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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
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[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
Metal Management, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
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MTLM LETTERHEAD
November 20, 1997
Dear Stockholder:
You are cordially invited to attend the annual meeting of stockholders of
Metal Management, Inc. (the "Company") to be held at the Westin River North, 320
North Dearborn Street, Chicago, Illinois 60610, on November 29, 1997, at 9:00
a.m., central time (the "Annual Meeting"). As you know, notice of this Annual
Meeting was mailed on November 19, 1997 to all of the record holders of shares
of the Company's common stock, par value $.01 per share (the "Common Stock"),
outstanding on September 30, 1997 (the "Stockholders").
Enclosed is the more detailed information we referred to in our notice
describing the actions to be taken at the Annual Meeting. In particular, you
will be asked to consider and vote upon, among other things: (i) the election of
directors; (ii) the ratification of auditors; (iii) a proposal for a merger (the
"Merger") involving Cozzi Iron & Metal, Inc. ("Cozzi"), the Company and CIM
Acquisition, Co. ("Merger Sub"), a wholly-owned subsidiary of the Company; (iv)
an amendment to the Company's Certificate of Incorporation to increase the
authorized number of shares of Common Stock and the authorized number of shares
of "blank check" preferred stock; (v) amendments to the Company's stock option
plans to increase the number of shares issuable under these plans; (vi) the
issuance of Common Stock on conversion of Series A and Series B Convertible
Preferred Stock; (vii) ratification of the issuance of Common Stock previously
issued or issuable in private placements by the Company to, among others,
officers, directors and affiliates of the Company; (viii) an amendment to the
Company's Certificate of Incorporation to eliminate cumulative voting; and (ix)
an amendment to the Company's Certificate of Incorporation to amend the Series A
Preferred Stock Certificate of Designations, all as more particularly described
in the accompanying Proxy Statement.
The terms of the Merger are set forth in a Merger Agreement (the "Merger
Agreement") by and among the Company, Merger Sub, Cozzi and Cozzi's
shareholders. Pursuant to the Merger Agreement, upon completion of the Merger,
each of the outstanding shares of Cozzi's common stock will be converted into
105,747 shares of Common Stock (resulting in 11,499,986 shares of Common Stock
being issued to Cozzi's shareholders), and Merger Sub will be merged with and
into Cozzi, resulting in Cozzi becoming a wholly-owned subsidiary of the
Company. Under the Delaware General Corporation Law, Stockholders are not
entitled to dissenters' rights in connection with the Merger. As of November 14,
1997, officers, directors and nominees of the Company owned an aggregate of
6,726,495 shares of Common Stock, comprising 41% of the issued and outstanding
Common Stock entitled to consider and vote on the Merger.
The accompanying Proxy Statement provides detailed information concerning
the proposed Merger, the reasons why the Board of Directors has recommended the
approval and adoption of the Merger Agreement and certain additional information
including, without limitation, the information set forth under the heading "Risk
Factors," which describes, among other things, potentially adverse effects to
Stockholders as a result of the Merger. Among the factors you should consider in
voting on the Merger are the following:
- If the Merger is completed, the undersigned will own, together with
the shareholders of Cozzi, approximately 45% of the Company's issued and
outstanding Common Stock. In addition, the undersigned have agreed to enter
into a Stockholders Agreement with the shareholders of Cozzi in which each
party will agree to vote for proposals to amend the Company's
organizational documents to require the approval of at least two-thirds of
the Board of Directors to take any significant corporate actions,
METAL MANAGEMENT ADDRESS
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including sale of assets, merger, issuance of stock and payment of
dividends. Further, in the Stockholders Agreement, the undersigned, on the
one hand, and the Cozzi shareholders, on the other hand, have agreed to
vote for the nominees to the Board of Directors designated by the other
group. Finally, the undersigned will, under employment agreements to be
entered into at the closing of the Merger, receive warrants to purchase
Common Stock at exercise prices below the fair market value of the Common
Stock at the time of the grant.
- The opinion of Salomon Brothers that the consideration to be paid by
the Company pursuant to the Merger is fair to the Company from a financial
point of view is based, in part, upon projected financial results prepared
by the Company's management which have not been reviewed or passed upon by
an independent third party and are subject to contingencies beyond
management's control. There may be differences between the projected
results of operations and the actual results of operations, and these
differences could be material.
- If the Merger is completed, the voting interests of Stockholders of
the Company will be substantially diluted. As of November 14, 1997,
assuming the Merger had been completed, Stockholders of the Company (other
than officers, directors and nominees) would have owned 35% of the issued
and outstanding shares of Common Stock compared to 59% prior to the Merger.
- The Company has issued 25,000 shares of Series A Convertible
Preferred Stock, and expects to issue an aggregate of 20,000 shares of
Series B Convertible Preferred Stock. If the Stockholders approve the
convertibility provisions of the Preferred Stock, then the undersigned, as
holders of Preferred Stock, will have the right to convert their shares of
Preferred Stock into Common Stock at a conversion price below the fair
market value of the Common Stock at the time the Preferred Stock was
issued.
- Pursuant to the Merger Agreement, each of the undersigned will enter
into new employment agreements with the Company providing for significant
payments to each of us if there is a "change in control" of the Company. In
addition, Albert Cozzi, who was recently appointed as the Company's Chief
Operating Officer and Senior Vice President, will enter into an employment
agreement with the Company under which, as additional consideration in
connection with the Merger, he will receive warrants exercisable for
755,172 shares of Common Stock at exercise prices below the fair market
value of the Common Stock on the date of the grant.
The board of directors has unanimously approved the Merger and believes
that the Merger is fair to, and in the best interests of, the Company and its
Stockholders, and recommends that all Stockholders vote FOR the Merger.
Stockholders do not have preemptive, subscription, conversion or redemption
rights. See "Risk Factors -- Conflicts of Interest" and "Description of Capital
Stock -- Common Stock."
Approval of the amendments to the Company's certificate of incorporation
requires the affirmative vote of the majority of the Company's outstanding
shares of Common Stock entitled to vote thereon. With respect to the nominees
for Director, the ten individuals receiving the highest number of votes will be
elected as Directors. All of the other proposals described above must be
approved by the affirmative vote of the majority of the shares of Common Stock
present in person or represented by proxy and eligible to vote at the Annual
Meeting, a quorum being present. Accordingly, whether or not you plan to attend
the Annual Meeting, please complete, sign and date the accompanying proxy card
and return it in the enclosed prepaid envelope. You may revoke your proxy in the
manner described in the accompanying Proxy Statement at any time before it has
been voted at the Annual Meeting. If you attend the Annual Meeting, you may vote
in person, even if you have previously returned your proxy card. Your prompt
cooperation will be greatly appreciated. This solicitation is authorized by and
is made on behalf of the Company's board of directors.
Sincerely,
METAL MANAGEMENT, INC.
GERARD M. JACOBS
President and Chief Executive Officer
T. BENJAMIN JENNINGS
Chairman of the Board and
Chief Development Officer
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November 20, 1997
METAL MANAGEMENT, INC.
PROXY STATEMENT
This Proxy Statement ("Proxy Statement") is being furnished to the holders
of common stock, par value $.01 per share (the "Common Stock"), of Metal
Management, Inc., a Delaware corporation (the "Company"), in connection with the
solicitation of proxies by the board of directors of the Company for use at the
Annual Meeting of Stockholders of the Company to be held at the Westin River
North, 320 North Dearborn Street, Chicago, Illinois 60610, on November 29, 1997,
at 9:00 a.m., central time, and any adjournments thereof (the "Annual Meeting").
Proxies properly executed and returned in a timely manner will be voted at
the Annual Meeting in accordance with the directions noted thereon. If no
direction is indicated, they will be voted for the proposals set forth on the
Notice of Annual Meeting and on any other matter in accordance with the judgment
of the persons acting under the proxies on other matters presented for a vote.
Any Stockholder giving a proxy has the power to revoke it at any time before it
is voted, either in person at the meeting, by written notice to the Company's
Secretary or by delivery of a later-dated proxy.
At the Annual Meeting, holders of Common Stock outstanding on September 30,
1997 (the "Record Date"; such holders, the "Stockholders") will be asked to
consider and vote upon: (i) nominees to serve on the Company's Board of
Directors; (ii) a proposal to concur in the selection of Price Waterhouse LLP as
the Company's principal independent accountants for the fiscal year ending March
31, 1998; (iii) a proposal to approve and adopt a Merger Agreement, dated as of
May 16, 1997, as amended (the "Merger Agreement"), by and among the Company, CIM
Acquisition, Co., an Illinois corporation and a wholly-owned subsidiary of the
Company ("Merger Sub"), and Cozzi Iron & Metal, Inc. ("Cozzi") and its
shareholders pursuant to which Merger Sub would merge with and into Cozzi (the
"Merger") resulting in Cozzi becoming a wholly-owned subsidiary of the Company;
(iv) a proposal to amend the Company's Certificate of Incorporation to increase
the number of authorized shares of Common Stock from 40,000,000 to 80,000,000;
(v) a proposal to amend the Company's Certificate of Incorporation to increase
the number of authorized shares of "blank check" preferred stock from 2,000,000
to 4,000,000; (vi) a proposal to amend the Company's 1995 Stock Plan for
Employees and Consultants to increase the number of shares authorized under the
plan from 1,300,000 to 2,600,000 ; (vii) a proposal to amend the Company's 1996
Director Option Plan to increase the number of shares authorized under the plan
from 100,000 to 200,000; (viii) a proposal to approve the issuance of Common
Stock issuable on conversion of Series A and Series B Convertible Preferred
Stock; (ix) a proposal to ratify the issuance of Common Stock previously issued
or issuable in private placements by the Company to, among others, officers,
directors and affiliates of the Company; (x) a proposal to amend the Company's
Certificate of Incorporation to eliminate cumulative voting; (xi) a proposal to
amend the Company's Certificate of Incorporation by amending the Series A
Preferred Stock Certificate of Designations; and (xii) to transact any other
business as may properly come before the Annual Meeting, or any adjournment
thereof.
The Company's executive offices are located at 500 North Dearborn Street,
Suite 405, Chicago, Illinois 60610 (telephone number (312) 645-0700). Proxy
materials will be mailed to Stockholders on or about November 21, 1997.
The Common Stock is included for quotation on The Nasdaq Stock Market
("Nasdaq") under the symbol "MTLM". On November 19, 1997, the last reported
sales price for the Common Stock as reported by Nasdaq was $19.00 per share.
The accompanying Proxy Statement provides a detailed description of the
proposed Merger, the business of Cozzi, the business of the Company, and risks
associated with the proposed Merger. Please give all of this information your
careful attention.
------------------------
THE DATE OF THIS PROXY STATEMENT IS NOVEMBER 20, 1997
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STOCKHOLDERS SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT OR INCORPORATED BY REFERENCE. NO PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT IN CONNECTION WITH THE
SOLICITATION MADE BY THIS PROXY STATEMENT AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THE DELIVERY OF THIS PROXY STATEMENT SHALL NOT, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE
FACTS SET FORTH IN THIS PROXY STATEMENT OR IN THE COMPANY'S AFFAIRS SINCE THE
DATE HEREOF. THIS PROXY STATEMENT DOES NOT CONSTITUTE A SOLICITATION BY ANYONE
IN ANY JURISDICTION IN WHICH THE SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE
PERSON MAKING THE SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT
IS UNLAWFUL TO MAKE A SOLICITATION.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy materials and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
materials and other information concerning the Company can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; The
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511, and at Seven World Trade Center, Suite 1300, New York, New York
10048. Copies can be obtained by mail from the Commission at prescribed rates
from the Public Reference Section of the Commission at its principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
also maintains a site on the World Wide Web at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The Common Stock is
included for quotation on the Nasdaq National Market and copies of reports and
other material concerning the Company can be inspected at the offices of the
National Association of Securities Dealers, Inc. at 1801 K Street, N.W., 8th
Floor, Washington, D.C. 20006.
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TABLE OF CONTENTS
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SUMMARY..................................................... 6
The Company............................................... 6
Cozzi..................................................... 9
Proposed Merger........................................... 9
Recommendation of the Board of Directors.................. 10
Opinion of Salomon Brothers............................... 10
Conflicts of Interest..................................... 10
Effective Time of the Merger.............................. 11
Conditions to the Merger.................................. 11
Appraisal Rights.......................................... 12
Termination............................................... 12
Termination Fees and Expenses............................. 12
Alternatives to the Merger................................ 12
Accounting Treatment...................................... 13
No Solicitation of Other Transactions..................... 13
Executive Officers and Directors after the Merger......... 13
Distribution and Dividend Policy.......................... 13
Special Note on Forward-Looking Statements................ 13
Selected Historical Financial Data of the Company......... 14
Selected Historical Financial Data of Cozzi............... 15
Selected Pro forma Combined Financial Data (Unaudited).... 16
RISK FACTORS................................................ 19
Conflicts of Interest..................................... 20
MATTERS TO BE CONSIDERED BY STOCKHOLDERS.................... 26
Purpose of the Meeting.................................... 26
Quorum and Voting Rights; Proxies......................... 26
PROPOSAL NUMBER ONE: TO ELECT TEN INDIVIDUALS AS DIRECTORS
TO HOLD OFFICE UNTIL THE NEXT ANNUAL
MEETING OF STOCKHOLDERS, OR OTHERWISE
AS PROVIDED IN THE COMPANY'S
CERTIFICATE OF INCORPORATION......... 28
Director Compensation..................................... 30
Executive Compensation.................................... 31
UNAUDITED PRO FORMA FINANCIAL INFORMATION................. 37
PROPOSAL NUMBER TWO: TO CONCUR IN THE APPOINTMENT BY THE
BOARD OF DIRECTORS OF PRICE
WATERHOUSE LLP AS THE COMPANY'S
PRINCIPAL INDEPENDENT ACCOUNTANTS FOR
THE FISCAL YEAR ENDING MARCH 31,
1998................................. 51
PROPOSAL NUMBER THREE: TO APPROVE AND ADOPT THE MERGER
AGREEMENT AND THE MERGER PURSUANT
TO WHICH COZZI WILL BECOME A
WHOLLY-OWNED SUBSIDIARY OF THE
COMPANY............................ 52
Background of and Reasons for the Merger.................. 52
Opinion of Salomon Brothers............................... 53
Description of the Merger Agreement....................... 55
PROPOSAL NUMBER FOUR: TO AMEND THE COMPANY'S CERTIFICATE
OF INCORPORATION TO INCREASE THE
NUMBER OF AUTHORIZED SHARES OF
COMMON STOCK FROM 40,000,000 TO
80,000,000.......................... 60
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PROPOSAL NUMBER FIVE: TO AMEND THE COMPANY'S CERTIFICATE
OF INCORPORATION TO INCREASE THE
NUMBER OF AUTHORIZED SHARES OF
"BLANK CHECK" PREFERRED STOCK FROM
2,000,000 TO 4,000,000.............. 61
PROPOSAL NUMBER SIX: TO AMEND THE COMPANY'S 1995 STOCK
PLAN FOR EMPLOYEES AND CONSULTANTS TO
INCREASE THE NUMBER OF SHARES OF
COMMON STOCK AUTHORIZED FOR ISSUANCE
UNDER THE PLAN FROM 1,300,000 TO
2,600,000............................ 61
PROPOSAL NUMBER SEVEN: TO AMEND THE COMPANY'S 1996
DIRECTOR OPTION PLAN TO INCREASE
THE NUMBER OF SHARES AUTHORIZED FOR
ISSUANCE UNDER THE PLAN FROM
100,000 TO 200,000................. 64
PROPOSAL NUMBER EIGHT: APPROVAL OF COMMON STOCK ISSUABLE
ON CONVERSION OF SERIES A AND
SERIES B CONVERTIBLE PREFERRED
STOCK.............................. 65
PROPOSAL NUMBER NINE: RATIFICATION AND AUTHORIZATION OF
THE ISSUANCE OF COMMON STOCK
PREVIOUSLY ISSUED OR ISSUABLE IN
PRIVATE PLACEMENTS BY THE COMPANY
TO, AMONG OTHERS, OFFICERS,
DIRECTORS AND AFFILIATES OF THE
COMPANY............................. 69
PROPOSAL NUMBER TEN: TO AMEND THE COMPANY'S CERTIFICATE OF
INCORPORATION TO ELIMINATE CUMULATIVE
VOTING............................... 73
PROPOSAL NUMBER ELEVEN: TO AMEND THE COMPANY'S CERTIFICATE
OF INCORPORATION BY AMENDING THE
SERIES A PREFERRED STOCK
CERTIFICATE OF DESIGNATIONS....... 74
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 75
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT........... 77
INFORMATION ABOUT THE COMPANY............................... 78
Overview.................................................. 78
Business Operations....................................... 79
Significant Customers..................................... 85
Competition............................................... 86
Employees................................................. 86
Properties................................................ 86
Legal Proceedings......................................... 87
Environmental Matters..................................... 87
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 93
Stock Price and Dividend Policy........................... 101
INFORMATION ABOUT COZZI..................................... 102
Overview.................................................. 102
Business Operations....................................... 102
Significant Customers..................................... 104
Competition............................................... 104
Employees................................................. 105
Properties................................................ 105
Environmental Matters..................................... 105
Legal Proceedings......................................... 106
Management's Discussion and Analysis of Financial
Condition and Results of Operation..................... 108
DESCRIPTION OF CAPITAL STOCK................................ 113
General................................................... 113
Common Stock.............................................. 113
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Preferred Stock........................................... 113
Transfer Agent............................................ 113
Delaware Business Combination Statute..................... 113
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 114
STOCKHOLDER PROPOSALS....................................... 115
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 116
INDEX TO FINANCIAL STATEMENTS............................... 117
Annex A -- Merger Agreement
Annex B -- Opinion of Salomon Brothers
Annex C -- Irrevocable Proxy (Isaac Stockholders)
Annex D -- Irrevocable Proxy (Isaac Stockholders)
Annex E -- Irrevocable Proxy (Directors)
Amendment to Certificate of Incorporation (Common Stock
Annex F -- increase)
Amendment to Certificate of Incorporation (Preferred Stock
Annex G -- increase)
Annex H -- 1995 Stock Plan
Annex I -- 1996 Director Option Plan
Amendment to Certificate of Incorporation (Certificate of
Annex J -- Designations)
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SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information herein, including the
Consolidated Financial Statements and the related notes thereto, appearing
elsewhere in this Proxy Statement. Unless the context otherwise requires, all
references in this Proxy Statement to the "Company" refer to Metal Management,
Inc., its predecessors and its and their subsidiaries, both before and after
giving effect to the Acquisitions, as the context requires. The Company
currently conducts its operating businesses through wholly-owned subsidiaries.
MATTERS TO BE CONSIDERED BY STOCKHOLDERS AT THE ANNUAL MEETING
The Annual Meeting of Stockholders of the Company will be held for the
following purposes:
1. To consider and vote upon ten nominees (the "Nominees") for
election to the Company's Board of Directors;
2. To concur in the appointment of Price Waterhouse LLP as the
Company's principal independent accountants for the fiscal year ending
March 31, 1998;
3. To consider and vote upon a proposal to approve and adopt the
Merger Agreement pursuant to which Merger Sub is to merge with and into
Cozzi, resulting in Cozzi becoming a wholly-owned subsidiary of the
Company;
4. To consider and vote upon a proposal to amend the Company's
Certificate of Incorporation to increase the number of authorized shares of
Common Stock from 40,000,000 to 80,000,000;
5. To consider and vote upon a proposal to amend the Company's
Certificate of Incorporation to increase the number of authorized shares of
"blank check" preferred stock from 2,000,000 to 4,000,000;
6. To consider and vote upon a proposal to amend the Company's 1995
Stock Plan for Employees and Consultants to increase the number of shares
of Common Stock authorized for issuance under the plan from 1,300,000 to
2,600,000;
7. To consider and vote upon a proposal to amend the Company's 1996
Director Option Plan to increase the number of shares authorized for
issuance under the plan from 100,000 to 200,000;
8. To consider and vote upon a proposal to approve the issuance of
Common Stock issuable on conversion of Series A and Series B Convertible
Preferred Stock;
9. To consider and vote upon a proposal to ratify the issuance of
Common Stock previously issued or issuable in private placements by the
Company to, among others, officers, directors and certain affiliates of the
Company;
10. To consider and vote upon a proposal to amend the Company's
Certificate of Incorporation to eliminate cumulative voting;
11. To consider and vote upon a proposal to amend the Company's
Certificate of Incorporation by amending the Series A Preferred Stock
Certificate of Designations; and
12. To transact such other business as may properly come before the
Annual Meeting or any adjournment thereof.
Only Stockholders of record at the close of business on the Record Date are
entitled to receive notice of and to vote at the Annual Meeting or any
adjournment thereof.
THE COMPANY
The Company believes that, based on the weight of scrap metal processed, it
is one of the largest processors and recyclers of scrap metal in North America.
The Company collects industrial scrap and obsolete scrap, processes it into
reusable forms, and supplies the recycled metals to mini-mills, integrated steel
mills,
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foundries and other customers. The Company believes that it provides one of the
broadest offerings of both ferrous and non-ferrous scrap metals in the industry.
The Company's ferrous products include shredded, sheared, hot briquetted, cold
briquetted, bundled scrap and broken furnace iron. The Company also processes
non-ferrous metals, including aluminum, copper, brass and high-temperature
alloys, using similar techniques. The Company is one of the most geographically
diverse scrap processors in North America with twenty-six metal recycling
facilities, including those operated through joint ventures, located in the
States of Alabama, Arizona, California, Illinois, Mississippi, Ohio and Texas.
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 ("GPC") 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 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.
Completed Acquisitions. The Company has recently completed a number of
acquisitions which are summarized below (the "Completed Acquisitions"). For more
information about the terms of the Completed Acquisitions, see "Information
about the Company -- Business Operations."
- Proler. Proler Southwest Inc. and Proler Steelworks L.L.C.
(collectively, "Proler"), were founded in 1992 and 1994, respectively,
principally by William and Ronald Proler. Proler operates a facility in
Houston, Texas (located on the Houston Ship Channel, adjacent to the
HouTex facility) and a site in Jackson, Mississippi. The Company
completed the acquisition of Proler on August 28, 1997.
- The Isaac Group. The Isaac group of companies (collectively, "Isaac"),
founded in 1899 by the Isaac family, operates four processing facilities
located in Defiance, Bryan, Cleveland and Dayton, Ohio. The Company
completed the acquisition of Isaac on June 23, 1997.
- Reserve Iron & Metal, L.P. Reserve Iron & Metal, L.P. ("Reserve"),
founded in 1978 and acquired in 1990 by the Joseph family, operates two
processing facilities located in Cleveland, Ohio and Chicago, Illinois
and has a 50% interest in a joint venture which operates a processing
facility located in Attalla, Alabama. The Company completed the
acquisition of Reserve on May 1, 1997.
- HouTex Metals Company, Inc. HouTex Metals Company, Inc. ("HouTex"),
founded in 1979 by the Melnik family, operates one processing facility on
the Houston Ship Channel. The Company completed the acquisition of HouTex
on January 7, 1997.
- The MacLeod Group. The "MacLeod Group" of companies ("MacLeod"), founded
in 1969 by Ian MacLeod, operates four processing facilities in Southern
California. The Company completed the acquisition of MacLeod on January
1, 1997.
- EMCO Recycling Corp. EMCO Recycling Corp., formed in 1993 by the
combination of three companies, Empire Metals, Inc., Valley Steel and
Copperstate Metals, Inc., operates processing facilities at ten sites in
Phoenix, Arizona and two other sites in the State of Arizona. The Company
completed the acquisition of EMCO on April 11, 1996.
Potential Acquisitions. From time to time the Company engages in
discussions with third parties regarding potential acquisitions of companies or
businesses in the same or substantially similar lines of business as the
Company. If the parties are able to agree generally on the nature, terms and
conditions of a transaction, including the purchase price and form of
consideration, a letter of intent is prepared to reflect this understanding. In
many cases, these letters of intent are structured as "binding intents" to
purchase the business, although each letter is still subject to a number of
terms and conditions including but not limited to negotiation and execution of
definitive purchase agreements. In addition, each potential acquisition may be
subject to additional contingencies specific to that acquisition. There can be
no assurance that any such
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potential acquisition will result in execution of a definitive agreement or that
such acquisition(s) will be completed on terms and conditions acceptable to the
Company, if at all. See "Risk Factors -- Inability to Complete Potential
Acquisitions." As of the date of this Proxy Statement, the Company has entered
into letters of intent to purchase the companies or businesses described below:
- Superior Forge, Inc. The Company entered into a binding letter of intent
on July 23, 1997 to acquire Superior Forge, Inc. ("Superior"). Superior,
founded and owned by Ian Albert, uses and generates aluminum and aluminum
scrap in its forging operations, located in Huntington Beach, California.
- Goldin Industries, Inc. The Company entered into a binding letter of
intent on August 5, 1997 to acquire certain scrap metal operations and
assets of Goldin Industries, Inc., Goldin Industries Louisiana, Inc. and
Goldin of Alabama, Inc. ("Goldin"). Goldin, founded and owned by the
Goldin family, operates five processing facilities, including two in
Gulfport, Mississippi, one in Harvey, Louisiana and two in Mobile,
Alabama.
- Houston Compressed Steel Corporation. The Company entered into a letter
of intent on August 1, 1997 to acquire Houston Compressed Steel
Corporation ("HCS"). HCS, owned by the Segal family, operates one
processing facility in Houston, Texas.
- Salt River Recycling, L.L.C. The Company entered into a binding letter
of intent on August 4, 1997 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 with one facility in Phoenix, Arizona.
Cozzi currently owns a 50% interest in Salt River which the Company will
acquire upon the closing of the Merger. The acquisition of the 50% joint
venture interest in Salt River is subject to completion of the Merger.
See "Risk Factors -- Failure to Acquire Joint Venture Interests."
- PerlCo, L.L.C. The Company entered into a binding letter of intent on
August 6, 1997 to acquire: (i) FPX, Inc. ("FPX"), which has a 50%
ownership interest in PerlCo, L.L.C. ("PerlCo"), a Tennessee limited
liability company with one facility in Memphis, Tennessee; and (ii)
Southern Tin Compress Corporation ("Southern Tin"), which owns the real
estate and certain equipment associated with the PerlCo operations. Cozzi
currently owns a 50% interest in PerlCo which the Company will acquire
upon closing the Merger. The acquisition of FPX and Southern Tin is
subject to completion of the Merger. See "Risk Factors -- Failure to
Acquire Joint Venture Interests."
- Aerospace Metals. The Company entered into a binding letter of intent on
August 28, 1997 to purchase substantially all of the assets and business
of, and to lease the real property used by, Aerospace Metals, Inc.,
Aerospace Parts Security, Inc. and Suisman Titanium Corp. (collectively,
"Aerospace"). Aerospace, founded and owned by Michael Suisman, operates
one facility located in Hartford, Connecticut.
- Atlas Recycling Limited Partnership. The Company entered into a binding
letter of intent on August 28, 1997 to purchase all of the scrap metal
related business operations and assets of Atlas Recycling Limited
Partnership ("Atlas"). Atlas operates two processing facilities in Texas,
including one in Corpus Christi and one outside of Del Rio.
- Yonack Iron & Metal Co. The Company entered into a binding letter of
intent on August 28, 1997 to acquire, through merger, all of the scrap
metal related business operations and assets of Yonack Iron & Metal Co.
("Yonack Iron"). Yonack, owned by Robert P. Yonack, operates five
processing facilities, including four in Dallas, Texas and one in Lonoke,
Arkansas.
- Yonack Services, Inc. The Company entered into a binding letter of
intent on August 28, 1997 to acquire, through merger, all of the scrap
metal related business operations and assets of Yonack Services, Inc.
("Yonack Services"), a Texas corporation. Yonack Services operates one
processing facility located in Forney, Texas.
- Gold Metal Recyclers, Inc. The Company entered into a binding letter of
intent on August 28, 1997 to acquire, through merger, all of the scrap
metal related business operations and assets of Gold Metal
8
<PAGE> 12
Recyclers, Inc. ("Gold"), a Texas corporation. Gold, owned by Kenneth E.
Goldberg and Neil A. Goldberg, operates one processing facility located
in Dallas, Texas.
- Spectrum Metal Recycling. The Company entered into a binding letter of
intent on August 28, 1997 to acquire, through merger, all of the scrap
metal related business operations and assets of GMY Corp., d/b/a Spectrum
Metal Recycling ("Spectrum"), a Texas corporation. Spectrum operates one
processing facility located in Houston, Texas.
The Merger and the acquisition of Superior, Goldin, HCS, Salt River,
PerlCo, Aerospace, Atlas, Yonack Iron, Yonack Services, Gold and Spectrum are
referred to throughout this Proxy Statement as the "Potential Acquisitions"; the
Potential Acquisitions and the Completed Acquisitions, the "Acquisitions." The
acquisition of each of Atlas, Yonack Iron, Yonack Services, Gold and Spectrum
(collectively, the "Related Texas Acquisitions") is subject to completion of the
Merger and to the simultaneous completion of each of the other Related Texas
Acquisitions. The terms and costs of the Acquisitions are more fully described
under "Information about the Company -- Business Operations." The Company
anticipates accounting for each of the Potential Acquisitions using the purchase
method of accounting.
COZZI
Cozzi Iron & Metal, Inc. ("Cozzi"), founded by the Cozzi family in 1945, is
a recycler of ferrous and non-ferrous scrap metal. Cozzi is headquartered in
Chicago, Illinois and has built a network of processing facilities located in
Chicago, Illinois, East Chicago, Indiana and the Pittsburgh, Pennsylvania area
with interest in joint ventures operating in Memphis, Tennessee and Phoenix,
Arizona. The Company has entered into binding letters of intent to acquire the
50% interest in each of these joint ventures not owned by Cozzi. See "The
Company -- Business Operations." The Company believes that Cozzi's strengths
include its excellent management, strong relationships with major industrial
scrap suppliers, efficient shredding capacity, rapidly growing stainless and
alloy steel business, broad product line, and geographic proximity to low cost
transportation afforded by the Mississippi River and the Great Lakes. For the
calendar year ended December 31, 1996, Cozzi sold approximately 1.2 million tons
of ferrous metal and 116 million pounds of non-ferrous metal and had revenues of
approximately $215.9 million. Subject to Stockholder approval, the Company has
agreed to cause CIM Acquisition, Co., an Illinois corporation and a wholly-owned
subsidiary of the Company ("Merger Sub") to merge with and into Cozzi, resulting
in Cozzi becoming a wholly-owned subsidiary of the Company (the "Cozzi
Acquisition"), pursuant to the Merger Agreement.
PROPOSED MERGER
The Boards of Directors of the Company and Cozzi have approved the Merger
and the Merger Agreement, a copy of which is attached hereto as Annex A. See
"Matters to be Considered by Stockholders -- Proposal Number Three -- Conflicts
of Interest." As of November 14, 1997, officers, directors and Nominees of the
Company owned an aggregate of 6,726,495 shares of Common Stock, comprising 41%
of the issued and outstanding Common Stock entitled to consider and vote on the
Merger. Upon fulfillment (or waiver) of the conditions set forth in the Merger
Agreement, at the Effective Time (as defined below): (i) Merger Sub will be
merged with and into Cozzi, resulting in Cozzi becoming a wholly-owned
subsidiary of the Company; (ii) all of the issued and outstanding shares of
Cozzi common stock, no par value per share ("Cozzi Common Stock"), will be
converted into 11,499,986 newly-issued shares of the Company's Common Stock; and
(iii) the holders of the Cozzi Common Stock will receive $6.0 million in cash
and warrants to purchase 1,500,000 shares of Common Stock. Messrs. Albert A.
Cozzi, Frank J. Cozzi and Gregory P. Cozzi, all of whom are officers and
shareholders of Cozzi, will, if the Stockholders approve the Merger and elect
them as Directors, take office at the Effective Time. See "Matters to be
Considered by Stockholders -- Proposal Number One."
9
<PAGE> 13
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Company's Board of Directors believes that the Merger is fair to, and
in the best interests of, the Company and its Stockholders and has approved, and
recommends that the Stockholders vote for, the Merger and the actions
contemplated by the Merger Agreement including the election of the Nominees. See
"Matters to be Considered by Stockholders -- Proposal Number Three -- Conflicts
of Interests." The primary factors that the Board considered in reaching its
recommendation were its belief that: the Merger with Cozzi will allow the
Company to: (i) become the premier consolidator in the scrap metal recycling
industry; (ii) derive substantial benefits from the depth and breadth of
management and expertise at both companies; (iii) yield operational and
financial synergies and cost savings; and (iv) more effectively access capital
markets. See "Matters to be Considered by Stockholders -- Proposal Number
Three -- Background of and Reasons for the Merger," "-- Opinion of Salomon
Brothers" and "-- Conflicts of Interest."
OPINION OF SALOMON BROTHERS
On July 21, 1997, Salomon Brothers Inc. ("Salomon Brothers") delivered a
written opinion to the Company to the effect that, as of that date, based upon
the facts and circumstances as they existed at that time and subject to certain
limitations, the consideration to be paid by the Company pursuant to the Merger
is fair, from a financial point of view, to the Company. In rendering this
opinion, Salomon Brothers reviewed and analyzed: (i) the Merger Agreement; (ii)
a draft of this Proxy Statement; (iii) certain publicly available information
concerning the Company, including the Annual Report on Form 10-K of the Company
for the year ended March 31, 1997; (iv) certain other internal information,
primarily financial in nature, including projections, concerning the business
and operations of the Company furnished by the Company; (v) certain publicly
available information concerning the trading of, and the trading market for, the
Common Stock; (vi) internal information, primarily financial in nature,
including projections, concerning the business and operations of Cozzi furnished
by the Company and Cozzi; (vii) certain internal information, primarily
financial in nature, including projections, concerning the business and
operations of Proler furnished by the Company; (viii) the financial terms of the
Proler acquisition; (ix) certain publicly available information with respect to
certain other companies believed to be comparable to Cozzi or the Company and
the trading markets for certain of such other companies' securities; and (x)
certain publicly available information concerning the nature and terms of
certain other transactions or information, financial studies, analyses,
investigations and financial, economic and market criteria considered relevant
by Salomon Brothers. Salomon Brothers also met with certain officers and
employees of Cozzi and the Company to discuss the foregoing, as well as other
matters it believed relevant to its inquiry. A copy of the full text of the
written opinion of Salomon Brothers, which sets forth the assumptions made,
procedures followed, matters considered and limits of its review, is attached as
Annex B to this Proxy Statement, and should be read in its entirety. See
"Matters to be Considered by Stockholders -- Proposal Number Three -- Opinion of
Salomon Brothers."
CONFLICTS OF INTEREST
Pursuant to the Merger Agreement, each of Gerard M. Jacobs and T. Benjamin
Jennings, who are currently officers and directors of the Company, will
terminate their existing employment agreements with the Company and enter into
new employment agreements with the Company at the closing of the Merger: (i)
providing for significant payments in the event of a "change in control" of the
Company; and (ii) granting each of Messrs. Jacobs and Jennings warrants to
purchase 750,000 shares of Common Stock at exercise prices below the fair market
value of the Common Stock at the date of the grant. In addition, pursuant to the
Merger Agreement, Albert Cozzi, who was appointed Chief Operating Officer and
Senior Vice President of the Company on September 1, 1997, will enter into an
employment agreement with the Company at the closing of the Merger under which,
as additional consideration in connection with the Merger, he will receive
warrants exercisable for 755,172 shares of Common Stock at exercise prices below
the fair market value of the Common Stock on the date of the grant. In addition,
the Company has agreed in principle, subject to completion of the Merger, to pay
George O. Moorehead, a Director and officer of the Company, $250,000 and certain
insurance and other benefits. The Company also has agreed in principal to issue
to Mr. Moorehead
10
<PAGE> 14
warrants to purchase 200,000 shares of Common Stock at $12.00 per share and to
pay Mr. Moorehead amounts totalling $665,000, such issuance and payments to be
triggered by the Company issuing certain warrants to Messrs. Jacobs and
Jennings, including under the new employment agreements between each of Messrs.
Jacobs and Jennings to be entered into at the Closing of the Merger. See
"Matters to be Considered by Stockholders -- Proposal Number One -- Employment
Agreements" and "-- Proposal Number Three -- Conflicts of Interest."
EFFECTIVE TIME OF THE MERGER
The Merger will become effective at the time that Articles of Merger
reflecting the merger of Merger Sub, an Illinois corporation, with and into
Cozzi are filed in the Office of the Secretary of State of the State of Illinois
(the date of the filing, the "Effective Date"; the time of filing, the
"Effective Time").
CONDITIONS TO THE MERGER
The obligations of each party to effect the Merger are conditioned on,
among other things, the satisfaction or waiver of each of the following
conditions: (i) the truth and accuracy of all of the representations and
warranties made by each party; (ii) completion by each party of their respective
obligations under the Merger Agreement; (iii) the absence of any material
adverse change in the other party; (iv) the absence of any court order
prohibiting or restricting completion of the Merger; and (v) receipt of all
written consents, assignments, waivers or authorizations required to effect the
Merger.
In addition, the Company will not be obligated to proceed with the Merger
unless: (i) the Company's Stockholders authorize and approve the Merger
Agreement; (ii) no Cozzi Shareholder elects to exercise appraisal rights with
respect to the Merger; (iii) Cozzi obtains a general release from the Estate of
James H. Cozzi and Irene Cozzi (the "Estate") releasing the Company and its
affiliates from all liability such parties may have to the Estate; and (iv)
Cozzi receives the written consent of G.E. Capital Public Finance, Inc. to the
transactions contemplated by the Merger Agreement. Cozzi and the Cozzi
Shareholders will not be obligated to proceed with the Merger unless: (i) the
Cozzi Shareholders receive an opinion from counsel to the effect that the Merger
will be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code; and (ii) Cozzi receives the written
consent of Bank of America National Trust and Savings Association to the
transactions contemplated by the Merger Agreement. See "Matters to be Considered
by Stockholders -- Proposal Number Three -- Conditions to the Merger."
SUBSTANTIAL DILUTION TO EXISTING STOCKHOLDERS
Upon completion of the Merger and the issuance of Common Stock upon
conversion of the Series A Preferred Stock, existing Stockholders (including
officers, directors and affiliates) will suffer substantial dilution of their
voting interest in the Company.
The following table illustrates the percentage of issued and outstanding
Common Stock held by: (i) Stockholders other than the Cozzis, directors,
officers or Nominees of the Company; (ii)directors, officers and Nominees (other
than Messrs. Cozzi, Jacobs and Jennings); (iii) Gerard M. Jacobs and T. Benjamin
Jennings, President and Chief Executive Officer, and Chairman of the Board and
Chief Development Officer, respectively, of the Company; and (iv) the Cozzi
shareholders, under four circumstances: (a) before the Merger is completed; (b)
assuming the Merger is completed; (c) before the Merger is completed, assuming
all outstanding shares of Series A and Series B Preferred Stock have been
converted into Common Stock at conversion prices of $17.00 and $18.50 per share,
respectively; and (d) after the Merger is completed
11
<PAGE> 15
assuming all outstanding shares of Series A and Series B Preferred Stock have
been converted into Common Stock at conversion prices of $17.00 and $18.50 per
share, respectively.
PERCENTAGE OF ISSUED AND OUTSTANDING COMMON STOCK
<TABLE>
<CAPTION>
OFFICERS,
DIRECTORS AND
NOMINEES
(OTHER THAN
MESSRS. COZZI,
UNAFFILIATED JACOBS AND MESSRS. JACOBS COZZI
STOCKHOLDERS JENNINGS) AND JENNINGS SHAREHOLDERS
------------ -------------- -------------- ------------
<S> <C> <C> <C> <C>
Pre-Merger........................... 59% 34% 7% 0%
Post Merger.......................... 35% 20% 4% 41%
Pre-Merger/Post-Conversion........... 64% 29% 7% 0%
Post Merger/Post-Conversion.......... 40% 18% 4% 38%
</TABLE>
See "Risk Factors -- Potential Substantial Dilution to Existing
Stockholders; Registration Rights."
APPRAISAL RIGHTS
Under the Delaware General Corporation Law ("Delaware Law"), Stockholders
are not entitled to appraisal rights in connection with the Merger. See "Matters
to be Considered by Stockholders -- Proposal Number Three -- Appraisal Rights."
TERMINATION
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time by: (i) mutual written consent of all parties to the
Merger Agreement at any time prior to the closing of the Merger (the "Closing
Date"); (ii) the Company, if Cozzi or the Cozzi Shareholders breach any material
representation, warranty, covenant or agreement under the Merger Agreement;
(iii) the Cozzi Shareholders, if the Company or Merger Sub breaches any material
representation, warranty, covenant or agreement under the Merger Agreement; (iv)
either the Cozzi Shareholders or the Company if the Closing has not been
consummated by December 15, 1997; (v) the Company, if the Merger Agreement and
the transactions contemplated thereby fail to receive the requisite vote for
approval and adoption by the Stockholders of the Company; (vi) the Company if it
is not satisfied in its sole discretion with the results of its environmental
assessment of Cozzi's properties; and (vii) the Cozzi Shareholders if they have
not received an opinion from counsel to the effect that the Merger will be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code. See "Matters to be Considered by
Stockholders -- Proposal Number Three -- Termination."
TERMINATION FEES AND EXPENSES
Each party to the Merger Agreement is required to pay its own fees and
expenses, including fees and expenses of counsel and its advisors.
ALTERNATIVES TO THE MERGER
The Company has evaluated numerous acquisition and merger opportunities in
the scrap metal recycling industry during the past twelve months. Management
believes that Cozzi possesses unique strengths in its management team and
customer relations, as well as the broad geographic scope of its operations. The
Company's Board of Directors has concluded that none of the other candidates
evaluated to date, except for the other Completed or Potential Acquisitions,
possess this unique blend.
12
<PAGE> 16
ACCOUNTING TREATMENT
For financial reporting purposes, the Merger will be treated as a purchase
transaction, with the Company as the acquiror of Cozzi. See "Historical and
Unaudited Pro forma Condensed Consolidated Financial Data."
NO SOLICITATION OF OTHER TRANSACTIONS
Under the Merger Agreement, Cozzi and the Cozzi Shareholders have agreed
not to initiate, solicit or encourage any inquiries from any person or group
with respect to any merger, consolidation or business combination involving
Cozzi or any of its subsidiaries other than the transactions contemplated by the
Merger Agreement.
EXECUTIVE OFFICERS AND DIRECTORS AFTER THE MERGER
From and after the Effective Time, assuming the election of the Nominees,
and until their successors are duly elected or appointed and qualified in
accordance with applicable law, the directors of the Company will be Albert A.
Cozzi, Frank J. Cozzi, Gregory P. Cozzi, George A. Isaac, III, Gerard M. Jacobs,
T. Benjamin Jennings, Christopher G. Knowles, Donald F. Moorehead, Jr., William
T. Proler and Harold Rubenstein. Upon completion of the Merger, the following
persons likely will be appointed as officers of the Company: T. Benjamin
Jennings, Chairman of the Board and Chief Development Officer; Gerard M. Jacobs,
Chief Executive Officer; Albert A. Cozzi, President and Chief Operating Officer;
and Frank J. Cozzi, Vice President and President of Cozzi. In addition, the
Company expects that George A. Isaac, III will continue to serve as a member of
the Executive Committee and Executive Vice President, Robert C. Larry will
continue to serve as Vice President, Finance, Chief Financial Officer and
Treasurer, Daniel B. Burgess will continue to serve as Executive Vice President,
and Xavier Hermosillo will continue to serve as Secretary, following the Merger.
For information concerning these persons, see "Matters to be Considered by
Stockholders -- Proposal Number One" and "-- Proposal Number Three."
DISTRIBUTION AND DIVIDEND POLICY
Since September 1995 the Company has not paid, and the Company does not
anticipate paying over the next twelve months, cash dividends on its Common
Stock.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Certain statements in this Proxy Statement that are not historical facts
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of
1933, as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Discussions containing
such forward-looking statements may be found below and in the material set forth
under "Summary," "Matters to be Considered by Stockholders -- Proposal Number
Three," "Information about the Company" and "Information about Cozzi" as well as
within the Proxy Statement generally. In addition, when used in the Proxy
Statement, the words "believes," "intends," "anticipates," "expects" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to a number of risks and uncertainties, including without limitation
the following: cyclicality of the scrap metal recycling industry, price
fluctuations in commodity markets, adverse economic conditions, inability to
successfully access capital, unavailability of suitable acquisition
opportunities, the cost of complying with environmental laws and regulations,
the risk that announced mergers are not consummated, the risk of challenges by
the Company's competition, and the risk that the Company will face difficulties
in consolidating and controlling operations in diverse geographic locations.
Actual results could differ materially from those projected in the
forward-looking statements as a result of the factors set forth in the Proxy
Statement generally and particularly in "Risk Factors." The Company undertakes
no obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect any future events or
circumstances.
13
<PAGE> 17
SELECTED HISTORICAL FINANCIAL DATA OF THE COMPANY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth summary historical financial data of the
Company for the periods indicated. The summary historical data as of and for
each of the four fiscal years in the period ended October 31, 1995, the five
months ended March 31, 1996 and the year ended March 31, 1997 were derived from
the audited consolidated financial statements of the Company. The summary
historical financial data as of and for the six months ended September 30, 1996
and 1997 were derived from unaudited interim financial statements of the
Company. In the opinion of management, such unaudited interim financial
statements contain all adjustments (consisting of only normal recurring items)
necessary to present fairly its financial position and results of operations as
of and for the periods presented. The information contained in this table should
be read in conjunction with "Information about the Company -- Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of the Company and the related notes
thereto, appearing elsewhere in this Proxy Statement. The financial data
included in the table below reflects the results of the Company's prior
operations: designing, manufacturing and marketing electronic presentation
products and color printers and related consumable products as discontinued
operations. The Company sold the assets relating to these operations in July
1996. See "Information about the Company -- Overview."
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL SIX MONTHS
ENDED OCTOBER 31, FIVE MONTHS YEAR ENDED ENDED SEPTEMBER 30,
------------------------------------- ENDED MARCH 31, MARCH 31, --------------------
1992 1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- --------------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.................. $ -0- $ -0- $ -0- $ -0- $ -0- $ 65,196 $29,942 $157,346
Gross profit............... -0- -0- -0- -0- -0- 6,872 2,824 16,128
Operating income (loss)
from continuing
operations............... -0- -0- -0- -0- (210) (1,584) (824) 4,278
Interest income (expense),
net...................... 968 310 229 312 142 (1,227) (450) (3,565)
Income (loss) from
continuing operations.... 968 310 228 261 (16) (2,010) (911) 526
Income (loss) from
discontinued
operations(1)............ 78 (202) (440) (2,698) 22 847 294 208
Net income (loss)
applicable to common
stock.................... 1,046 108 (212) (2,437) 6 (1,163) (617) 362
Fully diluted net income
(loss) from continuing
operations applicable to
common stock............. $ 0.13 $ 0.06 $ 0.04 $ 0.05 $ 0.00 $ (0.22) $ (0.10) $ 0.01
Cash dividends per share... $ 0.24 $ 0.24 $ 0.24 $ 0.18 $ 0.00 $ 0.00 $ 0.00 $ 0.00
BALANCE SHEET DATA:
Cash and cash
equivalents.............. $ 4,578 $ 893 $ 639 $ 3,032 $ 3,093 $ 5,718 $ 4,348 $ 11,999
Working capital............ 11,343 7,983 8,130 9,141 8,971 (13,555) 3,313 5,243
Total assets............... 16,665 15,304 13,486 10,130 10,349 70,125 33,860 267,669
Total debt(2).............. -- -- -- -- -- 36,441 8,593 100,541
Redeemable convertible
preferred stock.......... -- -- -- -- -- -- -- 24,323
Total stockholders'
equity................... $14,506 $13,759 $12,395 $ 9,314 $ 9,608 $ 23,148 $18,348 $ 88,637
</TABLE>
- ---------------
(1) Operating results for fiscal 1992 to 1995 and the five month transitional
period ended March 31, 1996 have been restated to reflect the results of the
disposed businesses as discontinued operations.
(2) Total debt includes all current and long term portions of related party and
third party debt as well as amounts outstanding under lines of credit.
14
<PAGE> 18
SELECTED HISTORICAL FINANCIAL DATA OF COZZI
(DOLLARS IN THOUSANDS)
The following table sets forth summary historical financial data of Cozzi.
The summary historical statement of operations and balance sheet data as of and
for each of the five fiscal years in the period ended December 31, 1996 were
derived from the audited consolidated financial statements of Cozzi. The
information contained in this table should be read in conjunction with
"Information about Cozzi -- Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
of Cozzi, including the notes thereto, appearing elsewhere in this Proxy
Statement. The summary historical financial data as of and for the nine months
ended September 30, 1996 and 1997 are derived from unaudited interim financial
statements of Cozzi. In the opinion of Cozzi, such unaudited interim financial
statements contain all adjustments (consisting of only normal recurring items)
necessary to present fairly its financial position and results of operations as
of and for the periods presented.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................. $107,965 $147,279 $199,717 $231,409 $215,908 $167,104 $191,296
Gross profit............... 9,887 15,508 25,013 24,905 20,543 17,289 19,149
Operating income (loss).... (169) 3,951 11,522 8,989 5,948 5,803 5,454
Interest expense, net...... 1,676 1,305 1,664 1,985 1,762 1,546 2,105
Net income (loss).......... $ (1,424) $ 2,269 $ 6,112 $ 3,881 $ 1,590 $ 2,046 $ 2,351
BALANCE SHEET DATA:
Cash and cash
equivalents............. $ 155 $ 297 $ 233 $ 58 $ 29 $ 69 $ 59
Working capital............ (4,268) (7,361) 16,154 19,709 20,523 17,134 21,762
Total assets............... 41,580 45,755 62,252 77,658 78,592 78,047 85,989
Total debt(1).............. 21,561 23,118 24,370 32,551 48,254 46,599 49,937
Total stockholders'
equity.................. $ 7,631 $ 9,900 $ 15,597 $ 19,478 $ 7,349 $ 7,803 $ 9,700
</TABLE>
- ---------------
(1) Total debt includes all current and long term portions of related party and
third party debt as well as amounts outstanding under lines of credit.
15
<PAGE> 19
SELECTED PRO FORMA COMBINED FINANCIAL DATA (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The following table sets forth summary unaudited pro forma combined
financial data of the Company after giving effect to the Merger accounted for as
a purchase transaction, to the sale of the Series A Convertible Preferred Stock
to the expected issuance of the Series B Convertible Preferred Stock, to the
acquisitions of Proler, Isaac, Reserve, HouTex and MacLeod and to certain equity
and financing transactions as if all these transactions had occurred on April 1,
1996 with respect to the pro forma statement of operations data, and to the
Merger, to the expected issuance of the Series B Convertible Preferred Stock,
and to other financing transactions as if these transactions had occurred on
September 30, 1997 with respect to the pro forma balance sheet data. The
selected unaudited pro forma combined financial data were derived from the
Company's unaudited combined condensed balance sheet as of September 30, 1997
and the unaudited combined condensed statement of operations for the six months
ended September 30, 1997 (incorporated by reference to the Company's Form 10-Q,
dated September 30, 1997, filed with the Commission on October 17, 1997), the
Company's audited combined statement of operations for the year ended March 31,
1997 (incorporated by reference to the Company's Annual Report on Form 10-K,
dated March 31, 1997, filed with the Commission on June 19, 1997), Cozzi's
unaudited balance sheet as of September 30, 1997 and unaudited statement of
operations for the six months ended September 30, 1997, and the twelve months
ended March 31, 1997, Proler's unaudited statement of operations for the five
months ended August 31, 1997, and the twelve months ended March 31, 1997,
Reserve's unaudited statement of operations for the month ended April 30, 1997,
and the twelve months ended March 31, 1997, Isaac's unaudited statement of
operations for the twelve weeks ended June 23, 1997, and the twelve months ended
March 31, 1997, HouTex's unaudited statement of operations for the nine months
ended December 31, 1996 and MacLeod's unaudited statement of operations for the
nine months ended December 31, 1996. The information contained in this table
should be read in conjunction with "Information about the
Company -- Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements of the Company,
including the related notes thereto, appearing elsewhere in this Proxy
Statement. See "Information about the Company -- Overview."
