**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

** **

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**FORM 10-K**

 

| **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|-------------------------------------------------------------------------------------------|
|                                                                                      |
| **For the  fiscal year ended December 31, 2002**                                          |
|                                                                                      |
| **Commission  File Number 1-13123**                                                       |

 

| **METALS USA, INC.**                                    |
|---------------------------------------------------------|
| (Exact name of Registrant as Specified in its  Charter) |

** **

| **Delaware**                                                    |   | **76-0533626**                           |
|-----------------------------------------------------------------|--------|------------------------------------------|
| (State or other jurisdiction  of incorporation or organization) |   | (I.R.S. Employer  Identification Number) |
|                                                            |   |                                     |
| **Three  Riverway, Suite 600**                                  |   |                                     |
| **Houston,  Texas**                                             |   | **77056**                                |
| (Address of Principal Executive Offices)                        |   | (Zip Code)                               |

 

Registrant’s telephonenumber, including area code:  **(713) 965-0990**

 

Securities registeredpursuant to Section 12(b) of the Act:

 

| **Title of  each class** |   | **Name of  Each Exchange on  Which Registered** |
|--------------------------|--------|-------------------------------------------------|
| None                     |   | None                                            |

 

Securities registeredpursuant to Section 12(g) of the Act:

Common Stock, $.01 parvalue

 

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

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of Registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K o

 

Indicate by check mark whether the Registrant is anaccelerated filer (as defined in Exchange Act Rule 12b-2.  Yes oNo ý

 

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 OTCBulletin Board high bid price of $0.025 per share on June 30, 2002, the lastbusiness day of the Registrant’s most recently completed second fiscal quarter,the aggregate market value of the Registrant’s previously outstanding commonstock held by non-affiliates on such date was approximately $0.8 million.  Based on the OTC Bulletin Board high bidprice of $3.50 per share on December 31, 2002, the last business day of therecently completed fiscal quarter after the Effective Date of the Registrant’sReorganization Plan and based on an estimated total allowed general unsecuredclaims of $367.3 million discharged in exchange for common stock under theReorganization Plan, the aggregate market value of the Registrant’s outstandingcommon stock held by (or by the exchange agent under our Reorganization Plan onbehalf of) non-affiliates on such date was approximately $54.6 million.  The common stock held by the Registrant’sdirectors, executive officers and persons beneficially owning 10% or more ofthe shares of common stock, who are the only persons known to the Registrant whomay be considered to be its “affiliates” as defined under Rule 12b-2, isexcluded from the figures in this paragraph. There were 20,154,710 shares of outstanding common stock $.01 par value,of the Registrant as of March 21, 2003 of which 14,693,548 shares have beendistributed and the remaining 5,461,162 shares are being held in escrow by ourexchange agent for future distribution in accordance with our ReorganizationPlan.  Based on the OTC Bulletin Boardhigh bid price of $3.05 per share on March 21, 2003 and on estimated claims asspecified above, the aggregate market value of the Registrant’s outstandingcommon stock held by (or on behalf of) non-affiliates on such date wasapproximately $47.6 million.

 

 

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***FRESH STARTACCOUNTING***

 

*We haveapplied “Fresh-Start Reporting” (as defined herein) to our consolidated balancesheet as of October 31, 2002 in accordance with Statement of Position No. 90-7,“Financial Reporting by Entities in Reorganization Under the Bankruptcy Code”as promulgated by the American Institute of Certified Public Accountants (“SOP90-7”). Under “Fresh-Start Reporting”, a new reporting entity is considered tobe created and the recorded amounts of assets and liabilities are adjusted toreflect their estimated fair values at the date “Fresh-Start Reporting” isapplied.  On October 31, 2002, MetalsUSA, Inc. emerged from bankruptcy.  As aresult of the application of “Fresh-Start Reporting,” the financial informationof our Company as of any date or for periods after November 1, 2002 is notcomparable to our historical financial information before November 1, 2002. Asa result of the 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.”*

* *

***SAFE HARBORSTATEMENT—FORWARD-LOOKING STATEMENTS***

* *

*ThisAnnual Report on Form 10-K contains statements that constitute “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995.  These statements appear in anumber of places, including Item 1. “Business,” Item 3. “Legal Proceedings” andItem 7. “Management’s Discussion and Analysis of Financial Condition andResults of Operations.”  Such statementscan be identified by the use of forward-looking terminology such as “believes,”“expects,” “may,” “estimates,” “will,” “should,” “plans” or “anticipates” orthe negative thereof or other variations thereon or comparable terminology, orby discussions of strategy.  Readers arecautioned that any such forward-looking statements are not guarantees of futureperformance and involve significant risks and uncertainties, and that actualresults may vary materially from those in the forward-looking statements as aresult of various factors.  Thesefactors include the effectiveness of management’s strategies and decisions,general economic and business conditions, developments in technology, new ormodified statutory or regulatory requirements and changing prices and marketconditions.  This report identifies otherfactors that could cause such differences. No assurance can be given that these are all of the factors that couldcause actual results to vary materially from the forward-looking statements. Inaddition, readers should refer to Item 7. “Management’s Discussion and Analysisof Financial Condition and Results of Operations — Factors Which May AffectFuture Operating Results” for risk factors that may affect future performance.*

 

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**METALSUSA, INC, AND SUBSIDIARIES**

 

**PART I**

 

**Item 1.    *Business***

 

*Unlessotherwise indicated, all references to the “Company,” “we,” “us,” “our” orother similar terms herein are intended to refer to Metals USA, Inc. and all ofits subsidiaries. Readers should refer to Item 7. “Management’s Discussion andAnalysis of Financial Condition and Results of Operations — Factors Which MayAffect Future Operating Results” for risk factors that may affect futureperformance.*

 

**Overview**

 

We are a leading provider of value-added processedsteel, stainless steel, aluminum and manufactured metal components.Approximately 85% of our revenues are derived from our metal service center anddistribution activities and the remaining portion of our revenues are derivedfrom our Building Products Group that manufactures and distributes productsprimarily related to the residential home improvement industry.  We were organized as a Delaware corporationon July 3, 1996, and began operations upon completion of an initial publicoffering in July 1997 that included a simultaneous acquisition of eightcompanies that had combined historical revenues of approximately $450million.  From 1997 through early 2000,we acquired numerous additional metal processing and distribution companies andincreased our historical revenues to over $2 billion in 2000.  Because of the economic conditions and thedivestiture of certain assets to reduce our indebtedness, our revenues fromcontinuing operations have declined from $1.55 billion in 2000 to $944 millionin 2002.  During the past three years,the steel industry has declined substantially as a result of pricing pressurefrom foreign imports and the economic recession experienced in the UnitedStates (“U.S.”).  These factors togetherwith the high level of debt our Company carried in late 2001, as well as othersdiscussed below, caused us to seek protection under U.S. bankruptcy laws onNovember 14, 2001.  We emerged frombankruptcy on October 31, 2002.  Formore information regarding our emergence from bankruptcy protection, see“Chapter 11 Proceedings” below.

 

We purchase metal from primaryproducers who generally focus on large volume sales of unprocessed metals instandard configurations and sizes.  Inmost cases, we perform the customized, value-added processing services requiredto meet specifications provided by end-use customers.  By providing these services, as well as offering inventorymanagement and just-in-time delivery services, we enable our customers toreduce material costs, decrease capital required for raw materials inventoryand processing equipment and save time, labor, warehouse space and otherexpenses.  In addition to our metalsprocessing capabilities, we also manufacture higher-value finished buildingproducts.  Our Company is organized intothree product groups, Flat Rolled, Plates and Shapes and Building Products.

 

Our Flat Rolled Group and Plates and Shapes Groupcustomers are in businesses such as the machining, furniture, transportationequipment, power and process equipment, industrial/commercial construction/fabrication,consumer durables and electrical equipment industries, and machinery andequipment manufacturers.  Our BuildingProducts customers are distributors and contractors engaged in residential andcommercial projects.

 

**Chapter 11Proceedings**

 

On November 14, 2001, wevoluntarily filed for relief under Chapter 11 of the U.S. Bankruptcy Code, inU.S. Bankruptcy Court, Southern District of Texas and began operating ourbusiness as debtors-in-possession pursuant to the Bankruptcy Code (the “Chapter11 Filing”).  As debtors-in-possessionunder Section 1107 and 1108 of the Bankruptcy Code, we maintained possession ofour properties and assets, and continued to operate our businesses.  We were authorized to manage our propertiesand operate our 

 

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businesses, but we did not engage in transactionsoutside the ordinary course of business without the approval of the BankruptcyCourt.

 

Our need to seek relief under the Bankruptcy Code wasdue primarily to (1) a reduction in cash flows resulting from an industry-widerecession caused by pricing pressure from foreign imports and decline in themanufacturing sector of the U.S. economy, (2) the inability to obtainadditional liquidity from our 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.  During 2001,the U.S economy in general and the manufacturing sector in particular movedinto a recession that was further exacerbated by the terrorist attack ofSeptember 11, 2001.  The Chapter 11 Filing was intended to maximizerecovery by creditors by preserving the Company as a viable entity with goingconcern value.  The protection affordedby the Chapter 11 Filing permitted us to reorganize and restructure ourdebt.  On June 21, 2002, we reached anagreement with the Official Committee of Unsecured Creditors of Metals USA,Inc. and affiliated debtors (the “Creditors Committee”) on the terms of ourreorganization plan, as amended (the “Reorganization Plan”), subject todefinitive documentation and obtaining the required approvals and exitfinancing.  We filed this ReorganizationPlan with the Bankruptcy Court on August 27, 2002.  The Bankruptcy Court held a hearing on September 18, 2002 anddetermined the disclosure statement contained adequate information to be usedfor distribution and the solicitation of vote from the impaired claimholders.  After receiving a majority ofvotes 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 (the“Effective Date”).

 

Under the terms of the Reorganization Plan, theunsecured creditors will receive, upon resolution of all disputed creditorclaims and completion of distributions, 20,000,000 shares of new common stock,par value $.01 per share (“Common Stock”) in the reorganized Company todischarge and in exchange for unsecured debt estimated at $367.3 million, andthe financial advisor to the Creditors Committee was issued 154,710 shares ofCommon Stock in accordance with their engagement agreement as partial paymentfor their services.  Our existing commonstock (the “Old Common Stock”), par value $.01 per share, outstanding prior tothe Effective Date was extinguished and holders of such shares will receive inexchange for such shares, upon completion of distributions under theReorganization Plan, five-year Warrants to purchase an aggregate of 3,556,713shares of our Common Stock (representing 15% of our outstanding Common Stockupon exercise).  The Warrants will havean exercise price calculated at full recovery for all unsecured creditors, suchexercise price to be determined approximately six months after the Effective Date,based upon the Company’s estimate of total general unsecured claims.  The exercise price is currently estimated tobe $18.37 per share (assuming that total allowed general unsecured claims are$367.3 million).  The Warrants arerequired under the Reorganization Plan to be distributed on or before April 30,2003.   Under the terms of theReorganization Plan we are required to use commercially reasonable efforts tolist the Common Stock on a nationally recognized market or exchange, but therecan be no assurance that any such listing will be approved or that anestablished trading market will develop for the Common Stock.  We do not currently intend to list theWarrants and cannot provide any assurance as to whether a market will developfor the Warrants.  The ReorganizationPlan established the 2002 Long-Term Stock Incentive Plan (the “2002 IncentivePlan”) for employees to be administered by the Board of Directors of the newlyreorganized Company.  Up to 2,015,000shares of Common Stock are reserved for issuance under the 2002 IncentivePlan.  All previously outstandingoptions of the Company that had been issued under the existing stock optionplans were cancelled.  Pursuant to the Reorganization Plan, theBoard of Directors of the reorganized Company was initially reconstituted withsix new members.  See “RecentDevelopments – Management Changes” and Item 10. "Directors and ExecutiveOfficers of the Registrant."

 

We wererequired to adopt “Fresh-Start Reporting” asspecified by the American Institute of Certified

 

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Public Accountant’s (“AICPA”) Statement ofPosition 90-7 (“SOP90-7”), *FinancialReporting by Entities in Reorganization Under the Bankruptcy Code.*  “Fresh-Start Reporting” is required upon asubstantive change in control and requires upon the Effective Date, that thereporting entity allocate the reorganization value of the Company to its assetsand liabilities in relation to their fair values.  Accordingly, the carrying values of ourassets and liabilities as of December 31, 2002 differ from the amounts shown inprevious periods.  The principaldifferences relate to the exchange of shares of our Common Stock forpre-petition liabilities subject to compromise, exchange of our Warrants forOld Common Stock, adjustments to reflect the fair value of certain non-currentassets and elimination of the retained deficit.

 

**RecentDevelopments**

 

***New Credit Facility***

 

Upon emerging from Bankruptcy on October 31, 2002, weexecuted our new financing agreement (the “New Credit Facility”) with a group oflenders.  The New Credit Facility has aninitial term of three years with an option to extend the agreement by twoone-year terms.  Thedebtors-in-possession financing (“DIP Financing”) was retired with borrowingsunder the New Credit Facility.  The NewCredit Facility provides for a revolving credit facility providing up to $200.0million in borrowings and is secured by all of our receivables, inventories,and intangible property.  Borrowingsunder the New Credit Facility are limited to the lesser of a borrowing base,comprised of eligible receivables and inventories, or $200.0 million in theaggregate; however, our property and equipment are not pledged as security forthe loan.  At March 21, 2003, we had$111.1 million drawn and an additional $66.9 million available to borrow underthe New Credit Facility.  See Item 7. “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations – Liquidity and Capital Resources– Financing Activities.”

 

***Management Changes***

 

Under the terms of the Reorganization Plan, effectiveOctober 31, 2002, all members of the Predecessor Company’s Board of Directorsresigned their board positions and were replaced by the following six newmembers appointed by the Creditors Committee: Daniel W. Dienst, Eugene I.Davis, John T. DiLacqua, Jr., Jack G. Leckie, Gerald E. Morris and Charles P.Sanida.  The Board of Directors electedDaniel W. Dienst as the Chairman of the Board.

 

Additionally, effective November 1, 2002, Mr. Kirkseyresigned from his position as Chief Executive Officer and President of theCompany.  As of the same date, Lester G.Peterson resigned from his position as Senior Vice President of CorporateDevelopment and President of the Plates and Shapes Group.  William R. Bennett, who was originally designatedas a director, was appointed by the new Board of Directors as Senior VicePresident of our Company and President of the Plates and Shapes Group.   The new Board of Directors created theOffice of the Chairman and appointed two of its members, Daniel W. Dienst andEugene I. Davis, to act as Chairman and Member, respectively, and to assume theduties of the President and chief executive officer until a replacement wasselected.

 

On January 21, 2003, Terry L. Freeman was promoted toChief Financial Officer and John A. Hageman was promoted to ChiefAdministrative Officer.  Mr. Freeman hasserved as Chief Accounting Officer since May 1998 and Senior Vice Presidentsince May 2002.  Mr. Hageman has servedas Senior Vice President and General Counsel since April 1997.

 

On February 18, 2003, the Board of Directors announcedthe appointment of C. Lourenço Gonçalves as President and Chief ExecutiveOfficer, effective February 24, 2003. Mr. Gonçalves was also appointed to the Board of Directors, filling theseventh and final board position.  Foradditional information, see Item 10. “Directors and Executive Officers of theRegistrant.”

 

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***Divestitures***

 

On April 5, 2002, we announced planned divestitures of11 additional business units that resulted in a significant downsizing of ourCompany.  These assets were sold toraise proceeds to reduce our indebtedness, improve our liquidity and enabled usto emerge from bankruptcy.  Thesedivestitures were a part of our Reorganization Plan that was approved by theBankruptcy Court.  These divestitures,along with previously announced divestitures generated proceeds ofapproximately $90.0 million during 2002. The proceeds from the sale of these assets were used primarily to reduceamounts outstanding under our pre-petition credit facilities.  Refer to Item 2. “Properties” for furtherdisclosure of the disposed properties and properties to be disposed of and Item7. “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — Liquidity and CapitalResources.”

 

***Increased Tariffs on Imports***

 

During the past year, prices for certain steelproducts in the U.S. reached a 20-year low and an estimated 32 steel producershave filed for bankruptcy protection over the last five years.  EffectiveMarch 20, 2002, increased tariffs of between 8% and 30% were imposed on mostimported steel. The purpose of these increases was to assist the financiallytroubled U.S. steel producing industry that has declined substantiallyover the last four years. Historically, steel prices have varied dramaticallyby product line and geographic region. The tariffs will be in effect for three years and are expected toprovide the U.S. steel industry an opportunity to reorganize and become morecompetitive with foreign imports.  Our Company does not produce any steel;however, historically service centers like our Company generally have benefitedfrom rising steel prices.  The combinedeffect of the implementation of the tariffs and the closure of a significantportion of our domestic steel manufacturing capacity due to the bankruptcies ofseveral steel mills created a supply imbalance with respect to flat rolledsteel.  Accordingly, prices for flatrolled steel increased dramatically during the first quarter of 2002.  During the initial period during whichprices were rising, we had to fund the purchase of higher cost material as thelower cost material was sold.  Thisnegative impact on cash flow continued until prices stabilized during thesecond quarter of 2002, and was offset by higher sales prices from sales ofthen-existing inventory during that period.

 

The tariffs did not apply toa number of products sold by our Plates and Shapes Group.  For example, the recommendations for protectionof the domestic steel industry did not include any tariff protection forwide-flange beams, which historically is one of the principal products sold byour Plates and Shapes Group.  Steelprices relating to products sold by our Plates and Shapes Group did notexperience dramatic price increases as was seen in the flat rolled steelmarkets during 2002.  On the contrary,the absence of a significant tariff impact plus the weakening domesticconstruction and fabrication industry has led to further price erosion acrossmost product lines.

 

Generally, sales made by ourPlates and Shapes Group are based upon a margin over current replacement cost;therefore, the impact of declining prices on our results of operations wasrealized as market acceptance of the lower producer prices were announced.   With respect to our Flat Rolled Group, ourgross margin dollars remained constant for the majority of our major customers,where we have pricing agreements with producers for the purchase price ofspecified volumes of material.  Pricesfor other customers were increased as producer price increases wereannounced.  Our Building Products Groupuses aluminum as the principal raw material and very little steel in theirproducts; therefore, the impact of higher steel prices was minimal.

 

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** **

**Industry Overview**

 

***                Metal Service Center Business***

 

Companiesoperating in the metals industry can be generally characterized as: (i) primarymetals producers, (ii) metals processors/service centers or (iii)end-users.  We believe that both primarymetals producers and end-users are increasingly seeking to have their metalsprocessing and inventory management requirements met by value-added metalsprocessors/service centers.  Primary metalsproducers, which manufacture and sell large volumes of metals in standard sizesand configurations, generally sell only to those large end-users and metalsprocessors/service centers who do not require processing of the products andwho can tolerate relatively long lead times. Metals processors/service centers offer services ranging from precision,value-added pre-production processing in accordance with specificcustomer demands, to storage and distribution of unprocessed metal products.These service centers function as intermediaries between primary metalsproducers and end-users, such as contractors and original equipmentmanufacturers (“OEMs”). End-users incorporate the processed metal into aproduct, in some cases without further modification.

 

Historically,metals service centers provided few value-added services and were little morethan distribution centers, linking metals producers with all but the largestend-users of metals.  In the past twodecades, however, the metals service center business has evolved significantly,and the most successful metals service centers have added processingcapabilities, thereby offering an increasingly broad range of value-addedservices and products both to primary metals producers and end-users.  This evolution has resulted from changingtrends in the primary metals industry as well as among end-users.

 

During the past two decades, the trend among primarymetals producers has been to focus on their core competency of high-volumeproduction of a relatively limited number of standardized metal products.  This change in focus has been driven bymetal producers’ need to develop and improve efficient, volume-drivenproduction techniques in order to remain competitive.  As a result, most of the primary producers have sold theirservice centers.  Accordingly, mostend-users are no longer able to obtain processed products directly from primarymetals producers and have recognized the economic advantages associated withoutsourcing their customized metals processing and inventory managementrequirements. 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 these processingservices make the ownership and operation of the necessary equipment morefinancially feasible.

 

In October 2001, U.S. Steel, an integrated steel producer,announced that it had created an internet based service center directed towardend-users.  This is a departure from thegeneral industry trend described above. The primary purpose of this initiative is to bypass value addedmetal providers such as our Company and our competitors and sell its productsdirectly to end-users (although service quotas will be contracted to processmetals on their behalf).  To date thisinitiative has had little impact on our operations.  There can be no assurance however, that similar initiatives ifundertaken by other producers, together with the U.S. Steel initiative couldnot adversely affect our business.  Asof March 21, 2003, no other such initiatives have been announced.

 

Value-added metals processors/service centers have also benefitedfrom growing customer demand for inventory management and just-in-time deliveryservices.  These supply-chain services,which are not normally available from primary metals producers, enableend-users to reduce material costs, decrease capital required for inventory andequipment and save time, labor and other expenses.  In response to customer expectations, the more sophisticatedvalue-added metals processors/service centers have acquired specialized andexpensive equipment to perform customized processing and have installedsophisticated computer systems to automate order entry, inventory tracking,management sourcing and work-order scheduling. Additionally, some value-added metals processors/service centers haveinstalled

 

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electronic data interchange (“EDI”) between theircomputer systems and those of their customers to facilitate order entry, timelydelivery and billing.

 

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 and fabricators nationwide.  For additional information regarding trendsand industry initiatives, see “Competition” and “Technology” below.

 

***                Building Products Business***

 

The residential remodeling industry is estimated to be$150 billion annually by the National Association of the Remodeling Industry(“NARI”).  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 been reflected in theincrease in home ownership since the middle of the century.  In 1990, over 64% of the population hadbuilt some type of home equity as opposed to 55% in 1950.  The increase in home ownership amongstmiddle-aged Americans is extremely important for the building productsindustry, 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, 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 domestic home supply is also expectedto bolster remodeling sales in the near future.  It is estimated that 85 million American homes are over 20 yearsold and are prime candidates for reconstruction and remodeling.  Although new housing trends have grownsteadily over the past few years, new homes generally account for less than 2%of the domestic home supply in any given year. As Americans look to improve and add value to their homes, more and morewill turn to remodeling as a cost-efficient alternative to new housingconstruction.  The NARI reports that newhomeowners tend to remodel their homes within the first 16-24 months of movingin, but more importantly, as the younger population reaches middle age, theyare likely to make more expensive purchases. Individuals age 35-44 spend twice as much money on remodeling than anyother age group in the country.  Further,advancements in quality and a broader range of price-offerings in home improvementproducts are making consumers feel more comfortable about making significantremodeling decisions as opposed to purchasing a new home.  All of these demographic trends are expectedto benefit the continued growth of the building products industry.

 

**Company Organization**

 

During 2001, weorganized our operations into three product groups to improve operationalefficiencies and reduce administrative costs, Flat Rolled, Plates and Shapesand Building Products.  We moved ourflat rolled specialty metals operations into the Flat Rolled Group and ournon-flat rolled specialty metals operations into the Plates and ShapesGroup.  We continue to operate theBuilding Products Group as a separate group. All of our specialty metals Plates and Shapes operations were soldduring 2002.

 

Each product groupis led by an experienced executive and is supported by a professional staff infinance, purchasing and sales and marketing. This product-oriented organizational structure facilitates the efficientadvancement of our goals and objectives to achieve operational synergies,focused capital investment and improved working capital turnover.  For additional industry segment information,see Item 7. “Management’s Discussion and Analysis of Financial Condition andResults of Operations –Results of Operations – Results of Operations bySegment” and Note 11 of notes to consolidated financial statements in Item 8.“Financial Statements and Supplementary Data.” The following descriptions reflect the reorganization of the productgroups.

 

***Plates and Shapes***

 

Plates and Shapes had revenues from continuingoperations of $347.1 million in 2002 and currently has 20 operating locationsthroughout the U.S.  This operatingsegment sells carbon steel products such as wide-flange beams, plate, tubular,angles and other structural shapes. These products are available in a number of alloy grades and sizes andgenerally undergo additional processing prior to customer delivery. Processingservices include cutting, sawing, cambering/leveling, punching, drilling,beveling, surface grinding, bending, shearing, cut-to-length andtee-splitting.  Plates and Shapescustomers are primarily in the fabrication, construction, machinery andequipment, transportation and energy industries.

 

***Flat Rolled***

 

Flat Rolled had revenues from continuing operations of$465.6 million in 2002 and currently has 15 operating locations in the Midwestand southern regions of the U.S. This operating segment sells a number ofproducts including carbon and stainless steel, aluminum, brass and copper in avariety of alloy grades and sizes. Steel mills generally ship carbon steel in sizes less than a quarter ofan inch in thickness in continuous coils that typically weigh 40 to 60 thousandpounds each.  Few customers can handlesteel in this form.  Accordingly,substantially all of the carbon steel material as well as the nonferrousmaterials sold by Flat Rolled undergo additional processing prior to customerdelivery.  Processing services includeslitting, precision blanking, leveling, cut-to-length, laser cutting, punching,bending and shearing. Flat Rolled customers are in the electricalmanufacturing, fabrication, furniture, appliance manufacturers, machinery andequipment and transportation industries.

 

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***Building Products***

 

Building Products had revenuesfrom continuing operations of $156.1 million in 2002 and currently has 18operating locations and 32 sales and distribution centers throughout thesoutheast, southwest and western regions of the U.S.  This operating segment sells a number of finished products thatare both cost and energy efficient for use in residential applications such assunrooms, roofing products, awnings and solariums.  Commercial uses of these products include large area coveredcanopies, awnings and covered walkways. Building Products customers are predominantly in the construction,wholesale trade and building material industries.

 

**Industry Consolidation**

 

Based on industry data, webelieve that the metals processor/service center industry is highly fragmented,with as many as 3,000 participants generating about $50 billion in annual netsales.

 

The necessity for value-addedmetals processors/service centers to add specialized processing equipment,manage inventory on behalf of their customers and use sophisticated computersystems is requiring industry participants to make substantial capitalinvestments in order to remain competitive. In addition, many customers are seeking to reduce their operating costsby limiting the number of suppliers with whom they do business, ofteneliminating those suppliers offering limited ranges of products andservices.  These trends have placed thesubstantial number of small, owner-operated businesses at a competitive disadvantagebecause they have limited access to the capital resources necessary to increasetheir capabilities, or they cannot economically justify the investmentin equipment.  As a result, smallercompanies are finding it increasingly difficult to compete as current industrytrends continue.

 

**Strategy**

 

Since our formation in July 1997, we have become oneof the leading providers of higher-value components from processed metals.  We have invested substantial capitalintegrating our operations to maximize operating margins and accelerateinternal sales growth.  As a result ofthe Chapter 11 Filing, we restructured our operations and capital structure,including the divestiture of several operating facilities.  For a description of the principal elementsof our Reorganization Plan implemented on the Effective Date, see “Chapter 11Proceedings” above.

 

**Processing Services and Products**

 

We engage in pre-production processing of steel, stainless steel 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.

 

We purchase our raw materials in anticipation of projectedcustomer requirements based on interaction with, and feedback from customers,market conditions, historical usage and industry research.  Primary producers typically find it morecost effective to focus on large volume production and sale of metals instandard sizes and configurations to large volume purchasers. We process themetals to the precise thickness, length, width, shape, temper and surfacequality specified by our customers. Value-added processes provided include:

 

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•      *Slitting*—  the cutting of coiled metals tospecified widths along the length of the coil.

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*•      Shearing and cutting to length*— the cutting of metals into pieces and along thewidth of a coil to create sheets or plates.

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*•      Precision blanking*— the process in which flat rolled metal is cutinto precise two-dimensional shapes.

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

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*•      Leveling*— the flattening of metals to uniform tolerancesfor proper machining.

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

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

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*•      Plate forming and rolling*— the forming and bending of plates to cylindricalor required specifications.

* *

*•      Edge trimming*— a process that removes a specified portion ofthe outside edges of coiled metal to produce uniform width and round or smoothedges.

* *

*•      Cambering*— the bending of structural steel to improveload-bearing capabilities.

* *

*•      Metallurgy*— the analysis and testing of the physical andchemical composition of metals.

 

Additionalcapabilities include applications engineering and a variety of othervalue-added processes such as blasting, painting and custom machining.  Using these capabilities, we use processedmetals to manufacture higher-value components.

 

Once an order isreceived, the appropriate inventory is selected and scheduled for processing inaccordance with the customer’s requirements and specified delivery date.  Orders are monitored by our computersystems, including, in certain locations, the use of bar coding to aid in andreduce the cost of tracking material. Our computer systems 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 orfoundry that produced the metal.  Manyof the products and services we provide can be ordered and tracked through aweb-based electronic network that directly connects our computer system tothose of our customers.

 

The substantialportion of our orders are filled within 24-48 hours.  This is accomplished through our special inventory managementprograms, which permit us to deliver processed metals in accordance with thejust-in-time inventory programs of our customers.  We are required to carry sufficient inventory of raw materials tomeet the short lead-time and just-in-time delivery requirements of ourcustomers.

 

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.

 

8

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We have quality control systems to ensure productquality and traceability throughout processing.  Quality controls include periodic supplier audits, customerapproved quality standards, inspection criteria and metals sourcetraceability.  A total of 25 of ourfacilities have International Standards Organization (“ISO”) 9002 certification.

 

**Sources of Supply**

 

In recent years, steel,aluminum, copper and other metals production in the U.S. has fluctuated fromperiod to period as mills attempt to match production to projected demand.  Periodically, this has resulted inshortages of, or increased ordering lead times for, some products, as well asfluctuations in price.  Typically,metals producers announce price changes with sufficient advance notice to allowus to order additional products prior to the effective date of a priceincrease, or to 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.

 

The overwhelmingmajority of raw materials are secured from domestic suppliers.  Our domestic steel and aluminum suppliersinclude but are not limited to Nucor Corp., U.S. Steel, AK Steel, GerdauAmeristeel, International Steel Group, Alcoa Inc., Ormet, Inc., Bayou Steel,Chaparral Steel and Ipsco Steel. As a result of implementation of the Reorganization Plan, many of oursuppliers have become stockholders in our Company.  Historically, we have purchased approximately 10% to 15% of ourraw material supplies from foreign producers.

 

Although most forms of steel and aluminum produced bymills can be obtained from a number of integrated mills or mini-mills, bothdomestically and internationally, there are a few products that are availablefrom only a limited number of producers. Since most metals are shipped Freight on Board (“FOB”) and thetransportation of metals is a significant cost factor, we seek to purchasemetals to the extent possible, from the nearest mill, but will use a moredistant mill when it offers a lower delivered price.

 

Ferrous metal producers have been undergoing rapidconsolidation because of the deteriorating market conditions over the pastthree years.  U.S. Steel, Nucor Corp.and International Steel Group have acquired several of their domesticcompetitors and international integrated producers have merged and consolidatedoperations.  The result of this trendwill be fewer integrated producers from which we can purchase our rawmaterials.  We are unable to predict what impact this consolidation may have on ouroperations.

 

**Sales andMarketing; Customers**

 

Our sales and marketing programfocuses on the identification ofOEMs and other metals end-users that could achieve significant cost savingsthrough 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 our sales force aboutregional end-users also result in the identification of potentialcustomers.  Once a potential customer isidentified, our “outside” salespeople assume responsibility for visiting theappropriate contact, typically the purchasing manager or manager of operations.

