<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
COMMISSION FILE NO. 0-14836
METAL MANAGEMENT, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<C> <C>
DELAWARE 94-2835068
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
</TABLE>
500 N. DEARBORN ST., SUITE 405,
CHICAGO, IL 60610
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (312) 645-0700
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 [ ]
As of October 14, 1997, the Registrant had 16,550,079 shares of Common
Stock outstanding.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements
Consolidated Condensed Balance Sheets -- September 30, 1997
(unaudited) and March 31, 1997............................ 1
Consolidated Condensed Statements of Operations -- three
months and six months ended September 30, 1997 and 1996
(unaudited)............................................... 2
Consolidated Condensed Statements of Cash Flows -- six
months ended September 30, 1997 and 1996 (unaudited)...... 3
Notes to Consolidated Condensed Financial Statements
(unaudited)............................................... 4
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 11
PART II: OTHER INFORMATION
ITEM 1: Legal Proceedings........................................... 29
ITEM 2: Changes in Securities....................................... 29
ITEM 5: Other Information........................................... 29
ITEM 6: Exhibits and Reports on Form 8-K............................ 30
SIGNATURES.................................................. 31
Exhibit Index............................................... 32
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
METAL MANAGEMENT INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1997
------------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 11,999 $ 5,718
Accounts receivable, net.................................. 50,518 9,560
Notes receivable from related parties..................... 0 406
Inventories............................................... 34,978 8,415
Prepaid expenses and other assets......................... 2,831 1,609
-------- -------
Total current assets................................... 100,326 25,708
Property and equipment, net................................. 57,479 20,208
Goodwill and other intangibles, net......................... 107,953 23,484
Other assets................................................ 1,911 725
-------- -------
Total assets........................................... $267,669 $70,125
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Operating lines-of-credit................................. $ 14,297 $ 7,887
Accounts payable.......................................... 34,220 5,246
Other accrued liabilities................................. 10,446 2,746
Current portion of notes payable to related parties....... 33,083 12,575
Current portion of long-term debt......................... 3,037 10,809
-------- -------
Total current liabilities.............................. 95,083 39,263
Long-term notes payable to related parties, less current
portion................................................... 27,992 1,430
Long-term debt, less current portion........................ 22,132 3,740
Deferred taxes.............................................. 7,462 1,411
Other liabilities........................................... 2,040 1,133
-------- -------
Total liabilities...................................... 154,709 46,977
Convertible Preferred Stock -- Series A..................... 24,323 0
Stockholders' equity:
Common stock.............................................. 165 102
Warrants.................................................. 15,451 1,351
Additional paid-in-capital................................ 67,592 16,628
Retained earnings......................................... 5,429 5,067
-------- -------
Total stockholders' equity............................. 88,637 23,148
-------- -------
Total liabilities and stockholders' equity............. $267,669 $70,125
======== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
1
<PAGE> 4
METAL MANAGEMENT INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales.................................. $102,911 $13,963 $157,346 $29,942
Cost of sales.............................. 92,757 13,140 141,218 27,118
-------- ------- -------- -------
Gross profit............................... 10,154 823 16,128 2,824
Operating expenses:
General and administrative............... 5,098 1,456 8,197 2,736
Depreciation and amortization............ 2,402 390 3,653 912
-------- ------- -------- -------
Total operating expenses................... 7,500 1,846 11,850 3,648
-------- ------- -------- -------
Operating income (loss) from continuing
operations............................... 2,654 (1,023) 4,278 (824)
Interest expense........................... (2,317) (216) (3,565) (450)
Other income............................... 350 70 411 109
-------- ------- -------- -------
Income (loss) from continuing operations
before income taxes and discontinued
operations............................... 687 (1,169) 1,124 (1,165)
Provision (benefit) for income taxes....... 382 (254) 598 (254)
-------- ------- -------- -------
Income (loss) from continuing operations... 305 (915) 526 (911)
Discontinued operations:
Gain on sale of assets on former product
lines of GPAR, net of income taxes.... 107 138 208 138
Income from operations of former product
lines of GPAR, net of income taxes.... 0 9 0 156
-------- ------- -------- -------
Net income (loss).......................... $ 412 $ (768) $ 734 $ (617)
Accretion of preferred stock to redemption
value.................................... 57 0 57 0
Preferred stock dividends.................. 315 0 315 0
-------- ------- -------- -------
Net income (loss) applicable to common
stock.................................... $ 40 $ (768) $ 362 (617)
======== ======= ======== =======
Primary earnings (loss) per common share
for:
Continuing operations applicable to
common stock.......................... $ 0.00 $ (0.10) $ 0.01 $ (0.10)
Gain on sale of discontinued
operations............................ $ 0.01 $ 0.02 $ 0.01 $ 0.01
Income from discontinued operations...... $ 0.00 $ 0.00 $ 0.00 $ 0.02
Net income (loss) applicable to
common stock.......................... $ 0.00 $ (0.08) $ 0.02 $ (0.07)
Weighted average primary shares
outstanding.............................. 19,154 8,925 16,553 8,925
Fully diluted earnings (loss) per share
for:
Continuing operations applicable to
common stock.......................... $ 0.00 $ (0.10) $ 0.01 $ (0.10)
Gain on sale of discontinued
operations............................ $ 0.01 $ 0.02 $ 0.01 $ 0.01
Income from discontinued operations...... $ 0.00 $ 0.00 $ 0.00 $ 0.02
Net income (loss) applicable to
common stock.......................... $ 0.00 $ (0.08) $ 0.02 $ (0.07)
Weighted average fully diluted shares
outstanding.............................. 19,561 8,925 18,060 8,925
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 5
METAL MANAGEMENT INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from continuing operations:
Net income (loss) from continuing operations................ $ 526 $ (911)
Adjustments to reconcile net income (loss) from continuing
operations to cash flows from continuing operations:
Depreciation and amortization.......................... 3,653 912
Other.................................................. (112) 0
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, net............................... 1,828 150
Inventories............................................ 11,512 (134)
Accounts payable....................................... (15,778) (1,443)
Other.................................................. (2,987) 1,460
-------- -------
Cash flows from continuing operations....................... (1,358) 34
Cash flows used by investing activities:
Marketable securities sold................................ 0 2,229
Purchases of property and equipment....................... (1,815) (1,502)
Acquisitions, net of cash acquired........................ (14,092) (909)
Other..................................................... 601 0
-------- -------
Net cash used by investing activities....................... (15,306) (182)
Cash flows provided (used) by financing activities:
Net borrowings (repayments) on lines-of-credit............ 1,379 (790)
Issuances of long-term debt............................... 187 0
Repayments of long-term debt.............................. (18,000) (1,835)
Issuances of common stock................................. 15,294 224
Issuances of convertible preferred stock.................. 23,950 0
Other..................................................... (73) 0
-------- -------
Net cash provided (used) by financing activities............ 22,737 (2,401)
-------- -------
Cash flows from discontinued operations..................... 208 3,804
-------- -------
Net increase in cash and cash equivalents................... 6,281 1,255
Cash and cash equivalents at beginning of period............ 5,718 3,093
-------- -------
Cash and cash equivalents at end of period.................. $ 11,999 $ 4,348
======== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
include the accounts of Metal Management, Inc. and its subsidiaries (herein
referred to as "MTLM" or the "Company") and have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
All significant intercompany accounts, transactions and profits have been
eliminated. Certain information related to the Company's organization,
significant accounting policies and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These unaudited condensed
consolidated financial statements reflect, in the opinion of management, all
material adjustments (which include only normal recurring adjustments) necessary
to fairly state the financial position and the results of operations for the
periods presented and the disclosures herein are adequate to make the
information presented not misleading. Operating results for interim periods are
not necessarily indicative of the results that can be expected for a full year.
These interim financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto included
in the Company's most recent Annual Report on Form 10-K.
In order to maintain consistency and comparability between periods
presented, certain amounts have been reclassified from the previously reported
financial statements in order to conform with the financial statement
presentation of the current period.
The accompanying financial statements include the financial position and
results of operations of Proler Southwest, Inc. and Proler Steelworks, L.L.C.
(collectively "Proler"), which the Company acquired in August 1997 (see Note 2
- -- Acquisitions). The Proler transaction has been accounted for using the
purchase method of accounting.
During the first quarter of fiscal 1997, the Company discontinued its
Spectra*Star and consumables business and its VideoShow product and related
product lines businesses. During the second quarter of fiscal 1997, the
Spectra*Star inventory and related production equipment was sold for
approximately $1.3 million in cash and other contingent consideration in the
form of royalties on future revenues from the sale of Spectra*Star printers and
related consumables. The VideoShow business was sold in the third quarter of
fiscal 1997 for consideration in the form of royalties on future revenues from
the sale of VideoShow products. The royalties received during fiscal 1998 are
reflected as an addition to gain on sale.
NOTE 2 -- ACQUISITIONS
Acquisitions completed during six months ended September 30, 1997
In August 1997, the Company acquired Proler, headquartered in Houston,
Texas. In connection with the acquisition, William T. Proler joined the Company
as a Director and entered into a 5 year employment agreement.
In June 1997, the Company acquired four companies under common ownership
comprising The Isaac Group ("Isaac"), headquartered in Maumee, Ohio. The Isaac
Group is comprised of Ferrex Trading Corporation, The Isaac Corporation,
Paulding Recycling, Inc. and Briquetting Corporation of America. The Company
assumed the payment of $8,544,200 of notes of Isaac payable to two former
shareholders of the Isaac Group. In connection with the acquisition, George A.
Isaac III joined the Company as an Executive Vice-President and Director and
entered into a 5 year employment agreement with the Company containing a
non-compete agreement which extends for 3 years beyond the term of the
employment agreement. As part of the employment agreement, Mr. Isaac received
warrants to purchase 76,923 shares of MTLM common stock at an exercise price of
$13.00 per share. In consideration for entering into a non-compete agreement,
the Company granted Mr. Isaac warrants to purchase 287,500 shares of MTLM common
stock at an exercise price of $11.70 per share. A non-compete intangible asset
was recorded and valued at $1.8 million.
4
<PAGE> 7
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
In May 1997, the Company acquired Reserve Iron & Metal L.P. ("Reserve"),
headquartered in Cleveland, Ohio. In connection with the acquisition, Paul D.
Joseph joined the Company as a Director and entered into a 10 year employment
agreement with the Company.
