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FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
Commission File Number 1-13123
METALS USA, INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE 76-0533626
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
THREE RIVERWAY, SUITE 600 77056
HOUSTON, TEXAS (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (713) 965-0990
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Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes /X/ No / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEEDING FIVE YEARS
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes /X/ No / /
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Number of shares of common stock outstanding at November 14, 2002: 20,149,510
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
INDEX
PAGE
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PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheets at September 30, 2002 and
December 31, 2001...................................................................................... 2
Unaudited Consolidated Statements of Operations for the three and nine months ended
September 30, 2002 and 2001............................................................................ 3
Unaudited Consolidated Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001............................................................................ 4
Condensed Notes to Unaudited Consolidated Financial Statements........................................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................................................. 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................ 33
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS..................................................................................... 33
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................................. 33
ITEM 4. CONTROLS AND PROCEDURES............................................................................... 34
ITEM 5. OTHER INFORMATION..................................................................................... 34
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................................................... 35
SIGNATURE..................................................................................................... 36
CERTIFICATIONS................................................................................................ 36
1
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
UNAUDITED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents .......................................................... $ 33.2 $ 72.2
Restricted cash .................................................................... 2.2 3.0
Accounts receivable, net of allowance of $6.9 and $6.4, respectively ............... 131.6 150.1
Inventories ........................................................................ 216.3 236.1
Prepaid expenses and other ......................................................... 7.9 26.0
Operations held for sale ........................................................... 55.4 49.1
------------- -------------
Total current assets ......................................................... 446.6 536.5
Property and equipment, net ........................................................... 107.1 148.9
Other assets, net ..................................................................... 6.1 4.5
------------- -------------
Total assets ................................................................. $ 559.8 $ 689.9
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Post petition liabilities:
Accounts payable ................................................................. $ 20.2 $ 16.3
Accrued liabilities .............................................................. 29.9 17.0
Operations held for sale, including pre-petition liabilities subject to compromise . 55.1 17.4
Pre-petition accrued liabilities - not subject to compromise ....................... 2.0 8.4
Post-petition and pre-petition debt - not subject to compromise .................... 183.3 301.9
------------- -------------
Total current liabilities .................................................... 290.5 361.0
Pre-petition liabilities - subject to compromise ...................................... 323.5 364.0
------------- -------------
Total liabilities ............................................................ 614.0 725.0
------------- -------------
Commitments and contingencies
Stockholders' deficit:
Common stock, $.01 par, 203,122,914 shares authorized, 36,509,972 shares
issued and outstanding ......................................................... 0.4 0.4
Additional paid-in capital ....................................................... 247.7 247.7
Retained deficit ............................................................... (302.3) (283.2)
------------- -------------
Total stockholders' deficit .................................................. (54.2) (35.1)
------------- -------------
Total liabilities and stockholders' deficit .................................. $ 559.8 $ 689.9
============= =============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
2
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net sales ................................................. $ 234.4 $ 292.7 $ 718.7 $ 933.1
Cost of sales ............................................. 177.0 225.8 542.7 715.0
------------- ------------- ------------- -------------
Gross profit .................................... 57.4 66.9 176.0 218.1
Operating costs and expenses:
Operating and delivery ................................. 27.9 35.8 89.8 111.5
Selling, general and administrative .................... 20.4 28.6 68.4 86.0
Depreciation and amortization .......................... 2.1 5.3 6.3 16.0
Integration credit ..................................... -- (2.1) -- (2.1)
Asset impairments ...................................... (0.4) 86.7 3.1 86.7
------------- ------------- ------------- -------------
Operating income (loss) ......................... 7.4 (87.4) 8.4 (80.0)
Other (income) expense:
Interest and securitization expense .................... 4.4 12.4 14.8 39.7
Other (income) expense, net ............................ (0.2) 0.2 (0.6) (0.2)
Reorganization expenses ................................ 10.7 -- 19.8 --
------------- ------------- ------------- -------------
Loss before income taxes, discontinued
operations and extraordinary charge ........... (7.5) (100.0) (25.6) (119.5)
Benefit for income taxes .................................. (3.5) (16.9) (7.5) (22.7)
------------- ------------- ------------- -------------
Loss before discontinued operations and
extraordinary charge .......................... (4.0) (83.1) (18.1) (96.8)
Discontinued operations, net of tax provision (benefit) ... (1.0) (2.3) (1.1) (3.8)
------------- ------------- ------------- -------------
Loss before extraordinary charge ................ (5.0) (85.4) (19.2) (100.6)
Extraordinary charge from early extinguishment of debt,
net of income taxes ................................... -- -- -- 1.8
------------- ------------- ------------- -------------
Net loss ........................................ $ (5.0) $ (85.4) $ (19.2) $ (102.4)
============= ============= ============= =============
Net loss per share - basic and diluted
Before discontinued operations and extraordinary
charge ............................................... $ (.11) $ (2.28) $ (.50) $ (2.65)
Discontinued operations ................................ (.03) (.06) (.03) (.11)
Extraordinary charge ................................... -- -- -- (.05)
------------- ------------- ------------- -------------
Total ............................................ $ (.14) $ (2.34) $ (.53) $ (2.81)
============= ============= ============= =============
Number of common shares used in the per share
calculations:
Net loss per share - basic and diluted ................ 36.5 36.5 36.5 36.5
============= ============= ============= =============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................... $ (19.2) $ (102.4)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Net loss from discontinued operations ..................................... 1.1 3.8
Asset impairments and integration credit .................................. 3.1 84.6
Gain on sale of property and equipment .................................... (0.4) --
Provision for bad debts ................................................... 3.3 4.0
Depreciation and amortization ............................................. 6.3 16.0
Deferred income taxes ..................................................... -- (7.2)
Extraordinary charge from early extinguishment of debt .................... -- 2.9
Changes in operating assets and liabilities, net of non-cash transactions:
Restricted cash ......................................................... (0.8) --
Accounts receivable ..................................................... (20.0) 3.5
Inventories ............................................................. (36.2) 68.8
Prepaid expenses and other .............................................. (2.4) 11.2
Accounts payable and accrued liabilities ................................ 9.4 (1.6)
Income taxes (receivable) payable ....................................... 17.2 (14.0)
Other operating ......................................................... 2.7 --
------------- -------------
Net cash provided by continuing operating activities .................. (35.9) 69.6
Net cash provided by (used in) discontinued operating activities .......... 34.1 31.0
------------- -------------
Net cash provided by (used in) operations ............................. (1.8) 100.6
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Repurchase of securitized receivables ....................................... -- (100.0)
Proceeds from sale of operations held for sale .............................. 80.3 2.8
Purchases of property and equipment ......................................... (2.2) (13.8)
------------- -------------
Net cash provided by (used in) investing activities ................... 78.1 (111.0)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on DIP Financing ............................................. 167.2 --
Net borrowings (repayments) on credit facilities ............................ (278.2) 31.9
Repayments on long-term debt ................................................ (1.7) (6.0)
Payment of dividends ........................................................ -- (2.2)
Debt issuance costs incurred ................................................ (2.6) (7.6)
Other financing ............................................................. -- (1.3)
------------- -------------
Net cash provided by (used in) financing activities ................... (115.3) 14.8
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................. (39.0) 4.4
CASH AND CASH EQUIVALENTS, beginning of period ................................... 72.2 3.8
------------- -------------
CASH AND CASH EQUIVALENTS, end of period ......................................... $ 33.2 $ 8.2
============= =============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. ORGANIZATION, BASIS OF PRESENTATION AND CHAPTER 11 PROCEEDINGS
ORGANIZATION
Metals USA, Inc., a Delaware corporation, together with its subsidiaries
("the Company") is a provider of value-added processed steel, aluminum and
specialty metals, as well as manufactured metal components. The Company sells to
businesses such as the machining, furniture, transportation equipment, power and
process equipment, industrial/commercial construction, consumer durables and
electrical equipment industries, and machinery and equipment manufacturers.
During 2000 and 2001, the steel industry declined substantially as a result
of pricing pressure from foreign imports and an economic recession experienced
in the U.S. These factors, combined with the Company's high level of debt,
caused the Company and all of its subsidiaries to voluntarily file for relief
under Chapter 11 of the U. S. Bankruptcy Code ("Chapter 11 Filing"), in the U.
S. Bankruptcy Court, Southern District of Texas, Houston Division ("Bankruptcy
Court") on November 14, 2001. On June 21, 2002, the Company reached an agreement
with the Official Committee of Unsecured Creditors ("Creditors Committee") on
the terms of a Plan of Reorganization ("Reorganization Plan"). On August 27,
2002, the Company filed its Reorganization Plan with the Bankruptcy Court. The
Bankruptcy Court approved the disclosure statement with respect to the
Reorganization Plan on September 18, 2002 and the Company began soliciting its
creditor constituencies. On October 18, 2002, the Bankruptcy Court confirmed the
Reorganization Plan. On October 31, 2002, the Company substantially completed
the required transactions to effect the Reorganization Plan. Accordingly, the
Company emerged from bankruptcy on October 31, 2002 (the "Effective Date").
During the course of the bankruptcy proceedings, the Company effected several
divestitures that have resulted in a significant downsizing of its operations.
The Reorganization Plan and other matters related to the bankruptcy proceedings
in general are discussed below under the caption "Chapter 11 Proceedings," Note
7 "Stockholders' Equity" and Note 11 "Subsequent Event - Emergence from
Bankruptcy."
BASIS OF PRESENTATION
The information contained in the following notes to the accompanying
consolidated financial statements is condensed from that which would appear in
the annual audited financial statements. Accordingly, the financial statements
included herein should be reviewed in conjunction with the Company's audited
consolidated financial statements and related notes thereto contained in the
Annual Report on Form 10-K ("Form 10-K") for the year ended December 31, 2001.
Any capitalized terms used but not specifically defined herein have the same
meaning given to them in the Form 10-K.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The financial statements
are prepared in accordance with the AICPA's Statement of Position (SOP) 90-7,
FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE BANKRUPTCY CODE. SOP
90-7 requires the Company to, among other things, (1) identify transactions that
are directly
5
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
associated with the bankruptcy proceedings from those events that occur during
the normal course of business, (2) identify pre-petition liabilities subject to
compromise from those that are not subject to compromise or are post petition
liabilities (see Notes 4 and 5) and (3) apply "Fresh-Start Reporting" rules upon
emerging from bankruptcy (see Note 11).
INTERIM FINANCIAL INFORMATION -- The interim consolidated financial
statements included herein are unaudited; however, they include all adjustments
of a normal recurring nature which, in the opinion of management, are necessary
to present fairly the interim consolidated financial information as of and for
the periods indicated. All intercompany transactions and balances have been
eliminated. Accounting measurements at interim dates inherently involve greater
reliance on estimates than at year-end. The results of operations for the
interim periods presented are not necessarily indicative of the results to be
expected for the entire year.
USE OF ESTIMATES AND ASSUMPTIONS -- The preparation of financial statements
in conformity with accounting principles generally accepted in the U.S. requires
management to make estimates and assumptions that affect (i) the reported
amounts of assets and liabilities, (ii) the disclosure of contingent assets and
liabilities known to exist as of the date the financial statements are
published, and (iii) the reported amount of net sales and expenses recognized
during the periods presented. The Company reviews all significant estimates
affecting its consolidated financial statements on a recurring basis and records
the effect of any necessary adjustments prior to their publication. Adjustments
made with respect to the use of estimates often relate to improved information
not previously available. Uncertainties with respect to such estimates and
assumptions are inherent in the preparation of financial statements.
EXTRAORDINARY ITEM -- During the first quarter of 2001, the Company
refinanced its credit facilities. In connection with this refinancing, the
Company recorded an extraordinary charge of $2.9, before a tax benefit of $1.1,
to write off the balance of unamortized deferred debt issuance costs related to
the former credit facility.
