** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

## **Washington,D.C.  20549**

# ** **

# ****

 

# **FORM 10-K/A**

# ** **

**ANNUAL REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended December 31, 2004**

 

### **Commission FileNumber 1-13123**

### ** **

**METALS USA, INC.**

(Exact name of Registrant as Specified in its Charter)

 
| **Delaware**                                                                                   | ** ** | **76-0533626**                           |
|------------------------------------------------------------------------------------------------|------------|------------------------------------------|
| (State or other  jurisdiction  of incorporation or organization)                               |       | (I.R.S. Employer  Identification Number) |
|                                                                                           |       |                                     |
| **One  Riverway, Suite 1100  Houston, Texas**                                                  | ** ** | **77056**                                |
| (Address of  Principal Executive Offices)                                                      |       | (Zip Code)                               |
|                                                                                           |       |                                     |
| Registrant’s  telephone number, including area code:  **(713)  965-0990**       |
|                                                                                           |
| Securities  registered pursuant to Section 12(b) of the Act: **None**                          |
|                                                                                           |
| Securities  registered pursuant to Section 12(g) of the Act: **Common  Stock, $.01 par value** |

 

Indicateby check mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes ý No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. ý

 

Indicate by check mark whether the Registrant is an accelerated filer(as defined in Exchange Act Rule 12b-2).  Yes ý No o

 

Indicate by check mark whether the Registrant hasfiled 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 ofsecurities under a plan confirmed by a court.  Yes ý No o

 

Based on the NASDAQ closing price of $17.88 per shareon June 30, 2004, the aggregate market value of the Registrant’s outstandingcommon stock held by non-affiliates, of approximately 13.4 million shares, onsuch date was $310.8 million.  Based onthe NASDAQ closing price of $24.18 per share on March 1, 2005, the aggregatemarket value of the Registrant’s outstanding common stock held bynon-affiliates, of approximately 16.8 million shares, on such date was $406.2million. The common stock held by the Registrant’s directors, executiveofficers and persons beneficially owning 10% or more of the shares of commonstock, who are the only persons known to the Registrant who may be consideredto be its “affiliates” as defined under Rule 12b-2, is excluded from thefigures in this paragraph.  There were20,279,280 shares of outstanding common stock, $.01 par value, of theRegistrant as of March 1, 2005.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Certain portions of the Registrant’s definitive proxy statement, to befiled with the Securities and Exchange Commission pursuant to Regulation 14Anot later than 120 days after the close of the Registrant’s fiscal year, areincorporated by reference under Part III.

 

 

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**EXPLANATORY NOTE**

 

      ThisAmendment No. 1 to Metals USA, Inc.’s Annual Report on Form 10-K for thefiscal year ended December 31, 2004, which was initially filed onMarch 9, 2005 (the “Original Filing”) is being filed pursuant to an exemptiveorder issued by the Securities and Exchange Commission (SEC ReleaseNo. 34-50754). In accordance with the exemptive order, the Company mayinclude management’s annual report on internal control over financial reportingand the related report of the Company’s independent registered publicaccounting firm in an amendment to its Annual Report on Form 10-K notlater than forty five days after the prescribed period for filing such AnnualReport, which in our case extended the deadline for filing the internal controlreport until April 30, 2005. In compliance with the exemptive order, theCompany is filing this Amendment to update Item 9A — Controls andProcedures to include: 
|   |         |                                                                                                                                                                                                                          |
|--------|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | •       | Management’s annual  report on internal control over financial reporting; and                                                                                                                                            |
|   |         |                                                                                                                                                                                                                          |
|   | •  | the Report of our  Independent Registered Public Accounting Firm relating to the Company’s  assessment of internal control over financial reporting and the effectiveness  of internal control over financial reporting. |

 

 As a result of thisAmendment, (1) the certifications pursuant to Section 302 andSection 906 of the Sarbanes-Oxley Act of 2002, filed and furnished,respectively, as exhibits to the original filing, have been re-executed andre-filed as of the date of this Amendment; and (2) a Consent of our IndependentRegistered Public Accounting Firm dated April 28, 2005 to cover theirreport related to our internal control over financial reporting is being filed.

 

   The other Items of the Original Filingare unaffected by the changes described above and have not been amended in thisAmendment. All information in this Amendment is as of the date of the OriginalFiling and does not reflect any subsequent information or events occurringafter the date of the Original Filing. Accordingly, this Amendment should beread in conjunction with the Company’s filings made with the Securities andExchange Commission subsequent to the filing of the Original Filing, includingany amendments to those filings. 

 

***FRESH START ACCOUNTING***

 

*We applied “Fresh-Start Reporting” to ourconsolidated balance sheet as of October 31, 2002 in accordance with Statementof Position No. 90-7, “Financial Reporting by Entities in Reorganization Underthe Bankruptcy Code” as promulgated by the American Institute of Certified PublicAccountants (“SOP 90-7”).  Under “Fresh-StartReporting”, a new reporting entity is considered to be created and the recordedamounts of assets and liabilities are adjusted to reflect their estimated fairvalues at the date “Fresh-Start Reporting” is applied.  On October 31, 2002, we emerged frombankruptcy.  As a result of theapplication of “Fresh-Start Reporting,” our financial information of any dateor for periods after November 1, 2002 is not comparable to our historicalfinancial information before November 1, 2002.**As a result of the emergence from bankruptcy and for the purpose ofpresentation, activities subsequent to October 31, 2002 relate to the “SuccessorCompany” and activities prior to November 1, 2002 relate to the “PredecessorCompany.”*

 

***SAFE HARBOR STATEMENT—FORWARD-LOOKING STATEMENTS***

 

*This Annual Report on Form 10-K**contains statements reflectingassumptions, expectations, projections, intentions or beliefs about futureevents that are intended as “forward-looking statements” within the meaningof the Private Securities Litigation Reform Act of 1995. **Allstatements included or incorporated by reference in this Annual Report, otherthan statements of historical fact, that address activities, events ordevelopments that we expect, believe or anticipate will or may occur in thefuture are forward-looking statements.  Thesestatements appear in a number of places, including Item 1. “Business,” Item 3. “LegalProceedings” and Item 7. “Management’s Discussion and Analysis of FinancialCondition and Results of Operations.” **These statements represent ourreasonable judgment on the future based on various factors and using numerousassumptions and are subject to known and unknown risks, uncertainties and otherfactors that could cause our actual results and financial position to differmaterially from those contemplated by the statements.  You can identify these statements bythe fact that they do not relate strictly to historical or current facts. Theyuse words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “may,”“will,” “should,” “plan,” “project”**andother words of similar meaning. **In particular, these include, butare not limited to, statements relating to the following:*

 

*•*                  projected operating or financial results, includeanticipated cash flows from operations and asset sale proceeds for 2005;

*•*                  expectations regarding capital expenditures, interestexpense and other payments;

*•*                  our beliefs and assumptions relating to our liquidityposition, including our ability to adapt to changing market conditions;

*•*                  our ability to compete effectively for market sharewith industry participants;

* *

*Any orall of our forward-looking statements may turn out to be wrong.  They can be affected by inaccurateassumptions or by known or unknown risks, uncertainties and other factorsincluding, among others:*

 

*•*                  supply, demand, prices and other market conditions forsteel and other commodities;

*•*                  the timing and extent of changes in commodity prices;

*•*                  the effects of competition in our business lines;

*•*                  the condition of the steel and metal  markets generally, which will be affected byinterest rates, foreign currency fluctuations and general economic conditions;

*•*                  the ability of our counterparties to satisfy theirfinancial commitments;

 

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*•*                  tariffs and other government regulations relating toour products and services;

*•*                  operational factors affecting the ongoing commercialoperations of our facilities, including catastrophic weather-related damage, regulatoryapprovals, permit issues, unscheduled blackouts, outages or repairs,unanticipated changes in fuel costs or availability of fuel emission credits orworkforce issues;

*•*                  our ability to operate our businesses efficiently,manage capital expenditures and costs (including general and administrativeexpenses) tightly and generate earnings and cash flow; and

*•*                  general political conditions and developments in theUnited States and in foreign countries whose affairs affect supply, demand andmarkets for steel, metals and metal products.

* *

*Inaddition, there may be other factors that could cause our actual results to bematerially different from the results referenced in the forward-lookingstatements, some of which are included elsewhere in this Form 10-K, includingin Item 7. “Management’s Discussion and Analysis of Financial Condition andResults of Operations – Factors Which May Affect Future Operating Results” forrisk factors that may affect future performance.  Many of these factors will be important indetermining our actual future results. Consequently, no forward-looking statement can be guaranteed.  Our actual future results may vary materiallyfrom those expressed or implied in any forward-looking statements. Allforward-looking statements contained in this Form 10-K are qualified in theirentirety by this cautionary statement. Forward-looking statements speak only as of the date they are made, andwe disclaim any obligation to update any forward-looking statements to reflectevents or circumstances after the date of this Form 10-K, except as otherwiserequired by applicable law.*

 

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**METALS USA, INC.**

 

### **PART I**

### ** **

**Item 1.    *Business***

 

*Unless otherwise indicated, all references to “we,”“us,” “our” or other similar terms herein are intended to refer to Metals USA,Inc. and all of its subsidiaries. Readers should refer to Item 7. “Management’sDiscussion and Analysis of Financial Condition and Results of Operations –Factors Which May Affect Future Operating Results” for risk factors that mayaffect future performance.*

 

##### **Overview**

##### ** **

We are a leading provider of value-added processed steel, stainlesssteel, aluminum, red metals and manufactured metal components.  Approximately 88% of our revenues are derivedfrom our metal service center and distribution activities and the remainingportion of our revenues are derived from our Building Products Group thatmanufactures and distributes products primarily related to the residential homeimprovement industry.  The PredecessorCompany was organized as a Delaware corporation on July 3, 1996, and began operations upon completion of aninitial public offering on July 11, 1997. On November 14, 2001, the Predecessor Company filed for voluntaryprotection from its creditors under Chapter 11 of the United States bankruptcylaws.  For more information aboutthe bankruptcy filing and the subsequent reorganization, please see Item 7. “Management’sDiscussion and Analysis of Financial Conditionand Results of Operations – Predecessor Company Chapter 11 Proceedings andReorganization.”  We began operating thereorganized company in November 2002. Beginning in March 2004, our common stock and warrants are quoted on theNASDAQ National Market under the ticker symbols “MUSA” and “MUSAW,” respectively.  From June 2003 to March 2004, our commonstock and warrants were traded on the American Stock Exchange under the tickersymbols “MLT” and “MLT.WS,” respectively.

 

Wehave three segments, which are identified by their product groups — the Flat Rolled,Plates and Shapes and Building Products Groups. Each of our segments purchases metal from primary producers whogenerally focus on large volume sales of unprocessed metals in standardconfigurations and sizes.

 

OurFlat Rolled and Plates and Shapes Groups perform customized, value-addedprocessing services to unimproved steel and other metals required to meetspecifications provided by our customers, as well as offering inventorymanagement and just-in-time delivery services. These services enable our customers to reduce material costs, decreasecapital required for raw materials inventory and processing equipment and savetime, labor, warehouse space and other expenses.  The customers of our Flat Rolled and Platesand Shapes Groups are in businesses such as the machining, furniture,transportation equipment, power and process equipment, industrial/commercialconstruction/fabrication, consumer durables and electrical equipmentindustries, as well as machinery and equipment manufacturers.  Our Building Products Group manufactureshigher-value finished building products for distributors and contractorsengaged in residential and commercial building products.

 

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**Strategy**

 

We are one of the leading providers of higher-valuecomponents from processed metals.  Wehave invested substantial capital integrating our operations to maximizeoperating margins and accelerate sales growth. We are committed to becoming a premier company in both the metalsprocessor/service center and building products industries in the U.S.  Our strategy is simply one of providing thebest service to our customers, diligent inventory management and prudent riskassessment.  Although no longer thecentral focus of our business plan, we will consider acquisitions that areaccretive to earnings and are complementary to our existing mix of products andservices.

 

##### **Segment Information**

##### ** **

Eachof our product groups is led by an experienced executive and is supported by aprofessional staff in finance, purchasing and sales and marketing.  This product-oriented organizationalstructure facilitates the efficient advancement of our goals and objectives toachieve operational synergies and focused capital investment.  For additional industry segment information,see Item 7.  “Management’s Discussion andAnalysis of Financial Condition and Results of Operations – Results ofOperations by Segment” and Note 9 to our consolidated financial statements inItem 8.  “Financial Statements andSupplementary Data.”

 

***Metal Processing/Service Center Businesses: Plates and Shapes and FlatRolled Groups***

 

*Overview*.  Companies operating in the metals industrycan be generally characterized as primary metals producers, metalsprocessors/service centers or end-users. Our Plates and Shapes and Flat Rolled Groups are metalsprocessor/service centers.  As such, wepurchase steel, aluminum, brass, copper and other metals from producing millsand then sell our metal processing services and the metal to our customers, whoare generally end-users.  We believe thatboth primary metals producers and end-users are increasingly seeking to havetheir metals processing and inventory management requirements met byvalue-added metals processors/service centers like us.

 

Primary metals producers, which manufacture and sell large volumes ofmetals in standard sizes and configurations, generally sell only to those largeend-users and metals processors/service centers who do not require processingof the products and who can tolerate relatively long lead times.  Metal processors/service centers offerservices ranging from precision value-added pre-production processing, inaccordance with specific customer specifications, to storage and distribution ofunprocessed metal products.  Generallyservice centers function as intermediaries between end-users and primary metalsproducers.  End-users, such as contractors and original equipmentmanufacturers, or OEMs, incorporate the processed metal into a finishedproduct, in some cases with little further modification.

 

In our Plates and Shapes and Flat Rolled Groups, weengage in pre-production processing of steel, stainless steel, red metals andaluminum and act as an intermediary between primary metals producers andend-users.  We purchase metals fromprimary producers, maintain an inventory of various metals to allow rapidfulfillment of customer orders and perform customized processing services tothe specifications provided by end-users and other customers.  By providing these services, as well asoffering inventory management and just-in-time delivery services, we enable ourcustomers to reduce overall production costs and decrease capital required forraw materials inventory and metals processing equipment.  The Plates and Shapes and Flat Rolled Groups contributed approximately88% of our 2004 net sales and the substantial majority of our 2004 net income.

 

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*Plates and Shapes Group*. Plates and Shapes consists of 21 facilities throughout the U.S. thatmaintain an inventory focusing on carbon steel products.  With net sales of $621.0 million in 2004, the Plates and ShapesGroup sells carbon steel products such as wide-flange beams, plate, tubing,angles, bars and other structural shapes. These products are available in a number of alloy grades and sizes andgenerally undergo additional processing prior to customer delivery.  This group provides processing services,including cutting, sawing, cambering/leveling, punching, drilling, beveling,surface grinding, bending, shearing, blast and paint, cut-to-length andtee-splitting.  Plates and Shapescustomers are primarily in thefabrication, construction, machinery and equipment, transportation and energyindustries.

 

*Flat Rolled Group*.  Flat Rolled consists of 12 facilitiesin the Midwest and southern regions of the U.S. that maintain an inventory ofcold rolled and hot rolled steel products and various nonferrous flat rolledproducts.  With net sales of $723.2 million in 2004, the Flat Rolled Group sells a numberof products, including carbon and stainless steel, aluminum, brass and copperin a variety of alloy grades and sizes. Because few end-user customers can handle carbon steel in the formgenerally shipped by steel mills (sizes less than a quarter of an inch inthickness in continuous coils that typically weigh 40 to 60 thousand poundseach), substantially all of the carbon steel material as well as the nonferrousmaterials sold by the Flat Rolled Group undergo additional processing prior tocustomer delivery.  Processing servicesinclude slitting, precision blanking, leveling, cut-to-length, punching,bending and shearing.  Flat Rolled customersare in the electrical manufacturing, fabrication, furniture, appliancemanufacturing, machinery and equipment and transportation industries.

 

*Industry Overview*.  Historically, metal service centers providedfew value-added services and were little more than distribution centers,linking metals producers with all but the largest end-users.  In the past two decades, however, the metalsservice center business has evolved significantly, and the most successfulmetals service centers have added a significant number of, and moresophisticated, processing capabilities, thereby offering an increasingly broadrange of value-added services and products both to primary metals producers andend-users.  This evolution has resultedfrom changing trends in the primary metals industry as well as among end-users.

 

During the past two decades, the trend among primary metals producershas been to focus on their core competency of high-volume production of arelatively limited number of standardized metal products.  This change in focus has been driven by metalproducers’ need to develop and improve efficient, volume-driven productiontechniques in order to remain competitive. As a result, most of the primary producers have sold their servicecenters.

 

Because metal producers generally have left the service centerbusiness, most end-users are no longer able to obtain processed productsdirectly from primary metals producers and have recognized the economicadvantages associated with outsourcing their customized metals processing andinventory management requirements. Outsourcing permits end-users to reduce total production cost byshifting the responsibility for pre-production processing to value-added metalsprocessors/service centers, whose higher efficiencies in performing theseprocessing services make the ownership and operation of the necessary equipmentmore financially feasible.

 

Value-addedmetals processors/service centers have also benefited from growing customerdemand for inventory management and just-in-time delivery services.  These supply-chain services, which are notnormally available from primary metals producers, enable end-users to reduceinput costs, decrease capital required for inventory and equipment and savetime, labor and other expenses.  Inresponse to customer expectations, the more sophisticated value-added metalsprocessors/service centers have acquired specialized and expensive equipment toperform customized processing and have installed

 

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sophisticated computer systems to automate orderentry, inventory tracking, management sourcing and work-order scheduling.  Additionally, some value-added metalsprocessors/service centers have installed electronic data interchange, or EDI,between their computer systems and those of their customers to facilitate orderentry, timely delivery and billing.  Wehave EDI capability.

 

These trends haveresulted in value-added metals processors/service centers playing anincreasingly important role in all segments of the metals industry.  Metals processors/service centers now servethe needs of over 300,000 OEMs, contractors and fabricators nationwide.  The necessity for value-added metalsprocessors/service centers to add specialized processing equipment, manageinventory on behalf of their customers and use sophisticated computer systemsis requiring industry participants to make substantial capital investments inorder to remain competitive.  Inaddition, many customers are seeking to reduce their operating costs bylimiting the number of suppliers with whom they do business, often eliminatingthose suppliers offering limited ranges of products and services.  These trends have placed the substantialnumber of small, owner-operated businesses at a competitive disadvantagebecause they have limited access to the capital resources necessary to increasetheir capabilities, or they may be unwilling to justify the investment inequipment.  As a result, smallercompanies are finding it increasingly difficult to compete as current industrytrends continue.  Using 2003 industrydata, we believe that the metals processor/service center industry is highlyfragmented, with as many as 3,000 participants generating about $50 billion inannual net sales.  Due to the presentlevel of metal prices, the size of the industry’s net sales would have been significantlyhigher in 2004, however; comparable industry data is not currently available.

 

*Products and Services*.  We purchase our raw materials inanticipation of projected customer requirements based on interaction with andfeedback from customers, market conditions, historical usage and industryresearch.  Primary producers typicallyfind it more cost effective to focus on large volume production and sale ofmetals in standard sizes and configurations to large volume purchasers.  We process the metals to the precise length,width, shape and surface quality specified by our customers.  Our value-added processes include:

 

•                  *Slitting* — thecutting of coiled metals to specified widths along the length of the coil.

 

•                  *Shearing and cutting to length* — thecutting of metals into pieces and along the width of a coil to create sheets orplates.

 

•                  *Precision blanking* — theprocess in which flat rolled metal is cut into precise two-dimensional shapes.

 

•                  *Laser, flame and plasma cutting* — thecutting of metals to produce various shapes according to customer-supplieddrawings.

 

•                  *Leveling* — theflattening of metals to uniform tolerances for proper machining.

 

•                  *Sawing*— the cutting to length of bars, tubular goods andbeams.

 

•                  *Tee-splitting* — thesplitting of metal beams.

 

•                  *Plate forming and rolling* — theforming and bending of plates to cylindrical or required specifications.

 

•                  *Edge trimming* — aprocess that removes a specified portion of the outside edges of coiled metalto produce uniform width and round or smooth edges.

 

•                  *Cambering* — thebending of structural steel to improve load-bearing capabilities.

 

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•                  *Metallurgy* — theanalysis and testing of the physical and chemical composition of metals.

 

•                  *Blast and Paint* — the process of cleaning steel by shot-blasting,then immediately applying a paint or primer.

 

Ouradditional capabilities include applications engineering and other value-addedprocesses such as custom machining. Using these capabilities, we use processed metals to manufacturehigher-value components.

 

Oncewe receive an order, we select the appropriate inventory and schedule it forprocessing in accordance with the customer’s requirements and specifieddelivery date.  Orders are monitored byour computer systems, including, in certain locations, the use of bar coding toaid in and reduce the cost of tracking material.  We record the source of all metal shipped tocustomers.  This enables us to identifythe source of any metal which may later be shown to not meet industry standardsor that fails during or after manufacture. This capability is important to our customers as it allows them toassign responsibility for non-conforming or defective metal to the mill thatproduced the metal.  Many of the productsand services we provide can be ordered and tracked through a web-basedelectronic network that directly connects our computer system to those of ourcustomers.

 

Thesubstantial portion of our orders are filled within 24-48 hours.  This is accomplished through our inventorymanagement programs, which permit us to deliver processed metals in accordancewith the just-in-time inventory programs of our customers.  We are required to carry sufficient inventoryof raw materials to meet the short lead-time and just-in-time deliveryrequirements of our customers.

 

While we ship products throughout the U.S., most ofour customers are located within a 250-mile radius of our facilities, thusenabling an efficient delivery system capable of handling a large number ofshort lead-time orders.  We transportmost of our products directly to our customers either with our own trucks forshort-distance and/or multi-stop deliveries or through common or contracttrucking companies.

 

Wehave quality control systems to ensure product quality and traceabilitythroughout processing.  Quality controlsinclude periodic supplier audits, customer approved quality standards,inspection criteria and metals source traceability.  A total of 20 of our metal processing/servicecenter facilities have International Standards Organization, or ISO, 9002certification.  In addition to our metalprocessing/service center facilities that are ISO certified, one location inour Building Products Group is ISO certified.

 

***Building Products Group***

 

*Recent Developments.* On August 13, 2004, E. L. (“Tom”) Thompson retired from the company aspresident of the Building Products Group. Robert C. McPherson III was appointed to replace Mr.  Thompson as Senior Vice President and President,Building Products Group.  Mr. McPhersonhas been with Metals USA since March 2003, in the capacity of Senior VicePresident, Business Development. Prior to that, Mr. McPherson worked forCalifornia Steel Industries, Inc. in Fontana, CA for 13 years, in a number ofexecutive positions.

 

Althoughhistorically profitable, we are working diligently to improve the overall levelof profitability of the Building Products business.  We have reduced our ongoing costs ofoperations by about $2.0 million dollars annually, through a combination ofreducing one whole layer of management and the elimination of eleven redundantor unprofitable sales locations.  As aresult of these actions, we 

 

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expensed approximately $5.0 million during the third and fourthquarters of 2004.  These actions were thelast major cost element of our 2004 initiative to improve the Building ProductsGroup’s profitability in 2005.

 

*Overview*.  Building Products had net sales of $183.0million in 2004 and currently has 18 operating locations and 26 sales anddistribution centers throughout the southeast, southwest and western regions ofthe U.S.  The Building Products Groupsells a number of finished products that are both inexpensive and energyefficient, including sunrooms, roofing products, awnings and solariums for usein residential applications and large area covered canopies, awnings andcovered walkways for commercial uses. Approximately 95% of the Building Products Group sales are attributableto the residential home markets; the remaining sales are attributable tocommercial applications.  BuildingProducts customers are predominantly in the construction, wholesale trade andbuilding material industries.  The Building Products Group contributedapproximately 12% of our 2004 net sales and a disproportionately smallerpercentage of our 2004 net income.

 

*IndustryOverview*.  Theresidential remodeling industry is estimated to be $170 billion annually by the National Association of the Remodeling Industry, orNARI.  Over the last ten years, theindustry has experienced accelerated growth due to a number of differentfactors, including demographic changes, rising disposable incomes, agingAmerican homes and increased rates of home ownership.  The increase in disposable incomes has beenreflected in the increase in home ownership since the middle of thecentury.  In 1990, over 64% of thepopulation had built some type of home equity as opposed to 55% in 1950.  The increase in home ownership amongmiddle-aged Americans is extremely important for the building products industry,as this generation spends twice as much on remodeling projects as anyother.  Industry sources, such as theNARI, believe that by the time Americans enter their peak earning years, theyhave grown comfortable with their neighborhoods and their children’s schoolsand would rather remodel their current home than purchase a new home.  Among the most popular remodeling projectsare windows and doors, siding, kitchens, bathrooms, sunrooms and roofing.  Our Building Products Group manufactures anddistributes windows and doors, sunrooms and roofing products through a networkof independent distributors and home improvement contractors.

 

The aging of the domestichome supply is also expected to bolster remodeling sales in the nearfuture.  It is estimated that 85 millionAmerican homes are over 20 years old and are prime candidates forreconstruction and remodeling.  Althoughnew housing trends have grown steadily over the past few years, new homesgenerally account for less than 2% of the domestic home supply in any givenyear.  As Americans look to improve andadd value to their homes, more and more will turn to remodeling as acost-efficient alternative to new housing construction.  The NARI reports that new homeowners tend toremodel their homes within the first 16-24 months of moving in, but moreimportantly, as the younger population reaches middle age, they are likely tomake more expensive purchases. Individuals age 35-44 spend twice as much on remodeling than any otherage group in the country.  Further,advancements in quality and a broader range of price-offerings in homeimprovement products are making consumers feel more comfortable about makingsignificant remodeling decisions as opposed to purchasing a new home.  All of these demographic trends are expectedto benefit the continued growth of the building products industry.

 

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**Sources of Supply**

 

In recent years, steel,aluminum, copper and other metals production in the U.S. has fluctuated from periodto period as mills attempt to match production to projected demand.  Periodically, this has resulted in shortagesof, or increased ordering lead times for, some products, as well asfluctuations in price.  Typically, metalsproducers announce price changes with sufficient advance notice to allow us toorder additional products prior to the effective date of a price increase, orto defer purchases until a price decrease becomes effective.  Our purchasing decisions are based on ourforecast of the availability of metal products, ordering lead times andpricing, as well as our prediction of customer demand for specific products.

 

We obtain theoverwhelming majority of our raw materials from domestic suppliers, whichinclude Nucor Corp., U.S. Steel, AK Steel, Gerdau Ameristeel, InternationalSteel Group, Alcoa Inc., Bayou Steel, Chaparral Steel and IPSCO Steel.  Although we have historically purchasedapproximately 10% to 15% of our raw material supplies from foreign producers,domestic suppliers have always been and we believe will continue to be ourprincipal source of raw material.