 

We employ a sales forceconsisting of “inside” and “outside” salespeople. “Inside” salespeople areprimarily responsible for maintaining customer relationships, receiving andsoliciting individual orders and responding to service and other inquiries by customers.  Increasingly, these “inside” salespeoplehave 

 

9

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been given responsibility for telemarketing topotential customers.  Our “outside”sales force is primarily responsible for identifying potential customers andcalling on them to explain our services. The sales force is trained and knowledgeable about the characteristicsand applications of various metals, as well as the manufacturing methodsemployed by our customers.

 

Nearly all sales are on a negotiatedprice basis.  In some cases, sales are the result of a competitive bidprocess where a customer sends us and several competitors a list of productsrequired and we submit a bid on each product. We have a diverse customer base,with no single customer accounting for more than 1% of our revenues in 2002,2001 or 2000.

 

**Competition**

 

We are engaged in a highlyfragmented and competitiveindustry.  Competition is based onprice, product quality, service, and timeliness of delivery and geographicproximity.  We compete with a largenumber of other metals processors/service centers on a national, regional andlocal basis, some of which may have greater financial resources.  Principal national competitors includeRyerson Tull, Inc. (NYSE:RT) and Reliance Steel & Aluminum Co,(NYSE:RS).  We also compete to a lesserextent with primary metals producers, who typically sell directly to very largecustomers requiring regular shipments of large volumes of metals.  Numerous smaller metals processors/servicecenters compete locally.

 

Historically, we believe that wehave been able to competeeffectively because of our significant number of locations, geographicdispersion, knowledgeable and trained sales force, integrated computer systems,modern equipment, broad-based inventory, combined purchasing volume andoperational economies of scale. Furthermore, as a result of the implementation of our ReorganizationPlan we believe the financial position of our Company is equal or similar toour peers.

 

**Technology**

 

In March 2000, we formedi-Solutions Direct, Inc. (“i-Solutions”) to develop our integrated supplyservices and web-based e-commerce initiative. Initially, i-Solutions created a web-based supply system to support aDepartment of Defense contract and continues to operate as such.   In March 2001, we introduced Metals USALink (“Link”), an online, web-based order entry and information system.  Link provides our customers 24/7internet access, customer specific product catalogs, order inquiry capabilitiesand the ability to monitor vendor managed inventory programs.  We believe Link provides our customersimproved metal procurement capabilities and permits them to move closer to atrue “just-in-time” inventory management program.  We currently have approximately 150 registered customers (whichwe refer to as “bronze,” “silver” or “gold” customers) using Link and generatemonthly sales of approximately $3.7 million.

 

**GovernmentRegulation and Environmental Matters**

 

Our operations are subject to anumber of federal, state and localregulations relating to the protection of the environment and to workplacehealth and safety. In particular, 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.  Hazardous materials we use in our operationsinclude general commercial lubricants and cleaning solvents.

 

We believe that we are in substantialcompliance with all such laws and donot currently anticipate that we will be required to expend any substantialamounts in the foreseeable future in order to meet current environmental orworkplace health and safety requirements. However, some of the properties we

 

10

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own or lease are located in areas with a historyof heavy industrial use, and are on or near sites listed on theComprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”)National Priority List.  We have anumber of leased properties located in or near industrial or light industrialuse areas; and accordingly, these properties may have been contaminated bypollutants which would have migrated from neighboring facilities or have beendeposited by prior occupants. Furthermore, we are not aware of any notices from authoritative agencieswith respect to clean-up/remediation claims for contamination at the leasedproperties. However, there can be no assurance that we will not be notified ofsuch claims with respect to our existing leased or owned properties in thefuture.

 

Although no environmental claimshave been made against the Company and we have not been named as a potentiallyresponsible party by the Environmental Protection Agency or any other party, itis possible that we could be identified by the Environmental Protection Agency,a state agency or one or more third parties as a potentially responsible partyunder CERCLA or under analogous state laws. If so, we could incur substantial litigation costs to prove that we arenot responsible for the environmental damage. We have obtained limited indemnities from the former stockholders of theacquired companies whose facilities are located at or near contaminated sites.  There can be no assurance that theseindemnities will be adequate to protect us from a material adverse effect onour consolidated financial condition, results of operations or liquidity,should we be held responsible for a share of any clean-up costs.

 

**ManagementInformation Systems**

 

Both the Plates and Shapes Group and Flat Rolled Groupservice centers use a product marketed and distributed specifically for theservice center industry.  The majorityof the Plates and Shapes Group and Flat Rolled Group service centers operate onthis platform.  We have also begun asimilar common platform initiative in the Building Products Group.  Nine of our subsidiaries currently use EDIthrough which they offer customers a paperless process with respect to order entry,shipment tracking, billing, remittance processing and other routineactivities.  Additionally, several ofthe subsidiaries also use computer aided drafting systems to directly interfacewith computer-controlled metal processing equipment, resulting in moreefficient use of material and time.

 

We believe the investment inuniform management information systems and computer aided manufacturingtechnology will permit us to respond quickly and proactively to our customers’needs and service expectations.  Thesesystems are able to share data regarding inventory status, order backlog, andother critical operational information on a real-time basis.

 

**Employees**

 

We employ approximately 2,475persons.  As of December 31, 2002,approximately 268 employees (11%) at various sites were members of unions: theUnited Steelworkers of America; the Sheet Metals Workers Union; theInternational Association of Bridge, Structural, and Ornamental Ironworkers ofAmerica; the International Brotherhood of Teamsters; United AutoWorkers; and the International Brotherhood of Boilermakers, Iron Ship Builders,Blacksmiths, Forgers and Helpers.  Ourrelationship with these unions generally has been satisfactory, but occasionalwork stoppages have occurred.  Withinthe last five years, one work stoppage occurred at one facility, which involvedapproximately 20 employees and lasted approximately 30 days.  We are currently a party to 14 collectivebargaining agreements, which expire at various times.  Collective bargaining agreements for all of our union employeesexpire in each of the next four years. Historically, we have succeeded in negotiating new collective bargainingagreements without a strike.

 

11

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From time to time, there are shortagesof qualified operators of metals processing equipment.  In addition, during periods of lowunemployment, turnover among less-skilled workers can be relatively high. Webelieve that our relations with our employees are good.

 

Senior management at certain of our subsidiaryoperations are comprised of former owners who received Old Common Stock as themajority of the consideration paid for their businesses and committed to staywith their operations after acquisition. These former owners have non-competition obligations that expire on thefifth anniversary of their date of acquisition.  Substantially all of these agreements will expire by the end ofthe second quarter of 2003, and all of these obligations will expire by2004.  Further, as a result of theimplementation of the Reorganization Plan, the former owners are no longersignificant stockholders in our Company. Where desired, there is no assurance that we will be able to retainthese individuals or find suitable replacements in a timely manner if suchindividuals leave our Company. The failure to retain or replace such managementwithin a reasonable period of time could negatively impact results fromoperations at such locations.

 

**Vehicles**

 

We operate a fleet of owned or leased trucks and trailers,as well as forklifts and support vehicles. We believe these vehicles generally are well maintained and adequate forour current operations.

 

**Risk Management, Insurance andLitigation**

 

The primary risks in ouroperations are bodily injury,property damage and injured workers’ compensation.  We maintain general liability insurance and liability insurancefor bodily injury and property damage and workers’ compensation coverage, whichwe consider sufficient to insure against these risks.

 

From time to time, we are a party to litigationarising in the ordinary course of our business, most of which involves claimsfor personal injury or property damage incurred in connection with ouroperations.  We are not currently involvedin any litigation that we believe will have a material adverse effect on ourconsolidated financial condition, results of operations or liquidity.

 

**Safety**

 

Our goal is to provide an accident-free workplace andwe are committed to continuing and improving upon each facilities’ focus andemphasis on safety in the workplace.  Wecurrently have a number of safety programs in place, which include regularweekly or monthly field safety meetings, bonuses based on an employee’s or ateam’s safety record and training sessions to teach proper safe workprocedures. We have developed a comprehensive “best practices” safety programto be implemented throughout our operations to ensure that all employees complywith safety standards established by our Company, our insurance carriers andfederal, state and local laws and regulations. This program is led by the corporate office, with the assistance of eachof our product group presidents, executive officers and industry consultantswith expertise in workplace safety.

 

**Financial Information About Segments**

 

For information regarding revenues from externalcustomers, measures of profit or loss and total assets for the last three yearsfor each segment, see Item 7. “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations – Results of Operations bySegment” and Note 11 of notes to consolidated financial statements in Item 8.“Financial Statements and Supplementary Data.”

 

12

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**Patents and Trademarks**

 

We own several U.S. and foreign trademarks, servicemarks and copyrights.  Certain of thetrademarks are registered with the U.S. Patent and Trademark Office, and, insome cases, with trademark offices of foreign countries.  We consider other information owned by ourCompany to be trade secrets.  We protectour trade secrets by, among other things, entering into confidentialityagreements with our employees and implementing security measures to restrictaccess to such information.  We believethat our safeguards provide adequate protection to our proprietary rights.  While we consider all of our intellectualproperty to be important, we do not consider any single intellectual propertyright to be essential to our operations as a whole.

 

**Seasonal Aspects, Renegotiation andBacklog**

 

There is a slight decrease in our business during thewinter months because of inclement weather conditions and the impact on theconstruction industry.  No materialportion of our business is subject to renegotiation of profits or terminationof contracts at the election of the government.  Because of the just-in-time delivery policy and the shortlead-time nature of our business, we do not believe the information on backlogof orders is material to an understanding of our business.

 

**Foreign Operations**

 

We currently conduct, and since inception, haveconducted, substantially all of our business in the U.S.  We currently do not derive any materialrevenue from countries other than the U.S. and do not have long-term assets orcustomer relationships outside of the U.S. Accordingly, we are not currently subject to any material risksassociated with any foreign operations.

 

**Research and Development**

 

We do not incur material expenses in research anddevelopment activities but do participate in various research and developmentprograms.  We address research anddevelopment requirements and product enhancement by maintaining a staff oftechnical support, quality assurance and engineering personnel.

 

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**Item 2.    *Properties***

 

As of December 31, 2002, we operated 20 metalsprocessing facilities in the Plates and Shapes Group and 15 facilities in theFlat Rolled Group.  These facilities areused to receive, warehouse, process and ship metals.  These facilities use various metals processing and materialshandling machinery and equipment.  OurBuilding Products Group operates 21 facilities where we process metals intovarious building products.  Theseservice center facilities are located and described as follows:

 

**OPERATING FACILITIES AS OF DECEMBER 31, 2002**

 
|                            |   | **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            |   | 81,000              |   | Leased             |   |
|                            |   | Langhorne, Pennsylvania       |   | 160,000             |   | Leased             |   |
|                            |   | Philadelphia, Pennsylvania    |   | 85,000              |   | Owned              |   |
|                            |   | York, Pennsylvania            |   | 109,000             |   | Leased             |   |
|                            |   | North Canton, Ohio(1)         |   | 110,000             |   | Leased             |   |
| South Central Plates and Shapes |   | Enid, Oklahoma                |   | 112,000             |   | Leased             |   |
|                            |   | Muskogee, Oklahoma(2)         |   | 229,000             |   | Owned              |   |
|                            |   | Dallas, Texas                 |   | 104,000             |   | Owned              |   |
| Mid Atlantic Plates and Shapes  |   | Ambridge, Pennsylvania        |   | 200,000             |   | Leased             |   |
|                            |   | Greenville, Kentucky          |   | 56,000              |   | Owned              |   |
|                            |   | Greensboro, North Carolina(2) |   | 115,000             |   | Owned              |   |
|                            |   | Wilmington, North Carolina    |   | 178,000             |   | Leased             |   |
|                            |   | Wilmington, North Carolina    |   | 45,000              |   | Leased             |   |
| Southeast Plates and Shapes     |   | Mobile, Alabama               |   | 214,000             |   | Owned              |   |
|                            |   | Jacksonville, Florida         |   | 60,000              |   | Owned              |   |
|                            |   | Oakwood, Georgia              |   | 206,000             |   | Owned              |   |
|                            |   | Waggaman, Louisiana           |   | 226,200             |   | Owned              |   |
|                            |   | Columbus, Mississippi         |   | 45,000              |   | Owned              |   |
| Southwest Plates and Shapes     |   | Hayward, California           |   | 64,000              |   | Leased             |   |
| i-Solutions                     |   | Ft. Washington, Pennsylvania  |   | 4,260               |   | Leased             |   |
|                            |   |                          |   |                |   |               |   |
| ***Flat Rolled Group:***        |   |                          |   |                |   |               |   |
| Carbon Flat Rolled              |   | Madison, Illinois             |   | 150,000             |   | Owned              |   |
|                            |   | Jeffersonville, Indiana(2)    |   | 90,000              |   | Owned              |   |
|                            |   | Randleman, North Carolina(2)  |   | 110,000             |   | Owned              |   |
|                            |   | Springfield, Ohio             |   | 96,000              |   | Owned              |   |
|                            |   | Wooster, Ohio(2)              |   | 140,000             |   | Owned              |   |
|                            |   | Chattanooga, Tennessee        |   | 60,000              |   | Owned              |   |
|                            |   | Houston, Texas(1)(3)          |   | 207,000             |   | Owned              |   |
|                            |   | Germantown, Wisconsin         |   | 90,000              |   | Owned              |   |
|                            |   | Horicon, Wisconsin(2)         |   | 103,000             |   | Leased             |   |
|                            |   | Wichita, Kansas               |   | 24,000              |   | Leased             |   |
|                            |   | Liberty, Missouri             |   | 84,000              |   | Leased             |   |

 

14

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|                             |   | **Location**               |   | **Square  Footage** |   | **Owned/  Leased** |   |
|----------------------------------|--------|----------------------------|--------|---------------------|--------|--------------------|--------|
| ***Flat Rolled Group (Cont.):*** |   |                       |   |                |   |               |   |
| Specialty Flat Rolled            |   | Mokena, Illinois           |   | 21,000              |   | Leased             |   |
|                             |   | Northbrook, Illinois       |   | 187,000             |   | Owned              |   |
|                             |   | Walker, Michigan           |   | 50,000              |   | Owned              |   |
|                             |   | Brooklyn Center, Minnesota |   | 19,000              |   | Leased             |   |
|                             |   |                       |   |                |   |               |   |
| ***Building Products Group***    |   | Phoenix, Arizona           |   | 111,000             |   | Leased             |   |
|                             |   | Brea, California           |   | 46,000              |   | Leased             |   |
|                             |   | Buena Park, California     |   | 73,000              |   | Leased             |   |
|                             |   | Corona, California         |   | 38,000              |   | Leased             |   |
|                             |   | Ontario, California        |   | 18,000              |   | Leased             |   |
|                             |   | Rancho Cordova, California |   | 24,000              |   | Leased             |   |
|                             |   | Groveland, Florida         |   | 250,000             |   | Leased             |   |
|                             |   | Leesburg, Florida          |   | 75,000              |   | Leased             |   |
|                             |   | Pensacola, Florida         |   | 48,000              |   | Leased             |   |
|                             |   | Stone Mountain, Georgia    |   | 60,000              |   | Leased             |   |
|                             |   | Kansas City, Missouri      |   | 58,000              |   | Leased             |   |
|                             |   | Las Vegas, Nevada          |   | 42,000              |   | Leased             |   |
|                             |   | Las Vegas, Nevada          |   | 39,000              |   | Leased             |   |
|                             |   | Irmo, South Carolina       |   | 38,000              |   | Leased             |   |
|                             |   | Houston, Texas             |   | 285,000             |   | Owned              |   |
|                             |   | Houston, Texas             |   | 220,000             |   | Leased             |   |
|                             |   | Mesquite, Texas            |   | 255,000             |   | Leased             |   |
|                             |   | Pacific, Washington        |   | 39,000              |   | Leased             |   |

 

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(1)   These facilities were held forsale as of December 31, 2002.

 

(2)   These facilities are subjectto liens with respect to specific debt obligations including Industrial RevenueBonds (“IRBs”).

 

(3)   This facility was sold onMarch 21, 2003.

 

In addition to the service center facilities listedabove, our Building Products Group also operates 32 sales and distributioncenters throughout the western, southwestern and southeastern U.S.  These facilities, which are all leased,generally range in size from 5,000 square feet to 20,000 square feet. Many ofour facilities are capable of being used at higher capacities, ifnecessary.  We believe that ourfacilities will be adequate for the expected needs of our existing businessesover the next several years.

 

During 2002, under the terms of the ReorganizationPlan, we sold certain non-core assets in an effort to provide additionalliquidity and closed or consolidated certain facilities and assets. During theyear, we sold, closed or consolidated 25 facilities in the Plates and ShapesGroup, and 10 facilities in the Flat Rolled Group.

 

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**Item 3.    *Legal Proceedings***

 

*Thissection contains statements that constitute “forward-looking statements” withinthe meaning  of the Private SecuritiesLitigation Reform Act of 1995.  Seedisclosure presented on the inside of the front cover of this report forcautionary information with respect to such forward-looking statements.*

 

On November 14, 2001, we voluntarily filed for relief under Chapter 11 of the U.S.Bankruptcy Code.  The petitions werefiled in Bankruptcy Court for the Southern District of Texas, Case No.01-42530-H4-11 through 01-42573-H4-11. We continued to operate our business as debtors-in-possession underSections 1107 and 1108 of the Bankruptcy Code until October 31, 2002, when wesubstantially completed the required transactions to effect the ReorganizationPlan that had previously been confirmed by the Bankruptcy Court on October 18,2002.  Under the provisions of the U.S.Bankruptcy Code, all secured and unsecured creditors were required to submitproofs of claim.  All proofs of claimwere required to be filed by July 8, 2002. We are currently finalizing the resolution of these claims.  A substantial number of outstandingunresolved claims will be subject to an objection hearing on March 29,2003.  Most of these claims will beresolved at that time.  We believe thatall claims have been properly recorded in the consolidated financial statementsincluded in Item 8. “Financial Statements and Supplementary Data.”  However, ultimate resolution of all of theseliabilities is not presently determinable.

 

We are 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.  For additional information on our bankruptcyproceedings see Item 1. “Business — Chapter 11 Proceedings” and Item 7.“Management’s Discussion and Analysis of Financial Condition and Results ofOperations — Overview.”

 

**Item 4.    *Submissionof Matters to a Vote of Security Holders***

 

The Company solicited from creditors and stockholdersacceptances or rejections of the Reorganization Plan during a one-monthballoting period ending on October 16, 2002. Pursuant to the Reorganization Plan, votes were solicited from holdersof general unsecured claims against the Company (Classes 4 and 5), includingthe holders of $200.0 million principal amount of the previously outstandingsenior subordinated notes, and beneficial owners of the Old Common Stock (Class6).  Set forth below is a tabulation ofthe votes:

 
|             |   | **Amount  Accepting  (% of Amount  Voted)** |   | **Amount  Rejecting  (% of Amount  Voted)** |   | **Number   Accepting  (% of Amount  Voted)** |   | **Number   Rejecting**

**(% of  Amount  Voted)** |   |
|------------------|--------|---------------------------------------------|--------|---------------------------------------------|--------|----------------------------------------------|--------|---------------------------------------------------|--------|
|             |   |                                        |   |                                        |   |                                         |   |                                              |   |
| Classes  4 and 5 |   | 90.67                                       | %      | 9.33                                        | %      | 87.05                                        | %      | 12.95                                             | %      |
| Class 6          |   | 84.84                                       | %      | 15.16                                       | %      | 81.40                                        | %      | 18.60                                             | %      |

 

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**Item 5.    *Marketfor Registrant’s Common Equity and Related Stockholder Matters***

 

On October 31, 2002, pursuant tothe Reorganization Plan, (i) all shares of the Old Common Stock existing priorto the Effective Date were cancelled in exchange for Warrants required underthe Reorganization Plan to be distributed no later than April 30, 2003 and (ii)20,000,000 shares of the Common Stock were issued for distribution to holdersof allowed general unsecured claims. See Item 1. “Business - Chapter 11 Proceedings.”  Consequently, the performance and tradinghistory of the Company’s Old Common Stock, which traded on the New York StockExchange under the symbol “MUI” from July 1997 through November 2001 and mostrecently on the OTC Bulletin Board (“OTCBB”) under the symbol “MUINQ.OB”(including after confirmation of the Reorganization Plan in respect of theWarrants issuable in exchange for shares of Old Common Stock), is not comparableto, or meaningful with respect to, the performance or trading history of theCommon Stock.

 

Prior to March 3, 2003, ourCommon Stock has traded on a “when issued basis” under the symbol “MTLSV” andcurrently trades under the symbol “MTLS” on the OTCBB market.  The high and low bid quotations on the OTCBBfor the period from November 5, 2002 (the date on which the Common Stock wasfirst quoted on the OTCBB) to December 31, 2002 were $5.00 and $3.50, respectively.  Information with respect to OTCBB quotationsreflect inter-dealer prices without retail mark-up, mark-down or commission andmay not represent actual transactions. Also, quotations on the OTCBB are sporadic, and we can give no assurancethat there will continue to be an active market for the Common Stock.  Under the terms of the Reorganization Plan,we are required to use commercially reasonable efforts to list the Common Stockon a nationally recognized market or exchange, but there can be no assurancethat any such listing will be approved or that an established trading marketwill develop for the Common Stock.

 

As of March 21, 2003, there were 20,154,710outstanding shares of Common Stock of which 14,693,548 shares have beendistributed and the remaining 5,461,162 shares are being held in escrow by ourexchange agent for future distribution in accordance with our ReorganizationPlan.  As of March 21, 2003, we haveissued shares to 1,426 claim holders in satisfaction of their claims (subjectto an additional final distribution to be made to all claimants when allremaining unsecured claims have been resolved).

 

We currently do not anticipate paying dividends on ourCommon Stock.  The covenants in the NewCredit Facility currently place certain restrictions on our ability to paydividends to holders of our Common Stock. For information regarding these restrictions, see Item 7. “Management’sDiscussion and Analysis of Financial Condition and Results of Operations –Liquidity and Capital Resources – Financing Activities” and Note 6 to the consolidatedfinancial statements in Item 8. “Financial Statements and SupplementaryData.”  Any determination to declare orpay dividends out of funds legally available for that purpose will be at thediscretion of the Board of Directors and will depend on future earnings,results of operations, financial condition, capital requirements and otherfactors the Board of Directors deems relevant, as well as the restrictions inthe Credit Facility and any other applicable contractual restrictions.

 

Prior to the Effective Date, the last dividend paid byour Company was attributable to holders of Old Common Stock for which a $0.03per share dividend was declared on March 28, 2001 and paid April 17, 2001 tostockholders of record on April 6, 2001.

 

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**Equity Compensation Plan Information**

 
| **Plan Category**                                                      |   | **Number of  securities to be  issued upon  exercise of  outstanding  options,  warrants and  rights** |   | **Weighted-  average  exercise  price of  outstanding  options,  warrants  and rights** |   | **Number of  securities  remaining  available for  future issuance  under equity  compensation  plans (excluding  securities  reflected in  column (a))** |   |
|------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                   |   | **(a)**                                                                                                |   | **(b)**                                                                                 |   | **(c)**                                                                                                                                                   |   |
| Equity compensation plans previously approved by security holders      |   | **—**                                                                                             |   | **—**                                                                              |   | 2,015,000                                                                                                                                                 |   |
| Equity compensation  plans not previously approved by security holders |   | —                                                                                                 |   | —                                                                                  |   | —                                                                                                                                                    |   |
| Total                                                                  |   | —                                                                                                 |   | —                                                                                  |   | 2,015,000                                                                                                                                                 |   |

 

The Company’s 2002 Incentive Plan provides thatstockholder approval of the 2002 Incentive Plan was obtained through the voteon the Reorganization Plan followed by entry of an order confirming theReorganization Plan.

 

**Item 6.    *SelectedFinancial Data***

* *

The following selected financialdata is derived from our consolidated financial statements for the periodsbefore and after emergence from bankruptcy proceedings on October 31,2002.  As a result of the emergence frombankruptcy and for the purpose of presentation, activities subsequent toOctober 31, 2002 relate to the “Successor Company” and activities prior toNovember 1, 2002 relate to the “Predecessor Company.”  With respect to periods relating to the Predecessor Company, theconsolidated financial statements and related selected financial data have beenreclassified for the effects of Statement of Financial AccountingStandards No. 144 (“SFAS No. 144”), Accounting for Impairment or Disposal ofLong-Lived Assets which require divestitures be excluded from results ofoperations for all periods presented.

 

In addition, the consolidatedfinancial statements for 2001 and 2002 were prepared in accordance with theAICPA’s SOP 90-7.  The consolidatedstatements of operations information for the period from November 1, 2002through December 31, 2002 and the consolidated balance sheet information atDecember 31, 2002 reflect our financial position and operating results afterapplication of our Reorganization Plan and the application of the principles of“Fresh-Start Reporting” in accordance with the provisions of SOP 90-7.  Accordingly, such financial information isnot comparable to our historical financial information prior to November 1,2002.

 

This financial data should beread 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 1998 through 2001 reflects the historical consolidated financialstatements of Metals USA, restated for the effects of SFAS No. 144, thebusiness combinations which were accounted for as “pooling-of-interests,” andthe remaining acquired companies from their respective acquisition dates.

 

18

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|                                                        |   | **Successor  Company**                                      |   | **Predecessor Company**                                   |   |
|-------------------------------------------------------------|--------|-------------------------------------------------------------|--------|-----------------------------------------------------------|--------|
|                                                        |   | **Period From  November 1,  2002 thru  December 31,  2002** |   | **Period From  January 1,  2002 thru  October 31,  2002** |   | **** |   |
| **Fiscal Years Ended December 31,**                         |
| **2001**                                                    |   | **2000**                                                    |   | **1999**                                                  |   | **1998** |
|                                                        |   |                                                        |   | **(In millions, except per share  amounts)**              |   |
| **Statements of Operations Data:**                          |   |                                                        |   |                                                      |   |
| Net sales                                                   |   | $                                                           | 126.2  |                                                      | $      | 817.5 |   | $ | 1,222.0 |   | $ | 1,554.8 |   | $ | 1,337.8 |   | $ | 1,191.0 |   |
| Cost of sales                                               |   | 97.3                                                        |   | 629.2                                                     |   | 939.5 |   | 1,187.3 |   | 979.5 |   | 896.2 |   |
| Gross profit                                                |   | 28.9                                                        |   | 188.3                                                     |   | 282.5 |   | 367.5 |   | 358.3 |   | 294.8 |   |
| Operating expenses                                          |   | 29.6                                                        |   | 190.8                                                     |   | 287.2 |   | 313.3 |   | 264.3 |   | 214.1 |   |
| Asset impairments and integration                           |   | —                                                      |   | (0.2                                                      | )      | 384.0 |   | — |   | 9.4 |   | — |   |
| Operating income (loss)                                     |   | (0.7                                                        | )      | (2.3                                                      | )      | (388.7 | ) | 54.2 |   | 84.6 |   | 80.7 |   |
| Interest and other                                          |   | 1.4                                                         |   | 14.7                                                      |   | 51.4 |   | 48.9 |   | 39.2 |   | 29.3 |   |
| Fresh-start/gain on reorganization                          |   | —                                                      |   | (80.9                                                     | )      | — |   | — |   | — |   | — |   |
| Reorganization expenses                                     |   | —                                                      |   | 28.3                                                      |   | 19.4 |   | — |   | — |   | — |   |
| Income (loss) before taxes and discontinued operations      |   | (2.1                                                        | )      | 35.6                                                      |   | (459.5 | ) | 5.3 |   | 45.4 |   | 51.4 |   |
| Provision (benefit) for taxes                               |   | —                                                      |   | (15.3                                                     | )      | (52.2 | ) | 3.9 |   | 18.8 |   | 21.1 |   |
| Income (loss) beforediscontinued  operations                |   | (2.1                                                        | )      | 50.9                                                      |   | (407.3 | ) | 1.4 |   | 26.6 |   | 30.3 |   |
| Discontinued operations, net                                |   | (1.2                                                        | )      | 0.4                                                       |   | (1.8 | ) | 10.3 |   | 13.2 |   | 9.7 |   |
| Net income (loss)                                           |   | $                                                           | (3.3   | )                                                         | $      | 51.3 |   | $ | (409.1 | ) | $ | 11.7 |   | $ | 39.8 |   | $ | 40.0 |   |
|                                                        |   |                                                        |   |                                                      |   |   |   |   |   |   |   |   |   |
| **Income (loss) per share:**                                |   |                                                        |   |                                                      |   |   |   |   |   |   |   |   |   |
| Income (loss) per share – basic:                       |   |                                                        |   |                                                      |   |   |   |   |   |   |   |   |   |
| From continuing operations                                  |   | $                                                           | (0.10  | )                                                         | $      | 1.39 |   | $ | (11.16 | ) | $ | 0.04 |   | $ | 0.69 |   | $ | 0.83 |   |
| From discontinued operations                                |   | (0.06                                                       | )      | 0.02                                                      |   | (0.05 | ) | 0.28 |   | 0.35 |   | 0.26 |   |
| Total                                                       |   | $                                                           | (0.16  | )                                                         | $      | 1.41 |   | $ | (11.21 | ) | $ | 0.32 |   | $ | 1.04 |   | $ | 1.09 |   |
|                                                        |   |                                                        |   |                                                      |   |   |   |   |   |   |   |   |   |
| Income (loss) per share – diluted:                     |   |                                                        |   |                                                      |   |   |   |   |   |   |   |   |   |
| From continuing operations                                  |   | $                                                           | (0.10  | )                                                         | $      | 1.39 |   | $ | (11.16 | ) | $ | 0.04 |   | $ | 0.69 |   | $ | 0.81 |   |
| From discontinued operations                                |   | (0.06                                                       | )      | 0.02                                                      |   | (0.05 | ) | 0.28 |   | 0.35 |   | 0.26 |   |
| Total                                                       |   | $                                                           | (0.16  | )                                                         | $      | 1.41 |   | $ | (11.21 | ) | $ | 0.32 |   | $ | 1.04 |   | $ | 1.07 |   |
|                                                        |   |                                                        |   |                                                      |   |   |   |   |   |   |   |   |   |
| Number of common shares used in the per share calculations: |   |                                                        |   |                                                      |   |   |   |   |   |   |   |   |   |
| Basic                                                       |   | 20.2                                                        |   | 36.5                                                      |   | 36.5 |   | 36.8 |   | 38.1 |   | 36.7 |   |
| Diluted                                                     |   | 20.2                                                        |   | 36.5                                                      |   | 36.5 |   | 37.0 |   | 38.4 |   | 37.3 |   |

 

19

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|                                      |   | **Successor**    |   |                         |       |     |   |     |   |     |   |
|-------------------------------------------|--------|------------------|--------|------------------------------|------------|----------|--------|----------|--------|----------|--------|
|                                      |   | **Company**      |   | **Predecessor Company**      |       |
|                                      |   | **December 31,** |   | **Years Ended December 31,** |       |
|                                      |   | **2002**         |   | **2001**                     |       | **2000** |   | **1999** |   | **1998** |   |
|                                      |   |             |   | **(In millions)**            | ** ** |
| **Balance  Sheet Data:**                  |   |             |   |                         |       |     |   |     |   |     |   |
| Working capital(1)                        |   | $                | 313.5  |                         | $          | 183.2    |   | $        | 344.8  |     | $      | 305.4 |   | $ | 414.3 |   |
| Total assets                              |   | 373.7            |   | 690.1                        |       | 1,104.8  |   | 1,049.3  |   | 1,026.4  |   |
| Long-term debt, less current portion(2)   |   | 127.4            |   | —                       |       | 489.9    |   | 434.7    |   | 502.6    |   |
| Stockholders’ equity  (deficit) |   | 189.0            |   | (35.1                        | )          | 375.1    |   | 379.4    |   | 341.6    |   |
| Dividends declared(3)                     |   | —           |   | 1.1                          |       | 4.5      |   | —   |   | —   |   |
|                                           |        |                  |        |                              |            |          |        |          |        |          |        |  |  |  |  |  |

 

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(1)   The balance as of December 31,2001 includes all pre-petition current liabilities that are not subject tocompromise and $38.3 million of pre-petition liabilities subject to compromiseincluded in operations held for sale. Including non-current pre-petition liabilities subject to compromise of$325.7 million, our working capital would have been a deficit of $142.5 millionas of December 31, 2001.

