<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 000-22715
SCHUFF STEEL COMPANY
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 86-0318760
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No.)
Organization)
</TABLE>
420 South 19th Avenue 85009
Phoenix, Arizona (Zip Code)
(Address of Principal Executive Offices)
(602) 252-7787
Registrant's Telephone Number, Including Area Code
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X *
--- ---
*This is the registrant's first required report under the Securities Exchange
Act of 1934.
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practical date:
As of August 13, 1997, there were 7,000,000 shares of Common Stock, $.001 par
value, outstanding.
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SCHUFF STEEL COMPANY
TABLE OF CONTENTS
Page
----
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996 1
Condensed Consolidated Statements of Income -
Three Months Ended June 30, 1997 and 1996 and
Six Months Ended June 30, 1997 and 1996 2
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1997 and June 30, 1996 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K 19
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SCHUFF STEEL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
---------------------
(Unaudited)
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,718 $ 7,253
Restricted funds on deposit 1,848 2,249
Receivables, net 15,884 16,885
Costs and recognized earnings in excess of billings on uncompleted contracts 1,821 871
Inventory 10,151 11,311
Prepaid expenses 588 178
Deferred taxes 622 --
---------------------
Total current assets 35,632 38,747
Property and equipment, net 5,931 5,116
Intangible pension asset 100 106
Other assets 100 --
---------------------
$ 41,763 $ 43,969
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,067 $ 4,043
Billings in excess of costs and recognized earnings on uncompleted contracts 16,938 19,623
Accrued payroll and employee benefits 3,156 1,539
Other accrued liabilities 1,463 367
Stockholder distributions payable 8,037 4,555
Income taxes payable 79 --
Current portion of long-term debt 316 144
---------------------
Total current liabilities 33,056 30,271
Deferred income taxes 322 --
Deferred rent expense 95 --
Accrued pension cost 64 263
Long-term debt, less current portion 2,376 2,753
---------------------
Total liabilities 35,913 33,287
Commitments and contingent liabilities
Stockholders' equity:
Preferred stock, $.001 par value, 1,000,000 shares authorized, no
shares issued and outstanding
Common stock, $.001 par value, 20,000,000 shares authorized, 5,000,000
shares issued and outstanding 5 5
Additional paid-in capital 15 15
Unfunded pension losses (390) (519)
Retained earnings 6,220 11,181
---------------------
Total stockholders' equity 5,850 10,682
---------------------
$ 41,763 $ 43,969
=====================
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. See notes to condensed consolidated financial statements.
1
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SCHUFF STEEL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
1997 1996 1997 1996
-----------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues $ 37,177 $ 29,691 $ 62,684 $ 40,101
Cost of revenues 32,739 25,600 54,394 34,018
-----------------------------------------------
Gross profit 4,438 4,091 8,290 6,083
General and administrative expenses 2,094 1,500 4,175 2,856
-----------------------------------------------
Operating income 2,344 2,591 4,115 3,227
Interest expense (96) (90) (191) (237)
Other income 172 80 219 132
-----------------------------------------------
Income before income tax benefit 2,420 2,581 4,143 3,122
Income tax benefit 156 -- 156
-----------------------------------------------
Net income $ 2,576 $ 2,581 $ 4,299 $ 3,122
===============================================
Pro forma, net income data:
Net income, reported above $ 2,576 $ 2,581 $ 4,299 $ 3,122
Pro forma provision for income taxes related to
operations as S Corporation 824 1,032 1,513 1,249
-----------------------------------------------
Pro forma net income $ 1,752 $ 1,549 $ 2,786 $ 1,873
===============================================
Pro forma net income per share $ 0.29 $ 0.26 $ 0.46 $ 0.31
===============================================
Shares used in computation 6,071 6,071 6,071 6,071
===============================================
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 5
SCHUFF STEEL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30
1997 1996
---------------------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,299 $ 3,122
Adjustment to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 745 601
Gain on disposal of property and equipment (21) (34)
Deferred taxes (300) --
Changes in operating assets and liabilities:
Restricted funds on deposit 401 --
Receivables 2,044 (5,468)
Costs and recognized earnings in excess of billings in
uncompleted contracts (353) 763
Inventories 1,256 (4,986)
Prepaid expenses (318) (534)
Accounts payable (1,765) (2,799)
Billings in excess of costs and recognized earnings on
uncompleted contracts (2,691) 10,342
Accrued payroll and employee benefits 1,592 697
Other accrued liabilities 1,032 2,973
Income taxes payable 79 --
Deferred rent expense 95 --
Accrued pension cost (64) (66)
---------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,031 4,611
INVESTING ACTIVITIES
Repayment of receivables from stockholders -- 18
Acquisitions of property and equipment (865) (1,062)
Proceeds from disposals of property and equipment 40 187
Increase in other assets (100) --
Purchase of business (427) --
---------------------
NET CASH USED IN INVESTING ACTIVITIES (1,352) (857)
FINANCING ACTIVITIES
Proceeds from revolving line of credit and long-term borrowings 17,712 33,528
Principal payments on revolving line of credit and long-term debt (19,148) (35,349)
Cash distributions to stockholders (5,778) (1,709)
---------------------
NET CASH USED IN FINANCING ACTIVITIES (7,214) (3,530)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,535) 224
Cash and cash equivalents at beginning of period 7,253 289
---------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,718 $ 513
=====================
</TABLE>
See notes to condensed consolidated financial statements.
3
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Schuff Steel Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three- and six-month periods ended June
30, 1997 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto of Schuff Steel Company
for the year ended December 31, 1996 which were included as part of the
Company's Registration Statement on Form S-1 (Registration No. 333-26711), as
declared effective by the Securities and Exchange Commissions on June 26, 1997.
2. RECEIVABLES AND CONTRACTS IN PROGRESS
Receivables consist of the following at:
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
-------------------------
(in thousands)
<S> <C> <C>
Contract receivables:
Contracts in progress $10,331 $11,566
Unbilled retentions 5,474 5,112
-------------------------
15,805 16,678
Notes receivable 33 65
Other receivables 46 142
-------------------------
$15,884 $16,885
=========================
</TABLE>
4
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Schuff Steel Company
Notes to Condensed Consolidated Financial
Statements (Unaudited)(continued)
3. INVENTORIES
Inventories consist of the following at:
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
--------------------------
(in thousands)
<S> <C> <C>
Raw materials $ 1,490 $ 665
Fabrication in process 8,066 10,032
Finished goods 595 614
------- -------
$10,151 $11,311
======= =======
</TABLE>
4. NET INCOME PER SHARE
Pro forma net income per share consists of the Company's historical net income
as an S Corporation, adjusted for additional income taxes that would have been
recorded had the Company operated as a C Corporation. This amount is divided by
the weighted average shares of common stock outstanding after giving retroactive
effect to the stock split described in Note 6, and increased to reflect the
assumed issuance of sufficient additional shares to pay a $7 million
distribution to shareholders from the Company's initial public offering
proceeds. All such additional shares are assumed to be issued at the offering
price of $8.00 per share, net of offering expenses.
5. INCOME TAXES
On June 26, 1997, the Company's shareholders elected to terminate the Company's
status as an S Corporation, and the Company became subject to federal and state
income taxes. Upon revocation of the S Corporation election, the Company
recorded a $300,000 credit to income as a deferred tax benefit. Prior to its
termination as an S Corporation, the Company declared an additional distribution
of $7.0 million to its then current stockholders. The Company's retained
earnings represent undistributed S Corporation earnings of approximately
$3,100,000 and certain C Corporation earnings prior to the Company's election of
subchapter S Corporation status in 1987. C Corporation earnings from June 26,
1997 to June 30, 1997, other than $359,000 with respect to its subsidiary, B&K
Steel Fabrications, Inc. (B&K Steel), which is taxed as a C Corporation, were
not significant to the operations of the Company.
5
<PAGE> 8
Schuff Steel Company
Notes to Condensed Consolidated Financial
Statements (Unaudited)(continued)
5. INCOME TAXES (CONTINUED)
Pro forma net income reflects the provision for income taxes that would have
been recorded had all of the Company's income been subject to income taxes as a
C Corporation for all periods assuming an effective tax rate of 40 percent.
The Company provides for income taxes using the liability method in accordance
with Financial Accounting Standards Board Statement No. 109, "Accounting for
Income Taxes."
Deferred tax assets and liabilities are comprised of the following at June 30,
1997:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Deferred tax assets:
Vacation accrual $209
Deferred compensation accrual 212
Revenue recognition on contracts in progress 134
Other 107
----
662
Deferred tax liabilities:
Pension accrual 136
Other 226
----
362
----
Net deferred tax assets $300
====
</TABLE>
Significant components of the income tax benefit for the three and six month
periods ended June 30, 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Six Months Ended
Ended June 30 June 30
1997 1997
----------------------------------
(in thousands)
<S> <C> <C>
Current:
Federal $ 122 $ 122
State 22 22
----- -----
144 144
Deferred:
Federal (255) (255)
State (45) (45)
----- -----
(300) (300)
----- -----
$(156) $(156)
===== =====
</TABLE>
6
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Schuff Steel Company
Notes to Condensed Consolidated Financial
Statements (Unaudited)(continued)
5. INCOME TAXES (CONTINUED)
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax benefit is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 1997 June 30, 1997
Actual Pro forma Actual Pro forma
-------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Tax at U.S. federal statutory rates $ 823 $ 823 $ 1,409 $ 1,409
State income taxes net of federal tax benefit 145 145 248 248
S Corporation termination (300) (300) (300) (300)
Tax attributable to S Corporation portion of
earnings (824) -- (1,513) --
-------------------------------------------
$ (156) $ 668 $ (156) $ 1,357
===========================================
</TABLE>
6. SHAREHOLDERS' EQUITY
On May 8, 1997, the Company effected a 50,000 for one common stock split.
Accordingly, all shares of common stock have been restated in the financial
statements to reflect the effect of this stock split. At the same time, the
Company also reincorporated in Delaware and changed its authorized shares and
classes of stock. The information set forth in the condensed consolidated
financial statements reflect the authorized shares after having given effect to
the reincorporation.
On June 26, 1997, the Company's Registration Statement on Form S-1 (Registration
No. 333-26711) was declared effective by the Securities and Exchange Commission.
On July 7, 1997, the Company sold 2,000,000 common shares pursuant to the
registration statement, increasing the total shares outstanding to 7,000,000.
The Company received net proceeds from the sale of approximately $14,200,000, of
which approximately $7,000,000 will be used to fund S Corporation distributions
payable to stockholders of record of the Company immediately prior to the
effective date of the Form S-1.
7. CONTINGENT MATTERS
The Company is involved from time to time through the ordinary course of
business in certain claims, litigation and assessments. Due to the nature of the
construction industry, the Company's employees from time to time become subject
to injury, or even death, while employed by the Company. The Company does not
believe there are any such contingencies at December 31, 1996
7
<PAGE> 10
Schuff Steel Company
Notes to Condensed Consolidated Financial
Statements (Unaudited)(continued)
7. CONTINGENT MATTERS (CONTINUED)
or June 30, 1997 for which the eventual outcome would have a material adverse
impact on the Company.
During 1996, the primary contractor on the Company's largest contract claimed
that the Company was liable under delay provisions and is seeking damages. While
the Company believes that the reasons for the delay should preclude any
liability, the Company has reduced expected revenues by approximately $900,000
due to this uncertainty.
During 1996, the Company was named as a defendant in a lawsuit relating to an
incident at one of its worksites whereby one of its employees was killed in a
crane accident. The Company believes the loss, if any, relating to the incident
will be fully insured and does not expect the ultimate outcome of the matter to
have a material adverse impact on its financial position.