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
MARCH 31, 1997 SEPTEMBER 30, 1997
-------------- ------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................. $ 645,722 $ 354,067
Gross profit.............................................. 64,594 37,421
Operating income from continuing operations............... 10,776 8,032
Interest expense, net..................................... 12,674 6,807
Net loss from continuing operations applicable to common
stock.................................................. $ (7,503) $ (5,487)
Fully diluted net loss from continuing operations per
common share(2)........................................ $ (0.27) $ (0.20)
Fully diluted common shares used in computing per share
amounts................................................ 27,578,324 27,958,973
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 23,643
Working capital........................................... 41,813
Total assets.............................................. 446,704
Total debt(1)............................................. 149,878
Total stockholders' equity(3)............................. $214,782
</TABLE>
- ---------------
(1) Total debt includes all current and long term portions of related party and
third party debt as well as amounts outstanding under lines of credit.
16
<PAGE> 20
(2) Net loss from continuing operations applicable to common stock is computed
as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
MARCH 31, 1997 SEPTEMBER 30, 1997
-------------- ------------------
<S> <C> <C>
Net income from continuing operations........ $ 242 $ 1,115
Preferred stock dividends.................... (7,745) (6,545)
Accretion of preferred stock discount(3)..... 0 (57)
---------- ----------
Net loss from continuing operations
applicable to common stock................. (7,503) (5,487)
Fully diluted weighted average shares
outstanding................................ 27,578,324 27,958,973
---------- ----------
Net loss from continuing operations per
common share............................... $ (0.27) $ (0.20)
========== ==========
</TABLE>
The Preferred Stock dividend rate assumes that the Stockholders have
approved the issuance of the Common Stock underlying the Series A and Series
B Preferred Stock. See "Matters to be considered by Stockholders -- Proposal
Number Eight."
(3) Pro forma stockholders' equity includes $24.3 million relating to the Series
A Convertible Preferred Stock which was reclassified to equity on a
prospective basis upon execution of certain waivers and amendments to the
terms of the Series A Convertible Preferred Stock. As a result of the
reclassification, no additional accretion of the preferred stock discount
will be recorded and no accretion beyond the historical amount recorded as
of September 30, 1997 has been assumed for the pro forma fiscal year ended
March 31, 1997 and six months ended September 30, 1997 earnings per share
computation.
17
<PAGE> 21
COMPARATIVE PER SHARE DATA
(UNAUDITED)
The following summary presents selected comparative per share information
for: (i) the Company on a historical basis in comparison with pro forma
information giving effect to the Merger, accounted for as a purchase; (ii) Cozzi
on a historical basis in comparison with pro forma equivalent information after
giving effect to the Merger, assuming that 11,499,986 shares of Common Stock are
issued in exchange for the 108.75 outstanding shares of Cozzi's common stock.
The historical and pro forma financial information should be read in conjunction
with the historical consolidated financial statements of the Company and Cozzi
and the related notes thereto and with the unaudited pro forma financial
information and the related notes thereto, appearing elsewhere in this Proxy
Statement or incorporated by reference herein.
<TABLE>
<CAPTION>
FISCAL SIX MONTHS
YEAR ENDED ENDED
MARCH 31, 1997 SEPTEMBER 30, 1997
-------------- ------------------
<S> <C> <C>
HISTORICAL-THE COMPANY
Net income (loss) from continuing operations applicable to
common stock(1)........................................ $ (0.22) $ 0.01
Book value per share(4)................................... $ 2.28 $ 5.36
HISTORICAL-COZZI(3)
Net income from continuing operations per share(1)........ $ 11,503.45 $ 12,064.37
Book value per share(4)................................... $ 77,131.03 $ 89,195.40
PRO FORMA AND EQUIVALENT PRO FORMA COMBINED NET LOSS FROM
CONTINUING OPERATIONS PER SHARE(2)
Pro forma combined net loss from continuing operations per
common share........................................... $ (0.27) $ (0.20)
Equivalent pro forma combined net loss from continuing
operations per Cozzi share(5).......................... $(28,769.69) $(20,753.04)
<CAPTION>
AS OF
SEPTEMBER 30, 1997
------------------
<S> <C> <C>
PRO FORMA COMBINED BOOK VALUE PER COMMON SHARE(2)
Pro forma combined book value per common share of common
stock(6)............................................... $ 7.66
Equivalent pro forma combined book value per share of
Cozzi common stock(5).................................. $809,714.78
</TABLE>
Note: Dividend information is not provided since neither the Company nor Cozzi
paid dividends for the periods presented.
- ---------------
(1) Income (loss) from continuing operations per share data is computed by
dividing net income (loss) from continuing operations by the number of
common equivalent shares outstanding during the period.
(2) The pro forma combined information also gives effect to the acquisitions of
MacLeod, HouTex, Reserve, Isaac, Proler and certain financing and equity
transactions as if these transactions occurred on April 1, 1996 with respect
to net income (loss) information.
(3) Cozzi historical per share data reflects that only 108.75 shares are
currently outstanding.
(4) The historical book value per share is computed by dividing total
Stockholders' equity by the number of shares of Common Stock outstanding at
the end of each period.
(5) The unaudited pro forma combined net loss from continuing operations per
equivalent Cozzi share and the unaudited pro forma book value per equivalent
Cozzi share is calculated by multiplying the respective unaudited pro forma
combined per share amounts for the Company by the Exchange Ratio of 105,747
shares of Common Stock for each share of Cozzi common stock.
(6) Pro forma combined book value per share was calculated based on the
outstanding shares upon consummation of the Merger (28,050,065) without
giving effect to the conversion of the Series A and Series B Convertible
Preferred Stock.
18
<PAGE> 22
RISK FACTORS
Each Stockholder should carefully consider and evaluate the following
factors, among others, before voting on the proposals set forth herein,
including the Merger and the authorization to issue the shares of common stock
underlying the Series A and Series B Preferred Stock.
INABILITY TO CONTROL OR MANAGE GROWTH OR TO SUCCESSFULLY INTEGRATE ACQUIRED
BUSINESSES
The Company intends to actively pursue acquisitions and mergers in the
scrap metal recycling industry. There can be no assurance that the Company will
be successful in acquiring other entities or that it will be able to effectively
manage these acquired entities. The Company's ability 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, the achievement of cost savings and
the availability of capital. The inability to control or manage growth
effectively or to successfully integrate future new businesses into the
Company's operations would have a material adverse effect on the Company's
results of operations and financial condition. Depending on the nature and size
of these transactions, if any, the Company may experience working capital and
liquidity shortages. There can be no assurance that additional financing will be
available on terms and conditions acceptable to the Company, if at all.
RECENT CHANGE IN STRATEGIC DIRECTION AND LIMITED OPERATING HISTORY
The Company has undergone a significant change in strategic direction and
emphasis in the last twelve to eighteen months. Given this substantial change,
past financial performance should not be considered a reliable indicator of
future performance and historical trends should not be used to anticipate
results or trends in future periods. Prior to the EMCO merger in April 1996, the
Company had no history of operations in the scrap metal recycling industry. Due
to the limited experience of management in effecting a consolidation strategy,
there can be no assurance that the Company will be able to successfully effect
its consolidation strategy even if the Company is able to acquire other entities
on acceptable terms and conditions. In addition, until being acquired by the
Company, none of the Completed Acquisitions, the Potential Acquisitions nor, in
some cases, potential future acquisitions have or will have previously operated
as subsidiaries of a public holding company subject to formal accounting and
reporting requirements. The Company will be required to continue devoting
additional management time and capital to enhance information systems and to
improve and monitor internal controls, as well as to recruit managers with
appropriate skills to insure the timeliness and accuracy of financial reports.
Further, the Company's management has limited experience in executing
consolidation strategies on the scale being pursued by the Company. The success
of the consolidation strategy depends in part on the ability of the Company's
management to oversee diverse operations and to successfully integrate
processing, marketing and other resources.
INABILITY TO COMPLETE POTENTIAL ACQUISITIONS
From time to time the Company engages in discussions with third parties
regarding potential acquisitions of companies or businesses in the same or
substantially similar lines of business as the Company. If the parties are able
to agree generally on the nature, terms and conditions of a transaction, a
letter of intent is prepared to reflect this understanding. In many cases, these
letters of intent are structured as "binding intents" to purchase the business,
although each letter is still subject to a number of terms and conditions
including but not limited to negotiation and execution of definitive purchase
agreements. In addition, each potential acquisition may be subject to additional
contingencies specific to that acquisition. There can be no assurance that any
such potential acquisition will result in execution of a definitive agreement or
that such acquisition will be completed on terms and conditions acceptable to
the Company, if at all.
LACK OF CAPITAL AND LEVERAGE
Implementing the Company's aggressive acquisition strategy requires
substantial amounts of capital. For example, to complete the Potential
Acquisitions, the Company needs to fund the cash portions of the purchase
19
<PAGE> 23
consideration, approximately $49.6 million, including approximately $6.0 million
to be paid in connection with the Merger. There can be no assurance that
sufficient funds for these acquisitions will become available on acceptable
terms, if at all. See "Matters to be Considered by Stockholders -- Proposal
Number Eight." Failure to raise sufficient capital when required or needed could
adversely affect the Company's results of operations and financial condition.
The Company intends to continue its strategy of financing its acquisitions
in part by incurring indebtedness to sellers of acquired entities. This may
require the Company to agree to certain restrictions on its operations which may
adversely effect the Company's ability to integrate the acquired entities into
the Company's structure. For example, in connection with the Proler, Isaac and
Reserve acquisitions, the Company incurred short-term indebtedness to the
sellers of these entities. These short-term notes restrict the Company's ability
to unilaterally direct or control the operations of Proler, Isaac or Reserve
until the notes are repaid. Failure to repay these notes or similar notes that
the Company may issue in the future would have a material adverse effect on the
Company's results of operations and financial condition and could cause the
Company to cede control in or ownership of the acquired entity. As of September
30, 1997, the Company had approximately $154.7 million of total liabilities,
including approximately $48.6 million of indebtedness owed in connection with
the acquisitions of MacLeod, Reserve, Isaac and Proler. The degree to which the
Company is leveraged could have adverse consequences to the Company including
the following: (i) 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; (ii) a substantial
portion, if not all, of the Company's cash flow will be required to pay
principal and interest; and (iii) 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.
FAILURE TO COMPLY OR THE COST OF COMPLYING WITH ENVIRONMENTAL LAWS
The Company is subject to extensive Federal, State and local laws,
including various rules and regulations relating to environmental matters.
Failure to comply, or the cost of complying, with these rules and regulations
could have a material adverse effect on the Company's results of operations and
financial condition. For a discussion of these rules and regulations as well as
others governing the Company's business, see "Information about the
Company -- Environmental Matters" and "Information about Cozzi -- Environmental
Matters."
LACK OF MANAGEMENT DEPTH AND EXPERIENCE
Due to the limited experience of the Company's senior management in the
scrap metal recycling business, the Company relies substantially on the
experience of the management team at each subsidiary on day-to-day operating
matters. There can be no assurance that these individuals will continue to serve
the subsidiaries. In addition, Albert A. Cozzi was appointed Chief Operating
Officer and Senior Vice President of the Company on September 1, 1997. In
connection with the Merger, the Company is required to appoint Mr. Cozzi as
President. There can be no assurance that if the Merger does not close, Mr.
Cozzi would continue to serve as Chief Operating Officer and Senior Vice
President of the Company. See "Matters to be Considered by
Stockholders -- Proposal Number Three." The loss of a significant number of
managers, failure to complete the Merger or Mr. Cozzi's potential departure as
an officer could have a material adverse effect on the Company's efforts to
effectively manage and integrate the Completed Acquisitions or any future
acquisitions, including Cozzi, and may also adversely impact the Company's
ability to successfully implement its consolidation strategy.
CONFLICTS OF INTEREST
Pursuant to the Merger Agreement, each of Gerard M. Jacobs and T. Benjamin
Jennings, who are currently officers and directors of the Company, will
terminate their existing employment agreements with the Company and enter into
new employment agreements with the Company at the closing of the Merger: (i)
providing for significant payments in the event of a "change in control" of the
Company; and (ii) granting each of Messrs. Jacobs and Jennings warrants to
purchase 750,000 shares of Common Stock at exercise prices below the fair market
value of the Common Stock at the date of the grant. In addition, pursuant to the
Merger
20
<PAGE> 24
Agreement, Albert Cozzi, who was appointed Chief Operating Officer and Senior
Vice President of the Company on September 1, 1997, will enter into an
employment agreement with the Company at the closing of the Merger under which,
as additional consideration in connection with the Merger, he will receive
warrants exercisable for 755,172 shares of Common Stock at exercise prices below
the fair market value of the Common Stock on the date of the grant. See "Matters
to be Considered by Stockholders -- Proposal Number Three -- Conflicts of
Interest."
ABILITY OF CERTAIN INDIVIDUALS TO IMPACT OWNERSHIP AND GOVERNANCE OF THE COMPANY
Upon the closing of the Merger, the Stockholders Agreement (as defined
herein) contemplates that one-half of the Company's Board of Directors will be
comprised of directors nominated by the Cozzi Shareholders and one-half by
Messrs. Jacobs and Jennings. Further, giving effect to the Merger, the Cozzi
Shareholders and Messrs. Jacobs and Jennings will own approximately 45% of the
Company's issued and outstanding shares of Common Stock. See "Matters to be
Considered by Stockholders -- Proposal Number Three -- Description of the Merger
Agreement" and "Security Ownership of Certain Beneficial Owners and Management."
After the Merger is completed, the Cozzi Shareholders and Messrs. Jacobs and
Jennings will have significant influence on 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. This influence
may not be consistent with the interests of the other Stockholders. Further, the
changes made in the Company's governance structure to effect the Merger is an
example of the Company's willingness to rapidly change the management and
governance of the Company if necessary or desirable to complete an acquisition.
There can be no assurance that the proposed changes in management and governance
as contemplated in connection with the Merger or that may occur in connection
with subsequent acquisitions or mergers will be favorable and in the best
interests of all Stockholders.
The parties to the Stockholders Agreement also have agreed to vote for
proposals, if and when presented by the Company, to amend the Company's
organizational documents to require the approval of at least two-thirds of the
Board of Directors to, among other things: (i) amend the Company's certificate
of incorporation or bylaws; (ii) liquidate or merge the Company; (iii) sell
substantially all of the Company's assets; (iv) elect or remove officers; (v)
adopt an annual budget; (vi) borrow funds, sell assets or make capital
expenditures exceeding $5 million; (vii) issue or register the Company's
securities; or (viii) declare or pay any dividends or distributions. If the
Company's organizational documents are amended to reflect these restrictions,
and the Directors cannot agree on the Company's strategic direction, a minority
of three dissenting Directors could prevent the Company from taking any of the
actions listed above. In addition, having an even number of Directors creates
the possibility that a divided Board would be unable to take any action
requiring majority approval. Should the Board be unable to act because of
deadlock, or if a minority of dissenting Directors prevent the Board from taking
a significant action, this could have a material adverse effect on the Company's
results of operations and financial condition.
CYCLICALITY OF OPERATING RESULTS/OPERATING LOSSES
The operating results of the scrap metal recycling processing industry in
general, and the Company's operations specifically, are highly cyclical in
nature as they tend to reflect and be amplified by general economic conditions.
In periods of national recession or periods of minimal economic growth, the
operations of scrap metal recycling companies have been materially adversely
affected. For example, 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 and significant fluctuations in demand and pricing for the Company's
products. Future economic downturns in the national economy would materially and
adversely affect the Company's results of operations and financial condition.
The ability of the Company to withstand significant economic downturns in the
future will depend in part on the level of the Company's capital and liquidity.
See "Information about the Company -- Management's Discussion and Analysis of
Financial Conditions and Results of Operation."
The Company's EMCO subsidiary has incurred operating losses and required
capital infusions since the April 1996 merger. There can be no assurance that
the Company will not be required to provide additional
21
<PAGE> 25
funding to EMCO. Further, there can be no assurance that existing or future
subsidiaries will not require similar infusions, or that the Company will be
able to provide such fundings if needed. The need to provide this funding or the
inability to do so could have a material adverse effect on the Company's results
of operations and financial condition.
FAILURE TO ACQUIRE JOINT VENTURE INTERESTS
Assuming the Merger is approved and completed, the Company will, through
Cozzi, be a member of, with a 50% interest in, two limited liability companies,
one with operations in Phoenix, Arizona (Salt River) and the other in Memphis,
Tennessee (PerlCo). The Company has binding signed letters of intent to acquire
the remaining 50% interest in each of these joint ventures. However, there can
be no assurance that the Company will acquire these remaining interests. If the
Company is unable to acquire either of these joint venture interests, then the
Company may be unable to realize some of the operational efficiencies
anticipated in connection with the Merger and may be prohibited by the
agreements governing the joint ventures from taking actions with respect to the
joint ventures' assets or liabilities that may be in the Company's best
interest.
DEPENDENCE ON SCRAP SUPPLIERS
The profitability of the Company's scrap recycling operations depends, in
part, on the availability of an adequate source of supply. The Company acquires
its scrap inventory from numerous sources. These suppliers typically are not
bound by long-term contracts and have no obligation to continue sending scrap
materials to the Company. Decisions by a substantial number of scrap suppliers
to cease sending scrap materials to the Company would have a material adverse
effect on the Company's results of operations and financial condition.
CONCENTRATION OF CUSTOMERS AND CREDIT RISK
On a pro forma basis, giving effect to the Completed Acquisitions and the
Merger, the Company's five largest customers would have represented
approximately 31% and 31% of pro forma combined revenues for the twelve months
ended March 31, 1997 and the six months ended September 30, 1997, respectively.
Accounts receivable balances from these customers represented approximately 30%
of combined pro forma accounts receivable at September 30, 1997. On a pro forma
basis, the Company's largest customer, David J. Joseph and Company accounted for
approximately 12% and 13% of pro forma combined revenues for the twelve months
ended March 31, 1997 and six months ended September 30, 1997, respectively, and
accounted for approximately 17% of pro forma accounts receivable at September
30, 1997. The loss of any one of the Company's, or if the Merger is consummated
Cozzi's, significant customers, could adversely affect the Company's results of
operations and financial condition. See "Information about Cozzi -- Significant
Customers."
In connection with the sale of the Company's products, the Company
generally does not require collateral as security for customer receivables.
Certain of the Company's subsidiaries have significant balances owing from
customers that operate in cyclical industries and under leveraged conditions
that may impair the collectibility of these receivables. Failure to collect
amounts due on these receivables could have a material adverse effect on the
Company's results of operations and financial condition.
RELIANCE OF SALOMON BROTHERS ON MANAGEMENT'S FINANCIAL FORECAST AND VALUATION
REPORT
The opinion of Salomon Brothers that the consideration to be paid by the
Company pursuant to the Merger is fair to the Company from a financial point of
view is based, in part, upon projected financial results prepared by the
Company's management. These projected results have not been reviewed or passed
upon by an independent third party and are subject to contingencies beyond
management's control. The Company's ability to actually realize the results
projected in the information provided to Salomon Brothers depends upon numerous
factors including, among other things, efficiently integrating the operations of
each of Cozzi and the Company, and securing additional capital. All material
events and circumstances cannot be anticipated or accurately predicted, and some
unanticipated events and circumstances are likely to occur. Accordingly, there
22
<PAGE> 26
may be differences between the projected results of operations and the actual
results of operations, and these differences could be material.
POTENTIAL SUBSTANTIAL DILUTION TO EXISTING STOCKHOLDERS; REGISTRATION RIGHTS
Existing Stockholders do not have preemptive rights. Upon completion of the
Merger and the issuance of Common Stock upon conversion of the Series A
Preferred Stock, existing Stockholders (including officers, directors and
affiliates) will suffer substantial dilution of their voting interest in the
Company.
The following table illustrates the percentage of issued and outstanding
Common Stock held by: (i) Stockholders other than the Cozzis, directors,
officers or Nominees of the Company; (ii)directors, officers and Nominees (other
than Messrs. Cozzi, Jacobs and Jennings); (iii) Gerard M. Jacobs and T. Benjamin
Jennings, President and Chief Executive Officer, and Chairman of the Board and
Chief Development Officer, respectively, of the Company; and (iv) the Cozzi
shareholders, under four circumstances: (a) before the Merger is completed; (b)
assuming the Merger is completed; (c) before the Merger is completed, assuming
all outstanding shares of Series A and Series B Preferred Stock have been
converted into Common Stock at conversion prices of $17.00 and $18.50 per share,
respectively; and (d) after the Merger is completed assuming all outstanding
shares of Series A and Series B Preferred Stock have been converted into Common
Stock at conversion prices of $17.00 and $18.50 per share, respectively.
PERCENTAGE OF ISSUED AND OUTSTANDING COMMON STOCK
<TABLE>
<CAPTION>
OFFICERS,
DIRECTORS AND
NOMINEES
(OTHER THAN
MESSRS. COZZI,
UNAFFILIATED JACOBS AND MESSRS. JACOBS COZZI
STOCKHOLDERS JENNINGS) AND JENNINGS SHAREHOLDERS
------------ -------------- -------------- ------------
<S> <C> <C> <C> <C>
Pre-Merger............................. 59% 34% 7% 0%
Post Merger............................ 35% 20% 4% 41%
Pre-Merger/Post-Conversion............. 64% 29% 7% 0%
Post Merger/Post-Conversion............ 40% 18% 4% 38%
</TABLE>
The Company may from time to time issue additional shares of Common Stock
or securities convertible into Common Stock either as consideration for
additional acquisitions or otherwise at prices below prevailing market prices of
the Common Stock or at prices below the Company's book value. Common Stock sold
at such a discount would result in dilution to the then-existing Stockholders of
the Company. See "Matters to be Considered by Stockholders -- Proposal Number
Nine" and "-- Proposal Number Eleven." Further, Stockholders are not granted
preemptive rights to further issuances of shares and, therefore, these issuances
would also reduce the existing Stockholders' percentage interest in the Company.
After giving effect to the Pending and Completed Acquisitions,
approximately 31,397,684 shares of Common Stock would have been outstanding as
of September 30, 1997 and 3,822,544 shares are issuable on the exercise of
warrants and options that will have vested and be exercisable on or before March
31, 1998. As of March 31, 1998, the Company will have approximately 3.5 million
shares of Common Stock authorized or outstanding that will be eligible for sale
pursuant to Rule 144 under the Securities Act. In addition, the Company has oral
or written agreements to register substantially all of the unregistered shares
of Common Stock which are currently outstanding and the shares of Common Stock
issuable upon exercise of substantially all currently outstanding options and
warrants to purchase shares of Common Stock. The utilization of Rule 144, and
the exercise of registration rights by the holders of these shares will increase
substantially the number of shares available for sale in the public market and
may have an adverse impact on the market price of the Common Stock.
23
<PAGE> 27
FAILURE TO APPROVE CONVERSION OF SERIES A AND SERIES B PREFERRED STOCK AND OTHER
RISKS ASSOCIATED WITH SERIES A AND SERIES B 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"). Two
thousand five hundred shares of the Series A Preferred Stock were purchased by
Gerard M. Jacobs, T. Benjamin Jennings and Donald F. Moorehead, Jr., directors
of the Company. On November 20, 1997, the Company agreed to issue an aggregate
of 20,000 shares of Series B Convertible Preferred Stock, par value $.01 per
share (the "Series B Preferred Stock"). See "Matters to be Considered by
Stockholders -- Proposal Number Eight." If the convertibility provisions of the
Series A Preferred Stock are not approved by the Stockholders by December 8,
1997, the dividend rate will increase from an annual rate of 9% to an annual
rate of 13% of the stated value of $1,000 per share. If the Company has obtained
Stockholder approval ("Stockholder Approval") of the convertibility provisions
of the Series A and Series B Preferred Stock, but has not filed a registration
statement (the "Registration Statement") covering the Common Stock issuable upon
conversion of the applicable Series of 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 applicable Series of
Preferred Stock a monthly fee equal to 2.0% of the Stated Value of the
applicable Series of Preferred Stock, in cash or in the form of additional
shares of Preferred Stock. This monthly fee would be equal to $500,000, with
respect to the Series A or Series C Preferred Stock and $400,000 with respect to
the Series B Preferred Stock.
The Company will also be obligated to redeem the shares of each Series of
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
applicable Series of 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 applicable
Series of Preferred Stock and such breach continues for ten business days after
written notice; or (iii) the Company sells all or substantially all of its
assets, engages in a transaction or series of transactions 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. There can be
no assurances that if the Company were required to redeem the shares of any
Series of Preferred Stock it would have sufficient cash or be able to obtain
financing on reasonable terms, if at all, to fund the redemption. If the Company
were unable to redeem the shares of any Series of Preferred Stock, then the
Company would be obligated to pay additional dividends and interest to the
holders of the applicable Series of Preferred Stock. The payment of these
additional dividends and interest could have a material adverse effect on the
Company's results of operations and financial condition.
VOLATILITY OF TRADING PRICE
The trading price of the Common Stock has been, and in the future is
expected to be, volatile and subject to 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,
prospects or financial results of the Company, general market and economic
conditions, additional future proposed acquisitions by the Company and other
factors. Failure in any fiscal quarter to meet the investment community's
revenues or earnings expectations, if any, could have an adverse impact on the
trading price of the Common Stock, as could sales of large amounts of Common
Stock by existing
24
<PAGE> 28
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 of Common Stock were
adversely affected by such sales, the Company's access to equity capital markets
could be adversely affected and issuances of Common Stock in connection with
acquisitions, or otherwise, could dilute future earnings per share. Management
believes that the Company's stock price reflects an assumption that the
Potential Acquisitions, including the Merger, will be completed. If the
Potential Acquisitions, including the Merger, are not completed, the trading
price of the Common Stock could be adversely affected.
POTENTIAL RESTRICTIONS ON MERGERS AND OTHER ACTIONS.
Section 203 of the Delaware General Corporation Law (the "Delaware Business
Combination Statute") prohibits, under certain circumstances, "business
combinations" between a Delaware corporation whose stock is publicly-traded and
an "interested stockholder" of such corporation. The provisions prohibiting
"business combinations" could delay or frustrate the removal of incumbent
directors or a change in control of the Company. The provisions also could
discourage, impede, or prevent a merger, tender offer or proxy contest, even if
such event would be favorable to the interest of stockholders. See "Description
of Capital Stock -- Delaware Business Combination Statute." In addition, the
Company's certificate of incorporation authorizes the issuance of 4,000,000
shares (assuming approval of Proposal Number Five) of "blank check" preferred
stock (the "Preferred Stock"), which the Board of Directors may cause the
Company to issue in one or more series. The Board of Directors has designated
36,000 shares and 23,000 shares, respectively, of the Preferred Stock for
issuance as Series A Convertible Preferred Stock ("Series A Preferred Stock")
and Series B Convertible Preferred Stock ("Series B Preferred Stock"). See
"Matters to be Considered by Stockholders -- Proposal Number Eight." The Board
of Directors has the authority to fix the number of shares of Preferred Stock
and determine or alter for each series, the voting powers, designations,
preferences and rights of such shares. If the Company should ever issue
Preferred Stock in addition to the Series A Preferred Stock, such Preferred
Stock could contain voting or other rights which could discourage, impede, or
prevent a merger, tender offer or proxy contest which could be favorable to the
interests of the stockholders.
So long as shares of Series A or Series B Preferred Stock are outstanding,
the Company is required to obtain the prior approval of the holders of at least
a majority of all shares of the applicable Series of Preferred Stock outstanding
at the time before: (i) increasing the authorized number of shares of such
Series of Preferred Stock; (ii) altering or changing the rights, preferences or
privileges of such Series of Preferred Stock or any other capital stock of the
Company so as to adversely affect such Series of Preferred Stock; or (iii)
creating any new class or series of capital stock having a preference over such
Series of Preferred Stock as to distribution of assets upon liquidation,
dissolution or winding up of the Company. This restriction could prevent the
Company from taking actions which could be favorable to the interests of the
stockholders.
25
<PAGE> 29
MATTERS TO BE CONSIDERED BY STOCKHOLDERS
PURPOSE OF THE MEETING
At the Annual Meeting, which will be held at the Westin River North, 320
North Dearborn Street, Chicago, Illinois 60610 on November 29, 1997, at 9:00
a.m., central time, Stockholders will be asked to consider and vote upon the
following proposals (the "Proposals"):
PROPOSAL NUMBER ONE: To elect ten individuals as Directors of the Company
to hold office until the next Annual Meeting of Stockholders, or otherwise as
provided in the Company's Certificate of Incorporation.
PROPOSAL NUMBER TWO: To concur in the appointment by the Board of
Directors of Price Waterhouse LLP as the Company's principal independent
accountants for the fiscal year ending March 31, 1998.
PROPOSAL NUMBER THREE: To approve and adopt the Merger Agreement and the
Merger pursuant to which Cozzi will become a wholly-owned subsidiary of the
Company.
PROPOSAL NUMBER FOUR: To amend the Company's Certificate of Incorporation
to increase the number of authorized shares of Common Stock from 40,000,000 to
80,000,000.
PROPOSAL NUMBER FIVE: To amend the Company's Certificate of Incorporation
to increase the number of authorized shares of "blank check" preferred stock
from 2,000,000 to 4,000,000.
PROPOSAL NUMBER SIX: To amend the Company's 1995 Stock Plan for Employees
and Consultants to increase the number of shares authorized for issuance under
the plan from 1,300,000 to 2,600,000.
PROPOSAL NUMBER SEVEN: To amend the Company's 1996 Director Option Plan to
increase the number of shares authorized for issuance under the Plan from
100,000 to 200,000.
PROPOSAL NUMBER EIGHT: To approve the issuance of Common Stock issuable on
conversion of Series A and Series B Convertible Preferred Stock.
PROPOSAL NUMBER NINE: To ratify the issuance of Common Stock previously
issued or issuable in private placements by the Company to, among others,
officers, directors and affiliates of the Company.
PROPOSAL NUMBER TEN: To amend the Company's Certificate of Incorporation
to eliminate cumulative voting.
PROPOSAL NUMBER ELEVEN: To amend the Company's Certificate of
Incorporation by amending the Series A Preferred Stock Certificate of
Designations.
QUORUM AND VOTING RIGHTS; PROXIES
Votes cast by proxy or in person at the Annual Meeting will be tabulated by
an inspector of election appointed for the meeting who will determine whether or
not a quorum is present. The presence in person or by properly executed proxy of
the holders of a majority of the issued and outstanding shares of Common Stock
entitled to vote at the Annual Meeting is necessary to constitute a quorum at
the Annual Meeting. Abstentions and broker non-votes will be treated as shares
that are present at the Annual Meeting for purposes of determining whether a
quorum exists, but will not be counted as votes in favor of or votes opposed to
approval of the Merger, since the vote to approve the Merger requires approval
of a majority of shares present in person or represented by proxy and eligible
to vote at the Annual Meeting. Abstentions and broker non-votes will not have an
impact on the election of directors since the ten individuals receiving the
highest number of votes will be elected directors. Since approval of the
amendments to the Company's Certificate of Incorporation requires the
affirmative vote of the majority of the Company's outstanding shares of Common
Stock entitled to vote thereon, abstentions and broker non-votes will have the
same effect as votes against the amendments to the Company's Certificate of
Incorporation.
Stockholders are entitled to one vote per share. Only holders of shares of
Common Stock on the Record Date will be entitled to notice of and to vote at the
Annual Meeting. As of the Record Date, 16,550,079 shares of Common Stock were
issued and outstanding. As of the Record Date, the existing directors and
executive
26
<PAGE> 30
officers of the Company owned approximately 6,726,495 shares of Common Stock,
representing approximately 41% of the issued and outstanding shares of Common
Stock. See "-- Proposal Number One" and "-- Proposal Number Three."
With respect to Proposal Number One, the ten individuals receiving the
highest number of votes will be elected as directors. Stockholders shall be
entitled to cumulate their votes for directors. Each Stockholder who elects to
cumulate votes may vote the number of votes which, absent cumulative voting, he
or she would be entitled to cast for the election of directors with respect to
his or her shares of stock multiplied by ten (the number of directors to be
elected at the Annual Meeting). A Stockholder may cast all of his or her votes
for a single director, or may distribute them among one or more Nominees. The
Company is soliciting discretionary authority to cumulate the votes of any
Stockholder who does not provide contrary direction. All of the other proposals
described above, except for the amendments to the Company's certificate of
incorporation, must be approved by the affirmative vote of the majority of the
shares of Common Stock present in person or represented by proxy and eligible to
vote at the Annual Meeting, a quorum being present.
The following is a summary of certain provisions of Irrevocable Proxies,
conformed copies of which are included as Annexes C through H to this Proxy
Statement. This summary is qualified in its entirety by reference to the
Irrevocable Proxies.
Pursuant to Irrevocable Proxies, the former shareholders of Isaac who
received shares of Common Stock in connection with the Isaac acquisition have
granted proxies to vote all these shares of Common Stock (1,942,857 shares, or
11.8% of the outstanding Common Stock) at the Annual Meeting to: (i) Gerard M.
Jacobs and T. Benjamin Jennings, in connection with Proposal Numbers One, Three,
Four and Five; and (ii) Kenneth Merlau, a Director of the Company, in connection
with all other matters considered by Stockholders at the Annual Meeting. These
proxies will remain in effect until June 23, 1999. Forms of each of these
proxies are attached as Annexes C and D, respectively, to this Proxy Statement.
Pursuant to an Irrevocable Proxy, Gerard M. Jacobs, T. Benjamin Jennings
and Donald F. Moorehead, currently Directors and Stockholders of the Company,
and Empire Metals, Inc., Ian MacLeod & Marilyn MacLeod Trust U/A 1/30/93 FBO Ian
MacLeod & Marilyn MacLeod, William T. Proler & Gaile Proler Management Trust DTD
4/29/96, Ronald J. Proler, Copperstate Metals, Inc., Robert F. Smith, and Clend
Investment Holdings Ltd. have granted or agreed to grant proxies to Allan Weine,
Chris Purrier and Andrew Frost to vote all of the shares of Common Stock held by
them (8,138,597 shares, or 49.17% of the outstanding Common Stock) at the Annual
Meeting in favor of Proposal Number Eight. Messrs. Weine, Purrier and Frost are
affiliated with the purchasers of 21,000 shares of Series A Convertible
Preferred Stock and 20,000 shares of Series B Convertible Preferred Stock. See
"Matters to be Considered by Stockholders -- Proposal Number Eight." This proxy
will remain in effect until the Annual Meeting is held and Proposal Number Eight
is voted on. A form of this Proxy is attached as Annex E to this Proxy
Statement.
All shares of Common Stock represented by properly executed proxies will,
unless such proxies have been previously revoked, be voted in accordance with
the instructions indicated in such proxies. Shares not represented by properly
executed proxies will not be voted. If no instructions are indicated in an
otherwise properly executed proxy, the shares of Common Stock will be voted in
favor of the Proposals and the Nominees, and in accordance with the judgment of
the persons acting under the proxies on other matters presented for a vote. A
Stockholder who has given a proxy may revoke it at any time before it is
exercised by: (i) giving written notice thereof to the Board of Directors of the
Company before the proxy is voted at the Annual Meeting; (ii) signing and
returning a later-dated proxy; or (iii) attending the Annual Meeting and voting
the shares in person. Merely attending the Annual Meeting will not by itself
revoke a proxy.
The Company will bear the cost of soliciting proxies, although the Company
currently does not intend to solicit proxies. Brokerage firms, fiduciaries,
nominees and others holding shares of Common Stock for beneficial owners will be
reimbursed for the out-of-pocket expenses in forwarding proxy materials to these
beneficial owners. In addition to the use of the mails, proxies may be solicited
by directors, officers and employees of the Company who will not be specifically
compensated for these services, by means of personal calls upon, or telephonic,
telegraphic or telecopy communications with, Stockholders or their
representatives.
27
<PAGE> 31
PROPOSAL NUMBER ONE: TO ELECT TEN INDIVIDUALS AS DIRECTORS TO HOLD OFFICE UNTIL
THE NEXT ANNUAL MEETING OF STOCKHOLDERS, OR OTHERWISE AS
PROVIDED IN THE COMPANY'S CERTIFICATE OF INCORPORATION.
A total of ten individuals will be elected at the Annual Meeting to serve
as Directors of the Company until the next annual meeting of Stockholders or
otherwise as provided in the Company's Certificate of Incorporation (the
"Certificate"). Unless instructions to the contrary are given, the persons named
as proxy voters in the accompanying proxy, or their substitutes, will vote for
the following Nominees for Directors with respect to all proxies received by the
Company. If any Nominee should become unavailable for any reason, the votes will
be cast for a substitute nominee designated by the Nominating Committee of the
Board. The members of the Board's Nominating Committee have no reason to believe
that the Nominees named will be unable to serve if elected.
The Nominees are Albert A. Cozzi, Frank J. Cozzi, Gregory P. Cozzi, George
A. Isaac, III, Gerard M. Jacobs, T. Benjamin Jennings, Christopher G. Knowles,
Donald F. Moorehead, Jr., William T. Proler and Harold Rubenstein. Messrs.
Isaac, Jacobs, Jennings, Knowles, Moorehead, Proler and Rubenstein will, if
elected, take office as Directors effective with the adjournment of the Annual
Meeting. If the Merger is approved, and Messrs. Albert A. Cozzi, Frank J. Cozzi
and Gregory P. Cozzi are elected, they will take office as Directors at the
Effective Time of the Merger. If the Merger is not approved by the Stockholders,
then these individuals will not take office as Directors. The Board of Directors
does not anticipate immediately filling the vacancies created by the failure of
any of these Nominees to take office as Directors.
Pursuant to a Stockholders Agreement to be entered into in connection with
the Merger: (i) Albert A. Cozzi, Frank J. Cozzi and Gregory P. Cozzi have
selected themselves, Christopher G. Knowles and William T. Proler as Nominees
for Director; and (ii) Gerard M. Jacobs and T. Benjamin Jennings have selected
themselves, George A. Isaac, III, Donald F. Moorehead, Jr. and Harold Rubenstein
as Nominees for Directors. See "-- Proposal Number Three -- Stockholders
Agreement."
The table below contains certain information about members of the Board of
Directors who also are Nominees, Nominees not currently serving as Directors,
and the current executive officers of the Company. For a description of
employment agreements and a stockholder's agreement to be entered into in
connection with the Merger, see "-- Proposal Number Three."
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ---- --- ---------
<S> <C> <C>
T. Benjamin Jennings................ 33 Director, Chairman of the Board, Member of Executive
Committee and Chief Development Officer
Gerard M. Jacobs.................... 42 Director, Member of Executive Committee, President
and Chief Executive Officer
Donald F. Moorehead, Jr............. 47 Director, Vice Chairman of the Board
Albert A. Cozzi..................... 52 Chief Operating Officer, Senior Vice President,
Nominee for Director
Frank J. Cozzi...................... 47 Nominee for Director
Gregory P. Cozzi.................... 43 Nominee for Director
George A. Isaac, III................ 44 Director, Member of Executive Committee and
Executive Vice President
William T. Proler................... 49 Director
Harold Rubenstein................... 69 Director
Christopher G. Knowles.............. 54 Nominee for Director
George O. Moorehead................. 44 Director, Executive Vice President(1)
Robert C. Larry..................... 36 Vice President, Finance, Treasurer and Chief
Financial Officer
</TABLE>
28
<PAGE> 32
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ---- --- ---------
<S> <C> <C>
Daniel B. Burgess................... 33 Executive Vice President
Xavier Hermosillo................... 46 Secretary
</TABLE>
- ---------------
(1) Mr. George O. Moorehead, Executive Vice President of the Company, has not
been re-nominated to serve as a Director. See "-- Employment Agreements"
below.
T. Benjamin Jennings has served as Director, Chairman of the Board and
Chief Development Officer of the Company and its predecessor, GPC, since April
1996 and as a member of the Executive Committee of the Board of Directors since
June 1996. From August 1995 through April 1996, Mr. Jennings served as Co-
Chairman of the Board, Co-President and Co-Chief Executive Officer of the
Company. From 1993 through 1995, Mr. Jennings was a Director of First Southwest
Company, a private investment banking firm based in Dallas, Texas. From 1990 to
1993, Mr. Jennings was a Vice President of Kidder Peabody & Co. Inc., where he
concentrated on asset management, investment banking, private debt and equity
placements, and related financing activities. Mr. Jennings is a graduate of Rice
University and serves as Chairman of Chicago Inner-City Games Foundation and is
also a Director of the YMCA of Metropolitan Chicago.
Gerard M. Jacobs has served as Director, President and Chief Executive
Officer of the Company and its predecessor, GPC, since April 1996 and as a
member of the Executive Committee of the Board of Directors since June 1996.
From August 1995 through April 1996, Mr. Jacobs served as Co-Chairman of the
Board, Co-President and Co-Chief Executive Officer of the Company. Mr. Jacobs is
a Director of Crown Group, Inc., a publicly-traded company engaged in various
businesses. From 1983 to 1995, Mr. Jacobs developed resource recovery, landfill
and hydroelectric projects for his own account and for the investment banking
firm of Russell, Rea & Zappala, Inc. in Pittsburgh, Pennsylvania. From 1978 to
1983 Mr. Jacobs practiced securities, corporate, and banking law with the firms
of Reed, Smith, Shaw & McClay and Manion, Alder & Cohen, P.C., both in
Pittsburgh, Pennsylvania. Mr. Jacobs is a graduate of Harvard University, where
he was elected to Phi Beta Kappa, and The University of Chicago School of Law,
which he attended as Weymouth Kirkland Law Scholar. Mr. Jacobs is an elected
member of the Board of Education of District 200, Oak Park and River Forest High
School, Oak Park, Illinois and is a Director of Chicago Inner-City Games
Foundation.
Donald F. Moorehead, Jr. joined the Board of Directors of the Company in
1996 following the Company's merger with EMCO. Mr. Moorehead is the founder of
USA Waste Services, Inc. ("USA Waste"). USA Waste is the third largest solid
waste management company in the United States as ranked by gross revenues. He
served as Chief Executive Officer of USA Waste from 1990 through 1994 and as
Chief Development Officer and Vice Chairman from 1994 through August 1997. Mr.
Moorehead currently is serving as a consultant to USA Waste. Mr. Moorehead is
currently a Director of FYI, Inc. From 1985 through 1990, he served as Chairman
of the Board and Chief Executive Officer of MidAmerican Waste Systems, Inc. Mr.
Moorehead is a graduate of the University of Tulsa. Mr. Moorehead is the brother
of George O. Moorehead.
Albert A. Cozzi, a Nominee for Director, has been employed by Cozzi since
1963, and since 1980 has served as Cozzi's President. Mr. Cozzi became Chief
Operating Officer and Senior Vice President of the Company on September 1, 1997.
Mr. Cozzi received an MBA from the University of Chicago in 1988. From 1990 to
1992 he served as Chairman of the Ferrous Committee of the Institute of Scrap
Recycling Industries ("ISRI"), an industry association. Mr. Cozzi is the brother
of Frank J. Cozzi and Gregory P. Cozzi.
Frank J. Cozzi, a Nominee for Director, has been employed by Cozzi since
1967, and since 1981 has served as Cozzi's Secretary/Treasurer. From 1990 to
1991 he served as President of the Chicago Chapter of ISRI, and from 1988 to
1990 was national chairman of ISRI's transportation committee. Mr. Cozzi
completed Harvard University's Owner President Management executive program in
1991. He also has served local and national positions with ISRI. Mr. Cozzi is
the brother of Albert A. Cozzi and Gregory P. Cozzi.
Gregory P. Cozzi, a Nominee for Director, has been employed by Cozzi since
1977 and currently serves as Cozzi's Vice President. Mr. Cozzi is a graduate of
Northern Michigan University. Mr. Cozzi is the brother of Albert A. Cozzi and
Frank J. Cozzi.
29
<PAGE> 33
George A. Isaac, III joined the Board of Directors of the Company,
including the Executive Committee, and became an Executive Vice President of the
Company in June 1997, following the Company's acquisition of Isaac. Since 1988,
he has served as President and Chief Executive Officer of the four companies in
the Isaac group of companies. Mr. Isaac is a Director of Capital Bank, NA,
located in Sylvania, Ohio. From 1977 through 1988 he worked as a management
consultant at Deloitte and Touche LLP, where he was elected a partner. He
received a B.S. and an MBA with distinction from the University of Michigan.
William T. Proler joined the Board of Directors of the Company in August
1997 following the Company's acquisition of Proler. Since 1994, he has served as
President and Chief Executive Officer of Proler Southwest Inc. and as a managing
member of Proler Steelworks L.L.C.
Harold Rubenstein joined the Board of Directors of the Company in April
1996 following the Company's merger with EMCO. Prior to April 1996, he served as
President and Chief Executive Officer of Empire Scrap Metals, Inc. Mr.
Rubenstein has over 40 years of experience in owning and managing scrap metal
operations.
Christopher G. Knowles, a Nominee for Director, was employed by Insurance
Auto Auctions, Inc. from January 1994 through March 1996 and from April 1994
through March 1996 served as its President and Chief Operating Officer. From
1980 to 1994 he was Chairman, Chief Executive Officer and principal owner of
Underwriters Salvage Company. Mr. Knowles graduated from Indiana University. Mr.
Knowles is a Director of Insurance Auto Auctions, Inc. and Zebra Technologies
Corporation.
George O. Moorehead joined the Board of Directors of the Company in 1996
following the Company's merger with EMCO. Since 1995 he has served as President,
Chief Executive Officer and a Director of EMCO. Mr. Moorehead is also a Director
of Eastern Environmental Services, Inc., a publicly-traded solid waste
management company. From 1990 through 1995 he was a private investor in the
solid waste management and scrap metal processing industries. Mr. Moorehead is
the brother of Donald F. Moorehead, Jr. The Company and Mr. Moorehead have
agreed that Mr. Moorehead will not be renominated to serve as a Director of the
Company and have agreed in principle to enter into two agreements, a Separation
Agreement and a Stock Warrant Settlement Agreement, resolving all outstanding
issues between the Company and Mr. Moorehead. See "-- Employment Agreements."
Robert C. Larry has served as Vice President, Finance, Treasurer and Chief
Financial Officer of the Company since August 1996. He served as Director of
Finance and Investments for Caremark International, Inc., a diversified,
publicly-traded company engaged in providing health care services, from March
1995 to August 1996. In 1991, Mr. Larry co-founded The Grabscheid Group, Ltd., a
professional services firm which specialized in financial restructuring and
recapitalization services for private and publicly-held firms. Mr. Larry served
as an accountant and consultant at Ernst & Young, L.L.P., an international
professional services firm, from 1983 to 1991. He graduated from Purdue
University and received an MBA from the University of Chicago. Mr. Larry is a
certified public accountant.
Daniel B. Burgess has served as an Executive Vice President of the Company
since September 1995. Prior to the sale of the Spectra*Star business in July
1996, Mr. Burgess was the Executive Vice President responsible for operations.
From June 1992 until September 1995, Mr. Burgess served as a Global Account and
Marketing Manager for AT&T. Mr. Burgess graduated from Rice University and
earned an MBA from Southern Methodist University.
Xavier Hermosillo was appointed Secretary of the Company in August 1995.
From August 1995 through September 7, 1997 he served as a Director of the
Company. Since August 1995, he also has provided investor and public relations
services to the Company through Xavier Hermosillo & Associates, a public
relations, marketing and government affairs firm which Mr. Hermosillo founded in
1985.
DIRECTOR COMPENSATION
Directors are paid a fee of $1,000 for each board or committee meeting
attended in person (other than board and committee meetings held on the same
day) and are reimbursed for their reasonable expenses in attending such
meetings. Under the Company's 1996 Director Option Plan, each non-employee
director of the Company is automatically granted an option to purchase 10,000
shares of Common Stock on the date of his or
30
<PAGE> 34
her election or appointment to the board plus an annual option, awarded on
January 15 of each year, to purchase 2,500 shares of Common Stock. See
"-- Proposal Number Seven."
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held a total of six meetings during
the fiscal year ended March 31, 1997. During fiscal 1997, no Director attended
fewer than 75% of these meetings. The Board of Directors has four standing
committees: an Audit Committee, an Executive Compensation Committee, an
Executive Committee and a Nominating Committee.
The Audit Committee is comprised of T. Benjamin Jennings, Kenneth Merlau
and Donald F. Moorehead, Jr. After the completion of the Merger, the Company
expects the Audit Committee to be comprised of Messrs. Isaac, Knowles and D.
Moorehead. This committee recommends engagement of the Company's independent
accountants, approves services performed by these accountants, and reviews and
evaluates the Company's accounting system and its system of internal accounting
controls. This committee did not meet during fiscal 1997.
The Executive Compensation Committee is comprised of Kenneth Merlau, Donald
F. Moorehead, Jr. and Harold Rubenstein. After the completion of the Merger, the
Company expects this committee to be comprised of Messrs. Jennings, Knowles and
D. Moorehead. This committee reviews and administers the compensation of the
officers of the Company. This committee did not meet during fiscal 1997.
The Executive Committee is comprised of Messrs. Isaac, Jacobs and Jennings.
After the completion of the Merger, the Company expects the Executive Committee
to be comprised of Messrs. A. Cozzi, Isaac, Jacobs and Jennings. The Executive
Committee is authorized to act on the Board's behalf, including in regard to
certain significant corporate actions requiring the approval of at least
two-thirds of the Board of Directors. See "-- Proposal Number Three." This
committee did not meet during fiscal 1997.
The Nominating Committee is comprised of Messrs. Jacobs, Jennings and
Merlau. After the completion of the Merger, the Company expects this committee
to be comprised of Messrs. A. Cozzi, Jacobs and Jennings who, pursuant to the
Stockholders Agreement, have agreed to nominate for election individuals
designated by the Cozzi Shareholders and by Messrs. Jacobs and Jennings. See
"-- Proposal Number Three." This committee nominates candidates for the Board,
and will consider nominees recommended by Stockholders. This committee did not
meet during fiscal 1997.
Under the bylaws of the Company, nominations for the election of Directors
may be made by any Stockholder entitled to vote in the election of directors,
but only if written notice of such Stockholder's intent to make such nominations
has been received by the Company at its principal executive office not less than
60 days nor more than 90 days prior to the meeting at which Directors are to be
elected; provided, however, that in the event that less than 50 days' notice or
prior public disclosure of the date of the meeting is given or made to
Stockholders, notice by the Stockholder to be timely must be so received not
later than the close of business on the tenth day following the day on which
notice of the date of the meeting was mailed or public disclosure was made. The
Stockholder's notice must set forth: (i) with respect to each proposed nominee,
the name, age, business and residence address, principal occupation or
employment, class and number of shares of stock of the Company owned and any
other information that is required to be disclosed in solicitations of proxies
for election of Directors pursuant to Regulation 14A of the Securities Exchange
Act of 1934; and (ii) with respect to the Stockholder giving the notice, the
name, address and class and number of shares of the Company that are
beneficially owned by such Stockholder. The presiding officer of the meeting may
refuse to acknowledge the nomination of any person not made in compliance with
the foregoing procedure.
EXECUTIVE COMPENSATION
The following tables set forth information with respect to those persons
who: (i) served as the chief executive officer of the Company during the fiscal
year ended March 31, 1997; and (ii) were the most highly compensated executive
officers of the Company at March 31, 1997 whose total annual salary and bonus
31
<PAGE> 35
exceeded $100,000 for the year. Compensation paid to these individuals for the
year ended March 31, 1997, the five months ended March 31, 1996 and the year
ended October 31, 1995 is as follows:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------- ------------------------- ----------------------------
(A) (B) (C) (D) (E) (F) (G) (H) (I)
SECURITIES
RESTRICTED UNDERLYING
OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARD(S)($) SARS(#) PAYOUTS($) COMPENSATION($)
- --------------------------- ---- -------- ------- ------------ ------------ ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
T. Benjamin Jennings(1)..... 1997 $177,500 -- -- -- -- -- $9,841(4)
Chairman of the Board 1996 $ 30,000 $75,000 -- -- 200,000 -- $1,623
and Chief Development 1995 -0-
Officer
Gerard M. Jacobs(1)......... 1997 $177,500 -- -- -- -- -- $8,450(5)
President and Chief 1996 $ 30,000 $75,000 -- 200,000 -- $1,623
Executive Officer 1995 -0-
Daniel B. Burgess(2)........ 1997 $105,000 $17,750 -- -- -- -- $4,296(6)
Executive Vice President 1996 $ 42,500 -- -- -- 30,000 -- $1,790
1995 $ 12,750 $25,000 -- -- 50,000 -- $ 537
George O. Moorehead(3)...... 1997 $173,089 -- -- -- 150,000 -- $6,819(7)
Executive Vice President 1996 n/a
of the Company, 1995 n/a
President of EMCO
</TABLE>
- ---------------
(1) Messrs. Jacobs and Jennings served without compensation from the Company
during the time from their appointment to their respective positions in
August 1995 through December 31, 1995. During the five months ended March
31, 1996, Messrs. Jacobs and Jennings each received a $75,000 bonus for
their services during the period August 1995 through December 31, 1995.