(2)   Because of the Chapter 11Filing, $301.9 million of long-term debt was reclassified as a currentpre-petition liability not subject to compromise and $200.0 million wasreclassified as a non-current pre-petition liability subject to compromise asof December 31, 2001.

(3)   Dividends declared withrespect to the Old Common Stock was as follows:  Four  quarterly dividendsof $0.03 per share during the year ended December 31, 2000 and one dividend of$0.03 per share during the first quarter of 2001.

 

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

 

*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.  Readersshould refer to “Factors Which May Affect Future Operating Results” for riskfactors that may affect future performance. The following discussion should beread in conjunction with Item 6. “Selected Financial Data” and Item 8.  “Financial Statements and SupplementaryData.”*

 

**Overview**

 

We are a leading providerof value-added processed steel, aluminum and specialty metals, as well asmanufactured metal components.  We sellto businesses such as the machining, furniture, transportation equipment, powerand process equipment, industrial/commercial construction, consumer durablesand electrical equipment, and machinery and equipment manufacturers.  During the past three years, the steelindustry declined substantially as a result of pricing pressure from foreignimports and an economic recession experienced in the U.S.  These factors, combined with our high levelof debt, caused us to seek protection under U.S. bankruptcy laws on November14, 2001.  We emerged from bankruptcy onOctober 31, 2002.  See “Chapter 11Proceedings” below.  Because of theeconomic conditions discussed above and the divestiture of certain assets toreduce our indebtedness, our revenues from continuing operations declined from$1.55 billion in 2000 to $944 million in 2002.

 

The consolidated financial statements are prepared inaccordance with SOP 90-7.  SOP 90-7requires our Company to, among other things, (1) identify transactions that aredirectly associated with the bankruptcy proceedings from those events thatoccur during the normal course of business, (2) identify 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, apply “Fresh-Start Reporting” rules upon emergingfrom bankruptcy.

 

**Chapter 11Proceedings**

 

On November 14, 2001, wevoluntarily filed for relief under Chapter 11 of the U.S. Bankruptcy Code, inU.S Bankruptcy Court, Southern District of Texas and began operating ourbusiness as debtors-in-possession pursuant to the Bankruptcy Code.  As debtors-in-possession under Section 1107and 1108 of the Bankruptcy Code, we maintained possession of our properties andassets, and continued to operate our businesses.  We were authorized to manage our properties and operate ourbusinesses, but we did not engage in transactions outside the ordinary courseof business without the approval of the Bankruptcy Court.

 

Our need to seek reliefunder the Bankruptcy Code was due primarily to (1) a reduction in cash flowsresulting from an industry-wide recession caused by pricing pressure fromforeign imports and decline in the manufacturing sector of the U.S. economy,(2) the inability to obtain additional liquidity from our primary lendingsources and (3) the high level of indebtedness related to acquisitions madeprior to 2000. During 2000, the U.S. steel industry began experiencing significantdeclines in prices for steel products resulting from an influx of foreignimports.  During 2001, the U.S economyin general and the manufacturing sector in particular moved into a recessionthat was further exacerbated by the terrorist attack of September 11, 2001. Dueto these deteriorating economic conditions, we incurred significant operatinglosses through 2002.  We expect theselosses to continue throughout 2003.  On June 21, 2002, we reached an agreement withthe Creditors Committee on the terms of the Reorganization Plan, subject todefinitive documentation and obtaining the required approvals and exitfinancing.  We filed the ReorganizationPlan with the Bankruptcy Court on August 27, 2002.  The Bankruptcy Court held a

 

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hearing on September 18, 2002 and determined thedisclosure statement to be used for distribution and voter solicitationcontained adequate information to be used for distribution and the solicitationof vote from the impaired claim holders. After receiving a majority of the vote from the claim holders, 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, theEffective Date.

 

Under the terms of the Reorganization Plan, theunsecured creditors will receive, upon resolution of all disputed creditorclaims and completion of distributions, 20,000,000 shares of Common Stock inthe reorganized Company to discharge and in exchange for approximately $367.3million of unsecured debt, and the financial advisor to the Creditors Committeewas issued 154,710 shares of Common Stock as partial payment for servicesperformed.  Our Old Common Stock,outstanding prior to the Effective Date was extinguished and holders of suchshares will receive in exchange for such shares, upon completion ofdistributions under the Reorganization Plan, five-year Warrants to purchase anaggregate of 3,556,713 shares of our Common Stock (representing 15% of ouroutstanding Common Stock upon exercise). The Warrants have an exercise price calculated at full recovery for allunsecured creditors, such exercise price to be determined six months after theEffective Date, based upon the Company’s estimate of total general unsecuredclaims.  The exercise price is currentlyestimated to be $18.37 per share (assuming that total allowed general unsecuredclaims are $367.3 million).  TheWarrants are required under the Reorganization Plan to be distributed on orbefore April 30, 2003.  Under the termsof the Reorganization Plan, we are required to use commercially reasonableefforts to list the Common Stock on a nationally recognized market or exchangebut there can be no assurance that any such listing will be approved or that anestablished trading market will develop for the Common Stock.  We do not currently intend to list theWarrants and cannot provide any assurance as to whether a market will developfor the Warrants.  The ReorganizationPlan established the 2002 Incentive Plan for employees to be administered bythe Board of Directors of the newly reorganized Company.  Up to 2,015,000 shares of Common Stock arereserved for issuance under the 2002 Incentive Plan.  All previously outstanding options of the Company that had beenissued under the existing stock option plans were cancelled.  Additionally, the Board of Directors of thereorganized Company was initially reconstituted with six new members.  See Item 10. “Directors and ExecutiveOfficers of the Registrant.”

 

We were required to adopt“Fresh-Start Reporting” as specified by SOP-90-7.  “Fresh-Start Reporting” is required upon a substantive change incontrol and requires upon the Effective Date, that the reporting entityallocate the reorganization value of the Company to its assets and liabilitiesin relation to their fair values. Accordingly, the carrying values of our assets and liabilities differfrom the amounts shown in previous periods. The principal differences relate to the exchange of shares of our CommonStock for pre-petition liabilities subject to compromise, exchange of Warrantsfor our Old Common Stock, adjustments to reflect the fair value of certainnon-current assets and elimination of the retained deficit.

 

**CriticalAccounting Policies**

 

In response to the Securitiesand Exchange Commission’s Release No. 33-8040, “Cautionary Advice RegardingDisclosure About Critical Accounting Policies”, we have identified criticalaccounting policies based upon the significance of the accounting policy to ouroverall financial statement presentation, as well as the complexity of theaccounting policy and our use of estimates and subjective assessments.  We have concluded our critical accountingpolicies are as follows:

 

*Concentration of credit risk* — Concentrationsof credit risk with respect to trade accounts are within severalindustries.  We perform ongoingcredit evaluations of customers and sets credit limits based upon

 

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review of the customers’ current credit information and paymenthistory.  We monitor customer paymentsand maintain a provision for estimated credit losses based on historicalexperience and specific customer collection issues that we have identified.Estimation of such losses requires adjusting historical loss experience forcurrent economic conditions and judgments about the probable effects ofeconomic conditions on certain customers. We cannot guarantee that the rate of future credit losses will besimilar to past experience.  Eachquarter we consider all available information when assessing the adequacy ofthe provision for allowances, claims and doubtful accounts.

 

*Inventories*— Inventories are stated at the lower of cost ormarket.  Certain of our subsidiaries usethe last-in, first-out (“LIFO”) method of accounting for inventories and othersubsidiaries use a variety of methods including specific identification,average cost and the first-in first-out (“FIFO”) method of accounting.  We regularly review inventory on handand record provisions for obsolete and slow-moving inventory based onhistorical and current sales trends. Changes in product demand and our customer base may affect the value ofinventory on hand which may require higher provisions for obsolete inventory.

 

*Revenue recognition*— We recognize revenues when products are shippedand all significant obligations of the Company have been satisfied.  Risk of loss passes at the time ofshipment.  Provisions are made currentlyfor estimated returns.

 

**ConsolidatedResults of Operations**

 

The following financialinformation reflects our historical financial statements, and the acquired anddivested companies as of their respective acquisition and divestituredates.  For comparison purposes with theyear ended December 31, 2001, the results of operations data for 2002 includesthe Predecessor Company results for the period January 1, 2002 through October31, 2002 and the Successor Company results for the period November 1, 2002 throughDecember 31, 2002.

 
|                                                         |   | **Fiscal Years Ended December 31,**   |       |
|--------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                         |   | **2002**                              |       | **%** |   | **2001** |   | **%** |   | **2000** |   | **%** |   |
|                                                         |   | **(in millions, except percentages)** | ** ** |
| Net sales                                                    |   | $                                     | 943.7      |   | *100.0* | *%* | $ | 1,222.0 |   | *100.0* | *%* | $ | 1,554.8 |   | *100.0* | *%* |
| Cost of sales                                                |   | 726.5                                 |       | *77.0* | *%* | 939.5 |   | *76.9* | *%* | 1,187.3 |   | *76.4* | *%* |
| Gross profit                                                 |   | 217.2                                 |       | *23.0* | *%* | 282.5 |   | *23.1* | *%* | 367.5 |   | *23.6* | *%* |
| Operating and delivery                                       |   | 121.4                                 |       | *12.9* | *%* | 149.4 |   | *12.2* | *%* | 169.8 |   | *10.9* | *%* |
| Selling, general and administrative                          |   | 91.8                                  |       | *9.7* | *%* | 116.7 |   | *9.6* | *%* | 122.7 |   | *7.9* | *%* |
| Depreciation and amortization                                |   | 7.2                                   |       | *0.8* | *%* | 21.1 |   | *1.7* | *%* | 20.8 |   | *1.3* | *%* |
| Asset impairments and integration                            |   | (0.2                                  | )          | *—* | * * | 384.0 |   | *31.4* | *%* | — |   | *—* | * * |
| Operating income (loss)                                      |   | (3.0                                  | )          | *(0.4* | *)%* | (388.7 | ) | *(31.8* | *)%* | 54.2 |   | *3.5* | *%* |
| Interest and other expenses, net                             |   | 16.1                                  |       | *1.7* | *%* | 51.4 |   | *4.2* | *%* | 48.9 |   | *3.1* | *%* |
| Fresh-start and gain on reorganization                       |   | (80.9                                 | )          | *(8.6* | *)%* | — |   | *—* | * * | — |   | *—* | * * |
| Reorganization expenses                                      |   | 28.3                                  |       | *3.0* | *%* | 19.4 |   | *1.6* | *%* | — |   | *—* | * * |
| Income (loss) before income taxesand discontinued operations |   | $                                     | 33.5       |   | *3.5* | *%* | $ | (459.5 | ) | *(37.6* | *)%* | $ | 5.3 |   | *0.4* | *%* |
|                                                              |        |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Results of Operations – Years EndedDecember 31, 2002 Compared to 2001***

 

*Net sales.*  Net sales decreased $278.3million, or 22.8%, from $1,222.0 million in 2001 to $943.7 million in2002.  The decrease in net sales was dueto a continued decline in the U.S. economy. Material shipments for steel products decreased 23.8% while averagerealized prices improved slightly (2.8%) in 2002 compared to 2001.  See “Results of Operations by Segment” for additional information.

 

23

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*Cost of sales.*  Cost of sales decreased $213.0million, or 22.7%, from $939.5 million in 2001 to $726.5 million in 2002.  The decrease in cost of sales wasprincipally due to the decrease in sales caused by the decline in the U.S.economy.  As a percentage of net sales,cost of sales remained relatively flat in 2002 as compared to 2001.

 

*Operatingand delivery*.  Operating and delivery expenses decreased$28.0 million, or 18.7%, from $149.4 million in 2001 to $121.4 million in2002.  As a percentage of net sales, operatingand delivery expenses increased from 12.2% in 2001 to 12.9% in 2002.  The increase as a percentage of net saleswas due to the lower sales level and the inherent fixed costs included inoperating and delivery expenses.

 

*Selling, general and administrative*. Selling, general and administrative expenses decreased $24.9 million, or21.3%, from $116.7 million in 2001 to $91.8 million in 2002.  This decrease in selling, general and administrativeexpenses was primarily attributable to overhead reductions resulting from thedeclining economy and decreasing sales level. As a percentage of net sales, selling, general and administrativeexpenses increased from 9.6% in 2001 to 9.7% in 2002.

 

*Asset impairments and integration*.  Assetimpairments and integration charge (credit) of $(0.2) million were recorded in2002 as compared to $384.0 million in 2001. As a result of the decline in the U.S. economy and subsequentbankruptcy, we determined that our ability to recover our investment in asignificant portion of our long-lived assets (goodwill, property and equipment)was doubtful in 2001.  Of the totalcharges in 2001, $288.7 million related to goodwill, $87.3 related to propertyand equipment and $10.1 million related to future reserves for personnel andfacility costs associated with disposition of certain properties.  The principal components of the $10.1million reserve were $7.9 million for lease buyouts, $1.1 million for severancepayments to employees and $1.1 million for asset reserves.    These charges were partially offset by anintegration credit of $2.1 million.  Ofthe total charges in 2002, $3.0 million were related to property and equipmentand were offset by reversal of $3.2 million of the 2001 reserve caused by lowerthan expected facility and severance costs associated with disposition ofcertain properties.

 

*Operating income (loss)*. Operating loss decreased $385.7 million, from a $388.7 million loss in2001 to a $3.0 million loss in 2002. Exclusive of the asset impairments and integration credit, the operatingloss decreased by $1.5 million, or 31.9%, from a loss of $4.7 million in 2001to a loss of $3.2 million in 2002.  Thedecline in revenues resulted in increases in all operating expenses as a percentageof net sales.  Operating loss as a percentageof net sales, decreased from (31.8)% in 2001 to (0.4)% in 2002.  Exclusive of the asset impairments andintegration credit, operating loss as a percentage of net sales would have been(0.4)% in both 2001 and 2002.

 

*Interest and other expenses, net*. Interest and other expenses, net decreased $35.3 million, or 68.7%, from$51.4 million in 2001 to $16.1 million in 2002.  Approximately $12.9 million of the decrease was due to theelimination of interest accrued in respect of the previously outstanding seniorsubordinated notes due to discontinuance of recording such interest as a resultof the Chapter 11 Filing.  The remaining$19.6 million decrease was due to lower debt levels and interest rates on ourcredit facilities and DIP Financing.  Intotal, interest costs decreased by $32.5 million and other expenses decreasedby $2.8 million.  Other expenses in 2001included a $1.8 million write-off of a non-trade related note receivable.

 

*Fresh-start and gain on reorganization*.  Uponexiting from bankruptcy on October 31, 2002, we recorded a write-down of ournon-current assets of $109.7 million and a gain on the reorganization of $190.6million.

 

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*Reorganization expenses.* Reorganization expenses associated with the Chapter 11 Proceedings inthe amount of $28.3 million were incurred in 2002.  These expenses included $18.8 million of professional fees, $8.1million of key employee retention expenses and obligations associated withemployment agreements and $1.4 million associated with the write-off of debtissuance costs incurred on the DIP Financing.

 

***Results of Operations – Years EndedDecember 31, 2001 Compared to 2000***

 

*Net sales*.  Net sales decreased $332.8million, or 21.4%, from $1,554.8 million in 2000 to $1,222.0 million in2001.  The decrease in net sales was dueto a significant decline in the U.S. economy. Material shipments for steel products decreased 19.2% and averagerealized prices decreased by 2.8% in 2001 compared to 2000.  See “Results of Operations by Segment” for additional information.

 

*Cost of sales*.  Cost of sales decreased $247.8million, or 20.9%, from $1,187.3 million in 2000 to $939.5 million in2001.  The decrease in cost of sales wasprincipally due to the decrease in sales caused by the decline in the U.S.economy described above.  As apercentage of net sales, cost of sales increased from 76.4% in 2000 to 76.9% in2001 as the cost of material sold declined 2.1% versus a 2.8% decline in the sales price.

 

*Operating and delivery*.  Operating and delivery expenses decreased$20.4 million, or 12.0%, from $169.8 million in 2000 to $149.4 million in2001.  As a percentage of net sales,operating and delivery expenses increased from 10.9% in 2000 to 12.2% in2001.  The increase as a percentage ofnet sales was due to inherent fixed costs and the inability to reduce costs asquickly as the sales decline.

 

*Selling, general and administrative*. Selling, general and administrative expenses decreased $6.0 million, or4.9%, from $122.7 million in 2000 to $116.7 million in 2001.  This decrease in selling, general andadministrative expenses was primarily attributable to overhead reductionsresulting from the declining economy and savings realized from the integrationplan.  As a percentage of net sales,selling, general and administrative expenses increased from 7.9% in 2000 to9.6% in 2001. The increase as a percentage of net sales was due to inherentfixed costs and the inability to reduce costs as quickly as the sales decline.

 

*Asset impairments and integration*.  Assetimpairments and integration charge (credit) of $384.0 million were recorded in2001 as compared to none in 2000.  As aresult of the decline in the U.S. economy and subsequent bankruptcy, wedetermined that our ability to recover our investment in a significant portionof our long-lived assets (goodwill, property and equipment) was doubtful.  Of the total impairment charges, $288.7million related to goodwill, $87.3 million related to property and equipmentand $10.1 million related to future reserves for personnel and facility costsassociated with the disposition of certain properties.  These charges were partially offset by anintegration credit of $2.1 million.

* *

*Operating income (loss)*. Operating income decreased $442.9 million, from $54.2 million in incomein 2000 to a $388.7 million loss in 2001. Exclusive of the asset impairments and integration credit in 2001,operating income (loss) decreased by $58.9 million, or 108.7%, from $54.2 millionin income to a $4.7 million loss.  Thedecrease in operating income (loss) was primarily attributable to the decliningeconomy discussed above.  The decline inrevenues resulted in increases in all operating expenses as a percentage of netsales.  Operating income (loss) as apercentage of net sales, decreased from 3.5% in 2000 to (31.8)% in 2001.  Exclusive of the asset impairments andintegration credit, operating income (loss) as a percentage of net sales wouldhave been (0.4)% in 2001.

 

*Interest and other expenses, net*. Interest and other expenses, net increased $2.5 million, or 5.1%, from$48.9 million in 2000 to $51.4 million in 2001.  The increase was due to an increase in other

 

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expenses of $3.4 million, partially offset bylower interest rates on our credit facilities and decreased interest on thepreviously outstanding senior subordinated notes due to discontinuance ofrecording such interest as a result of the Chapter 11 Filing.  The decrease in interest costs was partiallyoffset by an increase in the amortization of debt issuance costs.  Interest costs decreased by $3.8million.  Other expenses in 2001primarily consisted of a $1.8 million write-off of a non-trade related notereceivable versus other income of $1.6 million in 2000, which primarilyconsisted of a $1.2 million gain from an insurance settlement.

 

*Reorganization expenses*. Reorganization expenses associated with the Chapter 11 Proceedings inthe amount of $19.4 million were incurred in 2001.  These expenses included $6.2 million associated with thetermination of the interest rate swap agreements, $9.9 million associated withthe write-off of debt issuance costs incurred on the previously existing creditfacility and previously outstanding senior subordinated notes and $3.3 millionof professional fees.

 

**Results of Operations by Segment**

 
|                  |   | **Fiscal  Years Ended December 31,**  |    |
|-----------------------|--------|---------------------------------------|---------|
|                  |   | **Net  Sales**                        |    | **%** |   | **Operating**

**Costs and  Expenses** |   | **%** |   | **Operating  Income  (Loss)** |   | **%** |   | **Capital  Expend-  itures** |   | **Shipments  (1)** |   |
|                  |   | **(in millions, except percentages)** |    |
| **2002:**             |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Plates and Shapes** |   | $                                     | 347.1   |   | *36.8* | *%* | $ | 343.8 |   | *36.3* | *%* | $ | 3.3 |   | *(110.0* | *)%* | $ | 0.8 |   | 589 |   |
| Flat Rolled           |   | 465.6                                 |    | *49.3* | *%* | 459.0 |   | *48.5* | *%* | 6.6 |   | *(220.0* | *)%* | 1.3 |   | 717 |   |
| Building Products     |   | 156.1                                 |    | *16.6* | *%* | 146.1 |   | *15.4* | *%* | 10.0 |   | *(333.3* | *)%* | 1.1 |   | — |   |
| Corporate and other   |   | (25.1                                 | )       | *(2.7* | *)%* | (2.2 | ) | *(0.2* | *)%* | (22.9 | ) | *763.3* | *%* | 0.1 |   | (47 | ) |
| Total                 |   | $                                     | 943.7   |   | *100.0* | *%* | $ | 946.7 |   | *100.0* | *%* | $ | (3.0 | ) | *100.0* | *%* | $ | 3.3 |   | 1,259 |   |
| **2001:**             |   |                                  |    |   | * * |   |   |   | * * |   |   |   | * * |   |   |   |   |
| Plates and Shapes     |   | $                                     | 558.4   |   | *45.7* | *%* | $ | 556.1 |   | *34.5* | *%* | $ | 2.3 |   | *(0.6* | *)%* | $ | 4.4 |   | 847 |   |
| Flat Rolled           |   | 543.8                                 |    | *44.5* | *%* | 532.9 |   | *33.1* | *%* | 10.9 |   | *(2.8* | *)%* | 5.5 |   | 880 |   |
| Building Products     |   | 150.7                                 |    | *12.3* | *%* | 145.3 |   | *9.0* | *%* | 5.4 |   | *(1.4* | *)%* | 3.3 |   | — |   |
| Corporate and other   |   | (30.9                                 | )       | *(2.5* | *)%* | 376.4 |   | *23.4 * | *%* | (407.3 |   | *104.8* | *%* | 0.8 |   | (74 |   |
| Total                 |   | $                                     | 1,222.0 |   | *100.0* | *% * | $ | 1,610.7 |   | *100.0* | *% * | $ | (388.7 | )  | *100.0* | *% * | $ | 14.0 |   | 1,653 |   |
| **2000:**             |   |                                  |    |   | * * |   |   |   | * * |   |   |   | * * |   |   |   |   |
| Plates and Shapes     |   | $                                     | 736.2   |   | *47.4* | *%* | $ | 698.4 |   | *46.5* | *%* | $ | 37.8 |   | *69.7* | *%* | $ | 12.7 |   | 1,029 |   |
| Flat Rolled           |   | 699.4                                 |    | *45.0* | *%* | 678.3 |   | *45.2* | *%* | 21.1 |   | *38.9* | *%* | 10.0 |   | 1,112 |   |
| Building Products     |   | 170.2                                 |    | *10.9* | *%* | 160.2 |   | *10.7* | *%* | 10.0 |   | *18.5* | *%* | 6.3 |   | — |   |
| Corporate and other   |   | (51.0                                 | )       | *(3.3* | *)%* | (36.3 | ) | *(2.4* | *)%* | (14.7 | ) | *(27.1* | *)%* | 4.3 |   | (95 | ) |
| Total                 |   | $                                     | 1,554.8 |   | *100.0* | *%* | $ | 1,500.6 |   | *100.0* | *%* | $ | 54.2 |   | *100.0* | *%* | $ | 33.3 |   | 2,046 |   |

 

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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 — Year Ended December 31, 2002 Compared to2001***

 

*Plates and Shapes.*  Net sales decreased $211.3 million,or 37.8%, from $558.4 million in 2001 to $347.1 million in 2002.  The decrease in net sales is due to unitvolume decline.  Material shipmentsdecreased 30.5% in 2002 compared to 2001. Average realized sales prices declined by 10.6% in 2002 as compared to2001.  Operating costs and expensesdecreased $212.3 million, or 38.2%, from $556.1 million in 2001 to $343.8million in 2002.  Operating costs andexpenses as a percentage of net sales decreased from 99.6% in 2001 to 99.0% in2002 primarily due to improved margins. On a unit volume basis, operating costs per ton declined 11.1% primarilydue to closing and divesting higher cost facilities.  Operating income increased by $1.0 million, or 43.5%, from $2.3million in 2001 to $3.3 million in 2002.

 

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Operating income as a percentage of net salesincreased from 0.4% in 2001 to 1.0% in 2002, primarily due to improved margins.

 

*Flat Rolled.*  Net sales decreased $78.2 million, or 14.4%,from $543.8 million in 2001 to $465.6 million in 2002. The decrease in netsales is principally due to unit volume decline.  Material shipments decreased 18.5% in 2002 compared to 2001.Average realized sales prices increased by 5.0% in 2002 as compared to2001.  Operating costs and expensesdecreased $73.9 million, or 13.9%, from $532.9 million in 2001 to $459.0million in 2002. Operating costs and expenses as a percentage of net salesincreased from 98.0% in 2001 to 98.6% in 2002 as a result of the lower saleslevel. On a unit volume basis, operating costs and expenses increased by 5.6%primarily due to the lower sales level and the inherent fixed costs.  Operating income decreased by $4.3 million,or 39.4%, from $10.9 million in 2001 to $6.6 million in 2002.  Operating income as a percentage of netsales decreased from 2.0% in 2001 to 1.4% in 2002.

 

*Building Products.*  Net sales increased $5.4million, or 3.6%, from $150.7 million in 2001 to $156.1 million in 2002.  The increase in net sales is attributable tothe increased demand for our manufactured products.  Operating costs and expenses increased $0.8 million, or 0.6%,from $145.3 million in 2001 to $146.1 million in 2002. Operating costs andexpenses as a percentage of net sales decreased from 96.4% in 2001 to 93.6% in2002.  This percentage decrease was dueto improved margins.  Operating incomeincreased by $4.6 million, or 85.2%, from $5.4 million in 2001 to $10.0 millionin 2002.  This increase was principallydue to improved margins.  Operatingincome as a percentage of net sales increased from 3.6% in 2001 to 6.4% in2002.

 

*Corporate and other.*  Thiscategory reflects certain administrative costs, asset impairments and expensesmanagement has not allocated to its industry segments. The negative net salesamount represents the elimination of intercompany sales. Exclusive of the assetimpairments and integration credit of $384.0 million and $(0.2), respectively,the operating loss decreased by $0.2 million from $23.3 million in 2001 to$23.1 million in 2002.

 

***Segment Results —Years Ended December 31, 2001 Compared to 2000***

* *

*Plates and Shapes.*  Net sales decreased $177.8million, or 24.2%, from $736.2 million in 2000 to $558.4 million in 2001.  The decrease in net sales is due to unitvolume decline.  Material shipments decreased17.7% in 2001 compared to 2000.  Averagerealized sales prices declined by 7.8% in 2001 as compared to 2000.  Operating costs and expenses decreased$142.3 million, or 20.4%, from $698.4 million in 2000 to $556.1 million in2001.  Operating costs and expenses as apercentage of net sales increased from 94.9% in 2000 to 99.6% in 2001 primarilydue to the decline in net sales.  On aunit volume basis, operating costs per ton declined 3.3% primarily due to closinghigher cost facilities.  Operating incomedecreased by $35.5 million, or 93.9%, from $37.8 million in 2000 to $2.3million in 2001.  Operating income as apercentage of net sales decreased from 5.1% in 2000 to 0.4% in 2001, primarilydue to lower shipments and lower average realized sales prices.

 

*Flat Rolled.*  Net sales decreased $155.6 million, or22.2%, from $699.4 million in 2000 to $543.8 million in 2001. The decrease innet sales is principally due to unit volume decline.  Material shipments decreased 20.9% in 2001 compared to 2000.Average realized sales prices declined by 1.7% in 2001 as compared to2000.  Operating costs and expensesdecreased $145.4 million, or 21.4%, from $678.3 million in 2000 to $532.9million in 2001.  Operating costs andexpenses as a percentage of net sales increased from 97.0% in 2000 to 98.0% in2001 as a result of the decline in net sales. On a unit volume basis, operating costs and expenses declined by 0.7%primarily due to reduced number of personnel. Operating income decreased by $10.2 million, or 48.3%, from $21.1million in 2000 to $10.9 million in 2001. Operating income as a percentage of net sales decreased from 3.0% in2000 to 2.0% in 2001, 

 

27

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primarily due to lower shipments and lower average realized salesprices.

 

*Building Products*.  Net sales decreased $19.5million, or 11.5%, from $170.2 million in 2000 to $150.7 million in 2001.  The decrease in net sales is attributable tothe decreased demand for our manufactured products.  Operating costs and expenses decreased $14.9 million, or 9.3%,from $160.2 million in 2000 to $145.3 million in 2001.  Operating costs and expenses as a percentageof net sales increased from 94.1% in 2000 to 96.4% in 2001.  This percentage increase was due tospreading fixed operating costs over a lower volume of net sales.  Operating income decreased by $4.6 million,or 46.0%, from $10.0 million in 2000 to $5.4 million in 2001.  This decrease was principally due to thedecline in net sales.  Operating incomeas a percentage of net sales decreased from 5.9% in 2000 to 3.6% in 2001.

 

*Corporate and other.*  Thiscategory reflects certain administrative costs, asset impairments and expensesmanagement has not allocated to its industry segments.  The negative net sales amount represents theelimination of intercompany sales. Operating loss increased by $392.6 million from $14.7 million in 2000 to$407.3 million in 2001.  This increasewas principally due to asset impairments of $386.1 million, which included$288.7 million related to goodwill, $87.3 million related to property andequipment and $10.1 million related to accruals for expected personnel andfacility costs associated with the disposition of operations held forsale.  The goodwill impairment charge bysegment included $176.9 million for Plates and Shapes, $54.0 million for FlatRolled and $57.8 million for Building Products.  The property and equipment impairment charge by segment included$34.8 million for Plates and Shapes and $52.5 million for Flat Rolled.

 

**Liquidity andCapital Resources**

 

The primary source of liquidityis our working capital. The two primary components of working capital areaccounts receivable and inventory.  Wesupplement working capital requirements as needed with borrowings under our NewCredit Facility.  Generally, accountsreceivables are collected within 45 to 60 days from invoice date and ourinventory “turns” about four times per year. At December 31, 2002, we had available cash of $6.3 million and workingcapital of $313.5 million, including $19.5 million of net assets related to theoperations held for sale.  Further, ourdebt as a percentage of total capitalization (debt plus stockholders equity)was 40.5% at December 31, 2002; which we believe places our Company in asimilar financial position as our peers. At December 31, 2001, we had available cash of $72.4 million and workingcapital of $235.9 million, excluding $52.7 million of pre-petition liabilitiesthat were subject to compromise related to the operations held for sale.  Additionally, our borrowing availability atDecember 31, 2002 was $70.9 million. Borrowing availability fluctuates daily with changes in eligibleaccounts receivables and inventory, less outstanding borrowings and letters ofcredit.  At March 21, 2003, we had $111.1million drawn and an additional borrowingavailability of $66.9 million.