 

Although most forms ofsteel and aluminum produced by mills can be obtained from a number ofintegrated mills or mini-mills, both domestically and internationally, thereare a few products that are available from only a limited number ofproducers.  Since most metals are shippedfreight-on-board and the transportation of metals is a significant cost factor,we seek to purchase metals, to the extent possible, from the nearest mill, butwill use a more distant mill when it offers a lower delivered price.

 

Ferrous metal producershave been undergoing rapid consolidation over the past three years.  U.S. Steel, Nucor Corp. and InternationalSteel Group have acquired several of their domestic competitors, andinternational integrated producers have merged and consolidatedoperations.  Furthermore, it has beenannounced that Mittal Steel has agreed to purchase International Steel Group,which would create the largest steel producer in the world.  The result of this trend will be fewerintegrated producers from which we can purchase our raw materials. While webelieve that global consolidation of the steel industry is beneficial to thesteel industry as a whole, we are unable topredict what impact this consolidation may have on our operations.

 

**Sales andMarketing; Customers**

 

Our sales and marketingfocus is on the identification of OEMs and other metals end-users that couldachieve significant cost savings through the use of our inventory management,processing, just- in-time delivery and other services.  We use a variety of methods to identifypotential customers, including the use of databases, telemarketing, direct mailand participation in manufacturers’ trade shows.  Customer referrals and the knowledge of oursales force about regional end-users also result in the identification ofpotential customers.  Once a potentialcustomer is identified, our “outside” salespeople assume responsibility for visitingthe appropriate contact, typically the purchasing manager or manager ofoperations.

 

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Weemploy a sales force consisting of “inside” and “outside” salespeople.  “Inside” salespeople are primarilyresponsible for maintaining customer relationships, receiving and solicitingindividual orders and responding to service and other inquiries bycustomers.  Increasingly, these “inside”salespeople have been given responsibility for telemarketing to potentialcustomers.  Our “outside” sales force isprimarily responsible for identifying potential customers and calling on themto explain our services.  The sales forceis trained and knowledgeable about the characteristics and applications ofvarious metals, as well as the manufacturing methods employed by our customers.

 

Nearlyall sales are on a negotiated price basis. In some cases, sales are the result of a competitive bid process where acustomer provides a list of products, along with requirements, to us andseveral competitors and we submit a bid on each product.  We have a diverse customer base, with nosingle customer accounting for more than 2% of our revenues in 2004 and 2003,and 1% in 2002.

 

**Competition**

 

Weare engaged in a highly fragmented and competitive industry.  Competition is based on price, productquality, service, and timeliness of delivery and geographic proximity.  We compete with a large number of othermetals processors/service centers on a national, regional and local basis, someof which may have greater financial resources. Principal national competitors include Ryerson Tull, Inc. (NYSE:RT) andReliance Steel & Aluminum Co, (NYSE:RS). We also compete to a lesser extent with primary metals producers, whotypically sell directly to very large customers requiring regular shipments oflarge volumes of metals.  Numeroussmaller metals processors/service centers compete locally.

 

Historically,we believe that we have been able to compete effectively because of oursignificant number of locations, geographic dispersion, knowledgeable andtrained sales force, integrated computer systems, modern equipment, broad-basedinventory, combined purchasing volume and operational economies of scale.  Furthermore, we believe our liquidity andoverall financial position affords us a good platform with which to competewith our peers in the industry.

 

**GovernmentRegulation and Environmental Matters**

 

Our operations aresubject to a number of federal, state and local regulations relating to theprotection of the environment and to workplace health and safety.  In particular, our operations are subject toextensive federal, state and local laws and regulations governing wastedisposal, air and water emissions, the handling of hazardous substances,environmental protection, remediation, workplace exposure and othermatters.  Hazardous materials we use inour operations include general commercial lubricants and cleaning solvents.

 

We believe that we are insubstantial compliance with all such laws and do not currently anticipate thatwe will be required to expend any substantial amounts in the foreseeable futurein order to meet current environmental or workplace health and safetyrequirements.  However, some of theproperties we own or lease are located in areas with a history of heavyindustrial use, and are on or near sites listed on the ComprehensiveEnvironmental Response, Compensation, and Liability Act, or CERCLA, NationalPriority List.  We have a number ofproperties located in or near industrial or light industrial use areas;accordingly, these properties may have been contaminated by pollutants whichwould have migrated from neighboring facilities or have been deposited by prioroccupants.  Furthermore, we are not awareof any notices from authoritative agencies with respect to clean-up/remediationclaims for contamination at the leased properties.  However, we may be notified of such claimswith respect to our existing leased or owned properties in the future.

 

10

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Althoughno environmental claims have been made against us and we have not been named asa potentially responsible party by the Environmental Protection Agency or anyother party, it is possible that we could be identified by the EnvironmentalProtection Agency, a state agency or one or more third parties as a potentiallyresponsible party under CERCLA or under analogous state laws.  If so, we could incur substantial litigationcosts to prove that we are not responsible for the environmental damage.

 

**ManagementInformation Systems**

 

Both the Plates andShapes Group and Flat Rolled Group service centers use a system marketed anddistributed specifically for the service center industry.  During 2003, we completed a similar common-platforminitiative in the Building Products Group. Some of our subsidiaries currently use EDI, through which they offercustomers a paperless process with respect to order entry, shipment tracking,billing, remittance processing and other routine activities.  Additionally, several of our subsidiariesalso use computer-aided drafting systems to directly interface withcomputer-controlled metal processing equipment, resulting in more efficient useof material and time.

 

Webelieve investment in uniform management information systems and computer-aidedmanufacturing technology permits us to respond quickly and proactively to ourcustomers’ needs and service expectations. These systems are able to share data regarding inventory status, order backlog,and other critical operational information on a real-time basis.

 

**Employees**

 

We employ approximately2,500 persons.  As of December 31, 2004,approximately 300 employees (12%) at various sites were members of unions: theUnited Steelworkers of America; the Sheet Metals Workers Union; the InternationalAssociation of Bridge, Structural, and Ornamental Ironworkers of America; theInternational Brotherhood of Teamsters; and the International Brotherhood ofBoilermakers, Iron Ship Builders, Blacksmiths, Forgers and Helpers.  Our relationship with these unions generallyhas been satisfactory, but occasional work stoppages have occurred.  Within the last five years, one work stoppageoccurred at one facility, which involved approximately 30 employees and lastedapproximately 30 days.  We are currentlya party to 9 collective bargaining agreements, which expire at varioustimes.  Collective bargaining agreementsfor all of our union employees expire in each of the next three years.  Historically, we have succeeded innegotiating new collective bargaining agreements without a strike.

 

From time to time, there are shortages of qualifiedoperators of metals processing equipment. In addition, during periods of low unemployment, turnover amongless-skilled workers can be relatively high. We believe that our relations with our employees are good.

 

##### **Vehicles**

##### ** **

Weoperate a fleet of owned or leased trucks and trailers, as well as forkliftsand support vehicles.  We believe thesevehicles are generally well maintained and adequate for our current operations.

 

11

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##### **Risk Management and Insurance**

##### ** **

Theprimary risks in our operations are bodily injury, property damage and vehicleliability.  We maintain general andvehicle liability insurance and liability insurance for bodily injury andproperty damage and workers’ compensation coverage, which we considersufficient to protect us against a catastrophic loss due to claims associatedwith these risks.

 

**Safety**

 

Our goal is to provide an accident-free workplace.  We are committed to continuing and improvingupon each facility’s focus and emphasis on safety in the workplace.  We currently have a number of safety programsin place, which include regular weekly or monthly field safety meetings andtraining sessions to teach proper safe work procedures.  We have developed a comprehensive “bestpractices” safety program to be implemented throughout our operations to ensurethat all employees comply with our safety standards, as well as thoseestablished by our insurance carriers, and federal, state and local laws andregulations.  This program is led by thecorporate office, with the assistance of each of our product group presidents,executive officers and industry consultants with expertise in workplace safety.  Furthermore, we pay bonuses based on anemployee’s or a team’s safety record.

 

**FinancialInformation about Segments**

 

For information regardingrevenues from external customers, measures of profit or loss and total assetsfor the last three years for each segment, see Item 7.  “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations – Results of Operations bySegment” and Note 9 to our consolidated financial statements in Item 8.  “Financial Statements and Supplementary Data.”

 

**Patentsand Trademarks**

 

We own several U.S.patents, trademarks, service marks and copyrights.  Certain of the trademarks and patents areregistered with the U.S. Patent and Trademark Office, and, in some cases, withtrademark offices of foreign countries. We consider other information owned by us to be trade secrets.  We protect our trade secrets by, among otherthings, entering into confidentiality agreements with our employees andimplementing security measures to restrict access to such information.  We believe that our safeguards provideadequate protection to our proprietary rights. While we consider all of our intellectual property to be important, wedo not consider any single intellectual property right to be essential to ouroperations as a whole.

 

**SeasonalAspects, Renegotiation and Backlog**

 

There is a slightdecrease in our business during the winter months because of inclement weatherconditions and the impact on the construction industry.  No material portion of our business issubject to renegotiation of profits or termination of contracts at the electionof the government.  Because of thejust-in-time delivery policy and the short lead-time nature of our business, wedo not believe the information on backlog of orders is material to anunderstanding of our business.

 

12

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**ForeignOperations**

 

Substantially all of ourbusiness is domestic.  We do not deriveany material revenue from foreign countries and do not have long-term assets orcustomer relationships outside of the U.S. We have no foreign operations.

 

**Researchand Development**

 

We do not incur materialexpenses in research and development activities but do participate in variousresearch and development programs.  Weaddress research and development requirements and product enhancement by maintaininga staff of technical support, quality assurance and engineering personnel.

 

**PredecessorCompany Chapter 11 Proceedings and Reorganization**

 

In November 2001, the Predecessor Company sought protection under theU.S. bankruptcy laws.  We emerged from bankruptcyon October 31, 2002.  Under thereorganization plan approved by the bankruptcy court, the Predecessor Companydivested certain assets resulting in proceeds of approximately $90.1 millionduring 2002, re-valued its remaining assets, cancelled old common stock, issuednew common stock and warrants, and entered into our current revolving creditfacility.  For more information about thePredecessor Company’s bankruptcy filing and our subsequent reorganization,please see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations –Predecessor Company Chapter 11 Proceedings and Reorganization” as well as thenotes to our consolidated financial statements in Item 8.  “FinancialStatements and Supplementary Data.”

 

**Certain Relationships**

 

Threeof our nine directors (including our chairman) are directors of MetalManagement, Inc. (NASDAQ: MTLM). Moreover, our chairman is also the chief executive officer of MetalManagement.  Metal Management purchasesscrap metal from us at one of our metals processing/service centers.  This relationship with Metal Management beganwith the Predecessor Company well before the two companies shared commondirectors.  However, as a result of thedirector overlap, our board of directors decided to implement specifiedprocedures to avoid the appearance of, and to protect against, conflicts ofinterest relating to business transactions involving Metal Management.  Sales of scrap to Metal Management for theyears ended December 31, 2004 and 2003, the periods from November 1, 2002through December 31, 2002 and from January 1, 2002 through October31, 2002 were $2.0 million, $0.9 million, $0.2 million, and $0.5 million,respectively, and were transacted at prevailing market rates.

 

**AvailableInformation**

 

Our internet address iswww.metalsusa.com.  On our internetwebsite we make available, free of charge, our annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K and any amendmentsto those reports, as soon as reasonably practicable after we electronicallyfile such information with, or furnish it to, the SEC.  Our SEC reports can be accessed through theinvestor relations section of our internet website.  The information found on our internet websiteis not a part of this or any other report we file with or furnish to the SEC.

 

13

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**Item 2.    *Properties***

 

As of December 31, 2004, we operated twenty-one (21)metals processing facilities in the Plates and Shapes Group and twelve (12)facilities in the Flat Rolled Group. These facilities are used to receive, warehouse, process and shipmetals.  These facilities use variousmetals processing and materials handling machinery and equipment.  Our Building Products Group operates eighteen(18) facilities where we process metals into various building products andtwenty-six (26) sales and distribution centers. During 2004, nine (9) Building Products locations were closed and two(2) locations were merged.  We continueto serve the marketing areas of the closed facilities with our existing salesforce by expanding the responsible territories of our other facilities, andthrough the use of common carrier for product delivery.

 

Many of our facilities are capable of being used athigher capacities, if necessary.  Webelieve that our facilities will be adequate for the expected needs of ourexisting businesses over the next several years.  Our facilities, sales and distributioncenters and administrative offices are located and described as follows:

 

**OPERATING FACILITIES AS OF DECEMBER 31, 2004**

** **
| ** **                      | ** ** | **Location**               | ** ** | **Square  Footage** | ** ** | **Owned/  Leased** | ** ** |
|---------------------------------|------------|----------------------------|------------|---------------------|------------|--------------------|------------|
| ***Plates and Shapes Group:***  |       |                       |       |                |       |               |       |
| Northeast Plates and Shapes     |       | Baltimore, Maryland        |       | 65,000              |       | Leased             |       |
|                            |       | Seekonk, Massachusetts     |       | 115,000             |       | Owned              |       |
| ** **                      |       | Newark, New Jersey **(2)** |       | 81,000              |       | Leased             |       |
|                            |       | Langhorne, Pennsylvania    |       | 235,000             |       | Leased             |       |
|                            |       | Philadelphia, Pennsylvania |       | 85,000              |       | Owned              |       |
| ** **                      |       | York, Pennsylvania**(2)**  |       | 109,000             |       | Leased             |       |
| South Central Plates and Shapes |       | Enid, Oklahoma             |       | 112,000             |       | Leased             |       |
| ** **                      |       | Muskogee, Oklahoma**(1)**  |       | 229,000             |       | Owned              |       |
|                            |       | Cedar Hill, Texas          |       | 104,000             |       | Owned              |       |
| Mid Atlantic Plates and Shapes  |       | Ambridge, Pennsylvania     |       | 200,000             |       | Leased             |       |
|                            |       | Canton, Ohio               |       | 110,000             |       | Owned              |       |
|                            |       | Greenville, Kentucky       |       | 56,000              |       | Owned              |       |
|                            |       | Greensboro, North Carolina |       | 115,000             |       | Owned              |       |
|                            |       | Leetsdale, Pennsylvania    |       | 114,000             |       | Leased             |       |
|                            |       | Wilmington, North Carolina |       | 178,000             |       | Leased             |       |
| Southeast Plates and Shapes     |       | Mobile, Alabama            |       | 246,000             |       | Owned              |       |
|                            |       | Jacksonville, Florida      |       | 60,000              |       | Owned              |       |
|                            |       | Oakwood, Georgia           |       | 206,000             |       | Owned              |       |
|                            |       | Waggaman, Louisiana        |       | 295,000             |       | Owned              |       |

 

14

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| ** **                                  | ** ** | **Location**                    | ** ** | **Square  Footage** | ** ** | **Owned/  Leased** | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|---------------------|------------|--------------------|------------|
| ***Plates and Shapes Group (con’t):*** |       |                            |       |                |       |               |       |
|                                        |       | Columbus, Mississippi           |       | 45,000              |       | Owned              |       |
| Southwest Plates and Shapes                 |       | Hayward, California             |       | 64,000              |       | Leased             |       |
|                                        |       |                            |       |                |       |               |       |
| ***Flat Rolled Group:***                    |       |                            |       |                |       |               |       |
|                                        |       | Madison, Illinois               |       | 150,000             |       | Owned              |       |
| ** **                                  |       | Jeffersonville, Indiana **(1)** |       | 90,000              |       | Owned              |       |
|                                        |       | Randleman, North Carolina       |       | 150,000             |       | Owned              |       |
|                                        |       | Springfield, Ohio               |       | 110,000             |       | Owned              |       |
|                                        |       | Wooster, Ohio                   |       | 140,000             |       | Owned              |       |
|                                        |       | Chattanooga, Tennessee          |       | 60,000              |       | Owned              |       |
|                                        |       | Germantown, Wisconsin           |       | 90,000              |       | Owned              |       |
|                                        |       | Horicon, Wisconsin              |       | 120,000             |       | Leased             |       |
|                                        |       | Wichita, Kansas                 |       | 40,000              |       | Leased             |       |
|                                        |       | Liberty, Missouri               |       | 84,000              |       | Leased             |       |
|                                        |       | Northbrook, Illinois            |       | 187,000             |       | Owned              |       |
|                                        |       | Walker, Michigan                |       | 50,000              |       | Owned              |       |
| ***Building Products Group:***              |       |                            |       |                |       |               |       |
| Service Centers                             |       | Phoenix, Arizona                |       | 111,000             |       | Leased             |       |
|                                        |       | Brea, California                |       | 44,000              |       | Leased             |       |
|                                        |       | Buena Park, California          |       | 73,000              |       | Leased             |       |
|                                        |       | Corona, California              |       | 38,000              |       | Leased             |       |
|                                        |       | Ontario, California             |       | 29,000              |       | Leased             |       |
|                                        |       | Rancho Cordova, California      |       | 41,000              |       | Leased             |       |
|                                        |       | Groveland, Florida              |       | 247,000             |       | Leased             |       |
|                                        |       | Leesburg, Florida               |       | 61,000              |       | Leased             |       |
|                                        |       | Pensacola, Florida              |       | 48,000              |       | Leased             |       |
|                                        |       | Stone Mountain, Georgia         |       | 60,000              |       | Leased             |       |
|                                        |       | Kansas City, Missouri           |       | 58,000              |       | Leased             |       |
|                                        |       | Las Vegas, Nevada               |       | 133,000             |       | Leased             |       |
|                                        |       | Irmo, South Carolina            |       | 38,000              |       | Leased             |       |
|                                        |       | Houston, Texas                  |       | 285,000             |       | Owned              |       |
|                                        |       | Houston, Texas                  |       | 220,000             |       | Leased             |       |
|                                        |       | Mesquite, Texas                 |       | 200,000             |       | Leased             |       |
|                                        |       | Mesquite, Texas                 |       | 55,000              |       | Leased             |       |
|                                        |       | Kent, Washington                |       | 57,000              |       | Leased             |       |
|                                        |       |                            |       |                |       |               |       |
| Sales and Distribution Centers              |       | Birmingham, Alabama             |       | 12,000              |       | Leased             |       |
|                                        |       | Tucson, Arizona                 |       | 9,000               |       | Leased             |       |
|                                        |       | Cerritos, California            |       | 20,000              |       | Leased             |       |
|                                        |       | Hayward, California             |       | 25,000              |       | Leased             |       |
|                                        |       | San Diego, California           |       | 8,000               |       | Leased             |       |
|                                        |       | Clearwater, Florida             |       | 20,000              |       | Leased             |       |
|                                        |       | Fort Myers, Florida             |       | 18,000              |       | Leased             |       |
|                                        |       | Holly Hill, Florida             |       | 10,000              |       | Leased             |       |
|                                        |       | Jacksonville, Florida           |       | 17,000              |       | Leased             |       |
|                                        |       | Lakeland, Florida               |       | 24,000              |       | Leased             |       |

 

15

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| ** **                                  | ** ** | **Location**                 | ** ** | **Square  Footage** | ** ** | **Owned/  Leased** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|---------------------|------------|--------------------|------------|
| ***Building Products Group (con’t):*** |       |                         |       |                |       |               |       |
|                                        |       | West Melbourne, Florida      |       | 18,000              |       | Leased             |       |
|                                        |       | Duluth, Georgia              |       | 5,000               |       | Leased             |       |
|                                        |       | Louisville, Kentucky         |       | 11,000              |       | Leased             |       |
|                                        |       | Jackson, Mississippi         |       | 25,000              |       | Leased             |       |
|                                        |       | Overland, Missouri           |       | 14,000              |       | Leased             |       |
|                                        |       | Greensboro, North Carolina   |       | 15,000              |       | Leased             |       |
|                                        |       | Oklahoma City, Oklahoma      |       | 40,000              |       | Leased             |       |
|                                        |       | Harrisburg, Pennsylvania     |       | 12,000              |       | Leased             |       |
|                                        |       | Memphis, Tennessee           |       | 20,000              |       | Leased             |       |
|                                        |       | Nashville, Tennessee         |       | 15,000              |       | Leased             |       |
|                                        |       | Dallas, Texas                |       | 36,000              |       | Leased             |       |
|                                        |       | Longview, Texas              |       | 15,000              |       | Leased             |       |
|                                        |       | San Antonio, Texas           |       | 20,000              |       | Leased             |       |
|                                        |       | Weslaco, Texas               |       | 21,000              |       | Leased             |       |
|                                        |       | Salt Lake City, Utah         |       | 23,000              |       | Leased             |       |
|                                        |       | Virginia Beach, Virginia     |       | 10,000              |       | Leased             |       |
|                                        |       |                         |       |                |       |               |       |
| ***Administrative Locations:***             |       |                         |       |                |       |               |       |
| Corporate Headquarters                      |       | Houston, Texas               |       | 13,200              |       | Leased             |       |
| Southeast Plates and Shapes                 |       | Mobile, Alabama              |       | 16,000              |       | Owned              |       |
| Northeast Plates and Shapes                 |       | Pittsburgh, Pennsylvania     |       | 3,700               |       | Leased             |       |
| i-Solutions                                 |       | Ft. Washington, Pennsylvania |       | 4,300               |       | Leased             |       |

 

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**(1)****        **Thesefacilities are subject to liens with respect to specific debt obligations,including Industrial Revenue Bonds.

**(2)****        **We areunder contract to purchase these facilities.

 

**Item 3.    *Legal Proceedings***

 

*Thissection contains statements that constitute “forward-looking statements” withinthe meaning of the Private Securities Litigation Reform Act of 1995.  See disclosure presented on the inside of thefront cover of this report for cautionary information with respect to suchforward-looking statements.*

 

Weare involved in a variety of claims, lawsuits and other disputes arising in theordinary course of business.  We believethe resolution of these matters and the incurrence of their related costs andexpenses should not have a material adverse effect on our consolidatedfinancial position, results of operations or liquidity.

 

**Item 4.    *Submission of Matters to a Vote of SecurityHolders***

 

None.

 

16

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### **PART II**

### ** **

**Item 5.    *Market for Registrant’sCommon Equity and Related Stockholder Matters***

 

Beginningin March 2004, our common stock and warrants are quoted on the NASDAQ NationalMarket under the ticker symbols “MUSA” and “MUSAW,” respectively.  From June 2003 to March 2004, our commonstock and warrants were traded on the American Stock Exchange under the tickersymbols “MLT” and “MLT.WS,” respectively. From March 2003 until June 2003, our common stock traded on the OTCBulletin Board under the symbol “MTLS.” From November 1, 2002 until March 2003, our common stock traded on a “whenissued basis” under the symbol “MTLSV.”

 

Thefollowing table sets forth the high and low prices for our common stock andwarrants as reported by the NASDAQ, AMEX or by the OTC Bulletin Board, asapplicable for each calendar quarter during the periods indicated.

 
| ** **                 | ** ** | **Common Stock(1)** | ** ** | **Warrants** | ** ** |
|----------------------------|------------|---------------------|------------|--------------|------------|
| ** **                 | ** ** | **High**            | ** ** | **Low**      | ** ** | **High** | ** ** | **Low** | ** ** |
| **2002:**                  |       |                |       |         |       |   |   |   |   |
| November 1 to  December 31 |       | $                   | 5.00       |         | $          | 3.05 |   | $ | — |   | $ | — |   |
|                       |       |                |       |         |       |   |   |   |   |
| **2003:**                  |       |                |       |         |       |   |   |   |   |
| January 1 to  March 31     |       | $                   | 4.40       |         | $          | 2.25 |   | $ | — |   | $ | — |   |
| April 1 to June  30        |       | $                   | 4.45       |         | $          | 2.45 |   | $ | 0.50 |   | $ | 0.10 |   |
| July 1 to  September 30    |       | $                   | 7.20       |         | $          | 4.01 |   | $ | 0.69 |   | $ | 0.13 |   |
| October 1 to  December 31  |       | $                   | 10.49      |         | $          | 6.28 |   | $ | 1.90 |   | $ | 0.45 |   |
|                       |       |                |       |         |       |   |   |   |   |
| **2004:**                  |       |                |       |         |       |   |   |   |   |
| January 1 to  March 31     |       | $                   | 14.37      |         | $          | 9.45 |   | $ | 3.50 |   | $ | 1.23 |   |
| April 1 to June  30        |       | $                   | 18.17      |         | $          | 11.50 |   | $ | 4.80 |   | $ | 1.91 |   |
| July 1 to  September 30    |       | $                   | 18.48      |         | $          | 14.12 |   | $ | 4.75 |   | $ | 2.70 |   |
| October 1 to  December 31  |       | $                   | 20.15      |         | $          | 15.56 |   | $ | 5.20 |   | $ | 3.20 |   |
|                       |       |                |       |         |       |   |   |   |   |
| **2005:**                  |       |                |       |         |       |   |   |   |   |
| January 1 to  March 1      |       | $                   | 24.99      |         | $          | 16.55 |   | $ | 9.30 |   | $ | 3.71 |   |

 

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**(1)****        **OnOctober 31, 2002, pursuant to the reorganization plan approved by the court inour bankruptcy proceedings, all shares of the Predecessor Company’s commonstock were cancelled and we issued 20,000,000 shares of new common stock.  Accordingly, information relating to thePredecessor Company’s old common stock is not comparable to, or meaningful withrespect to, the performance or trading history of our new common stock. SeeItem 7.  “Management’s Discussion andAnalysis of Financial Condition and Results of Operations – Predecessor CompanyChapter 11 Proceedings and Reorganization” as well as the notes to ourconsolidated financial statements in Item 8. “Financial Statements and Supplementary Data.”

 

17

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As of March 1, 2005,there were 20,279,280 outstanding shares of our common stock, held byapproximately 2,000 shareholders of record. We currently do not anticipate paying dividends on our commonstock.  Our revolving credit facilitycurrently restricts our ability to pay dividends.  For information regarding these restrictions,see Item 7.  “Management’s Discussion andAnalysis of Financial Condition and Results of Operations – Liquidity andCapital Resources – Financing Activities” and Note 5 to our consolidatedfinancial statements in Item 8. “Financial Statements and Supplementary Data.”  Any determination to declare or pay dividendsout of funds legally available for that purpose will be at the discretion ofour board of directors and will depend on future earnings, results of operations,financial condition, capital requirements and other factors the board ofdirectors deems relevant, as well as the restrictions in our revolving creditfacility and any other applicable contractual restrictions.

 
| **Plan Category**                                               | ** ** | **Number of  shares  to be issued  upon  exercise of  outstanding  options and  grants** | ** ** | **Weighted-  average  exercise  price of  outstanding  options** | ** ** | **Number of shares  remaining available  for future issuance  under equity  compensation plans  (excluding shares  reflected in  column (a))** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **(a)**                                                                                  | ** ** | **(b)**                                                          | ** ** | **(c)**                                                                                                                                        | ** ** |
| Equity compensation  plans approved by  common stockholders     |       | 1,130,207                                                                                |       | $                                                                | 9.42       |                                                                                                                                           | 760,223    |   |
| Equity compensation  plans not approved by  common stockholders |       | —                                                                                   |       | —                                                           |       | —                                                                                                                                         |       |
| Total                                                           |       | 1,130,207                                                                                |       | $                                                                | 9.42       |                                                                                                                                           | 760,223    |   |

 

**Item 6.    *Selected Financial Data***

 

Thefollowing selected financial data is derived from our consolidated financialstatements for the years ended December 31, 2004 and 2003, and for the periodsbefore and after our emergence from bankruptcy proceedings on October 31, 2002.  As aresult of our emergence from bankruptcy and for the purpose of presentation,activities subsequent to October 31, 2002 relate to the “Successor Company” andactivities prior to November 1, 2002 relate to the “Predecessor Company.”  With respect to periods relating to thePredecessor Company, the consolidated financial statements and related selectedfinancial data have been reclassified for the effects of Statement of FinancialAccounting Standards No. 144 (“SFAS No. 144”),*“Accounting for Impairment or Disposal of Long-Lived Assets”* whichrequires divestitures be excluded from results of operations for all periodspresented.