(2) Mr. Burgess joined the Company on September 11, 1995 and was appointed
Executive Vice President.
(3) Mr. Moorehead was appointed as an Executive Vice President of the Company
and the President of EMCO upon the Company's consummation of the merger with
EMCO, which occurred on April 6, 1996.
(4) During fiscal 1997, Mr. Jennings received the following payments: $945 in
parking reimbursement, $5,574 of health insurance premiums, $2,902 of other
health benefits and $420 of long-term disability insurance premiums. During
fiscal 1996, Mr. Jennings received $1,623 of health insurance premiums.
(5) During fiscal 1997, Mr. Jacobs received the following payments: $945 in
parking reimbursement, $6,941 of health insurance premiums, and $564 of
long-term disability insurance premiums. During fiscal 1996, Mr. Jacobs
received $1,623 of health insurance premiums.
(6) During fiscal 1997, 1996 and 1995, Mr. Burgess received $3,744, $1,560 and
$468, respectively, in health insurance premiums, and $552, $230 and $69,
respectively, in long-term disability premiums.
(7) During fiscal 1997, Mr. Moorehead received $5,323 of health insurance
premiums and $1,496 of matching contributions under EMCO's 401(k) Plan.
32
<PAGE> 36
OPTION/SAR GRANTS DURING FISCAL 1996 AND FISCAL 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS/WARRANTS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO TERM (2)
OPTIONS/WARRANTS EMPLOYEES IN EXERCISE EXPIRATION ---------------------------
NAME GRANTED(1) FISCAL YEAR PRICE DATE 5% 10%
---- ---------------- ---------------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Fiscal 1997:
none................... -0- -- -- -- -- --
Fiscal 1996:
T. Benjamin Jennings... 200,000 30.0% $4.00 1/4/06 $503,116 $1,274,994
Gerard M. Jacobs....... 200,000 30.0% $4.00 1/4/06 $503,116 $1,274,994
George O. Moorehead.... 150,000 22.5% $4.00 1/4/06 $377,337 $ 956,245
Daniel B. Burgess...... 30,000 4.5% $4.00 11/1/05 $ 75,467 $ 191,249
</TABLE>
- ---------------
(1) All options are 100% vested.
(2) The potential realizable value is calculated based on the term of the option
at its time of grant (ten years) assuming that the stock price on the date
of grant appreciates at the indicated annual rate compounded annually for
the entire term of the option and that the option is exercised and sold on
the last day of its term for the appreciated stock price. No gain to the
optionee is possible unless the stock price increases over the option term.
The following table sets forth the employee stock options exercised during
fiscal year 1997 by the executive officers listed below and the number and value
of securities underlying unexercised options held by the executive officers at
March 31, 1997.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN
SHARES UNDERLYING UNEXERCISED THE MONEY OPTIONS AT
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR END FISCAL YEAR END
NAME EXERCISE RECEIVED(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(2)
---- ----------- ----------- -------------------------- ----------------------------
<S> <C> <C> <C> <C>
T. Benjamin Jennings........ 0 $ -- 200,000/0 $950,000
Gerard M. Jacobs............ 0 $ -- 200,000/0 $950,000
Daniel B. Burgess........... 0 $ -- 80,000/0 $417,500
George O. Moorehead......... 0 $ -- 150,000/0 $831,250
</TABLE>
- ---------------
(1) Value Realized is determined by multiplying the number of shares by the
difference between the closing price on the trade date and the exercise
price.
(2) Based on March 31, 1997 closing price of Common Stock of $8.75.
33
<PAGE> 37
STOCK PERFORMANCE GRAPH
The following graph compares total return of the Company's Common Stock
during the five year period beginning March 31, 1992, with the Nasdaq Composite
Index and the Russell 2000 Index. Each index assumes that $100 was invested at
the close of trading on March 31, 1992 and dividends were reinvested. Mr. Jacobs
and Mr. Jennings were appointed as Co-Chairman of the Board, Co-President, and
Co-Chief Executive Officer of the Company in August 1995. In April 1996, Mr.
Jacobs was appointed President and Chief Executive Officer, and Mr. Jennings was
appointed Chairman of the Board and Chief Development Officer, of the Company.
<TABLE>
<CAPTION>
Measurement Period
(Fiscal Year Covered) MTLM NASDAQ Russell 2000
<S> <C> <C> <C>
3/31/92 100.00 100.00 100.00
3/31/93 95.85 114.30 112.52
3/31/94 90.73 123.14 123.25
3/31/95 69.34 135.35 128.02
3/31/96 194.40 182.86 162.38
3/31/97 372.82 202.35 171.31
</TABLE>
EMPLOYMENT AGREEMENTS
The Company currently has employment agreements, each dated April 9, 1996
(or April 11, 1996, in the case of George O. Moorehead), with certain of the
executive officers named above. Under these agreements, Mr. Jacobs serves as
President and Chief Executive Officer, Mr. Jennings serves as Chairman of the
Board and Chief Development Officer and George O. Moorehead serves as Executive
Vice President. Each employment agreement contains substantially identical
terms. In particular, each agreement: (i) has a term of five years, which is
automatically extended each year for one additional year unless either the
Company or the individual elects not to extend the term; and (ii) provides for
an annual base salary of $168,000 per year (increased to $275,000 per year for
Messrs. Jacobs and Jennings effective June 1, 1997). In addition, the employment
agreements with Messrs. Jacobs and Jennings acknowledge that they may devote a
portion of their time to entities other than the Company. Each agreement
restricts the employee from competing, directly or indirectly, with the Company
for five years following termination of employment. In the event of a "Change in
Control" (defined in each employment agreement) the term of the employment
agreement will be extended for an additional two years, and each employee will
receive, in addition to other benefits, a cash payment equal to: (i) the
employee's current annual base salary plus the highest annual bonus for the
previous three years; times (ii) the number of years remaining until the
employee would reach the age of 65, but no more than five.
At the closing of the Merger, the Company expects to enter into new
employment agreements with each of Messrs. Jacobs and Jennings. See "Matters to
be Considered by Stockholders -- Proposal Number Three." In connection with the
Proler acquisition, the Company entered into employment agreements with five
employees of Proler, including William T. Proler. In connection with the Isaac
acquisition, the Company entered into an employment agreement with George A.
Isaac, III. In connection with the Reserve acquisition, the Company entered into
an employment agreement with Paul Joseph. For a description of each of these
34
<PAGE> 38
agreements, see "Information about the Company -- Business
Operations -- Completed Acquisitions." In connection with the Superior
acquisition, two officers of Superior have agreed to enter into employment
agreements with the Company to serve as Superior's executive officers. In
connection with the Goldin acquisition, the Company and two officers of Goldin
will enter into employment agreements. For a description of each of these
agreements, see "Information about the Company -- Business
Operations -- Potential Acquisitions."
George O. Moorehead has served as a Director and Executive Vice President
of the Company and as a director and President of EMCO since the Company's
acquisition of EMCO. Mr. Moorehead previously advised the Company that he
anticipated terminating his employment agreement following completion of the
Merger since he believed that the Merger constituted a "change of control" under
his employment agreement with the Company entitling him to the benefits
described above. Later, Mr. Moorehead asserted to the Company his position that
he was entitled to additional compensation under the terms of this employment
agreement, including warrants, on substantially the same terms and conditions as
those which the Company anticipates entering into with Messrs. Jacobs and
Jennings at closing of the Merger. The Company disagreed with Mr. Moorehead's
assertions. The Company and Mr. Moorehead subsequently agreed that Mr. Moorehead
will not be re-nominated to serve as a Director of the Company and agreed in
principle to enter into two agreements, a Separation Agreement and a Stock
Warrant Settlement Agreement resolving all outstanding issues between the
Company and Mr. Moorehead. Pursuant to the Separation Agreement: (i) effective
upon the closing of the Merger, Mr. Moorehead will (a) resign from his
employment by the Company, from his employment by EMCO and from his directorship
of EMCO, and (b) deliver a Non-Compete, Non-Solicitation and Confidentiality
Covenant and Agreement; and (ii) subject to completion of the Merger, the
Company will (a) pay Mr. Moorehead $250,000 upon the closing of the Merger, (b)
provide Mr. Moorehead certain insurance and other benefits during a five-year
period beginning on the date the Merger is completed, (c) pay certain legal fees
to Mr. Moorehead's counsel, and (d) permit Mr. Moorehead to exercise any options
or warrants to acquire Common Stock previously granted to him, on a "net
cashless" basis, subject to the Company's right to refuse "net cashless"
exercises under certain circumstances. Pursuant to the Stock Warrant Settlement
Agreement, the Company will agree to issue to Mr. Moorehead warrants to purchase
200,000 shares of Common Stock at $12.00 per share, exercisable for a period of
five years, and to pay Mr. Moorehead amounts totalling $665,000, such issuance
and payments to be triggered by the Company issuing certain warrants to Messrs.
Jacobs and Jennings. Mr. Moorehead would be permitted to exercise the warrants
issued under this Agreement on a "net cashless" basis subject to the Company's
right to refuse "net cashless" exercises under certain circumstances.
REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE
The Company's Compensation Committee is currently comprised of Kenneth
Merlau, Donald F. Moorehead, Jr. and Harold Rubenstein. In establishing and
monitoring executive compensation, the Committee focuses on the Company's
mission to continually improve its position in the scrap metal industry, with a
strong focus on improving cashflow and increasing shareholder value. The
Company's executive compensation policy is designed to enable the Company to
attract, retain and motivate the high caliber executives which the Board and the
Committee believe are required in order to achieve the Company's objective. Each
executive officer's compensation, including that of Messrs. Jacobs and Jennings,
is comprised of three elements: (i) base salary; (ii) annual bonus; and (iii)
incentive compensation. Executive compensation levels are established based on
the Committee's evaluation of market terms and conditions coupled with the
Board's view of what is necessary to attract and retain key executive officers.
Adjustments are made to each executive officer's total compensation package
based on changes in market factors as well as each individual's contribution to
Company performance. Further, the Company grants stock options as an additional
element of compensation. These stock options are designed to closely align each
executive officer's future compensation to the Company's long-term financial
success, as measured by stock performance. The total number of options awarded
each executive is based on a subjective evaluation of the performance of each
executive under consideration without regard to the number of options held by or
previously granted to each
35
<PAGE> 39
executive. At no point during the last completed fiscal year did the Company's
board modify or reject in any material way any action or recommendation of the
Compensation Committee.
The Compensation Committee:
Kenneth Merlau
Donald F. Moorehead, Jr.
Harold Rubenstein
RECOMMENDATION OF THE BOARD: The Board, acting on recommendations of the
Nominating Committee, hereby recommends and nominates Albert A. Cozzi, Frank J.
Cozzi, Gregory P. Cozzi, George A. Isaac, III, Gerard M. Jacobs, T. Benjamin
Jennings, Christopher G. Knowles, Donald F. Moorehead, Jr., William T. Proler
and Harold Rubenstein, for election as Directors of the Company by the
Stockholders at the Annual Meeting to serve until the next annual meeting of
Stockholders or as otherwise provided in the Certificate. See "Risk
Factors -- Conflicts of Interest."
Vote Required. The ten individuals receiving the highest vote totals will
be elected as Directors of the Company. Stockholders shall be entitled to
cumulate their votes for directors. Each Stockholder who elects to cumulate
votes may vote the number of votes which, absent cumulative voting, he or she
would be entitled to cast for the election of directors with respect to his or
her shares of stock multiplied by ten (the number of directors to be elected at
the Annual Meeting). A Stockholder may cast all of his or her votes for a single
director, or may distribute them among one or more nominees.
36
<PAGE> 40
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial statements
give effect to the Merger of the Company and Cozzi using the purchase method of
accounting. An unaudited pro forma combined condensed balance sheet is provided
as of September 30, 1997, giving effect to the Merger, to the expected issuance
of Series B Convertible Preferred Stock and to other financing transactions(as
described below) as if these transactions occurred on September 30, 1997.
Unaudited pro forma combined condensed statements of operations are provided for
the six months ended September 30, 1997 and the year ended March 31, 1997,
giving effect to the Merger, to the issuance of Series A Convertible Preferred
Stock and the expected issuance of Series B Convertible Preferred Stock, to the
acquisitions of Proler, Reserve, Isaac, HouTex and MacLeod, and to other
significant equity and financing transactions (as described below) as if these
transactions had occurred on April 1, 1996. The effect of the transactions are
reflected for the period up to the effective date of each transaction, and
thereafter, the effect of the transactions are included in the Company's
historical financial statements. The effective date for the transactions were as
follows:
<TABLE>
<CAPTION>
TRANSACTION EFFECTIVE DATE
----------- --------------
<S> <C>
Proler........................................ September 1, 1997
Series A Convertible Preferred Stock.......... August and September 1997
Isaac......................................... June 23, 1997
Reserve....................................... May 1, 1997
Private offering of 2,025,000 shares of Common
Stock....................................... April and May 1997
HouTex........................................ January 7, 1997
MacLeod....................................... January 1, 1997
</TABLE>
Other significant financing and equity transactions completed subsequent to
March 31, 1997 include:
<TABLE>
<CAPTION>
DATE TRANSACTION AMOUNT
---- ----------- ------
<S> <C> <C>
11/14/97 Short-term loan from a commercial bank, 30
day maturity at prime rate of interest...... $10,000,000
11/14/97 Payment of short-term debt obligations
incurred from Isaac acquisition............. $10,600,000
8/11/97 Payment of a short-term loan obtained from a
commercial bank............................. $ 6,500,000
5/29/97 Revolving and term loan obtained from a
commercial bank............................. $ 4,500,000
April & May 1997 Payment and refinancing of debt obligations
incurred from Houtex acquisition............ $ 6,655,000
April & May 1997 Payment and refinancing of debt obligations
incurred from MacLeod acquisition........... $ 9,600,000
</TABLE>
These transactions are described in detail in the notes to the unaudited
pro forma financial information.
The following unaudited pro forma combined condensed statements of
operations do not reflect the operating results from discontinued operations. As
previously disclosed, the discontinued operations include: (i) the Spectra*Star
printer and consumables business, which was sold during the first quarter of
fiscal 1997 and (ii) the VideoShow and related product lines business, which was
sold during the third quarter of fiscal 1997.
On October 24, 1997, all of the holders of the Series A Redeemable
Convertible Preferred Stock executed waivers of certain mandatory conversion and
redemption conditions. The accompanying unaudited pro forma combined condensed
balance sheet gives effect to the change in classification of the Series A
Redeemable Convertible Preferred Stock from "temporary equity" to shareholders'
equity as if the waiver had been obtained on September 30, 1997. See "Matters to
be Considered by Stockholders -- Proposal Number Eight" and "Proposal Number
Eleven."
37
<PAGE> 41
The accompanying unaudited pro forma combined condensed financial
statements have been derived from: (i) the Company's unaudited combined
condensed balance sheet as of September 30, 1997 and the unaudited combined
condensed statement of operations for the six months ended September 30, 1997
(incorporated by reference to the Company's Quarterly Report on Form 10-Q, dated
September 30, 1997, filed with the Commission on October 17, 1997), and the
Company's audited statement of operations for the year ended March 31, 1997
(incorporated by reference to the Company's Annual Report on Form 10-K, dated
March 31, 1997, filed with the Commission on June 19, 1997); (ii) Cozzi's
unaudited balance sheet as of September 30, 1997 and unaudited statements of
operations for the six months ended September 30, 1997 and the twelve months
ended March 31, 1997; (iii) Proler's unaudited statements of operations for the
five months ended August 31, 1997 and the twelve months ended March 31, 1997;
(iv) Isaac's unaudited statements of operations for the twelve weeks ended June
23, 1997 and the twelve months ended March 31, 1997; (v) Reserve's unaudited
statements of operations for the one month ended April 30, 1997 and the twelve
months ended March 31, 1997; (vi) HouTex's unaudited statement of operations for
the nine months ended December 31, 1996; and (vii) MacLeod's unaudited statement
of operations for the nine months ended December 31, 1996.
The excess of the acquisition costs over the fair value, as estimated by
the Company, of the net assets to be acquired from Cozzi has been allocated to
goodwill. The Company considers all intangible assets in the allocation of
purchase price. Such allocation of the purchase price may change upon the final
determination of the fair value of assets acquired (including other intangibles)
and liabilities assumed.
The unaudited pro forma combined condensed statements of operations do not
include the incremental shares that would be issued upon exercise of all stock
options and warrants issued or to be issued and the conversion of the
convertible preferred stock issued, as their inclusion would be anti-dilutive.
The unaudited pro forma combined condensed financial statements are
presented for comparative purposes only and do not purport to be indicative of
the combined financial position or results of operations which would have been
realized had the Merger, the issuance of Series A Convertible Preferred Stock
and the expected issuance of the Series B Convertible Preferred Stock, the
acquisitions of Proler, Isaac, Reserve, HouTex and MacLeod, and other
significant financing and equity transactions (as described above) been
consummated as of the date or during the periods for which the unaudited pro
forma financial statements are presented or for any future period or date.
38
<PAGE> 42
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
COZZI
THE COMPANY SEPTEMBER 30, PRO FORMA PRO FORMA
SEPTEMBER 30, 1997 1997 ADJUSTMENTS(1) COMBINED
------------------ ------------- -------------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 11,999 $ 59 $ (6,000) 2. $ 23,643
(915) 12.
19,100 14.
(600) 15.
Accounts receivable, net................................ 50,518 37,789 88,307
Inventories............................................. 34,978 11,270 3,313 7. 49,561
Other current assets.................................... 2,831 1,584 4,415
-------- ------- -------- --------
Total current assets.................................... 100,326 50,702 14,898 165,926
Property and equipment, net............................... 57,479 25,142 10,651 8. 93,272
Goodwill and other intangibles............................ 107,953 1,263 68,760 6. 176,713
(1,263) 6.
Other assets.............................................. 1,911 8,882 10,793
-------- ------- -------- --------
Total Assets..................................... $267,669 $85,989 $ 93,046 $446,704
======== ======= ======== ========
LIABILITIES AND EQUITY
Current liabilities:
Operating lines of credit............................... $ 14,297 $ 0 $ 14,297
Accounts payable........................................ 34,220 20,071 690 5. 54,981
Other accrued liabilities............................... 10,446 5,606 16,052
Current portion of debt................................. 36,120 3,263 (600) 15. 38,783
-------- ------- -------- --------
Total current liabilities........................ 95,083 28,940 90 124,113
Long term debt, less current.............................. 50,124 46,674 96,798
Deferred taxes............................................ 7,462 675 5,586 9. 8,971
(3,746) 11.
(1,006) 12.
Other liabilities......................................... 2,040 0 2,040
-------- ------- -------- --------
Total liabilities................................ 154,709 76,289 924 231,922
Redeemable convertible preferred stock.................... 24,323 0 (24,323) 13. -0-
-------- ------- -------- --------
Stockholders' equity:
Convertible preferred stock -- Series A................. 24,323 13. 24,323
Convertible preferred stock -- Series B................. 19,100 14. 19,100
Common stock, warrants and additional paid in capital... 83,208 13 67,965 3. 178,402
10,920 4.
(13) 10.
9,364 11.
1,600 12.
3,723 13.
1,622 14.
Retained earnings....................................... 5,429 9,687 (9,687) 10. (7,043)
(5,618) 11.
(1,509) 12.
(3,723) 13.
(1,622) 14.
-------- ------- -------- --------
Total stockholders' equity.............................. 88,637 9,700 116,445 214,782
-------- ------- -------- --------
Total liabilities and stockholders' equity....... $267,669 $85,989 $ 93,046 $446,704
======== ======= ======== ========
</TABLE>
See notes to unaudited pro forma financial information
39
<PAGE> 43
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(in thousands, except share data)
<TABLE>
<CAPTION>
THE COMPANY RESERVE ISAAC PROLER
SIX MONTHS ONE MONTH TWELVE WEEKS FIVE MONTHS
ENDED ENDED ENDED ENDED
9/30/97 4/30/97 6/23/97 8/31/97
----------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales........................................ $ 157,346 $9,304 $44,361 $13,466
Cost of sales.................................... 141,218 8,448 42,786 11,023
---------- ------ ------- -------
Gross profit..................................... 16,128 856 1,575 2,443
Expenses:
General and administrative..................... 8,197 489 3,461 1,511
Depreciation and amortization.................. 3,653 186 377 152
---------- ------ ------- -------
Operating income (loss) from continuing
operations..................................... 4,278 181 (2,263) 780
Interest expense................................. (3,565) (226) (682) (27)
Other income (expense)........................... 411 22 50 190
---------- ------ ------- -------
Income (loss) from continuing operations before
income taxes................................... 1124 (23) (2,895) 943
Provision (benefit) for income tax............... 598 0 0 312
---------- ------ ------- -------
Net income (loss) from continuing operations..... 526 (23) (2,895) 631
Accretion of preferred stock to redemption
value.......................................... 57
Preferred stock dividends........................ 315
---------- ------ ------- -------
Net income (loss) from continuing operations
applicable to common stock..................... $ 154 $ (23) $(2,895) $ 631
========== ====== ======= =======
Net income (loss) from continuing operations per
common share................................... $ 0.01 n/a n/a n/a
Weighted average shares outstanding.............. 18,060,000 n/a n/a n/a
</TABLE>
See notes to unaudited pro forma combined condensed financial statements
40
<PAGE> 44
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS -- (CONTINUED)
(in thousands, except share data)
<TABLE>
<CAPTION>
OTHER
PRE-COZZI OTHER TRANSACTIONS COZZI
PRE-COZZI PRO FORMA TRANSACTIONS PRO FORMA SIX MONTHS COZZI PRO FORMA
PRO FORMA COMBINED PRO FORMA COMBINED ENDED PRO FORMA COMBINED
ADJUSTMENTS 9/30/97 ADJUSTMENTS 9/30/97 9/30/97 ADJUSTMENT 9/30/97
----------- --------- ------------ ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
$ 0 $ 224,477 $ 0 $ 224,477 $ 129,590 $ 0 $ 354,067
203,475 203,475 115,429 (2,258) 35. 316,646
--------- ---------- -------- ---------- ---------- ---------- ----------
-- 21,002 0 21,002 14,161 2,258 37,421
(436) 16. 13,222 13,222 9,195 (75) 36. 22,430
88 37.
(554) 17. 5,115 5,115 1,351 (312) 38. 6,959
580 17. 805 39.
156 18.
(9) 19.
521 20.
53 21.
--------- ---------- -------- ---------- ---------- ---------- ----------
(311) 2,665 0 2,665 3,615 1,752 8,032
(12) 22. (5,217) 36 26. (5,361) (1,446) (6,807)
(264) 23. 60 27.
(44) 24. 48 28.
(64) 29.
(425) 32.
201 34.
-- 673 -- 673 (39) -- 634
--------- ---------- -------- ---------- ---------- ---------- ----------
(1,028) (1,879) (144) (2,023) 2,130 1,752 1,859
(1,662) 41. (752) (752) 818 678 41. 744
--------- ---------- -------- ---------- ---------- ---------- ----------
634 (1,127) (144) (1,271) 1,312 1,074 1,115
57 57 -- 57
315 4,158 30. 6,545 -- 6,545
2,072 31.
--------- ---------- -------- ---------- ---------- ---------- ----------
$ 634 $ (1,499) $ (6,374) $ (7,873) $ 1,312 $ 1,074 $ (5,487)
========= ========== ======== ========== ========== ========== ==========
$ (0.07) $12,064.37 $ (0.20)
2,362,033 25. 20,422,033 393,651 33. 20,815,684 108.75 11,499,986 40. 27,958,973
(108.75) 40.
(4,356,697) 42.
</TABLE>
41
<PAGE> 45
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(in thousands, except share data)
<TABLE>
<CAPTION>
AUDITED MACLEOD HOUTEX RESERVE ISAAC PROLER
THE COMPANY NINE MONTHS NINE MONTHS TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS
FISCAL YEAR ENDED ENDED ENDED ENDED ENDED
3/31/97 12/31/96 12/31/96 3/31/97 3/31/97 3/31/97
----------- ----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net sales................. $ 65,196 $22,608 $14,707 $119,579 $176,072 $30,709
Cost of sales............. 58,324 22,135 10,495 110,255 161,685 25,317
--------- ------- ------- -------- -------- -------
Gross profit.............. 6,872 473 4,212 9,324 14,387 5,392
Expenses:
General and
administrative....... 6,174 1,403 4,010 5,035 8,148 5,594
Depreciation and
amortization......... 2,282 121 251 2,249 1,738 360
--------- ------- ------- -------- -------- -------
Operating income (loss)
from continuing
operations.............. (1,584) (1,051) (49) 2,040 4,501 (562)
Interest expense.......... (1,449) (54) (364) (2,330) (993) (88)
Other income (expense).... 181 335 85 598 695 479
--------- ------- ------- -------- -------- -------
Income (loss) from
continuing operations
before income taxes..... (2,852) (770) (328) 308 4,203 (171)
Provision (benefit) for
income tax.............. (842) (272) (132) -- -- (58)
--------- ------- ------- -------- -------- -------
Net income (loss) from
continuing
operations........... (2,010) (498) (196) 308 4,203 (113)
Preferred stock
dividends............... -- -- -- -- -- --
--------- ------- ------- -------- -------- -------
Net income (loss) from
continuing operations
applicable to common
stock................... $ (2,010) $ (498) $ (196) $ 308 $ 4,203 $ (113)
========= ======= ======= ======== ======== =======
Net income (loss) from
continuing operations
per common share........ $ (0.22) n/a n/a n/a n/a n/a
Weighted average shares
outstanding............. 9,106,000 n/a n/a n/a n/a n/a
</TABLE>
See notes to unaudited pro forma combined condensed financial statements
42
<PAGE> 46
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS -- (CONTINUED)
(in thousands, except share data)
<TABLE>
<CAPTION>
OTHER
PRE-COZZI OTHER TRANSACTIONS COZZI PRO FORMA
PRE-COZZI PRO FORMA TRANSACTIONS PRO FORMA TWELVE MONTHS COZZI TWELVE MONTHS
PRO FORMA COMBINED PRO FORMA COMBINED ENDED PRO FORMA ENDED
ADJUSTMENTS 3/31/97 ADJUSTMENTS 3/31/97 3/31/97 ADJUSTMENTS 3/31/97
----------- --------- ------------ ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ $ 428,871 $ 0 $ 428,871 $ 216,851 $ 0 $ 645,722
-- 388,211 388,211 193,889 (972)35. 581,128
--------- ---------- ---------- ---------- ---------- ---------- -----------
-- 40,660 -- 40,660 22,962 972 64,594
(5,221)16. 5,143 25,143 15,315 (481)36. 40,329
352 37.
(3,749)17. 9,756 9,756 2,459 (393)38. 13,489
3,463 17. 1,66739.
899 18.
(110)19.
2,023 20.
229 21.
------------- ------- ---------- ---------- ---------- ---------- -----------
2,466 5,761 -- 5,761 5,188 (173) 10,776
(139)22. (8,678) (126) 26. (9,795) (2,879) (12,674)
(2,202)23. 40 27.
(1,059)24. 92 28.
(383)29.
(850)32.
110 34.
2,373 2,373 (72) 2,301
--------- ---------- ---------- ---------- ---------- ---------- -----------
(934) (544) (1,117) (1,661) 2,237 (173) 403
1,086 41. (218) (218) 986 (607)41. 161
--------- ---------- ---------- ---------- ---------- ---------- -----------
(2,020) (326) (1,117) (1,443) 1,251 434 242
-- -- 5,223 30. 7,745 -- 7,745
2,522 31.
--------- ---------- ---------- ---------- ---------- ---------- -----------
$ (2,020) $ (326) $ (8,862) $ (9,188) $ 1,251 $ 434 $ (7,503)
========= ========== ========== ========== ========== ========== ===========
$ (0.02) $11,503.45 $ (0.27)
4,947,338 25.14,053,338 2,025,000 33. 16,078,338 108.75 11,499,986 40. 27,578,324
(108.75)40.
</TABLE>
43
<PAGE> 47
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma combined condensed financial statements as of
September 30, 1997 and for the six months ended September 30, 1997 and the year
ended March 31, 1997 are based on the following assumptions and adjustments:
Items 1 - 10 represent pro forma adjustments to the Company's balance sheet
as of September 30, 1997 giving effect to the acquisition of Cozzi, using the
purchase method of accounting as if the acquisition had occurred on September
30, 1997.
1. The purchase consideration for Cozzi is comprised of the following
($ in 000's):
<TABLE>
<S> <C>
Shares of restricted Common Stock to be issued.............. 11,499,986
Warrants to purchase Common Stock to be issued.............. 1,500,000
Cash payment to be made..................................... $ 6,000
Value of restricted common stock to be issued............... 67,965
Value of warrants to be issued.............................. 10,920
Cash payment for transaction costs.......................... 1,500
-----------
Total estimated consideration............................... $ 86,385
===========
</TABLE>
The estimated consideration will be allocated for pro forma purposes as
follows ($ in 000's):
<TABLE>
<S> <C>
Current assets.............................................. $ 54,015
Noncurrent assets........................................... 44,675
Current liabilities......................................... (28,940)
Long term debts/other liabilities........................... (47,349)
Deferred taxes.............................................. (5,586)
Goodwill.................................................... 69,570
----------
$ 86,385
==========
</TABLE>
The above allocation of the estimated consideration is preliminary and may
change upon final determination of the fair value of assets acquired and
liabilities assumed. Pro forma adjustments assume that goodwill will be
amortized over 40 years.
2. Reflects the cash consideration to be paid to the shareholders of
Cozzi.
3. Reflects the issuance of 11,499,986 shares of common stock at an
average price of $5.91 per share in partial consideration for all the
outstanding shares of Cozzi. The shares of common stock provided to the Cozzi
shareholders are valued at a discount from the closing price of the Common Stock
on March 17, 1997, the day preceding public announcement of the Merger. The
shares to be issued are subject to significant restrictions as identified in the
Stockholders' Agreement which is included in Exhibit B to the Merger Agreement.
For example, in addition to trading restrictions imposed under Rule 144, the
stock is also subject to Rights of First Refusal in which selling stockholders
are required to offer shares to be sold in a bona fide written offer from a
third party to other shareholders which are a party to the Stockholders'
Agreement. The discount applied to the market price of the common stock in
recognition of the restrictions on sale or other disposition of the common stock
is 25%.
4. Reflects the estimated value of 750,000 warrants to be issued to the
Cozzi shareholders to acquire restricted common stock at an exercise price of
$5.91 per share and the estimated value of 750,000 warrants to be issued to
these individuals at an exercise price equal to 75% of the market price on the
date of closing. For pro forma presentation purposes, the warrants to be issued
at 75% of the market price on the date of closing
44
<PAGE> 48
were valued based on the closing stock price as of November 12, 1997, which was
$20.00 per share. The value of all warrants were estimated using the
Black-Scholes option pricing model using the following assumptions:
<TABLE>
<CAPTION>
EXPECTED EXPECTED DIVIDEND RISK FREE VALUE
VOLATILITY LIFE (YRS) YIELD INTEREST RATE (IN 000'S)
---------- ---------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C>
750,000 warrants @ $5.91........ 55% 5 0% 6.20% $ 2,880
750,000 warrants @ 75% of
market........................ 66% 5 0% 5.81% 8,040
-------
$10,920
=======
</TABLE>
The expected volatility was calculated based on the Company's daily stock
price over a 52 week period up to the measurement date of each warrant. The risk
free interest rate was based on the five year treasury bond rate on the
measurement date of each warrant.
5. Reflects estimated transaction costs remaining to be incurred for Cozzi
(in 000's):
<TABLE>
<S> <C>
Estimated transaction costs......................... $1,500
Incurred through September 30, 1997................. 810
------
Remaining costs to be paid................ $ 690
======
</TABLE>
The remaining costs to be incurred is presented as an increase in accounts
payable.
6. Reflects the goodwill, net of transaction costs already capitalized,
related to the acquisition of Cozzi ($68,760,000) and the elimination of Cozzi's
goodwill and other intangibles ($1,263,000) which will not be purchased.
7. Reflects the adjustment of LIFO inventory for Cozzi to a FIFO basis to
conform to the Company's accounting policy for inventory valuation.
8. Reflects the write-up of Cozzi's fixed assets to fair market value (in
000's):
<TABLE>
<S> <C>
Fair market value.................................. $35,793
Book value......................................... 25,142
-------
Write-up of real and personal assets............... $10,651
=======
</TABLE>
Land comprises approximately $7.8 million of the fixed asset value.
9. Reflects the increase in deferred taxes as a result of the write-up of
fixed assets and inventory of Cozzi. Deferred taxes were calculated assuming a
40% combined Federal and State effective tax rate.
10. Reflects the elimination of the equity accounts of Cozzi.
11. Upon closing of the Cozzi merger, the Company will record special
charges for non-recurring expenses related to warrants to be issued to Gerard M.
Jacobs, T. Benjamin Jennings, Daniel B. Burgess and Xavier Hermosillo. Messrs.
Jacobs and Jennings will each receive warrants to purchase 750,000 shares of
restricted common stock, of which 375,000 warrants are exercisable at $5.91 per
share and 375,000 warrants are exercisable at the lesser of $12.00 or 75% of the
market price on the closing date of the Cozzi merger. Mr. Burgess will receive
30,000 warrants exercisable at $4.00 per share and Mr. Hermosillo will receive
25,000 warrants exercisable at $5.00 per share. The value of the warrants will
be calculated based on the intrinsic value method as prescribed under APB 25
"Accounting for Stock issued to Employees" as follows:
a. The measurement date for the $5.91 warrants to be issued to
Messrs. Jacobs and Jennings will be May 16, 1997, which represents the date
of board approval of the $5.91 warrants. The aggregate compensation expense
to be recorded for these warrants is estimated on a pro forma basis to be
$2,392,000;
b. Compensation expense for the warrants to be issued to Messrs.
Jacobs and Jennings is estimated on a pro forma basis to be $6,000,000, for
pro forma presentation purposes, based on an assumed exercise price of
$12.00 and the Company's closing stock price of $20.00 on November 12,
1997;
c. The measurement date for the warrants to be issued to Messrs.
Burgess and Hermosillo will be September 8, 1997, which represents the date
of board approval of these warrants. The aggregate compensation expense to
be recorded with respect to the warrants to be issued to Messrs. Burgess
and Hermosillo is estimated on a pro forma basis to be $972,000.
45
<PAGE> 49
Based on the above, the non-recurring expense charge expected to be
incurred by the Company will be approximately $9.4 million. Presented as a $9.4
million increase to warrants, a $5.6 million decrease to retained earnings (net
of taxes at an assumed 40% effective tax rate) and a $3.8 million decrease to
deferred taxes.
12. The Company has reached an agreement in principle with George O.
Moorehead, President and a director of EMCO, Executive Vice President and a
Director of the Company, pursuant to which Mr. Moorehead would resign from his
employment by the Company, from his employment by EMCO and from his directorship
of EMCO, subject to completion of the Merger and certain other conditions, in
exchange for separation and other benefits. Upon the execution of a definitive
Separation Agreement, and the closing of the Merger, Mr. Moorehead will receive
a cash payment of $250,000, and certain insurance and other benefits during a
five-year period following the Merger. Upon the execution of a definitive Stock
Warrant Settlement Agreement and subject to the Company issuing certain warrants
to Messrs. Jacobs and Jennings, Mr. Moorehead will be entitled to receive
warrants to purchase up to 200,000 shares of Common Stock at an exercise price
of $12.00 per share and to receive from the Company amounts totalling $665,000.
The pro forma adjustment reflects an exercise price of $12.00 per share with
respect to these warrants. The value of these warrants, calculated based on the
intrinsic value method prescribed under APB 25 "Accounting for Stock issued to
Employees," is $1.6 million based on the November 12, 1997 closing price of
$20.00 per share of Common Stock. For pro forma presentation purposes, the
non-recurring charge is reflected on the pro forma balance sheet as an increase
to warrants of $1,600,000, a decrease to cash of $915,000, a decrease to
retained earnings of $1,509,000, (net of taxes at an assumed 40% effective tax
rate), and a decrease to deferred taxes of $1,006,000. See "Matters to be
Considered by Stockholders -- Proposal Number One -- Employment Agreements."
Items 13 - 15 reflect pro forma adjustments to the Company's consolidated
balance sheet for significant equity and financing transactions completed by the
Company subsequent to September 30, 1997 assuming these transactions were
completed on September 30, 1997.
13. On October 16, 1997 and October 24, 1997 all of the holders of the
Series A Redeemable Convertible Preferred Stock executed waivers of certain
mandatory conversion and redemption conditions. The waivers and consent to
amendment permanently and irrevocably waived all provisions of the Preferred
Stock that could require it to be redeemed in cash at or prior to maturity. The
changes in the terms of the Series A Preferred Stock require the balance sheet
classification of such securities to change prospectively from "temporary
equity" to a component of shareholders' equity. As a result of the
reclassification, no additional accretion of the preferred stock discount will
be recorded and no accretion is assumed for the pro forma fiscal year ended
March 31, 1997 earnings per share computation. The Series A Convertible
Preferred Stock will convey a beneficial conversion feature which will be
recognized and measured by allocating a portion of the proceeds equal to the
intrinsic value of that feature to paid in capital. The benefit will be measured
as the difference between the market value of the common stock and the
conversion price multiplied by the number of shares into which the security is
convertible. The benefit will be recorded as a non-cash dividend, upon the
approval by stockholders of the common stock issuable on conversion of preferred
stock. The pro forma balance sheet reflects the beneficial conversion feature
through a reduction to retained earnings and an increase to additional paid in
capital by an amount equal to $3,723,000.
14. The Company has agreed to issue an aggregate of 20,000 shares of
Series B Convertible Preferred Stock, par value $.01 per share (stated value
$1,000 per share) to two institutional investors. The Company expects to receive
net proceeds of $19.1 million. Dividends are expected to accrue at an annual
rate of 4.5% of the stated value of the Series B Convertible Preferred Stock.
The Series B Convertible Preferred Stock will convey a beneficial conversion
feature which will be recognized and measured by allocating a portion of the
proceeds equal to the intrinsic value of that feature to paid in capital. The
benefit will be measured as the difference between the market value of the
common stock and the conversion price multiplied by the number of shares into
which the security is convertible. The benefit will be recorded as a non-cash
dividend, upon the approval by stockholders of the common stock issuable on
conversion of preferred stock. The pro forma balance sheet reflects the
beneficial conversion feature through a reduction to retained earnings and an
increase to additional paid in capital by an amount equal to $1,622,000.
46
<PAGE> 50
15. On November 14,1997, the Company obtained a $10.0 million, short-term
loan from a commercial bank. This loan, which matures on December 15, 1997 and
accrues interest at the prime rate, was personally guaranteed by Gerard M.
Jacobs, T. Benjamin Jennings and Donald F. Moorehead Jr., Directors and officers
of the Company. On November 14, 1997, the Company used the proceeds from the
$10.0 million loan, in part, to pay $10.6 million of short-term debt obligations
issued in connection with the acquisition of Isaac. The adjustment is reflected
as a net $600,000 decrease to cash and current portion of debt.
Items 16 - 25 reflect pro forma adjustments to the Company's statement of
operations giving effect to the Company's acquisitions of MacLeod, HouTex,
Reserve, Isaac and Proler as if these acquisitions had occurred on April 1,
1996.
16. Reflects the reduction in compensation expense for the former
shareholders of Isaac and Proler who have signed new employment agreements with
the Company. The pro forma adjustment includes only the historical compensation
expense that has been contractually eliminated, and is reflected for the period
up to the effective date for each respective acquisition (in 000's):
<TABLE>
<CAPTION>
6 MO. YTD
9/30/97 3/31/97
------- -------
<S> <C> <C>
Proler shareholders....................................... $391 $3,134
Isaac shareholders........................................ 45 2,087
---- ------
Total........................................... $436 $5,221
==== ======
</TABLE>
17. Reserve and Isaac recorded depreciation expense based on accelerated
lives. The Company calculates depreciation expense using the straight line
method. Reflects the reversal of depreciation expense recognized based on the
accelerated lives and the recognition of depreciation expense based on the
straight-line method. Depreciation expense is calculated based on the fair
market value of the fixed assets acquired using an average useful life of 30
years for buildings and improvements, 7 to 19 years for operating machinery and
equipment and 5 years for office equipment. The pro forma adjustment is
reflected for the period up to the effective date for each respective
acquisition (in 000's):
<TABLE>
<CAPTION>
REVERSAL OF ACCELERATED DEPRECIATION EXPENSES: STRAIGHT-LINE DEPRECIATION EXPENSE:
- ---------------------------------------------- -----------------------------------
6 MO. YTD 6 MO. YTD
9/30/97 3/31/97 9/30/97 3/31/97
--------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Reserve................ $177 $2,139 Reserve............ $170 $1,545
Isaac.................. 377 1,610 Isaac.............. 410 1,918
---- ------ ---- ------
Total........ $554 $3,749 Total.............. $580 $3,463
==== ====== ==== ======
</TABLE>
18. MacLeod, HouTex and Proler used the straight line method for recording
depreciation expense. Reflects additional depreciation expense on the write-up
of the fixed assets to fair market value. Incremental depreciation expense was
computed assuming an average useful life of 30 years for buildings and
improvements and 7 years for machinery and equipment. Pro forma adjustment is
reflected for the period up to the effective date for each respective
acquisition (in 000's):
<TABLE>
<CAPTION>
INCREMENTAL DEPRECIATION EXPENSE
- --------------------------------
6 MO. YTD
9/30/97 3/31/97
------- -------
<S> <C> <C>
MacLeod................................... n/a $193
HouTex.................................... n/a 332
Proler.................................... 156 374
---- ----
Total........................... $156 $899
==== ====
</TABLE>
19. Reflects the elimination of existing goodwill amortization for
Reserve. Pro forma adjustment is reflected for the period up to the effective
date of the Reserve acquisition.
47
<PAGE> 51
20. Reflects goodwill amortization associated with the Company's
acquisition of each respective company. Pro forma adjustments are reflected for
the period up to the effective date of each respective acquisition (in 000's):
<TABLE>
<CAPTION>
GOODWILL AMORTIZATION
- ---------------------
6 MO. YTD
9/30/97 3/31/97
------- -------
<S> <C> <C>
MacLeod................................... n/a $ 104
HouTex.................................... n/a 109
Reserve................................... 9 112
Isaac..................................... 242 1,050
Proler.................................... 270 648
---- ------
Total........................... $521 $2,023
==== ======
</TABLE>
21. Reflects amortization expense on the $1.8 million non-compete
intangible asset from the acquisition of Isaac. The non-compete intangible asset
is being amortized over 8 years which represents the term of the non-compete
agreement. Pro forma adjustment is reflected up to the effective date of the
Isaac acquisition.
22. In connection with the Reserve acquisition, the Company issued a $1.5
million, 9%, one year note payable to the former shareholders of Reserve.
Reflects interest expense on the notes payable for the period up to the
effective date of the Reserve acquisition.
23. In connection with the Isaac acquisition, the Company issued $10.6
million, 8.5%, five month notes payable, and $25.9 million, 8.5%, three year
notes payable ($9.9 million due in eight months) to the former shareholders of
Isaac. On November 14, 1997, the Company repaid the $10.6 million, 8.5% notes
payable (See note 15). Reflects interest expense on the $25.9 million notes
payable for the period up to the effective date of the Isaac acquisition and the
reversal of interest expense accruing on the $10.6 million notes payable (in
000's):
<TABLE>
<CAPTION>
6 MO. YTD
9/30/97 3/31/97
------- -------
<S> <C> <C>
Reversal of interest recognized on $10.6 million note..... $ 244 n/a
Interest on $25.9 million note............................ (508) $(2,202)
----- -------
Total........................................... $(264) $(2,202)
===== =======
</TABLE>
24. In connection with the Proler acquisition, the Company issued a $8.1
million, six month note payable and a $2.4 million, 7%, two year note payable to
the former shareholders of Proler. The $8.1 million note payable accrues
interest at 8% for the first three months and increases to 10% in month four,
12% in month five and 14% in month six. For pro forma presentation purposes,
interest expense on the $8.1 million note is calculated at 11% which represents
the average interest rate on the note. Reflects interest expense on the notes
payable for the period up to the effective date of the Proler acquisition (in
000's):
<TABLE>
<CAPTION>
6 MO. YTD
9/30/97 3/31/97
------- -------
<S> <C> <C>
Interest on $8.1 million note............................. $(371) $ (891)
Interest on $2.4 million note............................. (70) (168)
----- -------
Total........................................... $(441) $(1,059)
===== =======
</TABLE>
25. Reflects the pro forma adjustment to weighted average shares
outstanding to increase the Company's historical weighted average shares
outstanding such that shares issued with each respective
48
<PAGE> 52
acquisition are considered outstanding for the entire period as if the
transactions had occurred on April 1, 1996:
<TABLE>
<CAPTION>
6 MO. YTD
9/30/97 3/31/97
--------- ---------
<S> <C> <C>
MacLeod............................................... n/a 546,000
HouTex................................................ n/a 366,000
Isaac................................................. 881,187 1,942,857
Proler................................................ 1,415,301 1,750,000
Debt Conversion....................................... 65,545 342,481
--------- ---------
2,362,033 4,947,338
========= =========
</TABLE>
On April 15, 1997, a note holder of the Company converted a $1.0 million
note payable into 182,481 shares of restricted common stock (see Note 28(c)). On
May 30, 1997, a note holder of the Company converted a $1.0 million note payable
into 160,000 shares of restricted common stock (see Note 26(c)). For the six
months ended September 30, 1997, the 182,481 shares issued on April 15, 1997
were outstanding for 169 of the 183 days in the period, and the 160,000 shares
issued on May 30, 1997 were outstanding for 124 days of the 183 days in the
period. The adjustment of 65,545 represents the shares to be added to the
Company's historical weighted average shares outstanding to reflect these shares
to be outstanding for the entire period. For the year ended March 31, 1997,
these shares issued are assumed to be outstanding for the entire period.
Items 26 - 34 reflect pro forma adjustments relating to significant
financing and equity transactions completed by the Company subsequent to March
31, 1997. The pro forma adjustments give effect to these transactions on the
Company's statement of operations as if each transaction occurred on April
1,1996.
26. In connection with the MacLeod acquisition, the Company issued a $6.0
million, 8%, five month note payable and a $600,000, 8%, five year note payable
to the former shareholders of MacLeod. Between March 1997 and May 1997, the
Company: a) paid the $600,000 note payable; b) paid $2.0 million of the $6.0
million note payable and; c) converted $1.0 million of the $6.0 million note
payable into 160,000 shares of common stock. On May 29,1997, the Company
refinanced the remaining $3.0 million due on the $6.0 million note payable into
a five year, 8.5% note payable. Adjustment reflects the reversal of interest
expense associated with the notes payable which have been repaid and refinanced
and the recognition of interest expense on the new $3.0 million, 8.5%, five year
note payable (in 000's):
<TABLE>
<CAPTION>
6 MO. YTD
9/30/97 3/31/97
------- -------
<S> <C> <C>
Reversal of interest expense.............. $ 79 $ 129
Interest on new note payable.............. (43) (255)
---- -----
Total........................... $ 36 $(126)
==== =====
</TABLE>
27. On January 1, 1997, the Company issued a $3.0 million, 8%, five month
note payable to a third party in exchange for the real estate on which the
MacLeod operations are conducted. In May 1997, the Company repaid this
obligation. Adjustment reflects the reversal of interest expense recognized on
this note payable.
28. In connection with the HouTex acquisition, the Company issued a $1.655
million, 6%, four month note payable and a $5.0 million, 6%, six month note
payable to the former shareholders of HouTex. During April and May 1997, the
Company: a) repaid the $1.655 million note payable; b) repaid $3.28 million of
the $5.0 million note payable; c) converted $1.0 million of the $5.0 million
note payable into 182,481 shares of common stock; and d) utilized the remaining
$720,000 due on the $5.0 million note payable to satisfy the cash portion
related to a warrant exercise by a former shareholder of HouTex. Adjustment
reflects the reversal of interest expense recognized on the notes payable.
29. On May 29, 1997, the Company obtained a $4.5 million revolving and
term loan, at the prime rate of interest. Adjustment represents interest expense
for the period up to the date of the term loan.
30. 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
49
<PAGE> 53
price of $21.0 million. The Company received net proceeds of $19.95 million.
Between August 21, 1997 and September 8, 1997, the Company issued 4,000
additional shares of Series A Convertible Preferred Stock to six individuals for
an aggregate purchase price of $4.0 million. 2,500 of the shares were
collectively purchased by Gerard M. Jacobs, T. Benjamin Jennings and Donald F.
Moorehead, Jr., directors of the Company. Adjustment reflects the dividends on
the preferred stock, which accrues at 9% until shareholder approval is obtained
at which time the dividend will be reduced to 6%, and the non-cash dividend
charge as described in Note 13 (in thousands).
<TABLE>
<CAPTION>
6 MO. YTD
9/30/97 3/31/97
------- -------
<S> <C> <C>
Dividends @ 6%............................ $ 435 $1,500
Non-cash dividend charge.................. 3,723 3,723
------ ------
$4,158 $5,223
====== ======
</TABLE>
31. Reflects dividends on the 20,000 shares of Series B Convertible
Preferred Stock at an annual rate of 4.5% and the non-cash dividend charge as
described in Note 14 (in thousands).
<TABLE>
<CAPTION>
6 MO. YTD
9/30/97 3/31/97
------- -------
<S> <C> <C>
Dividends @ 4.5%.......................... $ 450 $ 900
Non-cash dividend charge.................. 1,622 1,622
------ ------
$2,072 $2,522
====== ======
</TABLE>
32. Reflects interest expense on the $10.0 million short-term note payable
obtained on November 14, 1997 (See Note 15). Interest expense was calculated at
the prime rate of interest of 8.5%.
33. In April and May 1997, the Company completed a private offering of
2,025,000 shares of common stock at $7.25 per share. Adjustment represents the
shares issued in the private offering assuming the shares were outstanding, for
the year ended March 31, 1997 and the incremental shares outstanding for the
periods prior to issuance, for the six months ended September 30, 1997.
34. In August 1997, the Company repaid a $6.5 million term loan using the
proceeds of the Series A Preferred Stock. Adjustment represents the reversal of
interest expense recognized on the term loan.
Items 35 - 40 reflect pro forma adjustments to the Company's statement of
operations giving effect to the Company's acquisition of Cozzi as if it occurred
on April 1, 1996.
35. Reflects the adjustment of LIFO cost of goods sold for Cozzi to a FIFO
basis to conform to the Company's accounting policy for inventory valuation.
36. Reflects the reduction of contractually eliminated compensation
expense relating to the shareholders of Cozzi who will enter into new employment
agreements upon closing of the Merger.
37. Reflects additional compensation expense for Messrs. Jacobs and
Jennings pursuant to new employment agreements which will become effective upon
closing of the Merger.
38. Cozzi records depreciation expense based on accelerated lives. The
Company's depreciation expense is calculated using the straight line method.
Reflects the reversal of depreciation expense recognized based on the
accelerated lives and the recognition of depreciation expense based on the
straight-line method. Depreciation expense is calculated based on the fair
market value of the fixed assets acquired using an average useful life of 30
years for buildings and improvements, 7 to 19 years for operating machinery and
equipment and 5 years for office equipment (in 000's):
<TABLE>
<CAPTION>
6 MO. YTD
9/30/97 3/31/97
------- -------
<S> <C> <C>
Reversal of accelerated depreciation..................... $(1,286) $(2,340)
Recording of straight-line depreciation.................. 974 1,947
------- -------
Total.......................................... $ (312) $ (393)
======= =======
</TABLE>
50
<PAGE> 54
39. Reflects the elimination of existing goodwill amortization of Cozzi
and recognition of goodwill amortization associated with the Company's
acquisition of Cozzi (in 000's):
<TABLE>
<CAPTION>
6 MO. YTD
9/30/97 3/31/97
------- -------
<S> <C> <C>
Reversal of existing goodwill amortization................ $(65) $ (72)
Recognition of goodwill amortization...................... 870 1,739
---- ------
Total........................................... $805 $1,667
==== ======
</TABLE>
40. Reflects the number of shares of restricted Common Stock to be issued
to Cozzi shareholders in exchange for the outstanding Cozzi shares.
41. Adjustment to income tax provision to reflect the combined results of
operations of the Company and the acquired companies assuming a combined 40%
federal and state effective tax rate.
