UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549


___________________________________





FORM
10-Q





(Mark
One)


x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


For the
quarterly period ended: February 28, 2009





o TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the
transition period from --- to ---





Commission
File Number: 001-33342





Barzel
Industries Inc.


(Exact
name of registrant as specified in its charter)


___________________________________








Delaware
            20-4790836(State
      or Other Jurisdiction of Incorporation or Organization)
            (I.R.S.
      Employer Identification No.)320
      Norwood Park South – 2nd
      Floor, Norwood, MA 02062
            (781)
      762-0123(Address
      of principal executive offices, Zip Code)
            (Registrant’s
      telephone number, including area
code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes [X]  No [  ]





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months or for such period that the registrant was required to submit and post
such files.  Yes [X]  No [  ]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.





Large
      accelerated filer o
            Accelerated
      filer oNon-accelerated
      filer x (Do
      not check if a smaller reporting company)
            Smaller
      reporting company o





Indicated
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [  ]  No [X]





As of
March 31, 2009, 26,564,607 shares of the registrant’s common stock, par value
$0.001 per share, were outstanding.








BARZEL
INDUSTRIES INC.


Table
of Contents








PagePART
      I – FINANCIAL INFORMATIONItem
      1.    Financial Statements
                
                
                3Consolidated
      Balance Sheets as of February 28, 2009 (Unaudited) and November 29,
      2008
                
                
                3Consolidated
      Statements of Operations and Comprehensive Loss for the three months ended
      February 28, 2009 and February 23, 2008 (Unaudited)
                
                
                4Consolidated
      Statement of Stockholders’ Equity for the Period from November 29, 2008 to
      February 28, 2009 (Unaudited)
                
                
                5Consolidated
      Statements of Cash Flows for the three months ended February 28, 2009 and
      February 23, 2008 (Unaudited)
                
                
                6Notes
      to Consolidated Financial Statements (Unaudited)
                
                
                7Item
      2.    Management’s Discussion and Analysis of
      Financial Condition and Results of
                  Operations
                
                
                18Item
      3.    Quantitative and Qualitative Disclosures about
      Market Risk
                
                
                27Item
      4T.    Controls and Procedures
                
                
                27PART
      II – OTHER INFORMATIONItem
      1.    Legal Proceedings
                
                
                28Item
      1A. Risk Factors
                
                
                28Item
      2.    Unregistered Sales of Equity Securities and Use
      of Proceeds
                
                
                29Item
      3.    Defaults Upon Senior Securities
                
                
                29Item
      4.    Submission of Matters to a Vote of Security
      Holders
                
                
                29Item
      5.    Other Information
                
                
                30Item
      6.    Exhibits
                
                
                30SIGNATURES
                
                
                31





2


PART
I – FINANCIAL INFORMATION





Item
1.  Financial Statements.





Barzel
Industries Inc. and Subsidiaries


Consolidated
Balance Sheets


(In
thousands of U.S. dollars, except share and per share data)








February
      28, 2009
                        
                        
                        November
      29, 2008(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                        
                        $
                        27,436
                        
                        
                        $
                        25,298Trade
      accounts receivable, less allowance for doubtful accounts of $2,851 and
      $2,940 at February 28, 2009 and November 29, 2008,
      respectively
                        
                        
                        18,818
                        
                        
                        
                        53,940Income
      taxes receivable
                        
                        
                        560
                        
                        
                        
                        1,262Inventories
      (Note 7)
                        
                        
                        30,477
                        
                        
                        
                        53,171Prepaid
      expenses and other assets
                        
                        
                        5,439
                        
                        
                        
                        3,832Assets
      held for sale (Note 8)
                        
                        
                        4,430
                        
                        
                        
                        —Deferred
      income taxes
                        
                        
                        2,376
                        
                        
                        
                        2,234Total
      current assets
                        
                        
                        89,536
                        
                        
                        
                        139,737Investment
      in a joint venture
                        
                        
                        2,262
                        
                        
                        
                        2,288Property,
      plant and equipment, net (Note 9)
                        
                        
                        100,710
                        
                        
                        
                        124,922Goodwill
                        
                        
                        133,385
                        
                        
                        
                        133,511Intangibles,
      net
                        
                        
                        61,030
                        
                        
                        
                        63,625Deferred
      financing charges
                        
                        
                        12,264
                        
                        
                        
                        12,798Other
      assets
                        
                        
                        59
                        
                        
                        
                        59Total
      assets
                        
                        $
                        399,246
                        
                        
                        $
                        476,940LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                        
                        $
                        15,429
                        
                        
                        $
                        20,173Accounts
      payable to a joint venture (Note 12)
                        
                        
                        2,272
                        
                        
                        
                        1,523Accrued
      liabilities
                        
                        
                        19,724
                        
                        
                        
                        13,172Restructuring
      charges payable (Note 5)
                        
                        
                        4,682
                        
                        
                        
                        7,207Income
      taxes payable
                        
                        
                        159
                        
                        
                        
                        299Total
      current liabilities
                        
                        
                        42,266
                        
                        
                        
                        42,374Long-term
      debt (Note 10)
                        
                        
                        315,000
                        
                        
                        
                        348,814Restructuring
      charges payable (Note 5)
                        
                        
                        200
                        
                        
                        
                        358Deferred
      income taxes
                        
                        
                        26,105
                        
                        
                        
                        37,070Other
      long term liabilities (Note 14)
                        
                        
                        3,075
                        
                        
                        
                        3,127Total
      liabilities
                        
                        
                        386,646
                        
                        
                        
                        431,743Commitments
      and contingencies (Note 15)Stockholders’
      equity:Preferred
      stock:  $0.001 par value; authorized 10,000,000 shares; none
      issued
                        
                        
                        —
                        
                        
                        
                        —Common
      stock:  $0.001 par value; authorized 100,000,000 shares; issued
      and outstanding 26,564,607 at February 28, 2009 and at November 29,
      2008
                        
                        
                        26
                        
                        
                        
                        26Additional
      paid-in capital
                        
                        
                        128,311
                        
                        
                        
                        128,311Accumulated
      deficit
                        
                        
                        (89,324
                        )
                        
                        
                        (58,546
                        )Accumulated
      other comprehensive loss
                        
                        
                        (26,413
                        )
                        
                        
                        (24,594
                        )Total
      stockholders’ equity
                        
                        
                        12,600
                        
                        
                        
                        45,197Total
      liabilities and stockholders’ equity
                        
                        $
                        399,246
                        
                        
                        $
                        476,940


The
accompanying notes are an integral part of the consolidated financial
statements.


3
 Barzel
Industries Inc. and Subsidiaries
 Consolidated Statement s
of Operations and Comprehensive Loss
 (In
thousands of U.S. dollars, except share data)





Three
      Months EndedFebruary
      28, 2009
                
                
                February
      23, 2008(Unaudited)Net
      sales
                
                $
                47,955
                
                
                $
                195,629Cost
      of sales
                
                
                46,851
                
                
                
                162,984Gross
      margin
                
                
                1,104
                
                
                
                32,645Operating
      expensesPlant
                
                
                16,224
                
                
                
                17,661Delivery
                
                
                3,441
                
                
                
                6,182Selling
                
                
                2,201
                
                
                
                3,327Administrative
      and general
                
                
                7,846
                
                
                
                7,396Impairment
      loss (Note 8)
                
                
                3,280
                
                
                
                —Amortization
      of intangibles
                
                
                2,078
                
                
                
                1,928Restructuring
      (Note 5)
                
                
                (649
                )
                
                
                —34,421
                
                
                
                36,494Operating
      loss
                
                
                (33,317
                )
                
                
                (3,849
                )Interest
      expense
                
                
                (9,827
                )
                
                
                (10,772
                )Interest
      income
                
                
                212
                
                
                
                181Share
      in income (loss) of a joint venture
                
                
                (26
                )
                
                
                86(9,641
                )
                
                
                (10,505
                )Loss
      before benefit for income taxes
                
                
                (42,958
                )
                
                
                (14,354
                )Benefit
      for income taxes  (Note 14)
                
                
                12,180
                
                
                
                6,465Net
      loss
                
                $
                (30,778
                )
                
                $
                (7,889
                )Net
      loss per share (Note 6)Basic
                
                $
                (1.16
                )
                
                $
                (0.37
                )Diluted
                
                $
                (1.16
                )
                
                $
                (0.37
                )Comprehensive
      lossNet
      loss
                
                $
                (30,778
                )
                
                $
                (7,889
                )Changes
      in cumulative translation adjustment
                
                
                (1,819
                )
                
                
                (1,006
                )$
                (32,597
                )
                
                $
                (8,895
                )








The
accompanying notes are an integral part of the consolidated financial
statements.


4
 Barzel
Industries Inc. and Subsidiaries
 Consolidated Statement of
Stockholders’ Equity
 (
Unaudited)
 (In
thousands of U.S. dollars, except share data)





Common
      stock
                        
                        
                        
                        
                        
                        
                        
                        
                        Accumulated
                          other
                        
                        
                        TotalNumber
                        
                        
                        Amount
                        
                        
                        Additional
                          paid-in
      capital
                        
                        
                        Accumulated
                          deficit
                        
                        
                        comprehensive
      loss
                        
                        
                        stockholders’
                          equityBalance
      at November 29, 2008
                        
                        
                        26,564,607
                        
                        
                        $
                        26
                        
                        
                        $
                        128,311
                        
                        
                        $
                        (58,546
                        )
                        
                        $
                        (24,594
                        )
                        
                        $
                        45,197Net
      loss
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (30,778
                        )
                        
                        
                        
                        
                        
                        
                        (30,778
                        )Changes
      in cumulative translation adjustment
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (1,819
                        )
                        
                        
                        (1,819
                        )Balance
      at February 28, 2009
                        
                        
                        26,564,607
                        
                        
                        $
                        26
                        
                        
                        $
                        128,311
                        
                        
                        $
                        (89,324
                        )
                        
                        $
                        (26,413
                        )
                        
                        $
                        12,600








The
accompanying notes are an integral part of the consolidated financial
statements.











5
 Barzel
Industries Inc. and Subsidiaries
 Consolidated Statements of
Cash Flows
 ( In
thousands of U.S. dollars )








Three
      Months EndedFebruary
      28, 2009
                
                
                February
      23, 2008(Unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                
                $
                (30,778
                )
                
                $
                (7,889
                )Adjustments
      to reconcile net loss to net cash from operating
activitiesDepreciation
                
                
                2,570
                
                
                
                3,194Amortization
      of intangibles
                
                
                2,078
                
                
                
                1,927Impairment
      loss
                
                
                3,280
                
                
                
                —Gain
      on disposal of property, plant and equipment
                
                
                (888
                )
                
                
                (81
                )Amortization
      of deferred financing charges
                
                
                534
                
                
                
                540Deferred
      income taxes
                
                
                (11,257
                )
                
                
                (4,256
                )Share
      in (income) loss of a joint venture
                
                
                26
                
                
                
                (86
                )Other
      non cash charges
                
                
                178
                
                
                
                —Changes
      in working capital itemsTrade
      accounts receivable
                
                
                34,757
                
                
                
                (2,948
                )Income
      taxes receivable
                
                
                703
                
                
                
                (110
                )Inventories
                
                
                22,403
                
                
                
                (7,286
                )Prepaid
      expenses and other assets
                
                
                (1,653
                )
                
                
                (5,474
                )Accounts
      payable
                
                
                (3,535
                )
                
                
                16,269Accrued
      liabilities
                
                
                4,194
                
                
                
                19,925Income
      taxes payable
                
                
                (140
                )
                
                
                —Net
      cash provided by operating activities
                
                
                22,472
                
                
                
                13,725CASH
      FLOWS FROM INVESTING ACTIVITIESProceeds
      from disposal of property, plant and equipment
                
                
                19,267
                
                
                
                129Additions
      to property, plant and equipment
                
                
                (5,313
                )
                
                
                (1,754
                )Net
      cash provided by (used for) investing activities
                
                
                13,954
                
                
                
                (1,625
                )CASH
      FLOWS FROM FINANCING ACTIVITIESRefund
      of deposit
                
                
                —
                
                
                
                200Repayment
      of revolving credit facility
                
                
                (33,844
                )
                
                
                (13,293
                )Net
      cash used for financing activities
                
                
                (33,844
                )
                
                
                (13,093
                )Effect
      of exchange rate changes on cash and cash equivalents
                
                
                (444
                )
                
                
                (95
                )Net
      increase in (decrease) cash and cash equivalents
                
                
                2,138
                
                
                
                (1,088
                )Cash
      and cash equivalents, beginning of period
                
                
                25,298
                
                
                
                19,638Cash
      and cash equivalents, end of period
                
                $
                27,436
                
                
                $
                18,550SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONInterest
      paid
                
                $
                692
                
                
                $
                717Income
      taxes paid (refunds)
                
                $
                (1,459
                )
                
                $
                1,120








The
accompanying notes are an integral part of the consolidated financial
statements.