Relating to the incident set forth in the prior paragraph, the Company has been
named as a defendant in a lawsuit brought by the crane operator who claims he
was assaulted by employees of the Company after the incident. The Company's
insurance carrier has declined coverage. However, management does not expect the
amount of loss, if any, relating to the ultimate resolution of this matter to
have a material adverse impact on its financial position, regardless of whether
or not the insurance carrier ultimately provides coverage.
8
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion and analysis of financial condition and results of operations
should be read in conjunction with the unaudited condensed consolidated
financial statements and the related disclosures included elsewhere herein and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included as part of the Company's Registration Statement on Form S-1
(Registration No. 333-26711), as declared effective by the Securities and
Exchange Commission on June 26, 1997.
Results of Operations
Revenues increased by 25.2 percent to $37.1 million for the three months ended
June 30, 1997 from $29.7 million for the three months ended June 30, 1996.
Revenues increased by 56.3 percent to $62.7 million for the six months ended
June 30, 1997 from $40.1 million for the six months ended June 30, 1996. The
increases were attributable primarily to a greater number of large individual
contracts in 1997 as compared to 1996 and to lower revenue quarters in 1996 due
to the Company being in the early stages of large contracts for which revenue
recognition had not begun. The revenues for the three and six month periods
ended June 30, 1997 also included $2.9 million and $4.5 million of revenues,
respectively, of B&K Steel following its acquisition by the Company on January
31, 1997. The average revenues for the Company's ten largest revenue generating
projects in the three and six month periods ended June 30, 1997 were $3.0
million and $4.5 million, respectively, versus $2.7 million and $3.3 million in
the three and six month periods ended June 30, 1996, respectively. One contract,
relating to Bank One Ballpark, produced revenues of $8.0 million and $11.6
million for the three and six month periods ended June 30, 1997, respectively.
Gross profit increased by 8.5 percent to $4.4 million for the three month period
ended June 30, 1997 from $4.1 million for the three month period ended June 30,
1996. Gross profit increased 36.3 percent to $8.3 million for the six month
period ended June 30, 1997 from $6.1 million for the six month period ended June
30, 1996. The increase for the six month period ended June 30, 1997 was
primarily attributable to a 56.3 percent increase in revenues. As a percentage
of revenues, gross profit declined to 11.9 percent and 13.2 percent for the
three and six month periods ended June 30, 1997, respectively, from 13.8 percent
and 15.2 percent for the three and six month periods ended June 30, 1996. The
decrease in margins during the three months ended June 30,1997 was primarily
attributable to above average 1996 margins. With respect to the six months ended
June 30, 1997, the Company had lower margins due principally to a change in
estimated costs on its largest contract primarily as a result of increased costs
of certain subcontracted activities for which the Company will not be
reimbursed.
General and administrative expenses increased by 39.7 percent to $2.1 million
for the three months ended June 30, 1997 from $1.5 million for the three months
ended June 30, 1996. General and administrative expenses increased by 46.2
percent to $4.2 million for the six months ended June 30, 1997 from $2.9 million
for the six months ended June 30, 1996. General and administrative expenses as a
percentage of revenues decreased to 6.7 percent for the six months
9
<PAGE> 12
ended June 30, 1997 from 7.1 percent for the six months ended June 30, 1996 due
to the 56.3 percent increase in revenues and a less than proporationate increase
in general and administrative expenses required to support the increase in
revenues. General and administrative expenses include those for contract bids,
estimating, sales and marketing, facilities, project management, and support
services, none of which increased in proportion to the increase in revenues,
primarily because the Company's higher average contracts during the period did
not require proportionately higher general and administrative expenses. General
and administrative expenses increased from 5.6 percent of revenues for the three
months ended June 30, 1997 to 6.7 percent for the six months ended June 30, 1997
due to increased administrative costs associated with the B&K Steel acquisition,
which has higher general and administrative costs as a percentage of revenues,
and to increased lease expenses due to contractual increases and assumption of
additional space.
Interest expense decreased by 19.4 percent to $191,000 for the six months ended
June 30, 1997 from $237,000 for the six months ended June 30, 1996. The decrease
was attributable to the lower average line of credit borrowings, which was made
possible by the Company's ability to increase its billings in excess of costs
and recognized earnings on uncompleted contracts.
Other income increased 113.6 percent to $172,000 for the three month period
ended June 30, 1997 from $80,000 for the three month period ended June 30, 1996.
Other income increased 65.9 percent to $219,000 for the six month period ended
June 30, 1997 from $132,000 for the six month period ended June 30, 1996. The
increase in other income was primarily attributable to earnings on funds
invested.
Income tax benefit for the three and six month periods ended June 30, 1997 was
$156,000 which consisted of a $300,000 credit to deferred taxes generated upon
the revocation of the Company's S Corporation status on June 26, 1997 and a
$144,000 tax expense related to taxable earnings of B&K Steel, a C Corporation,
from the date of acquisition at January 31, 1997.
Backlog decreased 18.8 percent to $53.2 million at June 30, 1997 from $65.6
million at March 31, 1997. Backlog decreased 45.9 percent from June 30, 1997
compared to $98.5 million at June 30, 1996. Backlog at June 30, 1996 was
unusually high due to the receipt of five contracts, each in excess of $10.0
million, during the fourth quarter of 1995 and the first quarter of 1996. These
contracts produced backlog totaling $72.5 million at June 30, 1996, $42.8
million of which was attributable to the first and second phases of the Bank One
Ballpark project. Backlog at June 30, 1997 included $20.0 million relating to
the second and third phases of the Bank One Ballpark project. The Company's
backlog at June 30, 1997 also reflected approximately $9.8 million attributable
to six projects for one customer in Las Vegas, Nevada.
The Company has experienced, and is expected to continue to experience,
variations in quarterly and annual results of operations. Factors that may
affect these results include, among other things, the timing and terms of major
contract awards and the starting and completion dates of
10
<PAGE> 13
projects. Based upon its current backlog and project schedules, the Company
anticipates that revenues and pre-tax income for the third quarter of 1997 may
be lower than recorded for the same period of 1996.
Liquidity and Capital Resources
The Company completed an initial public offering of 2,000,000 shares of common
stock on July 7, 1997. The offering yielded $14.2 million in proceeds net of
underwriting discounts and other costs. The Company plans to use such proceeds
to fund $7.0 million in S Corporation distributions (out of a total of $8.0
million accrued at June 30, 1997), to purchase $2.5 million in specialized
fabrication equipment, with the balance to fund general corporate purposes
including the acquisition of businesses complimentary to the Company's business
and growth strategy.
In the ordinary course of its business, the Company attempts to structure the
payment arrangements under its contracts to match costs incurred under the
project. To the extent the Company is able to bill in advance of costs incurred,
it generates working capital through billings in excess of costs and recognized
earnings on uncompleted contracts. To the extent the Company is not able to bill
in advance of costs, it relies on its credit facilities to meet its working
capital needs. At June 30, 1997, the Company had no borrowings under its line of
credit due in large part to its billings in excess of costs and recognized
earnings on uncompleted contracts of $16.9 million. At such date, the Company
had working capital of approximately $2.6 million. The Company believes that it
has sufficient liquidity through its present resources, including the net
proceeds of its initial public offering, and its bank credit facility to meet
its near term financial needs.
The Company's short term cash needs are primarily for working capital to support
operations including receivables, inventories, and other costs incurred in
performing its contracts. Operating activities provided cash flows of $6.0
million and $4.6 million for the six months ended June 30, 1997 and 1996,
respectively, and $14.4 million for the year ended December 31, 1996. For the
six months ended June 30, 1997, operating cash flows were greater than net
income due to lowered working capital requirements. For the six months ended
June 30, 1996, operating cash flows were greater than net income due to
favorable billings relating to contracts in process. Favorable billings also
positively impacted operating cash flows for 1996. Investing activities required
$1.4 million and $857,000 for the six months ended June 30, 1997 and 1996,
respectively, and $2.3 million during the year ended December 31, 1996,
substantially all of which were related to purchases of property and equipment
and the cash portion of the acquisition of B&K Steel. Financing activities
consumed $7.2 million and $3.5 million for the six months ended June 30, 1997
and 1996, respectively, and $5.1 million for the year ended December 31, 1996,
and were related primarily to repayments of long-term debt and line of credit
balances. Also included in financing activities were distributions to
stockholders for income taxes related to the operations of the business and
other stockholder distributions. These distributions totaled $5.8 million and
$1.8 million for the six months ended June 30, 1997 and 1996, respectively, and
$2.3 million for the year ended December 31, 1996. Other than remaining S
Corporation distributions, the Company does not anticipate paying any future
dividends.
11
<PAGE> 14
The Company maintains a $10.0 million credit facility with a commercial bank
that is subject to renewal on June 30, 1999 and is collateralized by contract
receivables, equipment and inventory. The Company's credit facility requires
that the Company maintain minimum tangible net worth of $19.0 million, minimum
owners equity (the sum of capital, capital surplus and retained earnings divided
by total assets) of 33 percent at June 30 and September 30, 1997, and 40 percent
at December 31, 1997 and thereafter, a minimum current ratio of 1.25 to 1.00,
and a minimum debt coverage ratio of 1.5 to 1.0 (net profit after tax plus
depreciation and amortization plus or less changes in deferred taxes divided by
long-term debt including prior period current maturities). The security
agreements pursuant to which the Company's assets are pledged prohibit any
further pledge of such assets without the written consent of the Company's
lender. Under this facility, the Company may borrow an amount equal to the
greater of a) 75 percent of qualified contract receivables up to a maximum of
$10.0 million, or b) a maximum of $5.0 million based on the greater of (i) 50
percent of the net book value of fixed assets or (ii) 75 percent of the fair
market value of fixed assets. The Company's ability to borrow is also subject
to, among other restrictions, billings in excess of recognized earnings on
uncompleted contracts. At June 30, 1997, there was $3.0 million credit available
under the line for future borrowings. The Company is seeking to modify its
credit facility to increase the amounts available.
The Company has two other long-term debt commitments that are related to its
property and equipment. One is a subordinated note payable to a limited
partnership comprised of the Company's present stockholders and certain of their
family members, which requires monthly payments of $12,037 plus interest and
matures in 1999. The balance on this loan was approximately $1.9 million at June
30, 1997. The other long-term debt of the Company consists of two notes in the
aggregate principal amount of $796,250 incurred as part of the consideration for
the B&K Steel acquisition. Such notes are payable in five equal annual
installments ending in 2002.
The Company estimates that its capital expenditures for 1997 will be
approximately $2.5 million of which approximately $865,000 had been expended as
of June 30, 1997. The Company estimates that its available funds, cash generated
by operating activities and funds available under its bank credit facility will
be sufficient to fund these capital expenditures and its working capital needs.
However, the Company may expand its operations through future acquisitions and
may require additional equity or debt financing.
Impact of Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 128 (FAS 128), "Earnings Per
Share," issued by the Financial Accounting Standards Board in February 1997, is
effective for periods ending after December 15, 1997. At that time, the Company
will be required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of stock options
will be excluded. The impact is expected to result in an increase in pro forma
primary earnings per
12
<PAGE> 15
share for the year ended December 31, 1996 of $0.19 and the three and six month
periods ended June 30, 1997 of $0.05 and $0.09, respectively. The impact of FAS
128 on the calculation of fully diluted pro forma earnings per share for these
periods is not expected to be material.