42. The Company's weighted average shares outstanding at September 30,
1997 (18,060,000) includes 4,356,697 shares of dilutive stock options and
warrants. Due to the pro forma net loss for the six months ended September 30,
1997, these dilutive stock options and warrants are reduced from the pro forma
weighted average shares outstanding as their inclusion would make them
anti-dilutive.
PROPOSAL NUMBER TWO: TO CONCUR IN THE APPOINTMENT BY THE BOARD OF DIRECTORS OF
PRICE WATERHOUSE LLP AS THE COMPANY'S PRINCIPAL
INDEPENDENT ACCOUNTANTS FOR THE FISCAL YEAR ENDING MARCH
31, 1998.
The Board believes that Price Waterhouse LLP is knowledgeable about the
Company's operations and accounting practices and is well-qualified to act in
the capacity of its principal independent accountants. Therefore, the Board has
selected Price Waterhouse LLP to act as the Company's principal independent
accountants to examine its consolidated financial statements for the fiscal year
ending March 31, 1998. Although the selection of independent accountants does
not require the approval of the Stockholders, the Board believes it is desirable
to obtain the concurrence of the Stockholders to this selection. Due to the
difficulty and expense involved in retaining another independent accounting firm
on short notice, the Board does not contemplate appointing another firm to act
as the Company's independent accountants for the fiscal year ending March 31,
1998 if the Stockholders do not concur in the appointment of Price Waterhouse
LLP. Instead, the Board will consider the vote as advice in making its selection
of independent accountants for the following year.
Representatives of Price Waterhouse LLP are expected to be present at the
Annual Meeting and will have the opportunity to make a statement if they so
desire and will be available to respond to appropriate questions.
RECOMMENDATION OF THE BOARD: The Board recommends that the Stockholders
concur in the following resolution which will be presented for a vote of the
Stockholders at the Annual Meeting:
RESOLVED, that the Stockholders concur in the appointment by the Board of
Price Waterhouse LLP as the Company's principal independent accountants for the
fiscal year ending March 31, 1998.
Vote Required. The affirmative vote of a majority of the votes cast by
Stockholders present in person or by proxy and eligible to vote at the Annual
Meeting, a quorum being present, is required to adopt the foregoing resolution;
provided, however, that if this resolution is not approved by the Stockholders,
the Board will not appoint another firm to act as the Company's independent
accountants, but will consider the failure to pass the resolution in making its
selection of independent accountants for the following year.
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PROPOSAL NUMBER THREE: TO APPROVE AND ADOPT THE MERGER AGREEMENT AND THE MERGER
PURSUANT TO WHICH COZZI WILL BECOME A WHOLLY-OWNED
SUBSIDIARY OF THE COMPANY.
BACKGROUND OF AND REASONS FOR THE MERGER
General. The Merger Agreement provides for the merger of Merger Sub, a
newly formed, wholly-owned subsidiary of the Company with and into Cozzi, with
Cozzi to be the surviving entity of the Merger. The discussion in this Proxy
Statement of the Merger and the description of the principal terms of the
Agreement are subject to and qualified in their entirety by reference to the
Merger Agreement, a copy of which is attached hereto as Annex A and incorporated
herein by reference.
Background of the Merger. In April 1996, following the EMCO merger,
Messrs. Jacobs and Jennings arranged a meeting with Mr. Albert A. Cozzi to
generally discuss the potential consolidation of the scrap metal recycling
industry and specifically discuss each company's intentions with regard to their
respective investments in scrap metal recycling companies in Phoenix, Arizona.
The April 1996 meeting was exploratory and brief and did not lead to additional
merger or other business discussions between the parties for several months.
Mr. Jennings contacted Mr. Cozzi by telephone in early October 1996 to
discuss the national consolidation of the fragmented scrap metal recycling
industry as evidenced by several announcements made by the Company and certain
other entities. That conversation led to a meeting at Mr. Cozzi's office in
early October. At that meeting Messrs. Jennings and Cozzi concluded that they
shared the same strategic vision for the direction of the scrap metal recycling
industry which they believed should be consolidated. On or about October 16,
1996 a telephonic meeting occurred among Gerard M. Jacobs, T. Benjamin Jennings,
Donald F. Moorehead, Jr., George O. Moorehead, and Harold Rubenstein to briefly
discuss the benefits and risks of a potential merger with Cozzi. At the
conclusion of that meeting Messrs. Jacobs and Jennings were authorized to
initiate efforts to explore the possibility of a merger with Cozzi. On October
23, 1996 a meeting was conducted in the offices of Mr. Cozzi which concluded in
the execution of an "Exchange of Information and Nondisclosure Agreement" to
facilitate the exchange of confidential information between the Company and
Cozzi. Beginning in late October, representatives of the Company and Cozzi
commenced performance of their financial, operational, environmental and legal
due diligence activities. At the same time, Messrs. Jacobs, Jennings, and Cozzi
and their advisors commenced negotiations on the terms of a potential merger.
On December 5, 1996, Gerard M. Jacobs, T. Benjamin Jennings, Robert C.
Larry (for the Company), and Albert A. Cozzi, Frank J. Cozzi, Michael Mitchell,
and Burton Reif (for Cozzi) met at the Company's offices to discuss the terms of
a potential merger between the companies. At that meeting a preliminary term
sheet was presented by Messrs. Jacobs and Jennings that summarized in broad
terms a potential merger of the companies. At the conclusion of the meeting both
parties agreed to continue to explore the potential for a merger but no
agreements as to terms and conditions were reached. Messrs. Jacobs, Jennings,
and Albert Cozzi had numerous conversations from December 4, 1996 through
December 10, 1996 to exchange ideas and provide feedback with respect to the
terms for a potential merger. On December 11, 1996 a non-binding letter of
intent was executed between the Company and Cozzi which highlighted the main
points of a potential merger transaction. The non-binding letter of intent was
subject to various conditions precedent including but not limited to the
completion of due diligence, receipt of corporate and third-party approvals, and
negotiation and execution of binding agreements.
On February 24, 1997, Messrs. Jacobs and Jennings presented financial and
operational information regarding Cozzi to the Company's Board of Directors and
summarized the terms and conditions contemplated in the non-binding letter of
intent. Thereafter, discussions between the principals continued and on March
14, 1997, a binding letter of intent was executed between the Company and Cozzi.
The March 14, 1997 letter of intent differed in a number of respects from the
December 11, 1996 letter. In particular, the March letter: (i) provided for
consideration equal to 11,500,000 shares of Common Stock and $6 million in cash,
compared with 11,000,000 shares of Common Stock and $5 million in cash provided
in the December letter; (ii) provided that the consideration would be reduced by
any additional amounts payable by Cozzi as a result
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<PAGE> 56
of the Merger under an agreement with the Estate of James H. Cozzi; (iii)
included the purchase of the shares of Cozzi Building Corporation not owned by
Cozzi, which were not included in the acquisition described in the December
letter; (iv) required Cozzi to use its "best efforts" to negotiate the purchase
of the interests in PerlCo and Salt River not owned by Cozzi, while the December
letter only required that Cozzi "attempt to negotiate" these acquisitions; (v)
was intended to be binding upon the parties, while the December letter was not,
except with respect to confidentiality and non-disclosure obligations; (vi)
unlike the December letter, set forth the number and exercise prices and terms
of warrants to be granted to Messrs. Cozzi, Jacobs and Jennings; (vii) set out
in greater detail than did the December letter the terms of the stockholders
agreement to be entered into by Messrs. Cozzi, Jacobs and Jennings in connection
with the Merger, including by listing major corporate actions which would
require a two-thirds vote of the Board of Directors; (viii) unlike the December
letter, required the Cozzis to deal exclusively with the Company until June 30,
1997 with respect to the proposed transaction; and (ix) included a form of press
release which Cozzi and the Company agreed to issue jointly. See "-- Employment
Agreement" and "-- Stockholders Agreement" below.
On May 14, 1997 the Board of Directors discussed the definitive agreements
with respect to a contemplated merger agreement with Cozzi. The Board of
Directors also considered the recent financial performance of Cozzi and the
important operational expertise that Messrs. Cozzi may offer the Company and
authorized Messrs. Jacobs and Jennings to execute the Merger Agreement and
ancillary agreements. The Company did not retain the services of a financial
advisor in connection with the negotiations leading to the Merger Agreement.
Reasons for the Transaction. The Board of Directors believes that the
Merger with Cozzi will: (i) allow the Company to become the premier consolidator
in the scrap metal recycling industry; (ii) allow the Company to derive
substantial benefits from the depth and breadth of management and expertise at
both companies; (iii) yield operational and financial synergies and cost
savings; and (iv) allow the Company to more effectively access capital markets.
The Board of Directors also considered a number of potentially negative
factors in its deliberations concerning the Merger, including but not limited
to: (i) the possibility that the Company's existing cash and cash equivalents
will not be sufficient to fund the Company's obligations under the Merger
Agreement, and a failure to raise sufficient cash to close the Merger could
adversely affect the Company and the market price of the Common Stock; (ii) the
fact that the Company has not previously operated under a Chief Operating
Officer or under an Executive Committee, both of which are required by the
Merger Agreement; (iii) the possibility that the operating efficiencies and
other benefits anticipated following the Merger might not be achieved; and (iv)
the other risks described under "Risk Factors."
After considering the foregoing factors, the Board of Directors approved
the Merger with Cozzi, including the Merger Agreement, and recommended that the
stockholders of the Company approve and adopt the Merger Agreement and the
Merger. In view of the wide variety of factors considered, both positive and
negative, the Board of Directors did not find it practicable to, and did not,
quantify or otherwise assign relative weights to the specific factors it
considered. See "-- Conflicts of Interest."
OPINION OF SALOMON BROTHERS
The Company retained Salomon Brothers pursuant to a letter agreement dated
May 9, 1997 (the "Engagement Letter") to render an opinion relating to the
fairness, from a financial point of view, to the Company of the consideration to
be paid by the Company in the Merger. Neither the Company's Board nor its
management imposed any limitations on Salomon Brothers with respect to the
investigations made or procedures followed by Salomon Brothers in preparing and
rendering its opinion. Pursuant to the Engagement Letter, Salomon Brothers
rendered an opinion to the Board of Directors of the Company on July 21, 1997 to
the effect that, based upon and subject to the considerations set forth in such
opinion, as of such date, the consideration to be paid by the Company in the
Merger was fair to the Company from a financial point of view.
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<PAGE> 57
The full text of Salomon Brothers' fairness opinion, which sets forth the
assumptions made, general procedures followed, matters considered and limits on
the review undertaken, is included as Annex B to this Proxy Statement. The
summary of Salomon Brothers' opinion set forth below is qualified in its
entirety by reference to the full text of such opinion included as Annex B.
STOCKHOLDERS ARE URGED TO READ THE OPINION IN ITS ENTIRETY.
In connection with rendering its opinion, Salomon Brothers reviewed and
analyzed the following material bearing upon the financial and operating
conditions and prospects of Cozzi and the Company: (i) the Merger Agreement;
(ii) a draft of this Proxy Statement, including the historical and pro forma
financial statements included herein; (iii) certain publicly available
information concerning the Company, including the Annual Report on Form 10-K of
the Company for the year ended March 31, 1997; (iv) certain other internal
information, primarily financial in nature, including projections, concerning
the business and operations of the Company furnished to Salomon Brothers by the
Company for purposes of Salomon Brothers' analysis; (v) certain publicly
available information concerning the trading of, and the trading market for, the
Common Stock; (vi) certain internal information, primarily financial in nature,
including projections, concerning the business and operations of Cozzi furnished
to Salomon Brothers by Cozzi and the Company for purposes of Salomon Brothers'
analysis; (vii) certain internal information, primarily financial in nature,
including projections, concerning the business and operations of Proler
furnished to Salomon Brothers by the Company for purposes of Salomon Brothers'
analysis; (viii) the financial terms of the Proler acquisition; (ix) certain
publicly available information with respect to certain other companies that
Salomon Brothers believed to be comparable to Cozzi or the Company and the
trading markets for certain of such other companies' securities; and (x)
publicly available information concerning the nature and terms of certain other
transactions that Salomon Brothers considered relevant to its inquiry. Salomon
Brothers also considered such other information, financial studies, analyses,
investigations and financial, economic and market criteria that it deemed
relevant. Salomon Brothers also met with certain officers and employees of Cozzi
and the Company to discuss the foregoing, as well as matters Salomon Brothers
believed relevant to its inquiry.
In its review and analysis and in arriving at its opinion, Salomon Brothers
assumed and relied upon the accuracy and completeness of all of the financial
and other information provided to it or publicly available and neither attempted
independently to verify nor assumed responsibility for verifying any of such
information. Salomon Brothers did not conduct a physical inspection of any of
the properties or facilities of Cozzi or the Company and it did not make or
obtain or assume any responsibility for making or obtaining any independent
evaluations or appraisals of any such properties or facilities. With respect to
projections, Salomon Brothers assumed that they had been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
management of each of Cozzi and the Company as to the future financial
performance of Cozzi and the Company. Salomon Brothers expressed no view with
respect to such projections or the assumptions on which they were based. Salomon
Brothers assumed that the conditions precedent to the Merger in the Merger
Agreement will be satisfied and that the Merger will be consummated in
accordance with the terms of the Merger Agreement and that Company will acquire
Proler on the terms described herein.
In conducting its analysis and arriving at its opinion, Salomon Brothers
considered the following financial and other factors as it deemed appropriate
under the circumstances: (i) the historical and current financial position and
results of operations of Cozzi and the Company; (ii) the business prospects of
Cozzi and the Company; (iii) the historical and current market for the Common
Stock and for the equity securities of certain other companies that Salomon
Brothers believed to be comparable to Cozzi or the Company; and (iv) the nature
and terms of certain other acquisition transactions that Salomon Brothers
believed to be relevant. Salomon Brothers also took into account its assessment
of general economic, market and financial conditions as well as its experience
in connection with similar transactions and securities valuation generally.
Salomon Brothers' opinion necessarily was based on conditions as they existed
and could be evaluated on the date thereof and Salomon Brothers assumed no
responsibility to update or revise its opinion based upon circumstances or
events occurring after such date. Salomon Brothers did not consider any
acquisition that had not closed before the date of its opinion, other than the
Proler acquisition and the Merger. Salomon Brothers' opinion did not constitute
an opinion or imply any conclusion as to the likely trading range for the Common
Stock following consummation of the Merger. Salomon Brothers' opinion was for
the sole benefit of the
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Company (including its management and Board of Directors) in considering the
Merger and was, in any event, limited to the fairness, from a financial point of
view, of the consideration to be paid by the Company in the Merger and did not
address the Company's underlying business decision to effect the Merger or
constitute a recommendation to any holder of the Common Stock as to how such
holder should vote with respect to the Merger.
Salomon Brothers has advised the Board of Directors that, based on an
express disclaimer in the Engagement Letter, it does not believe that any person
(including a Stockholder of the Company), other than the Company (including its
management and Board of Directors), has a legal right to rely upon Salomon
Brothers' fairness opinion to support any claims against Salomon Brothers
arising under applicable state law and that, should any such claims be brought
against Salomon Brothers by any such person, this assertion will be raised as a
defense. In the absence of applicable state law authority, the availability of
such a defense will be resolved by a court of competent jurisdiction. Resolution
of the question of the availability of such a defense, however, will have no
effect on the rights and responsibilities of the Company's Board of Directors
under applicable state law, nor would the availability of such a state law
defense to Salomon Brothers have any effect on the rights and responsibilities
of either Salomon Brothers or the Company's Board of Directors under the federal
securities laws.
Salomon Brothers is an internationally recognized investment banking firm
engaged, among other things, in the valuation of businesses and their securities
in connection with mergers and acquisitions, restructurings, leveraged buyouts,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes. The Company selected Salomon Brothers to act as
its financial advisor on the basis of Salomon Brothers' international
reputation. In addition, in the ordinary course of its business, Salomon
Brothers may actively trade the debt and equity securities of the Company for
its own account and for the accounts of customers and, accordingly, may at any
time hold a long or short position in such securities.
Pursuant to the Engagement Letter, the Company paid Salomon Brothers
$350,000 in cash after Salomon Brothers delivered its fairness opinion. The
Company has also agreed to reimburse Salomon Brothers up to $25,000 for its
reasonable travel and other out-of-pocket expenses incurred in connection with
its engagement (including the reasonable fees and disbursements of its counsel)
and to indemnify Salomon Brothers against certain liabilities and expenses
relating to or arising out of its engagement, including certain liabilities
under the federal securities laws.
DESCRIPTION OF THE MERGER AGREEMENT
The following summarizes the material terms and provisions of the Merger
Agreement, a copy of which is attached as Annex A to this Proxy Statement and is
incorporated herein by reference. This summary is qualified in its entirety by
reference to the full text of the Merger Agreement.
General. The Boards of Directors of Cozzi and the Company, meeting
separately, each authorized the execution and performance of the Merger
Agreement. In addition, all of the shareholders of Cozzi have approved and
adopted the Merger Agreement. In connection with the Merger, Merger Sub, a
wholly-owned subsidiary of the Company, will be merged with and into Cozzi,
resulting in Cozzi becoming a wholly-owned subsidiary of the Company.
Effective Time. If the Merger Agreement is approved and adopted by the
requisite vote of the Stockholders of the Company, and all other conditions to
the obligations of the parties to consummate the Merger are satisfied or waived,
the Merger will become effective upon the filing of articles of merger with the
Secretary of State of the State of Illinois.
Conversion of Shares. In connection with the Merger, each share of Cozzi
common stock will be converted into 105,747 shares of Common Stock and
$55,172.41 and the Company will issue to the Cozzi Shareholders an aggregate of
11,499,986 shares of Common Stock and $6.0 million in cash.
Warrants. As additional consideration in connection with the Merger,
pursuant to their respective employment agreements, all Shareholders will
receive warrants exercisable for the following number of shares
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of Common Stock: 755,172 shares (Albert A. Cozzi), 582,759 shares (Frank J.
Cozzi) and 162,069 shares (Gregory P. Cozzi). The warrants will be exercisable
for a period of five years from the Closing Date. One-half of the warrants
issued to each of the Cozzi Shareholders will have an exercise price of $5.91
per share, and one-half will have an exercise price per share equal to 75% of
the last sales price of a share of Common Stock on the day before the Effective
Date.
Certain Covenants. The Company and Cozzi each have agreed to: (i) afford
each other party reasonable access to financial, operating and other
information; (ii) give prompt notice of breaches of any covenant or condition in
the Merger Agreement; (iii) make no public announcement related to the Merger
without the prior consent of the other parties except as required by law or any
securities exchange; (iv) cooperate in preparing and filing all forms, reports
and notifications required by any stock exchange on which the Common Stock is
listed and to use their best efforts to overcome any objections by any
governmental authority to the Merger; (v) use its best efforts to obtain the
authorizations required to consummate the transactions contemplated by the
Merger Agreement; and (vi) take all necessary action to pre-clear the Merger
with the Secretary of State of the State of Illinois.
Each of the Company and Cozzi has agreed that prior to consummation of the
Merger or the termination of the Merger Agreement each entity shall conduct
their respective business only in the ordinary course consistent with past
practice. In addition, Cozzi and the Cozzi Shareholders have agreed not to: (i)
initiate or encourage initiation by others of discussions or negotiations with
third parties or respond to solicitations by third persons relating to any
merger, sale or other disposition of any substantial part of the assets,
business or properties of Cozzi; or (ii) enter into any agreement or commitment
with respect to any of the foregoing transactions.
The Merger Agreement requires the Company to seek approval from the Cozzi
Shareholders before taking certain actions prior to approval of the
Stockholders, including without limitation: (i) amendments to or changes of the
Company's certificate of incorporation or bylaws; (ii) issuance of equity,
except in connection with certain acquisitions, private placements of Common
Stock up to $15 million in the aggregate, private placement of up to $50 million
of securities convertible into Common Stock or the sale of up to $200 million of
non-convertible high yield debt; (iii) changes in management of the Company or
changes in the compensation provided to officers and directors of the Company;
(iv) acquisitions of companies, except for mergers or acquisitions involving,
among others, Isaac or Proler or other acquisitions involving less than $5
million in consideration; (v) incurrence of any indebtedness or other
significant financing transactions.
Following the Effective Date of the Merger, the Cozzi Shareholders have
agreed not to compete against the Company or its affiliates in certain specified
territories for a period of thirty-six (36) months following the later of the
Closing Date or the date each such Cozzi Shareholder ceases to be an employee,
officer or Director of the Company.
Conditions to the Merger. The obligations of each party to effect the
Merger are conditioned on, among other things, the satisfaction or waiver of
each of the following conditions: (i) the truth and accuracy of all of the
representations and warranties made by each party; (ii) completion by each party
of its respective obligations under the Merger Agreement; (iii) the absence of
any material adverse change in the other party; (iv) the absence of any court
order prohibiting or restricting completion of the Merger; and (v) receipt of
all written consents, assignments, waivers or authorizations required to effect
the Merger
In addition, the Company will not be obligated to proceed with the Merger
unless: (i) the Company's Stockholders authorize and approve the Merger
Agreement; (ii) no Cozzi Shareholder elects to exercise appraisal rights with
respect to the Merger; (iii) Cozzi obtains a general release from the Estate of
James H. Cozzi and Irene Cozzi (the "Estate") releasing the Company and its
affiliates from all liability such parties may have to the Estate; and (iv)
Cozzi receives the written consent of G.E. Capital Public Finance, Inc. to the
transactions contemplated by the Merger Agreement. Cozzi and the Cozzi
Shareholders will not be obligated to proceed with the Merger unless: (i) the
Cozzi Shareholders receive an opinion from counsel to the effect that the Merger
will be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code; and (ii) Cozzi receives the written
consent of Bank of America National Trust and Savings Association to the
transactions contemplated by the Merger Agreement.
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Termination. The Merger Agreement may be terminated and the Merger
abandoned at any time prior to the Effective Time by: (i) mutual written consent
of all parties to the Merger Agreement at any time prior to the Closing Date;
(ii) the Company, if Cozzi or the Cozzi Shareholders breach any material
representation, warranty, covenant or agreement under the Merger Agreement;
(iii) the Cozzi Shareholders, if the Company or Merger Sub breaches any material
representation, warranty, covenant or agreement under the Merger Agreement; (iv)
either the Cozzi Shareholders or the Company if the Closing has not been
consummated by December 15, 1997; (v) the Company, if the Merger Agreement and
the transactions contemplated thereby fail to receive the requisite vote for
approval and adoption by the Stockholders of the Company; (vi) the Company, if
it is not satisfied in its sole discretion with the results of its environmental
assessment of the Cozzi properties; and (vii) the Cozzi Shareholders, if they
have not received an opinion from counsel to the effect that the Merger will be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code. See "Matters to be Considered by
Stockholders -- Proposal Number Three -- Termination."
Indemnification. The Company and the Cozzi Shareholders each have agreed
to indemnify the other party against any expenses, liabilities and damages
incurred or suffered by such party (collectively, "Indemnifiable Damages")
resulting from or arising out of any breach of a representation or warranty made
by the indemnifying party under the Merger Agreement. However, the indemnifying
party will be liable only for Indemnifiable Damages in excess of $500,000 in the
aggregate. In addition, the liability of the Cozzi Shareholders will be limited
to the 1,150,000 shares of Common Stock held in escrow as security for their
indemnification obligations.
Expenses. Each party to the Merger Agreement is required to pay its own
fees and expenses, including fees and expenses of counsel and its other
advisors.
Alternatives to the Merger. The Company has evaluated numerous acquisition
and merger opportunities in the scrap metal recycling industry during the past
twelve months. Management believes that Cozzi possesses unique strengths in its
management team and customer relations, as well as the broad geographic scope of
its operations. The Company's Board of Directors has concluded that none of the
other candidates evaluated to date, except for the other Completed or Potential
Acquisitions, possess this unique blend.
Regulatory Approvals. The Hart-Scott-Rodino Antitrust Improvements Act of
1976 (the "HSR Act") and the rules and regulations thereunder provide that
certain transactions may not be consummated until required information and
materials have been furnished to the Department of Justice and the Federal Trade
Commission and certain waiting periods have expired or been terminated. The
Company filed a Notification and Report Form on July 8, 1997 and on July 18,
1997 received notice that the waiting period under the HSR Act was terminated.
Notwithstanding the termination of the waiting period under the HSR Act, at
any time before or after the consummation of the Merger either the Department of
Justice or the Federal Trade Commission could take such action under the
antitrust laws if deemed necessary or desirable in the public interest, or
certain other persons could take action under the antitrust laws, including
seeking to prevent the Merger.
Cozzi and the Company are not currently aware that any other material
governmental permits, approvals, consents or similar actions are required for
consummation of the Merger, except for compliance with applicable federal and
state securities laws and the rules and regulations of the Nasdaq Stock Market.
Accounting Treatment. For financial reporting purposes, the Merger will be
treated as a purchase transaction, with the Company as the acquiror of Cozzi.
See "Historical and Unaudited Pro forma Condensed Consolidated Financial Data."
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Employment Agreements. In connection with the Merger, the Company
anticipates entering into employment agreements with the following persons who
will serve in the following positions with the Company and, in the case of Frank
J. Cozzi, with Cozzi:
<TABLE>
<S> <C>
T. Benjamin Jennings..... Chairman of the Board, Member of the Executive
Committee and Chief Development Officer
Gerard M. Jacobs......... Director, Member of the Executive Committee and
Chief Executive Officer
Albert A. Cozzi.......... Director, Member of the Executive Committee,
President and Chief Operating Officer
Frank J. Cozzi........... Director, President of Cozzi and Vice President
of the Company
</TABLE>
The Board expects that each employment agreement will: (i) have a term
beginning on the closing date of the Merger and continuing for five years,
provided that on each anniversary of the closing date of the Merger, the term
automatically will be extended by one-year periods unless either the Company or
the employee elects prior to such anniversary not to extend the term; and (ii)
provide for an annual base salary payable to each individual of at least
$275,000, plus a minimum cash bonus payable to each employee equal to at least
25% of the employee's base salary. Each agreement will restrict the employee's
ability to compete with the Company for three years following termination of
employment. The agreements will provide that each of Messrs. Jacobs and Jennings
will receive identical salary, bonus, vacation, disability and other benefits.
In addition, the employment agreements with Messrs. Jacobs and Jennings
acknowledge that they may devote a portion of their time to entities other than
the Company.
As additional compensation under their employment agreements, each of
Messrs. Jacobs and Jennings will receive warrants to purchase 750,000 shares of
Common Stock, exercisable for a period of five years from the Effective Date.
One-half of these warrants will be exercisable at $5.91 per share, and one-half
will be exercisable at a price equal to the lesser of $12.00 or 75% of the last
sales price of a share of Common Stock on the day before the Effective Date. For
a description of the warrants to be issued to the Cozzi Shareholders in
connection with the employment agreements, see "-- Description of the Merger
Agreement -- Warrants."
In the event of a "change in control" of the Company, the term of each
employment agreement will be extended for two years, and each employee will
receive, in addition to other benefits, a cash payment equal to: (i) the
employee's current annual base salary plus the highest annual bonus for the
previous three years; times (ii) the number of years remaining until the
employee would reach the age of 65, but in no event less than five. If a change
in control were to occur immediately after the Merger, Messrs. Jacobs and
Jennings, as well as Albert A. Cozzi and Frank J. Cozzi, each would be entitled
to receive at least $1,720,000 as severance pay, for total payments exceeding
$6,880,000.
Under the employment agreements described above, a "change in control" of
the Company is deemed to have occurred if, without the vote of the Executive
Committee: (a) any "person" (as defined in the Exchange Act) other than Albert
A. Cozzi, Frank J. Cozzi or Gregory P. Cozzi becomes a beneficial owner of
securities representing thirty percent (30%) or more of the combined voting
power of all outstanding shares of the Company; (b) during any two consecutive
years the majority of the Board of Directors is no longer comprised of
individuals who were approved by at least two thirds ( 2/3) of the Directors at
the beginning of the employment period; (c) the stockholders approve a merger or
consolidation of the Company with any other corporation, other than the Merger,
and other than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing to
represent at least eighty percent (80%) of the combined voting power of the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation; or (d) the stockholders approve
a plan of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all the Company's assets.
In connection with the Merger, the Company anticipates entering into an
employment agreement with Gregory P. Cozzi to serve as Vice President of Cozzi.
The Board expects that Gregory Cozzi's employment agreement will likely: (i)
have a term of five years, after which the term automatically will be extended
by
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one-year periods unless either the Company or Mr. Cozzi elects prior to such
anniversary not to extend the term; and (ii) provide for an annual base salary
of at least $135,000, plus a minimum cash bonus equal to at least twenty-five
percent of the base salary. The agreement will also restrict Mr. Cozzi's ability
to compete with the Company for three years following termination of his
employment. For a description of the warrants to be issued to Mr. Cozzi in
connection with his employment agreement, see "-- Description of the Merger
Agreement -- Warrants."
Stockholders Agreement. In connection with the Merger, Albert A. Cozzi,
Frank J. Cozzi and Gregory P. Cozzi (collectively, the "Cozzi Stockholders") and
Gerard M. Jacobs and T. Benjamin Jennings (collectively, the "MTLM
Stockholders") have agreed to enter into a stockholders agreement having a term
of ten years from the Closing Date, unless renewed or extended (the
"Stockholders Agreement"). After giving effect to the Merger, the Cozzi
Stockholders and the MTLM Stockholders together will own 45% of the Company's
issued and outstanding stock (without giving effect to the issuance of Common
Stock issuable upon exercise of warrants and options previously granted by the
Company).
Under the Stockholders Agreement, the Cozzi Stockholders and the MTLM
Stockholders have agreed that each group will be able to nominate one-half of
the total number of directors slated for election at each annual meeting of the
Company, provided that each group must nominate one individual, independent and
unaffiliated from each group or the Company, as part of its slate. See
"-- Proposal Number One." The Stockholders Agreement further requires each group
to vote for the other group's nominees for election to the Board. The parties to
the Stockholders Agreement also have agreed to vote for proposals, if and when
presented by the Company, to amend the Company's organizational documents to
require the approval of at least two-thirds of the Board of Directors to, among
other things: (i) amend the Company's certificate of incorporation or bylaws;
(ii) liquidate or merge the Company; (iii) sell substantially all of the
Company's assets; (iv) elect or remove officers; (v) adopt an annual budget;
(vi) borrow funds, sell assets or make capital expenditures exceeding $5
million; (vii) issue or register the Company's securities; or (viii) declare or
pay any dividends or distributions.
Under the Stockholders Agreement, if any of the Cozzi Stockholders or the
MTLM Stockholders desire to sell their respective shares of Common Stock, the
selling stockholder must generally offer its shares to members of its own
stockholder group, members of the other stockholder group, and the Company, in
that order, before selling to a third party. Also, if either group receives an
offer to buy its shares from a third party, it generally must offer the other
group's members the right to participate in the offer on the same terms and
conditions.
In connection with the Proler acquisition, the former equity owners of
Proler (the "Proler Stockholders") have entered into a two-year stockholders
agreement with T. Benjamin Jennings pursuant to which the parties agreed to vote
their shares of Common Stock in favor of William T. Proler (or, if he is unable
to serve, another individual chosen by the Proler Stockholders) as a Director of
the Company. See "Information About the Company -- Business
Operations -- Completed Acquisitions."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Based on representations, terms and conditions in the Merger Agreement, the
Merger of the Merger Sub with and into Cozzi, and the conversion of shares of
common stock of Cozzi into shares of the Company's Common Stock and rights to
receive a cash payment upon surrender of Cozzi stock certificates will not
result in the Company's recognizing any material gain or loss for federal income
tax purposes.
CONFLICTS OF INTEREST
Pursuant to the Merger Agreement, each of Gerard M. Jacobs and T. Benjamin
Jennings, who are currently officers and directors of the Company, will enter
into employment agreements with the Company at the closing of the Merger. In
addition, pursuant to the Merger Agreement, Albert Cozzi, who was appointed
Chief Operating Officer and Senior Vice President of the Company on September 1,
1997, will enter into an employment agreement with the Company at the closing of
the Merger under which, as additional consideration in connection with the
Merger, he will receive warrants exercisable for 755,172 shares of
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Common Stock at exercise prices below the fair market value of the Common Stock
on the date of the grant. See "-- Employment Agreements" above.
RECOMMENDATION OF THE BOARD: THE BOARD OF DIRECTORS OF THE COMPANY HAS
APPROVED THE MERGER, THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREIN AND RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER,
THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREIN. SEE "MATTERS TO
BE CONSIDERED BY STOCKHOLDERS -- PROPOSAL NUMBER THREE -- BACKGROUND OF AND
REASONS FOR THE MERGER" AND "RISK FACTORS -- CONFLICTS OF INTEREST."
RESOLVED, that the Merger, the Merger Agreement and the transactions
contemplated by the Merger Agreement be and hereby are approved, and that the
Company be and hereby is authorized to complete the Merger and the transactions
contemplated by the Merger Agreement, and to perform all of its obligations
under the Merger Agreement.
Vote Required. The affirmative vote of a majority of the votes cast by
Stockholders present in person or by proxy and eligible to vote at the Annual
Meeting, a quorum being present, is required to adopt the foregoing proposal.
PROPOSAL NUMBER FOUR: TO AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION TO
INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
FROM 40,000,000 TO 80,000,000.
Under the Company's existing Certificate of Incorporation, the Board of
Directors is authorized to issue up to 40,000,000 shares of Common Stock, of
which 16,550,079 million were issued as of the Record Date. Immediately
following the completion of the Merger, a total of 28,050,065 shares of Common
Stock will be outstanding, and 6,877,544 will be reserved for issuance upon
exercise of warrants or options that will vest within sixty days of the Record
Date, leaving only 5,072,391 shares of Common Stock authorized and available for
future issuance.
The Board of Directors believes that the amendment is necessary to allow
the Company sufficient flexibility in making acquisitions and raising additional
capital. The Board of Directors believes that the use of shares of Common Stock
as consideration in an acquisition is beneficial to Stockholders because it
preserves cash and does not in itself result in the Company incurring
indebtedness and may allow the Company to make acquisitions at lower prices than
if the consideration consisted entirely of cash. Any future issuances of Common
Stock would, however, dilute the ownership interest of existing Stockholders
because the Stockholders are not entitled to preemptive rights. If the amendment
is approved, the Company would be authorized to issue 80,000,000 shares of
Common Stock. A copy of the proposed amendment is attached as Annex F to this
Proxy Statement.
In addition to potentially diluting the ownership interest of existing
Stockholders, an increase in the number of authorized shares of Common Stock
may, in conjunction with Section 203 of the Delaware General Corporation Law
(prohibiting certain "business combinations" between a Delaware corporation
whose stock is publicly-traded and an "interested shareholder"), the lack of
cumulative voting rights of Common Stock and certain "Change of Control"
provisions of the Employment Agreements of affiliates of the Company, render
more difficult or discourage a merger, tender offer or proxy contest, the
assumption of control by a holder of a large block of the Company's securities
and the removal of incumbent management, even if such actions would be
beneficial to the interests of existing Stockholders.
RECOMMENDATION OF THE BOARD: The Board recommends that the Stockholders
concur in the following resolution which will be presented for a vote of the
Stockholders at the Annual Meeting:
RESOLVED, that the second sentence of subparagraph (a) of Paragraph 4 of
the Company's Amended and Restated Certificate of Incorporation be and it hereby
is amended by deleting the phrase "Forty Million (40,000,000)" and substituting
in its place the phrase "Eighty Million (80,000,000)."
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Vote Required. The affirmative vote of a majority of the Company's
outstanding shares of Common Stock are required to adopt the foregoing proposal.
PROPOSAL NUMBER FIVE: TO AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION TO
INCREASE THE NUMBER OF AUTHORIZED SHARES OF "BLANK CHECK"
PREFERRED STOCK FROM 2,000,000 TO 4,000,000.
Under the Company's existing Certificate of Incorporation, the Board of
Directors is authorized to issue up to 2,000,000 shares of "blank check"
preferred stock, par value $.01 per share ("Preferred Stock"). The Board of
Directors has designated 36,000 shares of Preferred Stock as Series A
Convertible Preferred Stock, 25,000 shares of which were issued as of the Record
Date. See "-- Proposal Number Eight" below for a description of the terms of the
Series A Convertible Preferred Stock. The Certificate as amended in accordance
with this proposal would authorize the Board of Directors to issue up to
4,000,000 shares of Preferred Stock, an increase of 2,000,000 shares, in one or
more series, with such rights and preferences as determined by the Board of
Directors. Pursuant to this provision, the Board may, without Stockholder
approval, authorize the issuance of preferred stock which ranks senior to the
Common Stock with respect to the payment of dividends and the distribution of
assets upon liquidation and may issue preferred stock with voting and conversion
rights which could adversely affect the voting power of the holders of Common
Stock. The Board of Directors believes that the amendment is necessary to allow
the Company the flexibility to raise additional capital. A copy of the proposed
amendment is attached as Annex G to this Proxy Statement.
In addition to potentially diluting the ownership interest of existing
Stockholders, an increase in the number of authorized shares of "Blank Check"
Preferred Stock may, in conjunction with Section 203 of the Delaware General
Corporation Law (prohibiting certain "business combinations" between a Delaware
corporation whose stock is publicly-traded and an "interested shareholder"), the
lack of cumulative voting rights of Common Stock and certain "Change of Control"
provisions of the Employment Agreements of affiliates of the Company, render
more difficult or discourage a merger, tender offer or proxy contest, the
assumption of control by a holder of a large block of the Company's securities
and the removal of incumbent management, even if such actions would be
beneficial to the interests of existing Stockholders. The authorization of the
Preferred Stock may be used by management of the Company to create voting
impediments or to frustrate persons seeking to effect a merger or otherwise gain
control of the Company. Such use is not currently contemplated by the Company.
RECOMMENDATION OF THE BOARD: The Board recommends that the Stockholders
concur in the following resolution which will be presented for a vote of the
Stockholders at the Annual Meeting.
RESOLVED, that the second sentence of subparagraph (a) of Paragraph 4 of
the Company's Amended and Restated Certificate of Incorporation be and it hereby
is amended by deleting the phrase "Two Million (2,000,000)" and substituting in
its place the phrase "Four Million (4,000,000)."
Vote Required. The affirmative vote of a majority of the Company's
outstanding shares of Common Stock is required to adopt the foregoing proposal.
PROPOSAL NUMBER SIX: TO AMEND THE COMPANY'S 1995 STOCK PLAN FOR EMPLOYEES AND
CONSULTANTS TO INCREASE THE NUMBER OF SHARES OF COMMON
STOCK AUTHORIZED FOR ISSUANCE UNDER THE PLAN FROM
1,300,000 TO 2,600,000.
The 1995 Stock Plan (the "Plan") was initially approved by the Company's
stockholders in March 1995 and was amended on April 9, 1996. The Plan grants the
Board of Directors the authority to grant options to the Company's employees and
consultants to purchase up to 1,300,000 shares of the Company's Common Stock.
The options granted under the Plan may be incentive stock options ("ISOs") or
non-statutory stock options ("NSOs"). A copy of the Plan is attached as Annex H
to this Proxy Statement.
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REASONS FOR INCREASE AND DESCRIPTION OF PLAN
The Board believes that the Plan helps the Company to attract and retain
personnel for positions of substantial responsibility, provides additional
incentive to the Company's employees and consultants and promotes the success of
the Company's business. The Company is seeking to increase the number of shares
of Common Stock issuable under the Plan in order to have a sufficient number of
shares of Common Stock available to grant additional options to current and
future employees, executive officers and consultants. Incentive stock options
may be granted only to employees, including officers of the Company and its
current and future subsidiaries. Nonstatutory stock options may be granted to
employees or consultants of the Company.
Each option granted under the Plan is evidenced by a written agreement
between the Company and the participant. Options granted under the Plan
generally vest in equal increments over a four year period although the Board
has discretion to change the vesting rate or terms of exercise of options
granted in the future. The Plan provides for "cashless" exercise procedures for
each option which must contain an exercise price equal to not less than 100% of
the fair market value of the Common Stock on the date the option is granted,
provided that the exercise price on options granted to participants who own more
than 10% of the Common Stock or the common stock of any parent or subsidiary of
the Company, may not be less than 110% of fair market value on the date of the
grant. In the case of a nonstatutory option granted to any other eligible
person, the per share exercise price is determined by the Board in its
discretion.
The Plan also contains provisions addressing the ability of a participant
to exercise options in the event of termination of employment, death or
disability. If the participant's employment or consulting relationship with the
Company or its subsidiaries is terminated for any reason other than death or
disability, the participant may, but only within such period of time after such
termination as is determined by the Board, not exceeding three months in the
case of an incentive stock option, exercise his or her option to the extent the
option was exercisable at the date of termination. To the extent the participant
was not entitled to exercise the option at the date of termination, or if he or
she does not exercise the option within the time specified above, the option
terminates. If a participant is unable to continue his or her employment or
consulting relationship with the Company or its subsidiaries as a result of his
or her total and permanent disability, the participant may, but only within
twelve months from the date of termination, exercise the option to the extent
the option was exercisable at the date of termination. To the extent the
participant was not entitled to exercise the option at the date of termination,
or if he or she does not exercise the option within the time specified above,
the option terminates. If a participant should die while employed by or
consulting for the Company or its subsidiaries, the option may be exercised at
any time within twelve months of the date of death, but only to the extent the
option was exercisable at the date of death. Any exercise following the death of
a participant may only be effected by the participant's estate or by a person
who acquired the right to exercise the option by bequest or inheritance.
All incentive stock options granted under the Plan expire not later than
ten years after the date of grant. However, options granted to a participant
who, immediately before the grant of such option, owns stock representing more
than 10% of the voting power of all the Company's classes of stock or any
subsidiary of the Company expire not later than five years after the date of
grant unless otherwise provided in the participant's option agreement. Options
granted under the Plan are not transferable other than by will or the laws of
descent and distribution or pursuant to a qualified domestic relations order,
and are exercisable during the participant's lifetime only by the participant.
Finally, the Board may not grant any one individual person an option to purchase
more than 500,000 shares of Common Stock in any one year.
Options granted under the Plan are subject to adjustment to reflect events
such as a stock split or payment of a stock dividend, if these events increase
or decrease the number of outstanding shares of Common Stock without receipt of
consideration by the Company. In the event of a proposed dissolution or
liquidation of the Company, each outstanding option will terminate immediately
prior to the consummation of the proposed action. If the Company merges with or
into another corporation and is not the surviving corporation, or if the Company
sells all or substantially all of its assets, each option granted under the Plan
may be assumed or an equivalent option may be substituted by the successor
corporation or by a parent or
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subsidiary of the successor corporation. The Plan permits the Board, in lieu of
assumption or substitution, to allow the participant immediately to exercise all
outstanding options.
The Board is granted the authority to amend, alter, suspend or discontinue
the Plan at any time. The Board may also accelerate any option or waive any
conditions or restrictions pertaining to an option or shares of stock relating
thereto at any time as well as substitute new options for previously granted
options, including previously granted options and may reduce the exercise price
of any option to the then current fair market value if the fair market value of
the Common Stock covered by such option shall have declined since the date the
option was granted. The Plan will continue in effect until 2005 unless sooner
terminated.
Federal Income Tax Aspects of the Plan. The following is a brief summary
of the federal income tax consequences of transactions under the Plan based on
federal income tax laws in effect on the Record Date. This summary is not
intended to be exhaustive and does not discuss the tax consequences of a
participant's death or provisions of the income tax laws of any municipality,
state or foreign country in which an optionee may reside.
Nonstatutory Options:
General Rules. An optionee will not recognize any taxable income at the
time he or she is granted a nonstatutory option. Upon exercise of the option,
the optionee will generally recognize compensation income for federal tax
purposes measured by the excess, if any, of the then fair market value of the
shares over the exercise price. In certain circumstances, where the shares are
subject to a substantial risk of forfeiture when acquired or where the optionee
is an officer, director or 10% shareholder, the date of taxation may be deferred
unless the optionee files an election with the Internal Revenue Service under
Section 83(b) of the Code.
Withholding. Any compensation income recognized by an optionee who is also
an employee will be treated as wages and will be subject to tax withholding by
the Company out of the current compensation paid to the optionee. If such
current compensation is insufficient to pay the withholding tax, the optionee
will be required to make direct payment to the Company for the tax liability.
Gain or Loss on Sale. Upon a resale of shares issued on the exercise of a
nonstatutory option by the optionee, any difference between the sales price and
the exercise price, to the extent not recognized as ordinary income as described
above, will be treated as capital gain or loss. The Company will be entitled to
a tax deduction in the amount and at the time that the optionee recognizes
ordinary income with respect to shares acquired upon exercise of a nonstatutory
option.
Incentive Stock Options:
General Rules. If an option granted under the Plan is treated as an
incentive stock option under the Code, the optionee will recognize no income
upon grant of the option, and will recognize no income upon exercise of the
option unless the alternative minimum tax rules apply. The Company will not be
allowed a deduction for federal tax purposes in connection with the exercise of
an incentive stock option.
Holding Periods. Upon the sale of the shares at least two years after the
grant of the option and one year after exercise of the option (the "statutory
holding periods"), any gain will be taxed to the optionee as capital gain. If
the statutory holding periods are not satisfied, the optionee will recognize
compensation income equal to the difference between the exercise price and the
lower of: (i) the fair market value of the stock at the date of exercise; or
(ii) the sale price of the stock, and the Company will be entitled to a
deduction in the same amount. Any additional gain or loss recognized on a
disqualifying disposition of the shares will be characterized as capital gain or
loss. A different rule for measuring ordinary income may apply if shares are
purchased by an optionee who is subject to Section 16(b) of the Exchange Act,
and the optionee subsequently disposes of the shares prior to expiration of
statutory holding periods. In the event of a disqualifying disposition, the
Company may be entitled to a deduction in the same amount as the ordinary income
recognized by the optionee. Any gain recognized in excess of the amount treated
as ordinary income will be characterized as capital gain.
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RECOMMENDATION OF THE BOARD: The Board recommends that the Stockholders
concur in the following resolution which will be presented for a vote of the
Stockholders at the Annual Meeting.
RESOLVED, that Paragraph Three of the Company's 1995 Stock Option Plan for
Employees and Consultants be and it hereby is amended by deleting the phrase
"1,300,000 Shares" and substituting in its place the phrase "2,600,000 Shares."
Vote Required. The affirmative vote of a majority of the votes cast by
Stockholders present in person or by proxy and eligible to vote at the Annual
Meeting, a quorum being present, is required to adopt the foregoing resolution.
PROPOSAL NUMBER SEVEN: TO AMEND THE COMPANY'S 1996 DIRECTOR OPTION PLAN TO
INCREASE THE NUMBER OF SHARES AUTHORIZED FOR ISSUANCE
UNDER THE PLAN FROM 100,000 TO 200,000.
Under the Company's 1996 Director Option Plan ("the Director Plan"), each
non-employee director of the Company ("Outside Director") is automatically
granted an option to purchase 10,000 shares of Common Stock on the date of his
or her appointment as an Outside Director plus an annual option, awarded on
January 15 of each year, to purchase 2,500 shares of Common Stock. The Company
is currently authorized to issue up to 100,000 shares of Common Stock under the
Director Plan, which the Board of Directors adopted in January 1996 and which
the stockholders approved on April 9, 1996. A copy of the Director Plan is
attached as Annex I to this Proxy Statement.
REASONS FOR INCREASE
The purposes of the Director Plan are to attract and retain the best
available personnel for service as Outside Directors and to provide additional
incentive to individuals to serve as directors and encourage their continued
service on the Board. The Board is seeking to increase the number of shares of
Common Stock authorized for issuance under the Director Plan in order to have a
sufficient number of shares of Common Stock available for grants under the
Director Plan.
Each option granted under the Director Plan is evidenced by a written
agreement between the Company and the participant. The price to be paid for each
share of Common Stock upon the exercise of an option granted under the Director
Plan is 100% of the fair market value of a share of Common Stock. For so long as
the Common Stock is traded on the Nasdaq National Market, the fair market value
of a share of Common Stock is the closing sales price for such stock (or the
closing bid if no sales were reported) on the last trading day prior to the date
of grant.
Options granted under the Director Plan are fully vested and exercisable at
the time of grant, but may be exercised no later than ten years after the date
of grant. The type of consideration to be paid for the shares of Common Stock
issued upon exercise of an option is determined by the Board and is set forth in
the option agreement. The form of consideration may vary for each option, and
may consist entirely of: (i) cash; (ii) check; (iii) other shares of the
Company's Common Stock; or (iv) delivery of documentation to effect a "cashless"
exercise and sale of shares to pay the exercise price.
The Director Plan also contains provisions addressing the ability of a
participant to exercise options in the event of termination as a Director,
disability or death. If an optionee ceases to serve as a Director, the optionee
may exercise options within twelve months after the date the optionee ceases to
be a Director, provided that in the case of death, the options may be exercised
by the optionee's estate or by a person who acquired the right to exercise the
option by bequest or inheritance. Options granted under the Director Plan may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the optionee, only by the optionee.
Options granted under the Director Plan are subject to adjustments to
reflect events such as stock splits, reverse stock splits, stock dividends,
combinations or reclassifications. In the event of a proposed dissolution or
liquidation of the Company, all outstanding options will terminate immediately
prior to the consummation of the proposed action. In the event of a sale of all
or substantially all of the assets of the Company, or the merger
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of the Company with or into another corporation, each outstanding option may be
assumed or an equivalent option substituted by the successor corporation or a
parent or subsidiary of the successor corporation. If the successor corporation
does not agree to assume the option or to substitute an equivalent option, the
optionees will have the right to exercise outstanding options as to all of the
Common Stock subject to such options, including shares as to which such options
would not otherwise be exercisable.
The Board is granted the authority to amend, alter, suspend or terminate
the Director Plan which will terminate by its terms in January 2006.
Federal Income Tax Aspects of the Director Plan. Options granted under the
Director Plan are non-statutory options. An optionee will not recognize any
taxable income at the time he or she is granted a nonstatutory option. However,
upon its exercise, the optionee will recognize taxable income generally measured
as the excess of the then fair market value of the shares purchased over the
purchase price. Upon resale of such shares by the optionee, any difference
between the sales price and the optionee's purchase price, to the extent not
recognized as taxable income as described above, will be treated as long-term or
short-term capital gain or loss, depending on the holding period. The Company
will be entitled to a tax deduction in the same amount as the ordinary income
recognized by the optionee with respect to shares acquired upon exercise of a
nonstatutory option.
The foregoing is only a summary of the effect of federal income taxation
upon the optionee and the Company with respect to the grant and exercise of
options under the Director Plan, does not purport to be complete, and does not
discuss the tax consequences of the optionee's death or the income tax laws of
any municipality, state or foreign country in which an optionee may reside.
RECOMMENDATION OF THE BOARD: The Board recommends that the Stockholders
concur in the following resolution which will be presented for a vote of the
Stockholders at the Annual Meeting.
RESOLVED, that Paragraph Three of the Company's 1996 Director Option Plan
be and it hereby is amended by deleting the phrase "100,000 Shares" and
substituting in its place the phrase "200,000 Shares."
Vote Required. The affirmative vote of a majority of the votes cast by
Stockholders present in person or by proxy and eligible to vote at the Annual
Meeting, a quorum being present, is required to adopt the foregoing resolution.
PROPOSAL NUMBER EIGHT: APPROVAL OF COMMON STOCK ISSUABLE ON CONVERSION OF
SERIES A AND SERIES B CONVERTIBLE PREFERRED STOCK
THE PROPOSAL
On August 8, 1997, the Company issued 16,000 shares of Series A Convertible
Preferred Stock, par value $.01 per share ("Stated Value" of $1,000 per share)
(the "Series A Preferred Stock"), to Advantage Fund Limited and 5,000 shares of
Series A Preferred Stock to Proprietary Convertible Investment Group, Inc. (the
"Series A Purchasers") for an aggregate purchase price of $21,000,000 pursuant
to a Securities Purchase Agreement dated as of August 8, 1997 (the "Series A
Purchase Agreement"). Between August 21, 1997 and September 8, 1997, the Company
issued an additional 4,000 shares of Series A Convertible Preferred Stock to
several individuals including the sales of 2,500 shares to Gerard M. Jacobs, T.
