AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 7, 1998
REGISTRATION NO. 333-49823
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
AMENDMENT NO. 1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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METALS USA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
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DELAWARE 5051 76-0533626
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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ARTHUR L. FRENCH
CHIEF EXECUTIVE OFFICER
THREE RIVERWAY
SUITE 600
HOUSTON, TEXAS 77056
(713) 965-0990
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES AND AGENT FOR SERVICE)
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COPIES TO:
WILLIAM D. GUTERMUTH JOHN A. HAGEMAN
BRACEWELL & PATTERSON, L.L.P. METALS USA, INC.
SOUTH TOWER PENNZOIL PLACE THREE RIVERWAY
711 LOUISIANA STREET, SUITE 2900 SUITE 600
HOUSTON, TEXAS 77002-2781 HOUSTON, TEXAS 77056
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
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If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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METALS USA, INC.
EXCHANGE OFFER RELATING TO $200,000,000 OF
8 5/8% SENIOR SUBORDINATED NOTES DUE 2008
REGISTERED UNDER THE SECURITIES ACT OF 1933
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THE EXCHANGE OFFER WILL EXPIRE AT 12:00 A.M., NEW YORK CITY TIME ON AUGUST 15, 1998, UNLESS EXTENDED BY
METALS USA, INC. IN ITS SOLE DISCRETION (THE "EXPIRATION DATE"). ALTHOUGH METALS USA, INC. HAS NO
PRESENT INTENTION TO CONDUCT ITS EXCHANGE OFFER LONGER THAN 30 DAYS, IT RESERVES THE RIGHT TO EXTEND
THE EXCHANGE OFFER.
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Metals USA, Inc., a Delaware corporation (the "Company"), hereby offers,
upon the terms and subject to the conditions set forth in this Prospectus
("Prospectus") and the accompanying Letter of Transmittal (the "Letter of
Transmittal" and, together with this Prospectus, the "Exchange Offer"), to
exchange $1,000 principal amount of its 8 5/8% Senior Subordinated Notes due
2008 (the "Exchange Notes"), which have been registered under the Securities
Act of 1933, as amended (the "Securities Act"), pursuant to a Registration
Statement (the "Registration Statement") of which this Prospectus is a part,
for each $1,000 principal amount of its outstanding 8 5/8% Senior Subordinated
Notes due 2008 (the "Original Notes"), of which an aggregate of $200,000,000
principal amount is outstanding.
The form and terms of the Exchange Notes are the same as the form and terms
of the Original Notes except that (i) the Exchange Notes will have been
registered under the Securities Act and, therefore, will not bear legends
restricting their transfer pursuant to the Securities Act, and (ii) holders of
the Exchange Notes generally will not be entitled to the rights of holders of
the Original Notes under the Registration Rights Agreement (as defined under
"Prospectus Summary -- The Original Note Offering") following the consummation
of the Exchange Offer. See "Registration Rights;" "The Exchange
Offer -- Consequences of Failure to Exchange" and "-- Resale of Exchange
Notes; Plan of Distribution." The Exchange Notes will evidence the same debt as
the Original Notes (which they replace) and will be issued under, and be
entitled to the benefits of, the indenture governing the Original Notes.
The Company will accept for exchange any and all Original Notes validly
tendered and not withdrawn prior to the Expiration Date. Tenders of Original
Notes may be withdrawn at any time prior to the Expiration Date. The Exchange
Offer is subject to certain customary conditions. See "The Exchange Offer."
The Original Notes may be tendered only in integral multiples of $1,000
principal amount.
(PROSPECTUS COVER CONTINUED ON FOLLOWING PAGE)
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SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES.
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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.
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The date of this Prospectus is July 8, 1998.
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Interest on the Exchange Notes is payable semiannually on February 15 and
August 15 of each year, commencing August 15, 1998. Except as described below,
the Exchange Notes are not redeemable at the option of the Company prior to
February 15, 2003. Thereafter, the Exchange Notes will be redeemable, in whole
or in part, at the option of the Company, at the redemption prices set forth
herein, together with accrued and unpaid interest, if any, to the date of
redemption. Up to 35% of the original principal amount of the Exchange Notes
will be redeemable at any time and from time to time on or prior to February 15,
2001, at the option of the Company, with the net proceeds of any Public Equity
Offering (as defined under "Description of the Exchange Notes -- Redemption")
at a redemption price equal to 108.625% of the principal amount thereof,
together with accrued and unpaid interest, if any, to the date of redemption;
provided, however, that at least 65% of the aggregate principal amount of the
Exchange Notes originally issued remains outstanding immediately after any such
redemption. See "Description of Exchange Notes -- Redemption." Upon a Change
in Control (as defined under "Description of the Exchange Notes -- Certain
Definitions"), each holder of Exchange Notes may require the Company to
purchase all or a portion of such holder's Exchange Notes at 101% of the
principal amount thereof, together with accrued and unpaid interest, if any, to
the date of purchase. The Exchange Notes are unsecured senior subordinated
obligations of the Company and will rank subordinate in right of payment to all
existing and future Senior Debt (as defined under "Description of the Exchange
Notes -- Certain Definitions") of the Company. For a more complete description
of the Exchange Notes, see "Description of the Exchange Notes."
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission" or the "SEC") set forth in no-action letters
issued to third parties, the Company believes, except as otherwise described
herein, the Exchange Notes issued pursuant to the Exchange Offer in exchange for
the Original Notes may be offered for resale, resold and otherwise transferred
by any holder thereof (other than any such holder which is an "affiliate" of
the Company within the meaning of Rule 405 of the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such holder's business and that such holder does not intend to
participate and there is no arrangement or understanding with any person to
participate, in the distribution of such Exchange Notes. Each broker-dealer that
receives Exchange Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Original Notes where such Original Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Issuer has agreed that, for such period of time as is necessary
to comply with applicable law in connection with any resale of the Exchange
Notes covered thereby (such period not to exceed 180 days after the Registration
Statement is declared effective), it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Exchange
Offer -- Resale of Exchange Notes; Plan of Distribution."
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement (which
term shall encompass any and all amendments thereto) on Form S-4 (No. 333-49823)
under the Securities Act with respect to the Exchange Notes 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 Commission. 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 and copied at the public reference facilities
maintained by the Commission in Washington, D.C. 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. Copies of such material can also be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington D.C.
20549 upon payment of prescribed rates. In addition, the Commission maintains a
web site that contains reports, proxy and information statements regarding
registrants that file electronically with the Commission. The address of this
web site is (http:\\www.sec.gov).
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed by the
Company may be inspected and copied at the public reference facilities
maintained by the Commission in Washington, D.C. and at the regional offices of
the SEC and at the regional offices of the Commission. Copies of such material
can also be obtained from the Public Reference Section of the Commission upon
payment of prescribed rates. Such material may also be accessed electronically
by means of the Commission's web site on the Internet.
The Company's common stock is listed on the New York Stock Exchange. Proxy
statements, reports and other information concerning the Company that are filed
under the Exchange Act may be inspected at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
The Company has agreed that, whether or not it is required to do so by the
rules and regulations of the Commission, for so long as any of the Original and
Exchange Notes (together, the "Notes") remain outstanding, it will furnish to
the holders thereof and file with the Commission (unless the Commission will not
accept such a filing) (i) all quarterly and annual financial information that
would be required to be contained in a filing with the Commission on Forms 10-Q
and 10-K as if the Company were required to file such forms, including a
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and, with respect to the annual information only, a report thereon
by the Company's certified independent accountants and (ii) all reports that
would be required to be filed with the Commission on Form 8-K if the Company
were required to file such reports in each case within the time periods set
forth in the Commission's rules and regulations. In addition, for so long as any
of the Notes remain outstanding, the Company has agreed to make available to any
prospective purchaser of the Notes or beneficial owner of the Notes in
connection with any sale thereof the information required by Rule 144A(d)(4)
under the Securities Act.
(i)
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE PRO FORMA AND
HISTORICAL FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS. DISCUSSIONS CONTAINING SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND
IN THE INFORMATION SET FORTH UNDER THE CAPTIONS "RISK FACTORS," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
"BUSINESS," AND ELSEWHERE IN THIS PROSPECTUS. ACTUAL EVENTS OR RESULTS MAY
DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A
RESULT OF VARIOUS FACTORS, INCLUDING, WITHOUT LIMITATION, THE RISK FACTORS SET
FORTH HEREIN AND THE MATTERS SET FORTH IN THIS PROSPECTUS GENERALLY. UNLESS
OTHERWISE INDICATED, "METALS USA" MEANS METALS USA, INC. PRIOR TO THE IPO, AND
THE "COMPANY" MEANS METALS USA AND ALL OF ITS SUBSIDIARIES. ADDITIONALLY, THE
TERM "ACQUIRED COMPANIES," AS USED HEREIN, REFERS TO EACH COMPANY ACQUIRED IN
CONNECTION WITH THE IPO AND THEREAFTER. CERTAIN INFORMATION REGARDING THE
ACQUIRED COMPANIES, INCLUDING THE DEFINED TERMS USED TO REFER TO THE INDIVIDUAL
ACQUIRED COMPANIES, APPEARS UNDER THE CAPTION "BUSINESS -- ACQUIRED
COMPANIES."
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 actively the consolidation of the highly
fragmented metals processing industry. On July 11, 1997, Metals USA acquired in
separate concurrent transactions eight companies (the "Founding Companies")
engaged principally in the value-added metals processing business and
consummated its initial public offering (the "IPO"). Subsequent to the IPO and
through the date of this Prospectus, the Company has acquired a number of
companies in the metals processing industry collectively referred to as the
"Subsequent Acquisitions," in continuation of its consolidation strategy. On
average, the Company's subsidiaries have been in business for over 40 years. See
"Business -- Acquired Companies" for a description of the Acquired Companies
and the associated individual defined terms. The Company engages in the
preproduction processing of steel, aluminum and specialty metals and intends to
continue to capitalize on the trend occurring among both primary metals
producers and end-users of metals products to reduce in-house processing and
outsource processing and inventory management requirements. For the twelve
months ended December 31, 1997, the Company had pro forma net sales and EBITDA
of $1,602.6 million and $110.9 million, respectively, and for the three months
ended March 31, 1998, the Company had pro forma net sales and EBITDA of $451.0
million and $37.2 million, respectively.
The Company sells to over 30,000 customers in industries such as aerospace,
furniture, transportation equipment, power and process equipment,
industrial/commercial construction, consumer durables and electrical equipment.
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 in
order to reduce its customers' overall cost of 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.
The Company believes it has successfully established itself as a leading
consolidator in the metals processor/service center industry and has significant
opportunities for growth due to its (i) wide array of products and services;
(ii) broad and diversified customer base; (iii) geographic diversification; and
(iv) successful track record of identifying and consummating accretive
acquisitions. The Company believes these competitive strengths will allow it to
further build upon its consolidation strategy as well as reduce its
susceptibility to economic fluctuations affecting any one industry or geographic
area.
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INDUSTRY
The Company believes that the metals processor/service center industry in
the United States currently has over 3,500 participants generating over $75
billion in annual revenues and is undergoing consolidation. Growth in the metal
service center industry has been driven by 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,
customers are increasingly outsourcing their metals processing and inventory
management requirements as they focus on their core competencies and reduce
material costs, decrease capital required for raw materials inventory and
processing equipment and save time, labor and other expenses. Additionally,
customers are seeking to reduce complexity and 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.
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 that
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 enhance its leadership in the
industry's consolidation.
BUSINESS STRATEGY
Key elements of the Company's strategy are:
o GROW THROUGH ADDITIONAL ACQUISITIONS. The Company intends to continue
to grow through its acquisition program, the key elements of which are: to enter
new geographic markets, to expand within existing geographic markets and to
enter complementary processing and service markets. The Company believes that
there continue to be significant opportunities to expand through acquisitions 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 OPERATE ON A DECENTRALIZED BASIS. The Company manages its existing
operations and intends to manage 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 GROW INTERNAL SALES. A key component of the Company's strategy is to
accelerate internal sales growth of its subsidiaries 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 is in the process of
implementing a Company-wide marketing program which will utilize professional
marketing sources and adopting "best-practices" among its subsidiaries 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.
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o IMPROVE OPERATING MARGINS. The Company believes that the combination
of the acquired businesses 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 administrative functions. The Company uses 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.
RECENT DEVELOPMENTS
On March 23, 1998, the Company announced that it agreed to make an offer
for all of the issued and outstanding common shares of Ideal Metal Inc.
("Ideal") at a cash price of CAN$5.25 per share. Another company made a
competing offer and on April 28, 1998, the Company received the agreed upon
compensatory fee of U.S.$1.7 million (CAN$2.5 million) from Ideal as a result of
the competing offer.
Subsequent to March 31, 1998, the Company acquired the following metal
processing companies: Industrial Metals, Inc. ("Industrial"), Sierra Pacific
Steel, Inc. ("Sierra"), Fullerton Industries, Inc. ("Fullerton"), Faitoute
Steel Company, Inc. ("Faitoute"), Steel Manufacturing and Warehouse Company
("Steel Manufacturing"), Wilkof-Morris Steel Corporation ("Wilkof"), Forest
Manufacturing, Inc. ("Forest"), LaserPro Inc. ("LaserPro"), Aluminum
Building Systems ("ABS"), Valley Aluminum Co. ("Valley"), Flagg Steel Co.
("Flagg"), GSBC, Inc. (dba Geneva Steel Blanking) ("Geneva"), Professional
Metals, Inc. ("Professional") and Intsel Steel ("Intsel"). These
acquisitions were accounted for using the "purchase" method of accounting.
Additionally, on May 29, 1998, the Company consummated the acquisition of Krohn
Steel Service Center, Inc. ("Krohn"), which was accounted for using the
"pooling-of-interests" method of accounting. The aggregate consideration paid
by the Company to acquire these companies was approximately $151.2 million in
cash, 3,480,950 shares of common stock and the issuance of notes of
approximately $3.7 million (excluding assumed indebtedness of approximately
$43.4 million).
On April 20, 1998, the Company filed a shelf registration statement with
the Securities and Exchange Commission on Form S-1 No. 333-50449 (the "1998
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. The
1998 Shelf Registration Statement was declared effective on April 22, 1998.
The Company's executive offices are located at Three Riverway, Suite 600,
Houston, Texas 77056, and its telephone number is (713) 965-0990.
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THE ORIGINAL NOTE OFFERING
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The Original Notes....... The Original Notes were sold by the Company on February 11, 1998, and
were subsequently resold to qualified institutional buyers pursuant to
Rule 144A under the Securities Act, to institutional investors that are
accredited investors in a manner exempt from registration under the
Securities Act and to certain persons in transactions outside the United
States in reliance on Regulation S under the Securities Act (the
"Original Note Offering").
Registration Rights
Agreement.............. In connection with the Original Note Offering, the Company entered into
a registration rights agreement (the "'Registration Rights Agreement"),
which grants holders of the Original Notes certain exchange and
registration rights. The Exchange Offer is intended to satisfy such
exchange and registration rights, which generally terminate upon the
consummation of the Exchange Offer.
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THE EXCHANGE OFFER
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Securities Offered....... $200,000,000 aggregate principal amount of 8 5/8% Exchange Notes due
2008.
The Exchange Offer....... $1,000 principal amount of the Exchange Notes in exchange for each
$1,000 principal amount of Original Notes. As of the date hereof,
$200,000,000 aggregate principal amount of Original Notes are
outstanding. The Company will issue the Exchange Notes to holders of
Original Notes on or promptly after the Expiration Date.
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that
Exchange Notes issued pursuant to the Exchange Offer in exchange for
Original Notes may be offered for resale, resold and otherwise
transferred by any holder thereof (other than any such holder which is
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus X
delivery provisions of the Securities Act, provided that such Exchange
Notes are acquired in the ordinary course of such holder's business and
that such holder does not intend to participate in the distribution of
such Exchange Notes.
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The
Letter of Transmittal states that by so acknowledging and by delivering
a Prospectus, a broker-dealer will not be deemed an "underwriter"
within the meaning of the Securities Act. This Prospectus, as it may be X
amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in
exchange for Original Notes where such Original Notes were acquired by
such broker-dealer as a result of market-making activities or other
trading activities. The Company has agreed that, for such period of time
as is necessary to comply with applicable law in connection with any
resale of the Exchange Notes covered thereby (such period not to exceed
180 days after the Registration Statement is declared effective), it
will make this Prospectus available to any broker-dealer for use in
connection with any such resale.
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Any holder of Original Notes who tenders in the Exchange Offer with the
intention to participate, or for the purpose of participating, in a
distribution of the Exchange Notes could not rely on the position of the
staff of the Commission enunciated in Exxon Capital Holdings Corporation
(available April 13, 1989), Morgan Stanley & Co., Inc. (available June
5, 1991) or similar no-action letters and, in the absence of an
exemption therefrom, must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with the
resale of the Exchange Notes. Failure to comply with such requirements
in such instance may result in such holder incurring liability under the
Securities Act for which the holder is not indemnified by the Company.
Expiration Date.......... 12:00 a.m., New York City time, on August 15, 1998, unless the Exchange
Offer is extended, in which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer is extended.
Interest on the Exchange
Notes
and the Original
Notes.................. The Exchange Notes will bear interest from February 11, 1998, the date
of issuance of the Original Notes that are tendered in exchange for the
Exchange Notes (or the most recent Interest Payment Date (as defined
below under the caption "The Exchange Notes") to which interest on
such Original Notes has been paid or, if accrued but unpaid at the time
of tender, will be paid).
Conditions to the
Exchange
Offer.................. The Exchange Offer is subject to certain customary conditions, which may
be waived by the Company.
Procedures for Tendering
Original Notes......... Each holder of Original Notes wishing to accept the Exchange Offer must
complete, sign and date the relevant accompanying Letter of Transmittal,
or a facsimile thereof, in accordance with the instructions contained
herein and therein, and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with the Original Notes and any
other required documentation to the Exchange Agent at the address set
forth in the Letter of Transmittal. By executing the Letter of
Transmittal, each holder of Original Notes will represent to the Company
that, among other things, such holder or the person receiving such
Exchange Notes, whether or not such person is the holder thereof, is
acquiring the Exchange Notes in the ordinary course of business and that
neither the holder nor any such other person has any arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes. In lieu of physical delivery of the certificates
representing Original Notes, tendering holders may transfer Original
Notes pursuant to the procedure for book-entry transfer as set forth
under "The Exchange Offer -- Procedures for Tendering."
Special Procedures for
Beneficial Owners...... Any beneficial owner whose Original Notes are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender should contact such registered holder promptly and
instruct such registered holder to tender on such beneficial owner's
behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such beneficial owner must, prior to completing and executing
the Letter of Transmittal and delivering its Original Notes, either make
appropriate arrangements to register ownership of the Original Notes in
such beneficial owner's name or obtain a properly completed bond power
from the
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registered holder. The transfer of registered ownership may take
considerable time.
Guaranteed Delivery
Procedures............. Holders of Original Notes who wish to tender their Original Notes and
whose Original Notes are not immediately available or who cannot deliver
their Original Notes, the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the Exchange Agent (or comply
with the procedures for book-entry transfer) prior to the Expiration
Date must tender their Original Notes according to the guaranteed
delivery procedures set forth in "The Exchange Offer -- Guaranteed
Delivery Procedures."
Withdrawal Rights........ Tenders may be withdrawn at any time prior to 5:00 p.m., New York City
time, on the Expiration Date pursuant to the procedures described under
"The Exchange Offer -- Withdrawals of Tenders."
Acceptance of Original
Notes and Delivery of
Exchange Notes......... The Company will accept for exchange any and all Original Notes that are
properly tendered in the Exchange Offer prior to 5:00 p.m., New York
City time, on the Expiration Date. The Exchange Notes issued pursuant to
the Exchange Offer will be delivered promptly following the Expiration
Date.
Federal Income Tax
Consequences of the
Exchange Offer......... The issuance of the Exchange Notes to holders of the Original Notes
pursuant to the terms set forth in this Prospectus will not constitute a
taxable exchange for federal income tax purposes. Consequently, no gain
or loss would be recognized by holders of the Original Notes upon
receipt of the Exchange Notes. See "Certain Federal Income Tax
Consequences of the Exchange Offer."
Effect on Holders of
Original Notes......... As a result of the making of this Exchange Offer, the Company will have
fulfilled certain of its obligations under the Registration Rights
Agreement, and holders of Original Notes who do not tender their
Original Notes will generally not have any further registration rights
under the Registration Rights Agreement or otherwise. Such holders will
continue to hold the untendered Original Notes and will be entitled to
all the rights and subject to all the limitations applicable thereto
under the Indenture (as defined below), except to the extent such rights
or limitations, by their terms, terminate or cease to have further
effectiveness as a result of the Exchange Offer. All untendered Original
Notes will continue to be subject to certain restrictions on transfer.
Accordingly, if any Original Notes are tendered and accepted in the
Exchange Offer, the trading market for the untendered Original Notes
could be adversely affected.
Exchange Agent........... U.S. Trust Company of California, N.A. (the "Exchange Agent")
THE EXCHANGE NOTES
<S> <C>
Securities Offered....... $200.0 million in aggregate principal amount of 8 5/8% Exchange Notes
due 2008.
Maturity Date............ February 15, 2008.
Interest Payment Dates... Interest on the Exchange Notes will accrue from the date of issuance and
be payable semi-annually on each February 15 and August 15 of each year
(each an "Interest Payment Date" and together, the "Interest Payment
Dates"), commencing August 15, 1998.
6
<PAGE>
Optional Redemption...... The Exchange Notes will be redeemable at the option of the Company, in
whole or in part, at any time on or after February 15, 2003, at the
redemption prices set forth herein, plus accrued and unpaid interest to
the date of redemption. In addition, at any time on or prior to February
15, 2001, the Company may redeem up to 35% of the aggregate principal
amount of the Exchange Notes originally issued with the net proceeds of
one or more Public Equity Offerings at a redemption price equal to
108.625% of the principal amount thereof, plus accrued and unpaid
interest to the date of redemption; provided that at least 65% of the
aggregate principal amount of the Exchange Notes originally issued
remains outstanding immediately after such redemption. See "Description
of Exchange Notes -- Redemption."
Ranking.................. The Exchange Notes will be senior subordinated obligations of the
Company and will be subordinated to all existing and future senior
indebtedness of the Company, including amounts outstanding under the
Company's credit facility (the "Credit Facility"), which provides for
up to $300.0 million in borrowings. On a pro forma basis, after giving
effect to the acquisitions completed during 1998 and the issuance of the
Notes, at March 31, 1998 the Company would have had approximately $272.2
million of senior indebtedness outstanding. See "Description of
Exchange Notes -- Subordination."
Subsidiary Guarantees.... The Exchange Notes will be unconditionally guaranteed on a senior
subordinated basis by the Guarantors (as defined in "Description of the
Exchange Notes--Certain Definitions"). The guarantees will be general
unsecured obligations of the Guarantors and will be subordinated in
right of payment to Guarantor Senior Debt (as defined in "Description
of the Exchange Notes--Certain Definitions") on the same basis as the
Exchange Notes are subordinated to Senior Debt. On a pro forma basis,
after giving effect to the acquisitions completed during 1998 and the
issuance of the Notes, at March 31, 1998 the Guarantors collectively
would have had approximately $52.9 million of Guarantor Senior Debt
outstanding.
Change of Control........ Upon the occurrence of a Change of Control (as defined in "Description
of the Exchange Notes--Certain Definitions"), holders of the Exchange
Notes will have the right to require the Company to purchase their
Exchange Notes, in whole or in part, at a purchase price equal to 101%
of the aggregate principal amount thereof, plus accrued and unpaid
interest to the date of purchase. See "Description of Exchange
Notes -- Change of Control."
Certain Covenants........ The Exchange Notes will be governed by an indenture among the Company,
the Guarantors and the Trustee dated February 11, 1998 (the
"Indenture") which will contain certain covenants, including, but not
limited to, covenants limiting the Company with respect to the
following: restricted payments, incurrence of additional indebtedness,
liens, transactions with affiliates, asset sales, investments, payment
restrictions affecting subsidiaries and mergers and consolidations. See
"Description of Exchange Notes -- Certain Covenants."
Registration Rights...... Pursuant to the Registration Rights Agreement executed by the Company
and the Initial Purchasers (as defined in "Risk Factors-- Absence of a
Public Market for Exchange Notes"), the Company has agreed to file this
Registration Statement with the Commission. If (i) the Exchange Offer is
not permitted by applicable law or
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<PAGE>
Commission policy or (ii) any Holder of Transfer Restricted Securities
(as defined in the Registration Rights Agreement) notifies the Company
that (A) it is prohibited by law or Commission policy from participating
in the Exchange Offer, (B) that it may not resell the Exchange Notes
acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in the Registration Statement is
not appropriate or available for such resales or (C) that it is a
broker-dealer and owns Original Notes acquired directly from the Company
or an affiliate of the Company, the Company will file a shelf
registration statement (the "Shelf Registration Statement") with the
Commission to cover the resales of the Original Notes by the holders
thereof. Pursuant to the Registration Rights Agreement, the Company has
agreed to file this Registration Statement with the Commission within 60
days following the date of issuance of the Original Notes (the "Closing
Date"), and to use its best efforts to have this Registration Statement
declared effective within 150 days after the Closing Date. If the
Company fails to satisfy these registration obligations, it will be
required to pay additional interest to the holders of Original Notes
under certain circumstances.
</TABLE>
For additional information regarding the Exchange Notes, see "Certain Federal
Income Tax Consequences of an Investment in the Exchange Notes" and
"Description of the Exchange Notes."
RISK FACTORS
Holders of Original Notes should carefully consider all of the information
set forth in this Prospectus and, in particular, the information set forth under
"Risk Factors" before making any decision regarding tendering their Original
Notes pursuant to the Exchange Offer and receiving Exchange Notes.
8
<PAGE>
SUMMARY FINANCIAL DATA
(IN MILLIONS, EXCEPT RATIOS)
The following supplemental consolidated financial information should be
read in conjunction with the Audited and Unaudited Supplemental Consolidated
Financial Statements of the Company and the applicable Notes thereto and the
following Pro Forma financial information should be read in conjunction with the
Unaudited Pro Forma Financial Statements and the Notes thereto contained
elsewhere in the Prospectus. The supplemental consolidated financial information
for the fiscal years ended 1995 through 1997 and the three months ended March
31, 1998 and 1997 reflects the historical financial statements of Metals USA,
restated for the effects of the business combinations with Jeffreys, Wayne and
Krohn, which were accounted for as "poolings-of-interest," and the remaining
Acquired Companies from their respective acquisition dates.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- --------------------------------
1998 1997 1997 1996 1995(1)
--------- --------- ---------- --------- ---------
SUPPLEMENTAL CONSOLIDATED FINANCIAL
INFORMATION:
Consolidated Statements of Operations
Data:
<S> <C> <C> <C> <C> <C>
Net sales.......................... $ 278.5 $ 72.0 $ 537.6 $ 265.5 $ 260.9
Cost of sales...................... 214.6 55.5 414.9 204.0 204.7
Operating and delivery............. 26.0 6.9 53.7 25.4 22.0
Selling, general and
administrative................... 18.1 7.2 41.1 21.4 15.6
Depreciation and amortization...... 3.0 .7 5.6 3.7 3.0
Operating income................... 16.8 1.7 22.3 11.0 15.6
Interest expense................... 4.8 .4 5.0 1.8 2.4
Other Consolidated Data:
Ratio of earnings to fixed
charges.......................... 3.2x 4.5x 3.9x 5.7x 5.6x
EBITDA(2).......................... $ 19.8 $ 2.4 $ 27.9 $ 14.7 $ 18.6
EDITDA/interest expense............ 4.1x 6.0x 5.6x 8.2x 7.8x
Net debt/EBITDA(3)................. 3.4x 2.2x 6.0x 1.7x 1.6x
PRO FORMA FINANCIAL INFORMATION:
Pro Forma Statements of Operations
Data(4):
Net sales.......................... $ 451.0 $ 1,602.6
Cost of sales...................... 345.7 1,242.9
Operating and delivery(5).......... 38.2 141.5
Selling, general and
administrative(5)................ 29.9 107.3
Depreciation and amortization(6)... 4.8 19.2
Operating income................... 32.4 91.7
Interest expense(7)................ 9.3 33.5
Other Pro Forma Data:
Ratio of earnings to fixed
charges.......................... 3.2x 2.6x
EBITDA............................. $ 37.2 $ 110.9
EBITDA/interest expense............ 4.0x 3.3x
Net debt/EBITDA(3)................. 3.0x 4.1x
</TABLE>
MARCH 31, 1998
---------------------- DECEMBER 31,
PRO FORMA(8) ACTUAL 1997
------------ ------ ------------
BALANCE SHEET DATA:
Cash............................. $ 19.4 $ 11.9 $ 7.3
Working capital.................. 380.0 279.2 193.0
Total assets..................... 947.9 670.2 480.6
Total debt....................... 472.2 283.0 174.3
Stockholders' equity............. 303.5 269.8 226.5
Dividends declared(9)............ -- -- --
(FOOTNOTES ON FOLLOWING PAGE)
9
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- ------------
(1) As a result of the merger with Metals USA, Jeffreys changed its fiscal year
to December 31 beginning January 1, 1996, to conform to the fiscal periods
of Metals USA and the other Acquired Companies. The historical financial
information of Jeffreys for the year ended July 31, 1995 has been included
in the Company's consolidated financial statements for the year ended
December 31, 1995.
(2) "EBITDA" as shown on this table is defined as operating income plus
depreciation and amortization. This definition of EBITDA differs from the
definition contained in the Indenture. See "Description of Exchange
Notes -- Certain Definitions." EBITDA is not intended to represent cash
flows from operations as defined by generally accepted accounting principles
("GAAP") and should not be considered as: (i) an alternative to net
income, (ii) an indicator of the Company's operating performance or (iii) as
an alternative to cash flows as a measure of liquidity.
(3) Net debt is defined as debt less cash. For the three months ended March 31,
1998 and 1997, EBITDA has been annualized for the calculation of net
debt/EBITDA.
(4) The pro forma statements of operations data assumes that the IPO, the
acquisition of the Founding Companies, the Subsequent Acquisitions and the
issuance of the Notes occurred on January 1, 1997 and is not necessarily
indicative of the results the Company would have obtained had these events
actually then occurred or of the Company's future results.
(5) The pro forma statements of operations data for the three months ended
March 31, 1998 and for the year ended December 31, 1997 reflects (a) in
selling, general and administrative, an aggregate of approximately $.6
million and $11.0 million, respectively, in pro forma reductions in salary,
bonuses and benefits to the owners of the Acquired Companies to which they
have agreed prospectively (the "Compensation Differential"), (b) in
operating and delivery, a $.2 million and $1.5 million, respectively,
reduction in lease expense pursuant to the renegotiation of certain leases
(the "Rent Differential"), and (c) in selling, general and
administrative, a reduction of $5.7 million for the year ended December 31,
1997 attributable to the non-recurring portion of the non-cash compensation
charge ("Compensation Charge").
(6) Includes $.6 million and $4.7 million of additional amortization of
goodwill that would have been recorded as a result of the acquisition of
the Founding Companies and the Subsequent Acquisitions computed on the
basis described in Notes to the Unaudited Pro Forma Financial Statements
for the three months ended March 31, 1998 and for the year ended December
31, 1997, respectively.
(7) Includes reductions in interest expense of $.1 million and $1.5 million due
to assumed refinancing of outstanding indebtedness with the Company's
Credit Facility for the three months ended March 31, 1998 and for the year
ended December 31, 1997, respectively. Interest expense is increased for
the three months ended March 31, 1998 and for the year ended December 31,
1997 by $2.6 million and $12.9 million, respectively, due to the assumed
financing of the cash portion of the Acquired Companies' purchase price
with the Company's Credit Facility and by $.7 million and $5.4 million,
respectively, due to the issuance of the Notes.
(8) The pro forma balance sheet data assumes that the acquisitions of
Industrial, Sierra, Fullerton, Faitoute, Steel Manufacturing, Wilkof,
Forest, LaserPro, ABS, Valley, Flagg, Geneva, Professional and Intsel were
completed on March 31, 1998.
(9) Exclusive of pre-acquisition distributions from S-Corporations.
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<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS IN
ADDITION TO OTHER INFORMATION INCLUDED IN THIS PROSPECTUS BEFORE MAKING AN
INVESTMENT IN THE EXCHANGE NOTES. THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS CONCERNING THE COMPANY'S OPERATIONS, ECONOMIC PERFORMANCE AND
FINANCIAL CONDITION, INCLUDING, IN PARTICULAR, THE LIKELIHOOD OF THE COMPANY'S
SUCCESS IN DEVELOPING AND EXPANDING ITS BUSINESS. THESE STATEMENTS ARE BASED ON
A NUMBER OF ASSUMPTIONS AND ESTIMATES THAT ARE INHERENTLY SUBJECT TO SIGNIFICANT
UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF THE
COMPANY, AND REFLECT FUTURE BUSINESS DECISIONS THAT ARE SUBJECT TO CHANGE. SOME
OF THESE ASSUMPTIONS INEVITABLY WILL NOT MATERIALIZE, AND UNANTICIPATED EVENTS
WILL OCCUR THAT WILL AFFECT THE COMPANY'S RESULTS.
EFFECTS OF LEVERAGE. On a pro forma basis, after giving effect to the
issuance of the Original Notes, and the acquisitions completed after March 31,
1998, the Company would have had total indebtedness of $472.2 million (including
$219.3 million of borrowings under the "Credit Facility"), working capital of
$380.0 million, stockholders' equity of $303.5 million and a ratio of earnings
to fixed charges of 3.2 to 1, at March 31, 1998. Moreover, the Company will be
permitted to incur substantial additional indebtedness in the future. It is
expected that the material portion of such additional indebtedness will be
senior to the Exchange Notes. See "Capitalization" and "Description of the
Exchange Notes."
The Company's ability to make scheduled payments of principal of, or to pay
the interest on, or to refinance, its indebtedness (including the Exchange
Notes), or to fund planned capital expenditures or future acquisitions will
depend on its future performance, which, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond its control. Based upon the current level of operations
and anticipated cost savings and net sales growth, management believes that cash
flow from operations and available cash, together with available borrowings
under the Credit Facility, will be adequate to meet the Company's anticipated
future requirements for working capital, budgeted capital expenditures and
scheduled payments of principal and interest on its indebtedness, including the
Exchange Notes, for the next several years. The Company cannot predict the
impact of future acquisitions on its cash requirements. The Company may need to
refinance all or a portion of the principal of the Exchange Notes on or prior to
maturity. There can be no assurance that the Company's business will generate
sufficient cash flow from operations or that anticipated net sales growth and
operating improvements will be realized or that future cash borrowings will be
available under the Credit Facility in an amount sufficient to enable the
Company to service its indebtedness, including the Exchange Notes, make
anticipated capital expenditures or fund future acquisitions. In addition, there
can be no assurance that the Company will be able to effect any such refinancing
on reasonable terms or at all. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The degree to which the Company is leveraged could have important
consequences to holders of the Exchange Notes, including but not limited to: (i)
increasing the Company's vulnerability to general adverse economic and industry
conditions, (ii) limiting the Company's ability to obtain additional financing
to fund future working capital, capital expenditures, future acquisitions and
other general corporate purposes, (iii) requiring the dedication of a
substantial portion of the Company's cash flow from operations to the payment of
principal of, and interest on, its indebtedness, thereby reducing the
availability of such cash flow to fund acquisitions, working capital, capital
expenditures or other general corporate purposes, (iv) limiting the Company's
flexibility in planning for, or reacting to, changes in its business and the
industry and (v) placing the Company at a competitive disadvantage relative to
less-leveraged competitors. In addition, both the Credit Facility and the
Indenture contain financial and other restrictive covenants that limit the
ability of the Company to, among other things, borrow additional funds. Failure
by the Company to comply with such covenants could result in an event of default
which, if not cured or waived, could have a material adverse effect on the
Company. In addition, the degree to which the Company is leveraged, could
prevent it from repurchasing all of the Exchange Notes tendered to it upon the
occurrence of a Change of Control. See "Description of Certain Indebtedness"
and "Description of the Exchange Notes -- Change of Control."
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<PAGE>
RISKS RELATING TO A CHANGE OF CONTROL. Upon a Change of Control (as
defined in "Description of the Exchange Notes -- Change of Control") holders
of the Exchange Notes will have the right to require the Company to repurchase
all or any part of such holders' Exchange Notes at a price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest to the date of
repurchase. The events that constitute a Change of Control under the Indenture
relating to the Exchange Notes would constitute a default under the Credit
Facility, which prohibits the purchase of the Exchange Notes by the Company in
the event of certain Change of Control events unless and until such time as the
Company's indebtedness under the Credit Facility is repaid in full. There can be
no assurance that the Company would have sufficient financial resources
available to satisfy all of its obligations under the Credit Facility and the
Exchange Notes in the event of a Change of Control. The Company's failure to
purchase the Exchange Notes would result in a default under the Indenture and
under the Credit Facility, each of which could have adverse consequences for the
Company and the holders of the Notes. See "Description of the Exchange
Notes -- Change of Control." The definition of "Change of Control" in the
Indenture includes a sale, lease, exchange or other transfer of "all or
substantially all" of the assets of the Company and its subsidiaries taken as a
whole to a person or a group of persons. There is no clearly established meaning
for the phrase "all or substantially all" in the context of an indenture.
Because there is no precise established definition of this phrase, the ability
of a holder of the Exchange Notes to require the Company to repurchase such
Exchange Notes as a result of a sale, lease, exchange or other transfer of
substantially all of the Company's assets to a person or group of persons may be
uncertain.
RESTRICTIVE LOAN COVENANTS. The Credit Facility and the Indenture contain
numerous financial and operating covenants that will limit the discretion of the
Company's management with respect to certain business matters. These covenants
will place significant restrictions on, among other things, the ability of the
Company to incur additional indebtedness, to create liens or other encumbrances,
to make certain payments and investments, and to sell or otherwise dispose of
assets and merge or consolidate with other entities. See "Description of
Certain Indebtedness" and "Description of the Exchange Notes -- Certain
Covenants." The Credit Facility also requires the Company to meet certain
financial ratios and tests. A failure to comply with the obligations contained
in the Credit Facility or the Indenture could result in an event of default
under either the Credit Facility or the Indenture which could result in
acceleration of the related debt and the acceleration of debt under other
instruments evidencing indebtedness that may contain cross-acceleration or
cross-default provisions. If, as a result thereof, a default occurs with respect
to Senior Debt the subordination provisions in the Indenture would likely
restrict payments to holders of the Exchange Notes.
SUBORDINATION OF EXCHANGE NOTES. The Company conducts all of its
operations through its subsidiaries. Accordingly, the Company relies on
dividends and cash advances from its subsidiaries to provide funds necessary to
meet its obligations, including the payment of principal and interest on the
Exchange Notes. The ability of subsidiaries to pay dividends or make cash
advances is subject to applicable laws and contractual restrictions, including
restrictions, with respect to certain subsidiaries, under credit agreements
between such subsidiaries and third party lenders.
The Exchange Notes will be unsecured obligations of the Company and the
Guarantors and will be subordinated in right of payment to all existing and
future senior indebtedness of the Company and the Guarantors, which include
borrowings under the Credit Facility. The Credit Facility provides for a
revolving facility of $300.0 million through a syndicate of banks and allows the
Company to have borrowings (exclusive of industrial development bonds) of up to
$50.0 million, in addition to Subordinated Debt (as defined in the Credit
Facility). The Credit Facility is guaranteed by substantially all of the
Company's subsidiaries and matures in February 2003, at which time all amounts
then outstanding become due. Borrowings under the Credit Facility are secured by
a pledge of all of the capital stock of each of the Company's material
subsidiaries. The Exchange Notes will rank PARI PASSU in right of payment with
all other existing and future senior subordinated debt of the Company and will
rank senior to other indebtedness that expressly provides that it is
subordinated in right of payment on the Exchange Notes. In the event of
bankruptcy, liquidation or reorganization of the Company, the assets of the
Company will be available to pay obligations on the Notes only after all Senior
Debt has been paid in full, and, accordingly, there can be
12
<PAGE>
no assurance that there will be sufficient assets remaining to pay amounts due
on any or all of the Exchange Notes outstanding. At March 31, 1998, the
aggregate principal amount of Senior Debt of the Company was $272.2 million on a
pro forma basis after giving effect to the Subsequent Acquisitions, the
completion of the Original Note Offering and the application of the net proceeds
therefrom. Additional senior indebtedness may be incurred by the Company from
time to time, subject to certain restrictions. In addition to being subordinated
to all existing and future senior indebtedness of the Company, the Exchange
Notes will be effectively subordinated to all secured debt of the Company.
ABSENCE OF COMBINED OPERATING HISTORY; RISKS OF INTEGRATING ACQUIRED
COMPANIES. Metals USA was founded in 1996 but conducted no operations and
generated no net sales prior to July 11, 1997. The Acquired Companies were
operated as separate independent entities prior to their acquisition, 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 effectively or to implement
successfully the Company's acquisition and internal growth operating strategies.
The pro forma financial results of the Acquired Companies cover periods when the
Acquired 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 Acquired 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 carbon steel, aluminum, stainless steel, copper, brass,
titanium and various specialty alloys and other 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 Acquired 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.
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
13
<PAGE>
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 Acquired Companies or other subsequently
acquired businesses 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 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 maintain its acquisition program. The Company
currently maintains a $300 million revolving Credit Facility with a group of
commercial banks. As of July 7, 1998, $39.0 million was available to the Company
under the Credit Facility. 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- 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 Acquired
Companies and subsequently acquired businesses and to continue to expand the net
sales of the Acquired Companies and any subsequently acquired businesses.
Although the Company intends to seek to improve the profitability of the
Acquired 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 Acquired 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 Acquired 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 Acquired 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 Acquired 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
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 with respect to acquisitions and for increased sales to
new and existing customers could have a material adverse effect on the Company's
net sales and profitability. See "Business -- Competition."
14
<PAGE>
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 certain of its 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
Acquired 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 IPO and the
Subsequent Acquisitions, the Company evaluated the properties owned or leased by
the Acquired 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 former stockholders of the
Acquired Companies whose facilities are located at the contaminated sites. The
Company believes, although there can be no assurances, 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 -- Government Regulation and
Environmental Matters."
FRAUDULENT CONVEYANCE CONSIDERATIONS. Various fraudulent conveyance laws
enacted for the protection of creditors may apply to the issuance of the
Subsidiary guarantees. To the extent that a court were to find that (x) a
Subsidiary guarantee was incurred by a Guarantor with intent to hinder, delay or
defraud any present or future creditor or such Guarantor contemplated insolvency
with a design to prefer one or more creditors to the exclusion in whole or in
part of others, or (y) a Guarantor did not receive fair consideration or
reasonably equivalent value for issuing its Subsidiary guarantee and such
Guarantor (i) was insolvent, (ii) was rendered insolvent by reason of the
issuance of its Subsidiary guarantee, (iii) was engaged or about to engage in a
business or transaction for which the remaining assets of such Guarantor
constituted unreasonably small capital to carry on its business or (iv) intended
to incur, or believed that it would incur, debts beyond its ability to pay such
debts as they matured, the court could void or subordinate such Subsidiary
guarantee in favor of other creditors of such Guarantor. Among other things, a
legal challenge of any Subsidiary guarantee may focus on the benefits, if any,
realized by such Guarantor as a result of the Company's issuance of the Exchange
Notes. The Subsidiary guarantees contain a savings clause, which generally limit
the obligation of any Guarantor under its Subsidiary guarantee to the maximum
amount as will, after giving effect to all of the liabilities of such Guarantor,
result in such obligation not constituting a fraudulent conveyance. To the
extent a Subsidiary guarantee was voided or limited as a fraudulent conveyance
or held unenforceable for any other reason, holders of the Exchange Notes would
cease to have any claim against such Guarantor and would be creditors solely of
the Company and the other Guarantors. In that event, the claims of holders of
the Exchange Notes against such Guarantor would be subject to the prior payment
of all liabilities (including trade payables) of such Guarantor. There can be no
assurance that, after providing for all prior claims, there would be sufficient
assets to satisfy the claims of the holders of the Exchange Notes relating to
any voided portion of any Subsidiary guarantee.
15
<PAGE>
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any such proceeding. Generally, however,
a guarantor may be considered insolvent if the sum of its debts, including
contingent liabilities, is greater than the fair market value of all of its
assets at a fair valuation or if the present fair market value of its assets is
less than the amount that would be absolute and mature. Based upon financial and
other information, the Company believes that the Guarantors are solvent, have
sufficient capital for carrying on their business and are able to pay their
debts as they mature. There can be no assurance, however, that a court passing
on such standards would agree with such beliefs. See "Description of the
Exchange Notes -- Guarantees."
RELIANCE ON KEY PERSONNEL. Due in part to the Company's decentralized
operating strategy, the Company is highly dependent on the continuing efforts of
its executive officers and the senior management of the Acquired 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. The Company's executive
officers and directors, former stockholders of the Acquired Companies and
entities affiliated with them beneficially own approximately 69.1% of the
outstanding shares of Common Stock. Holders of Restricted Common Stock are
entitled to elect one member of the Company's Board of Directors and 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. Accordingly, the Company's executive officers,
directors and the former stockholders of the Acquired Companies control in the
aggregate approximately 70.5% of 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."
ABSENCE OF A PUBLIC MARKET FOR NOTES. There is no existing market for the
Exchange Notes, and although BT Alex. Brown Incorporated, Donaldson, Lufkin &
Jenrette Securities Corporation, Bear Stearns & Co., Inc. and NationsBanc
Montgomery Securities LLC ("the Initial Purchasers") have advised the Company
that they intend to make a market in the Exchange Notes, they are not obligated
to do so and may discontinue such market making at any time. The Company does
not intend to apply for listing of the Exchange Notes on a securities exchange
or to seek approval for quotation through an automated quotation system.
Accordingly, there can be no assurance that an active market for the Exchange
Notes will develop following the completion of the Exchange Offering or, if
developed, that such market will be sustained or as to the liquidity of the
market. The Exchange Notes are expected to be eligible for trading by qualified
buyers in the PORTAL market.
16
<PAGE>
CAPITALIZATION
The following table sets forth the current maturities of long-term
obligations and capitalization at March 31, 1998 of the Company on a (i)
consolidated basis and (ii) pro forma basis to give effect to the acquisitions
completed after March 31, 1998 as if each had occurred on March 31, 1998. The
actual March 31, 1998 information presented below reflects the supplemental
consolidated results of the Company, as restated for the effects of the business
combination with Krohn, which was accounted for using the
"pooling-of-interests" method of accounting. This table should be read in
conjunction with the Company's Audited and Unaudited Supplemental Consolidated
Financial Statements together with the applicable Notes thereto and the
Unaudited Pro Forma Financial Statements of the Company and the Notes thereto
included elsewhere in this Prospectus.
MARCH 31, 1998
------------------------
ACTUAL PRO FORMA
------- ----------
(IN MILLIONS, EXCEPT
SHARE AND PER SHARE
AMOUNTS)
Current maturities of long-term debt
obligations (1)....................... $ 9.8 $ 9.8
------- ----------
Long-term debt (net of current
maturities):
Bank Credit Facility............... 50.9 219.3
Other notes payable and capital
lease obligations (1)............ 22.3 43.1
8 5/8% Senior Subordinated Notes
due 2008......................... 200.0 200.0
------- ----------
Total long-term debt.......... 273.2 462.4
------- ----------
Total debt.................... 283.0 472.2
Stockholders' equity:
Preferred Stock: $0.01 par value,
5,000,000 shares authorized; none
issued or outstanding............ -- --
Common Stock: $0.01 par value,
203,122,914 shares authorized;
35,646,038 issued and
outstanding; and 37,908,686
shares issued and outstanding,
pro forma (2).................... .4 .4
Additional paid-in capital......... 223.4 257.1
Unearned compensation.............. (1.5) (1.5)
Retained earnings.................. 47.5 47.5
------- ----------
Total stockholders' equity.... 269.8 303.5
------- ----------
Total capitalization....... $ 543.0 $765.9
======= ==========
- ------------
(1) See Notes to the Company's Audited Supplemental Consolidated Financial
Statements for a description of certain other debt obligations.
(2) Excludes shares of Common Stock subject to options granted upon
consummation of the IPO and shares of Common Stock subject to options
granted or to be granted in connection with the Subsequent Acquisitions.
See "Management -- 1997 Long-Term Incentive Plan" and " -- 1997
Non-Employee Directors' Stock Plan," and the Notes to the Company's
Audited Supplemental Consolidated Financial Statements.
17
<PAGE>
SELECTED FINANCIAL DATA
(IN MILLIONS, EXCEPT RATIOS)
The following supplemental consolidated financial information should be
read in conjunction with the Audited and Unaudited Supplemental Consolidated
Financial Statements of Metals USA, Inc. and Subsidiaries and the Notes thereto
included elsewhere in this Prospectus. The supplemental consolidated financial
information for the fiscal years ended 1993 through 1997 and the three months
ended March 31, 1998 and 1997 reflects the historical financial statements of
Metals USA, restated for the effects of the business combinations with Jeffreys,
Wayne and Krohn which were accounted for as "poolings-of-interests" and the
remaining Acquired Companies from their respective acquisition dates.
The Acquired Companies operated as privately-owned entities prior to their
acquisition by Metals USA and their results of operations reflect varying tax
structures ("S Corporations" or "C Corporations") which have influenced the
level of owners' compensation. The owners of the Acquired 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 acquisitions. These cost savings, which are not reflected in
the consolidated financial information presented below, are reflected in the pro
forma information presented below and elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,(1)
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
SUPPLEMENTAL CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.......................... $ 278.5 $ 72.0 $ 537.6 $ 265.5 $ 260.9 $ 235.7 $ 155.6
Cost of sales...................... 214.6 55.5 414.9 204.0 204.7 185.0 119.1
Operating and delivery............. 26.0 6.9 53.7 25.4 22.0 19.6 13.6
Selling, general and
administrative................... 18.1 7.2 41.1 21.4 15.6 14.0 10.5
Depreciation and amortization...... 3.0 .7 5.6 3.7 3.0 2.4 2.0
Operating income................... 16.8 1.7 22.3 11.0 15.6 14.7 10.4
Interest expense................... 4.8 .4 5.0 1.8 2.4 1.8 2.0
Other income....................... (.1) (.1) (.5) (.7) (.5) (.5) (1.5)
Income before income taxes......... 12.1 1.4 17.8 9.9 13.7 13.4 9.9
Net income......................... 7.2 (.4) 7.5 4.5 8.1 8.2 6.3
OTHER DATA:
Ratio of earnings to fixed
charges.......................... 3.2x 4.5x 3.9x 5.7x 5.6x 6.8x 5.5x
EBITDA(2).......................... $ 19.8 $ 2.4 $ 27.9 $ 14.7 $ 18.6 $ 17.1 $ 12.4
EDITDA/interest expense............ 4.1x 6.0x 5.6x 8.2x 7.8x 9.5x 6.2x
Net debt/EBITDA(3)................. 3.4x 2.2x 6.0x 1.7x 1.6x 2.0x 1.8x
PRO FORMA STATEMENTS OF OPERATIONS
DATA(4):
Net sales.......................... $ 451.0 $ 1,602.6
Cost of sales...................... 345.7 1,242.9
Operating and delivery(5).......... 38.2 141.5
Selling, general and
administrative(5)................ 29.9 107.3
Depreciation and amortization(6)... 4.8 19.2
Operating income................... 32.4 91.7
Interest expense(7)................ 9.3 33.5
Other (income) expense, net........ .3 (2.1)
Income before income taxes......... 22.8 60.3
Net income......................... 13.6 34.0
OTHER PRO FORMA DATA:
Ratio of earnings to fixed
charges.......................... 3.2x 2.6x
EBITDA............................. $ 37.2 $ 110.9
EBITDA/interest expense............ 4.0x 3.3x
Net debt/EBITDA(3)................. 3.0x 4.1x
</TABLE>
(CONTINUED ON FOLLOWING PAGE)
18
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 1998 FISCAL YEARS ENDED(1)
----------------------- -----------------------------------------------------
PRO FORMA(8) ACTUAL 1997 1996 1995 1994 1993
------------ ------- --------- --------- --------- --------- ---------
(IN MILLIONS)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents.......... $ 19.4 $ 11.9 $ 7.3 $ 2.4 $ 4.4 1.3 $ .9
Working capital.................... 380.0 279.2 193.0 51.6 53.2 47.2 39.7
Total assets....................... 947.9 670.2 480.6 107.3 100.1 99.0 70.5
Total debt......................... 472.2 283.0 174.3 27.8 34.5 35.6 23.2
Stockholders' equity............... 303.5 269.8 226.5 57.5 50.1 43.3 36.5
Dividends declared(9).............. -- -- -- -- -- -- --
</TABLE>
- ------------
(1) As a result of the merger with Metals USA, Jeffreys changed its fiscal year
to December 31 beginning January 1, 1996, to conform to the fiscal periods
of Metals USA and the other Acquired Companies. The historical financial
information of Jeffreys for the years ended July 31, 1993, 1994 and 1995
have been included in the Company's consolidated financial statements for
the years ended December 31, 1993, 1994 and 1995.
(2) "EBITDA" as shown on this table is defined as operating income plus
depreciation and amortization. This definition of EBITDA differs from the
definition contained in the Indenture. See "Description of
Notes -- Certain Definitions." EBITDA is not intended to represent cash
flows from operations as defined by generally accepted accounting
principles ("GAAP") and should not be considered as: (i) an alternative
to net income, (ii) an indicator of the Company's operating performance or
(iii) as an alternative to cash flows as a measure of liquidity.
(3) Net debt is defined as debt less cash. For the three months ended March 31,
1998 and 1997, EBITDA has been annualized for the calculation of net
debt/EBITDA.
(4) The pro forma statements of operations data assumes that the IPO, the
acquisition of the Founding Companies, the Subsequent Acquisitions and the
issuance of the Notes occurred on January 1, 1997 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.
(5) The pro forma statements of operations data for the three months ended
March 31, 1998 and for the year ended December 31, 1997 reflects (a) in
selling, general and administrative, an aggregate of approximately $.6
million and $11.0 million, respectively, in pro forma reductions in salary,
bonuses and benefits to the owners of the Acquired Companies to which they
have agreed prospectively (the "Compensation Differential"), (b) in
operating and delivery, a $.2 million and $1.5 million, respectively,
reduction in lease expense pursuant to the renegotiation of certain leases
(the "Rent Differential"), and (c) in selling, general and
administrative, a reduction of $5.7 million for the year ended December 31,
1997 attributable to the non-recurring portion of the non-cash compensation
charge ("Compensation Charge").
(6) Includes $.6 million and $4.7 million of additional amortization of
goodwill that would have been recorded as a result of the acquisition of
the Founding Companies and the Subsequent Acquisitions computed on the
basis described in Notes to the Unaudited Pro Forma Financial Statements
for the three months ended March 31, 1998 and for the year ended December
31, 1997, respectively.
(7) Includes reductions in interest expense of $.1 million and $1.5 million due
to assumed refinancing of outstanding indebtedness with the Company's
Credit Facility for the three months ended March 31, 1998 and for the year
ended December 31, 1997, respectively. Interest expense is increased for
the three months ended March 31, 1998 and for the year ended December 31,
1997 by $2.6 million and $12.9 million, respectively, due to the assumed
financing of the cash portion of the Acquired Companies' purchase price
with the Company's Credit Facility and by $.7 million and $5.4 million,
respectively, due to the issuance of the Notes.
(8) The pro forma balance sheet data assumes that the acquisitions of
Industrial, Sierra, Fullerton, Faitoute, Steel Manufacturing, Wilkof,
Forest, LaserPro, ABS, Valley, Flagg, Geneva, Professional and Intsel were
completed on March 31, 1998.
(9) Exclusive of pre-acquisition distributions from S-Corporations.
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 Company's Audited and Unaudited Supplemental
Consolidated 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. Most of the metal sold by the Company is 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 Acquired Companies manufacture finished building
products for commercial and residential applications and machine certain
specialty metals.
The Company anticipates that it will realize savings from: (i) greater
volume discounts from raw materials and other suppliers and (ii) consolidation
of insurance and other general and administrative costs. It is anticipated that
the administrative cost 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. The Company's Unaudited Pro Forma Combined Statements of Operations
do not reflect any amounts as may be realized from future cost savings.
During 1996 and the first half 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 recorded a compensation charge of
$3.6 million in 1996 and $6.0 million in the first half of 1997 representing the
difference between the amount paid for the shares and the estimated fair value
of the shares on the date of sale, as if the Founding Companies were combined
(the "Compensation Charge").
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 was the designated "accounting
acquiror" and the Company recorded the excess of the fair value of the Merger
consideration paid (exclusive of debt assumed), over the fair value of the net
assets acquired with respect to the Founding Companies as "goodwill."
Collectively, the excess of consideration paid (exclusive of debt assumed) over
the fair value of the net assets acquired from the merger of the Founding
Companies together with the merger of certain of the Subsequent Acquisitions
that were accounted for using the "purchase" method of accounting, totaled
approximately $251.9 million, on a pro forma basis, at March 31, 1998. 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 the amortization expense
attributable to the goodwill created from the application of SAB 97 with respect
to the Founding Companies is approximately $2.1 million per year and is not
deductible for income tax purposes. The pro forma impact of the amortization
expense attributable to the goodwill created from the Subsequent Acquisitions is
approximately $4.2 million per year, a portion of which is deductible for income
tax purposes.
The accounting classifications used by the Company to present the combined
results of operations for the Founding Companies and the Subsequent Acquisitions
generally conform to the conventions established by the Steel Service Center
Institute ("SSCI") and the National Association of Aluminum Distributors.
20
<PAGE>
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 its Subsidiaries 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. 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. 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
The following supplemental consolidated financial information reflects the
historical consolidated 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 MARCH 31,
------------------------------------------
1998 % 1997 %
--------- --------- --------- ---------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Net sales............................... $ 278.5 100.0% $ 72.0 100.0%
Cost of sales...................... 214.6 77.1% 55.5 77.1%
Operating and delivery............. 26.0 9.3% 6.9 9.6%
Selling, general and
administrative................... 18.1 6.5% 7.2 10.0%
Depreciation and amortization...... 3.0 1.1% .7 .9%
--------- --------- --------- ---------
Operating income........................ 16.8 6.0% 1.7 2.4%
Interest expense........................ 4.8 1.7% .4 .6%
Other income............................ (.1) -- (.1) (.1%)
--------- --------- --------- ---------
Income before income taxes.............. $ 12.1 4.3% $ 1.4 1.9%
========= ========= ========= =========
</TABLE>
RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS
ENDED MARCH 31, 1997
NET SALES. Net sales increased $206.5 million, or 286.8%, from $72.0
million for the three months ended March 31, 1997 to $278.5 million for the
three months ended March 31, 1998. The increase in net sales was principally due
to acquisitions completed during 1997. The purchase acquisitions completed in
the first quarter of 1998 did not have a significant impact on net sales or
results of operations for the three months ended March 31, 1998.
COST OF SALES. Cost of sales increased $159.1 million, or 286.7%, from
$55.5 million for the three months ended March 31, 1997 to $214.6 million for
the three months ended March 31, 1998. The increase in cost of sales was
principally due to the acquisitions described above. As a percentage of net
sales, cost of sales was 77.1% for both periods.
21
<PAGE>
OPERATING AND DELIVERY. Operating and delivery expenses increased $19.1
million, or 276.8%, from $6.9 million for the three months ended March 31, 1997
to $26.0 million for the three months ended March 31, 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 March 31, 1997 to 9.3% for the
three months ended March 31, 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 $10.9 million, or 151.4%, from $7.2 million for the three
months ended March 31, 1997 to $18.1 million for the three months ended March
31, 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 10.0% for the three
months ended March 31, 1997 to 6.5% for the three months ended March 31, 1998.
This percentage decrease was primarily due to the non-recurring non-cash
Compensation Charge of $2.8 million the Company incurred in connection with the
sale of common stock to consultants and members of management during the three
months ended March 31, 1997.
OPERATING INCOME. Operating income increased $15.1 million, from $1.7
million for the three months ended March 31, 1997 to $16.8 million for the three
months ended March 31, 1998. The increase in operating income was attributable
to the factors discussed above. As a percentage of net sales, operating income
increased from 2.4% for the three months ended March 31, 1997 to 6.0% for the
three months ended March 31, 1998. This percentage increase was primarily due to
the non-recurring non-cash Compensation Charge described above, partially offset
by higher cost of raw materials during the three months ended March 31, 1998.
INTEREST EXPENSE. Interest expense increased $4.4 million, from $.4
million for the three months ended March 31, 1997 to $4.8 million for the three
months ended March 31, 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.
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.
22
<PAGE>
The following supplemental consolidated 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. Because of the merger with Metals USA, Jeffreys
changed its fiscal year end from July 31 to December 31, beginning January 1,
1996 to conform to the fiscal periods of Metals USA and the other Acquired
Companies. The historical financial information of Jeffreys for the year ended
July 31, 1995 has been included in the Company's consolidated financial
statements for the year ended December 31, 1995.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1997 % 1996 % 1995 %
--------- --------- --------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net sales............................ $ 537.6 100.0% $ 265.5 100.0% $ 260.9 100.0%
Operating costs and expenses:
Cost of sales................... 414.9 77.2% 204.0 76.8% 204.7 78.5%
Operating and delivery.......... 53.7 10.0% 25.4 9.6% 22.0 8.4%
Selling, general and
administrative................ 41.1 7.6% 21.4 8.1% 15.6 6.0%
Depreciation and amortization... 5.6 1.0% 3.7 1.4% 3.0 1.1%
--------- --------- --------- --------- --------- ---------
Operating income..................... 22.3 4.2% 11.0 4.1% 15.6 6.0%
Interest expense..................... 5.0 .9% 1.8 .7% 2.4 .9%
Other income......................... (.5) -- (.7) -- (.5) (.2)%
--------- --------- --------- --------- --------- ---------
Income before income taxes........... $ 17.8 3.3% $ 9.9 3.7% $ 13.7 5.3%
========= ========= ========= ========= ========= =========
</TABLE>
RESULTS FOR 1997 COMPARED TO 1996
NET SALES. Net sales increased $272.1 million, or 102.5%, from $265.5
million in 1996 to $537.6 million in 1997. The increase in net sales was
principally due to acquisitions of the Founding Companies on July 11, 1997 and
the purchase acquisitions of Harvey, Meier and Federal Bronze on September 26,
1997. Average realized prices for steel products declined approximately 3.2% in
1997 compared to 1996.
COST OF SALES. Cost of sales increased $210.9 million, or 103.4%, from
$204.0 million in 1996 to $414.9 million in 1997. The increase in cost of sales
was principally due to the business acquisitions described above. As a
percentage of net sales, cost of sales increased from 76.8% in 1996 to 77.2% in
1997. This percentage increase was due to higher cost of raw materials.
OPERATING AND DELIVERY. Operating and delivery expenses increased $28.3
million, or 111.4%, from $25.4 million in 1996 to $53.7 million in 1997. The
increase in operating and delivery expenses was principally due to the business
acquisitions described above. As a percentage of net sales, operating and
delivery expenses increased from 9.6% in 1996 to 10.0% in 1997. This percentage
increase was primarily due to higher transportation costs to support an
expanding market area.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $19.7 million, or 92.1%, from $21.4 million in 1996 to $41.1
million in 1997. This increase in selling, general and administrative expenses
was primarily attributable to the business acquisitions described above.
Additionally, the Company recorded a Compensation Charge of $3.6 million and
$6.0 million in 1996 and 1997, respectively. As a percentage of net sales,
selling, general and administrative expenses decreased from 8.1% in 1996 to 7.6%
in 1997. This percentage decrease was primarily due to the Compensation Charge
as a percentage of net sales being less for 1997 than for 1996. Excluding the
effect of the Compensation Charges recorded in 1996 and 1997, as a percentage of
net sales, selling, general and administrative expenses decreased from 6.7% in
1996 to 6.5% in 1997. This percentage decrease was primarily due to the
allocation of fixed costs over a higher volume of net sales.
OPERATING INCOME. Operating income increased $11.3 million, or 102.7%,
from $11.0 million in 1996 to $22.3 million in 1997. The increase in operating
income was primarily attributable to the business acquisitions described above,
offset by the $6.0 million Compensation Charge described in the preceding
paragraph. As a percentage of net sales, operating income increased from 4.1% in
1996 to 4.2% in 1997.
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INTEREST EXPENSE. Interest expense increased $3.2 million, or 177.8%, from
$1.8 million in 1996 to $5.0 million in 1997. The increase in interest expense
was due to increased borrowings in connection with the business acquisitions
described above.
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 1996 COMPARED TO 1995
NET SALES. Net sales increased $4.6 million, or 1.8%, from $260.9 million
in 1995 to $265.5 million in 1996. The increase in net sales was principally due
to a 6.0% increase in shipments in 1995 compared to 1996. Additionally, average
realized prices decreased by approximately 2.5%. Approximately one-third of the
increased shipments were from the Oakwood, Georgia facility acquired in March
1995.
COST OF SALES. Cost of sales decreased $.7 million, or .3%, from $204.7
million in 1995 to $204.0 million in 1996. The decrease in cost of sales was
primarily attributable to a 4.4% decline in the cost of raw materials, partially
offset by the increased shipments described above. As a percentage of net sales,
cost of sales decreased from 78.5% in 1995 to 76.8% in 1996 due primarily to the
decline in the cost of raw materials referred to above.
OPERATING AND DELIVERY. Operating and delivery expenses increased $3.4
million, or 15.5%, from $22.0 million in 1995 to $25.4 million in 1996. This
increase was primarily attributable to the increased shipments described above.
As a percentage of net sales, operating and delivery expenses increased from
8.4% in 1995 to 9.6% in 1996. This percentage increase was primarily due to
higher transportation costs to support an expanding market area.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $5.8 million, or 37.2%, from $15.6 million in 1995 to $21.4
million in 1996. The increase in selling, general and administrative expenses
was primarily due to a $3.6 million Compensation Charge recorded during 1996
and, to a lesser extent, the increased selling costs attributable to the
increased shipments described above. As a percentage of net sales, selling,
general and administrative expenses increased from 6.0% for 1995 to 8.1% for
1996. This percentage increase was primarily due to the Compensation Charge
described above.
OPERATING INCOME. Operating income decreased $4.6 million, or 29.5%, from
$15.6 million in 1995 to $11.0 million in 1996. The decrease in operating income
was primarily attributable to the compensation charge discussed above. As a
percentage of net sales, operating income decreased from 6.0% in 1995 to 4.1% in
1996.
INTEREST EXPENSE. Interest expense decreased $0.6 million, or 25.0%, from
$2.4 million in 1995 to $1.8 million in 1996. The decrease in interest expense
was primarily due to lower average balances outstanding under the revolving
credit facilities.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes
differs from the federal statutory rate principally due to state income taxes
(net of federal income tax benefit) and the non-deductibility of the
Compensation Charge.
LIQUIDITY AND CAPITAL RESOURCES
Beginning with the IPO on July 11, 1997, and through February 11, 1998, the
Company has completed a number of financing transactions designed to enhance the
Company's liquidity, reduce incremental interest expense and extend debt
maturities. The transactions included a public equity offering of Common Stock
which resulted in net proceeds of $58.3 million, a private offering for $200.0
million aggregate principal amount of 8 5/8% Senior Subordinated Notes due 2008
(the "Notes") and the establishment of a $300.0 million revolving credit
facility with a group of commercial banks (the "Credit Facility"). As of March
31, 1998, $249.1 million was available to the Company under the Credit Facility.
As of July 7, 1998, the Company had outstanding borrowings of $261.0 million and
$39.0 million available for use under the Credit Facility.
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At March 31, 1998, the Company had cash of $11.9 million, working capital
of $279.2 million and total debt of $283.0 million. 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 (of which $144.8 million was attributable to the Original
Credit Facility, as defined below). At December 31, 1996, the Company had cash
of $2.4 million, working capital of $51.6 million and total debt of $27.8
million. 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 governing the Notes (the "Indenture") include restrictions on
the ability of the Company to pay dividends.
The Company used $15.0 million in net cash for operating activities and
generated $6.2 million in net cash from operating activities for the three
months ended March 31, 1998 and 1997, respectively. The Company generated $3.3
million and $9.5 million in net cash from operating activities for 1997 and
1996, respectively. Net cash used for investing activities was $36.4 million and
$1.8 million for the three months ended March 31, 1998 and 1997, respectively.
The principal use of cash during the three months ended March 31, 1998 was to
fund the cash portion of the acquisition cost for the Subsequent Acquisitions.
Net cash used in investing activities was $85.9 million and $6.5 million for
1997 and 1996, respectively. The principal use of cash during 1997 was to fund
the cash portion of the acquisition cost for the Acquired Companies. Net cash
provided by financing activities was $56.0 million and net cash used in
financing activities was $2.0 million for the three months ended March 31, 1998
and 1997, respectively. Net cash provided by financing activities was $87.5
million for 1997 and net cash used in financing activities was $5.0 million in
1996. For the three months ended March 31, 1998, the cash provided by financing
activities consisted primarily of the net proceeds from the sale of the Notes of
$193.7 million offset by net repayments on the Credit Facility. For 1997, the
cash provided by financing activities consisted primarily of the net proceeds
from the sale of Common Stock of $58.3 million and borrowings under the initial
$150.0 million unsecured revolving credit facility (the "Original Credit
Facility").
INVESTING ACTIVITIES
Concurrent with the completion of the IPO, Metals USA acquired the Founding
Companies for $27.8 million in cash, 10,128,609 shares of common stock and
assumed approximately $92.6 million of existing indebtedness. Following the IPO,
the Company acquired a number of additional metal processing companies. These
acquisitions include Jeffreys, Wayne, Meier, Harvey, Independent, Royal, RJ
Fabricating, Federal Bronze, Pacific, National, Western, Mark Metals, Metalmart,
Levinson, Seaboard, Sierra, Industrial, Fullerton, Concord, Faitoute, Krohn,
Steel Manufacturing, Wilkof, Forest, LaserPro, ABS, Valley, Flagg, Geneva,
Professional and Intsel. The acquisitions of Jeffreys, Wayne and Krohn were
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 $235.9 million in cash and
issued 16,241,663 shares of Common Stock and $3.7 million of notes in connection
with these acquisitions. Additionally, the Company assumed approximately $141.0
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.
On April 20, 1998, the Company filed the 1998 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. The 1998 Shelf Registration Statement
was declared effective on April 22, 1998.
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FINANCING ACTIVITIES
In July 1997, the Company completed its IPO of 5,900,000 shares of Common
Stock for which it received net proceeds of approximately $50.1 million. The
Company used a portion of the Credit Facility together with the net proceeds
from the IPO to retire substantially all of the indebtedness of the Founding
Companies. Additionally, on August 12, 1997, the Company sold 885,000 shares of
its Common Stock pursuant to the overallotment option granted to the
underwriters in connection with the IPO for net proceeds of $8.2 million. The
Company used the net proceeds from the exercise of the overallotment option to
repay borrowings on the Credit Facility and for other corporate purposes.
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 million 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 extension and
modification of the 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 including: (i) the maintenance of certain
financial ratios, (ii) restrictions on additional indebtedness, (iii)
restrictions on liens, guarantees and dividends, (iv) obtaining the lenders'
consent with respect to certain individual acquisitions and (v) maintenance of a
specified level of consolidated net worth. 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 estimated expenses of $.8 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 certain covenants restricting additional indebtedness,
liens, transactions with affiliates, asset sales, investments, payment
restrictions affecting subsidiaries 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 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.
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.
RECENT DEVELOPMENTS
On March 23, 1998, the Company announced that it agreed to make an offer
for all of the issued and outstanding common shares of Ideal Metal Inc.
("Ideal") at a cash price of CAN$5.25 per share. Another company made a
competing offer and on April 28, 1998, the Company received the agreed upon
compensatory fee of U.S.$1.7 million (CAN$2.5 million) from Ideal as a result of
the competing offer.
Subsequent to March 31, 1998, the Company acquired the following metal
processing companies: Industrial, Sierra, Fullerton, Faitoute, Steel
Manufacturing, Wilkof, Forest, LaserPro, ABS, Valley, Flagg, Geneva,
Professional and Intsel. These acquisitions were accounted for using the
"purchase" method of accounting. In addition, the Company completed the
acquisition of Krohn, which was accounted for using the "pooling-of-interests"
method of accounting. The aggregate consideration paid by the Company to acquire
these companies was approximately $151.2 million in cash, 3,480,950 shares of
common stock and the issuance of notes of approximately $3.7 million (excluding
assumed indebtedness of approximately $43.4 million).