 

Inaddition, the consolidated financial statements for 2001 and 2002 were preparedin accordance with the AICPA’s SOP 90-7.  The consolidated statements of operationsinformation for the period from November 1, 2002 through December 31, 2002 andthe consolidated balance sheet information at December 31, 2002 reflect ourfinancial position and operating results after application of our ReorganizationPlan and the application of the principles of “Fresh-Start Reporting” inaccordance with the provisions of SOP 90-7. Accordingly, such financial information is not comparable to ourhistorical financial information prior to November 1, 2002.

 

18

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Thisfinancial data should be read in conjunction with Item 7.  “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” included in this report.  The selected financial data for the fiscalyears ended 2000 through 2001 reflects our historical consolidated financialstatements reclassified for the effects of SFAS No. 144.

 
| ** **                                                   | ** ** | **(in millions, except per share amounts)** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                   | ** ** | **Successor Company**                       | ** ** | ** ** | **Predecessor Company** | ** ** |
| ** **                                                   | ** ** | **Year Ended  December 31,**                | ** ** | **Year Ended  December 31,** | ** ** | **Period From  November 1,  2002 thru  December 31,** | ** ** | ** ** | **Period From  January 1,  2002 thru  October 31,** | ** ** | **Years Ended  December 31,** | ** ** |
| ** **                                                   | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| **Statements  of Operations Data:**                          | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                    |       | $                                           | 1,509.8    |   | $ | 963.2 |   | $ | 128.7 |   |   | $ | 833.3 |   | $ | 1,243.0 |   | $ | 1,585.6 |   |
| Cost of sales                                                |       | 1,080.1                                     |       | 731.6 |   | 98.7 |   |   | 639.0 |   | 953.3 |   | 1,210.5 |   |
| Gross profit                                                 |       | 429.7                                       |       | 231.6 |   | 30.0 |   |   | 194.3 |   | 289.7 |   | 375.1 |   |
| Operating  expenses                                          |       | 256.0                                       |       | 215.2 |   | 30.9 |   |   | 197.1 |   | 296.2 |   | 320.8 |   |
| Asset  impairments and integration                           |       | —                                      |       | — |   | — |   |   | (0.2 | ) | 384.0 |   | — |   |
| Operating income  (loss)                                     |       | 173.7                                       |       | 16.4 |   | (0.9 | ) |   | (2.6 | ) | (390.5 | ) | 54.3 |   |
| Interest expense                                             |       | 8.4                                         |       | 5.7 |   | 1.3 |   |   | 15.8 |   | 49.6 |   | 50.5 |   |
| Other (income)  expense, net                                 |       | (2.5                                        | )          | (2.0 | ) | 0.1 |   |   | (1.1 | ) | 1.8 |   | (1.6 | ) |
| Fresh-start/gain  on reorganization                          |       | —                                      |       | — |   | — |   |   | (80.9 | ) | — |   | — |   |
| Reorganization  expenses                                     |       | —                                      |       | — |   | — |   |   | 28.3 |   | 19.4 |   | — |   |
| Income (loss)  before taxes and discontinued operations      |       | 167.8                                       |       | 12.7 |   | (2.3 | ) |   | 35.3 |   | (461.3 | ) | 5.4 |   |
| Provision  (benefit) for taxes                               |       | 63.3                                        |       | 5.1 |   | — |   |   | (15.4 | ) | (52.9 | ) | 3.9 |   |
| Income (loss)  before discontinued operations           |       | 104.5                                       |       | 7.6 |   | (2.3 | ) |   | 50.7 |   | (408.4 | ) | 1.5 |   |
| Discontinued  operations, net                                |       | —                                      |       | (0.1 | ) | (1.0 | ) |   | 0.6 |   | (0.7 | ) | 10.2 |   |
| Net income  (loss)                                           |       | $                                           | 104.5      |   | $ | 7.5 |   | $ | (3.3 | ) |   | $ | 51.3 |   | $ (409.1 | ) | $ | 11.7 |   |
|                                                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |
| **Income  (loss) per share:**                                |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss)  per share – basic:                       |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |
| From continuing  operations                                  |       | $                                           | 5.17       |   | $ | 0.38 |   | $ | (0.11 | ) |   | $ | 1.39 |   | $ (11.19 | ) | $ | 0.04 |   |
| From  discontinued operations                                |       | —                                      |       | (0.01 | ) | (0.05 | ) |   | 0.02 |   | (0.02 | ) | 0.28 |   |
| Total                                                        |       | $                                           | 5.17       |   | $ | 0.37 |   | $ | (0.16 | ) |   | $ | 1.41 |   | $ (11.21 | ) | $ | 0.32 |   |
|                                                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss)  per share – diluted:                     |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |
| From continuing  operations                                  |       | $                                           | 5.05       |   | $ | 0.37 |   | $ | (0.11 | ) |   | $ | 1.39 |   | $ (11.19 | ) | $ | 0.04 |   |
| From  discontinued operations                                |       | —                                      |       | — |   | (0.05 | ) |   | 0.02 |   | (0.02 | ) | 0.28 |   |
| Total                                                        |       | $                                           | 5.05       |   | $ | 0.37 |   | $ | (0.16 | ) |   | $ | 1.41 |   | $ (11.21 | ) | $ | 0.32 |   |
|                                                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |
| Number of common  shares used in the per share calculations: |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                        |       | 20.2                                        |       | 20.2 |   | 20.2 |   |   | 36.5 |   | 36.5 |   | 36.8 |   |
| Diluted                                                      |       | 20.7                                        |       | 20.3 |   | 20.2 |   |   | 36.5 |   | 36.5 |   | 37.0 |   |
|                                                              |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

19

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| ** **                                    | ** ** | **(in millions)**                               | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                    | ** ** | **Successor Company  Years Ended December 31,** | ** ** | ** ** | **Predecessor Company  Years Ended December 31,** | ** ** |
| ** **                                    | ** ** | **2004**                                        | ** ** | **2003** | ** ** | **2002** | ** ** | ** ** | **2001** | ** ** | **2000** | ** ** |
| **Balance  Sheet Data:**                      | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Working capital **(1)**                       |       | $                                               | 565.0      |   | $ | 303.4 |   | $ | 318.2 |   |   | $ | 183.2 |   | $ | 344.8 |   |
| Total assets                                  |       | 710.0                                           |       | 407.2 |   | 378.6 |   |   | 690.1 |   | 1,104.8 |   |
| Long-term debt,  less current portion **(2)** |       | 266.6                                           |       | 118.2 |   | 127.4 |   |   | — |   | 489.9 |   |
| Stockholders’  equity (deficit)          |       | 328.2                                           |       | 200.6 |   | 189.0 |   |   | (35.1 | ) | 375.1 |   |
| Dividends  declared **(3)**                   |       | —                                          |       | — |   | — |   |   | 1.1 |   | 4.5 |   |
|                                               |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**(1)****        **The balance as ofDecember 31, 2001 includes all pre-petition current liabilities that are notsubject to compromise and $38.3 million of pre-petition liabilities subject tocompromise included in operations held for sale.  Including non-current pre-petitionliabilities subject to compromise of $325.7 million, our working capital wouldhave been a deficit of $142.5 million as of December 31, 2001.

**(2)****        **Because of thePredecessor Company’s Chapter 11 filing, $301.9 million of long-term debt wasreclassified as a current pre-petition liability not subject to compromise and$200.0 million was reclassified as a non-current pre-petition liability subjectto compromise as of December 31, 2001.

**(3)****        **The Predecessor Companydeclared dividends with respect to its common stock as follows:  Four quarterly dividends of $0.03 per shareduring the year ended December 31, 2000 and one dividend of $0.03 per shareduring the quarter ended March 31, 2001. There have been no dividends declared by the Successor Company inrespect of any period.

 

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**Item 7.    *Management’s Discussionand Analysis of Financial Condition and Results of Operations***

 

*This section contains statements that constitute “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995.  See disclosure presented on theinside of the front cover of this report for cautionary information withrespect to such forward-looking statements. Readers should refer to “Factors Which May Affect Future OperatingResults” for risk factors that may affect future performance. The followingdiscussion should be read in conjunction with Item 6. “Selected Financial Data”and Item 8.  “Financial Statements andSupplementary Data.”*

* *

**Overview**

 

We are a leading providerof value-added processed steel, aluminum and specialty metals, as well asmanufactured metal components.  We sellto customers in businesses such as the machining, furniture, transportationequipment, power and process equipment, industrial/commercialconstruction/fabrication, consumer durables and electrical equipmentindustries, as well as machinery and equipment manufacturers.

 

 

Wedo not produce or manufacture any metal. We are primarily a service center company, and as such, we purchasesteel, aluminum, brass, copper and other metal from the producing mills.  We then sell our metal processing servicesand the metal to our customers.  Theprimary factors management follows with respect to the Flat Rolled and Platesand Shapes Product Groups are volume and operating margin, defined as net salesless operating costs and expenses.  OurBuilding Products Group manufactures and distributes windows and doors,sunrooms and roofing products through a network of independent distributors andhome improvement contractors.  Theprimary factors management follows in the Building Products Group are net salesand operating margin, defined as net sales less operating costs and expenses.See Part I, Item 1.  *Business,* included in this report, for a more complete discussion of ourbusiness and product groups*.*

 

**RecentEvents/ Industry Trends**

 

In2004, increased demand for steel in China, shortages of raw material such ascoking coal, iron ore, energy (oil), increased demand for scrap, and the weakU.S. dollar all contributed to significant increases in prices for domesticmetal of all types, particularly steel.  Further, improved economicconditions in Europe, Asia and in North America contributed to a higher levelof demand for steel.  During most of 2004supplies of many products were constrained, which also led to price increases.

 

During2004, the significance of China as the dominant factor in our business becameapparent. Producing over 270 million metric tons of steel, which is more steelthan the entire production of the United States, Japan and Russia combined; andconsuming even more than their domestic production, China has brought seriousimbalances to the iron ore, coal and steel businesses all over the world.  We do not believe that China’s ultimate goalis to be the primary producer and therefore the principal exporter of steel forthe entire world.  Rather, China appearsto be executing a well thought-out, long-term plan, aimed to develop theircountry and to give their people access to goods citizens of western economiestake for granted, like cars, appliances, and homeownership.  Currently, they are actively expanding theircommercial infrastructure, such as roads, rail, and hydroelectric dams.  All these things need steel.  As a consequence, the shortages in coal, ironore and steel may stay in place for several years.  During these years, we believe China may be anet importer of steel, even considering that they could be exporting some steelduring limited periods of time.  It isalso important to keep in mind that China needs to import iron ore because theydon’t have sufficient domestic reserves to meet their current consumption

 

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requirements.  We believe thisreliance on imported iron ore supports our view that China’s goal is not tobecome the world’s largest supplier of steel. Nevertheless, their appetite for iron ore, coal and other raw materialsis enough to influence world wide steel prices.

 

In early 2005, the three iron ore supplierscontrolling about 80% of the world market announced their intention to seeksignificant price increases from the integrated steel mills in Europe andAsia.  These three companies are locatedin Brazil and Australia.  This actionmerely compounds the global factors impacting raw material prices during2004.  On February 22, 2005, CompanhiaVale do Rio Doce (“CVRD,” a Brazilian company and the largest iron ore producerin the world), announced the settlement of an unprecedented 71% year-over-yearprice increase with Nippon Steel for 2005. Nippon Steel is the largest Japanese steel mill.  We believe this price point will be thereference price for all other Japanese mills, as well as for the Korean,Taiwanese and Chinese mills.  Iron oreprice increases in double digits were unusual until last year, when theBrazilian and the Australian companies were able to get a little less than 20%.  The 2005 increase is unprecedented, and webelieve will set the stage for a cost increase for the European and other largeintegrated steel mills throughout the world. As a consequence, we anticipate that both foreign and domestic millswill continue the disciplined practice they implemented in 2004 of passing alongsuch added costs, in the form of both price increases and surcharges.  Just when the higher worldwide prices willbegin to affect the domestic market is difficult to predict, but we believeprices will increase in 2005.  Currentlythe global factors driving raw material prices are in place to keep metalprices — particularly steel — at high levels (compared to the prevailing pricelevels in 2000 through 2003) for at least the next year.  However, anynumber of factors could cause metal prices to decline.  With good demandfrom the domestic economy, and adequate supply of metal, we expect 2005 to beanother good year for our business.

 

It is important to understand that we do not produce any steel;however, historically metal service centers generally benefit from rising steelprices, although in the short term rapidly rising prices create an equal demandon our cash.  This is because, during theinitial period in which prices are rising, we will have to fund the purchase ofhigher cost material as the lower cost material is sold.  This will have a negative impact on cash flowuntil prices for material stabilize and the normal lag from collections ofaccounts receivable passes.  From ourmiddle-man position in the supply chain, we will continue to pass-on any priceincreases and surcharges to our customers, in a predictable and disciplinedway, exactly as we have been doing since the inception of the surchargemechanism to carbon steel sales by the steel mills in January 2004.  We are not willing to accept unprofitable ormarginally profitable orders, and we see no reason to change our behaviornow.  We believe our cash flow fromoperations, supplemented with the cash availability afforded us by ourrevolving credit facility, will provide sufficient liquidity to meetanticipated challenges we face due to the rising steel price environment.  See the separate section “Liquidity andCapital Resources” in Item 7 for further information about cash flows fromoperations and liquidity.

 

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**Factors Which May Affect FutureOperating Results**

 

*The provisions of the Private Securities LitigationReform Act of 1995 provide companies with a “safe harbor” when makingforward-looking statements. This “safe harbor” encourages companies to provideprospective information about their companies without fear of litigation. Wewish to take advantage of the “safe harbor” provisions of the PrivateSecurities Litigation Reform Act of 1995 and are including this section in ourAnnual Report on Form 10-K in order to do so. Factors that could cause ouractual results to differ materially from management’s projections, forecasts,estimates and expectations include, but are not limited to, the following:*

 

*Substantial debt obligations.* Ourlong-term debt was $266.6 million as of December 31, 2004, including $253.0million under our revolving credit facility. Because we may be more leveraged than some of our competitors, our levelof indebtedness may place us at a competitive disadvantage.  In addition, the revolving credit facilitycontains restrictive operating and financial covenants that may limit ourability to obtain additional debt financing or to engage in other businessactivities that otherwise may be in our interest.  Those limits may restrict our ability toservice our debt obligations or finance our future activities (whetheroperations, potential acquisitions or other capital needs) through additionaldebt financing if cash flow from operations is insufficient to service ourexisting debt obligations.  If we cannotachieve the financial results necessary to maintain compliance with ourrevolving credit facility’s covenants, we could be declared in default and berequired to sell or liquidate our assets to repay outstanding debt.

 

*Limited liquidity*.  We arecurrently funding our liquidity needs out of operating cash flow and fromborrowings under the revolving credit facility. We believe our current liquidity is sufficient to meet our operating andcapital expenditure requirements during 2005; however, our existing sources ofliquidity may not be adequate to fund future liquidity needs and additionalsources of liquidity may not be available to us or adequate.  Any liquidity shortages would likely have amaterial adverse effect on our business and financial condition.

 

*Historical financial information not comparable tocurrent financial condition and results of operations.* As aresult of our emergence from bankruptcy on October 31, 2002, we were subject to“Fresh-Start Reporting.”  Accordingly,our financial information as of any date or for periods after November 1, 2002is not comparable to our historical financial information before November 1,2002.  This is primarily because the “Fresh-StartReporting” required us to reduce the carrying value of our property andequipment to zero.

 

*Susceptible to economic downturn.*Any downturn in the U.S. economy cancause demand by our customers to decline, which could cause volumes and pricingto remain low, reducing our sales. Likewise, our Building Products Group could be adversely affected ifmortgage rates rise or consumer confidence falls, since the results for thatgroup have been at least in part due to the strong housing market, which inturn has been driven by low mortgage rates and relatively high consumerconfidence.

 

*Possible impact on varying metals prices.*We principally use steel, aluminum andvarious specialty metals as feedstock. The metals industry as a whole is highly cyclical and at times pricingand availability of our feedstock can be extremely volatile due to numerousfactors beyond our control, including domestic and international economicconditions, labor costs, production levels, competition, import duties andtariffs and currency exchange rates. This volatility can significantly affect the availability and cost ofraw materials for us, and may, therefore, adversely affect our net sales,operating

 

23

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margin and net income.  Ourservice centers maintain substantial inventories of metal to accommodate theshort lead times and just-in-time delivery requirements of our customers.  Accordingly, we purchase metal in an effortto maintain our inventory at levels that we believe to be appropriate tosatisfy the anticipated needs of our customers, which we base on informationderived from customers, market conditions, historic usage and industryresearch.  Our commitments for metalpurchases are generally at prevailing market prices in effect at the time weplace our orders.  We have no substantiallong-term, fixed-price purchase contracts. When raw material prices rise, we may not be able to pass any portion ofthe price increase on to customers.  Whenraw material prices decline, customer demands for lower prices could result inlower sale prices and, to the extent we liquidate existing inventoryquantities, lower margins.

 

*Fluctuations in demand.*Many of our products are sold toindustries that experience significant fluctuations in demand based on economicconditions, energy prices, consumer demand and other factors beyond ourcontrol.  We may not be able to increaseor maintain our level of sales in periods of economic stagnation ordownturn.  Additionally, as more domesticmanufacturers move their manufacturing facilities out of the United States, wemay not be able to maintain our level of sales to those customers.

 

*Competition.* We are engaged in a highly fragmented and competitiveindustry.  We compete with a large numberof other value-added metals processors/service centers on a regional and localbasis, some of which may have greater financial resources than us.  We also compete, to a lesser extent, withprimary metals producers, who typically sell to very large customers requiringregular shipments of large volumes of metals. Increased competition could have a material adverse effect on our netsales and profitability.

 

*Environmental regulation.* Our operations are subject to extensivefederal, state and local laws and regulations governing waste disposal, air andwater emissions, the handling of hazardous substances, environmentalprotection, remediation, workplace exposure and other matters.  We believe that we are in substantialcompliance with all such laws and do not currently anticipate that we will berequired to expend any substantial amounts in the foreseeable future in orderto meet current environmental or workplace health and safety requirements.  However, some of the properties we own orlease are located in areas with a history of heavy industrial use and are on ornear sites listed on the CERCLA National Priority List.  We have a number of properties located in ornear industrial or light industrial use areas; accordingly, these propertiesmay have been contaminated by pollutants which would have migrated from neighboringfacilities or have been deposited by prior occupants.  Furthermore, we are not aware of any noticesfrom authoritative agencies with respect to clean-up/remediation claims forcontamination at the leased properties. However, we may be notified of such claims with respect to our existingleased or owned properties in the future.

 

Although no environmental claims have been madeagainst us and we have not been named as a potentially responsible party by theEnvironmental Protection Agency or any other party, it is possible that wecould be identified by the Environmental Protection Agency, a state agency orone or more third parties as a potentially responsible party under CERCLA orunder analogous state laws.  If so, wecould incur substantial litigation costs to prove that we are not responsiblefor the environmental damage.  We haveobtained limited indemnities from the former stockholders of the acquiredcompanies whose facilities are located at or near contaminated sites.  Those limited indemnities are subject tocertain deductible amounts, however, and may not protect us fully, if at all.

 

*Emergence from Chapter 11 Reorganization in 2002.* The Predecessor Company soughtprotection under Chapter 11 of the Bankruptcy Code in November 2001.  Exclusive of the “Fresh-Start Reporting” andreorganization adjustments, the Predecessor Company incurred net losses of$29.6 million and $409.1

 

24

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million during theten-month period ended October 31, 2002 and the fiscal year ended December 31,2001, respectively.  Approximately $384.0million of the 2001 net loss was attributable to write downs associated withthe carrying value of the Predecessor Company’s goodwill and property andequipment to their then estimated recoverable values.  We incurred a net loss of $3.3 million forthe two-month period ended December 31, 2002.  The Predecessor Company’s equity ownership,board of directors and a portion of its senior management was replaced inconnection with our reorganization. While our current senior management has concentrated on improving ourprofitability, we may not attain sustained profitability or achieve growth inour operating performance.

 

**CriticalAccounting Policies**

 

Wehave identified the following critical accounting policies based upon thesignificance of the policy to and the potential impact of estimates andsubjective assessments on our overall financial statement presentation.  During the past three years we have notchanged our critical accounting policies. We have concluded our critical accounting policies are as follows:

 

*Accounts Receivable.* We recognize revenue as productis shipped (risk of loss for our products passes at time of shipment), net ofprovisions for estimated returns.  Financial instruments, which potentially subjectus to concentrations of credit risk, consist principally of trade accounts andnotes receivable.  Collections on ouraccounts receivables are made through several lockboxes maintained by ourlenders.  Credit risk associated withconcentration of cash deposits is low as we have the right of offset with ourlenders for the substantial portion of our cash balances.  Concentrations of credit risk with respect totrade accounts are within several industries. Generally, credit is extended once appropriate credit history andreferences have been obtained.  Weperform ongoing credit evaluations of customers and set credit limits basedupon reviews of customers’ current credit information and payment history.  We monitor customer payments and maintain aprovision for estimated credit losses based on historical experience andspecific customer collection issues that we have identified.  Provisionsto the allowance for doubtful accounts are made monthly and adjustments aremade periodically based upon our expected ability to collect all suchaccounts.  Generally we do not requirecollateral for the extension of credit.

 

We record the effect of anynecessary adjustments prior to the publication of our consolidated financialstatements.  Each quarter we consider allavailable information when assessing the adequacy of the provision forallowances, claims and doubtful accounts.  Adjustments made with respect to theallowance for doubtful accounts often relate to improved information not previouslyavailable.  Uncertainties with respect tothe allowance for doubtful accounts are inherent in the preparation offinancial statements. At December 31, 2004 and 2003, the reserve was $7.7million and $6.9 million, respectively.  The rate offuture credit losses may not be similar to past experience.

 

*Inventories*— Inventories are stated at the lower of cost ormarket.  Our inventories are accountedfor using a variety of methods including specific identification, average costand the first-in first-out, or FIFO, method of accounting.  Through December 31, 2002, certain of oursubsidiaries used the last-in, first-out, or LIFO, method of accounting forinventories.  We have changed the methodof accounting for inventories for these subsidiaries to conform to the method(FIFO) used by similar businesses within our product groups effective January1, 2003.  The effect of this change inaccounting method was immaterial.  Accordingly,prior period information has not been restated. We regularly review inventory on hand and record provisions fordamaged and slow-moving inventory based on historical and current salestrends.  Changes in product demand andour customer base may affect the value of inventory on hand which may requirehigher provisions for damaged and slow-moving inventory.

 

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We record the effect of anynecessary adjustments prior to the publication of our consolidated financialstatements each quarterly reporting period. Adjustments made with respect to the inventory valuation allowance oftenrelate to improved information not previously available.  Uncertainties with respect to the inventoryvaluation allowance are inherent in the preparation of financialstatements.  At December 31, 2004 and2003, the reserve was $5.2 million and $5.3 million, respectively.  The rate of future lossesassociated with damaged or slow moving inventory may not be similar to pastexperience.

 

**ConsolidatedResults of Operations**

 

Thefollowing financial information reflects our historical financial statementsand divested operations as of their respective divestiture dates.  The results of operations data for 2002includes the Predecessor Company results for the period January 1, 2002 throughOctober 31, 2002 and the Successor Company results for the period November 1,2002 through December 31, 2002.  See theSupplementary table presented after the Results of Operations discussion belowfor the 2002 Successor Company and Predecessor Company results.

 
| ** **                                              | ** ** | **Fiscal Years Ended December 31,**   | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                              | ** ** | **2004**                              | ** ** | **%** | ** ** | **2003** | *** *** | **%** | *** *** | **2002** | *** *** | **%** | *** *** |
| ** **                                              | ** ** | **(in millions, except percentages)** | ** ** |
| Net sales                                               |       | $                                     | 1,509.8    | * * | *100.0* | *%* | $ | 963.2 | * * | *100.0* | *%* | $ | 962.0 | * * | *100.0* | *%* |
| Cost of sales                                           |       | 1,080.1                               | * *   | *71.5* | *%* | 731.6 | * * | *76.0* | *%* | 737.7 | * * | *76.7* | *%* |
| Gross profit                                            |       | 429.7                                 | * *   | *28.5* | *%* | 231.6 | * * | *24.0* | *%* | 224.3 | * * | *23.3* | *%* |
| Operating and  delivery                                 |       | 144.4                                 | * *   | *9.6* | *%* | 127.7 | * * | *13.3* | *%* | 128.4 | * * | *13.3* | *%* |
| Selling, general  and administrative                    |       | 109.6                                 | * *   | *7.3* | *%* | 87.0 | * * | *9.0* | *%* | 92.1 | * * | *9.6* | *%* |
| Depreciation and  amortization                          |       | 2.0                                   | * *   | *0.1* | *%* | 0.5 | * * | *0.1* | *%* | 7.3 | * * | *0.7* | *%* |
| Operating income  (loss)                                |       | 173.7                                 | * *   | *11.5* | *%* | 16.4 | * * | *1.7* | *%* | (3.5 | ) | *(0.4* | *)%* |
| Interest expense                                        |       | 8.4                                   | * *   | *0.6* | *%* | 5.7 | * * | *0.6* | *%* | 17.1 | * * | *1.8* | *%* |
| Other (income)  expense, net                            |       | (2.5                                  | )          | *(0.2* | *)%* | (2.0 | ) | *(0.2* | *)%* | (1.0 | ) | *(0.1* | *)%* |
| Fresh-start and  gain on reorganization                 |       | —                                |       | — | * * | — |   | — | * * | (80.9 | ) | *(8.4* | *)%* |
| Reorganization  expenses                                |       | —                                |       | — | * * | — |   | — | * * | 28.3 | * * | *2.9* | *%* |
| Income before  income taxes and discontinued operations |       | $                                     | 167.8      | * * | *11.1* | *%* | $ | 12.7 | * * | *1.3* | *%* | $ | 33.0 | * * | *3.4* | *%* |

 

***Results of Operations – Year Ended December 31, 2004 Compared to 2003***

 

*Net sales.*Net sales increased$546.6 million, or 56.7%, from $963.2 million in 2003 to $1,509.8 million in2004.  Theincrease in sales was primarily attributable to a 42.6% increase in averagerealized prices and a 16.6% increase in volumes for our Flat Rolled and Platesand Shapes Product Groups.  Net salesincreased for our Building Products Group by $17.8 million.