 

The cash balance at December 31,2001 was abnormally high and existed principally because we were operatingwithout the benefit of a financing agreement at the time.  Our working capital and liquidity hasimproved substantially at year-end 2002 compared to 2001.  The principal reasons for this are theconversion of substantially all pre-petition unsecured liabilities to equitypursuant to the Reorganization Plan and the cash generation efforts undertakenduring the bankruptcy proceedings. These efforts were primarily centered onapplication of proceeds from reduced working capital requirements for accountsreceivables and inventories which was necessitated by the slowing of the U.S.economy, net proceeds from the sale of underperforming or non-core assets andtax refund receipts.  Collectively,these activities allowed us to reduce bank debt by $165.6 million.

 

The following discussion of theprincipal sources and uses of cash should be read in conjunction with ourConsolidated Statements of Cash Flows which are set forth under Item 8 -“Financial Statements and Supplementary Data.” During the two-month period ended December 31, 2002, net cash providedby

 

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continuing operating activities was $8.7 millionthat was primarily due from a continued contraction of our working capitalrequirements, as the U.S. economy continued to soften.  During the ten-months ended October 31, 2002cash used in continuing operations was $27.5 million.  This use of cash was principally to fund bankruptcy relatedreorganization expenses and interest. Net cash provided by continuing operating activities was $135.5 millionfor 2001 and consisted primarily from lower working capital of $141.6million.  The net cash provided bydiscontinued operations for all periods presented was primarily attributable tothe liquidation of working capital.

 

Net cash provided by investingactivities for the two-month period ended December 31, 2002 was $6.4 millionand for the ten-months ended October 31, 2002 was $80.2 million, these wereattributable to the sale of underperforming or non-core assets.  During 2001 and 2002, capital expenditureswere severely limited as we strove to reduce bank indebtedness.  Net cash used in investing activities was$109.3 million for 2001 and consisted of the repurchase of securitizedreceivables of $100.0 million and the purchase of assets of $16.3 million,partially offset by other investing of $7.0 million.

 

Net cash used in financingactivities for the two-month period ended December 31, 2002 was $33.7 millionand for the ten-months ended October 31, 2002 was $141.9 million; consistingprimarily of repayments of debt.   Netcash used in financing activities was $2.6 million for 2001.

 

***Investing Activities***

** **

On April 5, 2002, we announced planned divestitures of11 additional business units that subsequently resulted in a significantdownsizing of our Company.  Thesedivestitures were a part of our Reorganization Plan. These divestitures, alongwith previously announced divestitures, generated net proceeds of approximately$90.0 million during 2002.  The proceedsfrom the sale of these assets were used to reduce amounts outstanding under ourcredit facilities.  These divestituresrepresented $216.7 million of our revenues and $0.5 million of operating lossfor the year ended December 31, 2002.

 

***Financing Activities***

 

On October 31, 2002, we executed our New CreditFacility with a group of lenders.  TheNew Credit Facility has an initial term of three years with an option to extendthe agreement by two one-year terms. The DIP Financing was retired with borrowings under the New CreditFacility.  The New Credit Facilityprovides for a revolving credit facility providing up to $200.0 million inborrowings and is secured by all of our receivables, inventories, andintangible property.  Borrowings underthe New Credit Facility are limited to the lesser of a borrowing base,comprised of eligible receivables and inventories, or $200.0 million in theaggregate; however, our property and equipment are not pledged as security forthe loan.

 

The New Credit Facility matures on October 31, 2005,subject to extension and bears interest at the bank’s base rate or LIBOR, atour option, plus an applicable margin based on a ratio of EBITDA (as definedand adjusted) to cash interest expense (the “Fixed Charge CoverageRatio”).  The Fixed Charge CoverageRatio is determined by dividing EBITDA by the sum of net capital expenditures,income taxes paid in cash, dividends, or other preference payments, interestexpense paid in cash and scheduled principal reductions on debt.  The applicable margin for base rate loansranges from 0.00% to 0.50%, and LIBOR margin loans range from 2.00% to3.00%.  These marginal rates vary withour financial performance as measured by the Fixed Charge Coverage Ratio.  A commitment fee is payable on any unusedportion of the New Credit Facility and varies between 0.250% and 0.375% perannum, based on the Fixed Charge Coverage Ratio.  The base and LIBOR rates were 4.75% and 1.34% as of March 21,2003.

 

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The New Credit Facility requires us to comply with various affirmative, negative andsubjective covenants, the most significant of which are as follows: (i) themaintenance of certain financial ratios and borrowing base availability, (ii)restrictions on additional indebtedness, (iii) restrictions on liens,guarantees and quarterly dividends, and (iv) obtaining the lenders’ consentwith respect to certain individual acquisitions.  The New Credit Facility allows for the payment of up to $1.1million of dividends in any fiscal quarter provided that borrowing baseavailability is greater than $40.0 million. As long as our availability (the applicable advance rate on eligiblereceivables and inventories, less outstanding borrowings and letters of credit)is $20.0 million or greater, we do not have to maintain a minimum Fixed ChargeCoverage Ratio.  Should availabilityfall below $20.0 million, we must comply with a Fixed Charge Coverage Ratio of1.0 to 1.0.  We were in compliance withall covenants as of December 31, 2002 and March 21, 2003.  In connection with the establishment of theNew Credit Facility, we incurred fees and expenses of approximately $2.1million, which are being amortized over the three-year term of the facility.

 

On January 2, 2002, we executed our DIP Financing with Bank of America and PNC Bank inthe amount of $350.0 million.  On July22, 2002, we amended our DIP Financing agreement reducing the maximum permittedborrowings to $275.0 million.  Thefacility was composed of a revolving line of credit consisting of revolvingloans, letters of credit and credit support. The DIP Financing bore interest at the bank’s prime rate plus anapplicable margin of 2%, had an eighteen-month term with two three-monthextensions and was collateralized by all of the Company’s accounts receivable,inventory, equipment and real estate. The lending formula was 85% of eligible accounts receivable and up to60% of eligible inventory. In addition, there were two sublimit loans in theamount of $31.0 million on equipment and $30.0 million on real estate.  The $31.0 million equipment loan wasamortized at $0.5 million per month with additional amounts paid with proceedsfrom asset divestitures.  Proceeds froma federal income tax refund in the amount of $23.7 million and net proceedsfrom asset sales were used to retire the equipment sublimit during 2002.  A commitment fee was payable on any unusedportion of the DIP Financing.  A letterof credit fee was payable for each letter of credit or credit support providedby the lenders. Borrowings were used to fund post-petition operating expensesand supplier and employee obligations throughout the reorganization process.

 

***Commitments and Contingencies***

 

We were not engaged inoff-balance sheet arrangements through any unconsolidated, limited purposeentities and no material guarantees of debt or other commitments to thirdparties existed at December 31, 2002.

 

We enter into operating leasesfor many of our facility, vehicle and equipment needs.  These leases allow us to conserve cash bypaying 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**                                   |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Beyond** |   |
|                              |   | **(In millions)**                           |   |
| New Credit Facility               |   | $                                           | 112.6  |   | $ | — |   | $ | — |   | $ | 112.6 |   | $ | — |   | $ | — |   | $ | — |   |
| Mortgage Note                     |   | 7.4                                         |   | 0.3 |   | 0.3 |   | 0.3 |   | 0.3 |   | 6.2 |   | — |   |
| Letters of credit supporting IRBs |   | 7.9                                         |   | 7.9 |   | — |   | — |   | — |   | — |   | — |   |
| Capital lease obligations         |   | 0.8                                         |   | 0.1 |   | 0.1 |   | — |   | 0.1 |   | 0.1 |   | 0.4 |   |
| Other letters of credit           |   | 14.9                                        |   | 14.9 |   | — |   | — |   | — |   | — |   | — |   |
| Operating lease obligations       |   | 80.8                                        |   | 12.7 |   | 10.7 |   | 8.8 |   | 7.7 |   | 6.6 |   | 34.3 |   |
|                                   |        |                                             |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Industry Trends**

 

The steel industry hasdeclined substantially over the last three years.  During the past year, prices for certain steel products in theU.S. reached a 20-year low and 32 steel producers have filed for bankruptcyprotection over the last five years. Effective March 20, 2002, increased tariffs of between 8% and 30% wereimposed on most imported steel.  Thepurpose of these increases was to assist the financially troubled U.S. steelindustry.  These increased tariffs areintended primarily for the benefit of steel producers.  Our Company does not produce any steel;however, historically service centers like the Company generally have benefitedfrom rising steel prices.  Subsequent toimplementation of the tariffs, steel prices have increased.  During the initial period in which priceswere rising, we had to fund the purchase of higher cost material as the lowercost material was sold.  This negativeimpact on cash flow continued until prices stabilized during the second quarterof 2002, and was offset by higher sales prices from sales of then-existinginventory during that period.

 

The tariffs did not apply toa number of products sold by our Plates and Shapes Group.  For example, the recommendations forprotection of the domestic steel industry did not include any tariff protectionfor wide-flange beams, which is one of the principal products sold by ourPlates and Shapes Product Group.  Steelprices relating to products sold by our Plates and Shapes Group did notexperience dramatic price increases as was seen in the flat rolled steelmarkets during 2002.  On the contrary,the absence of a significant tariff impact plus the weakening domesticconstruction and fabrication industry has led to further price erosion acrossmost product lines.

 

During the later stagesof the quarter ended December 31, 2002, revenue-producing activities weakenedas construction activity slowed.  OurFlat Rolled Group and Plates and Shapes Group each has experienced weak demandfor its products due to a slowdown in the construction and manufacturingindustries.  This weak demand couldadversely affect our revenues.  Weexpect this trend to continue throughout 2003.

 

**New AccountingPronouncements**

 

In July 2001,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 142 (“SFAS No. 142”), Accounting for Goodwill andOther Intangible Assets.  SFAS No. 142requires companies to assess goodwill assets for impairment each year, and morefrequently if circumstances suggest an impairment may have occurred.  SFAS 142 also introduces a more stringentframework for assessing goodwill impairment than the approach required underexisting rules.  SFAS 142 discontinuesthe regular charge, or amortization, of goodwill assets against income.  We adopted SFAS 142 on January 1, 2002.  Due to the write-off of all goodwill as ofDecember 31, 2001, SFAS 142 did not have any impact on our financial statementsduring 2002.  SFAS 142 requires proforma presentation.  However, due to thewrite-off of all goodwill as of December 31, 2001, no pro forma information hasbeen presented.  The goodwill amortization for the year ended December 31, 2001 was $7.2million.

 

In August 2001,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 144 (“SFAS No. 144”), Accounting for Impairment orDisposal of Long-Lived Assets.  SFAS 144supersedes Statement of Financial Accounting Standards No. 121 (“SFAS No.121”), Accounting for the Impairment of Long-Lived Assets and Long-Lived Assetsto be Disposed Of and the accounting and reporting provisions of AccountingPrinciples Board Opinion No. 30, Reporting the Results of Operations, Reportingthe Effects of Disposal of a Segment of a Business, and Extraordinary, Unusualand Infrequently Occurring Events and Transactions. SFAS 144 addressesfinancial accounting and reporting for the impairment and disposal oflong-lived assets and was adopted by the Company effective January 1,2002.  Beginning in the second quarterof 2002, we reported the divestitures announced on April 5, 2002 as discontinuedoperations.  As a result of executingthese divestitures, we

 

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recorded asset impairments of $3.0 million during 2002, such amountrepresenting the difference between the sales price and the carrying value ofthe divested assets.

 

In April 2002, the Financial Accounting StandardsBoard issued Statement of Financial Accounting Standards No. 145 (“SFAS 145”),Rescission of FASB Statements 4, 44 and 64, Amendment of FASB No. 13, andTechnical Corrections.  SFAS 145, amongother things, amends SFAS 4 and SFAS 44, to require that gains and losses fromthe extinguishments of debt generally be classified within continuingoperations.  The provisions for SFAS 145are effective for the fiscal years beginning after May 15, 2002 and earlyapplication is encouraged.  However, wewere required to adopt upon emergence from bankruptcy the application of“Fresh-Start Reporting” as specified by SOP 90-7.  Upon emergence from bankruptcy, any gains on debt forgiveness willbe reported in continuing operations. All previously reported amounts have been reclassified.

 

In June 2002, the Financial Accounting Standards Boardissued Statement of Financial Accounting Standards No. 146 (“SFAS 146”),Accounting for Costs Associated with Exit or Disposal Activities.  SFAS 146 replaces Emerging Issues Task ForceIssue 94-3, Liability Recognition of Certain Employee Termination Benefits andOther Costs to Exit an Activity.  Thisstandard requires companies to recognize costs associated with exit or disposalactivities when they are incurred rather than at the date of a commitment to anexit or disposal plan.  This statementis effective for exit or disposal activities that are initiated after December31, 2002.  However, we were required toadopt upon emergence from bankruptcy the application of “Fresh-Start Reporting”as specified by SOP 90-7.  We do notbelieve that the adoption of SFAS 146 will have a significant impact on ourfinancial statements.

 

In December 2002,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 148 (“SFAS 148”), Accounting for Stock-BasedCompensation-Transition and Disclosure.  SFAS 148 amends SFAS 123 toprovide alternate methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to requireprominent disclosures in both annual and interim financial statements about theeffects of stock-based compensation on reported results.  The provisionsof SFAS 148 are effective for years ending after December 15, 2002 and interimperiods beginning after December 15, 2002.  The adoption of SFAS 148 didnot have any impact on our results of operations or financial position in 2002.

 

**Factors Which May Affect FutureOperating Results**

 

*Theprovisions of the Private Securities Litigation Reform Act of 1995 providecompanies with a “safe harbor” when making forward-looking statements. This“safe harbor” encourages companies to provide prospective information abouttheir companies without fear of litigation. We wish to take advantage of the“safe harbor” provisions of the Private Securities Litigation Reform Act of1995 and are including this section in our Annual Report on Form 10-K in orderto 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:*

 

*Recentemergence from Chapter 11 Reorganization and history of recent losses.*  We sought protection under Chapter 11 of theBankruptcy Code in November 2001. Exclusive of the “Fresh-Start Reporting” and reorganization adjustments,we incurred net losses of $29.6 million and $409.1 million during the ten-monthperiod ended October 31, 2002 and the fiscal year ended December 31, 2001,respectively.  After the Effective Date,we also incurred a net loss of $3.3 million for the two-month period endedDecember 31, 2002.  Our equityownership, Board of Directors and a portion of our senior management wasreplaced in connection with our reorganization.  While our current senior management has concentrated onreformulating and refining our business strategy, there can be no assurancethat we  

 

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will attain profitability or achieve growth in our operatingperformance.

 

*Substantial debt obligations*.  Even after our emergence from bankruptcy,our long–term debt was $127.4 million as of December 31, 2002, including $112.6million under the New Credit Facility. We continue to be particularly susceptible to adverse changes in ourindustry, the economy and the financial markets. In addition, our ability toobtain additional debt financing or to engage in other business activities thatmay be in our interest may be limited by restrictive operating and financialcovenants under the terms of the New Credit Facility and any other debtinstruments. Those limits on financing may restrict our ability to service ourdebt obligations or finance future operations, potential acquisitions or othercapital needs through additional debt financing if cash flow from operations isinsufficient to service such obligations. Because we may be more leveraged than some of our competitors, our debtmay place us at a competitive disadvantage. In addition, if we cannot achieve the financial results necessary tomaintain compliance with these covenants, we could be declared in default andbe required to sell or liquidate our assets to repay outstanding debt.

 

*Limitedliquidity*.  We are currently funding our liquidity needsout of operating cash flow and from borrowings under the New CreditFacility.  We believe our currentliquidity is sufficient to meet our operating and capital expenditurerequirements during 2003.  No assurancescan be given that our existing sources of liquidity will be adequate to fundfuture liquidity needs, if additional sources of liquidity become necessary,that they would be available to us or adequate. Any liquidity shortages wouldlikely have a material adverse effect on our business and financial condition.

 

*Historicalfinancial information not comparable to current financial condition and resultsof operations.*  As aresult of our emergence from bankruptcy, we are operating our business under anew capital structure.  We were subjectto “Fresh-Start Reporting” and our balance sheet as of December 31, 2002reflects the application of these rules. Accordingly, the financial information of our Company as of any date orfor periods after November 1, 2002 is not comparable to our historicalfinancial information before November 1, 2002. This is primarily due to the reduction in the carrying values of ourproperty and equipment which were reduced to zero as a result of the reducedvalues attributable to the Common Stock based upon the estimated enterprisevalue for our Company as described in the disclosure statement filed with theReorganization Plan.

 

*Negative impact of reorganization on some of ourrelationships with customers, suppliers and employees*.  The effect, if any, which our Chapter 11Proceedings and the Reorganization Plan may have upon the continued operationsof our Company cannot be accurately predicted or quantified.  Our recent emergence from bankruptcy mayadversely affect our ability to negotiate favorable terms with suppliers andmay also adversely affect our ability to retain existing customers, and toobtain new customers.  Failure to obtainfavorable terms from suppliers, to retain existing customers or to obtain newcustomers may harm our business, financial condition and results of operations.

 

*Economicdownturn.*  Our metalservice center and distribution business has been impacted by decreasingvolumes and declining prices starting in 2000 and continuing through the firstquarter of 2003, due to softening demand from customers in the cyclicaldownturn in the U.S. economy.  Ifweakness in product demand continues and volumes and pricing remain low,reduced sales could continue to materially adversely affect operatingresults.  With respect to our BuildingProducts Group, housing starts have recently declined from a record high, yetremain at historically high levels.  Thestrong housing market has been driven by low mortgage rates.  There can be no assurance that low mortgagerates will continue.  In addition,adverse changes in mortgage rates and consumer confidence could materiallyaffect our Building Products Group revenues and profits.

 

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*Possibleimpact on*varying*metals prices.*  The principal raw materials used by us are steel, aluminum andvarious specialty metals.  The metalsindustry as a whole is cyclical, and at times pricing and availability of rawmaterials in the metals industry can be volatile due to numerous factors beyondour control, including general, domestic and international economic conditions,labor costs, production levels, competition, import duties and tariffs andcurrency exchange rates.  This volatilitycan significantly affect the availability and cost of raw materials for us, andmay, therefore, adversely affect our net sales, operating margin and netincome.  Our service centers maintainsubstantial inventories of metal to accommodate the short lead times andjust-in-time delivery requirements of our customers. Accordingly, we purchasemetal in an effort to maintain our inventory at levels that we believe to beappropriate to satisfy the anticipated needs of our customers based oninformation derived from customers, market conditions, historic usage andindustry research.  Our commitments formetal purchases are generally at prevailing market prices in effect at the timewe place our orders. We have no long-term, fixed-price purchase contracts.  During periods of rising raw materialspricing, there can be no assurance we will be able to pass any portion of suchincreases on to customers.  When rawmaterial prices decline, customer demands for lower prices could result inlower sale prices and, as we use existing inventory, lower margins.  Changing metal prices could adversely affectour gross profit margin and operating income.

 

*Fluctuations in demand.*  Many of our products are sold to industriesthat experience significant fluctuations in demand based on economicconditions, energy prices, consumer demand and other factors beyond ourcontrol.  No assurance can be given thatwe will be able to increase or maintain our level of sales in periods ofeconomic stagnation or downturn.

 

*Competition.* We are engaged in a highly fragmented and competitiveindustry.  We  compete with a large number of other value-added metalsprocessors/service centers on a regional and local basis, some of which mayhave greater financial resources than us. We also compete to a lesser extent with primary metals producers, whotypically sell to very large customers requiring regular shipments of largevolumes of metals.  Increasedcompetition could have a material adverse effect on our net sales andprofitability.

 

*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 onor near sites listed on the CERCLA National Priority List.  We have a number of leased propertieslocated in or near industrial or light industrial use areas; and accordingly,these properties may have been contaminated by pollutants which would havemigrated from neighboring facilities or have been deposited by prioroccupants.  Furthermore, we are notaware of any notices from authoritative agencies with respect toclean-up/remediation claims for contamination at the leased properties.  However, there can be no assurance that wewill not be notified of such claims with respect to our existing leased orowned properties in the future.

 

Although no environmental claims have been madeagainst the Company and we have not been named as a potentially responsibleparty by the Environmental Protection Agency or any other party, it is possiblethat we could be identified by the Environmental Protection Agency, a stateagency or one or more third parties as a potentially responsible party underCERCLA or under analogous state laws. If so, we could incur substantial litigation costs to prove that we arenot responsible for the environmental damage. We have obtained limited indemnities from the former stockholders of theacquired companies whose facilities are located at or near contaminatedsites.   The limited indemnities aresubject to certain

 

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deductible amounts, however, and there can be no assurance that theselimited indemnities will protect us to any extent.

 

*Relianceon key personnel*.  Most of our senior management at certain ofour subsidiary operations is generally comprised of former owners who receivedOld Common Stock and committed to stay with their operations afteracquisition.  As a result of theimplementation of the Reorganization Plan, substantially all of these individualshave suffered significant losses in our Old Common Stock and have lower incomesthan they averaged when they owned their former businesses.  These former owners have non-competitionobligations that expire on the fifth anniversary of their date ofacquisition.  Substantially all of theseagreements will expire by the end of the second quarter of 2003, and all ofthese obligations will expire by 2004. Further, as a result of the implementation of the Reorganization Plan,the former owners are no longer significant stockholders in our Company.  Where desired, there is no assurance that wewill be able to retain these individuals or find suitable replacements in atimely manner if such individuals leave the Company.  The failure to retain or replace such management within areasonable period of time could negatively impact results from operations atsuch locations.

 

**Item 7a*. Quantitative and Qualitative Disclosures About Market Risk***

 

In the normal course ofbusiness, we are exposed to market risk, primarily from changes in interestrates and the cost of metal we hold in inventory. We continually monitorexposure to market risk and develop appropriate strategies to manage this risk.With respect to interest rate risk, we may enter into certain derivativefinancial instruments such as interest rate swap agreements. We do not usederivative financial instruments for trading or to speculate on changes ininterest rates.  With respect to ourmetal purchases, there is no recognized market to purchase derivative financialinstruments to reduce the inventory exposure risks.

 

***Interest Rate Exposure***

 

Our exposure to market risk forchanges in interest rates relates primarily to our New Credit Facility.  All of the credit facilities were subject tovariable interest rates as of December 31, 2002 and 2001, respectively.  Accordingly, we are subject to interest raterisks on the New Credit Facility. Outstanding borrowings under the New Credit Facility were $112.6 millionas of December 31, 2002.  Assuming a 1%change in the interest rate on the New Credit Facility, our annual interestexpense would increase by $1.1 million.

 

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**Item 8.*    FinancialStatements and Supplementary Data***

 

The consolidated financial statements of our Companyare set forth at pages F-1 throughF-24 inclusive, found at the end of this report, as set forth in the indexthereto included under Item 15. “Exhibits, Financial Statement Schedules, and Reports on Form 8-K,” andare incorporated herein by reference.

 

Selected unaudited quarterlyfinancial information for the years ended December 31, 2002, and 2001 is asfollows:

 
|                                             |   | **Three Months Ended** |   |
|--------------------------------------------------|--------|------------------------|--------|
|                                             |   | **March  31(3)**       |   | **June 30** |   | **Sept 30** |   | **Dec 31(4)** |   |
| **Successor Company(1):**                        |   |                   |   |   |   |   |   |   |   |
| **2002:**                                        |   |                   |   |   |   |   |   |   |   |
| Net sales                                        |   | $                      | — |   | $ | — |   | $ | — |   | $ | 126.2 |   |
| Gross profit                                     |   | —                 |   | — |   | — |   | 28.9 |   |
| Operating income (loss)                          |   | —                 |   | — |   | — |   | (0.7 | ) |
| Income (loss) from continuing operations         |   | —                 |   | — |   | — |   | (2.1 | ) |
| Income (loss) per share – basic and diluted |   | —                 |   | — |   | — |   | (0.16 | ) |
|                                             |   |                   |   |   |   |   |   |   |   |
| **Predecessor Company(2):**                      |   |                   |   |   |   |   |   |   |   |
| **2002:**                                        |   |                   |   |   |   |   |   |   |   |
| Net sales                                        |   | $                      | 240.2  |   | $ | 244.1 |   | $ | 234.4 |   | $ | 98.8 |   |
| Gross profit                                     |   | 58.2                   |   | 60.4 |   | 57.4 |   | 12.3 |   |
| Operating income (loss)                          |   | (1.8                   | )      | 2.8 |   | 7.4 |   | (10.7 | ) |
| Income (loss) from continuing operations         |   | (7.7                   | )      | (6.7 | ) | (4.0 | ) | 69.3 |   |
| Income (loss) per share – basic and diluted |   | (0.19                  | )      | (0.20 | ) | (0.14 | ) | 1.94 |   |
| **2001:**                                        |   |                   |   |   |   |   |   |   |   |
| Net sales                                        |   | $                      | 325.5  |   | $ | 314.8 |   | $ | 292.7 |   | $ | 289.0 |   |
| Gross profit                                     |   | 74.9                   |   | 76.2 |   | 66.9 |   | 64.5 |   |
| Operating income (loss)                          |   | 0.9                    |   | 6.5 |   | (87.4 | ) | (308.7 | ) |
| Income (loss) from continuing operations         |   | (9.3                   | )      | (4.4 | ) | (83.1 | ) | (310.5 | ) |
| Income (loss) per share — basic and diluted |   | (0.33                  | )      | (0.14 | ) | (2.34 | ) | (8.40 | ) |

 

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(1)   For the period November 1, 2002 throughDecember 31, 2002.

(2)   For the period January 1, 2001 throughOctober 31, 2002.

(3)   Amounts for the quarter ended March 31 do notagree with amounts previously reported due to the adoption of SFAS 144.  See Item 7. “Management’s Discussion andAnalysis of Financial Condition and Results of Operations — New AccountingPronouncements.”

(4)   For the fourth fiscal quarter of 2002,includes only two months of results for the Successor Company and one month ofresults for the Predecessor Company.

 

**Item 9.    *Changesin and Disagreements with Accountants on Accounting and Financial Disclosure***

 

The appointment of Deloitte& Touche LLP, to serve as the Company’s independent public accountants waspreviously reported in the Company’s Current Report on Form 8-K dated June 21,2002.

 

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**PART  III**

 

**Item 10.  *Directors and ExecutiveOfficers of the Registrant***

 

Under the terms of the Reorganization Plan, effectiveOctober 31, 2002, all members of the Predecessor Company's Board of Directorsresigned and were replaced by the following six new members appointed by theCreditors Committee: Daniel W. Dienst, Eugene I. Davis, John T. DiLacqua, Jr.,Jack G. Leckie, Gerald E. Morris and Charles P. Sanida.  The new Board of Directors named Daniel W.Dienst as the Chairman of the Board, replacing J. Michael Kirksey.  Under our Amended and Restated By-laws andthe Restated Certificate of Incorporation, each member of the new Board ofDirectors shall serve until the earlier of (i) the death or resignation of suchdirector or (ii) the first annual meeting of stockholders after the EffectiveDate.  Under the Amended and RestatedBy-laws and under the terms of the Reorganization Plan, our Company is notrequired to hold an annual meeting of stockholders until up to thirteen monthsafter the Effective Date, such date being November 30, 2003.

 

Also effective November 1, 2002, Mr. Kirksey resignedfrom his position as Chief Executive Officer and President of the Company.  In addition, as of the same date, Lester G.Peterson resigned from his position as Senior Vice President of CorporateDevelopment and President of the Plates and Shapes Group.  The new Board of Directors created theOffice of the Chairman and appointed two of its members, Daniel W. Dienst andEugene I. Davis, to act as Chairman and Member, respectively, and to assume theduties of the President and chief executive officer until a successor wasselected.  In addition, William R.Bennett, who was originally designated as a Director, was appointed by the newBoard of Directors as Senior Vice President and President of the Plates andShapes Group.

 

Effective February 24, 2003, our Board of Directorsnamed C. Lourenço Gonçalves as the new President and Chief Executive Officerand elected Mr. Gonçalves as the seventh and final member of the Board ofDirectors.

 

The new Board of Directors and executive officers ofour Company and the respective ages thereof are summarized in the followingtable.  Except as otherwise indicated,each such person has held his present principal occupation for the past fiveyears and references to executive offices held are with our Company.

 
| **Name**                        |   | **Age** |   | **Principal  Position**                                                  |   |
|---------------------------------|--------|---------|--------|--------------------------------------------------------------------------|--------|
|                            |   |    |   |                                                                     |   |
| Daniel W. Dienst                |   | 37      |   | Chairman of the Board of  Directors and Director                         |   |
| C. Lourenço Gonçalves |   | 45      |   | Chief Executive Officer,  President and Director                         |   |
| Eugene I. Davis                 |   | 47      |   | Director                                                                 |   |
| John T. DiLacqua, Jr.           |   | 50      |   | Director                                                                 |   |
| Jack G. Leckie                  |   | 65      |   | Director                                                                 |   |
| Gerald E. Morris                |   | 70      |   | Director                                                                 |   |
| Charles P. Sanida               |   | 65      |   | Director                                                                 |   |
| William R. Bennett              |   | 56      |   | Senior Vice President,  President – Plates and Shapes Group         |   |
| Craig R. Doveala                |   | 50      |   | Senior Vice President,  President – Flat Rolled Group               |   |
| Edward L. Thompson              |   | 60      |   | Senior Vice President,  President – Building Products Group         |   |
| John A. Hageman                 |   | 48      |   | Senior Vice President, General  Counsel and Chief Administrative Officer |   |
| Terry L. Freeman                |   | 52      |   | Senior Vice President and Chief  Financial Officer                       |   |

 

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Daniel W. Dienst, became a Director on October 31,2002 and was elected Chairman and Co-President and chief executive officer ofour Company on November 1, 2002.  Mr.Dienst remained as Co-President and chief executive officer until February 24,2003.  Mr. Dienst serves as a ManagingDirector of the Corporate and Leveraged Finance Group of CIBC World MarketsGroup, a diversified global financial services firm, a position he has heldsince May 2000. From January 1999 through April 2000, Mr. Dienst held variouspositions within CIBC, including Executive Director of the High Yield/FinancialRestructuring Group.  From October 1995to March 1998, Mr. Dienst served in various capacities with Jefferies &Company, Inc., most recently as its Vice President, CorporateFinance/Restructurings.  Mr. Dienst hasalso served on the board of directors of Metal Management, Inc. since 2001 andwill assume the role as Chairman of the Board effective April 1, 2003.

 

C. Lourenço Gonçalves became President, Chief Executive Officer and a Director of our Companyeffective February 24, 2003.  Mr.Gonçalves, most recently served as President and Chief Executive Officer ofCalifornia Steel Industries, Inc., a position he held since 1998.  From 1981 to 1998 he was employed byCompanhia Siderurgica Nacional, the largest steel company in Brazil, where heheld positions as a managing director, general superintendent of Volta RedondaWorks, hot rolling general manager, cold rolling and coated products generalmanager, hot strip mill superintendent, continous casting superintendent andquality control manager.  Mr. Gonçalvesis a metallurgical engineer with a masters degree from the Federal Universityof Minas Gerais State and a bachelor’s degree from the Military Institute ofEngineering in Rio de Janeiro, Brazil. Mr. Gonçalves has also been elected to the Board of Directors, fillingthe seventh and final board position.