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BUSINESS
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. In connection with its IPO on July
11, 1997, Metals USA acquired the Founding Companies in exchange for cash and
shares of Common Stock. The Founding Companies are engaged in value-added
processing of steel, aluminum and specialty metals, as well as manufacturing
metal components. Since that date, Metals USA has acquired a number of
additional companies in similar businesses. On average, the Acquired Companies
have been in business for over 40 years. See "Business -- Strategy" and
" -- Acquired Companies."
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 aluminum and other
specialty metals, which are the fastest growing segment of the metals processing
industry.
The Acquired Companies sell to over 30,000 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 original equipment manufacturers ("OEMs"). End-users
incorporate the processed metal into a product, in some cases without further
modification.
Historically, metals service centers provided few value-added services and
were little more than distribution centers, linking metals producers with all
but the largest end-users of metals. In the past two decades, however, the
metals service center business has evolved significantly, and the most
successful metals service centers have added processing capabilities, thereby
offering an increasingly broad range of value-added services and products both
to primary metals producers and end-users. This evolution has resulted from
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
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remain competitive. As a result, during the past two decades, most of the
primary producers have sold their service centers. Accordingly, most end-users
are no longer able to obtain processed products directly from primary metals
producers and have recognized the economic advantages associated with
outsourcing their customized metals processing and inventory management
requirements. Outsourcing permits end-users to reduce total production cost by
shifting the responsibility for preproduction processing to value-added metals
processors/service centers, whose higher efficiencies in performing these
processing services make the ownership and operation of the necessary equipment
more financially feasible.
Value-added metals processors/service centers have also benefited from
growing customer demand for inventory management and just-in-time delivery
services. These services, which are not normally available from primary metals
producers, enable end-users to reduce material costs, decrease capital required
for inventory and equipment and save time, labor and other expenses. In response
to customer expectations, the more sophisticated value-added metals
processors/service centers have acquired specialized and expensive equipment to
perform customized processing and have installed sophisticated computer systems
to automate order entry, inventory tracking, management 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 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.
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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 Acquired Companies by acquiring
well-established value-added metals processors/service centers that, like the
Acquired Companies, are leaders in their regional markets.
EXPAND WITHIN EXISTING GEOGRAPHIC MARKETS. The Company also plans to
acquire additional value-added metals processors/service centers in many of the
markets in which it currently operates in order to expand the volume and scope
of the Company's operations in a particular market. The Company also intends to
pursue "tuck-in" acquisitions of smaller operations to increase utilization at
existing facilities, thereby improving operating efficiencies and more
effectively utilize 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 Acquired 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. While maintaining strong operating and financial controls, the Company
believes that a decentralized structure will retain the entrepreneurial culture
present in each of the Acquired 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 Acquired 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 Acquired Company and at each subsequently acquired company. 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 Acquired 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.
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
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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 Acquired 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 Acquired 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 Acquired 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 Acquired Companies will be
instrumental in identifying and completing future acquisitions. Some of the
Acquired Companies have recently completed acquisitions, which has given them
valuable acquisition experience. Moreover, several of the principals of the
Acquired 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.
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 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. The Company believes that it can structure
acquisitions as tax-free reorganizations by using its Common Stock
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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 PRECISION BLANKING -- the process in which flat rolled metal is cut
into precise two dimensional shapes by passing it through a press
employing a blanking die.
o LASER, FLAME AND PLASMA CUTTING -- the cutting of metals to produce
various shapes according to customer-supplied drawings.
o LEVELING -- the flattening of metals to uniform tolerances for proper
machining.
o SLITTING -- the cutting of coiled metals to specified widths along the
length of the coil.
o 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 wide-flange 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 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
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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 are examples of the types of value-added processes and
services offered by the Company:
One of the Company's larger customers is one of the world's largest
elevator and escalator manufacturers. The Company sells a variety of steel
products to this customer in customized lengths and perform the majority of
its preproduction processing and just-in-time inventory management. The
services and preproduction processing includes sawing, shearing, flame
cutting, forming, punching and drilling holes in the metal parts for
delivery within 24 hours of ordering.
The Company achieved substantial total production cost savings for a
major manufacturer of electrical components once the customer purchased all
of its steel directly from one of the Company's service centers rather than
an integrated mill. Management personnel worked with the customer to
develop a just-in-time inventory management program which enabled the
customer to substantially reduce the amount of on-hand inventory as well as
reduce the need for capital intensive processing equipment. The customer
realized a significant cash flow savings as its steel inventory dropped
from approximately a two month supply to approximately a three day supply.
The Acquired 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. Six of the Acquired Companies'
facilities have International Standards Organization ("ISO") 9002
certification while several others are actively working on their certification.
Management believes that the Company's emphasis on quality assurance is a
distinct competitive advantage and is increasingly important to customers
seeking to establish "partnering" relationships with their key suppliers.
SOURCES OF SUPPLY
In recent years, steel and aluminum production in the United States has
fluctuated from period to period as mills attempt to match production to
projected demand. Periodically, this has resulted in shortages of, or increased
ordering lead times for, some steel or aluminum products as well as fluctuations
in price. Typically, metals producers announce price changes 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 a price decrease becomes effective. The Company's purchasing decisions are
based on its forecast of the availability of metal products, ordering lead times
and pricing as well as its prediction of customer demand for specific products.
The Company purchases steel and aluminum from domestic and foreign
integrated mills and mini-mills and specialty metals from foundries. The
Company's 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
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producers. Since most metals are shipped F.O.B. the mill and the transportation
of metals is a significant cost factor, the Company seeks to purchase metals to
the extent possible from the nearest mill unless a more distant mill has a
significantly lower price. The Company believes that it can purchase raw
materials in sufficient quantities to permit it to realize purchasing economies
and discounts from its suppliers. The Company believes it is not materially
dependent on any one of its suppliers for raw materials and that its
relationships with its suppliers are good.
SALES AND MARKETING; CUSTOMERS
The Company believes that its commitment to consistent quality, service and
just-in-time delivery has enabled it to develop and maintain long-term
relationships with existing customers, while expanding its market penetration
through the use of its sales and marketing program. The Company's sales and
marketing program focuses on the identification of OEMs and other metals
end-users that could achieve significant cost savings through the use of the
Company's inventory management, processing, just-in-time delivery and other
services. The 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, the Company 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 30,000 customers, with
no single customer accounting for more than 2% of the Company's revenues in
1997. The Company believes that its long-term relationships with many of its
customers contribute significantly to its success.
COMPETITION
The Company is engaged in a highly-fragmented and competitive industry.
Competition is based 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
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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 pickling operations at three of
its facilities.
The Company's management believes that the Company is in substantial
compliance with all such laws and does not currently anticipate that the Company
will be required to expend any substantial amounts in the foreseeable future in
order to meet current environmental or workplace health and safety requirements.
However, some of the properties owned or leased by the Company are located in
areas with a history of heavy industrial use, 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.
Prior to entering into the agreements relating to the Mergers and the
Subsequent Acquisitions, the Company evaluated the properties owned or leased by
the Acquired 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 Acquired Companies 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 consolidated financial condition, results of
operations or liability, should the Company be found 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 Acquired 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. Six of the Acquired 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 Acquired Companies have computer-aided drafting systems
that control equipment used to perform some metals processing functions.
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EMPLOYEES
As of March 31, 1998, the Acquired Companies employed a total of
approximately 3,000 persons. Approximately 350 employees at 12 sites were
members of one of six unions: the United Steelworkers of America; the
International Association of Bridge, Structural, and Ornamental Ironworkers of
America; the International Brotherhood of Teamsters; Local 40 of the Glass,
Molders, Pottery, Plastic & Allied Workers International Union; United Auto
Workers; 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 is currently a party to 14
collective bargaining agreements which expire at various times. Collective
bargaining agreements expiring in 1998, 1999, 2000 and 2001 cover 155, 36, 66
and 93 employees, respectively. Historically, the Acquired 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. The Company intends to adopt "best practices" for its
employee benefits programs and human relations functions. The Company believes
that its relations with its employees are good.
VEHICLES
The Company operates a fleet of owned or leased trucks and trailers as well
as 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. The Company maintains 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 consolidated financial condition,
results of operations or liquidity.
SAFETY
The Company is committed to continuing the Acquired Companies' focus and
emphasis on safety in the workplace. The Acquired 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 safe 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 Acquired Companies' emphasis on an
accident-free workplace.
ACQUIRED COMPANIES
AFFILIATED METALS COMPANY
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
manufacturers of consumer
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durables, commercial transportation equipment, appliances and furniture.
Affiliated has about 130 employees. Patrick A. Notestine, the President of
Affiliated, has been employed by Affiliated for nine years, has signed an
employment agreement with Affiliated to continue in that capacity and is a
director of the Company.
ALUMINUM BUILDING SYSTEMS
Aluminum Building Systems ("ABS"), a former division of White Aluminum
Products, has facilities in Leesburg and Pensacola, Florida. ABS manufactures
and distributes wholesale aluminum building products in the Florida market. ABS
has about 130 employees. Bill Peterson, the President of ABS, has been employed
by ABS for 14 years and has signed an employment agreement with ABS to continue
in that capacity.
CONCORD
Concord Metals Corporation ("Concord"), headquartered in Walker,
Michigan, was founded in 1981 by Michael Sheppard and operates primarily in the
Michigan market area. Concord is a value-added metals processor and distributor
of flat rolled steel. Concord has 18 employees. Concord is a wholly-owned
subsidiary of Wayne. Michael Sheppard has signed an employment agreement with
Concord and will serve as General Manager and Vice President.
FAITOUTE STEEL COMPANY, INC.
Faitoute Steel Company, Inc. ("Faitoute"), headquartered in Newark, New
Jersey, was founded in 1904 by Moses Faitoute and operates primarily in the
northeast region of the United States. Faitoute is a value-added metals
processor and distributor of wide-flange beams, angle and bar stock and plate
and provides products and services primarily to structural steel fabricators in
the industrial machine, fabrications and construction industries. Faitoute has
about 35 employees. Ross H. Monks, Jr., the Chairman and Chief Executive Officer
of Faitoute, has been employed by Faitoute for 39 years and has signed an
employment agreement with Faitoute to continue in that capacity.
FEDERAL BRONZE ALLOYS INC.
Federal Bronze Alloys Inc. ("Federal Bronze"), headquartered in Newark,
New Jersey, is the successor entity to Federal Bronze Products, Inc., which was
founded in 1947 by Steve Stefiuk and operates primarily in the northeast region
of the United States. Federal Bronze is a specialty metals processor, providing
products and services primarily to the fluid power, machine tool and the pump
valve industries. Federal Bronze has about 55 employees. John Stefiuk, the
President and Chief Executive Officer of Federal Bronze, has been employed by
Federal Bronze for 25 years and has signed an employment agreement with Federal
Bronze to continue in that capacity.
FLAGG STEEL CO.
Flagg Steel Co. ("Flagg"), headquartered in St. Louis, Missouri, was
founded in 1971 by Robert W. Flagg and operates primarily in the midwestern
region of the United States. Flagg is a processor and distributor of tool and
die and other specialty steels. Flagg has about 40 employees. David C. Biscan,
the President of Flagg, has been employed by Flagg for 12 years and has signed
an employment agreement with Flagg to continue in that capacity.
FOREST MANUFACTURING, INC.
Forest Manufacturing, Inc. ("Forest"), headquartered in Forest, Virginia,
was founded in 1993. Forest is a flat rolled steel processor operating primarily
in the southeastern region of the United States. Forest has about 57 employees.
Timothy E. Murphy, the President of Forest, has signed an employment agreement
with Forest to continue in that capacity.
FULLERTON INDUSTRIES, INC.
Fullerton Industries, Inc., ("Fullerton"), headquartered in Northbrook,
Illinois, was founded in 1943 and operates primarily in the midwestern region of
the United States. Fullerton is a flat rolled processor of
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steel and specialty metal, including copper, brass, and aluminum. Principal
customers include manufacturers of consumer durable goods and the household
appliance and automotive industries. Fullerton has about 150 employees. Craig R.
Doveala, the President of Steel Service Systems and a director of the Company,
also serves as the Chief Executive Officer of Fullerton.
GSBC, INC. (DBA GENEVA STEEL BLANKING)
GSBC, Inc. (dba Geneva Steel Blanking) ("Geneva"), headquartered in
Youngstown, Ohio, was founded in 1951 and operates primarily in the northeastern
and midwestern regions of the United States. Geneva is a value-added flat rolled
steel processor providing precision blanking capabilities primarily to original
equipment manufacturers and appliance markers. Geneva has about 70 employees.
David T. McLeroy, the President of Geneva, has been employed by Geneva for 15
years and has signed an employment agreement with Geneva to continue in that
capacity.
HARVEY TITANIUM, LTD.
Harvey Titanium, Ltd. ("Harvey"), headquartered in Santa Monica,
California, was founded in 1978 by Barry Harvey and operates on a global basis
through its international sales office in the United Kingdom and through agents
around the world. Harvey is a value-added metal service center supplying
primarily custom orders of titanium products, as well as nickel-based alloys,
vacuum melted stainless steels and other exotic alloys. Harvey's customers are
primarily in the aerospace industry; however, Harvey also serves customers in
the recreation, petrochemical and biomedical industries. Harvey has about 50
employees. Barry Harvey, the President and Chief Executive Officer of Harvey,
has been employed by Harvey for 19 years and has signed an employment agreement
with Harvey to continue in that capacity.
INDEPENDENT METALS CO., INC.
Independent Metals Co., Inc. ("Independent"), headquartered in
Germantown, Wisconsin, was founded in 1982 by Barry Quinnies and operates
primarily in the upper midwest and southeastern regions of the United States.
Independent operates service centers in Germantown, Wisconsin; Broadview,
Illinois; Minneapolis, Minnesota and Orlando, Florida and is a processor and
distributor of flat rolled stainless steel, aluminum, brass and copper.
Independent sells its products to the industrial machine, transportation, food
processing and electronics manufacturing industries. Independent has about 160
employees. Barry Quinnies, the Chairman and Chief Executive Officer of
Independent, has been employed by Independent for 16 years and has signed an
employment agreement with Independent to continue in that capacity.
INDUSTRIAL METALS, INC.
Industrial Metals Incorporated ("Industrial"), headquartered in Mokena,
Illinois, was founded in 1978 by David Hall, Jr. and operates primarily in the
midwest market area. Industrial is a distributor of stainless steel, aluminum,
and copper based alloys. Industrial has 19 employees. Industrial will operate as
a subsidiary of Independent. David Hall, Jr., the President of Industrial, has
signed an employment agreement with Industrial to continue in that same
capacity.
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 has about 180 employees. Arnold W. Bradburd, the Chairman of the
Board and Chief Executive Officer of Interstate, has been employed by Interstate
for 23 years, has signed an employment agreement with Interstate to continue in
those capacities and is the Vice-Chairman of the Board of the Company.
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INTSEL STEEL
Intsel Steel ("Intsel"), headquartered in Houston, Texas, operates
primarily in the southwestern and southeastern regions of the United States.
Intsel has distribution facilities in Dallas and San Antonio, Texas; Birmingham,
Alabama; Tulsa, Oklahoma and Lafayette, Louisiana. Intsel is a leading
distributor of heavy carbon steel products. Intsel has about 185 employees.
William F. Kalinec, the President and Chief Executive Officer of Intsel, has
been employed by Intsel for 26 years and has signed an employment agreement with
Intsel to continue in that capacity.
JEFFREYS STEEL COMPANY, INC.
Jeffreys Steel Company, Inc. ("Jeffreys"), headquartered in Mobile,
Alabama, was founded in 1966 by Leon Jeffreys. Jeffreys operates steel service
centers in the south and southeastern United States. These service center
operations include locations in Mobile, Muscle Shoals and Attalla, Alabama;
Columbus, Mississippi; Kenner, Louisiana; Jacksonville, Lakeland and Fort
Lauderdale, Florida and Oakwood, Georgia. Jeffreys is a value-added
processor/service center specializing in steel plate and structural components
and provides products and services to the marine (including new ship
construction and repair), offshore oil and gas, construction and fabrication,
transportation pulp and paper and chemical industries. Jeffreys Steel has about
450 employees. Toby Jeffreys, the President of Jeffreys, has been employed by
Jeffreys for 23 years, and has signed an employment agreement with Jeffreys to
continue in that capacity. Leon Jeffreys, the Chairman of the Board of Jeffreys,
has signed an employment agreement with Jeffreys to continue in that capacity,
and serves as a director of the Company.
KROHN STEEL SERVICE CENTER, INC.
Krohn Steel Service Center, Inc. ("Krohn"), headquartered in Springfield,
Ohio, was founded in 1969 by Roger L. Krohn and operates primarily in the
midwestern and mid-atlantic regions of the United States. Krohn is a value-added
processor of flat rolled steel providing products and services primarily in the
equipment manufacturing and durable consumer goods industries. Krohn has
approximately 45 employees. Roger S. Krohn, the President and Chief Executive
Officer of Krohn, has been employed by Krohn for 19 years and has signed an
employment agreement with Krohn to continue in that capacity.
LASERPRO INC.
LaserPro Inc. ("LaserPro") was founded in 1994 by William D. Schnowske
and has locations in Schofield, Wisconsin and Burnsville, Minnesota. LaserPro is
a value-added processor of heavy carbon steel and performs CNC machining, laser
burning and waterjet processing. LaserPro has about 33 employees. William D.
Schnowske, the President of LaserPro, has been employed by LaserPro for five
years and has signed an employment agreement with LaserPro to continue in that
capacity.
THE LEVINSON STEEL COMPANY
The Levinson Steel Company ("Levinson"), founded in 1902, is a
Pittsburgh-based distributor and processor of plate and other structural
products, including high strength beams. Levinson has additional locations in
Ambridge and York, Pennsylvania; Camden, New Jersey; Seekonk, Massachusetts and
Greenville, Kentucky. Levinson's facilities are a good geographic fit with
Metals USA's Interstate subsidiary and will complement the Jeffreys and
Queensboro operations as well. Levinson has about 165 employees. William
Bennett, the President and Chief Executive Officer of Levinson, has been
employed by Levinson for seven years and has signed an employment agreement to
continue in that capacity.
MEIER METAL SERVICENTERS, INC.
Meier Metal Servicenters, Inc. ("Meier"), headquartered in Hazel Park,
Michigan, was founded in 1945 by Louis F. Meier and operates primarily in the
upper midwest and southeastern regions of the United States. Meier operates
service centers in Hazel Park and Grand Rapids, Michigan; Chicago, Illinois;
Dayton and Cleveland, Ohio and Greensboro, North Carolina and is a value-added
processor and distributor of nonferrous metals, including aluminum, brass,
copper, bronze and stainless steel. Meier sells its products to customers in the
tool and die, screw machine products, industrial machinery, transportation and
aerospace
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industries. Meier has about 115 employees. Lawrence Sauers, recently appointed
President and Chief Operating Officer of Meier, has been employed by Meier for
36 years and has signed an employment agreement with Meier to continue in that
capacity.
METALMART, INC. AND MARK METALS, INC.
Metalmart, Inc. ("Metalmart"), founded in 1974, is headquartered in
Carlsbad, California and has a large manufacturing plant in Whittier,
California. Metalmart has exclusive distribution of magnesium bar stock in the
western United States and access to sources for hard-to-find metal alloys.
Metalmart and Mark Metals, Inc. ("Mark Metals") have about 37 employees.
Randall Biggs, the Chief Executive Officer of Metalmart and Mark Metals, has
been employed by Metalmart for 23 years and has signed an employment agreement
with Metalmart to continue in that capacity.
NATIONAL MANUFACTURING, INC.
National Manufacturing, Inc. ("National"), headquartered in North Kansas
City, Missouri was founded in 1943 and manufacturers and distributes a variety
of aluminum products, including windows, storm doors and sidings. National has
about 41 employees. Ramon Coleman, the Chief Operating Officer of National, has
been employed by National for ten years and has signed an employment agreement
with National to continue in that capacity.
PACIFIC METAL COMPANY
Pacific Metal Company ("Pacific"), is headquartered in Portland, Oregon,
was founded in 1876 by Fredrick K. Morrow and operates in Seattle and Spokane,
Washington; Medford and Eugene, Oregon; Boise, Idaho; and Billings, Montana.
Pacific is a value-added metals processor of flat rolled common alloy aluminum
and steel; other products include sheet, bar and rod in a variety of dimensions
and alloys of brass, copper, stainless and galvanized steel. Pacific provides a
number of products and services primarily to the transportation, consumer
durables, electrical and telecommunications equipment and other manufacturing
industries. Pacific has about 160 employees. Don Peck, the Chairman and Chief
Executive Officer of Pacific, has been employed by Pacific for 41 years and has
signed an employment agreement with Pacific to continue in that capacity.
PROFESSIONAL METALS, INC.
Professional Metals, Inc. ("Professional") was founded in 1983 by Lewis
B. Krausse, Jr. and Wilbert N. Drummond, Jr. and has operations in Liberty,
Missouri, and Wichita, Kansas. Professional is a value-added flat roll processor
of aluminum and stainless steel. Professional has about 38 employees. Lewis B.
Krausse, Jr., the President of Professional, has been employed by Professional
for 15 years and has signed an employment agreement with Professional to
continue in that capacity.
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 has about 200
employees. Mark Alper, the President of Queensboro, has been employed by
Queensboro for 26 years, has signed an employment agreement with Queensboro to
continue in that capacity and is the Vice President Development and a director
of the Company.
R. J. FABRICATING INC.
R. J. Fabricating Inc. ("RJ Fabricating"), headquartered in Milwaukee,
Wisconsin, is a processor of steel products using laser burning,
computer-controlled ("CNC") punching and general fabrication. RJ Fabricating
has about 21 employees. Lester G. Peterson, the President of Williams and a
director of the Company, also serves as the President of RJ Fabricating.
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ROYAL ALUMINUM, INC.
Royal Aluminum, Inc. ("Royal"), is headquartered in Leesburg, Florida and
is the successor to a business founded in 1965. Royal manufactures and
distributes aluminum building products through its manufacturing facility in
Leesburg, Florida, and sells its products through five distribution centers
located primarily in the southeastern United States. Royal has about 85
employees. Allen Applebee, the President and Chief Operating Officer of Royal,
has been employed by Royal for 29 years and has signed an employment agreement
with Royal to continue in that capacity.
SEABOARD STEEL AND IRON CORPORATION
Interstate acquired the assets of Seaboard Steel and Iron Corporation
("Seaboard") in January 1998. Seaboard was a Baltimore-based full-line steel
service center with a diverse inventory of heavy carbon structural products.
Seaboard has been integrated with Interstate and had ten employees who are now
employed by Interstate.
SIERRA PACIFIC STEEL, INC.
Sierra Pacific Steel, Inc. ("Sierra") headquartered in Haywood,
California, was founded in 1957. Sierra is a distributor and processor of steel
pipe, plate, structural tubing, and other steel products to customers in the
Pacific northwest, Arizona and Utah. Sierra has about 34 employees. Joseph I.
Epstein, President of Sierra, has signed an employment agreement with Sierra to
continue in that capacity.
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 has
about 30 employees. William B. Edge, the President of Southern Alloy, has been
employed by Southern Alloy for 16 years, has signed an employment agreement with
Southern Alloy to continue in that capacity and is a Senior Vice President and
director of the Company.
STEEL MANUFACTURING AND WAREHOUSE COMPANY
Steel Manufacturing and Warehouse Company ("Steel Manufacturing"),
headquartered in Kansas City, Missouri, was founded in 1921 and operates
primarily in the midwestern region of the United States. Steel Manufacturing is
a value-added processor of structural and flat rolled steel providing products
and services primarily in the fabrication, heating and air conditioning
equipment and construction industries. Steel Manufacturing has about 70
employees. Charles H. Donnelly, Jr., the President and Chief Executive Officer
of Steel Manufacturing, has been employed by Steel Manufacturing for 26 years
and has signed an employment agreement with Steel Manufacturing to continue in
that capacity.
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 has about
75 employees. Craig R. Doveala, the President of Service Systems, has been
employed by Service Systems since its founding, has signed an employment
agreement with Service Systems to continue in that capacity and is a director of
the Company.
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 were the principal stockholders of
Texas Aluminum (Texas Aluminum and Cornerstone being collectively referred to
herein as
40
<PAGE>
"Texas Aluminum/Cornerstone"). Texas Aluminum/Cornerstone operates through
five manufacturing plants and 37 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 has about 275
employees. Michael E. Christopher has been employed by Texas Aluminum for ten
years, has signed an employment agreement with Texas Aluminum/Cornerstone as
President of Texas Aluminum/Cornerstone and is a Senior Vice President and 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 has about 130 employees. Richard A. Singer, the Chief Executive
Officer of Uni-Steel, has been employed by Uni-Steel for 32 years, has signed an
employment agreement with Uni-Steel to continue in such capacity and is a Senior
Vice President and a director of the Company.
VALLEY ALUMINUM CO.
Valley Aluminum Co. ("Valley"), headquartered in Phoenix, Arizona, was
founded in 1971 and operates primarily in the southwest region of the United
States. Valley manufactures and distributes wholesale aluminum building products
and has a distribution facility in Las Vegas, Nevada. Valley has about 47
employees. Michael E. Christopher, the President of Texas Aluminum and a
director of the Company, also serves as the President of Valley.
WAYNE STEEL, INC.
Wayne Steel, Inc. ("Wayne"), headquartered in Wooster, Ohio, was founded
in 1921 by Meyer Shapiro and operates in Randleman, North Carolina, and opened a
newly-constructed processing facility in Jeffersonville, Indiana in January
1998. Wayne is a value-added metals processor of flat rolled steel providing
products and services primarily in the transportation, electrical and
telecommunications equipment manufacturing industries. Wayne has about 220
employees. Tom Shapiro, the President and Chief Executive Officer of Wayne, has
been employed by Wayne for 25 years and has signed an employment agreement with
Wayne to continue in that capacity.
WESTERN AWNING COMPANY, INC.
Western Awning Company, Inc. ("Western") was founded in 1982 and is
headquartered in Pacific, Washington. Western processes and distributes a
variety of aluminum products. Western currently has 12 employees. Neal Sorenson,
the President of Western, has been employed by Western for 20 years and has
signed an employment agreement with Western to continue in that capacity.
WILKOF-MORRIS STEEL CORPORATION
Wilkof-Morris Steel Corporation ("Wilkof"), headquartered in Canton,
Ohio, was founded in 1931 by Morris Wilkof and operates primarily in the
midwestern region of the United States. Wilkof is a value-added processor of
heavy steel plates providing products and services primarily in the
transportation, industrial fabrication and equipment manufacturing industries.
Wilkof has about 75 employees. Todd C. Wilkof, the President and Chief Executive
Officer of Wilkof, has been employed by Wilkof for 20 years and has signed an
employment agreement with Wilkof to continue in that capacity.
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
41
<PAGE>
products and services primarily to the construction industry, OEMs and
fabricators. Williams has about 80 employees. Lester G. Peterson, the President
of Williams, has been employed by Williams for 27 years, has signed an
employment agreement with Williams to continue in that capacity and is a
director of the Company.
FACILITIES
The Company operates a number of metals processing facilities that are used
to receive, warehouse, process and ship metals. These facilities utilize various
metals processing and materials handling machinery and equipment. These service
center facilities are as follows:
<TABLE>
<CAPTION>
SQUARE OWNED/
LOCATION FOOTAGE LEASED
--------------------------------- --------- --------
<S> <C>
Affiliated........................... Granite City, Illinois 300,000 Leased
Butler, Indiana 200,000 Owned
ABS.................................. Leesburg, Florida 60,000 Leased
Concord.............................. Walker, Michigan 50,000 Leased
Faitoute............................. Newark, New Jersey 100,000 Leased
Federal Bronze....................... Newark, New Jersey 41,000 Leased
Flagg................................ Saint Louis, Missouri 19,000 Leased
Forest............................... Forest, Virginia 50,000 Leased
Fullerton............................ Northbrook, Illinois 182,000 Owned
Minneapolis, Minnesota 20,000 Owned
Geneva............................... Youngstown, Ohio 83,000 Leased
Harvey............................... Santa Monica, California 50,000 Leased
Independent.......................... Germantown, Wisconsin 90,000 Owned
New Hope, Minnesota 19,000 Leased
Broadview, Illinois 61,000 Leased
Orlando, Florida 23,000 Leased
Industrial........................... Mokena, Illinois 21,000 Leased
Interstate........................... Philadelphia, Pennsylvania 70,000 Leased
Philadelphia, Pennsylvania 120,000 Leased
Baltimore, Maryland 65,000 Leased
Ambridge, Pennsylvania 133,000 Leased
Intsel............................... Houston, Texas 216,000 Owned
Birmingham, Alabama 125,000 Owned
Dallas, Texas 104,000 Owned
San Antonio, Texas 89,000 Owned
Tulsa, Oklahoma 53,000 Leased
Lafayette, Louisiana 32,000 Owned
Jeffreys............................. Mobile, Alabama 214,000 Owned
Muscle Shoals, Alabama 104,000 Owned
Attalla, Alabama 53,000 Owned
Columbus, Mississippi 45,000 Owned
Kenner, Louisiana 61,000 Owned
Oakwood, Georgia 206,000 Owned
Jacksonville, Florida 60,000 Owned
Lakeland, Florida 120,000 Owned
Fort Lauderdale, Florida 27,000 Leased
Krohn................................ Springfield, Ohio 60,000 Owned
(TABLE CONTINUED ON FOLLOWING PAGE)
42
<PAGE>
SQUARE OWNED/
LOCATION FOOTAGE LEASED
--------------------------------- --------- --------
LaserPro............................. Schofield, Wisconsin 16,000 Leased
Levinson............................. Ambridge, Pennsylvania 130,000 Leased
Camden, New Jersey 104,000 Leased
Greenville, Kentucky 33,000 Owned
Seekonk, Massachusetts 115,000 Owned
York, Pennsylvania 109,000 Leased
Meier................................ Hazel Park, Michigan 73,000 Owned
Broadview, Illinois 21,000 Owned
Moraine, Ohio 21,000 Owned
Greensboro, North Carolina 52,000 Leased
Kentwood, Michigan 12,000 Leased
Cleveland, Ohio 12,000 Leased
Metalmart and Mark Metals............ Whittier, California 42,000 Leased
National............................. Kansas City, Missouri 58,000 Leased
Pacific.............................. Billings, Montana 10,000 Leased
Boise, Idaho 26,000 Leased
Eugene, Oregon 33,000 Owned
Medford, Oregon 14,000 Owned
Portland, Oregon 111,000 Leased
Spokane, Washington 49,000 Owned
Tukwila, Washington 80,000 Owned
Professional......................... Liberty, Missouri 84,000 Leased
Wichita, Kansas 11,000 Leased
Queensboro........................... Wilmington, North Carolina 178,000 Leased
Wilmington, North Carolina* 45,000 Owned
Greensboro, North Carolina* 115,000 Owned
Chesapeake, Virginia 62,000 Leased
RJ Fabricating....................... Milwaukee, Wisconsin 31,000 Leased
Royal................................ Leesburg, Florida 69,000 Owned
Leesburg, Florida 76,000 Leased
Irmo, South Carolina 38,000 Leased
Sierra Pacific....................... Haywood, California 65,000 Leased
Southern Alloy....................... Salisbury, North Carolina 24,000 Leased
Steel Manufacturing.................. Kansas City, Missouri 120,000 Leased
Service Systems...................... Horicon, Wisconsin* 103,000 Leased
Texas Aluminum/Cornerstone........... Houston, Texas 165,000 Owned
Houston, Texas 220,000 Leased
Las Vegas, Nevada 42,000 Leased
Ontario, California 11,000 Leased
Tempe, Arizona 24,000 Leased
Rancho Cordova, California 24,000 Leased
Uni-Steel............................ Enid, Oklahoma 112,000 Leased
Muskogee, Oklahoma 134,000 Leased
Valley............................... Phoenix, Arizona 111,000 Leased
Las Vegas, Nevada 39,000 Leased
Wayne................................ Wooster, Ohio* 140,000 Owned
Randleman, North Carolina* 110,000 Owned
Jeffersonville, Indiana* 90,000 Owned
Western.............................. Pacific, Washington 24,000 Leased
Wilkof............................... Canton, Ohio 100,000 Leased
Williams............................. Milwaukee, Wisconsin 137,000 Leased
- ------------
</TABLE>
* These facilities are subject to liens with respect to certain debt agreements.
43
<PAGE>
In addition to the service center facilities listed above, the Company's
aluminum building products division also operates 47 sales and distribution
centers throughout the western, southwestern and southeastern United States.
These facilities, which are all leased, range in size from 4,800 square feet to
50,000 square feet. Many of the Company's facilities are capable of being
utilized at higher capacities, if necessary. The Company is planning to expand
two of its existing facilities over the next 12 months. The Company believes
that its facilities after the planned expansions will be adequate for the
expected needs of its existing businesses over the next several years.
44
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the Company's
directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------- --- -------------------------------------
<S> <C>
Arthur L. French............................ 58 Chairman of the Board, Chief
Executive Officer and President
Arnold W. Bradburd.......................... 74 Vice Chairman of the Board, Chairman
and Chief Executive Officer of
Interstate
J. Michael Kirksey.......................... 43 Senior Vice President, Chief
Financial Officer and Director
Stephen R. Baur............................. 33 Senior Vice President and Chief
Development Officer
John A. Hageman............................. 44 Senior Vice President, General
Counsel and Secretary
Terry L. Freeman............................ 48 Vice President, Corporate Controller
and Chief Accounting Officer
Keith E. St. Clair.......................... 41 Vice President and Treasurer
W. Keith Stubbs, Jr......................... 31 Vice President--Corporate Development
Mark Alper.................................. 54 Vice President -- Development,
President of Queensboro, Director
Michael E. Christopher...................... 38 Senior Vice President, President of
Texas Aluminum/Cornerstone, Director
Craig R. Doveala............................ 47 President of Service Systems,
Director
William B. Edge............................. 39 President of Southern Alloy, Director
Patrick A. Notestine........................ 51 President of Affiliated, Director
Lester G. Peterson.......................... 57 President of Williams, Director
Tom Shapiro................................. 47 Senior Vice President, President of
Wayne, Director
Richard A. Singer........................... 53 Senior Vice President, Chief
Executive Officer of
Uni-Steel, Director
A. Leon Jeffreys............................ 69 Director
Steven S. Harter............................ 36 Director
Tommy E. Knight............................. 59 Director
Richard H. Kristinik........................ 59 Director
T. William Porter........................... 57 Director
</TABLE>
- ------------
Arthur L. French has served as Chairman of the Board, Chief Executive
Officer and President of the Company since December 1996. 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. Mr. French is also a director of Innovative Valve
Technologies, Inc., whose shares are listed on the NASDAQ.
Arnold W. Bradburd is Vice Chairman of the Board of the Company. He has
been employed by Interstate since 1974, serving as Chairman of the Board and
Chief Executive Officer since 1979. 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, 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
45
<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 is a Senior Vice President and Chief Development Officer of
the Company. From July 1996 until joining the Company, Mr. Baur was a Senior
Vice President of Notre Capital Ventures II, L.L.C. ("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 Senior 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 a
law firm in Wichita, Kansas.
Terry L. Freeman has served as Vice President and Corporate Controller of
the Company since April 1997 and was appointed the Company's Chief Accounting
Officer on May 20, 1998. 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.
W. Keith Stubbs, Jr. has served as Vice President -- Corporate Development
since his appointment on May 20, 1998, and has been an employee of the Company
since July 1997. From 1993 to 1997, he was employed by J.B. Poindexter & Co.,
Inc. serving as Manager, Business Development from August 1994 to June 1997.
From 1989 through 1993, Mr. Stubbs was a certified public accountant with KPMG
Peat Marwick LLP.
Mark Alper is the Vice President -- Development and a director of the
Company and President of Queensboro. He has been an employee of Queensboro since
1971 and President since 1995.
Michael E. Christopher is a Senior Vice President and a director of the
Company. He became Executive Vice President of Texas Aluminum in 1987, and
President of Cornerstone in 1995, and became President of Texas
Aluminum/Cornerstone in July 1997. Mr. Christopher currently serves as Vice
President of the Board of Directors of the National Patio Enclosure Association.
Craig R. Doveala is a director of the Company and the President of Service
Systems. He has been President of Service Systems since 1990.
William B. Edge is a director of the Company. He has been President of
Southern Alloy since 1990.
Patrick A. Notestine is a director of the Company and the President of
Affiliated. He has been President of Affiliated since 1988.
Lester G. Peterson is a director of the Company and the President of
Williams. He has been President of Williams since 1981. Mr. Peterson is a member
of the Wisconsin Board of the SSCI.
Richard A. Singer is a Senior Vice President and a director of the Company
and Chief Executive Officer of Uni-Steel. He has been President and Chief
Executive Officer of Uni-Steel since 1972.
A. Leon Jeffreys is the founder and has served as the Chairman of the Board
of Directors of Jeffreys since inception. Mr. Jeffreys was elected to the
Company's Board on October 21, 1997.
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
46
<PAGE>
Ventures, Ltd. From April 1989 to June 1993, Mr. Harter was Director of Mergers
and Acquisitions for 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., Comfort Systems USA, Inc. and HomeUSA, Inc.
Tommy E. Knight is a director of the Company. 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 is a director of the Company. Mr. Kristinik is the
Chairman of the Board of Directors and Chief Executive Officer of Coach USA,
Inc., a publicly-traded company on the NYSE, 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, in its Houston office for 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 is a director of the Company. Mr. Porter has been a
partner with Porter & Hedges, L.L.P., a Houston, Texas law firm, since 1981 and
currently serves as a director of Gundle/SLT and ITEQ, Inc., a manufacturer of
specialized process equipment.
The Board of Directors has been divided into three classes of five
directors, with directors serving staggered three-year terms, expiring at the
annual meeting of stockholders in 1999, 2000 and 2001, 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 Acquisition Committee, Audit
Committee, Compensation Committee, Nominating Committee and Executive Committee.
The members of the Audit Committee are Messrs. Harter, Kristinik and Knight and
the members of the Compensation Committee are Messrs. Knight, Harter and Porter.
47
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table provides certain summary information concerning
compensation earned by the Company's Chief Executive Officer and each of the
four other most highly compensated executive officers (the "Named Executive
Officers") during the year ended December 31, 1997.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION -------------------------
------------------- OTHER ANNUAL RESTRICTED NUMBER OF ALL OTHER
SALARY BONUS COMPENSATION STOCK AWARDS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($) ($) ($) GRANTED ($)
- ---------------------------------------- ----- ------- ------ ------------ ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
Arthur L. French........................ 1997 75,000 50,000 -- -- 200,000 1,465
Chief Executive Officer
Michael E. Christopher.................. 1997 77,884 -- -- -- -- --
Senior Vice President
William B. Edge......................... 1997 79,448 -- -- -- -- --
Senior Vice President
J. Michael Kirksey...................... 1997 75,000 40,000 -- -- 100,000 266
Senior Vice President and
Chief Financial Officer
Richard A. Singer....................... 1997 75,000 -- -- -- -- 470
Senior Vice President
</TABLE>
- ------------
(1) Reflects the compensation from July 1, 1997 through December 31, 1997 at the
rate stated in their respective employment agreements. Messrs. Christopher
and Edge are paid bi-weekly and Messrs. French, Kirksey and Singer are paid
semi-monthly.
STOCK OPTIONS
The following table reflects certain information regarding stock options
granted to the Named Executive Officers during 1997.
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
NUMBER OF -------------------------------------------
SECURITIES PERCENT OF TOTAL PRESENT
UNDERLYING OPTIONS GRANTED VALUE AT
OPTIONS TO EXERCISE EXPIRATION GRANT
NAME GRANTED EMPLOYEES IN 1997 PRICE DATE DATE(1)
- ---------------------------------------- ---------- ----------------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Arthur L. French........................ 200,000 6% $ 10 07/11/07 $1,260,000
Michael E. Christopher.................. -- -- -- -- --
William B. Edge......................... -- -- -- -- --
J. Michael Kirksey...................... 100,000 3% $ 10 07/11/07 630,000
Richard A. Singer....................... -- -- -- -- --
</TABLE>
- ------------
(1) Computed using the Black-Scholes model, with the following assumptions:
Expected price volitality_-- 43.3%, risk free rate of return -- 6.18%,
Expected dividend yield_--0%, and the Expected life of the option was 7.5
years.
48
<PAGE>
The following table reflects certain information concerning the number of
unexercised options held by the Named Executive Officers and the value of such
officers' unexercised options as of December 31, 1997. No options were exercised
by the Named Executive Officers during the year ended December 31, 1997.
YEAR END 1997 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS "IN-THE-MONEY" OPTIONS
AT DECEMBER 31, 1997 AT DECEMBER 31, 1997(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C>
Arthur L. French........................ -- 200,000 -- $ 1,050,000
Michael E. Christopher.................. -- -- -- --
William B. Edge......................... -- -- -- --
J. Michael Kirksey...................... -- 100,000 -- $ 525,000
Richard A. Singer....................... -- -- -- --
- ------------
</TABLE>
(1) Options are "in-the-money" if the closing market price of the Company's
Common Stock exceeds the exercise price of the options. The exercise price
of the options granted to Messrs. French and Kirksey is $10.00 per share.
The value of unexercised options for each of the Named Executive Officers
represents the difference between the exercise price of such options and
the closing price of the Company's Common Stock on December 31, 1997
($15.25 per share).
DIRECTORS COMPENSATION
Directors who are also employees of the Company or one of its subsidiaries
do not receive additional compensation for serving as directors. Each director
who is not an employee of the Company or one of its subsidiaries receives 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 is 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.
EMPLOYMENT AGREEMENTS; COVENANTS-NOT-TO-COMPETE
Each of Messrs. French and Kirksey have entered into an employment
agreement with the Company providing for an annual base salary of $150,000. The
employment agreements for Messrs. French and Kirksey are 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
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 his then-current salary for the remainder of the term or one year, whichever
is greater, 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
49
<PAGE>
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, Jeffreys,
Notestine, Peterson, Singer and Shapiro have entered into an employment
agreement with one of the Company's subsidiaries providing for an annual base
salary of $150,000. Each employment agreement is for a term of five years, and
unless terminated or not renewed by the respective 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
provides that, in the event of a termination of employment by the respective
company without cause during the first five years of the employment term (the
"Initial Term"), the employee will be entitled to receive from the respective
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 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 administers the Plan and selects the individuals
who receive awards and establishes 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 13%
of the aggregate number of shares of Common Stock outstanding. Metals USA
granted NQSOs to purchase a total of 705,000 shares of Common Stock to key
employees of Metals USA at the initial public offering price upon consummation
of the IPO. In addition, Metals USA granted NQSOs 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. Subsequent to the IPO, the
Company has granted NQSOs to purchase a total of 1,452,998 shares of Common
Stock at prices which vary between $6.810 and $19.8125 a share. These options
will vest at the rate of 20% per year, commencing on the first anniversary of
the IPO or date of grant and will expire ten years from the date of grant or
three months following termination of employment. 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.
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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.
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 of an option to purchase 10,000 shares upon such
person's initial election as a director, and (ii) 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 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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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 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." Prior
to the consummation of the IPO, Notre advanced to the Company funds necessary to
effect the Mergers and the IPO. All of Notre's advances were repaid from the net
proceeds of the IPO. Subsequently to the IPO, Notre distributed its shares to
its owners.
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 became
directors of the Company upon consummation of the IPO. The Company also granted
options to purchase 10,000 shares of Common Stock under the Directors' Plan,
effective upon the consummation of the IPO to Messrs. Knight, Kristinik, Porter
and Harter, who are directors of the Company.
The aggregate consideration paid by Metals USA for the Acquired Companies
consists of approximately $263.7 million in cash, 26,370,272 shares of Common
Stock, $3.7 million of notes, plus the assumption of $233.6 million of
indebtedness. The consideration paid by Metals USA for each of the Acquired
Companies was determined by negotiation between representatives of each Acquired
Company and was based primarily upon the pro forma adjusted net income of each
Acquired Company.
Pursuant to the agreements that were entered into in connection with the
Acquisitions, the principal stockholders of the Acquired Companies have agreed
not to compete with the Company for five years, effective on the respective
dates of acquisition.
LEASES OF REAL PROPERTY BY ACQUIRED COMPANIES
Interstate leases the facilities located in Philadelphia, Pennsylvania and
Baltimore, Maryland from Warehouse Real Estate Associates ("WREA"), a
partnership controlled by Mr. Bradburd, the Vice-Chairman of the Company, 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 pays all utility, taxes and
insurance costs on the leased premises. The Company believes that the rent to be
paid under the leases does not exceed fair market value.
Queensboro leases two adjacent tracts of real property located in
Wilmington, North Carolina from The Alper Company, a partnership of which Mr.
Alper, a director of the Company, 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.
Service Systems leases certain real property located in Horicon, Wisconsin
from an entity owned in part by Mr. Doveala, a director of the Company. The
lease for the real property expires in 2011 and
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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 pays 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. Service
Systems remains obligated to pay these industrial revenue bonds.
Texas Aluminum leases certain real property located in Jackson, Mississippi
from an entity controlled by Mr. Christopher, a Senior Vice President and
director of the Company. 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 pays for all
utilities, taxes and insurance on the leased premises. Texas Aluminum also
continues 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.
Uni-Steel leases certain real property located in Enid, Oklahoma from
Garfield Development, LLC, an entity owned in part by Mr. Singer, a director of
the Company. 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.
Williams leases certain real property located in Milwaukee, Wisconsin from
PP&W, L.L.C., an entity owned in part by Mr. Peterson, a director of the
Company. The lease for the rental property expires on December 31, 2011, and
provides for an annual rental of $458,950. The rent will be adjusted every five
years in accordance with the CPI. Additionally, Williams pays 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.
Jeffreys has a lease agreement for the use of executive aircraft with
J-Air, Inc., an entity controlled by Mr. Toby Jeffreys, President and Chief
Executive Officer of Jeffreys. The lease calls for minimum rental payments
during 1998 of $256,000. Any time used beyond the stated minimums is billed at
actual cost. The lease terminates in December 1998.
OTHER TRANSACTIONS
On or about July 11, 1997, Interstate purchased certain equipment from WREA
for $530,000. WREA is controlled by Mr. Bradburd, the Vice Chairman of the
Company. 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 were released prior to July
11, 1997.
Queensboro provides administrative services to Southern Metals Recycling,
Inc. ("Southern"), an entity owned in part by Mr. Alper, a director of the
Company. 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.
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 is a director and officer of the
Company.
Texas Aluminum/Cornerstone holds two promissory notes from EmC Industries,
LLC ("EmC") having balances as of June 30, 1997, in the amounts of $116,433
and $324,401, which are payable monthly
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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, a director and officer of the Company. 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.
The Company has agreed to indemnify Notre for liabilities arising in
connection with action taken by it in connection with its role as the organizer
of Metals USA prior to July 11, 1997.
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, as of July 2, 1998, by (i) each person known to
own beneficially more than 5% of the outstanding shares of Common Stock; (ii)
each Company director; (iii) each named executive officer; and (iv) all
executive officers and 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
----------------------
NUMBER PERCENT
------------ -------
Toby L. Jeffreys(1).................. 2,472,075 6.5%
Thomas J. Shapiro(2)................. 2,234,607 5.9%
Arnold W. Bradburd................... 1,776,032 4.7%
A. Leon Jeffreys(1).................. 1,266,203 3.3%
Steven S. Harter(3)(4)............... 1,026,048 2.7%
Michael E. Christopher............... 648,837 1.7%
Richard A. Singer.................... 483,380 1.3%
Lester G. Peterson................... 477,544 1.3%
Patrick A. Notestine................. 398,703 1.1%
Craig R. Doveala..................... 334,497 *
Mark Alper........................... 289,635 *
Arthur L. French..................... 225,100 *
J. Michael Kirksey(5)................ 118,000 *
Stephen R. Baur(6)................... 120,000 *
William B. Edge...................... 116,997 *
John A. Hageman(7)................... 75,000 *
Keith E. St. Clair(8)................ 60,000 *
Terry L. Freeman..................... 60,000 *
Richard H. Kristinik(3).............. 35,000 *
T. William Porter(3)................. 30,000 *
Tommy E. Knight(3)................... 25,000 *
------------ -------
All executive officers, directors and
named directors as a group
(21 persons)(9).................... 11,127,963 29.4%
============ =======
- ------------
* Less than 1%
(1) Includes 1,084,695 shares of Common Stock held by Jeffreys Family
Partnership, of which Mr. Toby Jeffreys and Mr. Leon Jeffreys are both
general partners.
(2) Includes 252,204 shares of Common Stock held by various trusts for which Mr.
Shapiro is a Co-Trustee.
(3) Includes 15,000 shares of Common Stock issuable upon the exercise of options
granted under the Directors' Plan.
(4) Includes 1,011,048 shares of Restricted Common Stock held by Harter Venture
Partners, Ltd., of which Mr. Harter is a general partner. Mr. Harter
disclaims beneficial ownership of 178,420 shares held in trust for his minor
children and of which neither he nor his wife is a trustee.
(5) Includes 10,000 shares of Common Stock held by Mr. Kirksey's minor children
and of which he is custodian.
(6) Includes 10,000 shares of Common Stock held by Mr. Baur's minor children and
of which he is custodian.
(7) Includes 15,000 shares of Common Stock held by Mr. Hageman's minor children
and of which he is custodian.
(8) Inlcudes 4,000 shares of Common Stock held by Mr. St. Clair's minor children
and of which he is custodian.
(9) This amount has been adjusted to eliminate any duplication of beneficial
ownership attributable to the shares owned by the Jeffreys Family
Partnership and the shares of Common Stock issuable under the Directors
Plan, referred to in footnote 3 above.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 208,122,914 shares
of capital stock, consisting of 200,000,000 shares of Common Stock, 3,122,914
shares of Restricted Common Stock and 5,000,000 shares of Preferred Stock
("Preferred Stock"). As of the date of this Prospectus, the Company had
outstanding 37,908,686 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 Company's Restated
Certificate of Incorporation, copies of which are available from the Company
upon request.
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. The Board of Directors
is classified into three classes, 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 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 is listed on The New York Stock Exchange under the symbol
"MUI." The Restricted Common Stock is not 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.
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 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.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following summarizes certain provisions of the Amended and Restated
Credit Agreement (the "Bank Credit Agreement") by and among the Company, as
borrower, The First National Bank of Chicago, as agent, and the financial
institutions party thereto. This summary does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the provisions of
the Bank Credit Agreement which may be obtained from the Company. Capitalized
terms used but not defined in this section shall have the meanings set forth in
the Bank Credit Agreement and such defined terms are incorporated herein by
reference and references to the "Company" in this section include only the
Company and not its Subsidiaries.
PRINCIPAL, MATURITY, INTEREST, AND FEES
The lenders under the Bank Credit Agreement provide the Company a senior
$300,000,000 revolving credit facility (the "Credit Facility"). Up to
$50,000,000 of the Credit Facility may be used for letters of credit. The Credit
Facility matures on and may be borrowed, repaid and reborrowed from time to time
until February 2003, subject to certain conditions on the date of any borrowing.
The Credit Facility bears interest at a rate per annum of, at the Company's
option, either (i) the Alternate Base Rate or (ii) the Eurodollar Rate plus the
Applicable Eurodollar Margin. The Applicable Eurodollar Margin varies from
0.625% to 1.375% per annum based on the Company's ratio of total outstanding
debt at the end of each fiscal quarter to EBITDA for the four-quarter period
ending on such date. The Applicable Eurodollar Margin on the Issuance Date is
anticipated to be 1.125% per annum. The weighted average interest rate of debt
outstanding under the Credit Facility at December 31, 1997 was 6.62%.
The fees charged for letters of credit are a rate per annum equal to the
Applicable Eurodollar Margin.
Commitment fees in an amount equal to the Applicable Commitment Fee
Percentage are payable on the unused portion of the Credit Facility. The
Applicable Commitment Fee Percentage varies from .20% to .35% per annum based on
the Company's ratio of total outstanding debt at the end of each fiscal quarter
to EBITDA for the four-quarter period ending on such date.
SECURITY AND GUARANTIES
The Credit Facility is secured by a first priority lien on all of the
capital stock of the Company's material existing and future Subsidiaries. Each
of the Company's material existing Subsidiaries and all future Material
Subsidiaries will guarantee the Credit Facility. The Company also may not permit
the total tangible assets of Subsidiaries which are not Guarantors to be equal
to or greater than 10% of Consolidated Tangible Assets.
CONDITIONS
Each use of the Bank Credit Agreement (whether for borrowing or for
obtaining a letter of credit) is conditioned on there being no Default (or event
that would constitute a Default upon notice or lapse of time or both, unless
cured or waived) and the accuracy of certain representations and warranties made
by the Company in the Bank Credit Agreement.
COVENANTS
The Bank Credit Agreement contains certain customary affirmative and
negative covenants, including, among other things, requirements that the Company
(i) periodically deliver certain financial information, (ii) not merge or permit
its Subsidiaries to merge in certain instances or make certain asset sales,
(iii) not permit certain liens to exist on its and its Subsidiaries' assets,
(iv) not incur or permit its Subsidiaries to incur additional debt or enter into
sale/lease back transactions except as may be permitted under the terms of the
Bank Credit Agreement, (v) not declare or make certain Restricted Payments,
including defeasance, redemption, repurchase or prepayment of the Notes, (vi)
not make or permit its Subsidiaries to make certain investments or consummate
certain acquisitions, (vii) not incur or permit any of its Subsidiaries to incur
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Capital Expenditures during any four fiscal quarter period in the aggregate in
excess of 3% of consolidated revenues for the immediately preceding four fiscal
quarters, and (viii) not agree to certain amendments to the Notes.
In addition, the Company must comply with the following financial
covenants:
(i) a ratio of (A) the sum of (1) EBITDA minus (2) depreciation
expense, to the extent included in the calculation of EBITDA plus (3)
Rentals to (B) (1) Interest Expense plus (2) Rentals plus (3) scheduled
amortization of Indebtedness of at least 2.5 to 1.0;
(ii) a ratio of (A) Total Debt to (B) EBITDA of not more than 4.0 to
1.0;
(iii) a ratio of (A) Total Debt minus Permitted Subordinated
Indebtedness to (B) EBITDA of not more than 2.75 to 1.0; and
(iv) Consolidated Net Worth of at least (A) 85% of Consolidated Net
Worth at September 30, 1997 plus (B) 50% of positive Net Income for each
fiscal quarter ending after September 30, 1997 plus (C) 75% of adjustments
to stockholders' equity from equity issued after September 30, 1997.
DEFAULTS AND REMEDIES
The Bank Credit Agreement contains certain customary events of default,
including (i) nonpayment of principal, interest, or other amounts, (ii) breaches
of representations and warranties, (iii) breaches of covenants, (iv) certain
bankruptcy events of the Company or any of its Subsidiaries, (v) certain ERISA
liabilities in excess of $10,000,000, (vi) unpaid judgments in excess of
$5,000,000, (vii) Change of Control (which includes any event that would be a
Change of Control (as defined in the Indenture)), and (viii) cross defaults to
other debt in excess of $10,000,000 individually or in the aggregate.
Upon the occurrence of an Event of Default the Required Lenders may
accelerate the outstanding principal amount and accrued interest and fees under
the Bank Credit Agreement and terminate their commitments to lend. Upon the
occurrence of certain bankruptcy events, the outstanding principal amount and
accrued interest and fees under the Bank Credit Agreement automatically
accelerate and the commitments to lend automatically terminate.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Original Notes were sold by the Company on February 11, 1998, and were
subsequently resold to qualified institutional buyers pursuant to Rule 144A
under the Securities Act and to certain persons in transactions outside the
United States in reliance on Regulation S under the Securities Act. In
connection with the Original Note Offering, the Company entered into the
Registration Rights Agreement, which requires, among other things, that on or
before April 12, 1998, the Company (i) file with the Commission a registration
statement under the Securities Act with respect to an issue of new notes of the
Company identical in all material respects to the Original Notes, (ii) use its
best efforts to cause such registration statement to become effective under the
Securities Act and (iii) upon the effectiveness of that registration statement,
offer to the holders of the Original Notes the opportunity to exchange their
Original Notes for a like principal amount of Exchange Notes, which would be
issued without a restrictive legend and may be reoffered and resold by the
holders thereof without restrictions or limitations under the Securities Act
(unless any such holder is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act). A copy of the Registration Rights Agreement
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The term "Holder" with respect to the Exchange Offer
means any person in whose name the Original Notes are registered on the books of
the Company or any other person who has obtained a properly completed bond power
from the registered holder.
Because the Exchange Offer is for any and all Original Notes, the number of
Original Notes tendered and exchanged in the Exchange Offer will reduce the
principal amount of Original Notes outstanding. Following the consummation of
the Exchange Offer, Holders of the Original Notes who did not tender their
Original Notes generally will not have any further registration rights under the
Registration Rights Agreement, and such Original Notes will continue to be
subject to certain restrictions on transfer. Accordingly, the liquidity of the
market for such Original Notes could be adversely affected. The Original Notes
are currently eligible for sale pursuant to Rule 144A through the PORTAL System
of the National Association of Securities Dealers, Inc. Because the Company
anticipates that most holders of Original Notes will elect to exchange such
Original Notes for Exchange Notes due to the absence of restrictions on the
resale of Exchange Notes under the Securities Act, the Company anticipates that
the liquidity of the market for any Original Notes remaining after the
consummation of the Exchange Offer may be substantially limited.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Original
Notes validly tendered and not withdrawn prior to 5:00 p.m. New York City time,
on the Expiration Date. The Company will issue $1,000 principal amount of
Exchange Notes in exchange for each $1,000 principal amount of outstanding
Original Notes accepted in the Exchange Offer. Holders may tender some or all of
their Original Notes pursuant to the Exchange Offer. However, Original Notes may
be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Original Notes except that (i) the Exchange Notes have been registered
under the Securities Act and hence will not bear legends restricting the
transfer thereof and (ii) the holders of the Exchange Notes generally will not
be entitled to certain rights under the Registration Rights Agreement, which
rights generally will terminate upon consummation of the Exchange Offer. The
Exchange Notes will evidence the same debt as the Original Notes and will be
entitled to the benefits of the Indenture.
Holders of Original Notes do not have any appraisal or dissenter's rights
under the General Corporation Law of Delaware or the Indenture in connection
with the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder, including Rule 14e-1 thereunder.
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The Company shall be deemed to have accepted validly tendered Original
Notes when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
Holders for the purpose of receiving the Exchange Notes from the Company.
If any tendered Original Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Original Notes will be
returned, without expense, to the tendering Holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Original Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of
Original Notes pursuant to the Exchange Offer. The Company will pay all charges
and expenses, other than transfer taxes in certain circumstances, in connection
with the Exchange Offer. See " -- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 12:00 a.m., New York City time, on
August 15, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
To extend the Exchange Offer, the Company will notify the Exchange Agent of
any extension by oral or written notice, followed by a public announcement
thereof no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date.
The Company reserves the right, in its reasonable judgment, (i) to delay
accepting any Original Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under " -- Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of the
Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by a public
announcement thereof. If the Exchange Offer is amended in a manner determined by
the Company to constitute a material change, the Company will promptly disclose
such amendment by means of a prospectus supplement that will be distributed to
the registered Holders, and, depending upon the significance of the amendment
and the manner of disclosure to the registered Holders, the Company will extend
the Exchange Offer for a period of five to ten business days if the Exchange
Offer would otherwise expire during such five to ten business-day period.
If the Company does not consummate the Exchange Offer, or, in lieu thereof,
the Company does not file and cause to become effective the Shelf Registration
Statement (as defined under "Registration Rights") within the time periods set
forth herein, liquidated damages will accrue and be payable on the Original
Notes either temporarily or permanently. See "Registration Rights."
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
INTEREST ON EXCHANGE NOTES
Interest on each Exchange Note will accrue (A) from the later of (i) the
last interest payment date on which interest was paid on the Original Note
surrendered in exchange therefor, or (ii) if the Original Note is surrendered
for exchange on a date in a period which includes the record date for an
interest payment date to occur on or after the date of such exchange and as to
which interest will be paid, the date of such interest payment date or (B) if no
interest has been paid on the Original Notes, from the Issue Date. Interest on
the Exchange Notes will be payable semiannually on each February 15 and August
15, commencing on August 15, 1998.
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PROCEDURES FOR TENDERING
Only a Holder of Original Notes may tender such Original Notes in the
Exchange Offer. To tender in the Exchange Offer, a Holder must complete, sign
and date the Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal and mail or
otherwise deliver such Letter of Transmittal or such facsimile, together with
the Original Notes and any other required documents, to the Exchange Agent so as
to be received by the Exchange Agent at the address set forth below prior to
5:00 p.m., New York City time, on the Expiration Date. Delivery of the Original
Notes may be made by book-entry transfer in accordance with the procedures
described below. Confirmation of such book-entry transfer must be received by
the Exchange Agent prior to the Expiration Date.
By executing the Letter of Transmittal, each Holder will make to the
Company the representation set forth below in the second paragraph under the
heading " -- Resale of Exchange Notes."
The tender by a Holder and the acceptance thereof by the Company will
constitute an agreement between such Holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF ORIGINAL NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR ORIGINAL NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS
MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES
OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Original Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined herein)
unless the Original Notes tendered pursuant thereto are tendered (i) by a
registered Holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
or (ii) for the account of an Eligible Institution. In the event that signatures
on a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution"
within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible
Institution").
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Original Notes listed therein, such Original Notes must
be endorsed or accompanied by a properly completed bond power, signed by such
registered Holder as such registered Holder's name appears on such Original
Notes with the signature thereon guaranteed by an Eligible Institution. If the
Letter of Transmittal or any Original Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Original Notes at The Depository Trust Company ("DTC") for the purpose of
facilitating the Exchange Offer, and subject to the establishment thereof, any
financial institution that is a participant in DTC's system may make book-entry
delivery of the Original Notes by causing DTC to transfer such Original Notes
into the Exchange Agent's account with respect to the Original Notes in
accordance with DTC's procedures for such transfer. Although delivery of the
Notes
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may be effected through book-entry transfer into the Exchange Agent's account at
the DTC, an appropriate Letter of Transmittal properly completed and duly
executed with any required signature guarantee and all other required documents
must in each case be transmitted to and received or confirmed by the Exchange
Agent at its address set forth below on or prior to the Expiration Date, or, if
the guaranteed delivery procedures described below are complied with, within the
time period provided under such procedures. Delivery of documents to DTC does
not constitute delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Original Notes and withdrawal of tendered
Original Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute right
to reject any and all Original Notes not properly tendered or any Original Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Original Notes must be cured within such time as the Company shall determine.
Although the Company intends to notify Holders of defects or irregularities with
respect to tenders of Original Notes, none of the Company, the Exchange Agent or
any other person shall incur any liability for failure to give such
notification. Tenders of Original Notes will not be deemed to have been made
until such defects or irregularities have been cured or waived. Any Original
Notes received by the Exchange Agents that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering Holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Original Notes and (i) whose Original
Notes are not immediately available, (ii) who cannot deliver their Original
Notes, the Letter of Transmittal or any other required documents to the Exchange
Agent or (iii) who cannot complete the procedures for book-entry transfer, prior
to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number(s)
of such Notes and the principal amount of Original Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within three
New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or facsimile thereof), together with the certificate(s)
representing the Original Notes (or a confirmation of book-entry transfer
of such Original Notes into the Exchange Agent's account at DTC) and any
other documents required by the Letter of Transmittal, will be deposited by
the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Original Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Original Notes into the Exchange Agent's account at DTC)
and all other documents required by the Letter of Transmittal, are received
by the Exchange Agent within three New York Stock Exchange trading days
after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Original Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWALS OF TENDERS
Except as otherwise provided herein, tenders of Original Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
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To withdraw a tender of Original Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Original Notes to be withdrawn (the
"Depositor"), (ii) identify the Original Notes to be withdrawn (including the
certificate number(s) and principal amount of such Original Notes, or, in the
case of notes transferred by book-entry transfer, the name and number of the
account at DTC to be credited), (iii) be signed by the Holder in the same manner
as the original signature on the Letter of Transmittal by which such Original
Notes were tendered (including any required signature guarantees) or be
accompanied by documents of transfer sufficient to have the Trustee with respect
to the Original Notes register the transfer of such Original Notes into the name
of the person withdrawing the tender and (iv) specify the name in which any such
Original Notes are to be registered, if different from that of the Depositor.
All questions as to the validity, form and eligibility (including time or
receipt) of such notices will be determined by the Company, whose determination
shall be final and binding on all parties. Any Original Notes so withdrawn will
be deemed not to have been validly tendered for purposes of the Exchange Offer
and no Exchange Notes will be issued with respect thereto unless the Original
Notes so withdrawn are validly retendered. Any Original Notes which have been
tendered but which are not accepted for exchange will be returned to the Holder
thereof without cost to such Holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn
Original Notes may be retendered by following one of the procedures described
above under " -- Procedures for Tendering" at any time prior to the Expiration
Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or to exchange Exchange Notes for, any
Original Notes, and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Original Notes, if:
(a) any law, statute, rule, regulation or interpretation by the staff
of the Commission is proposed, adopted or enacted, which, in the reasonable
judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(b) any governmental approval has not been obtained, which approval
the Company shall, in its reasonable judgment, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its reasonable judgment that any of the
conditions are not satisfied, the Company may (i) refuse to accept any Original
Notes and return all tendered Original Notes to the tendering Holders, (ii)
extend the Exchange Offer and retain all Original Notes tendered prior to the
expiration of the Exchange Offer, subject, however, to the rights of Holders to
withdraw such Original Notes (see " -- Withdrawals of Tenders") or (iii) waive
such unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Original Notes which have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered Holders, and, depending upon the significance of
the waiver and the manner of disclosure to the registered Holders, the Company
will extend the Exchange Offer for a period of five to ten business days if the
Exchange Offer would otherwise expire during such five to ten business-day
period.
EXCHANGE AGENT
U.S. Trust Company of California, N.A. will act as Exchange Agent for the
Exchange Offer.
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Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal for the Notes and requests for
copies of Notice of Guaranteed Delivery should be directed to the Exchange
Agent, addressed as follows:
By mail, courier or hand delivery:
U.S. Trust Company of California, N.A.
515 South Flower Street
Suite 2700
Los Angeles, CA 90071-2291
For inquiries contact:
Mr. Stuart M. Weiss
Vice President
Telephone (213) 861-5084
Facsimile (213) 488-1370
FEES AND EXPENSES
The expenses of the Exchange Offer will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone, facsimile or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith and pay
other registration expenses, including fees and expenses of the Trustee, filing
fees, blue sky fees and printing and distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Original Notes pursuant to the Exchange Offer. If, however, certificates
representing the Exchange Notes or the Original Notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be issued in
the name of, any person other than the registered Holder of the Original Notes
tendered, or if tendered Notes are registered in the name of any person other
than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of the Original Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered Holder or any other person) will be payable by the tendering
Holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Original Notes, which is the aggregate principal amount, as reflected in the
Company's accounting records on the date of exchange. Accordingly, no gain or
loss for accounting purposes will be recognized in connection with the Exchange
Offer. The expenses of the Exchange Offer will be amortized over the term of the
Exchange Notes.
RESALE OF EXCHANGE NOTES
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that Exchange
Notes issued pursuant to the Exchange Offer in exchange for Original Notes may
be offered for resale, resold and otherwise transferred by any Holder of such
Exchange Notes (other than any such Holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such Holder's business and such Holder does not intend to participate,
and has no arrangement or understanding with any person to participate, in the
distribution of such Exchange Notes. Any Holder who tenders in the Exchange
Offer with the intention to participate, or for the purpose of participating, in
a distribution of the Exchange
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Notes may not rely on the position of the staff of the Commission enunciated in
Exxon Capital Holdings Corporation (available April 13, 1989) and Morgan Stanley
& Co., Incorporated (available June 5, 1991), or similar no-action letters, but
rather must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction. In addition, any
such resale transaction should be covered by an effective registration statement
containing the selling security holders information required by Item 507 of
Regulation S-K of the Securities Act. Each broker-dealer that receives Exchange
Notes for its own account in exchange for Original Notes, where such Original
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, may be a statutory underwriter and must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes.
By tendering in the Exchange Offer, each Holder will represent to the
Company that, among other things, (i) the Exchange Notes acquired pursuant to
the Exchange Offer are being obtained in the ordinary course of business of the
person receiving such Exchange Notes, whether or not such person is a Holder,
(ii) neither the Holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes and (iii) the Holder and such other person acknowledge that if
they participate in the Exchange Offer for the purpose of distributing the
Exchange Notes (a) they must, in the absence of an exemption therefrom, comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale of the Exchange Notes and cannot rely on the
no-action letters referenced above and (b) failure to comply with such
requirements in such instance could result in such Holder incurring liability
under the Securities Act for which such Holder is not indemnified by the
Company. Further, by tendering in the Exchange Offer, each Holder that may be
deemed an "affiliate" (as defined under Rule 405 of the Securities Act) of the
Company will represent to the Company that such Holder understands and
acknowledges that the Exchange Notes may not be offered for resale, resold or
otherwise transferred by that Holder without registration under the Securities
Act or an exemption therefrom.
As set forth above, affiliates of the Company are not entitled to rely on
the foregoing interpretations of the staff of the Commission with respect to
resales of the Exchange Notes without compliance with the registration and
prospectus delivery requirements of the Securities Act.
CONSEQUENCES OF FAILURE TO EXCHANGE
As a result of the making of this Exchange Offer, the Company will have
fulfilled one of its obligations under the Registration Rights Agreement, and
Holders of Original Notes who do not tender their Original Notes generally will
not have any further registration rights under the Registration Rights Agreement
or otherwise. Accordingly, any Holder of Original Notes that does not exchange
that Holder's Original Notes for Exchange Notes will continue to hold the
untendered Original Notes and will be entitled to all the rights and limitations
applicable thereto under the Indenture, except to the extent that such rights or
limitations, by their terms, terminate or cease to have further effectiveness as
a result of the Exchange Offer.
The Original Notes that are not exchanged for Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such Original
Notes may be resold only (i) to the Company (upon redemption thereof or
otherwise), (ii) pursuant to an effective registration statement under the
Securities Act, (iii) so long as the Original Notes are eligible for resale
pursuant to Rule 144A, to a qualified institutional buyer within the meaning of
Rule 144A under the Securities Act in a transaction meeting the requirements of
Rule 144A, (iv) outside the United States to a foreign person pursuant to the
exemption from the registration requirements of the Securities Act provided by
Regulation S thereunder, (v) pursuant to an exemption from registration under
the Securities Act provided by Rule 144 thereunder (if available) or (vi) to an
institutional accredited investor in a transaction exempt from the registration
requirements of the Securities Act, in each case in accordance with any
applicable securities laws of any state of the United States.
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OTHER
Participation in the Exchange Offer is voluntary and Holders should
carefully consider whether to accept. Holders of the Original Notes are urged to
consult their financial and tax advisors in making their own decision on what
action to take.
The Company may in the future seek to acquire untendered Original Notes in
open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Company has no present plans to acquire any Original
Notes that are not tendered in the Exchange Offer or to file a registration
statement to permit resales of any untendered Original Notes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
OF THE EXCHANGE OFFER
The following discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "IRC"), applicable Department of the
Treasury regulations, judicial authority and administrative rulings and
practice. There can be no assurance that the Internal Revenue Service (the
"IRS") will not take a contrary view, and no ruling from the IRS has been or
will be sought. Legislative, judicial or administrative changes or
interpretations may be forthcoming that could alter or modify the statements and
conditions set forth herein. Any such changes or interpretations may or may not
be retroactive and could affect the tax consequences to Holders. Certain Holders
of the Original Notes (including insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, foreign corporations and persons who are
not citizens or residents of the United States) may be subject to special rules
not discussed below. Each Holder of Original Notes should consult his, her or
its own tax advisor as to the particular tax consequences of exchanging such
Holder's Original Notes for Exchange Notes, including the applicability and
effect of any state, local or foreign tax laws.
The issuance of the Exchange Notes to Holders of the Original Notes
pursuant to the terms set forth in this Prospectus will not constitute a taxable
exchange for federal income tax purposes. Consequently, no gain or loss would be
recognized by Holders of the Original Notes upon receipt of the Exchange Notes,
and ownership of the Exchange Notes will be considered a continuation of
ownership of the Original Notes. For purposes of determining gain or loss upon
the subsequent sale or exchange of the Exchange Notes, a Holder's basis in the
Exchange Notes should be the same as such Holder's basis in the Original Notes
exchanged therefor. A Holder's holding period for the Exchange Notes should
include the Holder's holding period for the Original Notes exchanged therefor.
