax liability ........................... 8.1 8.1
Other long-term liabilities ............................. 8.4 4.5
-------- --------
Total liabilities ................................... 547.7 254.1
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par, 5,000,000 shares authorized,
none issued and outstanding ......................... -- --
Common stock, $.01 par, 203,122,914 shares authorized,
37,813,195 and 32,680,226 shares issued and
outstanding, respectively ........................... .4 .3
Additional paid-in capital ............................ 251.7 184.6
Unearned compensation ................................. (1.5) (1.5)
Retained earnings ..................................... 62.5 43.1
-------- --------
Total stockholders' equity .......................... 313.1 226.5
-------- --------
Total liabilities and stockholders' equity .......... $ 860.8 $ 480.6
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
2
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ------------------
1998 1997 1998 1997
------ ------ ------- ------
<S> <C> <C> <C> <C>
Net sales ................................ $ 377.2 $ 73.1 $ 655.7 $ 145.1
Operating costs and expenses:
Cost of sales .......................... 289.3 57.0 503.9 112.5
Operating and delivery ................. 34.2 7.0 60.2 13.9
Selling, general and administrative .... 24.7 7.8 42.8 15.0
Depreciation and amortization .......... 3.7 .7 6.7 1.4
------- ------- ------- -------
Operating income ......................... 25.3 .6 42.1 2.3
Other (income) expense:
Interest expense ....................... 6.2 .4 11.0 .8
Other income, net ...................... (1.6) (.1) (1.7) (.2)
------- ------- ------- -------
Income before income taxes ............... 20.7 .3 32.8 1.7
Provision for income taxes ............... 8.5 1.7 13.4 3.5
------- ------- ------- -------
Net income (loss) ........................ $ 12.2 $ (1.4) $ 19.4 $ (1.8)
======= ======= ======= =======
Earnings per share ...................... $ .33 $ (.10) $ .55 $ (.13)
======= ======= ======= =======
Earnings per share -- assuming dilution . $ .32 $ (.10) $ .54 $ (.13)
======= ======= ======= =======
Number of common shares used in the
per share calculations:
Earnings per share .................... 36.7 14.2 35.2 14.2
======= ======= ======= =======
Earnings per share -- assuming dilution 37.6 14.2 36.0 14.2
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1998 1997
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ......................................... $ 19.4 $ (1.8)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities --
Capital contributions attributable to deemed tax
payments of S Corporations ............................ .3 2.1
Provision for bad debts ................................. 1.1 .4
Depreciation and amortization ........................... 6.7 1.4
Amortization of deferred financing costs ................ .4 --
Compensation expense-- management shares ................ -- 6.0
Changes in operating assets and liabilities, net of
business acquisitions--
Accounts receivable ................................... (23.9) (3.1)
Inventories ........................................... (13.9) 1.8
Prepaid expenses and other assets ..................... (7.7) (4.2)
Accounts payable and accrued liabilities .............. 7.6 3.9
Income taxes payable .................................. (1.7) .3
Other liabilities ..................................... 1.1 3.8
Other operating ......................................... (.3) .2
------ ------
Net cash (used in) provided by
operating activities .............................. (10.9) 10.8
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ....................... (8.1) (8.0)
Purchase of businesses, net of acquired cash .............. (86.0) --
------ ------
Net cash used in investing activities ............... (94.1) (8.0)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to stockholders ............................. (3.1) (3.3)
Issuance of 8 5/8 % Senior Subordinated Notes ............. 200.0 --
Net repayments on the Credit Facility ..................... (75.3) --
Net borrowings on Industrial Revenue Bonds and other
long-term debt .......................................... 3.3 3.7
Deferred financing costs incurred ......................... (7.2) (.1)
Other financing ........................................... (.3) .6
------ ------
Net cash provided by financing activities ........... 117.4 .9
------ ------
NET INCREASE IN CASH ........................................ 12.4 3.7
CASH, beginning of period ................................... 7.3 2.4
------ ------
CASH, end of period ........................................ $ 19.7 $ 6.1
====== ======
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Metals USA, Inc., a Delaware corporation, ("Metals USA") 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. Prior to its IPO, Metals USA had not conducted any operations relating
to the generation of net sales. Concurrent with the consummation of the IPO,
Metals USA acquired, in separate merger transactions, eight companies engaged in
the processing of steel, aluminum and specialty metals, as well as the
manufacture of metal components. Following the IPO and through June 30, 1998,
Metals USA has acquired numerous additional companies in similar businesses (See
Note 5). Metals USA, together with its wholly-owned subsidiaries, is referred to
as the "Company."
BASIS OF PRESENTATION
INTERIM FINANCIAL INFORMATION -- The interim consolidated 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 interim consolidated financial information as of and for
the periods indicated. All intercompany transactions and balances have been
eliminated. 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.
The information contained in the following notes to the accompanying
consolidated financial statements is condensed from that which would appear in
the annual audited financial statements; accordingly, the financial statements
included herein should be reviewed in conjunction with the Company's audited
consolidated financial statements and related notes thereto contained in the
annual report to stockholders filed with the Securities and Exchange Commission
on Form 10-K ("Form 10-K"). Any capitalized terms used but not specifically
defined herein have the same meaning given to them in the Form 10-K. As
discussed in the following paragraph, during the second quarter of 1998, the
Company completed an acquisition accounted for as a "pooling-of-interests"
transaction. Accordingly, the Company's historical consolidated financial
statements have been restated to reflect the results of operations, cash flows
and financial position of the acquired entity as if the acquisition occurred on
January 1, 1995. The restated financial statements are labeled as "Supplemental"
and are contained in the Company's Registration Statement on Form S-4, Amendment
No. 1 (Registration No. 333-49823), filed with the Securities and Exchange
Commission on July 7, 1998.