 

Eugene I. Davis, became a Director on October 31, 2002and was elected Co-President and chief executive officer of our Company onNovember 1, 2003.  Mr. Davis remained asCo-President and chief executive officer until February 24, 2003.  Mr. Davis has served as the chairman and CEOof Pirinate Consulting Group, L.L.C. since 1999.  Mr. Davis has also served as chairman and CEO of RBX Industries,Inc., a manufacturer and distributor of foam products, since September 2001,and served as its chief restructuring officer from January 2001 to September2001. Mr. Davis has served on the CFN Liquidating Trust Committee for theformer Contifinancial Corporation and its affiliates since April 2001.  Mr. Davis also currently serves as adirector for Anchor Glass Container Corporation, CD Warehouse, Inc.,Elder-Beerman Stores, Inc., Eagle Geophysical, Inc., Coho Energy, Inc., MurdockCommunications Corporation, Phonetel Technologies, Inc., PPM America SpecialInvestment Funds, and Tipperary Corporation, and serves on the board of trusteesof Green Brook Country Club.

 

John T. DiLacqua, Jr., became a Director of ourCompany on October 31, 2002.  Mr.DiLacqua has served as the president, CEO and director of Envirosource, Incsince 1999.  From 1997 to 1998, Mr.DiLacqua served as president of the U.S. Ferrous Division of PhilipServices.  Mr. DiLacqua served aspresident of the Luria Brothers Division of Connell Limited Partnership, one ofthe largest companies in the ferrous scrap recycling industry, from 1994 to1997, and served as vice president of finance and administration of LuriaBrothers from 1990 to 1994.  Mr.DiLacqua has also served on the board of directors of Metal Management, Inc.and Russell-Stanley since 2001.

 

Jack G. Leckie, became a Director of our Company onOctober 31, 2002.  Mr. Leckie currentlyserves as a publicly-elected supervisor for the Dunes Community DevelopmentDistrict and as a principal of Tourguidemike LLC.  Mr. Leckie formerly served for 41 years with Alcoa, Inc.,including the positions of president of Tifton Aluminum Company and ExecutiveVice President of Alcoa Extruded Construction Products.  Mr. Leckie is Chairman of our CompensationCommittee.

 

Gerald E. Morris, became a Director of our Company onOctober 31, 2002.  Mr. Morris currentlyserves as the president and CEO of Intalite International N.V. (“Intalite”), adiversified holding company with investments primarily in the metalsfabrication industry.  Mr. Morris alsoserves as a director and as

 

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chairman of the audit committee of Beacon Trust Company.  Mr. Morris previously served as chairman ofthe board of directors of Allmet Building Products, which was ultimately soldto the Company.  Mr. Morris haspreviously served as a director of Rexel, Inc. and Tivoli Industries, Inc., andas trustee of the Blanchard Group of Funds. Mr. Morris is a certified public accountant and Chairman of our AuditCommittee.

 

Charles P. Sanida became a Director of our Company onOctober 31, 2002.  Mr. Sanida is thePresident and CEO of Carlisle, Inc, a plant operations and managementconsulting firm.  He has been in this position since May 2002.  Mr. Sanida was in the steel industry withseveral major steel corporations for 42 years.  He has been involved inall aspects of the industry including steel production, product manufacture,sales, marketing and distribution.  From 1989 until April of 2002, Mr.Sanida held various senior management positions within IPSCO, Inc. and/or IPSCOSteel Inc., including President, Executive Vice President and Chief OperatingOfficer, Senior Vice President and Chief Technology Officer, and chairman ofseveral subsidiaries.

 

William R. Bennett, became Senior Vice President ofthe Company on October 31, 2002 and is responsible for the operations of theCompany's Plates and Shapes Group.  Mr.Bennett served as President, CEO and COO of Levinson Steel Company from 1991until 1998. After the sale of Levinson Steel Company to our Company, Mr.Bennett remained its president until 1999. From 1971 until 1987, Mr. Bennettserved in various capacities at DuBose Steel, Inc., a private steel company,including serving as its CEO from 1983 to 1988.

 

Craig R. Doveala, became a Senior Vice President ofour Company in July 1997 and is responsible for the operations of the Company’sFlat Rolled Group.  Mr. Doveala was theCEO of one of our original founding subsidiaries from 1997 to 2000 and was itsPresident from 1990 to 1997.

 

Edward L. Thompson, became a Senior Vice President ofour Company in May 2001 and is responsible for the operations of the Company’sBuilding Products Group.  Since 1995, heserved as President of Allmet Building Products, Inc., which was acquired byour Company in October 1999.

 

John A. Hageman, became Chief Administrative Officerin January 2003 and has been Senior Vice President, General Counsel andSecretary of our Company since April 1997. From July 1987 through March 1997, Mr. Hageman was Senior Vice Presidentof Legal Affairs, General Counsel and Secretary of Physician Corporation ofAmerica, a publicly traded health maintenance organization.

 

Terry L. Freeman, served as our principal financialofficer from September 2000, with the title of Senior Vice President, Treasurerand Chief Accounting Officer and was appointed Senior Vice President and ChiefFinancial Officer of our Company in January 2003.  From April 1997 to September 2000, Mr. Freeman served as VicePresident and Corporate Controller of our Company.  From June 1990 to March 1997, Mr. Freeman held various financialmanagement positions, lastly as Corporate Controller with MAXXAM, Inc., apublicly traded aluminum, forest products and real estate development company.

 

Messrs. Doveala, Thompson, Hageman and Freeman servedas executive officers of our Company during its Chapter 11 Proceedings.  No family relationships exist between anyexecutive officers or directors of our Company.

 

**Section 16(a) Beneficial OwnershipReporting Compliance**

 

Section 16(a) of the Securities Exchange Act of 1934rquires our directors, executive officers and persons beneficially owning morethan 10% of our Common Stock to file with the SEC and any stock exchange orautomated quotation system on which the Common Stock may then be listed orquoted (i) initial reports of ownership, (ii) reports of changes in ownershipand (iii) annual reports of ownership of

 

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Common Stock and other equity securities of our Company.  Such directors, executive officers andgreater than 10% beneficial owners are also required to furnish our Companywith copies of all such filed reports.

 

Based solely upon review ofthe copies of such reports furnished to our Company and written representationsthat no other reports were required during 2002, we believe that, except asspecified below, all Section 16(a) reporting requirements related to ourdirectors, executive officers and 10% beneficial owners were timely fulfilledduring 2002 to the extent issuances of shares of Common Stock or Warrants toMessrs. Doveala, Freeman, Hageman, Kirksey, Peterson and Thompson pursuant tothe Reorganization Plan constitute reclassifications exempt from Section 16(b)of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),pursuant to Rule 16b-7 under the Exchange Act. To the extent such issuances are not so exempt, such issuances wouldhave been required to be reported on a Form 4 within 2 business days afterOctober 31, 2002.  In addition, Mr.Freeman, who was first elected Chief Financial Officer on January 21, 2003, didnot file on a timely basis a Form 3 on becoming an officer and four Form 4srespecting four stock option grants in years prior to 2002; and Mr. Thompsondid not timely file a Form 3 on becoming an officer of our Company.  We are required to report Mr. Singer, a formerexecutive officer terminated in 2002, as having failed to file timely an annualreport of ownership on Form 5 for 2002 because we received from Mr. Singerneither a Form 5 within three days of the required filing date nor a writtenrepresentation that no Form 5 filing was necessary.

 

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**Item 11.** ***Executive Compensation***

 

The following tableprovides certain summary information concerning compensation awarded to, earned by, or paid to (i) anyperson who served as chief executive officer of our Company at any time during2002, (ii) the four most highly compensated executive officers (other thanchief executive officer) in 2002 who were executive officers on December 31,2002, and (iii) one additional former executive officers who was among our fourmost highly compensated executive officers (other than chief executive officer)in 2002 but was not an executive officer on December 31, 2002 (collectively,“Named Executive Officers”) for services rendered in all capacities to ourCompany for fiscal years ended December 31, 2002, 2001 and 2000.

 
|                  |   | **Annual Compensation** |   | **Long-Term  Compensation** |    |         |   |
|-----------------------|--------|-------------------------|--------|-----------------------------|---------|--------------|--------|
|                  |   | **Year**                |   | **Salary**                  |    | **Bonus(4)** |   | **Other(5)** |   | **Restricted  Stock  Awards** |   | **Number of  Options  Granted(6)** |   | **All Other  Compensation (7)** |   |
|                  |   |                    |   |                        |    |         |   |   |   |   |   |   |   |   |   |
| Daniel W. Dienst(1)   |   | 2002                    |   | $                           | —  |         | $      | — |   | $ | 75,000 |   | 3⁄4 |   | 3⁄4 |   | $ | — |   |
| Former Co-President   |   | 2001                    |   | $                           | —  |         | $      | — |   | $ | — |   | 3⁄4 |   | 3⁄4 |   | $ | — |   |
|                  |   | 2000                    |   | $                           | —  |         | $      | — |   | $ | — |   | 3⁄4 |   | 3⁄4 |   | $ | — |   |
|                  |   |                    |   |                        |    |         |   |   |   |   |   |   |   |   |   |
| Eugene I. Davis(1)    |   | 2002                    |   | $                           | —  |         | $      | — |   | $ | 55,000 |   | 3⁄4 |   | 3⁄4 |   | $ | — |   |
| Former Co-President   |   | 2001                    |   | $                           | —  |         | $      | — |   | $ | — |   | 3⁄4 |   | 3⁄4 |   | $ | — |   |
|                  |   | 2000                    |   | $                           | —  |         | $      | — |   | $ | — |   | 3⁄4 |   | 3⁄4 |   | $ | — |   |
|                  |   |                    |   |                        |    |         |   |   |   |   |   |   |   |   |   |
| J. Michael Kirksey(2) |   | 2002                    |   | $                           | 297,667 |         | $      | 19,182 |   | $ | 360,000 |   | 3⁄4 |   | 3⁄4 |   | $ | 66,006 |   |
| Former Chief          |   | 2001                    |   | $                           | 345,533 |         | $      | 37,500 |   | $ | — |   | 3⁄4 |   | 150,000 |   | $ | 5,478 |   |
| Executive Officer     |   | 2000                    |   | $                           | 303,000 |         | $      | 37,500 |   | $ | — |   | 3⁄4 |   | 3⁄4 |   | $ | 5,718 |   |
|                  |   |                    |   |                        |    |         |   |   |   |   |   |   |   |   |   |
| Lester G. Peterson(3) |   | 2002                    |   | $                           | 253,600 |         | $      | 12,921 |   | $ | 300,000 |   | 3⁄4 |   | 3⁄4 |   | $ | 73,929 |   |
| Senior Vice President |   | 2001                    |   | $                           | 239,740 |         | $      | — |   | $ | — |   | 3⁄4 |   | 100,000 |   | $ | 5,100 |   |
|                  |   | 2000                    |   | $                           | 213,546 |         | $      | — |   | $ | — |   | 3⁄4 |   | 3⁄4 |   | $ | 11,790 |   |
|                  |   |                    |   |                        |    |         |   |   |   |   |   |   |   |   |   |
| Craig R. Doveala      |   | 2002                    |   | $                           | 318,865 |         | $      | 30,008 |   | $ | 225,000 |   | 3⁄4 |   | 3⁄4 |   | $ | 56,692 |   |
| Senior Vice President |   | 2001                    |   | $                           | 280,697 |         | $      | 58,842 |   | $ | — |   | 3⁄4 |   | 100,000 |   | $ | 8,438 |   |
|                  |   | 2000                    |   | $                           | 244,346 |         | $      | 46,875 |   | $ | — |   | 3⁄4 |   | 3⁄4 |   | $ | — |   |
|                  |   |                    |   |                        |    |         |   |   |   |   |   |   |   |   |   |
| Edward L. Thompson    |   | 2002                    |   | $                           | 248,352 |         | $      | 41,696 |   | $ | 180,000 |   | 3⁄4 |   | 3⁄4 |   | $ | 53,832 |   |
| Senior Vice President |   | 2001                    |   | $                           | 253,529 |         | $      | — |   | $ | — |   | 3⁄4 |   | 3⁄4 |   | $ | 4,980 |   |
|                  |   | 2000                    |   | $                           | 222,221 |         | $      | 8,750 |   | $ | — |   | 3⁄4 |   | 3⁄4 |   | $ | 480 |   |
|                  |   |                    |   |                        |    |         |   |   |   |   |   |   |   |   |   |
| John A. Hageman       |   | 2002                    |   | $                           | 232,200 |         | $      | 15,407 |   | $ | 168,750 |   | 3⁄4 |   | 3⁄4 |   | $ | 33,495 |   |
| Senior Vice President |   | 2001                    |   | $                           | 226,293 |         | $      | 20,000 |   | $ | — |   | 3⁄4 |   | 100,000 |   | $ | 7,200 |   |
|                  |   | 2000                    |   | $                           | 205,845 |         | $      | 30,000 |   | $ | — |   | 3⁄4 |   | 3⁄4 |   | $ | 12,465 |   |
|                  |   |                    |   |                        |    |         |   |   |   |   |   |   |   |   |   |
| Terry L. Freeman      |   | 2002                    |   | $                           | 207,200 |         | $      | 14,213 |   | $ | 150,000 |   | 3⁄4 |   | 3⁄4 |   | $ | 28,207 |   |
| Senior Vice President |   | 2001                    |   | $                           | 201,413 |         | $      | 12,750 |   | $ | — |   | 3⁄4 |   | 15,000 |   | $ | 4,545 |   |
|                  |   | 2000                    |   | $                           | 160,063 |         | $      | 25,000 |   | $ | — |   | 3⁄4 |   | 3⁄4 |   | $ | 4,500 |   |

 

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(1)**          **AppointedCo-President and chief executive officer on November 1, 2002 and remained insuch position until February 24, 2003. Mr. Dienst and Mr. Davis were paid a quarterly consulting fee of $75,000and $55,000 respectively, for the fourth quarter of 2002 and like amounts forthe first fiscal quarter of 2003 in respect of their service as Co-Presidentand chief executive officer.

(2)**          **Resigned as ChiefExecutive Officer and President effective November 1, 2002.

(3)**          **Resigned as SeniorVice President and President of the Plates and Shapes Group effective November1, 2002.

(4)**          **Includes the cashportion of the 2001 bonus that was paid in 2002.

(5)**          **Other includesconsulting fees paid to Messrs. Dienst and Davis in 2002, payments under thekey employee retention plan that was approved by the Bankruptcy Court on June2, 2002 and the severance payments made to Messrs. Kirksey and Peterson in2002.

(6)**          **All options thatwere previously granted have been terminated as a part of the ReorganizationPlan.  No options have been grantedunder the 2002 Incentive Plan to the Named Executive Officers.  See “Employment Agreements” below for grantsmade in 2003.

(7)**          **Includes the sumsof the values of (a) Company contributions to its 401(k) plans, (b) premiumspaid by our Company for term life insurance for the benefit of the insured and(c) a non-cash payment representing an allowed unsecured claim in fullsatisfaction of that portion of the 2001 bonus plan which was earned before thebankruptcy petition date November 14, 2001, such amounts to be paid in CommonStock in 2003.  The amounts described inclauses (a), (b) and (c) above for each of the Named Executive Officers on the2002 line are set forth below:

 
| **Name**            |   | **(a)** |   | **(b)** |   | **(c)** |   |
|---------------------|--------|---------|--------|---------|--------|---------|--------|
| J. Michael  Kirksey |   | $       | — |    | $      | 1,188   |   | $ | 64,818 |   |
| Lester G.  Peterson |   | 3⁄4  |   | 3⁄4  |   | 73,929  |   |
| Craig R. Doveala    |   | 3⁄4  |   | 3⁄4  |   | 56,692  |   |
| Edward L.  Thompson |   | 3⁄4  |   | 528     |   | 53,304  |   |
| John A. Hageman     |   | 3⁄4  |   | 2,665   |   | 30,830  |   |
| Terry L. Freeman    |   | 3⁄4  |   | 1,320   |   | 26,887  |   |
|                     |        |         |        |         |        |         |        |  |  |  |

 

By order of the Bankruptcy Court on June 2, 2002, thekey employee retention plan (the “KERP”) was approved.  The KERP covered two groups of employees:(a) up to seven corporate executives (the “Group 1 Employees”) and (b) 140other key managerial and operational employees.  Messrs. Kirksey, Doveala, Peterson, Thompson, Hageman and Freemaneach received compensation as Group 1 Employees under the KERP.

 

The Group 1 Employees were entitled to receive: (a)cash payments equal to 25% of their current annual base salary payable upontermination of employment or approval by the Bankruptcy Court of the disclosurestatement; (b) cash payments ranging from 0% to 25% of their current annualbase salary depending on the timing of the Effective Date (emergence frombankruptcy); (c) cash payments equal to 25% of their current annual base salarypayable on the Effective Date if our Company has met or exceeded its projected12-month trailing consolidated earnings before interest, taxes, depreciationand amortization (“EBITDA”); and (d) compensation in the form of Common Stockpayable 75 days after the Effective Date in an amount equal to one-half percentof their current annual salary for each percentage in excess of a 50% recoveryto the holders of general unsecured claims. Pursuant to the terms of the KERP, the Group 1 Employees received thefollowing aggregate amounts: $403,750 under the provision described in clause(a) above; $403,750 based on 25% of their annual base salaries under theprovision described in clause (b) above; and $403,750 under the provisiondescribed in clause (c) above.  All ofsuch amounts paid under the KERP with respect to each Group 1 Employee areincluded in the above

 

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Compensation Table under “Other” for 2002.  We have not yet issued Common Stock to the Group 1 Employeesunder the provision described in clause (d) above, which is to be paid in theamount of 1.25% of such executive’s current annual salary on the basis of a52.5% recovery to holders of general unsecured claims under the ReorganizationPlan.

 

In connection with their resignations, each of Messrs.Peterson and Kirksey entered into severance agreements with our Company, eachdated November 1, 2002.  Under the termsof the KERP and his severance agreement, we were required to pay to Mr. Kirksey(i) $87,500, on November 4, 2002; (ii) six monthly payments of $5,000 beginningon November 15, 2002 as deferred compensation; (iii) reimbursement of paymentsmade by Mr. Kirksey of premiums for COBRA benefits under our healthcare planfor six months from November 1, 2002; and (iv) $87,500 on January 15,2003.  The amounts paid to Mr. Kirkseyunder clause (i) and on November 15 and December 15, 2002 under clause (ii) areincluded under “Other” in the above Compensation Table and amounts under clause(iii) for November and December 2002 were not made until January 2003.  Under the terms of the KERP and his severanceagreement, we were required to pay to Mr. Peterson (i) $75,000 on November 4,2002; (ii) up to $25,000 of Mr. Peterson’s reasonable relocation and home saleexpenses; and (iii) reimbursement of payments made by Mr. Peterson of premiumsfor COBRA benefits under our healthcare plan for six months from November 1,2002.  The amounts paid to Mr. Petersonunder clause (i) are included under “Other,” in the above Compensation Tableand amounts under clause (iii) for November and December 2002 were not made untilJanuary 2003.

 

**Employment Agreements**

 

We are not a party to any employment agreements withany of our executive officers other than Messrs. Bennett and Goncalves.

 

Effective November 1, 2002, Mr. Bennett entered intoan employment agreement with our Company, providing for an initial annual basesalary of $280,000 together with a minimum annual bonus of $70,000 for thecalendar years 2003 and 2004.  Theemployment agreement is for a term of 26 months, and unless terminated or notrenewed by our Company or not renewed by Mr. Bennett, the term will continuethereafter for one additional year on the same terms and conditions existing atthe time of renewal.  In the event of atermination because of Mr. Bennett’s disability, he will be entitled to receivean amount equal to his base salary for one year or the remainder of the term ofthe employment agreement, whichever is greater, provided that such amount willbe reduced by any disability insurance payments made to Mr. Bennett.  In the event of a termination of employmentwithout cause, Mr. Bennett is entitled to receive in one lump sum the greaterof (i) his base salary and bonus for which he is entitled for the remainder ofthe term of the agreement or (ii) $350,000. In either case, payment is due in one lump sum on the effective date oftermination.  In the event of Mr.Bennett’s death during the term of his employment agreement, then the agreementwill immediately terminate, and no severance compensation is required to bepaid to his estate.  In the event of achange in control of our Company (defined to include, among other events, saleof more than 50% of the operations of the Plates and Shapes Group), Mr. Bennettis entitled to receive in one lump sum the greater of (i) Mr. Bennett’s basesalary and bonus for which he is entitled for the remainder of the term of theagreement or (ii) Mr. Bennett’s total compensation over the 12 months prior tosuch change in control.  The employmentagreement contains a covenant not to compete with our Company for a period oftwelve months immediately following termination of employment.

 

Effective February 24, 2003, Mr. Goncalves enteredinto an employment agreement with our Company, providing for an initial annualbase salary of $375,000 together with a performance bonus as determinedannually by the Board in its sole discretion. The employment agreement is for a term of three years, and unlessterminated or not renewed by our Company or not renewed by Mr. Goncalves, theterm

 

43

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will continue thereafter on a year-to-year basis on the same terms andconditions existing at the time of renewal. In the event of a termination because of Mr. Goncalves’ disability, hewill be entitled to receive an amount equal to his then current salary for oneyear or the remainder of the term of the employment agreement, whichever isgreater; provided that such amount will be reduced by any disability insurancepayments made to Mr. Goncalves.  In theevent of a termination of employment without cause, Mr. Goncalves will beentitled to receive an amount equal to his then current salary for twoyears.  In either case, payment is duein one lump sum on the effective date of termination.  In the event of Mr. Goncalves’ death during the term of hisemployment agreement, then the agreement will immediately terminate, and noseverance compensation is required to be paid to his estate.  In the event Mr. Goncalves (x) is terminatedwithout cause within three months prior or twelve months after a change incontrol of our Company (which is defined to include, among other events, saleof our three product groups) or (y) terminates his employment voluntarily forcertain specific reasons, Mr. Goncalves is entitled to receive in one lump sumthe greater of (i) the base salary for which he is entitled under the agreementor (ii) two years of his current base salary. The employment agreement contains a covenant not to compete with ourCompany for a period of two years immediately following termination of employment.  Under the terms of the employment agreement,Mr. Goncalves is entitled to receive a grant of options from the 2002 IncentivePlan to purchase (a) 100,000 shares of Common Stock at a price of $4.75 pershare; (b) 100,000 shares of Common Stock at a price of $9.50 per share; and(c) 100,000 shares at a price of $14.25 per share.  The options granted under the employment agreement have a term offive years and one-third of the options granted at each respective exerciseprice will vest on each of the first three anniversaries of February 24, 2002.  Mr. Goncalves received a signing bonus of$50,000 in February 2003, and is entitled to the payment of a car allowance of$1,250 per month under the employment agreement.

 

Previously existing employment agreements with Messrs.Kirksey, Hageman, Freeman, Doveala, Singer, Peterson and Thompson werecancelled and terminated on the Effective Date as further explained in “CertainRelationships and Related Transactions” below.

 

**DirectorCompensation**

 

Each Director of our Company is paid an annualretainer of $40,000.  Each Director ispaid a fee of $2,000 for attendance at each face-to-face meeting of the Boardand $1,000 for participation in each Board meeting conducted by telephoneconference call.  Each Director who is amember of either the Audit or Compensation Committees receives from our Companyan annual payment of $5,000 (or, if a Committee Chairman, $10,000) for eachcommittee on which he serves, and each director also receives $2,000 for eachface-to-face committee meeting attended and $1,000 for participation in acommittee meeting conducted by telephonic conference, except that (i) if acommittee meeting is held the same day as a meeting of the full Board, no feewill be paid for committee meeting participation and (ii) if any Directorattends two committee meetings on the same day, such Director is entitled toreceive only one attendance or telephone participation fee for both suchmeetings together with any additional amount that may be approved by the Boardof Directors upon request of the Chairman in appropriate circumstances.  Each Director is reimbursed for all expensesrelating to attendance at meetings.  Wepaid aggregate fees of $80,000 to Directors of our Company in connection withthe Board of Directors’ and committee meetings in 2002.  No current member of the Board of Directorswas paid compensation during 2002 for service as a Director of our Companyother than the compensation arrangement described herein.  Any annual retainer or fee payable to anyDirector is to be payable in four equal installments, quarterly in advance, onor before the first day of each calendar quarter (or in the case of the fourthquarter of 2002, on the Effective Date), and is fully earned for any calendarquarter upon the Director serving any portion of such calendar quarter as adirector, chairman, committee member or committee chairman, as applicable.  Notwithstanding the above, Messrs. Dienstand Davis were not entitled to (x) quarterly installments of any director feesfor the quarters ending December 31, 2002 or March 31, 2003 or (y) any fees forattendance at or participation in Board of Directors or committee meetings heldprior to February 24, 2003,

 

44

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the date on which such Director ceased service as Co-President andchief executive officer of our Company.

 

The seven persons who served as Directors prior to theEffective Date (other than Mr. Kirksey), none of which is currently serving asa Director, were paid an aggregate amount of $190,250 in 2002 pursuant to thestandard director compensation arrangements in effect prior to the EffectiveDate.  Mr. Kirksey did not receive anyadditional compensation for serving as Chairman of the Board during 2002 priorto the Effective Date.

 

**CompensationCommittee Interlocks And Insider Participation**

 

From January 1,2002 until the Effective Date, themembers of the Compensation and Management Development Committee were T.William Porter and Steven S. Harter (and, for the period from February 22 untilthe Effective Date, Franklin Myers). Each of Messrs. Porter Harter and Myers resigned from their positions onsuch committee on the Effective Date. Mr. Harter served as President of our Company during 1996.  From November 1, 2002 through December 31,2002, the members of the Compensation Committee were Messrs. Leckie, DiLacqua,Morris and Sanida.

 

Intalite (an entity of which Mr. Morris is presidentand CEO) owned shares of the Old Common Stock and pursuant to theReorganization Plan, is entitled to receive Warrants to purchase shares ofCommon Stock in the respective amount specified in Note (2) to the table underItem 12. “Security Ownership of Certain Beneficial Owners and Management.”  The estimated exercise price of the Warrantsis $18.37 per share (assuming that total allowed general unsecured claims are$367.3 million), and the Warrants are required under the Reorganization Plan tobe issued to Mr. Morris no later than April 30, 2003.  The actual initial exercise price is required to be determined bythe Board of Directors no later than April 30, 2003, and shall be equal to (i)the Final Allowed Claim Amount (attributable to unsecured claimholders) dividedby (ii) 20,000,000.

 

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**Item 12.  *Security Ownership of CertainBeneficial Owners and Management***

 

The following table sets forth information as of  March21, 2003, with respect to beneficial ownership of our Common Stock by(i) each director, (ii) each executive officer, (iii) all executive officersand directors as a group, and (iv) each person known to our Company tobeneficially own 5% or more of the outstanding shares of our Common Stock.  Unless otherwise indicated, the address ofall such persons is c/o Metals USA, Inc., Three Riverway, Suite 600, Houston,Texas 77056.  Unless otherwiseindicated, each of the stockholders has sole voting and investment power withrespect to the shares beneficially owned.

 
|                                                                     |   | **Number of  Shares Beneficially Owned** |       | **Percentage** |   |
|--------------------------------------------------------------------------|--------|------------------------------------------|------------|----------------|--------|
|                                                                     |   |                                     | ** ** |           |   |
| The Citadel  Group(1)(2)                                                 |   | 4,496,813                                |       | 22.3           | %      |
| C. Lourenco  Goncalves                                                   |   | 3⁄4                                   |       |           | *      |
| Craig R.  Doveala(2)(3)                                                  |   | 71,492                                   |       |           | *      |
| Edward L.  Thompson(2)(3)                                                |   | 4,518                                    |       |           | *      |
| William R.  Bennett                                                      |   | 3⁄4                                   |       |           | *      |
| John A.  Hageman(2)(3)                                                   |   | 21,186                                   |       |           | *      |
| Terry L.  Freeman(2)(3)                                                  |   | 21,955                                   |       |           | *      |
| Daniel W. Dienst                                                         |   | 3⁄4                                   |       |           | *      |
| Eugene I. Davis                                                          |   | 3⁄4                                   |       |           | *      |
| John T.  DiLacqua, Jr.                                                   |   | 3⁄4                                   |       |           | *      |
| Jack G. Leckie                                                           |   | 3⁄4                                   |       |           | *      |
| Gerald E.  Morris(2)                                                     |   | 15,816                                   |       |           | *      |
| Charles P.  Sanida                                                       |   | 3⁄4                                   |       |           | *      |
| All executive  officers and directors as a group (12 persons)(2)(3) |   | 134,967                                  |       |           | *      |

 

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*Less than 1%.

 

(1)**          **Based upon aSchedule 13G jointly filed by Citadel Limited Partnership, GLB Partners, L.P.,Citadel Investment Group, L.L.C., Kenneth Griffin, Citadel Wellington PartnersL.P., Citadel Distressed and Credit Opportunity Fund Ltd., Citadel KensingtonGlobal Strategies Fund Ltd., Citadel Credit Trading Ltd., and Citadel EquityFund Ltd. (collectively, the “Citadel Group”) and reflecting share ownership ofthe same shares of Common Stock as of February 14, 2003.  The number of shares of Common Stock statedin such Schedule 13G to be beneficially owned by the Citadel Group are based onestimates in the Reorganization Plan; inasmuch as the estimate of total allowedgeneral unsecured claims in the Reorganization Plan is $378.5 million whereasour current such estimate as set forth elsewhere herein is $367.3 million, theshares so beneficially owned, if determined on the basis of the currentestimate, would be approximately 2.96% greater.  The address of each member of The Citadel Group is 225 W.Washington, 9th Floor, Chicago, Illinois 60606.  Each of the persons constituting the CitadelGroup has shared voting and dispositive power with respect to the sharesbeneficially owned by the Citadel Group.

(2)**          **Forthe Citadel Group, Messrs. Doveala, Thompson, Hageman, Freeman and Morris andall executive officers and directors as a group, includes 7,261, 52,069, 1,615,7,256, 6,819, 15,816, and 83,575 shares of Common Stock, respectively, that canbe purchased by such persons (or, in the case of Mr. Morris, by an entitycontrolled by him) under Warrants required to be distributed pursuant to theReorganization Plan no later than April 30, 2003, which Warrants shall beimmediate exercisable upon issuance at an exercise price currently estimated tobe $18.37 per share.  The actual initial exercise price is requiredto be determined by the Board of Directors no

 

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laterthan April 30, 2003, and shall be equal to (i) the “Final Allowed Claim Amount”(defined generally in the Reorganization Plan as the good faith estimate onApril 30, 2003 of the final aggregate amount of the allowed general unsecuredclaims) divided by (ii) 20,000,000.

(3)**          **Includes shares issued (or to be issued) tosuch person pursuant to the Reorganization Plan in exchange for allowed generalunsecured claims held by such person (calculated on the basis of anestimated total of $367.3 million of such claims).

 

For information regarding our securities authorized for issuance underequity compensation plans, see “Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.”