6
 Barzel
Industries Inc. and Subsidiaries
 Notes to Consolidated
Financial Statements
 (In U.S.
dollars; tabular amounts in thousands of U.S. dollars , except share and per
share data )
 (Unaudited)


1
– DESCRIPTION OF BUSINESS, ORGANIZATION AND GOING CONCERN





Headquartered
in Norwood, Massachusetts, with an operational hub in Ontario, Canada, Barzel
Industries Inc. (“Barzel” or the “Company”) operates a network of 16 metal
processing, manufacturing, and distribution facilities throughout the Canadian
provinces of Ontario and Quebec and in the Northeastern, Mid-Atlantic and
Mid-Western United States.  The Company operates these strategically
located facilities as one integrated system.  Through an innovative
management system that includes close statistical monitoring and analysis of its
plant capabilities, the Company services its customers with speed, quality and
reliability.





The
Company is a well-diversified, multi-process provider of value-added services
and offers a wide range of metal processing solutions to a variety of
industries, from construction and industrial manufacturing to finished
commercial racking products.





On
February 13, 2009, the Company changed its name to Barzel Industries Inc.
(“Barzel”) from Novamerican Steel Inc.  Effective February 17, 2009,
the Company’s common stock and warrants commenced trading on NASDAQ under the
symbols “TPUT” and “TPUTW,” respectively.





Going
Concern





The
accompanying unaudited consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern.  Management believes
the use of the going concern assumption is appropriate.  This basis of
accounting contemplates the recovery of the Company’s assets and the
satisfaction of its liabilities in the normal course of business.





Due to
the Company’s recent losses, its deficit, its substantial leverage and liquidity
constraints, and the current recession and its impact on the Company’s revenues,
the recoverability of its recorded assets and the satisfaction of its
liabilities depends on the success of its business plan, the continued support
of shareholders, lenders, suppliers and customers and its ability to restructure
debt service obligations and obtain access to additional liquidity, to refinance
its debt and/or to raise additional capital.  In light of the severity
and the rapid onset of the recession, there is a risk that the Company’s cash
from operations and from available credit facilities will not be sufficient to
enable the Company to make the full interest payment of $18.1 million due on the
Senior Secured Notes on May 15, 2009.  Failure to make such payment in
full would constitute a default that would entitle the holders thereof to
accelerate the maturity of the Senior Secured Notes and foreclose on the
collateral, which includes substantially all of our
assets.  Management is in discussions with the holders of the Senior
Secured Notes to restructure the payment obligations under the Senior Secured
Notes and regarding other capital structure alternatives to mitigate such
risk.





The
Company has initiated additional actions to further reduce its operating
expenses to address the liquidity position, including further reductions in
labor expense through reduced work hours, layoffs, additional severances and
salary reductions, further strategic purchasing efficiencies in consumables and
other plant expenses, deferral of certain non-critical projects and the sale of
certain other non-operating assets.  The Company believes these
actions will generate an additional $15 million of cash savings, primarily from
a reduction in annual operating expenses in 2009 as compared to
2008.  The substantial majority of these savings will begin in May
2009.  These savings are in addition to actions taken in 2008 and in
the first fiscal quarter of 2009, for an aggregate annualized reduction of
operating expenses in 2009 of approximately $40 million as compared to
2008.





There is
no assurance that the Company’s initiatives to improve its liquidity and
financial position will be successful.  Accordingly, without this
assurance, these material uncertainties are such that there exists substantial
doubt that the Company would be able to continue as a going
concern.





2 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





Basis
of Presentation





The
accompanying unaudited consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles (“GAAP”) for
interim financial reporting and in accordance with Article 10 of Regulation S-X.
 Accordingly, they do not include all of the information and note
disclosures required by GAAP for annual financial statements. The policies are
consistent with those outlined in the Company’s audited consolidated financial
statements for




7






Barzel
Industries Inc. and Subsidiaries
 Notes to Consolidated
Financial Statements
 (In U.S.
dollars; tabular amounts in thousands of U.S. dollars , except share and per
share data )
 (Unaudited)




2 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





the
fiscal year ended November 29, 2008.  For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company’s Annual Report on Form 10-K for the year ended November 29,
2008.





In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all material adjustments (consisting of normal recurring
items) necessary for a fair presentation of results for the interim periods
presented. The results of operations for any interim period are not necessarily
indicative of results for the full year.





Certain
amounts in the comparative 2008 financial statements have been reclassified to
conform to the 2009 financial statement classification, including the
reclassification of certain allocated overhead expenses totaling $4.9 million to
include them as part of plant expense rather than a component of cost of
sales.





Fiscal
period





The
Company’s current and future interim quarterly financial statements are reported
on a fiscal quarter basis with each three month period ending on the last
Saturday of February, May and August, respectively.





Basis
of consolidation





The
consolidated financial statements for the three months ended February 28, 2009,
include the financial results of Barzel and its wholly-owned subsidiaries Barzel
Holdings Inc. ("Barzel Holdings"), Barzel Finco Inc. ("Barzel Finco"), Barzel
Industries Canada Inc. (including the former Novamerican Steel Inc. (“Barzel
Canada”)), and Barzel Industries U.S. Inc. (“Barzel U.S.”).  All
significant intercompany balances and transactions have been eliminated in the
consolidated financial statements.





Translation
of foreign currencies





The
consolidated financial statements of the Company and its subsidiaries are
prepared using their respective functional currencies, which are the U.S. dollar
for U.S. operations and the Canadian dollar for Canadian
operations.  As a result, in the Company's consolidated financial
statements, the financial statements of the Canadian operations are translated
into U.S. dollars using the current rate method.





Under
this method, assets and liabilities are translated using the exchange rate in
effect at the balance sheet date.  Revenues and expenses are
translated at the average rates in effect during the period.  Gains
and losses arising from translation are included in accumulated other
comprehensive loss.





Transactions
conducted in foreign currencies by the Company are translated into their
respective functional currency as follows: monetary assets and liabilities are
translated at the exchange rate in effect at quarter end and revenues and
expenses are translated at the average exchange rate for the month in which they
occur. Exchange gains and losses arising from transactions denominated in
foreign currencies are included in the consolidated statements of operations and
comprehensive loss.  Losses amounted to $746,200 in the three months
ended February 28, 2009.  Gains amounted to $269,200 in the three
months ended February 23, 2008.





Accounting
estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an ongoing basis, management reviews its
estimates based on currently available information. Management believes the most
sensitive estimates include the allowance for doubtful accounts, the
recoverability of inventory, property, plant and equipment, goodwill and other
intangibles, and the provision for income taxes. Actual results could differ
from these estimates.


8
 Barzel
Industries Inc. and Subsidiaries
 Notes to Consolidated
Financial Statements
 (In U.S.
dollars; tabular amounts in thousands of U.S. dollars , except share and per
share data )
 (Unaudited)


3 – RECENT
ACCOUNTING PRONOUNCEMENTS





Recently
Adopted Accounting Standards




Effective
November 25, 2007, the Company adopted SFAS No. 159, Fair Value Option for Financial
Assets and Financial Liabilities, issued by the FASB in April 2007. This
statement’s objective is to improve financial reporting by allowing entities to
mitigate volatility in reported earnings caused by the measurement of related
assets and liabilities using different attributes, without having to apply
complex hedge accounting provisions. Under SFAS No. 159, entities that elect the
fair value option will report unrealized gains and losses in earnings at each
subsequent reporting date. Additionally, the statement establishes presentation
and disclosure requirements to help financial statement users understand the
effect of the entity’s election on its earnings. Currently, the Company has
chosen not to elect to treat any of its financial assets or liabilities under
the fair value option.  Therefore, the adoption of SFAS No. 159 had no
impact on the Company’s consolidated financial statements.





In
February 2008, the FASB issued FASB staff position (FSP) SFAS No.
157-2.  This statement defers fair value requirements for
non-financial assets and liabilities not required to be stated at fair value on
a recurring basis until the year beginning November 30, 2008. This deferral
primarily impacts assets such as property, plant and equipment, intangible
assets and goodwill upon non-recurring events such as business combinations,
asset impairments and goodwill impairment, among others. The adoption of FSP
SFAS No. 157-2 did not have a material impact on the Company’s financial
position, results of operations or cash flows. As of November 29, 2008, the
Company did not carry any of its assets or liabilities at fair
value on a recurring basis and did not recognize any unrealized amounts in
earnings related to changes in fair value for the year ended November 29,
2008.  The Company’s fair value measurement disclosure requirements
are currently limited to annual fair value disclosure of its financial
instruments.





In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivatives and
Hedging Activities.  This statement amends SFAS No. 133 to
require enhanced disclosures about an entity’s derivative and hedging activities
and thereby improves the transparency of financial reporting.  This
statement requires entities to provide enhanced disclosures about (a) how and
why an entity uses derivative instruments, (b) how derivative instruments and
related hedging items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash
flows.  SFAS No. 161 is effective for the Company’s year beginning
November 30, 2008.  The adoption of SFAS No. 161 did not have a
material impact on the Company’s financial position, results of operations or
cash flows as the Company has historically not used these
instruments.





In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles.  SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting principles to be used in
the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. This statement became effective November 15, 2008.  The
adoption of this pronouncement did not have a material impact on the Company’s
financial position, results of operations or cash flows.





Recently
Issued Accounting Standards




In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations. This
statement replaces SFAS No. 141, Business Combinations. This
statement retains the fundamental requirements in SFAS No. 141 that the
acquisition method of accounting (which SFAS No. 141 called the purchase method)
be used for all business combinations and for an acquirer to be identified for
each business combination. This statement also establishes principles and
requirements for how the acquirer: a) recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree; b) recognizes and measures the goodwill
acquired in the business combination or a gain from a bargain purchase; and c)
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS No. 141(R) will apply prospectively to business combinations
for which the acquisition date is on or after the beginning of the Company’s
fiscal year beginning November 28, 2009. While the Company has not yet evaluated
this statement for the impact, if any, that SFAS No. 141(R)will have on its
consolidated financial statements, the Company will be required to expense costs
related to any acquisitions after November 28, 2009.





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements. This statement amends Accounting
Research Bulletin 51 to establish accounting and reporting standards for the
noncontrolling minority interest in a subsidiary and for the deconsolidation of
a subsidiary. It clarifies that a noncontrolling interest in a 9
 Barzel
Industries Inc. and Subsidiaries
 Notes to Consolidated
Financial Statements
 (In U.S.
dollars; tabular amounts in thousands of U.S. dollars , except share and per
share data )
 (Unaudited)




3 – RECENT
ACCOUNTING PRONOUNCEMENTS (Continued)





subsidiary
is an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. The Company has not yet
determined the impact, if any, that SFAS No. 160 will have on its consolidated
financial statements. SFAS No. 160 is effective for the Company’s year beginning
November 28, 2009.





In April
2008, the FASB issued FSP SFAS No. 142-3, Determination of the Useful Life of
Intangible Assets.  This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, "Goodwill
and Other Intangible Assets." The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under
SFAS No. 142 and the period of expected cash flows used to measure the fair
value of the asset under FASB SFAS No. 141 (Revised 2007),
"Business  Combinations," and other U.S. generally accepted accounting
principles  (GAAP).  This FSP is effective for the Company’s
year beginning November 28, 2009.  Early adoption is
prohibited.  The Company does not expect the adoption of FSP SFAS No.
142-3 to have a material effect on its results of operations and financial
condition.





In
November 2008, the FASB ratified Emerging Issues Task Force (EITF) Issue
No. 08-6,Equity Method Investment Accounting
Considerations. EITF No. 08-6 clarifies the accounting for certain
transactions and impairment considerations involving equity method investments.
EITF No. 08-6 is effective for the Company’s year beginning November 28, 2009,
with early adoption prohibited. The Company is currently evaluating the impact
of the pending adoption of EITF No. 08-6 on the consolidated financial
statements.




In
November 2008, the FASB ratified EITF Issue No. 08-7,Accounting for Defensive Intangible
Assets. EITF No. 08-7 clarifies the accounting for certain separately
identifiable intangible assets which an acquirer does not intend to actively use
but intends to hold to prevent its competitors from obtaining access to them.
EITF No. 08-7 requires an acquirer in a business combination to account for a
defensive intangible asset as a separate unit of accounting which should be
amortized to expense over the period the asset diminishes in value. EITF No.
08-7 is effective for the Company’s year beginning November 28, 2009, with early
adoption prohibited. The Company is currently evaluating the impact of the
pending adoption of EITF No. 08-7 on the consolidated financial
statements.