NEW ACCOUNTING PRONOUNCEMENTS -- In July 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 142
("SFAS 142"), Accounting for Goodwill and Other Intangible Assets. SFAS 142
requires companies to assess goodwill assets for impairment each year, and more
frequently if circumstances suggest an impairment may have occurred. SFAS 142
also introduces a more stringent framework for assessing goodwill impairment
than the approach required under previous rules. SFAS 142 discontinues the
regular charge, or amortization, of goodwill assets against income. SFAS 142 was
adopted by the Company on January 1, 2002. Due to the write-off of all goodwill
as of December 31, 2001, the adoption of SFAS 142 did not have any impact on the
Company's financial statements during 2002. SFAS 142 requires pro forma
presentation. However, due to the write-off of all goodwill as of December 31,
2001, no pro forma information has been presented. The goodwill amortization for
the nine months ended September 30, 2001 was $6.0.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 ("SFAS 144"), Accounting for
Impairment or Disposal of Long-Lived Assets. SFAS 144 supersedes Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, Reporting the Results of Operations, Reporting
6
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions. SFAS 144 addresses financial
accounting and reporting for the impairment and disposal of long-lived assets
and was adopted by the Company effective January 1, 2002. Beginning in the
second quarter of 2002, the Company reported the divestitures announced on April
5, 2002 as discontinued operations (see Note 8). As a result of these
divestitures, the Company recorded asset impairments of $3.5 in the second
quarter of 2002, such amount representing the difference between the estimated
net proceeds and the carrying value of the divested assets. In addition, the
reversal of certain excess accruals in the third quarter of 2002 reduced the
year to date asset impairment amount to $3.1.
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145 ("SFAS 145"), Rescission of FASB
Statements 4, 44 and 64, Amendment of FASB No. 13, and Technical Corrections.
SFAS 145, among other things, amends SFAS 4 and SFAS 44, to require that gains
and losses from the extinguishments of debt generally be classified within
continuing operations. The provisions for SFAS 145 are effective for the fiscal
years beginning after May 15, 2002 and early application is encouraged. However,
the Company will be required to adopt upon emergence from bankruptcy and
application of Fresh Start Reporting as specified by SOP 90-7. Upon emergence
from bankruptcy, any gains on debt forgiveness will be reported in income from
continuing operations.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146 ("SFAS 146"), Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146 replaces Emerging Issues
Task Force Issue 94-3, Liability Recognition of Certain Employee Termination
Benefits and Other Costs to Exit an Activity. This standard requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
This statement is effective for exit or disposal activities that are initiated
after December 31, 2002. However, the Company will be required to adopt upon
emergence from bankruptcy and application of Fresh Start Reporting as specified
by SOP 90-7. The Company does not believe that the adoption of SFAS 146 will
have a significant impact on its financial statements.
CHAPTER 11 PROCEEDINGS
Certain liabilities outstanding as of the date of the Chapter 11 Filing
were subject to resolution under the Reorganization Plan that was voted upon by
the Company's creditors and shareholders and confirmed by the Bankruptcy Court.
The Company filed schedules with the Bankruptcy Court setting forth the assets
and liabilities of the Company as of the date of the Chapter 11 Filing, as shown
by the Company's accounting records. The Bankruptcy Court set July 8, 2002 as
the "Bar Date", the date by which creditors that disagree with the scheduled
information must file proofs of claims that arose prior to the Chapter 11
Filing. The Company is currently in the process of finalizing the reconciliation
of such claims and expects all claims to be resolved in the next six to twelve
months
On June 21, 2002, the Company reached an agreement with the Creditors
Committee on the terms of the Reorganization Plan, subject to definitive
documentation and obtaining the required approvals and exit financing. The
Company filed this Reorganization Plan with the Bankruptcy Court on August 27,
2002. The Bankruptcy Court held a hearing on September 18, 2002 and determined
the disclosure statement to be used for distribution and voter solicitation
contained adequate information. More than 90 percent of the unsecured creditors
that voted on the Reorganization Plan approved the Reorganization Plan. The
Reorganization Plan
7
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
was confirmed by the Bankruptcy Court on October 18, 2002. The Company was
permitted to consummate the transactions described in the Reorganization Plan
and emerged from bankruptcy on October 31, 2002, the Effective Date.
Under the terms of the Reorganization Plan, the unsecured creditors will
receive, upon resolution of disputed creditor claims and completion of
distributions under the Reorganization Plan, 20,000,000 shares of Common
Stock (the "New Common Stock") in the reorganized Company to discharge an in
exchange for approximately $373.9 of unsecured debt, and the financial
advisor to the holders of general unsecured claims was issued 149,510 shares
of New Common Stock. The Company's existing Common Stock was extinguished and
holders of such shares will receive in exchange for such shares, upon
completion of distributions under the Reorganization Plan, five-year warrants
(the "Warrants") to purchase an aggregate of 3,555,795 shares of the New
Common Stock of the reorganized Company (representing approximately 15% of
the Company's outstanding New Common Stock). The Warrants have an exercise
price calculated at full recovery for all unsecured creditors, such exercise
price to be determined six months after the Effective Date, based upon the
Company's estimate of total general unsecured claims. The exercise price is
currently estimated to be $18.93 per share (assuming that total allowed
general unsecured claims are $378.5). The Warrants will not be distributed
until six months after the Effective Date. The Company is required to use
commercially reasonable efforts to list the New Common Stock on the Nasdaq or
another national securities exchange but there can be no assurance that any
such listing will be approved or that an established trading market will
develop for the New Common Stock. The Company does not currently intend to
list the Warrants and cannot provide any assurance as to whether a market
will develop for the Warrants. The Reorganization Plan provides for the
establishment of a new equity incentive plan (the "New Management Stock
Incentive Plan") for employees to be administered by the Board of Directors
of the newly reorganized Company. Up to 2,015,000 shares of New Common Stock
are reserved for issuance under the New Management Stock Incentive Plan. All
previously outstanding options of the Company which had been issued under the
1997 Metals USA Executive Incentive Plans were cancelled. Additionally, the
Board of Directors of the newly reorganized Company was reconstituted with
six new members.
The Company will be required to adopt Fresh-Start Reporting as specified by
SOP-90-7. Fresh-Start Reporting is required upon a substantive change in control
and requires upon the date of confirmation, that the reporting entity allocate
the reorganization value of the Company to its assets and liabilities in
relation to their fair values similar to the procedures specified by Accounting
Principles Board Opinion 16, "Business Combinations". Accordingly, the carrying
values of the Company's assets and liabilities will differ from the amounts
shown at September 30, 2002. The principal differences relate to the exchange of
shares of New Common Stock for pre-petition liabilities subject to compromise,
exchange of Warrants for existing Common Stock, adjustments to reflect the fair
value of certain assets, the reclassification of the Company's secured credit
facilities from a current liability to a long-term liability and elimination of
the retained deficit. In addition, the Company's New Common Stock was valued
based on an estimated value of $200.7. See Note 11 for a pro forma balance sheet
and statement of operations which reflects the application of SOP 90-7.
The Company incurred $19.8 of reorganization expenses associated with the
Chapter 11 Proceedings during the nine months ended September 30, 2002. These
expenses consisted of professional fees, and U.S. Trustee fees and costs
associated with the retention of employees.
8
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
2. EARNINGS PER SHARE
The Company computes earnings (loss) per share in accordance with Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), EARNINGS PER SHARE. SFAS
128 requires presentation of basic earnings per share ("Earnings per Share -
Basic") and diluted earnings per share ("Earnings per Share - Assuming
Dilution"). Earnings per Share - Basic excludes dilution and is determined by
dividing income (loss) available to common stockholders by the weighted average
number of common shares outstanding during the period. Earnings per Share -
Assuming Dilution reflects the potential dilution that could occur if securities
and other contracts to issue common shares were exercised or converted into
common shares. Because these securities were antidilutive, they were not
included in the net loss calculation for the three and nine months ended
September 30, 2002 and 2001, respectively. The number of shares used in the per
share calculations were 36,509,972 for all periods presented.
3. INVENTORIES
Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- -------------
Raw materials --
Plates and Shapes .......................... $ 59.9 $ 88.4
Flat Rolled ................................ 96.5 92.6
Building Products .......................... 21.2 18.4
------------- -------------
Total raw materials ..................... 177.6 199.4
------------- -------------
Work-in-process and finished goods --
Plates and Shapes .......................... -- 2.0
Flat Rolled ................................ 16.9 16.8
Building Products .......................... 21.8 17.9
------------- -------------
Total work-in-process and finished goods 38.7 36.7
------------- -------------
Less -- LIFO reserve ............................ -- --
------------- -------------
Total ................................... $ 216.3 $ 236.1
============= =============
Inventories of the operations held for sale, in the amount of $18.3 and
$27.9, respectively, have been excluded from the inventory balances presented
above.
4. PRE-PETITION LIABILITIES SUBJECT TO COMPROMISE
The principal categories of claims classified as pre-petition liabilities
subject to compromise from continuing operations under bankruptcy proceedings
are identified below. These liabilities are classified as noncurrent because
under the Reorganization Plan, such liabilities were converted to equity as of
the effective date of such plan. On a consolidated basis, recorded pre-petition
liabilities subject to compromise from continuing operations under Chapter 11
Proceedings, consisted of the following:
9
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- -------------
Subordinated Notes ................................................... $ 200.0 $ 200.0
Accounts payable ..................................................... 108.1 144.7
Accrued interest on Subordinated Notes (August 15 - November 14, 2001) 4.3 4.3
Other liabilities .................................................... 11.1 15.0
------------- -------------
Total liabilities subject to compromise ......................... $ 323.5 $ 364.0
============= =============
In addition to the pre-petition liabilities subject to compromise from
continuing operations, the Company had $50.4 of pre-petition liabilities subject
to compromise from operations held for sale. Such amount is included in
operations held for sale as of September 30, 2002. The total amount of
liabilities subject to compromise is $373.9 as of September 30, 2002.
As a result of the Chapter 11 Filing, principal and interest payments were
not made on pre-petition unsecured debt. The total interest on the pre-petition
unsecured Subordinated Notes that was not charged to earnings for the period
from November 15, 2001 to September 30, 2002, was $15.1 ($12.9 year to date
September 30, 2002). Such interest is not being accrued because the Bankruptcy
Code disallows the payment of post-petition interest that accrues with respect
to unsecured or undersecured claims.
5. DEBT
Debt consists of the following:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- -------------
Post-petition secured debt not subject to compromise:
Borrowings under the DIP Financing .................................. $ 167.2 $ --
Pre-petition secured debt not subject to compromise:
Borrowings under previous credit facilities .......................... -- 278.2
Industrial Revenue Bonds (various issues) ............................ 8.6 17.1
Other obligations .................................................... 7.5 6.6
------------- -------------
Total pre and post-petition debt not subject to compromise $ 183.3 $ 301.9
============= =============
Unsecured debt subject to compromise:
Subordinated Notes (see Note 4) ..................................... $ 200.0 $ 200.0
============= =============
During 2002, one Industrial Revenue Bond in the amount of $7.5 had its
letter of credit called by the lenders. Such amount has been reclassified to
other obligations. As described in the Reorganization Plan, this debt was
exchanged into a note payable secured by real estate and equipment. The note
matures in five years and calls for quarterly payments of principal and interest
at 7% per annum based upon a fifteen-year amortization schedule.
During the course of the claims reconciliation and verification process,
certain obligations previously classified as pre-petition secured debt not
subject to compromise were determined not to be secured
10
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
obligations as such security interest had not been perfected. Accordingly, such
obligations are classified as other liabilities subject to compromise as of
September 30, 2002. See Note 4.
The weighted average interest rates under the Company's credit facilities
for the nine months ended September 30, 2002 and 2001 were 7.38% and 8.03%,
respectively.