RESTATEMENT OF HISTORICAL FINANCIAL STATEMENTS -- During the third and
fourth quarters of 1997, Metals USA completed the acquisition of all the capital
stock of Jeffreys Steel Company, Inc. ("Jeffreys") and Wayne Steel, Inc.
("Wayne") in business combinations accounted for as "poolings-of-interests"
transactions in accordance with the requirements of APB No. 16. On May 29, 1998,
Metals USA completed the acquisition of all the capital stock of Krohn Steel
Service Center, Inc. ("Krohn") in a business combination accounted for as a
"pooling-of-interests" transaction in accordance with the requirements of APB
No. 16. For the three months ended June 30, 1997, the aggregate pre-acquisition
net sales and net income for Jeffreys, Wayne and Krohn were $73.1 and $1.8,
respectively. For the six months ended June 30, 1997, the aggregate
pre-acquisition net sales and net income for Jeffreys, Wayne and Krohn were
$145.1 and $4.2, respectively. For the three months ended June 30, 1998, the
aggregate pre-acquisition net sales and net income for Krohn were $5.4 and $.5,
respectively. For the six months ended June 30, 1998, the aggregate
pre-acquisition net sales and net income for Krohn were $13.5 and $.9,
respectively.
5
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following table summarizes the restated consolidated net sales, net loss
and per share data of the Company after giving effect to the acquisitions of
Jeffreys, Wayne and Krohn:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1997
----------------------- ---------------------
NET SALES NET LOSS NET SALES NET LOSS
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales and net loss --
As previously reported in the
Company's Form 10-Q for the
quarterly period ended June ......... $ -- $ (3.2) $ -- $ (6.0)
30, 1997
Acquisitions accounted for as
"poolings-of-interests" ............ 73.1 1.8 145.1 4.2
------ ------ ------ ------
As restated ....................... $ 73.1 $ (1.4) $145.1 $ (1.8)
====== ====== ====== ======
Earnings per share --
As previously reported in the
Company's Form 10-Q for the
quarterly period ended June
30, 1997 ............................ $ (.67) $(1.26)
Acquisitions accounted for as
"poolings-of-interests" ............ .57 1.13
------ ------
As restated ....................... $ (.10) $ (.13)
====== ======
Earnings per share -- assuming
dilution --
As previously reported in the
Company's Form 10-Q for the
quarterly period ended June
30, 1997 ........................... $ (.67) $(1.26)
Acquisitions accounted for as
"poolings-of-interests"............. .57 1.13
------- -------
As restated....................... $ (.10) $ (.13)
======= =======
</TABLE>
USE OF ESTIMATES AND ASSUMPTIONS -- The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect (i) the reported amounts of assets
and liabilities, (ii) the disclosure of contingent assets and liabilities known
to exist as of the date the financial statements are published and (iii) the
reported amount of revenues and expenses recognized during the periods
presented. The Company reviews all significant estimates affecting its
consolidated financial statements on a recurring basis and records the effect of
any necessary adjustments prior to their publication. Adjustments made with
respect to the use of estimates often relate to improved information not
previously available. Uncertainties with respect to such estimates and
assumptions are inherent in the preparation of financial statements. The
accompanying consolidated balance sheets include preliminary allocations of the
respective purchase price paid for the companies acquired using the "purchase"
method of accounting and, accordingly, are subject to final adjustment.
6
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. EARNINGS PER SHARE
The number of shares of common stock used in the computation of Earnings per
Share excludes the potential dilution that could occur if securities and other
contracts to issue common stock were exercised or converted into common stock.
The number of shares of common stock used in the computation of Earnings per
Share -- Assuming Dilution reflects the potential dilution that could occur if
securities and other contracts to issue common stock were exercised or converted
into common stock after taking into account the methodologies prescribed by SFAS
No. 128. In the event the conversion of common stock equivalents is
anti-dilutive, such shares are not included. The computations result from
dividing income available to common stockholders by the applicable weighted
average number of common shares outstanding during the period.