The issue price, original issue discount inclusion and other tax characteristics
of the Exchange Notes should be identical to the issue price, original issue
discount inclusion and other tax characteristics of the Original Notes exchanged
therefor.
See also "Certain United States Federal Income Tax Considerations for
Non-United States Holders" hereinafter, discussing certain United States
federal income tax consequences related to the ownership and disposition of
Exchange Notes.
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DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Notes will be issued under an indenture (the "Indenture"),
dated as of February 11, 1998 by and among the Company, the Guarantors and U.S.
Trust Company of California, N.A., as Trustee (the "Trustee"). The following
summary of certain provisions of the Indenture does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, the Trust
Indenture Act of 1939, as amended (the "TIA"), and to all of the provisions of
the Indenture, including the definitions of certain terms therein and those
terms made a part of the Indenture by reference to the TIA as in effect on the
date of the Indenture. A copy of the Indenture may be obtained from the Company
or the Initial Purchasers. The definitions of certain capitalized terms used in
the following summary are set forth below under " -- Certain Definitions." For
purposes of this section, references to the "Company" include only the Company
and not its Subsidiaries.
The Exchange Notes will be unsecured obligations of the Company, ranking
subordinate in right of payment to all Senior Debt of the Company. The Exchange
Notes will be guaranteed on an unsecured, senior subordinated basis by all of
the Restricted Subsidiaries of the Company ranking subordinate in right of
payment to all Guarantor Senior Debt.
The Exchange Notes will be issued in fully registered form only, without
coupons, in denominations of $1,000 and integral multiples thereof. Initially,
the Trustee will act as Paying Agent and Registrar for the Exchange Notes. The
Exchange Notes may be presented for registration or transfer and exchange at the
offices of the Registrar, which initially will be the Trustee's corporate trust
office. The Company may change any Paying Agent and Registrar without notice to
holders of the Exchange Notes (the "Holders"). The Company will pay principal
(and premium, if any) on the Exchange Notes at the Trustee's corporate office in
New York, New York. At the Company's option, interest may be paid at the
Trustee's corporate trust office or by check mailed to the registered address of
Holders. Any Original Notes that remain outstanding after the completion of the
Exchange Offer, together with the Exchange Notes issued in connection with the
Exchange Offer, will be treated as a single class of securities under the
Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Exchange Notes are limited in aggregate principal amount to
$200,000,000 and will mature on February 15, 2008. Interest on the Exchange
Notes will accrue at the rate of 8 5/8% per annum and will be payable
semiannually in cash on each February 15 and August 15 commencing on August 15,
1998, to the persons who are registered holders at the close of business on the
February 1 and August 1 immediately preceding the applicable interest payment
date. Interest on the Exchange Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from and
including the date of issuance.
The Exchange Notes will not be entitled to the benefit of any mandatory
sinking fund.
REDEMPTION
OPTIONAL REDEMPTION. The Exchange Notes will be redeemable, at the
Company's option, in whole at any time or in part from time to time, on and
after February 15, 2003, upon not less than 30 nor more than 60 days notice, at
the following redemption prices (expressed as percentages of the principal
amount thereof) if redeemed during the twelve-month period commencing on
February 15 of the year set forth below, plus, in each case, accrued and unpaid
interest thereon, if any, to the date of redemption:
YEAR PERCENTAGE
- ---------------------------------------- ----------
2003.................................... 104.313%
2004.................................... 102.875%
2005.................................... 101.438%
2006 and thereafter..................... 100.000%
OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERINGS. At any time, or from
time to time, on or prior to February 15, 2001, the Company may, at its option,
use the net cash proceeds of one or more Public Equity
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Offerings (as defined below) to redeem the Exchange Notes at a redemption price
equal to 108.625% of the principal amount thereof plus accrued and unpaid
interest thereon, if any, to the date of redemption; PROVIDED that at least 65%
of the principal amount of Exchange Notes originally issued remains outstanding
immediately after any such redemption. In order to effect the foregoing
redemption with the proceeds of any Public Equity Offering, the Company shall
make such redemption not more than 120 days after the consummation of any such
Public Equity Offering.
As used in the preceding paragraph, "Public Equity Offering" means an
underwritten public offering of Qualified Capital Stock of the Company pursuant
to a registration statement filed with the Commission in accordance with the
Securities Act.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Exchange Notes are to be redeemed at
any time, selection of such Exchange Notes for redemption will be made by the
Trustee in compliance with the requirements of the principal national securities
exchange, if any, on which such Exchange Notes are listed or, if such Exchange
Notes are not then listed on a national securities exchange, on a PRO RATA
basis, by lot or by such method as the Trustee shall deem fair and appropriate;
PROVIDED, HOWEVER, that no Exchange Notes of a principal amount of $1,000 or
less shall be redeemed in part; PROVIDED, FURTHER, that if a partial redemption
is made with the proceeds of a Public Equity Offering, selection of the Exchange
Notes or portions thereof for redemption shall be made by the Trustee only on a
PRO RATA basis or on as nearly a PRO RATA basis as is practicable (subject to
the Depositary's procedures), unless such method is otherwise prohibited. Notice
of redemption shall be mailed by first-class mail at least 35 but not more than
60 days before the redemption date to each Holder of Exchange Notes to be
redeemed at its registered address. If any Exchange Note is to be redeemed in
part only, the notice of redemption that relates to such Exchange Note shall
state the portion of the principal amount thereof to be redeemed. A new Exchange
Note in a principal amount equal to the unredeemed portion thereof will be
issued in the name of the Holder thereof upon cancellation of the original
Exchange Note. On and after the redemption date, interest will cease to accrue
on Exchange Notes or portions thereof called for redemption as long as the
Company had deposited with the Paying Agent funds in satisfaction of the
applicable redemption price pursuant to the Indenture.
SUBORDINATION
The payment of all Obligations on the Exchange Notes is subordinated in
right of payment to the prior payment in full in cash or Cash Equivalents of all
Obligations on Senior Debt. Upon any payment or distribution of assets of the
Company of any kind or character, whether in cash, property or securities, to
creditors upon any liquidation, dissolution, winding up, reorganization,
assignment for the benefit of creditors or marshaling of assets of the Company
or in a bankruptcy, reorganization, insolvency, receivership or other similar
proceeding relating to the Company or its property, whether voluntary or
involuntary, all Obligations due or to become due upon all Senior Debt shall
first be paid in full in cash or Cash Equivalents, or such payment duly provided
for to the satisfaction of the holders of Senior Debt, before any payment or
distribution of any kind or character is made on account of any Obligations on
the Exchange Notes, or for the acquisition of any of the Exchange Notes for cash
or property or otherwise. If any default occurs and is continuing in the payment
when due, whether at maturity, upon any redemption, by declaration or otherwise,
of any principal of, interest on, unpaid drawings for letters of credit issued
in respect of, or regularly accruing fees with respect to, any Senior Debt, no
payment of any kind or character shall be made by or on behalf of the Company or
any other Person on its or their behalf with respect to any Obligations on the
Exchange Notes or to acquire any of the Exchange Notes for cash or property or
otherwise.
In addition, if any other event of default occurs and is continuing with
respect to any Designated Senior Debt, as such event of default is defined in
the instrument creating or evidencing such Designated Senior Debt, permitting
the holders of such Designated Senior Debt then outstanding to accelerate the
maturity thereof and if the Representative for the respective issue of
Designated Senior Debt gives written notice of the event of default to the
Trustee (a "Default Notice"), then, unless and until all events of default
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have been cured or waived or have ceased to exist or the Trustee receives notice
from the Representative for the respective issue of Designated Senior Debt
terminating the Blockage Period (as defined below), during the 180 days after
the delivery of such Default Notice (the "Blockage Period"), neither the
Company nor any other Person on its behalf shall (x) make any payment of any
kind or character with respect to any Obligations on the Exchange Notes or (y)
acquire any of the Exchange Notes for cash or property or otherwise.
Notwithstanding anything herein to the contrary, in no event will a Blockage
Period extend beyond 180 days from such Default Notice and only one such
Blockage Period may be commenced within any 360 consecutive days. No event of
default which existed or was continuing on the date of the commencement of any
Blockage Period with respect to the Designated Senior Debt shall be, or be made,
the basis for commencement of a second Blockage Period by the Representative of
such Designated Senior Debt whether or not within a period of 360 consecutive
days, unless such event of default shall have been cured or waived for a period
of not less than 90 consecutive days (it being acknowledged that any subsequent
action, or any breach of any financial covenants for a period commencing after
the date of commencement of such Blockage Period that, in either case, would
give rise to an event of default pursuant to any provisions under which an event
of default previously existed or was continuing shall constitute a new event of
default for this purpose).
By reason of such subordination, in the event of the insolvency of the
Company, creditors of the Company who are not holders of Senior Debt, including
the Holders of the Notes, may recover less, ratably, than holders of Senior
Debt.
GUARANTEES
Each Guarantor unconditionally guarantees, on a senior subordinated basis,
jointly and severally, to each Holder and the Trustee, the full and prompt
performance of the Company's obligations under the Indenture and the Exchange
Notes, including the payment of principal of and interest on the Exchange Notes.
The Guarantees will be subordinated to Guarantor Senior Debt on the same basis
as the Exchange Notes are subordinated to Senior Debt. The obligations of each
Guarantor are limited to the maximum amount which, after giving effect to all
other contingent and fixed liabilities of such Guarantor and after giving effect
to any collections from or payments made by or on behalf of any other Guarantor
in respect of the obligations of such other Guarantor under its Guarantee or
pursuant to its contribution obligations under the Indenture, will result in the
obligations of such Guarantor under the Guarantee not constituting a fraudulent
conveyance or fraudulent transfer under federal or state law. Each Guarantor
that makes a payment or distribution under a Guarantee shall be entitled to a
contribution from each other Guarantor in an amount PRO RATA, based on the net
assets of each Guarantor, determined in accordance with GAAP.
Each Guarantor may consolidate with or merge into or sell its assets to the
Company or other Guarantor that is a Wholly Owned Restricted Subsidiary of the
Company without limitation, or with other Persons upon the terms and conditions
set forth in the Indenture. See "Certain Covenants -- Merger, Consolidation and
Sale of Assets." In the event all of the Capital Stock of a Guarantor is sold
by the Company and the sale complies with the provisions set forth in "Certain
Covenants -- Limitation on Assets Sales," the Guarantor's Guarantee will be
released.
CHANGE OF CONTROL
The Indenture will provide that upon the occurrence of a Change of Control,
each holder of Exchange Notes will have the right to require that the Company
purchase all or a portion of such holder's Exchange Notes pursuant to the offer
described below (the "Change of Control Offer"), at a purchase price equal to
101% of the principal amount thereof plus accrued interest to the date of
purchase.
The Indenture will provide that, prior to the mailing of the notice
referred to below, but in any event within 30 days following any Change of
Control, the Company covenants to (i) repay in full and terminate all
commitments under Indebtedness under the Credit Agreement and all other Senior
Debt the terms of which require repayment upon a Change of Control or offer to
repay in full and terminate all commitments under all Indebtedness under the
Credit Agreement and all other such Senior Debt and to repay the Indebtedness
owed to each lender which has accepted such offer or (ii) obtain the requisite
consents under
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the Credit Agreement and all other Senior Debt to permit the repurchase of the
Exchange Notes as provided below. The Company shall first comply with the
covenant in the immediately preceding sentence before it shall be required to
repurchase Exchange Notes pursuant to the provisions described below.
Within 30 days following the date upon which the Change of Control
occurred, the Company must send, by first class mail, a notice to each holder,
with a copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 15 days nor later than 45 days from the date such
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date"). Holders electing to have an Exchange Note purchased pursuant to
a Change of Control Offer will be required to surrender the Exchange Note, with
the form entitled "Option of Holder to Elect Purchase" on the reverse of the
Exchange Note completed, to the Paying Agent at the address specified in the
notice prior to the close of business on the third business day prior to the
Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Exchange Notes that might be delivered by holders
seeking to accept the Change of Control Offer or that it would receive necessary
consents from the holders of Senior Debt. In the event the Company is required
to purchase outstanding Exchange Notes pursuant to a Change of Control Offer,
the Company expects that it would seek third party financing to the extent it
does not have available funds to meet its purchase obligations. However, there
can be no assurance that the Company would be able to obtain such financing.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a holder's right to redemption upon a Change of Control.
Restrictions in the Indenture described herein on the ability of the Company and
its Restricted Subsidiaries to incur additional Indebtedness, to grant liens on
its property, to make Restricted Payments and to make Asset Sales may also make
more difficult or discourage a takeover of the Company, whether favored or
opposed by the management of the Company. Consummation of any such transaction
in certain circumstances may require redemption or repurchase of the Exchange
Notes, and there can be no assurance that the Company or the acquiring party
will have sufficient financial resources to effect such redemption or
repurchase. Such restrictions and the restrictions on transactions with
Affiliates may, in certain circumstances, make more difficult or discourage any
leveraged buyout of the Company or any of its Subsidiaries by the management of
the Company. While such restrictions cover a wide variety of arrangements which
have traditionally been used to effect highly leveraged transactions, the
Indenture may not afford the holders protection in all circumstances from the
adverse aspects of a highly leveraged transaction, reorganization,
restructuring, merger or similar transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Exchange Notes pursuant to a Change of Control Offer. To the
extent that the provisions of any securities laws or regulations conflict with
the "Change of Control" provisions of the Indenture, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants:
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND ISSUANCE OF
PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. The Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create,
incur, assume, guarantee, acquire, become liable, contingently or otherwise,
with respect to, or otherwise become responsible for payment of (collectively,
"incur") any Indebtedness (other than Permitted Indebtedness), and the Company
will not permit any of its Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Wholly Owned Restricted Subsidiary of the
Company) or permit any Person (other than the Company or a Wholly Owned
Restricted Subsidiary of the Company) to own any Preferred Stock of any
Restricted Subsidiary of the Company; PROVIDED, HOWEVER, that if no
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Default or Event of Default shall have occurred and be continuing at the time of
or as a consequence of the incurrence of any such Indebtedness or issuance of
Preferred Stock, the Company or any of its Restricted Subsidiaries may incur
Indebtedness (including, without limitation, Acquired Indebtedness) or issue
Preferred Stock if on the date of the incurrence of such Indebtedness or
issuance of Preferred Stock, after giving effect to the incurrence or issuance
thereof, the Consolidated Fixed Charge Coverage Ratio of the Company is: (i)
greater than 2.0 to 1.0 if such incurrence or issuance is on or prior to
February 15, 2000, (ii) greater than 2.25 to 1.0 if such incurrance or issuance
is after February 15, 2000 and is on or prior to February 15, 2002, or (iii)
greater than 2.50 to 1.0 if such incurrence or issuance occurs thereafter.
LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not
cause or permit any of its Restricted Subsidiaries to, directly or indirectly,
(a) declare or pay any dividend or make any distribution (other than dividends
or distributions payable in Qualified Capital Stock of the Company) on or in
respect of shares of the Company's Capital Stock to holders of such Capital
Stock, (b) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or any warrants, rights or options to purchase or acquire
shares of any class of such Capital Stock, (c) make any principal payment on,
purchase, defease, redeem, prepay, decrease or otherwise acquire or retire for
value, prior to any scheduled final maturity, scheduled repayment or scheduled
sinking fund payment, any Indebtedness of the Company that is subordinate or
junior in right of payment to the Exchange Notes (other than the purchase,
repurchase or other acquisition of such Indebtedness purchased in anticipation
of satisfying sinking fund obligations, principal installments or final
maturity, in each case due within one year after the date of acquisition) or (d)
make any Investment (other than Permitted Investments) (each of the foregoing
actions set forth in clauses (a), (b) (c) and (d) being referred to as a
"Restricted Payment"), if at the time of such Restricted Payment or
immediately after giving effect thereto, (i) a Default of an Event of Default
shall have occurred and be continuing or (ii) the Company is not able to incur
at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in
compliance with the "Limitation on Incurrence of Additional Indebtedness and
Issuance of Preferred Stock of Restricted Subsidiaries" covenant or (iii) the
aggregate amount of Restricted Payments (including such proposed Restricted
Payment) made subsequent to the Issue Date (the amount expended for such
purposes, if other than in cash, being the fair market value of such property as
determined reasonably and in good faith by the Board of Directors of the
Company) shall exceed the sum of: (A) 50% of the cumulative Consolidated Net
Income (or if cumulative Consolidated Net Income shall be a loss, minus 100% of
such loss) of the Company from January 1, 1998 to the end of the most recent
quarter for which financial statements are available (the "Reference Date")
(treating such period as a single accounting period); PROVIDED, HOWEVER, that if
the Notes achieve an Investment Grade Rating as of the end of any fiscal
quarter, the percentage for the fiscal quarter after such fiscal quarter (and
for any other fiscal quarter where, on the first day of such fiscal quarter, the
Exchange Notes shall have an Investment Grade Rating) will be 100% of
Consolidated Net Income during each fiscal quarter after such fiscal quarter;
PROVIDED FURTHER, HOWEVER, that if such Restricted Payment is to be made in
reliance upon an additional amount permitted pursuant to the immediately
preceding proviso, the Exchange Notes must have an Investment Grade Rating at
the time such Restricted Payment is declared or, if not declared, made; plus (B)
100% of the aggregate net cash proceeds received by the Company from any Person
(other than a Subsidiary of the Company) from the issuance and sale subsequent
to the Issue Date and on or prior to the Reference Date of Qualified Capital
Stock of the Company; plus (C) without duplication of any amounts included in
clause (iii)(B) above, 100% of the aggregate net cash proceeds of any equity
contribution received by the Company from a holder of the Company's Capital
Stock (excluding, in the case of clauses (iii)(B) and (C), any net cash proceeds
from a Public Equity Offering to the extent used to redeem the Notes); (D) the
amount by which Indebtedness of the Company or its Subsidiaries created after
the Issue Date is reduced on the Company's consolidated balance sheet upon the
conversion or exchange (other than by a Subsidiary of the Company) subsequent to
the Issue Date, of any Indebtedness of the Company or its Subsidiaries for
Qualified Capital Stock of the Company (less the amount of any cash, or the fair
value of any other property, distributed by the Company or its Subsidiaries upon
such conversion or exchange), whether pursuant to the terms of such indebtedness
or pursuant to an agreement with a creditor to engage in an equity for debt
exchange; (E) an amount equal to the sum of (i) the net reduction in Investments
in
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Unrestricted Subsidiaries resulting from dividends, repayments of loans or
advances or other transfers of assets, in each case to the Company or any
Restricted Subsidiary from Unrestricted Subsidiaries (PROVIDED, that any amounts
included hereunder shall not be included in Consolidated Net Income), and (ii)
the portion (proportionate to the Company's equity interest in such Subsidiary)
of the fair market value (as determined in good faith by the Company's Board of
Directors) of the net assets of an Unrestricted Subsidiary at the time such
Unrestricted Subsidiary is designated a Restricted Subsidiary; PROVIDED,
HOWEVER, that the foregoing sum shall not exceed, in the case of any
Unrestricted Subsidiary, the amount of Investments previously made (and treated
as a Restricted Payment) by the Company or any Restricted Subsidiary in such
Unrestricted Subsidiary.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend within 60
days after the date of declaration of such dividend if the dividend would have
been permitted on the date of declaration; (2) if no Default or Event of Default
shall have occurred and be continuing, the acquisition or redemption of any
shares of Capital Stock of the Company, either (i) solely in exchange for shares
of Qualified Capital Stock of the Company or (ii) through the application of net
proceeds of a substantially concurrent sale for cash (other than to a Subsidiary
of the Company) of shares of Qualified Capital Stock of the Company; (3) if no
Default or Event of Default shall have occurred and be continuing, the
acquisition of any Indebtedness of the Company that is subordinate or junior in
right of payment to the Exchange Notes either (i) solely in exchange for shares
of Qualified Capital Stock of the Company, or (ii) through the application of
net proceeds of a substantially concurrent sale for cash (other than to a
Subsidiary of the Company) of (A) shares of Qualified Capital Stock of the
Company or (B) Refinancing Indebtedness; (4) so long as no Default or Event of
Default shall have occurred and be continuing, repurchases by the Company of
Common Stock of the Company from employees of the Company or any of its
Subsidiaries or their authorized representatives upon the death, disability or
termination of employment of such employees, in an aggregate amount not to
exceed $1,000,000 in any calendar year; and (5) other Restricted Payments in an
aggregate amount since the Issue Date not to exceed $10,000,000. In determining
the aggregate amount of Restricted Payments made subsequent to the Issue Date in
accordance with clause (iii) of the immediately preceding paragraph, amounts
expended pursuant to clauses (1), (2) and (4) shall be included in such
calculation.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment complies with the Indenture and setting forth in reasonable detail the
basis upon which the required calculations were computed, which calculations may
be based upon the Company's latest available internal quarterly financial
statements.
LIMITATION ON ASSET SALES. The Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors), (ii) at least 70% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be in the form of cash or Cash Equivalents; PROVIDED,
HOWEVER, that the amount of any Senior Debt of the Company (as shown on the
Company's most recent balance sheet) or any Indebtedness of any Restricted
Subsidiary of the Company (as shown on such Restricted Subsidiary's most recent
balance sheet) which is not expressly subordinated in right of payment to the
Notes or to any Guarantee of such Restricted Subsidiary, that is expressly
assumed by the transferee of any such assets or by operation of law shall be
deemed to be cash for purposes for this provision; and (iii) upon the
consummation of an Asset Sale, the Company shall apply, or cause such Restricted
Subsidiary to apply, the Net Cash Proceeds relating to such Asset Sale within
360 days of receipt thereof either (A) to prepay any Senior Debt and, in the
case of any Senior Debt under any revolving credit facility, effect a permanent
reduction in the availability under such revolving credit facility, (B) to make
an investment in properties and assets that replace the properties and assets
that were the subject of such Asset Sale or in properties and assets that will
be used in the business of the Company and its Restricted Subsidiaries as
existing on the Issue Date or in businesses reasonably related thereto
("Replacement Assets"), or (C) a combination of prepayment and investment
permitted by the foregoing clauses (iii)(A) and (iii)(B). On the 361st day after
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an Asset Sale or such earlier date, if any, as the Board of Directors of the
Company or of such Restricted Subsidiary determines not to apply the Net Cash
Proceeds relating to such Asset Sale as set forth in clauses (iii)(A), (iii)(B)
and (iii)(C) of the next preceding sentence (each, a "Net Proceeds Offer
Trigger Date"), such aggregate amount of Net Cash Proceeds which have not been
applied on or before such Net Proceeds Offer Trigger Date as permitted in
clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each a
"Net Proceeds Offer Amount") shall be applied by the Company or such
Restricted Subsidiary to make an offer to purchase (the "Net Proceeds Offer")
on a date (the "Net Proceeds Offer Payment Date") not less than 30 nor more
than 45 days following the applicable Net Proceeds Offer Trigger Date, from all
Holders on a PRO RATA basis, that amount of Exchange Notes equal to the Net
Proceeds Offer Amount at a price equal to 100% of the principal amount of the
Exchange Notes to be purchased, plus accrued and unpaid interest thereon, if
any, to the date of purchase; PROVIDED, HOWEVER, that if at any time any
non-cash consideration received by the Company or any Restricted Subsidiary of
the Company, as the case may be, in connection with any Asset Sale is converted
into or sold or otherwise disposed of for cash (other than interest received
with respect to any such non-cash consideration), then such conversion or
disposition shall be deemed to constitute an Asset Sale hereunder and the Net
Cash Proceeds thereof shall be applied in accordance with this covenant. The
Company may defer the Net Proceeds Offer until there is an aggregate unutilized
Net Proceeds Offer Amount equal to or in excess of $10,000,000 resulting from
one or more Asset Sales (at which time, the entire unutilized Net Proceeds Offer
Amount, and not just the amount in excess of $10,000,000, shall be applied as
required pursuant to this paragraph); PROVIDED, that in no event will the net
cash proceeds from an Asset Sale be subjected to more than one offer to purchase
Exchange Notes.
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "-- Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold the
properties and assets of the Company and its Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such properties and assets of the Company
or its Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
Notwithstanding the two immediately preceding paragraphs, the Company and
its Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (i) at least 75% of the
consideration for such Asset Sale constitutes Replacement Assets and (ii) such
Asset Sale is for fair market value; PROVIDED, that any consideration not
constituting Replacement Assets received by the Company or any of its Restricted
Subsidiaries in connection with any Asset Sale permitted to be consummated under
this paragraph shall constitute Net Cash Proceeds subject to the provisions of
the two preceding paragraphs.
Each Net Proceeds Offer will be mailed to the record Holders as shown on
the register of Holders within 25 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set forth
in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may
elect to tender their Exchange Notes in whole or in part in integral multiples
of $1,000 in exchange for cash. To the extent Holders properly tender Exchange
Notes in an amount exceeding the Net Proceeds Offer Amount, Exchange Notes of
tendering Holders will be purchased on a PRO RATA basis (based on amounts
tendered). A Net Proceeds Offer shall remain open for a period of 20 business
days or such longer period as may be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Exchange Notes pursuant to a Net Proceeds Offer. To the extent
that the provisions of any securities laws or regulations conflict with the
"Asset Sale" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Asset Sale" provisions of the Indenture by
virtue thereof.
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LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES. The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary of the Company to (a) pay dividends or make
any other distributions on or in respect of its Capital Stock; (b) make loans or
advances or to pay any Indebtedness or other obligation owed to the Company or
any other Restricted Subsidiary of the Company; or (c) transfer any of its
property or assets to the Company or any other Restricted Subsidiary of the
Company, except for such encumbrances or restrictions existing under or by
reason of: (1) applicable law; (2) the Indenture; (3) customary non-assignment
provisions of any contract or any lease governing a leasehold interest of any
Restricted Subsidiary of the Company; (4) any instrument governing Acquired
Indebtedness, which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person or the
properties or assets of the Person so acquired; (5) agreements existing on the
Issue Date to the extent and in the manner such agreements are in effect on the
Issue Date; or (6) an agreement governing Indebtedness incurred to Refinance the
Indebtedness issued, assumed or incurred pursuant to an agreement referred to in
clause (2), (4) or (5) above; PROVIDED, HOWEVER, that the provisions relating to
such encumbrance or restriction contained in any such Indebtedness are no less
favorable to the Company in any material respect as determined by the Board of
Directors of the Company in their reasonable and good faith judgment than the
provisions relating to such encumbrance or restriction contained in agreements
referred to in such clause (2), (4) or (5).
LIMITATION ON LIENS. The Company will not, and will not cause or permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or permit or suffer to exist any Liens of any kind against or upon any
property or assets of the Company or any of its Restricted Subsidiaries whether
owned on the Issue Date or acquired after the Issue Date, or any proceeds
therefrom, or assign or otherwise convey any right to receive income or profits
therefrom unless (i) in the case of Liens securing Indebtedness that is
expressly subordinate or junior in right of payment to the Exchange Notes, the
Exchange Notes are secured by Lien on such property, assets or proceeds that is
senior in priority to such Liens and (ii) in all other cases, the Exchange Notes
are equally and ratably secured, except for (A) Liens existing as of the Issue
Date to the extent and in the manner such Liens are in effect on the Issue Date;
(B) Liens securing Senior Debt and Liens securing Guarantor Senior Debt; (C)
Liens securing the Notes and the Guarantees; (D) Liens of the Company or a
Wholly Owned Restricted Subsidiary of the Company on assets of any Subsidiary of
the Company; (E) Liens securing Refinancing Indebtedness which is incurred to
Refinance any Indebtedness which has been secured by a Lien permitted under the
Indenture and which has been incurred in accordance with the provisions of the
Indenture; PROVIDED, HOWEVER, that such Liens (I) are no less favorable to the
Holders and are not more favorable to the lienholders with respect to such Liens
than the Liens in respect of the Indebtedness being Refinanced and (II) do not
extend to or cover any property or assets of the Company or any of its
Restricted Subsidiaries not securing the Indebtedness so Refinanced; and (F)
Permitted Liens.
PROHIBITION ON INCURRENCE OF SENIOR SUBORDINATED DEBT. The Company will
not incur or suffer to exist Indebtedness that is senior in right of payment to
the Notes and subordinate in right of payment to any other Indebtedness of the
Company.
MERGER, CONSOLIDATION AND SALE OF ASSETS. The Company will not, in a
single transaction or series of related transactions, consolidate or merge with
or into any Person, or sell, assign, transfer, lease, convey or otherwise
dispose of (or cause or permit any Restricted Subsidiary of the Company to sell,
assign, transfer, lease, convey or otherwise dispose of) all or substantially
all of the Company's assets (determined on a consolidated basis for the Company
and the Company's Restricted Subsidiaries) whether as an entirety or
substantially as an entirety to any Person unless: (i) either (1) the Company
shall be the surviving or continuing corporation or (2) the Person (if other
than the Company) formed by such consolidation or into which the Company is
merged or the Person which acquires by sale, assignment, transfer, lease,
conveyance or other disposition the properties and assets of the Company and of
the Company's Restricted Subsidiaries substantially as an entirety (the
"Surviving Entity") (x) shall be a corporation organized and validly existing
under the laws of the United States or any State thereof or the District of
Columbia and (y) shall expressly assume, by supplemental indenture (in form and
substance satisfactory to the Trustee), executed
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and delivered to the Trustee, the due and punctual payment of the principal of,
and premium, if any, and interest on all of the Notes and the performance of
every covenant of the Exchange Notes, the Indenture and the Registration Rights
Agreement on the part of the Company to be performed or observed; (ii)
immediately after giving effect to such transaction and the assumption
contemplated by clause (i)(2)(y) above (including giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction), the Company or such
Surviving Entity, as the case may be, (1) shall have a Consolidated Net Worth
equal to or greater than the Consolidated Net Worth of the Company immediately
prior to such transaction and (2) shall be able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
"-- Limitation on Incurrence of Additional Indebtedness and Issuance of
Preferred Stock of Restricted Subsidiaries" covenant; (iii) immediately before
and immediately after giving effect to such transaction and the assumption
contemplated by clause (i)(2)(y) above (including, without limitation, giving
effect to any Indebtedness and Acquired Indebtedness incurred or anticipated to
be incurred and any Lien granted in connection with or in respect of the
transaction), no Default or Event of Default shall have occurred or be
continuing; and (iv) the Company or the Surviving Entity shall have delivered to
the Trustee an Officers' Certificate and an opinion of counsel, each stating
that such consolidation, merger, sale, assignment, transfer, lease, conveyance
or other disposition and, if a supplemental indenture is required in connection
with such transaction, such supplemental indenture comply with the applicable
provisions of the Indenture and that all conditions precedent in the Indenture
relating to such transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
The Indenture will provide that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of the Company
in accordance with the foregoing, in which the Company is not the continuing
corporation, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture and the Notes with the same effect as if such
surviving entity had been named as such.
Each Guarantor (other than any Guarantor whose Guarantee is to be released
in accordance with the terms of the Guarantee and the Indenture in connection
with any transaction complying with the provisions of " -- Limitation on Asset
Sales") will not, and the Company will not cause or permit any Guarantor to,
consolidate with or merge with or into any Person other than the Company or any
other Guarantor unless: (i) the entity formed by or surviving any such
consolidation or merger (if other than the Guarantor) or to which such sale,
lease, conveyance or other disposition shall have been made is a corporation
organized and existing under the laws of the United States or any State thereof
or the District of Columbia; (ii) such entity assumes by supplemental indenture
all of the obligations of the Guarantor on the Guarantee; (iii) immediately
after giving effect to such transaction, no Default or Event of Default shall
have occurred and be continuing; and (iv) immediately after giving effect to
such transaction and the use of any net proceeds therefrom on a PRO FORMA basis,
the Company could satisfy the provisions of clause (ii) of the first paragraph
of this covenant. Any merger or consolidation of a Guarantor with and into the
Company (with the Company being the surviving entity) or another Guarantor that
is a Wholly Owned Restricted Subsidiary of the Company need only comply with
clause (iv) of the first paragraph of this covenant.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. (a) The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with, or for the benefit of, any of
its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate
Transactions permitted under paragraph (b) below and (y) Affiliate Transactions
on terms that are no less favorable than those that might reasonably have been
obtained in a
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comparable transaction at such time on an arm's-length basis from a Person that
is not an Affiliate of the Company or such Restricted Subsidiary. All Affiliate
Transactions (and each series of related Affiliate Transactions which are
similar or part of a common plan) involving aggregate payments or other property
with a fair market value in excess of $5,000,000 shall be approved by the Board
of Directors of the Company or such Restricted Subsidiary, as the case may be,
such approval to be evidenced by a Board Resolution stating that such Board of
Directors has determined that such transaction complies with the foregoing
provisions. If the Company or any Restricted Subsidiary of the Company enters
into an Affiliate Transaction (or a series of related Affiliate Transactions
related to a common plan) that involves an aggregate fair market value of more
than $10,000,000, the Company or such Restricted Subsidiary, as the case may be,
shall, prior to the consummation thereof, obtain a favorable opinion as to the
fairness of such transaction or series of related transactions to the Company or
the relevant Restricted Subsidiary, as the case may be, from a financial point
of view, from an Independent Financial Advisor and file the same with the
Trustee.
(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any Restricted
Subsidiary of the Company as determined in good faith by the Company's Board of
Directors or senior management (including, without limitation, any issuance of
securities, grants of cash, securities, stock options or otherwise, pursuant to,
or the funding of, employment arrangements, stock options and stock ownership
plans approved by the Board of Directors of the Company or the board of
directors of the relevant Restricted Subsidiary, and loans or advances in the
ordinary course of business); (ii) transactions exclusively between or among the
Company and any of its Wholly Owned Restricted Subsidiaries or exclusively
between or among such Wholly Owned Restricted Subsidiaries, provided such
transactions are not otherwise prohibited by the Indenture; (iii) any agreement
as in effect as of the Issue Date or any amendment thereto or any transaction
contemplated thereby (including pursuant to any amendment thereto) in any
replacement agreement thereto so long as any such amendment or replacement
agreement is not more disadvantageous to the Holders in any material respect
than the original agreement as in effect on the Issue Date; (iv) the purchase of
or payment of Indebtedness of or monies owed by the Company or any of its
Restricted Subsidiaries for goods or materials purchased, or services received,
in the ordinary course of business; (v) the purchase of or payment of
Indebtedness of or monies owed by the Company or any of its Restricted
Subsidiaries which if incurred after the Issue Date meets the requirements of
the provisions of paragraph (a) of this covenant; and (vi) Restricted Payments
and Investments permitted by the Indenture.
ADDITIONAL SUBSIDIARY GUARANTEES. If the Company or any of its Restricted
Subsidiaries transfers or causes to be transferred, in one transaction or a
series of related transactions, any property to any Restricted Subsidiary that
is not a Guarantor, or if the Company or any of its Restricted Subsidiaries
shall organize, acquire or otherwise invest in another Restricted Subsidiary
having total assets with a book value in excess of $1,000,000, then such
transferee or acquired or other Restricted Subsidiary shall (i) promptly execute
and deliver to the Trustee a supplemental indenture in form reasonably
satisfactory to the Trustee pursuant to which such Restricted Subsidiary shall
unconditionally guarantee all of the Company's obligations under the Notes and
the Indenture on the terms set forth in the Indenture and (ii) deliver to the
Trustee an opinion of counsel that such supplemental indenture has been duly
authorized, executed and delivered by such Restricted Subsidiary and constitutes
a legal, valid, binding and enforceable obligation of such Restricted
Subsidiary. Thereafter, such Restricted Subsidiary shall be a Guarantor for all
purposes of the Indenture.
CONDUCT OF BUSINESS. The Company and its Restricted Subsidiaries will not
engage in any businesses which are not the same, similar or related or
incidental to the businesses in which the Company and its Restricted
Subsidiaries are engaged on the Issue Date.
REPORTS TO HOLDERS. The Indenture will provide that the Company will
deliver to the Trustee within 15 days after the filing of the same with the
Commission, copies of the quarterly and annual reports and of the information,
documents and other reports, if any, which the Company is required to file with
the Commission pursuant to Section 13 or 15(d) of the Exchange Act. The
Indenture further provides that, notwithstanding that the Company may not be
subject to the reporting requirements of Section 13 or 15(d)
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of the Exchange Act, the Company will file with the Commission, to the extent
permitted, and provide the Trustee and Holders with such annual reports and such
information, documents and other reports specified in Sections 13 and 15(d) of
the Exchange Act. The Company will also comply with the other provisions of TIA
314(a).
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on any Exchange Notes when the same
becomes due and payable and the default continues for a period of 30 days
(whether or not such payment shall be prohibited by the subordination
provisions of the Indenture);
(ii) the failure to pay the principal on any Exchange Notes, when
such principal becomes due and payable, at maturity, upon redemption or
otherwise (including the failure to make a payment to purchase Exchange
Notes tendered pursuant to a Change of Control Offer or a Net Proceeds
Offer) (whether or not such payment shall be prohibited by the
subordination provisions of the Indenture);
(iii) a default in the observance or performance of any other
covenant or agreement contained in the Indenture which default continues
for a period of 60 days after the Company receives written notice
specifying the default (and demanding that such default be remedied) from
the Trustee or the Holders of at least 25% of the outstanding principal
amount of the Exchange Notes (except in the case of a default with respect
to the "Merger, Consolidation and Sale of Assets" covenant, which will
constitute an Event of Default with such notice requirement but without
such passage of time requirement);
(iv) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount
of any Indebtedness of the Company or any Restricted Subsidiary of the
Company, or the acceleration of the final stated maturity of any such
Indebtedness if the aggregate principal amount of such Indebtedness,
together with the principal amount of any other such Indebtedness in
default for failure to pay principal at final maturity or which has been
accelerated, aggregates $15,000,000 or more at any time;
(v) one or more judgments in an aggregate amount in excess of
$10,000,000 shall have been rendered against the Company or any of its
Restricted Subsidiaries and such judgments remain undischarged, unpaid or
unstayed for a period of 60 days after such judgment or judgments become
final and non-appealable;
(vi) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries; or
(vii) any of the Guarantees ceases to be in full force and effect or
any of the Guarantees is declared to be null and void and unenforceable or
any of the Guarantees is found to be invalid or any of the Guarantors
denies its liability under its Guarantee (other than by reason of release
of a Guarantor in accordance with the terms of the Indenture).
If an Event of Default (other than an Event of Default specified in clause
(vi) above with respect to the Company) shall occur and be continuing, the
Trustee or the Holders of at least 25% in principal amount of outstanding
Exchange Notes may declare the principal of and accrued interest on all the
Exchange Notes to be due and payable by notice in writing to the Company and the
Trustee specifying the respective Event of Default and that it is a "notice of
acceleration" (the "Acceleration Notice"), and the same (i) shall become
immediately due and payable or (ii) if there are any amounts outstanding under
the Credit Agreement, shall become immediately due and payable upon the first to
occur of an acceleration under the Credit Agreement or 5 business days after
receipt by the Company and the Representative under the Credit Agreement of such
Acceleration Notice. If an Event of Default specified in clause (vi) above with
respect to the Company occurs and is continuing, then all unpaid principal of,
and premium, if any, and accrued and unpaid interest on all of the outstanding
Exchange Notes shall IPSO FACTO become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any Holder.
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The Indenture will provide that, at any time after a declaration of
acceleration with respect to the Exchange Notes as described in the preceding
paragraph, the Holders of a majority in principal amount of the Exchange Notes
may rescind and cancel such declaration and its consequences (i) if the
rescission would not conflict with any judgment or decree, (ii) if all existing
Events of Default have been cured or waived except nonpayment of principal or
interest that has become due solely because of the acceleration, (iii) to the
extent the payment of such interest is lawful, interest on overdue installments
of interest and overdue principal, which has become due otherwise than by such
declaration of acceleration, has been paid, (iv) if the Company has paid the
Trustee its reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (v) in the event of the cure or waiver of an
Event of Default of the type described in clause (vi) of the description above
of Events of Default, the Trustee shall have received an Officers' Certificate
and an opinion of counsel that such Event of Default has been cured or waived.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Exchange Notes pursuant to
the optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Exchange Notes. If an Event of Default occurs prior
to February 15, 2003, by reason of any willful action (or inaction) taken (or
not taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Exchange Notes prior to February 15, 2003, then
the premium specified in the Indenture shall also become immediately due and
payable to the extent permitted by law upon the acceleration of the Exchange
Notes.
The Holders of a majority in principal amount of the Exchange Notes may
waive any existing Default or Event of Default under the Indenture, and its
consequences, except a default in the payment of the principal of or interest on
any Exchange Notes.
Holders of the Exchange Notes may not enforce the Indenture or the Exchange
Notes except as provided in the Indenture and under the TIA. Subject to the
provisions of the Indenture relating to the duties of the Trustee, the Trustee
is under no obligation to exercise any of its rights or powers under the
Indenture at the request, order or direction of any of the Holders, unless such
Holders have offered to the Trustee reasonable indemnity. Subject to all
provisions of the Indenture and applicable law, the Holders of a majority in
aggregate principal amount of the then outstanding Exchange Notes have the right
to direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee.
Under the Indenture, the Company is required to provide an Officers'
Certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or its Subsidiaries, as such, shall have any liability for any obligations of
the Company under the Exchange Notes, the Indenture or for any claim based on,
in respect of, or by reason of, such obligations or their creation. Each Holder
by accepting a Note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Exchange Notes. Such
waiver may not be effective to waive liabilities under the federal securities
laws and it is the view of the Commission that such a waiver is against public
policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations and the obligations of the Guarantors discharged with respect to the
outstanding Exchange Notes ("Legal Defeasance"). Such Legal
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Defeasance means that the Company shall be deemed to have paid and discharged
the entire indebtedness represented by the outstanding Exchange Notes, except
for (i) the rights of Holders to receive payments in respect of the principal
of, premium, if any, and interest on the Exchange Notes when such payments are
due, (ii) the Company's obligations with respect to the Exchange Notes
concerning issuing temporary Exchange Notes, registration of Exchange Notes,
mutilated, destroyed, lost or stolen Exchange Notes and the maintenance of an
office or agency for payments, (iii) the rights, powers, trust, duties and
immunities of the Trustee and the Company's obligations in connection therewith
and (iv) the Legal Defeasance provisions of the Indenture. In addition, the
Company may, at its option and at any time, elect to have the obligations of the
Company released with respect to certain covenants that are described in the
Indenture ("Covenant Defeasance") and thereafter any omission to comply with
such obligations shall not constitute a Default or Event of Default with respect
to the Exchange Notes. In the event Covenant Defeasance occurs, certain events
(not including non-payment, bankruptcy, receivership, reorganization and
insolvency events) described under "Events of Default" will no longer
constitute an Event of Default with respect to the Note.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders cash in U.S. dollars, non-callable U.S. government obligations,
or a combination thereof, in such amounts as will be sufficient, in the opinion
of a nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the Exchange Notes on the stated
date for payment thereof or on the applicable redemption date, as the case may
be; (ii) in the case of Legal Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that (A) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing on the
date of such deposit or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
shall not result in a breach or violation of, or constitute a default under the
Indenture or any other material agreement or instrument to which the Company or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee an
Officers' Certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company or others; (vii) the Company shall have delivered to
the Trustee an Officers' Certificate and an opinion of counsel, each stating
that all conditions precedent provided for or relating to the Legal Defeasance
or the Covenant Defeasance have been complied with; (viii) the Company shall
have delivered to the Trustee an opinion of counsel to the effect that, after
the 91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; and (ix) certain other customary
conditions precedent are satisfied.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Exchange Notes, as expressly provided for in the Indenture) as to all
outstanding Exchange Notes when (i) either (a) all the Exchange Notes
theretofore authenticated and delivered (except lost, stolen or destroyed
Exchange Notes which have been replaced or paid and Exchange
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Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Exchange Notes not theretofore delivered to the Trustee
for cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Exchange Notes
not theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Exchange Notes to the date of deposit
together with irrevocable instructions from the Company directing the Trustee to
apply such funds to the payment thereof at maturity or redemption, as the case
may be; (ii) the Company has paid all other sums payable under the Indenture by
the Company; and (iii) the Company has delivered to the Trustee an Officers'
Certificate and an opinion of counsel stating that all conditions precedent
under the Indenture relating to the satisfaction and discharge of the Indenture
have been complied with.
MODIFICATION OF THE INDENTURE
From time to time, the Company, the Guarantors and the Trustee, without the
consent of the Holders, may amend the Indenture for certain specified purposes,
including curing ambiguities, defects or inconsistencies, so long as such change
does not, in the opinion of the Trustee, adversely affect the rights of any of
the Holders in any material respect. In formulating its opinion on such matters,
the Trustee will be entitled to rely on such evidence as it deems appropriate,
including, without limitation, solely on an opinion of counsel. Other
modifications and amendments of the Indenture may be made with the consent of
the Holders of a majority in principal amount of the then outstanding Exchange
Notes issued under the Indenture, except that, without the consent of each
Holder affected thereby, no amendment may: (i) reduce the amount of Exchange
Notes whose Holders must consent to an amendment; (ii) reduce the rate of or
change or have the effect of changing the time for payment of interest,
including defaulted interest, on any Exchange Notes; (iii) reduce the principal
of or change or have the effect of changing the fixed maturity of any Exchange
Notes, or change the date on which any Exchange Notes may be subject to
redemption or repurchase, or reduce the redemption or repurchase price therefor;
(iv) make any Exchange Notes payable in money other than that stated in the
Exchange Notes; (v) make any change in provisions of the Indenture protecting
the right of each Holder to receive payment of principal of and interest on such
Exchange Note on or after the due date thereof or to bring suit to enforce such
payment, or permitting Holders of a majority in principal amount of Exchange
Notes to waive Defaults or Events of Default; (vi) modify or change any
provision of the Indenture or the related definitions affecting the
subordination or ranking of the Exchange Notes or any Guarantee in a manner
which adversely affects the Holders; or (vii) release any Guarantor from any of
its obligations under its Guarantee or the Indenture otherwise than in
accordance with the terms of the Indenture.
GOVERNING LAW
The Indenture will provide that it, the Exchange Notes and the Guarantees
will be governed by, and construed in accordance with, the laws of the State of
New York but without giving effect to applicable principles of conflicts of law
to the extent that the application of the law of another jurisdiction would be
regulated thereby.
THE TRUSTEE
U.S. Trust Company of California, N.A. is the Trustee under the Indenture
and has been appointed by the Company as Registrar and Paying Agent with regard
to the Exchange Notes. Such bank may also act as a depository of funds for or
make loans to, and perform other services for, the Company or its affiliates in
the ordinary course of business in the future. The corporate trust office of the
Trustee is located at 515 South Flower Street, Suite 2700, Los Angeles,
California 90071.
The Indenture will provide that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it by the Indenture, and use the
same
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degree of care and skill in its exercise as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs. Subject to such
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any Holder of Exchange
Notes, unless such Holder shall have offered to the Trustee security and
indemnify reasonably satisfactory to it against any loss, liability or expense
and then only to the extent required by the terms of the Indenture. The Trustee
may resign at any time or may be removed by the Company. If the Trustee resigns,
is removed or becomes incapable of acting as Trustee or if a vacancy occurs in
the office of the Trustee for any reason, a successor Trustee shall be appointed
in accordance with the provisions of the Indenture.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; PROVIDED that if the
Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of
the Company or at the time it merges or consolidates with the Company or any of
its Restricted Subsidiaries or assumed in connection with the acquisition of
assets from such Person and in each case not incurred by such Person in
connection with, or in anticipation or contemplation of, such Person becoming a
Restricted Subsidiary of the Company or such acquisition, merger or
consolidation.
"AFFILIATE" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the
foregoing.
"ASSET ACQUISITION" means (a) an Investment by the Company or any
Restricted Subsidiary of the Company in or purchase of any other Person pursuant
to which such Person shall become a Restricted Subsidiary of the Company or of
any Restricted Subsidiary of the Company, or shall be merged with or into the
Company or any Restricted Subsidiary of the Company, or (b) the acquisition by
the Company or any Restricted Subsidiary of the Company of the assets of any
Person (other than a Restricted Subsidiary of the Company) which constitute all
or substantially all of the assets of such Person or comprises any division or
line of business of such Person or any other properties or assets of such Person
other than in the ordinary course of business.
"ASSET SALE" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to
any Person other than the Company or a Wholly Owned Restricted Subsidiary of the
Company of (a) any Capital Stock of any Restricted Subsidiary of the Company; or
(b) any other property or assets of the Company or any Restricted Subsidiary of
the Company other than in the ordinary course of business; PROVIDED, HOWEVER,
that Asset Sales shall not include (i) any transaction or series of related
transactions for which the Company or its Restricted Subsidiaries receive
aggregate consideration of less than $1,000,000 and (ii) the sale, lease,
conveyance, disposition or other transfer of all or substantially all of the
assets of the Company as permitted under "Merger, Consolidation and Sale of
Assets."
"BOARD OF DIRECTORS" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
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"BOARD RESOLUTION" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"CAPITALIZED LEASE OBLIGATION" means, as to any Person, the obligations
of such Person under a lease that are required to be classified and accounted
for as capital lease obligations under GAAP and, for purposes of this
definition, the amount of such obligations at any date shall be the capitalized
amount of such obligations at such date, determined in accordance with GAAP.
"CAPITAL STOCK" means (i) with respect to any Person that is a
corporation, any and all shares, interests, participations or other equivalents
(however designated and whether or not voting) of corporate stock, including
each class of Common Stock and Preferred Stock of such Person and (ii) with
respect to any Person that is not a corporation, any and all partnership or
other equity interests of such Person.
"CASH EQUIVALENTS" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv)
certificates of deposit or bankers' acceptances maturing within one year from
the date of acquisition thereof issued by any bank organized under the laws of
the United States of America or any state thereof or the District of Columbia of
any U.S. branch of a foreign bank having at the date of acquisition thereof
combined capital and surplus of not less than $250,000,000; (v) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (iv) above; and (vi) investments in money
market funds which invest substantially all their assets in securities of the
types described in clauses (i) through (v) above.
"CHANGE OF CONTROL" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company to any Person or group of related Persons for purposes of Section 13(d)
of the Exchange Act (a "Group"), together with any Affiliates thereof (whether
or not otherwise in compliance with the provisions of the Indenture); (ii) the
approval by the holders of Capital Stock of the Company of any plan or proposal
for the liquidation or dissolution of the Company (whether or not otherwise in
compliance with the provisions of the Indenture); (iii) any Person or Group
other than one or more Permitted Holders shall become the owner, directly or
indirectly, beneficially or of record, of shares representing more than 50% of
the aggregate ordinary voting power represented by the issued and outstanding
Capital Stock of the Company; or (iv) the replacement of a majority of the Board
of Directors of the Company over a two-year period from the directors who
constituted the Board of Directors of the Company at the beginning of such
period, and such replacement shall not have been approved by a vote of at least
a majority of the Board of Directors of the Company then still in office who
either were members of such Board of Directors at the beginning of such period
or whose election as a member of such Board of Directors was previously so
approved.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"CONSOLIDATED EBITDA" means, with respect to any Person, for any period,
the sum (without duplication) of (i) Consolidated Net Income and (ii) to the
extent Consolidated Net Income has been
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reduced thereby, (A) all income taxes of such Person and its Restricted
Subsidiaries paid or accrued in accordance with GAAP for such period (other than
income taxes attributable to extraordinary, unusual or nonrecurring gains or
losses or taxes attributable to sales or dispositions outside the ordinary
course of business), (B) Consolidated Interest Expense and (C) Consolidated
Non-cash Charges less any non-cash items increasing Consolidated Net Income for
such period, all as determined on a consolidated basis for such Person and its
Restricted Subsidiaries in accordance with GAAP.
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges
of such Person for the Four Quarter Period. In addition to and without
limitation of the foregoing, for purposes of this definition, "Consolidated
EBITDA" and "Consolidated Fixed Charges" shall be calculated after giving
effect on a PRO FORMA basis for the period of such calculation to (i) the
incurrence or repayment of any Indebtedness of such Person or any of its
Restricted Subsidiaries (and the application of the proceeds thereof) giving
rise to the need to make such calculation and any incurrence or repayment of
other Indebtedness (and the application of the proceeds thereof), other than the
incurrence or repayment of Indebtedness in the ordinary course of business for
working capital purposes pursuant to working capital facilities, occurring
during the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter Period; (ii) any Asset
Sales or Asset Acquisitions (including, without limitation, any Asset
Acquisition giving rise to the need to make such calculation as a result of such
Person or one of its Restricted Subsidiaries (including any Person who becomes a
Restricted Subsidiary as a result of the Asset Acquisition) incurring, assuming
or otherwise being liable for Acquired Indebtedness and also including any
Consolidated EBITDA (provided that such Consolidated EBITDA shall be included
only to the extent includable pursuant to the definition of "Consolidated Net
Income") attributable to the assets which are the subject of the Asset
Acquisition or Asset Sale during the Four Quarter Period) occurring during the
Four Quarter Period or at any time subsequent to the last day of the Four
Quarter Period and on or prior to the Transaction Date, as if such Asset Sale or
Asset Acquisition (including the incurrence, assumption or liability for any
such Acquired Indebtedness) occurred on the first day of the Four Quarter
Period; and (iii) in calculating Consolidated EBITDA for any period, without
duplicating any adjustments pursuant to clauses (i) and (ii) above, Consolidated
EBITDA for such period shall be calculated giving pro forma adjustments that
would be permitted by the Commission in any filing with the Commission and to
any one-time employee compensation expenses incurred before the Issue Date or in
connection with the Asset Acquisition giving rise for the need to make such
calculation. If such Person or any of its Restricted Subsidiaries directly or
indirectly guarantees Indebtedness of a third Person, the preceding sentence
shall give effect to the incurrence of such guaranteed Indebtedness as if such
Person or any Restricted Subsidiary of such Person had directly incurred or
otherwise assumed such guaranteed Indebtedness. Furthermore, in calculating
"Consolidated Fixed Charges" for purposes of determining the denominator (but
not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1)
interest on outstanding Indebtedness determined on a fluctuating basis as of the
Transaction Date and which will continue to be so determined thereafter shall be
deemed to have accrued at a fixed rate per annum equal to the rate of interest
on such Indebtedness in effect on the Transaction Date; (2) if interest on any
Indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on the Transaction Date will be deemed to have been in effect during the
Four Quarter Period; and (3) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation of
the operation of such agreements. In making such computations, the Consolidated
Fixed Charges attributable to interest on any Indebtedness under a revolving
credit facility computed on a pro
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forma basis shall be computed based upon the average daily outstanding balance
of such Indebtedness during such period.
"CONSOLIDATED FIXED CHARGES" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense, plus
(ii) the product of (x) the amount of all dividend payments on any series of
Preferred Stock of such Person (other than dividends paid in Qualified Capital
Stock) paid, accrued or scheduled to be paid or accrued during such period times
(y) a fraction, the numerator of which is one and the denominator of which is
one minus the then current effective consolidated federal, state and local tax
rate of such Person, expressed as a decimal.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any
period, the sum of, without duplication: (i) the aggregate of the interest
expense (but excluding any write-off of deferred financing fees in connection
with any refinancing or retirement of Indebtedness) of such Person and its
Restricted Subsidiaries of such period determined on a consolidated basis in
accordance with GAAP, including without limitation, (a) any amortization of debt
discount and deferred financing costs, (b) the net costs under Interest Swap
Obligations, (c) all capitalized interest and (d) the interest portion of any
deferred payment obligation; and (ii) the interest component of Capitalized
Lease Obligations paid, accrued and/or scheduled to be paid or accrued by such
Person and its Restricted Subsidiaries during such period as determined on a
consolidated basis in accordance with GAAP.
"CONSOLIDATED NET INCOME" means, with respect to any Person, for any
period, the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; PROVIDED, that there shall be excluded therefrom (a) after-tax gains
from Asset Sales or abandonments or reserves relating thereto, (b) after-tax
items classified as extraordinary or nonrecurring gains, (c) the net income of
any Person acquired in a "pooling of interests" transaction accrued prior to
the date it becomes a Restricted Subsidiary of the referent Person or is merged
or consolidated with the referent Person or any Restricted Subsidiary of the
referent Person, (d) the net income (but not loss) of any Restricted Subsidiary
of the referent Person to the extent that the declaration of dividends or
similar distributions by that Restricted Subsidiary of that income is restricted
by a contract, operation of law or otherwise, (e) the net income of any Person,
other than a Restricted Subsidiary of the referent Person, except to the extent
of cash dividends or distributions paid to the referent Person or to a Wholly
Owned Restricted Subsidiary of the referent Person by such Person, (f) any
restoration to income of any contingency reserve, except to the extent that
provision for such reserve was made out of Consolidated Net Income accrued at
any time following the Issue Date, (g) income or loss attributable to
discontinued operations (including, without limitation, operations disposed of
during such period whether or not such operations were classified as
discontinued), and (h) in the case of a successor to the referent Person by
consolidation or merger or as a transferee of the referent Person's assets, any
earnings of the successor corporation prior to such consolidation, merger or
transfer of assets.
"CONSOLIDATED NET WORTH" of any Person means the consolidated
stockholders' equity of such Person, determined on a consolidated basis in
accordance with GAAP, less (without duplication) amounts attributable to
Disqualified Capital Stock of such Person.
"CONSOLIDATED NON-CASH CHARGES" means, with respect to any Person, for
any period, the aggregate depreciation, amortization and other non-cash expenses
of such Person and its Restricted Subsidiaries reducing Consolidated Net Income
of such Person and its Restricted Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP (excluding any such charges
constituting an extraordinary item or loss or any such charge which requires an
accrual of or a reserve for cash charges for any future period).
"CREDIT AGREEMENT" means the Amended and Restated Credit Agreement dated
as of February 11, 1998, between the Company, the lenders party thereto in their
capacities as lenders thereunder and The First National Bank of Chicago, as
agent, together with the related documents thereto (including, without
limitation, any guarantee agreements and security documents), in each case as
such agreements may be amended (including any amendment and restatement
thereof), supplemented or otherwise modified from time to time, including any
agreement extending the maturity of, refinancing, replacing or otherwise
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restructuring (including increasing the amount of available borrowings
thereunder (PROVIDED that such increase in borrowings is permitted by the
"Limitation on Incurrence of Additional Indebtedness and Issuance of Preferred
Stock of Restricted Subsidiaries" covenant above) or adding Restricted
Subsidiaries of the Company as additional borrowers or guarantors thereunder)
all or any portion of the Indebtedness under such agreement or any successor or
replacement agreement and whether by the same or any other agent, lender or
group of lenders.
"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
"DEFAULT" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"DESIGNATED SENIOR DEBT" means (i) Indebtedness under or in respect of
the Credit Agreement and (ii) any other Indebtedness constituting Senior Debt
which, at the time of determination, has an aggregate principal amount of at
least $10,000,000 and is specifically designated in the instrument evidencing
such Senior Debt as "Designated Senior Debt" by the Company.
"DISQUALIFIED CAPITAL STOCK" means that portion of any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the sole option of the holder
thereof on or prior to the final maturity date of the Exchange Notes.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.
"FAIR MARKET VALUE" means, with respect to any asset or property, the
price which could be negotiated in an arm's-length, free market transaction, for
cash, between a willing seller and a willing and able buyer, neither of whom is
under undue pressure or compulsion to complete the transaction. Fair market
value shall be determined by the Board of Directors of the Company acting
reasonably and in good faith and shall be evidenced by a Board Resolution of the
Board of Directors of the Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"GUARANTOR" means (i) each of Affiliated Metals Company, Cornerstone
Patio Concepts, L.L.C., Cornerstone Metals Corporation, Cornerstone Aluminum
Company, Inc., Cornerstone Building Products, Inc., Federal Bronze Alloys Inc.,
Independent Metals Co., Inc., Interstate Steel Supply Company of Pittsburgh,
Interstate Steel Supply Co., Interstate Steel Processing Company, Interstate
Steel Supply Company of Maryland, Harvey Titanium, Ltd., Jeffreys Steel Company,
Inc., Meier Metal Servicenters, Inc., Metals USA Finance Corporation, Metals USA
Service Corporation, MUSA GP, Inc., MUSA LP, Inc., Queensboro Steel Corporation,
R.J. Fabricating Inc., Royal Aluminum, Inc., Southern Alloy of America, Inc.,
Steel Service Systems, Inc., Texas Aluminum Industries, Inc., Uni-Steel, Inc.,
Wayne Steel, Inc. and Williams Steel & Supply Co., Inc. and (ii) each of the
Company's Restricted Subsidiaries that in the future executes a supplemental
indenture in which such Restricted Subsidiary agrees to be bound by the terms of
the Indenture as a Guarantor; PROVIDED that any Person constituting a Guarantor
as described above shall cease to constitute a Guarantor when its respective
Guarantee is released in accordance with the terms of the Indenture.
"GUARANTOR SENIOR DEBT" means with respect to any Guarantor, (i) the
principal of, premium, if any, and interest (including any interest accruing
subsequent to the filing of a petition of bankruptcy at the rate provided for in
the documentation with respect thereto, whether or not such interest is an
allowed claim under applicable law) on any Indebtedness of a Guarantor, whether
outstanding on the Issue Date or
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thereafter created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the Guarantee of such Guarantor. Without
limiting the generality of the foregoing, "Guarantor Senior Debt"shall also
include the principal of, premium, if any, interest (including any interest
accruing subsequent to the filing of a petition of bankruptcy at the rate
provided for in the documentation with respect thereto, whether or not such
interest is an allowed claim under applicable law) on, and all other amounts
owing in respect of, (x) all monetary obligations of every nature of the Company
under the Credit Agreement guaranteed by a Guarantor, including, without
limitation, obligations to pay principal and interest, reimbursement obligations
under letters of credit, fees, expenses and indemnities, (y) all Interest Swap
Obligations and (z) all obligations under Currency Agreements, in each case
whether outstanding on the Issue Date or thereafter incurred. Notwithstanding
the foregoing, "Guarantor Senior Debt" shall not include (i) any Indebtedness
of such Guarantor to a Restricted Subsidiary of such Guarantor or any Affiliate
of such Guarantor or any of such Affiliate's Subsidiaries, (ii) Indebtedness to,
or guaranteed on behalf of, any shareholder, director, officer or employee of
such Guarantor or any Restricted Subsidiary of such Guarantor (including,
without limitation, amounts owed for compensation), (iii) Indebtedness to trade
creditors and other amounts incurred in connection with obtaining goods,
materials or services, (iv) Indebtedness represented by Disqualified Capital
Stock, (v) any liability for federal, state, local or other taxes owed or owing
by such Guarantor, (vi) Indebtedness incurred in violation of the Indenture
provisions set forth under "Limitation on Incurrence of Additional Indebtedness
and Issuance of Preferred Stock of Restricted Subsidiaries," (vii) Indebtedness
which, when incurred and without respect to any election under Section 1111(b)
of Title 11, United States Code, is without recourse to the Company and (viii)
any Indebtedness which is, by its express terms, subordinated in right of
payment to any other Indebtedness of such Guarantor.
"INDEBTEDNESS" means with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money, (ii) all Obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all Capitalized Lease Obligations of such Person, (iv) all Obligations of such
Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business that are not overdue by 90 days or
more or are being contested in good faith), (v) all Obligations for the
reimbursement of any obligor on any letter of credit, banker's acceptance or
similar credit transaction, (vi) guarantees and other contingent obligations in
respect of Indebtedness referred to in clauses (i) through (v) above and clause
(viii) below, (vii) all Obligations of any other Person of the type referred to
in clauses (i) through (vi) which are secured by any lien on any property or
asset of such Person, the amount of such Obligation being deemed to be the
lesser of the fair market value of such property or asset or the amount of the
Obligation so secured, (viii) all Obligations under Currency Agreements and
Interest Swap Obligations of such Person and (ix) all Disqualified Capital Stock
issued by such Person with the amount of Indebtedness represented by such
Disqualified Capital Stock being equal to the greater of its voluntary or
involuntary liquidation preference and its maximum fixed repurchase price, but
excluding accrued dividends, if any. For purposes hereof, the "maximum fixed
repurchase price" of any Disqualified Capital Stock which does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Disqualified Capital Stock as if such Disqualified Capital Stock were purchased
on any date on which Indebtedness shall be required to be determined pursuant to
the Indenture, and if such price is based upon, or measured by, the fair market
value of such Disqualified Capital Stock, such fair market value shall be
determined reasonably and in good faith by the Board of Directors of the issuer
of such Disqualified Capital Stock.
"INDEPENDENT FINANCIAL ADVISOR" means a firm (i) which does not, and
whose directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company (other than an interest in less than
5% of the Company's Common Stock or any other publicly traded securities of the
Company) and (ii) which, in the judgment of the Board of Directors of the
Company, is otherwise independent and qualified to perform the task for which it
is to be engaged.
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"INTEREST SWAP OBLIGATIONS" means the obligations of any Person pursuant
to any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"INVESTMENT" means, with respect to any Person, any direct or indirect
loan or other extension of credit (including, without limitation, a guarantee)
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude extensions of trade credit by the
Company and its Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be. For the purposes of the "Limitation on
Restricted Payments" covenant, (i) "Investment" shall include and be valued
at the fair market value of the net assets of any Restricted Subsidiary at the
time that such Restricted Subsidiary is designated as an Unrestricted Subsidiary
and shall exclude the fair market value of the net assets of any Unrestricted
Subsidiary at the time that such Unrestricted Subsidiary is designated as a
Restricted Subsidiary and (ii) the amount of any Investment shall be the
original cost of such Investment plus the cost of all additional Investments by
the Company or any of its Restricted Subsidiaries, without any adjustments for
increases or decreases in value, or write-ups, write-downs or write-offs with
respect to such Investment, reduced by the payment of dividends or distributions
in connection with such Investment or any other amounts received in respect of
such Investment; PROVIDED that no such payment of dividends or distributions or
receipt of any such other amounts shall reduce the amount of any Investment if
such payment of dividends or distributions or receipt of any such amounts would
be included in Consolidated Net Income. If the Company or any Restricted
Subsidiary of the Company sells or otherwise disposes of any Common Stock of any
direct or indirect Restricted Subsidiary of the Company such that, after giving
effect to any such sale or disposition such entity is no longer a Restricted
Subsidiary, the Company shall be deemed to have made an Investment on the date
of any such sale or disposition equal to the fair market value of the Common
Stock or other equity interests of such entity not sold or disposed of.
"INVESTMENT GRADE RATING" means a rating of BBB- or higher by S&P and
Baa3 or higher by Moody's or the equivalent of such rating by S&P and Moody's or
by any other Rating Agency selected as provided in the definition of Rating
Agency.
"ISSUE DATE" means the date of original issuance of the Original Notes.
"LIEN" means any lien, mortgage, deed of trust, pledge, security
interest, charge or encumbrance of any kind (including any conditional sale or
other title retention agreement, any lease in the nature thereof and any
agreement to give any security interest).
"NET CASH PROCEEDS" means, with respect to any Asset Sale, the proceeds
in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of cash or Cash
Equivalents (other than the portion of any such deferred payment constituting
interest) received by the Company or any of its Restricted Subsidiaries from
such Asset Sale net of (a) reasonable out-of-pocket expenses and fees relating
to such Asset Sale (including, without limitation, legal, accounting and
investment banking fees and sales commissions and discounts), (b) taxes paid or
payable after taking into account any reduction in consolidated tax liability
due to available tax credits or deductions and any tax sharing arrangements, (c)
repayment of Indebtedness that is required to be repaid in connection with such
Asset Sale and (d) appropriate amounts to be provided by the Company or any of
its Restricted Subsidiaries, as the case may be, as a reserve, in accordance
with GAAP, against any liabilities associated with such Asset Sale and retained
by the Company or any Restricted Subsidiary, as the case may be, after such
Asset Sale, including, without limitation, pension and other post-employment
benefit liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with such Asset
Sale.
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"NOTRE" means Notre Capital Ventures II, L.L.C.
"OBLIGATIONS" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"OFFICERS' CERTIFICATE" means a certificate signed by the Chairman, a
Vice Chairman, the President or a Vice President, and by the Treasurer, an
Assistant Treasurer, the Controller, an Assistant Controller, the Secretary or
an Assistant Secretary of the Company, and delivered to the Trustee.
"PERMITTED HOLDER" means, as of the Issue Date, (i) any officer or
director of the Company, (ii) Notre, (iii) any officer or director of any
Subsidiary of the Company who holds 1% or more of the Company's Common Stock,
(iv) in the case of an entity, any Affiliates of the foregoing, and (v) in the
case of an individual, any spouse, sibling, child or grandchild of the foregoing
(in each case, whether such relationship arises from birth, adoption or through
marriage).
"PERMITTED INDEBTEDNESS" means, without duplication, each of the
following:
(i) Indebtedness under the Exchange Notes (or the Original Notes that
are not exchanged for Exchange Notes pursuant to the Exchange Offer), the
Indenture and the Guarantees;
(ii) Indebtedness incurred pursuant to the Credit Agreement or any
other credit agreement in an aggregate principal amount at any time
outstanding not to exceed $350,000,000 with respect to the Indebtedness
under the Credit Agreement or any other credit agreement, less the amount
of all mandatory principal payments actually made by the Company in respect
of any Term Loan Facility (excluding any such payments to the extent
refinanced at the time of payment under a replaced Credit Agreement;
(iii) other Indebtedness of the Company and its Restricted
Subsidiaries outstanding on the Issue Date reduced by the amount of any
scheduled amortization payments or mandatory prepayments when actually paid
or permanent reductions thereon;
(iv) Interest Swap Obligations of the Company covering Indebtedness
of the Company or any of its Restricted Subsidiaries and Interest Swap
Obligations of any Restricted Subsidiary of the Company covering
Indebtedness of such Restricted Subsidiary; PROVIDED, HOWEVER, that such
Interest Swap Obligations are entered into to protect the Company and its
Restricted Subsidiaries from fluctuations in interest rates on Indebtedness
incurred in accordance with the Indenture to the extent the notional
principal amount of such Interest Swap Obligation does not exceed the
principal amount of the Indebtedness to which such Interest Swap Obligation
relates;
(v) Indebtedness under Currency Agreements; PROVIDED that in the case
of Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness of the Company and its
Restricted Subsidiaries outstanding other than as a result of fluctuations
in foreign currency exchange rates or by reason of fees, indemnitees and
compensation payable thereunder;
(vi) Indebtedness of a Wholly Owned Restricted Subsidiary of the
Company to the Company or to a Wholly Owned Restricted Subsidiary of the
Company for so long as such Indebtedness is held by the Company or a Wholly
Owned Restricted Subsidiary of the Company, in each case subject to no Lien
held by a Person other than the Company or a Wholly Owned Restricted
Subsidiary of the Company; PROVIDED that if as of any date any Person other
than the Company or a Wholly Owned Restricted Subsidiary of the Company
owns or holds any such indebtedness or holds a Lien in respect of such
Indebtedness, such date shall be deemed the incurrence of Indebtedness not
constituting Permitted Indebtedness by the issuer of such Indebtedness;
(vii) Indebtedness of the Company to a Wholly Owned Restricted
Subsidiary of the Company for so long as such Indebtedness is held by a
Wholly Owned Restricted Subsidiary of the Company, in each case subject to
no Lien; PROVIDED that (a) any Indebtedness of the Company to any Wholly
Owned Restricted Subsidiary of the Company is unsecured and subordinated,
pursuant to a written agreement, to the Company's obligations under the
Indenture and the Exchange Notes and (b) if as of any date any
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Person other than a Wholly Owned Restricted Subsidiary of the Company owns
or holds any such Indebtedness or any Person holds a Lien in respect of
such Indebtedness, such date shall be deemed the incurrence of Indebtedness
not constituting Permitted Indebtedness by the Company;
(viii) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; PROVIDED, HOWEVER, that such
indebtedness is extinguished within two business days of incurrence;
(ix) Indebtedness of the Company or any of its Restricted
Subsidiaries represented by letters of credit for the account of the
Company or such Restricted Subsidiary, as the case may be, in order to
provide security for workers' compensation claims, payment obligations in
connection with self-insurance or similar requirements in the ordinary
course of business;
(x) Indebtedness in connection with one or more standby letters of
credit, guarantees, performance bonds or other reimbursement obligations,
in each case, issued in the ordinary course of business and not in
connection with the borrowing of money or the obtaining of advances or
credit (other than advances or credit on open account, includible in
current liabilities, for goods and services in the ordinary course of
business and on terms and conditions which are customary in the business of
the Company and its Restricted Subsidiaries as existing on the Issue Date
or in businesses reasonably related thereto, and other than the extension
of credit represented by such letter of credit, guarantee or performance
bond itself), not to exceed in the aggregate at any given time 10% of the
Consolidated Net Worth of the Company and its Restricted Subsidiaries;
provided, that any draw under or call upon any of the foregoing is repaid
in full within 30 days;
(xi) the incurrence by the Company or any of the Guarantors of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property, plant or equipment used in the business of the
Company or such Guarantor, in an aggregate principal amount not to exceed
the greater of (a) $20,000,000 or (b) 5% of the Consolidated Net Worth of
the Company at any one time outstanding;
(xii) Refinancing Indebtedness;
(xiii) Incurrence by the Company or any Guarantors of Indebtedness
owed to or guaranteed by any governmental agency, instrumentality or other
authority incurred to provide relief from natural disasters or otherwise to
provide economic development incentives; and
(xiv) additional Indebtedness of the Company and its Restricted
Subsidiaries in an aggregate principal amount not to exceed the greater of
(a) $20,000,000 or (b) 5% of the Consolidated Net Worth of the Company at
any one time outstanding.