Benjamin Jennings and Donald F. Moorehead, Jr., directors of the Company. On
November 20, 1997, the Company entered into a Securities Purchase Agreement (the
"Series B Purchase Agreement") pursuant to which the Company agreed to issue an
aggregate of 20,000 shares of Series B Convertible Preferred Stock, par value
$.01 per share ("Stated Value" of $1,000 per share) (the "Series B Preferred
Stock"), to Proprietary Convertible Investment Group, Inc. and Capital Ventures
International (the "Series B Purchasers") for an aggregate purchase price of
$20,000,000. The Company is authorized to issue up to an aggregate of 36,000
shares of Series A Preferred Stock and 23,000 shares of Series B Preferred
Stock. See "Description of Capital Stock."
Conversion of the Series A and Series B Preferred Stock into Common Stock
may require the Company to issue a number of shares of Common Stock that could
equal or exceed 20% of the number of shares of
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Common Stock outstanding before the issuance of Common Stock. As a result, Rule
4460(i)(1) of the National Association of Securities Dealers, Inc. Conduct Rules
requires that the Company obtain Stockholder approval before issuing the Common
Stock underlying the Series A and Series B Preferred Stock. The Certificates of
Designations, Preferences and Rights setting forth the terms of each Series of
Preferred Stock provide that the applicable Series of Preferred Stock cannot be
converted into Common Stock until the Stockholders approve issuance of the
Common Stock underlying such Series of Preferred Stock. Stockholder approval of
the resolution relating to the issuance of the Series A and Series B Preferred
Stock is referred to as the "Stockholder Approval."
TERMS OF THE SERIES A PREFERRED STOCK
The Series A Preferred Stock has a "Liquidation Preference" equal to $1,000
per share plus any accrued and unpaid dividends. Upon the liquidation,
dissolution or winding up of the Company, holders of the Series A and Series B
Preferred Stock are entitled to receive payment of the Liquidation Preference on
a pro rata basis based on the Liquidation Preference of the Preferred Stock held
by each holder before any payment is made to holders of Common Stock or any
stock of the Company junior to the Series A and Series B Preferred Stock.
Dividends on the Series A Preferred Stock accrue, whether or not declared
by the Board of Directors: (i) before Stockholder Approval is obtained, at an
annual rate of 9% of the Stated Value of each outstanding share of Series A
Preferred Stock; and (ii) after Stockholder Approval is obtained, at an annual
rate of 6% of the Stated Value of each outstanding share of Series A Preferred
Stock. Dividends are payable in cash or, at the Company's option, and upon
satisfaction of certain conditions, in additional shares of Series A Preferred
Stock. If Stockholder Approval is not obtained by December 8, 1997, the Company
will be obligated to redeem the shares of Series A Preferred Stock at a
redemption price equal to the Stated Value plus accrued and unpaid dividends
thereon, together with interest at the rate of 15% per annum on the Stated Value
from August 8, 1997 to the redemption date. However, as of October 16, 1997, all
of the holders of the 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 are not approved by the
Stockholders by December 8, 1997. See "-- Proposal Number Eleven." If
Stockholder Approval is not obtained by December 8, 1997, the dividend rate will
increase to an annual rate of 13% of the Stated Value of each outstanding share
of Series A Preferred Stock.
If Stockholder Approval is obtained, the holders of Series A Preferred
Stock will be able to convert the shares of Series A Preferred Stock into Common
Stock at a price equal to the lower of: (i) $18.30 (to be adjusted to reflect
stock splits, stock dividends or similar events); or (ii) 85% of the average
closing bid price for the Common Stock for the five trading days prior to the
date of the conversion notice. Since the conversion price for the Series A
Preferred Stock may vary depending on when the holder delivers a conversion
notice, it is not possible to specify the maximum number of shares of Common
Stock that the Company might be required to issue upon conversion of the Series
A Preferred Stock. In addition, if at any time before the earlier to occur of
August 8, 1998 or 90 days after the Registration Statement (defined below) is
declared effective, the Company issues convertible stock with a lower conversion
price than the then-applicable conversion price of the Series A Preferred Stock,
or with limitations on conversion rights that are proportionately less
restrictive than those imposed on the holders of the Series A Preferred Stock,
then the conversion price of the Series A Preferred Stock will be adjusted, or
the limitations on conversion rights will be modified, to be consistent with
those of the additional convertible stock.
Subject to Stockholder Approval, the holders of Series A Preferred Stock
have the right to convert the Series A Preferred Stock at any time after the
earlier to occur of November 8, 1997 or the effectiveness of the Registration
Statement (defined below). If the conversion of the Series A Preferred Stock
would result in the holders receiving more than 2,500,000 Shares of Common
Stock, then the Company may redeem any shares of Series A Preferred Stock in
excess of 2,500,000 shares at a redemption price equal to: (i) 117% of the
Stated Value of the shares; plus (ii) any accrued and unpaid dividends on such
shares. Any shares of Series A Preferred Stock which have not been converted on
or before August 8, 2000 (the "Maturity Date") will automatically be converted
to shares of Common Stock at the Maturity Date. However, if, at the Maturity
Date any of the Mandatory Conversion Conditions is not satisfied, then the
Company will be required to pay to
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the holders of Series A Preferred Stock, in cash, an amount equal to the
Liquidation Preference for the shares of Series A Preferred Stock which they
own. "Mandatory Conversion Conditions" include: (i) the market value of the
outstanding shares of Common Stock (other than those issuable upon conversion of
the Series A Preferred Stock) is greater than $75,000,000; (ii) the Common Stock
had an average daily trading volume of more than 30,000 shares during the
six-month period ending on the 15th day of the calendar month immediately prior
to the calendar month in which the Maturity Date occurs; (iii) the Common Stock
is designated for quotation on the Nasdaq National Market, the New York Stock
Exchange or another national securities exchange; and (iv) a registration
statement covering the resale of all of the shares of Common Stock issuable upon
conversion of the Series A Preferred Stock shall be effective, or such resale
may be made under Rule 144(k) under the Securities Act. The Mandatory Conversion
Conditions identified in (i) through (iii) above are referred to as the
"Specified Mandatory Conversion Conditions."
As of October 24, 1997, all of the holders of the Series A Preferred Stock
executed a Waiver of Mandatory Conversion Conditions, Waiver of Redemption
Event, and Consent to Amendment. Pursuant to this waiver, the holders waived any
rights to avoid a conversion of such holder's Series A Preferred Stock into
Common Stock at the Maturity Date by reason of the Company's failure to satisfy
any of the Specified Mandatory Conversion Conditions. In addition, the holders
waived any rights to require the Company to redeem their Series A Preferred
Stock in the event the Common Stock is no longer designated for quotation on the
Nasdaq National Market or another national securities exchange (a "Listed Stock
Event"). If the Common Stock fails to be designated for quotation on the Nasdaq
National Market or listed on the New York Stock Exchange or other national
securities exchange (the "Listed Stock Condition") or there is an occurrence of
the Listed Stock Event, the holders, at their option, may convert their shares
of Series A Preferred Stock into the number of shares of Common Stock obtained
by dividing the Stated Value of the Series A Preferred Stock to be converted by
the Delisting Price as of the conversion date. The "Delisting Price" would be
the lowest traded price of the Common Stock during the time when the Common
Stock is not listed on the Nasdaq National Market or listed on the New York
Stock Exchange or other national securities exchange. See "-- Proposal Number
Eleven."
The Series A Preferred Stock does not grant holders voting rights except
that, so long as shares of Series A Preferred Stock are outstanding, without the
prior approval of the holders of at least a majority of all shares of the Series
A Preferred Stock outstanding at the time, the Company may not: (i) increase the
number of shares of Series A Preferred Stock which the Company is authorized to
issue; (ii) alter or change the rights, preferences or privileges of the Series
A Preferred Stock or any other capital stock of the Company so as to adversely
affect the Series A Preferred Stock; or (iii) create any new class or series of
capital stock having a preference over the Series A Preferred Stock as to
distribution of assets upon liquidation, dissolution or winding up of the
Company. Approval of holders of the Series A Preferred Stock as to actions
described in (ii) and (iii) above will not be required if the average closing
price for the Common Stock on the five trading days immediately preceding the
effective date of such a change is equal to or exceeds $27.45.
Pursuant to a Registration Rights Agreement by and among the Company and
the purchasers of the Series A Preferred Stock (the "Series A Registration
Rights Agreement"), the Company has agreed to file a registration statement (the
"Registration Statement") under the Securities Act covering shares of Common
Stock issuable upon conversion of Series A Preferred Stock, within 30 days after
Stockholder Approval is obtained, subject to extension for an aggregate of 30
days in certain circumstances (the "Filing Deadline"). If the Company has not
filed the Registration Statement by the Filing Deadline 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
Series A Preferred Stock.
The Company will be obligated to redeem the shares of Series A Preferred
Stock at a redemption price equal to 120% of the Liquidation Preference if any
of the following occur: (i) the Registration Statement is not declared effective
within 120 days after Stockholder Approval is obtained 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
Series A Registration Rights Agreement, and such lapse or unavailability
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continues for a period of ten business days; (ii) the Company breaches in any
material respect the Series A Purchase Agreement, the Series A Registration
Rights Agreement or certain other documents defined in the Series A Purchase
Agreement and such breach continues for ten business days after written notice;
or (iii) the Company sells all or substantially all of its assets, engages in a
transaction or series of related transactions 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.
TERMS OF THE SERIES B PREFERRED STOCK
The Series B Preferred Stock has a "Liquidation Preference" equal to $1,000
per share plus any accrued and unpaid dividends. Upon the liquidation,
dissolution or winding up of the Company, holders of the Series A and Series B
Preferred Stock are entitled to receive payment of the Liquidation Preference on
a pro rata basis based on the Liquidation Preference of the Preferred Stock held
by each holder before any payment is made to holders of Common Stock or any
stock of the Company junior to the Series A and Series B Preferred Stock.
Dividends on the Series B Preferred Stock will accrue, whether or not
declared by the Board of Directors, at an annual rate of 4.5% of the Stated
Value of each outstanding share of Series B Preferred Stock. Dividends are
payable in cash or, at the Company's option, and upon satisfaction of certain
conditions, in additional shares of Series B Preferred Stock.
If Stockholder Approval is obtained, the holders of Series B Preferred
Stock will be able to convert the shares of Series B Preferred Stock into Common
Stock at a price equal to the lowest of: (i) 120% of the closing bid price for
the Common Stock on the date of purchase of the Series B Preferred Stock (to be
adjusted to reflect stock splits, stock dividends or similar events) (the "Fixed
Conversion Price"); (ii) 92.5% of the average closing bid price for the Common
Stock for the five trading days prior to the date of the conversion notice; or
(iii) if applicable, the lowest traded price of the Common Stock during the time
when the Common Stock is not listed on the Nasdaq National Market or listed on
the New York Stock Exchange or other national securities exchange. Since the
conversion price for the Series B Preferred Stock may vary depending on when the
holder delivers a conversion notice, it is not possible to specify the maximum
number of shares of Common Stock that the Company might be required to issue
upon conversion of the Series B Preferred Stock. In addition, if at any time
before the earlier to occur of one year after the date of issuance of the Series
B Preferred Stock or 90 days after the Registration Statement (defined below) is
declared effective, the Company issues convertible stock with a lower conversion
price than the then-applicable conversion price of the Series B Preferred Stock,
or with limitations on conversion rights that are proportionately less
restrictive than those imposed on the holders of the Series B Preferred Stock,
then the conversion price of the Series B Preferred Stock will be adjusted, or
the limitations on conversion rights will be modified, to be consistent with
those of the additional convertible stock.
Subject to Stockholder Approval, the holders of Series B Preferred Stock
will have the right to convert the Series B Preferred Stock at any time after
the earlier to occur of November 8, 1997 or the effectiveness of the
Registration Statement (defined below). If the conversion of the Series B
Preferred Stock would result in the holders receiving more than 2,000,000 Shares
of Common Stock, then the Company may redeem any shares of Series B Preferred
Stock in excess of 2,000,000 shares at a redemption price equal to: (i) 117% of
the Stated Value of the shares; plus (ii) any accrued and unpaid dividends on
such shares. Any shares of Series B Preferred Stock which have not been
converted on or before three years after the date the Series B Preferred Stock
was issued (the "Maturity Date") will automatically be converted to shares of
Common Stock at the Maturity Date. However, if, at the Maturity Date, a
registration statement covering the resale of all of the shares of Common Stock
issuable upon conversion of the Series B Preferred Stock is not effective, and
such resale may not be made under Rule 144(k) under the Securities Act, then the
Company will be required to pay to the holders of Series B Preferred Stock, in
cash, an amount equal to the Liquidation Preference for the shares of Series B
Preferred Stock which they own.
The Series B Preferred Stock does not grant holders voting rights except
that, so long as shares of Series B Preferred Stock are outstanding, without the
prior approval of the holders of at least a majority of all
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shares of the Series B Preferred Stock outstanding at the time, the Company may
not: (i) increase the number of shares of Series B Preferred Stock which the
Company is authorized to issue; (ii) alter or change the rights, preferences or
privileges of the Series B Preferred Stock or any other capital stock of the
Company so as to adversely affect the Series B Preferred Stock; or (iii) create
any new class or series of capital stock having a preference over the Series B
Preferred Stock as to distribution of assets upon liquidation, dissolution or
winding up of the Company. Approval of holders of the Series B Preferred Stock
as to actions described in (ii) and (iii) above will not be required if the
average closing price for the Common Stock on the five trading days immediately
preceding the effective date of such a change is equal to or exceeds 150% of the
Fixed Conversion Price.
Pursuant to a Registration Rights Agreement by and among the Company and
the purchasers of the Series B Preferred Stock (the "Series B Registration
Rights Agreement"), the Company has agreed to file a registration statement (the
"Registration Statement") under the Securities Act covering shares of Common
Stock issuable upon conversion of Series B Preferred Stock, within 30 days after
Stockholder Approval is obtained, subject to extension for an aggregate of 30
days in certain circumstances (the "Filing Deadline"). If the Company has not
filed the Registration Statement by the Filing Deadline 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
B Preferred Stock a fee of $400,000 per month, equal to 2.0% of the Stated Value
of the Series B Preferred Stock, in cash or in the form of additional shares of
Series B Preferred Stock.
The Company will be obligated to redeem the shares of Series B Preferred
Stock at a redemption price equal to 120% of the Liquidation Preference if any
of the following occur: (i) the Registration Statement is not declared effective
within 120 days after Stockholder Approval is obtained 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
Series B Registration Rights Agreement, and such lapse or unavailability
continues for a period of ten business days; (ii) the Company breaches in any
material respect the Series B Purchase Agreement, the Series B Registration
Rights Agreement or certain other documents defined in the Series B Purchase
Agreement and such breach continues for ten business days after written notice;
or (iii) the Company sells all or substantially all of its assets, engages in a
transaction or series of related transactions 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.
RECOMMENDATION OF THE BOARD: The Board of Directors of the Company
recommends that the Stockholders vote for approval of the issuance of Common
Stock upon conversion of the Series A Convertible Preferred Stock and the Series
B Convertible Preferred Stock.
RESOLVED, that the Company be and hereby is authorized to issue the number
of shares of Common Stock required to effect the conversion of the Series A
Convertible Preferred Stock and the Series B Convertible Preferred Stock, and
the Company's executive officers and any one of them, be and hereby are
authorized to execute, deliver and cause the Company to perform any and all
obligations necessary to effect this resolution and the issuance of the shares
of Common Stock underlying the Series A Convertible Preferred Stock and the
Series B Convertible Preferred Stock.
Vote Required. Approval of Proposal Number Eight will require the
affirmative vote of the holders of a majority of shares of Common Stock present
or represented by proxy and entitled to vote at the Annual Meeting, a quorum
being present.
PROPOSAL NUMBER NINE: RATIFICATION AND AUTHORIZATION OF THE ISSUANCE OF COMMON
STOCK PREVIOUSLY ISSUED OR ISSUABLE IN PRIVATE PLACEMENTS
BY THE COMPANY TO, AMONG OTHERS, OFFICERS, DIRECTORS AND
AFFILIATES OF THE COMPANY
The Company is seeking ratification and authorization by Stockholders of
the issuance of shares of Common Stock previously issued by the Company in
various private placements to, among others, officers,
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directors and affiliates of the Company or which are issuable on the exercise of
warrants or options to, among others, officers, directors and affiliates of the
Company. Specifically: (i) in connection with the acquisition of Proler, the
Company issued 1,750,000 shares of Common Stock and warrants to purchase 375,000
shares of Common Stock at an exercise price of $6.00 per share, including
warrants to purchase 159,375 shares issued to William T. Proler, a Director of
the Company; (ii) in connection with the acquisition of Isaac, the Company
issued 1,942,857 shares of Common Stock and warrants to purchase 826,923 shares
of Common Stock at exercise prices ranging from $10.80 to $13.00 per share,
including warrants to purchase 826,923 shares issued to George A. Isaac, III, a
Director of the Company; (iii) in connection with the acquisition of Reserve,
the Company issued warrants to purchase 1,400,000 shares of Common Stock at
exercise prices ranging from $3.50 to $4.00 per share subject to certain
adjustments (including warrants to purchase 840,000 shares issued to Paul D.
Joseph, a Director of the Company) and a $1.541 million promissory note
convertible into 171,295 shares of Common Stock at the election of the holder of
the note; (iv) the Company has issued warrants to purchase 175,000 shares of
Common Stock at an exercise price of $9.90 per share to certain key employees of
Reserve; (v) in connection with the acquisition of HouTex, the Company issued
657,482 shares of Common Stock and warrants to purchase 430,000 of Common Stock
at an exercise price of $4.00 per share, including warrants to purchase 87,000
shares issued to Mike Melnik, a Director of the Company; and (vi) in connection
with the acquisition of MacLeod, the Company issued 885,000 shares of Common
Stock and warrants to purchase 175,000 shares of Common Stock at exercise prices
ranging from $3.96 to $4.75 per share, including warrants to purchase 175,000
shares issued to Ian MacLeod, a Director of the Company. See "Information about
the Company -- Business Operations."
To facilitate a loan to the Company from a commercial bank, on January 7,
1997, Gerard M. Jacobs, T. Benjamin Jennings, Donald F. Moorehead, Jr., George
O. Moorehead, Harold Rubenstein and Raymond F. Zack, each of whom is or was a
Director at the time of issuance, provided personal guarantees to the bank. In
consideration of the guarantees, the Company issued warrants to these
individuals (the "Guaranty Warrants") to purchase an aggregate of 500,000 shares
of Common Stock at $4.00 per share (subject to certain restrictions). The
Guaranty Warrants expire on or about January 7, 2002. See "Certain Relationships
and Related Transactions."
In connection with the Merger, the Company anticipates entering into
employment agreements with the Cozzi Shareholders and Messrs. Jacobs and
Jennings. See "-- Proposal Number Three." In connection with their employment
agreements, these individuals will receive warrants (the "Cozzi Warrants") to
purchase an aggregate of 3,000,000 shares of Common Stock, exercisable for a
period of five years from the Effective Date. Of the warrants issued to each of
the Cozzi Shareholders, one-half will have an exercise price of $5.91 per share,
and one-half will have an exercise price equal to 75% of the last sales price of
a share of Common Stock on the day before the Effective Date. Of the warrants
issued to Messrs. Jacobs and Jennings, one-half will have an exercise price of
$5.91 per share, and one-half will have an exercise price equal to the lesser of
$12.00 or 75% of the last sales price of a share of Common Stock on the day
before the Effective Date.
The Company has agreed to issue to Daniel B. Burgess, an Executive Vice
President of the Company, upon completion of the Merger, warrants to purchase
30,000 shares of Common Stock at an exercise price of $4.00 per share. The
Company also has agreed to issue to Xavier Hermosillo, the Company's Secretary:
(i) upon the completion of the Merger, warrants to purchase 25,000 shares of
Common Stock at an exercise price of $5.00 per share; and (ii) as a finder's fee
in connection with the Superior acquisition, and conditioned upon the closing of
the Superior acquisition, warrants to purchase 20,000 shares of Common Stock at
an exercise price of $15.00 per share.
The Company has agreed to issue Common Stock and warrants and options to
purchase Common Stock in connection with the Potential Acquisitions, as
described below. For additional information about the Potential Acquisitions,
see "Information about the Company -- Business Operations." See also "Risk
Factors -- Inability to Complete Potential Acquisitions."
In connection with the acquisition of Superior, the Company anticipates:
(i) issuing 1,080,000 shares of Common Stock; and (ii) entering into five-year
employment agreements with two individuals pursuant to which these individuals
collectively could earn the right to receive options to purchase a maximum of
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1,000,000 shares of Common Stock. The number of options to be awarded would
depend on Superior's annual after-tax net income, and the exercise price would
be the Common Stock's trading price when Superior's annual financial statements
are accepted by the Company's chief financial officer.
In connection with the acquisition of Goldin, the Company anticipates: (i)
issuing 112,500 shares of Common Stock; and (ii) entering into eighteen-month
employment agreements with two individuals pursuant to which these individuals
collectively would be entitled to receive warrants to purchase an aggregate of
150,000 shares of Common Stock.
In connection with the acquisition of HCS, the Company anticipates issuing
310,345 shares of Common Stock, subject to adjustment depending on the trading
price of the Common Stock at the time the HCS acquisition is completed.
In connection with the acquisition of the interests in Salt River not owned
by Cozzi, the Company anticipates issuing 100,000 shares of Common Stock. In
connection with the acquisition of the interests in PerlCo not owned by Cozzi,
the Company anticipates: (i) issuing 789,740 shares of Common Stock (subject to
adjustment based on PerlCo's inventory levels and net worth at the closing of
the acquisition); and (ii) entering into employment agreements with three
individuals pursuant to which the Company would be required to issue warrants to
purchase an aggregate of 125,000 shares at an exercise price equal to 130% of
the closing price of Common Stock the day before the closing of the PerlCo
acquisition.
In connection with the acquisition of Aerospace, the Company will be
required to issue approximately 284,091 shares of Common Stock, which is equal
to $6,250,000 divided by $22, the closing price of the Common Stock on the day
the letter of intent was signed. The purchase price, including the number of
shares of Common Stock to be issued, will be adjusted to reflect changes in the
net value of the assets of Aerospace between August 31, 1997 and the closing
date of the acquisition.
In connection with the acquisition of Atlas, the Company anticipates: (i)
issuing 22,000 shares of Common Stock; and (ii) entering into a five-year
employment agreement pursuant to which a key employee of Atlas would be entitled
to receive options to purchase 25,000 shares of Common Stock at an exercise
price equal to the closing price of the Common Stock on the day before the
closing of the Atlas acquisition.
In connection with the acquisition of Yonack Iron, the Company anticipates:
(i) issuing 444,444 shares of Common Stock (subject to adjustment if the closing
price of the Common stock on the day before the closing is less than $22.00 or
more than $26.50); and (ii) entering into five-year employment agreements with
two of Yonack Iron's key employees pursuant to which these individuals
collectively would be entitled to receive warrants to purchase an aggregate of
80,000 shares of Common Stock at an exercise price equal to the closing price of
the Common Stock on the day before the closing of the acquisition. In connection
with the acquisition of Yonack Services, the Company anticipates issuing 17,500
shares of Common Stock.
In connection with the acquisition of Gold, the Company anticipates: (i)
issuing 167,000 shares of Common Stock; (ii) issuing options to purchase
$500,000 worth of Common Stock (as determined by the trading price of the Common
Stock on the day before closing); and (iii) entering into employment agreements
with two individuals pursuant to which the Company would be required to issue
warrants to purchase an aggregate of 60,000 shares of Common Stock at an
exercise price equal to the closing price of Common Stock the day before the
closing of the Gold acquisition.
In connection with the acquisition of Spectrum, the Company anticipates
issuing 20,000 shares of Common Stock.
At various times from April 29, 1997 through June 19, 1997, the Company
sold an aggregate of 2,025,000 shares of Common Stock at $7.25 per share to
various individuals in a private placement exempt from registration under
federal or state securities law. The proceeds were used to fund acquisition
related expenses and to repay certain short-term notes. The purchase price of
the shares issued in this placement was less than the market value of the Common
Stock at the time of issuance, which the Board of Directors believes was
reasonable in recognition of the transfer restrictions placed on these shares.
The purchasers in this placement included five individuals who were directors of
the Company at the time of issuance: Messrs. Jacobs, Jennings,
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and Rubenstein as well as Donald F. and George O. Moorehead. These individuals
collectively purchased 260,000 shares. Mr. Merlau, who is currently a Director,
purchased 137,931 shares of common stock in the private placement.
On August 4, 1997, the Board of Directors authorized the Company to
purchase the real estate on which the HouTex operations are conducted from a
corporation owned in part by Mike Melnik, currently a Director of the Company.
Subject to negotiation of definitive agreements and certain other conditions,
the Company intends to purchase this parcel for 225,000 shares of Common Stock.
The Company has agreed in principle to enter into a Stock Warrant
Settlement Agreement pursuant to which the Company will issue to George O.
Moorehead, a Director and Executive Vice President of the Company, warrants to
purchase 200,000 shares of Common Stock at $12.00 per share, exercisable for a
period of five years, such issuance to be triggered by the Company issuing
certain warrants to Messrs. Jacobs and Jennings. See "Matters to be Considered
by Stockholders -- Proposal Number One -- Employment Agreements."
From time to time the Board of Directors deems it advisable to issue
warrants or options to purchase shares of Common Stock to directors, officers,
and third parties at exercise prices below the fair market value of the Common
Stock on the date of the grants. The ability to grant such warrants or options
helps the Company to attract and retain personnel for positions of substantial
responsibility, provides additional incentive to the Company's employees and
consultants and promotes the success of the Company's business. The Board of
Directors is seeking Stockholder approval to issue to officers, directors and
third parties warrants or options to acquire up to 500,000 shares of Common
Stock, at exercise prices that may be less than the fair market value of the
Common Stock on the date of the grant, with such other terms, conditions,
vesting requirements and other features as the Board of Directors may determine,
in its sole discretion.
The sum of the shares of Common Stock: (i) issued or issuable in connection
with the Proler, Isaac, Reserve, HouTex and MacLeod acquisitions, including
those issuable on exercise of warrants; (ii) issuable upon exercise of warrants
issued to key employees of Reserve and Isaac; (iii) issuable upon exercise of
the Guaranty Warrants; (iv) issuable upon exercise of the Cozzi Warrants; (v)
issued in connection with the private placement completed in June 1997; (vi)
issuable in connection with the purchase of the HouTex real state; (vii)
issuable in connection with the Potential Acquisitions, including those issuable
on exercise of warrants and options; and (viii) issuable upon the exercise of
warrants which the Company has agreed in principle to issue to George Moorehead,
and upon the exercise of other warrants or options approved by the Board of
Directors in their sole discretion, aggregated 19,990,332 shares of Common Stock
(subject to increase in the case of HCS, PerlCo, Aerospace, Salt River,
Superior, Gold and Yonack Iron).
Under the rules governing issuers such as the Company whose common stock is
included for quotation on the Nasdaq, certain issuances of common stock require
stockholder approval as a condition to Nasdaq approving the listing or inclusion
of such shares in the Nasdaq system. These include issuances: (i) in connection
with the acquisition of the stock or assets of another company if the common
stock has or will have upon issuance voting power equal to or in excess of 20%
of the voting power outstanding before such issuance, or the number of shares of
common stock to be issued is or will equal or exceed 20% of the number of shares
of common stock outstanding before such issuance; (ii) issuances at a price less
than the greater of book or market value and which equals 20% or more of the
outstanding common stock; or (iii) which may result in officers or directors of
the Company acquiring the greater of 1% of the number of outstanding shares of
the Company or 25,000 shares. In certain cases, the Nasdaq may also view
individual issuances which do not exceed the thresholds set forth herein as
"related issuances" if they exceed the thresholds in the aggregate, particularly
if the proceeds of an issuance are utilized to fund consideration due to the
selling holders in the case of an acquisition or to repay indebtedness incurred
in connection with an acquisition. Failure to secure stockholder approval for
any issuance requiring such approval could result in the removal of the entity's
shares from the Nasdaq system. Although the Company does not believe that the
issuances described in this section require approval of the Stockholders, the
Board believes that ratification of the issuances is in the Company's best
interest.
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RECOMMENDATION OF THE BOARD: The Board recommends that the Stockholders
concur in the following resolution which will be presented for a vote of the
Stockholders at the Annual Meeting:
RESOLVED, that the issuance by the Company of: (i) 1,750,000 shares of
Common Stock and 375,000 shares of Common Stock upon exercise of warrants issued
in connection with the acquisition of Proler; (ii) 1,942,857 shares of Common
Stock and 826,923 shares of Common Stock upon exercise of warrants issued in
connection with the acquisition of Isaac; (iii) 1,571,296 shares of Common Stock
upon exercise of warrants or a convertible promissory note in connection with
the Reserve acquisition; (iv) 175,000 shares of Common Stock upon exercise of
warrants held by certain key employees of Reserve; (v) 657,482 shares of Common
Stock and 430,000 shares of Common Stock upon exercise of warrants issued in
connection with the acquisition of HouTex; (vi) 885,000 shares of Common Stock
and 175,000 shares of Common Stock upon exercise of warrants issued in
connection with the acquisition of MacLeod; (vii) 500,000 shares of Common Stock
upon exercise of the Guaranty Warrants; (viii) 1,500,000 shares of Common Stock
upon exercise of the Cozzi Warrants; (ix) 75,000 shares of Common Stock upon
exercise of warrants issued to Messrs. Burgess and Hermosillo; (x) 2,025,000
shares of Common Stock in the private placement completed in June 1997; (xi) up
to 14,847,605 shares of Common Stock and 4,442,727 shares of Common Stock upon
exercise of warrants or options issued in connection with the Potential
Acquisitions (subject to increase in the case of HCS, PerlCo, Aerospace, Salt
River, Superior, Gold and Yonack Iron, and subject to reallocation or adjustment
among the Potential Acquisitions); (xii) 225,000 shares of Common Stock issuable
in connection with the purchase of the HouTex real estate are hereby ratified,
confirmed and approved in all respects; (xiii) 200,000 shares of Common Stock
issuable upon exercise of warrants which the Company has agreed in principle to
issue to George Moorehead; and (ix) 500,000 shares of Common Stock issuable upon
exercise of warrants or options approved by the Board of Directors in their sole
discretion.
Vote Required. The affirmative vote of the majority of the votes cast by
Stockholders present in person or by proxy and eligible to vote at the Annual
Meeting, a quorum being present, is required to adopt the foregoing resolution.
PROPOSAL NUMBER TEN: TO AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION TO
ELIMINATE CUMULATIVE VOTING
The Board has approved, subject to Stockholder approval, adoption of an
amendment to the Company's Certificate of Incorporation to eliminate cumulative
voting in elections of directors. Currently, in all elections of directors, each
holder of shares of Common Stock is entitled to cast the number of votes equal
to the number of shares owned by such holder multiplied by the number of
individuals slated for election. The holder may cast all of his or her votes for
a single candidate or may distribute them among any two or more candidates in
such proportions as he or she may desire.
If the proposal to eliminate cumulative voting is adopted, then effective
with elections occurring after the 1997 Annual Meeting, a holder or holders of
shares representing a majority of the votes entitled to be cast in an election
of directors for the Company will be able to elect all individuals standing for
election.
The absence of cumulative voting could have the effect of preventing
representation of minority stockholders on the Board. In addition, the
elimination of cumulative voting may, under certain circumstances, discourage or
render more difficult a merger, tender offer proxy contest or acquisition of
large blocks of the Company's shares by persons who would not make such
acquisition without assurance of the ability to place a representative on the
Board; deter or delay the assumption of control by a holder of a large block of
the Company's shares; or render more difficult the replacement of incumbent
directors and management.
The Board believes, however, that, in general, and especially in
publicly-held corporations, each director should represent the interests of all
stockholders rather than the interests of a special constituency, and the
presence on the Board of one or more directors representing such a constituency
could disrupt and impair the efficient management of the Company. The Board
believes that eliminating cumulative voting will best ensure that the Board will
act for the benefit of all holders. Accordingly, the Board believes that it is
in the best interests of the Company and all of its stockholders to eliminate
cumulative voting.
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RECOMMENDATION OF THE BOARD: The Board recommends that the Stockholders
concur in the following resolution which will be presented for a vote of the
Stockholders at the Annual Meeting.
RESOLVED, that Article Ten of the Company's Amended and Restated
Certificate of Incorporation be and it hereby is deleted in its entirety and
replaced by the following: "In voting for the election of directors of the
corporation, holders of stock shall not have the right to accumulate their
votes."
Vote Required. The affirmative vote of a majority of the Company's
outstanding shares of Common Stock is required to adopt the foregoing proposal.
PROPOSAL NUMBER ELEVEN: TO AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION BY
AMENDING THE SERIES A PREFERRED STOCK CERTIFICATE OF
DESIGNATIONS
The Company is authorized to issue up to an aggregate of 36,000 shares of
Series A Convertible Preferred Stock, 25,000 shares of which were issued and
outstanding as of the Record Date. For a description of the terms of the Series
A Preferred Stock, see "-- Proposal Number Eight" and "Description of Capital
Stock."
The Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock (the "Series A Certificate") entitles the holders of
the Series A Preferred Stock to require the Company to redeem their shares of
Series A Preferred Stock under certain circumstances. As of October 16, 1997,
all of the holders of the 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 are not approved
by the Stockholders by December 8, 1997. In addition, as of October 24, 1997,
all of the holders of the Series A Preferred Stock executed a Waiver of
Mandatory Conversion Conditions, Waiver of Redemption Event, and Consent to
Amendment. Pursuant to this waiver, the holders waived any rights to avoid a
conversion of the Series A Preferred Stock into Common Stock at the Maturity
Date of August 8, 2000 by reason of the Company's failure to satisfy any of the
Specified Mandatory Conversion Conditions. In addition, the holders waived any
rights to require the Company to redeem their Series A Preferred Stock in the
event the Common Stock is no longer designated for quotation on the Nasdaq
National Market or another national securities exchange. See "-- Proposal Number
Eight." A copy of the proposed amendment is attached as Annex J to this Proxy
Statement.
The Board has approved, subject to Stockholder approval, adoption of an
amendment to the Series A Certificate to reflect the waivers described in the
foregoing paragraph. As of October 24, 1997, all of the holders of all of the
outstanding shares of the Series A Preferred Stock consented to the amendment to
the Series A Certificate described in this Proposal Number Eleven.
RECOMMENDATION OF THE BOARD: The Board recommends that the Stockholders
approve the following resolution which will be presented for a vote of the
Stockholders at the Annual Meeting.
RESOLVED, that the Certificate of Designations, Preferences and Rights of
Series A Convertible Preferred Stock be and it hereby is amended by deleting in
their entirety Sections 4(g)(ii)(1), 4(g)(ii)(2), 4(g)(ii)(3), 6(d)(v) and
6(d)(vii).
Vote Required. The affirmative vote of a majority of the Company's
outstanding shares of Common Stock and Series A Preferred Stock is required to
adopt the foregoing proposal. As of October 24, 1997, the holders of all of the
outstanding shares of the Series A Preferred Stock approved the foregoing
proposal.
\
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of November 14, 1997 by: (i) each
person who is known by the Company to own more than 5% of the Company's Common
Stock; (ii) the directors, the Nominees, the chief executive officer and each of
the executive officers of the Company named in the Summary Compensation Table;
and (iii) all current officers and directors as a group. Share amounts and
percentages shown for each person or entity are adjusted to give effect to
shares of the Company's Common Stock that are not outstanding but may be
acquired by a person or entity upon exercise of all options and warrants
exercisable by such entity or person within 60 days of November 14, 1997.
However, those shares of Common Stock are not deemed to be outstanding for the
purpose of computing the percentage of outstanding shares beneficially owned by
any other person.
<TABLE>
<CAPTION>
AS OF NOVEMBER 14, 1997
---------------------------------
SHARES BENEFICIALLY OWNED(1) PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES TOTAL SHARES
------------------------------------ ---------------- ------------
<S> <C> <C>
Harold Rubenstein........................................... 2,758,883(2) 16.0%
2010 W. Lower Buckeye Dr.
Phoenix, AZ 85009
George A. Isaac III......................................... 1,373,779(3) 7.9%
1645 Indian Wood Circle
Maumee, OH 43537
Robert F. Smith............................................. 1,280,000 7.7%
2211 York Rd.
Oak Brook, IL 60521
Ian MacLeod................................................. 1,074,700(4) 6.4%
9309 Rayo Avenue
South Gate, CA 90280
Gerard M. Jacobs............................................ 863,333(5) 5.1%
500 North Dearborn, Suite 405
Chicago, IL 60610
T. Benjamin Jennings........................................ 863,333(5) 5.1%
500 North Dearborn, Suite 405
Chicago, IL 60610
Donald F. Moorehead, Jr..................................... 769,513(6) 4.6%
2141 Looscan Lane
Houston, TX 77019
William T. Proler........................................... 743,750 4.5%
90 Hirsh Road
Houston, TX 77020
George O. Moorehead......................................... 671,016(7) 4.0%
3700 W. Lower Buckeye
Phoenix, AZ 85009
Paul D. Joseph.............................................. 210,000(8) 1.3%
4431 W. 130th St.
Cleveland, OH 44135
Kenneth Merlau.............................................. 147,931(9) *
6505 LeRoy Avenue
Lincolnwood, IL 60646
Mike Melnik................................................. 146,289 *
21 Japhet Street
Houston, TX 77020
Daniel B. Burgess........................................... 85,056(10) *
500 North Dearborn, Suite 405
Chicago, IL 60610
</TABLE>
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<PAGE> 79
<TABLE>
<CAPTION>
AS OF NOVEMBER 14, 1997
---------------------------------
SHARES BENEFICIALLY OWNED(1) PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES TOTAL SHARES
------------------------------------ ---------------- ------------
<S> <C> <C>
Xavier Hermosillo........................................... 15,000(11) *
1621 W. 21st Street
San Pedro, CA 90732
Albert A. Cozzi............................................. -0- *
2232 South Blue Island Ave.
Chicago, IL 60608
Frank J. Cozzi.............................................. -0- *
2232 South Blue Island Ave.
Chicago, IL 60608
Gregory P. Cozzi............................................ -0- *
2232 South Blue Island Ave.
Chicago, IL 60608
Christopher G. Knowles...................................... -0- *
305 Ridge Road
Barrington Hills, IL 60010
All current officers, directors and the Nominees as a group
(18 persons).............................................. 9,755,916 49.8%
</TABLE>
- ---------------
* Less than 1%
(1) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable and the information
contained in the footnotes to this table.
(2) Consists of 2,112,650 shares owned directly by Mr. Rubenstein and warrants
to purchase 646,233 shares of Common Stock exercisable at exercise prices
ranging from $4.00 to $6.48 per share.
(3) Consists of 546,856 shares owned directly by Mr. Isaac and warrants to
purchase 826,923 shares of Common Stock at exercise prices ranging from
$10.80 to $13.00 per share.
(4) Consists of 899,700 shares owned directly by Mr. MacLeod and warrants to
purchase 175,000 shares of Common Stock at exercise prices ranging from
$3.96 to $4.75 per share.
(5) Consists of 580,000 shares owned directly by each of Messrs. Jacobs and
Jennings and options to purchase 200,000 shares of Common Stock at an
exercise price of $4.00 per share and warrants to purchase 83,333 shares of
Common Stock at an exercise price of $4.00 per share, held by each of
Messrs. Jacobs and Jennings.
(6) Consists of 605,100 shares owned directly by Mr. Moorehead and options to
purchase 12,500 shares of Common Stock at exercise prices ranging from
$4.00 to $4.81 per share and warrants to purchase 151,913 shares of Common
Stock at exercise prices ranging from $4.00 to $6.48 per share.
(7) Consists of 369,163 shares owned directly by Mr. Moorehead and options to
purchase 150,000 shares of Common Stock at an exercise price of $4.00 per
share and warrants to purchase 151,853 shares of Common Stock at exercise
prices ranging from $4.00 to $6.48 per share.
(8) Consists entirely of warrants to purchase 210,000 shares of Common Stock at
exercise prices ranging from $3.50 to $4.00 per share.
(9) Consists of 137,931 shares owned directly by Mr. Merlau and options to
purchase 10,000 shares of Common Stock at $22.50 per share.
(10) Consists of 5,056 shares owned directly by Mr. Burgess and options to
purchase 80,000 shares of Common Stock at exercise prices ranging from
$2.50 to $4.00 per share.
(11) Consists entirely of options to purchase 15,000 shares of Common Stock at
exercise prices ranging from $4.00 to $4.88 per share.
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<PAGE> 80
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than ten percent of a registered class of
the Company's equity securities, to file reports of ownership on Form 3 and
changes in ownership on Form 4 or 5 with the Securities and Exchange Commission
(the "SEC") and the NASDAQ. These officers, directors and individuals, entities
or groups holding ten percent or more of the Company's outstanding Common Stock
("Ten Percent Shareholders") are also required by SEC rules to furnish the
Company with copies of all forms they file.
Based solely on its review of the copies of the forms received by the
Company, or written representations from certain reporting persons the Company
believes that, during fiscal 1997 all Section 16(a) filing requirements
applicable to its officers, directors and Ten Percent Shareholders were complied
with, except that: (i) Donald F. Moorehead, Jr., a Director of the Company,
submitted late two report on Form 4's relating to a single transaction that
occurred on April 29, 1997; (ii) Xavier Hermosillo, a former Director of the
Company, submitted a late Form 3 relating to his becoming a Director in August
1995 and two late Form 4's relating to two option grants in January 1996 and one
option grant on April 29, 1997; (iii) Raymond Zack, a former Director of the
Company, submitted a late Form 4 relating to the transfer to him of a warrant to
purchase shares of Common Stock in April 1997, before he resigned from the Board
of Directors in May 1997; and (iv) Robert C. Larry, the Company's Vice
President, Finance, Chief Financial Officer and Treasurer, submitted late a Form
4 relating to an option grant on April 29, 1997.
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<PAGE> 81
INFORMATION ABOUT THE COMPANY
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 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, 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. On January 1, 1997, the Company acquired MacLeod, headquartered
in South Gate, California. On January 7, 1997, the Company acquired HouTex,
headquartered in Houston, Texas. On May 1, 1997, the Company acquired Reserve,
headquartered in Cleveland, Ohio, with operations in Cleveland and Chicago and,
through a 50% joint venture interest, Attalla, Alabama. On June 23, 1997, the
Company acquired Isaac, headquartered near Toledo, Ohio. On August 28, 1997, the
Company acquired Proler, headquartered in Houston, Texas.
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 goal of becoming one of the largest recyclers of
scrap metal in North America. The Company operates or participates in joint
ventures operating twenty-six recycling centers in seven states and resells
processed scrap metal and other materials to domestic and foreign customers. The
Company intends to continue its expansion principally through acquisitions. The
Company believes that the scrap metal recycling industry is highly fragmented,
and that no single company is a significant processor of scrap metal on a
national scale, although certain companies are significant processors on a local
or regional scale.
ACQUISITION STRATEGY
The Company 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: (i) significant capital requirements caused by
expanding equipment needs and by more stringent environmental regulations; and
(ii) a desire of owners of independent scrap metal processors to sell
closely-held businesses to companies with access to public capital markets.
The Company 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. The
Company believes that this consolidation strategy will allow the Company to
improve its operating margins and profitability by: (i) increasing its market
share, which is expected to enhance customer relationships and enhance supply
capabilities; (ii) spreading the cost of management and administrative staff,
and utilizing equipment and other assets, across larger operations; and (iii)
transferring technology and best demonstrated processing and marketing
strategies among acquired recycling operations. The Company is continuously
evaluating acquisition opportunities.
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<PAGE> 82
BUSINESS OPERATIONS
Since adopting its consolidation strategy in August 1995, the Company has
completed or has agreed to complete, subject to various closing conditions, the
Potential Acquisitions and Completed Acquisitions summarized below.
Completed Acquisitions. The Company has recently completed a number of
acquisitions which are summarized below.
PROLER. Proler, founded and owned principally by William and Ronald
Proler, operates a facility in Houston, Texas (located on the Houston Ship
Channel next to the HouTex facility) and a site in Jackson, Mississippi. The
Company acquired Proler on August 28, 1997 for consideration consisting of: (i)
$7.5 million in cash; (ii) promissory notes in the aggregate amount of
$2,400,000 maturing two years from the closing date and bearing interest at 7%
per year; (iii) promissory notes in the aggregate amount of $8,100,000 maturing
March 1, 1998 and bearing interest at 8% per year for the first ninety days
following closing, and increasing to 10%, 12% and 14% per year for each of the
subsequent thirty-day periods; (iv) 1,750,000 shares of Common Stock; and (v)
warrants exercisable for a period of five years to purchase up to 375,000 shares
of Common Stock at an exercise price of $6.00 per share.
In connection with the acquisition of Proler, William T. Proler has joined
the Company as a Director and entered into a five-year employment agreement with
the Company. The employment agreements with Mr. Proler and with four other
previous shareholders of Proler extend for five year terms followed by non-
competition periods of three years. The salary of Mr. William T. Proler, a
director of the Company is $225,000. If a "change in control" (as defined in his
employment agreement) were to occur, Mr. Proler would be entitled to receive an
amount in cash equal to his annual salary times the number of years remaining
under the term of his employment agreement plus any earned bonuses for the year
in which the change of control occurred.
In connection with the Proler acquisition, the former equity owners of
Proler (the "Proler Stockholders") have entered into a two-year stockholders
agreement with T. Benjamin Jennings pursuant to which the parties agreed to vote
their shares of Common Stock in favor of William T. Proler (or, if he is unable
to serve, another individual chosen by the Proler Stockholders) as a Director of
the Company.
THE ISAAC GROUP. Isaac, founded in 1899 by the Isaac family, operates four
processing facilities located in Defiance, Bryan, Cleveland and Dayton, Ohio. On
June 23, 1997, the Company completed the acquisition of four companies under
common ownership which comprise the Isaac operation. The consideration paid in
connection with the Isaac acquisition consisted of: (i) 1,942,857 shares of
Common Stock; (ii) warrants to purchase 462,500 shares of Common Stock at
exercise prices ranging from $10.80 to $11.70 per share, exercisable from time
to time on or before June 23, 2002; and (iii) promissory notes, each bearing
interest at 8.5% (subject to adjustment equal to changes in the prime rate;
provided, however, that this rate may not be more than 1% above or below the
prime rate at June 23, 1997) as follows: (a) $10,600,000 due and payable to the
shareholders of Isaac on November 15, 1997, subject to extension for three
one-month periods upon delivery of warrants to purchase an aggregate of 100,000
shares of Common Stock per extension at an exercise price of $14.0875 per share,
exercisable from time to time on or before June 23, 2002; (b) $2,000,000 due and
payable to George A. Isaac, III on February 15, 1998; and (c) an aggregate of
$23,496,901 due and payable to the shareholders of Isaac, Ferrex Ohio, Paulding
and Briquetting in three equal principal payments on February 15, 1998 and
February 15, 1999 with a final maturity date of February 15, 2000. In addition,
Isaac had promissory notes payable to two of its shareholders outstanding in the
aggregate principal amounts of $8,544,201, which remain obligations of Isaac, as
a subsidiary of the Company.
In connection with the Isaac acquisition, George A. Isaac, III joined the
Company as a Director and entered into an employment agreement pursuant to which
he will serve as Executive Vice President of the Company and President and Chief
Executive Officer of each of the Isaac Companies. Mr. Isaac's employment
agreement, dated as of June 23, 1997: (i) has a term of five years, after which
the term automatically will be extended by one-year periods unless either the
Company or Mr. Isaac elects prior to such anniversary not to extend the term;
and (ii) provides for annual compensation of at least $275,000, plus a minimum
cash bonus
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<PAGE> 83
equal to at least 25% of the base salary. The employment agreement restricts Mr.
Isaac's ability to compete with the Company for three years after expiration of
the agreement. Mr. Isaac will also be a member of the Board of Directors'
Executive Committee and Office of the President. In consideration of Mr. Isaac
entering into the employment agreement, the Company issued to Mr. Isaac warrants
to purchase: (i) 76,923 shares of Common Stock at an exercise price of $13.00
per share, exercisable from time to time on or before February 15, 1998; and
(ii) 287,500 shares of Common Stock at an exercise price of $11.70 per share,
exercisable from time to time on or before June 23, 2002.
In the event of a "change in control" of the Company, Mr. Isaac will be
entitled to receive, in addition to other benefits, a cash payment equal to the
greater of: (i) Mr. Isaac's then current salary and annual cash bonus for the
balance of the term of the employment agreement; or (ii) the product of 2.99
multiplied by the highest total annual cash compensation for the previous three
years. In no event will the formula used to calculate this cash payment to Mr.
Isaac be less than that for any other member of the Executive Committee. If a
"change in control" were to occur immediately after the Merger, Mr. Isaac would
be entitled to receive at least $1,720,000 in severance pay.
Under Mr. Isaac's employment agreement, a "change in control" of the
Company is deemed to have occurred if: (a) any "person" (as defined in the
Exchange Act) other than Albert A. Cozzi, Frank J. Cozzi or Gregory P. Cozzi
becomes a beneficial owner of securities representing thirty percent (30%) or
more of the combined voting power of all outstanding shares of the Company; (b)
Gerard M. Jacobs ceases to serve as the Company's Chief Executive Officer or T.
Benjamin Jennings ceases to serve as Chairman of the Company's Board of
Directors; (c) during any two consecutive years the majority of the Board of
Directors is no longer comprised of individuals who were approved by at least
two thirds ( 2/3) of the Directors at the beginning of the employment period;
(d) the stockholders approve a merger or consolidation of the Company with any
other corporation, other than the Merger, and other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent at least eighty
percent (80%) of the combined voting power of the voting securities of the
Company or such surviving entity outstanding immediately after such merger or
consolidation; or (e) the stockholders approve a plan of complete liquidation of
the Company or an agreement for the sale or disposition by the Company of all or
substantially all the Company's assets.
RESERVE IRON & METAL, L.P. Reserve, founded in 1978 and acquired in 1990
by the Joseph family, operates two processing facilities located in Cleveland,
Ohio and Chicago, Illinois and has a 50% interest in a joint venture which
operates a processing facility located in Attalla, Alabama. On May 1, 1997, the
Company acquired all of the limited partnership interests and all of capital
stock of the general partner (the "General Partner") of the limited partnership
which owns Reserve's facilities. Reserve was acquired for approximately $7.4
million, comprised of: (i) $5.875 million in cash; and (ii) a promissory note
for $1,541,660 bearing interest at a rate of 9% due one year after the closing
date and convertible into shares of Common Stock at $9.00 per share. In
connection with the Company's acquisition of Reserve, the Company issued to the
shareholders of Reserve's general partner and to certain key employees of
Reserve warrants to purchase 1.575 million shares of Common Stock, at exercise
prices ranging from $3.50 to $9.90 per share (exercise prices are subject to
adjustment). A total of 840,000 of the warrants were issued to Paul D. Joseph, a
Director of the Company.
In connection with the acquisition of Reserve, the Company entered into a
ten-year employment agreement (subject to automatic one-year extensions unless
terminated by either party) with Paul Joseph, to serve as Chief Executive
Officer of Reserve at a base salary of $168,000 per year, plus a fifty percent
guaranteed bonus.
HOUTEX METALS COMPANY, INC. HouTex, founded in 1979 by the Melnik family,
operates a facility located adjacent to Proler on the Houston Ship Channel. The
Company acquired HouTex on January 7, 1997 for approximately $9.0 million,
comprised of: (i) $750,000 in cash; (ii) 475,000 shares of Common Stock; (iii)
warrants to purchase up to 250,000 shares of Common Stock at an exercise price
of $4.00 per share exercisable from time to time for a period of five years; and
(iv) promissory notes in the amounts of $960,055
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<PAGE> 84
and $695,213, each due April 30, 1997, and a note in the amount of $5.0 million
due June 30, 1997 (the "Clend Note"), all of which were secured by a pledge of
the shares of common stock of HouTex.
THE MACLEOD GROUP. MacLeod, founded in 1969 by Ian MacLeod, operates four
processing facilities located in Southern California. The Company completed the
acquisition of MacLeod on January 1, 1997. The Company acquired MacLeod and a
related real estate parcel on January 1, 1997 for approximately $9.3 million and
$3.5 million, respectively, comprised of: (i) $500,000 in cash; (ii) 725,000
shares of Common Stock; (iii) warrants to purchase up to 175,000 shares of
Common Stock at exercise prices ranging from $3.96 to $4.75 per share
exercisable from time to time for a period of three years; and (iv) promissory
notes in the amounts of $6.0 million and $600,000 due March 14, 1997 (subject to
extension through May 31, 1997) and January 1, 2002 (with payments due January 1
of each year beginning in 1998), respectively, secured by a pledge of the shares
of common stock of MacLeod; and (v) a promissory note in the amount of $3.0
million, secured by the real property purchased by the Company.