Forward Looking Statements
This Quarterly Report on Form 10-Q, including the Notes to the Condensed
Consolidated Financial Statements and in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contains forward
looking statements. Additional written or oral forward looking statements may be
made by the Company from time to time in filings with the Securities and
Exchange Commission or otherwise. The words "believe," "expect," "anticipate,"
"intends," "forecast," "project," and similar expressions identify forward
looking statements. Such statements may include, but not be limited to, the
anticipated outcome of contingent events, including litigation, projections of
revenues, income or loss, and capital expenditures, plans for future operations,
growth and acquisitions, financing needs or plans and the availability of
financing, plans relating to products or services of the Company, as well as
assumptions relating to the foregoing. Such forward looking statements are
within the meaning of that term in Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward looking statements reflect the Company's current views with respect to
future events and financial performance and speak only as of the date the
statements are made. Such forward looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or quantified. Future
events and actual results could differ materially from those set forth in,
contemplated by, or underlying the forward looking statements. Statements in
this Quarterly Report, including the Notes to the Condensed Consolidated
Financial Statements and in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations," describe factors, among others,
that could contribute to or cause such differences. Other factors that could
cause actual results to differ materially from those expressed in such forward
looking statements are set forth below under the caption "Factors That May
Affect Future Operating Results and Financial Condition." In addition, new
factors emerge from time to time and it is not possible for management to
predict all of such factors, nor can it assess the impact of each such factor on
the business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from forward looking statements. The
Company undertakes no obligation to publicly update or review any forward
looking statements, whether as a result of new information, future events, or
otherwise.
Factors That May Affect Future Operating Results and Financial Condition.
The Company's future operating results and financial condition are dependent on
a number of factors that the Company must successfully manage in order to
achieve favorable future operating results and financial condition. The
following potential risks and uncertainties, together with those mentioned
elsewhere herein, could affect the Company's future operating results, financial
condition, and the market price of its Common Stock.
13
<PAGE> 16
Fluctuating Quarterly Results of Operations
The Company has experienced, and in the future is expected to continue to
experience, substantial variations in its results of operations as a result of a
number of factors, many of which are outside the Company's control. In
particular, the Company's operating results may vary because of downturns in one
or more segments of the building construction industry, changes in economic
conditions, the Company's failure to obtain, or delays in awards of, major
projects, the cancellation of major projects, the Company's failure to timely
replace projects that have been completed or are nearing completion, or declines
in the amount of the Company's billings in excess of costs and recognized
earnings on uncompleted projects. Any of these factors could result in the
periodic inefficient or underutilization of the Company's resources and could
cause the Company's operating results to fluctuate significantly from period to
period, including on a quarterly basis.
Large Fixed Price Contracts
A substantial portion of the Company's backlog consists of projects being
performed on a fixed price basis. In bidding on projects, the Company estimates
its costs, including projected increases in costs of labor, material and
services. Despite these estimates, costs and gross profit realized on a fixed
price contract may vary from estimated amounts because of unforeseen conditions
or changes in job conditions, variations in labor and equipment productivity
over the terms of contracts, higher than expected increases in labor or material
costs and other factors. These variations could have a material adverse effect
on the Company's business, financial condition and results of operations for any
period.
Dependence On Construction Industry
The Company earns virtually all of its revenues in the building construction
industry, which is subject to local, regional and national economic cycles. The
Company's revenues and cash flows depend to a significant degree on major
construction projects in various industries, including the hotel and casino,
retail shopping, health care, mining, computer chip manufacturing, public works
and other industries, each of which industries may be adversely affected by
general or specific economic conditions. If construction activity declines
significantly in the Company's principal markets, the Company's business,
financial condition and results of operations would be adversely affected.
14
<PAGE> 17
Dependence On Subcontractors
The Company routinely relies on subcontractors to perform a significant portion
of its fabrication and project detailing to fulfill projects that the Company
cannot fulfill in-house due to capacity constraints or that are in markets in
which the Company has not established a strong local presence. With respect to
these projects, the Company's success depends on its ability to retain and
successfully manage these subcontractors. Any difficulty in attracting and
retaining qualified subcontractors on terms and conditions favorable to the
Company could have an adverse effect on the Company's ability to complete these
projects in a timely and cost effective manner.
Union Contracts
The Company currently is a party to a number of collective bargaining agreements
with various unions representing the Company's fabrication and erection
employees. These contracts expire or are subject to expiration at various times
in the future. The inability of the Company to renew such contracts could result
in work stoppages and other labor disturbances, which could disrupt the
Company's business and adversely affect the Company's results of operations.
Percentage Of Completion Accounting
The Company recognizes revenues using the percentage of completion accounting
method. Under this method, revenues are recognized based on the ratio that costs
incurred to date bear to the total estimated costs to complete the project.
Estimated losses on contracts are recognized in full when the Company determines
that a loss will be incurred. The Company frequently reviews and revises
revenues and total cost estimates as work progresses on a contract and as
contracts are modified. Accordingly, revenue adjustments based upon the revised
completion percentage are reflected in the period that estimates are revised.
Although revenue estimates are based upon management assumptions supported by
historical experience, these estimates could vary materially from actual
results. To the extent percentage of completion adjustments reduce previously
reported revenues, the Company would recognize a charge against operating
results, which could have a material adverse effect on the Company's results of
operations for the applicable period.
Geographic Concentration
The Company's fabrication and erection operations currently are conducted
primarily in Arizona and Nevada, states in which the construction industry has
experienced substantial growth during recent years. Because of this
concentration, future construction activity and the Company's business may be
adversely affected in the event of a downturn in economic conditions existing in
Arizona and Nevada and in the southwestern United States generally. Factors that
may affect economic conditions include increases in interest rates or
limitations in the availability of financing for construction projects,
decreases in the amount of funds budgeted for governmental projects, decreases
in capital expenditures devoted to the construction of plants, distribution
centers, industrial facilities, hotels and casinos, convention centers and other
facilities, the prevailing market prices of copper, gold and other metals that
impact related mining activity, and
15
<PAGE> 18
downturns in occupancy rates, office space demand, tourism and convention
related activity and population growth.
Variations In Backlog
The Company's backlog can be significantly affected by the receipt, or loss, of
individual contracts. In the event one or more large contracts were terminated
or their scope reduced, the Company's backlog would decrease substantially. The
Company's future business and results of operations may be adversely affected if
it is unable to replace significant contracts when lost or completed, or if it
otherwise fails to maintain a sufficient level of backlog.
Operating Risks; Litigation
Construction and heavy steel plate weldments involve a high degree of
operational risk. Natural disasters, adverse weather conditions, design,
fabrication and erection errors and work environment accidents can cause death
or personal injury, property damage and suspension of operations. The occurrence
of any of these events could result in loss of revenues, increased costs, and
liability to third parties. The Company is subject to litigation claims in the
ordinary course of business, including lawsuits asserting substantial claims.
Currently, the Company does not maintain any material reserves for its ongoing
litigation, and expenses substantially all litigation costs as incurred. The
Company periodically reviews the need to maintain litigation reserves. The
Company maintains risk management, insurance, and safety programs intended to
prevent or mitigate losses. There can be no assurance that any of these programs
will be adequate or that the Company will be able to maintain adequate insurance
in the future at rates that it considers reasonable.
Risks Of International Operations
The Company currently is expanding into international markets. The Company's
international operations are subject to certain political, economic and other
uncertainties, including risks of war, nationalization of assets, renegotiation
or nullification of existing contracts, changing political conditions, changing
laws and policies affecting trade and investment, and overlap of different tax
structures. Although the Company currently attempts to limit its exposure to
currency fluctuations by dealing solely in United States dollars, there can be
no assurance that the Company's international operations will escape the risks
of fluctuating currency values, hard currency shortages, or controls on currency
exchange.
Competition
Many small and various large companies offer fabrication, erection and related
services that compete with those provided by the Company. Local and regional
companies offer competition
16
<PAGE> 19
in one or more of the Company's geographic markets or product segments. Out of
state or international companies may provide competition in any market. The
Company competes for every project it obtains.
Although the Company believes customers consider, among other things, the
availability and technical capabilities of equipment and personnel, efficiency,
safety record and reputation, price competition usually is the primary factor in
determining which qualified contractor is awarded a contract. Competition has
resulted in pressure on pricing and operating margins, and the effects of
competitive pressure in the industry may continue. Some of the Company's
competitors have greater capital and other resources than the Company and are
well established in their respective markets. There can be no assurance that the
Company's competitors will not substantially increase their commitment of
resources devoted to competing aggressively with the Company or that the Company
will be able to compete profitably with its competitors.
Substantial Liquidity Requirements
The Company's operations require significant amounts of working capital to
procure materials for contracts to be performed over relatively long periods,
and for purchases and modifications of heavy-duty and specialized fabrication
equipment. In addition, the Company's contract arrangements with customers
sometimes require the Company to provide payment and performance bonds and, in
selected cases, letters of credit, to partially secure the Company's obligations
under its contracts, which may require the Company to incur significant
expenditures prior to receipt of payments. Furthermore, the Company's customers
often will retain a portion of amounts otherwise payable to the Company during
the course of a project as a guarantee of completion of that project. To the
extent the Company is unable to receive project payments in the early stages of
a project, the Company's cash flow would be reduced, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
No Assurance Of Successful Acquisitions
The Company intends to consider acquisitions of and alliances with other
companies in its industry that could complement the Company's business,
including the acquisition of entities in diverse geographic regions and entities
offering greater access to industries and markets not currently served by the
Company. There can be no assurance that suitable acquisition or alliance
candidates can be identified or, if identified, that the Company will be able to
consummate such transactions. Further, there can be no assurance that the
Company will be able to integrate successfully any acquired companies into its
existing operations, which could increase the Company's operating expenses.
Moreover, any acquisition by the Company may result in potentially dilutive
issuances of equity securities, incurrence of additional debt and amortization
of expenses related to goodwill and intangible assets, all of which could
adversely affect the Company's profitability. Acquisitions involve numerous
risks, such as diverting attention of the Company's management from other
business concerns, the entrance of the Company into markets in which it has had
no or only limited experience and the potential loss of key employees of the
acquired company, any of
17
<PAGE> 20
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence Upon Key Personnel
The Company's success depends on the continued services of the Company's senior
management and key employees as well as the Company's ability to attract
additional members to its management team with experience in the steel
fabrication and erection industry. Although the Company has implemented a stock
option plan designed to retain key management and other employees, and believes
that it offers competitive compensation to such personnel, the Company is not a
party to any employment agreements with its management personnel or other key
employees. The unexpected loss of the services of any of the Company's
management or other key personnel, or its inability to attract new management
when necessary, could have a material adverse effect upon the Company.
Potential Environmental Liability
The Company's operations and properties are affected by numerous federal, state
and local environmental protection laws and regulations, such as those governing
discharges to air and water and the handling and disposal of solid and hazardous
wastes. Compliance with these laws and regulations has become increasingly
stringent, complex and costly. There can be no assurance that such laws and
regulations or their interpretation will not change in a manner that could
materially and adversely affect the Company. Certain environmental laws, such as
the Comprehensive Environmental Response, Compensation and Liability Act and its
state law counterparts, provide for strict and joint and several liability for
investigation and remediation of spills and other releases of toxic and
hazardous substances. These laws may apply to conditions at properties currently
or formerly owned or operated by an entity or its predecessors, as well as to
conditions at properties at which wastes or other contamination attributable to
an entity or its predecessors come to be located.
Although the Company has not incurred any material environmental related
liability in the past and believes that it is in material compliance with
environmental laws, there can be no assurance that the Company, or entities for
which it may be responsible, will not incur such liability in connection with
the investigation and remediation of facilities it currently operates (or
formerly owned or operated) or other locations in a manner that could materially
and adversely affect the Company.
Governmental Regulation
Many aspects of the Company's operations are subject to governmental regulations
in the United States and in other countries in which the Company operates,
including regulations relating to occupational health and workplace safety,
principally the Occupational Safety and Health Act and regulations thereunder.