* *

*Cost of sales*.  Cost of salesincreased $348.5 million, or 47.6%, from $731.6 million in 2003 to$1,080.1 million in 2004.  The increase in cost of sales was primarily attributable to a 31.6%increase in the average cost per ton and a 16.6% increase in volumes for ourFlat Rolled and Plates and Shapes Product Groups.  Cost of sales as a percentage of net salesdecreased from 76.0% in 2003 to 71.5% in 2004. This percentage decrease was due to higher average realized sales prices.

 

26

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*Operating and delivery.* Operating anddelivery expenses increased $16.7 million, or 13.1%, from $127.7 millionin 2003 to $144.4 million in 2004.  This increase is primarily due to the increase in shipments.  As a percentage of net sales,operating and delivery expenses decreased from 13.3% in 2003 to 9.6% in2004.  Thispercentage decrease was primarily due to higher average realized sales pricestogether with fixed costs being spread over a higher volume of net sales.

* *

*Selling, general and administrative*.** **Selling, general and administrative expenses increased$22.6 million, or 26.0%, from $87.0 million in 2003 to $109.6 million in2004.  Thisincrease was principally due to higher incentive compensation resulting fromincreased sales and gross margins, along with $5.0 million of costsassociated with the elimination of one layer of management and the closing ofeleven redundant or unprofitable locations in ourBuilding Products Group.  As a percentageof net sales, selling, general and administrative expenses decreased from 9.0%in 2003 to 7.3% in 2004.  This percentagedecrease was primarily due to higher average realized sales prices togetherwith fixed costs being spread over a higher volume of net sales.

* *

*Depreciation and amortization.*Depreciation and amortization increased $1.5 million, from $0.5 millionin 2003 to $2.0 million in 2004, due to capital investment in facilitiesand equipment made during the prior twelve months.

 

*Operating income.*Operating incomeincreased by $157.3 million, from $16.4 million in 2003 to $173.7 million in2004.  Thisincrease is due to the improved margins and increased shipments in our FlatRolled and Plates and Shapes Product Groups.

* *

*Interest expense.*Interest expenseincreased $2.7 million, or 47.4%, from $5.7 million in 2003 to $8.4 million in2004, primarily as a result of increasedborrowings, and to a lesser extent higher interest rates, on our revolvingcredit facility to support the increased working capital requirements in 2004.

* *

*Other (income) expense, net.*Other income increased $0.5 million,or 25.0%, from $2.0 million in 2003 to $2.5 million in 2004.  These credits relate to settlements or adjustmentsattributable to the Predecessor Company claims and accruals.

* *

***Results of Operations – Year Ended December 31, 2003 Compared to 2002***

 

*Net sales.*Net salesincreased $1.2 million, or 0.1%, from $962.0 million in 2002 to $963.2 millionin 2003.  Exclusive of the operationsthat were accounted for under SFAS 121 and sold during 2002 (see Note 15 of ourconsolidated financial statements in Item 8, “Financial Statements andSupplementary Data”), net sales increased $32.4 million due to increasedvolumes in the Plates and Shapes and Building Products Groups and increasedaverage realized prices in the Flat Rolled Group.  With respect to the Flat Rolled and Platesand Shapes operations, exclusive of the operations that were sold, the benefitof a 3.3% increase in average realized prices was partially offset by a 0.3%decline in material shipments for steel products.

* *

*Cost of sales*.  Cost of salesdecreased $6.1 million, or 0.8%, from $737.7 million in 2002 to$731.6 million in 2003.  Exclusiveof the operations that were sold during 2002, cost of sales increased$17.4 million due to increased volumes in the Plates and Shapes andBuilding Products Groups.  With respectto the Flat Rolled and Plates and Shapes operations, exclusive of theoperations that were sold, the average cost per ton increased by 2.4%, whichwas partially offset by a 0.3% volume decrease. As a percentage of net sales, cost of sales decreasedfrom 76.7% in 2002 to 76.0% in 2003 as average realized pricesincreased more than costs.

 

27

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*Operating and delivery.* Operating anddelivery expenses decreased $0.7 million, or 0.5%, from $128.4 million in2002 to $127.7 million in 2003. Exclusive of the operations that were sold during 2002, operating anddelivery expenses increased $3.8 million, principally due to increased volumesin the Plates and Shapes and Building Products operations.  As a percentage of net sales, operating anddelivery expenses remained stable at 13.3% for both years.

* *

*Selling, general and administrative*.** **Selling, general and administrative expenses decreased$5.3 million, or 5.7%, from $92.3 million in 2002 to $87.0 million in2003.  Exclusive of the operations thatwere sold during 2002, selling, general and administrative expenses increased$0.6 million, primarily due to increased employee benefit costs.  As a percentage of net sales, selling,general and administrative expenses decreased from 9.6% in 2002 to 9.0% in2003.

* *

*Depreciation and amortization.*Depreciation and amortization decreased $6.8 million or 93.2%, from $7.3million in 2002 to $0.5 million in 2003. This decrease was due to the application of “Fresh-Start Reporting” thatresulted in the reduction in carrying values of all property and equipment tozero as of October 31, 2002, the effective date of our emergence frombankruptcy, offset by depreciation and amortization expense on capitalexpenditures since October 31, 2002.

 

*Operating income (loss). *Operating income increased by $19.9million, or 568.6%, from an operating loss of $3.5 million in 2002 to operatingincome of $16.4 million in 2003.  Theincrease in operating income was primarily attributable to increased margins inthe Plates and Shapes and Building Products operations and the decrease inselling, general and administrative expenses and depreciation and amortizationdiscussed above.  This was somewhatoffset by the sales of certain Plates and Shapes operations that generated anoperating loss of $2.7 million during the twelve months endedDecember 31, 2002.  As apercentage of net sales, operating income increased from (0.4%) in 2002 to 1.7%in 2003.

* *

*Interest expense. *Interest expense decreased $11.4million, or 66.7%, from $17.1 million in 2002 to $5.7 million in 2003.  This decrease was primarily due to decreaseddebt levels and lower interest rates. The decrease in debt was a result of debt forgiveness resulting from ourreorganization and proceeds generated from asset sales of $90.1 million during2002.

* *

*Other (income) expense, net. *Other income increased $1.0 million,or 100.0%, from $1.0 million in 2002 to $2.0 million in 2003.  This increase is primarily due to a credit of$1.6 million recorded in 2003 resulting from the final adjustments forrestructuring expenses.

* *

*Reorganization expenses. ** ***Reorganization expenses in the amount of $28.3 million in 2002 consistedof $18.8 million of professional and trustee fees associated with Chapter 11proceedings, $8.1 million of key employee retention expenses and obligationsassociated with employment agreements and $1.4 million associated with thewrite-off of debt issuance costs incurred on the Predecessor Company’sdebtor-in-possession financing.  The Company has not incurred anyreorganization expenses since the emergence from bankruptcy on October 31, 2002.

 

28

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***Results of Operations – 2002 Successor Company and Predecessor CompanyResults***

 

Thefollowing table presents the results for the Successor Company from November 1,2002 through December 31, 2002, results for the Predecessor Company fromJanuary 1, 2002 through October 31, 2002, and combined results forthe full-year 2002.

 
| ** **                                                     | ** ** | **(in millions)**                  | ** ** |
|----------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                     | ** ** | **Year Ended  December 31,  2002** | ** ** | **Successor  Company** | ** ** | ** ** | **Predecessor  Company** | ** ** |
| ** **                                                     | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                      |       | $                                  | 962.0      |   | $ | 128.7 |   |   | $ | 833.3 |   |
| Cost of sales                                                  |       | 737.7                              |       | 98.7 |   |   | 639.0 |   |
| Gross profit                                                   |       | 224.3                              |       | 30.0 |   |   | 194.3 |   |
| Operating and  delivery                                        |       | 128.4                              |       | 18.3 |   |   | 110.1 |   |
| Selling, general  and administrative                           |       | 92.1                               |       | 12.6 |   |   | 79.5 |   |
| Depreciation and  amortization                                 |       | 7.3                                |       | — |   |   | 7.3 |   |
| Operating income  (loss)                                       |       | (3.5                               | )          | (0.9 | ) |   | (2.6 | ) |
| Interest expense                                               |       | 17.1                               |       | 1.3 |   |   | 15.8 |   |
| Other (income)  expense, net                                   |       | (1.0                               | )          | 0.1 |   |   | (1.1 | ) |
| Fresh-start and  gain on reorganization                        |       | (80.9                              | )          | — |   |   | (80.9 | ) |
| Reorganization  expenses                                       |       | 28.3                               |       | — |   |   | 28.3 |   |
| Income (loss)  before income taxes and discontinued operations |       | $                                  | 33.0       |   | $ | (2.3 | ) |   | $ | 35.3 |   |

 

29

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## **Results of Operations by Segment**

## ** **

Theresults of operations by segment data for 2002 includes the Predecessor Companyresults for the period January 1, 2002 through October 31, 2002 combined withthe Successor Company results for the period November 1, 2002 through December31, 2002.  See the Supplementary tablepresented after the Results of Operations by Segment discussion below for the2002 Successor Company and Predecessor Company results.

 
| ** **          | ** ** | **Fiscal Years Ended December 31,**   | ** ** |
|---------------------|------------|---------------------------------------|------------|
| ** **          | ** ** | **Net  Sales**                        | ** ** | **%** | ** ** | **Operating  Costs and****Expenses** | ** ** | **%** | ** ** | **Operating  Income  (Loss)** | ** ** | **%** | ** ** | **Capital  Expend-  itures** | ** ** | **Shipments  (1)** | ** ** |
| ** **          | ** ** | **(in millions, except percentages)** | ** ** |
| **2004:**           | ** ** | ** **                            | ** ** |
| Plates and Shapes   |       | $                                     | 621.0      | * * | *41.1* | *%* | $ | 517.8 | * * | *38.8* | *%* | $ | 103.2 | * * | *59.4* | *%* | $ | 10.3 |   | 751 |   |
| Flat Rolled         |       | 723.2                                 | * *   | *47.9* | *%* | 641.4 | * * | *48.0* | *%* | 81.8 | * * | *47.0* | *%* | 2.3 |   | 773 |   |
| Building Products   |       | 183.0                                 | * *   | *12.1* | *%* | 175.1 | * * | *13.1* | *%* | 7.9 | * * | *4.5* | *%* | 2.2 |   | — |   |
| Corporate and other |       | (17.4                                 | )          | *(1.1* | *)%* | 1.8 | * * | *0.1* | *%* | (19.2 | ) | *(10.9* | *)%* | 2.6 |   | (22 | ) |
| Total               |       | $                                     | 1,509.8    | * * | *100.0* | *%* | $ | 1,336.1 | * * | *100.0* | *%* | $ | 173.7 | * * | *100.0* | *%* | $ | 17.4 |   | 1,502 |   |
| **2003:**           |       |                                  |       |   | * * |   |   |   | * * |   |   |   | * * |   |   |   |   |
| Plates and Shapes   |       | $                                     | 354.1      | * * | *36.8* | *%* | $ | 342.5 | * * | *36.2* | *%* | $ | 11.6 | * * | *70.7* | *%* | $ | 11.0 |   | 663 |   |
| Flat Rolled         |       | 463.6                                 | * *   | *48.1* | *%* | 455.9 | * * | *48.2* | *%* | 7.7 | * * | *47.0* | *%* | 3.1 |   | 658 |   |
| Building Products   |       | 165.2                                 | * *   | *17.1* | *%* | 152.8 | * * | *16.1* | *%* | 12.4 | * * | *75.6* | *%* | 2.4 |   | — |   |
| Corporate and other |       | (19.7                                 | )          | *(2.0* | *)%* | (4.4 | ) | *(0.5* | *)%* | (15.3 | ) | *(93.3* | *)%* | 1.0 |   | (33 | ) |
| Total               |       | $                                     | 963.2      | * * | *100.0* | *%* | $ | 946.8 | * * | *100.0* | *%* | $ | 16.4 | * * | *100.0* | *%* | $ | 17.5 |   | 1,288 |   |
| **2002:**           |       |                                  |       |   | * * |   |   |   | * * |   |   |   | * * |   |   |   |   |
| Plates and Shapes   |       | $                                     | 365.4      | * * | *38.0* | *%* | $ | 362.6 | * * | *37.6* | *%* | $ | 2.8 | * * | *(80.0* | *)%* | $ | 0.8 |   | 627 |   |
| Flat Rolled         |       | 465.6                                 | * *   | *48.4* | *%* | 459.0 | * * | *47.5* | *%* | 6.6 | * * | *(188.6* | *)%* | 1.3 |   | 717 |   |
| Building Products   |       | 156.1                                 | * *   | *16.2* | *%* | 146.1 | * * | *15.1* | *%* | 10.0 | * * | *(285.7* | *)%* | 1.1 |   | — |   |
| Corporate and other |       | (25.1                                 | )          | *(2.6* | *)%* | (2.2 | ) | *(0.2* | *)%* | (22.9 | ) | *654.3* | *%* | 0.3 |   | (47 | ) |
| Total               |       | $                                     | 962.0      | * * | *100.0* | *%* | $ | 965.5 | * * | *100.0* | *%* | $ | (3.5 | ) | *100.0* | *%* | $ | 3.5 |   | 1,297 |   |
|                     |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**(1)  **Shipments are expressed inthousands of tons and are not an appropriate measure of volume for the BuildingProducts Group.

 

# ***Segment Results***—***YearEnded December 31, 2004 Compared to 2003*

# ** **

*Plates and Shapes*.  Net sales increased$266.9 million, or 75.4%, from $354.1 million in 2003 to $621.0 million in2004.  Thisincrease is primarily due to a 54.7% increase in the average sales price perton and a 13.3% increase in shipments in 2004 compared to 2003.  The increase in average realized sales priceswas primarily due to the industry-wide raw material cost increases fromproducing mills and a higher level of demand from the improved U.S. economy.

*Operating costs and expensesincreased $175.3 million, or 51.2%, from $342.5 million in 2003 to $517.8million in 2004. *This increase was attributable to the highercosts of raw materials and to a lesser extent the increased shipments. Operating costsand expenses as a percentage of net sales decreased from 96.7% in 2003 to 83.4%in 2004.  This percentage decrease was primarily dueto higher average realized sales pricestogether with fixedcosts being spread over a higher volume of net sales.

*Operating income increased by $91.6million, from $11.6 million in 2003 to $103.2 million in 2004. *This increase is primarily attributable to increased shipments andimproved gross margins in 2004.   Operating income as a percentage of net salesincreased from 3.3% in 2003 to 16.6% in 2004.

 

30

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*Flat Rolled.*Net sales increased $259.6 million, or 56.0%, from $463.6 million in 2003 to$723.2 million in 2004.  Thisincrease is primarily due to a 32.7% increase in the average sales price perton and a 17.5% increase in shipments in 2004 compared to 2003.  The increase in average realized sales priceswas primarily due to the industry-wide raw material cost increases fromproducing mills and a higher level of demand from the improved U.S. economy.

Operating costs and expenses increased $185.5 million, or 40.7%, from$455.9 million in 2003 to $641.4 million in 2004.  This increase was attributable to the highercost of raw materials and to a lesser extent from increased shipments.  Operating costs and expenses as a percentageof net sales decreased from 98.3% in 2003 to 88.7% in 2004.  This percentage decrease was primarily due tohigher average realized sales prices together with fixed costs being spreadover a higher volume of net sales.

Operating income increased by $74.1 million, from $7.7 million in 2003to $81.8 million in 2004.  This increaseis primarily attributable to increased shipments and improved gross margins in2004.   Operating income as a****percentage of net sales increased from 1.7% in 2003 to11.3% in 2004.

 

*Building Products.*** **Net sales increased $17.8 million,or 10.8%, from $165.2 million in 2003 to $183.0 million in 2004.  The increase in net sales was principally dueto increased demand for these products, and to a lesser extent price increases.

Operating costs andexpenses increased $22.3 million, or 14.6%, from $152.8 million in 2003 to $175.1 millionin 2004, primarily due to higher sales volume and $5.0 million of costsassociated with the elimination of one layer of management and the closing ofeleven redundant or unprofitable locations. To a lesser extent, increased cost of raw materials and productrealignment initiatives taken by new division management also contributed tothe increase.  Operating costs andexpenses as a percentage of net sales increased from 92.5% in 2003 to 95.7% in2004.

Operating incomedecreased by $4.5 million, or 36.3%, from $12.4 million in 2003 to $7.9 millionin 2004.  This decrease is due toprimarily to $5.0 million of costs associated with the elimination of one layerof management and the closing of eleven redundant or unprofitablelocations.  Operating income as apercentage of net sales decreased from 7.5% in 2003 to 4.3% in 2004.

 

*Corporate and other.* This category reflects certainadministrative costs and expenses that we have not allocated to our industrysegments.  These costs includecompensation for executive officers, insurance, professional fees for audit,tax and legal services and data processing expenses.  The negative net sales amount represents theelimination of intercompany sales.  Theoperating loss increased $3.9 million, from $15.3 million in 2003 to$19.2 million in 2004.  Thisincrease is primarily attributable to increased incentive compensation costsand professional fees associated with our Sarbanes-Oxley complianceinitiatives, offset by lower costs for workers compensation insurance.

 

# ***Segment Results***—***YearEnded December 31, 2003 Compared to 2002*

# ** **

*Plates and Shapes*.  Net sales decreased$11.3 million, or 3.1%, from $365.4 million in 2002 to $354.1 million in2003.  Exclusive of the operations thatwere accounted for under SFAS 121 and sold during 2002 (see Note 15 of ourconsolidated financial statements in Item 8, “Financial Statements andSupplementary Data”), net sales increased $19.9 million primarily due to a 5.8%increase in volumes and, additionally, a 0.2% increase in average realizedsales prices.

*Operating costs and expensesdecreased $20.1 million, or 5.5%, from $362.6 million in 2002 to $342.5 millionin 2003.  Exclusive of the operationsthat were sold during 2002, operating costs and expenses increased $13.8million.  This increase is primarily dueto costs associated with increased volumes and increased employee benefit costswhich were partially offset by a decrease in depreciation expenses as a resultof the application of “Fresh-StartReporting” during 2002, discussed above.*

 

31

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Operating costs and expenses as a percentage of net sales decreasedfrom 99.2% in 2002 to 96.7% in 2003.

*Operating income increased by $8.8million, or 314.3%, from $2.8 million in 2002 to $11.6 million in 2003.  Exclusive of the operations that were soldduring 2002, operating income increased $6.1 million, primarily due toincreased material shipments.  Operatingincome as a percentage of net sales increased from 0.8% in 2002 to 3.3% in2003.*

* *

*Flat Rolled.*Net sales decreased $2.0 million, or 0.4%, from $465.6 million in 2002 to$463.6 million in 2003.  Thisdecrease is primarily due to a 7.5% decline in volume somewhat offset by a 7.7%increase in average realized prices in 2003 compared to 2002.

Operating costs and expenses decreased $3.1 million, or 0.7%, from$459.0 million in 2002 to $455.9 million in 2003.  This decrease was attributable to lowershipments and a decrease indepreciation expenses as a result of the application of “Fresh-Start Reporting”discussed above, during 2002, partially offset by increased employee benefitcosts.  Operating costs andexpenses as a percentage of net sales decreased slightly from 98.6% in 2002 to98.3% in 2003, primarily due to a decline in shipments.

Operating income increased by $1.1 million, or 16.7%, from $6.6 millionin 2002 to $7.7 million in 2003.  Thisincrease is primarily due to decreased costs associated with lower volumes andthe decrease in depreciation expensesdiscussed above.  Operating incomeas a****percentage of net sales increasedslightly from 1.4% in 2002 to 1.7% in 2003.

 

*Building Products.*** **Net sales increased $9.1 million,or 5.8%, from $156.1 million in 2002 to $165.2 million in 2003.  The increase in net sales was principally dueto increased demand for these products.

Operating costs andexpenses increased $6.7 million, or 4.6%, from $146.1 million in 2002 to$152.8 million in 2003.  Thisincrease was due to costs associated with increased volumes and increasedmarketing, insurance and employee benefit expenses partially offset by a decrease in depreciation expenses as aresult of the application of “Fresh-Start Reporting” discussed above.  Operating costs and expenses as a percentageof net sales decreased from 93.6% in 2002 to 92.5% in 2003.

Operating incomeincreased by $2.4 million, or 24.0%, from $10.0 million in 2002 to $12.4million in 2003.  Operating income as apercentage of net sales increased from 6.4% in 2002 to 7.5% in 2003 primarilydue to increased sales of higher margin products.

 

*Corporate and other.* This category reflects certain administrative costs and expenses that wehave not allocated to our industry segments as well as asset impairmentcharges.  These costs include compensationfor executive officers, insurance, professional fees for audit, tax and legalservices and data processing expenses. The negative net sales amount represents the elimination of intercompanysales.  The operating loss decreased $7.6million, from $22.9 million in 2002 to $15.3 million in 2003.  This decrease was primarily attributable to adecrease in the medical and property and casualty insurance costs, the majorityof which have been allocated to the product groups in 2003.  Additionally, the reduction in costs includesdecreased depreciation and asset impairment expenses.

 

32

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***Results of Operations by Segment – 2002 Successor Company andPredecessor Company Results***

 

Thefollowing table presents the full-year 2002 combined results (PredecessorCompany and Successor Company) by segment, the results for the SuccessorCompany from November 1, 2002 through December 31, 2002, and theresults for the Predecessor Company from January 1, 2002 throughOctober 31, 2002.

 
| ** **               | ** ** | **Net  Sales**                         | ** ** | **%**      | ** **   | **Operating  Costs and  Expenses** | ** ** | **%**      | ** **   | **Operating  Income  (Loss)** | ** ** | **%**      | ** **   | **Capital  Expend-  itures** | ** ** | **Shipments  (1)** | ** ** |
|--------------------------|------------|----------------------------------------|------------|------------|--------------|------------------------------------|------------|------------|--------------|-------------------------------|------------|------------|--------------|------------------------------|------------|--------------------|------------|
| ** **               | ** ** | **(in millions, except  percentages)** | ** ** | ** ** |
| **Year Ended 2002:**     | ** ** | ** **                             | ** ** | ** ** | ** **   | ** **                         | ** ** | ** ** | ** **   | ** **                    | ** ** | ** ** | ** **   | ** **                   | ** ** | ** **         | ** ** |
| Plates and Shapes        |       | $                                      | 365.4      | * *   | *38.0*       | *%*                                | $          | 362.6      | * *     | *37.6*                        | *%*        | $          | 2.8          | * *                     | *(80.0*    | *)%*               | $          | 0.8 |   | 627 |   |
| Flat Rolled              |       | 465.6                                  | * *   | *48.4*     | *%*          | 459.0                              | * *   | *47.5*     | *%*          | 6.6                           | * *   | *(188.6*   | *)%*         | 1.3                          |       | 717                |       |
| Building Products        |       | 156.1                                  | * *   | *16.2*     | *%*          | 146.1                              | * *   | *15.1*     | *%*          | 10.0                          | * *   | *(285.7*   | *)%*         | 1.1                          |       | —             |       |
| Corporate and other      |       | (25.1                                  | )          | *(2.6*     | *)%*         | (2.2                               | )          | *(0.2*     | *)%*         | (22.9                         | )          | *654.3*    | *%*          | 0.3                          |       | (47                | )          |
| Total                    |       | $                                      | 962.0      | * *   | *100.0*      | *%*                                | $          | 965.5      | * *     | *100.0*                       | *%*        | $          | (3.5         | )                            | *100.0*    | *%*                | $          | 3.5 |   | 1,297 |   |
|                     |       |                                   |       |       | * *     |                               |       |       | * *     |                          |       |       | * *     |                         |       |               |       |
| **Successor Company:**   |       |                                   |       |       | * *     |                               |       |       | * *     |                          |       |       | * *     |                         |       |               |       |
| Plates and Shapes        |       | $                                      | 49.1       | * *   | *38.2*       | *%*                                | $          | 47.8       | * *     | *36.9*                        | *%*        | $          | 1.3          | * *                     | *(144.5*   | *)%*               | $          | 0.2 |   | 87 |   |
| Flat Rolled              |       | 61.5                                   | * *   | *47.8*     | *%*          | 60.3                               | * *   | *46.5*     | *%*          | 1.2                           | * *   | *(133.3*   | *)%*         | 0.1                          |       | 90                 |       |
| Building Products        |       | 21.2                                   | * *   | *16.4*     | *%*          | 21.8                               | * *   | *16.8*     | *%*          | (0.6                          | )          | *66.7*     | *%*          | 0.2                          |       | —             |       |
| Corporate and other      |       | (3.1                                   | )          | *(2.4*     | *)%*         | (0.3                               | )          | *(0.2*     | *)%*         | (2.8                          | )          | *311.1*    | *%*          | —                       |       | (6                 | )          |
| Total                    |       | $                                      | 128.7      | * *   | *100.0*      | *%*                                | $          | 129.6      | * *     | *100.0*                       | *%*        | $          | (0.9         | )                            | *100.0*    | *%*                | $          | 0.5 |   | 171 |   |
| * *                 | * *   | * *                               | * *   | * *   | * *     | * *                           | * *   | * *   | * *     | * *                      | * *   | * *   | * *     | * *                     | * *   | * *           | * *   |
| * *                 | * *   | * *                               | * *   | * *   | * *     | * *                           | * *   | * *   | * *     | * *                      | * *   | * *   | * *     | * *                     | * *   | * *           | * *   |
| **Predecessor Company:** | ** ** | ** **                             | ** ** | ** ** | *** *** | ** **                         | ** ** | ** ** | *** *** | ** **                    | ** ** | ** ** | *** *** | ** **                   | ** ** | ** **         | ** ** |
| Plates and Shapes        |       | $                                      | 316.3      | * *   | *38.0*       | *%*                                | $          | 314.8      | * *     | *37.7*                        | *%*        | $          | 1.5          | * *                     | *(57.7*    | *)%*               | $          | 0.6 |   | 540 |   |
| Flat Rolled              |       | 404.1                                  | * *   | *48.4*     | *%*          | 398.7                              | * *   | *47.6*     | *%*          | 5.4                           | * *   | *(207.8*   | *)%*         | 1.2                          |       | 627                |       |
| Building Products        |       | 134.9                                  | * *   | *16.2*     | *%*          | 124.3                              | * *   | *14.9*     | *%*          | 10.6                          | * *   | *(407.6*   | *)%*         | 0.9                          |       | —             |       |
| Corporate and other      |       | (22.0                                  | )          | *(2.6*     | *)%*         | (1.9                               | )          | *(0.2*     | *)%*         | (20.1                         | )          | *773.1*    | *%*          | 0.3                          |       | (41                | )          |
| Total                    |       | $                                      | 833.3      | * *   | *100.0*      | *%*                                | $          | 835.9      | * *     | *100.0*                       | *%*        | $          | (2.6         | )                            | *100.0*    | *%*                | $          | 3.0 |   | 1,126 |   |
|                          |            |                                        |            |            |              |                                    |            |            |              |                               |            |            |              |                              |            |                    |            |  |  |  |  |  |

** **

----

**(1) **Shipments are expressed inthousands of tons and are not an appropriate measure of volume for the BuildingProducts Group.