DEBTOR-IN-POSSESSION FINANCING
On January 2, 2002, the Company executed its debtor-in-possession financing
("DIP Financing") with Bank of America and PNC Bank in the amount of $350.0. On
July 22, 2002, the Company amended its DIP Financing agreement reducing the
maximum permitted borrowings to $275.0. Initial borrowings of $278.2 were used
to repay the outstanding balance under the previous credit facilities. The
facility was composed of a revolving line of credit consisting of revolving
loans, letters of credit and credit support. The DIP Financing bore interest at
the bank's prime rate plus an applicable margin of 2%, had an eighteen-month
term with two three-month extensions and was collateralized by all of the
Company's accounts receivable, inventory, equipment and real estate. The lending
formula was 85% of eligible accounts receivable and up to 60% of eligible
inventory. In addition, there were two sublimit loans in the amount of $31.0 on
equipment and $30.0 on real estate. The $31.0 equipment loan was amortized at
$0.5 per month with additional amounts paid with proceeds from asset
divestitures. Proceeds from a federal income tax refund in the amount of $23.7
and net proceeds from asset sales were used to retire the equipment sublimit as
of September 30, 2002. The balance on the real estate sublimit at September 30,
2002 was $20.6. A commitment fee was payable on any unused portion of the DIP
Financing. A letter of credit fee was payable for each letter of credit or
credit support provided by the lenders. Borrowings were used to fund
post-petition operating expenses and supplier and employee obligations
throughout the reorganization process.
NEW CREDIT FACILITY
On October 31, 2002, the Company entered into a new financing agreement
with a group of lenders (the "New Credit Facility"). The New Credit Facility
has an initial term of three years with an option to extend the agreement by
two one-year terms. The DIP Facility was retired with borrowings under the
New Credit Facility. The New Credit Facility provides for a revolving credit
facility providing up to $200.0 in borrowings and is secured by all of the
Company's receivables, inventories, and intangible property. Borrowings under
the New Credit Facility are limited to the lesser of a borrowing base,
comprised of eligible receivables and inventories, or $200.0 in the
aggregate; however, the Company's real estate and machinery and equipment are
not pledged as security for the loan. As of November 12, 2002, the Company
had $63.4 available under the New Credit Facility. Such availability could be
impacted by Fresh Start Accounting in the event there are adjustments to the
pledged assets.
The New Credit Facility matures on October 31, 2005, subject to extension
and bears interest at the bank's base rate or LIBOR, at the Company's option,
plus an applicable margin based on a ratio of EBITDA (as defined and adjusted)
to cash interest expense (the "Fixed Charge Coverage Ratio"). The Fixed Charge
Coverage Ratio is determined by dividing the sum of EBITDA, net capital
expenditures, income taxes paid in cash, dividends, or other pro forma
distributions, by the sum of interest expense paid and scheduled principal
reductions on debt. The applicable margin for base rate loans ranges from 0.00%
to 0.50%, and the LIBOR margin loans ranges from 2.00% to 3.00%. These marginal
rates vary with the Company's financial
11
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
performance as measured by the Fixed Charge Coverage Ratio. A commitment fee is
payable on any unused portion of the New Credit Facility. The commitment fee
varies between 0.375% and 0.250% per annum, based on the Fixed Charge Coverage
Ratio. The base rate and the LIBOR rate are 4.25% and 1.38% as of November 12,
2002.
The New Credit Facility requires the Company to comply with various
affirmative, negative and subjective covenants, the most significant of which
are as follows: (i) the maintenance of certain financial ratios and borrowing
base availability, (ii) restrictions on additional indebtedness, (iii)
restrictions on liens, guarantees and quarterly dividends, and (iv) obtaining
the lenders' consent with respect to certain individual acquisitions. The New
Credit Facility allows for the payment of up to $1.1 of dividends in any fiscal
quarter provided that borrowing base availability is greater than $40.0. As long
as the Company's availability (the applicable advance rate on eligible
receivables and inventories, less outstanding borrowings and letters of credit)
is $20.0 or greater, the Company does not have to maintain a minimum Fixed
Charge Coverage Ratio. Should availability fall below $20.0, the Company must
comply with a Fixed Charge Coverage Ratio of 1.0 to 1.0.
In connection with the establishment of the New Credit Facility, the
Company incurred fees and expenses of approximately $2.2, which are being
amortized over the three-year term of the facility.
SUBORDINATED NOTES
The Subordinated Notes were unconditionally and fully guaranteed, such
guarantee being joint and several, by substantially all of the Company's current
and future subsidiaries. Metals USA, Inc., the parent company, did not have
sufficient independent assets, apart from its investment in its wholly owned
subsidiaries to satisfy the financial requirements of the Subordinated Notes.
Accordingly the Company was exempt from presenting subsidiary guarantor
financial information.
The Subordinated Notes plus accrued interest through November 14, 2001
totaling $204.3 will be exchanged for shares of New Common Stock under the terms
of the Reorganization Plan.
6. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are involved in a variety of claims,
lawsuits and other disputes arising in the ordinary course of business. The
Company believes the resolution of these matters and the incurrence of their
related costs and expenses should not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
7. STOCKHOLDERS' EQUITY
The last dividend paid by the Company was declared on March 28, 2001. It
was paid on April 17, 2001 to Stockholders' of record on April 6, 2001. There
have been no subsequent dividends declared.
Under the terms of the Reorganization Plan, the unsecured creditors will
receive, upon resolution of disputed creditor claims and completion of
distributions under the Reorganization Plan, 20,000,000 shares of New Common
Stock in the reorganized Company to discharge and in exchange for
approximately $373.9 of unsecured debt, and the financial advisor to holders
of general unsecured claims was issued 149,510 shares of New Common
12
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Stock. The Company's existing Common Stock was extinguished and holders of
such shares will receive in exchange for such shares, upon completion of
distributions under the Reorganization Plan, five-year Warrants to purchase
an aggregate of 3,555,795 shares of the New Common Stock of the reorganized
Company (representing approximately 15% of the Company's outstanding New
Common Stock). The Warrants have an exercise price calculated at full
recovery for all unsecured creditors, such exercise price to be determined
six months after the Effective Date, based upon the Company's estimate of
total general unsecured claims. The exercise price is currently estimated to
be $18.93 per share (assuming that total allowed general unsecured claims are
$378.5). The Warrants will not be distributed until six months after the
Effective Date. The Reorganization Plan provides for the establishment of the
New Management Stock Incentive Plan for employees to be administered by the
Board of Directors of the newly reorganized Company. Up to 2,015,000 shares
of New Common Stock are reserved for issuance under the New Management Stock
Incentive Plan. All previously outstanding options of the Company which had
been issued under the 1997 Metals USA Executive Incentive Plans were
cancelled.
8. OPERATIONS HELD FOR SALE
During the third quarter of 2001, the Company decided to sell certain
assets of its Plates and Shapes business unit. Because the operations held for
sale as of December 31, 2001 were initiated prior to the Company's adoption of
SFAS 144 on January 1, 2002, the accounting for the disposal of these assets is
governed by the provisions of SFAS 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of." This
pronouncement requires that the operational results of the operations held for
sale be reported as continuing operations on the statement of operations with
supplemental footnote disclosure of the assets, liabilities and results of
operations. Operational information included in the consolidated statements of
operations regarding the businesses classified as operations held for sale under
SFAS 121 as of September 30, 2002 are as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2002 2001
---------- ----------
Net sales ...... $ 30.7 $ 100.7
Operating loss . (2.7) (0.6)
While there can be no assurances as to the timing of these asset sales,
management expects them to be sold within one year.
On April 5, 2002, the Company announced planned divestitures of eleven
additional business units that resulted in a significant downsizing of the
Company. These divestitures were a part of the Reorganization Plan that was
approved by the Creditors Committee on June 21, 2002. These divestitures, along
with previously announced divestitures, had a carrying value and expected net
proceeds at September 30, 2002 of approximately $55.4. The proceeds from the
sale of these assets have been and will continue to be used to reduce amounts
outstanding under the Company's credit facilities. Collection of receivables
that were retained upon the sale of certain operations prior to September 30,
2002, as well as transactions under contract at September 30, 2002, are expected
to generate additional net proceeds of approximately $32.3. Further the Company
continues to actively pursue the sale of the remaining $23.1 of assets.
13
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
The accounting for the disposal of the operations placed into the held for
sale category during 2002 is governed by the provisions of SFAS 144. This
pronouncement requires that the operational results of the operations held for
sale be recorded as discontinued operations on the statement of operations with
separate earnings per share disclosure and supplemental footnote disclosure of
the assets and liabilities.
Operational information included in the consolidated statements of
operations for the nine months ended September 30, 2002 and 2001, with respect
to the businesses classified as discontinued operations and held for sale under
SFAS 144 are as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2002 2001
-------- --------
Net sales ................ $ 218.5 $ 302.7
Cost of sales ............ 170.9 237.8
-------- --------
Gross profit ........ 47.6 64.9
Operating expenses ....... 49.1 69.6
-------- --------
Operating loss ...... (1.5) (4.7)
Benefit for income taxes.. (0.4) (.9)
-------- --------
Net loss ............ $ (1.1) $ (3.8)
======== ========
While there can be no assurances as to the timing of these asset sales,
management expects them to be sold within one year. Accordingly, the asset and
liability amounts for discontinued operations held for sale under SFAS 144 have
been combined with the asset and liability amounts for operations held for sale
under SFAS 121 and have been classified as current assets and liabilities in the
consolidating balance sheet as follows:
AS OF SEPTEMBER 30, 2002 TOTAL AS OF
---------------------------------------- DECEMBER 31,
SFAS 121 SFAS 144 TOTAL 2001
---------- ---------- ---------- ----------
Assets:
Accounts receivable ........................................ $ 4.2 $ 23.1 $ 27.3 $ 14.5
Inventories and other ...................................... 1.8 16.7 18.5 28.5
Property and equipment, net ................................ 8.9 19.2 28.1 16.4
Reserves ................................................... (5.6) (12.9) (18.5) (10.3)
---------- ---------- ---------- ----------
Operations held for sale ................................. $ 9.3 $ 46.1 $ 55.4 $ 49.1
========== ========== ========== ==========
Liabilities:
Post-petition liabilities - not subject to compromise ...... $ 1.7 $ 3.0 $ 4.7 $ 3.0
Pre-petition liabilities - subject to compromise ........... 13.0 37.4 50.4 14.4
---------- ---------- ---------- ----------
Operations held for sale ................................ $ 14.7 $ 40.4 $ 55.1 $ 17.4
========== ========== ========== ==========
Amounts above include the assets and liabilities of the operations held for
sale under both SFAS 121 and SFAS 144 at September 30, 2002. The amounts as of
December 31, 2001, include only operations held for sale under SFAS 121, as
operations held for sale under SFAS 144 were not identified until the second
quarter of 2002.
14
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
9. SUPPLEMENTAL CASH FLOW INFORMATION
NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
-------- --------
Supplemental cash flow information:
Cash paid for interest ............ $ 13.5 $ 41.8
Cash refunded for income taxes paid (25.2) (5.3)
10. SEGMENT AND RELATED INFORMATION
The following table shows summarized financial information for the
continuing operations of the Company's reportable segments. The Company
evaluates performance of each segment based on operating income (loss).
Operating income (loss) by business segment excludes interest expense and
reorganization expenses. Corporate expenses are not allocated to the Company's
operating segments. The negative sales amount under Corporate and Other
represents the elimination of intercompany sales.
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------
PLATES AND BUILDING CORPORATE
SHAPES FLAT ROLLED PRODUCTS AND OTHER TOTAL
----------- ----------- --------- --------- ---------
2002:
Net sales ................... $ 259.6 $ 358.2 $ 120.7 $ (19.8) $ 718.7
Operating income (loss) ..... 5.9 10.7 11.6 (19.8) 8.4
Total assets ................ 120.5 172.6 100.6 119.9 513.6
Capital expenditures ........ 0.3 0.7 0.8 0.1 1.9
Depreciation and amortization 1.8 2.1 1.6 0.8 6.3
2001:
Net sales ................... $ 416.1 $ 426.4 $ 115.5 $ (24.9) $ 933.1
Operating income (loss) ..... 1.7 13.1 3.1 (97.9) (80.0)
Total assets ................ 251.5 206.4 120.9 251.7 830.5
Capital expenditures ........ 3.3 4.9 2.8 0.8 11.8
Depreciation and amortization 6.0 3.7 2.2 4.1 16.0
11. SUBSEQUENT EVENT - EMERGENCE FROM BANKRUPTCY
On October 31, 2002 the Company emerged from bankruptcy. The accompanying
pro forma consolidated statements of operations and the consolidated pro forma
balance sheet as of and for the nine months ended September 30, 2002, reflect
adjustments made to the reported historical financial statements of the Company
for the periods then ended relating to operations disposed of and adjustments
required to implement "Fresh-Start Reporting" as described by SOP 90-7. The
information presented by the accompanying pro forma financial statements are
intended to provide additional information of a general nature and are not
required disclosures and are not necessarily indicative of results to be
expected from future operations. Certain adjustments described herein are based
upon estimates and assumptions, which may be modified or supplemented as
circumstances warrant in the future. Moreover any such modifications or
additional adjustments may differ materially from those presented.