The number of shares used in the per share calculations consist of the
following:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- -----------------
1998 1997 1998 1997
------- ------- ------ ------
(IN MILLIONS)
Number of shares used in
computing earnings per
share (weighted-average
shares) ......................... 36.7 14.2 35.2 14.2
Effect of dilutive securities:
Stock options .................... .8 -- .8 --
Convertible securities ........... .1 -- -- --
-------- -------- -------- --------
Number of shares used in
computing earnings per
share -- assuming dilution ...... 37.6 14.2 36.0 14.2
======== ======== ======== ========
3. INVENTORIES
Inventories consist of the following:
JUNE 30, DECEMEBER 31,
1998 1997
------------- -------------
(UNAUDITED)
Raw materials --
Structural steel ................................. $ 49.3 $ 8.4
Flat-rolled steel ................................ 60.6 44.8
Specialty metals ................................. 67.6 22.0
Aluminum products ................................ 17.0 17.6
Other ............................................ 4.8 1.7
-------- --------
Total raw materials ............................. 199.3 94.5
-------- --------
Work-in-process and finished goods--
Structural steel ................................. 45.2 35.8
Flat-rolled steel ................................ 16.8 19.2
Specialty metals ................................. 7.1 5.1
Aluminum products ................................ 8.3 6.7
-------- --------
Total work-in-process and finished goods ........ 77.4 66.8
-------- --------
Less-- LIFO reserve ................................ (1.3) (1.9)
-------- --------
Total ........................................... $ 275.4 $ 159.4
======== ========
7
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
4. LONG-TERM DEBT
Long-term debt consists of the following:
JUNE 30, DECEMBER 31,
1998 1997
---------- -----------
(UNAUDITED)
8 5/8 % Senior Subordinated Notes .................. $ 200.0 $ --
Borrowings under the Credit Facility ............... 153.1 144.8
Various issues of Industrial Revenue Bonds ......... 27.0 21.6
Obligations under capital leases and other ......... 15.6 7.9
-------- --------
395.7 174.3
Less - Current portion ............................. (7.9) (7.2)
-------- --------
$ 387.8 $ 167.1
======== ========
On February 11, 1998, the Company entered into an amended and restated
five-year revolving Credit Facility which provides for borrowings of up to
$300.0. Additionally, on February 11, 1998, the Company completed the sale of
$200.0 aggregate principal amount of its 8 5/8% Senior Subordinated Notes due
2008 and received $194.5 of net cash proceeds (before expenses of $1.0)
therefrom. The Company used $179.3 of such proceeds to repay the borrowings
outstanding under the Original Credit Facility and Interim Credit Facility.
The Notes call for semi-annual interest payments on February 15 and August
15 of each year, beginning August 15, 1998 and mature on February 15, 2008. The
Notes are redeemable at the option of the Company, in whole or in part, at any
time on or after February 15, 2003, at redemption rates stated in the indenture
governing the Notes (the "Indenture") together with accrued and unpaid interest
to the date of redemption. Notwithstanding the foregoing, at any time on or
prior to February 15, 2001, the Company may redeem up to 35% of the aggregate
principal amount of the Notes originally issued with the net proceeds of one or
more offerings of the common stock of the Company, at a redemption price equal
to 108.625% of the principal amount thereof, plus accrued and unpaid interest to
the date of such redemption; provided that at least 65% of the aggregate
principal amount of Notes originally issued remains outstanding immediately
after such redemption. The Notes are guaranteed by substantially all of the
Company's current and future subsidiaries, and contain certain covenants
restricting additional indebtedness, liens, transactions with affiliates, asset
sales, investments and mergers and acquisitions of subsidiaries. The Notes are
subordinate to borrowings under the Credit Facility and will rank PARI PASSU in
right of payment with all other future subordinated debt of the Company and will
rank senior to other indebtedness that expressly provides that it is
subordinated in right of payment to the Notes.
The Credit Facility matures on February 11, 2003, bears interest at the
bank's prime rate or LIBOR, at the Company's option, plus an applicable margin
based on the ratio of funded debt to cash flows (as defined). An annual
commitment fee of up to .35% is payable on any unused portion of the Credit
Facility. The Credit Facility is used to fund acquisitions, make capital
expenditures, refinance debt of the companies acquired and for general working
capital requirements. Under the terms of the Credit Facility, the Company is
required to comply with various affirmative and negative covenants including:
(i) the maintenance of certain financial ratios, (ii) restrictions on additional
indebtedness, (iii) restrictions on liens, guarantees and dividends, (iv)
obtaining the lenders' consent with respect to certain individual acquisitions,
and (v) the maintenance of a specified level of consolidated net worth. In
addition, the Company's Credit Facility and the Indenture include restrictions
on the ability of the Company to pay dividends. Borrowings under the Credit
Facility are secured by the pledge of all of the capital stock of each of the
Company's material subsidiaries (as defined). At June 30, 1998, $146.9 was
available to the Company under the Credit Facility. Subsequent to June 30, 1998,
the Company has increased its borrowing under the Credit Facility to fund
acquisitions (See Note 8). As of August 10, 1998, the Company had outstanding
borrowings of $255.0 and $45.0 available for use under the Credit Facility.
8
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
5. ACQUISITIONS
During the six months ended June 30, 1998, the Company acquired the
following metal processing companies: Independent Metals Co., Inc.
("Independent"), Pacific Metal Company ("Pacific"), National Manufacturing, Inc.
("National"), Western Awning Company, Inc. ("Western"), Mark Metals, Inc. and
Metalmart, Inc. (collectively "Metalmart"), The Levinson Steel Company
("Levinson"), Concord Metals Corporation ("Concord"), Industrial Metals, Inc.
("Industrial"), Sierra Pacific Steel, Inc. ("Sierra"), Fullerton Industries,
Inc. ("Fullerton"), Faitoute Steel Company, Inc. ("Faitoute"), Krohn, Steel
Manufacturing and Warehouse Company ("Steel Manufacturing"), Wilkof-Morris Steel
Corporation ("Wilkof"), Forest Manufacturing, Inc. ("Forest"), LaserPro Inc.
("LaserPro"), Aluminum Building Systems, Inc. ("ABS"), Valley Aluminum Co.
("Valley"), Flagg Steel Co. ("Flagg"), GSBC, Inc. (dba Geneva Steel Blanking)
("Geneva") and the assets of Seaboard Steel and Iron Corporation ("Seaboard").
With the exception of Krohn, these acquisitions were accounted for using the
"purchase" method of accounting. The aggregate consideration paid by Metals USA
to acquire these companies was approximately $93.7 in cash, 6,351,254 shares of
common stock and the issuance of notes of approximately $3.7 (excluding assumed
indebtedness of approximately $87.4).