4
– DISPOSITION OF LONG-LIVED ASSETS





On
February 13, 2009, as part of a previously implemented restructuring program
(Note 5), the Company completed the sale of substantially all of the machinery
and equipment, furniture and fixtures and computer equipment located at its
Cumberland, Rhode Island and Albany, New York distribution facilities, including
the real property in Cumberland. The total consideration for the assets sold was
$1,879,397, net of closingadjustments.  The
Company recognized a net gain of approximately $42,000 related to the sale of
the assets, which is included in the line item “Restructuring” in the
Consolidated Statements of Operations and Comprehensive Loss.  As part
of the agreement, the Albany facility was not sold, but will be leased for a
period of two years at a rental amount of $100,000 per annum paid monthly
commencing at the date of the sale. In the event the Company receives an offer
to sell the facility during the lease term, the lessee has the right of first
refusal. Additionally, the lessee has the option to purchase the facility at any
time during the lease term for $1,000,000.  The lease is classified as
an operating lease.





On
February 27, 2009, as part of a previously implemented restructuring program
(Note 5), the Company completed the sale and purchase of certain assets in
Canada.  As part of the transaction, Barzel sold the machinery and
equipment at its processing facilities in Dorval, Quebec and Lasalle,
Quebec.  As the Dorval and Lasalle facilities were also leased
properties, the transaction included the termination of these leases as well as
the lease on property in Cambridge, Ontario, which the Company had leased and
which the Company exited in April 2008.  The total consideration for
the assets sold was $17,100,000, net of closing adjustments.  Pursuant
to the agreement, the Company acquired the real property in Baie D’Urfe, Quebec,
on which its existing tubular products facility is situated, for
$1,600,000.  Previously, the Company had leased the Baie D’urfe real
property and building. The Company also entered into a two-year option to
purchase the land adjacent to the Company’s Stoney Creek
facility.  Should the option be exercised, the land would be purchased
for a purchase price of $3,500,000. The Company recognized a net gain of
approximately $846,000 on these transactions, which is included in the line item
“Restructuring” in the Consolidated Statements of Operations and Comprehensive
Loss. 10
 Barzel
Industries Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 (In U.S.
dollars; tabular amounts in thousands of U.S. dollars , except share and per
share data )
 (Unaudited)


5
– RESTRUCTURING





2009
Actions





During
the three months ended February 28, 2009, the Company advanced its plan for
implementing the DecalogueTM operating methodology at the Company, transforming
it to operate as one integrated system.  As a result of the
realignment and simplification of the Company’s operating network, the Company
initiated a reduction in its U.S. and Canadian workforces and the disposition of
certain redundant and surplus assets (Note 4).  The divested Canadian
processing assets were redundant with the Company’s processing capabilities in
Stoney Creek, Ontario, Auburn, Massachusetts and Morrisville,
Pennsylvania.   The divested U.S. distribution facility assets
were redundant with the Company’s distribution facilities in Auburn,
Massachusetts and Syracuse, New York. The Company continues to provide its
customers with structural tubing, roll formed steel sections, a wide range of
manufactured sub-assemblies and accessories, as well as processing services that
include pickling, slitting, cut-to-length and precision blanking in steel and
other metals.





The costs
incurred under this action include the following:





·
            Employee
      termination costs


·
            Gains
      or losses on the disposition of assets or asset groupings that do not
      qualify as discontinued operations





The
Company entered into an agreement to sell substantially all of the assets at its
Cumberland, Rhode Island and Albany, New York facilities.  See Note 4
– Disposition of Long-Lived Assets.  The transaction was completed on
February 13, 2009.  The Cumberland and Albany facilities are
distribution facilities.  The facilities employed approximately 33
employees.  Under the agreement, the purchaser agreed to offer
employment to the employees at the Cumberland and Albany
facilities.  The purchaser also acquired prepaid expenses related to
the facilities, including taxes and health and life insurance coverage of those
employees.  These prepaid expenses were included in the calculation of
the gain on the sale of assets. As a result of the transaction, the Company
recorded an approximate $42,000 net gain on the sale of assets.  The
gain is included in the line item “Restructuring” in the Consolidated Statements
of Operations and Comprehensive Loss.




The
Company also closed the Norwood, Massachusetts and Hartford, Connecticut
distribution facilities.  In connection with the closure of these
facilities, the Company recorded $189,000 of employee severance and benefit
costs. The charge is included in the line item “Restructuring” in the
Consolidated Statements of Operations and Comprehensive Loss.




The
Company also completed the sale of certain assets at its Canadian processing
facilities in Dorval, Quebec and Lasalle, Quebec, terminated the building leases
for these facilities, and purchased real property in Baie D’Urfe,
Quebec.  See Note 4 – Disposition of Long-Lived Assets.  The
transaction was completed on February 27, 2009.  The Quebec facilities
employed approximately 66 employees. The Company recorded a gain on the sale of
assets of approximately $846,000.  Additionally, as part of the
transaction, the lease for the Cambridge, Ontario property was also terminated,
resulting in a reversal of $105,000 of lease termination obligations previously
charged to restructuring costs.  The reversal of the charge is
included in the line item “Restructuring” in the Consolidated Statements of
Operations and Comprehensive Loss.





The
following table summarizes the components of the restructuring charge for the
three months ended February 28, 2009:





Severance,
      payroll and other related costs (1)
                                
                                $
                                205Lease
      termination obligations and related costs (2)
                                
                                
                                (105
                                )Other
      exit costs (3)
                                
                                
                                (749
                                )Total
      restructuring
                                
                                $
                                (649
                                )





(1)
            Represents
      severance for 146 employees; 2 employees related to Canadian plants and
      144 related to U.S. plants and corporate overhead
    personnel.


(2)
            Represents
      the reversal of lease termination obligations for the Cambridge facility
      lease previously charged to restructuring
costs.


(3)
            Consists
      primarily of gain associated with the sale of real property, machinery and
      equipment, furniture and fixtures, and computer equipment, at the
      Company’s Cumberland, Rhode Island and Albany, New York facilities and its
      Canadian processing facilities in Dorval, Quebec and Lasalle, Quebec and
      other exit costs.


11
 Barzel
Industries Inc. and Subsidiaries
 Notes to Consolidated
Financial Statements
 (In U.S.
dollars; tabular amounts in thousands of U.S. dollars , except share and per
share data )
 (Unaudited)




5
– RESTRUCTURING (Continued)





2008
Actions





In April
2008, the Company announced a limited restructuring program associated with the
closure of the Cambridge, Ontario facility and the implementation of
organizational changes, particularly in the replenishment, processing,
distribution and sales processes. The program resulted in the termination of
certain employees, the relocation or reassignment of other employees and other
exit costs associated with the closure of the Cambridge facility.





The
following table summarizes the liability related to the 2008 and 2009
restructuring program:





Balance
                  at
                  November
      29, 2008
                
                
                Charges
                
                
                Payments
                
                
                Other
                
                
                Balance
                  at
                  February
      28, 2009Severance,
      payroll and other related costs
                
                $
                8,138
                
                
                $
                205
                
                
                $
                (2,544
                )
                
                $
                —
                
                
                $
                5,799Lease
      termination obligations and related costs
                
                
                245
                
                
                
                (105
                )
                
                
                (140
                )
                
                
                —
                
                
                
                —Other
      facility exit costs
                
                
                22
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                22Foreign
      exchange
                
                
                (840
                )
                
                
                —
                
                
                
                —
                
                
                
                (99
                )
                
                
                (939
                )Total
                
                $
                7,565
                
                
                $
                100
                
                
                $
                (2,684
                )
                
                $
                (99
                )
                
                $
                4,882





6 –
LOSS PER SHARE





Due to
the net losses incurred for the three months ended February 28, 2009 and
February 23, 2008, the calculation of diluted weighted average shares
outstanding for the three months ended February 28, 2009 and February 23, 2008
exclude potential common shares related to 6,352,847 and 25,579,069 dilutive
warrants, respectively.





The
following table provides the reconciliation between basic and diluted income
loss per share:





Three
      months endedFebruary
      28, 2009
              
              
              
              February
      23, 2008Net
      loss
              
              $
              (30,778)
              
              
              
              $
              (7,889)
              )Weighted
      average number of common stock outstanding
              
              
              26,564,607
              
              
              
              
              21,452,304Effect
      of dilutive warrants
              
              
              -
              
              
              
              
              -Weighted
      average number of diluted common stock outstanding
              
              
              26,564,607
              
              
              
              
              21,452,304Net
      loss per shareBasic
              
              $
              (1.16)
              
              
              
              $
              (0.37)Diluted
              
              $
              (1.16)
              
              
              
              $
              (0.37)





7 –
INVENTORIES





Inventories
consist of the following:





February
      28, 2009
              
              
              November
      29, 2008Raw
      materials
              
              $
              7,204
              
              
              $
              32,450Finished
      goods
              
              
              23,273
              
              
              
              20,721$
              30,477
              
              
              $
              53,171


12
 Barzel
Industries Inc. and Subsidiaries
 Notes to Consolidated
Financial Statements
 (In U.S.
dollars; tabular amounts in thousands of U.S. dollars , except share and per
share data )
 (Unaudited)


7 –
INVENTORIES (Continued)





As part
of the sale of the assets of the Cumberland, Rhode Island and Albany, New York
facilities, the Company sold inventory of steel, steel products and other goods
(including raw materials, finished goods and work in progress).  See
Note 4 – Disposition of Long-Lived Assets.  Total consideration for
inventory sold was approximately $1,084,000 and the Company recorded
approximately $1,912,000 as part of cost of goods sold which generated a loss on
sale of inventory of approximately $828,000.





8
– ASSETS HELD FOR SALE





In
February 2009, the Company made the decision to sell the real property and
buildings located in Norwood, Massachusetts and Hartford, Connecticut, formerly
associated with its distribution business, within the next 12 months for an
amount expected to be less than their current carrying amount.  As a
result, the Company recorded a pre-tax impairment loss of approximately
$2,527,000 to write down the Norwood and Hartford facilities to their estimated
realizable value of $3,430,000 and reclassified the associated real property and
buildings to “Assets held for sale” on the Company’s Consolidated Balance Sheets
as of February 28, 2009.  The impairment loss is included in the line
item “Impairment loss” in the Consolidated Statements of Operations and
Comprehensive Loss.  The Company ceased depreciating the real property
and buildings located in Norwood, Massachusetts and Hartford, Connecticut at the
time they were classified as held for sale.





As
discussed in Note 4, the real property and building associated with the former
Albany, New York facility was not sold but will be leased for a period of two
years at a rental amount of $100,000 per annum paid monthly commencing at the
date of the sale.  Additionally, the lessee was granted the option to
purchase the facility at any time during the lease term for
$1,000,000.





Since the
Albany facility is for sale, the Company recorded a pre-tax impairment loss
ofapproximately
$753,000 to write down the Albany facility to its estimated realizable value of
$1,000,000 and reclassified the associated real property and building to “Assets
held for sale” in the Company’s Consolidated Balance Sheets as of February 28,
2009.  The impairment loss is included in the line item “Impairment
loss” in the Consolidated Statements of Operations and Comprehensive
Loss.  The Company ceased depreciating the real property and building
associated with the Albany facility at the time it was classified as held for
sale.





9
– PROPERTY, PLANT AND EQUIPMENT





Property,
plant and equipment consist of the following:





February
      28, 2009
                
                
                November
      29, 2008Land
                
                $
                7,980
                
                
                $
                10,722Buildings
      and building improvements
                
                
                36,687
                
                
                
                43,659Machinery
      and equipment – light gauge
                
                
                12,651
                
                
                
                12,970Machinery
      and equipment – heavy gauge
                
                
                44,265
                
                
                
                56,416Furniture
      and fixtures
                
                
                381
                
                
                
                1,188Computer
      equipment
                
                
                886
                
                
                
                465Leasehold
      improvements
                
                
                239
                
                
                
                1,055Assets
      under construction
                
                
                11,792
                
                
                
                9,685114,881
                
                
                
                136,160Accumulated
      depreciation
                
                
                14,171
                
                
                
                11,238$
                100,710
                
                
                $
                124,922





Depreciation
expense related to property, plant and equipment was $2,570,000 and $3,194,000
for the three months ended February 28, 2009 and February 23, 2008,
respectively.  Gains on disposal of property, plant and equipment were
$888,000 and $81,000 for the three months ended February 28, 2009 and February
23, 2008, respectively.