In addition, the Company is subject to licensure and holds or has applied for
licenses in each of the states in the United States in which it operates and in
certain
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<PAGE> 21
local jurisdictions within such states. Although the Company believes that it is
in material compliance with applicable laws and permitting requirements, there
can be no assurance that it will be able to maintain this status. Further, the
Company cannot determine to what extent future operations and earnings of the
Company may be affected by new legislation, new regulations or changes in or new
interpretations of existing regulations.
Possible Volatility Of Stock Price
The stock market has experienced price and volume fluctuations that have
affected the market for many companies and have often been unrelated to the
operating performance of such companies. The market price of the Common Stock
could also be subject to significant fluctuations in response to variations in
the Company's quarterly operating results, analyst reports, announcements
concerning the Company, legislative or regulatory changes or the interpretation
of existing statutes or regulations affecting the Company's business,
litigation, general trends in the industry and other events or factors.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C>
10.1(a) Modification Agreement dated June 30, 1997 between the Company and Bank One,
Arizona, NA
10.1(b) Continuing Guaranty dated June 30, 1997 between B&K Steel Fabrications, Inc. and
Bank One, Arizona, NA
10.1(c) Subordination of Lien Rights between 19th Avenue/Buchanan Limited Partnership
and Bank One, Arizona, NA Relating to Real Property Located at 420 South 19th
Avenue, Phoenix, Arizona
10.1(d) Subordination of Lien Rights between 19th Avenue/Buchanan Limited Partnership
and Bank One, Arizona, NA Relating to Real Property Located at 1833-1841 W.
Buchanan Street, Phoenix, Arizona
10.1(e) Subordination of Lien Rights between 19th Avenue/Buchanan Limited Partnership
and Bank One, Arizona, NA Relating to Real Property Located at 619 N. Cooper
Road, Gilbert, Arizona
</TABLE>
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<PAGE> 22
<TABLE>
<S> <C>
10.1(f) Subordination Agreement dated June 30, 1997 between 19th Avenue/Buchanan Limited
Partnership, the Company and Bank One, Arizona, NA
11 Statement Regarding Computation of Earnings Per Share
27 Financial Data Schedule
</TABLE>
(b) The Company filed no reports on Form 8-K during the quarter for which this
report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCHUFF STEEL COMPANY
Date: August 14, 1997 By: /s/ Kenneth F. Zylstra
---------------------------
Kenneth F. Zylstra
Vice President and Chief Financial
Officer
(Principal Financial Officer
and Duly Authorized Officer)
20
<PAGE> 1
EXHIBIT 10.1(a)
MODIFICATION AGREEMENT
DATE: JUNE 30, 1997
PARTIES: Borrower: SCHUFF STEEL COMPANY,
a Delaware corporation.
Bank: BANK ONE, ARIZONA, NA,
a national banking association
RECITALS:
A. Bank has extended to Borrower credit ("Loan") in the principal
amount of $6,500,000.00 pursuant to the Revolving Line of Credit Loan Agreement
(Accounts Receivable and Inventory), dated June 30, 1995 ("Loan Agreement"),
and evidenced by the Revolving Line of Credit Note (Variable Rate), dated June
30, 1995 ("Note"). The unpaid principal of the Loan as of the date hereof is
$0.00.
B. The Loan and/or guaranty of Loan is secured by, among other things,
(i) the Continuing Security Agreement Inventory, Receivables and Rights to
Payment, dated September 15, 1994, and (ii) the Security Agreement Consumer
Goods, Equipment and Farm Equipment, including Titled Vehicles, dated September
15, 1994, both by Borrower for the benefit of Bank (the agreements, documents,
and instruments securing the Loan and the Note are referred to individually and
collectively as the ("SECURITY DOCUMENTS").
C. Bank and Borrower have executed and delivered previously the
following agreements ("MODIFICATIONS") modifying the terms of the Loan, the
Note, the Loan Agreement, and/or the Security Documents: (i) Modification
Agreement, dated June 30, 1996, (ii) Modification Agreement, dated March 31,
1997, and (iii) Letter Agreement, dated May 7, 1997. (The Note, the Loan
Agreement, the Security Documents, any arbitration resolution, and all other
agreements, documents, and instruments evidencing, securing, or otherwise
relating to the Loan, as modified in the Modifications, are sometimes referred
to individually and collectively as the "LOAN DOCUMENTS". Hereinafter, "NOTE",
LOAN AGREEMENT", and "SECURITY DOCUMENTS" shall mean such documents as modified
in the Modifications.)
D. Borrower has requested that Bank modify the Loan and the Loan
Documents as provided herein. Bank is willing to so modify the Loan and the
Loan Documents, subject to the terms and conditions herein.
AGREEMENT:
- ----------
For good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Borrower and Bank agree as follows:
1. ACCURACY OF RECITALS.
---------------------
Borrower acknowledges the accuracy of the Recitals.
2. MODIFICATION OF LOAN DOCUMENTS.
-------------------------------
2.1 The Loan Documents are modified as follows:
2.1.1 The maturity date of the Loan and the Note is changed from June
30, 1998 to June 30, 1999. On the maturity date Borrower shall pay to Bank the
unpaid principal, accrued and unpaid interest, and all other amounts payable by
Borrower under the Loan Documents as modified herein.
2.1.2 The reference to Section 1.1 "Expiration Date" in Section 13 of
the Loan Agreement is modified to read in its entirety as follows:
1.1 Expiration Date: June 30, 1999
1
<PAGE> 2
2.1.3 The amount of the Loan and the Note, and the maximum principal
amount that may at any time be outstanding thereunder, is changed from
$6,500,000.00 to $10,000,000.00 and Borrower may obtain, and Bank shall be
obligated to make, further advances under the Loan Documents subject to the
terms and conditions of the Loan Documents applicable to advances.
2.1.4 Section 1.2 of the Loan Agreement is hereby deleted in its
entirety and replaced with the following:
1.2 ADVANCES. Subject to the terms and conditions hereof,
Advances of the Loan will be made in amounts not to exceed the
amount ("Borrowing Base") calculated as the "Advance available" in
accordance with the formula set forth in the Contractor Borrowing
Base Reconciliation Certificate attached hereto as Exhibit A and by
this reference incorporated herein. In calculating the Borrowing
Base, the following terms shall have the hereinafter described
meanings:
"Billing" or "Progress Billing" is an amount owing to
Borrower and B & K Steel Fabrications, Inc., an Arizona
corporation, (collectively, "Entities"), which has arisen from
the delivery and/or shipment of products previously made and
from services rendered for which an invoice has been issued by
the Entities to its customer ("Customer") with respect to a
specific job contracted for by the Customer ("Job"), and which
amount is subject to a perfected security interest in favor of
Bank and is not subject to any other security interest, lien,
claim or encumbrance.
"Retention" is the amount of a Billing for which the
Entities will not receive payment from its Customer until the
related Job has been totally completed by the Entities.
"Ineligible" is that Billing, or that part of a Billing, as
determined by Bank in its sole and absolute discretion: (a)
which is subject to any offset, counterclaim or defense
asserted by the Customer, (b) which has remained unpaid for
more than the number of days set forth in Section 13 after the
date due under the terms of the related invoice, (c) where more
than fifteen percent (15%) of the total amount owing from the
Customer with respect to the related Job has remained unpaid
for more than the number of days set forth in Section 13 after
the date due under the terms of the related invoices, (d) which
is an uninsured amount owing from a Customer located in a
foreign country, or (e) which is owing from the United States
of America or any agency, department or subdivision thereof,
unless a properly executed assignment of claims has been
received by Bank.
"Inventory" is an amount (determined on the basis of the
lower of cost or market value) equal to the inventory of the
Entities (consisting of those items within the categories set
forth in Section 13), as determined by Bank in its sole and
absolute discretion, to be (a) in good condition and salable in
the ordinary course of the Entities' business, (b) owned by the
Entities free and clear of any mortgages, liens, security
interests, claims, encumbrances or rights of others, excepting
only the security interests in favor of Bank, (c) located at a
location identified in a Security Agreement (hereinafter
defined), (d) subject to a perfected security interest in favor
of Bank, (e) not subject to any consignment to any Customer,
and (f) not acquired by the Entities in or as part of a bulk
transfer of sale or assets unless the Entities have complied
with all applicable bulk sales or bulk transfer laws.
"Book Overdrafts" is the amount by which the aggregate
amount of checks of the Entities that are outstanding exceeds
the balance of the Entities' general ledger.
"Advance Multiplier" is the percentage set forth in Section
13 hereof as the "Eligible Receivables Percentage."
"Fixed Assets" is according to generally accepted accounting
principles consistently applied.
2.1.5 From and after June 30, 1997, interest shall accrue on the
unpaid principal of the Loan and the Note at the rate per annum equal to the
sum of (i) zero percent (0.00%) per annum, and (ii) the rate per annum most
recently publicly announced by Bank, or its successors, in Phoenix, Arizona, as
its "prime rate," as in effect from time to time. The rate per annum will
change on each day that such "prime rate" changes. The "prime rate" is not
necessarily the best or lowest rate offered by Bank, and Bank may lend to its
customers at rates that are at, above, or below its "prime rate."
2.1.6 The reference to Section 4.1(b) in Section 13 of the Loan
Agreement is hereby deleted and replaced with the following:
2
<PAGE> 3
4.1(b) Non-Utilization Fee: 0.25% per annum
2.1.7 Sections 6.1(d)(i) and (ii) of the Loan Agreement are modified
to read in their entirety as follows:
(i) a minimum Tangible Net Worth shall be maintained in the
amount set forth in Section 13 hereof, where Tangible Net Worth
shall mean Net Worth plus Subordinated Indebtedness. "Net
Worth" shall mean the sum of the following: capital, capital
surplus and retained earnings, less the sum of the value of
Borrower's books of all intangible assets, including, but not
limited to, goodwill, patents, franchises, trademarks,
copyrights and the write-up in the book value of any assets
resulting therefrom after acquisition. "Subordinated
Indebtedness" shall mean any and all indebtedness of Borrower
to any other Creditor, the repayment of which, is subordinated
in writing to Bank.
(ii) a minimum Owner's Equity shall be maintained on the dates
and of the percentage set forth in Section 13 hereof, where
"Owner's Equity" shall mean the results obtained by dividing
(A) Tangible Net Worth (as herein defined) by (B) Borrower's
Total Assets less Intangibles.
2.1.8 The reference to Section 6.1(d)(i) in Section 13 of the Loan
Agreement is hereby deleted in its entirety and replaced with the following:
6.1(d)(i) Minimum Tangible Net Worth: $19,000,000.00
2.1.9 The reference to Section 6.1(d)(ii) in Section 13 of the Loan
Agreement is hereby deleted in its entirety and replaced with the following:
6.1(d)(ii) Owner's Equity: at June 30, 1997 and September
30, 1997 - 33%
at December 31, 1997 and
forward - 40%
2.1.10 Section 6.1(d)(iv) of the Loan Agreement is hereby deleted in
its entirety.
2.1.11 Section 6.1(d)(vi) of the Loan Agreement is hereby deleted in
its entirety and replaced with the following:
(vi) a minimum Debt Coverage Ratio shall be maintained in the
amount set forth in Section 13 hereof, where "Debt Coverage
Ratio" shall mean the results obtained by dividing (A) net
profit after taxes plus Depreciation and Amortization plus or
less change in Deferred Taxes by (B) prior period Current
Maturities and Long Term Debt.
2.1.12 Section 13 of the Loan Agreement is hereby modified to include
a reference to Section 6.1(d)(vi) as follows:
6.1(d)(vi) Debt Coverage Ratio: 1.50:1.0
2.2 Each of the Loan Documents is modified to provide that it shall
be a default or an event of default thereunder if Borrower shall fail to comply
with any of the covenants of Borrower herein or if any representation or
warranty by Borrower herein is materially incomplete, incorrect, or misleading
as of the date hereof.