For purposes of determining whether any Indebtedness is Permitted
Indebtedness, (i) in the event that an item of Indebtedness meets the criteria
of more than one of the types of Indebtedness described above, the Company, in
its sole discretion, will classify such item of Indebtedness and only be
required to include the amount and type of such Indebtedness in one of the above
clauses and (ii) an item of Indebtedness may be divided and classified in more
than one of the types of Indebtedness described above.
"PERMITTED INVESTMENTS" means (i) Investments by the Company or any
Restricted Subsidiary of the Company in any Person that is or will become
immediately after such Investment a Wholly Owned Restricted Subsidiary of the
Company or that will merge or consolidate into the Company or a Wholly Owned
Restricted Subsidiary of the Company; (ii) Investments in the Company by any
Restricted Subsidiary of the Company; PROVIDED that any Indebtedness evidencing
such Investment is unsecured and subordinated, pursuant to a written agreement,
to the Company's obligations under the Notes and the Indenture; (iii)
investments in cash and Cash Equivalents; (iv) loans and advances to employees
and officers of the Company and its Restricted Subsidiaries in the ordinary
course of business for bona fide business purposes not in excess of $5,000,000
at any one time outstanding; (v) Currency Agreements and Interest Swap
Obligations entered into in the ordinary course of the Company's or its
Restricted Subsidiaries'
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businesses and otherwise in compliance with the Indenture; (vi) Investments in
securities of trade creditors or customers received pursuant to any plan of
reorganization or similar arrangement upon the bankruptcy or insolvency of such
trade creditors or customers or received in settlement of debts created in the
ordinary course of business or in satisfaction of judgments; (vii) Investments
made by the Company or its Restricted Subsidiaries as a result of consideration
received in connection with an Asset Sale made in compliance with the
"Limitation on Asset Sales" covenant; and (viii) additional Investments by the
Company or any Restricted Subsidiary of the Company in an aggregate amount,
based on original cost, not to exceed $20,000,000 at any one time outstanding.
"PERMITTED LIENS" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
(ii) statutory Liens of landlords and Liens of carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens
imposed by law incurred in the ordinary course of business for sums not yet
delinquent or being contested in good faith, if such reserve or other
appropriate provision, if any, as shall be required by GAAP shall have been
made in respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security, including any Lien securing letters of
credit issued in the ordinary course of business consistent with past
practice in connection therewith, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(iv) judgment Liens not giving rise to an Event of Default so long as
such Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceedings may be
initiated shall not have expired;
(v) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company
or any of its Restricted Subsidiaries;
(vi) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or
assets which is not leased property subject to such Capitalized Lease
Obligation;
(vii) purchase money Liens to finance property or assets of the
Company or any Restricted Subsidiary of the Company acquired in the
ordinary course of business; provided, however, that (A) the related
purchase money Indebtedness shall not exceed the cost of such property or
assets and shall not be secured by any property or assets of the Company or
any Restricted Subsidiary of the Company other than the property and assets
so acquired and (B) the Lien securing such Indebtedness shall be created
within 90 days of such acquisition;
(viii) Liens upon specific items of inventory or other goods and
proceeds of any Person securing such Person's obligations in respect of
bankers' acceptance issued or created for the account of such Person to
facilitate the purchase, shipment or storage of such inventory or other
goods;
(ix) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other property
relating to such letters of credit and products and proceeds thereof;
(x) Liens encumbering deposits made to secure obligations arising
from statutory, regulatory, contractual, or warranty requirements of the
Company or any of its Restricted Subsidiaries, including rights of offset
and set-off;
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(xi) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(xii) Liens securing Indebtedness under Currency Agreements;
(xiii) Liens incurred in the ordinary course of business of the
Company or any Restricted Subsidiary of the Company with respect to
obligations that do not exceed $10.0 million at any one time outstanding
and that (a) are not incurred in connection with the borrowing of money or
the obtaining of advances or credit (other than trade credit in the
ordinary course of business) and (b) do not in the aggregate materially
detract from the value of the property or materially impair the use thereof
in the operation of business by the Company or such Restricted Subsidiary;
(xiv) Liens securing Acquired Indebtedness incurred in accordance
with the "Limitation on Incurrence of Additional Indebtedness and Issuance
of Preferred Stock of Restricted Subsidiaries" covenant; PROVIDED that (A)
such Liens secured such Acquired Indebtedness at the time of and prior to
the incurrence of such Acquired Indebtedness by the Company or a Restricted
Subsidiary of the Company and were not granted in connection with, or in
anticipation of, the incurrence of such Acquired Indebtedness by the
Company or a Restricted Subsidiary of the Company and (B) such Liens do not
extend to or cover any property or assets of the Company or of any of its
Restricted Subsidiaries other than the property or assets that secured the
Acquired Indebtedness prior to the time such Indebtedness became Acquired
Indebtedness of the Company or a Restricted Subsidiary of the Company and
are no more favorable to the lienholders than those securing the Acquired
Indebtedness prior to the incurrence of such Acquired Indebtedness by the
Company or a Restricted Subsidiary of the Company; and
(xv) Liens not permitted by clauses (i) through (xiv) that are
incurred in the ordinary course of business of the Company or any
Restricted Subsidiary of the Company with respect to obligations that do
not exceed $10,000,000 at any one time outstanding.
"PERSON" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, limited liability company, or a
governmental agency or political subdivision thereof.
"PREFERRED STOCK" of any Person means any Capital Stock of such Person
that has preferential rights to any other Capital Stock of such Person with
respect to dividends or redemptions or upon liquidation.
"QUALIFIED CAPITAL STOCK" means any Capital Stock that is not
Disqualified Capital Stock.
"RATING AGENCY" means S&P and Moody's, or if S&P or Moody's or both shall
not make a rating on the Securities publicly available, a nationally recognized
statistical rating agency or agencies, as the case may be, selected by the
Company (as certified by a resolution of the Board of Directors of the Company)
which shall be substituted for S&P or Moody's or both, as the case may be.
"REFINANCE" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, pre-pay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"REFINANCING INDEBTEDNESS" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness and Issuance of
Preferred Stock of Restricted Subsidiaries" covenant (other than pursuant to
clause (ii), (iv), (v), (vi), (vii), (viii), (ix), (x), (xi), (xiii) or (xiv) of
the definition of Permitted Indebtedness), in each case that does not (1) result
in an increase in the aggregate principal amount of Indebtedness of such Person
as of the date of such proposed Refinancing (plus the amount of any premium
required to be paid under the terms of the instrument governing such
Indebtedness and plus the amount of reasonable expenses incurred by the Company
in connection with such Refinancing) or (2) create Indebtedness with (A) a
Weighted Average Life to Maturity that is less than the Weighted Average Life to
Maturity of the Indebtedness being Refinanced or (B) a final maturity earlier
than the final maturity of the Indebtedness being Refinanced; PROVIDED that (x)
if such Indebtedness being Refinanced is Indebtedness of
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the Company, then such Refinancing Indebtedness shall be indebtedness solely of
the Company and (y) if such Indebtedness being Refinanced is subordinate or
junior to the Exchange Notes, then such Refinancing Indebtedness shall be
subordinate to the Exchange Notes at least to the same extent and in the same
manner as the Indebtedness being Refinanced.
"REPRESENTATIVE" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Debt; PROVIDED that if, and
for so long as, any Designated Senior Debt lacks such a representative, then the
Representative for such Designated Senior Debt shall at all times constitute the
holders of a majority in outstanding principal amount of such Designated Senior
Debt in respect of any Designated Senior Debt.
"RESTRICTED SUBSIDIARY" of any Person means any Subsidiary of such Person
which is not an Unrestricted Subsidiary.
"SALE AND LEASEBACK TRANSACTION" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such Property.
"SENIOR DEBT" means, (i) the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable law) on any
Indebtedness of the Company, whether outstanding on the Issue Date or thereafter
created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the Exchange Notes. Without limiting the
generality of the foregoing, "Senior Debt" shall also include the principal
of, premium, if any, interest (including any interest accruing subsequent to the
filing of a petition of bankruptcy at the rate provided for in the documentation
with respect thereto, whether or not such interest is an allowed claim under
applicable law) on, and all other amounts owing in respect of (x) all monetary
obligations of every nature of the Company under the Credit Agreement,
including, without limitation, obligations to pay principal and interest,
reimbursement obligations under letters of credit, fees, expenses and
indemnities, (y) all Interest Swap Obligations and (z) all obligations under
Currency Agreements, in each case whether outstanding on the Issue Date or
thereafter incurred. Notwithstanding the foregoing, "Senior Debt" shall not
include (i) any Indebtedness of the Company to a Restricted Subsidiary of the
Company or any Affiliate of the Company or any of such Affiliate's Subsidiaries,
(ii) Indebtedness to, or guaranteed on behalf of, any shareholder, director,
officer or employee of the Company or any Restricted Subsidiary of the Company
(including, without limitation, amounts owed for compensation), (iii)
Indebtedness to trade creditors and other amounts incurred in connection with
obtaining goods, materials or services, (iv) Indebtedness represented by
Disqualified Capital Stock, (v) any liability for federal, state, local or other
taxes owed or owing by the Company, (vi) Indebtedness incurred in violation of
the Indenture provisions set forth under "Limitation on Incurrence of
Additional Indebtedness and Issuance of Preferred Stock of Restricted
Subsidiaries," (vii) Indebtedness which, when incurred and without respect to
any election under Section 1111(b) of Title 11, United States Code, is without
recourse to the Company and (viii) any Indebtedness which is, by its express
terms, subordinated in right of payment to any other indebtedness of the
Company.
"SIGNIFICANT SUBSIDIARY" shall have the meaning set forth in Rule 1.02(v)
of Regulation S-X under the Securities Act.
"SUBSIDIARY," with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (ii) any
other Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
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"TERM LOAN FACILITY" means any term loan facilities under the Credit
Agreement.
"UNRESTRICTED SUBSIDIARY" of any Person means (i) any Subsidiary of such
Person that at the time of determination shall be or continue to be designated
an Unrestricted Subsidiary by the Board of Directors of such Person in the
manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The
Board of Directors may designate any Subsidiary (including any newly acquired or
newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary
owns any Capital Stock of, or owns or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; PROVIDED that (x) the Company certifies to the
Trustee that such designation complies with the "Limitation on Restricted
Payments" covenant and (y) each Subsidiary to be so designated and each of its
Subsidiaries has not at the time of designation, and does not thereafter,
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable with respect to any Indebtedness pursuant to which the lender
has recourse to any of the assets of the Company or any of its Restricted
Subsidiaries. The Board of Directors may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary only if (x) immediately after giving effect to
such designation, the Company is able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness and Issuance of Preferred
Stock of Restricted Subsidiaries" covenant and (y) immediately before and
immediately after giving effect to such designation, no Default or Event of
Default shall have occurred and be continuing. Any such designation by the Board
of Directors shall be evidenced to the Trustee by promptly filing with the
Trustee a copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (a) the then
outstanding aggregate principal amount of such Indebtedness into (b) the sum of
the total of the products obtained by multiplying (i) the amount of each then
remaining installment, sinking fund, serial maturity or other required payment
of principal, including payment at final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means any Restricted
Subsidiary of such Person of which all the outstanding voting securities (other
than in the case of a foreign Restricted Subsidiary, directors' qualifying
shares or an immaterial amount of shares required to be owned by other Persons
pursuant to applicable law) are owned by such Person or any Wholly Owned
Restricted Subsidiary of such Person.
REGISTRATION RIGHTS
The Company and the Initial Purchasers entered into a registration rights
agreement (the "Registration Rights Agreement") on the Issue Date pursuant to
which the Company agreed that it will, at its cost, for the benefit of the
holders of the Original Notes (the "Holders"), (i) within 60 days after the
Issue Date (the "Filing Date"), file this Registration Statement with respect
to the Exchange Offer and (ii) cause the Registration Statement to be declared
effective under the Securities Act within 150 days after the Issue Date. Upon
the Registration Statement being declared effective, the Company will offer the
Exchange Notes in exchange for surrender of the Original Notes. The Company will
keep the Exchange Offer open for not less than 30 days (or longer if required by
applicable law) after the date notice of the Exchange Offer is mailed to the
Holders. For each of the Original Notes surrendered to the Company pursuant to
the Exchange Offer, the Holder who surrendered such Original Notes will receive
an Exchange Note having a principal amount equal to that of the surrendered
Original Notes. Interest on each Exchange Note will accrue (A) from the later of
(i) the last interest payment date on which interest was paid on the Original
Note surrendered in exchange therefor, or (ii) if the Original Note is
surrendered for exchange on a date in a period which includes the record date
for an interest payment date to occur on or after the date of such exchange and
as to which interest will be paid, the date of such interest payment date or (B)
if no interest has been paid on the Original Notes, from the Issue Date.
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If, (i) because of any change in law or in currently prevailing
interpretations of the staff of the Commission, the Company is not permitted to
effect the Exchange Offer, (ii) the Exchange Offer is not consummated within 195
days of the Issue Date, (iii) in certain circumstances, certain holders of
unregistered Exchange Notes so request, or (iv) in the case of any Holder that
participates in the Exchange Offer, such Holder does not receive Exchange Notes
on the date of the exchange that may be sold without restriction under state and
federal securities laws (other than due solely to the status of such Holder as
an affiliate of the Company within the meaning of the Securities Act), then in
each case, the Company will (x) promptly deliver to the Holders and the Trustee
written notice thereof and (y) at its sole expense, (a) as promptly as
practicable, file a shelf registration statement covering resales of the
Original Notes (the "Shelf Registration Statement"), (b) use its best efforts
to cause the Shelf Registration Statement to be declared effective under
Securities Act, and (c) use its best efforts to keep effective the Shelf
Registration Statement until the earlier of two years after its effective date
or such time as all of the applicable Original Notes have been sold thereunder.
The Company will, in the event that a Shelf Registration Statement is filed,
provide to each Holder copies of the prospectus that is a part of the Shelf
Registration Statement, notify each such Holder when the Shelf Registration
Statement for the Original Notes has become effective and take certain other
actions as are required to permit unrestricted resales of the Original Notes. A
Holder that sells Original Notes pursuant to the Shelf Registration Statement
will be required to be named as a selling security holder in the related
prospectus and to deliver a prospectus to purchasers, will be subject to certain
of the civil liability provisions under the Securities Act in connection with
such sales and will be bound by the provisions of the Registration Rights
Agreement that are applicable to such a Holder (including certain
indemnification rights and obligations).
If the Company fails to comply with the above provision or if the
Registration Statement or the Shelf Registration Statement fails to become
effective, then, as liquidated damages, additional interest ("Additional
Interest") shall become payable in respect of the Original Notes as follows:
(i) if (A) neither the Registration Statement nor the Shelf
Registration Statement has been filed with the Commission on or prior to
the Filing Date or (B) notwithstanding that the Company has consummated or
will consummate an Exchange Offer, the Company is required to file a Shelf
Registration Statement and such Shelf Registration Statement is not filed
on or prior to the date required by the Registration Rights Agreement,
then, commencing on the day after either such required filing date,
Additional Interest shall accrue on the principal amount of the Original
Notes at a rate of .50% per annum for the first 90 days immediately
following each such filing date, and such Additional Interest rate shall
increase by an additional .50% per annum at the beginning of each
subsequent 90-day period; or
(ii) if (A) neither the Registration Statement nor a Shelf
Registration Statement is declared effective by the Commission on or prior
to 150 days after the Issue Date or (B) notwithstanding that the Company
has consummated or will consummate an Exchange Offer, the Company is
required to file a Shelf Registration Statement and such Shelf Registration
Statement is not declared effective by the Commission on or prior to the
applicable Effectiveness Date (as defined in the Registration Rights
Agreement) then, commencing on the day after such date, Additional Interest
shall accrue on the principal amount of the Original Notes at a rate of
.50% per annum for the first 90 days immediately following such date, and
such Additional Interest rate shall increase by an additional .50% per
annum at the beginning of each subsequent 90-day period; or
(iii) if (A) the Company has not exchanged Exchange Notes for all
Original Notes validly tendered in accordance with the terms of the
Exchange Offer on or prior to the 45th day after the date on which the
Registration Statement was declared effective or (B) if applicable, the
Shelf Registration Statement has been declared effective and such Shelf
Registration Statement ceases to be effective at any time prior to the
second anniversary of its effective date (other than after such time as all
Original Notes have been disposed of thereunder), then Additional Interest
shall accrue on the principal amount of the Original Notes at a rate of
.50% per annum for the first 90 days commencing on (x) the 46th day after
such effective date, in the case of (A) above, or (y) the day such Shelf
Registration Statement
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ceases to be effective in the case of (B) above, and such Additional
Interest rate shall increase by an additional .50% per annum at the
beginning of each subsequent 90-day period;
PROVIDED, HOWEVER, that the Additional Interest rate on the Original Notes may
not exceed at any one time in the aggregate 1.50% per annum; PROVIDED, FURTHER,
HOWEVER, that (1) upon the filing of the Registration Statement or a Shelf
Registration Statement (in the case of clause (i) above), (2) upon the
effectiveness of the Registration Statement or a Shelf Registration Statement
(in the case of clause (ii) above), or (3) upon the exchange of Exchange Notes
for all Original Notes tendered (in the case of clause (iii)(A) above), or upon
the effectiveness of the Shelf Registration Statement which had ceased to remain
effective (in the case of clause (iii)(B) above), Additional Interest on the
Original Notes as a result of such clause (or the relevant subclause thereof),
as the case may be, shall cease to accrue.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by, all the provisions of the Registration Rights Agreement, a copy
of which will be available upon request to the Company.
BOOK-ENTRY; DELIVERY AND FORM
Except as described in the next paragraph, the Exchange Notes initially
will be represented by one or more permanent Global Exchange Notes. The Global
Exchange Notes will be deposited with, or on behalf of, The Depository Trust
Company, New York, New York ("DTC") and registered in the name of a nominee of
DTC.
Exchange Notes held by QIBs who elect to take physical delivery of their
certificates instead of holding their interests through a Global Exchange Note
(the "Non-Global Purchasers") will be issued in registered form (the
"Certificated Security"). Certificated Securities shall initially be
registered in the name of DTC or the nominee of DTC and be deposited with the
trustee or custodian on behalf of DTC. Upon the transfer to a QIB, foreign
purchaser or institutional Accredited Investor of any Certificated Security
initially issued to a Non-Global Purchaser, such Certificated Security will,
unless the transferee requests otherwise or the Global Exchange Notes have
previously been exchanged in whole for Certificated Securities, be exchanged for
an interest in a Global Exchange Note.
THE GLOBAL EXCHANGE NOTES. The Company expects that pursuant to procedures
established by DTC (i) upon the issuance of the Global Exchange Notes, DTC or
its custodian will credit, on its internal system, the principal amount of
Exchange Notes of the individual beneficial interests represented by such Global
Exchange Notes to the respective accounts of persons who have accounts with such
depositary and (ii) ownership of beneficial interests in the Global Exchange
Notes will be shown on, and the transfer of such ownership will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants). Such accounts initially will be designated by
or on behalf of the Initial Purchasers and ownership of beneficial interests in
the Global Exchange Notes will be limited to persons who have accounts with DTC
("participants") or persons who hold interests through participants. Holders
may hold their interests in the Global Exchange Notes directly through DTC if
they are participants in such system, or indirectly through organizations which
are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
Exchange Notes, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Exchange Notes represented by such Global Exchange
Notes for all purposes under the Indenture. No beneficial owner of an interest
in the Global Exchange Notes will be able to transfer that interest except in
accordance with DTC's procedures, in addition to those provided for under the
Indenture with respect to the Exchange Notes.
Payments of the principal of premium (if any) or interest (including
Additional Interest) on, the Global Exchange Notes will be made to DTC or its
nominee, as the case may be, as the registered owner thereof. None of the
Company, the Trustee or any paying agent will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the
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<PAGE>
Global Exchange Notes or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium (if any) interest (including Additional Interest) on the
Global Exchange Notes, will credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of the Global Exchange Notes as shown on the records of DTC or its
nominee. The Company also expects that payments by participants to owners of
beneficial interests in the Global Exchange Notes held through such participants
will be governed by standing instructions and customary practice, as is now the
case with securities held for the accounts of customers registered in the names
of nominees for such customers. Such payments will be the responsibility of such
participants.
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of a
Certificated Security for any reason, including to sell Exchange Notes to
persons in states which require physical delivery of the Exchange Notes, or to
pledge such securities, such holder must transfer its interest in a Global
Exchange Note, in accordance with the normal procedures of DTC and with the
procedures set forth in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Exchange Notes only at the direction of one or more
participants to whose account the DTC interests in the Global Exchange Notes are
credited and only in respect of such portion of the aggregate principal amount
of Exchange Notes as to which such participant or participants has or have given
such direction. However, if there is an Event of Default under the Indenture,
DTC will exchange the Global Exchange Notes for Certificated Securities, which
it will distribute to its participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and certain other organizations. Indirect
access to the DTC system is available to others such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a participant, either directly or indirectly ("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Exchange Notes among participants of DTC,
it is under no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
CERTIFICATED SECURITIES. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Exchange Notes and a successor
depositary is not appointed by the Company within 90 days, Certificated
Securities will be issued in exchange for the Global Exchange Notes.
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income tax consequences of the ownership and disposition of Exchange Notes by an
initial beneficial owner of Exchange Notes that, for United States federal
income tax purposes, is not a "United States person" (a "Non-United States
Holder"). This discussion is based upon the United States federal tax law now
in effect, which is subject to change, possibly retroactively. For purposes of
this discussion, a "United States person" means a citizen or
97
<PAGE>
resident of the United States, a corporation, partnership or other entity
created or organized in the United States or under the laws of the United States
or of any political subdivision thereof, an estate whose income is includible in
gross income for United States federal income tax purposes regardless of its
source or a trust, if a U.S. court is able to exercise primary supervision over
the administration of the trust and one or more U.S. persons have the authority
to control all substantial decisions of the trust. The tax treatment of the
holders of the Exchange Notes may vary depending upon their particular
situations. U.S. holders of the Exchange Notes are subject to different rules
than those discussed below. In addition, certain other holders (including
insurance companies, tax exempt organizations, financial institutions and
broker-dealers) may be subject to special rules not discussed below. Prospective
investors are urged to consult their tax advisors regarding the United States
federal tax consequences of holding and disposing of Exchange Notes, as well as
any tax consequences that may arise under the laws of any foreign, state, local
or other taxing jurisdiction.
INTEREST
Interest paid by the Company to a Non-United States Holder will not be
subject to United States federal income or withholding tax if such interest is
not effectively connected with the conduct of a trade or business within the
United States by such Non-United States Holder and such Non-United States Holder
(i) does not actually or constructively own 10% or more of the total combined
voting power of all classes of stock of the Company; (ii) is not a controlled
foreign corporation with respect to which the Company is a "related person"
within the meaning of the United States Internal Revenue Code of 1986, as
amended (the "Code") and (iii) certifies, under penalties of perjury, that
such holder is not a United States person and provides such holder's name and
address.
GAIN ON DISPOSITION
A Non-United States Holder will generally not be subject to United States
federal income tax on gain recognized on a sale, redemption or other disposition
of a Note unless (i) the gain is effectively connected with the conduct of a
trade or business within the United States by the Non-United States Holder or
(ii) in the case of a Non-United States Holder who is a nonresident alien
individual and holds the Note as a capital asset, such holder is present in the
United States for 183 or more days in the taxable year and certain other
requirements are met.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company will, where required, report to the holders of Notes and the
Internal Revenue Service the amount of any interest paid on the Exchange Notes
in each calendar year and the amounts of tax withheld, if any, with respect to
such payments.
In the case of payments of interest to Non-United States Holders, temporary
Treasury regulations provide that the 31% backup withholding tax and certain
information reporting will not apply to such payments with respect to which
either the requisite certification, as described above, has been received or an
exemption has otherwise been established; provided that neither the Company nor
its payment agent has actual knowledge that the holder is a United States person
or that the conditions of any other exemption are not in fact satisfied. Under
temporary Treasury regulations, these information reporting and backup
withholding requirements will apply, however, to the gross proceeds paid to a
Non-United States Holder on the disposition of the Exchange Notes by or through
a United States office of a United States or foreign broker, unless the holder
certifies to the broker under penalties of perjury as to its name, address and
status as a foreign person or the holder otherwise establishes an exemption.
Information reporting requirements, but not backup withholding, will also apply
to a payment of the proceeds of a disposition of the Notes by or through a
foreign office of a United States broker or foreign brokers with certain types
of relationships to the United States unless such broker has documentary
evidence in its file that the holder of the Notes is not a United States person,
and such broker has no actual knowledge to the contrary, or the holder
establishes an exception. Neither information reporting nor backup withholding
generally will apply to a payment of
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<PAGE>
the proceeds of a disposition of the Notes by or through a foreign office of a
foreign broker not subject to the preceding sentence.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against the Non-United
States Holder's United States federal income tax liability, provided that the
required information is furnished to the Internal Revenue Service.
The Treasury Department recently promulgated final regulations regarding
the withholding and information reporting rules discussed above. In general, the
final regulations do not significantly alter the substantive withholding and
information reporting requirements but rather unify current certification
procedures and forms and clarify reliance standards. The final regulations are
generally effective for payments made after December 31, 1998, subject to
certain transition rules. In addition, the taxation and withholding of tax on
interest and other payments made with respect to Notes held by Non-United States
Holders may be governed by the terms and provisions of a treaty between the
United States and the country in which the Non-United States Holder resides or
is domiciled. In such case, the terms of the treaty will most likely control (as
opposed to the above described rules on the taxation and withholding of tax on
such payments) and determine the withholding and tax to which such payments will
be subject. NON-UNITED STATES HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE IMPACT, IF ANY, OF THE NEW FINAL REGULATIONS.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
Prospectus in connection with any resale of such Exchange Notes. The Prospectus,
as it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in exchange
for Original Notes where such Original Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that, for such period of time as is necessary to comply with applicable law in
connection with any resale of the Exchange Notes covered thereby (such period
not to exceed 180 days after the Registration Statement is declared effective),
it will make this Prospectus, as amended or supplemented, available to any
broker-dealer in connection with any such resale. In addition, until October 13,
1998 (90 days after commencement of the Exchange Offer), all dealers effecting
transactions in the Exchange Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sales of the Exchange
Notes by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to the purchaser or to or through brokers or dealers who
may receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells the Exchange Notes that were received by it for its
own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that, by acknowledging that it will
deliver and by delivering a prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
For such period of time as is necessary to comply with applicable law in
connection with any resale of the Exchange Notes covered thereby (such period
not to exceed 180 days after the Registration Statement is declared effective),
the Company will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. The Company has agreed to pay
certain expenses incident to the Exchange Offer, other than
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<PAGE>
commission or concessions of any brokers or dealers, and will indemnify the
holders of the Exchange Notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters in connection with the Offering will be passed upon
for the Company by Bracewell & Patterson, L.L.P., Houston, Texas. Partners and
employees of Bracewell & Patterson, L.L.P. own less than one percent of the
Common Stock of the Company.
EXPERTS
The financial statements of Metals USA, Affiliated, Independent,
Interstate, Levinson, Queensboro, Texas Aluminum/Cornerstone, Uni-Steel, and
Southern Alloy included elsewhere in this Prospectus and Registration Statement,
to the extent and for the periods indicated in their reports, 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 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 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. The
financial statements of Harvey included elsewhere in this Prospectus have been
audited by Klein, Bogakos, and Robertson, CPA's, Inc., independent auditors, 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. The
consolidated financial statements of Pacific included elsewhere in this
Prospectus have been audited by Perkins & Company, P.C., independent auditors,
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. The
consolidated financial statements of Fullerton included elsewhere in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of such firm as experts in
accounting and auditing.
100
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
METALS USA, INC. UNAUDITED PRO FORMA
Introduction to Unaudited Pro
Forma Financial Statements..... F-2
Unaudited Pro Forma Balance
Sheet.......................... F-3
Unaudited Pro Forma Statement of
Operations for the twelve
months ended
December 31, 1997............. F-4
Unaudited Pro Forma Statement of
Operations for the three months
ended March 31, 1998........... F-5
Notes to Unaudited Pro Forma
Financial Statements........... F-6
METALS USA, INC. AND SUBSIDIARIES
Report of Independent Public
Accountants.................... F-9
Supplemental Consolidated
Balance Sheets................. F-10
Supplemental Consolidated
Statements of Operations....... F-11
Supplemental Consolidated
Statements of Cash Flows....... F-12
Supplemental Consolidated
Statements of Stockholders'
Equity......................... F-13
Notes to Supplemental
Consolidated Financial
Statements..................... F-14
METALS USA, INC. AND
SUBSIDIARIES -- UNAUDITED INTERIM
FINANCIAL STATEMENTS
Supplemental Consolidated
Balance Sheets at March 31,
1998 (Unaudited) and December
31, 1997....................... F-29
Unaudited Supplemental
Consolidated Statements of
Operations for the three months
ended March 31, 1998 and
1997........................... F-30
Unaudited Supplemental
Consolidated Statements of Cash
Flows for the three months
ended March 31, 1998 and
1997........................... F-31
Condensed Notes to Supplemental
Unaudited Consolidated
Financial Statements........... F-32
METALS USA, INC. AND SUBSIDIARIES
Report of Independent Public
Accountants.................... F-39
Consolidated Balance Sheets..... F-40
Consolidated Statements of
Operations..................... F-41
Consolidated Statements of Cash
Flows.......................... F-42
Consolidated Statements of
Stockholders' Equity........... F-43
Notes to Consolidated Financial
Statements..................... F-44
METALS USA, INC. AND
SUBSIDIARIES -- UNAUDITED INTERIM
FINANCIAL STATEMENTS
Consolidated Balance Sheets at
March 31, 1998 (Unaudited) and
December 31, 1997.............. F-59
Unaudited Consolidated
Statements of Operations for
the three months ended March
31, 1998 and 1997.............. F-60
Unaudited Consolidated
Statements of Cash Flows for
the three months ended March
31, 1998 and 1997.............. F-61
Condensed Notes to Unaudited
Consolidated Financial
Statements..................... F-62
TEXAS ALUMINUM INDUSTRIES, INC. AND
AFFILIATES
Report of Independent Public
Accountants.................... F-69
Combined Balance Sheets......... F-70
Combined Statements of Income... F-71
Combined Statements of
Stockholders' Equity and
Members' Equity................ F-72
Combined Statements of Cash
Flows.......................... F-73
Notes to Combined Financial
Statements..................... F-74
F-1
<PAGE>
PAGE
-----
INTERSTATE STEEL SUPPLY CO. AND
AFFILIATES
Report of Independent Public
Accountants.................... F-85
Combined Balance Sheets......... F-86
Combined Statements of Income... F-87
Combined Statements of
Stockholders' Equity and
Partners' Capital.............. F-88
Combined Statements of Cash
Flows.......................... F-89
Notes to Combined Financial
Statements..................... F-90
QUEENSBORO STEEL CORPORATION
Report of Independent Public
Accountants.................... F-94
Independent Auditors' Report.... F-95
Balance Sheets.................. F-96
Statements of Income............ F-97
Statements of Stockholders'
Equity......................... F-98
Statements of Cash Flows........ F-99
Notes to Financial Statements... F-100
AFFILIATED METALS COMPANY
Report of Independent Public
Accountants.................... F-106
Report of Independent
Auditors....................... F-107
Report of Independent
Auditors....................... F-108
Balance Sheets.................. F-109
Statements of Operations........ F-110
Statements of Stockholders'
Equity......................... F-111
Statements of Cash Flows........ F-112
Notes to Financial Statements... F-113
SOUTHERN ALLOY OF AMERICA, INC.
Report of Independent Public
Accountants.................... F-119
Balance Sheets.................. F-120
Statements of Operations........ F-121
Statements of Stockholders'
Equity (Deficit)............... F-122
Statements of Cash Flows........ F-123
Notes to Financial Statements... F-124
UNI-STEEL, INC.
Report of Independent Public
Accountants.................... F-129
Balance Sheet................... F-130
Statements of Income............ F-131
Statements of Stockholders'
Equity......................... F-132
Statements of Cash Flows........ F-133
Notes to Financial Statements... F-134
HARVEY TITANIUM, LTD.
Report of Independent
Auditors....................... F-141
Consolidated Balance Sheets..... F-142
Consolidated Statements of
Operations..................... F-143
Consolidated Statements of
Stockholders' Equity........... F-144
Consolidated Statements of Cash
Flows.......................... F-145
Notes to Consolidated Financial
Statements..................... F-146
F-1(a)
<PAGE>
PAGE
-----
INDEPENDENT METALS CO., INC.
Report of Independent Public
Accountants.................... F-152
Consolidated Balance Sheet...... F-153
Consolidated Statements of
Operations..................... F-154
Consolidated Statements of
Shareholders' Equity
(Deficit)...................... F-155
Consolidated Statements of Cash
Flows.......................... F-156
Notes to Consolidated Financial
Statements..................... F-157
PACIFIC METAL COMPANY AND SUBSIDIARY
Independent Auditors' Report.... F-162
Consolidated Balance Sheets..... F-163
Consolidated Statements of
Income......................... F-164
Consolidated Statements of
Stockholders' Equity........... F-165
Consolidated Statements of Cash
Flows.......................... F-166
Notes to Consolidated Financial
Statements..................... F-167
FULLERTON INDUSTRIES, INC.
Report of Independent
Auditors....................... F-176
Consolidated Balance Sheets..... F-177
Consolidated Statements of
Income......................... F-178
Consolidated Statements of
Stockholders' Equity........... F-179
Consolidated Statements of Cash
Flows.......................... F-180
Notes to Consolidated Financial
Statements..................... F-181
THE LEVINSON STEEL COMPANY
Report of Independent Public
Accountants.................... F-185
Balance Sheets.................. F-186
Statements of Income............ F-187
Statements of Stockholders'
Equity......................... F-188
Statements of Cash Flows........ F-189
Notes to Financial Statements... F-190
F-1(b)
<PAGE>
METALS USA, INC.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma 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") and the outstanding stock of Federal Bronze, Harvey,
Jeffreys, Meier, Wayne, Royal, RJ Fabricating, Independent, Pacific, Metalmart,
Mark Metals, Western, National, Sierra, Concord, Industrial, Levinson,
Fullerton, Faitoute, Krohn, Steel Manufacturing, Wilkof, Forest, LaserPro, ABS,
Valley, Flagg, Geneva, Professional and Intsel (together, the "Subsequent
Acquisitions" and together with the Founding Companies, the "Acquired
Companies"). The Founding Companies acquisitions occurred concurrently with the
consummation of Metals USA's initial public offering of 5,900,000 shares of its
Common Stock on July 11, 1997, and were accounted for using the "purchase"
method of accounting. On August 12, 1997, the Company sold 885,000 of its common
stock pursuant to an over allotment option with the underwriters. The sale by
the Company of the 6,785,000 shares of its Common Stock, together with the
Founding Companies acquisitions, is hereinafter referred to as the "IPO".
During the third and fourth quarters of 1997, acquisitions were completed which
included Federal Bronze, Harvey, Jeffreys, Meier, Wayne, Royal and RJ
Fabricating, with all except Jeffreys and Wayne accounted for using the
"purchase" method of accounting. During 1998, through July 7, 1998, Metals USA
completed acquisitions which included Independent, Pacific, Metalmart, Mark
Metals, Western, National, Sierra, Concord, Industrial, Levinson, Fullerton,
Faitoute, Steel Manufacturing, Wilkof, Forest, LaserPro, ABS, Valley, Flagg,
Geneva, Professional and Intsel which were all accounted for using the
"purchase" method of accounting. In addition, Metals USA completed the
acquisition of Krohn in May 1998, which was accounted for using the
"pooling-of-interests" method of accounting.
The unaudited pro forma balance sheet gives effect to the acquisitions of
Sierra, Industrial, Fullerton, Faitoute, Steel Manufacturing, Wilkof, Forest,
LaserPro, ABS, Valley, Flagg, Geneva, Professional and Intsel as if they had
occurred on March 31, 1998. The unaudited pro forma statements of operations
give effect to the IPO, the acquisition of the Founding Companies, the
Subsequent Acquisitions and the issuance of the Notes, as if they had occurred
on January 1, 1997.
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 Acquired 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 statement of operations. In addition, the Company has a five-year
revolving credit facility of $300.0 million (as amended, the "Credit
Facility"). Based on terms of the Credit Facility, the Company believes that
its interest expense will be reduced with respect to borrowings made under
revolving credit loans. This reduction in interest expense has been reflected in
the pro forma statement of operations, offset by increased interest expense with
respect to the $200.0 million aggregate principal amount of 8 5/8% Series
Subordinated Notes due 2008 (the "Notes"). It is anticipated that other
potential cost savings will be realized which 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 factors 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 Acquired 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 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 BALANCE SHEET
MARCH 31, 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
SUPPLEMENTAL PURCHASE PRO FORMA
CONSOLIDATED ACQUISITIONS ADJUSTMENTS PRO FORMA
------------- ------------ ----------- ---------
ASSETS
<S> <C> <C> <C> <C>
Cash................................. $ 11.9 $ 7.5 $-- $ 19.4
Accounts receivable, net............. 148.1 67.0 -- 215.1
Inventories.......................... 223.3 70.9 4.8 299.0
Prepaid expenses..................... 2.6 .6 -- 3.2
Deferred income tax asset............ 2.7 .1 -- 2.8
Other................................ 4.3 .5 -- 4.8
------------- ------------ ----------- ---------
Total current assets............ 392.9 146.6 4.8 544.3
Property and equipment, net.......... 107.1 24.0 6.7 137.8
Goodwill, net........................ 156.8 2.0 90.9 249.7
Other assets, net.................... 13.4 2.7 -- 16.1
------------- ------------ ----------- ---------
Total assets.................... $ 670.2 $175.3 $ 102.4 $ 947.9
============= ============ =========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable..................... $ 81.5 $ 43.3 $-- $ 124.8
Accrued liabilities.................. 19.0 6.7 -- 25.7
Current portion of long-term debt.... 9.8 17.2 (17.2) 9.8
Income taxes payable................. 3.4 .6 -- 4.0
------------- ------------ ----------- ---------
Total current liabilities....... 113.7 67.8 (17.2) 164.3
Long-term debt, less current
portion............................ 273.2 20.3 168.9 462.4
Deferred income tax liability........ 8.6 .8 -- 9.4
Other long-term liabilities.......... 4.9 .4 3.0 8.3
------------- ------------ ----------- ---------
Total liabilities............... 400.4 89.3 154.7 644.4
------------- ------------ ----------- ---------
Stockholders' equity:
Preferred stock.................... -- .8 (.8) --
Common stock....................... .4 15.1 (15.1) .4
Additional paid-in capital......... 223.4 4.6 29.1 257.1
Unearned compensation.............. (1.5) -- -- (1.5)
Retained earnings.................. 47.5 68.9 (68.9) 47.5
Treasury stock..................... -- (3.4) 3.4 --
------------- ------------ ----------- ---------
Total stockholders' equity...... 269.8 86.0 (52.3) 303.5
------------- ------------ ----------- ---------
Total liabilities and stockholders'
equity............................. $ 670.2 $175.3 $ 102.4 $ 947.9
============= ============ =========== =========
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
F-3
<PAGE>
METALS USA, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1997
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SUPPLEMENTAL PURCHASE PRO FORMA
CONSOLIDATED ACQUISITIONS ADJUSTMENTS PRO FORMA
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net sales............................... $ 537.6 $1,063.9 $ 1.1 $ 1,602.6
Operating costs and expenses:
Cost of sales...................... 414.9 826.7 1.3 1,242.9
Operating and delivery............. 53.7 89.8 (2.0) 141.5
Selling, general and
administrative................... 41.1 86.1 (19.9) 107.3
Depreciation and amortization...... 5.6 8.4 5.2 19.2
------------ ------------ ----------- -----------
Operating income........................ 22.3 52.9 16.5 91.7
Other (income) expense:
Interest expense................... 5.0 11.6 16.9 33.5
Other (income) expense............. (.5) (2.6) 1.0 (2.1)
------------ ------------ ----------- -----------
Income before income taxes.............. 17.8 43.9 (1.4) 60.3
Provision for income taxes.............. 10.3 6.6 9.4 26.3
------------ ------------ ----------- -----------
Net income.............................. $ 7.5 $ 37.3 $ (10.8) $ 34.0
============ ============ =========== ===========
Earnings per share -- assuming
dilution.............................. $ .89
Shares used in computing pro forma
earnings per share -- assuming
dilution.............................. 38.2
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
F-4
<PAGE>
METALS USA, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SUPPLEMENTAL PURCHASE PRO FORMA
CONSOLIDATED ACQUISITIONS ADJUSTMENTS PRO FORMA
------------ ------------ ----------- ---------
<S> <C> <C> <C> <C>
Net sales............................... $278.5 $172.5 $-- $ 451.0
Operating costs and expenses:
Cost of sales...................... 214.6 130.9 .2 345.7
Operating and delivery............. 26.0 12.5 (.3) 38.2
Selling, general and
administrative................... 18.1 12.9 (1.1) 29.9
Depreciation and amortization...... 3.0 1.1 .7 4.8
------------ ------------ ----------- ---------
Operating income........................ 16.8 15.1 .5 32.4
Other (income) expense:
Interest expense................... 4.8 1.3 3.2 9.3
Other (income) expense............. (.1) (.7) 1.1 .3
------------ ------------ ----------- ---------
Income before income taxes.............. 12.1 14.5 (3.8) 22.8
Provision for income taxes.............. 4.9 1.4 2.8 9.1
------------ ------------ ----------- ---------
Net income.............................. $ 7.2 $ 13.1 $ (6.6) $ 13.7
============ ============ =========== =========
Earnings per share -- assuming
dilution.............................. $ .35
Shares used in computing pro forma
earnings per share -- assuming
dilution.............................. 38.6
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
F-5
<PAGE>
METALS USA, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(IN MILLIONS, 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 actively the consolidation of the
highly-fragmented metals processing industry. Prior to the IPO, Metals USA had
conducted no operations. Metals USA acquired the Founding Companies concurrently
with the consummation of the IPO, with the Subsequent Acquisitions occurring
from September 26, 1997 through July 7, 1998.
The pro forma balance sheet reflects the supplemental consolidated
financial position of Metals USA as restated for the effects of the business
combinations with Jeffreys, Wayne and Krohn accounted for using the "pooling-of
interests" method of accounting ("Supplemental Consolidated" column). The
"Purchase Acquisitions" column gives effect to the acquisitions of Sierra,
Industrial, Fullerton, Faitoute, Steel Manufacturing, Wilkof, Forest, LaserPro,
ABS, Valley, Flagg, Geneva, Professional and Intsel as if they had occurred on
March 31, 1998.
The pro forma statements of operations reflect the supplemental
consolidated results of operations of Metals USA as restated for the effects of
the business combinations with Jeffreys, Wayne and Krohn accounted for using the
"pooling-of-interests" method of accounting ("Supplemental Consolidated"
column). The "Purchase Acquisitions" column reflects the pre-acquisition
results of operations of the companies acquired using the "purchase" method of
accounting.
2. ACQUISITION OF COMPANIES:
Concurrently with and as a condition to the consummation of the IPO, Metals
USA acquired all of the outstanding capital stock of the Founding Companies.
These acquisitions were accounted for using the purchase method of accounting.
During the third and fourth quarters of 1997, acquisitions were completed which
included Federal Bronze, Harvey, Jeffreys, Meier, Wayne, Royal and RJ
Fabricating, with all except Jeffreys and Wayne being accounted for using the
"purchase" method of accounting. During 1998, through July 7, 1998,
acquisitions were completed which included Independent, Pacific, Metalmart, Mark
Metals, Western, National, Sierra, Concord, Industrial, Levinson, Fullerton,
Faitoute, Steel Manufacturing, Wilkof, Forest, LaserPro, ABS, Valley, Flagg,
Geneva, Professional and Intsel, which were all accounted for using the
"purchase" method of accounting. In addition, the acquisition of Krohn was
completed in May 1998 and was accounted for using the "pooling-of-interests"
method of accounting.
The aggregate consideration paid by Metals USA for the Acquired Companies
consisted of approximately $263.7 in cash, 26,370,272 shares of Common Stock,
$3.7 million of notes plus the assumption of approximately $233.6 of
indebtedness. The consideration paid by Metals USA for each of the Acquired
Companies was determined by negotiation between representatives of each Acquired
Company and was based primarily upon the pro forma adjusted net income of each
Acquired Company.
3. UNAUDITED PRO FORMA BALANCE SHEET ADJUSTMENTS AND OFFERING TRANSACTIONS:
The pro forma adjustments in the unaudited pro forma balance sheet give
effect to the acquisitions completed subsequent to March 31, 1998 comprised of
(i) the issuance of 2,262,648 shares of Common Stock and $3.7 million of notes
and $151.2 of debt incurred for the cash portion of the consideration exchanged
for the common stock of the companies acquired, (ii) the estimated excess of
purchase price paid over fair value of assets acquired of $90.9 reflected as
additional goodwill, (iii) the purchase of additional property and equipment for
$6.7 and (iv) an adjustment of $4.8 to increase inventory accounted for
utilizing the last-in, first-out method of accounting to fair value.
F-6
<PAGE>
METALS USA, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
4. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS:
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997:
(a) Reflects the reduction in certain related party rental and lease
expenses which has been agreed to prospectively.
(b) Reflects the $11.0 reduction in salaries, bonuses and benefits to
the owners of the Acquired Companies to which they have agreed
prospectively and the reversal of the $6.0 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 $.3
charge for recurring salary expenses of management.
(c) Reflects the amortization of goodwill to be recorded as a result
of the IPO and Subsequent Acquisitions 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 assumed reductions in interest expense of $1.5 due to
refinancing of the outstanding indebtedness in conjunction with
the IPO and Subsequent Acquisitions, offset by an assumed increase
in interest expense of $12.9 due to financing the Subsequent
Acquisitions.
(e) Reflects the pre-acquisition results of operations for Cornerstone
Aluminum (acquired February 1997) as if the acquisition was
completed as of January 1, 1997.
(f) Reflects a $.7 charge eliminating the gains recorded as historical
LIFO adjustments to cost of sales. These adjustments result from
the restatement of base year LIFO costs to the appropriate
replacement costs as if the acquisitions occurred on January 1,
1997. Other adjustments reflect certain other nonrecurring
expenses with respect to the Subsequent Acquisitions, such as
expenses associated with compensation plans which were terminated
in conjunction with the acquisitions of their respective
companies.
(g) Reflects the incremental interest expense of $4.6 and amortization
of deferred financing costs of $.8 incurred as a result of the
issuance of the Notes and the Credit Facility and the repayment of
outstanding indebtedness of the Company.
(h) 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 statements of operations
adjustments:
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E) (F) (G) (H)
--- --------- --------- --------- --- --------- --------- ---------
<S> <C> <C>
Net sales............................ $ -- $ -- $ -- $ -- $ .4 $ .7 $ -- $ --
Operating costs and expenses:
Cost of sales.................... -- -- -- -- .3 1.0 -- --
Operating and delivery........... (1.5) -- -- -- -- (.5) -- --
Selling, general and
administrative................. (.3) (16.7) -- -- .1 (3.0) -- --
Depreciation and amortization.... .4 -- 4.7 -- -- .1 -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income..................... 1.4 16.7 (4.7) -- -- 3.1 -- --
Other (income) expense:
Interest (income) expense........ .1 -- -- 11.4 -- -- 5.4 --
Other (income) expense........... .1 -- -- -- -- .9 -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income taxes........... 1.2 16.7 (4.7) (11.4) -- 2.2 (5.4) --
Provision for income taxes........... -- -- -- -- -- -- -- 9.4
--------- --------- --------- --------- --------- --------- --------- ---------
Net income........................... $ 1.2 $ 16.7 $ (4.7) $ (11.4) $ -- $ 2.2 $ (5.4) $ (9.4)
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
PRO FORMA
ADJUSTMENTS
-----------
Net sales............................ $ 1.1
Operating costs and expenses:
Cost of sales.................... 1.3
Operating and delivery........... (2.0)
Selling, general and
administrative................. (19.9)
Depreciation and amortization.... 5.2
-----------
Operating income..................... 16.5
Other (income) expense:
Interest (income) expense........ 16.9
Other (income) expense........... 1.0
-----------
Income before income taxes........... (1.4)
Provision for income taxes........... 9.4
-----------
Net income........................... $ (10.8)
===========
F-7
<PAGE>
METALS USA, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
FOR THE THREE MONTHS ENDED MARCH 31, 1998:
(a) Reflects the reduction in certain related party rental and lease
expenses which has been agreed to prospectively.
(b) Reflects the $.6 reduction in salaries, bonuses and benefits to
the owners of the Acquired Companies to which they have agreed
prospectively.
(c) Reflects the amortization of goodwill to be recorded as a result
of the Subsequent Acquisitions 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 assumed reductions in interest expense of $.1 due to
refinancing of the outstanding indebtedness in conjunction with
the Subsequent Acquisitions, offset by an assumed increase in
interest expense of $2.6 due to financing the Subsequent
Acquisitions.
(e) Reflects a $.2 charge eliminating the gains recorded as historical
LIFO adjustments to cost of sales. These adjustments result from
the restatement of base year LIFO costs to the appropriate
replacement costs as if the acquisitions occurred on January 1,
1997. Other adjustments reflect certain other nonrecurring
expenses with respect to the Subsequent Acquisitions, such as
expenses associated with compensation plans which were terminated
in conjunction with the acquisitions of their respective
companies.
(f) Reflects the incremental interest expense of $.6 and amortization
of deferred financing costs of $.1 incurred as a result of the
issuance of the Notes and the Credit Facility and the repayment of
outstanding indebtedness of the Company.
(g) 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 statements of operations
adjustments:
<TABLE>
<CAPTION>
PRO FORMA
(A) (B) (C) (D) (E) (F) (G) ADJUSTMENTS
--- --------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................ $ -- $ -- $ -- $ -- $ -- $ -- $ -- $--
Operating costs and expenses:
Cost of sales.................... -- -- -- -- .2 -- -- .2
Operating and delivery........... (.2) -- -- -- (.1) -- -- (.3)
Selling, general and
administrative................. (.1) (.6) -- -- (.4) -- -- (1.1)
Depreciation and amortization.... .1 -- .6 -- -- -- -- .7
--------- --------- --------- --------- --------- --------- --------- -----------
Operating income..................... .2 .6 (.6) -- .3 -- -- .5
Other (income) expense:
Interest (income) expense........ -- -- -- 2.5 -- .7 -- 3.2
Other (income) expense........... -- -- -- -- 1.1 -- -- 1.1
--------- --------- --------- --------- --------- --------- --------- -----------
Income before income taxes........... .2 .6 (.6) (2.5) (.8) (.7) -- (3.8)
Provision for income taxes........... -- -- -- -- -- -- 2.8 2.8
--------- --------- --------- --------- --------- --------- --------- -----------
Net income........................... $ .2 $ .6 $ (.6) $ (2.5) $ (.8) $ (.7) $ (2.8) $ (6.6)
========= ========= ========= ========= ========= ========= ========= ===========
</TABLE>
F-8
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Metals USA, Inc.:
We have audited the accompanying supplemental consolidated balance sheets of
Metals USA, Inc. (a Delaware corporation) and subsidiaries (the "Company") as
of December 31, 1997 and 1996, and the related supplemental consolidated
statements of operations, cash flows and stockholders' equity for each of the
three years in the period ended December 31, 1997. The supplemental consolidated
financial statements give retroactive effect to the merger with Krohn Steel
Service Center, Inc. ("Krohn") on May 29, 1998, which has been accounted for
as a "pooling-of-interests" as described in Note 1. These supplemental
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental 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 supplemental consolidated financial statements referred to
above present fairly, in all material respects, the supplemental consolidated
financial position of Metals USA, Inc. and subsidiaries as of December 31, 1997
and 1996, and the supplemental consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1997, after giving retroactive effect to the merger with Krohn as described in
Note 1, all in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 30, 1998
F-9
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
--------------------
1997 1996
--------- ---------
ASSETS
Current assets:
Cash............................ $ 7.3 $ 2.4
Accounts receivable, net of
allowance of $3.6 and $.3...... 95.1 23.8
Inventories..................... 159.4 45.8
Prepaid expenses................ 1.9 .7
Deferred income tax asset....... 1.5 1.1
Other........................... 2.2 .6
--------- ---------
Total current assets....... 267.4 74.4
Property and equipment, net.......... 86.5 30.7
Goodwill, net........................ 120.1 --
Other assets, net.................... 6.6 2.2
--------- ---------
Total assets............... $ 480.6 $ 107.3
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................ $ 52.5 $ 16.3
Accrued liabilities............. 13.1 2.8
Current portion of long-term
debt............................ 7.2 3.2
Income taxes payable............ 1.6 .5
--------- ---------
Total current
liabilities.................. 74.4 22.8
Long-term debt, less current
portion.............................. 167.1 24.6
Deferred income tax liability........ 8.1 1.4
Other long-term liabilities.......... 4.5 1.0
--------- ---------
Total liabilities.......... 254.1 49.8
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value,
5,000,000 shares authorized,
none issued
and outstanding............... -- --
Common stock, $.01 par value,
203,122,914 shares authorized,
32,680,226 and 13,216,227
shares outstanding,
respectively................... .3 .1
Additional paid-in capital...... 184.6 17.3
Unearned compensation........... (1.5) (1.8)
Retained earnings............... 43.1 41.9
--------- ---------
Total stockholders'
equity....................... 226.5 57.5
--------- ---------
Total liabilities and
stockholders' equity......... $ 480.6 $ 107.3
========= =========
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-10
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Net sales............................... $ 537.6 $ 265.5 $ 260.9
Operating costs and expenses:
Cost of sales...................... 414.9 204.0 204.7
Operating and delivery............. 53.7 25.4 22.0
Selling, general and
administrative................... 41.1 21.4 15.6
Depreciation and amortization...... 5.6 3.7 3.0
--------- --------- ---------
Operating income........................ 22.3 11.0 15.6
Other (income) expense:
Interest expense................... 5.0 1.8 2.4
Other income....................... (.5) (.7) (.5)
--------- --------- ---------
Income before income taxes.............. 17.8 9.9 13.7
Provision for income taxes.............. 10.3 5.4 5.6
--------- --------- ---------
Net income.............................. $ 7.5 $ 4.5 $ 8.1
========= ========= =========
Earnings per share...................... $ .33 $ .38 $ .86
========= ========= =========
Earnings per share -- assuming
dilution.............................. $ .33 $ .38 $ .86
========= ========= =========
Number of common shares used in the per
share calculations:
Earnings per share................. 22.5 11.8 9.4
========= ========= =========
Earnings per share -- assuming
dilution......................... 22.9 11.8 9.4
========= ========= =========
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-11
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................... $ 7.5 $ 4.5 $ 8.1
Adjustments to reconcile net
income to net cash provided by
operating activities --
Capital contributions
attributable to deemed tax
payments of S
Corporations.............. 4.0 3.2 3.6
Provision for bad debts..... .6 .2 .3
Depreciation and
amortization.............. 5.6 3.7 3.0
Deferred income taxes....... .7 (.2) .3
Deferred financing costs
incurred.................. (1.0) -- .1
Compensation charged against
notes receivable.......... -- .5 --
Compensation
expense -- management
shares.................... 6.0 3.6 --
Changes in operating assets
and liabilities, net of
business acquisitions --
Accounts receivable..... 1.3 -- 2.7
Inventories............. (7.4) (11.2) 11.2
Prepaid expenses and
other assets.......... (.3) (.2) --
Accounts payable and
accrued liabilities... (14.0) 5.5 (4.0)
Income taxes payable.... .4 .2 --
Other operating............. (.1) (.3) (.2)
--------- --------- ---------
Net cash provided
by operating
activities....... 3.3 9.5 25.1
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property............ (18.7) (6.7) (8.9)
Purchase of businesses, net of
acquired cash................... (68.6) -- (6.0)
Other investing.................. 1.4 .2 (.1)
--------- --------- ---------
Net cash used in
investing
activities....... (85.9) (6.5) (15.0)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock................ 58.3 -- --
Distributions to shareholders.... (6.3) (6.0) (5.4)
Net borrowings (repayments) on
long-term debt.................. (4.0) (2.0) 3.1
Net borrowings (repayments) on
revolving credit facilities..... 39.7 3.1 (3.7)
Net payments on notes payable to
affiliates...................... (.3) (.3) (1.0)
Other financing.................. .1 .2 --
--------- --------- ---------
Net cash provided
by (used in)
financing
activities....... 87.5 (5.0) (7.0)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH...... 4.9 (2.0) 3.1
CASH, beginning of period............ 2.4 4.4 1.3
--------- --------- ---------
CASH, end of period.................. $ 7.3 $ 2.4 $ 4.4
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for --
Interest.................... $ 5.1 $ 1.8 $ 2.3
Income taxes................ 5.5 2.1 1.7
Non-cash activities --
Retirement plan contribution
charged to unearned
compensation and
additional paid-in
capital................... .4 .6 .6
Purchase of businesses for
stock..................... 197.6 -- --
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-12
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN UNEARNED RETAINED
STOCK CAPITAL COMPENSATION EARNINGS TOTAL
------- ----------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994........... $ .1 $ 6.4 $(2.9) $ 39.7 $ 43.3
Shares released under leveraged
ESOP Plan....................... -- .1 .5 -- .6
Capital contributions attributable
to deemed tax payments of S
Corporation..................... -- 3.6 -- -- 3.6
Distributions...................... -- -- -- (5.4) (5.4)
Net income......................... -- -- -- 8.1 8.1
------- ----------- ------------- --------- ---------
BALANCE, December 31, 1995........... .1 10.1 (2.4) 42.4 50.2
Adjustment to conform fiscal
year-ends....................... -- .1 .2 1.0 1.3
Shares released under leveraged
ESOP Plan....................... -- .2 .4 -- .6
Other adjustments.................. -- .1 -- -- .1
Shares issued to members of
management...................... -- 3.6 -- -- 3.6
Capital contributions attributable
to deemed tax payments of S
Corporations.................... -- 3.2 -- -- 3.2
Distributions...................... -- -- -- (6.0) (6.0)
Net income......................... -- -- -- 4.5 4.5
------- ----------- ------------- --------- ---------
BALANCE, December 31, 1996........... .1 17.3 (1.8) 41.9 57.5
Shares issued to members of
management...................... -- 6.0 -- -- 6.0
Shares sold in connection with the
IPO............................. .1 58.2 -- -- 58.3
Shares issued in connection with
the acquisition of the Founding
Companies....................... .1 80.1 -- -- 80.2
Shares issued in connection with
the Subsequent Acquisitions..... -- 18.6 -- -- 18.6
Shares released under leveraged
ESOP Plan....................... -- .1 .3 -- .4
Other adjustments.................. -- .3 -- -- .3
Capital contributions attributable
to deemed tax payments of S
Corporations.................... -- 4.0 -- -- 4.0
Distributions...................... -- -- -- (6.3) (6.3)
Net income......................... -- -- -- 7.5 7.5
------- ----------- ------------- --------- ---------
BALANCE, December 31, 1997........... $ .3 $ 184.6 $(1.5) $ 43.1 $ 226.5
======= =========== ============= ========= =========
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-13
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Metals USA, Inc., a Delaware corporation, ("Metals USA") was founded on
July 3, 1996 to become a leading national value-added metals processor 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 initial public offering ("IPO"), Metals USA had
conducted no operations. Concurrent with the consummation of its IPO on July 11,
1997, Metals USA acquired, in separate transactions (the "Mergers") eight
companies (the "Founding Companies") engaged in the processing of steel,
aluminum and specialty metals, as well as the manufacture of metal components.
Following the IPO and through December 31, 1997, Metals USA acquired seven
additional companies and subsequent to December 31, 1997, has acquired numerous
additional companies in similar businesses (See Note 2). Certain of the
companies acquired after the IPO were accounted for using the
"pooling-of-interests" method, resulting in a restatement of the Company's
financial statements for all periods presented (See Note 2). References herein
to the "Company" include Metals USA and its subsidiaries.
The acquisition of Krohn Steel Service Center, Inc. ("Krohn") met the
"pooling-of-interests" requirements of Accounting Principles Board Opinion No.
16 BUSINESS COMBINATIONS ("APB 16"). The acquisition was completed on May 29,
1998 and, accordingly, the Company's accompanying historical consolidated
financial statements have been restated to reflect the results of operations,
cash flows and financial position of Krohn, as if the acquisition occurred on
January 1, 1995. Because the acquisition occurred after December 31, 1997, these
restated financial statements are labeled as "Supplemental" in accordance with
the rules and regulations of the Securitites and Exchange Commission. See Note
2.
The Company sells to businesses such as the machining, furniture,
transportation equipment, power and process equipment, industrial/commercial
construction, consumer durables and electrical equipment industries, and
machinery and equipment manufacturers. The Company believes that its broad
customer base and its wide array of metals processing capabilities, products and
services, coupled with its broad geographic coverage of the United States,
reduce the Company's susceptibility to economic fluctuations affecting any one
industry or geographical area.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect (i) the reported amounts of assets and liabilities, (ii)
the disclosure of contingent assets and liabilities known to exist as of the
date the financial statements are published and (iii) the reported amount of
revenues and expenses recognized during the periods presented. The Company
reviews all significant estimates affecting its consolidated financial
statements on a recurring basis and records the effect of any necessary
adjustments prior to their publication. Adjustments made with respect to the use
of estimates often relate to improved information not previously available.
Uncertainties with respect to such estimates and assumptions are inherent in the
preparation of financial statements.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Metals USA and its subsidiaries. All intercompany
accounts and transactions have been eliminated in the consolidated financial
statements. Certain reclassifications have been made to prior years' financial
statements to be consistent with the current year's presentation.
INVENTORIES -- Inventories are stated at the lower of cost or market.
Certain of the Company's subsidiaries use the last-in first-out ("LIFO")
method of accounting for inventories and other subsidiaries use a variety of
methods including specific identification, average cost and the first-in
first-out ("FIFO") method of accounting. As of December 31, 1997 and 1996,
approximately 51.0% and 57.0%, respectively of the consolidated inventories were
accounted for using the LIFO method of accounting.
F-14
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER 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.
GOODWILL -- Goodwill represents the excess of cost over the estimated fair
value of identifiable assets of the businesses acquired using the "purchase"
method of accounting. Goodwill is stated at cost, net of accumulated
amortization, and is being amortized over a forty-year life using the
straight-line method. The Company reviews the recoverability of goodwill and
other long-lived assets including other intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset may be impaired. The Company has not recorded any impairment losses
with respect to goodwill, other long-lived assets or other intangible assets as
of December 31, 1997. Accumulated amortization totaled $1.2 as of December 31,
1997.
OTHER ASSETS -- Other assets include deferred financing costs and other
intangible assets, which are being amortized over the estimated useful life of
the related borrowing or intangible asset. Accumulated amortization of other
assets totaled $1.1 and $.5 as of December 31, 1997 and 1996, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The fair value of the notes payable
is estimated based on interest rates for the same or similar debt offered to the
Company having the same or similar remaining maturities and collateral
requirements. The carrying amounts of notes payable approximate fair value at
the applicable balance sheet dates.
CONCENTRATION OF CREDIT RISK -- Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist principally of
cash deposits, trade accounts and notes receivable. Concentrations of credit
risk with respect to trade accounts are within the machining, furniture,
transportation equipment, power and process equipment, industrial/commercial
construction, consumer durables and electrical equipment industries, and
machinery and equipment manufacturers. Generally, credit is extended once
appropriate credit history and references have been obtained. Adjustments to the
allowance for doubtful accounts are made periodically (as circumstances warrant)
based upon the expected collectibility of all such accounts. The Company
periodically reviews the credit history of its customers and generally does not
require collateral for the extension of credit.
INCOME TAXES -- The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"),
"Accounting for Income Taxes." Under SFAS No. 109, deferred income taxes are
recognized for the future tax consequences of differences between the tax bases
of assets and liabilities and their financial reporting amounts based on enacted
tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Provision for income taxes represents the amount of taxes
payable and the applicable changes in deferred tax assets and liabilities.
EARNINGS PER SHARE -- In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128 ("SFAS No.
128"), "Earnings Per Share." The Company adopted SFAS No. 128 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 ("Earnings per Share") and
diluted earnings per share ("Earnings per Share -- Assuming Dilution").
Earnings per Share excludes dilution and is determined by dividing income
available to common stockholders by the weighted average number of common shares
outstanding during the period. Earnings per Share -- Assuming Dilution reflects
the potential dilution that could occur if securities and other contracts to
issue common stock were exercised or converted into common stock. Earnings per
Share -- Assuming Dilution is computed similarly to fully diluted earnings per
share under previous accounting rules.
F-15
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Earnings per Share was computed using 9,448,313 shares (the aggregate
number of shares issued in connection with the acquisition of entities accounted
for using the "pooling-of-interests" method of accounting) for periods prior
to July 3, 1996 (date of inception). The 4,753,414 shares issued in connection
with the organization of Metals USA, including shares issued to management, were
considered to be issued and outstanding from the date of inception without
regard to the date such shares were actually issued. The 6,785,000 shares issued
in connection with the IPO and the 11,693,499 shares issued in connection with
the entities acquired using the "purchase" method of accounting have been
included in the Earnings per Share computation only from their respective dates
of issuance, resulting in weighted average shares of 8,341,480 for the year
ended December 31, 1997. Earnings per Share -- Assuming Dilution differs from
the Earnings per Share computation due to the inclusion of stock options that
were dilutive.
STOCK BASED COMPENSATION -- Statement of Financial Accounting Standards No.
123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation," allows
entities to choose between the fair value based method of accounting for
employee stock options or similar equity instruments and the intrinsic,
value-based method of accounting prescribed by Accounting Principles Board
Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees."
The Company has elected to account for stock options or similar equity
instruments using the intrinsic, value-based method of accounting prescribed in
APB No. 25.
2. BUSINESS COMBINATIONS
POOLING TRANSACTIONS
On September 26, 1997, Metals USA completed the acquisition of all the
capital stock of Jeffreys Steel Company, Inc. ("Jeffreys") in a business
combination accounted for as a "pooling-of-interests" transaction in
accordance with the requirements of APB No. 16. Jeffreys is headquartered in
Mobile, Alabama, and is engaged in the wholesale and retail sale of steel.
Jeffreys has historically reported on a July 31 fiscal year-end. For purposes of
the merger with Metals USA, the accompanying financial statements reflect
Jeffreys on a calendar year-end basis effective January 1, 1996. The historical
financial information of Jeffreys for the year ended July 31, 1995 has been
included in the Company's consolidated financial statements for the year ended
December 31, 1995. The net sales and net income of Jeffreys for the period from
August 1, 1995, through December 31, 1995, were $51.0 and $1.0, respectively.
The net income of Jeffreys for this transition period is included in the
accompanying consolidated statements of stockholders' equity as an adjustment to
retained earnings in order to conform their fiscal year to that of the Company.
On November 20, 1997, Metals USA completed the acquisition of all the
capital stock of Wayne Steel, Inc. ("Wayne") in a business combination
accounted for as a "pooling-of-interests" transaction in accordance with the
requirements of APB No. 16. Wayne operates as a wholesaler and processor of
steel and aluminum flat rolled products and is headquartered in Wooster, Ohio.
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. Krohn is a processor of flat rolled steel and is
headquartered in Springfield, Ohio.
Prior to the acquisition by Metals USA, the shareholders of Wayne and Krohn
had elected to be taxed as S Corporations; accordingly, any federal income tax
liabilities for the periods prior to the acquisition dates were the
responsibility of the respective stockholders. For purposes of these
consolidated financial statements, federal income taxes have been provided as if
Wayne and Krohn had filed C Corporation tax returns for the pre-acquisition
periods, with the current income tax provisions reflected in the consolidated
financial statements as increases to additional paid-in capital. Collectively,
Metals USA issued 9,448,313 shares of common stock in exchange for all of the
capital stock of Jeffreys, Wayne and Krohn. The unaudited aggregate
pre-acquisition net sales and net income for Jeffreys, Wayne and Krohn during
1997 were $239.9 and $8.9, respectively. There were no transactions between
Metals USA, Jeffreys, Wayne or Krohn during periods prior to these business
combinations.
F-16
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following table summarizes the restated consolidated net sales, net
income and per share data of the Company after giving effect to the acquisition
of Krohn:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
NET NET NET
NET SALES INCOME NET SALES INCOME NET SALES INCOME
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Net sales and net income --
As previously reported in the
Company's Form 10-K for the year
ended December 31, 1997.......... $ 507.8 $6.0 $ 240.1 $3.3 $ 235.2 $6.9
Acquisition accounted for as
"pooling-of-interests"............ 29.8 1.5 25.4 1.2 25.7 1.2
--------- ------ --------- ------ --------- ------
As restated................... $ 537.6 $7.5 $ 265.5 $4.5 $ 260.9 $8.1
========= ====== ========= ====== ========= ======
Earnings per share --
As previously reported in the
Company's Form 10-K for the year
ended December 31, 1997.......... $.28 $.31 $.84
Acquisition accounted for as
"pooling-of-interests"............ .05 .07 .02
------ ------ ------
As restated................... $.33 $.38 $.86
====== ====== ======
Earnings per share -- assuming
dilution --
As previously reported in the
Company's Form 10-K for the year
ended December 31, 1997.......... $.28 $.31 $.84
Acquisition accounted for as
"pooling-of-interests"............ .05 .07 .02
------ ------ ------
As restated................... $.33 $.38 $.86
====== ====== ======
</TABLE>
PURCHASE TRANSACTIONS
Concurrent with the completion of its IPO on July 11, 1997, Metals USA
acquired the eight Founding Companies, which are in the metal processing and
distribution business. The companies acquired were Affiliated Metals Company
headquartered in Granite City, Illinois; Interstate Steel Supply Co.
headquartered in Philadelphia, Pennsylvania; Queensboro Steel Corporation
headquartered in Wilmington, North Carolina; Southern Alloy of America, Inc.
headquartered in Salisbury, North Carolina; Steel Service Systems, Inc.
headquartered in Horicon, Wisconsin; Texas Aluminum Industries, Inc./The
Cornerstone Group headquartered in Houston, Texas; Uni-Steel, Inc. headquartered
in Enid, Oklahoma and Williams Steel & Supply Co., Inc. headquartered in
Milwaukee, Wisconsin. The acquisition of each of the Founding Companies was
accounted for using the "purchase" method of accounting in accordance with APB
No. 16. The aggregate consideration paid by Metals USA to acquire the Founding
Companies was approximately $27.8 in cash, 10,128,609 shares of common stock and
the assumption of $92.6 of debt.
Subsequent to the IPO, Metals USA acquired five additional companies using
the "purchase" method of accounting in accordance with APB No. 16. The
acquisitions completed in September 1997 included Harvey Titanium, Ltd.
headquartered in Santa Monica, California; Meier Metal Servicenters, Inc.
headquartered in Hazel Park, Michigan and the business of Federal Bronze
Products, Inc., headquartered in Newark, New Jersey. The acquisitions completed
in December 1997 included Royal Aluminum, Inc. headquartered in Leesburg,
Florida and R. J. Fabricating Inc. headquartered in Milwaukee, Wisconsin. These
five companies are referred to collectively as the "1997 Subsequent
Acquisitions." The aggregate
F-17
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
consideration paid by Metals USA for the 1997 Subsequent Acquisitions consists
of approximately $44.1 in cash, 1,564,890 shares of common stock and the
assumption of indebtedness of approximately $15.4.