EMCO RECYCLING CORP. EMCO was formed in 1993 by the combination of three
companies, Empire Metals, Inc., Valley Steel and Copperstate Metals, Inc. EMCO's
twelve processing facilities are located in Arizona, with ten located in and
around Phoenix. The Company acquired EMCO on April 11, 1996 in a merger valued
at approximately $12.8 million. During the third quarter of fiscal 1997, the
Company began efforts to restructure EMCO's operations. See "-- Management's
Discussion and Analysis of Financial Condition and Results of Operations."
POTENTIAL ACQUISITIONS. From time to time the Company engages in
discussions with third parties regarding potential acquisitions of companies or
businesses in the same or substantially similar lines of business as the
Company. If the parties are able to agree generally on the nature, terms and
conditions of a transaction, a letter of intent is prepared to reflect this
understanding. In many cases, these letters of intent are structured as "binding
intents" to purchase the business, although each letter is still subject to a
number of terms and conditions including but not limited to negotiation and
execution of definitive purchase agreements. In addition, each potential
acquisition may be subject to additional contingencies specific to that
acquisition. There can be no assurance that any such potential acquisition will
result in execution of a definitive agreement or that such acquisition(s) will
be completed on terms and conditions acceptable to the Company, if at all. See
"Risk Factors -- Inability to Complete Potential Acquisitions." As of the date
of this Proxy Statement, the Company has entered into letters of intent to
purchase Superior, Goldin, HCS, Salt River, PerlCo, Aerospace, Atlas, Yonack
Iron, Yonack Services, Gold and Spectrum. The acquisition of each of Atlas,
Yonack Iron, Yonack Services, Gold and Spectrum (collectively, the "Related
Texas Acquisitions") is subject to completion of the Merger and to the
simultaneous completion of each of the other Related Texas Acquisitions.
SUPERIOR. Superior, founded and owned by Ian Albert, forges aluminum using
a variety of methods at its facility located in Huntington Beach, California.
Superior sells forged aluminum products to customers in the aerospace and other
industries. The letter of intent with Superior requires the Company to pay
consideration consisting of: (i) 1,080,000 shares of Common Stock; and (ii) $1.8
million in cash. The Company has agreed to issue to Xavier Hermosillo, the
Company's Secretary, as a finder's fee in connection with the Superior
acquisition, and conditioned upon the closing of the Superior acquisition,
warrants to purchase 20,000 shares of Common Stock at an exercise price of
$15.00 per share. See "Matters to be Considered by the Stockholders -- Proposal
Number Nine."
In connection with the acquisition, two officers of Superior will enter
into five-year employment agreements (subject to automatic one-year extensions
unless terminated by either party) with the Company to serve as Superior's
executive officers. Under their employment agreements, such officers could be
eligible to receive an aggregate annual cash bonus of $95,000 to $380,000 (or,
at their election, options to purchase up to an aggregate maximum of 200,000
shares of Common Stock), depending on the amount by which Superior's annual
after-tax net income exceeds $2.5 million. If Superior's annual after-tax net
income was less than $2.5 million, neither of such officers would be eligible to
receive a bonus. The exercise price of any options granted to such officers in
lieu of cash bonuses would be equal to the trading price of the Common Stock on
the second business day after Superior's annual financial statements are
accepted by the Company's chief financial officer.
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<PAGE> 85
GOLDIN. Goldin, founded and owned by the Goldin family, operates five
processing facilities, including two in Gulfport, Mississippi; one in Harvey,
Louisiana and two in Mobile, Alabama. The letter of intent with Goldin requires
the Company to pay consideration consisting of: (i) 112,500 shares of Common
Stock; and (ii) $7,150,000 in cash. In connection with the acquisition, the
Company will receive options to purchase two real estate parcels on which
certain of Goldin's operations are conducted.
In connection with the Goldin acquisition, the Company and two officers of
Goldin will enter into eighteen month employment agreements (which may be
extended for an additional twelve months at the Company's option). Under these
employment agreements, such officers collectively would be entitled to receive
warrants to purchase 150,000 shares of Common Stock at an exercise price of
$10.00 per share.
HCS. HCS, owned by the Segal family, operates one processing facility in
Houston, Texas. The letter of intent with HCS requires the Company to pay
consideration consisting of 310,345 shares of Common Stock, subject to increase
or decrease if the closing price of the Common Stock on Nasdaq on the trading
day before the merger is less than $13.50 or greater than $15.50.
In connection with the merger, an officer of HCS will enter into a two-year
employment agreement with HCS (subject to extension upon mutual agreement of
such officer and William T. Proler or the Company), followed by a three-year
consulting arrangement with HCS. In addition, another officer of HCS will enter
into a five-year employment agreement with HCS.
SALT RIVER. Salt River, a limited liability company 50%-owned by Cozzi,
was formed in 1996 to operate a ferrous and non-ferrous metal processing plant
in Phoenix, Arizona which includes an auto shredding machine. The letter of
intent requires the Company to pay consideration of $1,500,000 for the 50%
limited liability company interest not owned by Cozzi. The purchase price will
be comprised of 100,000 shares of Common Stock. In connection with the Merger,
the Company will acquire the 50% interest in Salt River which Cozzi currently
owns. The acquisition of the remaining 50% interest in Salt River is subject to
completion of the Merger.
PERLCO. PerlCo, a limited liability company 50%-owned by Cozzi, was formed
in 1995 to operate a ferrous and non-ferrous metal processing plant in Memphis,
Tennessee. Cozzi completed installation of a new auto shredder at the Memphis
facility in 1996. The Company has signed a binding letter of intent to acquire:
(i) FPX, which has a 50% ownership interest in PerlCo; and (ii) Southern Tin,
which owns the real estate and certain equipment associated with the PerlCo
operations. The letter of intent requires the Company to pay consideration,
subject to adjustment depending on PerlCo's inventory levels and net worth on
the closing date, of $7,150,000, payable in the form of 789,740 shares of Common
Stock which was determined by the prevailing stock price on the date on which
agreement was reached with respect to the principal terms of the acquisition. In
connection with the Merger, the Company will acquire the 50% interest in PerlCo
which Cozzi currently owns. The PerlCo acquisition is subject to completion of
the Merger.
In connection with the PerlCo acquisition, the Company will enter into
three-year employment agreements with three officers of PerlCo under which these
officers collectively will be entitled to receive warrants for the purchase of
125,000 shares of Common Stock (to be divided among these three individuals as
they direct) at an exercise price equal to 130% of the closing price of the
Common Stock the day before the closing date.
AEROSPACE. Aerospace, founded and owned by Michael Suisman, operates one
facility located in Hartford, Connecticut. The letter of intent requires the
Company to pay a purchase price of $24,250,000 (subject to adjustment),
consisting of: (i) $18,000,000 in cash; and (ii) approximately 284,000 shares of
Common Stock (equal to $6,250,000 divided by $22, the closing price of the
Common Stock on the day the letter of intent was signed). The purchase price
will be adjusted to reflect changes in the net value of the assets of Aerospace
between August 31, 1997 and the closing date. The Company also has agreed to
lease from the sole shareholders of Aerospace the property on which Aerospace
conducts its operations under a ten-year lease (with three five-year renewal
options) requiring the Company to pay rent of $150,000 per year for the first
two years and $300,000 per year for the remaining eight years of the initial
lease term. The Company will have an
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option to purchase the property at the end of the fifth lease year for the
property's fair market value less the net book value of any tenant improvements,
but no less than $4,900,000.
In connection with the acquisition of Aerospace, the Company will enter
into three-year employment agreements with six currents officers of Aerospace.
It is expected that each of the employment contracts will contain stock option
and bonus arrangements. In addition, the Company will enter into a one-year
employment contract with Michael Suisman.
ATLAS. Atlas operates two facilities, one in Corpus Christi, Texas and one
in Del Rio, Texas. The letter of intent requires the Company to pay a purchase
price consisting of: (i) $2,760,000 in cash; and (ii) 22,000 shares of Common
Stock. Twenty five percent of the purchase price will be subject to a holdback
provision and will be released provided Atlas achieves certain pre-tax earnings
targets during the first two years immediately following the acquisition. The
Company also has agreed to lease the Del Rio, Texas site from an entity owned by
one of Atlas's shareholders for two years for $2,000 per month.
YONACK IRON. Yonack Iron, operates two facilities, one in Dallas, Texas
and one in Lonoke, Arkansas. The letter of intent requires the Company to pay a
purchase price consisting of: (i) $10,880,000 in cash; and (ii) 444,444 shares
of Common Stock (subject to adjustment if the closing price of the Common Stock
on the day before closing is less than $22 or more than $26.50).
YONACK SERVICES. Yonack Services operates one facility located in Forney,
Texas. The letter of intent requires the Company to pay a purchase price of: (i)
$350,000 in cash; and (ii) 17,500 shares of Common Stock.
GOLD. Gold operates one facility located in Dallas, Texas. The letter of
intent requires the Company to pay a purchase price consisting of: (i)
$2,650,000 in cash; (ii) a promissory note in the principal amount of $700,000;
(iii) options to purchase $500,000 worth of Common Stock (as determined by the
trading price of the Common Stock on the day before closing); and (iv) 167,000
shares of Common Stock. At closing, the Company will also repay liabilities of
Gold totaling $1,400,000. The Company also has agreed to enter into a lease
agreement with Gold's stockholders to lease the property on which Gold conducts
its operations for an initial two-year term at a monthly rental of $15,000 per
month in the first year and $16,500 per month thereafter.
In connection with the acquisition of Gold, the Company will enter into
five-year employment agreements with two of Gold's key employees. In connection
with the employment agreements, the Company will grant the employees options to
purchase an aggregate of 60,000 shares of Common Stock at an exercise price
equal to the closing price of the Common Stock on the day before closing.
SPECTRUM. Spectrum operates one facility located in Houston, Texas. The
letter of intent requires the Company to pay a purchase price of 20,000 shares
of Common Stock, fifty percent of which will be subject to a holdback provision
which shall be released upon Spectrum achieving certain revenue levels during
the first two years after the date of closing.
Recycling Operations. The recycling operations involve buying, processing,
and selling scrap metals. The principal forms in which scrap metals are
generated include industrial scrap and obsolete scrap. Industrial scrap results
from residual materials from manufacturing processes. Obsolete scrap consists
primarily of residual metals from old or obsolete consumer and industrial
products such as appliances and automobiles.
Ferrous Operations -- Ferrous Scrap Purchasing. The Company purchases
ferrous scrap from two primary sources: (i) manufacturers who generate steel and
iron ("industrial scrap"); and (ii) junkyards, demolition firms, railroads, the
military and others who generate steel and iron scrap ("obsolete scrap"). In
addition to these sources, the Company purchases, at auction, furnace iron from
integrated steel mills and obsolete steel and iron from government and large
industrial accounts. Finally, the Company purchases materials from small
dealers, peddlers and auto wreckers who deliver directly to the Company's
processing facilities. Prices are determined primarily by market demand and the
composition, quality, size, and weight of the materials.
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Ferrous Scrap Processing. The Company prepares ferrous scrap metal for
resale through a variety of methods including sorting, shredding, shearing or
cutting, baling, briquetting or breaking. The Company produces a number of
differently sized and shaped products depending upon customer specifications and
market demand.
Sorting. After purchasing ferrous scrap metal, the Company inspects the
material to determine how it should be processed to maximize profitability. In
some instances, scrap may be sorted and sold without further processing. The
Company separates scrap for further processing according to its size and
composition by using conveyor systems, front-end loaders, crane-mounted
electromagnets or claw-like grapples.
Shredding. Obsolete consumer scrap such as automobiles, home appliances
and other consumer goods, as well as certain light gauge industrial scrap, is
processed in the Company's shredding operation. These items are fed into a
shredder that quickly breaks the scrap down into fist-size pieces of ferrous
metal. The shredding process uses magnets and other technologies to separate
ferrous, non-ferrous and non-metallic materials. The ferrous material is sold to
the Company's customers including mini-mills and the non-metallic by-product of
the shredding operations, referred to as "shredder fluff," is disposed of in
third party landfills.
Shearing or Cutting. Pieces of oversized ferrous scrap which are too large
for other processing, such as obsolete steel girders and used drill pipe, are
cut with hand torches, crane-mounted alligator shears or stationary guillotine
shears. After being reduced to more manageable size, the scrap is then sold to
those customers who can accommodate larger materials, such as mini-mills.
Baling. The Company processes light gauge ferrous metals such as clips and
sheet iron, and by-products from industrial manufacturing processes, such as
stampings, clippings and excess trimmings, by baling these materials into large,
uniform blocks. The Company uses cranes, front-end loaders and conveyors to feed
the metal into hydraulic presses which compress the materials into uniform
blocks at high pressure.
Briquetting. The Company processes borings and turnings made of steel and
iron into briquettes using both hot and cold briquetting methods, and
subsequently sells these briquettes to steel mills or foundries. The Company
possesses the technology to control the metallurgical content of briquettes to
meet customer specifications. The majority of the Company's cold briquetting
capacity is located at Isaac's facility in Defiance, Ohio.
Breaking of Furnace Iron. The Company processes furnace iron which
includes blast furnace iron, steel pit scrap, steel skulls, beach iron and pit
scrap. Large pieces of iron are broken down by the impact of eight-to ten-ton
forged steel balls dropped from cranes. The fragments are then sorted and
screened according to size and iron content.
Ferrous Scrap Sales. The Company sells processed ferrous scrap to end
users such as mini-mills, integrated steel makers and foundries and to brokers
who aggregate materials for other large users. Most of the Company's customers
purchase processed ferrous scrap according to a monthly plan which establishes
the quantity purchased for the month. The Company sells its products to end
users and brokers through its sales force of approximately fifteen people. The
price charged by the Company for ferrous scrap depends upon market demand, as
well as quality and grade of the scrap. The Company believes profitability may
be enhanced by offering a broad product line to its customers. The Company
believes that its consolidation strategy will allow it to be a premier supplier
of scrap since it will be able to fill larger quantity orders due to increased
ability to secure large amounts of raw materials. The Company's sales of
processed ferrous scrap accounted for 32% of the Company's revenues for the
twelve months ended March 31, 1997, representing approximately 152,000 tons of
ferrous metals.
Non-Ferrous Operations -- Non-Ferrous Scrap Purchasing. The Company
purchases non-ferrous scrap from three primary sources: (i) manufacturers and
other non-ferrous scrap sources who generate or sell waste aluminum, copper,
stainless steel, brass, high-temperature alloys and other metals; (ii)
telecommunications, aerospace, defense, and recycling companies that generate
obsolete scrap consisting primarily of copper wire, exotic metal alloys and used
aluminum beverage cans; and (iii) peddlers who deliver, directly to the
Company's facilities, material which they collect from a variety of sources. The
Company collects non-ferrous
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scrap from sources other than those that deliver directly to the Company's
processing facilities by placing retrieval bins near these sources. Once full,
the bins are transported to the Company's processing facilities.
The Company also generates non-ferrous scrap as a by-product of its ferrous
scrap processing operations. Nonferrous scrap is recovered from the Company's
ferrous operations through two primary activities: (i) non-ferrous materials,
generally a mixture of aluminum, zinc, die-cast metal, stainless steel and
copper, are recovered as a byproduct of the shredding process; and (ii)
non-ferrous materials are identified visually and by using magnets.
A number of factors can influence the continued availability of non-ferrous
scrap such as the level of manufacturing activity and the quality of the
Company's supplier relationships. Consistent with industry practice, the Company
has certain long-standing supply relationships (not the subject of written
agreements) that management believes will improve as a result of implementing
its consolidation strategy.
Non-Ferrous Scrap Processing. The Company prepares non-ferrous scrap metal
for resale by sorting, shearing, cutting, chopping or baling.
Sorting. The Company's sorting operations separate non-ferrous scrap using
conveyor systems and front-end loaders. In addition, many non-ferrous metals are
sorted and identified using grinders, hand torches, eddy current separation
systems and spectrometers. The Company's ability to identify metallurgical
composition is critical to maintaining high margins and profitability. Due to
the high value of many non-ferrous metals, the Company can afford to utilize
more labor intensive sorting techniques than are employed in its ferrous
operations. The Company sorts nonferrous scrap for further processing according
to type, grade, size and chemical composition. Throughout the sorting process,
the Company determines whether the material requires further processing before
being sold.
Copper. Copper scrap may be processed in several ways. The Company
processes copper scrap predominately by using wire choppers which grind the wire
into small pellets. During chopping operations, the plastic casing of the wire
is separated from the copper using a variety of techniques. In addition to wire
chopping, the Company processes scrap copper by baling and other repacking to
meet customer specifications. For the twelve months ended March 31, 1997, the
Company sold approximately 22.6 million pounds of copper.
Aluminum. The Company processes aluminum based on the size of the pieces
and customer specifications. Large pieces of aluminum are cut using crane
mounted alligator shears and stationary guillotine shears and are baled along
with small aluminum stampings to produce large bales of aluminum. Smaller pieces
of aluminum are repackaged to meet customer specifications. For the twelve
months ended March 31, 1997, the Company sold approximately 34.4 million pounds
of aluminum.
Other Non-Ferrous Materials. The Company processes other non-ferrous
metals using similar cutting, baling and repacking techniques as it uses to
process aluminum. Among other significant non-ferrous metals the Company
processes are brass and high-temperature alloys.
Non-Ferrous Scrap Sales
The Company sells processed non-ferrous scrap to end users such as
specialty steel-makers, foundries, aluminum sheet and ingot manufacturers,
copper refineries and smelters, and brass and bronze ingot manufacturers. The
Company sells its products to end users and brokers through its sales force of
fifteen people. Prices for the majority of nonferrous scrap metals change based
upon the daily publication of spot and futures prices on the COMEX or London
Metal Exchange. The Company's sales of processed non-ferrous scrap accounted for
67% of the Company's revenues for the twelve months ended March 31, 1997,
representing approximately 65 million pounds of non-ferrous metals.
SIGNIFICANT CUSTOMERS
On a pro forma basis, giving effect to the Completed Acquisitions and the
Merger, the Company's five largest customers would have represented 31% and 31%
of pro forma combined revenues for the twelve
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months ended March 31, 1997 and the six months ended September 30, 1997,
respectively. Accounts receivable balances from these customers represented
approximately 30% of combined pro forma accounts receivable balances at
September 30, 1997. On a pro forma basis, the Company's largest customer, David
J. Joseph and Company accounted for 12% and 13% of pro forma combined revenues
for the twelve months ended March 31, 1997 and the six months ended September
30, 1997, respectively, and accounted for 17% of pro forma accounts receivable
at September 30, 1997. Any cancellation of or reduction in orders from such
customers could have a material adverse effect on the Company's results of
operations and financial condition.
COMPETITION
The Company faces competition for sales from producers of finished steel
products, such as integrated steel mills and mini-mills, many of which have
substantially greater financial, marketing and other resources, which may
vertically integrate their current operations by entering the scrap metals
recycling business. The scrap market is also regionally competitive both in the
purchase of raw scrap and the sale of processed scrap. The Company competes for
purchases of raw scrap with numerous independent recyclers as well as with
smaller scrap yards. The Company's primary competition for processed scrap sales
to its customers are other regional or local scrap metal recyclers.
Scrap metal processors face competition from substitutes for prepared steel
scrap, such as pre-reduced iron pellets, hot briquetted iron, pig iron, iron
carbide and other forms of processed iron. Substitutes for ferrous scrap could
result in a decreased demand for processed ferrous scrap, which could result in
lower prices for such products. Any decrease in the demand or price for the
Company's product may have a material adverse effect on the Company's results of
operations and financial condition.
EMPLOYEES
As of September 30, 1997, the Company employed approximately 686 persons
(primarily through the Company's wholly-owned subsidiaries), 96 of whom were
covered by collective bargaining agreements. The management of the Company
believes that it has good relations with its employees.
PROPERTIES
The Company's recycling facilities generally are comprised of: (i)
administrative offices; (ii) warehouses for the storage of repair parts and
certain types of raw and processed scrap; (iii) covered and open storage areas
for raw and processed scrap; (iv) a machine or repair shop for the maintenance
and repair of the facility's vehicles and equipment; (v) scales for weighing
scrap; and (vi) loading and unloading facilities. Each facility has specialized
equipment for processing all grades of raw scrap which may include a heavy duty
automotive shredder to process both ferrous and non-ferrous scrap, crane mounted
alligator or stationary guillotine shears to process large pieces of heavy
scrap, wire stripping and chopping equipment, baling equipment and torch cutting
facilities.
The Company's principal offices are located in an office building at 500
North Dearborn St., Suite 405, Chicago, Illinois, which the Company leases. As
of November 12, 1997, the Company conducts operations at twenty-six locations.
The Company's recycling operations are performed in the following locations:
Proler owns one operating facility located in Houston, Texas and one
operating facility located in Jackson, Mississippi.
Isaac owns operating facilities in Defiance, Cleveland and Bryan, Ohio and
leases operating facilities in Miamisburg and Paulding, Ohio. Isaac's
administrative offices are located in Maumee, Ohio and are leased from an entity
of which George A. Isaac III, a Director of the Company, is a shareholder.
Reserve leases sites in Cleveland, Ohio and Chicago, Illinois. Reserve owns
a 50% interest in a joint venture with operations in Attalla, Alabama. The joint
venture leases the site on which its operations are performed.
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HouTex leases a 45 acre processing site located in Houston, Texas from a
limited partnership affiliated with Mike Melnik, a current Director of the
Company. The facility is located on the Houston Shipping Channel and all of the
HouTex operations are performed at this facility.
Metal Management Realty, Inc., a wholly-owned subsidiary of the Company,
owns a seven acre site in South Gate, California where the main offices and
principal processing operations of MacLeod are located. In addition, MacLeod
conducts processing operations at three leased sites in the Los Angeles
metropolitan area.
EMCO owns a twenty-five acre site in an industrial area of Phoenix,
Arizona, at which it performs its main administrative activities and principal
processing operations. In addition, EMCO leases nine collection centers in the
Phoenix metropolitan area and two additional collection centers, one in
Prescott, Arizona and one in Yuma, Arizona.
Metal Management Realty, Inc. owns two parcels of real property in Tucson,
Arizona. This property is leased to Ellis Metals, Inc., which is principally
owned by Harold Rubenstein, a Director of the Company.
Giving effect to the Completed Acquisitions, the Company's scrap metal
recycling operations, including those conducted through joint ventures, are
conducted from facilities in the States of Alabama, Arizona, California,
Illinois, Mississippi, Ohio and Texas.
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, who lost both his legs in an accident that occurred
at Reserve's facility, 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. 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 solely 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 that 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.
ENVIRONMENTAL MATTERS
Comprehensive Regulatory Requirements. The Company is 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,
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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. Violation of such laws and regulations may give rise to
significant liability to the Company, including fines, damages, fees and
expenses.
Releases of certain industrial by-products and waste materials are subject
to particular laws and regulations. Although the specific provisions of laws and
regulations related to such releases 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 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 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 are detailed in and regulated by
various permits and licenses governing its 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's
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 works 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 could incur
substantial fines and could be required to suspend operations or close a site.
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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.
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, soil removal, groundwater treatment, creation of engineered
barriers, establishing institutional controls 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 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, the Company may
be fined and held liable for such damage. In addition, the Company 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 judicial relief for
purported violations of law. In some jurisdictions, recourse to the courts by
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
metal recycling facility is operated in full compliance with applicable laws and
regulations, local citizens and other persons and organizations may seek
compensation for damages allegedly 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 is
subject to potential liability and may also be required from time to time to
clean up or take certain remedial action with regard to sites currently or
formerly used in connection with its operations. Furthermore, the Company may be
required to pay for all or a portion of the costs to clean up or remediate sites
the Company never owned or on which it
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never operated if it is found to have arranged for transportation, treatment or
disposal of pollutants or hazardous or toxic substances on or to such sites. The
Company also is 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 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. 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 or liability 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 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 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, the need
for proactive remedial measures, and substantial fines, penalties, damages,
costs and expenses being imposed against the Company.
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 expects 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. Many factors
affect the level of expenditures the Company will be required to make in the
future to comply with environmental requirements, including: (i) new local,
state and federal laws and regulations; (ii) the developing nature of
administrative standards promulgated under Superfund and other environmental
laws, and changing interpretations of such laws; (iii) uncertainty regarding
adequate control levels, testing and sampling procedures, new pollution control
technology and cost benefit analysis based on market conditions; (iv) the
incompleteness of information regarding the condition of certain sites; (v) the
lack of standards and information for use in the apportionment of remedial
responsibilities; (vi) the numerous choices and costs associated with diverse
technologies that may be used in remedial actions at such sites; (vii) the
possible ability to recover
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indemnification or contribution from third parties; and (viii) the time periods
over which eventual remediation may occur. Therefore, the estimated costs, and
the timing of such 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, 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 does not carry
environmental impairment liability insurance. The Company operates under general
liability insurance policies, which the Company's management considers to be
adequate to protect the Company's assets and operations from other risks but
which does not cover environmental damage. If the Company 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 results of operations and
financial condition could be materially adversely affected.
Risks Associated With Certain By-Products. Although the majority of the
Company's metal products are currently exempt from applicable solid waste
regulations, the Company's scrap metal recycling operations produce significant
amounts of by-products. Heightened environmental risk is associated with certain
of these by-products. For example, certain of the Company's subsidiaries operate
shredders for which the primary feed materials are automobile hulks and obsolete
household appliances. Approximately 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 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 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. There can be no assurance,
however, that the potential liability may not be greater than $100,000.
Underground Storage Tanks. Underground storage tanks (UST's) exist at
several of the Company's 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 a 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, 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 is regulated by federal,
state and local agencies responsible for employee health and safety, including
OSHA. A total of two accidental deaths of, and one
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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 in regard to such death and injuries, or in regard to
any future deaths of or injuries to the Company's employees will not be
material.
Recommendations of Environmental Consultants. Environmental consultants to
the Company have recommended that a variety of remedial actions be undertaken,
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 the Company did not follow these
recommendations 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 may have an adverse effect on the Company's results
of operations and financial condition.
Compliance History. The Company has, in the past, been found not to be in
compliance with certain environmental laws and regulations, and has incurred
fines associated with such violations which have not been material in amount.
The Company has 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in connection with the
Consolidating Financial Statements of the Company and the notes related thereto
and "Selected Historical Financial Data of the Company" included elsewhere in
this Proxy Statement.
In April 1996, the Company completed its first acquisition in the scrap
metal recycling business by merging with EMCO. This was followed by the
acquisitions of MacLeod and HouTex in January 1997. On May 1, 1997, the Company
acquired Reserve. On June 23, 1997, the Company acquired Isaac. On August 28,
1997, the Company acquired Proler. These transactions were accounted for by the
purchase method of accounting and their results are included from the time of
acquisition. On May 16, 1997, the Company executed a definitive agreement to
merge a subsidiary of the Company with Cozzi. The Merger with Cozzi is subject
to stockholder and certain other approvals and conditions precedent. See
"Matters to be Considered by Stockholders -- Proposal Number
Three -- Description of the Merger Agreement." The Company has announced letters
of intent to acquire the following companies: Superior, announced in July 1997,
and Goldin, HCS, Salt River, PerlCo, Aerospace, Atlas, Yonack Iron, Yonack
Services, Gold and Spectrum, all announced in August 1997. These transactions
are expected to close during the third quarter of fiscal 1998 and will be
accounted for under the purchase method of accounting, but no assurance can be
provided that any of these transactions will close.
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.
RESULTS OF OPERATIONS
Six Months Ended September 30, 1997 to Six Months Ended September 30, 1996
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 include only the operations of
EMCO, which was acquired in April 1996.
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>
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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 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 primarily sell ferrous metals. The increase in
pounds of non-ferrous metals sold is due to the acquisition of MacLeod, which
primarily 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 in 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 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.
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
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compared to $294,000 ($0.03 per share) for the comparable prior period. Income
during the current fiscal year mainly reflects the royalty income recognized by
the Company from the sale of its Spectra*Star business, net of certain expenses
paid. The three and six months ended September 30, 1996 includes the full
operation of the Spectra*Star business through its July 1996 sale, and the
related gain recognized on the sale of the Spectra*Star business.
Year Ended March 31, 1997
Consolidated revenues for the year ended March 31, 1997 by broad product
categories were as follows ($ in thousands):
<TABLE>
<CAPTION>
COMMODITY WEIGHT AMOUNT %
- --------- ---------- ------- ---
<S> <C> <C> <C>
Ferrous metals (tons).......................... 151,782 $20,744 32%
Non-ferrous metals (pounds).................... 64,898,364 43,531 67%
Other.......................................... -- 921 1%
------- ---
$65,196 100%
======= ===
</TABLE>
Consolidated revenues for the fiscal year ended March 31, 1997 reflect
twelve months of results for EMCO and three months for MacLeod and HouTex,
respectively. Revenues in the scrap metal industry during fiscal 1997 were
negatively impacted by market conditions that reduced prices for scrap metals.
Prices for ferrous scrap metals sold by the Company declined significantly in
the third quarter of fiscal 1997. In addition, prices for non-ferrous metals
consisting principally of copper and aluminum also declined during fiscal 1997.
The selling price of scrap metal is impacted by regional and seasonal
variations. Furthermore, selling prices for scrap metal are also impacted by
broad and global cyclical movements which equalize supply and demand. The
Company believes one of the factors in fiscal 1997 that contributed to the
decline in selling prices for nonferrous metals was the negative reaction of
non-ferrous scrap customers to the much publicized speculative trading losses
sustained by a major copper trader. The Company believes one of the factors
during the third quarter of fiscal 1997 that contributed to the price decline in
ferrous metals was the weak export markets for ferrous metals.
Consolidated gross margin for fiscal 1997 was $6.8 million, or 10.4% of net
sales. As indicated above, gross margins in fiscal 1997 for scrap processors
were negatively impacted by general declines in scrap prices. Gross margins were
also impacted by losses at the Company's EMCO subsidiary. During the third
quarter of fiscal 1997, the Company initiated efforts to restructure the
operations at EMCO to reduce future operating expenses. No provisions were
recorded on the balance sheet for the restructuring costs. Restructuring costs
are being expensed as incurred.
Consolidated operating expenses for the 1997 fiscal year of $8.5 million
consist of general and administrative costs of $6.2 million and depreciation and
amortization of $2.3 million. Approximately $2.0 million of the general and
administrative costs represents corporate overhead expenses. The Company's EMCO
subsidiary has initiated an operational restructuring plan to reduce certain
overhead expenses.
During fiscal 1997, no accruals were established in connection with the
EMCO restructuring, although the Company incurred costs totaling approximately
$25,000. The Company does not expect to incur additional expenses in connection
with the EMCO Restructuring. Management believes the losses at EMCO may be
abated and the EMCO operations returned to profitability by the end of fiscal
1998.
Net interest and other expense for the 1997 fiscal year was $1.3 million.
This was comprised of $1.6 million in interest expense, offset by $.2 million in
interest income and $.1 million of other income. In the prior fiscal years, the
Company had excess cash invested in government and corporate bonds which
generated interest income for the Company. During the current fiscal year, the
Company began to incur interest expense associated with the financing of its
acquisitions. See "-- Liquidity and Capital Resources" for further discussion.
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Net loss from continuing operations for the 1997 fiscal year was $2.0
million ($.22 per share). The net loss from continuing operations was mainly due
to losses incurred at the Company's EMCO subsidiary and corporate overhead
costs, partially offset by operating income at the Company's HouTex and MacLeod
subsidiaries. The financial results for HouTex and MacLeod are only included
from their acquisition dates in January 1997. Losses at EMCO were due mainly to
unfavorable market conditions, inefficient operating processes and inefficient
machinery and equipment.
Income from discontinued operations for the 1997 fiscal year was $847,000
($.09 per share). During the 1997 fiscal year, the Company realized an after-tax
gain, including royalty income of $351,000, of $500,000 on the sale of assets of
the Spectra*Star and VideoShow businesses. The results of discontinued
operations reflect the operations of the Spectra*Star business up to the
divestiture date (July 16, 1996) as well as severance and other costs incurred
to discontinue the business. Severance costs were not material to the Company.
Five Months Ended March 31, 1996 to Year Ended October 31, 1995
Fiscal 1996 represents the five month period from November 1, 1995 to March
31, 1996. Net loss from continuing operations resulted from certain corporate
overhead costs offset by interest income and a tax benefit.
Interest and other income remained consistent during fiscal year 1996 as
compared to fiscal year 1995. Interest and other income was $142,000 for the
five months ended March 31, 1996, an average of $28,000 per month compared to
interest and other income of $312,000 for fiscal year 1995, an average of
$26,000 per month.
Income from discontinued operations was $22,000 ($.00 per share) for the
five months ended March 31, 1996, versus a loss of $2.7 million ($.53 per share)
in fiscal year 1995. Fiscal year 1995 results reflect one time charges of $2.2
million relating to restructuring of the color printer business and the
discontinuance of a portion of the electronic presentation business. The results
for fiscal year 1996 were negatively impacted by lower shipments of the
Company's products due to competitive pressures in the market. This was slightly
offset by lower operating expenses as a result of planned reductions in payroll
and related expenditures, as well as lower costs incurred by the Company for
research and development.
Year Ended October 31, 1995 to Year Ended October 31, 1994
Income from continuing operations of $261,000 ($.05 per share) represents
interest income and a provision for income taxes. Interest income was $312,000
during fiscal year 1995, compared to $229,000 during fiscal 1994. The increase
was primarily attributed to the recording of a loss during fiscal year 1994 of
$78,000 for certain of the Company's investments.
Loss from discontinued operations was $2.7 million ($.53 per share) in
fiscal year 1995 versus a loss of $440,000 ($.08 per share) in fiscal year 1994.
Fiscal year 1995 results reflect one time charges of approximately $2.2 million
relating to the restructuring of the color printer business and the
discontinuance of a portion of the electronic presentation business. Without the
one time charges, net loss from discontinued operations for fiscal year 1995
would have been $500,000. The Company's color printer business remained
unchanged from the prior fiscal year. The electronic presentation business
experienced weakness due to competitive product pressures, softness in
governmental purchases and lower sales outside the United States. The Company
was able to control expenses through reductions in staff and lower costs
incurred for research and development.
Year Ended October 31, 1994 to Year Ended October 31, 1993
Interest income was $229,000 during fiscal year 1994, compared to $310,000
during fiscal year 1993. The decrease was primarily attributed to the recording
of a loss of $78,000 on certain of the Company's investments.
Loss from discontinued operations was $440,000 ($.08 per share) in fiscal
year 1994 versus a loss of $202,000 ($.04 per share) in fiscal year 1993. The
Company's net sales decreased from fiscal year 1993
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primarily due to lower unit shipments of the Company's electronic presentation
products, competitive product pressures, softness in governmental purchases and
lower sales outside the United States. The Company incurred lower costs for
research and development in fiscal year 1994 versus fiscal year 1993 as a result
of the completion of several major development projects and the Company replaced
only a portion of the personnel who left through normal attrition. Certain
expenses were also incurred in fiscal year 1994 including an $81,000 termination
fee paid to cancel the Company's existing plant and office space.
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 to $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 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 Potential
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.
Year Ended March 31, 1997
Cash Flows from Continuing Operations. The Company's net cash flows from
continuing operations decreased significantly during fiscal year 1997 as a
result of significant losses incurred by EMCO and an increase in accounts
receivable balances as a result of the acquisitions of EMCO, MacLeod and HouTex.
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Cash Flows from Investing Activities. The Company made capital
expenditures of approximately $5.7 million during fiscal year 1997 which
included purchases of property and equipment ($3.2 million) and cash paid for
the acquisitions of EMCO, MacLeod and HouTex ($2.5 million). These cash outflows
were partially offset by $2.8 million of proceeds received from the sale of
marketable securities. Management anticipates continuing to make acquisitions,
capital expenditures for new equipment, and upgrading and expanding existing
equipment and facilities. The Company expects that these expenditures may
increase in the future due to the internal growth of the Company and
requirements of business combinations.
Cash Flows from Financing Activities. During fiscal year 1997, the Company
obtained $7.8 million from the proceeds of term debt. A total of $6.5 million of
this term debt is due on June 30, 1997, but may be extended at the Company's
option upon payment of an extension fee of $100,000, to July 1, 1998. Proceeds
from the term debt were utilized to fund capital expenditures, acquisitions and
make payments on existing debt. The Company also made net payments of $926,000
on its various lines of credit. As of March 31, 1997, the Company had used
substantially all of the funds available under its lines of credit. The Company
anticipates obtaining proceeds from additional convertible preferred equity,
issuances of common stock, or debt financing to fund its additional acquisitions
as well as provide additional working capital for its existing operations.
Cash Flows from Discontinued Operations. The Company generated $2.7
million of cash flows from discontinued operations during fiscal year 1997. The
cash flows generated are a result of proceeds received from the sale of assets
of the Spectra*Star business, royalty income received from the sale of products
from the discontinued businesses and collection of accounts receivable related
to the discontinued operations.
FINANCIAL CONDITION
The Company's principal sources of cash are its existing cash and cash
equivalents balances, collections 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. During 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. 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 Potential Acquisitions. In connection with each of
the Potential Acquisitions, the Company has agreed that the cash portion
(excluding transaction costs) of the purchase price will not exceed (in
thousands):
<TABLE>
<S> <C>
Cozzi.............................................. $ 6,000
Superior........................................... 1,800
Goldin............................................. 7,150
Aerospace.......................................... 18,000
Atlas.............................................. 2,760
Yonack Iron........................................ 10,880
Yonack Services.................................... 350
Gold............................................... 2,650
-------
Total.................................... $49,590
=======
</TABLE>
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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.
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, MARCH 31,
1997 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,
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
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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 "Risk Factors -- Potential Substantial Dilution to Existing
Stockholders; Registration Rights."
Year Ended March 31, 1997
Significant Cash Transactions Subsequent to Year-End. In June 1997, the
Company concluded its private sale of 2,025,000 shares of restricted Common
Stock which raised approximately $14.75 million in cash. In connection with the
Company's acquisition of Reserve on May 1, 1997, a cash payment of $5.9 million
was made.
Cash Requirements for Maturing Debt Obligations. The Company has a loan
from a commercial bank in the principal amount of $10.0 million ($9.5 million is
currently outstanding) which is due and payable on September 30, 1997, but which
can be extended, at the Company's option, to July 1, 1998, upon payment of a
nominal extension fee. The Company also has a $5.0 million line of credit ($3.4
million is currently outstanding and available) which matures in August 1999. In
connection with the Reserve acquisition, the Company assumed certain debt of
approximately $26.0 million of which $1.5 million is a current liability. These
loans accelerate if Paul D. Joseph no longer serves as Reserve's Chief Executive
Officer or in a similar capacity or if his employment agreement is terminated.
In connection with the acquisition of Isaac, the Company issued promissory
notes in the following aggregate amounts: (i) $10,600,000 due and payable on
November 15, 1997, subject to extension for up to three months upon issuance of
additional warrants; (ii) $2,000,000 due and payable on February 15, 1998; and
(iii) $23,496,901 due and payable in three equal principal installments on
February 15, 1998, February 15, 1999 and February 15, 2000. In addition, Isaac
has promissory notes outstanding in the aggregate principal amount of
$8,544,201. In connection with the acquisition of Proler, the Company issued a
promissory note in the amount of $2,000,000 maturing two years from the closing
date. See "-- Business Operations" above.
Working Capital Availability and Requirements. Accounts receivable
balances increased from $1.5 million at March 31, 1996 to $9.6 million at March
31, 1997. The increase in accounts receivable is attributable to the
acquisitions of EMCO, MacLeod and HouTex, offset by collections of accounts
receivable from the Spectra*Star business. Accounts payable increased from $0.3
million at March 31, 1996 to $5.2 million at March 31, 1997. The increase in
accounts payable is attributable to the acquisitions of EMCO, MacLeod and
HouTex.
Inventory levels vary at each of the Company's subsidiaries. Inventory on
hand as of March 31, 1997 consisted of the following ($ in thousands):
<TABLE>
<CAPTION>
% OF
COMMODITY WEIGHT AMOUNT AMOUNT
--------- --------- ------ ------
<S> <C> <C> <C>
Ferrous (tons)......................................... 39,983 $2,707 32%
Non-ferrous (pounds)................................... 9,073,387 4,754 57%
Other.................................................. -- 954 11%
------ ---
$8,415 100%
====== ===
</TABLE>
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, the Company's EMCO subsidiary requires
substantial capital investment to replace old equipment and to put into service
additional processing equipment.
The Company has 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. As of March 31, 1997, the Company had fully drawn substantially all of
the available funds under the lines of credit. The lines of credit expire at
various dates through August 1998. On May 30, 1997, the Company
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<PAGE> 104
entered into a $6.0 million revolving and term loan agreement with a commercial
bank under which the Company received proceeds of $4.5 million, repayment of
which is due on July 1, 1998. The loan has an interest rate equal to 1% above
the lender's prime rate.
The weighted average interest rate on the Company's borrowings outstanding
as of March 31, 1997 was 9.59%. Average borrowings under the Company's various
lines of credit during fiscal year 1997 were approximately $4.7 million. During
fiscal year 1997, amounts outstanding under the various lines of credit ranged
from $2.5 million to $7.9 million.
STOCK PRICE AND DIVIDEND POLICY
The Common Stock is included for quotation on the Nasdaq National Market
under the symbol "MTLM". The following table sets forth the quarterly high and
low closing sale prices per share for the Common Stock for the periods
indicated, as reported by Nasdaq. (1) These prices reflect inter-dealer prices,
without retail mark-up, mark-down or commission.
<TABLE>
<CAPTION>
HIGH SALE LOW SALE
--------- --------
<S> <C> <C>
FISCAL YEAR 1995 (YEAR ENDED 10/31/95)
First Quarter (3/31/95)................................... 1.88 1.25
Second Quarter (6/30/95).................................. 2.00 1.50
Third Quarter (9/30/95)................................... 2.13 1.44
Fourth Quarter (12/31/95)................................. 3.63 1.75
FISCAL YEAR 1996 (FIVE MONTHS ENDED 3/31/96) (2)
First Quarter (11/1/95 to 1/31/96)........................ 5.00 3.00
Second Quarter (2/1/96 to 3/31/96)........................ 5.00 4.25
FISCAL YEAR 1997 (YEAR ENDED 3/31/97)
First Quarter (6/30/96)................................... 5.56 4.38
Second Quarter (9/30/96).................................. 4.50 3.25
Third Quarter (12/31/96).................................. 4.19 3.38
Fourth Quarter (3/31/97).................................. 10.38 3.81
FISCAL YEAR 1998 (YEAR ENDED 3/31/97)
First Quarter (6/30/97)................................... 15.25 8.50
Second Quarter (9/30/97).................................. 30.00 13.88
</TABLE>
- ---------------
(1) The Company changed its name from "General Parametrics Corporation" to
"Metal Management, Inc." in April 1996 and the Common Stock symbol was
changed from "GPAR" to "MTLM".
(2) The Company changed its fiscal year-end to March 31 effective April 11,
1996.
The last reported sale price for the Common Stock on November 19, 1997 was
$19.00 per share. The sale price for the Common Stock on March 14, 1997, the
last business day before the Company publicly announced the Merger, was $7.63
per share. The number of record holders of the Common Stock at the Record Date
was 261. This number does not include an indeterminate number of Stockholders
whose shares of Common Stock are held by brokers in "street name."
On August 31, 1995, the Company announced that its Board of Directors
decided to discontinue the Company's payment of dividends. The Company does not
anticipate paying dividends over the next twelve months. None of the documents
governing the Company's indebtedness restrict the Company from paying dividends.
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<PAGE> 105
INFORMATION ABOUT COZZI
OVERVIEW
Cozzi, founded by the Cozzi family in 1945, is a leading recycler of
ferrous and non-ferrous scrap metal in the Midwest. Cozzi has built a network of
processing facilities located in Chicago, Illinois; East Chicago, Indiana and
the Pittsburgh, Pennsylvania area, with joint ventures operating in Memphis,
Tennessee and Phoenix, Arizona. The Company believes that Cozzi's strengths
include its strong relationships with major industrial scrap suppliers,
efficient shredding capacity, rapidly growing stainless and alloy steel
business, broad product line, and geographic proximity to low cost
transportation afforded by the Mississippi River and the Great Lakes.
Cozzi has expanded its operations and increased its processing capacity
through a combination of joint ventures, asset acquisitions and internal
expansion. In 1996, Cozzi entered into a joint venture (in the form of a limited
liability company of which Cozzi owns 50%) to operate a ferrous and non-ferrous
metal processing plant in Phoenix, Arizona which includes an auto shredding
machine. In 1995, Cozzi entered into a joint venture (in the form of a limited
liability company of which Cozzi owns 50%) to operate a ferrous and non-ferrous
metal processing plant in Memphis, Tennessee. Cozzi completed installation of a
new auto shredder at the Memphis facility in 1996. The Company has signed
binding letters of intent to acquire the 50% joint venture interests owned by
parties other than Cozzi in each of these joint ventures. See "Information about
the Company -- Business Operations."
In 1995, Cozzi acquired a stainless steel and alloy operation in Bedford
Park, Illinois, allowing Cozzi to enter into a business in which it previously
had little experience. In addition to equipment, Cozzi acquired the previous
owner's list of scrap metal suppliers. In 1994, Cozzi acquired an automobile
shredding operation in Chicago, Illinois, and in 1997, completed construction of
its fourth automobile shredding facility in the Chicago area. In 1997, Cozzi
also completed construction of a non-ferrous eddy current separation system in
Chicago, Illinois.
BUSINESS OPERATIONS
Recycling Operations. Cozzi's recycling operations involve buying,
processing, and selling scrap metals. The principal forms in which scrap metals
are generated include industrial scrap and obsolete scrap. Industrial scrap
results from residual materials from manufacturing processes. Obsolete scrap
consists primarily of residual metals from old or obsolete consumer and
industrial products such as appliances and automobiles.
Ferrous Operations -- Ferrous Scrap Purchasing. Cozzi purchases ferrous
scrap from two primary sources: (i) manufacturers who generate industrial scrap;
and (ii) junkyards, demolition firms, railroads, the military and others who
generate obsolete scrap. In addition to these sources, Cozzi purchases, at
auction, furnace iron from integrated steel mills and obsolete steel and iron
from government and large industrial accounts. Finally, Cozzi purchases
materials from small dealers, peddlers and auto wreckers who deliver directly to
Cozzi's processing facilities. Prices are determined primarily by market demand
and the composition, quality, size, and weight of the materials.
Ferrous Scrap Processing
Cozzi prepares ferrous scrap metal for resale through a variety of methods
including sorting, shredding, shearing or cutting, baling or breaking. Cozzi
produces a number of differently sized and shaped products depending upon
customer specifications and market demand.
Sorting. After purchasing ferrous scrap metal, Cozzi inspects the material
to determine how it should be processed to maximize profitability. In some
instances, scrap may be sorted and sold without further processing. Cozzi
separates scrap for further processing according to its size and composition by
using conveyor systems, front-end loaders, crane-mounted electromagnets or
claw-like grapples.
Shredding. Obsolete consumer scrap such as automobiles, home appliances
and other consumer goods, as well as certain light gauge industrial scrap, is
processed in Cozzi's shredding operation. These items are fed
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into a shredder that quickly breaks the scrap down into fist-size pieces of
ferrous metal. The shredding process uses magnets and other technologies to
separate ferrous, non-ferrous and non-metallic materials. The ferrous material
is sold to Cozzi's customers including mini-mills and the non-metallic
by-product of the shredding operations, referred to as "shredder fluff," is
disposed of in third party landfills. Cozzi operates four automobile shredding
facilities in Chicago, Illinois and, through its joint ventures, one in Phoenix,
Arizona and one in Memphis, Tennessee. The Company has signed binding letters of
intent to acquire the 50% joint venture interests owned by parties other than
Cozzi in each of these joint ventures. See "Information about the
Company -- Business Operations."
Shearing or Cutting. Pieces of oversized ferrous scrap which are too large
for other processing, such as obsolete steel girders and used drill pipe, are
cut with hand torches, crane-mounted alligator shears and/or stationary
hydraulic guillotine shears. After being reduced to more manageable size, the
scrap is then sold to those customers who can accommodate larger materials, such
as mini-mills. Cozzi operates four stationary hydraulic guillotine shears at its
facilities in Chicago, Illinois.
Baling. Cozzi processes light gauge ferrous metals such as clips and sheet
iron, and by-products from industrial manufacturing processes, such as
stampings, clippings and excess trimmings, by baling these materials into large,
uniform blocks. Cozzi uses cranes, front-end loaders and conveyors to feed the
metal into hydraulic presses which compress the materials into uniform blocks at
high pressure. Cozzi operates seven high capacity balers, each of which is
capable of producing 2000 pound bundles of scrap metal; six of these balers are
located in Chicago, Illinois and one near Pittsburgh, Pennsylvania.
Breaking of Furnace Iron. Cozzi processes furnace iron which includes
blast furnace iron, steel pit scrap, steel skulls, beach iron and pit scrap.
Large pieces of iron are broken down by the impact of eight-to-ten-ton forged
steel balls dropped from cranes. The fragments are then sorted and screened
according to size and iron content.
Ferrous Scrap Sales
Cozzi sells processed ferrous scrap to end users such as mini-mills,
integrated steel makers and foundries and to brokers who aggregate materials for
other large users. Most of Cozzi's customers purchase processed ferrous scrap
according to a monthly plan which establishes the quantity purchased for the
month. Cozzi sells its products to end users and brokers through its sales force
of approximately five people. The price charged by Cozzi for ferrous scrap
depends upon market demand, as well as quality and grade. Cozzi's sales of
processed ferrous scrap accounted for approximately 80% of Cozzi's revenues for
the twelve months ended March 31, 1997, representing approximately 1.2 million
tons of ferrous metals.
NON-FERROUS OPERATIONS
Non-Ferrous Scrap Purchasing. Cozzi purchases non-ferrous scrap from three
primary sources: (i) manufacturers and other non-ferrous scrap sources who
generate or sell waste aluminum, copper, stainless steel, brass,
high-temperature alloys and other metals; (ii) telecommunications, aerospace,
defense, and recycling companies that generate obsolete scrap consisting
primarily of copper wire, exotic metal alloys and used aluminum beverage cans;
and (iii) peddlers who deliver, directly to Cozzi's facilities, material which
they collect from a variety of sources. Cozzi collects non-ferrous scrap from
sources other than those that deliver directly to Cozzi's processing facilities
by placing retrieval bins near these sources. Once full, the bins are
transported to Cozzi's processing facilities.
Cozzi also generates non-ferrous scrap as a by-product of its ferrous scrap
processing operations. Non-ferrous scrap is recovered from Cozzi's ferrous
operations through two primary activities: (i) non-ferrous materials, generally
a mixture of aluminum, zinc, die-cast metal, stainless steel and copper, are
recovered as a by-product of the shredding process; and (ii) non-ferrous
materials are identified visually and by using magnets.
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<PAGE> 107
A number of factors can influence the continued availability of non-ferrous
scrap such as the level of manufacturing activity and the quality of Cozzi's
supplier relationships. Cozzi has certain long-standing supply relationships
which, consistent with industry practice, are not the subject of written
agreements.
Non-Ferrous Scrap Processing. Cozzi prepares non-ferrous scrap metal for
resale by sorting, shearing, cutting, stripping and baling.
Sorting. Cozzi's sorting operations separate non-ferrous scrap using
conveyor systems and front-end loaders. In addition, many non-ferrous metals are
sorted and identified using grinders, hand torches, eddy current separation
systems and spectrometers. Cozzi's ability to identify metallurgical composition
is critical to maintaining high margins and profitability. Due to the high value
of many non-ferrous metals, Cozzi can afford to utilize more labor intensive
sorting techniques than are employed in its ferrous operations. Cozzi sorts
non-ferrous scrap for further processing according to type, grade, size and
chemical composition. Throughout the sorting process, Cozzi determines whether
the material requires further processing before being sold.
Copper. Cozzi processes scrap copper using a variety of techniques
including stripping (separating plastic casing from wire) and by using baling
and other repacking methods to meet customer specifications. For the twelve
months ended March 31, 1997, Cozzi sold approximately 17 million pounds of
copper.