The purchase consideration for each of the above transactions was as
follows (in thousands, except shares and warrants):
<TABLE>
<CAPTION>
RESERVE ISAAC PROLER
------- ----- ------
<S> <C> <C> <C>
Shares of restricted MTLM common stock issued............... -0- 1,942,857 1,750,000
Warrants issued to purchase MTLM common stock............... 1,400,000 462,500 375,000
Cash paid, including transaction costs...................... $ 6,562 $ 513 $ 7,727
Value of common stock issued................................ 0 21,049 11,130
Value of warrants issued.................................... 8,118 3,028 1,574
Value of promissory notes issued............................ 1,542 36,547 10,500
--------- --------- ---------
Total purchase consideration........................... $16,222 $61,137 $30,931
========= ========= =========
</TABLE>
The purchase consideration is allocated as follows (in thousands):
<TABLE>
<CAPTION>
RESERVE ISAAC PROLER
------- ----- ------
<S> <C> <C> <C>
Current assets.............................................. $38,822 $39,171 $ 3,198
Noncurrent assets........................................... 12,345 21,543 5,722
Current liabilities......................................... (16,185) (32,520) (3,741)
Noncurrent liabilities...................................... (25,963) (15,556) (258)
Goodwill.................................................... 7,203 48,499 26,010
--------- --------- ---------
Total purchase consideration........................... $16,222 $61,137 $30,931
========= ========= =========
</TABLE>
The above transactions have been accounted for by the purchase method of
accounting. The purchase price was allocated based on estimates of the fair
value of assets acquired and liabilities assumed. These estimates are revised
during the allocation period as necessary when information regarding
contingencies becomes available to define and quantify assets acquired and
liabilities assumed. The allocation period varies by acquisition but does not
usually exceed one year. To the extent contingencies such as preacquisition
environmental matters or preacquisition tax matters are resolved or settled
during the allocation period such items are included in the revised allocation
of purchase price. After the allocation period, the effect of changes in such
contingencies is included in results of operations in the periods in which
adjustments are determined.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company, MacLeod, HouTex, Reserve,
Isaac, Proler and the sale of Series A convertible preferred stock (see Note 4)
as if these transactions had occurred on April 1, 1996. The unaudited pro forma
results have been prepared for comparative purposes only and include certain
adjustments, such as additional depreciation expense as a result of a step-up in
basis of the fixed assets, additional amortization expense as a result of
goodwill and interest expense related to acquisition debt. The pro forma results
do not purport to be indicative of the results of operations which actually
would have resulted had the acquisitions been in effect on April 1, 1996 (in
thousands, except share data):
<TABLE>
<CAPTION>
SIX MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, 1997 MARCH 31, 1997
------------------ -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net sales.................................................. $224,477 $428,871
Net loss from continuing operations applicable to common
stock.................................................... $ (5,801) $ (6,666)
Fully diluted net loss from continuing operations
applicable to common stock............................... $ (0.28) $ (0.41)
</TABLE>
5
<PAGE> 8
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Pending acquisitions
On May 16, 1997, the Company signed a definitive agreement to merge Cozzi
Iron & Metal, Inc. ("Cozzi"), headquartered in Chicago, Illinois with and into a
subsidiary of the Company. Cozzi will be the surviving entity. The closing of
the Cozzi merger is subject to shareholder approval and is also subject to
certain other conditions precedent. At the closing of this merger, the
shareholders of Cozzi will receive approximately 11.5 million shares of common
stock, warrants to purchase 1.5 million shares of common stock, and $6.0 million
in cash. Upon the closing of the Cozzi merger, it is contemplated that T.
Benjamin Jennings, Chairman of the Board and Chief Development Officer, and
Gerard M. Jacobs, President and Chief Executive Officer, will enter into five
year employment contracts with the Company that will provide, among other
things, compensation in the form of warrants to purchase up to 1.5 million
shares of common stock.
On July 23, 1997, the Company signed a binding letter of intent to acquire
Superior Forge, Inc. ("Superior"), of Huntington Beach, California. Superior
uses and generates aluminum and aluminum scrap in its various operations. In the
transaction, the shareholders of Superior will receive 1,080,000 shares of
common stock and $1.8 million in cash. The Company has agreed to issue to Xavier
Hermosillo, the Company's Secretary, as a finders fee in connection with the
Superior acquisition, and conditioned upon the closing of Superior, warrants to
purchase 20,000 shares of common stock at an exercise price of $15.00 per share.
On August 1, 1997, the Company signed a letter of intent to acquire Houston
Compressed Steel Corp. ("HCS"), headquartered in Houston, Texas. The
shareholders of HCS will receive 310,345 shares of common stock subject to an
adjustment based on the closing price of MTLM stock on the day the transaction
closes.
On August 4, 1997, the Company signed a binding letter of intent to
purchase Newell Phoenix, L.L.C.'s 50% membership interest in Salt River
Recycling, L.L.C. ("Salt River"), an Arizona limited liability company. Cozzi
currently owns a 50% interest in Salt River which will be acquired by the
Company upon the closing of the Cozzi merger. In the transaction, Newell
Phoenix, L.L.C. will receive 100,000 shares of common stock.
On August 5, 1997, the Company signed a binding letter of intent to
purchase all of the scrap metal-related business operations and assets,
excluding real estate, of Goldin Industries, Inc., Goldin Industries Louisiana,
Inc., and Goldin of Alabama, Inc. (the "Goldin Companies"). The Goldin
Companies, headquartered in Gulfport, Mississippi, operate five facilities,
including one near New Orleans, Louisiana, two in Mobile, Alabama, and two in
Gulfport, and principally processes industrial ferrous and non-ferrous metals.
In the transaction, the shareholders of the Goldin Companies will receive $7.15
million in cash, 112,500 shares of common stock, and warrants to purchase an
aggregate of 150,000 shares of common stock.
On August 6, 1997, the Company signed a binding letter of intent to
acquire, in a merger, FPX, Inc. ("FPX"), which has a 50% ownership interest in
PerlCo, L.L.C. ("PerlCo"), a Tennessee limited liability company. Cozzi
currently owns a 50% interest in PerlCo which will be acquired by the Company
upon the closing of the Cozzi merger. The Company will also acquire, through
merger, Southern Tin Compress Corporation ("Southern Tin"), which owns the real
estate and certain equipment associated with the PerlCo operations. In the
transaction, the shareholders of FPX and Southern Tin will receive an aggregate
of 789,740 shares of common stock (subject to adjustment in certain
circumstances) and warrants to purchase an aggregate of 125,000 shares of common
stock. Also at closing, certain affiliates of the FPX shareholders will be
repaid up to $2.0 million due from PerlCo.
On August 28, 1997, the Company signed a binding letter of intent to
acquire substantially all of the assets of Aerospace Metals, Inc. ("Aerospace"),
and certain of its affiliates headquartered in Hartford, Connecticut. Aerospace
recycles high temperature nickel and cobalt alloys and titanium. The sole
shareholder
6
<PAGE> 9
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
of Aerospace will receive $18.0 million of cash and 284,000 shares of common
stock. The common stock to be issued is subject to adjustment.
On August 28, 1997, the Company signed binding letters of intent to acquire
Gold Metal Recyclers, Yonack Iron & Metal, Atlas Recycling, Spectrum Metals and
Yonack Services ("Texas Acquisitions"). These businesses have scrap metal
operations in Texas and Arkansas. The aggregate consideration for these five
acquisitions is composed of $16.64 million in cash, $700,000 in promissory
notes, and 670,944 shares of common stock. The common stock to be issued is
subject to adjustment.
The closing of the pending transactions are subject to, among other things,
execution of mutually acceptable definitive merger and related agreements,
successful completion of due diligence, obtaining corporate approvals,
government approvals as necessary, and other customary conditions to closing.
The acquisitions of the 50% joint venture interests in Salt River and PerlCo and
the Texas Acquisitions are also subject to the consummation of the Cozzi merger.
NOTE 3 -- INVENTORIES
Inventories consisted of the following at (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 MARCH 31, 1997
------------------ --------------
<S> <C> <C>
Ferrous metals.................................. $29,801 $2,707
Non-ferrous metals.............................. 4,604 4,754
Other........................................... 573 954
------- ------
$34,978 $8,415
======= ======
</TABLE>
NOTE 4 -- CONVERTIBLE PREFERRED STOCK -- SERIES A
On August 8, 1997, the Company issued 21,000 shares of Series A Convertible
Preferred Stock, par value $.01 per share (stated value of $1,000 per share), to
two institutional investors for an aggregate purchase price of $21.0 million.
The net proceeds received by the Company from the institutional investors were
$19.95 million. The discount of $1.05 million is being accreted to the
convertible preferred stock using the interest method over the 3 year term of
the convertible preferred stock. Between August 21, 1997 and September 8, 1997,
the Company also issued 4,000 shares of Series A Convertible Preferred Stock to
six individuals for an aggregate purchase price of $4.0 million, including the
sale of 2,500 shares collectively to Gerard M. Jacobs, T. Benjamin Jennings and
Donald F. Moorehead, Jr., directors of the Company. The Series A Convertible
Preferred Stock contains a beneficial conversion feature which is measured at
the date of issue as the difference between the market value of the common stock
and the conversion price, multiplied by the number of common shares into which
the security is convertible. The benefit, akin to a dividend, will be recognized
as a non-cash charge to income available to common stockholders upon the
approval by stockholders of the common stock issuable on conversion. The entire
charge of $3,723,000 is expected to be recognized in the third quarter of fiscal
year 1998.
Dividends on the convertible preferred stock accrue, whether or not
declared by the Board of Directors, at an annual rate of 9% until Shareholder
approval is obtained, at which time the dividend will be reduced to 6% of the
Stated Value of each outstanding share of convertible preferred stock. The
Conversion features of the Preferred Stock are also subject to shareholder
approval and vary based on conditions, including the price of the common stock,
at the time of conversion.
As of October 16, 1997, all the holders of the Convertible Preferred Stock
executed a Waiver of Mandatory Redemption Event waiving each holder's rights to
require the Company to redeem such holder's shares of Convertible Preferred
Stock in the event the Company fails to obtain stockholder approval of the
convertibility features of such stock by December 8, 1997 or by reason of the
Company's failure to hold its
7
<PAGE> 10
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
annual meeting by such date. However, if the convertibility provisions are not
approved by the stockholders by December 8, 1997, the dividend rate on the
Convertible Preferred Stock will increase from 9% to 13% per year until such
stockholder approval is obtained.
On October 24, 1997, all the holders of the Convertible Preferred Stock
executed a Waiver of Mandatory Conversion Conditions, Waiver of Mandatory
Redemption Event, and Consent to Amendment, which, along with the Waiver of
Mandatory Redemption Event, permanently and irrevocably waived all provisions of
the Convertible Preferred Stock that cause mandatory redemption under conditions
that are not in the Company's control.
As a result, there remain no conditions outside of the Company's control
that could cause mandatory redemption of the Convertible Preferred Stock and,
accordingly, the Company will reflect the Convertible Preferred Stock in the
stockholders' equity section of the Company's consolidated balance sheet, on a
prospective basis, from and after October 24, 1997. Additionally, the
reclassification will eliminate accretion of the preferred stock discount on a
prospective basis from and after October 24, 1997.
On October 31, 1997, the Board of Directors authorized the issuance of
additional convertible preferred stock and common stock in private placements.
NOTE 5 -- CHANGES IN STOCKHOLDERS' EQUITY
Changes in stockholders' equity during the six months ended September 30,
1997 are as follows ($ in thousands):
<TABLE>
<CAPTION>
COMMON PAID-IN RETAINED
# OF SHARES STOCK WARRANTS CAPITAL EARNINGS TOTAL
----------- ------ -------- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997............ 10,154,740 $102 $ 1,351 $16,628 $5,067 $23,148
Equity issued in Private stock
offering........................ 2,025,000 20 0 14,661 0 14,681
Equity issued for acquisitions..... 3,692,857 37 13,088 32,142 0 45,267
Conversion of debt to equity....... 342,482 3 0 1,997 0 2,000
Exercise of options/warrants....... 335,000 3 (822) 2,151 0 1,332
Other.............................. 0 0 1,834 13 0 1,847
Dividends and accretion on
preferred stock................. 0 0 0 0 (372) (372)
Net income for the six months ended
September 30, 1997.............. 0 0 0 0 734 734
---------- ---- ------- ------- ------ -------
Balance at September 30, 1997........ 16,550,079 $165 $15,451 $67,592 $5,429 $88,637
========== ==== ======= ======= ====== =======
</TABLE>
NOTE 6 -- SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is summarized as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
Interest paid........................................ $2,685 $ 467
Income taxes paid (refunds received)................. $ 836 $(450)
</TABLE>
8
<PAGE> 11
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
In connection with the Company's acquisitions, the net cash paid for the
six months ended September 30, 1997 was as follows (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired............................... $202,435
Liabilities assumed......................................... (94,196)
Stock and warrants issued................................... (45,266)
Promissory notes and other consideration issued............. (48,589)
--------
Cash paid................................................... 14,384
Less: cash acquired.................................... (292)
--------
Net cash paid for acquisitions.............................. $ 14,092
========
</TABLE>
The promissory notes and other consideration issued is composed of the
following (in thousands):
<TABLE>
<CAPTION>
DATE TRANSACTION AMOUNT
---- ----------- ------
<C> <S> <C>
8/28/97 Six-month, variable interest rate, note payable issued to
the former shareholders of Proler........................ $ 8,100
8/28/97 Two year, 7% note payable issued to the former shareholders
of Proler................................................ 2,400
6/23/97 Five month, 8.5% note payable issued to the former
shareholders of Isaac.................................... 10,600
6/23/97 3 year, 8.5% note payable issued to the former shareholders
of
Isaac.................................................... 25,947
5/1/97 1 year, 9% note payable issued to the former shareholders
of Reserve............................................... 1,542
-------
$48,589
=======
</TABLE>
Non cash investing and financing activities for the six months ended
September 30, 1997 were as follows (in thousands):
<TABLE>
<S> <C>
Conversion of debt to common stock.......................... $2,720
Dividends payable on preferred stock........................ $ 315
Accretion of preferred stock discount....................... $ 57
</TABLE>
NOTE 7 -- RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 128 -- Earnings per
Share, was issued by the Financial Accounting Standards Board (FASB) in February
1997. The Company is required to adopt this statement in its third quarter of
fiscal 1998. This statement replaces current earnings per share (EPS) reporting
requirements and requires a dual presentation of basic and diluted EPS. Basic
EPS excludes dilution and is computed by dividing net income by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
SFAS No. 129 -- Disclosure of Information about Capital Structure, was
issued by the FASB in February 1997. The Company is required to adopt this
statement in its third quarter of fiscal 1998. This statement establishes
standards for disclosing information about the Company's capital structure. The
adoption of this statement will not have an effect on the Company's consolidated
financial statements.