The Company has recorded the excess of the purchase price over the
estimated fair value of identifiable assets acquired in connection with both the
Founding Companies and the 1997 Subsequent Acquisitions as "goodwill" in the
accompanying consolidated balance sheet. The goodwill is being amortized over a
forty-year period. The results of operations of the Founding Companies and the
1997 Subsequent Acquisitions are included in the accompanying consolidated
financial statements from their respective dates of acquisition.
The following summarized unaudited pro forma financial information reflects
the supplemental consolidated financial information of the Company and assumes
the acquisition of the Founding Companies, the 1997 Subsequent Acquisitions and
the issuance of the Notes (as defined in Note 6) occurred on January 1, 1996.
The pro forma decrease in earnings resulting from the issuance of the Notes was
approximately $.11 per share for both periods presented.
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996
------------ ------------
(UNAUDITED)
Net sales............................ $ 884.4 $ 788.9
Operating costs and expenses:
Cost of sales................... 679.8 603.4
Operating and delivery.......... 87.8 76.8
Selling, general and
administrative................ 57.1 51.3
Depreciation and amortization... 10.4 11.3
------------ ------------
Operating income..................... 49.3 46.1
Interest expense..................... 16.4 15.4
Other (income) expense............... (1.2) (1.3)
------------ ------------
Income before income taxes........... 34.1 32.0
Provision for income taxes........... 13.9 13.8
------------ ------------
Net income........................... $ 20.2 $ 18.2
============ ============
Earnings per share................... $ .62 $ .56
============ ============
Earnings per share -- assuming
dilution........................... $ .61 $ .56
============ ============
Number of common shares used in per
share calculations:
Earnings per share.............. 32,680,226 32,680,226
============ ============
Earnings per share -- assuming
dilution...................... 32,994,818 32,705,838
============ ============
The preceding pro forma amounts reflect the supplemental results of
operations for Metals USA, the Founding Companies and the 1997 Subsequent
Acquisitions, assuming the transactions were completed on January 1, 1996.
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 985,500
and 400,000 shares of common stock to management of and consultants to Metals
USA in 1997 and 1996, respectively, 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 Founding Companies and 1997 Subsequent
Acquisitions 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 Founding Companies and 1997 Subsequent Acquisitions, offset
by an assumed increase in interest expense incurred in connection
F-18
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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, 1996; (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, 1996; (g)
certain other nonrecurring expenses with respect to the 1997 Subsequent
Acquisitions, 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
(as defined in Note 6), 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.
3. INVENTORIES
Inventories consist of the following:
DECEMBER 31,
--------------------
1997 1996
--------- ---------
Raw materials --
Structural steel................ $ 8.4 $ 19.7
Flat-rolled steel............... 44.8 18.0
Specialty metals................ 22.0 --
Aluminum products............... 17.6 .6
Other........................... 1.7 4.0
--------- ---------
Total raw materials........ 94.5 42.3
--------- ---------
Work-in-process and finished goods --
Structural steel................ 35.8 --
Flat-rolled steel............... 19.2 5.1
Specialty metals................ 5.1 --
Aluminum products............... 6.7 .4
--------- ---------
Total work-in-process and
finished goods.......... 66.8 5.5
--------- ---------
Less -- LIFO reserve................. (1.9) (2.0)
--------- ---------
Total...................... $ 159.4 $ 45.8
========= =========
The replacement cost of the Company's inventory exceeds the historical cost
of the inventory, computed using the LIFO method of valuation, as reported in
the accompanying consolidated financial statements. If the FIFO method had been
used for all inventories, the carrying value would have been $161.3 and $47.8 at
December 31, 1997 and 1996, respectively. Additionally, net income would have
been $7.5, $4.5 and $8.4 for the years ended December 31, 1997, 1996 and 1995,
respectively.
F-19
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
ESTIMATED --------------------
USEFUL LIVES 1997 1996
------------ --------- ---------
Land................................. $ 3.8 $ 1.5
Building and improvements............ 5-40 years 35.5 18.5
Machinery and equipment.............. 7-30 years 61.1 22.7
Automobiles and trucks............... 3-12 years 7.0 5.3
--------- ---------
107.4 48.0
Less -- Accumulated depreciation..... (20.9) (17.3)
--------- ---------
Total........................... $ 86.5 $ 30.7
========= =========
Depreciation expense for the years ended December 31, 1997, 1996 and 1995
was $4.1, $3.7 and $3.0, respectively. Additionally, following the acquisitions
of Wayne and Jeffreys, the Company revised the estimated useful lives of the
depreciable assets of Wayne and Jeffreys to conform to the conventions adopted
by the Founding Companies. This revision reduced depreciation expense in 1997 as
compared to 1996 by approximately $1.2.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 31,
--------------------
1997 1996
--------- ---------
Accrued salaries and employee
benefits........................... $ 5.0 $ 1.0
Accrued taxes other than income...... 1.9 .7
Accrued interest..................... 1.0 .1
Accrued profit sharing............... 1.3 .4
Other................................ 3.9 .6
--------- ---------
Total........................... $ 13.1 $ 2.8
========= =========
6. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
--------------------
1997 1996
--------- ---------
Borrowings under the Credit
Facility............................. $ 144.8 $ --
Revolving credit facility with
interest at prime less 1.0%,
maturing on December 31, 1998,
secured by inventory and trade
accounts receivable................ -- 13.3
Various issues of Industrial Revenue
Bonds.............................. 21.6 8.0
Notes payable to former employee
stock ownership plan and trust
members payable in annual
installments including interest at
prime with an 8.5% cap through
February 1998...................... 1.7 2.1
Obligations under capital leases and
other.............................. 6.2 4.4
--------- ---------
174.3 27.8
Less -- Current portion.............. (7.2) (3.2)
--------- ---------
$ 167.1 $ 24.6
========= =========
F-20
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Scheduled maturities of long-term debt for the years ending December 31 are
as follows: 1998 -- $7.2; 1999 -- $2.2; 2000 --$2.5; 2001 -- $2.4; 2002 -- $2.3;
thereafter -- $157.7.
The Industrial Revenue Bonds (the "IRBs") are payable in installments
ranging from monthly to annual with variable interest ranging from 4.35% to
6.61% per annum at December 31, 1997 and mature from May 1, 2003 to May 1, 2009.
The IRBs are secured by real estate and equipment acquired with proceeds from
these bonds with a net book value of $21.2 at December 31, 1997. The IRBs place
various restrictions on certain of the Company's subsidiaries, including but not
limited to maintenance of required insurance coverage, maintenance of certain
financial ratios, limits on capital expenditures, maintenance of tangible net
worth and letters of credit.
Concurrent with the IPO, the Company obtained an initial $150.0 unsecured
revolving credit facility (the "Original Credit Facility") which was used to
fund acquisitions, refinance certain indebtedness of the acquired companies and
for general corporate and working capital requirements. In January 1998, the
Company obtained a $50.0 unsecured revolving credit facility (the "Interim
Credit Facility") to meet its acquisition related cash requirements pending the
completion of an extension and modification of the Original Credit Facility to
provide for up to $300.0 of borrowing availability. The closing of the extension
and modification of the $300.0 credit facility (the "Credit Facility") on
February 11, 1998 stipulated the termination of the Interim Credit Facility. The
Credit Facility matures in February 2003, bears interest at the bank's prime
rate or LIBOR, at Metals USA's option, plus an applicable margin based on the
ratio of funded debt to cash flows (as defined). An annual commitment fee of up
to 1/4% is payable on any unused portion of the Credit Facility. The Company
will use the Credit Facility to fund acquisitions, make capital expenditures,
refinance debt of the companies acquired and for general working capital
requirements. Borrowings under the Credit Facility are secured by the pledge of
all of the capital stock of each of the Company's material subsidiaries (as
defined). In connection with the IPO, the Mergers and the 1997 Subsequent
Acquisitions, the revolving credit facility and certain other obligations
outstanding as of December 31, 1996 (including certain obligations of the
acquired companies) were repaid with the borrowings under the Credit Facility.
The Credit Facility requires the Company to comply with various affirmative
and negative covenants including: (i) the maintenance of certain financial
ratios, (ii) restrictions on additional indebtedness, (iii) restrictions on
liens, guarantees and dividends, (iv) obtaining the lenders' consent with
respect to certain individual acquisitions, and (v) maintenance of a specified
level of consolidated net worth. At December 31, 1997, the Company was precluded
from the payment of dividends under the terms of the Credit Facility.
On February 11, 1998, the Company completed the sale of $200.0 aggregate
principal amount of the Company's 8 5/8% Senior Subordinated Notes due 2008 (the
"Notes"). The Company received $194.5 of net cash proceeds (before expected
expenses of $.8 upon closing). The Company used $179.3 of such proceeds to repay
the borrowings outstanding under the Original Credit Facility and Interim Credit
Facility on February 11, 1998. As of February 12, 1998, the entire amount of the
Credit Facility was available to the Company.
The Notes call for semi-annual interest payments on February 15 and August
15 of each year, beginning August 15, 1998 and mature on February 15, 2008. The
Notes are redeemable at the option of the Company, in whole or in part, at any
time on or after February 15, 2003, at the following redemption prices:
2003 -- 104.313%; 2004 -- 102.875%; 2005 -- 101.438%; thereafter -- 100.00%,
together with accrued and unpaid interest to the date of redemption.
Notwithstanding the foregoing, at any time on or prior to February 15, 2001, the
Company may redeem up to 35% of the aggregate principal amount of the Notes
originally issued with the net proceeds of one or more offerings of the common
stock of the Company, at a redemption price equal to 108.625% of the principal
amount thereof, plus accrued and unpaid interest to the
F-21
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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, payment restrictions affecting subsidiaries 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 Company has agreed, for the benefit of all holders of the
Notes, that it will file a registration statement within 60 days after the
issuance of the Notes relating to an exchange offer for the Notes under the
Securities Act of 1933, as amended.
7. INCOME TAXES
The components of the provision for income taxes are as follows:
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Federal --
Current......................... $ 8.7 $ 4.5 $ 4.3
Deferred........................ (.2) (.1) .2
--------- --------- ---------
8.5 4.4 4.5
State --
Current......................... 1.9 1.1 1.0
Deferred........................ (.1) (.1) .1
--------- --------- ---------
1.8 1.0 1.1
--------- --------- ---------
Total provision............ $ 10.3 $ 5.4 $ 5.6
========= ========= =========
The provision for income taxes differs from an amount computed at the
statutory rates as follows:
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Federal income tax at statutory
rates.............................. $ 6.2 $ 3.5 $ 4.8
State income taxes, net of federal
income tax benefit................. 1.2 .5 .6
Nondeductible expenses:
Stock compensation.............. 2.1 1.3 --
Amortization of goodwill........ .4 -- --
Other........................... .4 .1 .2
--------- --------- ---------
$ 10.3 $ 5.4 $ 5.6
========= ========= =========
F-22
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The significant items giving rise to the deferred tax assets (liabilities)
are as follows:
DECEMBER 31,
----------------------
1997 1996
---------- ----------
Deferred tax assets --
Allowance for doubtful
accounts........................ $ 1.0 $ .1
Uniform capitalization of
inventory....................... 1.8 .8
Nonqualified plan
contribution.................... -- .2
Accrued liabilities............. 2.1 .2
Deferred compensation........... .5 --
Net operating loss
carryforward.................. .3 --
State taxes..................... .3 --
---------- ----------
Total deferred tax
assets..................... 6.0 1.3
---------- ----------
Deferred tax liabilities --
Property and equipment.......... (7.6) (1.4)
Inventories -- LIFO reserve..... (3.3) --
Foreign investments............. (.9) --
Other........................... (.5) (.2)
---------- ----------
Total deferred tax
liabilities................ (12.3) (1.6)
Valuation allowance.................. (.3) --
---------- ----------
Net deferred tax
(liabilities) assets....... $ (6.6) $ (.3)
========== ==========
8. STOCKHOLDERS' EQUITY
COMMON STOCK AND PREFERRED STOCK
Metals USA effected a 135.81-for-one stock split on April 21, 1997 for each
share of $.01 par value common stock ("Common Stock") then outstanding. In
addition, Metals USA increased the number of authorized shares of Common Stock
to 50,000,000 and the authorized shares of Restricted Common Stock, as defined
below, to 3,122,914 and authorized 5,000,000 shares of $.01 par value preferred
stock, which may be designated in the future. On May 20, 1998, the Company's
stockholders approved an increase in the number of authorized shares of Common
Stock to 200,000,000. The effects of the Common Stock split and the increase in
the shares of authorized Common Stock have been retroactively reflected in the
consolidated balance sheets and in the accompanying notes.
In connection with its organization and initial capitalization, Metals USA
issued 135,810 shares of Common Stock at $.01 per share to Notre Capital
Ventures II, L.L.C. ("Notre"). Notre received 3,232,104 additional shares (at
approximately $.01 per share) in exchange for the contribution of incurred
expenses 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, Metals USA issued
a total of 985,500 shares of Common Stock to management of and consultants to
Metals USA at a price of $.01 per share. As a result, Metals USA has recorded a
non-recurring, non-cash compensation charge of $3.6 in 1996 and $6.0 in 1997,
representing the difference between the amount paid for the shares and the
estimated fair value of the shares on the date of sale, as if the Founding
Companies were combined.
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 Metals USA's Board of Directors and to .55 of one vote for each share held on
all other matters on which they are entitled to vote.
F-23
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Each share of Restricted Common Stock will automatically convert into
Common Stock on a share-for-share basis (a) in the event of a disposition of
such share of Restricted Common Stock by the holder thereof (other than a
disposition which is a distribution by a holder to its partners or beneficial
owners or a transfer to a related party of such holder (as defined)), (b) in the
event any person acquires beneficial ownership of 15% or more of the outstanding
shares of Common Stock, or (c) in the event any person offers to acquire 15% or
more of the total number of outstanding shares of Common Stock.
After July 1, 1998, Metals USA may elect to convert any outstanding shares
of Restricted Common Stock into shares of Common Stock in the event 80% or more
of the outstanding shares of Restricted Common Stock have been converted into
shares of Common Stock.
INITIAL PUBLIC OFFERING
On July 11, 1997 the Company completed its IPO, issuing to the public
5,900,000 shares of its common stock at a price of $10.00 per share, resulting
in net proceeds to the Company of $50.1 after deducting underwriting commissions
and discounts. On August 12, 1997, the Company sold 885,000 shares of Common
Stock pursuant to the over-allotment option granted to the underwriters. The
Company realized net proceeds from the sale of $8.2.
9. STOCK BASED COMPENSATION
LONG-TERM INCENTIVE PLAN
In April 1997, Metals USA's stockholders approved the Company's 1997
Long-Term Incentive Plan (the "Plan"), which provides for the granting or
awarding of incentive or non-qualified stock options ("NQSOs"), stock
appreciation rights, restricted or deferred stock, dividend equivalents and
other incentive awards to officers, key employees and consultants to Metals USA.
The number of shares authorized and reserved for issuance under the Plan is
limited to 13% of the aggregate number of shares of Common Stock outstanding.
The terms of the option awards are established by the Compensation Committee of
Metals USA's Board of Directors. These options will vest at the rate of 20% per
year, commencing on the first anniversary of the IPO or date of grant and will
expire ten years from the date of grant or three months following termination of
employment. The Company did not issue any stock options prior to January 1,
1996. Options granted in 1996 were attributable to an acquired company that was
accounted for as a "pooling-of-interest" business combination. Those options
were converted at the applicable share conversion ratio specified in the merger
agreement and exchanged for Company options issued under the Plan.
NON-EMPLOYEE DIRECTORS' STOCK PLAN
Metals USA's 1997 Non-Employee Directors' Stock Plan (the "Directors'
Plan"), which was adopted by the Board of Directors and approved by Metals
USA's stockholders in April 1997, provides for (i) the automatic grant to each
non-employee director serving at the consummation of the IPO of an option to
purchase 10,000 shares, (ii) the automatic grant to each non-employee director
of an option to purchase 10,000 shares upon such person's initial election as a
director, and (iii) an automatic annual grant at each annual meeting of
stockholders thereafter of an option to purchase 5,000 shares to each
non-employee director at which meeting such director is re-elected or remains a
director, unless such annual meeting is held within three months of such
person's initial election as a director. All options will have an exercise price
per share equal to the fair market value of the Common Stock on the date of
grant and are immediately vested and expire on the earlier of ten years from the
date of grant or one year after termination of service as a director. The
Directors' Plan also permits non-employee directors to elect to receive, in lieu
of cash directors' fees, shares or credits representing "deferred shares" at
future settlement dates, as selected by the director. The number of shares or
deferred shares received will equal the number of shares of Common Stock which,
at the date the fees would otherwise be payable, will have an aggregate fair
market value equal to the amount of such fees.
F-24
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following is a summary of activity:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
"FAIR
VALUE" OPTIONS FOR
PER SHARE WEIGHTED SHARES OF
OF OPTIONS AVERAGE PRICE COMMON
GRANTED PER SHARE STOCK
------------- ------------- -----------
<S> <C> <C> <C>
Balance January 1, 1996.............. --
Granted.............................. $ 10.06 $ 6.81 172,788
Exercised............................ (42,237)
Canceled or expired.................. --
-----------
Balance December 31, 1996............ 130,551
Granted in connection with the IPO... 6.30 10.00 2,134,024
Granted to directors................. 6.30 10.00 40,000
Granted.............................. 8.22 14.41 949,683
Exercised............................ --
Canceled or expired.................. --
-----------
Balance December 31, 1997............ 3,254,258
===========
</TABLE>
At December 31, 1997, exercisable options for shares of Common Stock were
61,440 at a weighted average price of $6.81 per share and 40,000 at a weighted
average price of $10.00 per share.
The Company used the Black-Scholes model to calculate the estimated
"fair-value" of stock options and similar awards. The model requires the use
of a number of subjective assumptions including: (i) risk free rate of return,
(ii) expected price volatility of the Common Stock, (iii) expected dividend
yield and (iv) estimated life of the option. Principal assumptions used in
estimating the "fair-value" of the Company's stock options using the
Black-Scholes model were as follows:
DECEMBER 31,
--------------------
1997 1996
--------- ---------
Risk free rate of return........ 6.18% 6.32%
Expected price volatility....... 43.3% 46.0%
Expected dividend yield......... -- --
Expected life of the option (in
years)......................... 7.5 7.5
The Company applies APB No. 25 and related interpretations in accounting
for its stock option plans. Had compensation cost for the Company's stock option
plans been determined based upon the fair value at the grant rate, consistent
with the methodology prescribed under the SFAS No. 123, the Company's net income
and earnings per share would have been reduced by the amortization of the
estimated fair value of stock options over the applicable vesting period of such
awards. The following pro forma disclosures may not be representative of similar
future disclosures because: (i) additional options may be granted in future
years and (ii) the computations used to estimate the "fair value" of the stock
options are subject to
F-25
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
significant subjective assumptions, any one or all of which may differ in
material respects from actual amounts.
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Net income as reported............... $ 7.5 $ 4.5 $ 8.1
Estimated "fair value" of stock
options vesting during the periods,
net of federal income tax
benefit............................ (1.1) (.1) --
--------- --------- ---------
Adjusted net income.................. $ 6.4 $ 4.4 $ 8.1
========= ========= =========
Adjusted earnings per share.......... $ .28 $ .37 $ .86
========= ========= =========
Adjusted earnings per
share -- assuming dilution......... $ .28 $ .37 $ .86
========= ========= =========
Number of common shares used in the
per share calculations:
Adjusted earnings per share..... 22.5 11.8 9.4
========= ========= =========
Adjusted earnings per
share -- assuming dilution..... 22.9 11.8 9.4
========= ========= =========
10. EMPLOYEE BENEFIT PLANS
PROFIT-SHARING PLANS
Certain subsidiaries of the Company provide various defined contributions
savings plans for their employees (the "Plans"). The Plans cover substantially
all full-time employees of such subsidiaries. Participants vest at varying rates
ranging from full vesting upon participation to those that provide for vesting
to begin after three years of service and are fully vested after seven years.
Certain Plans provide for a deferral option that allows employees to elect to
contribute a portion of their pay into the plan and provide for a discretionary
profit sharing contribution by the individual subsidiary. Generally the
subsidiaries match a portion of the amount deferred by participating employees.
Contributions for the profit sharing portion of the plan are generally at the
discretion of the individual subsidiary board of directors. The aggregate
contributions to the Plans were $.9, $.3 and $.2 for the years ended December
31, 1997, 1996 and 1995, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
Under the provisions of an employee stock ownership plan ("ESOP") and its
related trust, Jeffreys made annual contributions to the plan which were
invested in stock of Jeffreys and other qualifying securities for the benefit of
Jeffreys' employees. The plan provided for Jeffreys' purchases of employee
shares to be paid in cash and with the issuance of a note payable. Effective
September 26, 1997, the participation was frozen. Concurrent with the merger
with Metals USA, ESOP shares were exchanged for shares of Metals USA common
stock.
LEVERAGED ESOP ARRANGEMENT
The following disclosure has been restated to reflect the equivalent shares
of Metals USA common stock that were issued in connection with the acquisition
of Jeffreys.
Jeffreys' ESOP held 434,616 shares of stock prior to the purchase of
735,384 shares of outstanding stock from a majority stockholder for $5.31 per
share. The ESOP borrowed the funds to purchase such stock and Jeffreys
guaranteed the repayment of this loan. Jeffreys will repay this loan, plus
interest, through deductible contributions to the plan. As Jeffreys makes
contributions to the plan, which reduces the principal on the note, the plan
will release the corresponding shares related to the reduction in the note
principal. At the point when these shares are no longer specifically secured by
the note payable, they will be allocated to the individual participants of the
plan and considered earned by those employees at that time. Jeffreys accounts
for its ESOP in accordance with Statement of Position 93-6 ("SOP 93-6"),
"Employers' Accounting for Employee Stock Ownership Plans". Accordingly, the
debt of the ESOP is recorded as long-term debt and the shares pledged as
collateral are reported as unearned compensation. As shares are released from
collateral, Jeffreys reports compensation expense equal to the current estimated
market price of the
F-26
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
shares. ESOP share compensation expense was $.4, $.6 and $.6 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Since the obligation is secured by the shares purchased and the note is
guaranteed by Jeffreys, all amounts relating to this transaction are considered
unearned compensation of the employees until such time as the note is deemed
paid and the corresponding shares are released to the individual participants of
the plan. The balance in unearned compensation at December 31, 1997 and 1996 of
$1.5 and $1.8, respectively, results from the leveraged ESOP stock purchase less
the deemed release of shares at cost.
The activity relating to the ESOP shares was as follows:
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Allocated shares at beginning of
year............................... 795,639 710,970 635,856
Shares deemed released for the
current period..................... 87,165 84,669 75,114
Unallocated shares................... 287,196 374,361 459,030
----------- ----------- -----------
Total ESOP shares............... 1,170,000 1,170,000 1,170,000
=========== =========== ===========
In accordance with SOP 93-6, additional paid-in capital is adjusted
whenever the market value of the shares released is more or less than the cost
of the shares released. The increase in additional paid-in capital attributable
to this difference in market value and cost was $.1 and $.2 for the years ended
December 31, 1997 and 1996, respectively.
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE AGREEMENTS
The Company's minimum lease obligations under certain long-term
non-cancelable lease agreements for office space, warehouse space and equipment
are as follows: 1998 -- $6.6; 1999 -- $6.0; 2000 -- $5.3; 2001 -- $5.0;
2002 -- $3.9; thereafter -- $26.5.
The Company paid approximately $3.2, $.6 and $.7 in rent expense during the
years ended December 31, 1997, 1996 and 1995, respectively, under operating
leases. Certain of these leases are with affiliated individuals and companies
(see Note 12).
CONTINGENCIES
Subsidiaries of the Company are involved in a variety of claims, lawsuits
and other disputes arising in the ordinary course of business. The Company
believes the resolution of these matters and the incurrence of their related
costs and expenses should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
12. RELATED-PARTY TRANSACTIONS
Transactions with directors, officers, employees (including affiliates of
the foregoing) or affiliates of the Company must be at terms that are no less
favorable to the Company than those available from third parties and must be
approved in advance by a majority of disinterested members of the Board of
Directors.
In connection with the Mergers and certain of the subsequent acquisitions,
subsidiaries of the Company have entered into a number of lease arrangements for
facilities and equipment. These lease arrangements are for periods ranging from
10 to 20 years. Lease payments for these items in respect of the years ended
December 31, 1997, 1996 and 1995 were $1.4, $.3 and $.3, respectively. Future
commitments in respect of these leases are included in the schedule of minimum
lease payments in Note 11.
At December 31, 1997 and 1996 the aggregate principal amount of notes
receivable held by the Company were $.8 and $.1, respectively. Interest accrues
on the notes at rates ranging from 7.5% to 8.0% per annum. The notes call for
regular periodic payments of principal and interest and mature at varying dates
through March 1, 2007. The notes are secured by liens on specific assets of the
affiliates and personnel guarantees of the individuals. As of December 31, 1997,
the notes were current as to payment terms.
F-27
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
At December 31, 1997 and 1996, a subsidiary of the Company (Krohn) had
outstanding notes payable to shareholders in the aggregate principal amount of
$1.3. The notes bear interest at prime plus 2% and are payable on demand.
Interest expense related to these notes for each of the years ended December 31,
1997, 1996 and 1995 was $.1.
13. SUBSEQUENT EVENTS (UNAUDITED)
On May 20, 1998, the Company's stockholders approved an increase in the
number of authorized shares of Common Stock to 200,000,000.
The Unaudited Supplemental Financial Statements included elsewhere in this
Prospectus should be read in conjunction with those presented above with respect
to events occurring after the date of the auditors report.
F-28
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
1998 1997
------------ -------------
(UNAUDITED)
ASSETS
Current assets:
Cash............................... $ 11.9 $ 7.3
Accounts receivable, net of
allowance of $4.8 and $3.6......... 148.1 95.1
Inventories........................ 223.3 159.4
Prepaid expenses................... 2.6 1.9
Deferred income tax asset.......... 2.7 1.5
Other.............................. 4.3 2.2
------------ -------------
Total current assets....... 392.9 267.4
Property and equipment, net.......... 107.1 86.5
Goodwill, net........................ 156.8 120.1
Other assets, net.................... 13.4 6.6
------------ -------------
Total assets............... $ 670.2 $ 480.6
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................... $ 81.5 $ 52.5
Accrued liabilities................ 19.0 13.1
Current portion of long-term
debt............................... 9.8 7.2
Income taxes payable............... 3.4 1.6
------------ -------------
Total current
liabilities.................. 113.7 74.4
Long-term debt, less current
portion.............................. 273.2 167.1
Deferred income tax liability........ 8.6 8.1
Other long-term liabilities.......... 4.9 4.5
------------ -------------
Total liabilities.......... 400.4 254.1
------------ -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par,
5,000,000 shares authorized and
outstanding, none issued and
outstanding..................... -- --
Common stock, $0.01 par,
203,122,914 shares authorized,
35,646,038 and 32,680,226 shares
issued and outstanding,
respectively.................... .4 .3
Additional paid-in capital......... 223.4 184.6
Unearned compensation.............. (1.5) (1.5)
Retained earnings.................. 47.5 43.1
------------ -------------
Total stockholders'
equity....................... 269.8 226.5
------------ -------------
Total liabilities and
stockholders' equity......... $ 670.2 $ 480.6
============ =============
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-29
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
UNAUDITED SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
Net sales............................... $ 278.5 $ 72.0
Operating costs and expenses:
Cost of sales...................... 214.6 55.5
Operating and delivery............. 26.0 6.9
Selling, general and
administrative.................... 18.1 7.2
Depreciation and amortization...... 3.0 .7
--------- ---------
Operating income........................ 16.8 1.7
Other (income) expense:
Interest expense................... 4.8 .4
Other income....................... (.1) (.1)
--------- ---------
Income before income taxes.............. 12.1 1.4
Provision for income taxes.............. 4.9 1.8
--------- ---------
Net income (loss)....................... $ 7.2 $ (.4)
========= =========
Earnings per share...................... $ .21 $ (.03)
========= =========
Earnings per share -- assuming
dilution.............................. $ .21 $ (.03)
========= =========
Number of common shares used in the per
share calculations:
Earnings per share................. 33.8 14.2
========= =========
Earnings per share -- assuming
dilution.......................... 34.5 14.2
========= =========
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-30
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
UNAUDITED SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............... $ 7.2 $ (.4)
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 .9
Provision for bad debts.... .6 --
Depreciation and
amortization............. 3.0 .7
Deferred financing costs
incurred................. (7.0) (.1)
Amortization of deferred
financing costs.......... .1 --
Compensation
expense -- management
shares................... -- 2.8
Changes in operating assets
and liabilities, net of
business acquisitions --
Accounts receivable... (20.9) (3.7)
Inventories........... (2.6) 2.0
Prepaid expenses and
other assets........ (3.8) (1.2)
Accounts payable and
accrued
liabilities......... 7.2 4.9
Income taxes
payable............. 1.2 .7
Other liabilities..... .4 (.6)
Other operating............ (.7) .2
--------- ---------
Net cash (used
in) provided by
operating
activities...... (15.0) 6.2
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets.... .3 --
Purchase of property and
equipment...................... (2.9) (1.8)
Purchase of businesses, net of
acquired cash.................. (33.8) --
--------- ---------
Net cash used in
investing
activities...... (36.4) (1.8)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders... (2.7) (1.0)
Issuance of 8 5/8% Senior
Subordinated Notes............. 200.0 --
Net repayments on the Credit
Facility....................... (93.9) --
Net repayments on Industrial
Revenue Bonds and other
long-term debt................. (47.4) (1.8)
Other financing................. -- .8
--------- ---------
Net cash
provided by
(used in)
financing
activities...... 56.0 (2.0)
--------- ---------
NET INCREASE IN CASH................. 4.6 2.4
CASH, beginning of period............ 7.3 2.4
--------- ---------
CASH, end of period.................. $ 11.9 $ 4.8
========= =========
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-31
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED SUPPLEMENTAL 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 March 31, 1998,
the Company 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 involves 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
supplemental 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 supplemental consolidated financial statements and related
notes thereto contained elsewhere in this Prospectus. Certain capitalized terms
used herein have the same meaning given to them in the Supplemental Consolidated
Financial Statements.
F-32
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
RESTATEMENT OF HISTORICAL FINANCIAL STATEMENTS
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. Because the acquisition occurred after March 31,
1998, these restated financial statements are labeled as "Supplemental" in
accordance with the rules and regulations of the Securities and Exchange
Commission. The following table summarizes the restated consolidated net sales,
net income and per shared data of the Company after giving effect to the
acquisition of Krohn:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------
1997
1998 ---------------------
-------------------- NET
NET INCOME/
NET SALES INCOME NET SALES (LOSS)
--------- ------ --------- -------
<S> <C> <C> <C> <C>
Net sales and net income (loss) --
As previously reported in the
Company's Form 10-Q for the three
months ended March 31, 1998...... $ 270.5 $6.7 $65.1 $ (.7)
Acquisition accounted for as
pooling-of-interests............. 8.0 .5 6.9 .3
--------- ------ --------- -------
As restated................... $ 278.5 $7.2 $72.0 $ (.4)
========= ====== ========= =======
Earnings per share --
As previously reported in the
Company's Form 10-Q for the three
months ended March 31, 1998...... $.21 $(.05)
Acquisition accounted for as
pooling-of-interests............. -- .02
------ -------
As restated................... $.21 $(.03)
====== =======
Earnings per share -- assuming
dilution --
As previously reported in the
Company's Form 10-Q for the three
months ended March 31, 1998...... $.20 $(.05)
Acquisition accounted for as
pooling-of-interests............. .01 .02
------ -------
As restated................... $.21 $(.03)
====== =======
</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.
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. The computations result from dividing income
available to common stockholders by the applicable weighted average number of
common shares outstanding during the period.
Pro forma combined earnings per share were computed assuming all of the
shares issued and outstanding upon completion of the IPO (21,667,023 shares)
were issued and outstanding as of January 1,
F-33
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1997. These shares include shares issued to consultants, members of management
and the former owners of the Founding Companies, together with the shares sold
pursuant to the IPO. Shares issued in connection with the acquisitions are
included in the computation of weighted average shares outstanding only for
those periods subsequent to their respective dates of acquisition, except for
those acquisitions accounted for using the "pooling-of-interests" method, in
which case the shares are reflected in the computation of weighted average
shares outstanding as of the beginning of the earliest period presented.
Earnings per Share for the three months ended March 31, 1997, was computed
using 9,448,313 shares (the aggregate number of shares issued in connection with
the acquisition of entities accounted for using the "pooling-of-interests"
method of accounting) for periods prior to July 3, 1996 (date of inception),
together with the 4,753,414 shares issued in connection with the organization of
Metals USA (which includes shares issued to consultants and management prior to
the IPO). Shares issued to consultants and management prior to the IPO were
considered to be issued and outstanding from the date of inception without
regard to the date such shares were actually issued. Earnings per Share for the
three months ended March 31, 1998 was computed using the shares issued in
connection with the entities acquired subsequent to December 31, 1997 (all of
which were accounted for using the "purchase" method of accounting) such
shares in the Earnings per Share computation only from their respective dates of
issuance. Earnings per Share -- Assuming Dilution differs from the Earnings per
Share computation due to the potential dilution that could occur if options to
acquire common stock were exercised or converted into common stock.
3. INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
Raw materials --
Structural steel................... $ 27.2 $ 8.4
Flat-rolled steel.................. 70.5 44.8
Specialty metals................... 43.5 22.0
Aluminum products.................. 9.6 17.6
Other.............................. .1 1.7
----------- ------------
Total raw materials........... 150.9 94.5
----------- ------------
Work-in-process and finished goods --
Structural steel................... 32.6 35.8
Flat-rolled steel.................. 11.0 19.2
Specialty metals................... 9.5 5.1
Aluminum products.................. 21.2 6.7
----------- ------------
Total work-in-process and
finished goods............. 74.3 66.8
Less -- LIFO reserve.................... (1.9) (1.9)
----------- ------------
Total......................... $ 223.3 $159.4
=========== ============
4. LONG-TERM DEBT
Long-term debt consists of the following:
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
8 5/8% Senior Subordinated Notes........ $ 200.0 $--
Borrowings under the Credit Facility.... 50.9 144.8
Various issues of Industrial Revenue
Bonds................................. 21.5 21.6
Obligations under capital leases and
other................................. 10.6 7.9
----------- ------------
283.0 174.3
Less -- Current portion................. (9.8) (7.2)
----------- ------------
$ 273.2 $167.1
=========== ============
F-34
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The Company entered into an amended and restated five-year revolving credit
facility which provides for borrowings of up to $300.0 on February 11, 1998.
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 estimated expenses of $.8)
therefrom. The Company used $179.3 of such proceeds to repay the borrowings
outstanding under the Original Credit Facility and Interim Credit Facility on
February 11, 1998.
The Notes call for semi-annual interest payments on February 15 and August
15 of each year, beginning August 15, 1998 and mature on February 15, 2008. The
Notes are redeemable at the option of the Company, in whole or in part, at any
time on or after February 15, 2003, at 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 covenants
restricting additional indebtedness, liens, transactions with affiliates, asset
sales, investments and mergers and acquisitions of subsidiares. The Notes are
subordinate to borrowings under the Credit Facility and will rank PARI PASSU in
the 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 filed a registration
statement with the Securities and Exchange Commission on April 9, 1998, under
cover of Form S-4 (the "Exchange Offer Registration Statement") relating to an
exchange offer for the Notes under the Securities Act of 1933, as amended. The
Company has agreed, for the benefit of all holders of the Notes, that it will
use its best efforts to cause the Exchange Offer Registration Statement declared
effective within 150 days after the issuance of 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 1/4% is payable on any unused portion of the Credit
Facility. At March 31, 1998, $249.1 was available to the Company under the
Credit Facility. The Credit Facility is used to fund acquisitions, 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). As of June 15, 1998, the Company
had outstanding borrowings of $103.9 and $196.1 available for use under the
Credit Facility.
5. ACQUISITIONS
During the three months ended March 31, 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
F-35
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Corporation ("Concord"), and the assets of Seaboard Steel and Iron Corporation
("Seaboard"). These acquisitions were accounted for using the "purchase"
method of accounting. The aggregate consideration paid by Metals to acquire
these companies was approximately $40.7 in cash and 2,965,812 shares of common
stock (excluding assumed indebtedness of approximately $47.4).
The following summarized unaudited pro forma financial information reflects
the supplemental consolidated financial information of the Company and assumes
the acquisition of the Founding Companies, the Companies acquired through March
31, 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 $.02 per share for both periods presented.
THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1997
------------ ------------
(UNAUDITED)
Net Sales............................ $ 323.5 $ 282.1
Operating costs and expenses:
Cost of sales................... 247.0 216.7
Operating and delivery.......... 30.2 27.0
Selling, general and
administrative................ 21.8 18.8
Depreciation and amortization... 3.5 3.6
------------ ------------
Operating income..................... 21.0 16.0
Other (income) expenses:
Interest expense................ 6.7 5.5
Other........................... .3 (.2)
------------ ------------
Income before income taxes...... 14.0 10.7
Provision for income taxes........... 5.7 4.7
------------ ------------
Net income........................... $ 8.3 $ 6.0
============ ============
Earnings per share................... $ .23 $ .17
============ ============
Earnings per share -- assuming
dilution........................... $ .23 $ .17
============ ============
Number of common shares used in the
per share calculations:
Earnings per share.............. 35,646,038 35,646,038
============ ============
Earnings per share -- assuming
dilution...................... 36,358,286 35,671,650
============ ============
The preceding unaudited pro forma amounts reflect the supplemental results
of operations for Metals USA, the Founding Companies and the other acquisitions
completed through March 31, 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 subsidiares of affiliates of the
Founding Companies which were acquired by the Founding Companies prior to the
related
F-36
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 occured
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 repective
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.
6. SUPPLEMENTAL INFORMATION
SUPPLEMENTAL CASH FLOW INFORMATION
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
Supplemental cash flow information:
Cash paid for interest............. $ 2.6 $ .4
Cash paid for income taxes......... 2.8 .2
Non-cash investing and financing
activities:
Purchase of businesses for stock... 38.6 --
COMPENSATION CHARGE
During the three months ended March 31, 1997, the Company sold an aggregate
of 309,500 shares of common stock to management and consultants to the Company
for $0.01 per share. As a result, the Company recorded a non-recurring, non-cash
compensation charge of $2.8 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
Subsidiaries of the Company are involved in a variety of claims, lawsuits
and other disputes arising in the ordinary course of business. The Company
believes the resolution of these matters and the incurrence of their related
costs and expenses should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
8. SUBSEQUENT EVENTS
On March 23, 1998, the Company announced that it agreed to make an offer
for all of the issued and outstanding common shares of Ideal Metal Inc.
("Ideal") at a cash price of CAN$5.25 per share. Another company made a
competing offer and on April 28, 1998, the Company received the agreed
compensatory fee of U.S.$1.7 (CAN$2.5) as a result of the competing offer.
Subsequent to March 31, 1998, the Company acquired the following metal
processing companies: Industrial Metals, Inc. ("Industrial"), Sierra Pacific
Steel, Inc. ("Sierra"), Fullerton Industries, Inc. ("Fullerton"), Faitoute
Steel Company, Inc. ("Faitoute"), Steel Manufacturing and Warehouse Company
("Steel Manufacturing") and Wilkof-Morris Steel Corporation ("Wilkof").
These acquisitions were accounted for using the "purchase" method of
accounting. In addition, the Company completed the acquisition of Krohn Steel
Service Center, Inc. ("Krohn"), which was accounted for using the
"pooling-of-interests" method of accounting. The aggregate consideration paid
by the Company to acquire these
F-37
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
companies was approximately $22.0 in cash and 2,715,631 shares of common stock
(excluding assumed indebtedness of approximately $18.7).
On April 20, 1998, the Company filed a shelf registration statement with
the Securities and Exchange Commission under cover of Form S-1 (the "1998 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. The 1998 Shelf
Registration Statement was declared effective on April 22, 1998.
On May 20, 1998, the Company's stockholders approved an increase in the
number of authorized shares of Common Stock to 200,000,000.
F-38
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Metals USA, Inc.:
We have audited the accompanying consolidated balance sheets of Metals USA, Inc.
(a Delaware corporation) and subsidiaries (the "Company") as of December 31,
1997 and 1996, and the related consolidated statements of operations, cash flows
and stockholders' equity for each of the three years in the period ended
December 31, 1997. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Metals
USA, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 12, 1998
F-39
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
--------------------
1997 1996
--------- ---------
ASSETS
Current assets:
Cash............................ $ 7.3 $ 1.7
Accounts receivable, net of
allowance of $3.6 and $.3...... 91.4 21.1
Inventories..................... 153.8 41.2
Prepaid expenses................ 1.8 .7
Deferred income tax asset....... 1.4 1.0
Other........................... 2.2 .6
--------- ---------
Total current assets....... 257.9 66.3
Property and equipment, net.......... 82.5 26.7
Goodwill, net........................ 120.1 --
Other assets, net.................... 6.5 2.1
--------- ---------
Total assets............... $ 467.0 $ 95.1
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................ $ 50.9 $ 15.2
Accrued liabilities............. 12.9 2.4
Current portion of long-term
debt........................... 5.9 1.9
Income taxes payable............ 1.6 .5
--------- ---------
Total current
liabilities.................. 71.3 20.0
Long-term debt, less current
portion......................... 167.1 24.6
Deferred income taxes................ 7.0 .3
Other long-term liabilities.......... 4.5 1.0
--------- ---------
Total liabilities.......... 249.9 45.9
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value,
5,000,000 shares authorized,
none issued
and outstanding............... -- --
Common stock, $.01 par value,
53,122,914 shares authorized,
31,461,924 and 11,997,925
shares outstanding,
respectively................... .3 .1
Additional paid-in capital...... 183.2 17.0
Unearned compensation........... (1.5) (1.8)
Retained earnings............... 35.1 33.9
--------- ---------
Total stockholders'
equity....................... 217.1 49.2
--------- ---------
Total liabilities and
stockholders' equity......... $ 467.0 $ 95.1
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-40
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Net sales............................... $ 507.8 $ 240.1 $ 235.2
Operating costs and expenses:
Cost of sales...................... 390.7 183.6 183.8
Operating and delivery............. 52.2 24.0 20.7
Selling, general and
administrative................... 39.4 19.8 14.2
Depreciation and amortization...... 5.4 3.5 2.8
--------- --------- ---------
Operating income........................ 20.1 9.2 13.7
Other (income) expense:
Interest expense................... 5.0 1.7 2.3
Other income....................... (.1) (.4) (.3)
--------- --------- ---------
Income before income taxes.............. 15.2 7.9 11.7
Provision for income taxes.............. 9.2 4.6 4.8
--------- --------- ---------
Net income.............................. $ 6.0 $ 3.3 $ 6.9
========= ========= =========
Earnings per share...................... $ .28 $ .31 $ .84
========= ========= =========
Earnings per share -- assuming
dilution.............................. $ .28 $ .31 $ .84
========= ========= =========
Number of common shares used in the per
share calculations:
Earnings per share................. 21.3 10.6 8.2
========= ========= =========
Earnings per share -- assuming
dilution......................... 21.6 10.6 8.2
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-41
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................... $ 6.0 $ 3.3 $ 6.9
Adjustments to reconcile net
income to net cash provided by
operating activities --
Capital contributions
attributable to deemed tax
payments of S
Corporations.............. 2.9 2.4 2.9
Provision for bad debts..... .6 .2 .3
Depreciation and
amortization.............. 5.4 3.5 2.8
Deferred income taxes....... .6 (.2) .1
Deferred financing costs
incurred.................. (1.0) -- .1
Compensation charged against
notes receivable.......... -- .5 --
Compensation
expense -- management
shares.................... 6.0 3.6 --
Changes in operating assets
and liabilities, net of
business acquisitions --
Accounts receivable..... 2.4 -- 2.7
Inventories............. (6.4) (9.7) 10.4
Prepaid expenses and
other assets.......... (.3) (.2) .1
Accounts payable and
accrued liabilities... (14.2) 4.7 (3.5)
Income taxes payable.... .4 .2 --
Other operating............. (.1) (.4) (.2)
--------- --------- ---------
Net cash provided
by operating
activities....... 2.3 7.9 22.6
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property............ (18.5) (6.5) (8.5)
Purchase of businesses, net of
acquired cash................... (68.6) -- (6.0)
Other investing.................. 1.4 .2 (.1)
--------- --------- ---------
Net cash used in
investing
activities....... (85.7) (6.3) (14.6)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock................ 58.3 -- --
Distributions to shareholders.... (4.8) (3.9) (5.1)
Net borrowings (repayments) on
long-term debt.................. (4.0) (2.0) 3.1
Net borrowings (repayments) on
revolving credit facilities..... 39.6 3.1 (3.7)
Net payments on notes payable to
affiliates...................... (.3) (.4) (.5)
Other financing.................. .2 .2 --
--------- --------- ---------
Net cash provided
by (used in)
financing
activities....... 89.0 (3.0) (6.2)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH...... 5.6 (1.4) 1.8
CASH, beginning of period............ 1.7 3.1 1.3
--------- --------- ---------
CASH, end of period.................. $ 7.3 $ 1.7 $ 3.1
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for --
Interest.................... $ 4.9 $ 1.6 $ 2.2
Income taxes................ 5.5 2.1 1.7
Non-cash activities --
Retirement plan contribution
charged to unearned
compensation and
additional paid-in
capital................... .4 .6 .6
Purchase of businesses for
stock..................... 197.6 -- --
The accompanying notes are an integral part of these consolidated financial
statements.
F-42
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN UNEARNED RETAINED
STOCK CAPITAL COMPENSATION EARNINGS TOTAL
------- ----------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994........... $ .1 $ 7.6 $(2.9) $ 31.7 $ 36.5
Shares released under leveraged
ESOP Plan....................... -- .1 .5 -- .6
Capital contributions attributable
to deemed tax payments of S
Corporation..................... -- 2.9 -- -- 2.9
Distributions...................... -- -- -- (5.1) (5.1)
Net income......................... -- -- -- 6.9 6.9
------- ----------- ------------- --------- ---------
BALANCE, December 31, 1995........... .1 10.6 (2.4) 33.5 41.8
Adjustment to conform fiscal
year-ends....................... -- .1 .2 1.0 1.3
Shares released under leveraged
ESOP Plan....................... -- .2 .4 -- .6
Other adjustments.................. -- .1 -- -- .1
Shares issued to members of
management...................... -- 3.6 -- -- 3.6
Capital contributions attributable
to deemed tax payments of S
Corporations.................... -- 2.4 -- -- 2.4
Distributions...................... -- -- -- (3.9) (3.9)
Net income......................... -- -- -- 3.3 3.3
------- ----------- ------------- --------- ---------
BALANCE, December 31, 1996........... .1 17.0 (1.8) 33.9 49.2
Shares issued to members of
management...................... -- 6.0 -- -- 6.0
Shares sold in connection with the
IPO............................. .1 58.2 -- -- 58.3
Shares issued in connection with
the acquisition of the Founding
Companies....................... .1 80.1 -- -- 80.2
Shares issued in connection with
the Subsequent Acquisitions..... -- 18.6 -- -- 18.6
Shares released under leveraged
ESOP Plan....................... -- .1 .3 -- .4
Other adjustments.................. -- .3 -- -- .3
Capital contributions attributable
to deemed tax payments of S
Corporations.................... -- 2.9 -- -- 2.9
Distributions...................... -- -- -- (4.8) (4.8)
Net income......................... -- -- -- 6.0 6.0
------- ----------- ------------- --------- ---------
BALANCE, December 31, 1997........... $ .3 $ 183.2 $(1.5) $ 35.1 $ 217.1
======= =========== ============= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-43
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Metals USA, Inc., a Delaware corporation, ("Metals USA") was founded on
July 3, 1996 to become a leading national value-added metals processor 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 initial public offering ("IPO"), Metals USA had
conducted no operations. Concurrent with the consummation of its IPO on July 11,
1997, Metals USA acquired, in separate transactions (the "Mergers") eight
companies (the "Founding Companies") engaged in the processing of steel,
aluminum and specialty metals, as well as the manufacture of metal components.
Following the IPO and through December 31, 1997, Metals USA acquired seven
additional companies and subsequent to December 31, 1997, acquired eight
additional companies in similar businesses (See Note 2). Certain of the
companies acquired after the IPO were accounted for using the
"pooling-of-interests" method, resulting in a restatement of the Company's
financial statements for all periods presented (See Note 2). References herein
to the "Company" include Metals USA and its subsidiaries.
The Company sells to businesses such as the machining, furniture,
transportation equipment, power and process equipment, industrial/commercial
construction, consumer durables and electrical equipment industries, and
machinery and equipment manufacturers. The Company believes that its broad
customer base and its wide array of metals processing capabilities, products and
services, coupled with its broad geographic coverage of the United States,
reduce the Company's susceptibility to economic fluctuations affecting any one
industry or geographical area.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect (i) the reported amounts of assets and liabilities, (ii)
the disclosure of contingent assets and liabilities known to exist as of the
date the financial statements are published and (iii) the reported amount of
revenues and expenses recognized during the periods presented. The Company
reviews all significant estimates affecting its consolidated financial
statements on a recurring basis and records the effect of any necessary
adjustments prior to their publication. Adjustments made with respect to the use
of estimates often relate to improved information not previously available.
Uncertainties with respect to such estimates and assumptions are inherent in the
preparation of financial statements.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Metals USA and its subsidiaries. All intercompany
accounts and transactions have been eliminated in the consolidated financial
statements. Certain reclassifications have been made to prior years' financial
statements to be consistent with the current year's presentation.
INVENTORIES -- Inventories are stated at the lower of cost or market.
Certain of the Company's subsidiaries use the last-in first-out ("LIFO")
method of accounting for inventories and other subsidiaries use a variety of
methods including specific identification, average cost and the first-in
first-out ("FIFO") method of accounting. As of December 31, 1997 and 1996,
approximately 46.4% and 52.2%, respectively of the consolidated inventories were
accounted for using the LIFO method of accounting.
PROPERTY AND EQUIPMENT -- Property and equipment is stated at cost, net of
accumulated depreciation. Depreciation is computed utilizing the straight-line
method at rates based upon the estimated useful lives of the various classes of
assets.
GOODWILL -- Goodwill represents the excess of cost over the estimated fair
value of identifiable assets of the businesses acquired using the "purchase"
method of accounting. Goodwill is stated at cost, net of
F-44
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
accumulated amortization, and is being amortized over a forty-year life using
the straight-line method. The Company reviews the recoverability of goodwill and
other long-lived assets including other intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset may be impaired. The Company has not recorded any impairment losses
with respect to goodwill, other long-lived assets or other intangible assets as
of December 31, 1997. Accumulated amortization totaled $1.2 as of December 31,
1997.
OTHER ASSETS -- Other assets include deferred financing costs and other
intangible assets, which are being amortized over the estimated useful life of
the related borrowing or intangible asset. Accumulated amortization of other
assets totaled $1.1 and $.5 as of December 31, 1997 and 1996, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The fair value of the notes payable
is estimated based on interest rates for the same or similar debt offered to the
Company having the same or similar remaining maturities and collateral
requirements. The carrying amounts of notes payable approximate fair value at
the applicable balance sheet dates.
CONCENTRATION OF CREDIT RISK -- Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist principally of
cash deposits, trade accounts and notes receivable. Concentrations of credit
risk with respect to trade accounts are within the machining, furniture,
transportation equipment, power and process equipment, industrial/commercial
construction, consumer durables and electrical equipment industries, and
machinery and equipment manufacturers. Generally, credit is extended once
appropriate credit history and references have been obtained. Adjustments to the
allowance for doubtful accounts are made periodically (as circumstances warrant)
based upon the expected collectibility of all such accounts. The Company
periodically reviews the credit history of its customers and generally does not
require collateral for the extension of credit.
INCOME TAXES -- The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"),
"Accounting for Income Taxes." Under SFAS No. 109, deferred income taxes are
recognized for the future tax consequences of differences between the tax bases
of assets and liabilities and their financial reporting amounts based on enacted
tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Provision for income taxes represents the amount of taxes
payable and the applicable changes in deferred tax assets and liabilities.
EARNINGS PER SHARE -- In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128 ("SFAS No.
128"), "Earnings Per Share." The Company adopted SFAS No. 128 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 ("Earnings per Share") and
diluted earnings per share ("Earnings per Share -- Assuming Dilution").
Earnings per Share excludes dilution and is determined by dividing income
available to common stockholders by the weighted average number of common shares
outstanding during the period. Earnings per Share -- Assuming Dilution reflects
the potential dilution that could occur if securities and other contracts to
issue common stock were exercised or converted into common stock. Earnings per
Share -- Assuming Dilution is computed similarly to fully diluted earnings per
share under previous accounting rules.
Earnings per Share was computed using 8,230,011 shares (the aggregate
number of shares issued in connection with the acquisition of entities accounted
for using the "pooling-of-interests" method of accounting) for periods prior
to July 3, 1996 (date of inception). The 4,753,414 shares issued in connection
with the organization of Metals USA, including shares issued to management, were
considered to be issued and outstanding from the date of inception without
regard to the date such shares were actually issued. The
F-45
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6,785,000 shares issued in connection with the IPO and the 11,693,499 shares
issued in connection with the entities acquired using the "purchase" method of
accounting have been included in the Earnings per Share computation only from
their respective dates of issuance, resulting in weighted average shares of
8,341,480 for the year ended December 31, 1997. Earnings per Share -- Assuming
Dilution differs from the Earnings per Share computation due to the inclusion of
stock options that were dilutive.
STOCK BASED COMPENSATION -- Statement of Financial Accounting Standards No.
123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation," allows
entities to choose between the fair value based method of accounting for
employee stock options or similar equity instruments and the intrinsic,
value-based method of accounting prescribed by Accounting Principles Board
Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees."
The Company has elected to account for stock options or similar equity
instruments using the intrinsic, value-based method of accounting prescribed in
APB No. 25.
2. BUSINESS COMBINATIONS
POOLING TRANSACTIONS
On September 26, 1997, Metals USA completed the acquisition of all the
capital stock of Jeffreys Steel Company, Inc. ("Jeffreys") in a business
combination accounted for as a "pooling-of-interests" transaction in
accordance with the requirements of Accounting Principles Board Opinion No. 16
("APB No. 16"), "Business Combinations." Jeffreys is headquartered in
Mobile, Alabama, and is engaged in the wholesale and retail sale of steel.
Jeffreys has historically reported on a July 31 fiscal year-end. For purposes of
the merger with Metals USA, the accompanying financial statements reflect
Jeffreys on a calendar year-end basis effective January 1, 1996. The historical
financial information of Jeffreys for the year ended July 31, 1995 has been
included in the Company's consolidated financial statements for the year ended
December 31, 1995. The net sales and net income of Jeffreys for the period from
August 1, 1995, through December 31, 1995, were $51.0 and $1.0, respectively.
The net income of Jeffreys for this transition period is included in the
accompanying consolidated statements of stockholders' equity as an adjustment to
retained earnings in order to conform their fiscal year to that of the Company.
On November 20, 1997, Metals USA completed the acquisition of all the
capital stock of Wayne Steel, Inc. ("Wayne") in a business combination
accounted for as a "pooling-of-interests" transaction in accordance with the
requirements of APB No. 16. Wayne operates as a wholesaler and processor of
steel and aluminum flat rolled products and is headquartered in Wooster, Ohio.
Prior to the acquisition by Metals USA, the shareholders of Wayne had elected to
be taxed as an S Corporation; accordingly, any federal income tax liabilities
for the periods prior to the acquisition date were the responsibility of the
respective stockholders. For purposes of these consolidated financial
statements, federal income taxes have been provided as if Wayne had filed C
Corporation tax returns for the pre-acquisition periods, with the current income
tax provisions reflected in the consolidated financial statements as increases
to additional paid-in capital. Collectively, Metals USA issued 8,230,011 shares
of common stock in exchange for all of the capital stock of Jeffreys and Wayne.
The unaudited aggregate pre-acquisition net sales and net income for Jeffreys
and Wayne during 1997 were $210.1 and $7.3, respectively. There were no
transactions between Metals USA, Jeffreys or Wayne during periods prior to these
business combinations.
PURCHASE TRANSACTIONS
Concurrent with the completion of its IPO on July 11, 1997, Metals USA
acquired the eight Founding Companies, which are in the metal processing and
distribution business. The companies acquired were Affiliated Metals Company
headquartered in Granite City, Illinois; Interstate Steel Supply Co.
headquartered in Philadelphia, Pennsylvania; Queensboro Steel Corporation
headquartered in Wilmington, North Carolina; Southern Alloy of America, Inc.
headquartered in Salisbury, North Carolina; Steel Service Systems, Inc.
headquartered in Horicon, Wisconsin; Texas Aluminum Industries, Inc./The
Cornerstone
F-46
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Group headquartered in Houston, Texas; Uni-Steel, Inc. headquartered in Enid,
Oklahoma and Williams Steel & Supply Co., Inc. headquartered in Milwaukee,
Wisconsin. The acquisition of each of the Founding Companies was accounted for
using the "purchase" method of accounting in accordance with APB No. 16. The
aggregate consideration paid by Metals USA to acquire the Founding Companies was
approximately $27.8 in cash, 10,128,609 shares of common stock and the
assumption of $92.6 of debt.
Subsequent to the IPO, Metals USA acquired five additional companies using
the "purchase" method of accounting in accordance with APB No. 16. The
acquisitions completed in September 1997 included Harvey Titanium, Ltd.
headquartered in Santa Monica, California; Meier Metal Servicenters, Inc.
headquartered in Hazel Park, Michigan and the business of Federal Bronze
Products, Inc., headquartered in Newark, New Jersey. The acquisitions completed
in December 1997 included Royal Aluminum, Inc. headquartered in Leesburg,
Florida and R. J. Fabricating Inc. headquartered in Milwaukee, Wisconsin. These
five companies are referred to collectively as the "1997 Subsequent
Acquisitions." The aggregate consideration paid by Metals USA for the 1997
Subsequent Acquisitions consists of approximately $44.1 in cash, 1,564,890
shares of common stock and the assumption of indebtedness of approximately
$15.4.
The Company has recorded the excess of the purchase price over the
estimated fair value of identifiable assets acquired in connection with both the
Founding Companies and the 1997 Subsequent Acquisitions as "goodwill" in the
accompanying consolidated balance sheet. The goodwill is being amortized over a
forty-year period. The results of operations of the Founding Companies and the
1997 Subsequent Acquisitions are included in the accompanying consolidated
financial statements from their respective dates of acquisition.
The following summarized unaudited pro forma financial information assumes
the acquisition of the Founding Companies, the 1997 Subsequent Acquisitions and
the issuance of the Notes (as defined in Note 6) occurred on January 1, 1996.
The pro forma decrease in earnings resulting from the issuance of the Notes was
approximately $.11 per share for both periods presented.
YEARS ENDED DECEMBER
31,
--------------------
1997 1996
--------- ---------
(UNAUDITED)
Net sales............................ $ 854.5 $ 763.5
Operating costs and expenses:
Cost of sales................... 655.7 583.0
Operating and delivery.......... 86.2 75.4
Selling, general and
administrative................ 56.0 50.2
Depreciation and amortization... 10.2 11.1
--------- ---------
Operating income..................... 46.4 43.8
Interest expense..................... 16.4 15.4
Other (income) expense............... .7 (1.0)
--------- ---------
Income before income taxes........... 29.3 29.4
Provision for income taxes........... 12.4 12.7
--------- ---------
Net income........................... $ 16.9 $ 16.7
========= =========
Earnings per share................... $ .54 $ .53
========= =========
Earnings per share -- assuming
dilution........................... $ .53 $ .53
========= =========
Number of common shares used in per
share calculations:
Earnings per share.............. 31.5 31.5
========= =========
Earnings per share -- assuming
dilution...................... $ 31.8 $ 31.5
========= =========
The preceding pro forma amounts reflect the results of operations for the
Metals USA, the Founding Companies and the 1997 Subsequent Acquisitions,
assuming the transactions were completed on January 1,
F-47
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1996. 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 985,500
and 400,000 shares of common stock to management of and consultants to Metals
USA in 1997 and 1996, respectively, 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 Founding Companies and 1997 Subsequent
Acquisitions 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 Founding Companies and 1997 Subsequent Acquisitions, 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, 1996; (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, 1996; (g) certain other nonrecurring
expenses with respect to the 1997 Subsequent Acquisitions, 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 (as defined in Note 6), 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.
3. INVENTORIES
Inventories consist of the following:
DECEMBER 31,
--------------------
1997 1996
--------- ---------
Raw materials --
Structural steel................ $ 8.4 $ 19.7
Flat-rolled steel............... 39.0 13.2
Specialty metals................ 22.0 --
Aluminum products............... 17.6 .6
Other........................... 1.9 3.9
--------- ---------
Total raw materials........ 88.9 37.4
--------- ---------
Work-in-process and finished goods --
Structural steel................ 35.8 --
Flat-rolled steel............... 19.2 5.1
Specialty metals................ 5.1 --
Aluminum products............... 6.7 .4
--------- ---------
Total work-in-process and
finished goods.......... 66.8 5.5
--------- ---------
Less -- LIFO reserve................. (1.9) (1.7)
--------- ---------
Total...................... $ 153.8 $ 41.2
========= =========
The replacement cost of the Company's inventory exceeds the historical cost
of the inventory, computed using the LIFO method of valuation, as reported in
the accompanying consolidated financial statements. If the FIFO method had been
used for all inventories, the carrying value would have been $155.7 and $42.9 at
December 31, 1997 and 1996, respectively. Additionally, net income would have
been $6.1, $3.4 and $6.6 for the years ended December 31, 1997, 1996 and 1995,
respectively.
F-48
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
ESTIMATED --------------------
USEFUL LIVES 1997 1996
------------ --------- ---------
Land................................. $ 3.8 $ 1.5
Building and improvements............ 5-40 years 34.3 17.3
Machinery and equipment.............. 7-25 years 56.7 19.2
Automobiles and trucks............... 3-12 years 7.3 4.9
--------- ---------
102.1 42.9
Less -- Accumulated depreciation..... (19.6) (16.2)
--------- ---------
Total........................... $ 82.5 $ 26.7
========= =========
Depreciation expense for the years ended December 31, 1997, 1996 and 1995
was $3.9, $3.3 and $2.7, respectively. Additionally, following the acquisitions
of Wayne and Jeffreys, the Company revised the estimated useful lives of the
depreciable assets of Wayne and Jeffreys to conform to the conventions adopted
by the Founding Companies. This revision reduced depreciation expense in 1997 as
compared to 1996 by approximately $1.2.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 31,
--------------------
1997 1996
--------- ---------
Accrued salaries and employee
benefits........................... $ 5.0 $ 1.0
Accrued taxes other than income...... 1.8 .4
Accrued interest..................... 1.3 .2
Accrued profit sharing............... 1.2 .3
Other................................ 3.6 .5
--------- ---------
Total........................... $ 12.9 $ 2.4
========= =========
6. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
--------------------
1997 1996
--------- ---------
Borrowings under the Credit
Facility............................. $ 144.8 $ --
Revolving credit facility with
interest at prime less 1.0%,
maturing on December 31, 1998,
secured by inventory and trade
accounts receivable................ -- 13.3
Various issues of Industrial Revenue
Bonds.............................. 21.6 8.0
Notes payable to former employee
stock ownership plan and trust
members payable in annual
installments including interest at
prime with an 8.5% cap through
February 1998...................... 1.7 2.1
Obligations under capital leases and
other.............................. 4.9 3.1
--------- ---------
173.0 26.5
Less -- Current portion.............. (5.9) (1.9)
--------- ---------
$ 167.1 $ 24.6
========= =========
F-49
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Scheduled maturities of long-term debt for the years ending December 31 are
as follows: 1998 -- $5.9; 1999 -- $2.2; 2000 -- $2.5; 2001 -- $2.4; 2002 --
$2.3; thereafter -- $157.7.
The Industrial Revenue Bonds (the "IRBs") are payable in installments
ranging from monthly to annual with variable interest ranging from 4.35% to
6.61% per annum at December 31, 1997 and mature from May 1, 2003 to May 1, 2009.
The IRBs are secured by real estate and equipment acquired with proceeds from
these bonds with a net book value of $21.2 at December 31, 1997. The IRBs place
various restrictions on certain of the Company's subsidiaries, including but not
limited to maintenance of required insurance coverage, maintenance of certain
financial ratios, limits on capital expenditures, maintenance of tangible net
worth and letters of credit.
Concurrent with the IPO, the Company obtained an initial $150.0 unsecured
revolving credit facility (the "Original Credit Facility") which was used to
fund acquisitions, refinance certain indebtedness of the acquired companies and
for general corporate and working capital requirements. In January 1998, the
Company obtained a $50.0 unsecured revolving credit facility (the "Interim
Credit Facility") to meet its acquisition related cash requirements pending the
completion of an extension and modification of the Original Credit Facility to
provide for up to $300.0 of borrowing availability. The closing of the extension
and modification of the $300.0 credit facility (the "Credit Facility") on
February 11, 1998 stipulated the termination of the Interim Credit Facility. The
Credit Facility matures in February 2003, bears interest at the bank's prime
rate or LIBOR, at Metals USA's option, plus an applicable margin based on the
ratio of funded debt to cash flows (as defined). An annual commitment fee of up
to 1/4% is payable on any unused portion of the Credit Facility. The Company
will use the Credit Facility to fund acquisitions, make capital expenditures,
refinance debt of the companies acquired and for general working capital
requirements. Borrowings under the Credit Facility are secured by the pledge of
all of the capital stock of each of the Company's material subsidiaries (as
defined). In connection with the IPO, the Mergers and the 1997 Subsequent
Acquisitions, the revolving credit facility and certain other obligations
outstanding as of December 31, 1996 (including certain obligations of the
acquired companies) were repaid with the borrowings under the Credit Facility.
The Credit Facility requires the Company to comply with various affirmative
and negative covenants including: (i) the maintenance of certain financial
ratios, (ii) restrictions on additional indebtedness, (iii) restrictions on
liens, guarantees and dividends, (iv) obtaining the lenders' consent with
respect to certain individual acquisitions, and (v) maintenance of a specified
level of consolidated net worth. At December 31, 1997, the Company was precluded
from the payment of dividends under the terms of the Credit Facility.
On February 11, 1998, the Company completed the sale of $200.0 aggregate
principal amount of the Company's 8 5/8% Senior Subordinated Notes due 2008 (the
"Notes"). The Company received $194.5 of net cash proceeds (before expected
expenses of $.8 upon closing). The Company used $179.3 of such proceeds to repay
the borrowings outstanding under the Original Credit Facility and Interim Credit
Facility on February 11, 1998. As of February 12, 1998, the entire amount of the
Credit Facility was available to the Company.
The Notes call for semi-annual interest payments on February 15 and August
15 of each year, beginning August 15, 1998 and mature on February 15, 2008. The
Notes are redeemable at the option of the Company, in whole or in part, at any
time on or after February 15, 2003, at the following redemption prices:
2003 -- 104.313%; 2004 -- 102.875%; 2005 -- 101.438%; thereafter -- 100.00%,
together with accrued and unpaid interest to the date of redemption.
Notwithstanding the foregoing, at any time on or prior to February 15, 2001, the
Company may redeem up to 35% of the aggregate principal amount of the Notes
originally issued with the net proceeds of one or more offerings of the common
stock of the Company, at a redemption price equal to 108.625% of the principal
amount thereof, plus accrued and unpaid interest to the
F-50
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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, payment restrictions affecting subsidiaries 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 Company has agreed, for the benefit of all holders of the
Notes, that it will file a registration statement within 60 days after the
issuance of the Notes relating to an exchange offer for the Notes under the
Securities Act of 1933, as amended.
7. INCOME TAXES
The components of the provision for income taxes are as follows:
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Federal --
Current......................... $ 7.9 $ 3.9 $ 3.8
Deferred........................ (.3) (.2) .1
--------- --------- ---------
7.6 3.7 3.9
State --
Current......................... 1.6 .9 .9
--------- --------- ---------
Total provision............ $ 9.2 $ 4.6 $ 4.8
========= ========= =========
The provision for income taxes differs from an amount computed at the
statutory rates as follows:
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Federal income tax at statutory
rates.............................. $ 5.3 $ 2.8 $ 4.1
State income taxes, net of federal
income tax benefit................. 1.0 .4 .5
Nondeductible expenses:
Stock compensation.............. 2.1 1.3 --
Amortization of goodwill........ .4 -- --
Other........................... .4 .1 .2
--------- --------- ---------
$ 9.2 $ 4.6 $ 4.8
========= ========= =========
F-51
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The significant items giving rise to the deferred tax assets (liabilities)
are as follows:
DECEMBER 31,
----------------------
1997 1996
---------- ----------
Deferred tax assets --
Allowance for doubtful
accounts...................... $ 1.0 $ .1
Uniform capitalization of
inventory..................... 1.7 .6
Nonqualified plan
contribution................... -- .2
Accrued liabilities............. 2.0 .2
Deferred compensation........... .5 --
Net operating loss
carryforward.................. .3 --
State taxes..................... .3 --
---------- ----------
Total deferred tax
assets..................... 5.8 1.1
---------- ----------
Deferred tax liabilities --
Property and equipment.......... (6.5) (.3)
Inventories -- LIFO reserve..... (3.3) --
Foreign investments............. (.9) --
Other........................... (.5) (.1)
---------- ----------
Total deferred tax
liabilities.............. (11.2) (.4)
Valuation allowance.................. (.3) --
---------- ----------
Net deferred tax
(liabilities) assets..... $ (5.7) $ .7
========== ==========
8. STOCKHOLDERS' EQUITY
COMMON STOCK AND PREFERRED STOCK
Metals USA effected a 135.81-for-one stock split on April 21, 1997 for each
share of $.01 par value common stock ("Common Stock") then outstanding. In
addition, Metals USA increased the number of authorized shares of Common Stock
to 50,000,000 and the authorized shares of Restricted Common Stock, as defined
below, to 3,122,914 and 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 in the consolidated balance sheets and in the
accompanying notes.
In connection with its organization and initial capitalization, Metals USA
issued 135,810 shares of Common Stock at $.01 per share to Notre Capital
Ventures II, L.L.C. ("Notre"). Notre received 3,232,104 additional shares (at
approximately $.01 per share) in exchange for the contribution of incurred
expenses 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, Metals USA issued
a total of 985,500 shares of Common Stock to management of and consultants to
Metals USA at a price of $.01 per share. As a result, Metals USA has recorded a
non-recurring, non-cash compensation charge of $3.6 in 1996 and $6.0 in 1997,
representing the difference between the amount paid for the shares and the
estimated fair value of the shares on the date of sale, as if the Founding
Companies were combined.
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 Metals USA's Board of Directors and to .55 of one vote for each share held on
all other matters on which they are entitled to vote.
F-52
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Each share of Restricted Common Stock will automatically convert into
Common Stock on a share-for-share basis (a) in the event of a disposition of
such share of Restricted Common Stock by the holder thereof (other than a
disposition which is a distribution by a holder to its partners or beneficial
owners or a transfer to a related party of such holder (as defined)), (b) in the
event any person acquires beneficial ownership of 15% or more of the outstanding
shares of Common Stock, or (c) in the event any person offers to acquire 15% or
more of the total number of outstanding shares of Common Stock.
After July 1, 1998, Metals USA may elect to convert any outstanding shares
of Restricted Common Stock into shares of Common Stock in the event 80% or more
of the outstanding shares of Restricted Common Stock have been converted into
shares of Common Stock.
INITIAL PUBLIC OFFERING
On July 11, 1997 the Company completed its IPO, issuing to the public
5,900,000 shares of its common stock at a price of $10.00 per share, resulting
in net proceeds to the Company of $50.1 after deducting underwriting commissions
and discounts. On August 12, 1997, the Company sold 885,000 shares of Common
Stock pursuant to the over-allotment option granted to the underwriters. The
Company realized net proceeds from the sale of $8.2.
9. STOCK BASED COMPENSATION
LONG-TERM INCENTIVE PLAN
In April 1997, Metals USA's stockholders approved the Company's 1997
Long-Term Incentive Plan (the "Plan"), which provides for the granting or
awarding of incentive or non-qualified stock options ("NQSOs"), stock
appreciation rights, restricted or deferred stock, dividend equivalents and
other incentive awards to officers, key employees and consultants to Metals USA.
The number of shares authorized and reserved for issuance under the Plan is
limited to 13% of the aggregate number of shares of Common Stock outstanding.