2.3 Each reference in the Loan Documents to any of the Loan
Documents shall be a reference to such document as modified herein.
3. RATIFICATION OF LOAN DOCUMENTS AND COLLATERAL
The Loan Documents are ratified and affirmed by Borrower and shall remain in
full force and effect as modified herein. Any property or rights to or
interests in property granted as security in the Loan Documents shall remain as
security for the Loan and the obligations of Borrower in the Loan Documents.
4. BORROWER REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants to Bank:
4.1 No default or event of default under any of the Loan Documents
as modified herein, nor any event, that, with the
3
<PAGE> 4
giving of notice or the passage of time or both, would be a default or an event
of default under the Loan Documents as modified herein has occurred and is
continuing.
4.2 There has been no material adverse change in the financial
condition of Borrower or any other person whose financial statement has been
delivered to Bank in connection with the Loan from the most recent financial
statement received by Bank.
4.3 Each and all representations and warranties of Borrower in the
Loan Documents are accurate on the date hereof.
4.4 Borrower has no claims, counterclaims, defenses, or set-offs with
respect to the Loan or the Loan Documents as modified herein.
4.5 The Loan Documents as modified herein are the legal, valid, and
binding obligation of Borrower, enforceable against Borrower in accordance with
their terms.
4.6 Borrower is validly existing under the laws of the State of its
formation or organization and has the requisite power and authority to execute
and deliver this Agreement and to perform the Loan Documents as modified
herein. The execution and delivery of this Agreement and the performance of the
Loan Documents as modified herein have been duly authorized by all requisite
action by or on behalf of Borrower. This Agreement has been duly executed and
delivered on behalf of Borrower.
5. BORROWER COVENANTS.
-------------------
Borrower covenants with Bank:
5.1 Borrower shall execute, deliver, and provide to Bank such
additional agreements, documents, and instruments as reasonably required by
Bank to effectuate the intent of this Agreement.
5.2 Borrower fully, finally, and forever releases and discharges Bank
and its successors, assigns, directors, officers, employees, agents, and
representatives from any and all actions, causes of action, claims, debts,
demands, liabilities, obligations, and suits, of whatever kind or nature, in
law or equity of Borrower, whether now known or unknown to Borrower, (i) in
respect of the Loan, the Loan Documents, or the actions or omissions of Bank in
respect of the Loan or the Loan Documents and (ii) arising from events
occurring prior to the date of this Agreement.
5.3 Contemporaneously with the execution and delivery of this
Agreement, Borrower has paid to Bank:
5.3.1 All accrued and unpaid interest under the Note and all
amounts, other than interest and principal, due and payable by Borrower under
the Loan Documents as of the date hereof.
5.3.2 All the internal and external costs and expenses incurred
by Bank in connection with this Agreement (including, without limitation,
inside and outside attorneys, title, filing, and recording costs, expenses, and
fees).
5.3.3 A commitment fee of $12,500.00 due annually.
5.3.4 A documentation fee of $150.00.
5.4 Contemporaneously with the execution and delivery of this
Agreement, Bank has released the following Continuing Guarantys: (i) Continuing
Guaranty, dated June 30, 1995, by David A. and Nancy A. Schuff, and (ii)
Continuing Guaranty, dated June 30, 1995, by Scott A. Schuff.
6. EXECUTION AND DELIVERY OF AGREEMENT BY BANK.
--------------------------------------------
Bank shall not be bound by this Agreement until (i) Bank has executed and
delivered this Agreement, (ii) Borrower has performed all of the obligations of
Borrower under this Agreement to be performed contemporaneously with the
execution and delivery of this Agreement, (iii) if required by Bank, Borrower
and any guarantor(s) of the Loan have executed and delivered to Bank an
arbitration resolution, and (iv) each guarantor of the Loan has executed the
Consent of Guarantor(s) below.
4
<PAGE> 5
7. INTEGRATION, ENTIRE AGREEMENT, CHANGE, DISCHARGE, TERMINATION, OR WAIVER.
------------------------------------------------------------------------
The Loan Documents as modified herein contain the complete understanding and
agreement of Borrower and Bank in respect of the Loan and supersede all prior
representations, warranties, agreements, arrangements, understandings, and
negotiations. No provision of the Loan Documents as modified herein may be
changed, discharged, supplemented, terminated, or waived except in a writing
signed by the parties thereto.
8. BINDING EFFECT.
---------------
The Loan Documents as modified herein shall be binding upon and shall inure to
the benefit of Borrower and Bank and their respective successors and assigns.
9. CHOICE OF LAW.
--------------
This Agreement shall be governed by and construed in accordance with the laws
of the State of Arizona, without giving effect to conflicts of law principles.
10. COUNTERPART EXECUTION.
----------------------
This Agreement may be executed in one or more counterparts, each of which shall
be deemed an original and all of which together shall constitute one and the
same document. Signature pages may be detached from the counterparts and
attached to a single copy of this Agreement to physically form one document.
DATED as of the date first above stated.
SCHUFF STEEL COMPANY,
a Delaware corporation
By /s/ David A. Schuff
----------------------------
David A. Schuff, Chairman
BANK ONE, ARIZONA, NA,
a national banking association
By /s/ Brad Richards
-----------------------------
Brad Richards, Vice president
CONSENT OF GUARANTOR(S)
The undersigned (i) consent to the modification of the Loan Documents and all
other matters in the foregoing Agreement, (ii) reaffirm the Continuing
Guaranty, dated March 31, 1997 and any other agreements, documents and
instruments securing or otherwise relating thereto ("Guarantor Documents"),
(iii) acknowledge that the Guarantor Documents continue in full force and
effect, remain unchanged, except as specifically modified hereby, and are
valid, binding and enforceable in accordance with their respective terms,
(iv) agree that all references, if any, in the Guarantor Documents to any of
the Loan Documents are modified to refer to those documents as modified by the
Agreement, and (v) agree to be bound by the release of Bank set forth in the
Agreement.
Dated as of the date of the Agreement.
B & K STEEL FABRICATIONS, INC.,
an Arizona corporation
By /s/ Scott A. Schuff
-----------------------------
Scott A. Schuff, President
5
<PAGE> 6
EXHIBIT "A"
CONTRACTOR BORROWING BASE RECONCILIATION CERTIFICATE
SCHUFF STEEL COMPANY
1. Total Progress Billings $____________
2. Less: Ineligible Billings (____________)
3. Less: Retention (____________)
4. Eligible Progress Billings as of ______ $____________
5. Add: Inventory
6. Less: Accounts Payable (____________)
7. Less: Billings in Excess of Cost (____________)
8. Less: Book Overdrafts (____________)
9. Add: Cost in Excess of Billings ____________
10. Add: Unbilled Billings ____________
11. Add: Retention Payables (not to exceed
Retention Receivables) ____________
12. Total Cost as of _________ $____________
13. New Eligible Progress Billings
(Ln #4 - Ln #12) $____________
14. Borrowing Base Advance Potential
(Ln #13 x 75%, not to exceed $10MM) _____________
15. Less: RLC Balance (_____________)
16. Less: LOC Balance (_____________)
17. Maximum Borrower Base Advance _____________
18. 50% of Depreciated Book Value of Fixed Assets _____________
19. 75% of appraised FMV of Fixed Assets _____________
20. Fixed Assets Advance Potential (greater of
Ln #18, Ln #19 or $5MM) _____________
21. Maximum Advance (greater of Ln #17 or Ln #20) $_____________
SCHUFF STEEL COMPANY
By________________________
Its_______________________
<PAGE> 1
EXHIBIT 10.1(b)
CONTINUING GUARANTY
TO: BANK ONE, ARIZONA, NA, a national banking association
1. For valuable consideration, the undersigned ("Guarantors"), jointly
and severally, unconditionally guarantee and promise to pay to BANK ONE,
ARIZONA, NA ("Bank"), or order, on demand, in lawful money of the United States,
any and all Indebtedness of SCHUFF STEEL COMPANY, a Delaware corporation
("Borrower"), to Bank. The word "Indebtedness" includes any and all loans,
debts, obligations and liabilities of whatever nature of Borrower owed to Bank
whenever and however made, incurred or created, whether recovery upon such
Indebtedness may be barred by any statue of limitations, whether such
Indebtedness may be otherwise unenforceable, and whether Borrower is liable
individually or jointly with others.
2. The liability of Guarantors shall not exceed at any one time the
total of (i) the principal sum TWENTY MILLION AND 00/100 DOLLARS
($20,000,000.00) plus (ii) all interest owed thereon plus (iii) all costs,
attorneys' fees, losses and expenses which may be incurred by Bank by reason of
Borrower's default in the payment of the Indebtedness.
3. This Guaranty shall bind and obligate the undersigned and their
successors and assigns with Borrower, jointly and severally, for the payment of
the Indebtedness. A separate action may be commenced against Guarantors whether
action is brought against Borrower or whether Borrower may be joined in any such
action. Guarantors waive any defenses Borrower may now or hereafter have to
payment of the Indebtedness.
4. Guarantors authorize Bank, without notice or demand and without
affecting Guarantors' liability hereunder, to, from time to time: (a) renew,
compromise, extend, revise, accelerate or otherwise change the time for payment
of, or otherwise change the terms of, the Indebtedness or any part thereof (
including the rate of interest thereon); (b) take security for the payment of
this Guaranty or the Indebtedness, and exchange, enforce, waive, or release any
such security, or take additional security; (c) apply any proceeds from such
security or take additional security; (d) apply any proceeds from such security
and direct the order or manner of sale of such security as Bank, in its
discretion, may determine; and (e) release or substitute any one or more of the
Guarantors or additional Guarantors.
5. The obligation of the Guarantors shall remain in full force and
effect until the entire Indebtedness shall have been paid, and shall not be
affected upon the happening of any event, including without limitation, any of
the following: (a) the Bank's failure to give notice to the Guarantors of the
occurrence of any event of default in the payment of the Indebtedness or
performance of the Borrower; (b) the Bank's waiver of the payment, performance
or observance by the Borrower of any obligations, covenants or agreements
related in any way to the Indebtedness; (c) the Bank's impairment, modification,
release or amendment of any obligation, covenant or term of any agreement
related to the Indebtedness; (d) the voluntary or involuntary liquidation,
dissolution, sale or other disposition of any of the Borrower's assets or any
insolvency, bankruptcy, reorganization or other similar proceedings affecting
Borrower; or (e) any event or action that would, in the absence of this clause,
result as a matter of law in the release or discharge of the Guarantors from the
performance or observance of any obligation, covenant or agreement contained
herein other than payment in full of the Indebtedness.
6. Guarantors waive any right to require Bank to (a) proceed against
Borrowers, Guarantors, or other guarantors; (b) proceed against or exhaust any
security held from Guarantor or Borrowers; or (c) pursue any other remedy in
Bank's power whatsoever. Guarantors waive the benefits of Arizona Revised
Statues Section 33-814. Guarantors agree that if the Indebtedness is secured in
whole or part by a deed of trust on real property, Bank may proceed to foreclose
any other collateral first or may proceed against Guarantors, Borrower or any
obligor without waiving its right to exercise its remedies and foreclose its
lien under such deed of trust at a later time. Bank may, without notice, assign
this Guaranty in whole or in part.