 

**Liquidityand Capital Resources**

 

Ourprimary sources of liquidity are borrowings under our revolving credit facilityand our cash flow from operations.  AtDecember 31, 2004, our borrowing availability was $72.9 million and we hadavailable cash of $12.6 million. Further, our debt as a percentage of total capitalization (debt plusstockholders equity) was 45.2% at December 31, 2004, compared to 37.2% atDecember 31, 2003.  Our borrowing availability fluctuates daily withchanges in eligible accounts receivables and inventory, less outstandingborrowings and letters of credit.  Weamended our revolving credit facility to increase the maximum allowedborrowings and to extend the maturity date to November 9, 2009.  See Financing Activities below.  At March 1, 2005, we had $265.8 million drawnand borrowing availability of $60.4 million.

 

Althoughwe do not produce any metal, our financial performance is affected by changesin metal prices.  When metal prices rise,the prices at which we are able to sell our products generally increase overtheir historical costs; accordingly, our gross profit and our working capital(which consists primarily of accounts receivable and inventory) tend toincrease in a rising price environment. For example, our working capital (current assets less currentliabilities) increased from $303.4 million at December 31, 2003 to $565.0million at December 31, 2004.  Inaddition, over the same period our accounts receivable

 

33

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increased by $48.5 million, inventory increased by $222.9 million andaccounts payable increased by $15.1 million. These increases are primarily attributable to the rise in metal pricesduring 2004, as our collection rate for receivables improved and turn rate forinventory decreased somewhat from our normal levels.  The increase in inventory quantities at yearend was intentional as we expect metal prices to increase in 2005.  Conversely, when metal prices fall, our grossprofit and working capital tend to decrease.

 

Changes in metal pricesalso affect our liquidity because of the time difference between our paymentfor our raw materials and our collection of cash from our customers.  In a rising price environment, we sell ourproducts and typically collect our accounts receivable within 45 days after thesale; however, we tend to pay for replacement materials  (which are more expensive when metal pricesare rising) over a much shorter period, in part to benefit from early-paymentdiscounts.  As a result, when metalprices are rising, we tend to draw more on our revolving credit facility tocover the cash flow cycle from material purchase to cash collection.  This cash requirement for inventories ishigher in periods when we are increasing inventory quantities as we did at theend of 2004. Accordingly, from December 31, 2003 to December 31, 2004, ourlong-term debt increased by $148.4 million. We will begin to reduce inventory quantities when we believe metalprices are beginning to stabilize.  Whenmetal prices fall, we can replace our inventory at lower cost and, thus,generally do not need to access our revolving credit facility as much to coverthe cash flow cycle.  We believe our cashflow from operations, supplemented with the cash available under our revolvingcredit facility, will provide sufficient liquidity to meet the challenges andobligations we face during the current metal price environment.

 

Thefollowing discussion of the principal sources and uses of cash should be readin conjunction with our Consolidated Statements of Cash Flows which are setforth under Item 8 - “Financial Statements and Supplementary Data.”  During the year ended December 31, 2004, netcash used in operating activities was $128.6 million.  While we had operating income of $173.7million in 2004, $275.4 million of cash was used to fund inventory and accountsreceivable requirements in concert with rising steel prices during theyear.  During the year ended December 31,2003, net cash provided by operating activities was $26.9 million, which wasprimarily due to a continued contraction of our working capital requirements.

 

Netcash used by investing activities for the year ended December 31, 2004 was$16.0 million and consisted of the purchase of assets of $17.4 million,partially offset by the sales of assets of $1.4 million.  Net cash used by investing activities for theyear ended December 31, 2003 was $11.8 million and consisted of the purchase ofassets of $17.5 million, partially offset by the sales of assets of $5.7million.

 

Net cashprovided by financing activities was $145.8 million for year ended December 31,2004 and consisted primarily of net borrowings on the revolving credit facility.Net cash used in financing activities for the year ended December 31, 2003 was$10.0 million, consisting primarily of repayments of debt.

 

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***FinancingActivities***

 

On March 24, 2004, we amended our revolving creditfacility to expand the size of the facility from $200.0 million to $250.0million and to extend the maturity date to October 31, 2006.  On November 9, 2004, we again amended our revolvingcredit facility to expand thesize of the facility from $250.0 million to $350.0 million.  This amendment also lowered our borrowingcosts, increased our borrowing availability and extended the maturity date toNovember 9, 2009.  Our revolvingcredit facility is secured by all of our receivables, inventories, and intangibleproperty.  Borrowings under that facilityare subject to a borrowing base limitation, under which the maximum principalamount outstanding under that facility cannot exceed the sum of 60% of eligibleinventory (up to a maximum of 175% ofeligible accounts receivable) plus 85% of eligible accounts receivable.

 

Our revolving creditfacility bears interest at the bank’s base rate or LIBOR, at our option, plusan applicable margin based on a ratio of earnings before interest, taxes,depreciation and amortization (“EBITDA” as defined and adjusted) to cashinterest expense (the “fixed charge coverage ratio”).  The fixed charge coverage ratio is determinedby dividing EBITDA by the sum of net capital expenditures, income taxes paid incash, dividends, or other preference payments, interest expense paid in cashand scheduled principal reductions on debt. The applicable margin for base rate loans ranges from 0.00% to0.50%.  The November amendment loweredthe LIBOR margins from a range between 2.00% and 3.00% to a range between 1.50%and 2.50%.  These marginal rates varywith our financial performance as measured by the fixed charge coverageratio.  Additionally, that amendment providesfor a further reduction in the marginal LIBOR rates of 0.25% if we maintain atrailing twelve month EBITDA of at least $100.0 million and maintain a fixedcharge coverage ratio of at least 2.0 to 1. A commitment fee is payable on any unused portion of the revolvingcredit facility.  The commitment feevaries between 0.250% and 0.375% per annum, based on the fixed charge coverageratio.  The applicable base rate and theeffective LIBOR rate were 5.25% and 3.81% as of December 31, 2004.

 

Our revolving creditfacility requires us to comply with various affirmative, negative and subjectivecovenants, the most significant of which are: (i) the maintenance of aborrowing base availability, or, if the required borrowing base availability isnot maintained, the maintenance of the fixed charge coverage ratio, (ii)restrictions on additional indebtedness, (iii) restrictions on liens,guarantees and quarterly dividends, and (iv) obtaining the lenders’ consentwith respect to certain individual acquisitions.  The third amendment to the revolving creditfacility allows for an increase in capital expenditures, from $25.0 million to$35.0 million.  Additionally, itincreased the allowance for restricted payments from $10.0 million to $25.0million and for the payment of up to $2.2 million of dividends in any fiscal quarter provided thatborrowing base availability is greater than $40.0 million.  As long as ouravailability is $35.0 million orgreater, we do not have to maintain a minimum fixed charge coverage ratio.  Should availability fall below $35.0 million, we must maintain a fixedcharge coverage ratio of 1.0 to 1.0.  Wewere in compliance with all of the covenants as of December 31, 2004 and March1, 2005.

 

 From January 2002 until October 31, 2002, thePredecessor Company was party to a debtor-in-possession financing arrangement,or DIP financing, with Bank of America and PNC Bank, consisting of revolvingloans, letters of credit and credit support. This financing arrangement was used during the reorganizationperiod.  On October 31, 2002, we enteredinto a revolving credit facility with a group of lenders, using the initialproceeds from that facility to retire the Predecessor Company’sdebtor-in-possession financing.

 

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***Off-Balance Sheet Arrangements***

 

Wewere not engaged in off-balance sheet arrangements through any unconsolidated,limited purpose entities and no material guarantees of debt or othercommitments to third parties existed at December 31, 2004.

 

***Contractual Obligations***

 

Weenter into operating leases for many of our facility, vehicle and equipmentneeds.  These leases allow us to conservecash by paying a monthly lease rental fee for the use of rather than purchasingfacilities, vehicles and equipment.  Atthe end of the lease, we have no further obligation to the lessor.  Our future contractual obligations includethe following:

 
| ** **                        | ** ** | **For the Fiscal Years Ended December 31,** | ** ** |
|-----------------------------------|------------|---------------------------------------------|------------|
| ** **                        | ** ** | **Total**                                   | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Beyond** | ** ** |
| ** **                        | ** ** | **(in millions)**                           | ** ** |
| Credit Facility                   |       | $                                           | 253.0      |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 253.0 |   | $ | — |   |
| Purchase Orders                   |       | 260.0                                       |       | 260.0 |   | — |   | — |   | — |   | — |   | — |   |
| Mortgage Note                     |       | 6.7                                         |       | 0.3 |   | 0.4 |   | 6.0 |   | — |   | — |   | — |   |
| Letters of  credit supporting IRB |       | 5.7                                         |       | — |   | — |   | — |   | — |   | — |   | 5.7 |   |
| Other  obligations                |       | 5.2                                         |       | 3.7 |   | 0.6 |   | 0.5 |   | 0.1 |   | 0.1 |   | 0.2 |   |
| Operating lease  obligations      |       | 89.5                                        |       | 14.5 |   | 13.2 |   | 11.6 |   | 10.1 |   | 9.2 |   | 30.9 |   |
| Total                             |       | $                                           | 620.1      |   | $ | 278.5 |   | $ | 14.2 |   | $ | 18.1 |   | $ | 10.2 |   | $ | 262.3 |   | $ | 36.8 |   |

 

Wehave varying amounts of open purchase orders that are subject torenegotiation/cancellation by either party as to quantity or price.  Generally, the amounts outstanding relate todelivery periods of up to twelve weeks from date of purchase order.

 

Paymentsof interest associated with our debt obligations have been omitted from thetable above because they are predominantly based on varying market interestrates.  See Note 5 of our consolidatedfinancial statements in Item 8, “Financial Statements and Supplementary Data”,for detailed information about interest rates applicable to our debtobligations.

 

**New Accounting Pronouncements**

 

In November 2004, theFinancial Accounting Standards Board issued Statement of Financial AccountingStandards No. 151 (“SFAS 151”), *“Inventory Costs - Anamendment of ARB No. 43, Chapter 4”,* which requires that abnormalamounts of idle facility expense, freight, handling costs and spoilage shouldbe expensed as incurred and not included in overhead, and that allocation offixed production overheads to conversion costs should be based on normalcapacity of the production facilities.  Theprovisions in Statement 151 are effective for inventory costs incurred duringfiscal years beginning after June 15, 2005. We do not believe that the adoption of SFAS 151 will have a significantimpact on our financial statements.

 

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InDecember 2004, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 123-Revised 2004 (“SFAS 123(R)”), *“Share-Based Payment.” *Thisis a revision of SFAS No. 123, “*Accounting for Stock-BasedCompensation*” andsupersedes APB No. 25, “*Accounting for StockIssued to Employees.”* Asnoted in the notes to the financial statements, we do not record compensationexpense for stock-based compensation. Under SFAS 123(R), wewill be required to measure the cost of employee services received in exchangefor stock based on the grant-date fair value (with limited exceptions).  That cost will be recognized over the periodduring which an employee is required to provide service in exchange for the award(usually the vesting period).  The fairvalue will be estimated using an option-pricing model.  Excess tax benefits, as defined in SFAS 123,will be recognized as an addition to paid-in-capital.  This is effective as of the beginning of thefirst interim or annual reporting period that begins after June 15, 2005.  The pro forma table in Note 8 of the Notes tothe Consolidated Financial Statements illustrates the effect on net income andearnings per share if we had applied the fair value recognition provisions ofSFAS 123.  We do not believe that theadoption of SFAS 123(R) will have a significant impact on our financialstatements.

 

**Predecessor Company Chapter 11 Proceedings and Reorganization**

 

The steel industrydeclined substantially during 2000 and 2001 as a result of downward pricing pressurefrom foreign imports and an economic recession experienced in the U.S.  These factors, combined with a high level ofdebt, caused the Predecessor Company to seek protection under U.S. bankruptcylaws on November 14, 2001, when itvoluntarily filed for relief under Chapter 11 of the U.S. Bankruptcy Code, inU.S. Bankruptcy Court, Southern District of Texas and began operating asdebtors-in-possession.  Asdebtors-in-possession, the Predecessor Company maintained possession of, and continued to operate, the properties andassets.  The Predecessor Company was authorized to manage the properties andoperate the businesses in the ordinary course, but was not authorized to engagein transactions outside the ordinary course of business without the approval ofthe Bankruptcy Court.

 

The need to seek relief under the Bankruptcy Code was due primarily to(1) a reduction in cash flows resulting from an industry-wide recession causedby pricing pressure from foreign imports and decline in the manufacturingsector of the U.S. economy, (2) the inability to obtain additional liquidityfrom the then existing primary lending sources and (3) the high level ofindebtedness related to acquisitions made prior to 2000.  During 2000, the U.S. steel industry beganexperiencing significant declines in prices for steel products resulting froman influx of foreign imports.  During2001, the U.S economy in general and the manufacturing sector in particularmoved into a recession that was further exacerbated by the terrorist attack ofSeptember 11, 2001.  Due to thesedeteriorating economic conditions, the Predecessor Company incurred significantoperating losses through 2002.

 

In June 2002, the Predecessor Company reached an agreement with theofficial committee of unsecured creditors, or creditors committee, on the termsof the reorganization plan, subject to definitive documentation and obtainingthe required approvals and exit financing. The reorganization plan was filed with the bankruptcy court in August2002.  The court held a hearing inSeptember 2002 and determined that the disclosure statement contained adequateinformation to be used for distribution and the solicitation of vote from theimpaired claim holders.  After receivinga majority of votes from the claim holders, both in number and amount, thereorganization plan was confirmed by the bankruptcy court on October 18, 2002and we were permitted to consummate the transactions described in thereorganization plan and emerge from bankruptcy on October 31, 2002.

 

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As part of thereorganization plan, the Predecessor Company divested 11 business units toraise proceeds to reduce indebtedness and improve liquidity.  These divestitures, along with previouslyannounced divestitures, generated proceeds of approximately $90.1 millionduring 2002.

 

Under the terms of the reorganization plan, unsecured creditorsreceived 20,000,000 shares of our new common stock to discharge and in exchangefor all unsecured debt of the Predecessor Company.  The financial advisor to the creditorscommittee was issued 154,710 shares of new common stock in accordance withtheir engagement agreement as partial payment for their services.  All of the Predecessor Company’s previouslyoutstanding common stock was extinguished, and holders of the extinguishedcommon stock received Warrants to purchase an aggregate of 3,556,713 shares ofour new common stock (then representing 15% of our then outstanding CommonStock on a fully diluted basis).  TheWarrants have an exercise price of $18.50, an amount calculated at fullrecovery for all unsecured creditors based upon the total of unsecured claims,and expire on October 31, 2007.

 

We have the right to accelerate the dateof expiration of the Warrants to any date between April 1, 2003 and October 31,2007, if either (i) the quoted price of the Common Stock has been at least$27.75 on at least 20 of 30 successive trading days in a period ending not morethan 15 days prior to the date notice of such acceleration is given, (ii) amerger or sale of substantially all of the Company’s assets has occurred or,(iii) less than 355,671 of the Warrants remain outstanding on the date thenotice of acceleration is given.

 

Because all stock options that had been issued under the PredecessorCompany’s then existing stock option plans were cancelled, the reorganizationplan also established our 2002 Incentive Plan for employees, to be administeredby our board of directors.  Up to2,015,000 shares of common stock are reserved for issuance under our 2002Incentive Plan.  As of March 1, 2005, atotal of 1,254,777 of such shares have been issued.

 

**Additionally,pursuant to the reorganization plan, as we emerged from bankruptcy, thePredecessor Company board of directors, as well as the chief executive officerand certain other executive officers of the Predecessor Company, resigned.  The Predecessor Company board of directors wasreplaced with new members appointed by the creditors committee, and the newboard appointed two of its members, Daniel W. Dienst and Eugene I. Davis, toassume the duties of the president and chief executive officer until areplacement was selected.**

** **

**InJanuary 2003, Terry L. Freeman was promoted to Chief Financial Officer and JohnA. Hageman was promoted to Chief Administrative Officer, and, in February 2003,the board of directors appointed C. Lourenço Gonçalves as our Presidentand Chief Executive Officer.  Mr.Gonçalves was also appointed to our board of directors.**

** **

Wewere required to adopt “Fresh-Start Reporting” as specified by the AmericanInstitute of Certified Public Accountant’s, or AICPA, Statement of Position90-7, or SOP 90-7, “*Financial Reporting byEntities in Reorganization Under the Bankruptcy Code”*.  “Fresh-Start Reporting” is required upon asubstantive change in control and required that, on the date we emerged frombankruptcy, that we allocate our reorganization value to our assets andliabilities in relation to their fair values. Accordingly, the carrying valuesof our assets and liabilities as of December 31, 2003 differ from the amountsshown for periods prior to November 1, 2002 of the Predecessor Company.  The principal differences relate to theexchange of shares of new common stock for pre-petition liabilities subject tocompromise, issuance of warrants in exchange for the extinguished old commonstock, adjustments to reflect the fresh-start impact on the carrying value ofcertain non-current assets and elimination of the retained deficit.

 

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The Predecessor Company’sconsolidated financial statements for periods and dates prior to emergence frombankruptcy were prepared in accordance with SOP 90-7.  SOP 90-7 required, among other things, that thePredecessor Company (1) identify and segregate transactions that are directlyassociated with the bankruptcy proceedings from those events that occur duringthe normal course of business, (2) identify and segregate pre-petitionliabilities subject to compromise from those that are not subject to compromiseor are post-petition liabilities and (3) due to the change of control set forthin the Reorganization Plan, the Successor Company apply “Fresh-Start Reporting”rules upon emerging from bankruptcy.

 

Upon emerging from bankruptcy, we also entered into a revolving creditfacility with a group of lenders.  Ourrevolving credit facility had an initial term of three years with an option toextend the agreement by two one-year terms. We initially used borrowings under this facility to retire the PredecessorCompany’s debtor-in-possession financing. This revolving credit facility was amended November 9, 2004.  See “– Liquidity and Capital Resources –Financing Activities.”

 

**Item 7a.  *Quantitative andQualitative Disclosures About Market Risk***

 

Inthe normal course of business, we are exposed to market risk, primarily fromchanges in interest rates and the cost of metal we hold in inventory.  We continually monitor exposure to marketrisk and develop appropriate strategies to manage this risk.  With respect to our metal purchases, there isno recognized market to purchase derivative financial instruments to reduce theinventory exposure risks.  See “Liquidityand Capital Resources” in Item 7 for a discussion of market risk relative tosteel prices.

 

***Interest Rate Exposure***

 

Ourexposure to market risk for changes in interest rates relates primarily to ourrevolving credit facility.  The revolvingcredit facility was subject to variable interest rates as of December 31, 2004and 2003.  Accordingly, we are subject tointerest rate risks on the revolving credit facility.  Outstanding borrowings under the revolvingcredit facility were $253.0 million as of December 31, 2004.  Assuming a 1% change in the interest rate onthe revolving credit facility, our annual interest expense would increase by$2.5 million.

 

**Item 8.    *Financial Statements andSupplementary Data***

 

The consolidatedfinancial statements of our Company are set forth at pages F-1 through F-24inclusive, found at the end of this report, as set forth in the index theretoincluded under Item 15. “Exhibits and Financial Statement Schedules,”and are incorporated herein by reference.

 

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Selectedunaudited quarterly financial information for the years ended December 31,2004, and 2003 is as follows:

 
| ** **                             | ** ** | **Three Months Ended**                       | ** ** |
|----------------------------------------|------------|----------------------------------------------|------------|
| ** **                             | ** ** | **March 31**                                 | ** ** | **June 30** | ** ** | **Sept 30** | ** ** | **Dec 31** | ** ** |
| ** **                             | ** ** | **(in millions, except per share  amounts)** | ** ** |
|                                   |       |                                         |       |   |   |   |   |   |   |
| **2004:**                              |       |                                         |       |   |   |   |   |   |   |
| Net sales                              |       | $                                            | 319.2      |   | $ | 383.6 |   | $ | 412.6 |   | $ | 394.4 |   |
| Gross profit                           |       | 93.9                                         |       | 119.3 |   | 117.5 |   | 99.0 |   |
| Operating income (loss)                |       | 31.7                                         |       | 56.5 |   | 52.6 |   | 32.9 |   |
| Net income (loss)                      |       | 18.5                                         |       | 33.7 |   | 31.8 |   | 20.5 |   |
| Income (loss) per share – basic   |       | 0.92                                         |       | 1.67 |   | 1.57 |   | 1.01 |   |
| Income (loss) per share – diluted |       | 0.91                                         |       | 1.63 |   | 1.53 |   | 0.99 |   |
|                                   |       |                                         |       |   |   |   |   |   |   |
| **2003:**                              |       |                                         |       |   |   |   |   |   |   |
| Net sales                              |       | $                                            | 226.3      |   | $ | 242.3 |   | $ | 245.1 |   | $ | 249.5 |   |
| Gross profit                           |       | 52.6                                         |       | 58.8 |   | 60.3 |   | 59.9 |   |
| Operating income (loss)                |       | 1.5                                          |       | 5.0 |   | 5.9 |   | 4.0 |   |
| Net income (loss)                      |       | (0.2                                         | )          | 2.3 |   | 2.8 |   | 2.6 |   |
| Income (loss) per share – basic   |       | (0.01                                        | )          | 0.11 |   | 0.14 |   | 0.13 |   |
| Income (loss) per share – diluted |       | (0.01                                        | )          | 0.11 |   | 0.14 |   | 0.13 |   |

 

**Item 9.    *Changes in andDisagreements with Accountants on Accounting and Financial Disclosure***

 

None.

 

**Item 9A.*Controls and Procedures***

 

*Disclosure Controls and Procedures*

     We maintain disclosurecontrols and procedures, which are designed to ensure that information requiredto be disclosed in the reports we file or submit under the Securities ExchangeAct of 1934, as amended, is recorded, processed, summarized and reported withintime periods specified in the Securities and Exchange Commission’s rules andforms, and that such information is accumulated and communicated to ourmanagement, including our chief executive officer, or CEO, and chief financialofficer, or CFO, as appropriate to allow timely decisions regarding requireddisclosure. 

     Under the supervisionand with the participation of the Company’s management, including our CEO andCFO, an evaluation was performed on the effectiveness of the design andoperation of our disclosure controls and procedures as of the end of the periodcovered by this annual report. Based on that evaluation, our management,including our CEO and CFO, concluded that our disclosure controls andprocedures were effective as of December 31, 2004. 

     An evaluation was alsoperformed under the supervision and with the participation of our management,including our CEO and CFO, of any change in our internal controls overfinancial reporting that occurred during our last fiscal quarter and that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrols over financial reporting. That evaluation did not identify any changein our internal controls over financial reporting that occurred during ourlatest fiscal quarter and that has materially affected, or is reasonably likelyto materially affect, our internal controls over financial reporting. 

 

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*Management’s Report on InternalControl Over Financial Reporting*

     Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as this term is defined in Exchange ActRules 13a-15(f). All internal control systems, no matter how welldesigned, have inherent limitations. Therefore, even those systems determinedto be effective can provide only reasonable assurance with respect to financialstatement preparation and presentation. 

     Under the supervisionand with the participation of our management, including our CEO and CFO, weconducted an evaluation of the effectiveness of our internal control overfinancial reporting based on the framework in Internal Control – IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission. Based on our evaluation under the framework in *Internal Control – Integrated Framework*, ourmanagement concluded that our internal control over financial reporting waseffective as of December 31, 2004. 

     Our management’sassessment of the effectiveness of our internal control over financialreporting as of December 31, 2004 has been audited by Deloitte & Touche,LLP, an independent registered public accounting firm, as stated in theirreport which is included herein. 

 

**Item 9B.  *OtherInformation.***

 

None.

 

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

 

To the Board of Directorsand Stockholders of

Metals USA, Inc.

Houston, Texas

 

We have audited management’sassessment, included in the accompanying Management’s Report on InternalControl Over Financial Reporting, that Metals USA, Inc. and subsidiaries (the“Company”) maintained effective internal control over financial reporting as ofDecember 31, 2004, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO).  Company’s managementis responsible for maintaining effective internal control over financialreporting and for its assessment of the effectiveness of internal control overfinancial reporting. Our responsibility is to express an opinion onmanagement’s assessment and an opinion on the effectiveness of the Company’sinternal control over financial reporting based on our audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinions.

 

A company’s internal controlover financial reporting is a process designed by, or under the supervision of,the company’s principal executive and principal financial officers, or personsperforming similar functions, and effected by the company’s board of directors,management, and other personnel to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprincipals.  A company’s internal controlover financial reporting includes those policies and procedures that (1)pertain to the maintenance of records that, in reasonable detail, accurately andfairly reflect the transactions and dispositions of the assets of the company;(2) provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

 

Because of the inherentlimitations of internal control over financial reporting, including thepossibility of collusion or improper management override of controls, materialmisstatements due to error or fraud may not be prevented or detected on atimely basis.  Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

 

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In our opinion, management’sassessment that the Company maintained effective internal control overfinancial reporting as of December 31, 2004, is fairly stated, in all materialrespects, based on criteria established in*Internal Control—Integrated Framework*issued by the Committee ofSponsoring Organizations of the Treadway Commission . Also in our opinion, theCompany maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2004, based on criteria establishedin *Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements as of and for the yearended December 31, 2004 of Metals USA, Inc. and our report dated February18, 2005 expressed an unqualified opinion on those financial statements.

 

DELOITTE & TOUCHELLP

 

Houston, Texas

April 28, 2005

 

 

**PART  III**

 

Information requiredunder Part III (Items 10, 11, 12, 13 and 14) has been omitted from thisreport.  The Company intends to file withthe Securities and Exchange Commission, not later than 120 days after the closeof the fiscal year, a definitive proxy statement pursuant to Regulation 14A whichinvolves the election of directors, which information in such proxy statementis incorporated herein by reference.  TheCompany’s Code of Conduct is attached as Exhibit 14.