9
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following summarized unaudited pro forma financial information assumes
the acquisition of the companies acquired through June 30, 1998 and the issuance
of the Notes occurred on January 1, 1997. The pro forma decrease in earnings
resulting from the issuance of the Notes was approximately $.04 per share for
both periods presented.
SIX MONTHS ENDED
JUNE 30,
-------------------
1998 1997
--------- ---------
(UNAUDITED)
Net sales ........................................... $ 817.3 $ 725.3
Operating costs and expenses:
Cost of sales ..................................... 626.3 559.6
Operating and delivery ............................ 75.4 68.4
Selling, general and administrative ............... 53.0 45.8
Depreciation and amortization ..................... 9.0 9.0
------- -------
Operating income .................................... 53.6 42.5
Other (income) expense:
Interest expense .................................. 15.1 13.5
Other income, net ................................. (1.3) (.6)
------- -------
Income before income taxes .......................... 39.8 29.6
Provision for income taxes .......................... 16.1 12.9
------- -------
Net income .......................................... $ 23.7 $ 16.7
======= =======
Earnings per share .................................. $ .63 $ .44
======= =======
Earnings per share-- assuming dilution .............. $ .62 $ .44
======= =======
Number of common shares used in the
per share calculations (in millions):
Earnings per share ................................ 37.8 37.7
======= =======
Earnings per share-- assuming dilution ............ 38.4 37.7
======= =======
The preceding unaudited pro forma amounts reflect the results of operations
for Metals USA, the Founding Companies and the other acquisitions completed
through June 30, 1998, assuming the transactions were completed on January 1,
1997. Additionally, the amounts shown in the table reflect (a) the reduction in
certain related party rental and lease expenses which has been agreed to
prospectively; (b) the reduction in salaries, bonuses and benefits to the owners
of the acquired companies which they have agreed to prospectively and the
reversal of the non-cash compensation charge related to the issuance of common
stock to management of and consultants to Metals USA in 1997, partially offset
by a charge for recurring salary expenses of management; (c) the amortization of
goodwill recorded as a result of the acquisition of the companies acquired over
a forty-year estimated life plus additional depreciation expense due to the
allocation of a portion of the excess purchase price to property and equipment;
(d) the assumed reductions in interest expense due to the refinancing of the
outstanding indebtedness in conjunction with the acquisition of the companies
acquired, offset by an assumed increase in interest expense incurred in
connection with financing the acquisitions; (e) the pre-acquisition results of
operations for subsidiaries or affiliates of the Founding Companies which were
acquired by the Founding Companies prior to the related acquisition by Metals
USA, as if those previous acquisitions were completed as of January 1, 1997; (f)
a charge eliminating the gains recorded as historical LIFO adjustments to cost
of sales as a result of the restatement of base year LIFO costs to the
appropriate replacement costs as if the acquisitions occurred on January 1,
1997; (g) certain other nonrecurring expenses with respect to the companies
acquired, such as expenses associated with compensation plans which were
terminated in conjunction with the acquisitions of their respective companies;
(h) the incremental interest expense and amortization of deferred financing
costs incurred as a result of the issuance of the Notes and the Credit Facility,
net of the repayment of outstanding indebtedness of the Company and (i) the
incremental provision for federal and state income taxes for all entities being
combined.
10
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. SUPPLEMENTAL INFORMATION
SUPPLEMENTAL CASH FLOW INFORMATION
SIX MONTHS ENDED
JUNE 30,
-------------------
1998 1997
------ ------
(UNAUDITED)
Supplemental cash flow information:
Cash paid for interest ..................... $ 4.4 $ .5
Cash paid for income taxes ................. 12.4 .8
Non-cash investing and financing activities:
Purchase of businesses for stock ........... 76.5 --
COMPENSATION CHARGE
During the three and six months ended June 30, 1997, the Company sold an
aggregate of 676,000 and 985,500 shares of common stock, respectively, to
management and consultants to the Company for $.01 per share. As a result,
selling, general and administrative expenses includes a non-recurring, non-cash
compensation charge of $3.2 and $6.0 for the three and six months ended June 30,
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.
7. COMMITMENTS AND CONTINGENCIES
From time to time, certain subsidiaries of the Company may be involved in a
variety of claims, lawsuits and other disputes arising in the ordinary course of
business. The Company believes the resolution of these matters and the
incurrence of their related costs and expenses should not have a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity.
8. SUBSEQUENT EVENTS
Subsequent to June 30, 1998, the Company acquired the following metal
processing companies: Professional Metals, Inc. ("Professional"), Intsel
Southwest Limited Partnership ("Intsel") and the assets of Mulach Steel Corp.
("Mulach"). These acquisitions will be accounted for using the "purchase" method
of accounting. The aggregate consideration paid by the Company to acquire these
companies was approximately $105.1 in cash and 142,061 shares of common stock
(excluding assumed indebtedness of approximately $4.1).
11
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT ON FORM 10-Q CONTAINS STATEMENTS WHICH CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS," "MAY," "ESTIMATES,"
"WILL," "SHOULD," "PLANS" OR "ANTICIPATES" OR THE NEGATIVE THEREOF OR OTHER
VARIATIONS THEREON OR COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY.