7. Guarantors shall have no right of indemnity, reimbursement,
contribution or subrogation as to Borrower unless Bank, at its option, so
elects. Guarantors hereby waive any right to enforce any remedy which Bank now
has, or may hereafter have, against Borrower, and hereby waive any benefit of,
any right to participate
1
<PAGE> 2
in, any security now or hereafter held by Bank. Guarantors acknowledge that
Borrower may owe other sums and obligations to Bank. Guarantors agree that any
payments received by Bank, other than from Guarantors under this Guaranty,
whether from the Borrower or from the proceeds of any collateral or otherwise,
may be applied by Bank upon any amounts owned to Bank in such order and manner
as Bank may determine in its sole discretion. Guarantors waive all presentments,
demands for performance, notices of nonperformance, protests, notices of
protest, notices of dishonor and notices of acceptance of this Guaranty and of
the existence, creation , or incurring of new or additional Indebtedness.
Guarantors waive the benefits of Arizona Revised Statute Sections 12-1641 and
12-1642.
8. Guarantors agree to pay reasonable attorney's fees and all other
costs and expenses which may be incurred by Bank in the enforcement of this
Guaranty. Guarantors hereby indemnify Bank against all costs or repayments
incurred by Bank or required of Bank as a result of payment hereunder being
challenged as a preference.
9. Bank shall have a lien upon, and a right of set-off against, all
monies, securities and other property of Guarantors now or hereafter in the
possession of or on deposit with Bank, whether held in a general or special
account, or for safekeeping or otherwise; and every such lien and right of
set-off may be exercised without demand upon, or notice to Guarantors until the
Indebtedness is paid in full.
10. This Guaranty is cumulative as to amounts and does not revoke or
alter any guaranty previously delivered to Bank or any guaranty subsequently
delivered to Bank. This Guaranty does not in any manner limit the amount of any
borrowing or other financing arrangement between Bank and Borrower.
11. Guarantors acknowledge that the execution of this Guaranty shall
not entitle Guarantors to rely on the Bank to preserve or maintain any
collateral or other security that Bank may now have or hereafter acquire in
connection with the Indebtedness. Guarantors hereby release Bank from any
obligation to inspect, preserve or maintain any collateral or other security
that Bank may now have or hereafter acquire in connection with the Indebtedness,
and any obligation to monitor, control or see to the use of any monies advanced
to the Borrower. Guarantors further waive any and all rights to receive reports
or other information Bank may have relating to Borrower.
12. If Guarantor is a corporation or a partnership, Guarantor
represents and warrants that: (a) it has the necessary power under law and its
governing documents to make the agreements on its part herein contained; (b) the
execution of this Guaranty has been authorized by all necessary and proper
actions; (c) the execution and delivery of this Guaranty, the consummation of
the transactions contemplated hereby, and the fulfillment of or compliance with
the terms and conditions of this Guaranty do not conflict with or result in a
breach of any of the terms, conditions or provisions of any agreement or
instrument to which it is a party or by which it is bound; and (d) Guarantor
agrees that during the term of this Guaranty it will maintain its separate
existence, and will not dissolve, terminate, merge or consolidate.
13. Any married person who is a Guarantor hereby expressly agrees that
recourse may be had against their separate property as well as all community
property for all their obligations under this Guaranty.
14. Guarantors agree that during the term of this Guaranty they will
not transfer or dispose of any material part of their assets except in the
ordinary course of business for a full and fair consideration. Guarantors agree
that during the term of this Guaranty they will furnish annually, within 90 days
after the close of each year or fiscal year, as the case may be, a financial
statement consisting of a balance sheet and such other financial information as
Bank may reasonably request.
15. This Guaranty applies to, is binding upon, and inures to the
benefit of all parties hereto, and their successors and assigns.
2
<PAGE> 3
16. If any part or parts of this Guaranty shall at any time be held to
be invalid or unenforceable by binding arbitration or by a court of competent
jurisdiction, the remaining part or parts of the Guaranty shall be and remain in
full force and effect.
17. This Guaranty shall be construed in accordance with the laws of the
State of Arizona.
18. Guarantors acknowledge the Bank would not have allowed the
Indebtedness to exist except for the consideration received from Guarantor's
promise to pay pursuant to this Guaranty.
19. All words used herein in the plural shall be deemed to have been
used in the singular where the context and construction so requires; and when
there is more than one Borrower named herein, the word "Borrower" shall mean all
of them.
NON-INDIVIDUAL GUARANTOR
Dated: JUNE 30, 1997
B & K STEEL FABRICATIONS, INC.,
AN ARIZONA CORPORATION
BY /s/ Scott A. Schuff
---------------------------------
SCOTT A. SCHUFF, PRESIDENT
3
<PAGE> 4
ARBITRATION RESOLUTION
(a) BINDING ARBITRATION. The undersigned hereby agree that all
controversies and claims of any nature arising directly or indirectly out of
any and all loan transactions between them and any related agreements,
instruments or documents, shall at the written request of any party be
arbitrated pursuant to the applicable rules of the American Arbitration
Association. The arbitration shall occur in the State of Arizona. Judgment upon
any award rendered by the arbitrator(s) may be entered in any court having
jurisdiction. The Federal Arbitration act shall apply to the construction and
interpretation of this arbitration agreement.
(b) ARBITRATION PANEL. A single arbitrator shall have the power to render
a maximum award of one hundred thousand dollars. When any party files a claim
in excess of this amount, the arbitration decision shall be made by the
majority vote of three arbitrators. No arbitrator shall have the power to
restrain any act of any party.
(c) PROVISIONAL REMEDIES, SELF-HELP, AND FORECLOSURE. No provision of
subparagraph (a) shall limit the right of any party to exercise self help
remedies, to foreclose against any real or personal property collateral, or to
obtain any provisional or ancillary remedies (including but not limited to
injunctive relief or the appointment of a receiver) from a court of competent
jurisdiction. At Bank's option, it may enforce its rights under a mortgage by
judicial foreclosure, and under a deed of trust either by exercise of power of
sale or by judicial foreclosure. The institution and maintenance of any remedy
permitted above shall not constitute a waiver of the right to submit any
controversy or claim to arbitration. The statute of limitations, estoppel,
waiver, laches, and similar doctrines which would otherwise be applicable in an
action brought by a party shall be applicable in any arbitration proceeding.
(d) COUNTERPART EXECUTION. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same document. Signature pages may be
detached from the counterparts and attached to a single copy of this Agreement
to physically form one document.
Agreed to this 30th day of June, 1997.
BANK BORROWER
BANK ONE, ARIZONA, NA SCHUFF STEEL COMPANY
a national banking association a Delaware corporation
By /s/ Brad Richards By /s/ David A. Schuff
------------------------------ -------------------------
Brad Richards, Vice President David A. Schuff, Chairman
GUARANTORS
B & K STEEL FABRICATIONS, INC.
an Arizona corporation
By /s/ Scott A. Schuff
------------------------------
Scott A. Schuff, President
<PAGE> 1
EXHIBIT 10.1(c)
When Recorded return to:
BANK ONE, ARIZONA, NA
COMMERCIAL BANKING GROUP
P.O. BOX 71, DEPT. AZ1-1179
PHOENIX, AZ 85001
Attention: IMELDA CERVANTES
SUBORDINATION OF LIEN RIGHTS
This Agreement is executed as of the _____ day of ______________, 1997,
by the undersigned, 19th AVENUE/BUCHANAN LIMITED PARTNERSHIP, whose address is
420 SOUTH 19th AVENUE, PHOENIX, AZ 85009-5957.
Bank: BANK ONE, ARIZONA, NA, a national banking association
Borrower: SCHUFF STEEL COMPANY, A DELAWARE CORPORATION
Real Property (located at): 420 SOUTH 19TH AVENUE, PHOENIX, AZ 85009
and more particularly described as:
EXHIBIT 'A' ATTACHED HERETO AND INCORPORATED HEREIN BY REFERENCE
Collateral: ALL INVENTORY, RAW MATERIALS, WORK IN PROCESS, OR MATERIALS USED OR
CONSUMED IN DEBTOR'S BUSINESS, WHETHER NOW OWNED OR HEREAFTER ACQUIRED, AND ALL
PRODUCTS THEREOF, WHETHER IN THE POSSESSION OF THE DEBTOR, WAREHOUSEMAN, BAILEE,
OR ANY OTHER PERSON. ALL EQUIPMENT OF DEBTOR, WHEREVER LOCATED, NOW OWNED OR
HEREAFTER ACQUIRED, AND THE ACCESSIONS, ACCESSORIES, RELATED EQUIPMENT,
ADDITIONS, SUBSTITUTIONS, INCREASES, PRODUCTS AND PROCEEDS THEREFROM, ALL AS
MORE PARTICULARLY DESCRIBED IN CERTAIN SECURITY AGREEMENT(S) BETWEEN BANK AND
BORROWER.
In consideration of Bank extending credit and/or other financial
benefits to Borrower in the amount of $20,000,000.00, by the terms of which bank
has been or will be granted continuing security interests in the Collateral, the
undersigned acknowledges and agrees as follows:
1. The undersigned is the owner of or otherwise has or claims an
interest in or lien upon the Real Property.
2. The undersigned hereby subordinates to Bank's security interests in
the Collateral all the undersigned's claims and demands of every kind against
the Collateral and all priority rights accruing to the undersigned by virtue of
any liens of the undersigned on the Real Property and agrees that the rights of
the Bank in the Collateral shall be as though the Bank's security interests
attached and were perfected prior to the execution, attaching, perfection or
recording of the liens and priority rights of the undersigned without otherwise
affecting the status of the undersigned's liens and priority rights.
3. The undersigned agrees that the Collateral shall at all times be
personal property, shall not constitute fixtures or otherwise be part of the
Real Property and shall not be subject to any rights of the
4
<PAGE> 2
undersigned to levy or distrain thereon for rent or to assert title thereto or
right of possession thereof or any other claim of the undersigned which shall
impair or interfere with the security interests of Bank.
4. The undersigned hereby grants to Bank the right at any time to enter
upon the Real Property to inspect the Collateral or to remove the Collateral,
PROVIDED, HOWEVER, THAT, Bank shall promptly reimburse the undersigned for the
cost of repair of any physical injury caused to the Real Property by such
removal.
5. Bank may extend and modify the time of payment of indebtedness of
Borrower to Bank or the performance of any of the terms and conditions related
thereto without the consent of or notice to the undersigned and this Agreement
shall remain in full force and effect so long as such indebtedness remains owing
by Borrower to Bank.
6. The agreements herein contained shall be deemed to be covenants
running with the land and shall inure to the benefit of and be binding upon the
successors and assigns of Bank and the heirs, executors, personal
representatives, successors, assigns and transferees of the undersigned.
IN WITNESS WHEREOF, the undersigned has executed this Agreement as of
the day and year first written on the preceding page.
"Undersigned"
19TH AVENUE/BUCHANAN LIMITED PARTNERSHIP
----------------------------------------
Name of Landlord
By: /s/ David A. Schuff
--------------------------------------
Signature
David A. Schuff General Partner
-----------------------------------------
Printed Name Title
PARTNERSHIP
State of Arizona )
) ss.
County of Maricopa )
This instrument was acknowledged before me this 8th day of July, 1997, by David
A. Schuff, a general partner in 19TH AVENUE/BUCHANAN LIMITED PARTNERSHIP, an
Arizona limited partnership, on behalf of the partnership.
In witness whereof I hereunto set my hand and official seal.