 

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**PART  IV**

 

**Item 15. *Exhibits and FinancialStatement Schedules***

 

**(a)****          (1)Financial Statements:**

 
| Report  of Independent Registered Public Accounting Firm        |   |
|-----------------------------------------------------------------|--------|
| Consolidated Balance  Sheets                                    |   |
| Consolidated  Statements of Operations                          |   |
| Consolidated  Statements of Stockholders’ Equity (Deficit) |   |
| Consolidated  Statements of Cash Flows                          |   |
| Notes to  Consolidated Financial Statements                     |   |

 

**(2)  Financial StatementSchedules:**

 

All schedules have beenomitted since the required information is not significant or is included in theconsolidated financial statements or notes thereto or is not applicable.

 

**(b)****          Exhibits**

 

Reference is made to the Indexof Exhibits immediately preceding the exhibits hereto (beginning on page 43),which index is incorporated herein by reference.

 

 

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15 (d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized April 28, 2005.

 
|   | METALS  USA, INC. |
|--------|-------------------|
|   |              |
|   | By:               |   | /S/ C. LOURENCO GONCALVES |
|   |              |   | C. Lourenço Gonçalves, Chief |
|   |              | Executive  Officer and President |

 

 

 

 

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**INDEX OF EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                     |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                 |       | Plan  of Reorganization under Chapter 11 of the Bankruptcy Code for Metals USA,  Inc. and its Affiliate Debtors as included in the Disclosure Statement  Pursuant to Section 1125 of the Bankruptcy Code thereto dated September 18,  2002, incorporated herein by reference to Exhibit 99.1 to the Company’s  Current Report on Form 8-K (File No. 1-13123) filed with the Commission on  September 19, 2002. |
| 3.1                 |       | Amended  and Restated Certificate of Incorporation of Metals USA, Inc. (the  “Company”), incorporated by reference to Exhibit 4.1 to the Company’s Annual  Report on Form 10-Q (File No. 1-13123), filed with the Commission on  November 14, 2002.                                                                                                                                        |
| 3.2                 |       | Amended and Restated Bylaws of the Company, incorporated by  reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-Q (File  No. 1-13123), filed with the Commission on November 14, 2002.                                                                                                                                                                                                         |
| 3.3                 |       | Charter of the Compensation, Benefits, and Governance Committee of the  Board of Directors of Metals USA, Inc. (filed as Exhibit 3.3 to the Original  Filing on March 9, 2005)                                                                                                                                                                                                                                      |
| 3.4                 |       | Form of Charter of the Audit Committee of the Board of Directors of  Metals USA, Inc. (filed as Exhibit 3.4 to the Original Filing on March 9,  2005)                                                                                                                                                                                                                                                               |
| 4.1                 |       | Form  of Common Stock Certificate of the Company, incorporated by reference to  Exhibit 1.1 to the Company’s registration statement on Form 8-A (File No.  1-13123), filed with the Commission on November 20, 2002.                                                                                                                                                                                           |
| 4.2                 |       | Warrant Agreement,  dated as of October 31, 2002, between the Company and Equiserve Trust  Company, N.A., as Warrant Agent, incorporated herein by reference to Exhibit  2.3 to the Company’s registration  statement on Form 8-A (File No. 1-13123), filed with the Commission on  November 20, 2002.                                                                                                         |
| 4.3                 |       | Registration  Rights Agreement, dated as of October 31, 2002, between the Company and the  initial holders, incorporated herein by reference to Exhibit 4.3 to the  Company’s Annual Report on Form 10-Q (File No. 1-13123), filed with the  Commission on November 14, 2002.                                                                                                                                  |
| 4.5(a)              |       | Amendment  to Registration Rights Agreement, dated as of April 3, 2003, between the  Company and the initial holders, incorporated herein by reference to Exhibit  4.5(a) to the Company’s registration statement on Form 8-A (File No.  1-13123), filed with the Commission on May 1, 2003.                                                                                                                   |
| 10.1                |       | The  Company’s 2002 Long-Term Incentive Plan incorporated herein by reference to  the Company’s Annual Report on Form 10-K (File No. 1-13123), filed with the  Commission on March 28, 2003.                                                                                                                                                                                                    |
| 10.2                |       | 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, incorporated  herein by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-Q (File No. 1-13123), filed with the  Commission on November 14, 2002.                                                                               |
| 10.2(a)             |       | First  Amendment to Loan and Security Agreement, effective as of October 31, 2002,  by and among Bank of America, N.A. as administrative agent and Metals USA,  Inc. and each of its subsidiaries incorporated herein by reference to the  Company’s Annual Report on Form 10-K (File No. 1-13123), filed with the  Commission on March 28, 2003.                                                              |

 

 

46

----

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                            |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2(b)             |       | Second Amendment to Loan and  Security Agreement, effective as of March 24, 2004, by and among  Bank of America, N.A. as administrative agent and Metals USA, Inc. and each  of its subsidiaries incorporated herein by reference to the Company’s Annual  Report on Form 10-K (File No. 1-13123), filed with the Commission on March  26, 2004.            |
| 10.2(c)             |       | Third Amendment to Loan and Security Agreement,  effective as of November 9, 2004, by and among Bank of America, N.A.  as administrative agent and Metals USA, Inc. and each of its  subsidiaries incorporated herein by reference to the Company’s Quarterly Report on Form 10-Q (File  No. 1-13123), filed with the Commission on November 10, 2004.           |
| 10.3                |       | Employment Agreement, dated  February 24, 2003, between the Company and Celso Lourenço Gonçalves  incorporated herein by reference to the Company’s Annual Report on Form 10-K  (File No. 1-13123), filed with the Commission on March 28, 2003.                                                                                                  |
| 10.4                |       | Order of the United States  Bankruptcy Court for the Southern District of Texas, Houston Division  Granting Debtors’ Expedited Motion for Approval of Key Employee Retention  Plan, dated June 6, 2002 incorporated herein by reference to the Company’s  Annual Report on Form 10-K (File No. 1-13123), filed with the Commission on  March 28, 2003. |
| 14                  |       | Metals USA, Inc.  Code of Conduct. (filed as Exhibit 14 to the Original Filing on March 9,  2005)                                                                                                                                                                                                                                                                          |
| 21                  |       | List of Subsidiaries of the Company, incorporated  herein by reference to the Company’s  Quarterly Report on Form 10-Q (File No. 1-13123), filed with the Commission  on July 25, 2003.                                                                                                                                                                               |
| 23.1*               |       | Consent of the Independent  Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                                             |
| 31.1*               |       | Certification of the Chief  Executive Officer, dated March 9, 2005, pursuant to Rule 13a-14(a) or  15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                       |
| 31.2*               |       | Certification of the Chief  Financial Officer, dated March 9, 2005, pursuant to Rule 13a-14(a) or  15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                       |
| 32.1*               |       | Certification of the Chief  Executive Officer, Dated March 9, 2005, pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                             |
| 32.2*               |       | Certification of the Chief  Financial Officer, Dated March 9, 2005, pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                             |

 

----

* Filed herewith.

 

47

----

 

**METALS USA, INC. AND SUBSIDIARIES**

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors and Stockholders of

Metals USA, Inc.

Houston, Texas

 

We have auditedmanagement's assessment, included in the accompanying Management’s Report onInternal Control Over Financial Reporting, that Metals USA, Inc. andsubsidiaries (the “Company”) maintained effective internal control overfinancial reporting as of December 31, 2004, based on criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).  Company's management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting.Our responsibility is to express an opinion on management's assessment and anopinion on the effectiveness of the Company's internal control over financialreporting based on our audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement's assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions.

 

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principals.  A company's internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company's assets that could have a material effect on the financialstatements.

 

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

In our opinion, management's assessment that theCompany maintained effective internal control over financial reporting as ofDecember 31, 2004, is fairly stated, in all material respects, based oncriteria established in*InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission . Also in our opinion, the Companymaintained, in all material respects, effective internal control over financialreporting as of December 31, 2004, based on criteria established in *Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated financial statements as of and for the year endedDecember 31, 2004 of Metals USA, Inc. and our report dated February 18,2005 expressed an unqualified opinion on those financial statements.

 

DELOITTE & TOUCHE LLP 

 

Houston, Texas

April 28, 2005

 

F-1

----

 

**METALSUSA, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS****(In millions, except shareamounts)**

 
| ** **                                                                                                                           | ** ** | **Successor Company** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                           | ** ** | **December 31,**      | ** ** |
| ** **                                                                                                                           | ** ** | **2004**              | ** ** | **2003** | ** ** |
| **Assets**                                                                                                                           |       |                  |       |   |   |
| Current assets:                                                                                                                      |       |                  |       |   |   |
| Cash                                                                                                                                 |       | $                     | 12.6       |   | $ | 11.4 |   |
| Accounts  receivable, net of allowance of $7.7 and $6.9, respectively                                                                |       | 173.5                 |       | 125.0 |   |
| Inventories                                                                                                                          |       | 462.9                 |       | 240.0 |   |
| Prepaid expenses  and other                                                                                                          |       | 19.0                  |       | 8.4 |   |
| Total current assets                                                                                                                 |       | 668.0                 |       | 384.8 |   |
| Property and  equipment, net                                                                                                         |       | 36.1                  |       | 17.6 |   |
| Other assets,  net                                                                                                                   |       | 5.9                   |       | 4.8 |   |
| Total assets                                                                                                                         |       | $                     | 710.0      |   | $ | 407.2 |   |
|                                                                                                                                 |       |                  |       |   |   |
| **Liabilities and Stockholders’ Equity**                                                                                        |       |                  |       |   |   |
| Current  liabilities:                                                                                                                |       |                  |       |   |   |
| Accounts payable                                                                                                                     |       | $                     | 64.0       |   | $ | 48.9 |   |
| Accrued  liabilities                                                                                                                 |       | 35.0                  |       | 32.0 |   |
| Current portion  of long-term debt                                                                                                   |       | 4.0                   |       | 0.5 |   |
| Total current  liabilities                                                                                                           |       | 103.0                 |       | 81.4 |   |
| Long-term debt,  less current portion                                                                                                |       | 266.6                 |       | 118.2 |   |
| Other long-term  liabilities                                                                                                         |       | 12.2                  |       | 7.0 |   |
| Total  liabilities                                                                                                                   |       | 381.8                 |       | 206.6 |   |
| Commitments and  contingencies                                                                                                       |       |                  |       |   |   |
| Stockholders’  equity:                                                                                                          |       |                  |       |   |   |
| Preferred stock,  $.01 par value, 5,000,000 shares authorized; none issued                                                           |       | —                |       | — |   |
| Common stock,  $.01 par value, 200,000,000 shares authorized; 20,260,013 and 20,154,710  shares issued and outstanding, respectively |       | 0.2                   |       | 0.2 |   |
| Additional  paid-in capital                                                                                                          |       | 219.5                 |       | 196.2 |   |
| Deferred  compensation                                                                                                               |       | (0.2                  | )          | — |   |
| Retained  earnings                                                                                                                   |       | 108.7                 |       | 4.2 |   |
| Total  stockholders’ equity                                                                                                     |       | 328.2                 |       | 200.6 |   |
| Total  liabilities and stockholders’ equity                                                                                     |       | $                     | 710.0      |   | $ | 407.2 |   |

** **

The accompanying notes are an integral part ofthese consolidated financial statements.

 

F-2

----

 

**METALS USA, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OFOPERATIONS****(In millions, except pershare amounts)**

 
| ** **                                                         | ** ** | **Successor Company**              | ** ** | ** **                         | **Predecessor  Company** | ** **                                                     |
|--------------------------------------------------------------------|------------|------------------------------------|------------|------------------------------------|--------------------------|----------------------------------------------------------------|
| ** **                                                         | ** ** | **Year Ended  December 31,  2004** | ** ** | **Year Ended  December 31,  2003** | ** **               | **Period from  November 1,  2002 through  December 31,  2002** | ** ** | ** ** | **Period from  January 1,  2002 through  October 31,  2002** | ** ** |
| **Revenues:**                                                      |       |                               |       |                               |                     |                                                           |   |   |   |   |
| Net sales                                                          |       | $                                  | 1,509.8    |                               | $                        | 963.2                                                          |   | $ | 128.7 |   |   | $ | 833.3 |   |
| Cost of sales                                                      |       | 1,080.1                            |       | 731.6                              |                     | 98.7                                                           |   |   | 639.0 |   |
|                                                               |       | 429.7                              |       | 231.6                              |                     | 30.0                                                           |   |   | 194.3 |   |
| **Operating  costs and expenses:**                                 |       |                               |       |                               |                     |                                                           |   |   |   |   |
| Operating and  delivery                                            |       | 144.4                              |       | 127.7                              |                     | 18.3                                                           |   |   | 110.1 |   |
| Selling, general  and administrative                               |       | 109.6                              |       | 87.0                               |                     | 12.6                                                           |   |   | 79.5 |   |
| Depreciation and  amortization                                     |       | 2.0                                |       | 0.5                                |                     | —                                                         |   |   | 7.3 |   |
| Operating income  (loss)                                           |       | 173.7                              |       | 16.4                               |                     | (0.9                                                           | ) |   | (2.6 | ) |
| **Other  (income) expense:**                                       |       |                               |       |                               |                     |                                                           |   |   |   |   |
| Interest expense                                                   |       | 8.4                                |       | 5.7                                |                     | 1.3                                                            |   |   | 15.8 |   |
| Other (income)  expense, net                                       |       | (2.5                               | )          | (2.0                               | )                        | 0.1                                                            |   |   | (1.1 | ) |
| Fresh-start  adjustments                                           |       | —                             |       | —                             |                     | —                                                         |   |   | 109.7 |   |
| Gain on  reorganization                                            |       | —                             |       | —                             |                     | —                                                         |   |   | (190.6 | ) |
| Reorganization  expenses                                           |       | —                             |       | —                             |                     | —                                                         |   |   | 28.3 |   |
| **Income  (loss) before income taxes and discontinued operations** |       | 167.8                              |       | 12.7                               |                     | (2.3                                                           | ) |   | 35.3 |   |
| Provision  (benefit) for income taxes                              |       | 63.3                               |       | 5.1                                |                     | —                                                         |   |   | (15.4 | ) |
| **Income  (loss) before discontinued operations**                  |       | 104.5                              |       | 7.6                                |                     | (2.3                                                           | ) |   | 50.7 |   |
| Income (loss)  from discontinued operations, net of taxes          |       | —                             |       | (0.1                               | )                        | (1.0                                                           | ) |   | 0.6 |   |
| **Net  income (loss)**                                             |       | $                                  | 104.5      |                               | $                        | 7.5                                                            |   | $ | (3.3 | ) |   | $ | 51.3 |   |
|                                                               |       |                               |       |                               |                     |                                                           |   |   |   |   |
| **Income  (loss) per share — basic:**                         |       |                               |       |                               |                     |                                                           |   |   |   |   |
| Continuing  operations                                             |       | $                                  | 5.17       |                               | $                        | 0.38                                                           |   | $ | (0.11 | ) |   | $ | 1.39 |   |
| Discontinued  operations                                           |       | —                             |       | (0.01                              | )                        | (0.05                                                          | ) |   | 0.02 |   |
| Net income  (loss) per share                                       |       | $                                  | 5.17       |                               | $                        | 0.37                                                           |   | $ | (0.16 | ) |   | $ | 1.41 |   |
|                                                               |       |                               |       |                               |                     |                                                           |   |   |   |   |
| **Income  (loss) per share — diluted:**                       |       |                               |       |                               |                     |                                                           |   |   |   |   |
| Continuing  operations                                             |       | $                                  | 5.05       |                               | $                        | 0.37                                                           |   | $ | (0.11 | ) |   | $ | 1.39 |   |
| Discontinued  operations                                           |       | —                             |       | —                             |                     | (0.05                                                          | ) |   | 0.02 |   |
| Net income  (loss) per share                                       |       | $                                  | 5.05       |                               | $                        | 0.37                                                           |   | $ | (0.16 | ) |   | $ | 1.41 |   |
|                                                               |       |                               |       |                               |                     |                                                           |   |   |   |   |
| **Number  of common shares used in per share calculations:**       |       |                               |       |                               |                     |                                                           |   |   |   |   |
| Basic                                                              |       | 20.2                               |       | 20.2                               |                     | 20.2                                                           |   |   | 36.5 |   |
| Diluted                                                            |       | 20.7                               |       | 20.3                               |                     | 20.2                                                           |   |   | 36.5 |   |

 

The accompanying notes are an integral part ofthese consolidated financial statements.

 

F-3

----

 

**METALSUSA, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY (DEFICIT)****(Inmillions)**

 
| ** **                                                | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Deferred  Compensation** | ** ** | **Retained  Earnings  (Deficit)** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|----------------------------|------------|-----------------------------------|------------|-----------|------------|
| **Predecessor  Company:**                                 |       |              |       |                             |       |                       |       |                              |       |      |       |
| BALANCE, January  1, 2002                                 |       | $                 | 0.4        |                             | $          | 247.7                      |       | $                                 | —     |      | $          | (283.2 | ) | $ | (35.1 | ) |
| Net income from  January 1, 2002 through October 31, 2002 |       | —            |       | —                           |       | —                     |       | 51.3                              |       | 51.3      |       |
| Reorganization  adjustments                               |       | (0.4              | )          | (247.7                           | )          | —                     |       | 231.9                             |       | (16.2     | )          |
| BALANCE, October  31, 2002                                |       | —            |       | —                           |       | —                     |       | —                            |       | —    |       |
|                                                      |       |              |       |                             |       |                       |       |                              |       |      |       |
|                                                      |       |              |       |                             |       |                       |       |                              |       |      |       |
| **Successor  Company:**                                   |       |              |       |                             |       |                       |       |                              |       |      |       |
| Stock issued in  reorganization                           |       | 0.2               |       | 192.1                            |       | —                     |       | —                            |       | 192.3     |       |
| Net loss from  November 1, 2002 through December 31, 2002 |       | —            |       | —                           |       | —                     |       | (3.3                              | )          | (3.3      | )          |
| BALANCE,  December 31, 2002                               |       | 0.2               |       | 192.1                            |       | —                     |       | (3.3                              | )          | 189.0     |       |
| Tax benefit  realized from tax attribute carryforwards    |       | —            |       | 4.1                              |       | —                     |       | —                            |       | 4.1       |       |
| Net income                                                |       | —            |       | —                           |       | —                     |       | 7.5                               |       | 7.5       |       |
| BALANCE,  December 31, 2003                               |       | 0.2               |       | 196.2                            |       | —                     |       | 4.2                               |       | 200.6     |       |
| Tax benefit  realized from tax attribute carryforwards    |       | —            |       | 21.2                             |       | —                     |       | —                            |       | 21.2      |       |
| Stock option  exercises, grants and other adjustments     |       | —            |       | 2.1                              |       | (0.2                       | )          | —                            |       | 1.9       |       |
| Net income                                                |       | —            |       | —                           |       | —                     |       | 104.5                             |       | 104.5     |       |
| BALANCE,  December 31, 2004                               |       | $                 | 0.2        |                             | $          | 219.5                      |       | $                                 | (0.2       | )         | $          | 108.7 |   | $ | 328.2 |   |

 

The accompanying notes are an integral part ofthese consolidated financial statements.

 

F-4

----

 

**METALS USA, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS****(Inmillions)**

 
| ** **                                                           | ** ** | **Successor Company**              | ** ** | ** **                         | **Predecessor  Company** | ** **                                                     |
|----------------------------------------------------------------------|------------|------------------------------------|------------|------------------------------------|--------------------------|----------------------------------------------------------------|
| ** **                                                           | ** ** | **Year Ended  December 31,  2004** | ** ** | **Year Ended  December 31,  2003** | ** **               | **Period from  November 1,  2002 through  December 31,  2002** | ** ** | ** ** | **Period from  January 1, 2002  through  October 31,  2002** | ** ** |
| **Cash  flows from operating activities:**                           | ** ** | ** **                         | ** ** | ** **                         | ** **               | ** **                                                     | ** ** | ** ** | ** ** | ** ** |
| Net income  (loss)                                                   |       | $                                  | 104.5      |                               | $                        | 7.5                                                            |   | $ | (3.3 | ) |   | $ | 51.3 |   |
| Adjustments for  non-cash and non-operating items —             |       |                               |       |                               |                     |                                                           |   |   |   |   |
| Gain on  reorganization                                              |       | —                             |       | —                             |                     | —                                                         |   |   | (190.6 | ) |
| Fresh start  adjustments                                             |       | —                             |       | —                             |                     | —                                                         |   |   | 109.7 |   |
| Net (income)  loss from discontinued operations                      |       | —                             |       | 0.1                                |                     | 1.0                                                            |   |   | (0.6 | ) |
| (Gain) loss on  sale of property and equipment                       |       | (0.5                               | )          | (0.3                               | )                        | 0.2                                                            |   |   | (0.4 | ) |
| Provision for  bad debts                                             |       | 4.0                                |       | 2.7                                |                     | 0.2                                                            |   |   | 3.5 |   |
| Depreciation and  amortization                                       |       | 2.0                                |       | 0.5                                |                     | —                                                         |   |   | 7.3 |   |
| Deferred income  taxes                                               |       | (8.7                               | )          | —                             |                     | —                                                         |   |   | — |   |
| Adjustment to  Predecessor Company tax attribute valuation allowance |       | 21.2                               |       | 4.1                                |                     | —                                                         |   |   | — |   |
| Changes in  operating assets and liabilities, net —             |       |                               |       |                               |                     |                                                           |   |   |   |   |
| Accounts  receivable                                                 |       | (52.5                              | )          | (14.7                              | )                        | 15.9                                                           |   |   | (12.9 | ) |
| Inventories                                                          |       | (222.9                             | )          | (13.5                              | )                        | 2.7                                                            |   |   | (25.7 | ) |
| Prepaid expenses  and other                                          |       | 1.5                                |       | 18.7                               |                     | 4.2                                                            |   |   | (6.2 | ) |
| Accounts payable  and accrued liabilities                            |       | 23.3                               |       | 26.2                               |                     | (11.3                                                          | ) |   | 22.0 |   |
| Income taxes  payable                                                |       | —                             |       | 1.0                                |                     | —                                                         |   |   | 10.5 |   |
| Other operating,  net                                                |       | (0.5                               | )          | (5.5                               | )                        | (0.6                                                           | ) |   | 0.8 |   |
| Net cash  provided by (used in) continuing operations                |       | (128.6                             | )          | 26.8                               |                     | 9.0                                                            |   |   | (31.3 | ) |
| Net cash  provided by discontinued operations                        |       | —                             |       | 0.1                                |                     | 5.5                                                            |   |   | 39.7 |   |
| Net cash  provided by (used in) operations                           |       | (128.6                             | )          | 26.9                               |                     | 14.5                                                           |   |   | 8.4 |   |
| **Cash  flows from investing activities**                            |       |                               |       |                               |                     |                                                           |   |   |   |   |
| Sale of assets                                                       |       | 1.4                                |       | 5.7                                |                     | 6.9                                                            |   |   | 83.2 |   |
| Purchase of  assets                                                  |       | (17.4                              | )          | (17.5                              | )                        | (0.5                                                           | ) |   | (3.0 | ) |
| Net cash  provided by (used in) investing activities                 |       | (16.0                              | )          | (11.8                              | )                        | 6.4                                                            |   |   | 80.2 |   |
| **Cash  flows from financing activities:**                           |       |                               |       |                               |                     |                                                           |   |   |   |   |
| Net borrowings  (repayments) on credit facilities                    |       | 147.8                              |       | (7.4                               | )                        | (33.0                                                          | ) |   | (132.6 | ) |
| (Repayments) on  long-term debt                                      |       | (0.6                               | )          | (2.6                               | )                        | (0.7                                                           | ) |   | (6.8 | ) |
| Issuance of  common stock                                            |       | 0.4                                |       | —                             |                     | —                                                         |   |   | — |   |
| Deferred  financing costs and other                                  |       | (1.8                               | )          | —                             |                     | —                                                         |   |   | (2.5 | ) |
| Net cash  provided by (used) in financing activities                 |       | 145.8                              |       | (10.0                              | )                        | (33.7                                                          | ) |   | (141.9 | ) |
|                                                                 |       |                               |       |                               |                     |                                                           |   |   |   |   |
| **Net  increase (decrease) in cash**                                 |       | 1.2                                |       | 5.1                                |                     | (12.8                                                          | ) |   | (53.3 | ) |
| Cash, beginning  of period                                           |       | 11.4                               |       | 6.3                                |                     | 19.1                                                           |   |   | 72.4 |   |
| **Cash,  end of period**                                             |       | $                                  | 12.6       |                               | $                        | 11.4                                                           |   | $ | 6.3 |   |   | $ | 19.1 |   |

 

The accompanying notes are an integral part ofthese consolidated financial statements.

 

F-5

----

 

**METALSUSA, INC. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(In millions, except share andper share amounts)**

 

**1.     Organization, Basis ofPresentation and Summary of Significant Accounting Policies**

 

***Organization***

 

Metals USA, Inc. and its wholly-ownedsubsidiaries are collectively referred to throughout these financial statementsas “Metals USA”, the “Company”, “we”, “us” and “our.”  We are a leading provider of value-addedprocessed steel, stainless steel, aluminum and specialty metals, as well asmanufactured metal components.  We wereorganized as a Delaware corporation on July 3, 1996 and began operations onJuly 11, 1997.

 

Our operations are organized into threeproduct group segments located entirely in the United States.  Approximately 88% of our revenue is derivedfrom the metal service center and distribution activities that are segmentedinto two groups, Flat Rolled and Plates and Shapes.  The remaining portion of our revenue isderived from the Building Products Group, which principally manufactures anddistributes aluminum products related to the residential and commercialconstruction and improvement industry. We purchase metal from primary producers who generally focus on largevolume sales of unprocessed metals in standard configurations and sizes.  In most cases, we perform customized,value-added processing services required to meet specifications provided byend-use customers.  The Flat Rolled Groupand Plates and Shapes Group customers are in businesses such as the machining,furniture, transportation equipment, power and process equipment,industrial/commercial, construction/fabrication, consumer durables andelectrical equipment industries and machinery and equipment manufacturers.  The Building Products Group customers aredistributors and contractors engaged in residential and commercial buildingproducts.

 

***Basis of Presentation***

 

The financial statements for the periodsprior to November 1, 2002 are prepared in accordance with the AICPA’s Statementof Position 90-7 (“SOP 90-7”), *Financial Reporting byEntities in Reorganization under the Bankruptcy Code*.  SOP 90-7 required us to, among other things,(1) identify transactions that were directly associated with the bankruptcyproceedings from those events that occur during the normal course of businessand (2) identify pre-petition liabilities subject to compromise from those thatwere not subject to compromise or were post-petition liabilities and (3) apply “Fresh-StartReporting” rules upon emergence from Bankruptcy.  See Note 14 for description of theReorganization Plan and application of “Fresh-Start Reporting.”  Accordingly, our financial position, resultsof operations and cash flows for the period after we emerged from bankruptcyare not comparable to earlier periods.  Forreporting purposes, the Predecessor Company refers to activities prior toNovember 1, 2002 and the Successor Company refers to activities subsequent toOctober 31, 2002.  With respect to periods relating to thePredecessor Company, the consolidated financial statements have beenreclassified for the effects of Statement of Financial Accounting Standards No.144 (“SFAS No. 144”), *“Accounting forImpairment or Disposal of Long-Lived Assets”* which requiresdivestitures be excluded from results of operations for all periods presented(see Note 15).