In the
three months ended February 28, 2009, the Company recorded a pre-tax impairment
loss of $3,280,000 to write down the Company’s real property and buildings
associated with the Norwood, Hartford and Albany facilities to their estimated
realizable value and reclassified these assets to “Assets held for sale” in the
Company’s Consolidated Balance Sheets as of February 28, 2009. See Note 8 –
Assets Held for Sale.


13
 Barzel
Industries Inc. and Subsidiaries
 Notes to Consolidated
Financial Statements
 (In U.S.
dollars; tabular amounts in thousands of U.S. dollars , except share and per
share data )
 (Unaudited)


10 –
LONG-TERM DEBT





Long-term
debt obligations consist of the following:





Maturity
                
                February
      28, 2009
                
                
                November
      29, 200811.5%
      Senior Secured Notes
                2015
                
                $
                315,000
                
                
                $
                315,000ABL
      Credit Facility
                2012
                
                
                -
                
                
                
                33,814$
                315,000
                
                
                $
                348,814





The
weighted-average interest rate on funds borrowed under the Company’s ABL credit
facility (the “ABL Credit Facility”) was 4.45% for the three months ended
February 28, 2009 and 6.70% for the three months ended February 23,
2008.





As of
February 28, 2009, the aggregate eligible assets in the Company’s borrowing base
totaled $31,569,000 (representing the sum of the U.S. borrowing base and the
Canadian borrowing base) that is subject to a $15,000,000 availability block, of
which $883,000 was utilized for letter of credit obligations and no loans were
outstanding under the ABL Credit Facility.





As of
November 29, 2008, the aggregate eligible assets in the Company’s borrowing base
totaled $66,400,000 (representing the sum of the U.S. borrowing base and the
Canadian borrowing base) that is subject to a $15,000,000 availability block, of
which $883,000 was utilized for letter of credit obligations and $33,814,000 was
outstanding under the ABL Credit Facility. If the excess availability (this is,
the amount of eligible assets included in the borrowing base minus the amounts
outstanding under the ABL Credit Facility) is less than $20.0 million, the
Company is required to maintain a ratio of consolidated EBITDA to consolidated
fixed charges in excess of 1.0 to 1.0.





11
– COMMON STOCK AND WARRANTS





On
February 28, 2009 and November 29, 2008, the Company had 26,564,607 shares of
common stock outstanding and 6,352,847 warrants outstanding. At February 28,
2009, the Company had reserved 6,352,847 shares of common stock for issuance
upon exercise of warrants.




Exchange
of Warrants




Between
August 1, 2008 and November 29, 2008, pursuant to Exchange Agreements between
the Company and various holders of an aggregate of 19,226,222 warrants to
purchase common stock, the Company issued an aggregate of 5,112,303 shares of
common stock to such holders in exchange for such warrants, which were cancelled
upon such surrender. The warrants are exercisable at $5.50 and expire on March
7, 2011. The exchanges were privately negotiated, and the aggregate shares
issued included an aggregate of 2,305,145 shares issued to certain officers and
directors of the Company (at an exchange ratio based upon the consolidated
closing bid prices for the common stock and warrants on various dates in
accordance with NASDAQ regulations) and an aggregate of 2,807,158 shares issued
to certain non-affiliates of the Company.  The shares issued were
exempt from registration under Section 3(a)(9) of the Securities Act of 1933, as
amended, as the exchanges were effected with existing security holders and no
commissions or other remuneration was paid or given directly or indirectly for
soliciting such exchanges.




The
Company and certain stockholders have agreed to hold in escrow an aggregate of
842,415 shares of common stock issued in such exchanges (the “Escrow Shares”).
The Escrow Shares will remain in escrow until the Company’s 2009 Annual Meeting
of Stockholders, at which time the issuance of the Escrow Shares will be
submitted for stockholder approval.  If such approval is obtained, the
Escrow Shares will be released to the appropriate stockholders.





If such
approval is not obtained, the Company will unwind the relevant exchanges and, in
connection therewith, the Escrow Shares will be returned to the Company for
cancellation and the Company will re-issue the relevant warrants surrendered in
such exchanges.  As a result of the escrow arrangement, the Company
has reduced the aggregate number of shares issued in the exchanges without
stockholder approval to below 20% of the shares of common stock outstanding
prior to the exchanges. 14
 Barzel
Industries Inc. and Subsidiaries
 Notes to Consolidated
Financial Statements
 (In U.S.
dollars; tabular amounts in thousands of U.S. dollars , except share and per
share data )
 (Unaudited)




12 –
RELATED PARTY TRANSACTIONS





The
following transactions with related parties were concluded in the normal course
of business and were measured at their respective exchange values, which are the
amounts established and agreed to by the related parties:





Three
      months endedFebruary
      28, 2009
                    
                    
                    February
      23, 2008Processing
      revenue from a joint venture
                    
                    $
                    20
                    
                    
                    $
                    33Processing
      charges paid to a joint venture
                    
                    $
                    392
                    
                    
                    $
                    835Consulting
      fees paid to an entity owned by an officer and director
                    
                    $
                    481
                    
                    
                    $
                    294





The
Company had trade accounts payable and accrued liabilities of $2,272,000 and
$1,866,000 for processing charges due to a joint venture (Delta Tube Inc.) at
February 28, 2009 and February 23, 2008, respectively.





13 –
INVESTMENT IN A JOINT VENTURE





The
Company holds a 60% equity interest and a 50% voting interest in a joint venture
with ArcelorMittal Tubular Products Montreal Inc., that processes carbon steel
into tubing. The joint venture, Delta Tube and Company, Ltd. ("Delta Tube"), is
located in LaSalle, Québec, Canada.





Condensed
financial information of the joint venture is summarized below:





Three
      Months EndedFebruary
      28, 2009
                
                
                February
      23, 2008OperationsNet
      sales
                
                $
                684
                
                
                $
                1,045Operating
      income (loss)
                
                $
                (74
                )
                
                $
                142





14 –
INCOME TAXES





For the
three months ended February 28, 2009, the Company incurred a pretax loss of
$42,958,000 and recorded a tax benefit of $16,936,000, partially offset by a
valuation reserve of $4,756,000. For the three months ended February 23, 2008,
the Company incurred a pretax loss of $14,354,000 and recorded a tax benefit of
$6,465,000. The effective income tax rates were 28.4% and 45.0% for the three
months ended February 28, 2009 and February 23, 2008, respectively.





The
change in the total valuation allowance for the first fiscal quarter of 2009 was
an increase of $4,756,000.  During the first fiscal quarter of 2009,
the Company determined that the timing of when it will generate sufficient
Canadian taxable income to realize its Canadian deferred tax assets (primarily
from net operating loss carryforwards) became less certain, because the
likelihood of generating sufficient future taxable income of the right nature
and timing to effectively utilize these assets was considered insufficient for
meeting the required “more likely than not” standard.  Accordingly,
during the first fiscal quarter of 2009, the Company recorded a full valuation
allowance of $4,756,000 against the net deferred tax assets in
Canada.  Until the Company determines that it is more likely than not
that it will generate sufficient Canadian taxable income to realize its deferred
income tax assets, income tax benefits in each current period will be fully
reserved.





Income
tax expense is provided on an interim basis based upon the Company’s estimate of
the annual effective income tax rate, adjusted each quarter for discrete items.
In determining the estimated annual effective income tax rate, the Company
analyzes various factors, including projections of its annual earnings and the
taxing jurisdictions in which the earnings will be generated, the impact of
state and local income taxes, the Company’s ability to use tax credits and net
operating loss carryforwards, and available tax planning
alternatives.





Income
taxes for the three months ended February 23, 2008 were higher than the
estimated rate because the first three months included a $1,300,000 deferred tax
benefit due to a statutory rate reduction in Canada, which is not reflected in
the estimated annual rate. The effective income tax rate increased due to a
greater percentage of domestic losses expected, which are taxed at a higher
rate. 15
 Barzel
Industries Inc. and Subsidiaries
 Notes to Consolidated
Financial Statements
 (In U.S.
dollars; tabular amounts in thousands of U.S. dollars , except share and per
share data )
 (Unaudited)




14 –
INCOME TAXES (Continued)





Management
is required to estimate the annual effective tax rate based upon its estimate of
annual pre-tax income or loss for domestic and foreign operations. To the extent
that actual pre-tax results for the year differ from the estimates applied at
the end of the most recent interim period, the actual tax rate recognized in
fiscal 2009 could be materially different from the estimated rate for the three
months ended February 28, 2009.





The
Company accrues interest and penalties associated with unrecognized tax benefits
in income tax benefit in the Consolidated Statements of Operations and in Other
long-term liabilities in the Consolidated Balance Sheets. The expense for
interest and penalties reflected in the Consolidated Statements of Operations
(interest net of related income tax benefits) was $40,000 and $22,000 for the
three months ended February 28, 2009 and February 23, 2008, respectively. The
corresponding liabilities in the Consolidated Balance Sheets were $3,075,000 and
$3,127,000 at February 28, 2009 and November 29, 2008, respectively, which are
included within Other long-term liabilities in the Consolidated Balance
Sheets.





During
the year ended November 29, 2008, the Company’s Canadian subsidiary was notified
of a Canada Revenue Agency audit for the periods 2003-2007.  Fieldwork
was conducted during the year.  A reassessment proposal, primarily
related to intercompany transactions, was received in December
2008.  The Company’s Canadian subsidiary requested and received an
extension of time until April 14, 2009 to file a letter of representation
disputing the reassessment proposal and intends to vigorously support positions
taken on previously filed tax returns. Subsequently, during the three
months ended February 28, 2009, the Canada Revenue Agency agreed to meet with
certain former employees who have knowledge of the years under audit and to
provide the Company’s Canadian subsidiary sufficient time to review the proposal
based on the new information introduced to the audit. The new extended time will
be determined during the second fiscal quarter of 2009. In the event that
Revenue Canada prevails in its reassessment proposal, or any part thereof, the
Company’s Canadian subsidiary would seek competent authority relief from the
United States in order to avoid double taxation.  This is a lengthy
process and it is common for the competent authorities to take years to reach an
agreement between jurisdictions.





During
the three months ended February 28, 2009, the Company did not increase its
reserve for unrecognized tax benefits as it believes that the increase in
potential Canadian liability would be offset by a reduction in US liability due
to the fact that the US rate was higher than the Canadian rate during the years
under audit.





15
– COMMITMENTS AND CONTINGENCIES





Lease
Commitments





The
Company has various operating leases for manufacturing facilities, warehouses,
office space, vehicles, machinery and equipment.  As part of the sale
of substantially all of the assets of the Cumberland and Albany facilities, the
Company terminated various personal property and equipment (including trucks)
leases located at the Cumberland and Albany facilities.  In addition,
as part of the sale and purchase of certain assets in Canada, the Company
terminated various leases outlined below as well as the lease on property in
Cambridge, Ontario, which the Company exited in April 2008.





·
            Lease
      with respect to certain leased office space and industrial space in
      Lasalle, Quebec.




·
            Lease
      with respect to certain leased space in Dorval,
  Quebec.




·
            Lease
      with respect to certain leased space in Baie D’Urfe,
    Quebec.




·
            Lease
      with respect to certain leased space in Cambridge,
  Ontario.




As a
result of the terminations of the various real property, operating and equipment
(including trucks) leases, the Company’s operating lease obligations are
scheduled to be paid as follows: $3.0 million in the remainder of 2009; $2.4
million in 2010; $2.1 million in 2011; $1.0 million in 2012; $0.3 million in
2013; and $0.8 million, thereafter.





Contingencies





In
October 2001, the Company’s subsidiary, American Steel and Aluminum Corporation
(“ASA”), was named as one of 57 defendants in an action brought by two private
parties under the Comprehensive Environmental Response Compensation and
Liability Act, or CERCLA, to recover costs incurred and to be incurred in
connection with a waste disposal facility in Cumberland, Rhode Island which has
been categorized as a Superfund site by federal authorities. 16
 Barzel
Industries Inc. and Subsidiaries
 Notes to Consolidated
Financial Statements
 (In U.S.
dollars; tabular amounts in thousands of U.S. dollars , except share and per
share data )
 (Unaudited)




15
– COMMITMENTS AND CONTINGENCIES (Continued)





During
2006, ASA entered into a settlement with the plaintiffs, with the approval of
the United States Environmental Protection Agency, or EPA, resolving its alleged
liability for all claims for past and future response and oversight costs in
connection with the Remedial Investigation/Feasibility Study for the
site.