Notwithstanding the foregoing, the Company
15
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
believes the information presented in the accompanying pro forma financial
statements contains all material known adjustments. Reference is made to the
Amended Plan of Reorganization and Disclosure Statement filed with the
Bankruptcy Court on September 18, 2002, which was filed as an exhibit to the
Company's Form 8-K, filed with the Securities and Exchange Commission on
September 19, 2002.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30,
2002 PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
------------ ------------ ------------
ASSETS
Current assets: .................................................. (33.2)(2)
Cash and cash equivalents, including restricted cash .......... $ 35.4 (2.2)(3) $ --
Accounts receivable, net of allowance ......................... 131.6 -- 131.6
Inventories ................................................... 216.3 -- 216.3
Prepaid expenses and other .................................... 7.9 -- 7.9
Operations held for sale ...................................... 55.4 (9.6)(6) 45.8
------------ ------------ ------------
Total current assets .................................... 446.6 (45.0) 401.6
Property and equipment, net ...................................... 107.1 (107.1)(6) --
1.7(3)
Other assets ..................................................... 6.1 (1.8)(6) 6.0
------------ ------------ ------------
Total assets ............................................ $ 559.8 $ (152.2) $ 407.6
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable .............................................. $ 20.2 $ 2.0(5) $ 22.2
Accrued liabilities ........................................... 29.9 -- 29.9
Operations held for sale ...................................... 55.1 (50.4)(1) 4.7
Pre-petition accrued liabilities - not subject to compromise .. 2.0 (2.0)(5) --
Post and pre-petition debt - not subject to compromise ........ (33.2)(2)
183.3 (150.1)(4) --
------------ ------------ ------------
Total current liabilities 290.5 (233.7) 56.8
Pre-petition liabilities - subject to compromise 323.5 (200.0)(1) --
(123.5)(1)
Long-term liabilities ............................................ -- 150.1(4) 150.1
------------ ------------ ------------
Total liabilities ....................................... 614.0 (407.1) 206.9
------------ ------------ ------------
Stockholders' equity (deficit):
Common stock, $.01 par, 203,122,914 shares authorized,
36,509,972 and 20,149,510 shares issued, respectively ..... 0.4 (0.4)(1)
0.2(1) 0.2
200.5(1)
Additional paid-in capital 247.7 (247.7)(1) 200.5
(116.7)(6)
0.6(3)
Retained deficit ............................................ 248.1(1)
(302.3) 170.3(1) --
------------ ------------ ------------
Total stockholders equity (deficit) ................ (54.2) 254.9 200.7
------------ ------------ ------------
Total liabilities and stockholders' equity (deficit) $ 559.8 $ (152.2) $ 407.6
============ ============ ============
16
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NINE MONTHS ENDED SEPTEMBER 30, 2002
--------------------------------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
---------------- ----------------- -----------------
Net sales ..................................... $ 718.7 (30.7)(7) $ 688.0
Cost of sales ................................. 542.7 (23.3)(7) 519.4
---------------- ----------------- -----------------
Gross profit .......................... 176.0 (7.4) 168.6
Operating costs and expenses:
Operating and delivery ..................... 89.8 (4.4)(7) 85.4
Selling, general and administrative ........ 68.4 (5.7)(7) 62.7
Depreciation and amortization .............. 6.3 (6.3)(6) --
Asset impairments .......................... 3.1 -- 3.1
---------------- ----------------- -----------------
Operating income 8.4 9.0 17.4
Other (income) expense: 0.5(3)
Interest and securitization expense ........ 14.8 (8.9)(8) 6.4
Other (income) expense, net ................ (0.6) -- (0.6)
Reorganization expenses .................... 19.8 (19.8)(9) --
---------------- ----------------- -----------------
Income (loss) before income taxes and
discontinued operations ............. (25.6) 37.2 11.6
Provision (benefit) for income taxes .......... (7.5) (12.1)(10) 4.6
---------------- ----------------- -----------------
Loss before discontinued operations ... (18.1) 25.1 7.0
Discontinued operations, net of taxes ......... (1.1) -- (1.1)
---------------- ----------------- -----------------
Net income (loss) ..................... $ (19.2) $ 25.1 $ 5.9
================ ================= =================
Net income (loss) per share-- basic
Income (loss) before discontinued operations $ (.50) $ .35
Discontinued operations .................... (.03) (.05)
---------------- -----------------
Total .................................... $ (.53) $ .30
---------------- -----------------
Number of common shares used in the per
share calculations:
Net income (loss) per share - basic ........ 36.5 20.1
================ =================
The following pro forma adjustments were made as if the Company emerged
from bankruptcy on September 30, 2002 with respect to the balance sheet and as
if it emerged on January 1, 2002 with respect to the statement of operations for
the nine months ended September 30, 2002:
(1) Record the cancellation of the existing Common Stock ($0.4) and the
associated paid-in capital ($247.7) in exchange for Warrants to purchase
3,555,795 shares of the New Common Stock and the issuance of 20,149,510
shares of the New Common Stock ($0.2) with an estimated value of $200.7 in
exchange for unsecured debt ($200.0) and general unsecured claims ($123.5
from continuing operations and $50.4 from operations held for sale). The
equity valuation was based upon discounted cash flows and is more fully
described in the Reorganization Plan.
(2) Record the application of $33.2 of available cash to pay down post and
pre-petition debt not subject to compromise.
17
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
(3) Record the use of $2.2 of cash incurred to obtain the New Credit Facility
and reflect the amortization of such debt issuance costs of $0.5 during
the period.
(4) Record the retirement of the DIP Financing ($134.0) with borrowings under
the New Credit Facility and reclassify the remaining pre and post-petition
debt not subject to compromise as a long-term liability.
(5) Reclassify pre-petition liabilities not subject to compromise ($2.0) to
accounts payable as these liabilities will be settled in cash.
(6) Adjust property and equipment to the estimated carrying value as
determined under Fresh Start Reporting, eliminate deferred financing costs
associated with the DIP Financing ($1.8) and adjust depreciation ($6.3) to
reflect the amortization of the post reorganization balances.
(7) Eliminate the results of operations for operations held for sale under
SFAS 121.
(8) Adjust interest expense to reflect expense for post bankruptcy long-term
debt balance and reduced interest rate on the New Credit Facility ($8.9).
(9) Eliminate bankruptcy related reorganization expenses ($19.8).
(10) Record income taxes at an effective rate of 40%.
18
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements of Metals USA, Inc. and related notes thereto
included in Part I, Item 1 of this Report and the Company's audited consolidated
financial statements contained in the Form 10-K for the fiscal year ended
December 31, 2001. Unless otherwise indicated, all references to the "Company,"
"we," "us," "our" or other similar terms herein are intended to refer to Metals
USA, Inc. This section contains statements that constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Readers should refer to "Factors Which May Affect Future Operating
Results" discussed below and included in the Form 10-K for the fiscal year ended
December 31, 2001.
OVERVIEW
We are a provider of value-added processed steel, aluminum and specialty
metals, as well as manufactured metal components. We sell to businesses such as
the machining, furniture, transportation equipment, power and process equipment,
industrial/commercial construction, consumer durables and electrical equipment,
and machinery and equipment manufacturers. During 2000 and 2001, the steel
industry declined substantially as a result of pricing pressure from foreign
imports and an economic recession experienced in the U.S. These factors,
combined with our high level of debt, caused us to seek protection under U.S.
bankruptcy laws in November 2001.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The consolidated
financial statements are prepared in accordance with the AICPA's Statement of
Position (SOP) 90-7, FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE
BANKRUPTCY CODE. SOP 90-7 requires the Company to, among other things, (1)
identify transactions that are directly associated with the bankruptcy
proceedings from those events that occur during the normal course of business,
(2) identify pre-petition liabilities subject to compromise from those that are
not subject to compromise or are post petition liabilities and (3) apply
"Fresh-Start Reporting" rules upon emerging from Bankruptcy.
CHAPTER 11 PROCEEDINGS
On November 14, 2001, we voluntarily filed for relief under Chapter 11 of
the U.S. Bankruptcy Code, in U.S Bankruptcy Court, Southern District of Texas,
Houston Division and began operating our business as debtors-in-possession
pursuant to the Bankruptcy Code. As debtors-in-possession under Section 1107 and
1108 of the Bankruptcy Code, we maintained possession of our properties and
assets, and our management continued to operate our businesses. We were
authorized to manage our properties and operate our businesses, but we did not
engage in transactions outside the ordinary course of business without the
approval of the Bankruptcy Court.
Our need to seek relief under the Bankruptcy Code was due primarily to (1)
a reduction in cash flows resulting from an industry wide recession caused by
pricing pressure from foreign imports and recent decline in the manufacturing
sector of the U.S. economy and (2) the inability to obtain additional liquidity
from our primary lending sources. During 2000, the U.S. steel industry began
experiencing significant declines in
19
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
prices for steel products resulting from an influx of foreign imports. During
2001, the U.S economy in general and the manufacturing sector in particular
moved into a recession that was further exacerbated by the terrorist attack on
September 11, 2001. Due to these deteriorating economic conditions, we have
incurred significant operating losses during the past several quarterly
reporting periods. We expect these losses to continue through 2002. The goal of
the Chapter 11 Filing was to maximize recovery by creditors and shareholders by
preserving the Company as a viable entity with going concern value. The
protection afforded by the Chapter 11 Filing has permitted us to preserve cash
and restructure our debt. On June 21, 2002, we reached an agreement with the
Creditors Committee on the terms of the Reorganization Plan, subject to
definitive documentation and obtaining the required approvals and exit
financing. We filed this Reorganization Plan with the Bankruptcy Court on August
27, 2002. The Bankruptcy Court held a hearing on September 18, 2002 and
determined the disclosure statement to be used for distribution and voter
solicitation contained adequate information. The Reorganization Plan was
confirmed by the Bankruptcy Court on October 18, 2002. We were permitted to
consummate the transactions described in the Reorganization Plan and emerged
from bankruptcy on October 31, 2002, the Effective Date.
Under the terms of the Reorganization Plan, the unsecured creditors will
receive, upon resolution of disputed creditor claims and completion of
distributions under the Reorganization Plan, 20,000,000 shares of New Common
Stock in the reorganized Company to discharge and in exchange for
approximately $373.9 million of unsecured debt, and the financial advisor to
holders of general unsecured claims was issued 149,510 shares of New Common
Stock. Our existing Common Stock was extinguished and holders of such shares
will receive in exchange for such shares, upon completion of distributions
under the Reorganization Plan, five-year Warrants to purchase an aggregate of
3,555,795 shares of the New Common Stock of the reorganized Company
(representing approximately 15% of our outstanding New Common Stock). The
Warrants have an exercise price calculated at full recovery for all unsecured
creditors, such exercise price to be determined six months after the
Effective Date, based upon the Company's estimate of total general unsecured
claims. The exercise price is currently estimated to be $18.93 per share
(assuming that total allowed general unsecured claims are $378.5 million).