 

F-6

----

 

***Use of Estimates and Assumptions***

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the U.S. requires us to make estimates and assumptionsthat affect (i) the reported amounts of assets and liabilities, (ii) thedisclosure of contingent assets and liabilities known to exist as of the datethe financial statements are published and (iii) the reported amount ofrevenues and expenses recognized during the periods presented.  We review all significant estimates affectingour consolidated financial statements on a recurring basis and record theeffect of any necessary adjustments prior to their publication.  Adjustments made with respect to the use ofestimates often relate to improved information not previously available.  Uncertainties with respect to such estimatesand assumptions are inherent in the preparation of financial statements.

 

***Summary of Significant Accounting Policies***

 

*Principles of consolidation*— Our consolidated financial statements include the accounts of Metals USAand its subsidiaries which are all wholly-owned.  All intercompany accounts and transactionshave been eliminated in the consolidated financial statements.  Certain reclassifications have been made toprior years’ financial statements to be consistent with the current year’spresentation.

 

*Concentration of credit risk*—**Financial instruments,which potentially subject us to concentrations of credit risk, consistprincipally of cash deposits, trade accounts and notes receivable.  Concentrations of credit risk with respect totrade accounts are within several industries. Generally, credit is extended once appropriate credit history and referenceshave been obtained.  Provisions to theallowance for doubtful accounts are made monthly and adjustments are madeperiodically based upon our expected ability to collect all such accounts.  Additionally, we periodically review thecredit history of our customers and generally do not require collateral for theextension of credit.

 

*Inventories*—Inventories are stated at the lower of cost or market.  Our inventories are accounted for using avariety of methods including specific identification, average cost and thefirst-in first-out (“FIFO”) method of accounting.  Through December 31, 2002, certain of oursubsidiaries used the last-in, first-out (“LIFO”) method of accounting forinventories.  We changed the method ofaccounting for inventories for these subsidiaries to conform to the methodsused by similar businesses within our product groups effective January 1,2003.  As of December 31, 2002,approximately 22.2% of the consolidated inventories were accounted for usingthe LIFO method of accounting.  The LIFOreserve attributable to these inventories has historically been insignificant(less than $0.1); accordingly, if the FIFO method had been used for allinventories prior to December 31, 2002, the net income (loss) would have beenunchanged for all periods presented.

 

*Property and equipment*— Property and equipment isstated at cost, and depreciation is computed using the straight-line method,net of estimated salvage values, over the estimated useful lives of the assets.Expenditures for repairs and maintenance are charged to expense whenincurred.  Expenditures which extend theuseful lives of existing equipment, are capitalized and depreciated.  Upon retirement or disposition of propertyand equipment, the cost and related accumulated depreciation are removed fromthe accounts and any resulting gain or loss is recognized.  Leasehold improvements are capitalized andamortized over the lesser of the life of the lease or the estimated useful lifeof the asset.  During 2002, we wrote downthe carrying value of our property and equipment by $111.6.  Of the amount written off, $108.6 wasattributable to “Fresh-Start Reporting” rules under SOP 90-7.

 

F-7

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## *Valuation and qualifying accounts —*We provide reserves for accounts receivable, inventory, operationalreorganizations and personnel and facility costs associated withdispositions.  The reserves for theseactivities for the years ended December 31, 2004 and 2003, the periods fromNovember 1, 2002 through December 31, 2002 and from January 1, 2002through October 31, 2002 are summarized below:

 
| **Description**                                                       | ** ** | **Balance at  Beginning  of Period** | ** ** | **Amount  Charged to  Expense** | ** ** | **Utilization of  Reserve** | ** ** | **Balance at  End of  Period** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|--------------------------------|------------|
|                                                                  |       |                                 |       |                            |       |                        |       |                           |       |
| **Year  ended December 31, 2004:**                                    |       |                                 |       |                            |       |                        |       |                           |       |
| Allowance for  doubtful accounts                                      |       | $                                    | 6.9        |                            | $          | 4.0                         |       | $                              | (3.2       | ) | $ | 7.7 |   |
| Inventory  valuation allowance                                        |       | 5.2                                  |       | 0.3                             |       | (0.2                        | )          | 5.3                            |       |
| **Year  ended December 31, 2003:**                                    |       |                                 |       |                            |       |                        |       |                           |       |
| Allowance for  doubtful accounts                                      |       | $                                    | 7.3        |                            | $          | 2.7                         |       | $                              | (3.1       | ) | $ | 6.9 |   |
| Inventory  valuation allowance                                        |       | 5.8                                  |       | 3.5                             |       | (4.1                        | )          | 5.2                            |       |
| **Two  Months ended December 31, 2002:**                              |       |                                 |       |                            |       |                        |       |                           |       |
| Allowance for  doubtful accounts                                      |       | $                                    | 7.4        |                            | $          | 0.2                         |       | $                              | (0.3       | ) | $ | 7.3 |   |
| Inventory  valuation allowance                                        |       | 4.9                                  |       | 0.1                             |       | 0.8                         |       | 5.8                            |       |
|                                                                  |       |                                 |       |                            |       |                        |       |                           |       |
|                                                                  |       |                                 |       |                            |       |                        |       |                           |       |
| **Ten Months  ended October 31, 2002:**                               |       |                                 |       |                            |       |                        |       |                           |       |
| Allowance for  doubtful accounts                                      |       | $                                    | 6.3        |                            | $          | 3.5                         |       | $                              | (2.4       | ) | $ | 7.4 |   |
| Inventory  valuation allowance                                        |       | 7.5                                  |       | (1.0                            | )          | (1.6                        | )          | 4.9                            |       |
| Reserve for  personnel and facility cost associated with dispositions |       | 9.6                                  |       | (3.3                            | )          | (6.3                        | )          | 3⁄4                         |       |

 

*Impairment of long-lived assets*— Long-lived assets are comprised principally ofproperty and equipment.  We reviewlong-lived assets for impairment whenever events or changes in circumstancesindicate that the carrying amount may not be realizable.  If an evaluation is required, the estimatedfuture undiscounted cash flows associated with the asset are compared to theasset’s carrying amount to determine if an impairment of such asset isnecessary.  The effect of any impairmentwould be to expense the difference between the fair value of such asset and itscarrying value.

 

*Debt issuance costs*— We defer certain expensesincurred in connection with our long-term debt and amortize these costs tointerest expense over the term of the respective agreements.  Amortization for the years ended December 31,2004 and 2003, the periods from November 1, 2002 throughDecember 31, 2002 and from January 1, 2002 through October 31, 2002,totaled $0.7, $0.7, $0.1, and $1.6, respectively, and is included in interestexpense on the consolidated statements of operations.  During 2004 and 2002, we incurred $1.1 and$2.1, respectively, in debt issuance costs associated with the Revolving CreditFacility.

 

*Fair value of financial instruments*— The carrying values of cash, accounts receivableand accounts payable approximate fair value due to their short-termnature.  The fair value of the long-termdebt is estimated based on interest rates for the same or similar debt offeredin the open market.  AtDecember 31, 2004, the carrying value of our fixed rate long-termdebt approximates its fair value based on interest rates for the same orsimilar debt offered in the open market and the carrying amount of theindebtedness attributable to the Credit Facility of $253.0 approximates itsfair value.

 

F-8

----

 

*Revenue recognition* — We recognize revenues whenproducts are shipped and our significant obligations have been satisfied.  Shipping and handling costs billed to ourcustomers are accounted for as revenues. Risk of loss for products shipped passes at the time of shipment.  Provisions are made currently for estimatedreturns.

 

*Delivery expenses*—**Delivery expensesconsist of distribution costs, including shipping and handling.  These expenses totaled $41.6, $36.9, $4.3 and$27.5 for the years ended December 31, 2004 and 2003, for the periodsfrom November 1, 2002 through December 31, 2002 and from January 1, 2002through October 31, 2002, respectively.

 

*Income taxes*— Deferredincome taxes are recognized for the future tax consequences of differencesbetween the tax bases of assets and liabilities and their financial reportingamounts based on enacted tax laws and statutory tax rates applicable to theperiods in which the differences are expected to affect taxable income.  Valuation allowances are established whennecessary to reduce deferred tax assets to the amount expected to be realized.

 

*Earnings (loss) per share*— Earnings per Share — Basicexcludes dilution and is determined by dividing income (loss) available tocommon stockholders by the weighted average number of common shares outstandingduring the period.  Earnings per Share — Diluted reflects the potential dilution thatcould occur if securities and other contracts to issue common stock wereexercised or converted into common stock. In 2004, there were 909,565 options outstanding, of which zero wereantidilutive.  In 2003, there were815,000 options outstanding, of which 206,000 were antidilutive and accordinglyhave been excluded from the calculations.

 

Thenumber of shares used in the per share calculations consists of the following:

 
| ** **                                                                               | ** ** | **(in millions of shares)** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                               | ** ** | **Year  Ended  2004**       | ** ** | **Year  Ended  2003** | ** ** | **Period From  November 1,  2002 through  December 31,  2002** | ** ** | ** ** | **Period From  January 1, 2002  through  October 31,  2002** | ** ** |
|                                                                                     |       |                        |       |   |   |   |   |   |   |   |
| Weighted average  shares used in computing  income (loss)  per share — basic   |       | 20.2                        |       | 20.2 |   | 20.2 |   |   | 36.5 |   |
| Effect of  dilutive securities:                                                          |       |                        |       |   |   |   |   |   |   |   |
| Stock options  and convertible securities                                                |       | 0.5                         |       | 0.1 |   | — |   |   | — |   |
| Weighted average  shares used in computing  income (loss)  per share — diluted |       | 20.7                        |       | 20.3 |   | 20.2 |   |   | 36.5 |   |

 

 

*NewAccounting Pronouncements — *InNovember 2004, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 151 (“SFAS 151”), *“InventoryCosts - An amendment of ARB No. 43, Chapter 4”,* which requires thatabnormal amounts of idle facility expense, freight, handling costs and spoilageshould be expensed as incurred and not included in overhead, and thatallocation of fixed production overheads to conversion costs should be based onnormal capacity of the production facilities. The provisions in Statement 151 are effective for inventory costsincurred during fiscal years beginning after June 15, 2005.  We do not believe that the adoption of SFAS151 will have a significant impact on our financial statements.

 

F-9

----

 

In December 2004, the Financial Accounting StandardsBoard issued Statement of Financial Accounting Standards No. 123-Revised 2004 (“SFAS123(R)”), *“Share-BasedPayment.”*This is arevision of SFAS No. 123, “*Accounting for Stock-BasedCompensation*” andsupersedes APB No. 25, “*Accounting for StockIssued to Employees.”* Asnoted in the notes to the financial statements, we do not record compensationexpense for stock-based compensation. Under SFAS 123(R), wewill be required to measure the cost of employee services received in exchangefor stock based on the grant-date fair value (with limited exceptions).  That cost will be recognized over the periodduring which an employee is required to provide service in exchange for theaward (usually the vesting period).  Thefair value will be estimated using an option-pricing model.  Excess tax benefits, as defined in SFAS 123,will be recognized as an addition to paid-in-capital.  This is effective as of the beginning of thefirst interim or annual reporting period that begins after June 15, 2005.  The pro forma table in Note 8 of the Notes tothe Consolidated Financial Statements illustrates the effect on net income andearnings per share if we had applied the fair value recognition provisions ofSFAS 123.  We do not believe thatthe adoption of SFAS 123(R) will have a significant impact on our financialstatements.

 

**2.     Inventories**

 

Inventories consist of the following:

 
| ** **                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|------------------|------------|
| ** **                                 | ** ** | **2004**         | ** ** | **2003** | ** ** |
|                                       |       |             |       |   |   |
| Raw materials —                       |       |             |       |   |   |
| Plates and  Shapes                         |       | $                | 208.7      |   | $ | 103.4 |   |
| Flat Rolled                                |       | 169.5            |       | 79.0 |   |
| Building  Products                         |       | 21.0             |       | 15.0 |   |
| Total raw  materials                       |       | 399.2            |       | 197.4 |   |
| Work-in-process  and finished goods — |       |             |       |   |   |
| Plates and  Shapes                         |       | —           |       | — |   |
| Flat Rolled                                |       | 34.8             |       | 20.2 |   |
| Building  Products                         |       | 28.9             |       | 22.4 |   |
| Total  work-in-process and finished goods  |       | 63.7             |       | 42.6 |   |
| Total  inventories                         |       | $                | 462.9      |   | $ | 240.0 |   |

 

Aspreviously stated, a few subsidiaries accounted for their inventories using theLIFO method.  We changed the method ofaccounting for inventories for these subsidiaries to conform to the methodsused by similar businesses within our product groups effective January 1, 2003. The replacement cost of such inventories as ofDecember 31, 2002 approximated the historical cost of the inventory computedusing the LIFO method of valuation.  TheLIFO reserve attributable to these inventories has historically been insignificant(less than $0.1); accordingly, if the FIFO method had been used for all inventories prior to December 31, 2002,the net income (loss) would have been unchanged for all periods presented.

 

F-10

----

 

**3.     Property and Equipment**

 

Propertyand equipment consists of the following:

 
| ** **                            | ** ** | **Estimated  Useful Lives** | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|------------------|------------|
| ** **                            | **2004**   | ** **                  | **2003**   | ** **       |
| ** **                            | ** ** | ** **                  | ** ** | ** **       | ** ** | ** ** | ** ** |
| Land                                  |       | —                      |       | $                | 1.1        |   | $ | 0.6 |   |
| Building and  improvements            |       | 5-40 years                  |       | 10.2             |       | 5.2 |   |
| Machinery and  equipment              |       | 7-25 years                  |       | 22.9             |       | 7.2 |   |
| Automobiles and  trucks               |       | 3-10 years                  |       | 1.0              |       | 0.7 |   |
| Construction in  progress             |       | —                      |       | 3.1              |       | 4.3 |   |
| Total property  and equipment         |       |                        |       | 38.3             |       | 18.0 |   |
| Less —  accumulated depreciation |       |                        |       | (2.2             | )          | (0.4 | ) |
| Total property  and equipment, net    |       |                        |       | $                | 36.1       |   | $ | 17.6 |   |

 

AtDecember 31, 2001, the Predecessor Company’s property and equipment wasappraised and reduced in value by $87.3 due to the concerns of recovering thehistorical value through operations due to the bankruptcy filing.  Additionally, in connection with thefresh-start adjustments recorded as of October 31, 2002, (see Note 14), novalue was assigned to our property and equipment.  These assets had a carrying value of $108.6prior to the fresh-start adjustments. The excess of tax basis over the carrying value for financial statementpurposes accounts for a significant portion of the deferred tax assetsdescribed elsewhere in these financial statements.  We continue to use this property andequipment in conducting our regular operations. Amounts shown in the accompanying table have been acquired subsequent toOctober 31, 2002.

 

Depreciation expense for the yearsended December 31, 2004 and 2003, and for the period from January 1, 2002through October 31, 2002 was $1.9, $0.4, and $7.3, respectively.

 

**4.     Accrued Liabilities**

 

Accrued liabilities consist of thefollowing:

 
| ** **                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|------------------|------------|
| ** **                              | ** ** | **2004**         | ** ** | **2003** | ** ** |
|                                    |       |             |       |   |   |
| Accrued salaries  and employee benefits |       | $                | 15.1       |   | $ | 10.2 |   |
| Accrued taxes,  other than income       |       | 4.7              |       | 4.1 |   |
| Accrued  insurance                      |       | 4.2              |       | 11.1 |   |
| Accrued audit  and tax fees             |       | 2.1              |       | 1.1 |   |
| Accrued income  taxes payable           |       | 1.0              |       | 1.0 |   |
| Accrued lease  terminations             |       | 3.6              |       | 0.2 |   |
| Other                                   |       | 4.3              |       | 4.3 |   |
| Total accrued  liabilities              |       | $                | 35.0       |   | $ | 32.0 |   |

 

F-11

----

 

**5.     Debt**

 

Debtconsists of the following:

 
| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|------------------|------------|
| ** **                           | ** ** | **2004**         | ** ** | **2003** | ** ** |
|                                 |       |             |       |   |   |
| Revolving Credit  Facility           |       | $                | 253.0      |   | $ | 105.2 |   |
| Industrial  Revenue Bond             |       | 5.7              |       | 5.7 |   |
| Mortgage Note                        |       | 6.7              |       | 7.1 |   |
| Other                                |       | 5.2              |       | 0.7 |   |
| Total debt                           |       | 270.6            |       | 118.7 |   |
| Less — current  portion of debt |       | 4.0              |       | 0.5 |   |
| Total long-term  portion of debt     |       | $                | 266.6      |   | $ | 118.2 |   |

 

Maturitieson our debt as of December 31, 2004 were $4.0 in 2005, $1.0 in 2006, $6.5 in2007, $0.1 in 2008, $253.1 in 2009 and $5.9 thereafter.

 

Theweighted average interest rates under our Revolving Credit Facility for theyears ended December 31, 2004 and 2003, the periods from November 1, 2002through December 31, 2002 and January 1, 2002 through October 31, 2002, were4.12%, 4.41%, 3.08%, and 6.18%, respectively.

 

***Revolving Credit Facility***

 

On October 31, 2002, weentered into our Revolving Credit Facility with a group of lenders (the “RevolvingCredit Facility”).  On March 24, 2004, we executed the secondamendment to our Revolving Credit Facility with Bank of America, as agent forthe lenders, to expand the size of the facility from $200.0 to $250.0 and toextend the maturity date to October 31, 2006. On November 9, 2004, we again amended our Revolving Credit Facility, toexpand the size of the facility from $250.0 to $350.0.  Further, this third amendment lowered ourborrowing costs, increased our borrowing availability and extended the maturitydate to November 9, 2009.  TheRevolving Credit Facility is secured by all of our receivables, inventories,and intangible property.  Our propertyand equipment described in Note 3 are not collateral for the Revolving CreditFacility.  Borrowings under the RevolvingCredit Facility are limited to the lesser of a borrowing base, comprised ofeligible receivables and inventories, or $350.0 in the aggregate. The agreement, as amended, limits borrowingson inventory to 175% of eligible accounts receivable, as defined in the loanagreement.  As of February 16,2005 and December 31, 2004, we had $66.2 and $72.9, respectively, available toborrow under the Revolving Credit Facility.

 

The Revolving CreditFacility bears interest at the bank’s base rate or LIBOR, at our option, plusan applicable margin based on a ratio of earnings before interest, taxes,depreciation and amortization (“EBITDA” as defined and adjusted) to cashinterest expense (the “fixed charge coverage ratio”).  The fixed charge coverage ratio is determinedby dividing EBITDA by the sum of net capital expenditures, income taxes paid incash, dividends, or other preference payments, interest expense paid in cashand scheduled principal reductions on debt. The applicable margin for base rate loans ranges from 0.00% to0.50%.  Prior to the third amendment the LIBORmargin loans ranged from 2.00% to 3.00%. The third amendment lowered the LIBOR margins to a range from 1.50% to2.50%.  These marginal rates vary withour financial performance as measured by the fixed charge coverage ratio.  Additionally, the third amendment providesfor a further reduction in the marginal LIBOR rates of 0.25% if we maintain atrailing twelve month EBITDA of $100.0 and maintain a fixed charge coverageratio of 2.0 to 1.  A commitment fee ispayable on any unused portion of the Revolving Credit Facility.  The commitment fee

 

F-12

----

 

varies between 0.250% and0.375% per annum, based on the fixed charge coverage ratio.  The applicable base rate and the effectiveLIBOR rate were 5.25% and 3.81% as of December 31, 2004.

 

The Revolving CreditFacility requires us to comply with various affirmative, negative andsubjective covenants, the most significant of which are: (i) the maintenance ofa borrowing base availability, or, if the required borrowing base availabilityis not maintained, the maintenance of the fixed charge coverage ratio, (ii)restrictions on additional indebtedness, (iii) restrictions on liens,guarantees and quarterly dividends, and (iv) obtaining the lenders’ consentwith respect to certain individual acquisitions.  The third amendment to the Revolving CreditFacility allows for an increase in capital expenditures, from $25.0 to$35.0.  Additionally, it increased theallowance for restricted payments from $10.0 to $25.0 and for the payment of upto $2.2 of dividends in any fiscal quarter provided that borrowing baseavailability is greater than $40.0.  Aslong as our availability is $35.0 or greater, we do not have to maintain aminimum fixed charge coverage ratio. Should availability fall below $35.0, we must maintain a fixed chargecoverage ratio of 1.0 to 1.0.  We were incompliance with all of the covenants as of December 31, 2004.

 

***Industrial Revenue Bond***

 

The IRB is payable on May 1, 2016 in one lump sum payment. The interestrate assessed on the IRB varies from month to month and was 1.96% at December31, 2004. The IRB is secured by real estate and equipment acquired withproceeds from the bond with no net book value at December 31, 2004. The IRBplaces various restrictions on certain of our subsidiaries, including but notlimited to maintenance of required insurance coverage, maintenance of certainfinancial ratios, limits on capital expenditures and maintenance of tangiblenet worth and is supported by a letter of credit.  We were in compliance with all of the covenants as of December 31,2004.

 

***MortgageNote***

 

The mortgage note has a fixed interest rate of 6.88% per annum andmatures on October 31, 2007. The mortgage note places various restrictions oncertain of our subsidiaries, including but not limited to maintenance ofrequired insurance coverage, maintenance of certain financial ratios, limits oncapital expenditures and maintenance of tangible net worth. This mortgage noteis secured by property and equipment with no net book value as of December 31,2004. We were in compliance with all of the covenants as of December 31, 2004.

 

F-13

----

 

**6.****              IncomeTaxes**

 

Thecomponents of the provision (benefit) for income taxes are as follows:

 
| ** **                 | ** ** | **Successor Company**              | ** ** | ** **                         | **Predecessor  Company** | ** **                                                     |
|----------------------------|------------|------------------------------------|------------|------------------------------------|--------------------------|----------------------------------------------------------------|
| ** **                 | ** ** | **Year Ended  December 31,  2004** | ** ** | **Year Ended  December 31,  2003** | ** **               | **Period from  November 1,  2002 through  December 31,  2002** | ** ** | ** ** | **Period from  January 1,  2002 through  October 31,  2002** | ** ** |
|                       |       |                               |       |                               |                     |                                                           |   |   |   |   |
| **Federal  —**        |       |                               |       |                               |                     |                                                           |   |   |   |   |
| Current                    |       | $                                  | 54.2       |                               | $                        | 0.9                                                            |   | $ | — |   |   | $ | (15.0 | ) |
| Deferred                   |       | 1.3                                |       | 4.1                                |                     | —                                                         |   |   | — |   |
|                       |       | 55.5                               |       | 5.0                                |                     | —                                                         |   |   | (15.0 | ) |
| **State —**           |       |                               |       |                               |                     |                                                           |   |   |   |   |
| Current                    |       | 0.4                                |       | 0.1                                |                     | —                                                         |   |   | — |   |
| Deferred                   |       | 7.4                                |       | —                             |                     | —                                                         |   |   | — |   |
|                       |       | 7.8                                |       | 0.1                                |                     | —                                                         |   |   | — |   |
| Total provision  (benefit) |       | $                                  | 63.3       |                               | $                        | 5.1                                                            |   | $ | — |   |   | $ | (15.0 | ) |

 

Theprovision (benefit) differs from an amount computed at the statutory rates asfollows:

 
| ** **                                      | ** ** | **Successor Company**              | ** ** | ** **                         | **Predecessor  Company** | ** **                                                     |
|-------------------------------------------------|------------|------------------------------------|------------|------------------------------------|--------------------------|----------------------------------------------------------------|
| ** **                                      | ** ** | **Year Ended  December 31,  2004** | ** ** | **Year Ended  December 31,  2003** | ** **               | **Period from  November 1,  2002 through  December 31,  2002** | ** ** | ** ** | **Period from  January 1,  2002 through  October 31,  2002** | ** ** |
| ** **                                      | ** ** | ** **                         | ** ** | ** **                         | ** **               | ** **                                                     | ** ** | ** ** | ** ** | ** ** |
| Federal income  tax at statutory rates          |       | $                                  | 58.8       |                               | $                        | 4.4                                                            |   | $ | (1.1 | ) |   | $ | 12.7 |   |
| State taxes, net  of federal income tax benefit |       | 5.1                                |       | 0.4                                |                     | —                                                         |   |   | 2.6 |   |
| Nondeductible  expenses:                        |       |                               |       |                               |                     |                                                           |   |   |   |   |
| Bankruptcy costs                                |       | —                             |       | —                             |                     | —                                                         |   |   | 8.1 |   |
| Valuation  allowance                            |       | (1.1                               | )          | —                             |                     | 1.1                                                            |   |   | (45.9 | ) |
| Other                                           |       | 0.5                                |       | 0.3                                |                     | —                                                         |   |   | 7.5 |   |
| Total provision  (benefit)                      |       | $                                  | 63.3       |                               | $                        | 5.1                                                            |   | $ | — |   |   | $ | (15.0 | ) |

 

F-14

----

 

Thesignificant items giving rise to the deferred tax assets (liabilities) are asfollows:

 
| ** **                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|------------------|------------|
| ** **                              | ** ** | **2004**         | ** ** | **2003** | ** ** |
|                                    |       |             |       |   |   |
| **Deferred  tax assets —**         |       |             |       |   |   |
| Accounts  receivable and inventories    |       | $                | 3.7        |   | $ | 5.3 |   |
| Accrued  liabilities                    |       | 5.8              |       | 8.5 |   |
| Tax attributes  and carryforwards       |       | 18.0             |       | 22.5 |   |
| Property and  equipment                 |       | 26.5             |       | 30.5 |   |
| Other                                   |       | 2.1              |       | — |   |
| Total deferred  tax assets              |       | 56.1             |       | 66.8 |   |
| **Deferred  tax liabilities —**    |       |             |       |   |   |
| Foreign DISC                            |       | (1.2             | )          | (1.4 | ) |
| Other                                   |       | (0.2             | )          | (0.9 | ) |
| Total deferred  tax liabilities         |       | (1.4             | )          | (2.3 | ) |
| Valuation  allowance                    |       | (42.2            | )          | (64.5 | ) |
| Deferred tax  assets (liabilities), net |       | $                | 12.5       |   | $ | — |   |

 

Wehave both federal and state net deferred tax assets of which $11.3 are includedas a current asset within the amounts captioned “Prepaids expenses and other”,and $1.2 are included as a non-current asset within the amounts captioned “Otherassets, net” on the December 31, 2004 Consolidated Balance Sheet.