The
litigation remains pending against the non-settling defendants.  The
settlement does not address future remediation costs and the Company does not
believe it is currently possible to estimate its share, if any, of such costs
should claims for their recovery be pursued against ASA.  As part of
the rationalization of the Company’s distribution facilities, on February 13,
2009, the Company sold the facility in Cumberland, Rhode Island.  The
sale of this facility does not relieve the Company of its potential liability
for such environmental claims.





The
Company is involved in various other lawsuits, claims, demands, and other legal
proceedings and investigations arising out of or incidental to the conduct of
its business.  While it is not possible to determine the ultimate
disposition of each of these matters, the Company does not believe that their
ultimate disposition will have a material adverse effect on its results of
operations, financial condition or cash flows.




17


Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations.





The
following discussion and analysis of financial condition and results of
operations should be read in conjunction with our unaudited consolidated
financial statements, the notes to our unaudited consolidated financial
statements and the other financial information appearing elsewhere in this
report. Data for the quarters ended February 28, 2009 (“first fiscal quarter of
2009)” and February 23, 2008 (“first fiscal quarter of 2008”), have been derived
from our unaudited consolidated financial statements.  The terms
“Barzel,” the “Company,” “we,” “us,” and “our” refer to Barzel and its
consolidated subsidiaries.





FORWARD-LOOKING
STATEMENTS





This
report contains forward-looking statements.  All statements, other
than statements of historical facts, included in this report, are
forward-looking statements.  In addition, we or our representatives
have made or may make forward-looking statements on telephone or conference
calls, by webcasts or e-mails, in person, in presentations or written materials,
or otherwise.  Forward-looking statements include statements about
matters such as: future prices and sales of, and demand for our products and our
customers’ products; future changes in production capacity in our operations and
our customers’ operations; future costs of materials and production and future
overhead costs; productivity, business process and operational initiatives, and
their impact on us; industry market conditions and anticipated changes in our
position in markets we serve; future employment and contributions of personnel;
employee relations and collective bargaining agreements; tax rates; capital
expenditures and their impact on us; nature and timing of restructuring charges
and the impact thereof; interest rate management activities; currency rate
management activities; deleveraging activities; rationalization, restructuring,
realignment, strategic alliance, raw material and supply chain, investment,
acquisition, venture, consulting, operational, tax, financial and capital
projects; legal proceedings, contingencies, and environmental compliance;
potential offerings, sales and other actions regarding debt or equity securities
of us or our subsidiaries; potential debt restructuring activities and the need
therefor and impact thereof; and future asset sales, costs, working capital,
revenues, business opportunities, debt levels, cash flows, cost savings and
reductions, margins, earnings and growth.  The words “believe,”
“expect,” “anticipate,” “estimate,” “project,” “plan,” “should,” “intend,”
“may,” “will,” “would,” “potential” and similar expressions identify
forward-looking statements, but are not the exclusive means of doing
so.





These
statements are based on assumptions and assessments made by our management in
light of their experience and their perception of historical and current trends,
current conditions, possible future developments and other factors they believe
to be appropriate. Forward-looking statements are not guarantees,
representations or warranties and are subject to risks and uncertainties that
could cause actual results, developments and business decisions to differ
materially from those contemplated by such forward-looking statements. Some of
those risks and uncertainties include the risk factors set forth in this report
and in our Annual Report on Form 10-K for the fiscal year ended November 29,
2008 and the following:





·
            the
      current global economic downturn;




·
            the
      current weakness in the automotive, transportation, manufacturing and
      construction industries in the United States and
  Canada;




·
            our
      substantial indebtedness and the impact such indebtedness may have on the
      way we operate our business;




·
            the
      possibility that the recession, our operating performance and operating
      prospects and capital market conditions will limit our ability to timely
      meet our debt service obligations, comply with debt covenants, obtain
      necessary financing or refinancing or to restructure indebtedness or our
      debt service obligations on acceptable terms or at
  all;




·
            our
      ability to continue to comply with government
  regulations;




·
            adoption
      of or changes in legislation or regulations adversely affecting our
      businesses;




·
            changes
      in the United States or other monetary or fiscal policies or regulations
      in response to the recent capital markets and economic
    crises;




·
            changes
      in the financial stability of our major customers or in demand for our
      products and services;




·
            interruptions
      in our production capabilities due to unexpected equipment
      failures;




·
            fluctuation
      of prices for steel and other raw materials or a shortage of
      supply;




·
            changes
      in generally accepted accounting
principles;




·
            geopolitical
      events;




·
            competition
      in the industry;




18


·
            industry
      consolidation;




·
            our
      ability to implement our business
strategies;




·
            currency
      risks;




·
            our
      ability to meet our objective of growing revenues
    organically;




·
            our
      ability to attract and retain key sales, marketing and operations
      management professionals;




·
            interruptions
      in supply of critical raw materials due to credit or other limitations
      imposed by suppliers;




·
            assertion
      of claims, lawsuits and proceedings against
us;




·
            our
      ability to maintain an effective system of internal controls over
      financial reporting;




·
            failure
      to timely file periodic reports with the SEC or to continue listing of our
      securities on Nasdaq;




·
            geographic
      concentration of our business;




·
            work
      stoppages or our inability to renegotiate labor contracts when they
      expire; and




·
            outsourcing
      by our customers to overseas
facilities.




Occurrence
of any of the events or circumstances described above could have a material
adverse effect on our business, financial condition, results of operations or
cash flows or the market price of our securities.





All subsequent written and oral
forward-looking statements by or attributable to us or persons acting on our
behalf are expressly qualified in their entirety by these factors.





All forward-looking statements in this
report are based upon information available to us on the date of this
report.  We undertake no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future
events, changed circumstances or otherwise.





Business
Overview





Headquartered in Norwood,
Massachusetts, with an operational hub in Ontario, Canada, we operate a network
of 16 metal processing, manufacturing and distribution facilities throughout the
Canadian provinces of Ontario and Québec and in the Northeastern, Mid-Atlantic
and Mid-Western United States.  We operate these strategically located
facilities as one integrated system.  Through an innovative management
system that includes close statistical monitoring and analysis of our plant
capabilities, we service our customers with speed, quality and
reliability.





We are a well-diversified,
multi-process provider of value-added services and offer a wide range of metal
processing solutions to a variety of industries, from construction and
industrial manufacturing to finished commercial racking products.  We
believe we are one of only two independent continuous process picklers in
Canada.





We process, manufacture and distribute
carbon steel, stainless steel and aluminum products and operate as an
intermediary between primary metal producers and the manufacturers that require
processed metal, often with a short lead time delivery basis.  We
produce steel tubing in various sizes primarily for the structural
markets.  We also produce roll formed steel sections and manufacture
heavy equipment parts and accessories.  Our flat rolled processing
capabilities include pickling, slitting, blanking, leveling, temper-rolling and
cutting-to-length to precise customer specifications.  Additionally,
we perform many of these processing services for customers who provide their own
steel, referred to in the industry as toll processing.





Business
Strategy and Outlook





Our
company operates as one system, governed by The DecalogueTM operating
methodology.  Our operating methodology was developed by our
President, Dr. Domenico Lepore, and a member of our Board of Directors, Oded
Cohen.  The Decalogue methodology brings together the ideas of Dr. W.
Edwards Deming's Theory of Profound Knowledge and Dr. Eli Goldratt's Theory of
Constraints, and facilitates their application through a set of logical thinking
tools and statistical methods. Through these methods, we thoroughly map our
processes and identify, measure and address the constraint in our system, which
is defined as the part of our system that most hinders the generation of
throughput.





Throughput is the speed at which a
system can generate cash through sales.  In our case, it is the speed
at which we can move metal through the system, starting from our suppliers’
ability to provide us with the raw materials, to the delivery of the final
product to our customer and our receipt of payment for the work
done.





19


As the generation of throughput takes
into account supplier capabilities and customer feedback, it is critical that a
holistic approach be used to understand our business.  To do that, we
use a systemic organizational design to replace traditional hierarchal
organizational model.  What the Decalogue methodology acknowledges,
that other management systems do not, is the systemic nature of an organization,
meaning that the effectiveness of the manufacturing processes in the system can
be profoundly impacted by other processes, like human resources or
marketing.  Thus, the same tools that are used to monitor and manage
variations in manufacturing are also used to monitor and manage variations in
other processes within our system.  The aim is to have a totally
synchronized system that is moving, in its entirety, towards the same
goal.





We have significantly progressed our
project plans for implementing the Decalogue operating methodology at the
Company.  This transformation allows us to simplify, realign and
operate our network as one system, and has enabled (a) the system to operate at
much faster cycle times, enabling us to maximize the throughput from the sale of
our enhanced capacity, (b) a permanent cash inventory reduction of $110.8
million primarily from this faster replenishment and operating cycle, and (c)
the implementation of organizational changes, especially in our replenishment,
processing, distribution and sales processes, and the sale of redundant, surplus
assets, which we believe will result in a reduction of operating expenses of
over $10.0 million in 2009 as compared to 2008.





Through February of 2009, we have
effected further rationalizations of certain of our U.S. distribution facilities
and processing centers in Quebec, including the sale of non-strategic assets
that will result in additional annualized savings of $15.0 million in 2009 as
compared to 2008.  These organizational changes, when added to the
changes effected in 2008, have resulted in the reduction of approximately 536
employees, primarily in the areas of administration and general management,
purchasing, inside sales, accounting and plant operating personnel since January
1, 2008.  These reductions have been offset by the addition of
approximately 82 new employees of substantially different competencies,
educational backgrounds and cultural diversities.  To date, we have
hired professionals in the areas of marketing, sales, quality, technical
services, new product development, logistics, safety, process engineering and
synchronized manufacturing, among others.





In addition, we have initiated
additional actions to further reduce our operating expenses, including further
reductions in labor expense through reduced work hours, layoffs, additional
severances and salary reductions, further strategic purchasing efficiencies in
consumables and other plant expenses, deferral of certain non-critical projects
and the sale of certain other non-operating assets.  The Company
believes these actions will generate an additional $15.0 million in cash
savings, primarily from a reduction in annual operating expenses, the
substantial majority of which will begin in May 2009.





Our revenue has been severely impacted
by the economic recession, including lower North American demand from service
centers, lower average selling prices and the impact of changes in the exchange
rate of the Canadian dollar.  Our sales have also been negatively
impacted by certain of our transformation actions, including our exit of
inventory-based automotive sales, our exit of other non-replenishable material
customers (in particular, sheet product customers of our distribution business),
and the loss of certain customers as a result of the rationalization of certain
of our US distribution facilities and processing centers in Quebec.





We intend to maintain and grow our
revenue by identifying and pursuing additional market segments in which we can
sell our production capacity. We have identified numerous end markets and we
intend to incrementally exploit these market segments to fully utilize our
existing capacity. For example, we intend to expand our sales end markets to
transportation, non-residential construction, energy, aerospace and defense,
railroad manufacturing and mining machinery. We have also identified additional
opportunities in certain export market segments.





The severity of the recession and its
impact on us has been exacerbated by the dramatic actions taken by our customers
to reduce their costs by, among other things, reducing purchases and working off
inventories built up during the prior period of economic growth. As a result, in
February 2009, U.S. and Canadian steel service center hot-rolled inventories
were 44.0% lower in terms of tons on hand compared with February 2008; yet,
inventories rose in the first fiscal quarter of 2009 in terms of months on hand,
because of continued weakened demand.  U.S. and Canadian steel service
center hot-rolled inventories were approximately 3.1 months on hand at the end
of February 2009. With the market still oversupplied, the North American steel
mills are operating at less than 50.0% of their available
capacity.  We believe that overall demand will continue to remain weak
at least through the second fiscal quarter of 2009.





The combination of a dramatic decrease
in demand in both the U.S. and Canada and relatively higher service center
inventory levels has resulted in unprecedented declines in pricing over the
prior seven months.  Flat rolled carbon steel sheet prices fell from
over $1,100 per ton in August 2008 to below $450 per ton in early April 2009 as
a result of


20


lower
customer demand. While mill costs remain high, easing scrap and freight costs
further facilitated these decreases. We believe that weak demand and
persistently low operating levels throughout the supply chain, with the mills in
particular, will result in sustained lower prices for the foreseeable future.
The outlook for the U.S. dollar, freight rates and other world steel sheet
markets indicate that import pressures are likely to increase, providing for
potentially lower prices in the near term.





While
there are multiple factors that affect our results, the first fiscal quarter of
2009 was most affected by the dramatic decrease in steel demand and an
unprecedented reduction in the overall price of steel, which was exaggerated by
a decrease in consumer confidence resulting from the global financial crisis and
the impacted recessionary environment.  Demand throughout most sectors
of the economy decreased significantly in the first fiscal quarter of 2009.
Construction, heavy manufacturing, and automotive were hit particularly hard. As
a result of the large decrease in demand, market prices for our products
experienced continued decline through March 2009. This change in the market
compressed margins in the first fiscal quarter of 2009.  This resulted
in the challenge of selling higher priced inventory into a declining price
market, while demand was also shrinking significantly.