Stainless Steel and Aluminum. Cozzi uses similar techniques to process
stainless steel and aluminum, based on the size of the pieces and customer
specifications. Large pieces of stainless steel are cut using alligator shears,
stationary guillotine shears and hand torches and are baled, while smaller
pieces of stainless steel are repackaged to meet customer specification. Large
pieces of aluminum are cut using alligator shears, stationary guillotine shears
and hand torches and are baled along with small aluminum stampings to produce
large bales of aluminum. Smaller pieces of aluminum are repackaged to meet
customer specifications. For the twelve months ended March 31, 1997, Cozzi sold
approximately 50 million pounds of stainless steel and 16 million pounds of
aluminum, respectively.
Other Non-Ferrous Materials. Cozzi processes other non-ferrous metals
using similar cutting, baling and repacking techniques as it uses to process
aluminum. Among other significant non-ferrous metals Cozzi processes are brass
and high-temperature alloys.
Non-Ferrous Scrap Sales. Cozzi sells processed non-ferrous scrap to end
users such as specialty steel-makers, foundries, aluminum sheet and ingot
manufacturers, copper refineries and smelters, and brass and bronze ingot
manufacturers. Cozzi sells its products to end users and brokers through its
sales force of three people. Prices for the majority of non-ferrous scrap metals
change based upon the daily publication of spot and futures prices on the COMEX
or London Metal Exchange. Cozzi's sales of processed non-ferrous scrap accounted
for approximately 20% of Cozzi's revenues for the twelve months ended March 31,
1997, representing approximately 104 million pounds of non-ferrous metals.
SIGNIFICANT CUSTOMERS
Each of Cozzi's facilities sells a significant portion of its processed
scrap production to a relatively small number of customers who typically are not
bound by long-term purchase contracts. One of Cozzi's customers, David J. Joseph
Company, accounted for approximately 20% of Cozzi's revenue for the twelve
months ended March 31, 1997. David J. Joseph Company is a scrap metal broker,
and Cozzi believes that a significant portion of the scrap metal purchased by
David J. Joseph Company is resold to Nucor Corporation. Any cancellation of or
reduction in orders from this customer could have a material adverse effect on
Cozzi's results of operations and financial condition.
COMPETITION
Cozzi faces competition for sales from producers of finished steel
products, such as integrated steel mills and mini-mills, many of which have
substantially greater financial, marketing and other resources, which may
vertically integrate their operations by entering the scrap metals recycling
business. The scrap market is also regionally competitive both in terms of the
purchase of raw scrap and the sale of processed scrap. Cozzi competes for
purchases of raw scrap with numerous independent recyclers as well as with
smaller scrap yards.
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<PAGE> 108
Cozzi's primary competition for processed scrap sales to its customers are other
regional or local scrap metal recyclers.
Scrap metal processors face competition from substitutes for prepared steel
scrap, such as pre-reduced iron pellets, hot briquetted iron, pig iron, iron
carbide and other forms of processed iron. Substitutes for ferrous scrap could
result in a decreased demand for processed ferrous scrap, which could result in
lower prices for such products. Any decrease in the demand or price for Cozzi's
products may have a material adverse effect on Cozzi's results of operations and
financial condition.
EMPLOYEES
As of September 30, 1997, Cozzi employed approximately 450 persons, 314 of
whom were covered by collective bargaining agreements. The management of Cozzi
believes that it has good relations with its employees.
PROPERTIES
Cozzi's principal offices are located at 2232 South Blue Island Avenue,
Chicago, Illinois which Cozzi owns. Cozzi owns or leases nineteen other
properties.
Cozzi owns fourteen parcels of property in Chicago, Illinois. Several of
these parcels are scrap yards and the other properties contain warehouses and/or
office buildings. Additionally, Cozzi owns a 7 acre site in Bedford Park,
Illinois; a 13.5 acre site in East Chicago, Indiana; and a four acre site in
Monongahela, Pennsylvania, near Pittsburgh. Cozzi leases to a third party a
30,000 square foot site on the southwest corner of 26th and Paulina, Chicago and
a 120,000 square foot site along the Calumet River, located in Chicago.
Cozzi leases or subleases three parcels located in industrial areas of
Chicago, Illinois, one of which houses a scrap yard and two of which are used as
employee parking lots.
ENVIRONMENTAL MATTERS
Comprehensive Regulatory Requirements. Like the Company, Cozzi is subject
to significant government regulation, including stringent environmental laws and
regulations. For a description of certain of these laws and regulations, See
"Information about the Company -- Environmental Matters -- Comprehensive
Regulatory Requirements."
Significant Potential Environmental Liability. Like the Company, Cozzi is
subject to significant potential environmental liability. Following the Merger,
any substantial liability of Cozzi for environmental damage could materially
adversely affect the marketability and price of the Company's stock. For a
general description of such significant potential environmental liability, as
well as a description of certain environmental risk factors which management of
the Company currently believes are generally applicable to both the Company and
Cozzi, See "Information about the Company -- Environmental
Matters -- Significant Potential Environmental Liability: General;
Incompleteness of Site Investigations; Likelihood of Contamination at Some
Sites; Uncertain Costs of Environmental Compliance and Remediation; Lack of
Environmental Impairment Insurance; Risks Associated with Certain By-Products;
Potential Superfund Liability; Underground Storage Tanks; Employee Health and
Safety Issues; Recommendation of Environmental Consultants; and Compliance
History."
On-Going Environmental Due Diligence Investigation. The Company is
performing an on-going due diligence investigation of Cozzi's environmental
matters, but such investigation has not yet been completed. No assurance can be
given that all material adverse information regarding Cozzi's environmental
matters will be discovered by such due diligence investigation prior to the
closing of the Merger, if at all.
Limited Environmental Indemnification from Cozzi Shareholders. Even if the
Company's on-going due diligence investigation of Cozzi discovers material
adverse information regarding Cozzi environmental matters, the Company may elect
to proceed to close the Merger. In such event, the Company's potential to
recover damages from, or to receive indemnification from, the Cozzi Shareholders
in regard to such material
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<PAGE> 109
adverse information is quite limited. Under the terms of the Merger Agreement,
the Cozzi Shareholders have excepted from their representations and warranties a
broad list of events, circumstances and conditions in regard to potential
environmental contamination. These exceptions would make it quite difficult for
the Company to recover damages from, or to receive indemnification from, the
Cozzi Shareholders in regard to many environmental matters which, in the case of
certain of the Company's Completed Acquisitions and Potential Acquisitions,
might trigger such a recovery of damages or receipt of indemnification by the
Company under similar circumstances.
Particular Concerns. Without limiting the generality of the foregoing risk
factors, the Company to date has identified and is evaluating the following
items of particular environmental concern regarding Cozzi, among others:
1. Potential Superfund Liabilities.
(a) Like the Company's Reserve subsidiary, Cozzi has received a notice
from the EPA that Cozzi is a PRP under Superfund in regard to the Standard
Scrap Metal/Chicago International Exporting Removal Action Site. Based upon
its analysis of the situation, Cozzi currently does not expect such
potential liability to be in excess of $50,000. There can be no assurance,
however, that the potential liability may not be greater than $50,000.
(b) Cozzi has received a notice from the EPA that Cozzi is a PRP under
Superfund in regard to the site referred to as H&H Recycling in Gary,
Indiana. Cozzi is not currently in a position to determine its potential
liability in regard to this site. There can be no assurance that such
potential liability will not be material.
(c) Cozzi was served in a private cost recovery action alleging that
Cozzi is a PRP under Superfund in regard to the site referred to as Gould
Battery Site in Pennsylvania. Based upon its analysis of the situation,
including transaction documentation and indemnifications, Cozzi currently
expects that its ultimate liability in regard to this matter will be de
minimus, but there can be no assurance this will be the case.
2. Employee Health and Safety Issues. Like the Company, Cozzi is
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, Cozzi employees have occurred at three of Cozzi's
facilities during the past three years. Cozzi has been fined by OSHA in regard
to the two accidental deaths. No assurance can be given that potential
liabilities of the Company in regard to such deaths and injury, or in regard to
any future deaths of or injuries to the Company's employees will not be
material.
3. Compliance History. Like the Company, Cozzi's operations are subject
to a variety of permits, consents, licenses and approvals issued by various
federal, state and local agencies. Cozzi has, in the past, been not in
compliance with certain environmental laws and regulations, has incurred fines
associated with such violations which have not been material in amount, and may
in the future incur additional fines associated with such violations. No
assurance can be given that compliance issues and liabilities will not occur in
the future, nor that any fines, penalties, damages and expenses associated
therewith will not be material.
LEGAL PROCEEDINGS
On November 7, 1995, Employers Insurance of Wausau ("Wausau") filed suit
against Cozzi for non-payment of worker's compensation premiums totaling
$1,695,760 for the policy year October 15, 1993, to October 15, 1994. (Employers
Insurance of Wausau v. Cozzi Iron & Metal, Inc., case no. 95 CH 10750 in the
Circuit Court of Cook County, Illinois.) Cozzi has filed a jury demand, a second
amended answer and a first amended counterclaim seeking damages for Wausau's
violation of the Illinois Consumer Fraud and Deceptive Business Practices Act
for Wausau's failure to disclose fully various premiums and policy options
available to Cozzi. Document discovery began in August 1996.
There is pending in the 40th Judicial District Court for the Parish of St.
John the Baptist in the State of Louisiana consolidated class actions (case nos.
26392 c/w 27528, c/w 27529, c/w 34355, consolidated June 7,
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1995) in which plaintiffs assert causes of action against various defendants,
including Great Lakes Turnings, Ltd., in which Cozzi is a 50% shareholder
("GLTL"), arising out of alleged noxious odors resulting from a February 11,
1990, fire aboard a ship carrying GLTL scrap. Should the case go to trial, and
judgment be entered against GLTL, it is possible that the plaintiffs might: (i)
seek to pierce GLTL's corporate veil on the basis that GLTL has no significant
assets; and (ii) seek judgment against GLTL's two shareholders, including Cozzi.
In June 1996, Henry Garcia, an employee of American Scrap Processing, Inc.,
a wholly-owned subsidiary of Cozzi, suffered a workplace injury in East Chicago,
Indiana, resulting in a double leg amputation above the knee. On June 28, 1996,
Mr. Garcia filed a worker's compensation claim with the Indiana Worker's
Compensation Board. Because Cozzi owned the crane and magnet allegedly involved
in the accident, it anticipates being sued and has notified its liability
carrier.
Esther Gonzalez Romo's husband, an employee of Scrap Processing, Inc., a
wholly-owned subsidiary of Cozzi, died after being in a coma for eighteen months
following a workplace accident. A worker's compensation claim has been filed. On
February 10, 1995, a suit was filed in the Circuit Court of Cook County,
Illinois (Esther Gonzalez Romo v. Scrap Processing, Inc., case no. 95 L 2516
consolidated on March 1, 1995 with case no. 95 L 4544 as Esther Gonzalez Romo v.
Pettibone, et al). The subject shredder manufacturer has filed a third-party
claim against Scrap Processing, Inc. and Cozzi, claiming they modified the
equipment.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following discussion should be read in conjunction with the Financial
Statements of Cozzi and the notes related thereto and "Selected Historical
Financial Data of Cozzi" included elsewhere in this Proxy Statement.
Cozzi's Financial Statements do not reflect significant accruals with
respect to environmental matters or legal proceedings. Cozzi is not aware of any
material liabilities with respect to such claims.
RESULTS OF OPERATIONS
Cozzi's results of operations depend upon demand for its products, scale
prices for scrap metals in the domestic markets and overall steel production.
While ferrous scrap prices have on average increased historically, such prices
are subject to market cycles. Cozzi's operating income declined in calendar year
1996 as a slowdown in economic activity, coupled with an increase in imported
scrap substitutes, resulted in declining demand and prices for scrap metals and
steel products. Increasing steel demand and prices have led to improved
profitability since 1993, although Cozzi experienced softening in its markets in
calendar year 1996 and the first half of 1997.
The following table sets forth information regarding the income from
operations (in millions) for Cozzi:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ ------------------
1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Sales................................ $147.3 $199.7 $231.4 $215.9 $167.1 $191.2
Cost of Goods Sold................... 131.8 174.7 206.5 195.4 149.8 172.1
------ ------ ------ ------ ------ ------
Gross Profit............... 15.5 25.0 24.9 20.5 17.3 19.1
Selling, General & Administrative
Expense............................ 11.4 13.5 15.9 14.6 11.5 13.7
Interest Expense -- Net.............. 1.3 1.7 2.0 1.8 1.6 2.1
Income (Loss) on Futures Contracts... -- -- -- (.2) (.4) .1
Equity in Net Income (Loss) of Joint
Venture............................ -- -- (.7) (1.1) (.4) .4
------ ------ ------ ------ ------ ------
Pre-Tax Income............. $ 2.8 $ 9.8 $ 6.3 $ 2.8 $ 3.4 $ 3.8
====== ====== ====== ====== ====== ======
</TABLE>
Nine months ended September 30, 1997 compared to Nine months ended September
30, 1996
Revenues -- Revenues for the nine months ended September 30, 1997 increased
$24.1 million (14.4%) compared to the nine months ended September 30, 1996, due
to an increase in ferrous metal revenue coupled with an increase of non-ferrous
metal revenues and brokerage revenues. Revenues from ferrous operations
increased approximately $11.7 million (8.8%) reflecting lower average selling
prices with an increase in shipments of approximately 118,000 tons (13.6%).
Revenues from non-ferrous operations increased approximately $12.4 million
(35.9%) reflecting increased shipments (31,000 tons) with lower average selling
prices. Brokerage revenues increased $3.2 million (112.4%) mainly due to a
purchase of European generated scrap metal.
Cost of Goods Sold -- Overall, cost of goods sold increased $22.3 million
(14.9%) to $172.1 million, although as a percentage of scrap revenues increased
from 89.8% to 90.0%.
Selling and Administrative Expenses -- Selling and Administrative expenses
increased $2.2 million (19.1%) to $13.7 million primarily due to freight costs
increasing $1.5 million due to an increase in tons shipped of ferrous and
non-ferrous metal and an increase in the number of sales contracts of freight
delivered "Free on Board" (F.O.B.).
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Interest Expense -- Interest Expense for the nine months ended September
30, 1997 increased $.5 million (31.3%) compared to the nine months ended
September 30, 1996, primarily due to the interest charges related to debt
incurred for the purchase of treasury stock entered into in late June 1996.
Gain/Loss on Futures Contract -- The futures contracts purchased for
aluminum commodities for the nine months ended September 30, 1997 resulted in a
gain of $83,000.
Equity in Net Income of Joint Ventures -- Equity in income from Joint
Ventures for the nine months ended September 30, 1997 increased $.8 million
compared to the nine months ended September 30, 1996. The increase was primarily
due to the installation of the metal recovery system in February 1997 in
Memphis, Tennessee.
Year Ended December 31, 1996 to Year Ended December 31, 1995 .
Revenues. Revenues in calendar year 1996 decreased $15.5 million (6.7%)
compared to calendar year 1995, due to a decrease in ferrous and non-ferrous
metal revenues. Revenues from ferrous operations decreased $11.8 million (6.5%)
reflecting minimal decrease in shipments (34,000 tons) and lower average selling
prices. Revenues from non-ferrous operations decreased $3.7 million (7.5%)
reflecting increased shipments (4,000 tons) offset by lower average selling
prices. Average selling prices of ferrous scrap decreased approximately $5 per
ton (3.3%) to approximately $145 per ton as a result of what Cozzi believes to
be short term market conditions. Additionally, average selling prices of
nonferrous scrap decreased in 1996.
Cost of Goods Sold. Overall cost of goods sold decreased $11.1 million
(5.4%) to $195.4 million and increased as a percentage of scrap revenues from
89.2% to 90.5%.
Selling and Administrative Expenses. Selling and administrative expenses
decreased $1.3 million (8.3%) to $14.6 million for calendar year 1996 compared
to calendar 1995, primarily due to freight costs decreasing $.4 million due to
fewer shipments, administrative costs decreasing $.3 million due to a reduction
in bonuses paid and a gain on disposition of obsolete assets of $.3 million.
Interest Expense. Interest expense for calendar year 1996 decreased $.2
million compared with calendar year 1995 as a result of capitalizing interest
associated with purchases of equipment for its joint ventures and Cozzi's
construction of shredders and eddy current systems.
Loss on Future Contracts. In 1996, Cozzi entered into futures contracts
for aluminum commodities in anticipation of risk reduction on price fluctuations
in its raw materials inventory. Cozzi lost $.2 million on these contracts during
1996.
Loss from Joint Ventures. Losses due to joint ventures for calendar year
1996 increased $.4 million compared to the prior year primarily due to losses
incurred at the new joint venture operations in Phoenix, Arizona.
Year Ended December 31, 1995 to Year Ended December 31, 1994.
Revenues. Revenues in calendar year 1995 increased $31.7 million (15.9%)
compared to calendar year 1994, due to an increase in ferrous and non-ferrous
metal revenues. Revenues from ferrous operations increased $13.6 million (8.1%)
reflecting increased shipments (43,000 tons) and higher average selling prices.
Revenues from non-ferrous operations increased $18.1 million (58.0%) reflecting
increased shipments (11,500 tons) and higher average selling prices. Average
selling prices of ferrous scrap increased approximately $6 per ton (4.2%) to
approximately $150 per ton. Additionally, average selling prices of non-ferrous
scrap increased in 1995.
Cost of Goods Sold. Overall cost of goods sold increased $31.8 million
(18.2%) to $206.5 million and increased as a percentage of scrap revenues from
87.5% to 89.2%.
Selling and Administrative Expenses. Selling and administrative expenses
increased $2.4 million (18.0%) to $15.9 million for calendar year 1995 compared
to calendar year 1994, primarily due to freight costs increasing $2.0 million
due to an increase in shipments.
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Interest Expense. Interest expense for calendar year 1995 increased $.3
million compared with calendar year 1994 as a result of additional debt incurred
for the Chicago and Memphis transactions and the purchase of capital assets.
Loss from Joint Ventures. Losses due to joint ventures for calendar year
1995 increased $.7 million compared to the prior year due to losses incurred at
new joint venture operations in Memphis, Tennessee. A portion of the loss was
due to initial start-up costs.
Year Ended December 31, 1994 to Year Ended December 31, 1993.
Revenues. Revenues in calendar year 1994 increased $52.4 million (35.6%)
compared to calendar year 1993, due to an increase in ferrous and non-ferrous
metal revenues. Revenues from ferrous operations increased $33.3 million (24.7%)
reflecting increased shipments (101,000 tons) and higher average selling prices.
Revenues from non-ferrous operations increased $19 million (157.0%) reflecting
increased shipments (15,300 tons) and higher average selling prices. Average
selling prices of ferrous scrap increased approximately $17 per ton (13.4%) to
approximately $144 per ton. Additionally, average selling prices of non-ferrous
scrap increased in 1994.
Cost of Goods Sold. Overall cost of goods sold increased $42.9 million
(32.6%) to $174.7 million and decreased as a percentage of scrap revenues from
89.5% to 87.5%.
Selling and Administrative Expenses. Selling and administrative expenses
increased $2.1 million (18.4%) to $13.5 million for calendar year 1994 compared
to calendar year 1993, primarily due to freight costs increasing $1.8 million
due to an increase in shipments and administrative costs increasing $.6 million
due to an increase in profit sharing and deferred compensation plan benefits to
employees.
Interest Expense. Interest expense for calendar year 1994 increased $.4
million compared with calendar year 1993 as a result of increased borrowings to
fund working capital needs.
LIQUIDITY AND CAPITAL RESOURCES
Cozzi assesses its overall need for liquidity in terms of its ability to
support ongoing operating needs, including, but not limited to, capital
expenditures and investments in joint venture companies. While operating
activities have generally generated excess cash, a line of credit has been
utilized to support cash requirements. Beginning in 1995, Cozzi embarked upon a
strategy to expand its existing operations through acquisition of equipment and
facilities as well as through investments in joint ventures. This expansion
strategy is expected to continue. The expansion has been funded through
operating cash flows and bank borrowings. Cozzi believes that cash flows from
operations and amounts available under Cozzi's existing credit facilities ($8.0
million at September 30, 1997) are sufficient to meet its short-term and
long-term operating and capital expenditure requirements.
Cash flows from operating activities -- Cash flows from operating
activities represent Cozzi's principal source of funding. Cash flows from
operating activities were $2.1 million for the nine months ended September 30,
1997 as compared to $9.3 million for the same period of 1996. The decrease in
operating cash flow for the nine months ended September 30, 1997 as compared to
the nine months ended September 30, 1996 resulted primarily from an increase in
accounts receivable of $11.3 million in 1997 versus a decrease of $10.2 million
in 1996. The increase in accounts receivable was a result of higher non-ferrous
sales, which have longer credit terms, and large sales of scrap in September,
1997.
Cozzi had positive cash flows from operating activities of $5.1 and $2.1
million for the years ended December 31, 1996 and 1995, respectively, and
negative cash flows of ($0.3) million for the year ended December 31, 1994. Cash
flows benefited from a decrease in accounts receivable of $8.3 million for the
year ended December 31, 1996, while experiencing a detriment from increases in
accounts receivable of $10.8 and $13.1 million for the years ended December 31,
1995 and 1994, respectively. Additionally, Cozzi experienced deficits in cash
flows from operations for the years ended December 31, 1996 and 1994 as
inventories increased $5.6 and $5.7 million, respectively, and benefited in 1995
with decreasing inventories of $(2.4) million.
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Cash flows from investing activities -- Cash flows from investing
activities consist of capital expenditures for expansion and additions to
existing property and equipment as well as capital outlays for investment in new
joint venture operations. Cozzi's capital expenditures for property and
equipment were $5.7 and $6.1 million for the nine months ended September 30,
1997 and 1996, respectively. Additionally, Cozzi had a net increase of $1.2
million through September 30, 1997 and net decrease of $2.8 million through
September 30, 1996 of investments in and loans to their joint ventures.
Cozzi's capital expenditures for property and equipment were $9.3, $7.4 and
$0.9 for the years ended December 31, 1996, 1995 and 1994, respectively. During
1996, Cozzi received proceeds of $7.6 million from the sale of equipment. In
addition, Cozzi invested $5.0 and an additional $0.2 million in its joint
ventures for the years ended December 31, 1996 and 1995, respectively.
Cash flows from financing activities -- Cash flows from financing
activities consist primarily of lines of credit and various equipment loans.
Cozzi's net borrowings were $1.6 and $1.5 million for the nine months ended
September 30, 1997 and 1996, respectively. Cozzi paid cash of $1.2 million
towards the repurchase of treasury stock and the stock of a subsidiary from the
estate of a deceased shareholder during the nine months ended September 30,
1996.
Cozzi's net borrowings were $3.2, $4.6 and ($0.4) million for the years
ended December 31, 1996, 1995 and 1994, respectively. Cozzi paid cash of $1.2
and $0.2 million of treasury stock and the stock of a subsidiary in 1996 and
1994, respectively, in order to buy out shares of previous owners.
FINANCIAL CONDITION
Assets -- Cozzi's total assets as of September 30, 1997 increased $7.9
million over September 30, 1996. Cozzi's working capital increased by $4.6
million primarily due to an increase of accounts receivable of $13.2 million and
a decrease in inventories of $5.2 million. Cozzi's property and equipment
decreased $6.4 million primarily due to the sale of equipment of $7.0 million to
a finance company. Investments in joint ventures as of September 30, 1997
increased $5.4 million over September 30, 1996. This increase was predominately
for investments in equipment for the Memphis joint venture.
Cozzi's total assets as of December 31, 1996 increased $0.9 million over
December 31, 1995 and increased $15.4 million from December 31, 1994 to December
31, 1995. Cozzi's net assets decreased and working capital increased $2.6
million and $6.6 million as of December 31, 1996 and 1995, respectively. The
increase from December 31, 1995 to December 31, 1996 was from a $8.3 million
decrease in accounts receivable and a $5.6 million increase in inventory. The
increase from December 31, 1994 to December 31, 1995 was from a $10.8 million
increase in accounts receivable and $2.9 million decrease in inventories.
Cozzi's property and equipment decreased $5.2 million from December 31, 1995 to
December 31, 1996 and increased $8.9 million from December 31, 1994 to December
31, 1995. The decrease from December 31, 1995 to December 31, 1996 was the
result of the sale of equipment to the joint venture partner for $4.8 million.
The increase from December 31, 1994 to December 31, 1995 was a result of the
acquisition of equipment and an additional facility.
Liabilities -- Cozzi's total liabilities as of September 30, 1997 increased
$6.0 million over September 30, 1996. Cozzi's current liabilities increased by
$3.7 million due to a $2.4 million increase in accounts payable and accrued
liabilities which primarily resulted from increased purchases and the timing of
disbursements. Cozzi's long term debt increased $2.1 million. This increase was
a result of the $3.9 million increase in the line of credit for operating
activities and a $3.0 million increase in borrowings for equipment purchases for
joint ventures. Cozzi had $8.0 million available on their lines of credit as
September 30, 1997.
Cozzi's total liabilities as of December 31, 1996 increased $13.1 million
over December 31, 1995 and increased $11.5 million from December 31, 1994 to
December 31, 1995. Cozzi's current liabilities as of December 31, 1996 decreased
$3.4 million from December 31, 1995 and increased $3.1 million from December 31,
1994 to December 31, 1995. Cozzi had customer deposits amounting to $3.0 million
at December 31, 1995 which Cozzi did not have at December 31, 1996 or 1994
attributing to the majority of the fluctuation within the three years. Cozzi's
long term debt increased $15.7 million and $8.2 million as of
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December 31, 1996 and 1995, respectively. The increase from December 31, 1995 to
December 31, 1996 was from a $12.7 million financing for the purchase of
treasury stock and $5.0 million of capital equipment financing. The increase
from December 31, 1994 to December 31, 1995 was attributable to $7.3 million
increase in the working capital line of credit for operations and $1.3 million
of capital equipment financing.
Stockholders' Equity -- Cozzi's total equity as of September 30, 1997
increased $2.1 million from September 30, 1996. The increase was the net income
for the period September 30, 1996 to September 30, 1997.
Cozzi's total equity as of December 31, 1996 decreased $12.1 million from
December 31, 1995 and increased $3.9 million from December 31, 1994 to December
31, 1995. The decrease from December 31, 1995 to December 31, 1996 was
attributable to the purchase of $13.7 million of treasury stock and the stock of
a subsidiary and retained earnings increasing $1.6 million due to Cozzi's income
for the period. The increase from December 31, 1994 to December 31, 1995 was a
result of Cozzi's net income of $3.9 million that increased retained earnings.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of: (i) 40,000,000
shares of Common Stock, par value $0.01 per share, 16,550,079 of which shares
were outstanding as of the Record Date; and (ii) 2,000,000 shares of Preferred
Stock without designation, par value $0.01 per share. The Board of Directors has
designated: (i) 36,000 shares of Preferred Stock as Series A Convertible
Preferred Stock, face amount of $1,000 per share (the "Series A Preferred
Stock"), 25,000 shares of which were outstanding as of the Record Date; and (ii)
23,000 shares of Preferred Stock as Series B Convertible Preferred Stock, face
amount of $1,000 per share (the "Series B Preferred Stock"), no shares of which
were outstanding as of the Record Date. If Proposal Number Four and Proposal
Number Five are approved, the authorized capital stock of the Company will
consist of 80,000,000 shares of Common Stock and 4,000,000 shares of Preferred
Stock.
COMMON STOCK
Each share of Common Stock is entitled to one vote. There are no
preemptive, subscription, conversion or redemption rights pertaining to the
shares of Common Stock. Stockholders are entitled to receive dividends as
declared by the Board of Directors out of assets legally available therefor and
to share ratably in the assets of the Company available upon liquidation.
Holders of Common Stock may cumulate their votes by voting the number of shares
which, absent cumulative voting, they would be entitled to cast for the election
of directors with respect to their shares of Common Stock multiplied by the
number of Directors to be elected at an Annual Meeting. If the Stockholders
approve Proposal Number Ten, then the Company's Certificate of Incorporation
will be amended to eliminate cumulative voting.
PREFERRED STOCK
The Company's certificate of incorporation grants the Board of Directors
the right to cause the Company to issue, from time to time, all or part of the
preferred stock remaining undesignated in one or more series, and to fix the
number of shares of preferred stock remaining undesignated and determine or
alter for each series, the voting powers, full, limited, or none, and other
designations, preferences, or relative, participating, optional or other special
rights and such qualifications, limitations, or restrictions thereof. On August
8, 1997, the Company designated 36,000 shares of preferred stock as "Series A
Convertible Preferred Stock," par value $.01 per share (Stated Value of $1,000
per share). On November 20, 1997, the Company designated 23,000 shares of
preferred stock as "Series B Convertible Preferred Stock," par value $.01 per
share (Stated Value of $1,000 per share). For a description of the dividend and
liquidation rights and other preferences of the Series A and Series B Preferred
Stock, see "Matters to be Considered by Stockholders -- Proposal Number
Eight -- Terms of the Preferred Stock" and "-- Proposal Number Eleven."
TRANSFER AGENT
The Company's transfer agent is LaSalle National Bank.
DELAWARE BUSINESS COMBINATION STATUTE
Section 203 of the Delaware General Corporation Law (the "The Delaware
Business Combination Statute") prohibits certain "business combinations" between
a Delaware corporation whose stock is generally publicly-traded and an
"interested stockholder" of the corporation for a three-year period following
the date that the person or entity became an interested stockholder, unless: (i)
the corporation has elected, in its certificate of incorporation, not to be
governed by the Delaware Business Combination Statute; (ii) the business
combination was approved by the board of directors of the corporation before the
other party to the business combination became an interested stockholder; (iii)
upon consummation of the transaction which resulted in the person or entity
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the commencement of
the transaction (excluding voting stock owned by directors who are also officers
or held in employee benefit plans in which the employees
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do not have a confidential right to tender or vote stock held by the plan); or
(iv) the business combination was approved by the board of directors of the
corporation and ratified by the holders of 66 2/3% of the voting stock of the
Company exclusive of that owned by the interested stockholders. The Company has
not opted out of the Delaware Business Combination Statute.
The three-year prohibition described in the preceding paragraph also does
not apply to certain business combinations proposed by an interested stockholder
following the announcement or notification of certain extraordinary transactions
involving the corporation and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of a majority of the corporation's directors. The
term "business combination" is defined generally to include mergers or
consolidations between a Delaware corporation and an interested stockholder,
transactions with an interested stockholder involving the assets or stock of the
corporation or its majority-owned subsidiaries, and transactions which increase
an interested stockholder's percentage ownership of stock. The term "interested
stockholder" is defined, generally, as those stockholders who become beneficial
owners of 15% or more of a corporation's voting stock.
The provisions of the Delaware Business Combination Statute could delay or
frustrate the removal of incumbent directors or a change in control of the
Company. These provisions also could discourage, impede, or prevent a merger,
tender offer or proxy contest, even if such an event would be favorable to the
interests of the stockholders.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For a description of agreements, including promissory notes, with current
Directors and Nominees which the Company entered into in connection with the
Completed Acquisitions or intends to enter into in connection with the Merger,
see "Information about the Company -- Business Operations" and "Matters to be
Considered by Stockholders -- Proposal Number Three."
Since August 1995, Xavier Hermosillo, an officer and Director of the
Company, has provided investor and public relations services for the Company
through his firm, Xavier Hermosillo & Associates. Under an agreement with Mr.
Hermosillo's firm, the Company pays up to $4,000 per month for these services.
The Company paid fees of $36,000 for the year ended March 31, 1997 for these
services. The Company has agreed to issue to Xavier Hermosillo, a Director and
the Company's Secretary, as a finder's fee in connection with the Superior
acquisition, and conditioned upon the closing of the Superior acquisition,
warrants to purchase 20,000 shares of Common Stock at an exercise price of
$15.00 per share. See "Matters to be Considered by the Stockholders -- Proposal
Number Nine."
On April 11, 1996, the Company and Harold Rubenstein, a Director of the
Company and the Company's largest stockholder, entered into a five-year
consulting agreement. Under this Agreement, Mr. Rubenstein provides the Company
with consulting and management assistance with respect to operations, strategic
planning and other aspects of the Company's business. Fees paid for these
services amounted to $84,000 for the year ended March 31, 1997.
The Company has issued a promissory note due April 11, 1999 bearing
interest at 9% per year with a balance outstanding as of March 31, 1997 of
$547,000, to H&S Broadway, an entity principally owned by Harold Rubenstein. The
Company has also issued a promissory note due April 11, 1999 with a balance as
of March 31, 1997 of $403,000 to Harold Rubenstein. During the fiscal year ended
March 31, 1997, the Company paid $78,000 of interest to H&S Broadway and Harold
Rubenstein. Harold Rubenstein also is a 9.91% shareholder of Waste Manufacturing
and Leasing, a company that leases equipment to EMCO and from which EMCO
purchases manufactured containers.
The Company has entered into various transactions with Ellis Metals, Inc.
("Ellis Metals") and Empire Metals ("Empire"), which are principally owned by
Harold Rubenstein. On April 11, 1996, the Company entered into a five year
exclusive supply agreement with Ellis Metals, which requires Ellis Metals to
sell all of its inventory to EMCO or to EMCO's customers through a direct
shipment arrangement. In the latter arrangement, EMCO receives a brokerage fee.
In consideration for entering into this agreement, Ellis Metals
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receives a fee of $2,500 per month. During the 1997 fiscal year, the Company
paid Ellis Metals $30,000 under the terms of this agreement. The Company also
has advanced $300,000 to Ellis Metals under an unsecured note. The Company
purchases inventory from Empire, from time to time, at prices equivalent to
market value. During the 1997 fiscal year, the Company purchased $3.9 million
and $.3 million of inventory from Ellis Metals and Empire, respectively, and
also had sales of $.3 million to Ellis Metals. As of March 31, 1997, the Company
had accounts payable of $93,000 and $84,000 to Ellis Metals and Empire,
respectively.
The Company leases certain land to Ellis Metals. During the 1997 fiscal
year, the Company received $78,000 in rent payments from Ellis Metals. The
Company has a five year option, beginning June 1, 1999, to purchase certain
assets of Ellis Metals for $1.364 million, subject to certain adjustments.
To facilitate a loan to the Company from a commercial bank, on January 7,
1997, Gerard M. Jacobs, T. Benjamin Jennings, Donald F. Moorehead, Jr., George
O. Moorehead, Harold Rubenstein and Raymond F. Zack, each of whom is or was a
Director at the time of issuance, provided personal guarantees to the bank. In
consideration of the guarantees, the Company issued warrants to these
individuals (the "Guaranty Warrants") to purchase an aggregate of 500,000 shares
of Common Stock at $4.00 per share (subject to certain restrictions). The
Guaranty Warrants expire on or about January 7, 2002.
The Company and George O. Moorehead, a Director and Executive Vice
President of the Company, have agreed in principal to enter into two agreements,
a Separation Agreement and a Stock Warrant Settlement Agreement, resolving all
outstanding issues between the Company and Mr. Moorehead. Pursuant to the
Separation Agreement: (i) effective upon the closing of the Merger, Mr.
Moorehead will (a) resign from his employment by the Company, from his
employment by EMCO and from his directorship of EMCO, and (b) deliver a
Non-Compete, Non-Solicitation and Confidentiality Covenant and Agreement; and
(ii) subject to completion of the Merger, the Company will (a) pay Mr. Moorehead
$250,000 upon the closing of the Merger, (b) provide Mr. Moorehead certain
insurance and other benefits during a five-year period beginning on the date the
Merger is completed, (c) pay certain legal fees to Mr. Moorehead's counsel, and
(d) permit Mr. Moorehead to exercise any options or warrants to acquire Common
Stock previously granted to him, on a "net cashless" basis, subject to the
Company's right to refuse "net cashless" exercises under certain circumstances.
Pursuant to the Stock Warrant Settlement Agreement, the Company will agree to
issue to Mr. Moorehead warrants to purchase 200,000 shares of Common Stock at
$12.00 per share, exercisable for a period of five years, and to pay Mr.
Moorehead amounts totalling $665,000, such issuance and payments to be triggered
by the Company issuing certain warrants to Messrs. Jacobs and Jennings. Mr.
Moorehead would be permitted to exercise the warrants issued under this
Agreement on a "net cashless" basis subject to the Company's right to refuse
"net cashless" exercises under certain circumstances. See "Matters to be
Considered by Stockholders -- Proposal Number One -- Employment Agreements."
MacLeod leases certain land from Ian MacLeod, a Director of the Company
under a five-year lease (subject to three five-year extensions) providing for an
annual base rent of $48,000. The Company owns the real property on which
MacLeod's principal activities are performed.
Isaac leases certain property from a company in which George A. Isaac III,
a Director of the Company, is a shareholder. The property is subject to a lease
which commenced with the acquisition of Isaac as of June 23, 1997. The annual
base rent for the property is approximately $317,000.
HouTex leases a 45 acre processing facility located in Houston, Texas from
a limited partnership affiliated with Mike Melnik, a current Director of the
Company for an annual rent of $228,000.
Kenneth Merlau, who became a Director of the Company on September 7, 1997
received from Isaac consulting fees of approximately $230,000 in connection with
the acquisition of Isaac.
STOCKHOLDER PROPOSALS
Any Stockholder who wishes to submit a proposal for consideration at the
Company's 1998 Annual Meeting of Stockholders must have submitted the proposal
to the Company, 500 North Dearborn Street,
115
<PAGE> 119
Suite 405, Chicago, Illinois 60610, Attention: Secretary. A stockholder's
proposal must be received not later than July 20, 1998 for inclusion, if
appropriate, in the Company's proxy statement and form of proxy relating to its
1998 Annual Meeting.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company incorporates by reference herein the following documents filed
pursuant to the Exchange Act under the Company's Exchange Act File No. 0-14836:
(i) the Company's Annual Report on Form 10-K (as amended) for the fiscal year
ended March 31, 1997; (ii) the Company's Quarterly Reports on Form 10-Q for the
periods ended June 30, 1997 and September 30, 1997; (iii) the Company's Current
Report on Form 8-K dated May 1, 1997 (relating to the Reserve acquisition and
including historical and proforma financial statements of Reserve); (iv) the
Company's Current Report on Form 8-K dated June 23, 1997 (relating to the Isaac
acquisition and including historical and pro forma financial statements of
Isaac); (v) the Company's Current Report on Form 8-K dated August 28, 1997
(relating to the Proler acquisition); and (vi) the Company's Current Report on
Form 8-K dated October 24, 1997 (relating to the reclassification of amounts
received from the sale of the Series A Preferred Stock). All reports and other
documents filed by the Company pursuant to Section 13(a)(c), 14 or 15(d) of the
Exchange Act subsequent to the date of this Proxy Statement also shall be deemed
to be incorporated by reference herein and to be a part hereof from the date of
filing these reports and documents. Any statement incorporated or deemed to be
incorporated herein shall be deemed to be modified or superseded for purposes of
this Proxy Statement to the extent that any statement contained herein or in any
other subsequently filed document which also is or is deemed to be incorporated
by reference herein modifies or supersedes the statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Proxy Statement. The Company will not update this
Proxy Statement for events occurring subsequent to the date of this Proxy
Statement.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Proxy Statement has been delivered, upon written or oral
request of the person, a copy of any or all of the foregoing documents
incorporated herein by reference (other than exhibits to documents, unless these
exhibits are specifically incorporated by reference into the documents).
Requests for these documents should be made to Mr. Robert C. Larry at the
Company's principal executive offices located at 500 North Dearborn Street,
Suite 405, Chicago, Illinois 60610; telephone number (312) 645-0700.
116
<PAGE> 120
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
METAL MANAGEMENT, INC.
Report of Independent Accountants........................... F-1
Consolidated Statements of Operations for the years ended
October 31, 1994 and 1995, the five months ended March 31,
1996, and the year ended March 31, 1997................... F-2
Consolidated Balance Sheets for the years ended October 31,
1995 and March 31, 1997................................... F-3
Consolidated Statements of Cash Flows for the years ended
October 31, 1994 and 1995, the five months ended March 31,
1996, and the year ended March 31, 1997................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended October 31, 1994 and 1995, the five months
ended March 31, 1996, and the year ended March 31, 1997... F-5
Notes to Consolidated Financial Statements.................. F-6
Consolidated Condensed Balance Sheets for the six months
ended September 30, 1997 (unaudited) and year ended March
31, 1997.................................................. F-29
Consolidated Condensed Statements of Operations for the
three months and six months ended September 30, 1997 and
1996 (unaudited).......................................... F-30
Consolidated Condensed Statements of Cash Flows for the six
months ended September 30, 1997 and 1996 (unaudited)...... F-31
Notes to Consolidated Condensed Financial Statements
(unaudited)............................................... F-32
COZZI IRON & METAL, INC.
Independent Auditors' Report................................ F-39
Consolidated Balance Sheets for the years ended December 31,
1995 and 1996 and the six months ended September 30, 1997
(unaudited)............................................... F-40
Consolidated Statements of Income for the years ended
December 31, 1994, 1995 and 1996 and the nine months ended
September 30, 1996 and 1997 (unaudited)................... F-41
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1994, 1995, and 1996 and nine
months ended September 30, 1997 (unaudited)............... F-42
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995, and 1996 and the nine months
ended September 30, 1996 and 1997(unaudited).............. F-43
Notes to Consolidated Financial Statements for the years
ended December 31, 1994, 1995, and 1996 and the nine
months ended September 30, 1996 and 1997 (unaudited)...... F-44
PROLER SOUTHWEST INC. AND PROLER STEELWORKS L.L.C.
Report of Independent Accountants........................... F-52
Combined Balance Sheet for the year ended December 31, 1996
and the six months ended June 30, 1997 (unaudited)........ F-53
Combined Statements of Operations for the year ended
December 31, 1996 and the six months ended June 30, 1996
and 1997 (unaudited)...................................... F-54
Combined Statements of Cash Flows for the year ended
December 31, 1996 and the six months ended June 30, 1996
and 1997 (unaudited)...................................... F-55
Notes to Combined Financial Statements for the year ended
December 31, 1996 and the six months ended June 30, 1997
(unaudited)............................................... F-56
</TABLE>
117
<PAGE> 121
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Metal Management, Inc.
(formerly General Parametrics Corporation)
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of changes in
stockholders' equity present fairly, in all material respects, the financial
position of Metal Management, Inc. (formerly General Parametrics Corporation)
and its subsidiaries at March 31, 1997 and October 31, 1995, and the results of
their operations and their cash flows for the year ended March 31, 1997, the
five months ended March 31, 1996 and for each of the two years in the period
ended October 31, 1995, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Chicago, Illinois
May 21, 1997, except as to Notes 16 and 17,
which are as of June 19, 1997
F-1
<PAGE> 122
METAL MANAGEMENT INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED FIVE MONTHS ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, MARCH 31, MARCH 31,
1994 1995 1996 1997
----------- ----------- ----------------- ----------
<S> <C> <C> <C> <C>
Net sales................................... $ 0 $ 0 $ 0 $65,196
Cost of sales............................... 0 0 0 58,324
------ ------- ------- -------
Gross profit................................ 0 0 0 6,872
Operating expenses:
General and administrative................ 0 0 210 6,174
Depreciation and amortization............. 0 0 0 2,282
------ ------- ------- -------
Total operating expenses.................... 0 0 210 8,456
------ ------- ------- -------
Operating loss from continuing operations... 0 0 (210) (1,584)
Interest expense............................ 0 0 0 (1,449)
Interest income............................. 229 312 142 222
Other financing costs....................... 0 0 0 (166)
Other income................................ 0 0 0 125
------ ------- ------- -------
Income (loss) from continuing operations
before income taxes and discontinued
operations................................ 229 312 (68) (2,852)
Provision (benefit) for income taxes........ 1 51 (52) (842)
------ ------- ------- -------
Income (loss) from continuing operations.... 228 261 (16) (2,010)
Discontinued operations (Note 3):
Gain on sale of assets on former product
lines of GPAR, net of income tax
benefit................................ 0 0 0 502
Income (loss) from operations of former
product lines of GPAR, net of income tax
provision (benefit)....................... (440) (2,698) 22 345
------ ------- ------- -------
Net income (loss)........................... $ (212) $(2,437) $ 6 $(1,163)
====== ======= ======= =======
Earnings (loss) per share for:
Continuing operations..................... $ 0.04 $ 0.05 $ 0.00 $ (0.22)
Gain on sale of discontinued operations... $ 0.00 $ 0.00 $ 0.00 $ 0.05
Income (loss) from discontinued
operations............................. $(0.08) $ (0.53) $ 0.00 $ 0.04
Net income (loss)......................... $(0.04) $ (0.48) $ 0.00 $ (0.13)
Dividends declared per share of common
stock..................................... $ .24 $ .18 $ .00 $ .00
Weighted average common shares
outstanding............................... 5,098 5,125 5,299 9,106
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-2
<PAGE> 123
METAL MANAGEMENT INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
OCTOBER 31, MARCH 31,
1995 1997
----------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,032 $ 5,718
Marketable securities..................................... 3,246 14
Accounts receivable, net.................................. 1,599 9,560
Notes receivable from related parties..................... 0 406
Inventories............................................... 1,718 8,415
Prepaid expenses and other assets......................... 362 1,491
Current deferred taxes.................................... 0 104
------- -------
Total current assets................................. 9,957 25,708
Marketable securities....................................... 115 0
Property and equipment, net................................. 58 20,208
Goodwill and other intangibles, net......................... 0 23,484
Long-term notes receivable from related parties............. 0 300
Restricted cash............................................. 0 184
Other assets................................................ 0 241
------- -------
Total assets......................................... $10,130 $70,125
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Operating line of credit.................................. $ 0 $ 7,887
Accounts payable.......................................... 331 5,246
Other accrued liabilities................................. 485 2,746
Current portion of notes payable to related parties....... 0 12,575
Current portion of long-term debt......................... 0 10,809
------- -------
Total current liabilities............................ 816 39,263
Long-term notes payable to related parties, less current
portion................................................... 0 1,430
Long-term debt, less current portion........................ 0 3,740
Deferred taxes.............................................. 0 1,411
Other liabilities........................................... 0 1,133
------- -------
Total liabilities.................................... 816 46,977
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred Stock, $.01 par value -- 2,000,000 shares
authorized; none outstanding........................... 0 0
Common Stock, $.01 par value -- 40,000,000 shares
authorized; 10,154,740 issued and outstanding.......... 52 102
Warrants, 2,015,038 issued and outstanding.................. 0 1,351
Additional paid-in-capital.................................. 3,038 16,628
Retained earnings........................................... 6,224 5,067
------- -------
Total stockholders' equity........................... 9,314 23,148
------- -------
Total liabilities and stockholders' equity............. $10,130 $70,125
======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-3
<PAGE> 124
METAL MANAGEMENT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED FIVE MONTHS ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, MARCH 31, MARCH 31,
1994 1995 1996 1997
----------- ----------- ----------------- ----------
<S> <C> <C> <C> <C>
Cash flows from continuing operations:
Net income (loss) from continuing
operations................................. $ 228 $ 261 $ (16) $(2,010)
Adjustments to reconcile net income (loss)
from continuing operations to cash flows
from continuing operations:
Depreciation and amortization............ 0 0 0 2,273
Gain on sale of assets................... 0 0 0 (19)
Deferred income taxes.................... 0 0 0 (733)
Other.................................... 0 0 0 273
Changes in assets and liabilities, net of
acquisitions:
Accounts and notes receivable............ 0 0 0 (1,413)
Inventories.............................. 0 0 0 42
Accounts payable......................... 0 0 0 (1,099)
Other.................................... 0 0 0 938
------- ------ ------- -------
Cash flows from continuing operations........ 228 261 (16) (1,748)
Cash flows provided (used) by investing
activities:
Marketable securities matured.............. 1,959 1,524 637 2,794
Marketable securities purchased............ (1,652) (33) 0 0
Purchases of property and equipment........ 0 0 0 (3,209)
Acquisitions, net of cash acquired......... 0 0 0 (2,545)
Proceeds from sale of assets............... 0 0 0 67
------- ------ ------- -------
Net cash provided (used) by investing
activities................................. 307 1,491 637 (2,893)
Cash flows provided (used) by financing
activities:
Net payments on lines-of-credit............ 0 0 0 (926)
Issuances of long-term debt................ 0 0 0 7,806
Repayments of long-term debt............... 0 0 0 (2,699)
Issuances of common stock.................. 68 276 288 317
Payment of cash dividends.................. (1,220) (920) 0 0
------- ------ ------- -------
Net cash provided (used) by financing
activities................................. (1,152) (644) 288 4,498
------- ------ ------- -------
Cash flows from discontinued operations, net
of divestiture proceeds.................... 363 1,285 (831) 2,751
Net increase (decrease) in cash and cash
equivalents................................ (254) 2,393 78 2,608
Cash and cash equivalents at beginning of
period..................................... 893 639 3,032 3,110
------- ------ ------- -------
Cash and cash equivalents at end of period... $ 639 $3,032 $3,110 $ 5,718
======= ====== ======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-4
<PAGE> 125
METAL MANAGEMENT INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except shares)
<TABLE>
<CAPTION>
COMMON ADDITIONAL
STOCK PAID-IN- RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL WARRANTS EARNINGS EQUITY
------ ------ ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1993...... 5,067,389 $ 51 $ 2,695 $ 0 $11,013 $13,759
Common Stock issued under
Employee Stock Purchase Plan... 21,002 0 41 0 0 41
Common Stock issued upon exercise
of options..................... 7,200 0 22 0 0 22
Common Stock issued under
Executive Bonus Plan........... 2,300 0 5 0 0 5
Payment of cash dividends........ 0 0 0 0 (1,220) (1,220)
Net loss......................... 0 0 0 0 (212) (212)
---------- ---- ------- ------ ------- -------
Balance at October 31, 1994...... 5,097,891 51 2,763 0 9,581 12,395
Common Stock issued upon exercise
of options..................... 92,000 1 244 0 0 245
Common Stock issued under
Employee Stock Purchase Plan... 24,927 0 31 0 0 31
Payment of cash dividends........ 0 0 0 0 (920) (920)
Net loss......................... 0 0 0 0 (2,437) (2,437)
---------- ---- ------- ------ ------- -------
Balance at October 31, 1995...... 5,214,818 52 3,038 0 6,224 9,314
Common Stock issued upon exercise
of options..................... 108,636 1 271 0 0 272
Common Stock issued under
Employee Stock Purchase Plan... 11,199 0 16 0 0 16
Net income....................... 0 0 0 0 6 6
---------- ---- ------- ------ ------- -------
Balance at March 31, 1996........ 5,334,653 53 3,325 0 6,230 9,608
Common Stock and warrants issued
for acquisitions............... 4,700,000 47 12,759 1,048 0 13,854
Common Stock issued upon exercise
of options..................... 103,850 2 281 0 0 283
Common Stock issued under
Employee Stock Purchase Plan... 16,237 0 34 0 0 34
Other issuances of stock options
and warrants................... 0 0 122 303 0 425
Tax benefit on stock options
exercised...................... 0 0 107 0 0 107
Net loss......................... 0 0 0 0 (1,163) (1,163)
---------- ---- ------- ------ ------- -------
Balance at March 31, 1997........ 10,154,740 $102 $16,628 $1,351 $ 5,067 $23,148
========== ==== ======= ====== ======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-5
<PAGE> 126
METAL MANAGEMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ACCOUNTING POLICIES
Description of business
Metal Management Inc., (herein referred to as "Company" or "MTLM"),
formerly General Parametrics Corporation ("GPAR"), a Delaware corporation, and
its wholly-owned subsidiaries are engaged in the business of dismantling,
processing, marketing, brokering and recycling both ferrous and non-ferrous
metals. These services are provided through MTLM's seventeen recycling centers
located in Arizona, California and Texas. Upon completion of the pending
acquisitions (see Note 2 -- Acquisitions and Mergers), MTLM will operate an
additional eighteen recycling centers in Arizona, Illinois, Indiana,
Mississippi, Ohio, Pennsylvania, Tennessee and Texas.
Previously, the Company was engaged in the business of designing,
manufacturing and marketing color printers and related color printer consumable
products (see Note 3 -- Discontinued Operations).
Change of company name and fiscal year
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.
Basis of presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts,
transactions and profits have been eliminated in consolidation.
Uses of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from these
estimates.
Cash equivalents
Highly liquid investments with original maturities of three months or less
are classified as cash equivalents. Restricted cash represents funds on deposit
with an outside lender related to outstanding borrowings. These funds are not
legally restricted from withdrawal.
Accounts receivable
Accounts receivable represents amounts due from customers on product sales.
A reserve for tonnage variances of $101,000 has been provided at March 31, 1997
to account for allowances in scrap metal shipment weights which are settled on a
quarterly basis. A reserve for uncollectible accounts of $414,000 related to
sales of color printers and related products was provided at October 31, 1995.