SFAS No. 130 -- Reporting Comprehensive Income, and SFAS No. 131 --
Disclosures about Segments of an Enterprise and Related Information, were issued
by the FASB in June 1997 and are effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 establishes standards for the reporting and
display of
9
<PAGE> 12
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
comprehensive income, which includes net income and changes in equity except
those resulting from investments by, or distributions to, stockholders. SFAS No.
131 establishes standards for disclosures related to business operating
segments. The Company is currently evaluating the impact that these statements
will have on the consolidated financial statements.
NOTE 8 -- EARNINGS PER SHARE
Primary earnings per share is based upon weighted average common shares
outstanding and common stock equivalents, when dilutive. Common stock
equivalents have been determined assuming the exercise of all dilutive stock
options and warrants adjusted for the assumed repurchase of common stock, at the
average market price, from the exercise proceeds. The fully diluted per share
computation assumes the repurchase of common stock at the ending market price.
The potentially dilutive effect of the Company's convertible preferred stock
were not used in the fully diluted net income per common share calculation as
its effect was antidilutive. For the three and six months ended September 30,
1996, common share equivalents were excluded from this computation since they
did not have a dilutive effect of 3% or more.
NOTE 9 -- OTHER
On October 31, 1997, the Board of Directors authorized the Company to enter
into agreements that would provide certain separation and other benefits with
respect to George O. Moorehead upon the occurrence of certain events. Upon the
execution of a definitive Separation Agreement with Mr. Moorehead and the
closing of the Cozzi merger, Mr. Moorehead will be entitled to receive aggregate
cash payments of $915,000 and certain other benefits over a five year period.
Upon the execution of a definitive Stock Warrant Settlement Agreement with Mr.
Moorehead, Mr. Moorehead, under certain conditions, would receive warrants to
purchase 200,000 shares of common stock at an exercise price of less than market
value.
10
<PAGE> 13
This Form 10-Q(A) includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements in this Form 10-Q(A) which address
activities, events or developments that the Company expects or anticipates will
or may occur in the future, including such things as future acquisitions
(including the amount and nature thereof), business strategy, expansion and
growth of the Company's business and operations and other such matters are
forward-looking statements. Although the Company believes the expectations
expressed in such forward-looking statements are based on reasonable assumptions
within the bounds of its knowledge of its business, a number of factors could
cause actual results to differ materially from those expressed in any
forward-looking statements, whether oral or written, made by or on behalf of the
Company. Many of these factors have previously been identified in filings or
statements made by or on behalf of the Company. See also "Factors Influencing
Future Results and Accuracy of Forward Looking Statements" below.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included under
Item 1. In addition, reference should be made to the audited consolidated
financial statements and notes thereto and related Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's most recent Annual Report on Form 10-K.
The financial statements of the Company do not reflect significant accruals
or charges with respect to environmental matters or legal proceedings. The
Company is not aware of any material liabilities with respect to such claims.
GENERAL OVERVIEW
The Company was founded in 1981 and re-incorporated in Delaware in June
1986. Prior to April 11, 1996, the Company was called General Parametrics
Corporation and operated as a manufacturer and marketer of color thermal and dye
sublimation printers and related consumables, including ribbons, transparencies
and paper. This business was discontinued by the Company during fiscal 1997. On
April 9, 1996, the Company's stockholders approved an amendment to the Company's
Certificate of Incorporation to change the name of the Company from General
Parametrics Corporation to Metal Management, Inc. Effective April 15, 1996, the
Company formally changed its NASDAQ stock symbol to "MTLM". On April 25, 1996,
the Board of Directors of the Company approved a change in the Company's fiscal
year end from October 31 to March 31, effective April 1, 1996.
The Company entered the scrap metal recycling industry on April 11, 1996,
through its merger with EMCO Recycling Corp. ("EMCO"), headquartered in Phoenix,
Arizona. As part of the strategic redirection, in April 1996, management
announced plans to exit the Spectra*Star printer and consumables business. On
July 16, 1996, Mannesmann Tally ("Tally") acquired the inventory and related
production equipment of the Spectra*Star business for approximately $1.3 million
in cash and provided additional contingent consideration in the form of
royalties on future sales of Spectra*Star printers and related consumables. The
Company discontinued and sold its VideoShow and related products lines business
("VideoShow") in December 1996 for consideration substantially in the form of
royalties on future sales of VideoShow equipment. The VideoShow consideration is
not expected to be material to the Company.
The Company and its wholly-owned subsidiaries are engaged in the business
of dismantling, processing, marketing, brokering and recycling of both ferrous
and non-ferrous metals with the objective of becoming one of the largest
recyclers of scrap metal in North America. The Company operates twenty-six
recycling centers in seven states, including those operated through joint
ventures, and resells processed scrap metal and other materials to domestic and
foreign customers. MTLM intends to continue its expansion principally through
acquisition to consolidate the highly fragmented scrap metal recycling industry.
The Company believes that no single company is a significant processor of scrap
metal on a national scale, although certain companies are
11
<PAGE> 14
significant processors on a local or regional scale. As of September 30, 1997
the Company's operations, consisted of the following businesses (collectively,
the "Acquired Companies"):
<TABLE>
<CAPTION>
SUBSIDIARY LOCATION(S) MONTH ACQUIRED
---------- ----------- --------------
<S> <C> <C>
EMCO Phoenix, Arizona April 1996
MacLeod Los Angeles, California January 1997
HouTex Houston, Texas January 1997
Reserve Cleveland, Ohio and Chicago, Illinois May 1997
Isaac Maumee, Defiance, Bryan, Dayton, and Cleveland, June 1997
Ohio
Proler Houston, Texas and Jackson, Mississippi August 1997
</TABLE>
Pending Acquisitions as of October 17, 1997 include:
<TABLE>
<CAPTION>
COMPANY LOCATION(S)
------- -----------
<S> <C>
Cozzi Chicago, Illinois and Pittsburgh, Pennsylvania
Superior Huntington Beach, California
Houston Compressed Houston, Texas
Salt River Phoenix, Arizona
Goldin Companies Gulfport, Mississippi, Mobile, Alabama and New Orleans,
Louisiana
PerlCo Memphis, Tennessee
Aerospace Hartford, Connecticut
Atlas Recycling Corpus Christi and Del Rio, Texas
Yonack Iron & Metal Dallas, Texas and Lonoke, Arkansas
Yonack Services Forney, Texas
Gold Metal Recyclers Dallas, Texas
Spectrum Metal Recycling Houston, Texas
</TABLE>
ACQUISITION STRATEGY
MTLM believes that similar to the solid waste industry, the scrap metal
recycling industry has recently begun to experience market consolidation due to,
among other things: (1) significant capital requirements caused by expanding
equipment needs and by more stringent environmental regulations; and (2) the
desire of owners of independent scrap metal processors to sell closely-held
businesses to companies with access to public capital markets.
MTLM seeks to acquire significant processors of scrap metal in large
metropolitan markets which will serve as regional platform companies and to
follow these acquisitions with "tuck-in" acquisitions of smaller processors.
MTLM believes that this consolidation strategy will allow MTLM to improve its
operating margins and profitability by: (1) increasing its market share, which
is expected to enhance customer relationships and enhance supply capabilities;
(2) spreading the cost of management and administrative staff, and utilizing
equipment and other assets, across larger operations; and (3) transferring
technology and best demonstrated processing and marketing strategies among
acquired recycling operations. The Company is continuously evaluating
acquisition opportunities.
RESULTS OF OPERATIONS
The Company's results for the three and six months ended September 30, 1997
include the operations of the Acquired Companies since the effective date of
each respective acquisition. The Company's results from operations during the
three and six months ended September 30, 1996 only include the operations of
EMCO which was acquired in April 1996.
12
<PAGE> 15
Consolidated net sales for the three months ended September 30, 1997 and
1996 in broad product categories were as follows ($ in thousands):
<TABLE>
<CAPTION>
9/30/97 (FISCAL 1998) 9/30/96 (FISCAL 1997)
---------------------------- ----------------------------
COMMODITY WEIGHT NET SALES % WEIGHT NET SALES %
--------- ------ --------- - ------ --------- -
<S> <C> <C> <C> <C> <C> <C>
Ferrous metals (tons)................ 458,000 $ 53,607 52% 44,000 $ 4,706 34%
Non-ferrous metals (pounds).......... 33,888,000 18,344 18 22,500,000 9,000 64
Brokerage (tons)..................... 247,000 28,674 28 -- 0 0
Other................................ -- 2,286 2 -- 257 2
-------- --- ------- ---
$102,911 100% $13,963 100%
======== === ======= ===
</TABLE>
Consolidated net sales for the six months ended September 30, 1997 and 1996
in broad product categories were as follows ($ in thousands):
<TABLE>
<CAPTION>
9/30/97 (FISCAL 1998) 9/30/96 (FISCAL 1997)
---------------------------- ----------------------------
COMMODITY WEIGHT NET SALES % WEIGHT NET SALES %
--------- ------ --------- - ------ --------- -
<S> <C> <C> <C> <C> <C> <C>
Ferrous metals (tons)................ 675,000 $ 79,992 51% 71,900 $ 9,650 32%
Non-ferrous metals (pounds).......... 62,161,000 35,980 23 41,500,000 19,835 67
Brokerage (tons)..................... 390,000 37,785 24 -- 0 0
Other................................ -- 3,589 2 -- 457 1
-------- --- ------- ---
$157,346 100% $29,942 100%
======== === ======= ===
</TABLE>
Ferrous sales represented 52% and 51% of consolidated net sales for the
three and six months ended September 30, 1997, respectively, as compared to 34%
and 32% of consolidated net sales in the comparable prior period. The increase
in ferrous sales, both in tons sold and as a percentage of total net sales, is
due to the acquisitions of HouTex, Reserve, Isaac and Proler, which primarily
sell ferrous metals.
Non-ferrous sales represented 18% and 23% of consolidated net sales for the
three and six months ended September 30, 1997, respectively, as compared to 64%
and 67% of consolidated net sales in the comparable prior period. The decrease
in percentage of non-ferrous sales is due to the acquisitions of HouTex,
Reserve, Isaac and Proler, which sell mainly ferrous metals. The increase in
pounds of non-ferrous metals sold is due to the acquisition of MacLeod, which
mainly sells non-ferrous metals.
A portion of Reserve and Isaac's business involves the brokering of scrap
iron and other metals for sale to foundries, mills and other brokers. Brokered
metals are shipped directly to the customer from the supplier, thereby,
eliminating processing costs and inventory holding costs. For the three and six
months ended September 30, 1997, the Company realized a 5% and 6% gross profit
margin, respectively, on brokered sales. Gross margins on brokered sales will
vary depending on the type of metals and markets in which metals are brokered.
Consolidated gross margin represented 10% of consolidated net sales for the
three and six months ended September 30, 1997, versus 6% and 9% for the
comparable prior periods. Results for the six months ended September 30, 1996
only reflect the operations of EMCO which operated in a particularly competitive
market during the period. The price of scrap metal is affected by regional and
seasonal variations. Furthermore, prices for scrap metal are also impacted by
broad and global cyclical movements and as such equilibrates supply and demand.