The Warrants will not be distributed until six months after the Effective
Date. We are required to use commercially reasonable efforts to list the New
Common Stock on the Nasdaq or another national securities exchange but there
can be no assurance that any such listing will be approved or that an
established trading market will develop for the New Common Stock. We do not
currently intend to list the Warrants and cannot provide any assurance as to
whether a market will develop for the Warrants. The Reorganization Plan
provides for the establishment of the New Management Stock Incentive Plan for
employees to be administered by the Board of Directors of the newly
reorganized Company. Up to 2,015,000 shares of New Common Stock are reserved
for issuance under the New Management Stock Incentive Plan. All previously
outstanding options of the Company which had been issued under the 1997
Metals USA Executive Incentive Plans were cancelled. Additionally, the Board
of Directors of the newly reorganized Company was reconstituted with six new
members. See Part II Item 3 - "Changes in Securities and Use of Proceeds" and
Item 5 - "Other Information" below.
We will be required to adopt Fresh-Start Reporting as specified by
SOP-90-7. Fresh-Start Reporting is required upon a substantive change in control
and requires upon the date of confirmation, that the reporting entity allocate
the reorganization value of the Company to its assets and liabilities in
relation to their fair values similar to the procedures specified by Accounting
Principles Board Opinion 16, "Business Combinations". Accordingly, the carrying
values of our assets and liabilities differ from the amounts shown at September
30, 2002. The principal differences relate to the exchange of shares of New
Common Stock for
20
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
pre-petition liabilities subject to compromise, exchange of Warrants for
existing Common Stock, adjustments to reflect the fair value of certain assets,
the reclassification of our secured credit facilities from a current liability
to a long-term liability and elimination of the retained deficit. In addition,
the Company's New Common Stock was valued based on an enterprise value of
$200.7. See Note 11 for a pro forma balance sheet and statement of operations
which reflects the application of SOP 90-7.
CRITICAL ACCOUNTING POLICIES
In response to the Securities and Exchange Commission's Release No.
33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting
Policies", we have identified critical accounting policies based upon the
significance of the accounting policy to our overall financial statement
presentation, as well as the complexity of the accounting policy and our use of
estimates and subjective assessments. We have concluded our critical accounting
policies are as follows:
ALLOWANCE FOR DOUBTFUL ACCOUNTS --Concentrations of credit risk with
respect to trade accounts are within several industries. Generally, credit is
extended once appropriate credit history and references have been obtained.
Provisions to the allowance for doubtful accounts are made monthly and
adjustments are made periodically (as circumstances warrant) based upon the
expected collectibility of all such accounts. Additionally, we periodically
review the credit history of our customers and generally do not require
collateral for the extension of credit.
INVENTORIES -- Inventories are stated at the lower of cost or market.
Certain of our subsidiaries use the last-in, first-out ("LIFO") method of
accounting for inventories and other subsidiaries use a variety of methods
including specific identification, average cost and the first-in first-out
("FIFO") method of accounting.
REVENUE RECOGNITION -- We recognize revenues when products are shipped and
all significant obligations of the Company have been satisfied. Risk of loss
passes at the time of shipment.
IMPAIRMENT OF LONG-LIVED ASSETS -- Long-lived assets are comprised
principally of property and equipment. We review long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be realizable. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset are compared
to the asset's carrying amount to determine if an impairment of such asset is
necessary. The effect of any impairment would be to expense the difference
between the fair value of such asset and its carrying value.
REORGANIZATION EXPENSES. Reorganization expenses include all costs and
expenses directly attributable to the Chapter 11 Proceedings. We are required to
pay all costs and expenses associated with the Chapter 11 Proceedings that are
approved by the Bankruptcy Court, including the professional fees of the secured
lenders providing the DIP Financing, the unsecured creditors and those incurred
by the Company.
21
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED RESULTS OF CONTINUING OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2002 % 2001 % 2002 %
------- ------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT PERCENTAGES)
Net sales ............................. $ 234.4 100.0% $ 292.7 100.0% $ 718.7 100.0%
Cost of sales ......................... 177.0 75.5% 225.8 77.1 542.7 75.5%
------- ------- ------- ------- ------- -------
Gross profit ..................... 57.4 24.5% 66.9 22.9% 176.0 24.5%
Operating and delivery ................ 27.9 11.9% 35.8 12.2% 89.8 12.5%
Selling, general and administrative ... 20.4 8.7% 28.6 9.8% 68.4 9.5%
Depreciation and amortization ......... 2.1 0.9% 5.3 1.8% 6.3 0.9%
Asset impairments/integration
credit .............................. (0.4) (0.2)% 84.6 28.9% 3.1 0.4%
------- ------- ------- ------- ------- -------
Operating income (loss) .......... 7.4 3.2% (87.4) (29.8)% 8.4 1.2%
Interest and securitization expense ... 4.4 1.9% 12.4 4.3% 14.8 2.1%
Other (income) expense, net ........... (0.2) (0.1)% 0.2 0.1% (0.6) (0.1)%
Reorganization expenses ............... 10.7 4.6% -- -- 19.8 2.8%
------- ------- ------- ------- ------- -------
Loss before income taxes ......... $ (7.5) (3.2)% $(100.0) (34.2)% $ (25.6) (3.6)%
======= ======= ======= ======= ======= =======
NINE MONTHS ENDED SEPTEMBER 30,
2001 %
(IN MILLIONS, EXCEPT PERCENTAGES)
Net sales ............................. $ 933.1 100.0%
Cost of sales ......................... 715.0 76.6%
------- -------
Gross profit ..................... 218.1 23.4%
Operating and delivery ................ 111.5 12.0%
Selling, general and administrative ... 86.0 9.2%
Depreciation and amortization ......... 16.0 1.7%
Asset impairments/integration
credit .............................. 84.6 9.1%
------- -------
Operating income (loss) .......... (80.0) (8.6)%
Interest and securitization expense ... 39.7 4.2%
Other (income) expense, net ........... (0.2) --
Reorganization expenses ............... -- --
------- -------
Loss before income taxes ......... $(119.5) (12.8)%
======= =======
CONSOLIDATED RESULTS OF CONTINUING OPERATIONS -- THREE MONTHS ENDED SEPTEMBER
30, 2002 COMPARED TO SEPTEMBER 30, 2001
NET SALES. Net sales decreased $58.3 million, or 19.9%, from $292.7 million
for the three months ended September 30, 2001 to $234.4 million for the three
months ended September 30, 2002. The decrease in net sales was principally due
to decreased shipments in substantially all product lines (except Building
Products), which overall declined by 19.1%. The average sales price per ton
decreased by 1.0% from the prior year.
COST OF SALES. Cost of sales decreased $48.8 million, or 21.6%, from $225.8
million for the three months ended September 30, 2001, to $177.0 million for the
three months ended September 30, 2002. The decrease in cost of sales was
principally due to the decreased shipments described above. As a percentage of
net sales, cost of sales for the three months ended September 30, 2002 declined
to 75.5% versus 77.1% for the three months ended September 30, 2001. This
decline was the result of a 3.1% decrease in the average cost per ton versus a
1.0% decrease in the average sales price per ton.
OPERATING AND DELIVERY. Operating and delivery expenses decreased $7.9
million, or 22.1%, from $35.8 million for the three months ended September 30,
2001 to $27.9 million for the three months ended September 30, 2002. The
decrease in operating and delivery expenses was principally due to the decreased
shipments described above. As a percentage of net sales, operating and delivery
expenses decreased slightly from 12.2% for the three months ended September 30,
2001 to 11.9% for the three months ended September 30, 2002.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses decreased $ 8.2 million, or 28.7%, from $28.6 million for the three
months ended September 30, 2001 to $20.4 million for the three months ended
September 30, 2002. This decrease in selling, general and administrative
expenses was
22
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
primarily attributable to the decreased sales activity. As a percentage of net
sales, selling, general and administrative expenses decreased from 9.8% for the
three months ended September 30, 2001 to 8.7% for the three months ended
September 30, 2002. This percentage decrease was primarily due to a decrease in
the provision for bad debts that decreased from $2.0 in the third quarter of
2001 to $0.7 for the third quarter of 2002.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
decreased $3.2 million or 60.4%, from $5.3 million for the three months ended
September 30, 2001 to $2.1 million for the three months ended September 30,
2002. This decrease was due to the asset impairments that were recorded for
property and equipment and goodwill as of December 31, 2001. The goodwill
amortization for the three months ended September 30, 2001 was $2.0.
ASSET IMPAIRMENTS AND INTEGRATION CREDIT. Asset impairment charges and an
integration credit totaling $84.6 million were recorded in the third quarter of
2001, such amount representing a decrease in net realizable value. There was an
asset impairment credit of $0.4 during the three months ended September 30,
2002.
OPERATING INCOME. Operating loss decreased $94.8 million, from a $87.4
million loss for the three months ended September 30, 2001 to $7.4 million of
income for the three months ended September 30, 2002. The increase in operating
income was primarily attributable to improved margins, the large asset
impairment charge recorded in 2001 as well as reduced depreciation and
amortization expenses, all as further discussed above. Excluding the asset
impairment charges and integration credit, the operating loss decreased $9.8
million, from a $2.8 million loss for the three months ended September 30, 2001
to $7.0 million of income for the three months ended September 30, 2002. As a
percentage of net sales and excluding the asset impairments and integration
credit, operating income increased from (1.0)% for the three months ended
September 30, 2001 to 3.0% for the three months ended September 30, 2002.
INTEREST EXPENSE. Interest expense decreased $8.0 million, or 64.5%, from
$12.4 million for the three months ended September 30, 2001 to $4.4 million for
the three months ended September 30, 2002. The decrease in interest expense was
primarily due to decreased debt levels, lower interest rates and the
discontinuance of accruing interest on the Subordinated Notes of $4.3 million as
this liability was subject to compromise in the Chapter 11 Proceedings.
REORGANIZATION EXPENSES. Reorganization expenses in the amount of $10.7
million for the three months ended September 30, 2002 consist of approximately
$7.3 million of professional fees, U.S. Trustee fees and other costs directly
associated with the Chapter 11 Proceedings and $3.4 million related to employee
retention.
CONSOLIDATED RESULTS OF CONTINUING OPERATIONS -- NINE MONTHS ENDED
SEPTEMBER 30, 2002 COMPARED TO SEPTEMBER 30, 2001
NET SALES. Net sales decreased $214.4 million, or 23.0%, from $933.1
million for the nine months ended September 30, 2001 to $718.7 million for the
nine months ended September 30, 2002. The decrease in net sales was principally
due to decreased shipments in substantially all product lines (except Building
Products)
23
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
which overall declined by 20.2%. In addition to the volume decline, the average
sales price per ton decreased by 3.5%.
COST OF SALES. Cost of sales decreased $172.3 million, or 24.1%, from
$715.0 million for the nine months ended September 30, 2001, to $542.7 million
for the nine months ended September 30, 2002. The decrease in cost of sales was
principally due to the decreased shipments described above. As a percentage of
net sales, cost of sales for the nine months ended September 30, 2002 declined
to 75.5% versus 76.6% for the nine months ended September 30, 2001. This
improvement was the result of a 4.9% decrease in the average cost per ton versus
a 3.5% decrease in the average sales price per ton.
OPERATING AND DELIVERY. Operating and delivery expenses decreased $21.7
million, or 19.4%, from $111.5 million for the nine months ended September 30,
2001 to $89.8 million for the nine months ended September 30, 2002. The decrease
in operating and delivery expenses was principally due to the decreased
shipments described above. As a percentage of net sales, operating and delivery
expenses increased from 12.0% for the nine months ended September 30, 2001 to
12.5% for the nine months ended September 30, 2002. This percentage increase was
primarily due to the decrease in sales and the inherent fixed costs included in
operating and delivery expenses.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses decreased $17.6 million, or 20.5%, from $86.0 million for the nine
months ended September 30, 2001 to $68.4 million for the nine months ended
September 30, 2002. This decrease in selling, general and administrative
expenses was primarily attributable to the decreased sales activity. As a
percentage of net sales, selling, general and administrative expenses increased
from 9.2% for the nine months ended September 30, 2001 to 9.5% for the nine
months ended September 30, 2002. This percentage increase was primarily due to
the decrease in sales, an increase in the cost of self insured medical and
workers compensation insurance and the inherent fixed costs included in selling,
general and administrative expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased $9.7
million or 60.6%, from $16.0 million for the nine months ended September 30,
2001 to $6.3 million for the nine months ended September 30, 2002. This decrease
was due to the asset impairments that were recorded for property and equipment
and goodwill as of December 31, 2001. The goodwill amortization for the nine
months ended September 30, 2001 was $6.0.