In recent
quarters, the market price of steel has been the most significant factor
impacting selling prices and has materially impacted earnings. In a rising price
environment, our results are generally favorably impacted as lower-priced
material, purchased in previous periods, flows through cost of goods sold, while
our selling prices increase at a faster pace to cover current replacement costs.
On the other hand, when steel prices fall, we typically have higher-priced
material flowing through cost of goods sold while selling prices compress to
what the market will bear, negatively impacting our results.  On a
prospective basis, our shorter lead times and faster inventory turnover will
significantly mitigate this effect.





We expect our volumes in the second
fiscal quarter of 2009 to be higher than the first fiscal quarter of 2009, as a
result of our sales efforts, particularly in our distribution and structural
tubing businesses. Overall, our second fiscal quarter of 2009 is expected to
result in flat revenue, lower cost of sales, and lower operating expenses when
compared to our first fiscal quarter of 2009. Revenue will be flat despite an
increase in volume as a result of continued declining prices for steel and for
our products. Operating expenses will be lower because of actions taken in
February 2009, resulting in an annual reduction of approximately $15.0
million.  The additional actions discussed above to reduce operating
expenses further will begin contributing the substantial majority of an
additional $15.0 million in cash savings, primarily from a reduction in annual
operating expenses, in May 2009.





Selected Operating Data





The following table sets forth certain
unaudited operating data for each of the periods presented:





Three
      Months Ended
                  February
      28, 2009
                
                
                
                
                
                Three
      Months
                  Ended
                  February
      23, 2008Amount
                
                
                Percentage
                
                
                Amount
                
                
                PercentageTons
      - Direct sales
                
                
                55,387
                
                
                
                52.8
                
                
                
                202,600
                
                
                
                54.4Tons
      - Toll processing
                
                
                49,515
                
                
                
                47.2
                
                
                
                169,600
                
                
                
                45.6Total
      Tons
                
                
                104,902
                
                
                
                100.0
                
                
                
                372,200
                
                
                
                100.0




Results
of Operations





The
following table and discussion sets forth, for the periods presented, our
consolidated results of operations expressed in dollar terms and as a percentage
of net sales. Such information has been derived from our unaudited consolidated
statements of operations and comprehensive loss.




Three
      Months
                    Ended
                    February
      28, 2009
                  
                  
                  
                  
                  
                  Three
      Months
                    Ended
                    February
      23, 2008Amount
                    (U.S. dollars in
      thousands)
                  
                  
                  Percentage
                  
                  
                  Amount
                    (U.S. dollars in
      thousands)
                  
                  
                  PercentageNet
      sales
                  
                  $
                  47,955
                  
                  
                  
                  100.0
                  
                  
                  $
                  195,629
                  
                  
                  
                  100.0Cost
      of sales
                  
                  
                  46,851
                  
                  
                  
                  97.7
                  
                  
                  
                  162,984
                  
                  
                  
                  83.3Gross
      margin
                  
                  
                  1,104
                  
                  
                  
                  2.3
                  
                  
                  
                  32,645
                  
                  
                  
                  16.7Operating
      expensesPlant
                  
                  
                  16,224
                  
                  
                  
                  33.8
                  
                  
                  
                  17,661
                  
                  
                  
                  9.0


21


Delivery
                      
                      
                      3,441
                      
                      
                      
                      7.2
                      
                      
                      
                      6,182
                      
                      
                      
                      3.2Selling
                      
                      
                      2,201
                      
                      
                      
                      4.6
                      
                      
                      
                      3,327
                      
                      
                      
                      1.7Administrative
      and general
                      
                      
                      7,846
                      
                      
                      
                      16.4
                      
                      
                      
                      7,396
                      
                      
                      
                      3.7Impairment
      loss
                      
                      
                      3,280
                      
                      
                      
                      6.8
                      
                      
                      
                      —
                      
                      
                      
                      —Amortization
      of intangibles
                      
                      
                      2,078
                      
                      
                      
                      4.3
                      
                      
                      
                      1,928
                      
                      
                      
                      1.0Restructuring
                      
                      
                      (649
                      )
                      
                      
                      (1.3
                      )
                      
                      
                      —
                      
                      
                      
                      —34,421
                      
                      
                      
                      71.8
                      
                      
                      
                      36,494
                      
                      
                      
                      18.6Operating
      loss
                      
                      
                      (33,317
                      )
                      
                      
                      (69.5
                      )
                      
                      
                      (3,849
                      )
                      
                      
                      (1.9
                      )Interest
      expense
                      
                      
                      (9,827
                      )
                      
                      
                      (20.4
                      )
                      
                      
                      (10,772
                      )
                      
                      
                      (5.4
                      )Interest
      income
                      
                      
                      212
                      
                      
                      
                      0.3
                      
                      
                      
                      181
                      
                      
                      
                      0.0Share
      in income (loss) of joint venture
                      
                      
                      (26
                      )
                      
                      
                      0.0
                      
                      
                      
                      86
                      
                      
                      
                      0.0(9,641
                      )
                      
                      
                      (20.1
                      )
                      
                      
                      (10,505
                      )
                      
                      
                      (5.4
                      )Loss
      before benefit for income taxes
                      
                      
                      (42,958
                      )
                      
                      
                      (89.6
                      )
                      
                      
                      (14,354
                      )
                      
                      
                      (7.3
                      )Benefit
      for income taxes
                      
                      
                      12,180
                      
                      
                      
                      25.5
                      
                      
                      
                      6,465
                      
                      
                      
                      3.3Net
      loss
                      
                      $
                      (30,778
                      )
                      
                      
                      (64.1
                      )
                      
                      $
                      (7,889
                      )
                      
                      
                      (4.0
                      )
 Three
Months Ended February 28, 2009 as compared to Three Months Ended February 23,
2008





The consolidated financial statements for the first fiscal quarter
of 2009 include the financial results of Barzel, its wholly-owned subsidiaries
Barzel Holdings Inc., Barzel Finco Inc., Barzel Industries Canada Inc., and
Barzel Industries U.S. Inc.  All intercompany balances and
transactions have been eliminated in the consolidated financial
statements.





Net
Sales





Net sales for the first fiscal quarter
of 2009 decreased by $147.6 million, or 75.4%, to $48.0 million from $195.6
million for the first fiscal quarter of 2008.  Net sales include
direct sales and toll processing revenues. For the first fiscal quarter of 2009,
direct sales and toll processing revenues were approximately $46.2 million and
$1.8 million, respectively.  For the first fiscal quarter of 2008,
direct sales and toll processing revenues were approximately $192.6 million and
$3.0 million, respectively.  The impact of changes in the exchange
rate of the Canadian dollar on sales was a decrease of $21.9 million. Excluding
the impact of changes in exchange rates, net sales for the first
fiscal quarter of 2009 would have decreased by $125.7 million, as compared to
the first fiscal quarter of 2008.





Decreased direct sales and toll
processing revenues were primarily due to a dramatic decline in the price and
volume of our products in the first fiscal quarter of 2009, driven by weaker
global economic conditions, particularly in the industrial manufacturing,
construction, transportation and energy industries, resulting in continued
weakened demand for steel.  Our sales were also negatively impacted by
our exit of certain market segments where the end user product and/or terms of
sale were not consistent with our replenishment model.  In addition,
to minimize our credit risks, we reduced our sales of steel in the U.S. and
Canada to certain customers and market segments (except for cash on delivery),
particularly to customers in the automotive segment.




Total tons
directly
sold and toll processed for the first fiscal quarter of 2009 decreased by
267,298 tons, or 71.8%, to 104,902 tons from 372,200 tons for the first fiscal
quarter of 2008. Direct sale tons decreased by 147,213 tons, or 72.6%, to
55,387 tons in the first fiscal year of 2009 from 202,600 tons in the first
fiscal quarter of 2008.  The decrease in direct sale tons resulted
from continued softening demand from our distribution and structural tubing
customers, stemming from the sustained decline in steel demand, particularly in
the transportation and construction industries.  Our automotive
business is down substantially in the first fiscal quarter of 2009, based both
on the industry’s pervasive weakness and our decision to exit most of the
inventory-based automotive segment. Toll processed tons decreased by 120,085
tons, or 70.8%, to 49,515 tons in the first fiscal quarter of 2009 from 169,600
in the first fiscal quarter of 2008. The decrease in toll processed tons was
primarily driven by decreased automotive volumes, including weaker processing
for steel mills and processing centers in Canada, primarily resulting from
weaker Canadian automotive and manufacturing sectors.





Cost
of Sales





Cost of
sales includes direct and indirect costs associated with our manufactured and
distributed products.  Direct costs include material, while indirect
costs include, but are not limited to, inbound freight charges, purchasing and
receiving costs, inspection costs, internal transfer costs and other costs of
our distribution network.





Cost of
sales for the first fiscal quarter of 2009 decreased by $116.1 million, or
71.2%, to $46.9 million from $163.0 million for the first fiscal quarter of
2008. As a percentage of net sales, cost of sales increased to 97.7% in the
first


22
 
 fiscal
quarter of 2009 from 83.3% in the first fiscal quarter of 2008.  The
impact of changes in the exchange rate of the Canadian dollar on cost of sales
was a decrease of $18.0 million. The cost of sales for the first fiscal quarter
of 2008 included the remaining $6.7 million of the total $7.8 million of
purchase price that was allocated to inventory to increase certain acquired
inventories up to their fair market value on the date of the acquisition of
Novamerican Steel Inc. by Symmetry Holdings Inc.  Excluding the impact
of changes in exchange rate and the purchase price allocation to inventory in
the first fiscal quarter of 2008, cost of sales for the first fiscal quarter of
2009 would have decreased by $91.4 million, as compared to the first fiscal
quarter of 2008.  The overall increase in cost of sales as a
percentage of net sales in the first fiscal quarter of 2009 primarily resulted
from lower average selling prices of our products during the quarter as we
experienced unprecedented declines in pricing from higher cost steel inventories
in cost of sales, including net losses of $2.1 million from bulk sales of
inventory at our Cumberland, Rhode Island, Norwood, Massachusetts and Albany,
New York facilities.





Gross
Margin





Gross
margin for the first fiscal quarter of 2009 was $1.1 million, or 2.3% of net
sales, compared to $32.6 million, or 16.7% of net sales, for the first fiscal
quarter of 2008.  Our gross margins may not be comparable to those of
other entities, since some entities include all of the costs related to their
distribution network in cost of sales, and others (like us) exclude a portion of
such costs from gross margins.  Gross margin for the first fiscal
quarter of 2008 was reduced by $6.7 million of additional costs associated with
the purchase price allocation to inventory.  The impact of changes in
the exchange rate of the Canadian dollar on gross margin was a decrease of $3.9
million.  Excluding the purchase price allocation to inventory in the
first fiscal quarter of 2008 and the impact of changes in exchange rates, gross
margin would have decreased by $34.3 million, as compared to the first fiscal
quarter of 2008.  The decrease in gross margin in the first fiscal
quarter of 2009 is due to the dramatic decline in the selling price of our
products, driven by declining market conditions.  In addition, gross
margin in the first fiscal quarter of 2009 was negatively impacted by losses of
$2.1 million associated with bulk sales of inventory at our Cumberland, Rhode
Island, Norwood, Massachusetts and Albany, New York facilities.





Operating
Expenses





Operating expenses for the first fiscal
quarter of 2009 decreased by $2.1 million, or 5.8%, to $34.4 million, from $36.5
million for the first fiscal quarter of 2008.  As a percentage of net
sales, operating expenses increased to 71.8% in the first fiscal quarter of 2009
from 18.6% in the first fiscal quarter of 2008.  Operating expenses
for the first fiscal quarter of 2009 included an impairment loss of $3.3
million, or 6.8% of net sales, for the sale of real property and buildings
associated with our Norwood, Hartford and Albany facilities.  See Note
8 to the consolidated financial statements, Assets Held for
Sale.  Operating expenses for the first fiscal quarter of 2009 also
included restructuring of ($0.6) million, or 1.3% of net sales, associated with
exit activities and asset disposition actions related to the 2009 restructuring
actions.  See Note 5 to the consolidated financial statements,
Restructuring.  Additionally, operating expenses for the first fiscal
quarter of 2008 included approximately $0.5 million in higher depreciation
expense associated with the purchase price allocation to property, plant and
equipment and approximately $2.1 million of amortization associated with the
purchase price allocation to intangible assets other than
goodwill.  The impact of changes in exchange rates on operating
expenses for the first fiscal quarter of 2009 was a decrease of $4.8
million.  Excluding the impairment loss and restructuring, additional
depreciation and amortization and the impact of changes in exchange rates,
operating expenses for the first fiscal quarter of 2009 would have decreased by
$2.6 million, as compared to the first fiscal quarter of 2008.