Consolidated general and administrative expenses were $5.1 million (5% of
net sales) and $8.2 million (5% of net sales) for the three and six months ended
September 30, 1997, respectively, versus $1.4 million (10% of net sales) and
$2.7 million (9% of net sales) for the comparable prior periods. The increase in
general and administrative expenses reflects the administrative expenses
incurred at the operations of Company's recent acquisitions. Corporate overhead
has also increased due to additions in corporate staff and corporate expenses
(i.e. legal, audit, travel, etc.) to support the acquisition strategy the
Company is pursuing. The reduction in general and administrative expenses as a
percent of consolidated net sales reflects the large scale of operations at
Reserve and Isaac that provides for more efficient allocation of administrative
expenses.
13
<PAGE> 16
Depreciation and amortization expense was $2.4 million and $3.6 million for
the three and six months ended September 30, 1997, respectively, versus $390,000
and $912,000 for the comparable prior periods. The increase is attributed to
goodwill amortization and depreciation of fixed assets arising from the
acquisitions completed since the fourth quarter of fiscal 1997.
Interest expense was $2.3 million and $3.6 million for the three and six
months ended September 30, 1997, respectively, versus $216,000 and $450,000 for
the comparable prior periods. This increase is due to the issuance of notes to
sellers and the assumption of debt associated with the Completed Acquisitions.
Income tax expense for the three and six months ended September 30, 1997
was $382,000 and $598,000, respectively, which yields an effective tax rate of
53% for the six months ended September 30, 1997. The effective tax rate differs
from the statutory rate primarily due to the permanent difference represented by
non-deductible goodwill amortization.
Net loss from continuing operations, after accretion of preferred stock to
redemption value and preferred stock dividends, was $67,000 ($0.00 per share)
for the three months ended September 30, 1997 versus a loss of $915,000 ($0.10
per share) for the comparable prior period. For the six months ended September
30, 1997, net income from continuing operations, after accretion of preferred
stock to redemption value and preferred stock dividends, was $154,000 ($0.01 per
share) versus a loss of $911,000 ($0.10 per share) for the comparable prior
period.
Income from discontinued operations was $107,000 ($.01 per share) for the
three months ended September 30, 1997 as compared to $147,000 ($.02 per share)
for the comparable prior period. For the six months ended September 30, 1997,
income from discontinued operations was $208,000 ($.01 per share) as compared to
$294,000 ($0.03 per share) for the comparable prior period. Income during the
current fiscal year mainly reflects the royalty income recognized by the Company
from the sale of its Spectra*Star business, net of certain expenses paid. The
three and six months ended September 30, 1996 includes the full operation of the
Spectra*Star business through its July 1996 sale, and the related gain
recognized on the sale of the Spectra*Star business.
LIQUIDITY AND CAPITAL RESOURCES
The Company will continue to pursue acquisitions in the scrap metal
recycling industry and anticipates financing these acquisitions through the
issuance of debt and equity. The Company will require substantial capital to
fund future acquisitions and current operations. There can be no assurance that
any additional financing will be available on terms acceptable to the Company,
if at all.
Six Months Ended September 30, 1997 to Six Months Ended September 30, 1996
Cash Flows from Continuing Operations. The Company utilized $1.4 million of
cash flows in its continuing operations during the six months ended September
30, 1997 versus $34,000 of cash flows which were generated from continuing
operations in the comparable period in 1996. The decrease mainly reflects a
decrease in accounts payable, offset by lower inventory levels in the Company's
scrap metal operations.
Cash Flows from Investing Activities. During the six months ended September
30, 1997, the Company purchased approximately $1.8 million of property and
equipment and utilized cash of approximately $14.1 million for the acquisitions
of and transaction costs related to Reserve, Isaac and Proler. Management
anticipates the Company will continue to make acquisitions, make capital
expenditures for new equipment, and upgrade and expand existing equipment and
facilities. The Company expects that these expenditures may increase in the
future due to the internal growth of the Company and business combinations.
Cash Flows from Financing Activities. During the six months ended September
30, 1997, the Company received proceeds from a private offering of 2,025,000
shares of restricted common stock which aggregated $14.7 million and received
proceeds from the issuance of 25,000 shares of convertible preferred stock which
aggregated $23.9 million (collectively, the "Private Placements"). The proceeds
from the Private Placements were used to fund the acquisitions of Reserve and
Proler and used to pay debt associated with the acquisitions
14
<PAGE> 17
of MacLeod and HouTex. The Company also repaid a $6.5 million term loan from a
commercial bank. Borrowings on lines-of-credit increased to fund working capital
requirements. The Company anticipates growing through acquisitions and will
require additional debt or equity to fund Pending Acquisitions and future
acquisitions. On November 14, 1997, the Company obtained a $10.0 million line of
credit from a commercial bank. The loan accrues interest at the prime rate
(which was 8.5% on November 20, 1997) and is due on December 15, 1997 but can be
extended for sixty days for a fee of $50,000. The Company used the proceeds of
the loan towards the payment on November 14, 1997 of approximately $11.0 million
to former shareholders of Isaac in repayment of certain notes. On November 20,
1997 the Company agreed to issue 20,000 shares of Series B Convertible Preferred
Stock, from which the Company expects to receive net proceeds of approximately
$19.1 million.
Cash Flows from Discontinued Operations. The Company's cash flows from
discontinued operations for the six months ended September 30, 1997 reflects
royalty income received from the sale of the Spectra*Star business. Cash flows
during the comparable period last year reflect the cash generated by the
operations of the Spectra*Star business.
FINANCIAL CONDITION
The Company's principal sources of cash are its existing cash and cash
equivalents balances, collection of accounts receivable and proceeds from lines
of credit and other borrowings. At September 30, 1997, the Company had $12.0
million in cash and cash equivalents versus $5.7 million at March 31, 1997.
Six Months Ended September 30, 1997
Significant Cash Transactions During the Six Months ended September 30,
1997. Durng the six months ended September 30, 1997, the Company completed
certain significant debt and equity transactions. The Company raised
approximately $14.7 million in cash from the issuance of restricted common stock
and raised approximately $23.9 million in cash from the issuance of convertible
preferred stock (see Note 4). The Company also entered into a $6.0 million
revolving and term loan with a commercial bank and received proceeds of $4.5
million from that loan. The Company utilized a portion of the cash to pay
approximately $10.0 million of notes which were issued in connection with the
acquisitions of MacLeod and HouTex, to pay a $6.5 million term loan from a
commercial bank and to fund $13.4 million of the cash consideration for the
acquisitions of Reserve and Proler.
Cash Requirements for Pending Acquisitions. In connection with each of the
Pending Acquisitions, the Company has agreed that the cash portion (excluding
transaction costs) of the purchase price will not exceed (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Cozzi...................................................... $ 6,000
Superior................................................... 1,800
Goldin Companies........................................... 7,150
Aerospace.................................................. 18,000
Atlas Recycling............................................ 2,760
Yonack Iron & Metal........................................ 10,880
Yonack Services............................................ 350
Gold Metal Recyclers....................................... 2,650
-------
Total................................................. $49,590
=======
</TABLE>
There can be no assurance that any of these acquisitions will close. The
Company's existing cash and cash equivalents will not be sufficient to fund all
of these acquisitions. The Company is seeking other financing sources to meet
such obligations but no assurances can be provided that such financing will be
available when needed, or that, if available, it will be on satisfactory terms.
15
<PAGE> 18
Cash Requirements for Maturing Debt Obligations. In connection with the
Isaac acquisition, the Company issued approximately $20.6 million of short-term
notes of which $10.6 million is due on November 15, 1997 and $10.0 million is
due on February 15, 1998. In addition, the Company assumed $8.5 million of notes
payable to two former shareholders of Isaac, of which $2.8 million is due on
February 15, 1998. The Company may extend the due date on the $10.6 million note
by three one-month periods by issuing to the note holders warrants to purchase
100,000 shares of common stock per extension period. In connection with the
Proler acquisition, the Company issued approximately $8.1 million of short-term
notes which are due in March 1998. The Company's existing cash and cash
equivalents may not be sufficient to fund these obligations. The Company is
seeking other financing sources to meet such obligations but no assurances can
be provided that such financing will be available when needed, or that, if
available, it will be on satisfactory terms.
Working Capital Availability and Requirements. Accounts receivable balances
increased from $9.6 million at March 31, 1997 to $50.5 million at September 30,
1997 due to the recent acquisitions of Reserve, Isaac and Proler. Accounts
payable increased from $5.2 million at March 31, 1997 to $34.2 million at
September 30, 1997 due to the recent acquisitions.
Inventory levels vary at each of the Company's subsidiaries based on levels
determined by managers of each respective subsidiary. Inventory on hand
consisted of the following ($ in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 MARCH 31, 1997
------------------- ---------------
COMMODITY VALUE % VALUE %
--------- ----- - ----- -
<S> <C> <C> <C> <C>
Ferrous metals............................................. $29,801 85% $2,707 32%
Non-ferrous metals......................................... 4,604 13 4,754 57
Other...................................................... 573 2 954 11
------- --- ------ ---
$34,978 100% $8,415 100%
======= === ====== ===
</TABLE>
The value of the inventory represents the carrying cost on the balance
sheet, which does not necessarily indicate fair value. The increase in carrying
cost of inventory at September 30, 1997 is primarily due to the acquisitions of
Reserve and Isaac, which mainly sell ferrous metals and carry significant
amounts of inventory.
Property and equipment increased from $20.2 million at March 31, 1997 to
$57.5 million at September 30, 1997, as a result of the acquisitions and
increased capital expenditures at the Company's businesses. The Company expects
to make substantial investments in additional equipment and property for
expansion, for replacement of assets, and in connection with future
acquisitions. In particular, EMCO may require substantial capital investment to
replace old equipment and to put into service additional processing equipment.
The Company and its wholly-owned subsidiaries have various revolving lines
of credit with commercial lenders which provide for revolving credit at interest
rates that range from 0% to 1.75% in excess of the lenders' prime rates. The
Company's ability to borrow under the lines of credit is based primarily on its
accounts receivable and inventory balances. At September 30, 1997, the Company
had approximately $8.8 million available under its various lines of credit.
Scrap metal recycling companies have substantial ongoing working capital
and capital equipment requirements in order to continue to operate and grow. For
example, through September 30, 1997, the Company advanced approximately $6.9
million to EMCO for working capital and equipment requirements. As a result, the
Company will seek equity or debt financing to fund future improvements and
expansion of its scrap metal recycling businesses as well as to make other
acquisitions of scrap metal recycling facilities. There can be no assurance that
such financing will be available when needed, or that, if available, it will be
on satisfactory terms. The failure to obtain financing may cause the Company to
default on certain existing debt obligations and would hinder the Company's
ability to make continued investments in capital equipment and pursue
expansions, which could materially adversely affect results of operations and
financial condition. Any equity financing which is undertaken would result in
dilution to the then-existing stockholders of the Company. See "Factors
Influencing Future Results -- Risk of Dilution to Existing Stockholders."
16
<PAGE> 19
FACTORS INFLUENCING FUTURE RESULTS AND
ACCURACY OF FORWARD-LOOKING STATEMENTS
In the normal course of its business, the Company, in an effort to help
keep its stockholders and the public informed about the Company's operations,
may from time to time issue or make certain statements, either in writing or
orally, that are or contain forward-looking statements, as that term is defined
in the U.S. federal securities laws. Generally, these statements relate to
business plans or strategies, projected or anticipated benefits from
acquisitions made by or to be made by the Company, or projections involving
anticipated revenues, earnings, or other aspects of operating results. The words
"expect," "believe," "anticipate," "project," "estimate," and similar
expressions are intended to identify forward-looking statements. The Company
cautions readers that such statements are not guarantees of future performance
or events and are subject to a number of factors that may tend to influence the
accuracy of the statements and the projections upon which the statements are
based, including but not limited to those discussed below. As noted elsewhere in
this report, all phases of the Company's operations are subject to a number of
uncertainties, risks, and other influences, many of which are outside the
control of the Company, and any one of which, or a combination of which, could
materially affect the results of the Company's operations and whether forward-
looking statements made by the Company ultimately prove to be accurate.