 

Asof December 31, 2004, we have net operating loss (“NOL”) carryforwards for U.S.federal income taxes of approximately $30.5 which expire in 2023.  Such NOLs are subject to limitations ofInternal Revenue Code Section 382.  Thecarryovers are based on tax returns as currently filed.  Our tax returns are subject to periodic auditby the various jurisdictions in which we operate.  These audits, including those currentlyunderway, can result in adjustments of taxes due or adjustments of the NOLswhich are available to offset future taxable income.

 

Valuationallowances of $67.5 were recorded as a part of the fresh-startadjustments.  Valuation allowances havebeen established for uncertainties in realizing the benefit of certain tax losscarryforwards and other deferred tax assets. In assessing the realizability of carryforwards and other deferred taxassets, we consider whether it is more likely than not that some portion or allof the deferred tax assets will be realized. The valuation allowance is adjusted in the periods that we determine itis more likely than not that deferred tax assets will or will not be realized.  As we realize the benefit of these taxassets, the resulting credit is reflected as an increase inpaid-in-capital.  During 2004, weadjusted the valuation allowance by $22.3, which represents the recognition oftax benefits realized through 2004, along with Predecessor Company tax benefitsexpected to be realized in future periods.

 

F-15

----

 

**7.****              Stockholders’ Equity (Deficit)**

 

***Common Stock***

 

Under the terms of the Reorganization Plan, described in Note 14, theunsecured creditors received 20,000,000 shares of Common Stock in thereorganized Company to discharge and in exchange for all unsecured debt.  The financial advisor to holders of generalunsecured claims was issued 154,710 shares of Common Stock.  Authorized shares of Common Stock were200,000,000 at December 31, 2004.

 

Holdersof the Company’s common stock are entitled to one vote per share on all mattersto be voted on by shareholders and are entitled to receive dividends, if any,as may be declared from time to time by the Board of Directors of the Company.  Upon any liquidation or dissolution of theCompany, the holders of common stock are entitled, subject to any preferentialrights of the holders of preferred stock, to receive a pro rata share of all ofthe assets remaining available for distribution to shareholders after paymentof all liabilities.

 

***Warrants***

 

Under the terms of theReorganization Plan, our Old Common Stock was extinguished.  Holders of our Old Common Stock received inexchange five-year Warrants to purchase an aggregate of 3,556,713 shares of theCommon Stock (representing 15% of our outstanding Common Stock).  The Warrants were issued during 2003, have anexercise price of $18.50 per share and expire on October 31, 2007.

 

We have the right to accelerate the dateof expiration of the Warrants to any date between April 1, 2003 and October 31,2007, if either (i) the quoted price of the Common Stock has been at least$27.75 on at least 20 of 30 successive trading days in a period ending not morethan 15 days prior to the date notice of such acceleration is given, (ii) amerger or sale of substantially all of the Company’s assets has occurred or,(iii) less than 355,671 of the Warrants remain outstanding on the date thenotice of acceleration is given.

 

**8.****              StockBased Compensation**

 

The Reorganization Planestablished the 2002 Long Term Stock Incentive Plan (the “2002 Incentive Plan”)for employees to be administered by the Board of Directors of our newlyreorganized Company and up to 2,015,000 shares of Common Stock were reservedfor issuance under the Plan.  Optionsgranted under the Plan are issued at exercise prices which are equal to orabove the closing price on the date of the grant.  One-third of the options granted under thePlan vest on each of the first three anniversary dates following the dategranted, and have a term of five years. Under the provisions of the 2002 Incentive Plan, the CompensationCommittee of the Board of Directors (the “Committee”) is authorized to awardshares of common stock whereby physical delivery of such shares occurs uponvesting (“stock grants”).  We recognizecompensation expense for stock grants using the straight-line method.  During 2004, 57,600 (having a weightedaverage fair value of $9.90) stock grants were awarded, of which 23,200 shareswere issued during 2004, 17,200 were issued on February 1, 2005, and 17,200shares are expected to be issued on February 1, 2006.  Further, on January 28, 2005, the Committeeawarded 28,237 (having a weighted average fair value of $17.22) shares of stockgrants, all of which vest on January 28, 2008, and awarded 180,272 options toacquire common stock at an exercise price of $17.22 per share.  These stock options have the same terms andconditions as the previous awards.

 

F-16

----

 

Thefollowing is a summary of stock option activity:

 
| ** **                  | ** ** | **Weighted  Average Fair  Value  per Share** | ** ** | **Exercise  Price per Share** | ** **           | **Weighted  Average Price  per Share** | ** ** | **Number of  Shares** | ** ** |
|-----------------------------|------------|----------------------------------------------|------------|-------------------------------|----------------------|----------------------------------------|------------|-----------------------|------------|
|                        |       |                                         |       |                          |                 |                                   |       |                  |       |
| Balance,  December 31, 2002 |       |                                         |       |                          |                 |                                   |       | —                |       |
| Granted to directors        |       | $                                            | 0.89       |                          | $3.08                |                                   | $          | 3.08                  |       | 187,500 |   |
| Granted to  employees       |       | $                                            | 0.96       |                          | $4.75 – $14.25  |                                   | $          | 6.95                  |       | 652,500 |   |
| Exercised                   |       |                                         |       |                          |                 |                                   |       | —                |       |
| Canceled or  expired        |       | $                                            | 1.24       |                          | $4.75                |                                   | $          | 4.75                  |       | (25,000 | ) |
| Balance,  December 31, 2003 |       |                                         |       |                          |                 |                                   |       | 815,000               |       |
| Granted to directors        |       | $                                            | 4.84       |                          | $10.71 – $17.36 |                                   | $          | 14.03                 |       | 170,000 |   |
| Granted to  employees       |       | $                                            | 3.78       |                          | $10.71               |                                   | $          | 10.71                 |       | 24,000 |   |
| Exercised                   |       | $                                            | 1.28       |                          | $4.75                |                                   | $          | 4.80                  |       | (82,103 | ) |
| Canceled or  expired        |       | $                                            | 1.83       |                          | $4.75 – $10.71  |                                   | $          | 5.63                  |       | (20,332 | ) |
| Balance,  December 31, 2004 |       |                                         |       |                          |                 |                                   |       | 906,565               |       |
|                        |       |                                         |       |                          |                 |                                   |       |                  |       |
| Exercisable as  of:         |       |                                         |       |                          |                 |                                   |       |                  |       |
| December 31,  2004          |       |                                         |       |                          |                 | $                                      | 6.02       |                  | 306,239    |   |
| December 31,  2003          |       |                                         |       |                          |                 | $                                      | 3.08       |                  | 62,500     |   |
| December 31,  2002          |       |                                         |       |                          |                 | —                                 |       | —                |       |

 

 
| Weighted average  remaining contractual life: |   |   |   |   |   |   |   | **Years** |   |
|-----------------------------------------------|--------|--------|--------|--------|--------|--------|--------|-----------|--------|
|                                          |   |   |   |   |   |   |   |      |   |
| December 31,  2004                            |   |   |   |   |   |   |   | 3.4       |   |
| December 31,  2003                            |   |   |   |   |   |   |   | 4.2       |   |
| December 31,  2002                            |   |   |   |   |   |   |   | —    |   |

 

The fair value of theseoption grants were estimated on the date of grant using the Black-Scholesoption-pricing model with the following assumptions:

 
| Expected  dividend yield         |   | 0.0%        |   |
|----------------------------------|--------|-------------|--------|
| Expected stock  price volatility |   | 40.0%       |   |
| Risk free  interest rate         |   | 2.4% - 3.2% |   |
| Expected life of  options        |   | 4.0         |   |

 

F-17

----

 

We account for our stockoption plan under APB Opinion No. 25 under which no compensation cost has beenrecognized.  Had compensation cost forthese plans been accounted for consistent with SFAS No. 123, “*Accounting for Stock-Based Compensation*,”and SFAS No. 148, “*Accounting forStock-Based Compensation-Transition and Disclosure*,” our net incomeand net income per share would have decreased to the following pro formaamounts:

 
| ** **                                                                                              | ** ** | **Year Ended  December 31,  2004** | ** ** | **Year Ended  December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
|                                                                                                    |       |                               |       |                               |       |
| Net income, as  reported                                                                                |       | $                                  | 104.5      |                               | $          | 7.5 |   |
| Deduct:                                                                                                 |       |                               |       |                               |       |
| Total stock-based  employee compensation:  Expense determined under fair value based method, net of tax |       | (0.2                               | )          | (0.2                               | )          |
| Pro forma net  income                                                                                   |       | $                                  | 104.3      |                               | $          | 7.3 |   |
| Net income per  share, Basic:                                                                           |       |                               |       |                               |       |
| As reported                                                                                             |       | $                                  | 5.17       |                               | $          | 0.37 |   |
| Pro forma                                                                                               |       | $                                  | 5.16       |                               | $          | 0.36 |   |
| Net income per  share, Diluted:                                                                         |       |                               |       |                               |       |
| As reported                                                                                             |       | $                                  | 5.05       |                               | $          | 0.37 |   |
| Pro forma                                                                                               |       | $                                  | 5.04       |                               | $          | 0.36 |   |

 

**9.****              Segmentand Related Information**

** **

We are organized into three productgroup segments.  Each segment isdescribed as follows:

 

•                  *Plates and Shapes* consists of 21 facilities that maintain aninventory focusing on carbon products such as structural plate, beams, bars andtubing.  This segment provides processingservices such as cutting, cambering/leveling, punching, bending, shearing,cut-to-length, blast and paint, and tee-splitting.

 

•                  *Flat Rolled* consists of 12 facilities that maintain aninventory of cold rolled, coated, and hot rolled steel products and variousnonferrous flat rolled products including aluminum, stainless steel, copper andbrass.  This segment provides processingservices such as slitting, precision blanking, leveling, cut-to-length,punching, bending and shearing.

 

•                  *Building Products* consists of 18 operating locationsand 26 sales and distribution centers that produce and distribute aluminum andsteel building products consisting of covered canopies and walkways, awnings,sunrooms, solariums and other products primarily for the commercial andresidential building products industries. During 2004, 9 locations were closed and 2 locations were merged into anew location.  We continue to serve themarketing areas of the closed facilities with our existing sales force byexpanding the responsible territories of our other facilities, and through theuse of common carrier for product delivery.

 

F-18

----

 

The following table summarizesfinancial information regarding these segments:

 

 
| ** **                                               | ** ** | **Plates and  Shapes** | ** ** | **Flat Rolled** | ** ** | **Building  Products** | ** ** | **Corp, Elims  And Other** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|-----------------|------------|------------------------|------------|----------------------------|------------|-----------|------------|
|                                                     |       |                   |       |            |       |                   |       |                       |       |      |       |
| **Successor  Company:**                                  |       |                   |       |            |       |                   |       |                       |       |      |       |
| Year ended  December 31, 2004                            |       |                   |       |            |       |                   |       |                       |       |      |       |
| Net sales                                                |       | $                      | 621.0      |            | $          | 723.2                  |       | $                          | 183.0      |      | $          | (17.4 | ) | $ | 1,509.8 |   |
| Operating income  (loss)                                 |       | 103.2                  |       | 81.8            |       | 7.9                    |       | (19.2                      | )          | 173.7     |       |
| Total assets                                             |       | 274.4                  |       | 211.3           |       | 79.2                   |       | 145.1                      |       | 710.0     |       |
| Capital  expenditures                                    |       | 10.3                   |       | 2.3             |       | 2.2                    |       | 2.6                        |       | 17.4      |       |
| Depreciation and  amortization                           |       | 0.9                    |       | 0.3             |       | 0.4                    |       | 0.4                        |       | 2.0       |       |
| Year ended  December 31, 2003                            |       |                   |       |            |       |                   |       |                       |       |      |       |
| Net sales                                                |       | $                      | 354.1      |            | $          | 463.6                  |       | $                          | 165.2      |      | $          | (19.7 | ) | $ | 963.2 |   |
| Operating income  (loss)                                 |       | 11.6                   |       | 7.7             |       | 12.4                   |       | (15.3                      | )          | 16.4      |       |
| Total assets                                             |       | 143.6                  |       | 107.7           |       | 62.1                   |       | 93.8                       |       | 407.2     |       |
| Capital  expenditures                                    |       | 11.0                   |       | 3.1             |       | 2.4                    |       | 1.0                        |       | 17.5      |       |
| Depreciation and  amortization                           |       | 0.2                    |       | 0.1             |       | 0.2                    |       | —                     |       | 0.5       |       |
| Period from  November 1, 2002 through December 31, 2002: |       |                   |       |            |       |                   |       |                       |       |      |       |
| Net sales                                                |       | $                      | 49.1       |            | $          | 61.5                   |       | $                          | 21.2       |      | $          | (3.1 | ) | $ | 128.7 |   |
| Operating income  (loss)                                 |       | 1.3                    |       | 1.2             |       | (0.6                   | )          | (2.8                       | )          | (0.9      | )          |
| Total assets                                             |       | 96.3                   |       | 135.6           |       | 61.4                   |       | 85.3                       |       | 378.6     |       |
| Capital  expenditures                                    |       | 0.2                    |       | 0.1             |       | 0.2                    |       | 0.0                        |       | 0.5       |       |
| Depreciation and  amortization                           |       | —                 |       | —          |       | —                 |       | —                     |       | —    |       |
|                                                     |       |                   |       |            |       |                   |       |                       |       |      |       |
|                                                     |       |                   |       |            |       |                   |       |                       |       |      |       |
| **Predecessor  Company:**                                |       |                   |       |            |       |                   |       |                       |       |      |       |
| Period from  January 1, 2002 through   October 31, 2002: |       |                   |       |            |       |                   |       |                       |       |      |       |
| Net sales                                                |       | $                      | 316.3      |            | $          | 404.1                  |       | $                          | 134.9      |      | $          | (22.0 | ) | $ | 833.3 |   |
| Operating income  (loss)                                 |       | 1.5                    |       | 5.4             |       | 10.6                   |       | (20.1                      | )          | (2.6      | )          |
| Total assets                                             |       | 98.9                   |       | 137.8           |       | 73.8                   |       | 110.8                      |       | 421.3     |       |
| Capital  expenditures                                    |       | 0.6                    |       | 1.2             |       | 0.9                    |       | 0.3                        |       | 3.0       |       |
| Depreciation and  amortization                           |       | 2.2                    |       | 2.2             |       | 2.0                    |       | 0.9                        |       | 7.3       |       |

 

Weevaluate segment performance on the basis of operating income.  The amounts shown as an operating loss underthe column heading “Corp, Elims and Other” consist primarily of general andadministrative costs that are not allocated to the segments.

 

Thereconciliation of operating income (loss) to income (loss) before taxes anddiscontinued operations is shown within the Consolidated Statements ofOperations and therefore is not separately presented.

 

Ourareas of operations are solely in the U.S. No geographic area is significant to the consolidated operations.  We have a broad customer base within the U.S.with no single customer being significant to consolidated operations.

 

F-19

----

 

**10.****       EmployeeBenefit Plans**

 

TheMetals USA, Inc. 401(k) Plan (the “Plan”) was established on June 1, 1998.  Effective January 1, 2004,participants are eligible to join the Plan on hire date.  Employee contributions are limited to theInternal Revenue Service established annual dollar limits.  Prior to January 1, 2004, participants wereeligible to join the Plan after completing six full calendar months of serviceand contributions were limited to 15% of eligible compensation.

 

EffectiveDecember 31, 2003, active employees are 100% vested in both prior and futureCompany matching contributions and earnings. Employees hired after December 31, 2003 become 50% vested in Companymatching contributions and earnings after completing one year of service andfully vested after completing two years of service.  On January 1, 2004, the Company match wasreinstated after being suspended on October 1, 2001.  We match 100% of the first 2% of eachemployee’s contributions.

 

TheMetals USA, Inc. Union 401(k) Plan was established on October 1, 1998 toprovide a standard defined contribution savings plan for all employees coveredunder the terms of a collective bargaining agreement (the “Union Plan”).  The employer is not obligated by the UnionPlan to make contributions, unless required by the operative collectivebargaining agreement.  The Union Planallows the employee to contribute up to 25% of their eligiblecompensation.  The Company match for theUnion Plan is 1/2% up to the first 6% of an employee’s contribution.  In 2004, Company matching contributions were$1.7 for both plans.

 

**11.****       Commitmentsand Contingencies**

 

***Operating Lease Agreements***

 

Our minimum leaseobligations for continuing operations under certain long-term non-cancelableoperating lease agreements for office space, warehouse space and equipment areas follows: 2005 — $14.5; 2006 — $13.2; 2007 — $11.6; 2008 —  $10.1; 2009 — $9.2 thereafter — $30.9.  We recorded approximately $17.0, $10.9, $1.8,and $9.7 in rent expense in continuing operations for the years ended December31, 2004 and 2003, for the periods from November 1, 2002 through December 31,2002 and from January 1, 2002 through October 31, 2002, respectively.  Certain of these leases are with previouslyaffiliated individuals and companies.

 

***Letters of Credit***

 

Wehave entered into a letter of credit in the amount of $5.7 in conjunction withthe IRB (see Note 5) and other letters of credit aggregating $18.5 as ofDecember 31, 2004.  Other letters ofcredit consist primarily of collateral support for our property and casualtyinsurance program.  All letters of creditreduce the amount available to borrow under the Revolving Credit Facility.

 

***Contingencies***

 

Weare involved in a variety of claims, lawsuits and other disputes arising in theordinary course of business.  We believethe resolution of these matters and the incurrence of their related costs andexpenses should not have a material adverse effect on our consolidatedfinancial position, results of operations or liquidity.

 

F-20

----

 

**12.****       SupplementalCash Flow Information**

 
| ** **                                       | ** ** | **Successor Company**              | ** ** | ** **                         | **Predecessor Company** | ** **                                                     |
|--------------------------------------------------|------------|------------------------------------|------------|------------------------------------|-------------------------|----------------------------------------------------------------|
| ** **                                       | ** ** | **Year Ended  December 31,  2004** | ** ** | **Year Ended  December 31,  2003** | ** **              | **Period from  November 1,  2002 through  December 31,  2002** | ** ** | ** ** | **Period from January 1,  2002 through  October 31,  2002** | ** ** |
| ** **                                       | ** ** | ** **                         | ** ** | ** **                         | ** **              | ** **                                                     | ** ** | ** ** | ** ** | ** ** |
| Cash paid for  interest expense                  |       | $                                  | 7.2        |                               | $                       | 5.4                                                            |   | $ | 0.6 |   |   | $ | 13.6 |   |
| Cash paid  (refunded) for income taxes           |       | 54.5                               |       | (19.3                              | )                       | (0.1                                                           | ) |   | (25.5 | ) |
| Non-cash  acquisitions of property and equipment |       | 4.8                                |       | —                             |                    | —                                                         |   |   | — |   |
|                                                  |            |                                    |            |                                    |                         |                                                                |  |  |  |  |  |  |  |  |

 

**13.****       RelatedParty Transactions**

 

Transactionswith our directors, executive officers, principal shareholders or affiliatesmust be at terms that are no less favorable to us than those available fromthird parties and must be approved in advance by a majority of disinterestedmembers of the Board of Directors. During the years ended December 31, 2004 and 2003, and the period fromNovember 1, 2002 through December 31, 2002, the Board of Directors receivedfees of $0.6, $0.7, and $0.2, respectively. A subsidiary of ours sells scrap to Metal Management, Inc., a companywhere we shared three common directors in 2004. One of these directors, Mr. Daniel Dienst, serves as our Chairman of theBoard of Directors, and serves as Chairman of the Board of Directors and ChiefExecutive Officer of Metal Management Inc. Sales of scrap to Metal Management Inc. for the years ended December 31,2004 and 2003, the periods from November 1, 2002 through December 31, 2002 andfrom January 1, 2002 through October 31, 2002 were $2.0, $0.9, $0.2, and $0.5,respectively, and were transacted at prevailing market rates.

 

**14.****       Reorganization and Fresh-Start Reporting**

 

The steel industry declined substantiallyduring 2000 and 2001 as a result of pricing pressure from foreign imports andan economic recession experienced in the United States (“U.S.”).  These factors, combined with the PredecessorCompany’s high level of debt, caused the Predecessor Company to seek protectionunder U.S. bankruptcy laws.  OnNovember 14, 2001, the Predecessor Company and all of itssubsidiaries voluntarily filed for relief under Chapter 11 of the U.S.Bankruptcy Code (“Chapter 11 Filing”), in the U.S. Bankruptcy Court, SouthernDistrict of Texas.  On October 31, 2002(the “Effective Date”), our Reorganization Plan became effective and we emergedfrom bankruptcy court protection.

 

*Fresh-startadjustments and gain on reorganization*—**During 2002, we recorded fresh-startadjustments primarily related to the reduction of the carrying value of ournon-current assets of $109.7 and a gain on reorganization associated with theemergence from bankruptcy of $190.6.

 

F-21

----

 

*Reorganization expenses*—**Reorganization expensesinclude all costs and expenses directly attributable to the Chapter 11Filing.  For the period from January 1,2002 through October 31, 2002 these expenses consisted of the following:

 
| Professional  fees                                                                 |   | $   | 18.8   |   |
|------------------------------------------------------------------------------------|--------|-----|--------|--------|
| Employee  retention expenses and obligations associated with employment agreements |   | 8.1 |   |
| Write-off of  debt issuance costs                                                  |   | 1.4 |   |
| Total  reorganization expenses                                                     |   | $   | 28.3   |   |

 

Under the terms of theReorganization Plan, the unsecured creditors received, upon resolution of alldisputed creditor claims and completion of distributions, 20,000,000 shares ofnew common stock, par value $.01 per share, (“Common Stock”) in the reorganizedCompany to discharge and in exchange for an estimated $367.3 of unsecured debt,and the financial advisor to Creditors Committee was issued 154,710 shares ofCommon Stock. Subsequent to October 31, 2002, we settled certain disputedclaims which increased the original estimate by $3.4 to $370.7.  The Predecessor Company’s existing commonstock, par value $.01 per share, outstanding prior to the Effective Date (the “OldCommon Stock”) was extinguished.  Uponcompletion of distributions under the Reorganization Plan, holders of the OldCommon Stock received in exchange five-year warrants (the “Warrants”) topurchase an aggregate of 3,556,713 shares of the Common Stock (representing 15%of the outstanding Common Stock).  TheWarrants have an exercise price of $18.50 which was calculated at full recoveryfor all unsecured creditors.  The warrantexercise price was determined six months after the Effective Date based uponour estimate of total general unsecured claims. Instructions regarding theexchange of the Warrants were delivered to the exchange agent onMay 9, 2003. The Warrants expire on October 31, 2007.

 

Wewere required to adopt “Fresh-Start Reporting” as specified by SOP 90-7.  “Fresh-Start Reporting” is required upon asubstantive change in control and requires that the reporting entity allocatethe reorganization value to its assets and liabilities in relation to theirfair values as of the Effective Date. The reorganization value of $305.0 was based on accepted valuationtechniques, including using a five-year discounted cash flow analysis andanalysis of comparable publicly traded companies.  The equity value of $192.3 was equal to thereorganization value less debt (net of assets held for sale and other credits).

 

**15. Operations Held for Sale**

 

**During2001, the Predecessor Company decided to sell certain assets from its Platesand Shapes business unit.  Because thesale of these operations was initiated prior to the Predecessor Company’sadoption of SFAS 144 on January 1, 2002, the accounting for the disposal ofthese assets was governed by the provisions of SFAS 121, which required thatthe operating results of operations held for sale be reported as continuingoperations on the statement of operations.**

 

F-22

----

 

**Operatingresults included in the consolidated statements of operations regarding thebusinesses classified as operations held for sale under SFAS 121 are asfollows:**

** **

** **
| ** **                         | ** ** | **Successor  Company**                                         | ** ** | ** ** | **Predecessor  Company**                                     | ** ** |
|------------------------------------|------------|----------------------------------------------------------------|------------|------------|--------------------------------------------------------------|------------|
| ** **                         | ** ** | **Period from  November 1, 2002  through  December 31,  2002** | ** ** | ** ** | **Period from  January 1, 2002  through  October 31,  2002** | ** ** |
| ** **                         | ** ** | ** **                                                     | ** ** | ** ** | ** **                                                   | ** ** |
| **Statement  of Operations Data:** |       |                                                           |       |       |                                                         |       |
| Net sales                          |       | $                                                              | —     |       |                                                         | $          | 31.2 |   |
| Operating loss                     |       | (0.1                                                           | )          |       | (2.6                                                         | )          |
|                                    |            |                                                                |            |            |                                                              |            |  |  |

** **

On April 5, 2002, thePredecessor Company announced planned divestitures of 11 additional businessunits that resulted in a significant downsizing.  These divestitures were a part of theReorganization Plan.  The accounting fordisposal of these operations was governed by the provisions of SFAS 144.  This pronouncement requires that theoperational results of the operations held for sale be recorded as discontinuedoperations on the statement of operations. Operational information included in the consolidated statements ofoperations with respect to the businesses classified as discontinued operationsunder SFAS 144 are as follows:

 
| ** **                         | ** ** | **Successor  Company**             | ** ** | ** **                                                     | **Predecessor  Company** | ** ** |
|------------------------------------|------------|------------------------------------|------------|----------------------------------------------------------------|--------------------------|------------|
| ** **                         | ** ** | **Year Ended  December 31,  2003** | ** ** | **Period from  November 1, 2002  through  December 31,  2002** | ** **               | ** ** | **Period from  January 1, 2002  through  October 31,  2002** | ** ** |
|                               |       |                               |       |                                                           |                     |       |   |   |
| **Statement  of Operations Data:** |       |                               |       |                                                           |                     |       |   |   |
| Net sales                          |       | $                                  | 3.4        |                                                           | $                        | 6.2        |   |   | $ | 192.2 |   |
| Cost of sales                      |       | 2.8                                |       | 4.9                                                            |                     |       | 149.8 |   |
| Gross profit                       |       | 0.6                                |       | 1.3                                                            |                     |       | 42.4 |   |
| Operating  expenses                |       | 0.7                                |       | 2.3                                                            |                     |       | 41.4 |   |
| Operating income  (loss)           |       | (0.1                               | )          | (1.0                                                           | )                        |       | 1.0 |   |
| Provision for  taxes               |       | —                             |       | —                                                         |                     |       | 0.4 |   |
| Net loss                           |       | $                                  | (0.1       | )                                                              | $                        | (1.0       | ) |   | $ | 0.6 |   |

 

F-23

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**Thereare no assets held for sale at December 31, 2004 and at December 31, 2003.  Total proceeds received from the sale of bothassets held for sale under SFAS 144 and SFAS 121 during the year ended December31, 2003, for the periods from November 1, 2002 through December 31, 2002 andfrom January 1, 2002 through October 31, 2002 were $5.4, $6.9 and $83.2,respectively.**

** **

During the first quarterof 2003, the remaining unsold operating unit, which had been included in assetsheld for sale since April 2002 and for which the we had no interestedpurchasers, was returned to held for use status and the results of operationswere reclassified and included in results of continuing operations for allperiods presented.

 

F-24

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