READERS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE SIGNIFICANT RISKS AND
UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF ANY NUMBER OF FACTORS, MOST OF WHICH
ARE BEYOND THE CONTROL OF MANAGEMENT. THESE FACTORS INCLUDE GENERAL ECONOMIC AND
BUSINESS CONDITIONS, NEW OR MODIFIED STATUTORY OR REGULATORY REQUIREMENTS,
CHANGING PRICES AND MARKET CONDITIONS, AND THE EFFECTIVENESS OF MANAGEMENT'S
STRATEGIES AND DECISIONS. NO ASSURANCE CAN BE GIVEN THAT THESE ARE ALL OF THE
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO VARY MATERIALLY FROM THE
FORWARD-LOOKING STATEMENTS.
The following should be read in conjunction with the response to Part I,
Item 1 of this Report and the Company's audited consolidated financial
statements contained in the Form 10-K. Any capitalized terms used but not
defined in this Item have the same meaning given to them in the Form 10-K.
RESULTS OF OPERATIONS
The following historical financial information reflects the historical
financial statements of Metals USA restated for the effects of the business
combinations with Jeffreys, Wayne and Krohn accounted for as
"poolings-of-interests" and the remaining acquired companies from their
respective acquisition dates.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------ -----------------------------------
1998 % 1997 % 1998 % 1997 %
------ ------ ------ ----- ------ ----- ------ -----
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ..................... $377.2 100.0% $ 73.1 100.0% $655.7 100.0% $145.1 100.0%
Cost of sales ............... 289.3 76.7% 57.0 78.0% 503.9 76.8% 112.5 77.5%
Operating and delivery ...... 34.2 9.1% 7.0 9.6% 60.2 9.2% 13.9 9.6%
Selling, general and
administrative ............ 24.7 6.5% 7.8 10.7% 42.8 6.5% 15.0 10.3%
Depreciation and amortization 3.7 1.0% .7 .9% 6.7 1.1% 1.4 .9%
------ ------ ------ ------ ------ ------ ------ ------
Operating income .............. 25.3 6.7% .6 .8% 42.1 6.4% 2.3 1.7%
Interest expense ............ 6.2 1.6% .4 .5% 11.0 1.7% .8 .6%
Other income, net ........... (1.6) (.4%) (.1) (.1%) (1.7) (.3%) (.2) (.1%)
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes .... $ 20.7 5.5% $ .3 .4% 32.8 5.0% 1.7 1.2%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE
MONTHS ENDED JUNE 30, 1997
NET SALES. Net sales increased $304.1 million, or 416.0%, from $73.1 million
for the three months ended June 30, 1997 to $377.2 million for the three months
ended June 30, 1998. The increase in net sales was principally due to
acquisitions completed during 1997 and the first quarter of 1998. The purchase
acquisitions completed in the second quarter of 1998 did not have a significant
impact on net sales or results of operations for the three months ended June 30,
1998.
COST OF SALES. Cost of sales increased $232.3 million, or 407.5%, from $57.0
million for the three months ended June 30, 1997, to $289.3 million for the
three months ended June 30, 1998. The increase in cost of sales was principally
due to the acquisitions described above. As a percentage of net sales, cost of
sales decreased from 78.0% for the three months ended June 30, 1997 to 76.7% for
the three months ended June 30, 1998. This percentage decrease was due to lower
cost of raw materials.
12
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(CONTINUED)
OPERATING AND DELIVERY. Operating and delivery expenses increased $27.2
million, or 388.6%, from $7.0 million for the three months ended June 30, 1997
to $34.2 million for the three months ended June 30, 1998. The increase in
operating and delivery expenses was principally due to the acquisitions
described above. As a percentage of net sales, operating and delivery expenses
decreased from 9.6% for the three months ended June 30, 1997 to 9.1% for the
three months ended June 30, 1998. This percentage decrease was primarily due to
spreading of fixed operating costs over a higher volume of net sales.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $16.9 million, or 216.7%, from $7.8 million for the three
months ended June 30, 1997 to $24.7 million for the three months ended June 30,
1998. This increase in selling, general and administrative expenses was
primarily attributable to the acquisitions described above and, to a lesser
extent, increased volumes of product shipments. As a percentage of net sales,
selling, general and administrative expenses decreased from 10.7% for the three
months ended June 30, 1997 to 6.5% for the three months ended June 30, 1998.
This percentage decrease was primarily due to the non-recurring non-cash
Compensation Charge of $3.2 million the Company incurred in connection with the
sale of common stock to consultants and members of management during the three
months ended June 30, 1997.
OPERATING INCOME. Operating income increased $24.7 million, from $.6 million
for the three months ended June 30, 1997 to $25.3 million for the three months
ended June 30, 1998. The increase in operating income was attributable to the
factors discussed above. As a percentage of net sales, operating income
increased from .8% for the three months ended June 30, 1997 to 6.7% for the
three months ended June 30, 1998. This percentage increase was primarily due to
the non-recurring non-cash Compensation Charge described above and, to a lesser
extent, lower cost of raw materials during the three months ended June 30, 1998.
INTEREST EXPENSE. Interest expense increased $5.8 million, from $.4 million
for the three months ended June 30, 1997 to $6.2 million for the three months
ended June 30, 1998. The increase in interest expense was primarily due to
increased borrowings attributable to the debt assumed and the cash portion of
the purchase price paid in connection with the acquisitions completed by the
Company on July 11, 1997 and periods thereafter.