The terms of the option awards are established by the Compensation Committee of
Metals USA's Board of Directors. These options will vest at the rate of 20% per
year, commencing on the first anniversary of the IPO or date of grant and will
expire ten years from the date of grant or three months following termination of
employment. The Company did not issue any stock options prior to January 1,
1996. Options granted in 1996 were attributable to an acquired company that was
accounted for as a "pooling-of-interest" business combination. Those options
were converted at the applicable share conversion ratio specified in the merger
agreement and exchanged for Company options issued under the Plan.
NON-EMPLOYEE DIRECTORS' STOCK PLAN
Metals USA's 1997 Non-Employee Directors' Stock Plan (the "Directors'
Plan"), which was adopted by the Board of Directors and approved by Metals
USA's stockholders in April 1997, provides for (i) the automatic grant to each
non-employee director serving at the consummation of the IPO of an option to
purchase 10,000 shares, (ii) the automatic grant to each non-employee director
of an option to purchase 10,000 shares upon such person's initial election as a
director, and (iii) an automatic annual grant at each annual meeting of
stockholders thereafter of an option to purchase 5,000 shares to each
non-employee director at which meeting such director is re-elected or remains a
director, unless such annual meeting is held within three months of such
person's initial election as a director. All options will have an exercise price
per share equal to the fair market value of the Common Stock on the date of
grant and are immediately vested and expire on the earlier of ten years from the
date of grant or one year after termination of service as a director. The
Directors' Plan also permits non-employee directors to elect to receive, in lieu
of cash directors' fees, shares or credits representing "deferred shares" at
future settlement dates, as selected by the director. The number of shares or
deferred shares received will equal the number of shares of Common
F-53
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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.
The following is a summary of activity:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
"FAIR
VALUE" OPTIONS FOR
PER SHARE WEIGHTED SHARES OF
OF OPTIONS AVERAGE PRICE COMMON
GRANTED PER SHARE STOCK
------------- ------------- -----------
<S> <C> <C> <C>
Balance January 1, 1996.............. --
Granted.............................. $ 10.06 $ 6.81 172,788
Exercised............................ (42,237)
Canceled or expired.................. --
-----------
Balance December 31, 1996............ 130,551
Granted in connection with the IPO... 6.30 10.00 2,134,024
Granted to directors................. 6.30 10.00 40,000
Granted.............................. 8.22 14.41 949,683
Exercised............................ --
Canceled or expired.................. --
-----------
Balance December 31, 1997............ 3,254,258
===========
</TABLE>
At December 31, 1997, exercisable options for shares of Common Stock were
61,440 at a weighted average price of $6.81 per share and 40,000 at a weighted
average price of $10.00 per share.
The Company used the Black-Scholes model to calculate the estimated
"fair-value" of stock options and similar awards. The model requires the use
of a number of subjective assumptions including: (i) risk free rate of return,
(ii) expected price volatility of the Common Stock, (iii) expected dividend
yield and (iv) estimated life of the option. Principal assumptions used in
estimating the "fair-value" of the Company's stock options using the
Black-Scholes model were as follows:
DECEMBER 31,
--------------------
1997 1996
--------- ---------
Risk free rate of return........ 6.18% 6.32%
Expected price volatility....... 43.3% 46.0%
Expected dividend yield......... -- --
Expected life of the option (in
years)......................... 7.5 7.5
The Company applies APB No. 25 and related interpretations in accounting
for its stock option plans. Had compensation cost for the Company's stock option
plans been determined based upon the fair value at the grant rate, consistent
with the methodology prescribed under the SFAS No. 123, the Company's net income
and earnings per share would have been reduced by the amortization of the
estimated fair value of stock options over the applicable vesting period of such
awards. The following pro forma disclosures may not be representative of similar
future disclosures because: (i) additional options may be granted in future
years and (ii) the computations used to estimate the "fair value" of the stock
options are subject to
F-54
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
significant subjective assumptions, any one or all of which may differ in
material respects from actual amounts.
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Net income as reported............... $ 6.0 $ 3.3 $ 6.9
Estimated "fair value" of stock
options vesting during the periods,
net of federal income tax
benefit............................ (1.1) (.1) --
--------- --------- ---------
Adjusted net income.................. $ 4.9 $ 3.2 $ 6.9
========= ========= =========
Adjusted earnings per share.......... $ .23 $ .30 $ .84
========= ========= =========
Adjusted earnings per
share -- assuming dilution......... $ .23 $ .30 $ .84
========= ========= =========
Number of common shares used in the
per share calculations:
Adjusted earnings per share..... 21.3 10.6 8.2
========= ========= =========
Adjusted earnings per
share -- assuming dilution..... 21.6 10.6 8.2
========= ========= =========
10. EMPLOYEE BENEFIT PLANS
PROFIT-SHARING PLANS
Certain subsidiaries of the Company provide various defined contributions
savings plans for their employees (the "Plans"). The Plans cover substantially
all full-time employees of such subsidiaries. Participants vest at varying rates
ranging from full vesting upon participation to those that provide for vesting
to begin after three years of service and are fully vested after seven years.
Certain Plans provide for a deferral option that allows employees to elect to
contribute a portion of their pay into the plan and provide for a discretionary
profit sharing contribution by the individual subsidiary. Generally the
subsidiaries match a portion of the amount deferred by participating employees.
Contributions for the profit sharing portion of the plan are generally at the
discretion of the individual subsidiary board of directors. The aggregate
contributions to the Plans were $.9, $.2 and $.2 for the years ended December
31, 1997, 1996 and 1995, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
Under the provisions of an employee stock ownership plan ("ESOP") and its
related trust, Jeffreys made annual contributions to the plan which were
invested in stock of Jeffreys and other qualifying securities for the benefit of
Jeffreys' employees. The plan provided for Jeffreys' purchases of employee
shares to be paid in cash and with the issuance of a note payable. Effective
September 26, 1997, the participation was frozen. Concurrent with the merger
with Metals USA, ESOP shares were exchanged for shares of Metals USA common
stock.
LEVERAGED ESOP ARRANGEMENT
The following disclosure has been restated to reflect the equivalent shares
of Metals USA common stock that were issued in connection with the acquisition
of Jeffreys.
Jeffreys' ESOP held 434,616 shares of stock prior to the purchase of
735,384 shares of outstanding stock from a majority stockholder for $5.31 per
share. The ESOP borrowed the funds to purchase such stock and Jeffreys
guaranteed the repayment of this loan. Jeffreys will repay this loan, plus
interest, through deductible contributions to the plan. As Jeffreys makes
contributions to the plan, which reduces the principal on the note, the plan
will release the corresponding shares related to the reduction in the note
principal. At the point when these shares are no longer specifically secured by
the note payable, they will be
F-55
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
allocated to the individual participants of the plan and considered earned by
those employees at that time. Jeffreys accounts for its ESOP in accordance with
Statement of Position 93-6 ("SOP 93-6"), "Employers' Accounting for Employee
Stock Ownership Plans". Accordingly, the debt of the ESOP is recorded as long-
term debt and the shares pledged as collateral are reported as unearned
compensation. As shares are released from collateral, Jeffreys reports
compensation expense equal to the current estimated market price of the shares.
ESOP share compensation expense was $.4, $.6 and $.6 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Since the obligation is secured by the shares purchased and the note is
guaranteed by Jeffreys, all amounts relating to this transaction are considered
unearned compensation of the employees until such time as the note is deemed
paid and the corresponding shares are released to the individual participants of
the plan. The balance in unearned compensation at December 31, 1997 and 1996 of
$1.5 and $1.8, respectively, results from the leveraged ESOP stock purchase less
the deemed release of shares at cost.
The activity relating to the ESOP shares was as follows:
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Allocated shares at beginning of
year............................... 795,639 710,970 635,856
Shares deemed released for the
current period..................... 87,165 84,669 75,114
Unallocated shares................... 287,196 374,361 459,030
----------- ----------- -----------
Total ESOP shares............... 1,170,000 1,170,000 1,170,000
=========== =========== ===========
In accordance with SOP 93-6, additional paid-in capital is adjusted
whenever the market value of the shares released is more or less than the cost
of the shares released. The increase in additional paid-in capital attributable
to this difference in market value and cost was $.1 and $.2 for the years ended
December 31, 1997 and 1996, respectively.
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE AGREEMENTS
The Company's minimum lease obligations under certain long-term
non-cancelable lease agreements for office space, warehouse space and equipment
are as follows: 1998 -- $6.4; 1999 -- $5.8; 2000 -- $5.1; 2001 -- $4.8;
2002 -- $3.7; thereafter -- $26.3.
The Company paid approximately $3.0, $.4 and $.5 in rent expense during the
years ended December 31, 1997, 1996 and 1995, respectively, under operating
leases. Certain of these leases are with affiliated individuals and companies
(see Note 12).
CONTINGENCIES
Subsidiaries of the Company are involved in a variety of claims, lawsuits
and other disputes arising in the ordinary course of business. The Company
believes the resolution of these matters and the incurrence of their related
costs and expenses should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
12. RELATED-PARTY TRANSACTIONS
Transactions with directors, officers, employees (including affiliates of
the foregoing) or affiliates of the Company must be at terms that are no less
favorable to the Company than those available from third parties and must be
approved in advance by a majority of disinterested members of the Board of
Directors.
F-56
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
In connection with the Mergers and certain of the subsequent acquisitions,
subsidiaries of the Company have entered into a number of lease arrangements for
facilities and equipment. These lease arrangements are for periods ranging from
10 to 20 years. Lease payments for these items in respect of the years ended
December 31, 1997, 1996 and 1995 were $1.3, $.1 and $.1, respectively. Future
commitments in respect of these leases are included in the schedule of minimum
lease payments in Note 11.
At December 31, 1997 and 1996 the aggregate principal amount of notes
receivable held by the Company were $.8 and $.1, respectively. Interest accrues
on the notes at rates ranging from 7.5% to 8.0% per annum. The notes call for
regular periodic payments of principal and interest and mature at varying dates
through March 1, 2007. The notes are secured by liens on specific assets of the
affiliates and personnel guarantees of the individuals. As of December 31, 1997,
the notes were current as to payment terms.
13. SUBSEQUENT EVENTS (UNAUDITED)
The Unaudited Financial Statements included elsewhere in this Registration
Statement should be read in conjunction with those presented above with respect
to events occurring after the date of the auditors report.
On May 20, 1998, the Company's stockholders approved an increase in the
number of authorized shares of Common Stock to 200,000,000.
RESTATEMENT OF HISTORICAL FINANCIAL STATEMENTS
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. The following table summarizes the restated
consolidated net sales, net income and per share data of the Company after
giving effect to the acquisition of Krohn:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
NET NET NET
NET SALES INCOME NET SALES INCOME NET SALES INCOME
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Net sales and net income --
As previously reported in the
Company's Form 10-K for the
year ended December 31,
1997.......................... $ 507.8 $6.0 $ 240.1 $3.3 $ 235.2 $6.9
Acquisition accounted for as
"pooling-of-interests"......... 29.8 1.5 25.4 1.2 25.7 1.2
--------- ------ --------- ------ --------- ------
As restated................ $ 537.6 $7.5 $ 265.5 $4.5 $ 260.9 $8.1
========= ====== ========= ====== ========= ======
Earnings per share --
As previously reported in the
Company's Form 10-K for the
year ended December 31,
1997.......................... $.28 $.31 $.84
Acquisition accounted for as
"pooling-of-interests"......... .05 .07 .02
------ ------ ------
As restated................ $.33 $.38 $.86
====== ====== ======
</TABLE>
(TABLE CONTINUED ON FOLLOWING PAGE)
F-57
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
NET NET NET
NET SALES INCOME NET SALES INCOME NET SALES INCOME
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C>
Earnings per share -- assuming
dilution --
As previously reported in the
Company's Form 10-K for the
year ended December 31,
1997.......................... $.28 $.31 $.84
Acquisition accounted for as
"pooling-of-interests"......... .05 .07 .02
------ ------ ------
As restated................ $.33 $.38 $.86
====== ====== ======
</TABLE>
Because the acquisition occurred after December 31, 1997, the Company has
restated these financial statements, and as presented elsewhere in this
Prospectus, such restated financial statements are labeled "Supplemental" in
accordance with the rules and regulations of the Securities and Exchange
Commission. The "Supplemental" financial statements reflect the results of
operations, cash flows and financial position of Krohn, as if the acquisition
occurred on January 1, 1995.
F-58
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
1998 1997
------------ -------------
(UNAUDITED)
ASSETS
Current assets:
Cash............................... $ 11.9 $ 7.3
Accounts receivable, net of
allowance of $4.8 and $3.6........ 144.4 91.4
Inventories........................ 219.3 153.8
Prepaid expenses................... 2.5 1.8
Deferred income tax asset.......... 2.7 1.4
Other.............................. 2.4 2.2
------------ -------------
Total current assets....... 383.2 257.9
Property and equipment, net.......... 103.3 82.5
Goodwill, net........................ 156.8 120.1
Other assets, net.................... 13.3 6.5
------------ -------------
Total assets............... $ 656.6 $ 467.0
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................... $ 80.2 $ 50.9
Accrued liabilities................ 18.5 12.9
Current portion of long-term
debt.............................. 6.5 5.9
Income taxes payable............... 3.4 1.6
------------ -------------
Total current
liabilities.................. 108.6 71.3
Long-term debt, less current
portion............................. 273.2 167.1
Deferred income tax liability........ 7.5 7.0
Other long-term liabilities.......... 4.9 4.5
------------ -------------
Total liabilities.......... 394.2 249.9
------------ -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par,
5,000,000 shares authorized and
outstanding, none issued and
outstanding..................... -- --
Common stock, $0.01 par, 53,122,914
shares authorized, 34,427,736
and 31,461,924 shares issued and
outstanding, respectively....... .3 .3
Additional paid-in capital......... 222.0 183.2
Unearned compensation.............. (1.7) (1.5)
Retained earnings.................. 41.8 35.1
------------ -------------
Total stockholders'
equity....................... 262.4 217.1
------------ -------------
Total liabilities and
stockholders' equity......... $ 656.6 $ 467.0
============ =============
The accompanying condensed notes are an integral part of these consolidated
financial statements.
F-59
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
Net sales............................... $ 270.5 $ 65.1
Operating costs and expenses:
Cost of sales...................... 208.1 49.9
Operating and delivery............. 25.6 6.6
Selling, general and
administrative.................... 17.7 6.7
Depreciation and amortization...... 3.0 .7
--------- ---------
Operating income........................ 16.1 1.2
Other (income) expense:
Interest expense................... 4.8 .4
Other income....................... -- (.1)
--------- ---------
Income before income taxes.............. 11.3 .9
Provision for income taxes.............. 4.6 1.6
--------- ---------
Net income (loss)....................... $ 6.7 $ (.7)
========= =========
Earnings per share...................... $ .21 $ (.05)
========= =========
Earnings per share -- assuming
dilution.............................. $ .20 $ (.05)
========= =========
Number of common shares used in the per
share calculations:
Earnings per share................. 32.5 13.0
========= =========
Earnings per share -- assuming
dilution.......................... 33.3 13.0
========= =========
The accompanying condensed notes are an integral part of these consolidated
financial statements.
F-60
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............... $ 6.7 $ (.7)
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............. -- .7
Provision for bad debts.... .6 --
Depreciation and
amortization............. 3.0 .7
Deferred financing costs
incurred................. (7.0) (.1)
Amortization of deferred
financing costs.......... .1 --
Compensation
expense -- management
shares................... -- 2.8
Changes in operating assets
and liabilities, net of
business acquisitions --
Accounts receivable... (21.1) (3.5)
Inventories........... (4.1) (.3)
Prepaid expenses and
other assets........ (1.9) (1.2)
Accounts payable and
accrued
liabilities......... 7.2 5.8
Income taxes
payable............. 1.2 .7
Other liabilities..... .4 (.6)
Other operating............ (.8) .1
--------- ---------
Net cash (used
in) provided by
operating
activities...... (15.7) 4.4
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets.... .3 --
Purchase of property and
equipment...................... (2.9) (1.8)
Purchase of businesses, net of
acquired cash.................. (33.8) --
--------- ---------
Net cash used in
investing
activities...... (36.4) (1.8)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of 8 5/8% Senior
Subordinated Notes............. 200.0 --
Net repayments on the Credit
Facility....................... (141.7) --
Net repayments on Industrial
Revenue Bonds and other
long-term debt................. (1.6) (1.8)
Other financing................. -- (.2)
--------- ---------
Net cash
provided by
(used in)
financing
activities...... 56.7 (2.0)
--------- ---------
NET INCREASE IN CASH................. 4.6 .6
CASH, beginning of period............ 7.3 1.7
--------- ---------
CASH, end of period.................. $ 11.9 $ 2.3
========= =========
The accompanying condensed notes are an integral part of these consolidated
financial statements.
F-61
<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 March 31, 1998,
the Company 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 involves 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 elsewhere
in this report. Certain capitalized terms used herein have the same meaning
given to them in the audited consolidated financial statements.
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.
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. The computations result
F-62
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
from dividing income available to common stockholders by the applicable weighted
average number of common shares outstanding during the period.
Pro forma combined earnings per share were computed assuming all of the
shares issued and outstanding upon completion of the IPO (21,667,023 shares)
were issued and outstanding as of January 1, 1997. These shares include shares
issued to consultants, members of management and the former owners of the
Founding Companies, together with the shares sold pursuant to the IPO. Shares
issued in connection with the acquisitions are included in the computation of
weighted average shares outstanding only for those periods subsequent to their
respective dates of acquisition, except for those acquisitions accounted for
using the "pooling-of-interests" method, in which case the shares are
reflected in the computation of weighted average shares outstanding as of the
beginning of the earliest period presented.
Earnings per Share for the three months ended March 31, 1997, was computed
using 8,230,011 shares (the aggregate number of shares issued in connection with
the acquisition of entities accounted for using the "pooling-of-interests"
method of accounting) for periods prior to July 3, 1996 (date of inception),
together with the 4,753,414 shares issued in connection with the organization of
Metals USA (which includes shares issued to consultants and management prior to
the IPO). Shares issued to consultants and management prior to the IPO were
considered to be issued and outstanding from the date of inception without
regard to the date such shares were actually issued. Earnings per Share for the
three months ended March 31, 1998 was computed using the shares issued in
connection with the entities acquired subsequent to December 31, 1997 (all of
which were accounted for using the "purchase" method of accounting) such
shares in the Earnings per Share computation only from their respective dates of
issuance. Earnings per Share -- Assuming Dilution differs from the Earnings per
Share computation due to the potential dilution that could occur if options to
acquire common stock were exercised or converted into common stock.
3. INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
Raw materials --
Structural steel................... $ 27.2 $ 8.4
Flat-rolled steel.................. 66.3 39.0
Specialty metals................... 43.5 22.0
Aluminum products.................. 9.6 17.6
Other.............................. .1 1.9
----------- ------------
Total raw materials........... 146.7 88.9
----------- ------------
Work-in-process and finished goods --
Structural steel................... 32.6 35.8
Flat-rolled steel.................. 11.0 19.2
Specialty metals................... 9.5 5.1
Aluminum products.................. 21.2 6.7
----------- ------------
Total work-in-process and
finished goods............. 74.3 66.8
Less -- LIFO reserve.................... (1.7) (1.9)
----------- ------------
Total......................... $ 219.3 $153.8
=========== ============
F-63
<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:
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
8 5/8% Senior Subordinated Notes........ $ 200.0 $--
Borrowings under the Credit Facility.... 50.9 144.8
Various issues of Industrial Revenue
Bonds................................. 21.5 21.6
Obligations under capital leases and
other................................. 7.3 6.6
----------- ------------
279.7 173.0
Less -- Current portion................. (6.5) (5.9)
----------- ------------
$ 273.2 $167.1
=========== ============
The Company entered into an amended and restated five-year revolving credit
facility which provides for borrowings of up to $300.0 on February 11, 1998.
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 estimated expenses of $.8)
therefrom. The Company used $179.3 of such proceeds to repay the borrowings
outstanding under the Original Credit Facility and Interim Credit Facility on
February 11, 1998.
The Notes call for semi-annual interest payments on February 15 and August
15 of each year, beginning August 15, 1998 and mature on February 15, 2008. The
Notes are redeemable at the option of the Company, in whole or in part, at any
time on or after February 15, 2003, at 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 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
the 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 filed a registration
statement with the Securities and Exchange Commission on April 9, 1998, under
cover of Form S-4 (the "Exchange Offer Registration Statement") relating to an
exchange offer for the Notes under the Securities Act of 1933, as amended. The
Company has agreed, for the benefit of all holders of the Notes, that it will
use its best efforts to cause the Exchange Offer Registration Statement declared
effective within 150 days after the issuance of 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 1/4% is payable on any unused portion of the Credit
Facility. At March 31, 1998, $249.1 was available to the Company under the
Credit Facility. The Credit Facility is used to fund acquisitions, 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,
F-64
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(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). As of
June 15, 1998, the Company had outstanding borrowings of $103.9 and $196.1
available for use under the Credit Facility.
5. ACQUISITIONS
During the three months ended March 31, 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"), and the assets
of Seaboard Steel and Iron Corporation ("Seaboard"). These acquisitions were
accounted for using the "purchase" method of accounting. The aggregate
consideration paid by Metals to acquire these companies was approximately $40.7
in cash and 2,965,812 shares of common stock (excluding assumed indebtedness of
approximately $47.4).
The following summarized unaudited pro forma financial information assumes
the acquisition of the Founding Companies, the companies acquired through March
31, 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 $.02 per share for both periods presented.
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
(UNAUDITED)
Net Sales............................ $ 315.5 $ 275.2
Operating costs and expenses:
Cost of sales................... 240.5 211.1
Operating and delivery.......... 29.8 26.6
Selling, general and
administrative................. 21.6 18.6
Depreciation and amortization... 2.2 2.5
--------- ---------
Operating income..................... 21.4 16.4
Other (income) expenses:
Interest expense................ 6.7 5.5
Other........................... .3 (.2)
--------- ---------
Income before income taxes...... 14.4 11.1
Provision for income taxes........... 5.4 4.4
--------- ---------
Net income........................... $ 9.0 $ 6.7
========= =========
Earnings per share................... $ .26 $ .19
========= =========
Earnings per share -- assuming
dilution........................... $ .26 $ .19
========= =========
Number of common shares used in the
per share calculations:
Earnings per share.............. 34.5 34.5
========= =========
Earnings per share -- assuming
dilution....................... 35.2 34.5
========= =========
F-65
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The preceding unaudited pro forma amounts reflect the results of operations
for Metals USA, the Founding Companies and the other acquisitions completed
through March 31, 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 of 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.
6. SUPPLEMENTAL INFORMATION
SUPPLEMENTAL CASH FLOW INFORMATION
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
Supplemental cash flow information:
Cash paid for interest............. $ 2.6 $ .4
Cash paid for income taxes......... 2.8 .2
Non-cash investing and financing
activities:
Purchase of businesses for stock... 38.6 --
COMPENSATION CHARGE
During the three months ended March 31, 1997, the Company sold an aggregate
of 309,500 shares of common stock to management and consultants to the Company
for $.01 per share. As a result, the Company recorded a non-recurring, non-cash
compensation charge of $2.8 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
Subsidiaries of the Company are involved in a variety of claims, lawsuits
and other disputes arising in the ordinary course of business. The Company
believes the resolution of these matters and the incurrence of their related
costs and expenses should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
F-66
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
8. SUBSEQUENT EVENTS
On March 23, 1998, the Company announced that it agreed to make an offer
for all of the issued and outstanding common shares of Ideal Metal Inc.
("Ideal") at a cash price of CAN$5.25 per share. Another company made a
competing offer and on April 28, 1998, the Company received the agreed
compensatory fee of U.S. $1.7 (CAN$2.5) as a result of the competing offer.
Subsequent to March 31, 1998, the Company acquired the following metal
processing companies: Industrial Metals, Inc. ("Industrial"), Sierra Pacific
Steel, Inc. ("Sierra") and Fullerton Industries, Inc. ("Fullerton"). 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 $16.5 in cash and 984,702 shares of common stock (excluding
assumed indebtedness of approximately $12.0).
On April 20, 1998, the Company filed a shelf registration statement with
the Securities and Exchange Commission under cover of Form S-1 (the "1998 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. The 1998 Shelf
Registration Statement was declared effective on April 22, 1998.
On May 20, 1998, the Company's stockholders approved an increase in the
number of authorized shares of Common Stock to 200,000,000.
RESTATEMENT OF HISTORICAL FINANCIAL STATEMENTS
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. The following table summarizes the restated
consolidated net sales, net income and per share data of the Company after
giving effect to the acquisition of Krohn:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------
1997
1998 ---------------------
-------------------- NET
NET INCOME/
NET SALES INCOME NET SALES (LOSS)
--------- ------ --------- -------
<S> <C> <C> <C> <C>
Net sales and net income (loss) --
As previously reported in the
Company's Form 10-Q for the
three months ended March 31,
1998.......................... $ 270.5 $ 6.7 $ 65.1 $ (.7)
Acquisition accounted for as
"pooling-of-interests"......... 8.0 .5 6.9 .3
--------- ------ --------- -------
As restated................ $ 278.5 $ 7.2 $ 72.0 $ (.4)
========= ====== ========= =======
Earnings per share --
As previously reported in the
Company's Form 10-Q for the
three months ended March 31,
1998.......................... $ .21 $(.05)
Acquisition accounted for as
"pooling-of-interests"......... -- .02
------ -------
As restated................ $ .21 $(.03)
====== =======
Earnings per share -- assuming
dilution --
As previously reported in the
Company's Form 10-Q for the
three months ended March 31,
1998.......................... $ .20 $(.05)
Acquisition accounted for as
"pooling-of-interests"......... .01 .02
------ -------
As restated................ $ .21 $(.03)
====== =======
</TABLE>
F-67
<PAGE>
METALS USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Because the acqusition occurred after December 31, 1997, the Company has
restated these financial statements and, as presented elsewhere in this
Prospectus, such restated financial statements are labeled as "Supplemental"
in accordance with the rules and regulations of the Securities and Exchange
Commission. The "Supplemental" financial statements reflect the results of
operations, cash flows and financial position of Krohn, as if the acquisition
occurred on January 1, 1997.
F-68
<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 and for
the period from January 1, 1997 through July 10, 1997. 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 and for the period from January 1, 1997 through July 10, 1997
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
January 30, 1998
F-69
<PAGE>
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
JUNE 30, DECEMBER 31,
1995 1996
-------- -------------
ASSETS
Current assets:
Cash............................ $ 359 $ 156
Accounts and notes receivable,
net of allowance of
$519 and $677................. 3,432 4,221
Accounts and notes receivable
from affiliates................ 993 81
Inventories..................... 8,193 10,878
Prepaid expenses................ 47 38
Deferred income taxes........... 591 754
-------- -------------
Total current assets....... 13,615 16,128
Property and equipment, net.......... 3,712 4,058
Notes receivable from affiliates..... -- 465
Other assets......................... 715 576
Goodwill............................. 690 822
-------- -------------
Total assets.......... $ 18,732 $22,049
======== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes
payable........................ $ 593 $ 683
Current portion of notes payable
and capital lease obligations
to affiliates.................. 54 77
Accounts payable................ 3,882 5,540
Income taxes payable............ 269 396
Accrued liabilities............. 1,416 1,158
-------- -------------
Total current
liabilities............. 6,214 7,854
Notes payable, less current
portion............................ 7,879 6,004
Notes payable and capital lease
obligations payable to affiliates,
less current portion............... 368 1,419
Deferred income taxes................ 249 163
Other long-term liabilities.......... 41 274
-------- -------------
Total liabilities..... 14,751 15,714
-------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock................. 379 369
Common stock.................... 1,517 1,501
Members' equity................. -- 1
Additional paid-in capital...... 198 188
Retained earnings............... 2,199 4,560
Less: treasury stock, at
cost.................... (312) (284)
-------- -------------
Total stockholders'
equity.................. 3,981 6,335
-------- -------------
Total liabilities and
stockholders'
equity............. $ 18,732 $22,049
======== =============
The accompanying notes are an integral part of these combined financial
statements.
F-70
<PAGE>
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, YEAR ENDED PERIOD FROM
-------------------- DECEMBER 31, JANUARY 1, 1997
1994 1995 1996 THROUGH JULY 10, 1997
--------- --------- ------------ ---------------------
<S> <C> <C> <C> <C>
Net sales............................ $ 26,105 $ 34,706 $ 40,651 $25,271
Costs and expenses:
Cost of sales................... 17,991 23,893 27,146 16,553
Operating and delivery.......... 5,621 5,863 6,386 3,232
Selling, general and
administrative................ 1,654 2,810 3,539 4,079
Depreciation and amortization... 346 517 568 409
--------- --------- ------------ ---------------------
Operating income..................... 493 1,623 3,012 998
Other (income) expense:
Interest expense................ 444 837 682 592
Other income.................... (169) (143) (8) (102)
--------- --------- ------------ ---------------------
Income before income taxes........... 218 929 2,338 508
Provision for income taxes........... 93 277 456 207
--------- --------- ------------ ---------------------
Net income........................... $ 125 $ 652 $ 1,882 $ 301
========= ========= ============ =====================
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-71
<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, 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..... -- -- 5 -- -- -- -- --
Purchase of 30 shares of
preferred stock at $100 per
share.......................... -- -- -- -- -- -- -- (3)
Distributions to stockholders.... -- -- -- -- -- -- (3,400) --
Net income....................... -- -- -- -- -- -- 301 --
-------- -------- ----------- -------- ---------- -------- --------- ---------
Balance, July 10, 1997............... $363 $1,128 $ 15 $ 1 $369 $188 $ 1,461 $(287)
======== ======== =========== ======== ========== ======== ========= =========
</TABLE>
TOTAL
---------
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..... 5
Purchase of 30 shares of
preferred stock at $100 per
share.......................... (3)
Distributions to stockholders.... (3,400)
Net income....................... 301
---------
Balance, July 10, 1997............... $ 3,238
=========
The accompanying notes are an integral part of these combined financial
statements.
F-72
<PAGE>
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, DECEMBER 31, PERIOD FROM
-------------------- ------------ JANUARY 1, 1997
1994 1995 1996 THROUGH JULY 10, 1997
--------- --------- ------------ ---------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 125 $ 652 $ 1,882 $ 301
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Adjustment to conform fiscal year
ends........................... -- -- 579 --
Provision for bad debts.......... 456 501 718 (98)
Depreciation and amortization.... 346 517 763 409
(Gain) loss on sale of property
and equipment.................. (11) 11 (266) (18)
Deferred income taxes............ (95) (111) (249) (83)
Changes in operating assets and
liabilities, net of business
acquisitions --
Accounts and notes
receivable.................. (1,196) (100) (783) (858)
Accounts and notes receivable
from affiliates............. 124 (654) (167) (30)
Inventories.................... (341) (1,166) (1,970) 204
Other assets................... (17) (82) (29) (59)
Accounts payable............... 39 393 1,476 (1,029)
Accounts payable to
affiliates.................. 11 161 -- --
Income taxes payable........... (18) 171 127 100
Accrued liabilities............ 373 309 (269) 98
--------- --------- ------------ --------
Net cash provided by (used
in) operating
activities................ (204) 602 1,812 (1,063)
--------- --------- ------------ --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets....... 104 71 611 25
Purchases of property.............. (438) (606) (739) (247)
Collections on notes receivable.... 129 109 445 11
Purchase of businesses, net of
acquired cash.................... -- (2,500) (150) (1,300)
--------- --------- ------------ --------
Net cash provided by (used
in) investing
activities................ (205) (2,926) 167 (1,511)
--------- --------- ------------ --------
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) (308)
Borrowings on revolving credit
facility......................... 5,498 1,403 3,692 10,491
Payments on revolving credit
facility......................... (6,005) (1,299) (5,160) (4,725)
Payments made to former ESOP
members.......................... (92) (63) (89) (90)
Borrowings on notes payable to
affiliates....................... -- 650 1,020 2,450
Principal payments on notes payable
to affiliates.................... -- (452) (800) (12)
Issuance of common stock and
members' equity.................. -- 10 1 5
Distribution to stockholders....... -- -- (100) (3,400)
--------- --------- ------------ --------
Net cash provided by (used
in) financing
activities................ 222 2,445 (2,182) 4,411
--------- --------- ------------ --------
NET INCREASE (DECREASE) IN CASH...... (187) 121 (203) 1,837
CASH, BEGINNING OF PERIOD............ 425 238 359 156
--------- --------- ------------ --------
CASH, END OF PERIOD.................. $ 238 $ 359 $ 156 $ 1,993
========= ========= ============ ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest........................... $ 441 $ 526 $ 699 $ 523
Income taxes....................... 207 217 584 107
Non-cash investing and financing
activities:
Purchase of assets through
assumption of debt............... $ -- $ 19 $ 820 $ 1,734
Purchase of treasury stock through
assumption of debt............... 102 35 32 3
Sale of assets by issuing note
receivable....................... -- -- 330 --
Sale of assets by issuing note
receivable, affiliate............ -- -- -- 300
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-73
<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, Cornerstone Patio
Concepts, L.L.C. ("CPC"), a Nevada limited liability corporation and
Cornerstone Aluminum Company, Inc. ("CAC"), an Arizona Corporation, from the
date of acquisition (see BUSINESS COMBINATIONS). CMC, CBP, CPC and CAC 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, CPC and CAC 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 entered into a merger
agreement with Metals USA, Inc. ("Metals USA") pursuant to which all of Texas
Aluminum/Cornerstone's outstanding shares of capital stock were 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, (see
Note 13).
The financial statements for the period from January 1, 1997 through July
10, 1997 are presented for purposes of complying with certain reporting
requirements of Regulation S-X of the Securities and Exchange Commission and are
not necessarily indicative of the results to be expected for the entire year.
BUSINESS COMBINATIONS
CMC, CBP and CAC are 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,
F-74
<PAGE>
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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.
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 $1,734 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.
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-75
<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, 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-76
<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
======== ============
3. SUMMARY OF LONG-TERM FINANCING ARRANGEMENTS
Notes payable to non-affiliates consist of the following:
JUNE 30, DECEMBER 31,
1995 1996
-------- ------------
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
Revolving credit facility with
interest at prime plus .5%,
maturing on May 15, 1998, secured
by inventory, trade accounts and
notes receivable and equipment, and
personally guaranteed by
stockholders....................... 1,405 311
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
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
(TABLE CONTINUED ON FOLLOWING PAGE)
F-77
<PAGE>
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
1995 1996
-------- ------------
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
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
Note payable to individuals in annual
installments of $25 including
interest, beginning August 5, 1997
and maturing on August 5, 2000,
unsecured.......................... -- 100
Other long-term debt................. 69 8
-------- ------------
8,472 6,687
Less: current portion................ (593) (683)
-------- ------------
$ 7,879 $ 6,004
======== ============
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 were 9% and 8.25%,
respectively.
Notes payable and capital lease obligations to affiliates consists of the
following:
JUNE 30, DECEMBER 31,
1995 1996
-------- ------------
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
Capital lease obligation to an
affiliated company with monthly
installments payable through
December 2011 (See Note 12)........ -- 806
Note payable to an affiliated company
in monthly installments of interest
only at 8%, maturing on July 31,
2000, unsecured.................... 100 --
Notes payable to stockholders,
accruing interest at prime, due at
various dates from October 1998
through February 2002, unsecured... 150 250
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
Less: current portion................ (54) (77)
-------- ------------
$ 368 $ 1,419
======== ============
F-78
<PAGE>
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Texas Aluminum/Cornerstone's long-term notes payable and capital lease
obligations are subject to mandatory redemption as follows:
<TABLE>
<CAPTION>
AFFILIATES
YEAR ENDING NON- --------------------------------
DECEMBER 31, AFFILIATES NOTES PAYABLE CAPITAL LEASE
------------- ----------- -------------- -------------
<S> <C> <C> <C>
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
=============
</TABLE>
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
======== ============
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, $14,314 and
$14,847 at June 30, 1995, December 31, 1996 and July 10, 1997 respectively.
Additionally, net income would have been $286, $1,219, $1,837 and $301 for the
years ended June 30, 1994 and 1995, December 31, 1996 and the period from
January 1, 1997 through July 10, 1997, 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
======== ============
F-79
<PAGE>
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
6. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
JUNE 30, PERIOD FROM
---------------------- DECEMBER 31, JANUARY 1, 1997
1994 1995 1996 THROUGH JULY 10, 1997
---------- ---------- ------------ ---------------------
<S> <C> <C> <C> <C>
Federal:
Current......................... $ 165 $ 338 $ 578 $ 250
Deferred........................ (84) (99) (196) (72)
---------- ---------- ------------ ---------------------
81 239 382 178
---------- ---------- ------------ ---------------------
State:
Current......................... 23 50 107 40
Deferred........................ (11) (12) (33) (11)
---------- ---------- ------------ ---------------------
12 38 74 29
---------- ---------- ------------ ---------------------
Total provision............ $ 93 $ 277 $ 456 $ 207
========== ========== ============ =====================
The provision for income taxes differs from an amount computed at the
statutory rates as follows:
YEAR ENDED
-------------------------------------
JUNE 30, PERIOD FROM
---------------------- DECEMBER 31, JANUARY 1, 1997
1994 1995 1996 THROUGH JULY 10, 1997
---------- ---------- ------------ ---------------------
Federal income tax at statutory
rates.............................. $ 76 $ 325 $ 818 $ 148
State income taxes, net of Federal
benefit............................ 12 38 74 19
Effect of S Corporation income....... -- (89) (454) --
Nondeductible expenses (mainly meals
and entertainment)................. 5 3 18 40
---------- ---------- ------------ ---------------------
$ 93 $ 277 $ 456 $ 207
========== ========== ============ =====================
</TABLE>
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
======== ============
F-80
<PAGE>
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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
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. For the period from January 1, 1997 through July 10, 1997,
Texas Aluminum has accrued $20 for their contribution to the plan.
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
F-81
<PAGE>
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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. 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.
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
=========
Texas Aluminum/Cornerstone paid approximately $1,300, $1,700, $1,700 and
$985 in rent expense during the years ended June 30, 1994 and 1995 and December
31, 1996 and the period from January 1, 1997 through July 10, 1997,
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.
F-82
<PAGE>
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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, December 31, 1996 and for
the period from January 1, 1997 through July 10, 1997 were $36, $43, $64 and
$35, 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 and the period from January 1, 1997 through July 10, 1997 were
$306, $541, $697 and $510, 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.
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
F-83
<PAGE>
TEXAS ALUMINUM INDUSTRIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
13. SUBSEQUENT EVENTS
On July 11, 1997, Metals USA purchased all of the issued and outstanding
equity securities of Texas Aluminum/Cornerstone, through the issuance of common
stock and cash pursuant to a definitive merger agreement dated May 1997.
During July 1997, subsequent to the merger, $16,059 of Texas
Aluminum/Cornerstone's debt was repaid with advances from Metals USA.
F-84
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Interstate Steel Supply Co. and Affiliates
We have audited the accompanying combined balance sheets of Interstate Steel
Supply Co. and Affiliates (collectively, the "Companies") as of December 31,
1995 and 1996, and the related combined statements of operations, stockholders'
equity and partners' capital and cash flows for each of the three years in the
period ended December 31, 1996 and for the period from January 1, 1997 through
July 10, 1997. These 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 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 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 Interstate
Steel Supply Co. and Affiliates as of December 31, 1995 and 1996, and the
combined results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996 and for the period from January 1,
1997 through July 10, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 3, 1998
F-85
<PAGE>
INTERSTATE STEEL SUPPLY CO. AND AFFILIATES
COMBINED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
--------------------
1995 1996
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents....... $ 83 $ 168
Accounts receivable -- trade,
less allowance of $225 and
$300........................... 7,864 6,821
Inventories..................... 8,755 11,403
Prepaid expenses and other
current assets................. 69 191
--------- ---------
Total current assets....... 16,771 18,583
Property and equipment, net.......... 3,447 3,325
Other assets......................... 987 1,116
--------- ---------
Total assets............... $ 21,205 $ 23,024
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................ $ 1,401 $ 1,866
Accrued liabilities............. 941 1,051
Lines of credit................. 11,100 10,100
Current portion of long-term
debt........................... 93 94
--------- ---------
Total current
liabilities.............. 13,535 13,111
Long-term debt....................... 817 723
--------- ---------
Total liabilities.......... 14,352 13,834
--------- ---------
Stockholders' equity:
Common stock; 200,000 shares,
$1.00 par value authorized,
35,500 issued and
outstanding.................... 36 36
Common stock; 2,000 shares, no
par value authorized, 2,000
issued and outstanding......... 2 2
Additional paid-in capital...... 72 72
Retained earnings............... 6,739 9,072
Partners' capital............... 1,502 1,506
Treasury stock.................. (1,498) (1,498)
--------- ---------
Total stockholders'
equity................... 6,853 9,190
--------- ---------
Total liabilities and
stockholders' equity..... $ 21,205 $ 23,024
========= =========
The accompanying notes are an integral part of these combined financial
statements.
F-86
<PAGE>
INTERSTATE STEEL SUPPLY CO. AND AFFILIATES
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERIOD FROM
------------------------------- JANUARY 1, 1997
1994 1995 1996 THROUGH JULY 10, 1997
--------- --------- --------- ---------------------
<S> <C> <C> <C> <C>
Net sales............................ $ 49,299 $ 61,375 $ 66,806 $38,201
Costs and expenses:
Cost of sales................... 37,283 44,868 47,902 28,103
Operating and delivery.......... 6,197 7,916 8,243 4,844
Selling, general and
administrative expenses....... 4,187 5,279 5,391 2,856
Depreciation and amortization... 483 561 550 192
--------- --------- --------- ---------------------
Operating income................ 1,149 2,751 4,720 2,206
Other (income) expense:
Interest expense, net........... 792 908 936 467
Other, net...................... (1) 1 10 --
--------- --------- --------- ---------------------
Income before income taxes........... 358 1,842 3,774 1,739
Provision for income taxes........... -- -- -- --
--------- --------- --------- ---------------------
Net income........................... $ 358 $ 1,842 $ 3,774 $ 1,739
========= ========= ========= =====================
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-87
<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............. -- -- -- (7,893) -- (1,660) (9,553)
Net income.............................. -- -- -- 1,585 -- 154 1,739
------- ------- ----------- --------- --------- -------- ------
Balance, July 10, 1997.................. $ 36 $ 2 $ 72 $ 2,764 $(1,498) $-- $1,376
======= ======= =========== ========= ========= ======== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-88
<PAGE>
INTERSTATE STEEL SUPPLY CO. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERIOD FROM
------------------------------- JANUARY 1, 1997
1994 1995 1996 THROUGH JULY 10, 1997
--------- --------- --------- ---------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................... $ 358 $ 1,842 $ 3,774 $ 1,739
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and
amortization................. 483 561 550 192
Loss (gain) on sale of
assets....................... 2 10 -- --
Changes in operating assets and
liabilities:
Accounts receivable, net... (695) (768) 1,041 (4,511)
Inventories................ (1,272) (1,315) (2,648) 824
Prepaid expenses and other
assets................... 112 6 (121) (563)
Accounts payable and
accrued liabilities...... (3) 158 575 2,965
Other assets............... (119) (178) (129) (109)
--------- --------- --------- --------
Net cash provided by (used
in) operating
activities............... (1,134) 316 3,042 537
--------- --------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment......................... (571) (533) (428) (252)
Proceeds from sales of property and
equipment......................... 10 6 -- --
Other, net.......................... 11 -- -- --
--------- --------- --------- --------
Net cash used in investing
activities............... (550) (527) (428) (252)
--------- --------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) on
line-of-credit.................... 1,225 750 (1,000) 7,350
Principal payments on long-term
obligations....................... (239) (259) (93) (161)
Proceeds from issuance of long-term
obligations....................... 900 -- -- --
Distributions to shareholders and
partners.......................... (308) (564) (1,436) (6,710)
Capital contributions............... -- 250 -- --
--------- --------- --------- --------
Net cash provided by (used
in) financing
activities............... 1,578 177 (2,529) 479
--------- --------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... (106) (34) 85 764
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD................................ 223 117 83 168
--------- --------- --------- --------
CASH AND CASH EQUIVALENTS, END OF
PERIOD................................ $ 117 $ 83 $ 168 $ 932
========= ========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest.............. $ 847 $ 964 $ 930 $ 500
Reduction in notes
receivable -- shareholders and
partners.......................... -- 140 -- --
Distribution of Warehouse Real
Estate Associates' net assets to
partners.......................... -- -- -- 1,660
Distribution of life insurance cash
surrender value to shareholders... -- -- -- 1,183
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-89
<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 entered into a definitive merger agreement with Metals USA,
Inc. ("Metals USA") pursuant to which all of Interstate's outstanding shares
of capital stock were 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 (See Note 8).
The financial statements for the period from January 1, 1997 through July
10, 1997 are presented for purposes of complying with certain reporting
requirements of Regulation S-X of the Securities and Exchange Commission and 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.
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-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.
F-90
<PAGE>
INTERSTATE STEEL SUPPLY CO. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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, $13,487 and $11,453 at December 31, 1995
and 1996, and July 10, 1997, respectively. Additionally, net income would have
been $1,030, $2,475, $3,146 and $1,816 for the years ended December 31, 1994,
1995, 1996 and for the period from January 1, 1997 through July 10, 1997,
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-91
<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 depreciation and
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
=========
F-92
<PAGE>
INTERSTATE STEEL SUPPLY CO. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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, $472 and
$257 have been charged to operations for the years ended December 31, 1994, 1995
and 1996 and for the period from January 1, 1997 through July 10, 1997,
respectively.
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
On July 11, 1997, Metals USA, Inc. purchased all of the issued and
outstanding equity securities of Interstate, through the issuance of common
stock and cash pursuant to a definitive merger agreement dated May 1997.
Prior to the merger, Interstate made a cash distribution of approximately
$5,250 which represented Interstate's estimated S Corporation accumulated
adjustment account. Had these distributions been made at December 31, 1996 or
June 30, 1997, 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 funded this distribution by using its existing credit facilities.
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 entered into agreements with Warehouse
Real Estate Associates to purchase certain equipment from Warehouse Real Estate
Associates 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, an affiliate of Interstate entered into a 10 year
lease with Warehouse Real Estate Associates with respect to certain real
property where Interstate conducts its operations 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. An affiliate of Interstate
has agreed to purchase the real estate at the end of year ten for the then
appraised fair market value of such property.
Prior to the merger, Interstate Steel Supply Company dividended a life
insurance policy to its sole stockholder, which had a book value at June 30,
1997 of approximately $1,183.
During July 1997, subsequent to the merger, $16,613 of Interstate's debt
was repaid with advances from Metals USA.
F-93
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Queensboro Steel Corporation:
We have audited the statement of income, stockholders' equity, and cash flows of
Queensboro Steel Corporation (the "Company") for the period from January 1,
1997 through July 10, 1997. 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, Queensboro Steel Corporation's results of operations and
its cash flows for the period from January 1, 1997 through July 10, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
January 30, 1998
F-94
<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
and Note 12 as to which
the date is July 11, 1997
F-95
<PAGE>
QUEENSBORO STEEL CORPORATION
BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
--------------------
1995 1996
--------- ---------
ASSETS
Current assets:
Cash............................ $ 5 $ 5
Accounts receivable:
Trade, less allowance of
$20 and $20.............. 10,249 8,390
Other...................... 108 173
Inventories..................... 6,217 8,574
Costs and estimated earnings in
excess of billings on
uncompleted contracts.......... 406 971
Prepaid expenses and other
current assets................. 184 165
--------- ---------
Total current assets....... 17,169 18,278
Property and equipment, net.......... 3,085 4,638
Other assets......................... 281 307
--------- ---------
Total assets............... $ 20,535 $ 23,223
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................ $ 2,857 $ 3,007
Accrued liabilities............. 517 625
Billings in excess of costs and
estimated earnings on
uncompleted contracts.......... 228 842
Current portion of long-term
debt........................... 10 --
--------- ---------
Total current
liabilities.............. 3,612 4,474
Long-term debt....................... 8,884 8,551
Deferred compensation................ 359 410
--------- ---------
Total liabilities.......... 12,855 13,435
--------- ---------
Stockholders' equity:
Capital stock, 200,000 shares
authorized:
Class A voting, $10 par value,
18,666 shares issued and
outstanding.................. 187 187
Class B non-voting, $10 par
value, 78,666 shares issued
and outstanding.............. 787 787
Additional paid-in capital...... 870 870
Retained earnings............... 5,758 7,944
Unrealized gain on securities... 78 --
--------- ---------
Total stockholders'
equity................... 7,680 9,788
--------- ---------
Total liabilities and
stockholders' equity..... $ 20,535 $ 23,223
========= =========
The accompanying notes are an integral part of these financial statements.
F-96
<PAGE>
QUEENSBORO STEEL CORPORATION
STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED DECEMBER 31, JANUARY 1, 1997
------------------------------- THROUGH
1994 1995 1996 JULY 10, 1997
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
Net sales............................ $ 50,795 $ 60,322 $ 54,996 $32,976
Costs and expenses:
Cost of sales................... 37,996 45,945 38,912 24,368
Operating and delivery.......... 7,408 8,080 8,355 4,971
Selling, general and
administrative expenses....... 3,656 3,839 3,870 2,286
Depreciation and amortization... 369 362 405 246
--------- --------- --------- ---------------
Operating income................ 1,366 2,096 3,454 1,105
Other (income) expense:
Interest expense................ 465 612 587 411
Other income.................... (63) (67) (77) (14)
--------- --------- --------- ---------------
Net income........................... $ 964 $ 1,551 $ 2,944 $ 708
========= ========= ========= ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-97
<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...................... -- -- -- 708 -- 708
Dividends....................... -- -- -- (7,116) -- (7,116)
-------- -------- ----------- --------- ----------- -------------
Balance, July 10, 1997............... $ 187 $ 787 $ 870 $ 1,536 $-- $ 3,380
======== ======== =========== ========= =========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-98
<PAGE>
QUEENSBORO STEEL CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED DECEMBER 31, JANUARY 1, 1997
------------------------------- THROUGH
1994 1995 1996 JULY 10, 1997
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 964 $ 1,551 $ 2,944 $ 708
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization.... 369 362 405 246
Loss (gain) on sale of assets.... (1) 2 4 --
Increase in deferred
compensation................... 54 40 51 28
Changes in operating assets and
liabilities:
Accounts receivable, net....... (1,225) (2,930) 1,702 22
Inventories.................... (2,241) 1,552 (2,358) (927)
Prepaid expenses and other
assets...................... (69) (63) 99 (45)
Accounts payable and accrued
liabilities................. 925 (173) 258 337
Billings related to cost and
estimated earnings on
uncompleted contracts....... 721 212 49 (659)
Other operating activity....... -- -- -- (14)
--------- --------- --------- ---------------
Net cash provided by (used
in) operating
activities................ (503) 553 3,154 (304)
--------- --------- --------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment...................... (896) (1,519) (1,962) (304)
Proceeds from sales of property
and equipment.................. 2 16 7 51
Other, net....................... (7) (1) 2 --
--------- --------- --------- ---------------
Net cash used in investing
activities................ (901) (1,504) (1,953) (253)
--------- --------- --------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on revolving
line-of-credit................. (61,087) (40,844) (43,543) (59,165)
Borrowings on revolving
line-of-credit................. 62,755 42,829 40,210 65,884
Borrowings on long-term debt..... -- -- 3,000 --
Financing costs.................. -- -- (100) --
Net Advances (to) from
Affiliates..................... -- -- -- 173
Principal payments on long-term
debt........................... (125) (125) (10) --
Dividends paid................... (138) (909) (758) (6,334)
--------- --------- --------- ---------------
Net cash provided by (used
in) financing
activities................ 1,405 951 (1,201) 558
--------- --------- --------- ---------------
NET INCREASE IN CASH................. 1 -- -- 1
CASH BEGINNING OF PERIOD............. 4 5 5 5
--------- --------- --------- ---------------
CASH END OF PERIOD................... $ 5 $ 5 $ 5 $ 6
========= ========= ========= ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest........... $ 466 $ 601 $ 559 $ 409
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Investment securities received
(donated)...................... $ -- $ (78) $ 78 $ --
Note received in settlement of an
account receivable............. -- -- 156 --
Distribution of property and
equipment to shareholders...... -- -- -- 782
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-99
<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 entered into a definitive merger agreement
with Metals USA, Inc. ("Metals USA") pursuant to which all of Queensboro's
outstanding shares of capital stock were 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 (see Note 11).
The financial statements for the period from January 1, 1997 through July
10, 1997 are presented for purposes of complying with certain reporting
requirements of Regulation S-X of the Securities and Exchange Commission and are
not necessarily indicative of the results to be expected for the entire year.
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.
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.
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
F-100
<PAGE>
QUEENSBORO STEEL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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.
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
========= =========
F-101
<PAGE>
QUEENSBORO STEEL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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 and July 10, 1997, inventories would have been $8,086, $9,776 and $10,671
and net income for the years ended December 31, 1994, 1995, 1996 and for the
period from January 1, 1997 through July 10, 1997, would have been $1,324,
$1,882, $2,279 and $676, 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
========= =========
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
========= =========
F-102
<PAGE>
QUEENSBORO STEEL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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.
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.
F-103
<PAGE>
QUEENSBORO STEEL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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, $40 and $20 for
1994, 1995, 1996 and for the period from January 1, 1997 through July 10, 1997,
respectively. The discretionary profit-sharing contributions were $50, $65, $25
and $15 in 1994, 1995, 1996 and for the period from January 1, 1997 through July
10, 1997, 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.
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 and $221 for the years ended December 31,
1994, 1995, 1996 and for the period from January 1, 1997 through July 10, 1997,
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
F-104
<PAGE>
QUEENSBORO STEEL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
the affiliated corporation, for which it billed $274 in 1994, $370 in 1995, $344
in 1996 and $186 for the period from January 1, 1997 through July 10, 1997.
Queensboro leases fabrication shop facilities from an affiliated
partnership under operating lease terms (see Note 9). Lease expense was $137 in
1994, 1995, 1996 and $73 for the period from January 1, 1997 through July 10,
1997.
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. OTHER TRANSACTIONS
On July 11, 1997, Metals USA, purchased all of the issued and outstanding
equity securities of Queensboro, through the issuance of common stock and cash
pursuant to a definitive merger agreement dated May 1997.
Queensboro dividended its Wilmington facility to its stockholders
concurrently with the Merger. An affiliate of Queensboro entered into a
long-term lease for the facility which calls for monthly lease payments of $40.
At December 31, 1996 the carrying value of the facility was approximately $601.
Additionally, immediately prior to the Merger, Queensboro transferred the salary
continuation agreement described in the last paragraph of Note 8 to an entity
that is not a party to the Merger.
During July 1997, subsequent to the merger, $12,612 of Queensboro's debt
was repaid with advances from Metals USA.
F-105
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Affiliated Metals Company
We have audited the accompanying statements of operations, stockholders' equity
and cash flows of Affiliated Metals Company (the "Company") for the period
from September 1, 1996 through July 10, 1997. 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, Affiliated Metals Company's results of operations and its
cash flows for the period from September 1, 1996 through July 10, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
January 30, 1998
F-106
<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-107
<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-108
<PAGE>
AFFILIATED METALS COMPANY
BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 2, AUGUST 31,
1995 1996
------------ ----------
ASSETS
Current assets:
Cash............................ $ 2 $ 10
Accounts receivable, less
allowances for doubtful
accounts
of $30 at September 2, 1995
and August 31, 1996........... 7,013 7,074
Inventories..................... 6,810 10,658
Prepaid expenses and other
current assets................ 125 130
------------ ----------
Total current assets....... 13,950 17,872
Property and equipment, net.......... 2,699 7,940
Other assets......................... 705 649
------------ ----------
Total assets............... $ 17,354 $ 26,461
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft.................. $ 23 $ 143
Accounts payable................ 5,860 7,154
Accrued liabilities............. 494 529
Current portion of long-term
debt.......................... 407 10,358
------------ ----------
Total current
liabilities............. 6,784 18,184
Long-term debt....................... 8,018 4,337
Deferred income taxes................ 622 599
Redeemable preferred stock, $119.048
par value; 1,680 shares authorized;
840 and 600 shares issued and
outstanding
at September 2, 1995 and August 31,
1996, respectively................. 100 71
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
Retained earnings............... 1,780 3,220
------------ ----------
Total stockholders'
equity.................. 1,830 3,270
------------ ----------
Total liabilities and
stockholders'
equity............. $ 17,354 $ 26,461
============ ==========
The accompanying notes are an integral part of these financial statements.
F-109
<PAGE>
AFFILIATED METALS COMPANY
STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FIFTY-TWO WEEKS ENDED
------------------------------------------ PERIOD FROM
SEPTEMBER 3, SEPTEMBER 2, AUGUST 31, SEPTEMBER 1, 1996
1994 1995 1996 THROUGH JULY 10, 1997
------------ ------------ ---------- ---------------------
<S> <C> <C> <C> <C>
Net sales............................ $ 63,046 $ 78,976 $ 81,002 $88,932
Costs and expenses:
Cost of sales................... 54,600 68,481 67,924 75,992
Operating and delivery
expenses...................... 4,316 5,060 5,871 8,200
Selling, general and
administrative expenses....... 2,352 2,803 3,431 2,633
Depreciation and amortization... 304 313 300 521
------------ ------------ ---------- ---------------------
Operating income..................... 1,474 2,319 3,476 1,586
Other expense:
Interest expense................ 735 1,058 1,011 1,415
Other, net...................... 37 22 38 166
------------ ------------ ---------- ---------------------
Income before income taxes........... 702 1,239 2,427 5
Provision for income taxes........... 297 497 979 18
------------ ------------ ---------- ---------------------
Net income (loss).................... $ 405 $ 742 $ 1,448 $ (13)
============ ============ ========== =====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-110
<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..................... -- -- -- (4) (4)
Net loss........................ -- -- -- (13) (13)
------ ------ --- --------- -------------
Balance, July 10, 1997............... 6,000 $ -- $ 50 $ 3,203 $ 3,253
====== ====== === ========= =============
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-111
<PAGE>
AFFILIATED METALS COMPANY
STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FIFTY-TWO WEEKS ENDED
-------------------------------------------- PERIOD FROM
SEPTEMBER 3, SEPTEMBER 2, AUGUST 31, SEPTEMBER 1, 1996
1994 1995 1996 THROUGH JULY 10, 1997
------------- ------------- ---------- ---------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ 405 $ 742 $ 1,448 $ (13)
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and
amortization................ 304 313 300 521
Loss on sale of assets......... 3 -- 10 90
Deferred tax provision
(benefit)................... (20) (45) (1) (25)
Changes in operating assets and
liabilities:
Accounts receivable,
net..................... (890) (2,020) (61) (4,627)
Inventories............... (190) 61 (3,848) (3,389)
Prepaid expenses and other
assets.................. (116) 54 (27) (86)
Accounts payable.......... (525) 2,786 1,293 1,332
Accrued liabilities....... (70) 245 35 53
Other..................... (7) (22) -- 29
Other operating activity....... (121)
------------- ------------- ---------- --------
Net cash provided by
(used in) operating
activities............ (1,106) 2,114 (851) (6,236)
------------- ------------- ---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment........................ (310) (615) (5,553) (1,338)
Proceeds from sales of property and
equipment........................ 5 -- 58 290
Other, net......................... (36) -- -- --
------------- ------------- ---------- --------
Net cash used in
investing
activities............ (341) (615) (5,495) (1,048)
------------- ------------- ---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) on bank
overdraft........................ 783 (1,259) 120 1,650
Principal payments on long-term
debt............................. (198) (523) (668) (626)
Proceeds from issuance of long-term
debt............................. 1,412 325 6,939 6,399
Purchase of redeemable preferred
stock............................ (529) (29) (29) (71)
Dividends paid on redeemable
preferred stock.................. (21) (11) (8) (4)
------------- ------------- ---------- --------
Net cash provided by
(used in) financing
activities............ 1,447 (1,497) 6,354 7,348
------------- ------------- ---------- --------
NET INCREASE IN CASH................. -- 2 8 64
CASH BEGINNING OF PERIOD............. -- -- 2 10
------------- ------------- ---------- --------
CASH END OF PERIOD................... $-- $ 2 $ 10 $ 74
============= ============= ========== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest (net of
amount capitalized of $153 in
1996)............................ $ 784 $ 1,054 $ 991 $ 1,311
Cash paid for income taxes......... 389 370 1,083 104
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-112
<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.
Affiliated Metals and its shareholders entered into a definitive merger
agreement with Metals USA, Inc. ("Metals USA") pursuant to which all of
Affiliated Metal's outstanding shares of capital stock were exchanged for cash
and shares of Metals USA common stock concurrently with the consummation of the
initial public offering (the "Offering") of Metals common stock (see Note 9).
The financial statements for the period from September 1, 1996 through July
10, 1997 are presented for purposes of complying with certain reporting
requirements of Regulation S-X of the Securities and Exchange Commission and 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.
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.
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-113
<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. For the period from September
1, 1996 through July 10, 1997, three customers accounted for 10.6%, 8.0% and
7.9% 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, 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:
<TABLE>
<CAPTION>
ESTIMATED SEPTEMBER 2, AUGUST 31,
USEFUL LIVES 1995 1996
------------- ------------ ----------
<S> <C> <C>
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
============ ==========
</TABLE>
F-114
<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. In April 1997, Affiliated entered into an agreement to extend
until September 1997 the financing agreements related to the construction note
payable.
F-115
<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
==========
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.
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-116
<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:
<TABLE>
<CAPTION>
FIFTY-TWO WEEKS ENDED
------------------------------------------ PERIOD FROM
SEPTEMBER 3, SEPTEMBER 2, AUGUST 31, SEPTEMBER 1, 1996
1994 1995 1996 THROUGH JULY 10, 1997
------------ ------------ ---------- ---------------------
<S> <C> <C> <C> <C>
Federal:
Current......................... $ 260 $ 442 $ 796 $ 37
Deferred........................ (16) (37) (1) (20)
------------ ------------ ---------- ---------------------
244 405 795 17
State:
Current......................... 57 100 184 (1)
Deferred........................ (4) (8) -- 2
------------ ------------ ---------- ---------------------
53 92 184 1
------------ ------------ ---------- ---------------------
Total provision...................... $ 297 $ 497 $ 979 $ 18
============ ============ ========== =====================
</TABLE>
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:
<TABLE>
<CAPTION>
FIFTY-TWO WEEKS ENDED
------------------------------------------ PERIOD FROM
SEPTEMBER 2, SEPTEMBER 3, AUGUST 31, SEPTEMBER 1, 1996
1994 1995 1996 THROUGH JULY 10, 1997
------------ ------------ ---------- ---------------------
<S> <C> <C> <C> <C>
U.S. federal statutory rate.......... 34.0% 34.0% 34.0% 35.0%
State income taxes, net of Federal
tax benefit........................ 4.8 4.8 5.0 15.0
Other................................ 3.5 1.3 1.3 290.0
------------ ------------ ---------- ------
42.3% 40.1% 40.3% 340.0%
============ ============ ========== ======
</TABLE>
F-117
<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, August 31, 1996 and the period from September 1, 1996 through
July 10, 1997, of $89, $100, $141 and $114, 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, August 31, 1996 and the period from
September 1, 1996 through July 10, 1997 was $126, $125, $128 and $113,
respectively.
9. SUBSEQUENT EVENT
On July 11, 1997, Metals USA purchased all of the issued and outstanding
equity securities of Affiliated, through the issuance of common stock and cash
pursuant to a definitive merger agreement dated May 1997.
During July 1997, subsequent to the merger, $22,110 of Affiliated's debt
was repaid with advances from Metals USA.
In December 1997, Affiliated exercised its five-year renewal option on its
lease for the corporate office and one of its production facilities (see Note
8).
F-118
<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. (the "Company") as of December 31, 1995 and 1996, and the related
statements of operations, stockholders' equity and cash flows for the years then
ended and for the period from January 1, 1997 through July 10, 1997. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Southern Alloy of
America, Inc. as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for each of the two years then ended and for the
period from January 1, 1997 through July 10, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
January 30, 1998
F-119
<PAGE>
SOUTHERN ALLOY OF AMERICA, INC.
BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
--------------------
1995 1996
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents....... $ 57 $ --
Accounts receivable:
Trade, less allowances of
$18 and $13.............. 1,483 1,262
Affiliates................. 1,020 945
Inventories..................... 1,050 1,063
Prepaid expenses and other
current assets.................. 22 63
--------- ---------
Total current assets....... 3,632 3,333
Property and equipment, net.......... 456 353
Other assets......................... 84 68
--------- ---------
Total assets............... $ 4,172 $ 3,754
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................ $ 1,602 $ 1,450
Accrued liabilities............. 97 68
Revolving line-of-credit........ 1,424 1,424
Current portion of obligations
under capital lease............ 68 25
Current portion of long-term
debt........................... 38 24
--------- ---------
Total current
liabilities.................. 3,229 2,991
Obligations under capital lease, less
current portion.................... 69 44
Long-term debt, less current
portion.............................. 24 --
--------- ---------
Total liabilities.......... 3,322 3,035
--------- ---------
Stockholders' equity:
Common stock 100,000 shares
authorized; 19,500 and 17,200
shares issued and outstanding
at December 31, 1995 and 1996,
respectively................... 20 17
Additional paid-in capital...... 410 608
Retained earnings............... 420 94
--------- ---------
Total stockholders'
equity....................... 850 719
--------- ---------
Total liabilities and
stockholders'
equity.............. $ 4,172 $ 3,754
========= =========
The accompanying notes are an integral part of these financial statements.
F-120
<PAGE>
SOUTHERN ALLOY OF AMERICA, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
YEAR ENDED DECEMBER PERIOD FROM
31, JANUARY 1, 1997
-------------------- THROUGH
1995 1996 JULY 10, 1997
--------- --------- ---------------
Net sales............................ $ 12,018 $ 10,815 $ 5,872
Costs and expenses:
Cost of sales................... 7,669 7,084 3,821
Operating and delivery.......... 902 709 412
Selling, general and
administrative expenses....... 2,806 2,850 1,520
Depreciation and amortization... 108 126 82
--------- --------- ---------------
Operating income..................... 533 46 37
Other (income) expense:
Interest expense................ 252 168 72
Interest income................. (146) (108) (17)
--------- --------- ---------------
Income (loss) before income taxes.... 427 (14) (18)
Provision (benefit) for income
taxes............................... -- -- --
--------- --------- ---------------
Net income (loss).................... $ 427 $ (14) $ (18)
========= ========= ===============
The accompanying notes are an integral part of these financial statements.
F-121
<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............ 2,300 3 -- -- 3
Distributions to owners......... -- -- -- (1,099) (1,099)
Net income...................... -- -- -- (18) (18)
------- ------ ----------- --------- -------------
Balance, July 10, 1997............... 19,500 $ 20 $ 608 $ (1,023) $ (395)
======= ====== =========== ========= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-122
<PAGE>
SOUTHERN ALLOY OF AMERICA, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
YEAR ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1997
-------------------- THROUGH
1995 1996 JULY 10, 1997
--------- --------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ 427 $ (14) $ (18)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation.................... 108 126 82
Grant of stock option........... -- 246 --
Gain on sale of assets.......... (9) (71) --
Changes in operating assets and
liabilities:
Accounts receivable, net...... (113) 221 (322)
Inventories................... (90) (13) (352)
Prepaid expenses and other
assets..................... (10) (41) (73)
Other long-term assets........ 25 16 47
Accounts payable.............. 529 (152) 617
Accrued liabilities........... (57) (29) 50
Other operating activity...... -- -- (4)
--------- --------- ---------------
Net cash provided by
operating activities.... 810 289 27
--------- --------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment..................... (99) (23) (28)
Proceeds from sales of property
and equipment................. 8 71 --
--------- --------- ---------------
Net cash provided by (used
in) investing
activities.............. (91) 48 (28)
--------- --------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase on revolving
line-of-credit................ 156 -- 180
Net advances (to) from officers
and affiliates................ (535) 75 945
Payments on capital lease
obligations................... (63) (68) (13)
Principal payments on long-term
obligations................... (30) (38) (15)
Redemption of common stock...... -- (248) --
Sale of common stock............ -- -- 3
Dividends paid.................. (190) (115) (1,099)
--------- --------- ---------------
Net cash provided by (used
in) financing
activities.............. (662) (394) 1
--------- --------- ---------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 57 (57) --
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD.......................... -- 57 --
--------- --------- ---------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD............................... $ 57 $ -- $--
========= ========= ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest.......... $ 26 $ 159 $ 83
The accompanying notes are an integral part of these financial statements.
F-123
<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 entered into a definitive merger
agreement with Metals USA, Inc. ("Metals USA") pursuant to which all of
Southern Alloy's outstanding shares of capital stock were 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. (See Note
10).
The financial statements for the period from January 1, 1997 through July
10, 1997 are presented for purposes of complying with certain reporting
requirements of Regulation S-X of the Securities and Exchange Commission and are
not necessarily indicative of the results to be expected for the entire year.
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.
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 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.
F-124
<PAGE>
SOUTHERN ALLOY OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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
========= =========
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
F-125
<PAGE>
SOUTHERN ALLOY OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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, $16 and $3 in 1995, 1996
and the period from January 1, 1997 through July 10, 1997, respectively.
F-126
<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 $3.
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, $103 and $69 in 1995, 1996 and the period from January 1, 1997
through July 10, 1997, 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, $198 and $112 for 1995, 1996 and the period from
January 1, 1997 through July 10, 1997, 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
========= =========
Southern Alloy made a distribution of receivables from affiliates with a
carrying value of approximately $842.
F-127
<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 and 1996, and the period from January 1, 1997
through July 10, 1997:
PERIOD FROM
JANUARY 1, 1997
THROUGH
1995 1996 JULY 10, 1997
--------- --------- ------------------
SOMAR, Inc........................... $ 109 $ 57 -$-
Engineered Machine Technologies,
Inc................................ 37 51 17
--------- --------- ------------------
$ 146 $ 108 $ 17
========= ========= ==================
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 EVENT
On July 11, 1997, Metals USA, Inc. purchased all of the issued and
outstanding equity securities of Southern Alloy, through the issuance of common
stock and cash pursuant to a definitive merger agreement dated May 1997.
Concurrent with the Merger, Southern Alloy entered 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 entered into a lease for 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.
During July 1997, subsequent to the merger, $2,115 of Southern Alloy's debt
was repaid with advances from Metals USA.
F-128
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Uni-Steel, Inc.:
We have audited the accompanying balance sheet of Uni-Steel, Inc. (the
"Company"), an Oklahoma Corporation, as of September 30, 1996, and the related
statements of income, stockholders' equity and cash flows for the year ended
September 30, 1996 and for the period from October 1, 1996 through July 10,
1997. 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 Uni-Steel, Inc. as of September
30, 1996, and the results of its operations and its cash flow for the year ended
September 30, 1996 and for the period from October 1, 1996 through July 10, 1997
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
January 30, 1998
F-129
<PAGE>
UNI-STEEL, INC.
BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30,
1996
-------------
ASSETS
Current assets:
Cash and cash equivalents....... $ 203
Accounts receivable, less
allowance of $122.............. 6,586
Accounts
receivable -- affiliates....... 261
Inventories..................... 9,947
Current portion of note
receivable..................... 25
Deferred income taxes........... 127
Prepaid expenses and other
current assets................. 22
-------------
Total current assets....... 17,171
Property and equipment, net.......... 3,176
Notes receivable, net of current
portion............................ 1,212
Other assets......................... 355
Goodwill............................. 344
-------------
Total assets............... $22,258
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................ $ 3,165
Accounts
payable -- affiliates........... 121
Accrued liabilities............. 419
Note payable to shareholders.... 36
Line of credit.................. 7,100
Current portion of long-term
debt........................... 174
Income taxes payable............ 92
-------------
Total current
liabilities............... 11,107
Long-term debt, net of current
portion............................ 413
Deferred income taxes................ 788
-------------
Total liabilities.......... 12,308
-------------
Commitments and contingencies
Redemption value of 36,533 shares of
common stock $1.00 par value
subject to mandatory redemption.... 4,201
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
Additional paid-in capital...... 1,104
Retained earnings............... 5,743
Less: treasury stock, at cost... (1,161)
-------------
Total stockholders' equity...... 5,749
-------------
Total liabilities and
stockholders' equity...... $22,258
=============
The accompanying notes are an integral part of these financial statements.
F-130
<PAGE>
UNI-STEEL, INC.
STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS)
PERIOD FROM
YEAR ENDED OCTOBER 1, 1996
SEPTEMBER 30, THROUGH
1996 JULY 10, 1997
------------- ---------------
Net sales............................ $54,620 $47,891
Operating costs and expenses:
Cost of sales................... 43,192 37,967
Operating and delivery.......... 5,608 5,102
Selling, general and
administrative................ 2,917 2,423
Depreciation and amortization... 542 389
------------- ---------------
Operating income..................... 2,361 2,010
Other (income) expense:
Interest expense................ 575 529
Interest income................. (179) (140)
Other, net...................... (4) --
------------- ---------------
392 389
------------- ---------------
Income before income taxes........... 1,969 1,621
Provision for income taxes........... 741 603
------------- ---------------
Net income........................... $ 1,228 $ 1,018
============= ===============
The accompanying notes are an integral part of these financial statements.
F-131
<PAGE>
UNI-STEEL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ PAID-IN RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
------- ------- ----------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1995.......... 63,467 $ 63 $ 1,432 $ 4,515 $ (969) $ 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 1,104 5,743 (1,161) 5,749
Increase in redemption value of
common stock subject to
mandatory redemption.......... -- -- (398) -- -- (398)
Net income...................... -- -- -- 1,018 -- 1,018
------- ------- ----------- --------- --------- -------------
Balance, July 10, 1997............... 63,467 $ 63 $ 706 $ 6,761 $ (1,161) $ 6,369
======= ======= =========== ========= ========= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-132
<PAGE>
UNI-STEEL, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
PERIOD FROM
YEAR ENDED OCTOBER 1, 1996
SEPTEMBER 30, THROUGH
1996 JULY 10, 1997
------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 1,228 $ 1,018
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities:
Depreciation and
amortization................. 542 389
Deferred income taxes......... (36) (53)
Increases in cash surrender
values of life insurance..... (56) (57)
Changes in operating assets
and liabilities:
Accounts receivable, net... 181 (85)
Inventories................ (1,748) (1,993)
Prepaid expenses and other
assets................. (4) (3)
Accounts payable and
accrued liabilities.... 233 (190)
Income taxes payable....... (131) (129)
------------- ---------------
Net cash provided by
(used in) operating
activities........... 209 (1,103)
------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment....................... (362) (346)
Principal collected on notes....... 13 12
Investments acquired............... -- (86)
------------- ---------------
Net cash used in
investing
activities........... (349) (420)
------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase on revolving
line-of-credit.................. 800 900
Principal payments on shareholder
debt............................ (95) (36)
Principal payments on long-term
obligations..................... (445) (199)
Principal borrowings on long-term
obligations..................... -- 1,000
Purchase of treasury stock......... (192) --
------------- ---------------
Net cash provided by
financing
activities........... 68 1,665
------------- ---------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (72) 142
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD.......................... 275 203
------------- ---------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD............................. $ 203 $ 345
============= ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for:
Interest........................ $ 568 $ 529
Income taxes.................... 909 702
The accompanying notes are an integral part of these financial statements.
F-133
<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 entered into a merger agreement with Metals
USA, Inc. ("Metals USA") pursuant to which all of Uni-Steel's outstanding
shares of capital stock were 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 (See Note 11).
The financial statements for the period from October 1, 1996 through, July
10, 1997 are presented for purposes of complying with certain reporting
requirements of Regulation S-X of the Securities and Exchange Commission and are
not neccessarily 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 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.
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 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.
F-134
<PAGE>
UNI-STEEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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-135
<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
Automobiles 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
-------------
$ 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. If the lower of FIFO cost or market had been
used for all inventories, their carrying value would have been equal to the LIFO
value of $9,947 at September 30, 1996 and $11,242 at July 10, 1997.
Additionally, net income would have been the same at $1,228 and $1,018 for the
year ended September 30, 1996 and for the period from October 1, 1996 through
July 10, 1997, respectively.
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 were 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. As of July 10, 1997, Uni-Steel had drawn $8,000 against
its $10,000 line of credit.
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-136
<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
=============
At September 30, 1996, future principal payments of long-term debt are as
follows:
1997................................. $ 174
1998................................. 164
1999................................. 158
2000................................. 91
2001 and Thereafter.................. --
---------
$ 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
The components of the provision for income taxes are as follows:
PERIOD FROM
OCTOBER 1, 1996
YEAR ENDED THROUGH
SEPTEMBER 30, 1996 JULY 10, 1997
------------------ ---------------
Current tax expense:
Federal......................... $ 693 $ 581
State........................... 84 75
Deferred tax expense:
Federal......................... (34) (41)
State........................... (2) (12)
-------- ---------------
Total tax provision.................. $ 741 $ 603
======== ===============
F-137
<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 are as follows:
YEAR ENDED
SEPTEMBER 30, 1996
------------------
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:
PERIOD FROM
OCTOBER 1, 1996
YEAR ENDED THROUGH
SEPTEMBER 30, 1996 JULY 10, 1997
------------------ ---------------
Federal income tax expense at the
statutory rate..................... $ 670 $ 551
State income taxes................... 54 42
Meals and entertainment.............. 17 10
------- ---------------
$ 741 $ 603
======= ===============
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 and $246 for the year
ended September 30, 1996, and the period from October 1, 1996 through July 10,
1997, respectively.
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
F-138
<PAGE>
UNI-STEEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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 sheet.
OPERATING LEASES
Uni-Steel leases warehouse space under an operating lease expiring in
October 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
=========
Following is a summary of rental expense under non-cancelable operating
leases:
PERIOD FROM
FOR THE OCTOBER 1, 1996
YEAR ENDED THROUGH
SEPTEMBER 30, 1996 JULY 10, 1997
------------------ ---------------
Minimum rentals...................... $ 24 $ 18
Contingent rentals................... 191 369
------- ---------------
Total........................... $ 215 $ 387
======= ===============
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:
PERIOD FROM
OCTOBER 1, 1996
YEAR ENDED THROUGH
SEPTEMBER 30, 1996 JULY 10, 1997
------------------ ---------------
Sales to related companies........... $ 2,807 $ 2,350
================== ===============
Shipping provided by a related
company (Included in operating and
delivery expenses in the
accompanying statements of
income)............................ $ 1,227 $ 989
================== ===============
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 $ 109
================== ===============
F-139
<PAGE>
UNI-STEEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
11. SUBSEQUENT EVENTS
On July 11, 1997, Metals USA purchased all of the issued and outstanding
equity securites of Uni-Steel, through the issuance of common stock and cash
pursuant to a definitive merger agreement dated May 1997.
Concurrent with the merger, Uni-Steel sold certain real property to an
affiliated party for $630 and entered into an agreement with the affiliate to
lease the 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 agreed to
waive such agreements upon the consumation of the Merger.
During July 1997, subsequent to the merger, $10,116 of Uni-Steel's debt was
repaid with advances from Metals USA.
F-140
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Harvey Titanium, Ltd.
We have audited the accompanying consolidated balance sheet of Harvey
Titanium, Ltd. and Subsidiary as of June 30, 1997 and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Harvey
Titanium, Ltd. and Subsidiary at June 30, 1997 and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
KLEIN, BOGAKOS AND ROBERTSON, CPA'S INC.
Santa Monica, Ca
September 23, 1997
F-141
<PAGE>
HARVEY TITANIUM, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT FOR SHARE AMOUNTS)
JUNE 30, SEPTEMBER 30,
1997 1997
--------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents....... $ 428 $ 584
Accounts receivable:
Trade, less allowance of
$230 at June 30 and
September 30, 1997...... 9,149 12,632
Other...................... 91 75
Inventories..................... 15,203 16,789
Deferred income taxes........... 309 309
Prepaid expenses and other
current assets................. 22 114
--------- -------------
Total current
assets................ 25,202 30,503
Property and equipment, net.......... 1,211 1,230
Other assets......................... 56 56
--------- -------------
Total assets.......... $ 26,469 $31,789
========= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................ $ 10,510 $12,366
Accrued liabilities............. 756 809
Income taxes payable............ 1,275 244
Notes payable -- former
stockholder..................... 400 344
Current portion of long term
debt and capitalized lease
obligation..................... 129 75
--------- -------------
Total current
liabilities........... 13,070 13,838
Long term debt and capitalized lease
obligations........................ 7,286 278
Due to parent........................ -- 10,789
Deferred income taxes................ 855 855
--------- -------------
Total liabilities..... 21,211 25,760
Shareholders' equity:
Common stock, no par value,
7,500 shares authorized, 489
shares issued and outstanding
at June 30 and September 30,
1997 5 5
Retained earnings............... 5,253 6,024
--------- -------------
Total stockholders' equity...... 5,258 6,029
--------- -------------
Total liabilities and
stockholders' equity......... $ 26,469 $31,789
========= =============
The accompanying notes are an integral part of these financial statements.
F-142
<PAGE>
HARVEY TITANIUM, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
JUNE 30, --------------------
1997 1996 1997
----------- --------- ---------
(UNAUDITED)
Net Sales............................ $52,630 $ 11,678 $ 15,561
Costs and expenses:
Cost of sales................... 41,121 8,861 12,273
Operating and delivery.......... 2,228 491 594
Selling, general, and
administrative expenses......... 4,226 706 1,004
Depreciation and amortization... 200 50 47
----------- --------- ---------
Operating income........... 4,855 1,570 1,643
Other expense:
Interest expense................ 669 142 283
Loss on abandonment of assets... 60 -- --
----------- --------- ---------
729 142 283
----------- --------- ---------
Income before taxes.................. 4,126 1,428 1,360
Provision for income taxes........... 1,691 586 589
----------- --------- ---------
Net income........................... $ 2,435 $ 842 $ 771
=========== ========= =========
The accompanying notes are an integral part of these financial statements.
F-143
<PAGE>
HARVEY TITANIUM, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ --------- -------------
<S> <C> <C> <C> <C>
Balance, July 1, 1996................... 489 $ 5 $ 2,818 $ 2,823
Net income......................... -- -- 2,435 2,435
------ ------ --------- -------------
Balance, June 30, 1997.................. 489 5 5,253 5,258
Net income (unaudited)............. -- -- 771 771
------ ------ --------- -------------
Balance, September 30, 1997
(unaudited)........................... 489 $ 5 $ 6,024 $ 6,029
====== ====== ========= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-144
<PAGE>
HARVEY TITANIUM, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
JUNE 30, --------------------
1997 1996 1997
---------- --------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................. $ 2,435 $ 842 $ 771
Adjustments to reconcile net income to
net cash used by operating activities:
Depreciation and amortization...... 200 50 50
Loss on abandonment of assets...... 60 -- --
Deferred income taxes.............. 52 -- --
Changes in operating assets and
liabilities:
Accounts receivable, net...... (756) 1,838 (3,467)
Inventories................... (7,087) (439) (1,586)
Prepaid expenses and other
assets..................... 14 2 (92)
Other long term assets........ (9) -- --
Accounts payable.............. 3,067 (1,835) 1,856
Accrued liabilities........... 373 19 53
Deferred revenue.............. (25) (25) --
Income taxes payable.......... 715 20 (1,031)
---------- --------- ---------
Net cash provided (used)
in operating
activities............ (961) 472 (3,446)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment........................ (1,073) (69) (69)
---------- --------- ---------
Net cash used in investing
activities................. (1,073) (69) (69)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayment) on
revolving line-of-credit......... 2,450 600 (6,950)
Advances from parent............... -- -- 10,789
Net payments to former
stockholder...................... (129) (99) (56)
Proceeds from capital lease
obligations...................... 301 -- 40
Principal payments on long term
debt............................. (63) (17) (136)
Principal payments on capital lease
obligations...................... (27) (8) (16)
---------- --------- ---------
Net cash provided by
financing
activities............ 2,532 476 3,671
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................... 498 879 156
CASH AND CASH EQUIVALENTS BEGINNING OF
PERIOD................................ (70) (70) 428
---------- --------- ---------
CASH AND CASH EQUIVALENTS END OF
PERIOD................................ $ 428 $ 809 $ 584
========== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest............. $ 636 $ 142 $ 283
Cash paid for income taxes......... 918 564 1,620
The accompanying notes are an integral part of these financial statements
F-145
<PAGE>
HARVEY TITANIUM, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT FOR SHARE AMOUNTS)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Harvey Titanium, Ltd., ("Harvey") a California Corporation, is a
specialty metal service center located in Santa Monica, California, specializing
primarily in the distribution of titanium products. Harvey performs services for
its customers including cutting, extruding, machining and treating of titanium
sheet, plate, ingot and billet. Harvey's customers are composed primarily of
manufacturers of aerospace products. Harvey markets its products principally in
the western part of the United States. Total sales to Europe aggregated
approximately $7,200.
As described in Note 10, on September 26, 1997, Harvey and its sole
stockholder entered into a definitive merger agreement with Metals USA, Inc.
("Metals USA") pursuant to which all of Harvey's outstanding shares of capital
stock were exchanged for cash and shares of Metals USA common stock.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Harvey and
its wholly-owned subsidiary, Harvey Overseas Sales Corporation, an
Interest-Charge Domestic International Sales Corporation (IC-DISC). Total export
sales amounted to $10,700 for the year ended June 30, 1997. All significant
intercompany balances and transactions have been eliminated.
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)
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. Harvey 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; accordingly, it is possible that an unfavorable resolution
of the contingency described in Note 8 could have a material adverse effect on
Harvey's consolidated financial position, results of operation or liquidity.
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 Harvey
at September 30, 1997, and the results of its operations and cash flows for the
three months ended September 30, 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.
INCOME TAXES
Harvey accounts for income taxes in accordance with Statement 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, commission payments to an IC-DISC and different inventory
capitalization methods. Valuation allowances
F-146
<PAGE>
HARVEY TITANIUM, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue is generally recognized on the sale of goods when the goods are
shipped, all significant contractual obligations have been satisfied, and the
collection of the resulting receivable is reasonably assured.
INVENTORIES
Inventories are stated at the lower of cost of market with cost determined
primarily using the " last-in, first-out" ("LIFO") method, which is not in
excess of market. If the first-in, first-out (FIFO) method of inventory
valuation had been used, inventory would have been $1,328 higher, and income,
before income taxes, would have been $2,651 for the year ended June 30, 1997.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject Harvey to concentrations
of credit risk, consist principally of cash deposits and trade accounts
receivable. Harvey places its temporary cash investments with credit-worthy
financial institutions and periodically evaluates the credit ratings of such
institutions to mitigate risk. Concentrations of credit risk with respect to
trade accounts receivable result from Harvey having one customer, a large
aerospace company, that accounted for approximately 20% of the accounts
receivable at June 30, 1997. For the year ended June 30, 1997, the same customer
accounted for approximately 30% of 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. Harvey periodically
reviews the credit history of its customers and generally does not require
collateral for the extension of credit.
DEPRECIATION AND AMORTIZATION
Property and equipment is stated at cost, net of accumulated depreciation.
Depreciation is computed on the declining balance method over the estimated
lives of the assets. Amortization of leasehold improvements over their estimated
useful life, regardless of the lease term, is determined on the straight line
method. Expenditures for maintenance and repairs are charged to expense as
incurred.
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. Harvey adopted SFAS No. 121 on July 1, 1996.
F-147
<PAGE>
HARVEY TITANIUM, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1997 consists of the following:
ESTIMATED
USEFUL LIVES
--------------
Machinery and equipment.............. 5-7 years $ 1,184
Auto and trucks...................... 5 years 19
Furniture............................ 5 years 691
Leasehold Improvements............... 7-15 years 357
---------
2,251
Less: accumulated depreciation....... (1,040)
---------
Total property and
equipment, net............. $ 1,211
=========
3. LONG TERM DEBT
Long-term debt at June 30, 1997 consists of the following:
Revolving line of credit.............................. $ 6,950
Loan payable to a lending institution, secured by
equipment and payable in monthly installments of $5,
plus interest at a fixed rate of 8.83%, with the
final payment due in July, 1999..................... 135
---------
7,085
Less: current portion................................. 63
---------
$ 7,022
=========
Harvey has a revolving line of credit agreement with the Bank of
California, effective March 21, 1995, modified on various occasions and restated
in its entirety on February 4, 1997, which provides for borrowings of up to
$7,500 with interest charged monthly at.875% in excess of the bank's prime
lending rate (8.50% at June 30, 1997) and matures January 29, 1998. This line is
secured by substantially all of the assets of Harvey and is personally
guaranteed by the Company's stockholder.
In addition, the credit agreement limits advances pursuant to a "borrowing
base" calculation based upon receivables and inventory and contains restrictive
covenants, which among other things, require Harvey to maintain certain levels
of working capital, net worth, profitability and financial leverage ratios.
Additional restrictions limit new indebtedness, purchase and sale of assets,
investments, mergers and acquisitions and dividend payments. Borrowings of
$6,950 were outstanding at June 30, 1997.
On August 28, 1997 Harvey modified its existing revolving line-of-credit
agreement with Bank of California to provide for increased available borrowings
of up to $13,000 and to extend the maturity date to August 30, 1998. This debt
is classified as noncurrent as a result of this extension.
F-148
<PAGE>
HARVEY TITANIUM, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. OBLIGATIONS UNDER CAPITAL LEASE
Harvey leases certain shop and office equipment under non-cancelable
capital leases through March, 2002, which bear interest at rates ranging from
9.0% to 14.84%.
Future minimum lease payments under capital leases as of June 30, 1997 are
as follows:
YEAR ENDED JUNE 30,
- ----------------------------------------
1998............................... $ 97
1999............................... 97
2000............................... 90
2001............................... 74
2002............................... 53
---------
Total future minimum lease
payments.......................... 411
Less: deferred interest............ 81
---------
Capital lease obligation........... 330
Less: current portion, net of
deferred interest................. 66
---------
$ 264
=========
The cost of equipment under capital leases and accumulated amortization
amounted to approximately $362 and $72 , respectively, at June 30, 1997.
5. INCOME TAXES
Income tax expense for the year ended June 30, 1997 is comprised of the
following:
Federal:
Current............................ $ 1,232
Deferred........................... 67
---------
1,299
State:
Current............................ 407
Deferred........................... (15)
---------
392
---------
Total tax provision..................... $ 1,691
=========
F-149
<PAGE>
HARVEY TITANIUM, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The significant items giving rise to the deferred tax (assets) and
liabilities as of June 30, 1997 are as follows:
Deferred tax liabilities:
Bases differences in property and
equipment......................... $ 15
Investment in partnership.......... 97
IC-DISC commission................. 743
---------
Total deferred tax
liabilities................. 855
Deferred tax assets:
Allowance for doubtful accounts.... (100)
Inventory bases differences........ (78)
California franchise tax........... (131)
---------
Total deferred tax assets..... (309)
---------
Net deferred tax liabilities............ $ 546
=========
The provision for income taxes differs from an amount computed at the
statutory rates as follows:
U.S. Federal statutory rate............. 34.0%
State income taxes, net of Federal tax
benefit............................... 6.1%
Other................................... 0.9%
---------
41.0%
=========
6. EMPLOYEE BENEFIT PLANS
Effective June 1, 1997, Harvey adopted a profit sharing 401(k) plan with a
Section 125 component. The plan allows for employee contributions through salary
reductions of up to 15% of total compensation. Harvey contributes an amount
equal to 50% of participant 401(K) contributions, up to a maximum of 3% of their
salaries. Employer contributions vest at the rate of 20% per year starting with
the completion of the second year of employment Participants are entitled, upon
termination, death, or retirement, to their respective portion of retirement
fund assets. The Section 125 component allows employees to use pre-tax
compensation to pay for dependent care and certain medical costs. Harvey's
employer contribution for the year ended June 30, 1997 amounted to $2.
7. LEASE COMMITMENTS
Harvey has leased office and warehouse facilities and transportation
equipment under various non-cancelable long term agreements, which have initial
or remaining non-cancelable terms in excess of one year as of June 30, 1997.
Total rent expense related to such leases aggregated $591 for the year ended
June 30, 1997.
The current office/warehouse lease, effective December 1, 1996, expires in
November, 2001, and is renewable at the option of Harvey for an additional five
years. This lease is a net lease which requires that Harvey pay all executory
expenses such as real estate taxes, insurance, common area and other operating
costs. Harvey also leases office space in London, England for its international
sales office under a lease that expires in October, 1997.
Future minimum rental commitments for fiscal years ending after June 30,
1997, under the leases described above, net of sub-lease income, are as follows:
1998 -- $567; 1999 -- $551; 2000 -- $516; 2001 -- $485; 2002 -- $182.
F-150
<PAGE>
HARVEY TITANIUM, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. CONTINGENCY
Harvey has been notified that it is a party to a product liability claim
(for which it has no product liability insurance) relating to the sale of parts
that allegedly did not comply with certain contract specifications. Harvey and
other parties have entered into a tolling agreement, which effectively delays
the statute of limitations with respect to any potential legal action that may
arise from this matter. Discussions between the parties are in their early
stages with respect to the product liability claim. This matter is subject to
significant uncertainties and, accordingly, it is presently impossible to make a
reasonable estimate of the amount or range of amounts of any monetary liability
that could result from this uncertainty.
9. RELATED PARTY TRANSACTIONS
On June 28, 1996, the stockholder loaned Harvey $595 in the form of a
subordinated note payable. An additional loan of $452 was made by the
stockholder to Harvey on June 30, 1997. Both loans are unsecured, allow for
prepayment of principal and bear interest at a rate of 8% per annum, payable
semiannually. After reductions for principal repayments made at various times
during the year and reclassification of certain personal expenditures at year
end in connection with the annual financial audit, the remaining outstanding
balance was $400 at June 30, 1997. Interest paid to the stockholder during the
year amounted to $25.
Prior to December 1, 1996, Harvey leased its old office and warehouse
facilities from its sole stockholder under a total of two leases. In connection
with the lease of the current office/warehouse facility, the old leases were
terminated in November, 1996.
10. SUBSEQUENT EVENTS -- (UNAUDITED)
On September 26, 1997, Harvey and its sole stockholder entered into a
definitive agreement with a wholly-owned subsidiary of Metals USA, which among
other things, calls for the merger of Harvey with the Metals USA subsidiary.
Subsequent to the merger, (i) Harvey repaid the estimated remaining balance
on the stockholder note and, (ii) the outstanding balances on the revolving line
of credit facility and the long term debt owed to Bank of California totaling
$10,789 were paid by Metals USA.
F-151
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Boards of Directors of
Independent Metals Co., Inc.:
We have audited the accompanying consolidated balance sheets of Independent
Metals Co., Inc. (a Wisconsin corporation) and subsidiary as of December 31,
1997 and 1996, and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the years then ended. These
financial statements are the responsibility of the Companies' 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.
As discussed in Note 9 to the financial statements, on January 7, 1998, the
shareholders sold all of their stock in the Company.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Independent Metals
Co., Inc. and subsidiary as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
January 23, 1998.
F-152
<PAGE>
INDEPENDENT METALS CO., INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
(IN THOUSANDS OF DOLLARS, EXCEPT FOR SHARE AMOUNTS)
1997 1996
--------- ---------
ASSETS
CURRENT ASSETS:
Cash............................ $ 12 $ 12
Accounts receivable -- net of
allowance of $100 and $86,
respectively................... 9,204 8,898
Inventories..................... 14,766 15,417
Other current assets............ 325 290
--------- ---------
Total current assets....... 24,307 24,617
PROPERTY AND EQUIPMENT, net.......... 3,918 4,525
GOODWILL, net of accumulated
amortization of $62 and $32,
respectively....................... 396 427
OTHER ASSETS, net of accumulated
amortization of $218 and $236,
respectively....................... 226 331
--------- ---------
Total assets............... $ 28,847 $ 29,900
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term
debt........................... $ 439 $ 608
Accounts payable................ 12,071 12,661
Accrued liabilities............. 1,008 983
Current portion of capital
lease.......................... 93 103
--------- ---------
Total current
liabilities.............. 13,611 14,355
LONG-TERM DEBT, less current
portion............................ 16,572 14,587
OTHER LONG-TERM LIABILITIES.......... -- 93
--------- ---------
Total liabilities.......... 30,183 29,035
--------- ---------
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $1.00 par value,
56,000
shares authorized, 760 shares
issued......................... 1 1
Additional paid-in capital...... 75 75
Retained earnings (deficit)..... (1,060) 1,141
Less -- Treasury stock, at cost,
90 shares...................... (352) (352)
--------- ---------
Total shareholders' equity
(deficit)................ (1,336) 865
--------- ---------
Total liabilities and
shareholders' equity
(deficit)................ $ 28,847 $ 29,900
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-153
<PAGE>
INDEPENDENT METALS CO., INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS OF DOLLARS)
1997 1996
--------- ---------
NET SALES............................ $ 94,471 $ 94,271
OPERATING COST AND EXPENSES:
Cost of sales................... 78,479 77,917
Operating and delivery.......... 7,297 7,218
Selling, general and
administrative................. 5,056 4,399
Depreciation and amortization... 1,108 1,052
--------- ---------
Operating income........... 2,531 3,685
OTHER (INCOME) EXPENSE:
Interest expense................ 1,451 1,645
Other, net...................... 4 (31)
--------- ---------
Net income................. $ 1,076 $ 2,071
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-154
<PAGE>
INDEPENDENT METALS CO., INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS OF DOLLARS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK RETAINED TREASURY STOCK SHAREHOLDERS'
---------------- PAID-IN EARNINGS ------------------ EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) SHARES COST (DEFICIT)
------ ------ -------- --------- ------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995........... 760 $ 1 $ 75 $ (930) 90 $ (352) $(1,206)
Net income...................... -- -- -- 2,071 -- -- 2,071
------ ------ --- --------- ------ --------- -------------
BALANCE, December 31, 1996........... 760 1 75 1,141 90 (352) 865
Net income...................... -- -- -- 1,076 -- -- 1,076
Distributions to shareholders... -- -- -- (3,277) -- -- (3,277)
------ ------ --- --------- ------ --------- -------------
BALANCE, December 31, 1997........... 760 $ 1 $ 75 $(1,060) 90 $ (352) $(1,336)
====== ====== === ========= ====== ========= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-155
<PAGE>
INDEPENDENT METALS CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS OF DOLLARS)
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................... $ 1,076 $ 2,071
Adjustments to reconcile net
income to net cash provided by
operating activities --
Depreciation and
amortization............. 1,108 1,052
Gain on property and
equipment transactions... -- (2)
Changes in operating assets
and liabilities --
Accounts receivable... (306) 2,679
Inventories........... 651 (478)
Other assets.......... (35) (157)
Accounts payable...... (590) 3,805
Accrued liabilities... 125 (407)
--------- ---------
Total
adjustments.... 953 6,492
--------- ---------
Net cash
provided by
operating
activities..... 2,029 8,563
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets.... 21 3
Purchases of property and
equipment...................... (386) (618)
Purchase of businesses, net of
acquired cash.................. -- (641)
--------- ---------
Net cash used in
investing
activities..... (365) (1,256)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (payments) on line of
credit, net.................... 2,599 (7,531)
Payments on long-term debt and
capitalized lease
obligations.................... (886) (771)
Proceeds from issuance of
long-term debt................. -- 1,048
Payments of noncompete
obligations.................... (100) (53)
Distributions to shareholders... (3,277) --
--------- ---------
Net cash used in
financing
activities..... (1,664) (7,307)
--------- ---------
NET CHANGE IN CASH................... -- --
CASH, beginning of period............ 12 12
--------- ---------
CASH, end of period.................. $ 12 $ 12
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-156
<PAGE>
INDEPENDENT METALS CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS OF DOLLARS)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Independent
Metals Co., Inc. and its wholly owned subsidiary, which are collectively
referred to as "Independent." All significant intercompany transactions have
been eliminated. Independent is a flat rolled processor of carbon steel,
stainless steel and specialty metal, including copper, brass, and aluminum, with
operations in Germantown, Wisconsin; Broadview, Illinois; New Hope, Minnesota
and Orlando, Florida. Principal customers include: consumer durable goods
manufacturers, food equipment manufacturers, metal stamping, and electronic
manufacturers. Independent's market areas are concentrated in the midwestern
United States and Florida.
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 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 reported
periods. Actual results could differ from those estimates.
RECLASSIFICATIONS
The fiscal 1996 financial statements have been reclassified to conform to
the fiscal 1997 financial statement presentation.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories are valued at the lower of last-in, first-out (LIFO) cost or
market.
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.
GOODWILL
On February 1, 1996, Independent purchased the assets of Jenks Metals, Inc.
("Jenks") for approximately $1,043. The excess of the purchase price over the
fair value of the identifiable assets acquired (approximately $328) was recorded
as goodwill. After giving effect to the amortization of goodwill for the month
of January 1996, on a pro forma basis the results of operations for Independent
did not differ in any material respect from the actual results reported for the
year ended December 31, 1996.
Goodwill is amortized on a straight-line basis over fifteen years. Other
assets consist primarily of start-up costs related to the acquisition that are
being amortized on a straight-line basis over five years.
OTHER ASSETS
Deferred loan costs associated with borrowings related to the Industrial
Development Revenue Bonds and notes payable to the bank are deferred and
amortized on a straight-line basis over the life of the loans. As of December
31, 1997, Independent has paid off all Industrial Development Revenue Bonds.
F-157
<PAGE>
INDEPENDENT METALS CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS)
Noncompete agreements associated with the purchase of Jenks, which totaled
$200 as of February 1, 1996, are amortized on a straight-line basis over the
terms of the agreements. The term of the agreements range from four to five
years through 2001.
The liability associated with the noncompete agreement is payable over a
two year period with the last payment due in February 1998.
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 Independent 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 Independent to
concentrations of credit risk, consist principally of cash deposits and trade
account receivables. Independent 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.
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. Independent periodically
reviews the credit history of its customers and generally does not require
collateral for the extension of credit.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Approximate cash paid for:
1997 1996
--------- ---------
Interest............................. $ 1,463 $ 1,706
========= =========
A noncompete obligation of $200 was incurred in connection with the
purchase of Jenks in February, 1996.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------
(YEARS) 1997 1996
------------- --------- ---------
Land................................. -- $ 118 $ 118
Building and improvements............ 30 2,181 2,208
Machinery and equipment.............. 3-15 7,422 7,073
Automobiles and trucks............... 4-6 688 674
--------- ---------
10,409 10,073
Less -- Accumulated depreciation..... 6,491 5,548
--------- ---------
$ 3,918 $ 4,525
========= =========
F-158
<PAGE>
INDEPENDENT METALS CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS)
3. INVENTORIES
The following summarizes the effect on inventories had Independent used the
first-in, first-out ("FIFO") cost method of inventory valuation at December
31:
1997 1996
--------- ---------
Inventories at FIFO cost............. $ 16,698 $ 16,695
Less -- LIFO reserve................. (1,932) (1,278)
--------- ---------
Total........................... $ 14,766 $ 15,417
========= =========
Inventories for financial reporting purposes exceed inventories for income
tax purposes by $1,241 at December 31, 1997.
4. LONG-TERM DEBT AND NOTES PAYABLE
Independent had a Loan and Security Agreement with a bank that covered a
term loan and a revolving line of credit. The agreement was secured by
substantially all business assets.
Independent had $15,788 outstanding under the revolving line of credit
agreement that included an amount of $635 of outstanding checks, net of deposits
in transit, at December 31, 1997. Borrowings under the line of credit carried
interest at an adjustable rate based upon prime (8.5% at December 31, 1997) or
the London Interbank Offered rate (5.78% at December 31, 1997) based upon levels
of net earnings as defined in the agreement. The average interest rate at
December 31, 1997 was 8.4%. Aggregate outstanding borrowings under this
agreement could not exceed the lesser of $18,000 or a percentage of eligible
receivables and of eligible inventories as defined in the agreement. Independent
received additional availability of $1,500 from December 30, 1997 to January 15,
1998.
The entire line of credit has been classified as long-term based upon
assumptions by management that the 1998 levels of eligible receivables and
inventories would have been sufficient to maintain this amount of borrowings and
based on Independent's intent not to reduce the amount in 1998, if the sale (see
Note 9) had not occurred.
Long-term debt consists of:
1997 1996
--------- ---------
Revolving line of credit............. $ 15,788 $ 13,189
Industrial Development Revenue
Bonds(a)........................... -- 350
Note payable to bank, due in monthly
installments of $30,729 plus
interest at prime (8.5% at December
31, 1997) plus 1/2% through
February, 2000(b).................. 799 1,168
Note payable, due in monthly
installments of $8,591, including
interest at 8.5% through January,
2003(c)............................ 424 488
--------- ---------
17,011 15,195
Less -- Current portion of long-term
debt............................... 439 608
--------- ---------
$ 16,572 $ 14,587
========= =========
- ------------
(a) In December, 1988, the Village of Germantown, Wisconsin, issued $1,600 of
Industrial Development Revenue Bonds. The proceeds were loaned to
Independent and were used to expand the building and to purchase equipment.
The principal payments reflect the maturity dates of the bonds and are due
in annual installments of $175 through 1998. The loans bear interest,
payable quarterly, ranging from 7.5% to 7.7%. The bonds were paid in full in
1997.
F-159
<PAGE>
INDEPENDENT METALS CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS)
(b) As part of the Jenks acquisition (Note 1), Independent amended its note
payable to bank. An additional $500 was added to the note in February 1996,
to fund the acquisition.
(c) The note payable had an adjustable interest rate. The rate was set annually
at the lesser of prime as of February 1 of each year or 10%. The note was
secured by substantially all business assets located in Florida and was
subordinate to the bank's security interest.
Fixed maturities of long-term debt are as follows:
1998................................. $ 439
1999................................. 16,233
2000................................. 144
2001................................. 90
2002................................. 97
Thereafter........................... 8
---------
$ 17,011
=========
The revolving line of credit and note payable to bank were paid in full
subsequent to year end as part of the sale (see Note 9).
5. INCOME TAXES
The shareholders of Independent have elected to be treated as an "S
Corporation" under the Internal Revenue Code. As an S Corporation,
Independent's taxable income or loss is includable in the individual tax returns
of its shareholders for federal and state income tax purposes.
In the event that the S Corporation election is terminated, the net
deferred income tax liability would be reflected in Independent's financial
statements.
Independent Metals Co., Inc.'s wholly owned subsidiary is organized as a
Limited Liability Corporation ("LLC"). Under the Internal Revenue Code an LLC
is treated in a manner similar to a partnership. As an LLC, the subsidiary's
taxable income or loss is includable in the tax return of Independent.
6. EMPLOYEE BENEFIT PLAN
Independent sponsors the INMETCO Savings and Profit Sharing Plan (the
"Plan"), which covers substantially all employees. The Plan offers a 401(k)
tax deferral option to employees of Independent. Contributions to the Plan can
be made by employees up to a defined percentage of their compensation.
Independent matches twenty percent of employee contributions up to six percent
of the employee's compensation. Independent may, at its discretion, make
additional contributions to the Plan. The total amount charged to operations for
the Plan was $58 and $47 for 1997 and 1996, respectively.
7. LEASES
Leased property under capital leases consists of the following:
Trucks, computer and peripheral
equipment and telephone............ $ 688
Less -- Accumulated amortization..... 598
---------
$ 90
=========
F-160
<PAGE>
INDEPENDENT METALS CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS)
Future minimum lease payments at December 31, 1997, under leases that have
noncancellable terms, are as follows:
CAPITAL OPERATING
LEASES LEASES
-------- ----------
1998.................. $ 99 $ 244
1999.................. -- 243
2000.................. -- 196
2001.................. -- 44
2002.................. -- 22
Thereafter............ -- --
-------- ----------
99 $ 749
==========
Less -- Amount representing
interest........................... 6
--------
Less -- Amounts due within one
year............................... 93
--------
$--
========
Total rent expense under operating leases was approximately $514 and $489
in 1997 and 1996, respectively.
8. STOCK PURCHASE AGREEMENTS
Independent has an agreement to repurchase at the option of the
shareholders / employees all of its common stock upon their death or termination
of employment due to disability. In addition, upon termination of a
shareholder / employee for reasons other than disability or death, Independent
has the option to purchase all the common stock held by the
shareholder / employee. The purchase price is based upon a formula.
In addition, should a shareholder/employee receive an offer to buy their
stock from a third-party, Independent has the right of first refusal to purchase
the stock at the third-party offer price.
9. SUBSEQUENT EVENT
On January 7, 1998, the shareholders sold all of their stock in Independent
to Metals USA, Inc.
F-161
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Pacific Metal Company
Portland, Oregon
We have audited the accompanying consolidated balance sheets of Pacific
Metal Company and Subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pacific
Metal Company and Subsidiary as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
As described in Note 14 to the financial statements, the Company has
restated its financial statements to correct an error in accounting for stock
appreciation rights.
PERKINS & COMPANY, P.C.
Portland, Oregon
February 11, 1998, except for Note 15 as to
which the date is March 3, 1998
F-162
<PAGE>
PACIFIC METAL COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
ASSETS
Current assets:
Cash............................ $ 255 $ --
Trade accounts and notes
receivable, net of allowance of
$185 and $88................... 6,551 7,335
Inventories..................... 11,589 10,634
Refundable income taxes......... 110 124
Prepaid expenses................ 118 148
Deferred income taxes........... 915 1,360
------------ ------------
Total current assets....... 19,538 19,601
Property and equipment, net.......... 5,312 5,344
Other assets......................... 90 56
------------ ------------
Total assets............... $ 24,940 $ 25,001
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line-of-credit........ $ 7,050 $ 5,327
Checks drawn in excess of
deposits....................... 301 95
Current portion of long-term
debt........................... 426 430
Accounts payable................ 5,049 4,921
Accrued liabilities............. 2,294 4,015
------------ ------------
Total current
liabilities............. 15,120 14,788
Long-term debt, net of current
portion............................ 2,971 2,541
Deferred income taxes................ 465 577
Other long-term liabilities.......... 12 --
------------ ------------
Total liabilities.......... 18,568 17,906
Commitments and contingencies........
Stockholders' equity:
Common stock, $1 par value,
500,000 shares authorized,
177,250 shares issued and
outstanding.................... 177 177
Additional paid-in capital...... 269 308
Unearned ESOP compensation...... (264) (209)
Retained earnings............... 6,190 6,819
------------ ------------
Total stockholders'
equity.................. 6,372 7,095
------------ ------------
Total liabilities and
stockholders' equity.... $ 24,940 $ 25,001
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-163
<PAGE>
PACIFIC METAL COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS)
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
Net sales............................ $ 84,261 $ 85,920
Operating costs and expenses:
Costs of sales.................. 65,236 66,605
Operating and delivery.......... 6,333 6,465
Selling, general and
administrative................. 8,870 10,367
Depreciation and amortization... 710 812
------------ ------------
Operating income..................... 3,112 1,671
Other (income) expense:
Interest expense................ 843 679
Other, net...................... (336) (274)
------------ ------------
507 405
------------ ------------
Income before income taxes........... 2,605 1,266
Provision for income taxes........... 1,008 464
------------ ------------
Net income........................... $ 1,597 $ 802
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-164
<PAGE>
PACIFIC METAL COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNEARNED TOTAL
------------------ PAID-IN ESOP RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS EQUITY
------- ------- ----------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, as previously reported at
December 31, 1995.................. 174,900 $ 175 $ 169 $ (538) $ 5,411 $ 5,217
Prior-period
adjustments -- error in
accounting for stock
appreciation rights........... -- -- -- -- (646) (646)
------- ------- ----------- ------------- --------- -------------
BALANCE, as restated at December 31,
1995............................... 174,900 175 169 (538) 4,765 4,571
Stock options exercised......... 2,350 2 83 -- -- 85
Increase in average fair value
of ESOT shares allocated...... -- -- 17 -- -- 17
Dividends declared.............. -- -- -- -- (177) (177)
Dividends on unallocated ESOT
shares expensed............... -- -- -- -- 5 5
Payments made toward principal
of ESOT obligation............ -- -- -- 274 -- 274
Net income...................... -- -- -- -- 1,597 1,597
------- ------- ----------- ------------- --------- -------------
BALANCE, December 31, 1996........... 177,250 177 269 (264) 6,190 6,372
Increase in average fair value
of ESOT shares allocated...... -- -- 39 -- -- 39
Dividends declared.............. -- -- -- -- (177) (177)
Dividends on unallocated ESOT
shares expensed............... -- -- -- -- 4 4
Payments made toward principal
of ESOT obligation............ -- -- -- 55 -- 55
Net income...................... -- -- -- -- 802 802
------- ------- ----------- ------------- --------- -------------
BALANCE, December 31, 1997........... 177,250 $ 177 $ 308 $ (209) $ 6,819 $ 7,095
======= ======= =========== ============= ========= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-165
<PAGE>
PACIFIC METAL COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 1,597 $ 802
Adjustments to reconcile net income
to net cash provided in operating
activities:
Provision for bad debts......... 174 47
Depreciation and amortization... 710 812
(Gain) loss on sale of
equipment....................... (98) 8
Deferred income taxes........... 37 (332)
Dividends accrued on unallocated
ESOT shares..................... 5 4
Increase in average value of
ESOT shares allocated........... 17 39
Deferred compensation........... (11) (12)
Changes in operating assets and
liabilities:
Trade accounts and notes
receivable.................... 296 (832)
Refundable income taxes....... (22) (14)
Inventories................... 1,349 955
Prepaid expenses.............. 43 (30)
Accounts payable.............. 323 (128)
Accrued liabilities........... 226 1,721
------------ ------------
Net cash provided by
operating
activities........ 4,646 3,040
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment......................... 141 23
Purchase of property and
equipment......................... (1,491) (875)
Other assets....................... (38) 34
------------ ------------
Net cash used in
investing
activities........ (1,388) (818)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of revolving
line-of-credit, net............... (2,825) (1,723)
Net change in checks drawn in
excess of deposits................ (553) (205)
Borrowings on long-term notes...... 553 --
Repayment of long-term notes....... (196) (350)
Payment of lease obligations....... (20) (22)
Proceeds from stock options
exercised......................... 85 --
Dividends paid..................... (87) (177)
------------ ------------
Net cash used in
financing
activities........ (3,043) (2,477)
------------ ------------
NET INCREASE (DECREASE) IN CASH...... 215 (255)
CASH, beginning of period............ 40 255
------------ ------------
CASH, end of period.................. $ 255 $ --
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for --
Interest........................ $ 865 $ 673
Income taxes.................... 993 810
Noncash activities --
Reduction in unearned ESOP
compensation.................... 274 55
Dividends declared.............. 177 177
The accompanying notes are an integral part of these consolidated financial
statements.
F-166
<PAGE>
PACIFIC METAL COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Pacific Metal
Company and its wholly owned subidiary PMCC, Inc., dba Pacific Metal, which are
collectively referred to as "Pacific Metal." All material intercompany
balances and transactions have been eliminated in consolidation. Pacific Metal
operates metal service centers distributing principally flat rolled, common
alloy aluminum and steel from seven branch locations in Oregon, Washington,
Idaho, Montana and California. The products are used predominately in
construction, precision fabrication and in the manufacturing of trucks and
trailers, consumer durables, and machinery and equipment. As a distributor,
Pacific Metal has the ability to select from many alternate sources of supply
for its products.
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 the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of net sales and expenses during the
reporting period. Actual results could differ from those estimates.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES -- Inventories are stated at the lower of cost or market using
principally the last-in, first-out ("LIFO") method.
PROPERTY AND EQUIPMENT -- Property and equipment is stated at cost less
accumulated depreciation and amortization. For financial reporting purposes, the
costs of property and equipment are depreciated over the estimated useful lives
of the assets using the declining-balance and straight-line methods. Capital
leases are amortized over the lease term.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying amount of notes
receivable approximates fair value at the applicable balance sheet dates. The
fair value of the notes was based on expected cash flows discounted using
current rates at which similar loans would be made to borrowers with similar
credit ratings. The carrying amount of the revolving line-of-credit and
long-term debt approximate fair value at the applicable balance sheet dates. The
fair value of the line-of-credit and long-term debt are estimated based on
interest rates for the same or similar debt offered to Pacific Metal having the
same or similar maturities and collateral requirements.
CONCENTRATIONS OF CREDIT RISK -- Financial instruments, which potentially
subject Pacific Metal to concentrations of credit risk, consist principally of
cash deposits, trade accounts and notes receivable. Pacific Metal places its
cash principally with one large financial institution with balances in excess of
Federal Deposit Insurance Corporation limits. Concentrations of credit risk with
respect to trade accounts are within the machinists and fabricators,
industrial/commercial contractors and transportation equipment manufacturers
industries. Generally, 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. Pacific Metal periodically reviews
the credit history of its customers and generally does not require collateral
for the extension of credit.
INCOME TAXES -- Pacific Metal accounts for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, ACCOUNTING FOR
INCOME TAXES. Under SFAS No. 109, deferred income taxes are recognized for the
future tax consequences of differences between tax bases of assets and
liabilities and their financial reporting amounts based on enacted tax laws and
statutory tax rates applicable
F-167
<PAGE>
PACIFIC METAL COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
to the periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense represents the
amount of taxes payable and the applicable changes in deferred tax assets and
liabilities.
ADVERTISING COSTS -- Pacific Metal expenses advertising costs as incurred.
RECENT ACCOUNTING PRONOUNCEMENTS -- The Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF 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. Pacific Metal adopted SFAS 121 on January 1,
1996. The impact of adopting this standard did not have a material impact on the
results of operations.
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"). Pacific Metal has elected to follow APB No. 25 in accounting
for its employee stock options. Under APB No. 25, no compensation expense is
recognized when the exercise price of options equals the fair market value of
the stock on the date of grant.
2. INVENTORIES
Inventories consist of the following:
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
Aluminum products.................... $ 8,437 $ 8,338
Cargon plates and sheets............. 6,167 5,618
Carbon tubular products.............. 99 24
Rolled finished bars/shapes.......... 210 2
Stainless steel products............. 319 277
Other................................ 745 808
Less -- LIFO reserve................. (4,388) (4,433)
------------ ------------
Total........................... $ 11,589 $ 10,634
============ ============
The replacement cost of Pacific Metal's inventory exceeds the historical
cost of the inventory, computed using LIFO the method of valuation, as reported
in the accompanying financial statements. If the average cost method had been
used for all inventories, the carrying value would have been $15,977 and $15,067
at December 31, 1996 and December 31, 1997, respectively. Additionally, net
income would have been $955 and $829 for the years ended December 31, 1996 and
December 31, 1997, respectively.
F-168
<PAGE>
PACIFIC METAL COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
Land................................. $ 353 $ 353
Buildings and improvements........... 3,272 3,731
Machinery and equipment.............. 7,321 7,555
Automobiles and trucks............... 162 193
------------ ------------
11,108 11,832
Less -- Accumulated depreciation and
amortization....................... (5,796) (6,488)
------------ ------------
Total...................... $ 5,312 $ 5,344
============ ============
4. REVOLVING LINE OF CREDIT
Under a loan agreement dated as May 31, 1996, maturing April 30, 1998, and
as subsequently amended, Pacific Metal has a revolving line-of credit of
$10,000. At Pacific Metal's option, funds are borrowed at either the bank's
prime rate or the London Interbank Offered Rate (LIBOR) plus 1.65%. At December
31, 1997, the bank's prime rate was 8.5%, and the LIBOR rate was 6.75%. Pacific
Metal's advances against the line of credit are limited to 80% of its qualified
accounts receivable and the lesser of 50% of its qualified inventory or $6,500.
Under the credit agreement, which includes the term loan (See Note 5),
inventory, accounts receivable and equipment are pledged as collateral. Also,
the agreement contains provisions, among others, requiring the maintenance of
certain levels of working capital, tangible net worth and cash flow.
5. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
Note payable to U.S. Bank through
June 2001 consisting of monthly
principal payments of $25 plus
accrued interest. For the period
June, 1, 1996 to May 31, 2000,
interest is accrued at the Index
rate (8.5%) on the principal
balance of $300. Interest is
accrued at the Fixed Interest Rate
(2.12% over the constant maturity
auction average for One-year U.S.
Treasury Bills (5.66% until June 1,
1998)) on the remaining principal
balance. For the period June 1,
2000 until paid in full, interest
is accrued at the Index rate on the
remaining principal balance (See
Note 4)............................ $1,350 $1,050
Mortgage notes payable to U.S. Bank
through 2003 in monthly
installments of $16, including
interest at 8.25%. Property with a
book value of $926 is subject to
the mortgage....................... 1,739 1,689
Guaranteed ESOP debt due in
decreasing annual installments
through 2002 at an average interst
rate of 7.61% (Note 10)............ 264 209
Capital lease obligation (Note 8).... 44 23
------------ ------------
3,397 2,971
Less current portion................. 426 430
------------ ------------
$2,971 $2,541
============ ============
F-169
<PAGE>
PACIFIC METAL COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
As of December 31, 1997, future maturities of long-term debt for the next
five years, exclusive of capital lease obligations, are as follows:
1998................................. $ 407
1999................................. 412
2000................................. 418
2001................................. 272
2002................................. 78
6. DETAIL OF ACCRUED LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
Accrued salaries and benefits........ $ 701 $1,074
Accrued stock appreciation rights.... 1,380 2,728
Accrued property and sales taxes..... 36 36
Other................................ 177 177
------------ ------------
$2,294 $4,015
============ ============
7. DEFERRED COMPENSATION
Pacific Metal has agreements with three retired management personnel which
provided for their employment until retirement and a monthly payment thereafter
for specified periods of time. All of the agreements provide that if the
employee dies before he has received retirement payments of $50 (except for one
person for whom the payments must exceed $75), his surviving spouse shall
receive the unpaid balance thereof in monthly installments. The estimated
liability under this agreement has been charged to expense over the period of
employment ending with the retirement date of each employee. These agreements
resulted in a charge to income of $22 for each of the years ended December 31,
1996 and 1997.
8. COMMITMENTS
Pacific Metal leases land and buildings under long-term lease agreements
classified as operating leases. The lease for its Portland, Oregon distribution
facilities expires in 2001 with one five-year option for renewal. The lease is
subject to adjustment to fair market value rates, as defined, but not less than
the initial annual rental of $378. Leases for two branch warehouse locations
expire in 1998 and 2001. Pacific Metal also leases automobiles, trucks,
warehouse and office equipment under operating leases expiring through 2002.
Pacific Metal has a capital lease for equipment. The amortization of this
lease had been included in depreciation expense. Cost and accumulated
amortization was $143 and $120, respectively, at December 31, 1996 and $143 and
$143, respectively, at December 31, 1997.
F-170
<PAGE>
PACIFIC METAL COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The following is a schedule, by years, of future minimum lease payments
under leases that have initial or remaining noncancelable lease terms in excess
of one year as of December 31, 1997, and the present value of net minimum lease
payments under the capital lease which is carried as a liability as of December
31, 1997:
OPERATING
CAPITAL LEASE LEASES
------------- ---------
Year ending December 31,
1998................................. $ 23 $ 930
1999................................. -- 879
2000................................. -- 796
2001................................. -- 499
2002................................. -- 109
Thereafter........................... -- 74
------------- ---------
Total minimum payments required...... 23 $ 3,287
=========
Less amount representing interest.... --
-------------
Present value of minimum payments.... $ 23
=============
The total rental expense for all operating leases amounted to approximately
$1,300 and $1,234 for the years ended December 31, 1996 and 1997, respectively.
Pacific Metal, as lessor, leases portions of its distribution facility in
Medford, Oregon. The facility is leased on a noncancelable operating lease. The
lease was renewed July 1997 and expires in June 2000 with total minimum future
rentals of $90 at December 31, 1997.
Pacific Metal's warehouse employees and truck drivers at its Seattle,
Washington branch, comprising approximately 15% of the Company's employees, are
subject to collective bargaining agreements between the Company and the
International Brotherhood of Teamsters. The agreements are negotiated every
three years and were last negotiated on April 30, 1997.
9. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
Federal --
Current......................... $ 823 $ 684
Deferred........................ 47 (294)
------------ ------------
870 390
State --
Current......................... 148 112
Deferred........................ (10) (38)
------------ ------------
138 74
------------ ------------
Total provision....... $1,008 $ 464
============ ============
F-171
<PAGE>
PACIFIC METAL COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The provision for income taxes differs from an amount computed at statutory
rates as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
Federal income tax at statutory
rates.............................. $ 886 $ 430
State income taxes, net of federal
income tax benefit................. 86 41
Nondeductible expenses and other,
net................................ 36 (7)
------------ ------------
$1,008 $ 464
============ ============
The significant items giving rise to the deferred tax assets (liabilities)
are as follows:
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
Deferred tax assets --
Allowance for doubtful
accounts...................... $ 71 $ 34
Uniform capitalization of
inventory..................... 220 194
Deferred compensation........... 9 5
Accrued liabilities............. 616 1,130
Other........................... 7 2
------------ ------------
Total deferred tax
assets............. 923 1,365
------------ ------------
Deferred tax liabilities --
Property and equipment.......... (473) (582)
------------ ------------
Total deferred tax
liabilities........ (473) (582)
------------ ------------
Net deferred tax
assets............. $ 450 $ 783
============ ============
10. EMPLOYEE BENEFIT PLANS
Pacific Metal sponsors a leveraged Employee Stock Ownership Plan ("ESOP")
that covers employees with more than one year of service and whose employment is
not covered by a collective bargaining agreement. An Employee Stock Ownership
Trust ("ESOT") was established in 1984 to fund the ESOP by obtaining financing
to acquire shares of common stock.
In 1994, the ESOT acquired 7,320 shares of common stock for $371 with the
proceeds of a $384 loan from Centennial Bank of Eugene. The loan is payable
through 2001 in monthly installments of $4 plus interest at the bank's prime
rate (8.25% at December 31, 1996) plus .75%. Pacific Metal has guaranteed the
repayment of the loans to the ESOT. Under the guarantee agreement, Pacific Metal
is obligated to make contributions to the ESOT to enable it to make similar
payments against the bank loans and, therefore, the unpaid balance is recorded
as long-term debt. An unearned ESOP compensation amount has been reported as an
offset to stockholder's equity of the same amount.
The ESOT regularly issues notes for shares repurchased from certain former
employees of Pacific Metal. Repurchase notes outstanding as of December 31, 1996
amounted to $3 and were repaid in full during 1997. For 1996, this additional
ESOT obligation has been recorded as long-term debt with stockholders' equity
offset by the same amount.
Pacific Metal's contributions are determined annually by the Board of
Directors, but are not less than the amount necessary to enable the ESOT to make
its regularly scheduled payments of principal and interest due on its term loans
plus an amount sufficient to enable the ESOT to repurchase stock from terminated
F-172
<PAGE>
PACIFIC METAL COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
ESOP participants to the extent not funded by the ESOT. Shares are allocated to
participants ratably over the life of the ESOT loans.
Dividends on allocated shares of the ESOT are paid to participants and are
reported as a reduction of retained earnings. Dividends on unallocated shares
are reported as compensation expense.
Compensation expense for shares acquired prior to January 1, 1994 is
determined based on Pacific Metal's contributions to the ESOT. For shares
acquired after December 31, 1993, Pacific Metal measures compensation expense in
accordance with Statement of Position 93-6 of the Accounting Standards Division
of the American Institute of Certified Public Accountants, which requires
compensation expense to be measured using the fair market value of the shares
when allocated to participants.
Selected financial data pertaining to the ESOT is as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
Contributions........................ $ 595 $ 554
Dividends on unallocated shares
reported as expense................ 5 4
Increase in average fair value of
ESOT shares allocated.............. 17 39
------------ ------------
Total ESOP expense................... $ 617 $ 597
============ ============
Interest expense (included in ESOP
expense above)..................... $ 32 $ 22
============ ============
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
Allocated shares..................... 118,562 119,681
Unallocated shares, accounted for
under SOP 93-6..................... 5,213 4,119
------------ ------------
Total ESOT shares.................... 123,775 123,800
============ ============
Fair value of unallocated ESOT shares
accounted for under
SOP 93-6........................... $ 354 $ 419
Fair value of allocated ESOT shares
subject to repurchase by
the Company........................ $ 8,062 $ 12,184
As of December 31, 1996, the fair value of the ESOT shares subject to
repurchase by Pacific Metal represents the best estimate of the fair value of
Pacific Metal continuing to operate as an independent entity. As a result of the
contemplated merger with Metals USA, Inc., the fair value of the ESOT shares is
based upon the proposed transaction price. If this transaction is not completed,
the ultimate fair value may be different.
Pacific Metal contributed $60 and $64 in 1996 and 1997, respectively, to a
multi-employer pension plan for a portion of its employees covered by a
collective bargaining agreement.
11. STOCK OPTIONS
Pacific Metal's non-qualified stock option plan provides for the issuance
of stock options to key executive employees covering up to 100,000 shares of
Pacific Metal's common stock. Any option granted under the plan may include a
stock appreciation right. A stock appreciation right ("SAR") permits the
optionee to receive cash in an amount equal to the excess of the fair market
value per share of the common stock at the date the right is exercised over the
option price per share of the option exercised.
Options to purchase shares of Pacific Metal's common stock, together with
an equivalent number of SARs, have been granted to four employees, and these
options become exercisable in two installments and
F-173
<PAGE>
PACIFIC METAL COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
expire ten years after the date of grant. The first installment was effective
January 1, 1989 and grants options to purchase 24,970 shares of common stock at
a purchase price of $35 per share. The second installment was effective December
31, 1989 and grants options to purchase 25,000 shares of common stock at a
purchase price of $43 per share.
The number of shares which may be purchased under these options will
automatically be changed to reflect any subsequent stock split, merger,
consolidation, reorganization, recapitalization or other event affecting the
outstanding common stock of Pacific Metal.
Upon exercise of stock options, Pacific Metal receives cash equal to the
number of options exercised multiplied by the per share option price. Common
stock is credited for the par value of the shares issued and additional paid-in
capital is credited for an amount equal to the option price of the shares
issued, less the amount credited to common stock. The difference between any
increase and decrease in the fair market value of the SARs and the option price
is recorded currently in the consolidated statement of income. For 1996, the
fair market value of the SARs represents Pacific Metal's best estimate of the
fair value of Pacific Metal continuing to operate as an independent entity. In
1997, the fair value of the SARs is based upon the proposed transaction price
with Metals USA, Inc. Compensation expense in connection with the SARs amounted
to $381 and $1,348 for the years ended December 31, 1996 and 1997, respectively.
A summary of stock option activity is as follows:
NUMBER OF
SHARES UNDER AVERAGE
OPTION PRICE
------------- --------
Balance at December 31, 1995......... 46,100 $39.29
Exercised in 1996.................... (2,350) $36.19
-------------
Balance at December 31, 1996......... 43,750 $39.45
Exercised in 1997.................... -- --
-------------
Balance at December 31, 1997......... 43,750 $39.45
=============
At December 31, 1996 and 1997 there were 19,400 options and SARs
exercisable at $35 per share and 24,350 options and SARs exercisable at $43 per
share. All of these options are fully vested.
12. RELATED PARTY TRANSACTION
Included in trade accounts and notes receivable at December 31, 1997 is a
note receivable from an officer of Pacific Metal for $250. This note bears
interest at Pacific Metal's line-of-credit rate plus 1% and is due May 12, 1998.
13. EXCHANGE OF LAND AND BUILDING
Pacific Metal constructed a new facility in Eugene, Oregon, which was
completed in 1996. A portion of the new land and building was obtained through
an exchange of the previous facility in Eugene which had a book value of $105
and a fair value of $600. Pacific Metal incurred additional costs of $771 in
1996. The new facility has been recorded in the amount of $876, which represents
the book value of the land and building exchanged, plus the additional costs
incurred in 1996.
F-174
<PAGE>
PACIFIC METAL COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
14. PRIOR PERIOD ADJUSTMENT
The accompanying financial statements for 1996 have been restated to
correct an error in accounting for SARs. Previously, Pacific Metal recognized
compensation expense when the SARs were exercised because Pacific Metal did not
expect a significant number of the related stock options to be exercised. The
financial statements have been restated to accrue compensation expense as the
fair market value of Pacific Metal's stock exceeds the exercise price of the
related options. The effect of the restatement was to decrease net income for
1996 by $205, net of an income tax benefit of $128. Retained earnings at
December 31, 1995 has been adjusted for the effects of the restatement on prior
years.
15. SUBSEQUENT EVENT
Pacific Metal and its stockholders entered into a definitive merger
agreement with Metals USA, Inc. on March 3, 1998, pursuant to which all of
Pacific Metal's outstanding shares of common stock were exchanged for cash and
shares of Metals USA, Inc. common stock. The agreement contemplates that the
transaction will be accounted for using the purchase method.
F-175
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Fullerton Industries, Inc.
We have audited the accompanying consolidated balance sheets of Fullerton
Industries, Inc. and Subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of income, 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Fullerton
Industries, Inc. and Subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
January 23, 1998, except for Note 10,
for which the date is April 17, 1998
Chicago, Illinois
F-176
<PAGE>
FULLERTON INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
--------------------
1997 1996
--------- ---------
ASSETS
Current assets:
Cash............................ $ 2,670 $ 1,885
Accounts receivable, less
allowance for doubtful accounts
of $250........................ 8,851 7,662
Inventories, net................ 8,389 8,627
Other current assets............ 384 454
--------- ---------
Total current assets....... 20,294 18,628
Property plant and equipment, at
cost:
Land............................ 623 623
Building........................ 3,199 3,199
Machinery and equipment......... 8,623 8,412
Furniture and fixtures.......... 556 548
--------- ---------
13,001 12,782
Less: Accumulated depreciation
and amortization............... 9,532 8,944
--------- ---------
Net property, plant and equipment.... 3,469 3,838
--------- ---------
Other assets:
Deposits and other.............. 198 198
Cash value of life insurance,
less policy loans of $121...... 27 30
--------- ---------
Total assets............... $ 23,988 $ 22,694
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
portion........................ $ 200 $ 184
Accounts payable................ 4,156 4,890
Accrued expenses................ 1,239 1,022
Accrued income taxes............ 347 301
--------- ---------
Total current
liabilities............. 5,942 6,397
Long-term obligations, less current
portion............................ 9,678 8,807
Deferred income taxes................ 271 422
Stockholders' equity:
7% noncumulative voting
preferred stock, $10 par
value -- 150,000 shares
authorized, 81,277.89 shares
issued and outstanding......... 813 813
Common stock, $100 par
value -- 15,000 shares
authorized, 6,617.21 shares
issued......................... 662 662
Retained earnings............... 8,504 7,475
--------- ---------
9,979 8,950
Less: Cost of 1,474.94 shares of
common stock in treasury....... 1,882 1,882
--------- ---------
Total stockholders'
equity.................. 8,097 7,068
--------- ---------
Total liabilities and
stockholders' equity.... $ 23,988 $ 22,694
========= =========
See notes to consolidated financial statements.
F-177
<PAGE>
FULLERTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS)
YEAR ENDED DECEMBER 31
----------------------
1997 1996
---------- ----------
Net sales............................ $ 101,007 $ 92,443
Costs and expenses:
Cost of sales................... 83,612 76,508
Operating and delivery.......... 7,905 7,045
Selling, general and
administrative expenses........ 6,386 5,720
Depreciation and amortization... 588 599
---------- ----------
Operating income................ 2,516 2,571
Other expense:
Interest expense................ 714 755
Other income.................... (20) (76)
---------- ----------
Income before income taxes........... 1,822 1,892
Provision for income taxes........... (793) (830)
---------- ----------
Net income........................... $ 1,029 $ 1,062
========== ==========
See notes to consolidated financial statements.
F-178
<PAGE>
FULLERTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
PREFERRED COMMON RETAINED TREASURY
STOCK STOCK EARNINGS STOCK TOTAL
--------- ------- --------- --------- ------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995........... $ 813 $ 662 $ 6,413 $ (1,882) $6,006
Net income...................... -- -- 1,062 -- 1,062
--------- ------- --------- --------- ------
BALANCE, December 31, 1996........... 813 662 7,475 (1,882) 7,068
Net income...................... -- -- 1,029 -- 1,029
--------- ------- --------- --------- ------
BALANCE, December 31, 1997........... $ 813 $ 662 $ 8,504 $ (1,882) $8,097
========= ======= ========= ========= ======
</TABLE>
See notes to consolidated financial statements.
F-179
<PAGE>
FULLERTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
YEAR ENDED DECEMBER
31
--------------------
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................... $ 1,029 $ 1,062
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization... 588 599
Deferred compensation........... 71 60
Loss on sale of land and
equipment...................... -- 4
Deferred income taxes........... (151) (140)
Changes in operating capital:
Accounts receivable............. (1,189) 1,977
Inventories..................... 238 (796)
Other current assets............ 70 228
Accounts payable................ (734) 276
Accrued expenses................ 217 41
Accrued income taxes............ 46 (155)
--------- ---------
Net cash provided by
operating activities.... 185 3,156
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................. (219) (198)
--------- ---------
Net cash used in investing
activities.............. (219) (198)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of long-term obligations..... (184) (186)
Proceeds (repayments) of notes
payable, net....................... 1,000 (2,000)
Change in cash value of life
insurance.......................... 3 (9)
--------- ---------
Net cash provided by (used
in) financing
activities.............. 819 (2,195)
--------- ---------
NET INCREASE IN CASH................. 785 763
CASH, BEGINNING OF YEAR.............. 1,885 1,122
--------- ---------
CASH, END OF YEAR.................... $ 2,670 $ 1,885
========= =========
See notes to consolidated financial statements.
F-180
<PAGE>
FULLERTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Fullerton
Industries, Inc. and its wholly-owned subsidiary Fullerton Metals Co., which are
collectively referred to as "Fullerton." All significiant intercompany
transactions have been eliminated. Fullerton is a flat rolled processor of
carbon steel, stainless steel and specialty metal, including copper, brass, and
aluminum, with operations in Northbrook, Illinois. Principal customers include
consumer durable goods manufacturers and the household appliance and automotive
industries. Fullerton's market areas are concentrated in the midwestern United
States.
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.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories are valued at the lower of cost or market. Fullerton determines
cost based on the LIFO (last in, first out) method.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost. Depreciation is
provided over the estimated useful lives of the respective assets
(building -- 40 years; other property and equipment -- 5 to 12 years) generally
using the straight-line method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the long-term debt is estimated based on interest rates
for debt offered to Fullerton having 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 Fullerton to
concentrations of credit risk, consist principally of cash deposits and, trade
account receivables. Fullerton 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.
Fullerton had a credit risk concentration as one customer accounted for 12.3% of
accounts receivable at December 31, 1997. For the years ended December 31, 1997
and 1996, 11.1%, and 12.8%, respectively, of net sales were to a single
customer. 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. Fullerton periodically
reviews the credit history of its customers and generally does not require
collateral for the extension of credit.
F-181
<PAGE>
FULLERTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS)
2. TRANSACTIONS WITH AFFILIATES
Fullerton leases certain equipment from entities controlled by the
company's principal stockholders under operating leases with month-to-month
terms ($941 and $917 paid in 1997 and 1996, respectively).
Leases with affiliates are generally extended after the expiration of the
initial lease period, and at December 31, 1997, affiliated lessors held $191 of
lease deposits.
3. INVENTORIES
The current cost of inventories if determined by the average cost method
would have been approximately $6,512 and $6,727 greater than that determined by
the LIFO method at December 31, 1997 and 1996, respectively.
4. LONG-TERM OBLIGATIONS AND NOTES PAYABLE TO BANKS
Long-term obligations at December 31 consist of the following:
1997 1996
--------- ---------
Notes payable to banks; interest
ranging from 6.75% to 7.29%........ $ 8,000 $ 7,000
Subordinated notes payable to former
shareholders, payable in monthly
installments (including interest at
8 1/4%) of $26 to November 2004.... 1,543 1,724
Deferred compensation, discounted at
various rates...................... 335 267
--------- ---------
9,878 8,991
Less: Current portion................ 200 184
--------- ---------
$ 9,678 $ 8,807
========= =========
Annual maturities of long-term obligations, excluding notes payable to
banks, are $200 in 1998; $217 in 1999; $235 in 2000; $252 in 2001; $274 in 2002;
and $700 thereafter.
Loan agreements with two banks, as amended, provide for unsecured
borrowings of $10,000 and expire March 31, 1999. During 1996, the company
entered into a three-year interest rate swap agreement (the "Swap") for $3,000
of the loan facility. The Swap, which expires on March 31, 1999, fixes the
interest rate at 7.29%.
As part of the loan agreement and subordinated notes payable to former
shareholders, certain financial covenants are required to be maintained
including limitations on dividends. The subordinated notes are collateralized by
the treasury stock.
Cash payments for interest were $718 and $813 in 1997 and 1996,
respectively.
F-182
<PAGE>
FULLERTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS)
5. INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Significant components of deferred income tax liabilities and assets at
December 31 are as follows:
1997 1996
--------- ---------
Deferred tax liabilities:
Tax over book depreciation...... $ 580 $ 722
--------- ---------
Total deferred tax liabilities....... $ 580 $ 722
========= =========
Deferred tax assets:
Allowance for doubtful
accounts....................... $ 99 $ 114
Deferred compensation........... 132 105
Other -- Net.................... 78 81
--------- ---------
Total deferred tax assets............ $ 309 $ 300
========= =========
Net deferred tax liabilities......... $ 271 $ 422
========= =========
The income tax provisions for the years ended December 31 are as follows:
1997 1996
--------- ---------
Current:
Federal......................... $ 770 $ 770
State........................... 174 200
Deferred:
Federal......................... (130) (117)
State........................... (21) (23)
--------- ---------
$ 793 $ 830
========= =========
A reconulation of the difference between the federal statutory tax rates
and the effective tax rates as a percentage of net income is as follows:
YEAR ENDED
DECEMBER 31,
--------------------
1997 1996
--------- ---------
U.S. federal statutory rate.......... 34.0% 34.0%
State income taxes, net of federal
benefit.............................. 5.5 6.2
Other, net........................... 4.0 3.7
--------- ---------
43.5% 43.9%
========= =========
Cash payments for income taxes were $898 and $1,125 in 1997 and 1996,
respectively.
F-183
<PAGE>
FULLERTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS)
6. DESCRIPTION OF LEASING ARRANGEMENTS WITH NONAFFILIATED LESSORS
Fullerton leases certain equipment and a facility under noncancelable
operating leases from nonaffiliated lessors with minimum annual lease payments
as follows:
Year ending December 31
1998............................ $ 197
1999............................ 101
2000............................ 64
2001............................ 14
2002............................ 4
---------
$ 380
=========
Rent expense with nonaffiliated lessors was $504 and $398 in 1997 and 1996,
respectively.
7. EMPLOYEE BENEFIT PLANS
Fullerton contributes to a Section 401(k) plan covering substantially all
employees who are not members of a bargaining unit. Company matching
contributions, which are discretionary, to the plan were $34 and $36 in 1997 and
1996, respectively.
Fullerton contributes to a defined-benefit, multiemployer pension plan
under collective bargaining agreements. Contributions to this plan were $134 and
$100 in 1997 and 1996, respectively.
8. COMMITMENTS
Fullerton periodically uses futures contracts to hedge inventory purchase
commitments. Gains and losses are reported as a component of the related
transaction. No futures contracts existed at December 31, 1997.
9. OTHER INFORMATION (UNAUDITED)
YEAR 2000
Fullerton has developed a plan to modify its information technololgy to be
ready for the year 2000 and has begun converting critical data processing
systems. Fullerton currently expects the project to be substantially completed
by the end of 1998. Fullerton does not expect this project to have a significant
effect on operations or its financial condition.
10. SUBSEQUENT EVENT
On April 17, 1998, Metals USA, Inc. purchased all of the issued and
outstanding equity securities of Fullerton, through the issuance of common stock
and cash pursuant to a definitive merger agreement.