During the first fiscal quarter of 2009, higher salary expenses
associated with our Morrisville, Pennsylvania structural tubing facility
expansion and higher repair, maintenance and utilities costs in our U.S. and
Canadian facilities combined with reduced leverage of fixed operating costs
distributed over lower sales volumes, contributed to the overall increase in
plant, delivery, selling and administrative and general expenses as a percentage
of sales as compared to the first fiscal quarter of 2008.  Plant
operating expenses were $16.2 million in the first fiscal quarter of 2009, or
33.8% of net sales, as compared to $17.7 million or 9.0% of net sales in the
first fiscal quarter of 2008.  The $1.5 million dollar decrease in
plant expenses in the first fiscal quarter of 2009 is primarily attributable to
an unfavorable exchange rate impact of $2.0 million offset by approximately a
$0.5 million increase in wages for our Morrisville, Pennsylvania structural
tubing facility expansion.  Delivery expenses were $3.4 million in the
first fiscal quarter of 2009, or 7.2% of net sales, as compared to $6.2 million
or 3.2% of net sales in the first fiscal quarter of 2008.  Selling
expenses were $2.2 million in the first fiscal quarter of 2009, or 4.6% of net
sales, as compared to $3.3 million in the first fiscal quarter of 2008, or 1.7%
of net sales.  Administrative and general expenses were $7.8 million
in the first fiscal quarter of 2009, or 16.4% of net sales, as compared to $7.4
million in the first fiscal quarter of 2008, or 3.7% of net
sales.





23





Interest
Expense and Income, Net





Interest
income for the first fiscal quarter of 2009 was $0.2 million as compared to $0.2
million for the first fiscal quarter of 2008.  Interest expense for
the first fiscal quarter of 2009 decreased $1.0 million, or 9.2%, to $9.8
million, from $10.8 million for the first fiscal quarter of
2008.  Interest expense on our senior secured notes (the “Senior
Secured Notes”) and our asset based loan credit facility (the “ABL Credit
Facility”) was $9.1 million and $0.2 million, respectively, for the first fiscal
quarter of 2009 and $9.1 million and $1.2 million, respectively, for the first
fiscal quarter of 2008.  The remaining $0.5 million of interest
expense for the first fiscal quarter of 2009 and 2008, respectively, primarily
represents the amortization of deferred financing charges. The Senior Secured
Notes outstanding are $315.0 million with a fixed interest rate of
11.5%.





Loss
Before Benefit For Income Taxes





Loss
before benefit for income taxes in the first fiscal quarter of 2009 was $42.9
million, as compared to loss before benefit for income taxes in the first fiscal
quarter of 2008 of $14.3 million.  The first fiscal quarter of 2009
loss before benefit for income taxes was principally affected by a severe
decrease in gross margin and, and to a lesser extent, $3.3 million for an
impairment loss, $2.1 million for the amortization associated with the purchase
price allocation to intangible assets other than goodwill, and $0.5 million for
additional depreciation associated with the purchase price allocation to
property, plant and equipment.





Benefit
For Income Taxes





Income taxes were a benefit of $16.9
million, partially offset by a valuation reserve of $4.7 million, and $6.5
million for the first fiscal quarter of 2009 and the first fiscal quarter of
2008, respectively, and reflect an estimated effective income tax rate of
approximately 39.0% and 36.0%, respectively. The increase in the first fiscal
quarter of 2009 rate is due to a greater percentage of domestic losses expected,
which are taxed at a higher rate.





Net
Loss





Net loss
was $30.8 million in the first fiscal quarter of 2009, or net loss of $1.16 per
basic and diluted share outstanding, as compared to net loss of $7.9 million in
the first fiscal quarter of 2008, or net loss of $0.37 per basic and $0.03 per
diluted share outstanding.




Liquidity
and Capital Resources





Overview
of Cash Flow and Plans to Manage Liquidity





We rely on cash generated from our
internal operations, as well as available credit facilities, as our primary
sources of liquidity.  Our ability to generate cash from internal
operations may be affected by general economic, financial, competitive,
legislative and regulatory factors beyond our control. Typically, our cash flow
from operations fluctuates significantly between quarters due to various
factors. These factors include customer and seasonal order patterns,
fluctuations in working capital requirements, interest payments, timing of
capital investments and other factors. We believe that the funds available from
operations will be sufficient to provide us with the liquidity necessary for
anticipated working capital requirements and capital expenditure requirements.
However, as described under “Risk Factors,” in light of the severity and the
rapid onset of the recession, there is a risk that these resources will not be
sufficient to enable us to make the full interest payment of $18.1 million due
on the Senior Secured Notes on May 15, 2009. Failure to make such payment in
full would constitute a default that would entitle the holders thereof to
accelerate the maturity of the Senior Secured Notes and foreclose on the
collateral, which includes substantially all of our assets. We are currently in
discussions with the holders of the Senior Secured Notes (the “Noteholders”) to
restructure our payment obligations and regarding other capital structure
alternatives, to mitigate such risk. We cannot assure you that such discussions
will be successfully completed or as to the terms which might be agreed
upon.





On
November 15, 2007, we entered into the ABL Credit Facility, a $175.0 million,
five year, asset-based revolving credit facility. The $175.0 million available
under the ABL Credit Facility is subject to a borrowing base consisting of
certain eligible accounts receivable and inventory and a permanent $15.0 million
availability block of the calculated borrowing base. The ABL Credit Facility
includes borrowing capacity available for letters of credit and for short-term
borrowings referred to as swingline borrowings.





24


On
November 15, 2007, the Company, through its subsidiary Barzel Finco Inc., issued
Senior Secured Notes in an aggregate principal amount of $315.0 million.
Interest on the Senior Secured Notes accrues at the rate of 11.5% per annum and
is payable semi-annually in arrears on May 15 and November 15, with the first
interest payment having been due and paid on May 15, 2008.  The Senior
Secured Notes mature on November 15, 2015.





On February 28, 2009, our total
long-term debt was $315.0 million (representing $315.0 million of Senior Secured
Notes and $0 drawn on the ABL Credit Facility) and we had $27.4 million of cash
and cash equivalents (or a net debt of $287.6 million).  For the first
fiscal quarter of 2009, the weighted average interest rate of borrowed ABL
Credit Facility funds was 4.45%.





As of
February 28, 2009, the aggregate eligible assets in our borrowing base totaled
$31.6 million (representing the sum of the U.S. borrowing base and the Canadian
borrowing base) that is subject to a $15.0 million availability block, and of
which $0.9 million was utilized for letter of credit
obligations.  There were no borrowings outstanding under the ABL
Credit Facility as of February 28, 2009.  As of February 28, 2009, the
excess availability under the ABL Credit Facility was $30.7 million. Since the
borrowing base under the ABL Credit Facility is calculated in U.S. dollars and
includes certain eligible accounts receivable and inventory denominated in
Canadian dollars, a change in the exchange rate could affect our borrowing
base.  At February 28, 2009, our liquidity consisted
of  $27.4 million of cash on hand and up to $10.7 million of
availability under the ABL Credit Facility.





If our
excess availability, as defined under the ABL Credit Facility, is less than
$20.0 million ($30.7 million at February 28, 2009), we are required to maintain
a ratio of consolidated EBITDA to consolidated fixed charges in excess of 1.0 to
1.0. Due to our significantly lower gross profits currently and in recent
quarters, we do not currently maintain such minimum ratio, and we may not be
able to achieve such minimum ratio until a substantial recovery from the current
economic recession.  If our ratio of consolidated EBITDA to
consolidated fixed charges is below 1.0 to 1.0, we could not borrow or issue
letters of credit under the ABL Credit Facility to the extent it would reduce
our excess availability below $20.0 million. Moreover, if our ratio of
consolidated EBITDA to consolidated fixed charges is below 1.0 to 1.0 and our
excess availability was to further decrease to be less than $20.0 million, we
would be in default under the ABL Credit Facility.  Our
excess  availability could decrease due to a decrease in accounts
receivable due to lower net sales, aging of uncollected accounts receivable,
decline in the market value of inventory and other factors beyond our
control.  Upon such a default, the lenders would have the right to
terminate the ABL Credit Facility and sweep cash on hand to the extent necessary
to repay any outstanding borrowings, letters of credit and expenses. Such events
would not, however, result in a default under our Senior Secured Notes unless
the amount of borrowings and letters of credit outstanding under the ABL Credit
Facility at such time exceeded $10.0 million (which we do not expect would be
the case).





In
addition to our primary sources of liquidity, we generated cash totaling $18.4
million from the sale of redundant and surplus assets, principally machinery and
equipment in Albany, Cumberland, Dorval and Lasalle and the real property in
Cumberland (net of the purchase price of $1.6 million to purchase our previously
leased facility in Baie D’Urfe).  The proceeds therefrom are included
in our cash on hand as of February 28, 2009. We also terminated certain real
estate leases which reduced operating expenses by $0.6 million per month. We are
proposing to sell certain other miscellaneous smaller assets, but can give no
assurance that we will be successful in completing such sales or as to the
proceeds therefrom.





In the
first fiscal quarter of 2009, we recorded a restructuring charge of $0.2 million
for the organizational redesign related to our implementation of the Decalogue
operating methodology.  The restructuring charges are primarily for
severance and related costs for 146 terminated employees.  In the
first fiscal quarter of 2009, we made cash restructuring payments of $2.7
million.  In fiscal year 2009, we expect future cash restructuring
payments of approximately $4.1 million to be paid as
follows:  approximately $2.0 million, $1.4 million and $0.7 million in
the fiscal second, third and fourth quarters of 2009, respectively.





We have
initiated additional actions to further reduce our operating expenses to address
the liquidity position, including further reductions in labor expense through
reduced work hours, layoffs, additional severances and salary reductions,
further strategic purchasing efficiencies in consumables and other plant
expenses, deferral of certain non-critical projects and the sale of certain
other non-operating assets.  We believe these actions will generate an
additional $15.0 million in cash savings, primarily from a reduction in annual
operating expenses, the substantial majority of which will begin in May
2009.





We spent $5.3 million in capital
expenditures in the first fiscal quarter of 2009, including $2.9 million for our
Morrisville, Pennsylvania structural tubing facility expansion, $1.6 million for
real property in Baie D’Urfe, Quebec, on which our existing tubular products is
situated, and $0.8 million for various tooling and equipment.  We
expect capital


25


expenditures
of approximately $5.5 million in the remainder of fiscal year 2009, including
$1.2 million for the completion of the expansion at the Morrisville,
Pennsylvania tubing facility, substantially all of which has been spent through
March 31, 2009.





In order to seek to minimize our credit
risks in light of the current severe recession, we reduced our sales to some
customers and potential customers in the U.S. and Canada (except for cash on
delivery). We cannot assure you that we will not be materially adversely
affected by accounts receivable losses or that we will not need to further
reduce sales to avoid accounts receivable losses in the future.





In connection with any restructuring of
our payment obligations under the Senior Secured Notes, or otherwise, we may
from time to time and at any time issue, exchange, restructure or repurchase our
debt or equity securities.  Such transactions may involve a receipt or
use of cash, may involve notes, guarantees, warranties, common stock or other
securities or a combination thereof, and may be affected in open market or
privately negotiated transactions.





Overview
of Cash Flow Activities for the Three Months Ended February 28, 2009 and
February 23, 2008





Operating
Activities





Cash
provided by operating activities was $22.5 million in the first fiscal quarter
of 2009 compared to $13.7 million in the first fiscal quarter of 2008. Cash used
by operations included $3.5 million related to a decrease in accounts
payable.  Such uses were offset by cash provided by operating
activities resulting from a decrease in accounts receivable of $34.7 million, a
decrease in inventories of $22.4 million, an increase in accrued liabilities of
$4.2 million, and a decrease of income taxes receivable of $0.7
million.  The decrease in accounts receivable is a result of an
overall economic decline in the market coupled with a specific reduction of
customers whose products and/or terms of sale are not consistent with our
replenishment model.  During the first fiscal quarter of 2009, we
further reduced our carrying inventory as part of our implementation of our
replenishment model.  In the first fiscal quarter of 2009, we also
made cash restructuring payments of $2.7 million.