OTHER INCOME. Other income increased $1.5 million, from $.1 million for the
three months ended June 30, 1997 to $1.6 million for the three months ended June
30, 1998. The increase in other income was primarily due to $1.5 million of net
proceeds attributable to the breakup fee from the termination of the Ideal Metal
Inc. transaction in April 1998.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes differs
from the federal statutory rate principally due to state income taxes (net of
federal income tax benefit), the non-deductibility of the Compensation Charge
and the amortization of goodwill attributable to certain acquisitions.
RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS
ENDED JUNE 30, 1997
NET SALES. Net sales increased $510.6 million, or 351.9%, from $145.1
million for the six months ended June 30, 1997 to $655.7 million for the six
months ended June 30, 1998. The increase in net sales was principally due to
acquisitions completed during 1997 and the first quarter of 1998. The purchase
acquisitions completed in the second quarter of 1998 did not have a significant
impact on net sales or results of operations for the six months ended June 30,
1998.
13
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(CONTINUED)
COST OF SALES. Cost of sales increased $391.4 million, or 347.9%, from
$112.5 million for the six months ended June 30, 1997, to $503.9 million for the
six months ended June 30, 1998. The increase in cost of sales was principally
due to the acquisitions described above. As a percentage of net sales, cost of
sales decreased from 77.5% for the six months ended June 30, 1997 to 76.8% for
the six months ended June 30, 1998. This percentage decrease was due to lower
cost of raw materials.
OPERATING AND DELIVERY. Operating and delivery expenses increased $46.3
million, or 333.1%, from $13.9 million for the six months ended June 30, 1997 to
$60.2 million for the six months ended June 30, 1998. The increase in operating
and delivery expenses was principally due to the acquisitions described above.
As a percentage of net sales, operating and delivery expenses decreased from
9.6% for the six months ended June 30, 1997 to 9.2% for the six months ended
June 30, 1998. This percentage decrease was primarily due to spreading of fixed
operating costs over a higher volume of net sales.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $27.8 million, or 185.3%, from $15.0 million for the six
months ended June 30, 1997 to $42.8 million for the six months ended June 30,
1998. This increase in selling, general and administrative expenses was
primarily attributable to the acquisitions described above and, to a lesser
extent, increased volumes of product shipments. As a percentage of net sales,
selling, general and administrative expenses decreased from 10.3% for the six
months ended June 30, 1997 to 6.5% for the six months ended June 30, 1998. This
percentage decrease was primarily due to the non-recurring non-cash Compensation
Charge of $6.0 million the Company incurred in connection with the sale of
common stock to consultants and members of management during the six months
ended June 30, 1997.
OPERATING INCOME. Operating income increased $39.8 million, from $2.3
million for the six months ended June 30, 1997 to $42.1 million for the six
months ended June 30, 1998. The increase in operating income was attributable to
the factors discussed above. As a percentage of net sales, operating income
increased from 1.7% for the six months ended June 30, 1997 to 6.4% for the six
months ended June 30, 1998. This percentage increase was primarily due to the
non-recurring non-cash Compensation Charge described above and, to a lesser
extent, lower cost of raw materials during the six months ended June 30, 1998.
INTEREST EXPENSE. Interest expense increased $10.2 million, from $.8 million
for the six months ended June 30, 1997 to $11.0 million for the six months ended
June 30, 1998. The increase in interest expense was primarily due to increased
borrowings attributable to the debt assumed and the cash portion of the purchase
price paid in connection with the acquisitions completed by the Company on July
11, 1997 and periods thereafter.
OTHER INCOME. Other income increased $1.5 million, from $.2 million for the
six months ended June 30, 1997 to $1.7 million for the six months ended June 30,
1998. The increase in other income was primarily due to $1.5 million of net
proceeds attributable to the breakup fee from the termination of the Ideal Metal
Inc. transaction in April 1998.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes differs
from the federal statutory rate principally due to state income taxes (net of
federal income tax benefit), the non-deductibility of the Compensation Charge
and the amortization of goodwill attributable to certain acquisitions.
14
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION AND FINANCING AND INVESTING ACTIVITIES
The Company used $10.9 million in net cash for operating activities and
generated $10.8 million in net cash from operating activities for the six months
ended June 30, 1998 and 1997, respectively. Net cash used for investing
activities was $94.1 million and $8.0 million for the six months ended June 30,
1998 and 1997, respectively. The principal use of cash during the six months
ended June 30, 1998 was to fund the cash portion of the acquisition cost for the
acquired companies and the repayment of a portion of the indebtedness assumed in
the acquisitions. Net cash provided by financing activities was $117.4 million
and $.9 million for the six months ended June 30, 1998 and 1997, respectively.
For the six months ended June 30, 1998, the cash provided by financing
activities consisted primarily of the net proceeds from the sale of the Notes of
$193.5 million offset by net repayments on the Credit Facility. At December 31,
1997, the Company had cash of $7.3 million, working capital of $193.0 million
and total debt of $174.3 million. At June 30, 1998, the Company had cash of
$19.7 million, working capital of $348.7 million and total debt of $395.7
million. As of August 10, 1998, the Company had outstanding borrowings under the
Credit Facility of $255.0 million, leaving $45.0 million available for use.
The Company expects to continue to aggressively pursue its acquisition
program and, accordingly, will require additional sources of capital to fund a
portion of the future acquisition costs. In this regard, the Company is
currently exploring a number of alternatives with commercial banks and other
financial advisors.
The Company anticipates that its cash flow from operations (excluding
acquisition requirements) will be sufficient to meet the Company's normal
working capital and debt service requirements for at least the next several
years. The Company intends to retain all of its earnings 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 next several years. In addition, the Company's Credit Facility and
the Indenture include restrictions on the ability of the Company to pay
dividends.