My commission expires:
July 14, 2000 /s/ Evelin R. Lackey
- ---------------------- -----------------------------
Notary Public
[SEAL]
5
<PAGE> 1
EXHIBIT 10.1(d)
When Recorded return to:
BANK ONE, ARIZONA, NA
COMMERCIAL BANKING GROUP
P.O. BOX 71, DEPT. AZ1-1179
PHOENIX, AZ 85001
Attention: IMELDA CERVANTES
SUBORDINATION OF LIEN RIGHTS
This Agreement is executed as of the _____ day of ______________, 1997,
by the undersigned, 19th AVENUE/BUCHANAN LIMITED PARTNERSHIP, whose address is
420 SOUTH 19th AVENUE, PHOENIX, AZ 85009-5957.
Bank: BANK ONE, ARIZONA, NA, a national banking association
Borrower: SCHUFF STEEL COMPANY, A DELAWARE CORPORATION
Real Property (located at): 1833-1841 W. BUCHANAN STREET, PHOENIX, AZ 85009
and more particularly described as:
EXHIBIT 'A' ATTACHED HERETO AND INCORPORATED HEREIN BY REFERENCE
Collateral: ALL INVENTORY, RAW MATERIALS, WORK IN PROCESS, OR MATERIALS USED OR
CONSUMED IN DEBTOR'S BUSINESS, WHETHER NOW OWNED OR HEREAFTER ACQUIRED, AND ALL
PRODUCTS THEREOF, WHETHER IN THE POSSESSION OF THE DEBTOR, WAREHOUSEMAN, BAILEE,
OR ANY OTHER PERSON. ALL EQUIPMENT OF DEBTOR, WHEREVER LOCATED, NOW OWNED OR
HEREAFTER ACQUIRED, AND THE ACCESSIONS, ACCESSORIES, RELATED EQUIPMENT,
ADDITIONS, SUBSTITUTIONS, INCREASES, PRODUCTS AND PROCEEDS THEREFROM, ALL AS
MORE PARTICULARLY DESCRIBED IN CERTAIN SECURITY AGREEMENT(S) BETWEEN BANK AND
BORROWER.
In consideration of Bank extending credit and/or other financial
benefits to Borrower in the amount of $20,000,000.00, by the terms of which bank
has been or will be granted continuing security interests in the Collateral, the
undersigned acknowledges and agrees as follows:
1. The undersigned is the owner of or otherwise has or claims an
interest in or lien upon the Real Property.
2. The undersigned hereby subordinates to Bank's security interests in
the Collateral all the undersigned's claims and demands of every kind against
the Collateral and all priority rights accruing to the undersigned by virtue of
any liens of the undersigned on the Real Property and agrees that the rights of
the Bank in the Collateral shall be as though the Bank's security interests
attached and were perfected prior to the execution, attaching, perfection or
recording of the liens and priority rights of the undersigned without otherwise
affecting the status of the undersigned's liens and priority rights.
3. The undersigned agrees that the Collateral shall at all times be
personal property, shall not constitute fixtures or otherwise be part of the
Real Property and shall not be subject to any rights of the
6
<PAGE> 2
undersigned to levy or distrain thereon for rent or to assert title thereto or
right of possession thereof or any other claim of the undersigned which shall
impair or interfere with the security interests of Bank.
4. The undersigned hereby grants to Bank the right at any time to enter
upon the Real Property to inspect the Collateral or to remove the Collateral,
PROVIDED, HOWEVER, THAT, Bank shall promptly reimburse the undersigned for the
cost of repair of any physical injury caused to the Real Property by such
removal.
5. Bank may extend and modify the time of payment of indebtedness of
Borrower to Bank or the performance of any of the terms and conditions related
thereto without the consent of or notice to the undersigned and this Agreement
shall remain in full force and effect so long as such indebtedness remains owing
by Borrower to Bank.
6. The agreements herein contained shall be deemed to be covenants
running with the land and shall inure to the benefit of and be binding upon the
successors and assigns of Bank and the heirs, executors, personal
representatives, successors, assigns and transferees of the undersigned.
IN WITNESS WHEREOF, the undersigned has executed this Agreement as of
the day and year first written on the preceding page.
"Undersigned"
19TH AVENUE/BUCHANAN LIMITED PARTNERSHIP
Name of Landlord
By: /s/ David A. Schuff
----------------------------------------
Signature
David A. Schuff General Partner
-------------------------------------------
Printed Name Title
PARTNERSHIP
State of Arizona )
) ss.
County of Maricopa )
This instrument was acknowledged before me this 8th day of July, 1997, by David
A. Schuff, a general partner in 19TH AVENUE/BUCHANAN LIMITED PARTNERSHIP, an
Arizona limited partnership, on behalf of the partnership.
In witness whereof I hereunto set my hand and official seal.
My commission expires:
July 14, 2000 /s/ Evelin R. Lackey
- ---------------------- -----------------------------
Notary Public
[SEAL]
7
<PAGE> 1
EXHIBIT 10.1(e)
When Recorded return to:
BANK ONE, ARIZONA, NA
COMMERCIAL BANKING GROUP
P.O. BOX 71, DEPT. AZ1-1179
PHOENIX, AZ 85001
Attention: IMELDA CERVANTES
SUBORDINATION OF LIEN RIGHTS
This Agreement is executed as of the 8th day of July, 1997, by the
undersigned, 19th AVENUE/BUCHANAN LIMITED PARTNERSHIP, whose address is 420
SOUTH 19th AVENUE, PHOENIX, AZ 85009-5957.
Bank: BANK ONE, ARIZONA, NA, a national banking association
Borrower: SCHUFF STEEL COMPANY, A DELAWARE CORPORATION
Tenant: B & K STEEL FABRICATIONS, INC., AN ARIZONA CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF BORROWER)
Real Property (located at): 619 NORTH COOPER ROAD, GILBERT, AZ 85233
and more particularly described as:
EXHIBIT "A" ATTACHED HERETO AND INCORPORATED HEREIN BY REFERENCE
Collateral: ALL INVENTORY, RAW MATERIALS, WORK IN PROCESS, OR MATERIALS USED OR
CONSUMED IN DEBTOR'S BUSINESS, WHETHER NOW OWNED OR HEREAFTER ACQUIRED, AND ALL
PRODUCTS THEREOF, WHETHER IN THE POSSESSION OF THE DEBTOR, WAREHOUSEMAN, BAILEE,
OR ANY OTHER PERSON. ALL EQUIPMENT OF DEBTOR, WHEREVER LOCATED, NOW OWNED OR
HEREAFTER ACQUIRED, AND THE ACCESSIONS, ACCESSORIES, RELATED EQUIPMENT,
ADDITIONS, SUBSTITUTIONS, INCREASES, PRODUCTS AND PROCEEDS THEREFROM, ALL AS
MORE PARTICULARLY DESCRIBED IN CERTAIN SECURITY AGREEMENT(S) BETWEEN BANK AND
BORROWER.
In consideration of Bank extending credit and/or other financial
benefits to Borrower in the amount of $20,000,000.00, by the terms of which bank
has been or will be granted continuing security interests in the Collateral, the
undersigned acknowledges and agrees as follows:
1. The undersigned is the owner of or otherwise has or claims an
interest in or lien upon the Real Property.
2. The undersigned hereby subordinates to Bank's security interests in
the Collateral all the undersigned's claims and demands of every kind against
the Collateral and all priority rights accruing to the undersigned by virtue of
any liens of the undersigned on the Real Property and agrees that the rights of
the Bank in the Collateral shall be as though the Bank's security interests
attached and were perfected prior to the execution, attaching, perfection or
recording of the liens and priority rights of the undersigned without otherwise
affecting the status of the undersigned's liens and priority rights.
2
<PAGE> 2
3. The undersigned agrees that the Collateral shall at all times be
personal property, shall not constitute fixtures or otherwise be part of the
Real Property and shall not be subject to any rights of the undersigned to levy
or distrain thereon for rent or to assert title thereto or right of possession
thereof or any other claim of the undersigned which shall impair or interfere
with the security interests of Bank.
4. The undersigned hereby grants to Bank the right at any time to enter
upon the Real Property to inspect the Collateral or to remove the Collateral,
PROVIDED, HOWEVER, THAT, Bank shall promptly reimburse the undersigned for the
cost of repair of any physical injury caused to the Real Property by such
removal.
5. Bank may extend and modify the time of payment of indebtedness of
Borrower to Bank or the performance of any of the terms and conditions related
thereto without the consent of or notice to the undersigned and this Agreement
shall remain in full force and effect so long as such indebtedness remains owing
by Borrower to Bank.
6. The agreements herein contained shall be deemed to be covenants
running with the land and shall inure to the benefit of and be binding upon the
successors and assigns of Bank and the heirs, executors, personal
representatives, successors, assigns and transferees of the undersigned.
IN WITNESS WHEREOF, the undersigned has executed this Agreement as of
the day and year first written on the preceding page.
"Undersigned"
19TH AVENUE/BUCHANAN LIMITED PARTNERSHIP
Name of Landlord
By: /s/ David A. Schuff
--------------------------------------------
Signature
David A. Schuff General Partner
-----------------------------------------------
Printed Name Title
PARTNERSHIP
State of Arizona )
) ss.
County of Maricopa )
This instrument was acknowledged before me this 8th day of July, 1997, by David
A. Schuff, a general partner in 19TH AVENUE/BUCHANAN LIMITED PARTNERSHIP, an
Arizona limited partnership, on behalf of the partnership.
In witness whereof I hereunto set my hand and official seal.
My commission expires:
July 14, 2000 /s/ Evelin R. Lackey
- ---------------------- -----------------------------
Notary Public
[SEAL]
3
<PAGE> 1
EXHIBIT 10.1(f)
BANK ONE, ARIZONA, NA
SUBORDINATION AGREEMENT
TO: BANK ONE, ARIZONA, NA
The undersigned Borrower (hereinafter called "Borrower") is now
indebted to the undersigned creditor of Borrower (hereinafter called "Creditor")
in the principal sum of ONE MILLION EIGHT HUNDRED SIXTY SIX THOUSAND EIGHT
HUNDRED SIXTY EIGHT AND 16/100 Dollars ($1,866,868.16); and the Borrower may
hereafter, from time to time, become indebted to the Creditor in further
amounts.
In order to induce BANK ONE, ARIZONA, NA (hereinafter called "Bank") at
any time, or from time to time, at its option, to make loans or extend credit or
other accommodations or benefits to or for the account of Borrower, with or
without security, or to purchase or extend credit upon any instrument or writing
in respect of which the Borrower may be liable in any capacity in such manner
and amount and upon terms and conditions as the Bank may deem advisable, and in
consideration of any such loan, renewal or extension of credit which the Bank
may make, the undersigned Creditor does hereby wholly subordinate, as
hereinafter provided, any and all present and future indebtedness of Borrower to
Creditor, absolute or contingent, and any instrument, negotiable or otherwise,
evidencing any such indebtedness, and all claims, rights and remedies therefor,
(sometimes hereinafter referred to as "Subordinated Indebtedness") to any and
all indebtedness of Borrower to Bank, whether now existing or hereafter arising,
direct or indirect, absolute or contingent, joint, several, or joint and
several, secured and unsecured, due or not due, and whether arising directly
between Borrower and Bank, or acquired outright, conditionally or as collateral
security from another by the Bank, and any renewals, modifications or extensions
thereof, any interest thereon, and all costs of collecting the same, including,
but not limited to reasonable attorneys' fees incurred by Bank (sometimes
hereinafter referred to as "Superior Indebtedness"). So long as Borrower is
indebted to Bank on account of Superior indebtedness, and so long as Bank is
committed to make any advances whatsoever to Borrower in connection therewith,
the parties hereto undertake and agree as follows:
1. Subordinated Indebtedness shall, at all times and in all respects,
be wholly subordinate and inferior in claim and right to the Superior
Indebtedness, and all claims, rights and remedies therefor are hereby
subordinated and made subsequent and inferior to the Superior Indebtedness and
any claims, rights and remedies arising out of, or in connection therewith.
2. Creditor will not ask, demand, sue for, take or receive from
Borrower by set off or in any other manner the whole or any part of Subordinated
Indebtedness, nor any security therefor, unless and until all Superior
Indebtedness shall have been fully paid.