 

**Item 13.  *Certain Relationships andRelated Transactions***

 

Pursuant to the Reorganization Plan, we entered into aregistration rights agreement with the Citadel Group that requires the Companyto file a registration statement with the Securities and Exchange Commission toregister for resale (other than in an underwritten offering) the shares ofCommon Stock issued to the Citadel Group under the Reorganization Plan.  We are required to cause such registrationstatement to remain effective (subject to suspension during certain specifiedperiods) until all such shares have been resold or, if earlier, October 31,2005.  We are also required to permitthe inclusion of such shares on a “piggyback” basis in certain other registrationstatements filed by our Company.  We arerequired to pay all costs of its compliance with the registration rightsagreement and the reasonable fees and expenses of a single counsel for holdersof such shares in connection therewith.

 

Each of Messrs. Doveala, Hageman and Freeman, was aparty to an employment agreement with our Company entered into in 1997, whichagreement was terminated and cancelled on the Effective Date pursuant to theReorganization Plan.  Pursuant to theChange of Control provision of their contract each executive officer held anunsecured claim equal to one year’s salary. Each of Messrs. Doveala, Hageman, Freeman, Kirksey, Thompson andPeterson also held an unsecured claim in the amount of an accrued but unpaidbonus for 2001.  As stated in theReorganization Plan all unsecured claims in excess of $1,000 is to be settledin Common Stock; accordingly Messrs. Doveala, Hageman, Freeman, Kirksey,Thompson and Peterson are to receive 19,422, 13,930, 12.354, 3,529, 2,902 and4,026 shares, respectively, of Common Stock in exchange for their respectiveunsecured claims of $356,692, $255,830, $226,887, $64,618, $53,304 and $73,929(calculated on the basis of an estimated total of allowed general unsecuredclaims of $367.3 million resulting in an exchange price of $18.37 pershare).  In addition, Mr. Freeman was anunsecured creditor as a holder of $50,000 of our senior subordinatednotes.  Accordingly, Mr. Freeman willreceive 2,782 shares of Common Stock (calculated on the basis of an estimatedtotal of allowed general unsecured claims of $367.3 million resulting in anexchange price of $18.37 per share).

 

Each of the executive officers and Intalite (an entityof which Mr. Morris is president and CEO) owned shares of the Old Common Stock,and pursuant to the Reorganization Plan, such persons are entitled to receiveWarrants to purchase shares of Common Stock in the respective amounts specifiedin Note (2) to the table under Item 12. “Security Ownership of CertainBeneficial Owners and Management.”  Thecurrently estimated exercise price of the Warrants is $18.37 per share(assuming that total allowed general unsecured claims of $367.3 million), andthe Warrants are required under the Reorganization Plan to be issued to suchpersons no later than April 30, 2003. The actual initial exercise price is required to be determined by theBoard of Directors of the Company no later than April 30, 2003, and shall beequal to (i) the Final Allowed Claim Amount divided by (ii) 20,000,000.

 

Metals USA Plates and Shapes Northeast, L.P. (“Platesand Shapes Northeast”) leases the facilities located in Philadelphia,Pennsylvania and Baltimore, Maryland from Warehouse Real Estate Associates

 

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(“WREA”) (reorganized as Warehouse Real Estate Associates, L.P.), apartnership controlled by Mr. Arnold W. Bradburd, a director of the Companyduring 2002 until the Effective Date, and his wife. The leases were for aninitial term of ten years (beginning July 1999) and provide for a total annualrental of $234,000 during the initial five years, to be adjusted to anapplicable current market rate during the second five years.  At the conclusion of the initial lease term,Plates and Shapes Northeast has agreed to purchase the real estate from WREA ata price to be determined by averaging two or more independent appraisals.  The Company believes that the rent to bepaid under the leases does not exceed fair market value.  Plates and Shapes Northeast leases propertyfrom Warehouse Real Estate Associates L.P. II, a partnership controlled by Mr.Bradburd, in Ambridge, Pennsylvania at fair market value effective in 1998 fora period of ten years.  At theconclusion of the lease term, Plates and Shapes Northeast is required topurchase the property at fair market value determined by two or moreindependent appraisals.  However, Platesand Shapes Northeast/Metals may acquire the property after year eight at 90% offair market value determined by two or more independent appraisals.  Additionally, Plates and Shapes Northeastpays all utility, taxes and insurance costs on each of the leased premises.

 

Metals USA Plates and Shapes Southcentral, Inc. leasescertain real property located in Enid, Oklahoma from Garfield Development, LLC,an entity owned in part by Mr. Richard A. Singer, who was President, ChiefOperating Officer and Director of our Company in 2002 prior to his resignationon February 11, 2002.  The lease for thereal property has a ten-year term and provides for an annual rental of$115,000.  The rent rate will beadjusted every five years in accordance with the CPI.  We believe that the rent for the property does not exceed fairmarket value.

 

Metals USA Plates and Shapes Northcentral, Inc.(“Plates and Shapes Northcentral”) had leased certain real property (the“Milwaukee Property”) located in Milwaukee, Wisconsin from PP&W, L.L.C., anentity owned in part by Mr. Peterson, a former Senior Vice President of ourCompany during 2002, prior to the assignment of such lease to a third party inconnection with the sale (the “Milwaukee Facility Sale”) of the assets inMilwaukee of Plates and Shapes Northcentral on September 8, 2002.  Thelease for the Milwaukee Property was to expire on December 31, 2011, andprovided for an annual rental of $504,540. Additionally, Plates and Shapes Northcentral had paid for all utilities,taxes and insurance on the Milwaukee Property. We believe that the rent for the property did not exceed fair marketvalue.  Prior to the closing of theMilwaukee Facility Sale, Plates and Shapes Northcentral had paid for a magneticcrane installed on the Milwaukee Property. In connection with the Milwaukee Facility Sale, the lease did not permitus to remove the crane from the Milwaukee Property and therefore we considerthe fair market value of the crane of $45,000, as of the date of the closing ofthe Milwaukee Facility Sale to constitute additional compensation paid toPP&W, L.L.C. in 2002.

 

As a part of the Reorganization Plan, Mr. Dienst wasappointed to the Board of Directors. Mr. Dienst is employed by CIBC, which has served as the financialadvisor to the Creditors Committee. CIBC was issued 154,710 shares of Common Stock and received cashpayments of $1.2 million for financial advisory fees associated with theChapter 11 Proceedings.  Mr. Dienstdisclaims beneficial ownership of the shares of Common Stock received by CIBC.

 

**Item14.  Controls and Procedures**

 

Withinthe 90-day period before the filing of this report, an evaluation was carriedout under the supervision and with the participation of our management,including the President and Chief Executive Officer (“CEO”) and the ChiefFinancial Officer (“CFO”), of the effectiveness of our disclosure controls andprocedures.  Based on that evaluation,the CEO and CFO have concluded that our disclosure controls and procedures areeffective to ensure that the information required to be disclosed in reports wefile or

 

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submit under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules and forms,and that such information is accumulated and communicated to our management,including the CEO and CFO, as appropriate, to allow timely decisions regardingrequired disclosure.

 

Wemaintain a system of internal accounting controls that are designed to providedreasonable assurance that our books and records accurately reflect thetransactions of the Company and that our policies and procedures arefollowed.  There have been nosignificant changes in our internal controls or in other factors that couldsignificantly affect such controls since the most recent evaluation of thesecontrols, including any corrective actions with regard to significantdeficiencies or material weaknesses in our internal controls.  Additionally, on March 1, 2003, Mr. SamSciple was appointed to the newly created position of Vice President andDirector of Internal Audit.

 

**Item 15.****                            *Exhibits, Financial Statement Schedules, and Reports on Form8-K***

 

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

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

 

**(b)****                    (2) Financial Statement Schedules:**

** **

All schedules have been omitted since the requiredinformation is not significant or is included in the consolidated financialstatements or notes thereto or is not applicable.

 

**(c)****          Reports on Form 8-K**

 

October 15, 2002 – Regulation FDDisclosure – Disclosure of significant dispositions.

 

**(d)****          Exhibits**

 

Reference is made to the Index of Exhibits immediatelypreceding the exhibits hereto (beginning on page 54), which index isincorporated herein by reference.

 

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**SIGNATURES**

 

Pursuant to the requirements ofSection 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized on March 28, 2003.

 
|   | METALS USA, INC. |
|--------|------------------|
|   |             |
|   | By:              | /s/  C. LourenCo  GonCalves |
|   |             | C. Lourenco Goncalves, Chief  Executive Officer and President |
|        |                  |  |  |

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the Registrant and in the capacities indicatedon March 28 2003.

 
| **Signature**                    |   | **Title**                                           |   |
|----------------------------------|--------|-----------------------------------------------------|--------|
|                             |   |                                                |   |
| /s/  C.  LourenCo GonCalves |   | Chief Executive Officer,  President and Director    |   |
| C. Lourenco Goncalves            |   |                                                |   |
|                             |   |                                                |   |
| /s/  TERRY L. FREEMAN       |   | Senior Vice President, and  Chief Financial Officer |   |
| Terry  L. Freeman                |   |                                                |   |
|                             |   |                                                |   |
| /s/  DANIEL W. DIENST       |   | Chairman of the Board of  Directors and Director    |   |
| Daniel  W. Dienst                |   |                                                |   |
|                             |   |                                                |   |
| /s/  EUGENE I. DAVIS        |   | Director                                            |   |
| Eugene  I. Davis                 |   |                                                |   |
|                             |   |                                                |   |
| /s/  JOHN T. DILACQUA, JR   |   | Director                                            |   |
| John  T. DiLacqua, Jr.           |   |                                                |   |
|                             |   |                                                |   |
| /s/  JACK G. LECKIE         |   | Director                                            |   |
| Jack  G. Leckie                  |   |                                                |   |
|                             |   |                                                |   |
| /s/  GERALD E. MORRIS       |   | Director                                            |   |
| Gerald  E. Morris                |   |                                                |   |
|                             |   |                                                |   |
| /s/  CHARLES P. SANIDA      |   | Director                                            |   |
| Charles  P. Sanida               |   |                                                |   |

 

 

50

----

 

**CERTIFICATIONS**

I, C. Lourenco Goncalves, certifythat:

 

1.                                       I have reviewed this annual reporton Form 10-K of Metals USA, Inc.;

 

2.                                       Based on my knowledge, this annualreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.                                       Based on my knowledge, the financialstatements, and other financial information included in this annual report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this annual report;

 

4.                                       The registrant’s other certifyingofficers and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and we have:

 

a)              designed such disclosure controls and procedures toensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this annual report is being prepared;

b)             evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this annual report (the “Evaluation Date”); and

c)              presented in this annual report our conclusions aboutthe effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.                                       The registrant’s other certifyingofficers and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent functions):

 

a)              all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

b)             any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

6.                                       The registrant’s other certifyingofficers and I have indicated in this annual report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date: March 28, 2003 |   |                                   |
|----------------------|--------|----------------------------------------|
|                 | By:    | /s/  C. LourenCo GonCalves             |
|                 |   | C. Lourenco Goncalves                  |
|                 |   | President and Chief  Executive Officer |

 

 

51

----

 

I, Terry L. Freeman, certify that:

 

1.               I have reviewed this annual report on Form 10-K ofMetals USA, Inc.;

 

2.               Based on my knowledge, this annual report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this annual report

 

3.               Based on my knowledge, the financial statements, andother financial information included in this annual report, fairly present inall material respects the financial condition, results of operations and cashflows of the registrant as of, and for, the periods presented in this annualreport;

 

4.               The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and wehave:

 

a)              designed such disclosure controls and procedures toensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this annual report is being prepared;

b)             evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this annual report (the “Evaluation Date”); and

c)              presented in this annual report our conclusions aboutthe effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant’s auditorsand the audit committee of registrant’s board of directors (or personsperforming the equivalent functions):

 

a)              all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

b)             any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

6.                                       The registrant’s other certifyingofficers and I have indicated in this annual report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date: March 28, 2003 |   |                                                |
|----------------------|--------|-----------------------------------------------------|
|                 |   |                                                |
|                 | By:    | /s/  Terry L. Freeman                               |
|                 |   | Terry L. Freeman                                    |
|                 |   | Senior Vice President  and  Chief Financial Officer |

 

52

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**METALS USA, INC. AND SUBSIDIARIES**

 

**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 Quarterly 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 Quarterly Report on Form 10-Q (File  No. 1-13123), filed with the Commission on November 14, 2002.                                                                                                                                                                                                     |   |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 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 Quarterly  Report on Form 10-Q (File No. 1-13123), filed with the Commission on November  14, 2002.                                                                                                                              |   |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 10.1*               |   | The Company’s 2002 Long-Term  Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                 |   |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 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  Quarterly 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.                                                                                                                                                                                                                 |   |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 10.3*               |   | Employment Agreement, dated  February 24, 2003, between the Company and Celso Lourenco Goncalves.                                                                                                                                                                                                                                                                                                                  |   |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 10.4*               |   | Employment Agreement, dated November  1, 2002, between the Company and William R. Bennett.                                                                                                                                                                                                                                                                                                                         |   |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 10.5*               |   | 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                                                                                                                                                                                                        |   |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 21                  |   | List of Subsidiaries of the  Company, incorporated herein by reference to the amendment to the Company’s Quarterly Report on Form 10-Q (File  No. 1-13123), filed with the Commission on November 14, 2002.                                                                                                                                                                                                   |   |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 99.1*               |   | Informational Addendum  Pursuant to Section 906 0f Sarbanes-Oxley Act of 2002 (not filed pursuant to  the Securities Exchange Act of 1934).                                                                                                                                                                                                                                                                        |   |

 

----

*  Filed herewith.

 

53

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**METALSUSA, INC. AND SUBSIDIARIES**

 

**INDEPENDENTAUDITORS’ REPORT**

 

To the Board of Directors and Stockholders of

Metals USA, Inc.

Houston, Texas

 

We have audited the accompanying consolidated balance sheets of MetalsUSA, Inc. and subsidiaries (the “Company”) as of December 31, 2002(Successor Company balance sheet) and 2001 (Predecessor Company balance sheet)and the related consolidated statements of operations, shareholders’ equity(deficit) and cash flow for the period from November 1, 2002 toDecember 31, 2002 (Successor Company operations), the period fromJanuary 1, 2002 to October 31, 2002, and the years endedDecember 31, 2001 and 2000 (Predecessor Company operations).  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

As discussed in Note 1 to the consolidated financial statements, onNovember 14, 2001, the Company filed petition for relief under Chapter 11of the U.S. Bankruptcy Code from which it emerged on October 31,2002.  Accordingly, the accompanyingfinancial statements have been prepared in conformity with AICPA Statement ofPosition 90-7, “Financial Reporting for Entities in Reorganization Under theBankruptcy Code,” for the Successor Company as a new entity with assets,liabilities, and a capital structure having carrying values not comparable withprior periods as described in Note 2 to the consolidated financial statements.

 

In our opinion, the Successor Company financial statements presentfairly, in all material respects, the financial position of the Company as ofDecember 31, 2002, and the results of its operations and its cash flowsfor the period from November 1, 2002 to December 31, 2002, inconformity with accounting principles generally accepted in the United Statesof America.  Further, in our opinion,the Predecessor Company financial statements referred to above present fairly,in all material respects, the financial position of the Predecessor Company asof December 31, 2001, the results of its operations and its cash flows forthe period from January 1, 2002 to October 31, 2002, and the yearsended December 31, 2001 and 2000, in conformity with accounting principlesgenerally accepted in the United States of America.

 

As discussed in Note 1 to the consolidated financial statements, theCompany adopted Statement of Financial Accounting Standards No. 144,“Accounting for Impairment or Disposal of Long-Lived Assets” on January 1,2002.

 

DELOITTE & TOUCHE LLP

 

Houston, Texas

March 21, 2003

 

F-1

----

 

**METALSUSA, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

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

 
|                                                                                                                                             |   | **Successor  Company**  |   | **Predecessor  Company** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|--------------------------|------------|
|                                                                                                                                             |   | **December  31,  2002** |   | **December  31,  2001**  | ** ** |
|                                                                                                                                             |   |                    |   |                     |       |
| **Assets**                                                                                                                                       |   |                    |   |                     |       |
| Current assets:                                                                                                                                  |   |                    |   |                     |       |
| Cash                                                                                                                                             |   | $                       | 6.3    |                     | $          | 72.4 |   |
| Accounts receivable, net of allowance of $6.8 and $6.3, respectively                                                                             |   | 107.8                   |   | 110.6                    |       |
| Inventories                                                                                                                                      |   | 217.4                   |   | 179.6                    |       |
| Prepaid expenses and other                                                                                                                       |   | 18.5                    |   | 25.9                     |       |
| Operations held for sale                                                                                                                         |   | 19.5                    |   | 194.2                    |       |
| Total current assets                                                                                                                             |   | 369.5                   |   | 582.7                    |       |
| Property and equipment, net                                                                                                                      |   | 0.5                     |   | 103.1                    |       |
| Other assets, net                                                                                                                                |   | 3.7                     |   | 4.3                      |       |
| Total assets                                                                                                                                     |   | $                       | 373.7  |                     | $          | 690.1 |   |
|                                                                                                                                             |   |                    |   |                     |       |
| **Liabilities  and Stockholders’ Equity (Deficit)**                                                                                         |   |                    |   |                     |       |
| Current liabilities:                                                                                                                             |   |                    |   |                     |       |
| Accounts payable                                                                                                                                 |   | $                       | 23.8   |                     | $          | 13.0 |   |
| Accrued liabilities                                                                                                                              |   | 28.1                    |   | 15.2                     |       |
| Current portion of long-term debt                                                                                                                |   | 1.3                     |   | —                   |       |
| Operations held for sale                                                                                                                         |   | 2.8                     |   | 61.0                     |       |
| Pre-petition liabilities not subject to compromise                                                                                               |   | —                  |   | 310.3                    |       |
| Total current liabilities                                                                                                                        |   | 56.0                    |   | 399.5                    |       |
| Pre-petition liabilities subject to compromise                                                                                                   |   | —                  |   | 325.7                    |       |
| Long-term debt, less current portion                                                                                                             |   | 127.4                   |   | —                   |       |
| Other long-term liabilities                                                                                                                      |   | 1.3                     |   | —                   |       |
| Total liabilities                                                                                                                                |   | 184.7                   |   | 725.2                    |       |
| Commitments and contingencies                                                                                                                    |   |                    |   |                     |       |
| Stockholders’ equity (deficit):                                                                                                             |   |                    |   |                     |       |
| Common stock, $.01 par value, 200,000,000 and 203,122,914 sharesauthorized, respectively; 20,154,710 and  36,509,972 sharesissued,  respectively |   | 0.2                     |   | 0.4                      |       |
| Additional paid-in capital                                                                                                                       |   | 192.1                   |   | 247.7                    |       |
| Retained deficit                                                                                                                                 |   | (3.3                    | )      | (283.2                   | )          |
| Total stockholders’ equity (deficit)                                                                                                        |   | 189.0                   |   | (35.1                    | )          |
| Total liabilities and stockholders’ equity (deficit)                                                                                        |   | $                       | 373.7  |                     | $          | 690.1 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-2

----

 

**METALSUSA, INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

 
|                                                           |   | **Successor  Company**                                    |   | **Predecessor  Company**                                |   |
|----------------------------------------------------------------|--------|-----------------------------------------------------------|--------|---------------------------------------------------------|--------|
|                                                           |   | **Period  from  November 1,  2002 through  December 31,** |   | **Period  from  January 1,  2002 through  October 31,** |   | **Year Ended  December 31,** |   |
|                                                           |   | **2002**                                                  |   | **2002**                                                |   | **2001** |   | **2000** |   |
| **Revenues:**                                                  |   |                                                      |   |                                                    |   |   |   |   |   |
| Net sales                                                      |   | $                                                         | 126.2  |                                                    | $      | 817.5 |   | $ | 1,222.0 |   | $ | 1,554.8 |   |
| Cost of sales                                                  |   | 97.3                                                      |   | 629.2                                                   |   | 939.5 |   | 1,187.3 |   |
| Gross profit                                                   |   | 28.9                                                      |   | 188.3                                                   |   | 282.5 |   | 367.5 |   |
| **Operating costs and expenses:**                              |   |                                                      |   |                                                    |   |   |   |   |   |
| Operating and delivery                                         |   | 17.2                                                      |   | 104.2                                                   |   | 149.4 |   | 169.8 |   |
| Selling, general  and administrative                           |   | 12.4                                                      |   | 79.4                                                    |   | 116.7 |   | 122.7 |   |
| Depreciation and amortization                                  |   | —                                                    |   | 7.2                                                     |   | 21.1 |   | 20.8 |   |
| Asset impairments and integration credit                       |   | —                                                    |   | (0.2                                                    | )      | 384.0 |   | — |   |
| Operating income (loss)                                        |   | (0.7                                                      | )      | (2.3                                                    | )      | (388.7 | ) | 54.2 |   |
| **Other (income) expense:**                                    |   |                                                      |   |                                                    |   |   |   |   |   |
| Interest expense                                               |   | 1.3                                                       |   | 15.8                                                    |   | 49.6 |   | 50.5 |   |
| Other (income) expense, net                                    |   | 0.1                                                       |   | (1.1                                                    | )      | 1.8 |   | (1.6 | ) |
| Fresh-start adjustments                                        |   | —                                                    |   | 109.7                                                   |   | — |   | — |   |
| Gain on reorganization                                         |   | —                                                    |   | (190.6                                                  | )      | — |   | — |   |
| Reorganization expenses                                        |   | —                                                    |   | 28.3                                                    |   | 19.4 |   | — |   |
| **Income (loss) before taxes and discontinued****operations**  |   | (2.1                                                      | )      | 35.6                                                    |   | (459.5 | ) | 5.3 |   |
| Provision (benefit) for income taxes                           |   | —                                                    |   | (15.3                                                   | )      | (52.2 | ) | 3.9 |   |
| **Income (loss) before discontinued operations**               |   | (2.1                                                      | )      | 50.9                                                    |   | (407.3 | ) | 1.4 |   |
| Income (loss) from discontinued operations,net of taxes        |   | (1.2                                                      | )      | 0.4                                                     |   | (1.8 | ) | 10.3 |   |
| **Net income (loss)**                                          |   | $                                                         | (3.3   | )                                                       | $      | 51.3 |   | $ | (409.1 | ) | $ | 11.7 |   |
|                                                           |   |                                                      |   |                                                    |   |   |   |   |   |
| **Income (loss) per share — basic and diluted:**          |   |                                                      |   |                                                    |   |   |   |   |   |
| Before discontinued operations                                 |   | $                                                         | (0.10  | )                                                       | $      | 1.39 |   | $ | (11.16 | ) | $ | 0.04 |   |
| Discontinued operations                                        |   | (0.06                                                     | )      | 0.02                                                    |   | (0.05 | ) | 0.28 |   |
| Net income (loss) per share                                    |   | $                                                         | (0.16  | )                                                       | $      | 1.41 |   | $ | (11.21 | ) | $ | 0.32 |   |
|                                                           |   |                                                      |   |                                                    |   |   |   |   |   |
| **Number of common shares used in per****share calculations:** |   |                                                      |   |                                                    |   |   |   |   |   |
| Basic                                                          |   | 20.2                                                      |   | 36.5                                                    |   | 36.5 |   | 36.8 |   |
| Diluted                                                        |   | 20.2                                                      |   | 36.5                                                    |   | 36.5 |   | 37.0 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-3

----

 

**METALSUSA, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)**

**(In millions)**

 
|                                                                                             |   | **Common  Stock** |   | **Additional  Paid-In  Capital** |   | **Treasury  Stock,  At Cost** |   | **Retained  Earnings  (Deficit)** |   | **Accumulated  Other  Comprehensive  Income (Loss)** |   | **Total** |   |
|--------------------------------------------------------------------------------------------------|--------|-------------------|--------|----------------------------------|--------|-------------------------------|--------|-----------------------------------|--------|------------------------------------------------------|--------|-----------|--------|
| **Predecessor  Company:**                                                                        |   |              |   |                             |   |                          |   |                              |   |                                                 |   |      |   |
| BALANCE,  December 31, 1999                                                                      |   | $                 | 0.4    |                             | $      | 263.7                         |   | $                                 | (4.5   | )                                                    | $      | 119.8     |   | $ | — |   | $ | 379.4 |   |
| Shares  repurchased                                                                              |   | —            |   | —                           |   | (11.5                         | )      | —                            |   | —                                               |   | (11.5     | )      |
| Cancellation of  treasury stock                                                                  |   | —            |   | (16.0                            | )      | 16.0                          |   | —                            |   | —                                               |   | —    |   |
| Dividends                                                                                        |   | —            |   | —                           |   | —                        |   | (4.5                              | )      | —                                               |   | (4.5      | )      |
| Net income                                                                                       |   | —            |   | —                           |   | —                        |   | 11.7                              |   | —                                               |   | 11.7      |   |
| BALANCE,  December 31, 2000                                                                      |   | 0.4               |   | 247.7                            |   | —                        |   | 127.0                             |   | —                                               |   | 375.1     |   |
| Net loss                                                                                         |   | —            |   | —                           |   | —                        |   | (409.1                            | )      | —                                               |   | (409.1    | )      |
| Other  comprehensive income (loss) – change in fair value of interest rate swap  agreements |   | —            |   | —                           |   | —                        |   | —                            |   | (6.2                                                 | )      | (6.2      | )      |
| Other  comprehensive income (loss) – termination of interest rate swap agreements           |   | —            |   | —                           |   | —                        |   | —                            |   | 6.2                                                  |   | 6.2       |   |
| Dividends                                                                                        |   | —            |   | —                           |   | —                        |   | (1.1                              | )      | —                                               |   | (1.1      | )      |
| BALANCE,  December 31, 2001                                                                      |   | 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 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-4

----

 

**METALSUSA, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In millions)**

** **
|                                                    |   | **Successor  Company**                                    |       | **Predecessor  Company**                                |       |
|---------------------------------------------------------|--------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
|                                                    |   | **Period  from  November 1,  2002 through  December 31,** |       | **Period  from  January 1,  2002 through  October 31,** |       | **Year Ended  December 31,** |   |
|                                                    |   | **2002**                                                  |       | **2002**                                                |       | **2001** |   | **2000** |   |
| **Cash flows from operating activities:**               |   |                                                      | ** ** |                                                    | ** ** |   | ** ** |   | ** ** |
| Net income (loss)                                       |   | $                                                         | (3.3       | )                                                       | $          | 51.3 |   | $ | (409.1 | ) | $ | 11.7 |   |
| Adjustments for non-cash and non-operating items — |   |                                                      |       |                                                    |       |   |   |   |   |
| Gain on reorganization                                  |   | —                                                    |       | (190.6                                                  | )          | — |   | — |   |
| Fresh start adjustments                                 |   | —                                                    |       | 109.7                                                   |       | — |   | — |   |
| Net (income) loss from discontinued operations          |   | 1.2                                                       |       | (0.4                                                    | )          | 1.8 |   | (10.3 | ) |
| Asset impairments and integration credit                |   | —                                                    |       | (0.2                                                    | )          | 384.0 |   | — |   |
| (Gain) loss on sale of property and equipment           |   | 0.2                                                       |       | (0.4                                                    | )          | — |   | — |   |
| Provision for bad debts                                 |   | 0.2                                                       |       | 3.5                                                     |       | 5.7 |   | 3.1 |   |
| Depreciation and amortization                           |   | —                                                    |       | 7.2                                                     |       | 21.1 |   | 20.8 |   |
| Deferred income taxes                                   |   | —                                                    |       | —                                                  |       | (25.7 | ) | 0.9 |   |
| Write-off of debt issuance costs                        |   | —                                                    |       | —                                                  |       | 2.9 |   | — |   |
| Reorganization expenses                                 |   | —                                                    |       | —                                                  |       | 12.2 |   | — |   |
| Changes in operating assets and liabilities, net — |   |                                                      |       |                                                    |       |   |   |   |   |
| Accounts receivable                                     |   | 15.8                                                      |       | (11.1                                                   | )          | 41.2 |   | (2.9 | ) |
| Inventories                                             |   | 2.3                                                       |       | (23.1                                                   | )          | 100.4 |   | (28.2 | ) |
| Prepaid expenses and other                              |   | 4.2                                                       |       | (6.2                                                    | )          | 6.9 |   | 0.8 |   |
| Accounts payable and accrued liabilities                |   | (11.3                                                     | )          | 21.3                                                    |       | 13.1 |   | 8.4 |   |
| Income taxes (receivable) payable                       |   | —                                                    |       | 10.5                                                    |       | (17.4 | ) | — |   |
| Other operating, net                                    |   | (0.6                                                      | )          | 1.0                                                     |       | (1.6 | ) | 0.9 |   |
| Net cash provided by (used in) continuing operations    |   | 8.7                                                       |       | (27.5                                                   | )          | 135.5 |   | 5.2 |   |
| Net cash provided by (used in) discontinued operations  |   | 5.8                                                       |       | 35.9                                                    |       | 45.0 |   | (6.2 | ) |
| Net cash provided by (used in) operations               |   | 14.5                                                      |       | 8.4                                                     |       | 180.5 |   | (1.0 | ) |
| **Cash flows from investing activities**                |   |                                                      |       |                                                    |       |   |   |   |   |
| Sale (repurchase) of securitized receivables            |   | —                                                    |       | —                                                  |       | (100.0 | ) | 10.0 |   |
| Sale of assets                                          |   | 6.9                                                       |       | 83.2                                                    |       | — |   | — |   |
| Purchase of assets                                      |   | (0.5                                                      | )          | (3.0                                                    | )          | (16.3 | ) | (37.3 | ) |
| Other investing, net                                    |   | —                                                    |       | —                                                  |       | 7.0 |   | (5.9 | ) |
| Net cash provided by (used in) investing activities     |   | 6.4                                                       |       | 80.2                                                    |       | (109.3 | ) | (33.2 | ) |
| **Cash flows from financing activities:**               |   |                                                      |       |                                                    |       |   |   |   |   |
| Net borrowings (repayments) on credit facilities        |   | (33.0                                                     | )          | (132.6                                                  | )          | 8.7 |   | 55.2 |   |
| Repayments on long-term debt                            |   | (0.7                                                      | )          | (6.8                                                    | )          | (6.3 | ) | (5.9 | ) |
| Payment of dividends                                    |   | —                                                    |       | —                                                  |       | (2.2 | ) | (3.3 | ) |
| Deferred financing costs incurred                       |   | —                                                    |       | (2.5                                                    | )          | (8.0 | ) | (1.3 | ) |
| Reorganization, repurchase of stock and other, net      |   | —                                                    |       | —                                                  |       | 5.2 |   | (11.4 | ) |
| Net cash used in financing activities                   |   | (33.7                                                     | )          | (141.9                                                  | )          | (2.6 | ) | 33.3 |   |
|                                                    |   |                                                      |       |                                                    |       |   |   |   |   |
| **Net increase (decrease) in cash**                     |   | (12.8                                                     | )          | (53.3                                                   | )          | 68.6 |   | (0.9 | ) |
| Cash, beginning of period                               |   | 19.1                                                      |       | 72.4                                                    |       | 3.8 |   | 4.7 |   |
| **Cash**, **end of year**                               |   | $                                                         | 6.3        |                                                    | $          | 19.1 |   | $ | 72.4 |   | $ | 3.8 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-5

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**METALSUSA, INC. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(In millions, except share and pershare amounts)**

 

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

 

***Organization***

 

Metals USA, Inc., a Delawarecorporation, (“Metals USA” or the “Company”) is a leading provider ofvalue-added processed steel, stainless steel, aluminum and specialty metals, aswell as manufactured metal components. The Company was founded on July 3,1996 and commenced substantial operations on July 11, 1997 with the concurrentconsummation of its initial public offering and acquisition of eight metalprocessing companies.  Subsequently,Metals USA acquired numerous metal processing companies.