INVESTING ACTIVITIES
Subsequent to December 31, 1997, the Company has acquired the following
metal processing companies: Independent, Pacific, National, Western, Metalmart,
Levinson, Concord, Industrial, Sierra, Fullerton, Faitoute, Krohn, Steel
Manufacturing, Wilkof, Forest, LaserPro, ABS, Valley, Flagg, Geneva,
Professional, Intsel and the assets of Seaboard and Mulach. The acquisition of
Krohn has been accounted for using the "pooling-of-interests" method of
accounting. The remaining acquisitions were accounted for using the "purchase"
method of accounting. Collectively, the Company paid a total of $198.8 million
in cash, issued 6,493,315 shares of common stock and $3.7 million of notes in
connection with these acquisitions. Additionally, the Company assumed
approximately $91.5 million of existing indebtedness of these companies.
The Company intends to continue to actively pursue acquisition
opportunities. The Company expects to fund future acquisitions through the
issuance of additional common stock, borrowings, including use of amounts
available under the Credit Facility, and cash flow from operations. Capital
expenditures for equipment and expansion of facilities are expected to be funded
from cash flow from operations and supplemented as necessary by borrowings from
the Credit Facility or other sources of financing. To the extent the Company
funds a significant portion of the consideration for future acquisitions with
cash, it may have to increase the amount of the Credit Facility or obtain other
sources of financing.
The Company has an effective Shelf Registration Statement relating to the
issuance of up to 10,000,000 shares of common stock to be issued in connection
with future acquisitions. Approximately 7,457,199 shares are available under
this registration statement for use in connection with future acquisitions.
15
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCING ACTIVITIES
During the first quarter of 1998, the Company completed two significant
financing transactions designed to enhance the Company's liquidity, reduce
incremental interest expense and extend debt maturities. The transactions
included a private offering of $200.0 million aggregate principal amount of the
Company's 8 5/8% Senior Subordinated Notes due 2008 and the establishment of a
$300.0 million revolving credit facility with a group of commercial banks.
Concurrent with the IPO, the Company obtained the Original Credit Facility
which was used to fund acquisitions, refinance certain indebtedness of the
acquired companies and for general corporate and working capital requirements.
In January 1998, the Company obtained a $50.0 Interim Credit Facility to meet
its acquisition related cash requirements pending the completion of an extension
and modification of the Original Credit Facility to provide for up to $300.0
million of borrowing availability. The closing of the amended and restated
Credit Facility on February 11, 1998 stipulated the termination of the Interim
Credit Facility. The Credit Facility matures in February 2003 and will be used
to fund acquisitions, make capital expenditures, refinance debt of the companies
acquired and for general working capital requirements. The Credit Facility
requires the Company to comply with various affirmative and negative covenants
as described in Note 4 to the Condensed Notes to the Unaudited Consolidated
Financial Statements contained elsewhere in this report. Borrowings under the
Credit Facility are secured by the pledge of all of the capital stock of each of
the Company's material subsidiaries.
On February 11, 1998, the Company received $194.5 million of net cash
proceeds (before expenses of $1.0 million) from the sale of the Notes. The Notes
call for semi-annual interest payments on February 15 and August 15 of each
year, beginning August 15, 1998 and mature on February 15, 2008. The Notes are
guaranteed by substantially all of the Company's current and future
subsidiaries, and contain various affirmative and negative covenants as
described in Note 4 to the Condensed Notes to the Unaudited Consolidated
Financial Statements contained elsewhere in this report. The Notes are
subordinate to borrowings under the Credit Facility and will rank PARI PASSU in
right of payment with all other future subordinated debt of the Company and will
rank senior to other indebtedness that expressly provides that it is
subordinated in right of payment to the Notes. The Company used $179.3 million
of such proceeds to repay the borrowings outstanding under the Original Credit
Facility and Interim Credit Facility on February 11, 1998.
TRENDS
The Company expects that the purchase price of domestic steel, in certain
product categories, will decline during the second half of 1998 principally due
to increased imports of lower cost steel from Asia. The increased level of
imports from Asia is attributable to the reduction in Asian consumption
resulting from their economic environment. The Company purchases the majority of
its raw materials, including steel from domestic suppliers; however, the Company
has increased its purchases of steel from foreign suppliers in recent months to
position itself to take advantage of lower steel prices.
Although the Company's net sales for certain of its products are influenced
by steel prices, its results of operations are primarily dependent on the
overall level of economic activity. However, in the event of significant price
fluctuations, gross margins could be adversely affected while on hand inventory
quantities are liquidated. The Company attempts to mitigate the impact of price
fluctuations by maximizing inventory turns consistent with customer
requirements. The Company believes that less than 25% of its net sales could be
affected by the anticipated decline in steel prices. A majority of the Company's
net sales are either (i) made pursuant to contractual pricing arrangements that
range from six to twelve months, which effectively eliminate the adverse effect
of short-term price declines on those steel products, or (ii) net sales of
aluminum and other specialty metals, which are unaffected by steel prices. For
these reasons, together with the diversity of its product mix, customer and
industry base, the Company does not expect the anticipated decline in steel
prices during the second half of 1998 to have a material effect on its results
of operations, financial position or liquidity.