ASSET IMPAIRMENTS AND INTEGRATION CREDIT. Asset impairment charges of $3.1
million were recorded during the nine months ended September 30, 2002, such
amount representing the difference between the estimated sales price and the
carrying value of the assets held for sale. During the nine months ended
September 30, 2001, asset impairment charges and an integration credit in the
amount of $84.6 million were recorded.
OPERATING INCOME. Operating loss decreased $88.4 million, from a loss of
$80.0 million for the nine months ended September 30, 2001 to income of $8.4
million for the nine months ended September 30, 2002. The increase in operating
income was primarily attributable to improved margins, reduced asset impairments
and reduced depreciation and amortization expenses, all as further discussed
above. Excluding the asset impairment charges and integration credit, the
operating income increased $6.9 million, from income of $4.6 million for the
nine months ended September 30, 2001 to $11.5 million of income for the three
months ended
24
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
September 30, 2002. As a percentage of net sales and excluding the asset
impairments and integration credit, operating income increased from 0.5% for the
nine months ended September 30, 2001 to 1.6% for the nine months ended September
30, 2002.
INTEREST AND SECURITIZATION EXPENSE. Interest and securitization expense
decreased $24.9 million, or 62.7%, from $39.7 million for the nine months ended
September 30, 2001 to $14.8 million for the nine months ended September 30,
2002. The decrease in interest expense was primarily due to decreased debt
levels, lower interest rates and the discontinuance of accruing interest on the
Subordinated Notes of $12.9 million as this liability is subject to compromise
in the Chapter 11 proceedings.
REORGANIZATION EXPENSES. Reorganization expenses in the amount of $19.8
million for the nine months ended September 30, 2002 consist of approximately
$14.3 million of professional fees, U.S. Trustee fees and other costs directly
associated with Chapter 11 Proceedings and $5.5 million related to employee
retention.
SEGMENT RESULTS OF CONTINUING OPERATIONS -- THREE MONTHS ENDED SEPTEMBER 30,
2002 COMPARED TO SEPTEMBER 30, 2001
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------------------
OPERATING OPERATING
NET COSTS AND INCOME CAPITAL TONS
SALES % EXPENSES % (LOSS) % SPENDING SHIPPED
---------- ----- ---------- ----- ---------- ------ ---------- -------
2002: (IN MILLIONS, EXCEPT PERCENTAGES AND TONS IN THOUSANDS)
Plates and Shapes ......... $ 80.1 34.1% $ 76.6 33.7% $ 3.5 47.3% $ 0.1 140
Flat Rolled ............... 117.1 50.0% 113.2 49.9% 3.9 52.7% 0.3 169
Building Products ......... 43.1 18.4% 38.4 16.9% 4.7 63.5% 0.3 -
Corporate and other ....... (5.9) (2.5)% (1.2) (0.5)% (4.7) (63.5)% - (10)
---------- ----- ---------- ----- ---------- ------ ---------- -------
Total .................... $ 234.4 100.0% $ 227.0 100.0% $ 7.4 100.0% $ 0.7 299
========== ===== ========== ===== ========== ====== ========== =======
2001:
Plates and Shapes ......... $ 126.1 43.1% $ 129.1 34.0% $ (3.0) (3.4)% $ 1.4 179
Flat Rolled ............... 132.4 45.2% 128.9 33.9% 3.5 4.0% 0.4 208
Building Products ......... 41.0 14.0% 39.5 10.4% 1.5 1.7% 1.0 -
Corporate and other ....... (6.8) (2.3)% 82.6 21.7% (89.4) (102.3)% 0.2 (12)
---------- ----- ---------- ----- ---------- ------ ---------- -------
Total .................... $ 292.7 100.0% $ 380.1 100.0% $ (87.4) 100.0% $ 3.0 375
========== ===== ========== ===== ========== ====== ========== =======
PLATES AND SHAPES. Net sales decreased $46.0 million, or 36.5%, from $126.1
million for the three months ended September 30, 2001 to $80.1 million for the
three months ended September 30, 2002. Product shipments declined 21.8% and
average sales prices decreased 18.2% for the three months ended September 30,
2002 compared to the three months ended September 30, 2001. A significant
component of the variance from the third quarter of 2001 to the third quarter of
2002 relates to the sale of the majority of the specialty division of the Plates
and Shapes group in the first quarter of 2002. Excluding the effect of these
operations on the change, sales decreased $21.7 million or 22.5%, tons decreased
19.7% and the average sales price decreased by 3.6%. Operating costs and
expenses decreased $52.5 million, or 40.7%, from $129.1 million for the three
months ended September 30, 2001 to $76.6 million for the three months ended
September 30, 2002. Operating costs and expenses as a percentage of net sales
decreased from 102.4% for the three months ended
25
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
September 30, 2001 to 95.6% for the three months ended September 30, 2002,
primarily due to a reduction in expenses and a decrease in the cost of raw
materials. The change in operating expenses excluding the effect of the
specialty operations was a reduction of $27.7 million or 28.0% and as a
percentage of sales, operating expenses decreased from 102.2% to 94.9%.
Operating income increased by $6.5 million, from a loss of $3.0 million for the
three months ended September 30, 2001 to income of $3.5 million for the three
months ended September 30, 2002. This increase is due to the lower costs as well
as lower depreciation expenses as a result of the impairment of assets at
year-end 2001. Operating income as a percentage of net sales increased from
(2.4)% for the three months ended September 30, 2001 to 4.4% for the three
months ended September 30, 2002. Excluding the specialty division, operating
income would have been $3.9 million in the quarter ended September 30, 2002
versus a loss of $2.2 million in the prior year, an increase of $6.1 million .
FLAT ROLLED. Net sales decreased $15.3 million, or 11.6%, from $132.4
million for the three months ended September 30, 2001 to $117.1 million for the
three months ended September 30, 2002. This decrease is primarily due to a 18.8%
decline in shipments for the three months ended September 30, 2002 compared to
the three months ended September 30, 2001 offset by an increase in the sales
price per ton of 8.6%. Operating costs and expenses decreased $15.7 million, or
12.2%, from $128.9 million for the three months ended September 30, 2001 to
$113.2 million for the three months ended September 30, 2002. This decrease was
primarily attributable to lower shipments as the average cost per ton increased
by 9.1% during the comparable periods. This increase in cost was due to import
tariffs on flat rolled steel coupled with a shortage of domestic supply arising
from the shutdown of domestic processing facilities. Operating costs and
expenses as a percentage of net sales, decreased from 97.4% for the three months
ended September 30, 2001 to 96.7% for the three months ended September 30, 2002,
primarily due to operating cost reductions. Operating income increased by $0.4
million, or 11.4%, from $3.5 million for the three months ended September 30,
2001 to $3.9 million for the three months ended September 30, 2002. This
increase was attributable to operating cost reductions. Operating income as a
percentage of net sales increased from 2.6% for the three months ended September
30, 2001 to 3.3% for the three months ended September 30, 2002.
BUILDING PRODUCTS. Net sales increased $2.1 million, or 5.1%, from $41.0
million for the three months ended September 30, 2001 to $43.1 million for the
three months ended September 30, 2002. The increase in net sales is principally
due to increased demand for these products. Operating costs and expenses
decreased $1.1 million, or 2.8%, from $39.5 million for the three months ended
September 30, 2001 to $38.4 million for the three months ended September 30,
2002. This was due to improved efficiencies and reduced cost of sales. Gross
margin increased by $1.4 million from 31.1% of sales in 2001 to 32.8% in 2002.
Operating costs and expenses as a percentage of net sales decreased from 96.3%
for the three months ended September 30, 2001 to 89.1% for the three months
ended September 30, 2002. Operating income increased by $3.2 million, or 213.3%,
from $1.5 million for the three months ended September 30, 2001 to $4.7 million
for the three months ended September 30, 2002, Operating income as a percentage
of net sales increased from 3.7% for the three months ended September 30, 2001
to 10.9% for the three months ended September 30, 2002.
CORPORATE AND OTHER. The negative net sales amount represents the
elimination of intercompany sales. Operating costs and expenses reflect certain
administrative costs and expenses management has not allocated to its industry
segments as well as the asset impairment charges. Excluding the effect of the
asset impairment charges and integration credit, corporate and other operating
costs and expenses increased by $1.2 million primarily as a result of increased
health care expenses and a non-cash accrual for the national risks attributable
to workers compensation self-insurance.
26
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
SEGMENT RESULTS OF CONTINUING OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 2002
COMPARED TO SEPTEMBER 30, 2001
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------------------------
OPERATING OPERATING
NET COSTS AND INCOME CAPITAL TONS
SALES % EXPENSES % (LOSS) % SPENDING SHIPPED
------------ ----- ------------ ----- ----------- ------ --------- -------
2002: (IN MILLIONS, EXCEPT PERCENTAGES AND TONS IN THOUSANDS)
Plates and Shapes .... $ 259.6 36.1% $ 253.7 35.7% $ 5.9 70.2% $ 0.3 435
Flat Rolled .......... 358.2 49.8% 347.5 48.9% 10.7 127.4% 0.7 569
Building Products .... 120.7 16.8% 109.1 15.4% 11.6 138.1% 0.8 -
Corporate and other .. (19.8) (2.7)% -- - (19.8) (235.7)% 0.1 (38)
------------ ----- ------------ ----- ----------- ------ --------- -------
Total ............... $ 718.7 100.0% $ 710.3 100.0% $ 8.4 100.0% $ 1.9 966
============ ===== ============ ===== =========== ====== ========= =======
2001:
Plates and Shapes .... $ 416.1 44.6% $ 414.4 40.9% $ 1.7 (2.1)% $ 3.3 582
Flat Rolled .......... 426.4 45.7% 413.3 40.8% 13.1 (16.4)% 4.9 689
Building Products .... 115.5 12.4% 112.4 11.1% 3.1 (3.9)% 2.8 -
Corporate and other .. (24.9) (2.7)% 73.0 7.2% (97.9) 122.4% 0.8 (55)
------------ ----- ------------ ----- ----------- ------ --------- -------
Total ............... $ 933.1 100.0% $ 1,013.1 100.0% $ (80.0) 100.0% $ 11.8 1,216
============ ===== ============ ===== =========== ====== ========= =======
PLATES AND SHAPES. Net sales decreased $156.5 million, or 37.6%, from
$416.1 million for the nine months ended September 30, 2001 to $259.6 million
for the nine months ended September 30, 2002. Product shipments declined 25.3%
and average sales prices decreased 16.4% for the nine months ended September 30,
2002 compared to the nine months ended September 30, 2001. A significant
component of the variance when comparing 2001 to 2002 relates to the sale of the
majority of the specialty component of the Plates and Shapes group in the first
quarter of 2002. Excluding the effect of these operations on the change, sales
decreased $86.4 million or 27.4%, tons decreased 23.0% and the average sales
price decreased by 5.7%. Operating costs and expenses decreased $160.7 million,
or 38.8%, from $414.4 million for the nine months ended September 30, 2001 to
$253.7 million for the nine months ended September 30, 2002. Operating costs and
expenses as a percentage of net sales decreased from 99.6% for the nine months
ended September 30, 2001 to 97.7% for the nine months ended September 30, 2002,
primarily due to a 18.5% decrease in the cost of raw materials versus the 16.4%
decrease in the average sales price. The change in operating expenses excluding
the effect of the specialty operations was a reduction of $92.7 million or 29.6%
and as a percentage of sales, operating expenses decreased from 99.2% to 96.2%.