 

The Company sells to businesses such as the machining, furniture, transportationequipment, power and process equipment, industrial/commercialconstruction/fabrication, consumer durables and electrical equipmentindustries, and machinery and equipment manufacturers.  During the past three years, the steelindustry has declined substantially as a result of pricing pressure fromforeign imports and an economic recession experienced in the United States(“U.S.”).  These factors, combined withthe Company’s high level of debt, caused it to seek protection under U.S.bankruptcy laws in November 2001.

 

***Basis of Presentation***

 

As aresult of the 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 have beenreclassified for the effects of Statementof Financial Accounting Standards No. 144 (“SFAS No. 144”), Accounting forImpairment or Disposal of Long-Lived Assets which require divestitures beexcluded from results of operations for all periods presented.

#### ** **

#### **OnNovember 14, 2001, the Predecessor Company and all of its subsidiariesvoluntarily filed for relief under Chapter 11 of the U.S. Bankruptcy Code(“Chapter 11 Filing”), in the U.S. Bankruptcy Court, Southern District ofTexas.  On October 31, 2002 (the“Effective Date”), the Company’s Reorganization Plan became effective, and theSuccessor Company emerged from bankruptcy court protection.  The financial statements are prepared inaccordance with the AICPA’s Statement of Position 90-7 (“SOP 90-7”), *FinancialReporting by Entities in Reorganization Under the Bankruptcy Code*.  SOP 90-7 required the Company to, amongother things, (1) identify transactions that were directly associated with thebankruptcy proceedings from those events that occur during the normal course ofbusiness and (2) identify pre-petition liabilities subject to compromise fromthose that were not subject to compromise or were post-petition liabilities and(3) apply “Fresh-Start Reporting” rules upon emergence from Bankruptcy.  See Note 2 for description of theReorganization Plan and application of “Fresh-Start Reporting.”  Accordingly, the Company’s financialposition, results of operations and cash flows for the period after emergencefrom bankruptcy are not comparable to earlier periods.  For reporting purposes, the PredecessorCompany refers to activities prior to November 1, 2002 and the SuccessorCompany refers to activities subsequent to October 31, 2002.**

 

***Use of Estimates and Assumptions***

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theU.S. requires management to make estimates and assumptions that affect (i) thereported amounts of assets and liabilities, (ii) the disclosure of contingentassets and liabilities known to exist as of the date the financial statementsare published and (iii) the reported amount of revenues and expenses recognized

 

F-6

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during the periods presented. The Company reviewsall significant estimates affecting its consolidated financial statements on arecurring basis and records the effect of any necessary adjustments prior totheir publication. Adjustments made with respect to the use of estimates oftenrelate to improved information not previously available. Uncertainties withrespect to such estimates and assumptions are inherent in the preparation offinancial statements.

 

***Summary of Significant Accounting Policies***

 

*Principles of consolidation*— Theconsolidated financial statements include the accounts of Metals USA and itssubsidiaries. All intercompany accounts and transactions have been eliminatedin the consolidated financial statements. Certain reclassifications have beenmade to prior years’ financial statements to be consistent with the currentyear’s presentation.

 

*Concentration of credit risk*—**Financial instruments, which potentially subjectthe Company to concentrations of credit risk, consist principally of cashdeposits, trade accounts and notes receivable. Concentrations of credit riskwith respect to trade accounts are within several industries.  Generally, credit is extended onceappropriate credit history and references have been obtained. Provisions to theallowance for doubtful accounts are made monthly and adjustments are madeperiodically based upon the expected collectibility of all such accounts.  Additionally, the Company periodicallyreviews the credit history of its customers and generally does not require collateralfor the extension of credit.

 

## ***Valuation and qualifying accounts***— The Company provides reserves foraccounts receivable, operational reorganizations and personnel and facilitycosts associated with dispositions.  Thereserves for these activities for the years ended December 31, 2002, 2001 and2000 are summarized below:

 
| **Description**                                                        |   | **Balance at  Beginning  of Year** |   | **Amount  Charged to  Expense** |   | **Utilization  of Reserve,  net** |   | **Other** |   | **Balance  at End  of Year** |   |
|------------------------------------------------------------------------|--------|------------------------------------|--------|---------------------------------|--------|-----------------------------------|--------|-----------|--------|------------------------------|--------|
| **Year  ended December 31, 2002:**                                     |   |                               |   |                            |   |                              |   |      |   |                         |   |
| Allowance for  doubtful accounts                                       |   | $                                  | 6.3    |                            | $      | 3.4                               |   | $         | (3.6   | )                            | $      | — |   | $ | 6.1 |   |
| Reserve for  personnel and facility cost associated with dispositions  |   | 9.6                                |   | (3.3                            | )      | (6.3                              | )      | 3⁄4    |   | 3⁄4                       |   |
| **Year  ended December 31, 2001:**                                     |   |                               |   |                            |   |                              |   |      |   |                         |   |
| Allowance for  doubtful accounts                                       |   | $                                  | 5.3    |                            | $      | 5.7                               |   | $         | (4.7   | )                            | $      | — |   | $ | 6.3 |   |
| Integration  charge (credit)                                           |   | 4.4                                |   | (2.1                            | )      | (2.3                              | )      | 3⁄4    |   | 3⁄4                       |   |
| Reserve for  personnel and facility cost associated with dispositions. |   | 3⁄4                             |   | 10.1                            |   | (0.5                              | )      | 3⁄4    |   | 9.6                          |   |
| **Year  ended December 31, 2000:**                                     |   |                               |   |                            |   |                              |   |      |   |                         |   |
| Allowance for  doubtful accounts                                       |   | $                                  | 5.1    |                            | $      | 2.5                               |   | $         | (2.3   | )                            | $      | — |   | $ | 5.3 |   |
| Integration  charge (credit)                                           |   | 7.5                                |   | 3⁄4                          |   | (3.1                              | )      | 3⁄4    |   | 4.4                          |   |

 

*Inventories*—Inventories are stated at the lower of cost or market. Certain of the Company’ssubsidiaries use the last-in, first-out (“LIFO”) method of accounting forinventories and other subsidiaries use a variety of methods including specificidentification, average cost and the first-in first-out (“FIFO”) method ofaccounting.  As of December 31, 2002 and2001, approximately 22.2% and 16.1%, respectively, of the consolidatedinventories were accounted for using the LIFO method of accounting.  If the FIFO method had been used for allinventories, the net loss would have been unchanged for all periods presented.

 

F-7

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*Property and equipment*— Property and equipment are stated at cost, anddepreciation is computed using the straight-line method, net of estimatedsalvage values, over the estimated useful lives of the assets. Expenditures forrepairs and maintenance are charged to expense when incurred.  Expenditures for major renewals andbetterments, which extend the useful lives of existing equipment, arecapitalized and depreciated.  Uponretirement or disposition of property and equipment, the cost and relatedaccumulated depreciation are removed from the accounts and any resulting gainor loss is recognized.  Leaseholdimprovements are capitalized and amortized over the lesser of the life of thelease or the estimated useful life of the asset.  During 2002 and 2001, the Company wrote down the carrying valueof its property and equipment by $111.6 and $87.3, respectively.  Of the amount written off in 2002, $108.6was attributable to “Fresh-Start Reporting” rules under SOP 90-7.

 

*Impairment of long-lived assets*—Long-lived assets are comprised principally of property and equipment.  Managementreviews long-lived assets for impairment whenever events or changes incircumstances indicate 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.

 

Due to the recent recession in the U.S. and theChapter 11 Filing, the economic conditions indicated that a significant portionof the Company’s long-lived assets were impaired.  At December 31, 2001, the Company estimated the fair value ofgoodwill and property and equipment based on each operating unit’s expectedundiscounted future cash flows.  Theseestimates were calculated from current economic and operating conditionsprojected throughout 2002 and future periods. Management believes theseestimates were appropriate in light of the current over-capacity of globalsteel production.  These projectionsindicated that the carrying amounts for goodwill and property and equipmentwere not recoverable.  The Companyobtained an independent appraisal of its property and equipment and managementbelieves this appraisal represents the fair value of these assets as ofDecember 31, 2001.  As a result, theproperty and equipment balances were written down to the appraised value ifsuch value was lower than the net book value of such assets as of December 31,2001.  The Company recorded $288.7 of impairment losses with respect to goodwilland $87.3 to property and equipment during the year ended December 31, 2001.

 

*Debt issuance costs*— The Company defers certain expenses incurred inconnection with its long-term debt and amortizes these costs to interestexpense over the term of the respective agreements.  Amortization for the periods from November 1, 2002 throughDecember 31, 2002 and from January 1, 2002 through October 31, 2002 and theyears ended December 31, 2001 and 2000, totaled $0.1, $1.6, $2.5 and $1.9,respectively, and is included in interest expense on the consolidatedstatements of operations.  During2002, the Company incurred $2.1 in debt issuance costs associated with the NewCredit Facility.

 

*Fair value of financial instruments*— Thecarrying values of cash, accounts receivable and accounts payable approximatefair value due to their short-term nature. The fair value of the long-term debt is estimated based on interestrates for the same or similar debt offered in the open market.  At December 31, 2002, the carrying value ofthe Company’s fixed rate long-term debt approximates its fair value based oninterest rates for the same or similar debt offered in the open market and thecarrying amount of the indebtedness attributable to the Credit Facility of$112.6 approximates its fair value.

 

*Revenue recognition*— The Company recognizes revenues when products areshipped and all significant obligations of the Company have beensatisfied.  Risk of loss passes at thetime of shipment.  Provisions are madecurrently for estimated returns.

 

F-8

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*Delivery expenses*—**Delivery expenses consist of distribution costs,including shipping and handling.  Theseexpenses totaled $4.3, $27.5, $36.9 and $45.4 for the periods from November 1, 2002 through December 31, 2002 and fromJanuary 1, 2002 through October 31, 2002 and the years ended December 31, 2001and 2000, respectively.

 

*Asset impairments and integrationcredit*—**Assetimpairment charges include the write down of the carrying value of property andequipment, the write off of the carrying value of goodwill and impairmentcharges to future reserves for personnel and facility costs associated with thedisposition of operations held for sale. Asset impairments of $3.0 and $386.1 were recorded for the period fromJanuary 1, 2002 through October 31, 2002 and the year ended December 31, 2002,respectively.  Integration creditsresulted from the reversal of reserves determined to be in excess of amountsultimately required for the disposition of certain assets.  Credits resulting from the reversal of suchreserves were $3.2 and $2.1 for the period from January 1, 2002 through October31, 2002 and the year ended December 31, 2002 and 2001, respectively.

 

*Fresh-start adjustments and gain on reorganization*—**During2002, the Company recorded fresh-start adjustments primarily related to thereduction of the carrying value of its non current assets of $109.7 and a gainon reorganization associated with the emergence from bankruptcy of $190.6.

 

*Reorganization expenses*—**Reorganization expenses include all costs andexpenses directly attributable to the Chapter 11 Filing.  For the period from January 1, 2002 throughOctober 31, 2002 and year ended December 31, 2001, these expenses consisted ofthe following:

 
|                                                                             |   | **Period  from  January 1, 2002  through  October 31, 2002** |   | **Year Ended  December 31,  2001** |   |
|----------------------------------------------------------------------------------|--------|--------------------------------------------------------------|--------|------------------------------------|--------|
| Professional fees                                                                |   | $                                                            | 18.8   |                               | $      | 3.3 |   |
| Employee retention expenses and obligations associatedwith employment agreements |   | 8.1                                                          |   | —                             |   |
| Termination of interest rate swap agreements                                     |   | —                                                       |   | 6.2                                |   |
| Write-off of debt issuance costs                                                 |   | 1.4                                                          |   | 9.9                                |   |
| Total reorganization expenses                                                    |   | $                                                            | 28.3   |                               | $      | 19.4 |   |

 

*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*— TheCompany computes earnings (loss) per share in accordance with Statement ofFinancial Accounting Standards No. 128 (“SFAS No. 128”), *Earnings Per Share*.  SFAS No. 128 requires presentation of“Earnings per Share — Basic” and “Earnings per Share —Diluted”.  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 that could occur if securities andother contracts to issue common stock were exercised or converted into commonstock.  There were outstanding optionsto purchase 4.1, 4.1 and 4.0 shares of Common Stock for the period from January1 

 

F-9

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2002 through October 31, 2002, and the yearsended December 31, 2001 and 2000, respectively.  Because these securities were antidilutive, they were notincluded in the net loss calculation for all periods in 2002 and 2001.  The number of shares used in the per sharecalculations consists of the following:

 
|                                                                             |   | **Period  from  November 1,  2002 through  December 31,** |   | **Period  from  January 1,  2002 through  October 31,** |       | **Year Ended  December 31,** |       |
|----------------------------------------------------------------------------------|--------|-----------------------------------------------------------|--------|---------------------------------------------------------|------------|------------------------------|------------|
|                                                                             |   | **2002**                                                  |   | **2002**                                                | ** ** | **2001**                     | ** ** | **2000** | ** ** |
| Weighted average shares used in computingincome (loss) per share - basic         |   | 20.2                                                      |   | 36.5                                                    |       | 36.5                         |       | 36.8 |   |
| Effect of dilutive securities:                                                   |   |                                                      |   |                                                    |       |                         |       |   |   |
| Stock options and convertible securities                                         |   | —                                                    |   | —                                                  |       | —                       |       | .2 |   |
| Weighted average shares used in computingincome (loss) per share -  diluted |   | 20.2                                                      |   | 36.5                                                    |       | 36.5                         |       | 37.0 |   |

 

*New Accounting Pronouncements***—** In July 2001, the FinancialAccounting Standards Board issued Statement of Financial Accounting StandardsNo. 142 (“SFAS No. 142”), Accounting for Goodwill and Other IntangibleAssets.  SFAS No. 142 requires companiesto assess goodwill assets for impairment each year, and more frequently ifcircumstances suggest an impairment may have occurred.  SFAS 142 also introduces a more stringentframework for assessing goodwill impairment than the approach required underexisting rules.  SFAS 142 discontinuesthe regular charge, or amortization, of goodwill assets against income.  SFAS 142 was adopted by the Company onJanuary 1, 2002.  Due to the write-offof all goodwill as of December 31, 2001, SFAS 142 will not have any impact onthe Company’s financial statements during 2002**.* ***SFAS142 requires pro forma presentation. However, due to the write-off of all goodwill as of December 31, 2001,no pro forma information has been presented. The goodwill amortization for the years ended December 31, 2001 and 2000was $7.2 and $8.0, respectively.

*** ***

***In August 2001, the Financial AccountingStandards Board issued SFAS No. 144. SFAS 144 supersedes Statement of Financial Accounting Standards No. 121(“SFAS 121”), Accounting for the Impairment of Long-Lived Assets and Long-LivedAssets to be Disposed Of and the accounting and reporting provisions ofAccounting Principles Board Opinion No. 30, Reporting the Results of Operations,Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS144 addresses financial accounting and reporting for the impairment anddisposal of long-lived assets and was adopted by the Company effective January1, 2002. Beginning in the second quarter of 2002, the Company reported thedivestitures announced on April 5, 2002 as discontinued operations (see Note10).  As a result of executing thesedivestitures, the Company recorded asset impairments of $3.0 during 2002, suchamount representing the difference between the sales price and the carryingvalue of the divested assets.***

 

In April 2002, the Financial Accounting StandardsBoard issued Statement of Financial Accounting Standards No. 145 (“SFAS 145”),Rescission of FASB Statements 4, 44 and 64, Amendment of FASB No. 13, andTechnical Corrections.  SFAS 145, amongother things, amends SFAS 4 and SFAS 44, to require that gains and losses fromthe extinguishments of debt generally be classified within continuingoperations.  The provisions for SFAS 145are effective for the fiscal years beginning after May 15, 2002 and earlyapplication is encouraged.  However, theCompany was required to adopt upon emergence from bankruptcy the application of“Fresh-Start Reporting” as specified by SOP 90-7.  Upon emergence from

 

F-10

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bankruptcy, any gains on debt forgiveness will be reported incontinuing operations.  All previouslyreported amounts have been reclassified.

 

In June 2002, the Financial Accounting Standards Boardissued Statement of Financial Accounting Standards No. 146 (“SFAS 146”),Accounting for Costs Associated with Exit or Disposal Activities.  SFAS 146 replaces Emerging Issues Task ForceIssue 94-3, Liability Recognition of Certain Employee Termination Benefits andOther Costs to Exit an Activity.  Thisstandard requires companies to recognize costs associated with exit or disposalactivities when they are incurred rather than at the date of a commitment to anexit or disposal plan.  This statementis effective for exit or disposal activities that are initiated after December31, 2002.

 

In December 2002, the Financial Accounting StandardsBoard issued Statement of Financial Accounting Standards No. 148 (“SFAS 148”),“Accounting for Stock-Based Compensation-Transition and Disclosure”.  SFAS148 amends SFAS 123 to provide alternate methods of transition for a voluntarychange to the fair value based method of accounting for stock-based employeecompensation.  In addition, SFAS 148 amends the disclosure requirements ofSFAS 123 to require prominent disclosures in both annual and interim financialstatements about the effects of stock-based compensation on reported results. The provisions of SFAS 148 are effective for years ending after December 15,2002 and interim periods beginning after December 15, 2002. ****The adoption of SFAS 148 did not have anyimpact on the Company’s results of operations or financial position in 2002.

 

**2.    Reorganizationand Fresh-Start Reporting**

 

Under the terms of the Reorganization Plan, theunsecured creditors will receive, upon resolution of all disputed creditorclaims and completion of distributions, 20,000,000 shares of new common stock,par value $.01 per share, (“Common Stock”) in the reorganized Company todischarge and in exchange for approximately $367.3 of unsecured debt, and thefinancial advisor to Creditors Committee was issued 154,710 shares of CommonStock.  The Company’s existing commonstock, par value $.01 per share, outstanding prior to the Effective Date (the“Old Common Stock”) was extinguished and holders of such shares will receive inexchange for such shares, upon completion of distributions under theReorganization Plan, five-year warrants (the “Warrants”) to purchase anaggregate of 3,556,713 shares of the Common Stock (representing 15% of theoutstanding Common Stock).  The Warrantshave an exercise price calculated at full recovery for all unsecured creditors,such exercise price to be determined six months after the Effective Date, basedupon the Company’s estimate of total general unsecured claims.  The exercise price is currently estimated tobe $18.37 per share (assuming that total allowed general unsecured claims are $367.3).  The Warrants are required under theReorganization Plan to be distributed on or before April 30, 2003.  The Reorganization Plan established the 2002Long Term Stock Incentive Plan (the “2002 Incentive Plan”) for employees to beadministered by the Board of Directors of the newly reorganized Company.  Up to 2,015,000 shares of Common Stock arereserved for issuance under the 2002 Incentive Plan.  All previously outstanding options of the Company that had beenissued under the existing stock option plans were cancelled.  Additionally, the Board of Directors of thereorganized Company was initially reconstituted with six new members.

 

The Company was required toadopt “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 of the Company to its assets and liabilities inrelation to their fair values as of the Effective Date.  The reorganization value of $305.0 was basedon accepted valuation techniques, including using a five-year discounted cashflow analysis and analysis of comparable publicly traded

 

F-11

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companies. The equity value of $192.3 is equal to the reorganization value lessdebt (net of assets held for sale and other credits).  Accordingly, the carrying values of our assets and liabilitiesdiffer from the amounts shown in previous periods.  The application of “Fresh-Start Reporting” as of the Effective Date,is summarized below:

 
|                                                     |   | **Predecessor  Company** |   | **Adjustments  to Record Effects  of the Reorganization Plan** |   | **Successor  Company**       |   |
|----------------------------------------------------------|--------|--------------------------|--------|----------------------------------------------------------------|--------|------------------------------|--------|
|                                                     |   | **Balance  Sheet**       |   | **Reorganization  Adjustments**                                |   | **Fresh-Start  Adjustments** |   | **Balance  Sheet** |   |
| **Assets:**                                              |   |                     |   |                                                           |   |                         |   |   |   |
| Current assets                                           |   | $                        | 416.9  |                                                           | $      | —                       |   | $ | — |   | $ | 416.9 |   |
| Property and equipment, net                              |   | 108.6                    |   | —                                                         |   | (108.6                       | )      | — |   |
| Other assets, net                                        |   | 3.7                      |   | 1.8                                                            |   | (1.1                         | )      | 4.4 |   |
| Total assets                                             |   | $                        | 529.2  |                                                           | $      | 1.8                          |   | $ | (109.7 | ) | $ | 421.3 |   |
| **Liabilities:**                                         |   |                     |   |                                                           |   |                         |   |   |   |
| Current liabilities                                      |   | $                        | 226.7  |                                                           | $      | (159.8                       | )      | 0.3 |   | $ | 67.2 |   |
| Long-term debt, less current portion                     |   | —                   |   | 161.8                                                          |   | —                       |   | 161.8 |   |
| Other long-term liabilities                              |   | 367.3                    |   | (367.3                                                         | )      | —                       |   | — |   |
| Total liabilities                                        |   | 594.0                    |   | (365.3                                                         | )      | 0.3                          |   | 229.0 |   |
| **Stockholders Equity (Deficit):**                       |   |                     |   |                                                           |   |                         |   |   |   |
| Common stock                                             |   | 0.4                      |   | 0.2                                                            |   | (0.4                         | )      | 0.2 |   |
| Additional paid-in capital                               |   | 247.7                    |   | 192.1                                                          |   | (247.7                       | )      | 192.1 |   |
| Retained earnings (deficit)                              |   | (312.9                   | )      | 174.8                                                          |   | 138.1                        |   | — |   |
| Total stockholders’ equity (deficit)                |   | (64.8                    | )      | 367.1                                                          |   | (110.0                       | )      | 192.3 |   |
| Total liabilities and stockholders’equity (deficit) |   | $                        | 529.2  |                                                           | $      | 1.8                          |   | $ | (109.7 | ) | $ | 421.3 |   |

 

**3.****    Inventories**

 

Inventories consist of the following:

 
|                                      |   | **Successor  Company**  |   | **Predecessor  Company** |   |
|-------------------------------------------|--------|-------------------------|--------|--------------------------|--------|
|                                      |   | **December  31,  2002** |   | **December  31,  2001**  |   |
| Raw materials —                      |   |                    |   |                     |   |
| Plates and Shapes                         |   | $                       | 60.7   |                     | $      | 57.7 |   |
| Flat Rolled                               |   | 96.8                    |   | 67.2                     |   |
| Building Products                         |   | 17.7                    |   | 18.4                     |   |
| Total raw materials                       |   | 175.2                   |   | 143.3                    |   |
| Work-in-process and finished goods — |   |                    |   |                     |   |
| Plates and Shapes                         |   | —                  |   | 2.0                      |   |
| Flat Rolled                               |   | 17.7                    |   | 16.4                     |   |
| Building Products                         |   | 24.5                    |   | 17.9                     |   |
| Total work-in-process and finished goods  |   | 42.2                    |   | 36.3                     |   |
| Total inventories                         |   | $                       | 217.4  |                     | $      | 179.6 |   |

 

F-12

----

 

The replacement cost ofthe Company’s inventory as of December 31, 2002 and 2001 approximated thehistorical cost of the inventory computed using the LIFO method ofvaluation.  If the FIFO method had beenused for all inventories, net income (loss) would have been unchanged for theyears ended December 31, 2002 and 2001, respectively.  In addition, the Company reclassified $10.9 and $84.4 ofinventories to operations held for sale at December 31, 2002 and 2001,respectively.

 

**4.    Property and Equipment**

 

Property and equipment consistsof the following:

 
|                                 |   |                        |       | **Successor  Company** |       | **Predecessor  Company** |       |
|--------------------------------------|--------|-----------------------------|------------|------------------------|------------|--------------------------|------------|
|                                 |   | **Estimated  Useful Lives** |       | **December 31,  2002** |       | **December  31,  2001**  |       |
|                                 |   |                        | ** ** |                   | ** ** |                     | ** ** |
| Land                                 |   | —                      |       | $                      | —     |                     | $          | 7.5 |   |
| Building and improvements            |   | 5-40  years                 |       | —                 |       | 64.9                     |       |
| Machinery and equipment              |   | 7-25  years                 |       | 0.5                    |       | 71.3                     |       |
| Automobiles and trucks               |   | 3-12  years                 |       | —                 |       | 6.6                      |       |
| Construction in progress             |   | —                      |       | —                 |       | 5.6                      |       |
| Total property and equipment         |   |                        |       | 0.5                    |       | 155.9                    |       |
| Less — accumulated depreciation |   |                        |       | 3⁄4                 |       | (52.8                    | )          |
| Total property and equipment, net    |   |                        |       | $                      | 0.5        |                     | $          | 103.1 |   |

 

Thebook value of property and equipment was completely written off as a result ofthe fresh-start adjustments as of October 31, 2002.  These assets had a carrying value of $108.6 prior to suchwrite-off.

 

*Depreciation expense forcontinuing operations for the period from January 1, 2002 through October 31,2002 and the years ended December 31, 2001 and 2000 was $7.2, $13.5 and $12.6,respectively.*

 

**5.    Accrued Liabilities**

 

*Accrued liabilities consist ofthe following:*

 
|                                   |   | **Successor  Company**  |   | **Predecessor  Company** |   |
|----------------------------------------|--------|-------------------------|--------|--------------------------|--------|
|                                   |   | **December  31,  2002** |   | **December  31,  2001**  |   |
| Accrued salaries and employee benefits |   | $                       | 6.1    |                     | $      | 4.4 |   |
| Accrued taxes, other than income       |   | 4.2                     |   | 0.8                      |   |
| Accrued insurance                      |   | 10.1                    |   | 7.0                      |   |
| Accrued bankruptcy costs               |   | 3.3                     |   | 1.6                      |   |
| Accrued audit and tax fees             |   | 1.5                     |   | 0.4                      |   |
| Other                                  |   | 2.9                     |   | 1.0                      |   |
| Total accrued liabilities              |   | $                       | 28.1   |                     | $      | 15.2 |   |

 

F-13

----

 

**6.    Debt**

 

Debt consists of the following:

 
|                                       |   | **Successor  Company**  |   | **Predecessor  Company** |   |
|--------------------------------------------|--------|-------------------------|--------|--------------------------|--------|
|                                       |   | **December  31,  2002** |   | **December  31,  2001**  |   |
| Borrowings under credit facilities         |   | $                       | 112.6  |                     | $      | 278.2 |   |
| Industrial Revenue Bonds (various issues)  |   | 7.9                     |   | 17.1                     |   |
| Mortgage Note                              |   | 7.4                     |   | —                   |   |
| Obligations under capital leases and other |   | 0.8                     |   | 6.6                      |   |
| Subordinated Notes                         |   | 3⁄4                  |   | 200.0                    |   |
| Total debt                                 |   | 128.7                   |   | 501.9                    |   |
| Less — current portion of debt        |   | 1.3                     |   | 301.9                    |   |
| Total long-term portion of debt            |   | $                       | 127.4  |                     | $      | 200.0 |   |

 

Maturities on the debt as ofDecember 31, 2002 were $1.3 in 2003, $1.3 in 2004, $113.6 in 2005, $0.9 in2006, $6.8 in 2007 and $4.8 thereafter.

 

As of December 31, 2001, allborrowings under credit facilities, Industrial Revenue Bonds (“IRBs”) andobligations under capital leases and other were included in pre-petitionliabilities not subject to compromise. The Subordinated Notes were included in pre-petition liabilities subjectto compromise.  The weighted averageinterest rates under the Company’s credit facilities for the period fromJanuary 1, 2002 through October 31, 2002 and the years ended December 31, 2001and 2000 were 6.18%, 7.88% and 8.04%, respectively.  The weighted average interest rates under the Company’s creditfacilities for the period from November 1, 2002 through December 31, 2002 was3.08%.

 

***New Credit Facility***

 

On October 31, 2002, the Company entered into its exitfinancing with a group of lenders (the “New Credit Facility”).  The New Credit Facility has an initial termof three years with an option to extend the agreement by two one-yearterms.  The debtor-in-possessionfacility (the “DIP Financing”) was retired with borrowings under the New CreditFacility.  The New Credit Facilityprovides for a revolving credit facility providing up to $200.0 in borrowingsand is secured by all of the Company’s receivables, inventories, and intangibleproperty.  Borrowings under the NewCredit Facility are limited to the lesser of a borrowing base, comprised ofeligible receivables and inventories, or $200.0 in the aggregate; however, theCompany’s property and equipment are not pledged as security for the loan.  As of March 21, 2003, the Company had $66.9available to borrow under the New Credit Facility.

 

The New Credit Facility matures on October 31, 2005,subject to extension and bears interest at the bank’s base rate or LIBOR, atthe Company’s option, plus an applicable margin based on a ratio of EBITDA (asdefined and adjusted) to cash interest expense (the “Fixed Charge CoverageRatio”).  The Fixed Charge CoverageRatio is determined by dividing EBITDA by the sum of net capital expenditures,income taxes paid in cash, dividends, or other preference payments, interestexpense paid in cash and scheduled principal reductions on debt.  The applicable margin for base rate loansranges from 0.00% to 0.50%, and the LIBOR margin loans range from 2.00% to3.00%.  These marginal rates vary withthe Company’s financial performance as measured by the Fixed Charge CoverageRatio.  A commitment fee

 

F-14

----

 

is payable on any unused portion of the New Credit Facility.  The commitment fee varies between 0.250% and0.375% per annum, based on the Fixed Charge Coverage Ratio.  The base rate and the LIBOR rate were 4.75%and 1.39% as of December 31, 2002.

 

The New Credit Facility requires the Company to complywith various affirmative, negative and subjective covenants, the mostsignificant of which are as follows: (i) the maintenance of certain financialratios and borrowing base availability, (ii) restrictions on additionalindebtedness, (iii) restrictions on liens, guarantees and quarterly dividends,and (iv) obtaining the lenders’ consent with respect to certain individualacquisitions.  The New Credit Facilityallows for the payment of up to $1.1 of dividends in any fiscal quarterprovided that borrowing base availability is greater than $40.0.  As long as the Company’s availability  (the applicable advance rate on eligiblereceivables and inventories, less outstanding borrowings and letters of credit)is $20.0 or greater, the Company does not have to maintain a minimum FixedCharge Coverage Ratio.  Shouldavailability fall below $20.0, the Company must comply with a Fixed ChargeCoverage Ratio of 1.0 to 1.0.  TheCompany was in compliance with all of the covenants as of December 31, 2002.

 

In connection with the establishment of the New CreditFacility, the Company incurred debt issuance costs of approximately $2.1, whichare being amortized over the three-year term of the facility.