16
<PAGE>
METALS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
YEAR 2000 ISSUE
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Specifically, computational
errors are a known risk with respect to dates after December 31, 1999. The
Company has addressed the issue with respect to its existing subsidiaries and
potential acquisitions as part of its normal due diligence procedures. The
Company does not believe the cost of achieving Year 2000 compliance, in excess
of the cost of normal software upgrades and replacements incurred through fiscal
1999, will be material to the Company's consolidated results of operations,
financial position or liquidity.
As a result of the Company's ongoing acquisition program, the Company's
assessment of potential Year 2000 issues may change. As such, there can be no
assurance that the systems of newly acquired companies, vendors and other third
party relationships on which the Company may rely will be made Year 2000
compliant in a timely manner or that any such failure to be Year 2000 compliant
by another company would not have a material adverse effect on the Company's
business or consolidated results of operations, financial position or liquidity.
17
<PAGE>
METALS USA, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any litigation that management considers to be
of a material nature.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting held on May 20, 1998, holders of the
Company's Common Stock elected five Class I directors and the holders of
Restricted Common Stock elected one Class I director. The Class I directors will
hold office until the Company's Annual Meeting in 2001, or until their
respective successors are elected. The Class I directors are: Mark Alper, Craig
R. Doveala, Patrick A. Notestine, Richard A. Singer, Thomas J. Shapiro and
Steven S. Harter. Mr. Harter was elected by the holders of the Company's
Restricted Common Stock.
Holders of the Company's Common Stock approved an amendment to the Company's
Amended and Restated Certificate of Incorporation to increase the number of
authorized shares of Common Stock from 50,000,000 shares to 200,000,000 shares.
The results of the vote for the amendment to the Company's Amended and Restated
Certificate of Incorporation were as follows: For -- 20,822,429; Against --
2,835,940; Abstentions (including broker non-votes) -- 94,178.
Holders of the Company's Common Stock and Restricted Common Stock ratified
the Board of Directors appointment of Arthur Andersen LLP as the Company's
independent public accountants for the year ending December 31, 1998. The
results of the vote for the ratification of the appointment of Arthur Andersen
LLP were as follows: For -- 23,738,797; Against -- 3,750; Abstentions (including
broker non-votes) -- 10,000.
ITEM 5. OTHER INFORMATION
On June 16, 1998, the Company filed a registration statement under cover of
Form S-1, as amended, to facilitate the offering by certain stockholders to sell
1,503,384 shares of Common Stock. The offering was undertaken to permit an
orderly transition of unregistered shares previously issued to affiliates of
Jeffreys and the Founding Companies into the public marketplace. The Company did
not receive any proceeds from the sale of these securities. The Company expects
that future sales of restricted shares will be handled in a similar manner from
time to time as market conditions and the liquidity needs of its stockholders
warrant.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
21 List of Subsidiaries of the Company
27 Financial Data Schedule
99 Supplemental Consolidated Financial Statements of Metals USA, Inc.
and Subsidiaries, incorporated by reference to the Company's
Registration Statement on Form S-4, Amendment No. 1 (Registration
No. 333-49823) dated July 7, 1998.
B. REPORTS ON FORM 8-K:
On July 10, 1998, the Company filed a Current Report on Form 8-K (under
Item 2), dated July 7, 1998, relating to the acquisitions of Intsel and eleven
other companies.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, who has signed this report on behalf of
the Registrant and as the principal accounting officer of the Registrant.
METALS USA, INC.
By: /s/ TERRY L. FREEMAN
Terry L. Freeman
Vice President, Corporate
Controller and Chief Accounting
Officer
Date: August 14, 1998
EXHIBIT 21
METALS USA, INC.
SUBSIDIARY LIST
Affiliated Metals Company
Aluminum Building Systems, Inc.
Concord Metals Corporation
Faitoute Steel Company, Inc.
Federal Bronze Alloys Inc.
Flagg Steel Co.
Forest Manufacturing, Inc.
Fullerton Industries, Inc.
GSBC, Inc. (dba Geneva Steel Blanking)
Harvey Titanium, Ltd.
Industrial Metals, Inc.
Independent Metals Co., Inc.
Interstate Steel Supply Company
Interstate Steel Supply Company of Pittsburg
Interstate Steel Supply Company of Maryland
Interstate Steel Processing Company
Intsel Southwest Limited Partnership
Jeffreys Steel Company, Inc.
Jeffreys Real Estate Corp.
Krohn Steel Service Center, Inc.
LaserPro Inc.
The Levinson Steel Company
Mark Metals, Inc.
Meier Metal Servicenters, Inc.
Metalmart, Inc.
Metals USA Management Co., L.P.
Metals USA Finance Corp.
Metals USA Services Corporation
Mulach Steel Corp.
MUSA GP, Inc.
MUSA LP, Inc.
National Manufacturing, Inc.
Pacific Metal Company
Professional Metals, Inc.
Queensboro Steel Corporation
Royal Aluminum, Inc.
R.J. Fabricating, Inc.
Sierra Pacific Steel, Inc.
Southern Alloy of America, Inc.
Steel Manufacturing and Warehouse Company
Steel Service Systems, Inc.
Texas Aluminum Industries, Inc.
Cornerstone Metals Corporation
Cornerstone Building Products, Inc.
Cornerstone Aluminum Company, Inc.
Cornerstone Patio Concepts, L.L.C.
Uni-Steel, Inc.
Valley Aluminum Co.
Wayne Steel, Inc.
Western Awning Company, Inc.
Wilkof-Morris Steel Corporation
Williams Steel & Supply Co., Inc.
WSS Transportation, Inc.
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0
0
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