3. In the event of any distribution, division, or application, partial
or complete, voluntary or involuntary, by operation of law or otherwise, or all
or any part of the assets of Borrower, or the proceeds thereof, to creditors of
Borrower, by reason of the liquidation, dissolution, or other winding up of
Borrower's business, or in the event of any sale, receivership, insolvency or
bankruptcy proceedings by or against Borrower, or assignment for the benefit of
creditors, or of any proceedings by or against Borrower for any relief under any
bankruptcy or insolvency laws, or relating to the relief of debtors,
readjustment or indebtedness, reorganizations, arrangements, compositions or
extensions, or in the event of the death of Borrower or Creditor, or any
partners thereof, or of any other event whereby it becomes necessary or
desirable to file or present claims against Borrower for the purpose of
receiving payment thereof, or on account thereof, then and in any such event,
any payment or distribution of any kind or character, either in cash or other
property, which shall be made or shall be payable with respect to any
Subordinated Indebtedness shall be paid over to Bank for application to the
payment of the Superior Indebtedness, whether due or not due, and no payments
shall be made upon or in respect of Subordinated Indebtedness unless and until
the Superior Indebtedness shall have been paid and satisfied in full. In any
such event, all claims of the Bank and all claims of the Creditor shall, at the
option of the Bank, forthwith become due and payable without demand or notice.
4. In order to protect and enable Bank to enforce its rights hereunder,
or otherwise, Creditor hereby assigns to Bank all of the Subordinated
Indebtedness, and all of the claims of Creditor against Borrower subordinated
hereby, together with any security interest of Creditor securing the payment of
Subordinated Indebtedness. Bank shall not be under any duty to take any action
in connection with any of said instruments delivered or claims or security
therefor assigned to it, and shall not be responsible in any respect in
connection therewith for action it may take or refrain from taking, or
otherwise, except for willful malfeasance.
5. Creditor irrevocably authorizes and empowers Bank, or any person
Bank may designate, to act as attorney for Creditor with full power and
authority in the name of Creditor, or otherwise, to make and present such claims
or proofs of claims against Borrower on account of the Subordinated Indebtedness
as Bank, or its appointee, may deem expedient and proper and, if necessary, to
vote such claims in any proceedings and to receive and collect any and all
dividends or other payments and disbursements made thereon in whatever form they
may be paid or issued, and to give acquittance therefor and to apply same to the
Superior Indebtedness, and Creditor hereby agrees, from time to time and upon
request, to make, execute and deliver to Bank such powers of attorney,
assignments, endorsements, proofs of claim, pleading, verifications, affidavits,
consents, agreements or other instruments as may be requested by Bank in order
to enable the Bank to enforce
1
<PAGE> 2
any and all claims upon, or with respect to, the Subordinated Indebtedness, and
to collect and receive any and all payments or distributions which may be
payable or deliverable at any time upon or with respect to the Subordinated
Indebtedness.
6. Without the prior written consent of Bank, Borrower will not pay to
Creditor any sum on account of Subordinated Indebtedness, nor give Creditor any
security for the payment thereof, nor lend any sums to Creditor, nor accept any
surrender or release, in whole or in part, of any said claims hereby
subordinated nor, except pursuant to the provisions of Paragraph 9 hereof,
deliver any negotiable instruments to evidence the Subordinated Indebtedness,
nor in any way, directly or indirectly, transfer or pay any money to Creditor.
7. Should any payment or distribution or security or proceeds thereof
be received by Creditor upon or with respect to the Subordinated Indebtedness
prior to the satisfaction of the Superior Indebtedness, Creditor will forthwith
deliver the same to the Bank in precisely the form as received (except for the
endorsement or assignment of creditor where necessary for application on the
Superior Indebtedness, whether due or not due, and until so delivered the same
shall be held in trust by Creditor as property of the Bank. In the event of the
failure of Creditor to make any such endorsement or assignment, the Bank, or any
of its officers or employees, on behalf of the Bank, is hereby irrevocably
authorized to make the same.
8. No renewal, modification or extension of time of payment of the
Superior Indebtedness, and no release or surrender of any security for the
Superior Indebtedness, or the obligations of any endorsers, sureties or
guarantors thereof, or release from the terms of this or any other subordination
agreement of any claims subordinated, and no delay or omission in exercising any
right or power on account of or in connection with the Superior Indebtedness, or
under this Subordination Agreement, shall, in any manner, impair or affect the
rights and duties of Bank, the Creditor and Borrower. Bank, in its uncontrolled
discretion, may waive or release any right or option under this Subordination
Agreement without the consent of Borrower or Creditor, and without otherwise in
any way affecting the obligations of Borrower and Creditor hereunder. Creditor
hereby waives notice of the creation, existence, renewal, or modification or
extension of the time of payment, of the Superior Indebtedness.
9. The Creditor and Borrower agree to make and maintain in their books
of account notations satisfactory to Bank of the rights and priorities of Bank
hereunder, and from time to time, upon request, to furnish Bank with sworn
financial statements. Bank may inspect the books of account and any records of
the Borrower at any time during business hours. Upon the request of Bank,
Borrower and Creditor agree to cause all Subordinated Indebtedness to be
evidenced by the note or notes of Borrower with such maturity date or dates as
Bank may request. Such note or notes, together with any previously existing
notes or other instruments evidencing Subordinated Indebtedness, shall be
delivered to Bank and, at the option of Bank, may be held by Bank or returned to
Creditor marked with a specific statement that the indebtedness thereby
evidenced is subject to the provisions of this Subordination Agreement.
10. This Subordination Agreement shall be a continuing agreement and
Bank may continue, without notice to Creditor, to lend monies, extend credit and
make other accommodations to or for the account of Borrower on the faith hereof
and until a written revocation, signed by Creditor, is received by Bank. Such
revocation, however, shall not affect this Subordination Agreement with respect
to any obligations or liabilities of Borrower then existing in connection with
Superior Indebtedness and, as to such obligations and liabilities, such
revocation shall not become effective unless and until such obligations and
liabilities of Borrower to Bank shall have been paid in full. If Creditor or
Borrower is a partnership, no change in the respective partnership shall affect
the terms hereof.
11. Creditor agrees that Bank, at any time from time to time, either
before or after any such notice of revocation, may enter into such agreement or
agreements with Borrower, as Bank may deem proper, extending the time of payment
or renewing or otherwise altering the terms of all or any of the obligations of
Borrower to Bank, or affecting any security underlying any or all of such
obligations, or may exchange, sell or surrender or otherwise deal with any such
security, or may release any balance of funds of Borrower with Bank, without
notice to Creditor and without in any way impairing or affecting this
Subordination Agreement.
12. Creditor consents and agrees that all Superior Indebtedness shall
be deemed to have been made or incurred at the request of Creditor and in
reliance upon this Subordination Agreement; provided, however, that neither the
foregoing provision, or any other provision contained in this Agreement, shall
be deemed or construed to constitute, either directly or by implication, a
guaranty by Creditor of any debts, obligations or liabilities incurred by
Borrower to Bank.
13. No waiver shall be deemed to be made by Bank of any of its rights
hereunder unless the same shall be in writing signed on behalf of the Bank, and
each such waiver, if any shall be a waiver only with respect to the specific
matter or matters to which the waiver relates and shall in no way impair the
rights of the Bank or the obligations of Creditor to Bank in any other respect
at any other time.
14. This Subordination Agreement shall inure to the benefit of Bank and
the successors and assigns of Bank, and any financing institution joining in
making said loan(s) or extending said line(s) of credit, or committing itself to
make any advances in connection therewith, or which may now, or hereafter,
participate therein. Notice of acceptance of this Subordination Agreement is
hereby waived and this Agreement shall be binding upon the Creditor, its heirs,
personal representatives, successors and assigns, as the case may be, it being
understood, however, that no assignment of the Subordinated Indebtedness due
Creditor from Borrower, or any part thereof, shall be made to one not a party
hereto without the written consent of the Bank first had and obtained, as
hereinabove provided.
15. Creditor agrees not to commence or join with any other creditor of
Borrower in commencing any bankruptcy, reorganization or insolvency proceedings
against the Borrower.
2
<PAGE> 3
16. This Agreement shall be deemed to have been executed, delivered and
performed in Arizona, and construed according to the laws of the State of
Arizona. Creditor and Borrower waive notice of acceptance hereof and all other
notices or demands whatsoever.
17. In the event of a breach of any covenant or agreement made herein
by either Creditor or Borrower, Bank may, at its option, declare all of the
Superior Indebtedness and/or Subordinated Indebtedness immediately due and
payable.
18. The words "Creditor" and "Borrower" as herein used shall include
the plural as well as the singular and, if Creditor or Borrower includes two (2)
or more, they shall be jointly and severally bound hereby.
19. Anything herein to the contrary notwithstanding, so long as
Borrower is in compliance with all covenants of the Loan Agreement, dated June
30, 1995, between Borrower and Bank, Borrower may pay monthly accrued interest
and principal payments on the Subordinated Indebtedness.
IN WITNESS WHEREOF, this Subordination Agreement has been duly executed
this 30th day of June, 1997.
SCHUFF STEEL COMPANY, 19th AVENUE/BUCHANAN LIMITED PARTNERSHIP,
a Delaware corporation an Arizona limited partnership
By /s/ David A. Schuff By /s/ David A. Schuff
---------------------------- ------------------------------------
David A. Schuff, Chairman David A. Schuff, general partner
(Borrower)
By /s/ Nancy A. Schuff
------------------------------------
Nancy A. Schuff, general partner
By /s/ Scott A. Schuff
------------------------------------
Scott A. Schuff, general partner
(Creditor)
3
<PAGE> 1
Schuff Steel Company
Exhibit 11 - Statement Re: Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
------------------------------------
(000's omitted, except per share data)
<S> <C> <C> <C> <C>
Primary:
Average shares outstanding 5,000 5,000 5,000 5,000
Net effect of dilutive stock options -- based on the
treasury stock method using average market price
130 -- 108 --
Net effect of options issued within twelve months of
the initial public offering -- 130 22 130
Net effect of shares expected to be issued
attributable to stockholder distributions from
offering proceeds 941 941 941 941
------------------------------------
Totals 6,071 6,071 6,071 6,071
====================================
Pro forma net income $1,752 $1,549 $2,786 $1,873
====================================
Pro forma per share amount $ 0.29 $ 0.26 $ 0.46 $ 0.31
====================================
Fully diluted:
Average shares outstanding 5,000 5,000 5,000 5,000
Net effect of dilutive stock options -- based on the
treasury stock method using period end market
price 130 -- 108 --
Net effect of options issued within twelve months of
the initial public offering -- 130 22 130
Net effect of shares expected to be issued
attributable to stockholder distributions from
offering proceeds 941 941 941 941
------------------------------------
Totals 6,071 6,071 6,071 6,071
====================================
Pro forma net income $1,752 $1,549 $2,786 $1,873
====================================
Pro forma per share amount $ 0.29 $ 0.26 $ 0.46 $ 0.31
====================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1,000
<CASH> 6,566
<SECURITIES> 0
<RECEIVABLES> 15,884
<ALLOWANCES> 0
<INVENTORY> 10,151
<CURRENT-ASSETS> 35,632
<PP&E> 15,775
<DEPRECIATION> 9,846
<TOTAL-ASSETS> 41,763
<CURRENT-LIABILITIES> 33,056
<BONDS> 2,376
0
0
<COMMON> 5
<OTHER-SE> 5,845
<TOTAL-LIABILITY-AND-EQUITY> 41,763
<SALES> 62,684
<TOTAL-REVENUES> 62,684
<CGS> 54,394
<TOTAL-COSTS> 54,394
<OTHER-EXPENSES> 4,175
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 191
<INCOME-PRETAX> 4,143
<INCOME-TAX> 1,357
<INCOME-CONTINUING> 2,786
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,786
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.46
</TABLE>