Operating income increased by $4.2 million, , from $1.7 million for the nine
months ended September 30, 2001 to $5.9 million for the nine months ended
September 30, 2002. This increase is primarily due to the increased margins and
decreased operating costs. Operating income as a percentage of net sales
increased from 0.4% for the nine months ended September 30, 2001 to 2.3% for the
nine months ended September 30, 2002. Excluding the specialty division,
operating income would have been $8.7 million in the nine months ended September
30, 2002 versus $2.4 million in the prior year, an increase of $6.3 million.
FLAT ROLLED. Net sales decreased $68.2 million, or 16.0%, from $426.4
million for the nine months ended September 30, 2001 to $358.2 million for the
nine months ended September 30, 2002. This decrease is primarily due to a 17.4%
decline in shipments for the nine months ended September 30, 2002 compared to
the nine months ended September 30, 2001. Operating costs and expenses decreased
$65.8 million, or 15.9%,
27
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
from $413.3 million for the nine months ended September 30, 2001 to $347.5
million for the nine months ended September 30, 2002. This decrease was
primarily attributable to lower shipments. Operating costs and expenses as a
percentage of net sales, remained flat at 96.9% for the nine months ended
September 30, 2001 versus 97.0% for the nine months ended September 30, 2002.
Operating income decreased by $2.4 million, or 18.3%, from $13.1 million for the
nine months ended September 30, 2001 to $10.7 million for the nine months ended
September 30, 2002. This decrease was attributable to the decreased shipments.
Operating income as a percentage of net sales decreased from 3.1% for the nine
months ended September 30, 2001 to 3.0% for the nine months ended September 30,
2002.
BUILDING PRODUCTS. Net sales increased $5.2 million, or 4.5%, from $115.5
million for the nine months ended September 30, 2001 to $120.7 million for the
nine months ended September 30, 2002. The increase in net sales was principally
due to increased demand for these products. Operating costs and expenses
decreased $3.3 million, or 2.9%, from $112.4 million for the nine months ended
September 30, 2001 to $109.1 million for the nine months ended September 30,
2002. This was due to improved efficiencies and reduced cost of sales. Gross
margin dollars increased $5.8 million or 16.8% as the gross margin percentage
increased from 29.9% in 2001 to 33.4% in 2002. Operating costs and expenses as a
percentage of net sales decreased from 97.3% for the nine months ended September
30, 2001 to 90.4% for the nine months ended September 30, 2002. Operating income
increased by $8.5 million, or 274.2%, from $3.1 million for the nine months
ended September 30, 2001 to $11.6 million for the nine months ended September
30, 2002. Operating income as a percentage of net sales increased from 2.7% for
the nine months ended September 30, 2001 to 9.6% for the nine months ended
September 30, 2002.
CORPORATE AND OTHER. The negative net sales amount represents the
elimination of intercompany sales. Operating costs and expenses reflect certain
administrative costs and expenses management has not allocated to its industry
segments as well as asset impairment charges. The operating loss decreased $
78.1 million, from $97.9 million for the nine months ended September 30, 2001 to
$19.8 million for the nine months ended September 30, 2002. Excluding the effect
of the asset impairment charges recorded in both periods and the integration
credit in 2001, operating costs and expenses increased $3.4 million in 2002.
This increase was primarily attributable to the increased cost of increased
health care expenses and a non-cash accrual for the national risks attributable
to workers compensation self-insurance.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities was negative $35.9 million for 2002
and consisted primarily of a net loss of $19.2 million and negative changes in
non-cash working capital of $30.1, partially offset by non-cash expenses of
$13.4. Net cash provided by operating activities was $69.6 million for 2001 and
consisted primarily of a net loss of $102.4 million offset by positive changes
in non-cash working capital of $67.9 million plus non-cash expenses of $104.1.
Net cash used in financing activities was $115.3 million for 2002 and
consisted primarily of repayments of borrowings on credit facilities and payment
of financing costs incurred on the credit facilities. Net cash provided by
financing activities was $14.8 million for 2001 and consisted primarily of net
borrowings from credit facilities of $25.9 million, partially offset by $7.6
million of debt issuance costs incurred with respect to such credit facilities
and payment of dividends of $2.2 million.
28
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
At September 30, 2002, we had available cash of $33.2 million and working
capital of $206.5 million, excluding $50.4 million of pre-petition liabilities
that were subject to compromise related to the operations held for sale. At
December 31, 2001, we had available cash of $72.2 million and working capital of
$189.9 million, excluding $14.4 million of pre-petition liabilities that were
subject to compromise related to the operations held for sale. The lower cash
balance at September 30, 2002 compared to December 31, 2001 was primarily due to
net repayments on the DIP Financing and other secured debt of $112.7 million.
For further discussion of disposal of the pre-petition liabilities, see Chapter
11 Proceedings above.
Free cash flow is defined as cash provided by operating activities less
customary capital expenditures plus proceeds from asset sales. Free cash flow as
defined, is a non-GAAP measure that is not comparable to similarly titled
measures used by other companies. If free cash flow is positive, funds would be
available to invest in significant operating initiatives or reduce outstanding
debt. If free cash flow is negative, capital would need to be raised from the
sale of assets or securing additional debt to fund the outflow of cash. For the
nine months ended September 30, 2002 we had free cash flow of $76.3 million, an
increase of $86.7 million as compared to negative free cash flow of $10.4
million for the nine months ended September 30, 2001. Free cash flow from
continuing operations in 2002 consisted primarily of negative cash flow from
continuing operations of $5.8 million and a $30.1 million net decrease in
non-cash working capital, offset by $78.1 million of net proceeds from sales of
property, equipment and other assets. Discontinued operations generated cash
flow of $34.1 million during 2002.
FINANCING ACTIVITIES
On January 2, 2002, we executed our DIP Financing with Bank of America and
PNC Bank in the amount of $350.0 million. On July 22, 2002, we amended our DIP
Financing agreement reducing the maximum permitted borrowings to $275.0 million.
Initial borrowings of $278.2 million were used to repay the outstanding balance
under the previous credit facilities. The facility was composed of a revolving
line of credit consisting of revolving loans, letters of credit and credit
support. The DIP Financing bore interest at the bank's prime rate plus an
applicable margin of 2%, has an eighteen-month term with two three-month
extensions and was collateralized by all of the Company's accounts receivable,
inventory, equipment and real estate. The lending formula was 85% of eligible
accounts receivable and up to 60% of eligible inventory. In addition, there were
two sublimit loans in the amount of $31.0 million on equipment and $30.0 million
on real estate. The $31.0 million equipment loan was amortized at $0.5 million
per month with additional amounts paid with proceeds from asset divestitures.
Proceeds from a federal income tax refund in the amount of $23.7 million and net
proceeds from asset sales were used to retire the equipment sublimit as of
September 30, 2002. The balance on the real estate sublimit at September 30,
2002 was $20.6 million. A commitment fee was payable on any unused portion of
the DIP Financing. A letter of credit fee was payable for each letter of credit
or credit support provided by the lenders. Borrowings were used to fund
post-petition operating expenses and supplier and employee obligations
throughout the reorganization process.
On October 31, 2002, we executed our New Credit Facility with a group of
lenders. The New Credit Facility has an initial term of three years with an
option to extend the agreement by two one-year terms. The DIP Facility was
retired with borrowings under the New Credit Facility. The New Credit Facility
provides for a revolving credit facility providing up to $200.0 in borrowings
and is secured by all of our receivables, inventories, and intangible property.
Borrowings under the New Credit Facility are limited to the lesser of a
borrowing base, comprised of eligible receivables and inventories, or $200.0 in
the aggregate; however, our
29
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
real estate and machinery and equipment are not pledged as security for the
loan. At November 12, 2002, we had $63.4 available under the New Credit
Facility. Such availability could be impacted by fresh start accounting in to
the event there are adjustments to the pledged assets.
The New Credit Facility matures on October 31, 2005, subject to extension
and bears interest at the bank's base rate or LIBOR, at our option, plus an
applicable margin based on a ratio of EBITDA (as defined and adjusted) to cash
interest expense (the "Fixed Charge Coverage Ratio"). The Fixed Charge Coverage
Ratio is determined by dividing the sum of EBITDA, net capital expenditures,
income taxes paid in cash, dividends, or other pro forma distributions, by the
sum of interest expense paid and scheduled principal reductions on debt. The
applicable margin for base rate loans ranges from 0.00% to 0.50%, and the LIBOR
margin loans ranges from 2.00% to 3.00%. These marginal rates vary with our
financial performance as measured by the Fixed Charge Coverage Ratio. A
commitment fee is payable on any unused portion of the New Credit Facility. The
commitment fee varies between 0.375% and 0.250% per annum, based on the Fixed
Charge Coverage Ratio. The base rate and the LIBOR rate are 4.25% and 1.38% as
of November 12, 2002.
The New Credit Facility requires us to comply with various affirmative,
negative and subjective covenants, the most significant of which are as follows:
(i) the maintenance of certain financial ratios and borrowing base availability,
(ii) restrictions on additional indebtedness, (iii) restrictions on liens,
guarantees and quarterly dividends, and (iv) obtaining the lenders' consent with
respect to certain individual acquisitions. The New Credit Facility allows for
the payment of up to $1.1 of dividends in any fiscal quarter provided that
borrowing base availability is greater than $40.0. As long as our availability
(the applicable advance rate on eligible receivables and inventories, less
outstanding borrowings and letters of credit) is $20.0 or greater, we do not
have to maintain a minimum Fixed Charge Coverage Ratio. Should availability fall
below $20.0, we must comply with a Fixed Charge Coverage Ratio of 1.0 to 1.0.
In connection with the establishment of the New Credit Facility, we
incurred fees and expenses of approximately $2.2, which are being amortized over
the three-year term of the facility.
INVESTING ACTIVITIES
On April 5, 2002, we announced planned divestitures of eleven additional
business units that subsequently resulted in a significant downsizing of our
Company. These divestitures were a part of our Reorganization Plan that was
approved by the Creditors Committee on June 21, 2002. These divestitures, along
with previously announced divestitures, had a carrying value and expected net
proceeds at September 30, 2002 of approximately $55.4 million. The proceeds from
the sale of these assets have been and will be used to reduce amounts
outstanding under our credit facilities. Collection of receivables that were
retained upon the sale of certain operations prior to September 30, 2002, as
well as transactions under contract at September 30, 2002, are expected to
generate additional net proceeds of approximately $32.3 million. Further we
continue to actively pursue the sale of the remaining $23.1 million of assets.
These divestitures represented $218.5 million of our revenues and $0.8 million
of net loss for the nine months ended September 30, 2002.
COMMITMENTS AND CONTINGENCIES
We have experienced no material change in our future contractual
obligations since December 31, 2001. During the pendency of the Chapter 11
Proceedings, with approval of the Bankruptcy Court, we have assumed favorable
pre-petition contracts and leases and rejected certain unfavorable leases and
contracts.
30
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
INDUSTRY TRENDS
The steel industry has declined substantially over the last four years.
Steel prices in the U.S. reached a twenty (20) year low during 2002 and several
steel producers have filed for bankruptcy protection. Effective March 20, 2002,
increased tariffs of between 8% and 30% were imposed on most imported steel. The
purpose of these increases was to assist the financially troubled U.S. steel
industry. These tariffs are primarily for the benefit of steel producers.
Subsequent to implementation of the tariffs, steel prices have increased. Our
Company does not produce any steel; however, service centers generally benefit
from rising steel prices. During the initial period whereby prices were rising,
we had to fund the purchase of higher cost material as the lower cost material
was sold. This negative impact on cash flow continued until prices stabilized
during the second quarter of 2002, and were offset by higher sales prices from
sales of existing inventory during that period.
During the later stages of the quarter ended September 30, 2002, revenue
producing activities began to weaken as construction activity slowed. Our Flat
Rolled Group and Plates and Shapes Group have experienced weak demand for its
products due to a slowdown in the construction and manufacturing industries.
This weak demand could adversely affect our revenues. We expect this trend to
continue throughout the remainder of 2002 and well into 2003.