The following discussion outlines certain factors that could affect the
Company's consolidated results of operations for fiscal 1998 and beyond and
cause them to differ materially from those that may be set forth in
forward-looking statements made by or on behalf of the Company.
GENERAL
The Company's Board of Directors intends to actively pursue acquisitions
and mergers in scrap metal recycling. Depending on the nature and size of
potential acquisitions, mergers and other transactions, if any, the Company's
cash flows from operating and investing activities, together with its cash, cash
equivalents and marketable securities may not be sufficient in the future.
Therefore, the Company will have to supplement these sources of liquidity with
additional sources of funds such as borrowings and stock offerings. No assurance
can be provided that such financing will be available or available on reasonable
terms.
LIMITED OPERATING HISTORY
Prior to the EMCO merger in April 1996, the Company had no history of
operations in the scrap metal recycling industry. The acquired companies have
not previously operated as subsidiaries of a public holding company subject to
formal accounting and reporting requirements. Consequently, in order to
transition the acquired companies, the Company will have to continue to
establish information systems, internal controls, and hire managers with
appropriate skills to insure the timeliness and accuracy of financial reports.
During fiscal 1997, the Company announced restatement of certain financial
results and amended its second and third quarter reports on Form 10-Q due to
accounting errors at EMCO. In addition, the acquired companies have historically
been organized in a manner in which its management and ownership were the same.
The management of the acquired companies have not previously reported to
management responsible for diverse operations and have had limited experience in
executing consolidation strategies on the scale being pursued by the Company.
Furthermore, the success of the consolidation strategy is dependent in part on
the ability of the Company's management to oversee diverse operations and to
successfully integrate processing, marketing and other resources of the acquired
companies. The Company's management team has not previously had experience in
such capacity.
IMMEDIATE AND FUTURE CAPITAL REQUIREMENTS
The Company is pursuing an aggressive acquisition strategy which requires
substantial amounts of capital. For example, to complete the Cozzi and other
pending acquisitions, the Company will need to fund the cash portions of the
purchase consideration of approximately $49.6 million. The Company is evaluating
various financing strategies and alternatives to obtain sufficient capital to
close the Cozzi and other pending acquisitions and to provide working capital
support and to fund future acquisitions; however, no assurance can
17
<PAGE> 20
be provided that sufficient funds on acceptable terms will become available.
Failure to raise sufficient capital to close the Cozzi acquisition, or other
acquisitions could adversely affect the Company and its stock price.
SHORT TERM BORROWING STRATEGIES TO FUND ACQUISITIONS
The Company intends to continue an acquisition strategy which will utilize
seller note obligations with short term as well as long term maturities. The
issuances of seller notes may provide restrictive covenants on the Company. For
example, the seller notes issued to acquire HouTex, MacLeod, Reserve, Isaac and
Proler provided restrictions on the ability of the Company to unilaterally
direct or control the respective operations until the seller notes were repaid.
The seller notes issued also provided pledges of the stock of the acquired
entities and certain other restrictive covenants. The seller notes issued to
acquire Reserve, Isaac and Proler remain unpaid, and no assurance can be
provided that the Company will access capital on acceptable terms in adequate
time frames to repay these notes or other seller note obligations issued in the
future. An inability to repay seller note obligations would have adverse
consequences to the Company.
SUBSTANTIAL LEVERAGE
As a result of the recent mergers and acquisitions, the Company, as of
September 30, 1997, had approximately $154.7 million in consolidated
liabilities. In order to pursue expansion and acquisition opportunities, the
Company expects to incur additional debt, either through bank or credit lines or
the sale of debt securities in registered or unregistered transactions, as well
as any additional equity financing it may undertake. The servicing of such
present and future debt of the Company will utilize cash either in the form of
cash on hand or cash generated by operating and financing activities.
As of September 30, 1997, the Company had a long-term debt (including
current portions of long-term debt and notes payable to related parties) to
total capital ratio of 47%. The degree to which the Company is leveraged could
have adverse consequences to the Company including the following: (1) the
Company's ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate purposes or other
purposes may be impaired; (2) a substantial portion of the Company's cash flow
from operations will be dedicated to the payment of principal and interest; and
(3) the Company will be more vulnerable to an economic downturn in the scrap
metal recycling industry which has historically been sensitive to changes in
general economic conditions.
RISK OF EXPANSION AND CONSOLIDATION STRATEGIES
The Company currently plans to continue to pursue additional acquisitions
in the scrap metal recycling industry. There can be no assurance that any
previously announced or unannounced mergers will be consummated nor that, if
they are, the Company will be able to effectively manage disparate business
enterprises. The ability of the Company to achieve its expansion objectives and
to manage its growth effectively depends on a variety of factors, including the
ability to identify appropriate acquisition targets and to negotiate acceptable
terms for their acquisition, the integration of new businesses into the
Company's operations and the availability of capital. The inability to control
or manage growth effectively or to successfully integrate future new business
into the Company's operations would have a material adverse effect on the
Company's financial condition and results of operations. There can be no
assurance that the Company will be able to successfully expand or that growth
and expansion will result in profitability. There can be no assurance that the
Company will be able to realize any of the other anticipated benefits of future
mergers or acquisitions that it may undertake or achieve its financial goals and
operational objectives in execution of its consolidation strategy.
COMPANY MANAGEMENT FACTORS
Due to the limited experience of the Company's management in the scrap
metal recycling business, the Company relies substantially on the scrap metal
recycling experience of the current management teams at each of its wholly-owned
subsidiaries. While certain of the management personnel of the acquired
facilities have executed employment agreements, there can be no assurance that
such personnel will continue to serve
18
<PAGE> 21
at the acquired businesses. The loss of a significant number of management
personnel of the Company's acquired businesses could have a material adverse
effect on the Company's efforts to effectively manage and integrate these
operations. In addition, the loss of executive officers of the Company would
also adversely impact the Company's performance and ability to successfully
expand the business.
A condition of the Cozzi merger agreement contemplates the Company
appointing Albert A. Cozzi to be the President and Chief Operating Officer of
the Company. While Mr. Cozzi has substantial experience in the scrap metal
industry and would be an important part of the Company's senior management team,
no assurance can be provided that the Cozzi merger will close.
POTENTIAL CHANGES IN MANAGEMENT AND GOVERNANCE
Changes in Management
Upon the closing of the Cozzi merger, material changes will occur in the
management and governance structure of the Company. The Cozzi merger agreement
contemplates that T. Benjamin Jennings will remain as the Chairman of the Board
and Chief Development Officer of the Company, Gerard M. Jacobs will remain as
Chief Executive Officer of the Company, Robert C. Larry will remain as Chief
Financial Officer of the Company, and Albert A. Cozzi will be appointed
President and Chief Operating Officer of the Company. In addition, the Cozzi
merger agreement contemplates that an Executive Committee will be formed
comprised of Messrs. Albert A. Cozzi, Jacobs, Jennings, Isaac and possibly other
individuals. The Company has not previously operated with a Chief Operating
Officer or with an Executive Committee. There can be no assurance that these
changes in management structure will be successful in carrying out the
acquisition and operating plans of the Company.
Changes in Governance
Upon the closing of the Cozzi merger, the Cozzi merger agreement
contemplates that the Company's Board of Directors will likely be comprised of
directors equally nominated by the shareholders of Cozzi and by Messrs. Jacobs
and Jennings. The Cozzi merger agreement contemplates that two outside directors
will be nominated who are mutually agreeable to both sides of the Cozzi merger.
The Cozzi merger is an example of the willingness of the Company to rapidly
change the management and governance of the Company, if necessary or desirable.
No assurance can be provided that the proposed changes in management and
governance as contemplated in the Cozzi merger agreement will occur or that a
subsequent acquisition or merger will not similarly change the management and
governance structure of the Company nor can there be assurance that any changes
to the corporate governance will be advantageous to the Company.
CONTROL OF COMPANY BY MANAGEMENT, PRINCIPAL STOCKHOLDERS AND MEMBERS OF THE
BOARD OF DIRECTORS
As a result of the acquisitions, Messrs. Jacobs and Jennings, together with
other members of the Board of Directors and other Principal Stockholders, have
sufficient voting power to control the outcome of all matters (including the
election of directors and future mergers, acquisitions or sale of assets)
submitted to stockholders for approval and may be deemed to have effective
control over the affairs and management of the Company. Messrs. Jacobs and
Jennings along with the existing members of the Board of Directors of the
Company, currently beneficially own approximately 41% of the Company's issued
and outstanding common stock. To date, the Directors of the Company have voted
in support of initiatives recommended by Messrs. Jacobs and Jennings. There can
be no assurance that such support will continue in the future with respect to
voting by Directors. The Cozzi merger, if consummated, will result in 65%
ownership of the Company's common stock by management, members of the Board of
Directors and Cozzi shareholders which further concentrates ownership and
control among principals of the Company.
IMPACT OF THE COZZI DEFINITIVE AGREEMENTS ON MANAGEMENT OF THE COMPANY AND
STRATEGIC ACTIONS CONSIDERED BY THE COMPANY PRIOR TO CLOSING OF THE COZZI MERGER
On May 16, 1997, the Company executed a definitive agreement to merge a
subsidiary of the Company with Cozzi. The definitive agreement requires the
Company to seek approval from Cozzi shareholders prior to
19
<PAGE> 22
executing certain strategic actions up to the closing of the Cozzi merger or
termination thereof. Actions that require approval by the Cozzi shareholders
included but are not limited to:
1. Amendments to or changes of the Company's charter or bylaws.
2. Issuance of equity, except those contemplated by Section 5.2(b) of the
merger agreement.
3. Changes in management of the Company or changes in the compensation
provided to officers and directors of the Company.
4. Acquisitions of companies, except those contemplated by Section 5.2(e)
of the merger agreement.
5. Incurrence of any indebtedness or other significant financing
transactions.
No assurance can be provided that the Cozzi merger will be consummated.
CYCLICALITY OF OPERATING RESULTS
The operating results of the scrap metal recycling processing industry in
general, are highly cyclical in nature as they tend to reflect and amplify the
general national economic condition. In periods of national recession or periods
of minimal economic growth, the operations of scrap metal recycling companies
have been materially adversely affected. During recessions or periods of minimal
economic growth, the automobile and the construction industries typically
experience major cutbacks in production, resulting in decreased demand for
steel, copper and aluminum supplies. For example, the scrap metal recycling
industry was adversely affected for a period of five years from approximately
1988 to 1993. Future economic downturns would materially and adversely affect
the operating results of the Company. The ability of the Company to withstand
significant economic downturns in the future will depend in part on the amount
of cash maintained and availability under lines of credit for the Company. To
date, EMCO and Isaac have required cash infusions from the Company. The Company
believes that EMCO and Isaac will require additional working capital funding
during fiscal 1998.
PRICE FLUCTUATIONS
The Company's results of operations have been in the past, and the results
of operations of the overall Company are expected to be, subject to price
fluctuations that occur in the metals commodities markets. A further decline in
commodity prices could further reduce revenues and net income prospectively.
Such losses could have a material adverse effect on the Company's results of
operations and liquidity of the Company.
DEPENDENCE ON SCRAP SUPPLIERS
The Company's scrap recycling operations are dependent upon the supply of
scrap materials from its suppliers. Few of such suppliers are bound by long-term
supply arrangements, and therefore they have no obligation to continue to supply
scrap materials to the Company. In the event that substantial numbers of scrap
suppliers cease supplying scrap materials to the Company, the financial
condition and results of operations of the Company would be materially and
adversely affected.
CONCENTRATION OF CUSTOMERS AND CREDIT RISK
For the six months ended September 30, 1997, the Company's 10 largest
customers represented 42% of consolidated net sales and 35% of net accounts
receivable. No single customer represented more than 10% of consolidated net
sales for the six months ended September 30, 1997. The loss of any one of the
Company's significant customers could affect the Company's results of operations
and cash flows.