 

***Debtor-in-Possession Financing***

 

On January 2, 2002, the Company executed its DIPFinancing with Bank of America and PNC Bank in the amount of $350.0.  On July 22, 2002, the Company amended itsDIP Financing agreement reducing the maximum permitted borrowings to$275.0.  Initial borrowings of $278.2 were used to repay the outstanding balanceunder the previous credit facilities.  Thefacility was composed of a revolving line of credit consisting of revolvingloans, letters of credit and credit support.**TheDIP Financing bore interest at the bank’s prime rate plus an applicable marginof 2%, had an eighteen-month term with two three-month extensions and wascollateralized by all of the Company’s accounts receivable, inventory,equipment and real estate.  The lendingformula was 85% of eligible accounts receivable and up to 60% of eligibleinventory.  A commitment fee was payableon any unused portion of the DIP Financing. Borrowings were used to fund post-petition operating expenses and supplierand employee obligations throughout the reorganization process.  The DIP Financing was retired upon executionof the New Credit Facility discussed above.

 

On March 12, 2001, the Companyentered into a credit facility with Bank of America and PNC Bank. Thecredit facility was for a period of three years, represented $450.0 infinancing, and replaced the former credit facility.  In connection with the establishment of the credit facility, theCompany incurred fees and expenses of $7.5, which were being amortized over thethree-year term of the facility.  As aresult of the Chapter 11 Filing, the unamortized amount of $5.8 was written offand included in reorganization expense for the year ended December 31, 2001.  This credit facility was retired uponexecution of the DIP Financing on January 2, 2002.

 

***Industrial Revenue Bonds*(various issues)**

 

The IRBs are payable ininstallments ranging from monthly to annual with variable interest ranging from1.70% to 3.67% per annum at December 31, 2002 and mature from July 1, 2004 toMay 1, 2023. The IRBs are secured by real estate and equipment acquired withproceeds from these bonds with no net book value at December 31, 2002.  The IRBs place various restrictions on certainof the Company’s subsidiaries, including but not limited to maintenance ofrequired insurance coverage, maintenance of

 

F-15

----

 

certain financial ratios, limits on capitalexpenditures and maintenance of tangible net worth and are supported by lettersof credit.  The Company was incompliance with all of the covenants as of December 31, 2002.

 

***Mortgage Note***

 

*Certain of the IRBs wereautomatically called as a result of the Chapter 11 Filing.  The Company subsequently refinanced theseIRBs with a mortgage note with a fixed interest rate of 6.88% per annum andmaturing on October 31, 2007.  Thismortgage note is secured by property and equipment with no net book value as ofDecember 31, 2002.*

 

***Subordinated Notes***

 

The Subordinated Notes plus accrued interest throughNovember 14, 2001 totaling $204.3 will be exchanged for shares approximately11,122,000 shares of Common Stock under the terms of the Reorganization Plan onOctober 31, 2002 (assuming that total general unsecured claims are $367.3).

 

**7.    Income Taxes**

 

The significant items givingrise to the deferred tax assets (liabilities) are as follows:

 
|                                    |   | **Successor  Company**  |   | **Predecessor  Company** |   |
|-----------------------------------------|--------|-------------------------|--------|--------------------------|--------|
|                                    |   | **December  31,  2002** |   | **December  31,  2001**  |   |
| **Deferred  tax assets —**         |   |                    |   |                     |   |
| Accounts  receivable and inventories    |   | $                       | 2.2    |                     | $      | 3.6 |   |
| Accrued  liabilities                    |   | 4.2                     |   | 10.4                     |   |
| Net operating  loss carryforward        |   | 2.5                     |   | 1.1                      |   |
| Property and  equipment                 |   | 2.1                     |   | 35.7                     |   |
| Other                                   |   | —                  |   | 2.9                      |   |
| Total deferred  tax assets              |   | 11.0                    |   | 53.7                     |   |
| **Deferred  tax liabilities —**    |   |                    |   |                     |   |
| Foreign  investments                    |   | (1.5                    | )      | (1.6                     | )      |
| Other                                   |   | (2.2                    | )      | —                   |   |
| Total deferred  tax liabilities         |   | (3.7                    | )      | (1.6                     | )      |
| Valuation  allowance                    |   | (7.3                    | )      | (52.1                    | )      |
| Deferred tax  assets (liabilities), net |   | $                       | — |                     | $      | — |   |

 

A valuation allowance has been established to offset theportion of the deferred tax asset related to the loss carryforward expected toexpire before utilization and for other deferred tax assets that the Companydoes not expect to realize through future operations.

 

The components of the provision (benefit) for incometaxes are as follows:

 

F-16

----

 
|                       |   | **Successor  Company**                                    |   | **Predecessor  Company**                                |   |
|----------------------------|--------|-----------------------------------------------------------|--------|---------------------------------------------------------|--------|
|                       |   | **Period  from  November 1,  2002 through  December 31,** |   | **Period  from  January 1,  2002 through  October 31,** |   | **Year Ended  December 31,** |   |
|                       |   | **2002**                                                  |   | **2002**                                                |   | **2001** |   | **2000** |   |
| **Federal —**         |   |                                                      |   |                                                    |   |   |   |   |   |
| Current                    |   | $                                                         | — |                                                    | $      | (15.0 | ) | $ | (29.6 | ) | $ | 7.7 |   |
| Deferred                   |   | —                                                    |   | —                                                  |   | (21.3 | ) | 2.1 |   |
|                       |   | —                                                    |   | (15.0                                                   | )      | (50.9 | ) | 9.8 |   |
| **State —**           |   |                                                      |   |                                                    |   |   |   |   |   |
| Current                    |   | —                                                    |   | —                                                  |   | 0.2 |   | 0.6 |   |
| Deferred                   |   | —                                                    |   | —                                                  |   | (2.7 | ) | 0.4 |   |
|                       |   | —                                                    |   | —                                                  |   | (2.5 | ) | 1.0 |   |
| Total  provision (benefit) |   | $                                                         | — |                                                    | $      | (15.0 | ) | $ | (53.4 | ) | $ | 10.8 |   |

 

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

 
|                                            |   | **Successor  Company**                                   |   | **Predecessor  Company**                                |   |
|-------------------------------------------------|--------|----------------------------------------------------------|--------|---------------------------------------------------------|--------|
|                                            |   | **Period  from  November 1, 2002 through  December 31,** |   | **Period  from  January 1,  2002 through  October 31,** |   | **Year Ended  December 31,** |   |
|                                            |   | **2002**                                                 |   | **2002**                                                |   | **2001** |   | **2000** |   |
| Federal  income tax at statutory rates          |   | $                                                        | (1.1   | )                                                       | $      | 12.7 |   | $ | (162.2 | ) | $ | 7.9 |   |
| State  taxes, net of federal income tax benefit |   | —                                                   |   | 2.6                                                     |   | 0.1 |   | 0.5 |   |
| Nondeductible  expenses:                        |   |                                                     |   |                                                    |   |   |   |   |   |
| Bankruptcy  costs                               |   | —                                                   |   | 8.1                                                     |   | — |   | — |   |
| Amortization  and impairment of goodwill        |   | —                                                   |   | —                                                  |   | 59.0 |   | 1.6 |   |
| Valuation  allowance                            |   | 1.1                                                      |   | (45.9                                                   | )      | 52.1 |   | — |   |
| Other                                           |   | —                                                   |   | 7.5                                                     |   | (2.4 | ) | 0.8 |   |
| Total  provision  (benefit)                |   | $                                                        | — |                                                    | $      | (15.0 | ) | $ | (53.4 | ) | $ | 10.8 |   |

 

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

 

***Common Stock***

 

During 2001, the Companydeclared and paid one quarterly dividend of $0.03 per share.  During 2000, the Company declared fourquarterly dividends of $0.03 per share. Three of these quarterly dividends were paid during 2000 and the fourthwas paid in January 2001.

 

Under the terms of the Reorganization Plan, theunsecured creditors will receive, upon resolution of all disputed creditorclaims and completion of distributions, 20,000,000 shares of Common Stock inthe reorganized Company to discharge and in exchange for approximately $367.3of unsecured debt, and the financial advisor to holders of general unsecuredclaims was issued 154,710 shares of Common Stock.  In addition, authorized shares of Common Stock were decreasedfrom 203,122,914 to 200,000,000.

 

F-17

----

 

***Warrants***

 

Under the terms of the Reorganization Plan, theCompany’s Old Common Stock was extinguished and holders of such shares willreceive in exchange for such shares, upon completion of distributions under theReorganization Plan, five-year Warrants to purchase an aggregate of 3,556,713shares of the Common Stock (representing 15% of the Company’s outstandingCommon Stock).   The Warrants have an exerciseprice calculated at full recovery for all unsecured creditors, such exerciseprice to be determined six months after the Effective Date, based upon anestimate of total general unsecured claims. The exercise price is currently estimated to be $18.37 per share(assuming that total allowed general unsecured claims are $367.3).  The Warrants are required to be distributedno later than April 30, 2003.

 

**9.   Stock Based Compensation**

 

The Reorganization Plan established the 2002 IncentivePlan (or employees to be administered by the Board of Directors of the newlyreorganized Company.  Up to 2,015,000shares of Common Stock are reserved for issuance under the 2002 IncentivePlan.  No options were granted under the2002 Incentive Plan as of December 31, 2002. All previously outstanding options of the Company that had been issuedunder the existing stock option plans were cancelled.

 

OnFebruary 24, 2003, the Company issued an option to purchase 300,000 shares ofCommon Stock from the 2002 Incentive Plan of which 100,000 are exercisable at$4.75 per share, 100,000 at $9.50 per share and 100,000 at $14.25 pershare.  The fair value of this optiongrant was $0.1.

 

**10.  Operations Held for Sale**

** **

**During 2001, the Company decidedto sell certain assets of its Plates and Shapes business unit.  Because the sale of these operations wereinitiated prior to the Company’s adoption of SFAS 144 on January 1, 2002, theaccounting for the disposal of these assets is governed by the provisions ofSFAS 121.  SFAS 121 requires that theoperating results of operations held for sale be reported as continuingoperations on the statement of operations with supplemental footnote disclosureof the assets, liabilities and results of operations. **Operating results included in the consolidated statementsof operations regarding the businesses classified as operations held for saleunder SFAS 121 are as follows:

** **
|                              |   | **Successor  Company**                                   |   | **Predecessor Company**                                |   |
|-----------------------------------|--------|----------------------------------------------------------|--------|--------------------------------------------------------|--------|
|                              |   | **Period from  November 1,  2002 through  December 31,** |   | **Period from  January 1,  2002 through  October 31,** |   | **Year Ended****December 31,** |   |
|                              |   | **2002**                                                 |   | **2002**                                               |   | **2001** |   | **2000** |   |
| **Statement of Operations Data:** |   |                                                     |   |                                                   |   |   |   |   |   |
| Net sales                         |   | $                                                        | — |                                                   | $      | 31.2 |   | $ | 122.6 |   | $ | 164.6 |   |
| Operating  loss                   |   | (0.1                                                     | )      | (2.6                                                   | )      | (6.6 | ) | (0.5 | ) |
|                                   |        |                                                          |        |                                                        |        |  |  |  |  |  |  |  |  |

** **

On April 5, 2002, the Company announced planneddivestitures of 11 additional business units that resulted in a significantdownsizing of the Company.  Thesedivestitures were a part of the Reorganization Plan.  The accounting for disposal of the operations placed into theheld for sale category during 2002 is governed by the provisions of SFAS144.  This pronouncement requires thatthe operational results of the

 

F-18

----

 

operations held for sale be recorded as discontinued operations on thestatement of operations with separate earnings per share disclosure andsupplemental footnote disclosure of the assets and liabilities.  Operational information included in theconsolidated statements of operations with respect to the businesses classifiedas discontinued operations and held for sale under SFAS 144 are as follows:

** **
|                              |   | **Successor  Company**                                   |   | **Predecessor Company**                                |   |
|-----------------------------------|--------|----------------------------------------------------------|--------|--------------------------------------------------------|--------|
|                              |   | **Period from  November 1,  2002 through  December 31,** |   | **Period from  January 1,  2002 through  October 31,** |   | **Year Ended****December 31,** |   |
|                              |   | **2002**                                                 |   | **2002**                                               |   | **2001** |   | **2000** |   |
| **Statement of Operations Data:** |   |                                                     |   |                                                   |   |   |   |   |   |
| Net sales                         |   | $                                                        | 8.7    |                                                   | $      | 208.0 |   | $ | 340.0 |   | $ | 466.7 |   |
| Cost  of sales                    |   | 6.7                                                      |   | 161.3                                                  |   | 266.3 |   | 363.8 |   |
| Gross  profit                     |   | 2.0                                                      |   | 46.7                                                   |   | 73.7 |   | 102.9 |   |
| Operating  expenses               |   | 3.2                                                      |   | 46.0                                                   |   | 76.7 |   | 85.8 |   |
| Operating  income (loss)          |   | (1.2                                                     | )      | 0.7                                                    |   | (3.0 | ) | 17.1 |   |
| Provision  (benefit) for taxes    |   | —                                                   |   | 0.3                                                    |   | (1.2 | ) | 6.8 |   |
| Net  loss                         |   | $                                                        | (1.2   | )                                                      | $      | 0.4 |   | $ | (1.8 | ) | $ | 10.3 |   |

** **

**The asset and liability amounts fordiscontinued operations held for sale under SFAS 144 are combined with theasset and liability amounts for operations held for sale under SFAS 121 and areclassified as current assets and liabilities in the consolidating balance sheetas follows:**

** **
|                                                 |   | **Successor  Company**        |   | **Predecessor  Company**      |   |
|------------------------------------------------------|--------|-------------------------------|--------|-------------------------------|--------|
|                                                 |   | **As of  December 31,  2002** |   | **As of  December 31,  2001** |   |
| **Assets:**                                          |   |                          |   |                          |   |
| Accounts receivable                                  |   | $                             | 5.7    |                          | $      | 53.9 |   |
| Inventories and other                                |   | 11.1                          |   | 89.5                          |   |
| Property  and equipment, net                         |   | 13.6                          |   | 62.2                          |   |
| Reserves                                             |   | (10.9                         | )      | (11.4                         | )      |
| Operations  held for sale                            |   | $                             | 19.5   |                          | $      | 194.2 |   |
| **Liabilities:**                                     |   |                          |   |                          |   |
| Post-petition  liabilities not subject to compromise |   | $                             | 2.8    |                          | $      | 8.3 |   |
| Pre-petition  liabilities subject to compromise      |   | 3⁄4                        |   | 52.7                          |   |
| Operations  held for sale                            |   | $                             | 2.8    |                          | $      | 61.0 |   |

** **

**Amounts above include the assetsand liabilities of the operations held for sale under both SFAS 121 and SFAS144 at December 31, 2002.  Totalproceeds received from the sale of these assets during 2002 was $90.1.**

 

**11. Segment and Related Information**

 

TheCompany is organized into three product group segments.  Each segment is described as follows:

 

F-19

----

 

•                  *Plates and Shapes* consists of 20 facilities that maintain an inventory focusing on carbonproducts such as structural plate, beams, bars and tubing.  This segment provides processing servicessuch as cutting, cambering/leveling, punching, bending, shearing, cut-to-lengthand tee-splitting.

 

•                  *Flat Rolled*consists of 15 facilities that maintain an inventory of cold rolled and hotrolled steel products and various nonferrous flat rolled products includingaluminum, stainless steel, copper and brass. This segment provides processing services such as slitting, precisionblanking, leveling, cut-to-length, laser cutting, punching, bending andshearing.

 

•                  *Building Products* consists of 18 facilities that produce and distributealuminum and steel building products consisting of covered canopies andwalkways, awnings, sunrooms, solariums and other products primarily for thecommercial and residential building products industries.

 

*The following table summarizes financialinformation regarding these segments:*

 
|                                                     |   | **Plates and  Shapes** |   | **Flat  Rolled** |   | **Building  Products** |   | **Corp,  Elims  And Other** |   | **Total** |   |
|----------------------------------------------------------|--------|------------------------|--------|------------------|--------|------------------------|--------|-----------------------------|--------|-----------|--------|
| **Successor  Company:**                                  |   |                   |   |             |   |                   |   |                        |   |      |   |
| Period from November 1, 2002 through  December 31, 2002: |   |                   |   |             |   |                   |   |                        |   |      |   |
| Net sales                                                |   | $                      | 46.6   |             | $      | 61.5                   |   | $                           | 21.2   |      | $      | (3.1 | ) | $ | 126.2 |   |
| Operating income (loss)                                  |   | 1.5                    |   | 1.2              |   | (0.6                   | )      | (2.8                        | )      | (0.7      | )      |
| Total assets                                             |   | 83.5                   |   | 122.9            |   | 61.4                   |   | 86.4                        |   | 354.2     |   |
| Capital expenditures                                     |   | 0.2                    |   | 0.1              |   | 0.2                    |   | —                      |   | 0.5       |   |
| **Predecessor Company:**                                 |   |                   |   |             |   |                   |   |                        |   |      |   |
| Period from January 1, 2002 through October  31, 2002:   |   |                   |   |             |   |                   |   |                        |   |      |   |
| Net sales                                                |   | $                      | 300.5  |             | $      | 404.1                  |   | $                           | 134.9  |      | $      | (22.0 | ) | $ | 817.5 |   |
| Operating income (loss)                                  |   | 1.8                    |   | 5.4              |   | 10.6                   |   | (20.1                       | )      | (2.3      | )      |
| Total assets                                             |   | 92.7                   |   | 137.8            |   | 73.8                   |   | 90.0                        |   | 394.3     |   |
| Capital expenditures                                     |   | 0.6                    |   | 1.2              |   | 0.9                    |   | 0.1                         |   | 2.8       |   |
| Depreciation and amortization                            |   | 2.1                    |   | 2.2              |   | 2.0                    |   | 0.9                         |   | 7.2       |   |
| Year Ended December 31, 2001:                            |   |                   |   |             |   |                   |   |                        |   |      |   |
| Net sales                                                |   | $                      | 558.4  |             | $      | 543.8                  |   | $                           | 150.7  |      | $      | (30.9 | ) | $ | 1,222.0 |   |
| Operating income (loss)                                  |   | 2.3                    |   | 10.9             |   | 5.4                    |   | (407.3                      | )      | (388.7    | )      |
| Total assets                                             |   | 112.8                  |   | 140.8            |   | 86.1                   |   | 156.2                       |   | 495.9     |   |
| Capital expenditures                                     |   | 4.4                    |   | 5.5              |   | 3.3                    |   | 0.8                         |   | 14.0      |   |
| Depreciation and amortization                            |   | 8.3                    |   | 4.9              |   | 3.0                    |   | 4.9                         |   | 21.1      |   |
| Year Ended December 31, 2000:                            |   |                   |   |             |   |                   |   |                        |   |      |   |
| Net sales                                                |   | $                      | 736.2  |             | $      | 699.4                  |   | $                           | 170.2  |      | $      | (51.0 | ) | $ | 1,554.8 |   |
| Operating income (loss)                                  |   | 37.8                   |   | 21.1             |   | 10.0                   |   | (14.7                       | )      | 54.2      |   |
| Total assets                                             |   | 273.9                  |   | 206.9            |   | 122.1                  |   | 254.9                       |   | 857.8     |   |
| Capital expenditures                                     |   | 11.6                   |   | 8.8              |   | 6.3                    |   | 4.3                         |   | 31.0      |   |
| Depreciation and amortization                            |   | 7.9                    |   | 4.9              |   | 2.9                    |   | 5.1                         |   | 20.8      |   |

 

The amounts shown as anoperating loss under the column heading “Corp, Elims and Other” consistprimarily of general and administrative costs that are not allocated to thesegments and the amortization of goodwill. Assets not specifically associated with a specific segment consistedprimarily of goodwill in

 

F-20

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2000. Operating loss for 2001 includes asset impairments of $386.1, including$288.7 related to goodwill, $87.3 related to property and equipment and $10.1related to costs associated with the disposition of operations held forsale.  The goodwill impairment charge bysegment included $176.9 for Plates and Shapes, $54.0 for Flat Rolled and $57.8for Building Products.  The property andequipment impairment charge by segment included $34.8 for Plates and Shapes and$52.5 for Flat Rolled.

 

Reconciliation of operatingincome (loss) to income (loss) before taxes and discontinued operations issummarized as follows:

 
|                                                    |   | **Successor  Company**                                   |   | **Predecessor Company**                                |   |
|---------------------------------------------------------|--------|----------------------------------------------------------|--------|--------------------------------------------------------|--------|
|                                                    |   | **Period from  November 1,  2002 through  December 31,** |   | **Period from  January 1,  2002 through  October 31,** |   | **Year Ended****December 31,** |   |
|                                                    |   | **2002**                                                 |   | **2002**                                               |   | **2001** |   | **2000** |   |
| **Statement of Operations Data:**                       |   |                                                     |   |                                                   |   |   |   |   |   |
| Operating income (loss)                                 |   | $                                                        | (0.7   | )                                                      | $      | (2.3 | ) | $ | (388.7 | ) | $ | 54.2 |   |
| Interest  expense                                       |   | 1.3                                                      |   | 15.8                                                   |   | 49.6 |   | 50.5 |   |
| Other  (income) expense, net                            |   | 0.1                                                      |   | (1.1                                                   | )      | 1.8 |   | (1.6 | ) |
| Fresh-start  adjustments                                |   | —                                                   |   | 109.7                                                  |   | — |   | — |   |
| Gain  on reorganization                                 |   | —                                                   |   | (190.6                                                 | )      | — |   | — |   |
| Reorganization  expenses                                |   | —                                                   |   | 28.3                                                   |   | 19.4 |   | — |   |
| Income  (loss) before taxes and discontinued operations |   | $                                                        | (2.1   | )                                                      | $      | 35.6 |   | $ | (459.5 | ) | $ | 5.3 |   |

 

The Company’s areas ofoperations are solely in the U.S.  Nogeographic area is significant to the consolidated operations.  The Company has a broad customer base withinthe U.S. with no single customer being significant to consolidated operations.

 

**12.  Employee BenefitPlans**

 

The Company established theMetals USA, Inc. 401(k) Plan (the “Plan”) on June 1, 1998.  Participants are eligible for the Plan aftercompleting six full calendar months of service and can contribute up to 15% oftheir eligible compensation. Participants’ employer contributions vest at varying rates, ranging fromfull vesting upon participation to vesting that begins after one year ofservice and are fully vested after four years. On October 1, 2001, the Company suspended its matching contributions.

 

The Company established theMetals USA, Inc. Union 401(k) Plan on October 1, 1998 to provide a standarddefined contributions savings plan for all employees covered under the terms ofa collective bargaining agreement (the “Union Plan”).  The employer is not obligated by the Union Plan to makecontributions, unless required by the operative collective bargainingagreement.  The Union Plan allows theemployee to contribute up to 15% of their eligible compensation.

 

The aggregate contributions tothe Plans were $2.3 and $3.9 for the years ended December 31, 2001 and 2000,respectively.

 

F-21

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**13. Commitments and Contingencies**

 

***Operating Lease Agreements***

 

The Company’s minimum leaseobligations for continuing operations under certain long-term non-cancelableoperating lease agreements for office space, warehouse space and equipment areas follows: 2003 — $12.7; 2004 — $10.7; 2005 — $8.8;2006 —  $7.7; 2007 — $6.6thereafter — $34.3. The Company recorded approximately $1.8, $9.7, $13.7 and $21.5 in rentexpense on continuing operations forthe periods from November 1, 2002 through December 31, 2002 and from January 1,2002 through October 31, 2002 and the years ended December 31, 2001 and 2000, respectively. Certain of these leases are with previously affiliated individuals andcompanies.

 

***Letters of Credit***

 

The Company has entered into lettersof credit in the amount of $7.9 in conjunction with the various IRBs (see Note6) and other letters of credit in the amount of $14.9 as of December 31,2002.   These letters of credit reducethe amount available to borrow under the New Credit Facility.

 

***Contingencies***

 

The Company and its subsidiariesare involved in a variety of claims, lawsuits and other disputes arising in theordinary course of business.  TheCompany believes the resolution of these matters and the incurrence of theirrelated costs and expenses should not have a material adverse effect on theCompany’s consolidated financial position, results of operations or liquidity.

 

**14.  Supplemental CashFlow Information**

** **
|                                  |   | **Successor  Company**                                    |   | **Predecessor  Company**                                |   |
|---------------------------------------|--------|-----------------------------------------------------------|--------|---------------------------------------------------------|--------|
|                                  |   | **Period  from  November 1,  2002 through  December 31,** |   | **Period  from  January 1,  2002 through  October 31,** |   | **Year Ended  December 31,** |   |
|                                  |   | **2002**                                                  |   | **2002**                                                |   | **2001** |   | **2000** |   |
| Cash paid for interest expense        |   | $                                                         | 0.6    |                                                    | $      | 13.6 |   | $ | 48.2 |   | $ | 47.9 |   |
| Cash paid (refunded) for income taxes |   | (0.1                                                      | )      | (25.5                                                   | )      | (10.7 | ) | 8.5 |   |
|                                       |        |                                                           |        |                                                         |        |  |  |  |  |  |  |  |  |

 

**15.  Pro FormaInformation (Unaudited)**

 

On October 31, 2002 the Company emerged from bankruptcy. Theaccompanying pro forma consolidated statement of operations for the year endedDecember 31, 2002 reflects the combination of the statements of operations forthe Predecessor Company for the period January 1, 2002 through October 31, 2002and the Successor Company for the period November 1, 2002 through December 31,2002.  The pro forma adjustments reflectadjustments made to the reported historical financial statements of the Companyrelating to operations disposed of and adjustments required to implement“Fresh-Start Reporting” as described by SOP 90-7.  The information presented by the accompanying pro forma consolidatedstatement of operations is intended to provide additional information of ageneral nature and are not required disclosures and are not necessarilyindicative of results to be expected from future operations. Certainadjustments described herein are based upon estimates and assumptions, whichmay

 

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be modified or supplemented as circumstances warrant in thefuture. Moreover any such modifications or additional adjustments may differmaterially from those presented. Notwithstanding the foregoing, the Companybelieves the information presented in the accompanying pro forma consolidatedstatement of operations for the year ended December 31, 2002 contains allmaterial known adjustments.

** **
|                                                                 |   | **Successor  Company**                                          |   | **Predecessor  Company**                                      |   |                       |   |                                          |   |
|----------------------------------------------------------------------|--------|-----------------------------------------------------------------|--------|---------------------------------------------------------------|--------|----------------------------|--------|-----------------------------------------------|--------|
|                                                                 |   | **Period  from  November 1,  2002 through  December 31,  2002** |   | **Period  from  January 1,  2002 through  October 31,  2002** |   | **Pro Forma  Adjustments** |   | **Pro Forma  Year Ended  December 31,  2002** |   |
| **Revenues:**                                                        |   |                                                            |   |                                                          |   |                       |   |                                          |   |
| Net sales                                                            |   | $                                                               | 126.2  |                                                          | $      | 817.5                      |   | (31.2                                         | )(1)   | $ | 912.5 |   |
| Cost of sales                                                        |   | 97.3                                                            |   | 629.2                                                         |   | (23.5                      | )(1)   | 703.0                                         |   |
| Gross profit                                                         |   | 28.9                                                            |   | 188.3                                                         |   | (7.7                       | )      | 209.5                                         |   |
| **Operating costs and expenses:**                                    |   |                                                            |   |                                                          |   |                       |   |                                          |   |
| Operating and delivery                                               |   | 17.2                                                            |   | 104.2                                                         |   | (4.4                       | )(1)   | 117.0                                         |   |
| Selling, general and administrative                                  |   | 12.4                                                            |   | 79.4                                                          |   | (5.9                       | )(1)   | 85.9                                          |   |
| Depreciation and amortization                                        |   | —                                                          |   | 7.2                                                           |   | (6.0                       | )(2)   | 1.2                                           |   |
| Asset impairments                                                    |   | —                                                          |   | (0.2                                                          | )      | 0.2                        | (2)    | —                                        |   |
| Operating income (loss)                                              |   | (0.7                                                            | )      | (2.3                                                          | )      | 8.4                        |   | 5.4                                           |   |
| **Other (income) expense:**                                          |   |                                                            |   |                                                          |   |                       |   |                                          |   |
| Interest expense                                                     |   | 1.3                                                             |   | 15.8                                                          |   | (8.9                       | )(3)   | 8.2                                           |   |
| Other (income) expense, net                                          |   | 0.1                                                             |   | (1.1                                                          | )      | —                     |   | (1.0                                          | )      |
| Fresh-start adjustments                                              |   | —                                                          |   | 109.7                                                         |   | (109.7                     | )(4)   | —                                        |   |
| Gain on reorganization                                               |   | —                                                          |   | (190.6                                                        | )      | 190.6                      | (4)    | —                                        |   |
| Reorganization expenses                                              |   | —                                                          |   | 28.3                                                          |   | (28.3                      | (4)    | —                                        |   |
| **Income (loss) before income taxes****and discontinued operations** |   | (2.1                                                            | )      | 35.6                                                          |   | (35.3                      | )      | (1.8                                          | )      |
| Provision (benefit) for income taxes                                 |   | —                                                          |   | (15.3                                                         | )      | 14.6                       | (5)    | (0.7                                          | )      |
| **Loss before discontinued operations**                              |   | (2.1                                                            | )      | 50.9                                                          |   | (49.9                      | )      | (1.1                                          | )      |
| Discontinued operations, net of taxes                                |   | (1.2                                                            | )      | 0.4                                                           |   | 0.8                        | (6)    | —                                        |   |
| **Net income (loss)**                                                |   | $                                                               | (3.3   | )                                                             | $      | 51.3                       |   | $                                             | (49.1  | ) | $ | (1.1 | ) |
|                                                                 |   |                                                            |   |                                                          |   |                       |   |                                          |   |
| **Income (loss) per share — basic****and diluted**              |   |                                                            |   |                                                          |   |                       |   |                                          |   |
| Before discontinued operations                                       |   | $                                                               | (0.10  | )                                                             | $      | 1.39                       |   |                                          |   | $ | (0.05 | ) |
| Discontinued operations                                              |   | (0.06                                                           | )      | 0.02                                                          |   |                       |   | —                                        |   |
| Net income (loss) per share                                          |   | $                                                               | (0.16  | )                                                             | $      | 1.41                       |   |                                          |   | $ | (0.05 | ) |
| **Number of common shares used****in the per share calculations:**   |   |                                                            |   |                                                          |   |                       |   |                                          |   |
| Basic and diluted                                                    |   | 20.2                                                            |   | 36.5                                                          |   |                       |   | 20.2                                          |   |
|                                                                      |        |                                                                 |        |                                                               |        |                            |        |                                               |        |  |  |  |  |

 

The following pro formaadjustments were made to the statement of operations as if the Company emergedfrom bankruptcy on January 1, 2002:

 

----

(1)**         **Eliminate the results of operations foroperations held for sale under SFAS 121.

 

F-23

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(2)**         **Adjust depreciation ($6.0) to reflect theamortization of the post reorganization balances and eliminate assetimpairments on divested assets ($0.2).

(3)**         **Adjust interest expense to reflect expensefor post bankruptcy long-term debt balance and reduced interest rate on the NewCredit Facility ($8.9).

(4)**         **Eliminate gain on reorganization ($190.6) andfresh-start adjustments ($109.7) associated with the bankruptcy and relatedreorganization expenses ($28.3).

(5)**         **Record income tax benefit at an effectiverate of 40%.

(6)**         **Eliminate net loss from discontinuedoperations ($0.8).

 

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