UNCERTAINTIES
The proceeds from the announced divestitures have been and will be used to
reduce our indebtedness and improve our liquidity. These divestitures were an
important part of the Reorganization Plan that was approved by the Creditors
Committee. We filed the Reorganization Plan with the Bankruptcy Court on August
27, 2002, received approval to solicit voter approval of the plan on September
18, 2002, received approval of the Reorganization Plan by the Bankruptcy Court
on October 18, 2002 and exited from Bankruptcy on October 31, 2002. There can be
no assurance that we will experience profitable operations subsequent to the
emergence from Bankruptcy.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 ("SFAS No. 142"), Accounting for Goodwill
and Other Intangible Assets. SFAS No. 142 requires companies to assess goodwill
assets for impairment each year, and more frequently if circumstances suggest an
impairment may have occurred. SFAS 142 also introduces a more stringent
framework for assessing goodwill impairment than the approach required under
existing rules. SFAS 142 discontinues the regular charge, or amortization, of
goodwill assets against income. SFAS 142 was adopted by the Company on January
1, 2002. Due to the write-off of all goodwill as of December 31, 2001, SFAS 142
will not have any impact on the Company's financial statements during 2002. SFAS
142 requires pro forma presentation. However, due to the write-off of all
goodwill as of December 31, 2001, no pro forma information has been presented.
The goodwill amortization for the nine months ended September 30, 2001 was $6.0
million.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 ("SFAS No. 144"), Accounting for
Impairment or Disposal of Long-Lived Assets. SFAS 144
31
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
supersedes Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of and the accounting and reporting provisions of Accounting Principles
Board Opinion No. 30, Reporting the Results of Operations, Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. SFAS 144 addresses financial
accounting and reporting for the impairment and disposal of long-lived assets
and was adopted by the Company effective January 1, 2002. Beginning in the
second quarter of 2002, the Company reported the divestitures announced on April
5, 2002 as discontinued operations (see Note 8). As a result of executing these
divestitures, the Company recorded asset impairments of $3.5 million during the
second quarter of 2002, such amount representing the difference between the
sales price and the carrying value of the divested assets.
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145 ("SFAS 145"), Rescission of FASB
Statements 4, 44 and 64, Amendment of FASB No. 13, and Technical Corrections.
SFAS 145, among other things, amends SFAS 4 and SFAS 44, to require that gains
and losses from the extinguishments of debt generally be classified within
continuing operations. The provisions for SFAS 145 are effective for the fiscal
years beginning after May 15, 2002 and early application is encouraged. However,
we will be required to adopt upon emergence from bankruptcy and application of
Fresh Start Reporting as specified by SOP 90-7. Upon emergence from bankruptcy,
any gains on debt forgiveness will be reported in income from continuing
operations.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146 ("SFAS 146"), Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146 replaces Emerging Issues
Task Force Issue 94-3, Liability Recognition of Certain Employee Termination
Benefits and Other Costs to Exit an Activity. This standard requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
This statement is effective for exit or disposal activities that are initiated
after December 31, 2002. However, we will be required to adopt upon emergence
from bankruptcy and application of Fresh Start Reporting as specified by SOP
90-7. We do not believe that the adoption of SFAS 146 will have a significant
impact on our financial statements.
FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS
This report on Form 10-Q contains statements which constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "estimates,"
"will," "should," "plans" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy.
Readers are cautioned that any such forward-looking statements are not
guarantees of future performance and involve significant risks and
uncertainties, and that actual results may vary materially from those in the
forward-looking statements as a result of any number of factors, most of which
are beyond the control of management. These factors include general economic and
business conditions, new or modified statutory or regulatory requirements,
changing prices and market conditions, and the effectiveness of management's
strategies and decisions. No assurance can be given that these are all of the
factors that could cause actual results to vary materially from the
forward-looking statements.
32
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Readers should refer to "Factors Which May Affect Future Operating Results"
included in the Annual Report on Form 10-K ("Annual Report") for the fiscal year
ended December 31, 2001 for risk factors that may affect future performance. In
addition to the risk factors disclosed in the Annual Report, there are other
potential risks or uncertainties that may exist as of the date of this report.
Consequently, the reader should not consider any such list to be a complete
statement of all potential risks or uncertainties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relate primarily
to our New Credit Facility. The outstanding balance of $137.5 million as of
November 12, 2002 is subject to interest rate risks. A hypothetical 1% increase
in interest rates would increase our interest expense by $1.4 million per annum.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 14, 2001, we voluntarily filed for relief under Chapter 11 of
the U.S. Bankruptcy Code. The petitions were filed in Bankruptcy Court for the
Southern District of Texas, Case No. 01-42530-H4-11 through 01-42573-H4-11. We
continued to operate our business as debtors-in-possession under Sections 1107
and 1108 of the Bankruptcy Code until October 31, 2002, when we substantially
completed the required transactions to effect the Reorganization Plan that had
previously been confirmed by the Bankruptcy Court on October 18, 2002. Under the
provisions of the U.S. Bankruptcy Code, all secured and unsecured creditors are
required to submit proofs of claim. All proofs of claim were required to be
filed by July 8, 2002. We are currently finalizing the reconciliation of these
claims.
We are involved in a variety of claims, lawsuits and other disputes arising
in the ordinary course of business. We believe the resolution of these matters
and the incurrence of their related costs and expenses should not have a
material adverse effect on our consolidated financial position, results of
operations or liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Under the terms of the Reorganization Plan, pursuant to the exemption
from registration under the Securities Act of 1933 afforded by Section 1145
of the Bankruptcy Code, the unsecured creditors will receive, upon resolution
of disputed creditor claims and completion of distributions under the
Reorganization Plan, 20,000,000 shares of New Common Stock in the reorganized
Company to discharge and in exchange for approximately $373.9 million of
unsecured debt, and the financial advisor to holders of general unsecured
claims was issued 149,510 shares of New Common Stock on October 31, 2002, in
consideration of financial advisory services pursuant to the exemption from
registration under the Securities Act of 1933 afforded by Section 4(2)
thereof which services were recorded at a value of approximately $1.5
million. Our existing Common Stock was extinguished and holders of such
shares will receive in exchange for such shares, upon completion of
distributions under the Reorganization Plan, five-year Warrants to purchase
an aggregate of 3,555,795 shares of the New Common
33
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Stock of the reorganized Company (representing approximately 15% of the
Company's outstanding New Common Stock), pursuant to the exemption from
registration under the Securities Act of 1933 afforded by Section 1145 of the
Bankruptcy Code. The Warrants have an exercise price calculated at full recovery
for all unsecured creditors, such exercise price to be determined six months
after the Effective Date, based upon the Company's estimate of total general
unsecured claims. The exercise price is currently estimated to be $18.93 per
share (assuming that total allowed general unsecured claims are $378.5 million).
The Warrants will not be distributed until six months after the Effective Date..
We are required to use commercially reasonable efforts to list the New Common
Stock on the Nasdaq or another national securities exchange but there can be no
assurance that any such listing will be approved or that an established trading
market will develop for the New Common Stock. We do not currently intend to list
the Warrants andcannot provide any assurance as to whether a market will develop
for the Warrants. The Reorganization Plan provides for the establishment of the
New Management Stock Incentive Plans for employees to be administered by the
Board of Directors of the newly reorganized Company. Up to 2,015,000 shares of
New Common Stock are reserved for issuance under the New Management Stock
Incentive Plan. All previously outstanding options of the Company which had been
issued under the 1997 Metals USA Executive Incentive Plan were cancelled.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period before the filing of this report, an evaluation
was carried out under the supervision and with the participation of our
management, including both members of the "Office of the Chairman" who jointly
and severally execute the duties and responsibilities of the Chief Executive
Officer ("CEO") and the Senior Vice President, Treasurer and Chief Accounting
Officer who is the principal financial officer of the Company and executes the
duties and responsibilities of the Chief Financial Officer ("CFO"), of the
effectiveness of our disclosure controls and procedures. Based on that
evaluation, the CEO and CFO have concluded that our disclosure controls and
procedures are effective to ensure that the information required to be disclosed
in reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms, and that such information is accumulated
and communicated to our management, including the CEO and CFO, as appropriate,
to allow timely decisions regarding required disclosure.
We maintain a system of internal accounting controls that are designed to
provided reasonable assurance that our books and records accurately reflect the
transactions of the Company and that our policies and procedures are followed.
There have been no significant changes in our internal controls or in other
factors that could significantly affect such controls since the most recent
evaluation of these controls, including any corrective actions with regard to
significant deficiencies or material weaknesses in our internal controls.
ITEM 5. OTHER INFORMATION
Under the terms of the Reorganization Plan, effective October 31, 2002, all
members of the Board of Directors resigned and were replaced by six new members
appointed by the Creditors Committee. Our new Board of Directors consists of
Daniel W. Dienst, Eugene I. Davis, John T. DiLacqua, Jr., Charles Sanida, Jack
G. Lackie and Gerald E. Morris. The New Board of Directors has named
Daniel W. Dienst as the Chairman of the Board, replacing J. Michael Kirksey.
34
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Also effective November 1, 2002, Mr. Kirksey resigned from his position
as Chief Executive Officer and President of the Company. In addition, as of
the same date, Lester G. Peterson resigned from his position as Senior Vice
President of Corporate Development and President of the Plates and Shapes
Group. The new Board of Directors created the Office of the Chairman and
appointed two of its members, Daniel W. Dienst and Eugene I. Davis, to act as
Chairman and Member, respectively, and to assume the duties of the chief
executive officer until a new President of the Company is selected. In
addition, William R. Bennett, who was orginally designated as a director, was
appointed by the new Board of Directors as Senior Vice President and
President of the Plates and Shapes Group. The new Board of Directors has
begun a search for a new Chief Executive Officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS:
*4.1 Amended and Restated Certificate of Incorporation
*4.2 Amended and Restated By-laws
*4.3 Registration Rights Agreement, dated as of October 31, 2002,
between the Company and the initial holders.
*10.11 Form of Loan and Security Agreement dated October 31, 2002 by and
among Bank of America, N.A. as Agent, and Metals USA, Inc. and each of its
subsidiaries.
21 List of Subsidiaries of the Company
99 Informational Addendum Pursuant to Section 906 0f Sarbanes-Oxley
Act of 2002 (not filed pursuant to the Securities Exchange Act of 1934).
------------------------
* Previously filed
b. REPORTS ON FORM 8-K:
August 14, 2002 - Statement Under Oath of J. Michael Kirksey, Principal
Executive Officer and Terry L. Freeman, Principal Financial Officer
August 23, 2002 - Regulation FD Disclosure - Filing of proposed plan of
reorganization (the "Reorganization Plan")
September 18, 2002 - Regulation FD Disclosure - Bankruptcy Court approves
the adequacy of the disclosure statement to be used to solicit approval of the
Reorganization Plan
October 15, 2002 - Regulation FD Disclosure - Disclosure of significant
dispositions
35
METALS USA, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, who has signed this report on behalf of
the Registrant and as the principal accounting officer of the Registrant.
METALS USA, INC.
Date: November 15, 2002 By: /s/ TERRY L. FREEMAN
------------------------------------------
Terry L. Freeman
Senior Vice President, Treasurer
and Chief Accounting Officer
36
CERTIFICATIONS
I, Daniel W. Dienst, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Metals USA, Inc.
and subsidiaries;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 15, 2002
/s/ DANIEL W. DIENST
-------------------------------------------------
Name: Daniel W. Dienst
Title: Chairman of the Board
(Co-Chief Executive Officer)
37
I, Eugene I. Davis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Metals USA, Inc.
and subsidiaries;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 15, 2002
/s/ EUGENE I. DAVIS
-------------------------------------------------
Name: Eugene I. Davis
Title: Member of the Office of the Chairman
(Co-Chief Executive Officer)
38
I, Terry L. Freeman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Metals USA, Inc.
and subsidiaries;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 15, 2002
/s/ TERRY L. FREEMAN
-------------------------------------------------
Name: Terry L. Freeman
Title: Senior Vice President, Treasurer and
Chief Accounting Officer
(Principal Financial Officer)
39