Financial instruments that potentially subject the Company to significant
concentration of credit risk are primarily trade accounts receivable. The
Company sells its products primarily to scrap metal brokers and steel mills
located in the United States. Generally, the Company does not require collateral
or other security to support customer receivables. Historically, the Company's
wholly-owned subsidiaries have not experienced material losses from the
noncollection of receivables, however, certain of the Company's subsidiaries
have significant balances owing from customers that operate in cyclical
industries and leveraged conditions which may impair the collectibility of
receivables.
20
<PAGE> 23
OPERATING LOSSES AT EMCO
EMCO has incurred operating losses and required capital infusions since the
April 1996 merger. Management believes that the losses have resulted primarily
from unfavorable market conditions in Arizona, from operation of antiquated and
inefficient machinery and equipment, from lack of certain machinery and
equipment, and from certain operational issues. During fiscal 1997, in an effort
to abate such operating losses, the Company initiated efforts to restructure the
operations of EMCO. The restructuring has reduced expenses by primarily
eliminating the utilization of certain leased equipment, reducing the size of
the workforce, and reducing the cost of outside processing from certain vendors.
In addition, as a part of the restructuring program, EMCO management initiated a
review of the buying and selling departments. The Company is not certain whether
it will be able to accomplish a successful restructuring of EMCO's business.
As part of the Cozzi merger, the Company will own 50% of the Salt River
joint venture owned by Cozzi in Phoenix, Arizona. On August 4, 1997, the Company
signed a letter of intent to purchase the other 50% interest of the joint
venture from Newell Phoenix L.L.C. It is the Company's intention to combine the
operations of Salt River with the EMCO operations. There can be no assurance
that either the Cozzi or the Newell Phoenix transaction will close, or if both
transactions close, there can be no assurance that any integration or
consolidation of EMCO's business with Salt River will be successful.
RISK OF DILUTION TO EXISTING STOCKHOLDERS
The Company's strategy of expansion and additional acquisitions will
require it to issue additional shares of common stock or securities convertible
into common stock as consideration for additional acquisitions. Common stock may
be issued at a discount to the market price and issuance of a material amount of
common stock or such securities would result in significant dilution to the
then-existing stockholders of the Company. For example, the Cozzi merger, if
consummated, will result in the issuance of an additional 11.5 million shares of
common stock and warrants to purchase at least 3.0 million shares of common
stock. The Company expects to be required to seek equity financing to meet
future capital requirements, which would also result in additional dilution. See
"Immediate and Future Capital Requirements."
VOLATILITY OF STOCK PRICE
The Company's stock price has been, and in the future is expected to be,
volatile and to experience market fluctuation as a result of a number of
factors, including, but not limited to, merger and acquisition announcements and
developments, current and anticipated results of operations, future product
offerings by the Company or its competitors and factors unrelated to the
operating performance of the Company. The trading price of the Company's Common
Stock may also vary as a result of changes in the business, operations or
financial results of the Company, prospects of general market and economic
conditions, additional future proposed acquisitions by the Company and other
factors. Failure in any quarter to meet the investment community's revenues or
earnings expectations could have an adverse impact on the Company's stock price,
as could sales of large amounts of stock by existing stockholders. In addition,
sales of substantial amounts of the Company's common stock in the public market
could adversely affect the market price of the Company's common stock. In the
event the market price were adversely affected by such sales, the Company's
access to equity capital markets could be adversely affected and issuances of
common stock by MTLM in connection with acquisitions, or otherwise, could dilute
future earnings per share.
The Company believes that the investment public has factored the closing of
the Cozzi acquisition as well as potential future acquisitions into the
Company's current stock price. If the Cozzi or any future acquisitions do not
close, an adverse impact may occur on the Company's stock price.
POTENTIAL REDEMPTION OF SERIES A PREFERRED STOCK
On August 8, 1997, the Company issued 21,000 shares of Series A Convertible
Preferred Stock and between August 21, 1997 and September 8, 1997, the Company
issued 4,000 shares of Series A Convertible Preferred Stock, par value $.01 per
share (stated value of $1,000 per share) (the "Series A Preferred Stock"). 2,500
shares of the Series A Preferred Stock in the aggregate were purchased by Gerard
M. Jacobs,
21
<PAGE> 24
T. Benjamin Jennings and Donald F. Moorehead, Jr., directors of the Company. As
of October 16, 1997, all of the holders of Series A Preferred Stock executed a
Waiver of Mandatory Redemption Event waiving any right to require the Company to
redeem the Series A Preferred Stock if the convertibility provisions of the
Series A Preferred Stock are not approved by the Stockholders by December 8,
1997, by reason of the Company's failure to hold its annual meeting by such
date. However, if the convertibility features are not approved by the
stockholders by December 8, 1997, the dividend rate on the Series A Preferred
Stock will increase from 9% to 13% per year until such stockholder approval is
obtained. If the Company has obtained Stockholder approval ("Stockholder
Approval") of the convertibility provisions of the Series A Preferred Stock, but
has not filed a registration statement (the "Registration Statement") covering
the Common Stock issuable upon conversion of the Series A Preferred Stock,
within thirty days of receiving Stockholder Approval, or if the Registration
Statement is not declared effective within 120 days after Stockholder Approval
is obtained, then the Company will be obligated to pay the holders of the Series
A Preferred Stock a fee of $500,000 per month, equal to 2.0% of the stated value
of the Series A Preferred Stock, in cash or in the form of additional shares of
Preferred Stock.
The Company also will be obligated to redeem the shares of Series A
Preferred Stock at a redemption price equal to 120% of the sum of $1,000 per
share plus all accrued and unpaid dividends if any of the following occur: (i)
the Registration Statement is not declared effective within 120 days after
Stockholder Approval is obtained (subject to extension to allow the Company to
amend or supplement the Registration Statement, and during periods when
disclosure would be detrimental to the Company's business) or if it has been
declared effective but the effectiveness lapses or the Registration Statement
becomes unavailable except for permitted standstill periods as described in the
registration rights agreement between the Company and the holders of the Series
A Preferred Stock, and such lapse or unavailability continues for ten business
days; (ii) the Company breaches in any material respect certain agreements
entered into in connection with the sale of the Series A Preferred Stock; (iii)
the Company sells all or substantially all of its assets, engages in a
transaction in which more than 50% of the voting power of the Company is
disposed of, or merges or consolidates with any entity other than Cozzi,
immediately following which the Company's prior stockholders do not own at least
50% of the surviving entity; or (iv) the Common Stock is no longer listed for
quotation on the NASDAQ National Market System or another national securities
exchange. There can be no assurances that if the Company were required to redeem
the shares of Series A Preferred Stock, it would have sufficient cash, or be
able to obtaining financing on reasonable terms, if at all, to fund this
redemption. If the Company were unable to redeem the shares of Series A
Preferred Stock, then the Company would be obligated to pay additional dividends
and fees to the holders of the Series A Preferred Stock. The payment of these
additional dividends, interest and fees could have a material adverse effect on
the Company's financial condition and results of operations.
ENVIRONMENTAL MATTERS
COMPREHENSIVE REGULATORY REQUIREMENTS
The Company and its subsidiaries are subject to significant government
regulation including stringent environmental laws and regulations. Among other
things, these laws and regulations impose comprehensive local, state, federal,
foreign and supranational statutory and regulatory requirements concerning,
among other matters, the treatment, acceptance, identification, storage,
handling, transportation and disposal of industrial by-products, hazardous and
solid waste materials, waste water, stormwater effluent, air emissions, soil
contamination, surface and ground water pollution, employee health and safety,
operating permit standards, monitoring and spill containment requirements,
zoning, and land use, among others. Various laws and regulations set
prohibitions or limits on the release of contaminants into the environment. Such
laws and regulations also require permits to be obtained and manifests to be
completed and delivered in connection with any shipment of prescribed materials
so that the movement and disposal of such material can be traced and the persons
responsible for any mishandling of such material can be identified. This
regulatory framework imposes significant compliance burdens, costs and risks on
the Company and its subsidiaries. Violation of such laws and regulations may
give rise to significant liability of the Company, including fines, damages,
fees and expenses.
22
<PAGE> 25
Releases of certain industrial by-products and waste materials are subject
to particular laws and regulations. While the specific provisions of releases
related laws and regulations vary among jurisdictions, such laws and regulations
typically require that the relevant authorities be notified promptly, that the
release be cleaned up promptly, and that remedial action be taken by the
responsible party and/or owner of the site to restore the environment to levels
protective of human health and the environment. Generally, the governmental
authorities are empowered to act to clean up and remediate releases and
environmental damage and to charge the costs of such cleanup to one or more of
the owners of the property, the person responsible for the spill, the generator
of the contaminant and certain other parties or to direct the responsible party
to take such action. Such authorities may also impose a tax or other liens to
secure such parties' reimbursement obligations. Environmental laws and
regulations impose strict operational requirements on the performance of certain
aspects of hazardous or toxic substances remedial work. These requirements
specify complex methods for identification, monitoring, storage, treatment and
disposal of waste materials managed during a project. Failure to meet these
requirements could result in substantial fines and other penalties.
Environmental legislation and regulations have changed rapidly in recent
years, and it is likely that the Company and its subsidiaries will be subject to
even more stringent environmental standards in the future. For example, the
ultimate effect of the regulations to be implemented under the Clean Air Act
Amendments of 1990 (the "Clean Air Act") on the Company and its subsidiaries,
and the actual amount of any capital expenditures required thereby, will depend
on how the Clean Air Act is interpreted and implemented pursuant to regulations
that are currently being developed and on such additional factors as the
evolution of environmental control technologies and the economic viability of
such operations at the time. For these reasons, future capital expenditures for
environmental control facilities cannot be predicted with accuracy; however, one
may expect that environmental control standards will become increasingly
stringent and that the expenditures necessary to comply with them could increase
substantially.
Local, state, federal, foreign and supranational governments and agencies
have also from time to time proposed or adopted other types of laws, regulations
or initiatives with respect to the scrap metal recycling industry. Included
among them are laws, regulations and initiatives intended to ban or restrict the
intrastate, interstate or international shipment of wastes, to impose higher
taxes or fees on certain shipments of waste, or to classify or reclassify
certain categories of non-hazardous wastes as hazardous. Certain local, state,
federal, foreign and international governments and agencies have promulgated
"flow control" or other regulations, which attempt to require that all waste (or
certain types of waste) generated within the jurisdiction in question must go to
certain disposal sites. From time to time legislation is considered that would
enable or facilitate such laws, regulations or initiatives. Due to the
complexity of regulation of the industry and to public and political pressure,
implementation of existing or future laws, regulations or initiatives by
different levels of governments may be inconsistent and are difficult to
foresee.
The principal services of the Company and its subsidiaries are detailed in
and regulated by various permits and licenses governing their scrap metal
recycling operations. Government agencies continually monitor the performance of
a permit or license holder in relation to the terms of its permit or license.
The Company and its subsidiaries' facilities are subject to periodic unannounced
inspection by local, state and federal authorities to ensure compliance with
permit and license terms and applicable laws and regulations. The Company and
its subsidiaries work with the authorities to remedy any deficiencies found
during such inspections. If serious violations are found or deficiencies, if
any, are not remedied, the Company and its subsidiaries could incur substantial
fines and could be required to close a site.
Governmental authorities have a wide variety of powerful administrative
enforcement actions and remedial orders available to them to cause compliance
with environmental laws or to remedy or punish violations of such laws. Such
orders may be directed to various parties, including present or former owners or
operators of the concerned sites, or parties that have or had control over the
sites. In certain instances, fines and treble damages may be imposed. In the
event that administrative actions fail to cure a perceived problem or where the
relevant regulatory agency so desires, an injunction or temporary restraining
order or damages may be sought in a court proceeding. Some laws give private
parties the right, in addition to existing common laws claims, to file claims
for injunctive relief or damages against the owners or operators of the site.