F-184
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
The Levinson Steel Company:
We have audited the accompanying balance sheets of The Levinson Steel Company (a
Delaware corporation) as of December 31, 1997 and 1996, and the related
statements of income, 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 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 The Levinson Steel Company as
of December 31, 1997 and 1996, 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
Pittsburgh, Pennsylvania,
March 4, 1998
(except with respect to the
matter discussed in Note 8,
as to which the date is
March 11, 1998)
F-185
<PAGE>
THE LEVINSON STEEL COMPANY
BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
DECEMBER 31
--------------------
1997 1996
--------- ---------
ASSETS
Current assets:
Cash............................ $ 7 $ 19
Accounts receivable, net of
allowance for doubtful accounts
of $200,000 and $150,000,
respectively................... 10,856 6,018
Inventories..................... 20,459 19,151
Other current assets............ 185 202
--------- ---------
Total current assets....... 31,507 25,390
--------- ---------
Property, plant and equipment:
Land............................ 325 325
Building and improvements....... 1,333 1,333
Machinery, equipment and
fixtures....................... 2,579 2,300
--------- ---------
4,237 3,958
Less -- Accumulated
depreciation................... (1,540) (1,267)
--------- ---------
Net property, plant and
equipment................ 2,697 2,691
--------- ---------
Other assets......................... 47 99
--------- ---------
Total assets.......... $ 34,251 $ 28,180
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility....... $ 17,783 $ 16,408
Current maturities of long-term
debt........................... 443 966
Accounts payable................ 2,976 1,940
Accrued liabilities............. 2,483 964
--------- ---------
Total current
liabilities.............. 23,685 20,278
--------- ---------
Long-term debt, net of current
maturities......................... 702 1,256
--------- ---------
Total liabilities.......... 24,387 21,534
--------- ---------
Commitments
Stockholders' equity:
Common stock, par value $.10 per
share -- authorized 1,000
shares, issued and
outstanding -- 300 shares as of
December 31, 1997.............. -- 80
Paid-in capital................. 3,701 8,028
Retained earnings............... 6,163 2,311
Treasury stock.................. -- (3,773)
--------- ---------
Total stockholders'
equity................... 9,864 6,646
--------- ---------
Total liabilities and
stockholders' equity..... $ 34,251 $ 28,180
========= =========
The accompanying notes are an integral part of these statements.
F-186
<PAGE>
THE LEVINSON STEEL COMPANY
STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS)
1997 1996
--------- ---------
Net sales............................ $ 67,923 $ 57,121
Costs and expenses:
Cost of sales................... 48,103 40,362
Operating and delivery.......... 8,813 8,693
Selling, general and
administrative.................. 4,997 4,450
Depreciation and amortization... 345 441
--------- ---------
Operating income................ 5,665 3,175
Other (income) expenses:
Interest expense................ 1,601 1,652
Other income.................... (988) 90
--------- ---------
Income before income taxes........... 5,052 1,433
Provision for income taxes........... 1,200 80
--------- ---------
Net income........................... $ 3,852 $ 1,353
========= =========
The accompanying notes are an integral part of these statements.
F-187
<PAGE>
THE LEVINSON STEEL COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
CAPITAL PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
-------- -------- --------- --------------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995........... $ 80 $ 8,028 $ 958 $-- $ 9,066
Repurchase of shares............ -- -- -- (3,773) (3,773)
Net income...................... -- -- 1,353 -- 1,353
-------- -------- --------- --------------- ---------
BALANCE, December 31, 1996........... 80 8,028 2,311 (3,773) 6,646
Repurchase of shares............ -- -- -- (634) (634)
Recapitalization (Note 5)....... (80) (4,327) -- 4,407 --
Net income...................... -- -- 3,852 -- 3,852
-------- -------- --------- --------------- ---------
BALANCE, December 31, 1997........... $-- $ 3,701 $ 6,163 $-- $ 9,864
======== ======== ========= =============== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-188
<PAGE>
THE LEVINSON STEEL COMPANY
STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................... $ 3,852 $ 1,353
Adjustments to reconcile net
income to net cash provided by
operating activities --
Depreciation and
amortization............. 345 441
Loss on disposition of
equipment................ 11 57
Changes in operating assets
and liabilities --
Accounts receivable... (4,838) 2,029
Inventories........... (1,309) (255)
Other current
assets.............. 17 (75)
Accounts payable...... 1,037 (1,016)
Accrued liabilities... 1,519 (94)
Other liabilities..... -- (20)
--------- ---------
Net cash provided by
operating
activities.......... 634 2,420
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment...................... (315) (292)
Proceeds from sale of
equipment...................... 5 524
--------- ---------
Net cash (used in)
provided by
investing
activities.......... (310) 232
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net revolving credit facility
activity....................... 1,375 (430)
Repayment of debt............... (1,077) (1,169)
Borrowings...................... -- 2,731
Repurchase of shares............ (634) (3,773)
--------- ---------
Net cash used in
financing
activities.......... (336) (2,641)
--------- ---------
NET CHANGE IN CASH................... (12) 11
CASH, beginning of year.............. 19 8
--------- ---------
CASH, end of year.................... $ 7 $ 19
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for --
Interest.............. $ 1,469 $ 1,646
Income taxes.......... 118 250
The accompanying notes are an integral part of these statements.
F-189
<PAGE>
THE LEVINSON STEEL 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
The Levinson Steel Company ("Levinson") is a distributor of structural
steel products and operates five regional service centers with warehouse
facilities (Ambridge and York, Pennsylvania; Seekonk, Massachusetts; Camden, New
Jersey and Greenville, Kentucky) and two sales offices (Bethlehem, Pennsylvania
and Birmingham, Alabama) serving customers throughout the eastern United States.
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.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTS RECEIVABLE
Levinson grants credit to customers based upon management's assessment of
their creditworthiness. Sales to domestic steel fabricators and service centers,
original equipment manufacturers and customers in the construction industry
account for virtually all of the Levinson trade receivables.
INVENTORIES
Inventories are valued at the lower of cost or market. Costs are determined
on a weighted moving average basis. Levinson's inventories consist primarily of
purchased steel products held for resale through service distribution
warehouses.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Maintenance and repairs
are charged to operations as incurred. Major renewals and betterments, which
increase the value or productive capacity of assets, are capitalized. Upon sale
or retirement, the related value and accumulated depreciation are removed from
the accounts and any resulting gain or loss is reflected in the accompanying
statements of income.
Depreciation is provided based upon the estimated useful lives using the
straight-line method. Estimated useful lives are 5 to 25 years for buildings and
improvements and 3 to 10 years for machinery, equipment and fixtures.
DEFERRED FINANCING COSTS
Costs incurred in connection with securing financing arrangements have been
capitalized and are included with other assets in the accompanying balance
sheets. Deferred financing costs are amortized over the term of the borrowing
facility and are presented net of accumulated amortization of $107 and $55 at
December 31, 1997 and 1996, respectively.
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 Levinson 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.
F-190
<PAGE>
THE LEVINSON STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject Levinson to concentrations
of credit risk, consist principally of cash deposits and, trade account
receivables. Levinson places its cash with several financial institutions
limiting the amount of credit exposure to any one financial institution.
Concentration of credit risk with respect to trade accounts receivable are
within the northeastern regions of the United States. Management performs
ongoing credit evaluations of its customers and providers 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. Levinson periodically reveiws the credit history of its
customers and generally does not require collateral for the extension of credit.
2. DEBT
1997 1996
--------- ---------
Revolving credit facility, interest
at prime plus .25% (8.5% as of
December 31, 1997), payable
monthly............................ $ 17,783 $ 16,408
Term loan, interest at prime plus
.75% (9% as of December 31, 1997),
payable in monthly installments of
$20 excluding interest, maturity
February 28, 2003.................. 934 1,198
Note payable, interest at 7.88%,
payable in monthly installments of
$17 including interest............. 159 352
Capital lease obligation, interest at
9.25%, payable in monthly
installments of $4 including
interest........................... 52 89
Other Indebtedness................... -- 583
--------- ---------
18,928 18,630
Less -- Revolving credit
facility...................... 17,783 16,408
Current maturities...... 443 966
--------- ---------
Long-term debt....................... $ 702 $ 1,256
========= =========
Levinson has a financing agreement with a bank that provides for a
Revolving Credit Facility through November 8, 1998, with an automatic annual
renewal provision. This agreement provides for borrowings up to the lesser of
85% of eligible accounts receivable and 65% of eligible inventory, as defined,
not to exceed borrowings of $19,000. This agreement also provides for additional
borrowings under the term loan and up to $500 under a capital expenditure line
of credit with interest at prime plus 1% convertible to a term loan with
five-year amortization after one year. Borrowings under the various instruments
are secured by virtually all of the assets of Levinson, and limitations on
borrowings are based upon the secured assets.
The agreement provides for adjustments to the interest rates for the
Revolving Credit Facility the term loan, and the transaction loan based upon
financial ratios achieved by Levinson. Additionally, the agreement includes
restrictive covenants that require Levinson to maintain specified levels of
tangible net worth, cash flow coverage and leverage ratios. Certain other
provisions restrict capital expenditures, distributions to stockholders and the
incurrence of additional indebtedness.
F-191
<PAGE>
THE LEVINSON STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
CAPITAL LEASE OBLIGATION
Levinson leases certain machinery and equipment under a capital lease
agreement, which expires March 1999. The following is a schedule of the
approximate future minimum lease payments under this obligation together with
the present value of the net minimum lease payments:
1998................................. $ 44
1999................................. 11
---------
Total minimum lease payments......... 55
Less -- Amount representing
interest........................... 3
---------
Present value of net minimum lease
payments........................... $ 52
=========
The capitalized value of assets recorded as capitalized leases was
approximately $176 and depreciation expense on these assets was approximately
$18 for each of the years ended December 31, 1997 and 1996.
3. COMMITMENTS
Levinson leases certain warehouses, trucks and equipment under
noncancellable operating leases. Levinson expects to renew these leases upon
expiration. The approximate future minimum obligation under these leases is as
follows:
1998................................. $ 1,156
1999................................. 648
2000................................. 462
2001................................. 184
2002................................. 10
---------
Total................................ $ 2,460
=========
Rent expense for the years ended December 31, 1997 and 1996 was
approximately $1,552 and $1,294, respectively.
4. STOCKHOLDERS EQUITY
During 1997, Levinson affected a recapitalization via a merger with The
Levinson Steel Acquisition Company, a company wholly owned by the majority
shareholders of Levinson. In connection with this merger, Levinson reacquired
24,882 shares of common stock representing the minority ownership for $634. As a
result of this merger, the shares held in treasury were retired and the then
outstanding shares were exchanged for shares of the surviving entity.
During 1996, Levinson reacquired 639 shares of common stock for $3,773. The
shares repurchased were financed with borrowings under the Revolving Credit
Facility, term loan and transaction loan.
5. EMPLOYEE BENEFIT PLANS
Levinson has a 401(k) benefit plan. Levinson incurred matching
contributions expense of approximately $86 and $82 for 1997 and 1996,
respectively.
Levinson contributes to certain pension funds, two of which represent
multiemployer plans, in accordance with union contracts at three locations.
Contributions are based upon hours worked at one location, gross regular
earnings at another location and a monthly amount per eligible employee at the
other location. Pension expense for these plans was approximately $88 for both
fiscal 1997 and 1996.
F-192
<PAGE>
THE LEVINSON STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
6. INCOME TAXES
The provision for income taxes recognize the tax effects of all income and
expense transactions in the statements of income, regardless of the year in
which the transactions are reported for tax purposes.
The provisions for income taxes consist of the following:
1997 1996
--------- ---------
Current --
Federal......................... $ 720 $ 25
State........................... 480 55
--------- ---------
1,200 80
Deferred............................. -- --
--------- ---------
Total................................ $ 1,200 $ 80
========= =========
Utilization of net operating loss carryforwards, serve to reduce the 1997
tax provision and eliminate the regular tax liability for 1996. The 1996
provision for income taxes results from alternative minimum taxes.
Temporary differences between book and tax income relate primarily to net
operating loss carryforwards, depreciation, inventories and various reserve
balances. Levinson has net operating loss carryforwards for tax purposes of
approximately $4,014 as of December 31, 1997, which will expire on various dates
through 2005.
Deferred tax balances consist of the following as of December 31:
1997 1996
--------- ---------
Net operating loss carryforward...... $ 1,392 $ 2,340
Reserves and other differences....... 303 518
Inventories.......................... 332 766
Accumulated depreciation............. (219) (627)
Valuation allowance.................. (1,808) (2,997)
--------- ---------
Net.................................. $ -- $ --
========= =========
The benefit of the deferred tax asset will be recognized in the years in
which it is realized.
7. OTHER INCOME
During 1997, Levinson entered into a settlement agreement relating to a
lawsuit filed against a software vendor in 1996. As a result, Levinson recorded
a gain of $1,200, which is shown net of related expenses of $211 in the
accompanying statement of income.
8. SUBSEQUENT EVENT
On March 11, 1998, Levinson entered into a definitive agreement to merge
with and into a wholly owned subsidiary of Metals USA, Inc. Subsequent to this
merger, the Company will operate as a wholly owned subsidiary of Metals USA,
Inc. This transaction was completed during April 1998.
F-193
<PAGE>
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO WHICH
IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF ANY
OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM 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 THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
PAGE
----
Available Information................... i
Prospectus Summary...................... 1
Summary Financial Data.................. 9
Risk Factors............................ 11
Capitalization.......................... 17
Selected Financial Data................. 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 20
Business................................ 27
Management.............................. 44
Certain Transactions.................... 51
Principal Stockholders.................. 54
Description of Capital Stock............ 55
Description of Certain Indebtedness..... 57
The Exchange Offer...................... 59
Certain Federal Income Tax Consequences
of the Exchange Offer................. 66
Description of the Exchange Notes....... 68
Registration Rights..................... 94
Book Entry; Delivery and Form........... 96
Certain United States Federal Tax
Considerations for Non-United States
Holders............................... 97
Plan of Distribution.................... 99
Legal Matters........................... 100
Experts................................. 100
Index to Financial Statements........... F-1
$200,000,000
[METALS USA LOGO]
------------------------
PROSPECTUS
------------------------
EXCHANGE OFFER
RELATING TO $200,000,000
OF 8 5/8% SENIOR SUBORDINATED
NOTES DUE 2008
REGISTERED UNDER THE
SECURITIES ACT OF 1933
JULY 8, 1998
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Company's Certificate of Incorporation, as amended, and Bylaws
incorporate substantially the provisions of the Delaware General Corporation Law
("DGCL") providing for indemnification of directors and officers of the
Company against expenses, judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with any proceeding arising by
reason of the fact that such person is or was an officer or director of the
Company or is or was serving at the request of the Company as a director,
officer or employee of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise.
As permitted by Section 102 of the DGCL, the Company's Certificate of
Incorporation, as amended, contains provisions eliminating a director's personal
liability for monetary damages to the Company and its stockholders arising from
a breach of a director's fiduciary duty except for liability (a) for any breach
of the director's duty of loyalty to the Company or its stockholders, (b) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) under Section 174 of the DGCL, or (d) for any
transaction from which the director derived an improper personal benefit.
Section 145 of the DGCL provides generally that a person sued as a
director, officer, employee or agent of a corporation may be indemnified by the
corporation for reasonable expenses, including attorneys' fees, if in the case
of other than derivative suits such person has acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation (and, in the case of a criminal proceeding, had no
reasonable cause to believe that such person's conduct was unlawful). In the
case of a derivative suit, an officer, employee or agent of the corporation
which is not protected by the Certificate of Incorporation may be indemnified by
the corporation for reasonable expenses, including attorneys' fees, if such
person has acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, except that no
indemnification shall be made in the case of a derivative suit in respect of any
claim as to which an officer, employee or agent has been adjudged to be liable
to the corporation unless that person is fairly and reasonably entitled to
indemnity for proper expenses. Indemnification is mandatory in the case of a
director, officer, employee, or agent who is successful on the merits in defense
of a suit against such person.
The Company has entered into Indemnity Agreements with its directors and
certain key officers pursuant to which the Company generally is obligated to
indemnify its directors and such officers to the full extent permitted by the
DGCL as described above.
The Company has purchased liability insurance policies covering directors
and officers in certain circumstances.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
The exhibits listed below are filed as exhibits to this Registration
Statement and are filed herewith or are incorporated by reference as
indicated below:
EXHIBIT
NUMBER DESCRIPTION
- -------------------------------------------------------------
3.1 -- Amended and Restated Certificate of
Incorporation of Metals USA, Inc.
(the "Company"), as amended,
incorporated by reference to the
Company's registration statement on
Form S-1, Registration No. 333-26601
dated June 17, 1997.
3.2 -- Bylaws of the Company, as amended,
incorporated by reference to the
Company's registration statement on
Form S-1, Registration No. 333-26601
dated May 7, 1997.
4.1 -- Form of certificate evidencing
ownership of Common Stock of the
Company, incorporated by reference to
the Company's registration statement
on Form S-1, Registration No.
333-26601 dated July 9, 1997.
II-1
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- -------------------------------------------------------------
4.2 -- Indenture, dated February 11, 1998,
by and among the Company as issuer
and the Guarantors named therein, and
U.S. Trust Company of California,
N.A., as Trustee regarding the
Company's 8 5/8% Senior Subordinated
Notes due 2008, incorporated by
reference to the Company's
registration statement on Form S-1,
Registration No. 333-35575 dated
February 20, 1998.
4.3 -- Purchase Agreement dated February 6,
1998 by and among the Company and BT
Alex. Brown Incorporated, Bear
Stearns & Co., Inc., Donaldson,
Lufkin & Jenrette Securities
Corporation and NationsBanc
Montgomery Securities LLC regarding
the Company's 8 5/8% Senior
Subordinated Notes due 2008,
incorporated by reference to the
Company's registration statement on
Form S-1, Registration No. 333-35575
dated February 20, 1998.
4.4 -- Registration Rights agreement dated
February 6, 1998 by and among the
Company and BT Alex. Brown
Incorporated, Bear Stearns & Co.,
Inc., Donaldson, Lufkin & Jenrette
Securities Corporation and
NationsBanc Montgomery Securities LLC
regarding the Company's 8 5/8% Senior
Subordinated Notes due 2008,
incorporated by reference to the
Company's registration statement on
Form S-1, Registration No. 333-35575
dated February 20, 1998.
5.1`` -- Opinion of Bracewell & Patterson,
L.L.P., as to the legality of the
Exchange Notes.
8.1`` -- Opinion of Bracewell & Patterson,
L.L.P., as to the validity of certain
income tax matters.
10.1 -- The Company's 1997 Long-Term
Incentive Plan, incorporated by
reference to the Company's
registration statement on Form S-1,
Registration No. 333-26601 dated May
7, 1997.
10.2 -- The Company's 1997 Non-Employee
Directors' Stock Plan, incorporated
by reference to the Company's
registration statement on Form S-1,
Registration No. 333-26601 dated May
7, 1997.
10.3 -- Agreement and Plan of Organization
dated as of April 30, 1997, by and
among the Company, Affiliated Metals
Acquisition Corp., Affiliated Metals
Company and the Stockholders named
therein, incorporated by reference to
the Company's registration statement
on Form S-1, Registration No.
333-26601 dated May 7, 1997.
10.4 -- Agreement and Plan of Organization
dated as of April 30, 1997 by and
among the Company, Interstate Steel I
Acquisition Corp., Interstate Steel
II Acquisition Corp., Interstate
Steel III Acquisition Corp.,
Interstate Steel IV Acquisition
Corp., Interstate Steel Supply
Company, Interstate Steel Supply
Company of Pittsburgh, Interstate
Steel Supply Company of Maryland,
Interstate Steel Processing Company
and the Stockholders named therein,
incorporated by reference to the
Company's registration statement on
Form S-1, Registration No. 333-26601
dated May 7, 1997.
10.5 -- Agreement and Plan of Organization
dated as of April 30, 1997 by and
among the Company, Queensboro Steel I
Acquisition Corp., Queensboro Steel
Corporation and the Stockholders
named therein, incorporated by
reference to the Company's regis-
tration statement on Form S-1,
Registration No. 333-26601 dated May
7, 1997.
10.6 -- Agreement and Plan of Organization
dated as of April 30, 1997 by and
among the Company, Southern Alloy
Acquisition Corp., Southern Alloy of
America, Inc. and the Stockholders
named therein, incorporated by
reference to the Company's regis-
tration statement on Form S-1,
Registration No. 333-26601 dated May
7, 1997.
10.7 -- Agreement and Plan of Organization
dated as of April 30, 1997 by and
among the Company, Steel Service
Systems Acquisition Corp., Steel
Service Systems, Inc. and the
Stockholders named therein,
incorporated by reference to the
Company's registration statement on
Form S-1, Registration No. 333-26601
dated May 7, 1997.
II-2
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- -------------------------------------------------------------
10.8 -- Agreement and Plan of Organization
dated as of April 30, 1997 by and
among the Company, Texas Aluminum I
Acquisition Corp., Texas Aluminum II
Acquisition Corp., Texas Aluminum III
Acquisition Corp., Texas Aluminum IV
Acquisition Corp., Texas Aluminum V
Acquisition Corp., Texas Aluminum
Industries, Inc., Cornerstone Metals
Corporation, Cornerstone Building
Products, Inc., Cornerstone Aluminum
Company, Inc., Cornerstone Patio
Concepts, L.L.C. and the Stockholders
named therein, incorporated by
reference to the Company's
registration statement on Form S-1,
Registration No. 333-26601 dated May
7, 1997.
10.9 -- Agreement and Plan of Organization
dated as of April 30, 1997 by and
among the Company, Uni-Steel
Acquisition Corp., Uni-Steel, Inc.
and the Stockholders named therein,
incorporated by reference to the
Company's registration statement on
Form S-1, Registration No. 333-26601
dated May 7, 1997.
10.10 -- Agreement and Plan of Organization
dated as of April 30, 1997 by and
among the Company, Williams Steel
Acquisition Corp., Williams Steel &
Supply Co., Inc., and the
Stockholders named therein,
incorporated by reference to the
Company's registration statement on
Form S-1, Registration No. 333-26601
dated May 7, 1997.
10.11 -- Form of Employment Agreement between
the Company and Arthur L. French,
incorporated by reference to the
Company's registration statement on
Form S-1, Registration No. 333-26601
dated July 9, 1997.
10.12 -- Form of Employment Agreement between
the Company and J. Michael Kirksey,
incorporated by reference to the
Company's registration statement on
Form S-1, Registration No. 333-26601
dated July 9, 1997.
10.13 -- Form of Employment Agreement between
the Company and Stephen R. Baur,
incorporated by reference to the
Company's registration statement on
Form S-1, Registration No. 333-26601
dated July 9, 1997.
10.14 -- Form of Employment Agreement between
the Company and John A. Hageman,
incorporated by reference to the
Company's registration statement on
Form S-1, Registration No. 333-26601
dated July 9, 1997.
10.15 -- Form of Employment Agreement between
the Company and Terry L. Freeman,
incorporated by reference to the
Company's registration statement on
Form S-1, Registration No. 333-26601
dated July 9, 1997.
10.16 -- Form of Employment Agreement between
the Company and Keith E. St. Clair,
incorporated by reference to the
Company's registration statement on
Form S-1, Registration No. 333-26601
dated July 9, 1997.
10.17 -- Form of Founders' Employment
Agreement between Interstate Steel
Supply Company of Maryland and
Interstate Steel Processing Company
and Arnold W. Bradburd, incorporated
by reference to the Company's
registration statement on Form S-1,
Registration No. 333-26601 dated June
17, 1997.
10.18 -- Form of Founders' Employment
Agreement between Steel Service
Systems, Inc. and Craig R. Doveala,
incorporated by reference to the
Company's registration statement on
Form S-1, Registration No. 333-26601
dated June 17, 1997.
10.19 -- Form of Founders' Employment
Agreement between Southern Alloy of
America, Inc. and William Bartley
Edge, incorporated by reference to
the Company's registration statement
on Form S-1, Registration No.
333-26601 dated June 17, 1997.
10.20 -- Form of Founders' Employment
Agreement between Queensboro Steel
Corporation and Mark Alper,
incorporated by reference to the
Company's registration statement on
Form S-1, Registration No. 333-26601
dated June 17, 1997.
10.21 -- Form of Founders' Employment
Agreement between Uni-Steel, Inc. and
Richard A. Singer, incorporated by
reference to the Company's
registration statement on Form S-1,
Registration No. 333-26601 dated June
17, 1997.
10.22 -- Form of Founders' Employment
Agreement between Williams Steel &
Supply Co., Inc. and Lester G.
Peterson, incorporated by reference
to the Company's registration
statement on Form S-1, Registration
No. 333-26601 dated June 17, 1997.
II-3
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- -------------------------------------------------------------
10.23 -- Form of Founders' Employment
Agreement between Texas Aluminum
Industries, Inc., Cornerstone Metals
Corporation, Cornerstone Building
Products, Inc., Cornerstone Aluminum
Company, Inc., Cornerstone Patio
Concepts, L.L.C. and Michael E.
Christopher, incorporated by
reference to the Company's
registration statement on Form S-1,
Registration No. 333-26601 dated June
17, 1997.
10.24 -- Form of Founders' Employment
Agreement between Affiliated Metals
Company and Patrick A. Notestine,
incorporated by reference to the
Company's registration statement on
Form S-1, Registration No. 333-26601
dated June 17, 1997.
10.25 -- Form of Agreement among certain
stockholders, incorporated by
reference to the Company's
registration statement on Form S-1,
Registration No. 333-26601 dated July
9, 1997.
10.26 -- Indemnity Agreement with Notre
Capital Ventures II, L.L.C.,
incorporated by reference to the
Company's registration statement on
Form S-1, Registration No. 333-26601
dated July 9, 1997.
10.27 -- Agreement and Plan of Merger dated
September 26, 1997, by and among the
Company, HTL Acquisition Corp.,
Harvey Titanium, Ltd. and the
Stockholders named therein,
incorporated by reference to the
Company's registration statement on
Form S-1, Registration No. 333-35575
dated November 14, 1997.
10.28 -- Agreement dated September 26, 1997,
by and among the Company, Meier Metal
Servicenters, Inc. and the
Stockholders named therein,
incorporated by reference to the
Company's registration statement on
Form S-1, Registration No. 333-35575
dated November 14, 1997.
10.29 -- Agreement dated September 26, 1997,
by and among the Company, Jeffreys
Steel Company, Inc. and the
Stockholders named therein,
incorporated by reference to the
Company's registration statement on
Form S-1, Registration No. 333-35575
dated November 14, 1997.
10.30 -- Form of Employment Agreement between
Jeffreys Steel Company, Inc. and Leon
Jeffreys, incorporated by reference
to the Company's registration
statement on Form S-1, Registration
No. 333-35575 dated February 20,
1998.
10.31 -- Agreement and Plan of Merger dated
December 17, 1997, by and among the
Company, IM Acquisition Corp.,
Independent Metals Co. Inc., and the
Stockholders named therein,
incorporated by reference to the
Company's registration statement on
Form S-1, Registration No. 333-35575
dated February 20, 1998.
10.32 -- Amended and Restated Credit Agreement
dated February 11, 1998, by and among
the Company and The First National
Bank of Chicago, as agent,
incorporated by reference to the
Company's registration statement on
Form S-1, Registration No. 333-35575
dated February 20, 1998.
10.33 -- Agreement and Plan of Merger dated as
of February 16, 1998, by and among
the Company, PMC Acquisition Corp.,
Pacific Metal Company and the
Stockholders named therein,
incorporated by reference to the
Company's Form 8-K dated March 16,
1998.
12.1`` -- Computation of Ratio of Earnings to
Fixed Charges
21.1`` -- List of subsidiaries of the Company
23.1`` -- Consent of Arthur Andersen LLP
23.2`` -- Consent of Ernst & Young LLP
23.3`` -- Consent of McGladrey & Pullen, LLP
23.4`` -- Consent of Rubin, Brown, Gornstein &
Co.
23.5``-- Consent of Klein, Bogakos and
Robertson, CPA's Inc.
23.6 -- Consent of Bracewell & Patterson,
L.L.P. (included in Exhibits 5.1 and
8.1)
23.7``-- Consent of Ernst & Young LLP
23.8``-- Consent of Perkins & Company, P.C.
23.9``-- Consent of Arthur Andersen LLP
23.10``-- Consent of Arthur Andersen LLP
24.1` -- Form of Power of Attorney
25.1 -- Form T-1 Statement of Eligibility of
U.S. Trust Company of California,
N.A., as trustee, incorporated by
reference to the Company's
registration statement on Form S-1,
Registration No. 333-35575 dated
February 20, 1998.
99.1`` Metals USA, Inc. Letter of
Transmittal for the Exchange Offer.
- ------------
_` Filed previously.
`` Filed herewith.
II-4
<PAGE>
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described in Item 14, or otherwise, the Company has
been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Metals USA,
Inc. has duly caused this Registration Statement or amendment thereto to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Houston, State of Texas, on July 7, 1998.
METALS USA, INC.
By: ____/s/__ARTHUR L. FRENCH_________
ARTHUR L. FRENCH
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT OR AMENDMENT THERETO HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE INDICATED CAPACITIES ON JULY 7, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------------------------------------------
<S> <C>
/s/ARTHUR L. FRENCH Chairman of the Board, Chief
ARTHUR L. FRENCH Executive Officer and President
J. MICHAEL KIRKSEY* Senior Vice President, Chief
Financial Officer and Director
/s/TERRY L. FREEMAN Vice President, Corporate Controller
TERRY L. FREEMAN and Chief Accounting Officer
STEVEN S. HARTER* Director
ARNOLD W. BRADBURD* Vice Chairman of the Board
MICHAEL E. CHRISTOPHER* Senior Vice President and Director
MARK ALPER* Vice President--Development and
Director
A. LEON JEFFREYS* Director
PATRICK S. NOTESTINE* Director
RICHARD A. SINGER* Senior Vice President and Director
LESTER G. PETERSON* Director
CRAIG R. DOVEALA* Director
WILLIAM B. EDGE* Senior Vice President and Director
TOM SHAPIRO* Senior Vice President and Director
T. WILLIAM PORTER* Director
RICHARD H. KRISTINIK* Director
TOMMY E. KNIGHT* Director
*By:/s/ARTHUR L. FRENCH
ARTHUR L. FRENCH
ATTORNEY-IN-FACT
</TABLE>
II-6
EXHIBIT 5.1
July 7, 1998
Metals USA, Inc.
Three Riverway
Suite 600
Houston, Texas 77056
Ladies and Gentlemen:
We have acted as counsel to Metals USA, Inc. (the "Company"), a Delaware
corporation, in connection with the offer by the Company to exchange $1,000
principal amount at final maturity of its 85/8% Exchange Senior Subordinated
Notes due 2008 (the "Exchange Notes") for each $1,000 principal amount at final
maturity of its 85/8% Senior Subordinated Notes due 2008 (the "Original Notes"),
of which an aggregate of $200,000,000 principal amount is outstanding (the
"Exchange Offer"). The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-4 (Registration
No. 333-49823) with respect to the Exchange Offer (the "Registration
Statement"), under the Securities Act of 1933, as amended (the "Securities
Act").
We have examined originals or copies certified by officers of the Company of (a)
the Indenture, as supplemented and amended, dated as of February 11, 1998 (the
"Indenture"), by and between the Company and U.S. Trust Company of California,
N.A., as Trustee (the "Trustee"), pursuant to which the Original Notes were
issued and the Exchange Notes will be issued, (b) the Articles of Incorporation,
as amended, of the Company, (c) the Bylaws of the Company, (d) certified copies
of certain resolutions adopted by the Board of Directors of the Company, and (e)
such other documents and records as we have deemed necessary and relevant for
the purposes hereof. In addition, we have relied on certificates of officers of
the Company and of public officials and others as to certain matters of fact
relating to this opinion and have made such investigations of law as we have
deemed necessary and relevant as a basis hereof. We have assumed the genuineness
of all signatures, the authenticity of all documents and records submitted to us
as copies, the conformity to authentic original documents and records of all
documents and records submitted to us as copies, and the truthfulness of all
statements of fact contained therein. We have also assumed the due execution and
delivery of the Indenture by a duly authorized officer of the Trustee.
<PAGE>
Metals USA, Inc.
June 24, 1998
Page 2
Based on the foregoing, subject to the limitations, assumptions and
qualifications set forth herein, and having due regard for such legal
considerations as we deem relevant, we are of the opinion that:
1. the Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware; and
2. the Exchange Notes have been duly authorized by the Company and
will be, when issued at the conclusion of Exchange Offer as
described in the Registration Statement, (i) legally issued,
fully paid and non-assessable and (ii) legally binding
obligations of the Company entitled to the benefits of the
Indenture.
We hereby consent to the filing of this opinion with the Commission as Exhibit
5.1 to the Registration Statement and to the references to our firm under the
heading "Legal Matters" in the Prospectus included in the Registration
Statement. By giving such consent, we do not admit that we are experts with
respect to any part of the Registration Statement, including this Exhibit,
within the meaning of the term "expert" as used in the Securities Act or the
rules and regulations thereunder.
Very truly yours,
/s/ BRACEWELL & PATTERSON, L.L.P.
Bracewell & Patterson, L.L.P.
EXHIBIT 8.1
July 7, 1998
Metals USA, Inc.
Three Riverway
Suite 600
Houston, Texas 77056
Ladies and Gentlemen:
We have acted as counsel to Metals USA, Inc., a Delaware corporation (the
"Company") in connection with the offer by the Company to exchange $1,000
principal amount of its 85/8% Senior Subordinated Notes due 2008 (the "Exchange
Notes") for each outstanding $1,000 principal amount of its 85/8% Senior
Subordinated Notes due 2008 (the "Original Notes") of which an aggregate of
$200,000,000 principal amount is outstanding (the "Exchange Offer"). The Company
has filed with the Securities and Exchange Commission (the "Commission") a
Registration Statement on Form S-4 (Registration No. 333-49823), as amended,
with respect to the Exchange Offer (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act").
We have examined originals or copies of the Registration Statement and of (a)
the Indenture dated as of February 11, 1998 (the "Indenture") by and between the
Company and U.S. Trust Company of California, N.A., as Trustee (the "Trustee"),
pursuant to which the Original Notes were issued and pursuant to which the
Exchange Notes will be issued, (b) the Articles of Incorporation and Bylaws of
the Company, each as amended to date, (c) certain resolutions of the Board of
Directors of the Company, and (d) such other documents and records as we have
deemed necessary and relevant for the purposes hereof. In addition, we have
relied on certificates of officers of the Company and of public officials and
others as to certain matters of fact relating to this opinion and have made such
investigations of law as we have deemed necessary and relevant as a basis
hereof. We have assumed the genuineness of all signatures, the authenticity of
all documents and records submitted to us as originals, the conformity to
authentic original documents and records of all documents and records submitted
to us as copies and the truthfulness of all statements of fact contained
therein.
<PAGE>
Metals USA, Inc.
June 24, 1998
Page 2
Based upon and subject to the foregoing, and having regard for legal
considerations which we deem relevant, we hereby confirm, and adopt as our
opinion, the statements of legal matters contained in the Prospectus included in
the Registration Statement under the captions "Certain Federal Income Tax
Consequences of the Exchange Offer" and "Certain United States Federal Tax
Considerations for Non-United States Holders."
We hereby consent to the filing of this opinion with the Securities and Exchange
Commission as Exhibit 8.1 to the Registration Statement and to the references to
our firm under the caption "Certain Federal Income Tax Considerations" in the
Prospectus included in the Registration Statement.
Very truly yours,
/s/ BRACEWELL & PATTERSON, L.L.P.
Bracewell & Patterson, L.L.P.
EXHIBIT 12.1
METALS USA, INC. AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
(IN MILLIONS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL CONSOLIDATED
Earnings:
Income before income taxes......... $ 12.1 $ 1.4 $ 17.8 $ 9.9 $ 13.7 $ 13.4 $ 9.9
Fixed charges...................... 5.4 .4 6.1 2.1 3.0 2.3 2.2
--------- --------- --------- --------- --------- --------- ---------
$ 17.5 $ 1.8 $ 23.9 $ 12.0 $ 16.7 $ 15.7 $ 12.1
========= ========= ========= ========= ========= ========= =========
Fixed Charges:
Interest expense, net of amounts
capitalized...................... $ 4.8 $ .4 $ 5.0 $ 1.8 $ 2.4 $ 1.8 $ 2.0
Portion of rental cost representing
interest......................... .6 -- 1.1 .3 .6 .5 .2
--------- --------- --------- --------- --------- --------- ---------
$ 5.4 $ .4 $ 6.1 $ 2.1 $ 3.0 $ 2.3 $ 2.2
========= ========= ========= ========= ========= ========= =========
Ratio of earnings to fixed charges...... 3.2x 4.5x 3.9x 5.7x 5.6x 6.8x 5.5x
========= ========= ========= ========= ========= ========= =========
PRO FORMA:
Earnings:
Income before income taxes......... $ 22.8 $ 60.3
Fixed charges...................... 10.5 38.2
--------- ---------
$ 33.3 $ 98.5
========= =========
Fixed Charges:
Interest expense, net of amounts
capitalized...................... $ 9.3 $ 33.5
Portion of rental cost representing
interest......................... 1.2 4.7
--------- ---------
$ 10.5 $ 38.2
========= =========
Ratio of earnings to fixed charges...... 3.2x 2.6x
========= =========
</TABLE>
EXHIBIT 21.1
METALS USA, INC.
SUBSIDIARY LIST
Affiliated Metals Company
Aluminum Building Systems
Concord Metals Corporation
Faitoute Steel Corporation
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.
Interstate Steel Supply Company
Interstate Steel Supply Company of Pittsburg
Interstate Steel Supply Company of Maryland
Interstate Steel Processing Company
Intsel Steel
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.
MUSA GP, Inc.
MUSA LP, Inc.
Metals USA Services Corporation
Metals USA Finance Corporation
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.
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Houston, Texas
July 6, 1998
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
to the use of our report dated October 4, 1996, with respect to the financial
statements of Affiliated Metals Company included in Amendment No. 1 to
Registration Statement Form S-4 (No. 333-49823) and related Propectus of Metals
USA, Inc. for the registration of $200 million of Metals USA, Inc.'s 8 5/8%
Senior Subordinated Notes due 2008.
Ernst & Young LLP
St. Louis, Missouri
July 2, 1998
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4
(No. 333-49823) of our report, dated February 25, 1997, except Note 11 as to
which the date is April 18, 1997 and Note 12 as to which the date is July 11,
1997, relating to the financial statements of Queensboro Steel Corporation. We
also consent to the reference to our Firm under the caption "Experts" in the
Prospectus.
McGLADREY & PULLEN, LLP
Wilmington, North Carolina
July 2, 1998
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the use in this Amendment No. 1 to Registration
Statement on Form S-4 of Metals USA, Inc. of our report, dated October 19, 1995
on Affiliated Metals Company for the years ended September 3, 1994 and September
2, 1995, and to the reference to us under the heading "Independent Auditors"
in the Prospectus which is a part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in the
Prospectus which is a part of this Registration Statement.
RUBIN, BROWN, GORNSTEIN & CO. LLP
St. Louis, Missouri
July 2, 1998
EXHIBIT 23.5
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in this Registration Statement on Form S-4
(No. 333-49823) of our report, dated September 23, 1997, relating to the
financial statements of Harvey Titanium, Ltd. We also consent to the reference
to our Firm under the caption "Experts" in the Prospectus.
KLEIN, BOGAKOS AND ROBERTSON, CPA'S INC.
Santa Monica, California
July 2, 1998
EXHIBIT 23.7
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
to the use of our report dated January 23, 1998, except for Note 10 for which
the date is April 17, 1998, with respect to the consolidated financial
statements of Fullerton Industries, Inc., in Amendment No. 1 to the Registration
Statement (Form S-4 No. 333-49823) and related Prospectus of Metals USA, Inc.
for the registration of $200 million of Metals USA, Inc.'s 8 5/8% Senior
Subordinated Notes due 2008.
Ernst & Young LLP
Chicago, Illinois
July 2, 1998
EXHIBIT 23.8
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Metals USA, Inc. on
Form S-4 of our report dated February 11, 1998, on the consolidated financial
statements of Pacific Metal Company and Subsidiary as of December 31, 1997 and
1996 and for the years ended December 31, 1997 and 1996 appearing in the
Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in
such Prospectus.
PERKINS & COMPANY, P.C.
Portland, Oregon
July 2, 1998
EXHIBIT 23.9
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
July 2, 1998
EXHIBIT 23.10
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated March 4, 1998 (except with regard to the matter discussed in Note
8, as to which the date is March 11, 1998), with respect to the financial
statements of The Levinson Steel Company (and to all references to our Firm)
included in or made a part of this registration statement.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
July 2, 1998
EXHIBIT 99.1
LETTER OF TRANSMITTAL
TO TENDER FOR EXCHANGE
85/8% SENIOR SUBORDINATED NOTES DUE 2008
OF
METALS USA, INC.
PURSUANT TO THE PROSPECTUS
DATED JULY 8, 1998
THIS OFFER WILL EXPIRE AT 12:00 A.M. HOUSTON, TEXAS TIME, ON AUGUST 15,
1998, UNLESS EXTENDED BY THE COMPANY IN ITS SOLE DISCRETION (THE "EXPIRATION
DATE"). TENDERS OF NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION
DATE.
- --------------------------------------------------------------------------------
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
U.S. TRUST COMPANY OF CALIFORNIA, N.A.
<TABLE>
<S> <C> <C>
BY MAIL VIA THE ENCLOSED ENVELOPE: BY OVERNIGHT COURIER OR EXPRESS MAIL: BY HAND:
U.S. Trust Company of California, N.A. U.S. Trust Company of California, N.A. U.S. Trust Company of California, N.A.
c/o United States Trust Company c/o United States Trust Company c/o United States Trust Company
of New York of New York of New York
P.O. Box 841, Peter Cooper Station 770 Broadway, 13th Floor 111 Broadway, Lower Level
New York, NY 10276-0841 New York, NY 10003 New York, NY 10006
Attention: Corporate Trust and Agency Attention: Corporate Trust and Agency Attention: Corporate Trust and Agency
Services Services Services
</TABLE>
BY FACSIMILE: PHONE NUMBER:
(212) 420-6155 (800) 225-2398
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY AND PRINT OR TYPE ALL
RESPONSES. YOUR BANK OR BROKER CAN ASSIST YOU IN COMPLETING THIS FORM. QUESTIONS
AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS AND THIS
LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT. DELIVERY OF THIS
LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TO A NUMBER OTHER THAN AS LISTED
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
<PAGE>
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE EXCHANGE NOTES PURSUANT TO
THE EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW) THEIR ORIGINAL NOTES
TO THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE.
This Letter of Transmittal is to be used by holders ("Holders") of
8 5/8% Senior Subordinated Notes due 2008 (the "Original Notes") of Metals USA,
Inc. (the "Company") if: (i) certificates representing Original Notes are to be
physically delivered to the Exchange Agent herewith by such Holders; (ii) tender
of Original Notes is to be made by book-entry transfer to the Exchange Agent's
account at the Depository Trust Company ("DTC") pursuant to the procedures set
forth under the caption "The Exchange Offer -- Procedures for Tendering" and
"Book-Entry; Delivery and Form" in the Prospectus dated July 8, 1998 (the
"Prospectus"); or (iii) tender of Original Notes is to be made according to the
guaranteed delivery procedures set forth under the caption "The Exchange Offer
- -- Guaranteed Delivery Procedures" in the Prospectus, and, in each case,
instructions are not being transmitted through the DTC Automated Tender Offer
Program ("ATOP"). The undersigned hereby acknowledges receipt of the Prospectus.
All capitalized terms used herein and not defined shall have the meanings
ascribed to them in the Prospectus.
Holders of Original Notes that are tendering by book-entry transfer to
the Exchange Agent's account at DTC can execute the tender through ATOP, for
which the transaction will be eligible. DTC participants that are accepting the
exchange offer as set forth in the Prospectus and this Letter of Transmittal
(together, the "Exchange Offer") must transmit their acceptance to DTC, which
will edit and verify the acceptance and execute a book-entry delivery to the
Exchange Agent's account at DTC. DTC will then send an Agent's Message to the
Exchange Agent for its acceptance. Delivery of the Agent's Message by DTC will
satisfy the terms of the Offer as to execution and delivery of a Letter of
Transmittal by the participant identified in the Agent's Message. DTC
participants may also accept the Exchange Offer by submitting a notice of
guaranteed delivery through ATOP.
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
If a Holder desires to tender Original Notes pursuant to the Exchange
Offer and time will not permit this Letter of Transmittal, certificates
representing such Original Notes and all other required documents to reach the
Exchange Agent, or the procedures for book-entry transfer cannot be completed,
on or prior to the Expiration Date, then such Holder must tender such Original
Notes according to the guaranteed delivery procedures set forth under the
caption "The Exchange Offer -- Guaranteed Delivery Procedures" in the
Prospectus. See Instruction 2.
The undersigned should complete, execute and deliver this Letter of
Transmittal to indicate the action the undersigned desires to take with respect
to the Exchange Offer.
-2-
<PAGE>
TENDER OF ORIGINAL NOTES
[ ] CHECK HERE IF TENDERED ORIGINAL NOTES ARE ENCLOSED HEREWITH.
[ ] CHECK HERE IF TENDERED ORIGINAL NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH
DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:_______________________________________________
Account Number:______________________________________________________________
Transaction Check Number:____________________________________________________
[ ] CHECK HERE IF TENDERED ORIGINAL NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT
AND COMPLETE THE FOLLOWING:
Name(s) of Registered Holder(s):_____________________________________________
Window Ticket Number (if any):_______________________________________________
Date of Execution of Notice of Guaranteed Delivery:__________________________
Name of Eligible Institution that Guaranteed Delivery:_______________________
- --------------------------------------------------------------------------------
-3-
<PAGE>
List below the Original Notes to which this Letter of Transmittal
relates. The name(s) and address(es) of the registered Holder(s) should be
printed, if not already printed below, exactly as they appear on the Original
Notes tendered hereby. The Original Notes and the principal amount of Original
Notes, in integrals of $1,000, that the undersigned wishes to tender should be
indicated in the appropriate boxes. If the space provided is inadequate, list
the certificate number(s) and principal amount(s) on a separately executed
schedule and affix the schedule to this Letter of Transmittal.
DESCRIPTION OF ORIGINAL NOTES
<TABLE>
<CAPTION>
PRINCIPAL
NAME(S) AND ADDRESS(ES) AMOUNT
OF REGISTERED HOLDER(S) AGGREGATE TENDERED
(PLEASE FILL IN IF BLANK) CERTIFICATE PRINCIPAL AMOUNT (IN INTEGRALS OF
SEE INSTRUCTION 3. NUMBER(S)* REPRESENTED** $1,000 ONLY)**
<S> <C> <C>
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- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
TOTAL PRINCIPAL
AMOUNT OF
ORIGINAL NOTES
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* NEED NOT BE COMPLETED BY HOLDERS TENDERING BY BOOK-ENTRY TRANSFER.
** UNLESS OTHERWISE SPECIFIED, THE ENTIRE AGGREGATE PRINCIPAL AMOUNT
REPRESENTED BY THE ORIGINAL NOTES DESCRIBED ABOVE WILL BE DEEMED TO BE
TENDERED. SEE INSTRUCTION 4.
- --------------------------------------------------------------------------------
-4-
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
Ladies and Gentlemen:
The undersigned hereby tenders to Metals USA, Inc. (the "Company"),
upon the terms and subject to the conditions set forth in its Prospectus dated
July 8, 1998 (the "Prospectus"), receipt of which is hereby acknowledged, and
in accordance with this Letter of Transmittal (which together constitute the
"Exchange Offer"), the principal amount of Original Notes indicated in the
foregoing table entitled "Description of Original Notes" under the column
heading "Principal Amount Tendered." The undersigned represents that it is duly
authorized to tender all of the Original Notes tendered hereby which it holds
for the account of beneficial owners of such Original Notes ("Beneficial
Owner(s)") and to make the representations and statements set forth herein on
behalf of such Beneficial Owner(s).
Subject to, and effective upon, the acceptance for purchase of the
principal amount of Original Notes tendered herewith in accordance with the
terms and subject to the conditions of the Exchange Offer, the undersigned
hereby sells, assigns and transfers to, or upon the order of, the Company, all
right, title and interest in and to all of the Original Notes tendered hereby.
The undersigned hereby irrevocably constitutes and appoints the Exchange Agent
the true and lawful agent and attorney-in-fact of the undersigned (with full
knowledge that the Exchange Agent also acts as the agent of the Company) with
respect to such Original Notes, with full powers of substitution and revocation
(such power of attorney being deemed to be an irrevocable power coupled with an
interest) to (i) present such Original Notes and all evidences of transfer and
authenticity to, or transfer ownership of, such Original Notes on the account
books maintained by DTC to, or upon the order of, the Company, (ii) present such
Original Notes for transfer of ownership on the books of the Company, and (iii)
receive all benefits and otherwise exercise all rights of beneficial ownership
of such Original Notes, all in accordance with the terms and conditions of the
Exchange Offer as described in the Prospectus.
By accepting the Exchange Offer, the undersigned hereby represents and
warrants that (i) the Exchange notes to be acquired by the undersigned and any
Beneficial Owner(s) in connection with the Exchange Offer are being acquired by
the undersigned and any Beneficial Owner(s) in the ordinary course of business
of the undersigned and any Beneficial Owner(s), (ii) the undersigned and each
Beneficial Owner are not participating, do not intend to participate, and have
no arrangement or understanding with any person to participate, in the
distribution of the Exchange Notes, (iii) except as indicated below, neither the
undersigned nor any Beneficial Owner is an "affiliate," as defined in Rule 405
under the Securities Act of 1933, as amended (together with the rules and
regulations promulgated thereunder, the "Securities Act"), of the Company and
(iv) the undersigned and each Beneficial Owner acknowledge and agree that (x)
any person participating in the Exchange Offer with the intention or for the
purpose of distributing the Exchange Notes must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale of the Exchange Notes acquired by such person with a
registration statement containing the selling securityholder information
required by Item 507 of Regulation S-K promulgated by the Securities and
Exchange Commission (the "Commission") and cannot rely on the interpretation of
the Staff of the Commission set forth in the no-action letters that are noted in
the section of the Prospectus entitled "The Exchange Offer -- Resale of Exchange
Notes" and (y) any broker-dealer that, pursuant to the Exchange Offer, receives
Exchange Notes for its own account in exchange of Original Notes which it
acquired for its own account as a result of market-making activities or other
trading activities must deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such Exchange Notes. If the
undersigned is a broker-dealer that will receive Exchange Notes for its own
account, it represents and warrants that the Original Notes to be exchanged for
the Exchange Notes were acquired as the result of market-making activities or
other trading activities, and it acknowledges that it will deliver a prospectus
in connection with any resale of such Exchange Notes. By so acknowledging and by
delivering a prospectus, a broker-dealer shall not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
-5-
<PAGE>
The undersigned understands that tenders of Original Notes may be
withdrawn by written notice of withdrawal received by the Exchange Agent at any
time prior to the Expiration Date in accordance with the Prospectus. In the
event of a termination of the Exchange Offer, the Original Notes tendered
pursuant to the Exchange Offer will be returned to the tendering Holders
promptly (or, in the case of Original Notes tendered by book-entry transfer,
such Original Notes will be credited to the account maintained at DTC from which
such Original Notes were delivered). If the Company makes a material change in
the terms of the Exchange Offer or the information concerning the Exchange Offer
or waives a material condition of such Exchange Offer, the Company will
disseminate additional Exchange Offer materials and extend such Exchange Offer,
if and to the extent required by law.
The undersigned understands that the tender of Original Notes pursuant
to any of the procedures set forth in the Prospectus and in the instructions
hereto will constitute the undersigned's acceptance of the terms and conditions
of the Exchange Offer. The Company's acceptance for exchange of Original Notes
tendered pursuant to any of the procedures described in the Prospectus will
constitute a binding agreement between the undersigned and the Company in
accordance with the terms and subject to the conditions of the Exchange Offer.
For purposes of the Exchange Offer, the undersigned understands that validly
tendered Original Notes (or defectively tendered Original Notes with respect to
which the Company has waived such defect or has caused such defect to be waived)
will be deemed to have been accepted by the Company if, as and when the Company
gives oral or written notice thereof to the Exchange Agent.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Original Notes
tendered hereby, and that when such tendered Original Notes are accepted for
purchase by the Company, the Company will acquire good title thereto, free and
clear of all liens, restrictions, charges and encumbrances and not subject to
any adverse claim or right. The undersigned and each Beneficial Owner will, upon
request, execute and deliver any additional documents deemed by the Exchange
Agent or by the Company to be necessary or desirable to complete the sale,
assignment and transfer of the Original Notes tendered hereby.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall not be affected by, and shall survive the death or incapacity
of, the undersigned and any Beneficial Owner(s), and any obligation of the
undersigned or any Beneficial Owner(s) hereunder shall be binding upon the
heirs, executors, administrators, trustees in bankruptcy, personal and legal
representatives, successors and assigns of the undersigned and such Beneficial
Owner(s).
The undersigned understands that the delivery and surrender of any
Original Notes is not effective, and the risk of loss of the Original Notes does
not pass to the Exchange Agent, until receipt by the Exchange Agent of this
Letter of Transmittal, or a manually signed facsimile hereof, properly completed
and duly executed, together with all accompanying evidences of authority and any
other required documents in form satisfactory to the Company. All questions as
to form of all documents and the validity (including time of receipt) and
acceptance of tenders and withdrawals of Original Notes will be determined by
the Company, in its sole discretion, which determination shall be full and
binding.
Unless otherwise indicated herein under "Special Issuance
Instructions," the undersigned hereby requests that any Original Notes
representing principal amounts not tendered or not accepted for exchange be
issued in the name(s) of the undersigned (and in the case of Original Notes
tendered by book-entry transfer, by credit to the account of DTC), and Exchange
Notes issued in exchange for Original Notes pursuant to the Exchange Offer be
issued to the undersigned. Similarly, unless otherwise indicated herein under
"Special Delivery Instructions," the undersigned hereby requests that any
Original Notes representing principal amounts not tendered or not accepted for
exchange and Exchange Notes issued in exchange for Original Notes pursuant to
the Exchange Offer be delivered to the undersigned at the address shown below
the undersigned's signature(s). In the event that the "Special Issuance
Instructions" box or the "Special Delivery Instructions" box is, or both are,
completed, the undersigned hereby requests that any Original Notes
-6-
<PAGE>
representing principal amounts not tendered or not accepted for purchase be
issued in the name(s) of, certificates for such Original Notes be delivered to,
and Exchange Notes issued in exchange for Original Notes pursuant to the
Exchange Offer be issued in the name(s) of, and be delivered to, the person(s)
at the address(es) so indicated, as applicable. The undersigned recognizes that
the Company has no obligation pursuant to the "Special Issuance Instructions"
box or "Special Delivery Instructions" box to transfer any Original Notes from
the name of the registered Holder(s) thereof if the Company does not accept for
exchange any of the principal amount of such Original Notes so tendered.
[ ] CHECK HERE IF YOU OR ANY BENEFICIAL OWNER FOR WHOM YOU HOLD ORIGINAL
NOTES TENDERED HEREBY IS AN AFFILIATE OF THE COMPANY.
[ ] CHECK HERE IF YOU OR ANY BENEFICIAL OWNER FOR WHOM YOU HOLD ORIGINAL
NOTES TENDERED HEREBY IS A BROKER-DEALER WHO ACQUIRED SUCH NOTES
DIRECTLY FROM THE COMPANY OR AN AFFILIATE OF THE COMPANY.
[ ] CHECK HERE AND COMPLETE THE LINES BELOW IF YOU OR ANY BENEFICIAL OWNER
FOR WHOM YOU HOLD ORIGINAL NOTES TENDERED HEREBY IS A BROKER-DEALER WHO
ACQUIRED SUCH NOTES IN MARKET-MAKING OR OTHER TRADING ACTIVITIES. IF
THE BOX IS CHECKED, THE COMPANY WILL SEND 10 ADDITIONAL COPIES OF THE
PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO TO
YOU OR SUCH BENEFICIAL OWNER AT THE ADDRESS SPECIFIED IN THE FOLLOWING
LINES.
Name:_____________________________
Address:______________________________
____________________________
-7-
<PAGE>
<TABLE>
<S> <C> <C>
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7) (SEE INSTRUCTIONS 1, 5, 6 AND 7)
To be completed ONLY if Original Notes in a To be completed ONLY if Original Notes in a
principal amount not tendered or not accepted for principal amount not tendered or not accepted for
exchange are to be issued in the name of, or exchange are to be sent to, or Exchange Notes are to be
Exchange Notes are to be issued in the name of, sent to, someone other than the person(s) whose
someone other than the person(s) whose signature(s) signature(s) appear(s) within this Letter of Transmittal
appear(s) within this Letter of Transmittal or issued or issued to an address different from that shown in the
to an address different from that shown in the box box entitled "Description of Original Notes" within this
entitled "Description of Original Notes" within this Letter of Transmittal.
Letter of Transmittal.
Issue: |_| Original Notes Delivery:|_| Original Notes
|_| Exchange Notes |_| Exchange Notes
(check as applicable) (check as applicable)
Name ................................................. Name ...................................................
(PLEASE PRINT) (PLEASE PRINT)
Address .............................................. Address ................................................
(PLEASE PRINT) (PLEASE PRINT)
...................................................... ........................................................
(ZIP CODE) (ZIP CODE)
...................................................... ........................................................
(TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER) (TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER)
(SEE SUBSTITUTE FORM W-9 HEREIN) (SEE SUBSTITUTE FORM W-9 HEREIN)
</TABLE>
-8-
<PAGE>
PLEASE SIGN HERE
(To be completed by all tendering
Holders of Original Notes regardless of whether Original Notes
are being physically delivered herewith)
This Letter of Transmittal must be signed by the registered Holder(s) exactly as
name(s) appear(s) on certificate(s) for Original Notes or, if tendered by a
participant in DTC, exactly as such participant's name appears on a security
position listing as owner of Original Notes, or by the person(s) authorized to
become registered Holder(s) by endorsements and documents transmitted herewith.
If signature is by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations, or others acting in a fiduciary or
representative capacity, please set forth full title and see Instruction 5.
................................................................................
................................................................................
Signature(s) of Registered Holder(s) or Authorized Signatory
(SEE GUARANTEE REQUIREMENT BELOW)
Dated: ..................................................................1998
Name(s): ......................................................................
.....................................................................
(Please Print)
Capacity (Full Title) ..........................................................
Address: .....................................................................
...................................................................
(Including Zip Code)
Area Code and
Telephone Number ...............................................................
Tax Identification or
Social Security Number: ........................................................
(Complete Accompanying Substitute Form W-9)
SIGNATURE GUARANTEE
(IF REQUIRED-SEE INSTRUCTIONS 1 AND 5)
Authorized Signature ...........................................................
Name of Firm ...................................................................
[PLACE SEAL HERE]
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-9-
<PAGE>
INSTRUCTIONS
Forming Part of the Terms and Conditions of the Exchange Offer
1. SIGNATURE GUARANTEES. Signatures of this Letter of Transmittal must
be guaranteed by a recognized member of the Medallion Signature Guarantee
Program or by any other "eligible guarantor institution," as such term is
defined in Rule 17Ad-15 promulgated under the Exchange Act (each of the
foregoing, an "Eligible Institution"), unless the Original Notes tendered hereby
are tendered (i) by a registered Holder of Original Notes (or by a participant
in DTC whose name appears on a security position listing as the owner of such
Original Notes) that has not completed either the box entitled "Special Issuance
Instructions" or the box entitled "Special Delivery Instructions" on this Letter
of Transmittal, or (ii) for the account of an Eligible Institution. If the
Original Notes are registered in the name of a person other than the signer of
this Letter of Transmittal, if Original Notes not accepted for exchange or not
tendered are to be returned to a person other than the registered Holder, or if
Exchange Notes are to be issued in the name of or sent to a person other than
the registered Holder, then the signatures on this Letter of Transmittal
accompanying the tendered Original Notes must be guaranteed by an Eligible
Institution as described above. See Instruction 5.
2. DELIVERY OF LETTER OF TRANSMITTAL AND ORIGINAL NOTES. This Letter of
Transmittal is to be completed by Holders if (i) certificates representing
Original Notes are to be physically delivered to the Exchange Agent herewith by
such Holders; (ii) tender of Original Notes is to be made by book-entry transfer
to the Exchange Agent's account at DTC pursuant to the procedures set forth
under the caption "The Exchange Offer -- Procedures for Tendering" and
"Book-Entry; Delivery and Form" in the Prospectus; or (iii) tender of Original
Notes is to be made according to the guaranteed delivery procedures set forth
under the caption "The Exchange Offer -- "Guaranteed Delivery Procedures" in the
Prospectus. All physically delivered Original Notes, or a confirmation of a
book-entry transfer into the Exchange Agent's account at DTC of all Original
Notes delivered electronically, as well as a properly completed and duly
executed Letter of Transmittal (or manually signed facsimile thereof), any
required signature guarantees and any other documents required by this Letter of
Transmittal, must be received by the Exchange Agent at its address set forth on
the cover page hereto on or prior to the Expiration Date, or the tendering
Holder must comply with the guaranteed delivery procedures set forth below.
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
If a Holder desires to tender Original Notes pursuant to the Exchange
Offer and time will not permit this Letter of Transmittal, certificates
representing such Original Notes and all other required documents to reach the
Exchange Agent, or the procedures for book-entry transfer cannot be completed,
on or prior to the Expiration Date, such Holder must tender such Original Notes
pursuant to the guaranteed delivery procedures set forth under the caption "The
Exchange Offer -- Guaranteed Delivery Procedures" in the Prospectus. Pursuant to
such procedures, (i) such tender must be made by or through an Eligible
Institution; (ii) a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form provided by the Company, or an Agent's
Message with respect to guaranteed delivery that is accepted by the Company,
must be received by the Exchange Agent, either by hand delivery, mail, telegram,
or facsimile transmission, on or prior to the Expiration Date; and (iii) the
certificates for all tendered Original Notes, in proper form for transfer (or
confirmation of a book-entry transfer or all Original Notes delivered
electronically into the Exchange Agent's account at DTC pursuant to the
procedures for such transfer set forth in the Prospectus), together with a
properly completed and duly executed Letter of Transmittal (or manually signed
facsimile thereof) and any other documents required by this Letter of
Transmittal, or in the case of a book-entry transfer, a properly transmitted
Agent's Message, must be received by the Exchange Agent within two business days
after the date of the execution of the Notice of Guaranteed Delivery.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE ORIGINAL
NOTES AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH DTC AND ANY
ACCEPTANCE OR AGENT'S MESSAGE DELIVERED THROUGH ATOP, IS AT THE ELECTION AND
RISK OF THE TENDERING HOLDER AND, EXCEPT AS OTHERWISE PROVIDED IN THIS
INSTRUCTION 2, DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. IF DELIVERY IS BY MAIL, IT IS SUGGESTED THAT THE HOLDER USE
PROPERLY INSURED, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, AND THAT THE
MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT
DELIVERY TO THE EXCHANGE AGENT PRIOR TO SUCH DATE.
-10-
<PAGE>
No alternative, conditional or contingent tenders will be accepted. All
tendering Holders, by execution of this Letter of Transmittal (or a facsimile
thereof), waive any right to receive any notice of the acceptance of their
Original Notes for exchange.
3. INADEQUATE SPACE. If the space provided herein is inadequate, the
certificate numbers and/or the principal amount represented by Original Notes
should be listed on a separate signed schedule attached hereto.
4. PARTIAL TENDERS. (Not applicable to Holders who tender by book-entry
transfer). If Holders wish to tender less than the entire principal amount
evidenced by any Original Note submitted, such Holders must fill in the
principal amount that is to be tendered in the column entitled "Principal Amount
Tendered." The minimum permitted tender is $1,000 in principal amount of
Original Notes. All other tenders must be in integral multiples of $1,000 in
principal amount. In the case of a partial tender of Original Notes, as soon as
practicable after the Expiration Date, new certificates for the remainder of the
Original Notes that were evidenced by such Holder's old certificates will be
sent to such Holder, unless otherwise provided in the appropriate box on this
Letter of Transmittal. The entire principal amount that is represented by
Original Notes delivered to the Exchange Agent will be deemed to have been
tendered, unless otherwise indicated.
5. SIGNATURES ON LETTER OF TRANSMITTAL, INSTRUMENTS OF TRANSFER AND
ENDORSEMENTS. If this Letter of Transmittal is signed by the registered
Holder(s) of the Original Notes tendered hereby, the signatures must correspond
exactly with the name(s) as written on the face of the certificate(s). If this
Letter of Transmittal is signed by a participant of DTC whose name is shown as
the owner of the Original Notes tendered hereby, the signature must correspond
with the name shown on the security position listing as the owner of the
Original Notes.
If any of the Original Notes tendered hereby are registered in the name
of two or more Holders, all such Holders must sign this Letter of Transmittal.
If any of the Original Notes tendered hereby are registered in different names
on several certificates, it will be necessary to complete, sign and submit as
many separate Letters of Transmittal as there are different registrations of
certificates.
If this Letter of Transmittal or any Original Note or instrument of
transfer is signed by a trustee, executor, administrator, guardian,
attorney-in-fact, agent, officer of a corporation or other person acting in a
fiduciary or representative capacity, such person should so indicate when
signing, and proper evidence satisfactory to the Company of such person's
authority to so act must be submitted.
When this Letter of Transmittal is signed by the registered Holder(s)
of the Original Notes listed herein and transmitted hereby, no endorsements of
Original Notes or separate instruments of transfer are required unless Exchange
Notes are to be issued, or Original Notes not tendered or exchanged are to be
issued, to a person other than the registered Holder(s), in which case
signatures on such Original Notes or instruments of transfer must be guaranteed
by an Eligible Institution.
IF THIS LETTER OF TRANSMITTAL IS SIGNED OTHER THAN BY THE REGISTERED
HOLDER(S) OF THE ORIGINAL NOTES LISTED HEREIN, THE ORIGINAL NOTES MUST BE
ENDORSED OR ACCOMPANIED BY APPROPRIATE INSTRUMENTS OF TRANSFER, IN EITHER CASE
SIGNED EXACTLY AS THE NAME(S) OR THE REGISTERED HOLDER(S) APPEAR ON THE ORIGINAL
NOTES AND SIGNATURES ON SUCH ORIGINAL NOTES OR INSTRUMENTS OF TRANSFER ARE
REQUIRED AND MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION, UNLESS THE SIGNATURE
IS THAT OF AN ELIGIBLE INSTITUTION.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If certificates for
Exchange Notes or unexchanged or untendered Original Notes are to be issued in
the name of a person other than the signer of this Letter of Transmittal, or if
Exchange Notes or such Original Notes are to be sent to someone other than the
signer of this Letter of Transmittal or to an address other than that shown
herein, the appropriate boxes on this Letter of Transmittal should be completed.
All Original Notes tendered by book-entry transfer and not accepted for payment
will be returned by crediting the account at DTC designated herein as the
account for which such Original Notes were delivered.
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<PAGE>
7. TRANSFER TAXES. Except as set forth in this Instruction 7, the
Company will pay or cause to be paid any transfer taxes with respect to the
transfer and sale of Original Notes to it, or to its order, pursuant to the
Exchange Offer. If Exchange Notes, or Original Notes not tendered or exchanged
are to be registered in the name of any persons other than the registered
owners, or if tendered Original Notes are registered in the name of any persons
other than the persons signing this Letter of Transmittal, the amount of any
transfer taxes (whether imposed on the registered Holder or such other person)
payable on account of the transfer to such other person must be paid to the
Company or the Exchange Agent (unless satisfactory evidence of the payment of
such taxes or exemption therefrom is submitted) before the Exchange Notes will
be issued.
8. WAIVER OF CONDITIONS. The conditions of the Exchange Offer may be
amended or waived by the Company, in whole or in part, at any time and from time
to time in the Company's sole discretion, in the case of any Original Notes
tendered.
9. SUBSTITUTE FORM W-9. Each tendering owner of an Original Note (or
other payee) is required to provide the Exchange Agent with a correct taxpayer
identification number ("TIN"), generally the owner's social security or federal
employer identification number, and with certain other information, on
Substitute Form W-9, which is provided hereafter under "Important Tax
Information," and to certify that the owner (or other payee) is not subject to
backup withholding. Failure to provide the information on the Substitute Form
W-9 may subject the tendering owner (or other payee) to a $50 penalty imposed by
the Internal Revenue Service and 31% federal income tax withholding on any
interest on Exchange Notes paid to such holder. The box in Part 3 of the
Substitute Form W-9 may be checked if the tendering owner (or other payee) has
not been issued a TIN and has applied for a TIN or intends to apply for a TIN in
the near future. If the box in Part 3 is checked and the Exchange Agent is not
provided with a TIN by the time of payment, the Exchange Agent will withhold 31%
on all such payments of interest on Exchange Notes until a TIN is provided to
the Exchange Agent.
10. BROKER-DEALERS PARTICIPATING IN THE EXCHANGE OFFER. If no
broker-dealer checks the last box on page 7 of this Letter of Transmittal, the
Company has no obligation under the Registration Rights Agreement to allow the
use of the Prospectus for resales of the Exchange Notes by broker-dealers or to
maintain the effectiveness of the Registration Statement of which the Prospectus
is a part after the consummation of the Exchange Offer.
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Any questions or
requests for assistance or additional copies of the Prospectus, this Letter of
Transmittal or the Notice of Guaranteed Delivery may be directed to the Exchange
Agent at the telephone numbers and location listed above. A Holder or owner may
also contact such Holder's or owner's broker, dealer, commercial bank or trust
company or nominee for assistance concerning the Exchange Offer.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR A FACSIMILE HEREOF), TOGETHER
WITH CERTIFICATES REPRESENTING THE ORIGINAL NOTES AND ALL OTHER REQUIRED
DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY, MUST BE RECEIVED BY THE EXCHANGE
AGENT ON OR PRIOR TO THE EXPIRATION DATE.
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<PAGE>
IMPORTANT TAX INFORMATION
Under federal income tax law, an owner of Original Notes whose tendered
Original Notes are accepted for exchange is required to provide the Exchange
Agent with such owner's current TIN on Substitute Form W-9 below. If such owner
is an individual, the TIN is his or her social security number. If the Exchange
Agent is not provided with the correct TIN, the owner or other recipient of
Exchange Notes may be subject to a $50 penalty imposed by the Internal Revenue
Service. In addition, any interest on Exchange Notes paid to such owner or other
recipient may be subject to 31% backup withholding tax.
Certain owners of Notes (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. In order for a foreign individual to qualify as an
exempt recipient, that owner must submit to the Exchange Agent a properly
completed Internal Revenue Service Form W-8 (a "Form W-8"), signed under
penalties of perjury, attesting to that individual's exempt status. A Form W-8
can be obtained from the Exchange Agent. See the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional instructions.
Backup withholding is not an additional tax. Rather, the federal income
tax liability of persons subject to backup withholding will be reduced by the
amount of tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained from the Internal Revenue Service.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding, the owner is required to notify the
Exchange Agent of the owner's current TIN (or the TIN of any other payee) by
completing the following form, certifying that the TIN provided on Substitute
Form W-9 is correct (or that such owner is awaiting a TIN), and that (i) the
owner has not been notified by the Internal Revenue Service that the owner is
subject to backup withholding as a result of failure to report all interest or
dividends or (ii) the Internal Revenue Service has notified the owner that the
owner is no longer subject to backup withholding.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT
The Holder is required to give the Exchange Agent the TIN (e.g., social
security number or employer identification number) of the owner of the Original
Notes. If the Original Notes are registered in more than one name or are not
registered in the name of the actual owner, consult the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9," for
additional guidance on which number to report.
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<PAGE>
<TABLE>
<S> <C>
PAYER'S NAME:[SEE EXCHANGE AGENT]
SUBSTITUTE PART 1--PLEASE PROVIDE YOUR TIN Social security number(s) or
FORM W-9 IN THE BOX AT RIGHT AND CERTIFY Employer Identification Number(s)
BY SIGNING AND DATING BELOW
- ---------------------------------------------------------------------------------------------------------
DEPARTMENT OF THE TREASURY PART 2--Certification--Under the penalties
INTERNAL REVENUE SERVICE of perjury, I certify that:
PAYOR'S REQUEST FOR TAXPAYER (1) The number shown on this form is my
IDENTIFICATION NUMBER correct taxpayer identification number
("TIN") (or I am waiting for a number to be
issued to me), and
(2) I am not subject to backup withholding
because: (a) I am exempt from backup
withholding, or (b) I have not been
notified by the Internal Revenue
Service (IRS) that I am subject to
backup withholding as a result of a
failure to report all interest or
dividends, or (c) the IRS has notified
me that I am no longer subject to
backup withholding.
CERTIFICATION INSTRUCTIONS--You must
cross out item (2) above if you have
been notified by the IRS that you are
currently subject to backup
withholding because of under reporting
interest or dividends on your tax
return.
- ---------------------------------------------------------------------------------------------------------
SIGNATURE______________________ PART 3--
DATE___________________________ Awaiting TIN [ ]
- ---------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN A $50 PENALTY
IMPOSED BY THE INTERNAL REVENUE SERVICE AND BACKUP WITHHOLDING OF 31%.
PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN
PART 3 OF SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (1) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office or (2) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of payment, 31% of all
reportable cash payments made to me will be withheld until I provide a taxpayer
identification number.
Signature___________________________ Date_____________________
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