Investing
Activities





Cash flow
provided by investing activities was $14.0 million in the first fiscal quarter
of 2009, primarily related to proceeds of $19.3 million from disposal of
property, plant and equipment, offset by $5.3 million in additions to property,
plant and equipment.  Capital expenditures in the first fiscal quarter
of 2009 included $2.9 million for our Morrisville, Pennsylvania structural
tubing facility expansion, $1.6 million for real property in Baie D’Urfe, Quebec
and $0.8 million for various tooling and equipment.





Cash used in investing activities was
$1.6 million in the first fiscal quarter of 2008, primarily for $1.8 million in
additions to property, plant and equipment associated with our Morrisville,
Pennsylvania facility expansion, partially offset by $0.1 million in proceeds on
disposal of property and equipment.





Financing
Activities





Cash used
in financing activities was $33.8 million in the first fiscal quarter of 2009,
related to the repayment of borrowings under the ABL Credit
Facility.  Cash used in financing activities was $13.1 million in the
first fiscal quarter of 2008.  We repaid $13.3 million of borrowing
under the ABL Credit Facility during the first fiscal quarter of 2008. This was
partially offset by $0.2 million from a refund of
deposit.





Critical
Accounting Policies




There
have been no material changes in our critical accounting policies, as disclosed
in our Annual Report on Form 10-K for the year ended November 29,
2008.





Recent
Accounting Pronouncements





For
information with respect to recent accounting pronouncements and the impact of
these pronouncements on our consolidated financial statements, see Note 2 of
Notes to Consolidated Financial Statements.


26





Item
3.  Quantitative and Qualitative Disclosures About Market
Risk.





We incur costs in U.S. dollars and
Canadian dollars, the currency of our manufacturing and distribution facilities,
and we sell our products in both U.S. dollars and Canadian
dollars.  In general, our results of operations, cash flows and
financial condition are affected by changes in the Canadian dollar relative to
the U.S. dollar. During the first fiscal quarter of 2009, the average exchange
rate of the Canadian dollar versus the U.S. dollar was 1.2358 compared to 1.0058
for the first fiscal quarter of 2008.  The impact of these events in
the first fiscal quarter of 2009 was a decrease of $21.9 million in net sales,
$18.0 million in cost of goods sold and $4.8 million in operating
expenses.





We have Canadian dollar denominated
long term debt under the ABL Credit Facility.  At February 28, 2009,
no loans were outstanding under the ABL Credit Facility.  In the first
fiscal quarter of 2009, currency losses were $0.8 million.  In the
first fiscal quarter of 2008, currency gains were $0.3 million.





We cannot predict changes in currency
exchange rates in the future or whether those changes will have net positive or
negative impacts on our net sales, cost of sales or net
income.  Exchange rate fluctuations are beyond our control and we
cannot assure you that we would be able to mitigate any adverse effects of such
changes.  There can be no assurance that changes in the rate of
exchange between the Canadian dollar and the U.S. dollar will not adversely
affect our business, results of operations, financial condition or cash
flows.





We are exposed to market risk from
changes in interest rates and exchange rates.  From time to time, we
may enter into financial contracts in the ordinary course of business in order
to hedge these exposures.  We do not use financial instruments for
trading or speculative purposes. At February 28, 2009 and November 29, 2008, we
had no such contracts outstanding.





Exchange Rate Risk.We
estimate that a 10% movement in the value of the Canadian dollar would affect
our net sales by approximately $18.6 million annually, based on our annualized
Canadian dollar net sales for the first fiscal quarter of 2009.





Item
4T.  Controls and Procedures.





Evaluation
of Disclosure Controls and Procedures





Under the
supervision and participation of our management team, including our chief
executive officer, who also serves as our principal financial officer, we
conducted an evaluation of our disclosure controls and procedures, as such term
is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), as of February 28, 2009.
Based on this evaluation, our principal financial officer concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports that are filed or submitted under the
Exchange Act, is recorded, processed, summarized and reported, within the time
periods specified in the SEC’s rules and forms, and that such information is
accumulated and communicated to management, including our chief executive
officer, as appropriate to allow timely decisions regarding required
disclosure.





Changes
in Internal Control over Financial Reporting





During
the fiscal quarter ended February 28, 2009, there have been no changes in our
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.  On March 6, 2009, our former Controller and Principal
Accounting Officer left the Company to pursue other
opportunities.  Our Principal Executive Officer will serve as interim
Principal Accounting Officer until a new Principal Accounting Officer is
appointed.


27


PART
II – OTHER INFORMATION





Item
1.  Legal Proceedings.





In October 2001, our subsidiary,
American Steel and Aluminum Corporation (“ASA”), was named as one of 57
defendants in an action brought in the United States District Court for the
District of Rhode Island by two private parties under the Comprehensive
Environmental Response Compensation and Liability Act, or CERCLA, to recover
costs incurred and to be incurred in connection with a waste disposal facility
in Cumberland, Rhode Island which has been categorized as a Superfund site by
federal authorities.  During 2006, ASA entered into a settlement with
the plaintiffs, with the approval of the United States Environmental Protection
Agency, or EPA, resolving its alleged liability for all claims for past and
future response and oversight costs in connection with the Remedial
Investigation/Feasibility Study for the site.  The litigation remains
pending against the non-settling defendants.  The settlement does not
address future remediation costs and we do not believe it is currently possible
to estimate its share, if any, of such costs should claims for their recovery be
pursued against ASA.  As part of the rationalization of our
distribution facilities, on February 13, 2009, we sold the facility in
Cumberland, Rhode Island.  The sale of this facility does not relieve
us of potential future liability relating to this Superfund site.





We are
involved in various other lawsuits, claims, demands, and other legal proceedings
and investigations arising out of or incidental to the conduct of our
business.  While it is not possible to determine the ultimate
disposition of each of these matters, we do not believe that their ultimate
disposition will have a material adverse effect upon our results of operations,
financial condition or cash flow.





Item
1A.  Risk Factors





In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 1A “Risk Factors” in our Annual
Report on Form 10-K for our fiscal year ended November 29, 2008. The risks
discussed in our Annual Report on Form 10-K could materially affect our
business, financial condition and future results. The risks described in our
Annual Report on Form 10-K are not the only risks facing us.





There
have been no material changes to factors discussed in Part I, Item 1A “Risk
Factors” in our Annual Report on Form 10-K for the fiscal year ended November
29, 2008 except as set forth below.





The
current recession and our substantial indebtedness is adversely affecting our
liquidity and our ability to operate our business, remain in compliance with
debt covenants, and react to changes in the economy and our
industry.  The consequences could have a materially adverse effect on
our financial condition, liquidity, results of operation and
securities.





The
United States and Canadian economies have entered into severe
recessions.  If these recessions continue or deepen, they will have
further material adverse effects on our financial position, liquidity and
results of operations.





We are
highly leveraged, particularly in comparison to some of our competitors, and we
face significant liquidity constraints.  If we are unable to meet our
debt service obligations, we will need to obtain additional indebtedness,
refinance or restructure all or a portion of our indebtedness or debt service
obligations, sell assets, or raise equity. In addition, our failure to meet our
debt service obligations would likely result in a reduction of our credit
rating, which could harm our ability to take such actions. The current recession
and capital markets crisis would make it very difficult to successfully complete
such actions on acceptable terms or at all.  If we default on our debt
service obligations, it would have a material adverse effect on our business,
financial condition, liquidity and results of operations and the market and the
market price of our common stock, warrants and Senior Secured
Notes.





The ABL
Credit Facility and the Senior Secured Notes significantly restrict our ability
to dispose of assets, obtain additional debt or refinance debt and use the
proceeds therefrom or from additional capital raising activities. Those proceeds
may not be adequate to meet our needs. Any restructuring or refinancing of our
indebtedness or debt service obligations could be at higher interest rates and
may require us to comply with more onerous covenants. Even if we successfully
restructure or refinance our indebtedness or debt service obligations, the
relief afforded may be temporary and may not provide sufficient borrowing
capacity to meet future growth working capital needs.





If we
issue additional equity securities in connection with a debt restructuring or
refinancing, a capital raising transaction, or otherwise, our current
stockholders and warrant holders could experience substantial
dilution.





28


In
addition, companies which are experiencing liquidity constraints frequently face
other challenges as well, including distraction of management, loss of key
personnel, increased difficulty in timely collection of accounts receivable,
disruption of implementation of business strategies, longer and more difficult
sales cycles and increased pricing pressures, and increased competition as
competitors seek to take advantage of the companies’
difficulties.  Further, key suppliers may terminate their supply
arrangements or impose volume or credit limits, cash on delivery requirements or
other restrictions and timely supplies may not be available from other sources
on acceptable terms or at all.  Companies may also have to reduce or
delay capital expenditures or change business strategies.  We may
experience similar consequences, which could have a material adverse effect on
our business, financial condition, liquidity and results of
operations.





In
addition, our common stock and warrants could become delisted from Nasdaq due to
failure of the price of our common stock to rise so that it meets Nasdaq’s
continued listing standards (when the temporary suspension of the price standard
terminates), the need to issue securities with shareholder approval when
required by Nasdaq rules, the failure to remain current in our SEC reporting
requirements, or otherwise. Delisting could result in material adverse
consequences, including a reduction in or loss of a trading market for our
securities, a reduction in the market prices thereof, a reduced amount of news
and analyst coverage for us, a decreased ability to issue additional securities
or obtain additional financing and a decreased ability of our warrant holders to
exercise their warrants.





A
default under the covenants contained in the ABL Credit Facility or Senior
Secured Notes that is not cured or waived could have a material adverse effect
on our financial condition, liquidity, results of operations and
securities.





The
breach of any of the covenants (including covenants to give notice of material
developments as well as covenants to make debt service payments thereunder)
contained in the ABL Credit Facility, unless waived by the lenders, would be a
default under the ABL Credit Facility. This would permit the lenders to
accelerate the maturity of the ABL Credit Facility and elect to terminate their
commitments thereunder. This would have an immediate material adverse effect on
our liquidity. An acceleration of maturity of the ABL Credit Facility would
permit, unless our indebtedness thereunder is less than $10.0 million, the
Noteholders to accelerate the maturity of the Senior Secured Notes. A breach of
the covenants (including covenants to timely file periodic reports with the SEC
as well as covenants to make debt service payments thereunder) in the Senior
Secured Notes also will permit the Noteholders to accelerate the maturity of the
Senior Secured Notes. Acceleration of maturity of the Senior Secured Notes would
permit the lenders to accelerate the maturity of the ABL Credit Facility and
elect to terminate their commitments thereunder. If we were unable to repay our
debt to the lenders and Noteholders or otherwise obtain a waiver from the
lenders and Noteholders, the lenders and Noteholders could sweep our cash,
foreclose on the collateral securing the ABL Credit Facility and the Senior
Secured Notes, which are substantially all of our assets, and exercise all other
rights available to them. We cannot assure you that we will have sufficient
funds to make these accelerated payments and we may not be able to obtain any
such waiver on acceptable terms or at all. Any of such actions would adversely
affect the market and market price for our common stock, warrants and Senior
Secured Notes.





If
our initiatives to improve liquidity and financial position are unsuccessful,
there could exist substantial doubt that we would be able to continue as a going
concern.





Our
consolidated financial statements for the first fiscal quarter of 2009 were
prepared in conformity with generally accepted accounting principles, which
contemplate continuation of the Company as a going concern.  As
described in Note 1 to our consolidated financial statements, if our initiatives
to improve liquidity and financial position are unsuccessful,such
failure could create material uncertainties which could require us to reclassify
our debt as short term and which may result in substantial doubt existing that
we would be able to continue as a going concern.





Item
2.   Unregistered Sales of Equity Securities and Use of
Proceeds





None





Item
3.  Defaults Upon Senior Securities





Not
applicable.





Item
4.  Submission of Matters to a Vote of Security Holders





None.





29


Item
5.  Other Information





Not
applicable.




Item
6.  Exhibits.





10.1
            Form
      of Services Agreement, dated January 1, 2009, between Barzel Industries
      Inc. and Oded Cohen31.1
            Section
      302 Certification of Principal Executive Officer31.2
            Section
      302 Certification of Principal Financial Officer32.1
            Section
      906 Certification





30


SIGNATURES





Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





BARZEL
      INDUSTRIES INC.Date:
      April 20, 2009
            
            By:
            /s/
      Corrado De GasperisCorrado
      De GasperisChief
      Executive Officer (Principal Executive Officer and Principal Financial
      Officer)








31





Item
      6.
                Exhibits.10.1
                Form
      of Services Agreement, dated January 1, 2009, between Barzel Industries
      Inc. and Oded Cohen31.1
                Section
      302 Certification of Principal Executive Officer31.2
                Section
      302 Certification of Principal Financial Officer32.1
                Section
      906 Certification





32