23
<PAGE> 26
The Company believes that with heightened legal, political and citizen
awareness and concerns, all companies in the scrap metal recycling industry may
be faced, in the normal course of operating their businesses, with fines and
penalties and the need to expend substantial funds for capital projects,
remedial work and operating activities, such as environmental contamination
monitoring, and related activities. Regulatory or technological developments
relating to the environment may require companies engaged in the scrap metal
recycling industry to modify, supplement or replace equipment and facilities at
costs which may be substantial. Because the scrap metal recycling industry has
the potential for discharge of materials into the environment, a material
portion of the capital expenditures by the Company and its subsidiaries is
expected to relate, directly or indirectly, to such equipment and facilities.
Moreover, it is possible that future developments, such as increasingly strict
requirements of environmental laws and regulations, and enforcement policies
will require even more significant capital investments in this regard.
Due to the nature of the scrap metal recycling business, it is possible
that inquiries or claims based upon environmental laws may be made in the future
by governmental bodies or individuals against the Company and any other scrap
metal recycling entities that the Company may acquire. The location of the
Company's facilities in large urban areas may increase the risk of scrutiny and
claims. The Company is unable to predict whether any such future inquiries or
claims will in fact arise or the outcome of such matters. Additionally, it is
not possible to predict the total size of all capital expenditures or the amount
of any increases in operating costs or other expenses that may be incurred by
the Company to comply with the environmental requirements applicable to the
Company and its operations, or whether all such cost increases can be passed on
to customers through product price increases. Moreover, environmental
legislation has been enacted, and may in the future be enacted, to create
liability for past actions that were lawful at the time taken but that have been
found to affect the environment and to create public rights of action for
environmental conditions and activities. As is the case with scrap recyclers in
general, if damage to persons or the environment has been caused, or is in the
future caused, by hazardous materials activities of the Company or its
subsidiaries, the Company or its subsidiaries may be fined and held liable for
such damage. In addition, the Company and such subsidiaries may be required to
remedy such conditions and/or change procedures. Thus, there can be no assurance
that potential liabilities, expenditures, fines and penalties associated with
environmental laws and regulations will not be imposed on the Company in the
future or that such liabilities, expenditures, fines or penalties will not have
a material adverse effect on the Company.
In addition, public interest groups, local citizens, local municipalities
and other persons or organizations may have a right to seek relief from court
for purported violations of law. In some jurisdictions, recourse to the courts
for individuals under common law principles such as trespass or nuisance have
been or may be enhanced by legislation providing members of the public with
statutory rights of action to protect the environment. In such cases, even if a
scrap metals recycling facility is operated in full compliance with applicable
laws and regulations, local citizens and other persons and organizations may
seek compensation for damages caused by the operation of the facility. In some
cases, the operation of scrap metal recycling facilities is subjected to
heightened public scrutiny because of residential or other non-industrial
property uses that have developed around such facilities. So-called "Not In My
Backyard" ("NIMBY") grass roots community opposition to such facilities can
materially interfere with such facilities' on-going operations and growth.
SIGNIFICANT POTENTIAL ENVIRONMENTAL LIABILITY
General
The Company and its subsidiaries are subject to potential liability and may
also be required from time to time to clean up or take certain remediation
action with regard to sites currently or formerly used in connection with their
operations. Furthermore, the Company and its subsidiaries may be required to pay
for all or a portion of the costs of clean up or remediation at sites the
Company and its subsidiaries never owned or on which they never operated if they
are found to have arranged for transportation, treatment or disposal of
pollutants or hazardous substances on or to such sites. The Company and its
subsidiaries are also subject to potential liability for environmental damage
that their assets or operations may cause nearby landowners, particularly as a
result of any contamination of drinking water sources or soil, including damage
resulting from conditions existing prior to the acquisition of such assets or
operations. Any substantial liability for
24
<PAGE> 27
environmental damage could materially adversely affect the operating results and
financial condition of the Company, and could materially adversely affect the
marketability and price of the Company's stock. Risk factors include the
following:
Incompleteness of Site Investigations
As part of its pre-transaction "due diligence" investigations, the Company
typically hires an environmental consulting firm to conduct transaction screen
reviews, or Phase I and/or Phase II site assessments of the sites owned or
leased by particular acquisition or merger candidates (the "Pre-Transaction Site
Assessments"). However, such Pre-Transaction Site Assessments have not covered
(and will not in the future cover) all of the sites owned or leased by the
companies which are acquired by or merge with the Company or its subsidiaries.
Moreover, such Pre-Transaction Site Assessments which have occurred have not
been designed or expected (and will not in the future be designed or expected)
to disclose all material contamination that may be present. For example, the
Company does not include soil sampling or core borings as a standard part of its
Pre-Transaction Site Assessments, even though such sampling and core borings
might increase the chances of finding contamination on a particular site.
Failure to conduct soil sampling and core borings on a particular site could
result in the Company failing to identify a seriously contaminated site prior to
an acquisition or merger, and could materially adversely affect the Company.
Likelihood of Contamination at Some Sites
Pre-Transaction Site Assessments of the Company's current subsidiaries'
sites conducted by independent environmental consulting firms have revealed that
some soil, surface water and/or groundwater contamination is likely at certain
of such sites, and have recommended that certain additional investigations and
remediation be conducted. Based upon its review of these reports, the Company
believes that it is likely that contamination exists at certain of its
subsidiaries' sites and that it is likely that additional investigation,
monitoring and remediation will be required at some of the sites. Also based
upon its review of these reports, the Company believes that such contamination
is likely to include, but not be limited to: polychlorinated biphenyls (PCBs);
total petroleum hydrocarbons; volatile organic compounds (VOCs); antimony;
arsenic; cadmium; copper; lead; mercury; silver; zinc; waste oil; toluene; meta-
and para-xylenes; baghouse dust; and/or aluminum dross. The ultimate extent of
such contamination cannot be stated with any certainty at this point, and there
can be no assurance that the cost of remediation will be immaterial. The
existence of such contamination could result in federal, state, local or private
enforcement or cost recovery actions against the Company, possibly resulting in
disruption of Company operations, and substantial fines, penalties, damages,
costs and expenses being imposed against the Company and its subsidiaries.
The Company has supplied its Pre-Transaction Site Assessments to the
management of its subsidiaries, who are responsible for reviewing them,
examining ongoing operations, and taking any necessary steps to achieve and/or
maintain compliance with the environmental laws, including but not limited to
any necessary remedial measures or operational changes. The Company expects to
require future cash outlays as it incurs the actual costs relating to the
remediation of environmental liabilities. No assurance can be provided that such
costs will not be significant. The Company and its subsidiaries expect cash
flows from operations to provide the funds for environmental capital, operating
and remediation expenditures; however, no assurance can be given that such cash
flows will be adequate for this purpose.
Uncertain Costs of Environmental Compliance and Remediation
It must be emphasized that, as a result of certain factors which impact
upon the Company and its subsidiaries' future expenditures to comply with
environmental requirements -- such as new local, state and federal laws and
regulations; the developing nature of administrative standards promulgated under
Superfund and other environmental laws, and changing interpretations of such
laws; uncertainty regarding adequate control levels, testing and sampling
procedures, new pollution control technology and cost benefit analysis based on
market conditions; the incompleteness of information regarding the condition of
certain sites; the lack of standards and information for use in the
apportionment of remedial responsibilities; the numerous choices and costs
associated with diverse technologies that may be used in remedial actions at
such sites; the possible ability to recover indemnification or contribution from
third parties; and the time periods over which
25
<PAGE> 28
eventual remediation may occur -- the estimated costs for future environmental
compliance (capital expenditures or increases in operating costs or other
expenditures) and remediation cannot be accurately predicted and are necessarily
imprecise; however, such costs could be material to future quarterly or annual
results of operations of the Company. In addition to not being possible to
predict the amount or timing of future costs of environmental compliance and
remediation, it is not possible to predict whether or not such costs can be
passed on to customers through price increases.
Lack of Environmental Impairment Insurance
The Company and its subsidiaries do not carry environmental impairment
liability insurance. The Company and its subsidiaries operate under general
liability insurance policies, which Company management considers to be adequate
to protect the Company and its subsidiaries' assets and operations from other
risks but which does not cover environmental damage. If the Company and its
subsidiaries were to incur significant liability for environmental damage not
covered by environmental impairment insurance, or for other claims in excess of
its general liability insurance and umbrella coverage, the Company's financial
condition could be materially adversely affected.
Risks Associated With Certain By-Products
While the majority of the Company's metal products are currently exempt
from applicable solid waste regulations, the scrap metal recycling operations of
the Company's subsidiaries produce significant amounts of by-products.
Heightened environmental risk is associated with certain of these by-products.
For example, the Company's EMCO subsidiary operates a shredder for which the
primary feed materials are automobile hulks and obsolete household appliances.
Approximately twenty percent (20%) of the weight of an automobile hulk consists
of material (shredder fluff) which remains after the segregation of ferrous and
saleable non-ferrous metals. Federal environmental regulations require shredder
fluff to pass a toxic leaching test to avoid classification as a hazardous
waste. The Company's EMCO subsidiary endeavors to have hazardous contaminants
removed from the feed material prior to shredding and as a result the Company
believes the shredder fluff generated is properly not considered a hazardous
waste. Should the laws, regulations or testing methods change with regard to
shredder fluff disposal, the Company and its EMCO subsidiary may incur
additional significant expenditures.
Potential Superfund Liability
The Company's Reserve subsidiary has received a notice from the United
States Environmental Protection Agency (the "EPA") that Reserve and numerous
other parties are considered potentially responsible parties (a "PRP") and may
be obligated under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("Superfund" or "CERCLA") to pay a portion of the cost of
remedial investigation, feasibility studies and ultimately remediation to
correct alleged releases of hazardous substances at the Standard Scrap
Metal/Chicago International Exporting Removal Action Site. Superfund may impose
joint and several liability for the costs of remedial investigations and actions
on the entities that arranged for disposal of certain wastes, the waste
transporters that selected the disposal sites, and the owners and operators of
such sites. Responsible parties (or any one of them) may be required to bear all
of such costs regardless of fault, legality of the original disposal, or
ownership of the disposal site. Based upon its analysis of the situation, the
management of Reserve currently does not expect such potential liability to be
in excess of $100,000.
Unregistered Storage Tanks
Underground storage tanks (UST's) exist at several of the Company's
subsidiaries' sites. UST's are subject to various federal, state and local laws
on their operation. In the event a release of regulated product has occurred,
the Company may incur significant costs to investigate and remediate the
release.
Environmental consultants to the Company have reported that an underground
storage tank (UST) located at one of the Company's EMCO subsidiary's yards had
not been reported to the Arizona environmental authorities as required by law.
EMCO, as the lessee, reported the matter to the owner of the property, and
believes that such report is the extent of its obligations with respect to this
matter. However,
26
<PAGE> 29
there can be no assurance that any failure of the owner to report will not
result in liability or the assessment of penalties against the Company or EMCO.
Environmental consultants to the Company have also reported that an above-ground
storage tank at the Company's HouTex subsidiary is required to be registered but
is not yet registered.
Employee Health and Safety Issues
The Company and its subsidiaries are regulated by federal, state and local
agencies responsible for employee health and safety, including OSHA. A total of
two accidental deaths of, and one serious accidental injury to, employees have
occurred at the Company's HouTex and Reserve subsidiaries during the past three
years. Reserve has been fined by OSHA in regard to such incidents. HouTex has
also been cited and fined by OSHA for alleged failure to establish energy
control procedures and employee training in regard to mobile shearing equipment.
No assurance can be given that potential liabilities of the Company or its
subsidiaries in regard to such death and injuries, or in regard to any future
deaths of or injuries to employees of the Company's subsidiaries, will not be
material.
Recommendations of Environmental Consultants
Environmental consultants to the Company have recommended that a variety of
remedial actions be undertaken in regard to its subsidiaries, including: the
sampling of soil, surface and ground water at its various facilities; the
remediation of any existing contamination under applicable regulations; the
development of Spill Prevention Control and Countermeasure Plans ("SPCC"); the
completion of certain actions in regard to Storm Water Pollution Prevention
Plans; the timely completion and/or filing of certain annual reports and
summaries required by governmental agencies; the completion of Oil Discharge and
Response Plans; and the remediation of certain materials suspected of containing
asbestos. If these recommendations were to be not followed by the Company and
its subsidiaries for an indefinite period of time, one or more of the sites
might, potentially, be subject to a governmental enforcement action, the
imposition of fines, penalties and damages, and/or require remediation at some
future time at a cost which the Company cannot guarantee would not be material.
Compliance History
The Company's subsidiaries have, in the past, been found not to be in
compliance with certain environmental laws and regulations, and have incurred
fines associated with such violations which have not been material in amount.
The Company's subsidiaries have also paid a portion of the costs of certain
remediation actions at certain sites. No assurance can be given that additional
compliance issues and liabilities will not occur in the future, or that the
fines, penalties, damages and expenses might not be material.
EFFECT OF ANTITAKEOVER PROVISIONS OF DELAWARE LAW, THE COMPANY'S CHARTER
DOCUMENTS AND EMPLOYMENT AGREEMENTS
The Company is a corporation governed by the laws of the state of Delaware.
Certain provisions of Delaware law and the charter documents of the Company may
have the effect of delaying, deferring or preventing changes in control or
management of the Company. Specifically, the Company's Board of Directors may
issue shares of Preferred Stock without stockholder approval on such terms as
the Board may determine. The rights of the holders of Common Stock of the
Company are subject to, and may be adversely affected by, the rights of any
Preferred Stock that may be issued in the future. The Company is subject to the
provisions of Section 203 of the Delaware General Corporation Law, which has the
effect of making changes in control of a company more difficult. The Company
entered into employment agreements with Gerard M. Jacobs, T. Benjamin Jennings
and George O. Moorehead. Such agreements provide for certain payments to be made
to such persons in the event of a change of control of the Company. The effects
of the antitakeover protections of Delaware corporate law, the Company charter
documents and these employment agreements could be to make it more difficult for
a third party to acquire, or could discourage a third party from acquiring, a
majority of the outstanding stock of Company.
The Cozzi merger, if consummated, contemplates a shareholder agreement
among Messrs. Jacobs, Jennings and the Cozzi shareholders which could discourage
a third party from acquiring a majority of the
27
<PAGE> 30
outstanding common stock of the Company. Upon closing of the Cozzi merger, the
Company expects to enter into employment agreements with Albert, Frank and Greg
Cozzi as well as new employment agreements with Gerard M. Jacobs and T. Benjamin
Jennings. Prior to the closing, the Cozzi merger agreement forbids the Company
from initiating discussions or negotiations with third parties or responding to
solicitations by third persons relating to any merger, sale or other disposition
of any substantial part of the Company's assets, without an approval from Cozzi.
28
<PAGE> 31
PART II -- OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company's Reserve subsidiary is currently involved in a legal
proceeding in which Reserve Iron & Metal Limited Partnership (a Delaware Limited
Partnership) and P. Joseph Iron & Metal, Inc. (its sole general partner) are
named as defendants. The court in which such proceedings are pending and the
date of the proceeding is: George Abboud v. Reserve Iron & Metal Limited
Partnership, Cuyahoga County Court of Common Pleas, Case No. 304772, George
Abboud v. P. Joseph Iron & Metal, Inc., Cuyahoga County Court of Common Pleas,
Case No. 304772, March 27, 1996.
Claimant George Abboud has alleged that Reserve Iron & Metal, as his
employer, intentionally required Mr. Abboud to work under conditions in which an
injury to Mr. Abboud was substantially certain to occur. Reserve Iron & Metal
has denied this allegation and believes evidence will show that Mr. Abboud
negligently performed his work, which caused his injury. Claimant George Abboud
seeks money damages in an amount in excess of $25,000 to be determined at trial.
No trial date has been set. Discovery is still pending.
Certain of the sellers of Reserve (the "Indemnifying Parties") have agreed
to indemnify the Company and its affiliates against a portion of specified
potential liabilities. As is customary with certain types of potential
liabilities, Reserve's insurance carriers have accepted the defense of Reserve,
but have done so subject to reserving their respective rights to deny coverage
under certain circumstances. Assuming, for hypothetical purposes, that insurance
coverage would not be available or would be inadequate, such potential
liabilities, were they to become actual liabilities, could be significant. Any
amounts payable by the Indemnifying Parties will be funded by reducing the
purchase price note owed by the Company and/or by increasing the exercise price
on warrants issued to such Indemnifying Parties as part of the original terms of
the Purchase Agreement and the ten-year employment agreements, respectively.
With reference to these certain potential liabilities, Reserve has advised the
Company it believes it has adequate insurance coverage and has denied any
liability for these potential liabilities. There can be no assurance, however,
that Reserve will not suffer actual liability or that it will have adequate
insurance to cover the liability and in such case, the Company could be
materially and adversely affected.
ITEM 2: CHANGES IN SECURITIES
(c) Sales and/or Issuances of unregistered shares during the quarter ended
September 30, 1997:
Each of the private placements of stock described below was made to a
limited number of investors, including accredited investors, in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act.
In connection with the Company's acquisition of Proler on August 28, 1997,
the Company issued 1,750,000 shares of unregistered common stock valued at $11.1
million and warrants to purchase 375,000 shares of unregistered common stock at
an exercise price of $6.00 per share. A total of 743,750 shares of unregistered
common stock and 159,375 warrants were issued to William T. Proler, a director
of the Company.
On August 8, 1997, the Company issued 21,000 shares of Series A Convertible
Preferred Stock, par value $.01 per share (stated value of $1,000 per share), to
two institutional investors for an aggregate purchase price of $21.0 million.
The net proceeds received by the Company from the institutional investors were
$19.95 million. Between August 21, 1997 and September 8, 1997, the Company also
issued 4,000 shares of Series A Convertible Preferred Stock to six individuals
for an aggregate purchase price of $4.0 million, including the sale of 2,500
shares collectively to Gerard M. Jacobs, T. Benjamin Jennings and Donald F.
Moorehead, Jr., directors of the Company.
ITEM 5: OTHER INFORMATION
Xavier Hermosillo resigned from the Board of Directors as of September 5,
1997. Kenneth A. Merlau joined the Board of Directors on September 7, 1997.
29
<PAGE> 32
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the second quarter of
fiscal 1998:
(1) Form 8-K dated August 28, 1997 disclosing the acquisition
agreement with Proler Southwest, Inc. and Proler Steelworks, L.L.C.
30
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 to
this report on Form 10-Q to be signed on its behalf by the undersigned,
thereunto duly authorized.
METAL MANAGEMENT, INC.
By: /s/ GERARD M. JACOBS
------------------------------------
Gerard M. Jacobs
Director, President and
Chief Executive Officer
By: /s/ T. BENJAMIN JENNINGS
------------------------------------
T. Benjamin Jennings
Director, Chairman of the Board and
Chief Development Officer
By: /s/ ROBERT C. LARRY
------------------------------------
Robert C. Larry
Vice President, Finance and
Chief Financial Officer
Date: November 24, 1997
31
<PAGE> 34
METAL MANAGEMENT, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
2.1 Agreement and Plan of Merger dated as of August 27, 1997, by
and among the Registrant, Proler Acquisition, Inc., Proler
Southwest, Inc. and the Shareholders of Proler Southwest,
Inc. (incorporated by reference to Exhibit 2.1 of the
Registrant's report on Form 8-K dated
August 28, 1997).
2.2 Purchase Agreement for Membership Interests of Proler
Steelworks, L.L.C. dated as of August 27, 1997 by and among
the Registrant, Proler Steelworks, L.L.C. and the Members of
Proler Steelworks, L.L.C. (incorporated by reference to
Exhibit 2.2 of the Registrant's report on Form 8-K dated
August 28, 1997).
3.1 Amended and Restated Bylaws, as amended through May 24, 1997
(incorporated by reference to Exhibit 3.1 of the
Registrant's report on Form 10-K for the year ended March
31, 1997).
3.2 Certificate of Designations, Preferences and Rights of
Series A Convertible Preferred Stock of the Registrant
(incorporated by reference to Exhibit 3.2 of the
Registrant's report on Form 10-Q for the quarter ended June
30, 1997).
4.1 Securities Purchase Agreement, dated August 8, 1997, between
the Registrant and Proprietary Convertible Investment Group,
Inc. and Advantage Fund Limited (incorporated by reference
to Exhibit 4.1 of the Registrant's report on Form 10-Q for
the quarter ended June 30, 1997).
4.2 Registration Rights Agreement, dated August 8, 1997, between
the Registrant and Proprietary Convertible Investment Group,
Inc. and Advantage Fund Limited (incorporated by reference
to Exhibit 4.2 of the Registrant's report on Form 10-Q for
the quarter ended June 30, 1997).
10.1 Employment Agreement dated as of August 27, 1997 by and
between the Registrant and William T. Proler (incorporated
by reference to Exhibit 10.1 of the Registrant's report on
Form 8-K dated August 28, 1997).
11.1 Computation of net income (loss) per share.
27.1 Financial Data Schedule.
</TABLE>
32
<PAGE> 1
EXHIBIT 11.1
METAL MANAGEMENT
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Earnings:
Net income (loss) from continuing
operations applicable to common
stock................................. $ (67) $ (915) $ 154 $ (911)
Gain on sale of discontinued
operations................................. 107 138 208 138
Net income from discontinued
operations............................ 0 9 0 156
------- ------ ------- ------
Net income (loss) applicable to
common stock..................... $ 40 $ (768) $ 362 $ (617)
======= ====== ======= ======
Primary earnings per share:
Weighted average common shares
outstanding.............................. 15,466 8,925 13,703 8,925
Common stock equivalents(1)................ 3,688 0 2,850 0
------- ------ ------- ------
Total primary shares................ 19,154 8,925 16,553 8,925
======= ====== ======= ======
Per share amounts:
Net income (loss) from continuing
operations applicable to common
stock................................. $ 0.00 $(0.10) $ 0.01 $(0.10)
Gain on sale of discontinued
operations............................ 0.01 0.02 0.01 0.01
Net income from discontinued
operations............................ 0.00 0.00 0.00 0.02
------- ------ ------- ------
Net income (loss) applicable to
common stock..................... $ 0.00 $(0.08) $ 0.02 $(0.07)
======= ====== ======= ======
Fully diluted earnings per share:
Weighted average common shares
outstanding........................... 15,466 8,925 13,703 8,925
Common stock equivalents(1).............. 4,095 0 4,357 0
------- ------ ------- ------
Total............................... 19,561 8,925 18,060 8,925
======= ====== ======= ======
Per share amounts:
Net income (loss) from continuing
operations applicable to common
stock................................. $ 0.00 $(0.10) $ 0.01 $(0.10)
Gain on sale of discontinued
operations............................ 0.01 0.02 0.01 0.01
Net income from discontinued
operations............................ 0.00 0.00 0.00 0.02
------- ------ ------- ------
Net income (loss) applicable to
common stock..................... $ 0.00 $(0.08) $ 0.02 $(0.07)
======= ====== ======= ======
</TABLE>
- -------------------------
(1) For the three months and six months ended September 30, 1996, common stock
equivalents were less than 3% of the weighted average shares outstanding and
therefore, were not added to weighted average shares outstanding.
33
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 11,999,000
<SECURITIES> 0
<RECEIVABLES> 51,155,000
<ALLOWANCES> 637,000
<INVENTORY> 34,978,000
<CURRENT-ASSETS> 100,326,000
<PP&E> 61,516,000
<DEPRECIATION> 4,037,000
<TOTAL-ASSETS> 267,669,000
<CURRENT-LIABILITIES> 95,083,000
<BONDS> 0
0
24,323,000
<COMMON> 165,000
<OTHER-SE> 88,472,000
<TOTAL-LIABILITY-AND-EQUITY> 267,669,000
<SALES> 157,346,000
<TOTAL-REVENUES> 157,346,000
<CGS> 141,218,000
<TOTAL-COSTS> 141,218,000
<OTHER-EXPENSES> 11,850,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,565,000
<INCOME-PRETAX> 1,124,000
<INCOME-TAX> 598,000
<INCOME-CONTINUING> 526,000
<DISCONTINUED> 208,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 362,000
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