Property and equipment
Property and equipment are recorded at cost less accumulated depreciation.
Major renewals and improvements are capitalized while repairs and maintenance
are expensed as incurred. Property, plant and
F-6
<PAGE> 127
equipment acquired in purchase transactions are recorded at its estimated fair
value at the time of the acquisition. Depreciation is computed using the
straight-line method over estimated useful lives of 29 to 39 years for buildings
and improvements, 3 to 15 years for operating machinery, equipment, furniture
and fixtures and 3 to 7 years for automobiles and trucks. When assets are sold
or otherwise disposed of, the cost and related accumulated depreciation are
removed from the accounts and any gain or loss is included in results of
operations.
Goodwill and other intangible assets
Goodwill represents the excess of consideration paid for companies acquired
in purchase transactions over the fair value of net assets acquired. Goodwill is
amortized on a straight-line basis over a period of 40 years. Non-compete
agreements are amortized on a straight-line basis over a period of 10 years.
Other intangible assets are amortized on a straight-line basis over the lesser
of their legal or estimated useful lives. The following items comprised the
balance at March 31, 1997 (in thousands):
<TABLE>
<S> <C>
Goodwill.................................................... $21,653
Non-compete agreements...................................... 1,403
Deferred financing and acquisition charges.................. 956
Other intangibles........................................... 23
-------
24,035
Less -- accumulated amortization............................ (551)
-------
$23,484
=======
</TABLE>
Amortization expense for the year ended March 31, 1997 was $551,000. The
ongoing value and remaining useful life of goodwill and intangible assets are
subject to periodic evaluation and the Company currently expects the carrying
amounts to be fully recoverable.
Revenue recognition
The Company recognizes revenue when title passes to the customer, which
generally occurs at the time of shipment.
Income taxes
The Company utilizes the liability method of accounting for income taxes,
as set forth in Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes". Under this method, deferred income taxes are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse. Income tax benefits related to
non-qualified stock option exercises are credited to additional paid-in-capital
when recognized.
Financial instruments
The carrying values of financial instruments including cash and cash
equivalents, accounts receivable, notes receivable from related parties and
accounts payable approximate the related fair values because of the relatively
short maturity of these instruments. The carrying values of line of credit
borrowings, notes payable to related parties and long-term debt, including the
current portion, approximate the related fair values as the stated interest
rates approximate market rates. The Company does not enter into futures
contracts to hedge the effect of commodity prices.
Major customers and concentration of credit risk
13 customers represented 37% of revenues for the year ended March 31, 1997.
These customers comprised approximately 53% of accounts receivable at March 31,
1997. The Company's largest customer accounted for 9% of revenues and 22% of
accounts receivable for the year ended March 31, 1997.
F-7
<PAGE> 128
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 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.
Reclassifications
Certain prior year financial information has been reclassified to conform
to the current year presentation. Such reclassifications had no material effect
on the previously reported consolidated balance sheet, results of operations or
cash flows of the Company.
Income (loss) per common share
Income (loss) per share is based upon weighted average common shares
outstanding and common stock equivalents, when dilutive. Common stock
equivalents are 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. Due to the net loss for the years
ended October 31, 1994, October 31, 1995 and March 31, 1997, common stock
equivalents were not added to weighted average common shares outstanding as the
result would have been antidilutive. For the five months ended March 31, 1996,
the dilutive effect of common stock equivalents was immaterial and they were
therefore not added to weighted average shares outstanding.
The Financial Accounting Standards Board has issued SFAS No. 128, "Earnings
per Share". SFAS No. 128 replaces primary earnings per share with basic earnings
per share, which excludes dilution, and requires presentation of both basic and
diluted earnings per share on the face of the income statement. Diluted earnings
per share is computed similarly to the current fully diluted earnings per share.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, and requires restatement of all prior-period earnings
per share data presented. The adoption of this statement is not expected to
materially impact the Company's earnings per share computations.
Impairment of long-lived assets
Effective April 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
Of". SFAS No. 121 requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Statement No. 121 is applicable for most long-lived
assets, identifiable intangibles and goodwill related to those assets.
Management has determined that long-lived assets are fairly stated in the
accompanying balance sheets, and that no indicators of impairment are present.
NOTE 2 -- ACQUISITIONS AND MERGERS
Transactions during fiscal 1997
The Company merged with EMCO Recycling Corp. ("EMCO"), headquartered in
Phoenix, Arizona, and acquired The MacLeod Companies ("MacLeod"), headquartered
in Los Angeles, California and
F-8
<PAGE> 129
HouTex Metals Company, Inc. ("HouTex"), headquartered in Houston, Texas. The
purchase consideration for each of the transactions as of March 31, 1997 was as
follows (in thousands, except shares and warrants):
<TABLE>
<CAPTION>
EMCO MACLEOD HOUTEX TOTAL
---- ------- ------ -----
<S> <C> <C> <C> <C>
Date of acquisition................ April 11, 1996 January 1, 1997 January 7, 1997
Shares of restricted MTLM common
stock issued..................... 3,500,000 725,000 475,000 4,700,000
Warrants issued for MTLM common
stock............................ 1,000,000 175,000 310,000 1,485,000
Cash paid, including transaction
costs............................ $ 2,219 $ 1,119 $ 1,121 $ 4,459
Value of MTLM common stock
issued........................... 8,807 2,330 1,669 12,806
Value of MTLM warrants issued...... 316 137 596 1,049
Promissory notes issued............ 0 6,600 6,655 13,255
Other liabilities incurred......... 1,403 0 0 1,403
-------------- --------------- --------------- ---------
Total purchase
consideration............... $12,745 $10,186 $10,041 $32,972
============== =============== =============== =========
</TABLE>
In connection with the above transactions, the Company also acquired
certain real property utilized in the scrap metal business. In connection with
the EMCO merger, the Company acquired certain real property which was indirectly
owned by one of the former principal owners of EMCO for $1.1 million ($150,000
in cash and $950,000 in 9% notes payable due in three years, see Note 8 -- Notes
Receivable/Payable to Related Parties and Note 14 -- Related Party
Transactions). In connection with the MacLeod acquisition, the Company acquired
certain real property on which the principal MacLeod operations are performed,
for $3.5 million ($500,000 in cash and $3.0 million in 8% mortgage notes payable
to an unrelated third party due on May 31, 1997, see Note 9 -- Long term Debt
and Leases).
The above transactions have been accounted for by the purchase method of
accounting and the results of the operations of the acquired companies have been
included in the consolidated financial statements since the date of acquisition.
The purchase price was allocated based on estimated fair values at the date of
acquisition. This resulted in an excess of purchase price over net assets
acquired of $9.8 million, $5.6 million and, $6.2 million for EMCO, MacLeod and
HouTex, respectively, as of March 31, 1997.
Transactions subsequent to year-end
On May 1, 1997, the Company acquired Reserve Iron & Metal L.P. ("Reserve"),
headquartered in Cleveland, Ohio. The acquisition of Reserve resulted in the
issuance of $5.9 million in cash, $1.5 million in promissory notes, warrants to
purchase up to 1.4 million shares of common stock and the assumption of debt.
Excess purchase price over net assets acquired will be approximately $4.5
million. The Company made arrangements with Reserve's lender to provide for the
existing loans to remain in place without changes to terms and conditions of the
credit agreement. The warrants have varying vesting provisions, and their
effective exercise prices will depend in part upon the resolution of specified
potential liabilities referred to in the following paragraph. The Company
entered into ten-year employment agreements with certain former shareholders of
Reserve and also entered into employment agreements with certain key employees
of Reserve for which warrants to purchase an aggregate of up to 175,000 shares
of common stock of the Company was issued.
The Company agreed, in principle, with certain of the sellers of Reserve to
amend the Purchase Agreement. Among other matters, certain of the sellers of
Reserve (the "Indemnifying Parties") have agreed to indemnify the Company and
its affiliates against a significant 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
F-9
<PAGE> 130
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.
Pro forma financial information (unaudited)
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company, MacLeod, HouTex and Reserve
as if the acquisitions had occurred on April 1, 1996. These 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 fixed assets, additional amortization expense as a result of goodwill
and interest expense on acquisition debt. They do not purport to be indicative
of the results of operations which actually would have resulted had the
combination been in effect on April 1, 1996 (in thousands, except share data).
<TABLE>
<CAPTION>
UNAUDITED
YEAR ENDED
MARCH 31, 1997
--------------
<S> <C>
Net sales................................................... $222,090
Net loss from continuing operations......................... $ (4,038)
Net loss per share from continuing operations............... $ (.40)
</TABLE>
<TABLE>
<CAPTION>
UNAUDITED
MARCH 31, 1997
--------------
<S> <C>
ASSETS
Current assets.............................................. $ 58,970
Property & equipment, net................................... 31,043
Other assets................................................ 1,556
Goodwill.................................................... 27,499
--------
Total assets.................................... $119,068
========
LIABILITIES & EQUITY
Current liabilities......................................... $ 56,609
Non-current liabilities..................................... 33,823
Stockholder's equity........................................ 28,636
--------
Total liabilities and equity........................... $119,068
========
</TABLE>
See Note 16 -- Subsequent Events -- Financing Transactions.
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 and government approvals and is also
subject to certain other conditions precedent. At the closing of this merger,
the shareholders of Cozzi will likely receive 11.5 million shares of the
Company's common stock, 1.5 million warrants to purchase common stock, and $6.0
million in cash. Further, at the effective time of the merger, the Company
intends to appoint Albert A. Cozzi as President and the Chief Operating Officer
of the Company. T. Benjamin Jennings will remain Chairman of the Board and Chief
Development Officer, and Gerard M. Jacobs will remain the Chief Executive
Officer of the Company. Contemporaneous with closing, Albert A. and Frank J.
Cozzi, as well as T. Benjamin Jennings and Gerard M. Jacobs, anticipate entering
into five-year employment agreements with the Company. In addition, Albert A.,
Frank J. and Gregory P. Cozzi and T. Benjamin Jennings and Gerard M. Jacobs
intend to enter into a ten-year stockholder agreement to, among other things,
vote their
F-10
<PAGE> 131
respective shares in a common fashion in regard to elections of directors and
officers and in certain other circumstances.
On March 18, 1997, the Company signed a binding Letter of Intent to acquire
Proler Southwest Inc., and Proler Steelworks LLC ("Proler"). Proler Southwest
Inc. and Proler Steelworks LLC have operations in Houston, Texas and Jackson,
Mississippi, respectively. The transaction is expected to be effected by the
Company acquiring all of the equity interests in Proler Southwest Inc., and
Proler Steelworks LLC in exchange for $15.0 million in cash, a $2.0 million
promissory note, 1.75 million shares of common stock of the Company and warrants
to purchase 375,000 shares of common stock.
NOTE 3 -- DISCONTINUED OPERATIONS
In October 1995, the Company elected to discontinue a portion of its
electronic presentation products, including the VideoShow, VideoShow PRESENTER
and related products and recorded restructuring costs of $1.44 million. Also in
October 1995, the Company recorded a $716,000 special charge for the
repositioning of its color printer products. These costs are reflected in
discontinued operations. The charges were comprised of: writedowns of
discontinued ($530,000) and slow-moving ($395,000) inventory, write-offs of
capitalized software development costs for discontinued products ($524,000) and
color printers ($321,000), write-off of fixed assets ($203,000) associated with
the manufacture of discontinued products and a reserve of $180,000 for lease
costs related to excess facilities to be vacated and sub-leased.
During the first quarter of fiscal 1997, management made the decision to
exit the Spectra*Star printer and consumables business and the VideoShow and
related products lines. In accordance with Accounting Principles Board (APB)
Opinion Number 30, the Company's consolidated statements of operations present
the operating results of discontinued operations separately from continuing
operations. Prior periods have been restated to conform with this presentation.
On July 16, 1996, Mannesmann Tally ("Tally") acquired the Spectra*Star
inventory and related production equipment 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 by
Tally. The company recognized an after-tax gain of $502,000 (after transaction
related expenses) on the disposition of the assets, including $351,000 of
royalties.
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. Future royalties are not expected to be material to the
Company. The after-tax gain on the disposition of these assets was not
considered material to the Company.
Net revenues recognized for the discontinued operations were $12.3 million,
$9.5 million, $3.1 million and $2.3 million for the years ended October 31, 1994
and 1995, the five months ended March 31, 1996 and the year ended March 31,
1997, respectively. Additional consideration from royalty income will be
recorded as earned and will be reported as adjustments to the gain on sale of
discontinued operations.
Income tax provisions (benefits) for the discontinued operations were
($389,000), ($551,000), $52,000, and ($307,000) for the years ended October 31,
1994 and 1995, the five months ended March 31, 1996 and the year ended March 31,
1997, respectively. Income tax benefit for the gain on sale of assets of
Spectra*Star was $15,000 for the year ended March 31, 1997.
The following information represents selected financial data with respect
to discontinued operations (in thousands:
<TABLE>
<CAPTION>
FIVE MONTHS ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1996 OCTOBER 31, 1995 OCTOBER 31, 1994
----------------- ---------------- ----------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................ $3,074 $ 9,511 $12,338
Cost of sales........................................ 1,969 7,028 7,724
Restructuring costs.................................. 0 1,437 0
Other operating expenses............................. 1,031 4,295 5,443
</TABLE>
F-11
<PAGE> 132
NOTE 4 -- MARKETABLE SECURITIES
Marketable securities are stated at cost, which approximates market value.
Marketable securities maturing within one year are classified as current assets.
The Company's marketable securities are classified as "available for sale" in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", which the Company adopted in fiscal 1995. There was no
material impact on the Company's financial position or results of operations as
a result of the adoption of this standard. Marketable securities consist of the
following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31, MARCH 31,
1995 1997
----------- ---------
<S> <C> <C>
Municipal Bonds and Obligations.......................... $2,253 $ 0
Corporate Notes, Bonds and Obligations................... 1,108 14
------ ---
$3,361 $14
====== ===
</TABLE>
NOTE 5 -- INVENTORIES
Inventories for all periods presented are stated at the lower of cost or
market. Cost is determined principally on the average cost method.
Discontinued operations
During the year ended October 31, 1995, a $925,000 charge was recorded to
write-off certain discontinued inventory items. Net inventories consisted of the
following at October 31, 1995 (in thousands):
<TABLE>
<S> <C>
Raw materials............................................... $ 534
Work-in-process............................................. 111
Finished goods.............................................. 1,073
------
$1,718
======
</TABLE>
Continuing operations
Inventories consist of the following at March 31, 1997 (in thousands):
<TABLE>
<S> <C>
Ferrous metals.............................................. $2,707
Non-ferrous metals.......................................... 4,754
Other....................................................... 954
------
$8,415
======
</TABLE>
NOTE 6 -- PROPERTY AND EQUIPMENT
The cost and accumulated depreciation of property and equipment are as
follows (in thousands):
<TABLE>
<CAPTION>
DISCONTINUED CONTINUING
OPERATIONS OPERATIONS
OCTOBER 31, 1995 MARCH 31, 1997
---------------- --------------
<S> <C> <C>
Land and improvements............................. $ 0 $ 5,759
Buildings and improvements........................ 77 1,577
Operating machinery and equipment................. 2,936 8,799
Automobiles and trucks............................ 0 2,550
Furniture and fixtures............................ 0 3,221
------- -------
3,013 21,906
Less -- accumulated depreciation.................. (2,955) (1,698)
------- -------
$ 58 $20,208
======= =======
</TABLE>
Depreciation expense for property and equipment of continuing operations
was $1.73 million for the year ended March 31, 1997.
F-12
<PAGE> 133
NOTE 7 -- LINES OF CREDIT
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. As of March 31, 1997, the Company
had fully drawn predominately all of the availability under the lines of credit.
The lines expire at various dates through August 1998. The Company is in
compliance with all covenants under the various lines of credit. One of the
revolving lines of credit requires an annual fee of .5% of the amount of the
line.
The weighted average interest rate on the borrowings outstanding at March
31, 1997 was 9.59%. Average borrowings under the various lines of credit during
fiscal 1997 were approximately $4.7 million. During fiscal 1997, amounts
outstanding under the various lines of credit ranged from $2.5 million to $7.9
million.
See Note 16 -- Subsequent Events -- Financing Transactions
NOTE 8 -- NOTES RECEIVABLE/PAYABLE TO RELATED PARTIES
Notes receivable/payable to related parties consists of the following at
March 31, 1997 (in thousands):
<TABLE>
<S> <C>
Notes receivable:
8% Notes receivable from Mike and Zalman Melnik, repaid as
due with accrued interest on April 30, 1997............... 406
9% Notes receivable from Ellis Metals, due with monthly
interest, principal due on April 11, 2006................. 300
--------
706
Less: current portion....................................... (406)
--------
Long-term notes receivable from related parties............. $ 300
========
Notes payable:
8% Notes payable to Ian MacLeod, due May 31, 1997, secured
by a stock pledge agreement (Note A)...................... $ 5,800
6% Notes payable to Clend Investment, due June 30, 1997,
secured by a stock pledge agreement....................... 5,000
6% Notes payable to Mike Melnik, due April 30, 1997, secured
by a stock pledge agreement............................... 960
6% Notes payable to Zalman Melnik, due April 30, 1997,
secured by a stock pledge agreement....................... 695
8% Notes payable to Ian MacLeod, due in annual installments
of $120 through January 1, 2002, secured by a stock pledge
agreement (Note B)........................................ 600
9% Notes payable to H&S Broadway, due April 11, 1999,
secured by real property.................................. 547
9% Notes payable to Harold Rubenstein, due April 11, 1999,
secured by real property.................................. 403
--------
14,005
Less: current portion....................................... (12,575)
--------
Long-term notes payable to related parties.................. $ 1,430
========
</TABLE>
H&S Broadway is principally owned by Harold Rubenstein, a former principal
owner of EMCO, a current Director of the Company, and the Company's largest
shareholder. During the current fiscal year, $78,000 of interest was
collectively paid to H&S Broadway and Harold Rubenstein.
Ian MacLeod, the former owner of MacLeod, is employed by and also serves as
a Director of the Company. At March 31, 1997, the Company had a $129,000 of
interest payable due to Ian MacLeod.
F-13
<PAGE> 134
Clend Investment ("Clend") is beneficially owned by Mike Melnik and Zalman
Melnik, who are the former owners of HouTex, and are currently employed by the
Company. Mike Melnik also serves as a Director of the Company. At March 31,
1997, the Company had an aggregate $92,000 interest payable due to Clend, Mike
Melnik and Zalman Melnik.
The HouTex acquisition agreement provided certain rights to Clend to
convert principal amounts of its note to common stock of the Company. Also, the
terms of the HouTex acquisition agreement require the Company to grant up to
250,000 warrants ("Limited Warrants") as contingent purchase consideration to
Clend if the entire principal amount of the note is not paid within specified
dates. The Limited Warrants are subject to early expiration if the Company's
closing stock price exceeds an amount equal to 175% of the exercise price for a
period of twenty consecutive trading days. Certain acceleration provisions in
the Limited Warrants are expected to result in the issuance of additional
restricted shares of common stock in fiscal 1998. In such case, the Limited
Warrants would expire 30 days from the date the Company gives the Limited
Warrant holder notice that the closing stock price has exceeded 175% of the
exercise price. As of March 31, 1997, the Company had issued 150,000 Limited
Warrants to Mike and Zalman Melnik, collectively, and 60,000 Limited Warrants to
Clend.
Scheduled maturities of notes payable to related parties are as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDING, MARCH 31
----------------------------
<S> <C>
1998........................................................ 12,575
1999........................................................ 120
2000........................................................ 1,070
2001........................................................ 120
2002........................................................ 120
-------
$14,005
=======
</TABLE>
See Note 16 -- Subsequent Events -- Financing Transactions.
NOTE 9 -- LONG-TERM DEBT AND LEASES
At March 31, 1997, long-term debt consisted of the following (in
thousands):
<TABLE>
<S> <C>
Term loan, interest at LIBOR +1.75%, due on June 30, 1997... $ 6,500
Mortgage note payable, interest at 8%, due with accrued
interest on May 31, 1997, secured by real property........ 3,000
Mortgage note payable, interest at 8%, payable in monthly
installments of $25 including interest through May 1998
and a $1,300 balloon payment, secured by real property.... 1,374
Term loan, interest at 9.75% payable in monthly installments
of $21 including interest through December 2001, secured
by equipment.............................................. 905
Note payable, interest at 9.25%, payable in monthly
installments of $19 including interest through October
1999, secured by vehicles and equipment................... 522
State of California Pollution Control Bonds, interest
ranging from 5.5% to 6.1%, payable in monthly installments
of $8 including interest, due November 2001............... 385
Other notes payable (24 notes with balances ranging from $6
to $266) maturing at various dates through 2001, interest
at rates ranging from 7.31% to 12.46%, secured by
equipment................................................. 1,863
--------
14,549
Less current portion........................................ (10,809)
--------
$ 3,740
========
</TABLE>
F-14
<PAGE> 135
The $6.5 million term loan may be extended, at the Company's option and for
a fee of $25,000, to September 30, 1997. The loan can be extended further, at
the Company's option and for a fee of $100,000, to July 1, 1998. This loan was
unsecured, except for personal guarantees from certain officers and directors of
the Company (See Note 14 -- Related Party Transactions).
The State of California Pollution Control Bonds are guaranteed by the Small
Business Association (SBA) and require monthly base loan payments in amounts
necessary to fund annual redemption and interest. Funds received in excess of
current interest and principal reductions accumulate for the benefit of the
Company in a restricted cash account. In addition, a deposit is maintained equal
to three months of base loan payments plus interest earned. The Company's plant
and equipment are security for the indebtedness.
Scheduled maturities of long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDING, MARCH 31
- ----------------------------
<S> <C>
1998........................................................ $10,809
1999........................................................ 2,132
2000........................................................ 811
2001........................................................ 527
2002........................................................ 270
-------
$14,549
=======
</TABLE>
See Note 16 -- Subsequent Events -- Financing Transactions.
The Company leases certain facilities and equipment under operating and
capital leases expiring at various dates. Rent expense for buildings and land
was $476,000 and rent expense for equipment was $2,000 for the year ended March
31, 1997. Payments under capital leases were $91,000 for the year ended March
31, 1997. Most of the operating leases contain renewal options. Future minimum
lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
FISCAL YEAR ENDING, MARCH 31 LEASES LEASES
---------------------------- --------- -------
<S> <C> <C>
1998........................................................ $ 597 $121
1999........................................................ 476 83
2000........................................................ 490 81
2001........................................................ 491 79
2002........................................................ 403 34
Thereafter.................................................. 1,642 0
------ ----
$4,099 $398
====== ====
</TABLE>
F-15
<PAGE> 136
NOTE 10 -- INCOME TAXES
The provision (benefit) for federal and state income taxes from continuing
operations is as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31, MARCH 31, MARCH 31,
1994 1995 1996 1997
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Federal:
Current.............................. $1 $40 $(41) $(170)
Deferred............................. 0 0 0 (649)
-- --- ---- -----
1 40 (41) (819)
-- --- ---- -----
State:
Current.............................. 0 11 (11) 61
Deferred............................. 0 0 0 (84)
-- --- ---- -----
0 11 (11) (23)
-- --- ---- -----
Total tax provision (benefit).......... $1 $51 $(52) $(842)
== === ==== =====
</TABLE>
The components of deferred tax liabilities and assets are comprised of the
following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31, MARCH 31,
1995 1997
----------- ---------
<S> <C> <C>
Cash to accrual adjustment............................... $ 0 $ 255
Depreciation............................................. 5 2,329
----- -------
Gross deferred income tax liabilities...................... 5 2,584
----- -------
Accounts receivable reserves............................. (165) 0
Inventory................................................ (103) (221)
Vacation reserve......................................... (67) (65)
Fixed asset reserves..................................... (93) 0
Lease reserve............................................ (72) (2)
NOL carryforward......................................... 0 (792)
Financing costs.......................................... 0 (60)
Other.................................................... (10) (137)
----- -------
Gross deferred income tax assets........................... (510) (1,277)
----- -------
Deferred tax asset valuation allowance..................... 505 0
----- -------
$ 0 $ 1,307
===== =======
</TABLE>
Realization of deferred tax assets is dependent upon generating sufficient
future taxable income in the periods in which the assets reverse or the benefits
expire. Although realization is not assured, management believes it is more
likely than not that the Company's deferred tax assets will be realized through
future taxable earnings. The current year U.S. federal net operating loss
carryforward expires in 2012.
The reconciliation of income tax from continuing operations computed at the
U.S. federal statutory tax rate to the company's effective rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31,
1994 % 1995 %
----------- - ----------- -
<S> <C> <C> <C> <C>
Normal statutory rate............................. $ 78 34.0 $ 106 $ 34.0
State income taxes, net of federal benefit........ 0 0.0 11 3.5
Tax exempt interest............................... (77) (33.6) (66) (21.2)
---- ------ ----- ------
$ 1 .4 $ 51 16.3
==== ====== ===== ======
</TABLE>
F-16
<PAGE> 137
<TABLE>
<CAPTION>
5 MONTHS ENDED YEAR ENDED
MARCH 31, 1996 % MARCH 31, 1997 %
-------------- - -------------- -
<S> <C> <C> <C> <C>
Normal statutory rate.......................... $(23) (34.0) $(998) (35.0)
State income taxes, net of federal benefit..... (11) (16.1) (105) (3.7)
Non-deductible goodwill........................ 0 0.0 145 5.1
Non-deductible acquisition costs............... 0 0.0 70 2.5
Non-deductible meals & entertainment........... 0 0.0 56 2.0
Other.......................................... (18) (26.4) (10) (.4)
---- ----- ----- -----
$(52) (76.5) $(842) (29.5)
==== ===== ===== =====
</TABLE>
NOTE 11 -- STOCKHOLDERS' EQUITY
Common stock and preferred stock
On April 9, 1996, the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation to increase the number of authorized
shares of the Company's common stock to 40,000,000. The Company's Certificate of
Incorporation also allows the issuance of up to 2,000,000 shares of preferred
stock. No preferred shares have been issued to date. See Note 16 -- Subsequent
Events -- Financing Transactions.
Stock option plans
On April 9, 1996, the Company's stockholders approved the adoption of the
1996 Director Option Plan (the "Director Plan") and the reservation of 100,000
shares of common stock for issuance thereunder. The Director Plan provides for
options to be granted to outside directors of the Company who are subject to the
reporting requirements of Section 16 of the Securities Exchange Act of 1934.
Under the Director Plan, each outside director is automatically granted an
option to purchase 10,000 shares on the date on which such person first becomes
an outside director. Thereafter, each outside director is automatically granted
an option to purchase 2,500 shares on January 15th of each year, as long as such
outside director has served on the Board of Directors for at least one month.
The options are granted at 100% of the market price on the date of the grant,
become fully vested and exercisable on such date and expire 10 years from the
date of the grant.
On April 9, 1996, the Company's stockholders approved an amendment to the
Company's 1995 Stock Option Plan (the "1995 Plan") to reserve an additional
800,000 shares of common stock for an aggregate 1,300,000 shares of common stock
which can be issued under the 1995 Plan. The 1995 Plan allows the Board of
Directors to grant options to purchase shares to officers and employees in the
form of either incentive stock options (ISO's) or nonstatutory stock options
(NSO's). The Board of Directors determines, within limits set forth in the 1995
Plan, the term of each option, the option exercise price, the number of shares
subject to each option and the times at and conditions under which each option
is or becomes exercisable.
During fiscal 1995, the Board of Directors terminated the 1986 Stock Option
Plan with respect to future grants. The following summarizes the activity of the
Director Plan, 1995 Plan and the 1986 Plan for the year ended March 31, 1997,
the five months ended March 31, 1996 and the years ended October 31, 1995 and
1994, respectively:
<TABLE>
<CAPTION>
DIRECTOR & 1995 PLAN
---------------------------------------------------
1997 1996
------------------------ ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Beginning balance................................ 716,750 $3.92 51,000 $3.22
Granted.......................................... 110,000 $4.53 665,750 $3.97
Exercised........................................ (16,750) $2.90 0 $0.00
Canceled......................................... (57,500) $3.89 0 $0.00
------- -------
Ending balance................................... 752,500 $4.03 716,750 $3.92
======= =======
Exercisable at end of period..................... 667,500 $3.96 669,750 $3.91
======= =======
Options available for grant...................... 530,750 83,250
======= =======
</TABLE>
F-17
<PAGE> 138
For the year ended March 31, 1997 and the five months ended March 31, 1996,
the weighted average fair value and weighted average exercise price of options
granted was as follows:
<TABLE>
<CAPTION>
DIRECTOR & 1995 PLAN
----------------------------------------------------------------------------
1997 1996
------------------------------------ -------------------------------------
SHARES FAIR VALUE EXERCISE PRICE SHARES FAIR VALUE EXERCISE PRICE
------ ---------- -------------- ------ ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Exercise price > Market
price........................ 95,000 $1.59 $4.53 562,500 $0.99 $4.01
Exercise price = Market
price........................ 15,000 $2.07 $4.54 84,000 $1.26 $4.00
Exercise price < Market
price........................ n/a n/a n/a 19,250 $1.80 $2.85
</TABLE>
<TABLE>
<CAPTION>
DIRECTOR & 1995 PLAN
-----------------------------------------------
1995 1994
----------------------- ---------------------
OPTION PRICE OPTION PRICE
SHARES PER SHARE SHARES PER SHARE
------ ------------ ------ ------------
<S> <C> <C> <C> <C>
Beginning balance.................................. 0 $0.00 0 $0.00
Granted............................................ 51,000 $1.57 - $4.00 0 $0.00
Exercised.......................................... 0 $0.00 0 $0.00
Canceled........................................... 0 $0.00 0 $0.00
------- --
Ending balance..................................... 51,000 $1.57 - $4.00 0 $0.00
======= ==
Exercisable at end of period....................... 25,000 $2.50
=======
Options available for grant........................ 449,000
=======
</TABLE>
<TABLE>
<CAPTION>
1986 PLAN
----------------------------------------------------
1997 1996
------------------------ -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Beginning balance............................... 156,850 $2.82 304,800 $2.71
Granted......................................... 0 $0.00 0 $0.00
Exercised....................................... (87,100) $2.65 (108,636) $2.55
Canceled........................................ (64,750) $3.07 (39,314) $2.77
------- --------
Ending balance.................................. 5,000 $2.50 156,850 $2.82
======= ========
Exercisable at end of period.................... 5,000 $2.50 141,788 $2.87
======= ========
Options available for grant..................... 0 0
======= ========
</TABLE>
<TABLE>
<CAPTION>
1986 PLAN
---------------------------------------------------
1995 1994
------------------------ ------------------------
OPTION PRICE OPTION PRICE
SHARES PER SHARE SHARES PER SHARE
------ ------------ ------ ------------
<S> <C> <C> <C> <C>
Beginning balance............................ 572,800 $1.90 - $6.00 569,600 $1.90 - $6.00
Granted...................................... 1,500 $1.57 - $1.63 190,000 $1.88 - $2.75
Exercised.................................... (92,000) $2.34 - $2.98 (7,200) $1.90 - $2.34
Canceled..................................... (177,500) $2.23 - $3.56 (179,600) $2.23 - $4.25
-------- --------
Ending balance............................... 304,800 $1.57 - $6.00 572,800 $1.90 - $6.00
======== ========
Exercisable at end of period................. 277,497 $1.88 - $6.00 353,785 $1.90 - $6.00
======== ========
Options available for grant.................. 0 462,630
======== ========
</TABLE>
Exercise price for options outstanding at March 31, 1997 ranged from $2.50
to $5.00. The weighted average remaining contractual life of the outstanding
options is 8.73 years. The exercise of non-qualified stock options resulted in
income tax benefits of $107,000 for the year ended March 31, 1997, which were
credited to
F-18
<PAGE> 139
additional paid-in-capital. The income tax benefits are the tax effect of the
difference between market price on the date of exercise and option price.
Warrants
The Company has issued warrants to purchase restricted common stock,
primarily as consideration for acquisitions and loan guarantees. The summary of
warrant activity for the year ended March 31, 1997, five months ended March 31,
1996 and the years ended October 31, 1995, and 1994, respectively, is as
follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ---------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
WARRANTS EXERCISE PRICE WARRANTS EXERCISE PRICE
-------- ---------------- -------- ----------------
<S> <C> <C> <C> <C>
Beginning balance.......................... 20,000 $3.50 10,000 $3.00
Granted.................................... 1,995,038 $4.66 10,000 $4.00
Exercised.................................. 0 $0.00 0 $0.00
Canceled................................... 0 $0.00 0 $0.00
--------- ------
Ending balance............................. 2,015,038 $4.65 20,000 $3.50
========= ======
Exercisable at end of period............... 2,015,038 $4.65 20,000 $3.50
========= ======
</TABLE>
<TABLE>
<CAPTION>
1995 1994
--------------------------- ---------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
WARRANTS EXERCISE PRICE WARRANTS EXERCISE PRICE
-------- ---------------- -------- ----------------
<S> <C> <C> <C> <C>
Beginning Balance........................... 0 $0.00 0 $0.00
Granted..................................... 10,000 $3.00 0 $0.00
Exercised................................... 0 $0.00 0 $0.00
Canceled.................................... 0 $0.00 0 $0.00
------ -
Ending Balance.............................. 10,000 $3.00 0 $0.00
======
Exercisable at end of period................ 10,000 $3.00
======
</TABLE>
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan ("Plan") was initiated in fiscal
1987. The Plan allowed employees to purchase shares of the Company's Common
Stock at the lower of 85% of the fair market value of the Common Stock, as
determined by the closing bid price on the NASDAQ National Market System, on the
first and last day of the offering period. Shares issued for the year ended
March 31, 1997, five months ended March 31, 1996, and the years ended October
31, 1995 and 1994 were 16,237, 11,199, 24,927 and 21,002, respectively.
Pro forma disclosures
The Company has adopted SFAS No. 123 "Accounting for Stock-Based
Compensation". However, in accordance with the provisions of SFAS No. 123, the
Company continues to account for stock-based compensation under the provisions
of APB 25, "Accounting for Stock Issued to Employees", and accordingly does not
recognize compensation cost for options with exercise prices equal to market
value at the date of grant. As required by SFAS No. 123, the following
disclosure of pro forma information provides the effects on net income (loss)
and net income (loss) per share as if the Company had accounted for its employee
stock awards under the fair value method prescribed by SFAS 123 (in thousands,
except per share data).
<TABLE>
<CAPTION>
YEAR ENDED 5 MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
<S> <C> <C>
Pro forma net (loss).............................. $(1,290) $(556)
Pro forma net (loss) per share.................... $ (.14) $(.10)
</TABLE>
F-19
<PAGE> 140
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants for the year ended March 31, 1997 and the five months ended March 31,
1996: expected dividend yield of 0% and expected option lives of 3 years for
both years, an expected volatility of 60.0% and 34.2% and risk free interest
rate of 6.52% and 5.89%, respectively. The Black-Scholes option valuation model
was developed for use in estimating the fair value of traded options which have
no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from traded options and
because changes in the subjective input assumptions can materially affect the
fair value estimate, it is management's opinion that the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
NOTE 12 -- EMPLOYEE BENEFIT PLANS
The Company offers a defined contribution 401(k) Plan covering eligible
employees. Participants can elect to contribute up to 15% of their qualified
pre-tax compensation. The Company may match participant contributions as
determined at the sole discretion of the Company. Since inception of the plan,
the Company has made no contributions to the plan.
The Company's wholly-owned EMCO subsidiary offers a defined contribution
401(k) Plan and a profit-sharing Plan. Eligible employees can contribute up to
15% of their qualified pre-tax compensation. EMCO matches 50% of participant
contributions up to 6% of compensation. EMCO made matching contributions of
$52,000 for the year ended March 31, 1997. No contributions were made to the
profit-sharing plan.
NOTE 13 -- COMMITMENTS AND CONTINGENCIES (SEE NOTE 2 -- ACQUISITIONS AND
MERGERS)
Environmental matters
The Company is subject to comprehensive local, state and international
regulatory and statutory requirements relating to the acceptance, storage,
handling and disposal of solid waste and waste water, air emissions, soil
contamination and employee health, among others. The Company believes that it
and its subsidiaries are in material compliance with currently applicable
environmental and other applicable laws and regulations. However, environmental
legislation may in the future be enacted and create liability for past actions
and the Company or its subsidiaries may be fined or held liable for damages.
There can be no assurance that potential damages, liabilities, expenditures,
fines and penalties will not have a material adverse effect on the Company's
financial condition or results of operations.
Substantial leverage
The Company has substantial leverage which 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.
See Note 16 -- Subsequent Events -- Financing Transactions and Note 17 --
Management's Plan Regarding Current Debt Obligations.
Purchase of real property
On January 7, 1997, the Company's HouTex subsidiary entered into a 10 year
lease agreement with 15/21 Japhet Realty Ltd. ("Japhet"), which is principally
owned by the former HouTex shareholders, Mike and Zalman Melnik. Rent paid for
the year ended March 31, 1997 was $51,000. The lease agreement allows Japhet to
sell the property to the Company for $4.0 million between the 54th month and the
89th month of the lease term. The Company also has an option to buy the property
for $4.0 million during the same period.
F-20
<PAGE> 141
NOTE 14 -- RELATED PARTY TRANSACTIONS
See Note 8 Notes Receivable/Payable to Related Parties, Note 11 --
Stockholder's Equity, Note 13 -- Commitments and Contingencies and Note 16 --
Subsequent Events -- Financing Transactions.
On April 11, 1996, the Company and Harold Rubenstein entered into a five
year consulting agreement. The services provided include consultation and direct
management assistance with respect to operations, strategic planning and other
aspects of the Company's business. Fees paid for these services amounted to
$84,000 for the year ended March 31, 1997.
The Company has entered into various transactions with Ellis Metals, Inc.
("Ellis Metals") and Empire Metals ("Empire") which are companies principally
owned by Harold Rubenstein. On April 11, 1996, the Company entered into a five
year exclusive supply agreement with Ellis Metals, which requires Ellis Metals
to sell all of its inventory to the Company's wholly owned EMCO subsidiary or to
EMCO's customers through a direct shipment arrangement. In the latter
arrangement, EMCO receives a brokerage fee. In consideration for entering into
this agreement, Ellis Metals receives a monthly exclusivity fee of $2,500 during
the term of the agreement. During the current year, the Company paid Ellis
Metals $30,000 under terms of the agreement. The Company also advanced $300,000
to Ellis Metals which is reflected as a note receivable. The Company also
purchases inventory from Empire, from time to time, at prices equivalent to
market value. During the current year, the Company purchased $3.9 million and
$.3 million of inventory from Ellis Metals and Empire, respectively, and also
had sales of $.3 million to Ellis Metals. At March 31, 1997, the Company had
accounts payable of $93,000 and $84,000 to Ellis Metals and Empire,
respectively.
The Company owns the land on which certain Ellis Metals operations are
located and leases the land to Ellis Metals. During the current fiscal year, the
Company received $78,000 in rent payments from Ellis Metals. The Company has a
five year option, beginning June 1, 1999, to purchase certain assets of Ellis
Metals for $1.364 million, subject to certain adjustments. It is the Company's
intention to exercise such option.
In conjunction with a loan obtained from a commercial bank on January 7,
1997 (see Note 9 -- Long-term Debt and Leases), personal guarantees were
provided by six directors of the Company, including Gerard M. Jacobs, T.
Benjamin Jennings, Donald F. Moorehead, Jr., George O. Moorehead, Harold
Rubenstein and Raymond F. Zack. These individuals received warrants to purchase
an aggregate of 500,000 shares of restricted common stock of the Company at
$4.00 per share (subject to certain restrictions) in consideration for making
such guarantees. The warrants were recorded as other financing costs during the
current fiscal year based on the estimated fair value of the loan guaranty of
$302,000. The cost is being amortized over the six month term of the loan.
The Company receives investor and public relations services from Xavier
Hermosillo, a Director of the Company. The Company paid fees of $15,000 and
$36,000 for the five months ended March 31, 1996 and the year ended March 31,
1997, respectively, for these services.
Certain of the Company's wholly-owned MacLeod subsidiaries lease space on
which certain MacLeod operations are located from Ian MacLeod. Rent paid for the
year ended March 31, 1997 was $13,200. This lease expires on January 31, 1998.
The Company owns the real property on which MacLeod's principal activities are
performed.
F-21
<PAGE> 142
NOTE 15 -- SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is summarized as follows (in thousands):
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED
OCTOBER 31, OCTOBER 31, MARCH 31, MARCH 31,
1994 1995 1996 1997
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Interest paid..................................... $ 0 $ 0 $ 0 $ 1,085
Income taxes refunded............................. $17 $320 $256 $ 1,184
Details of business acquisitions:
Fair value of assets acquired................... $ 0 $ 0 $ 0 $ 58,455
Liabilities assumed............................. 0 0 0 (25,483)
Stock and warrants issued....................... 0 0 0 (13,855)
Promissory notes and other consideration
issued....................................... 0 0 0 (14,658)
--- ---- ---- --------
Cash paid....................................... 0 0 0 4,459
Less: cash acquired............................... 0 0 0 (1,914)
--- ---- ---- --------
Net cash paid for acquisitions.................... $ 0 $ 0 $ 0 $ 2,545
=== ==== ==== ========
Noncash investing and financing activities:
Notes payable issued for real estate............ $ 0 $ 0 $ 0 3,950
tax benefit on stock options exercised.......... $ 0 $ 0 $ 0 107
</TABLE>
NOTE 16 -- SUBSEQUENT EVENTS -- FINANCING TRANSACTIONS
Subsequent to March 31, 1997, the Company completed several financing and
capital transactions which raised additional cash and refinanced or paid down
existing related party and third party debt. The transactions were as follows:
1. During April 1997, the Board of Directors approved a private sale of up to
2,025,000 restricted shares of the Company's common stock at $7.25 (the
"Private Placement"). As of June 19, 1997, all the restricted shares
available for sale in the private placement had been sold, including the sale
of 260,000 shares, collectively, to five directors of the Company, including
Gerard M. Jacobs, T. Benjamin Jennings, Donald F. Moorehead, Jr., and George
O. Moorehead and Harold Rubenstein. A purchaser of the restricted stock that
is not a Director or employee of the Company exchanged consideration
comprised of cash and a short term note. The short term note, in the
principal amount of $2.25 million, accrues interest at the prime rate and is
payable on or before June 30, 1997. On June 16, 1997, the Company received a
$500,000 payment on the note.
2. On April 1, 1997, the Company issued 60,000 Limited Warrants to Clend, which
resulted in additional goodwill of $216,000 (see Note 8).
3. On April 15, 1997, Clend converted $1.0 million of its note payable into
182,481 restricted shares of common stock of the Company (see Note 8).
4. On April 30, 1997, the Company made a $200,000 payment on Promissory Note A
due to Ian MacLeod and paid the $960,000 and $695,000 notes payable due to
Mike and Zalman Melnik, respectively (see Note 8).
5. On May 1, 1997, the Company issued 60,000 Limited Warrants to Clend, which
resulted in additional goodwill of $221,000 (see Note 8).
6. On May 21, 1997, Mike and Zalman Melnik exercised their Limited Warrants to
purchase 150,000 shares of restricted common stock in exchange for aggregate
cash payments to the Company of $600,000 (see Note 8). Also, on May 21, 1997,
Clend exercised its Limited Warrants to purchase 180,000 shares of restricted
common stock in exchange for a $720,000 reduction of the amount owned by the
Company pursuant to the Clend Note.
F-22
<PAGE> 143
7. On May 27, 1997, the Company made a $1.0 million payment on a line of credit
from a commercial bank (see Note 7).
8. On May 29, 1997, the Company made a payment of all principal and interest on
its $3.0 million mortgage payable (see Note 9). Also, on May 29, 1997, Ian
MacLeod and the Company agreed to amend the acquisition agreement dated
January 1, 1997, whereby the Company agreed to issue 160,000 restricted
shares of common stock of the Company in exchange for a $1.0 million
reduction of Promissory Note A. In addition, Ian MacLeod agreed to eliminate
the restrictions on the Company's ability to incur indebtedness involving the
MacLeod subsidiaries and to release stock pledges involving MacLeod. At the
same time, the Company made a $1.6 million payment on Promissory Note A and
executed a note to refinance the remaining $3.0 million principal portion of
Promissory Note A into a 5 year note due June 29, 2002 which accrues interest
at 8.5% (see Note 8).
9. On May 30, 1997, the Company entered into a $6.0 million revolving and term
loan agreement with a commercial bank under which the Company received
proceeds of $4.5 million. The loans are due on July 1, 1998 and carry an
interest rate equal to 1% above the lenders' prime rate. The proceeds from
the loans were utilized to repay the remaining $3.28 million balance on the
Clend Note (thereby ceasing the issuance of any additional Limited Warrants),
to repay the $600,000 MacLeod Promissory Note B (see Note 8 -- Notes
Receivable/Payable to Related Parties), and for working capital purposes.
There was no material gain or loss, individually or in the aggregate, as a
result of the above transactions. The following tables summarizes the unaudited
pro forma outstanding debt and equity balances of the Company at March 31, 1997,
giving effect to the debt assumed in the Reserve acquisition (see Note 2) and
the transactions described above (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENTS FOR
SUBSEQUENT UNAUDITED
ACTUAL FINANCINGS AND PRO FORMA
MARCH 31, 1997 ACQUISITIONS REF MARCH 31, 1997
-------------- --------------- --- --------------
<S> <C> <C> <C> <C>
Operating line of credit....................... 7,887 (1,000) 7 6,887
0 4,500 9 4,500
-------- -------- -------
7,887 3,500 11,387
======== ======== =======
Notes payable to Related Parties:
Promissory note A to Ian MacLeod............. 5,800 (200) 4 0
-- (5,600) 8 --
Note payable to Clend Investment............. 5,000 (1,000) 3 0
-- (720) 6 --
-- (3,280) 9 --
Note payable to Mike and Zalman Melnik....... 1,655 (1,655) 4 0
Promissory note B to Ian MacLeod............. 600 (600) 9 0
Note payable to H&S Broadway................. 547 -- 547
Note payable to Harold Rubenstein............ 403 -- 403
Note payable issued to Ian MacLeod........... 0 3,000 8 3,000
Note payable issued for Reserve
acquisition............................... 0 1,542 1,542
-------- -------- -------
14,005 (8,513) 5,492
Less: current portion........................ (12,575) (12,575) 0
-------- -------- -------
Long-term notes payable to Related Parties..... 1,430 4,062 5,492
======== ======== =======
</TABLE>
F-23
<PAGE> 144
<TABLE>
<CAPTION>
ADJUSTMENTS FOR
SUBSEQUENT UNAUDITED
FINANCINGS AND PRO FORMA
MARCH 31, 1997 ACQUISITIONS REF MARCH 31, 1997
-------------- --------------- --- --------------
<S> <C> <C> <C> <C>
Long-term debt................................. 14,549 (3,000) 8 11,549
Debt assumed from Reserve...................... 0 27,126 27,126
-------- -------- -------
14,549 24,126 38,675
Less: current portion........................ (10,809) 1,546 (9,263)
-------- -------- -------
3,740 25,672 29,412
======== ======== =======
Common stock and paid in capital............... 16,730 14,681 1 31,411
-- 1,000 3 1,000
-- 2,142 6 2,142
0 1,000 8 1,000
-------- -------- -------
16,730 18,823 35,553
======== ======== =======
Warrants....................................... 1,351 216 2 1,567
-- 221 5 221
-- (822) 6 (822)
Warrants issued for Reserve acquisition........ 0 5,488 5,488
-------- -------- -------
1,351 5,103 6,454
======== ======== =======
</TABLE>
NOTE 17 -- MANAGEMENT'S PLAN REGARDING CURRENT DEBT OBLIGATIONS
As outlined in Notes 7, 8, and 9, certain of the Company's debt obligations
at March 31, 1997 existed under facilities that were scheduled to mature within
approximately one year. In addition, the Company assumed $1,454,000 of
short-term debt obligations when it acquired Reserve on May 1, 1997 (see Notes 2
and 16). Management's current projections indicate that there will not be
sufficient cash flow from operations to fund the repayment of all principal
obligations on maturing short-term debt. Substantially all of the Company's
assets are pledged as collateral under the Company's various borrowing
facilities.
As described in Note 16, the Company has completed several debt and capital
transactions since March 31, 1997 that have raised cash or refinanced or repaid
existing debt. Additionally, management has entered into amendments or obtained
binding commitments from certain current lenders to extend maturities of
existing current obligations beyond June 30, 1998. These transactions and
commitments should provide the Company with sufficient cash and available
borrowings to fund the Company's current debt obligations and anticipated
operating cash needs for fiscal 1998. Management continues to explore various
other financing strategies, including the refinancing of certain existing debt
facilities on a long-term basis, the issuance of convertible or other types of
debt, and the issuance of equity securities. There can be no assurance that the
Company will be able to access sufficient capital on acceptable terms.
F-24
<PAGE> 145
NOTE 18 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain unaudited quarterly financial
information for the Company's last ten fiscal quarters (in thousands, except per
share amounts).
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------
JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
---------- -------- ------- ----------
<S> <C> <C> <C> <C>
FISCAL 1995
Net sales............................................... $ 0 $ 0 $ 0 $ 0
Gross profit............................................ 0 0 0 0
Net income from continuing operations................... 76 49 74 62
Net income (loss) from discontinued operations.......... 14 (136) (329) (2,247)
Net income (loss)....................................... $ 90 $ (87) $(255) $(2,185)
Earnings (loss) per share for:
Continuing operations................................. $.02 $ .01 $ .01 $ .01
Discontinued operations............................... .00 (.03) (.06) (.44)
Net income (loss)..................................... .02 (.02) (.05) (.43)
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED TWO MONTHS ENDED
JANUARY 31 MARCH 31
------------- ----------------
<S> <C> <C>
FISCAL 1996
Net sales................................................... $ 0 $ 0
Gross profit................................................ 0 0
Net income (loss) from continuing operations................ (20) 4
Net income (loss) from discontinued operations.............. 68 (46)
Net income (loss)........................................... 48 (42)
Earnings (loss) per share for:
Continuing operations..................................... $.00 $.00
Discontinued operations................................... .01 (.01)
Net income (loss)......................................... .01 (.01)
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
------- ------------ ----------- --------
<S> <C> <C> <C> <C>
FISCAL 1997
Net sales.......................................... $15,978 $13,963 $10,402 $24,853
Gross profit....................................... 2,000 823 382 3,667
Net income (loss) from continuing operations....... 5 (915) (1,160) 60
Net income from discontinued operations............ 146 147 25 529
Net income (loss).................................. 151 (768) (1,135) 589
Earnings (loss) per share for:
Continuing operations............................ $ .00 $ (.10) $ (.13) $ .01
Discontinued operations.......................... .02 .02 .00 .05
Net income (loss)................................ .02 (.08) (.13) .06
</TABLE>
Fiscal 1995 and 1996 results are restated to reflect the results of
discontinued operations (see Note 3 -- Discontinued Operations).
F-25
<PAGE> 146
NOTE 19 -- EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF ACCOUNTANTS' REPORT
Completed Acquisitions
On June 23, 1997, MTLM acquired the scrap recycling businesses of The Isaac
Group of Companies ("Isaac"), headquartered in Maumee, Ohio. The Isaac Group
includes Ferrex Trading Corporation, The Isaac Corporation, Paulding Recycling,
Inc. and Briquetting Corporation of America. The acquisition of Isaac resulted
in the issuance of 1,942,857 shares of MTLM common stock, warrants to purchase
462,500 shares of MTLM common stock, $20,582,300 of short-term notes, and
$15,964,601 of long-term notes. In addition, the Company guaranteed $8,544,200
of short-term notes payable by Isaac to two of its former shareholders. 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 and a non-compete agreement with extends for 3 years
beyond the employment agreement. In consideration for entering into the non-
compete agreement, the Company granted Mr. Isaac warrants to purchase 287,500
shares of MTLM common stock.
In connection with the acquisition, the Company entered into a credit
agreement with a commercial lender which provides a revolving line of credit up
to an amount of $37.0 million, subject to borrowing base availability. The line
of credit expires on June 23, 1998 and borrowings are secured by substantially
all of Isaac's assets. The line of credit also provides for an irrevocable
letter of credit in addition to working capital. The letter of credit is issued
in the aggregate amount of $27.4 million and provides security for $45.0 million
of notes payable to former Isaac shareholders.
On August 27, 1997, MTLM closed its merger with Proler Southwest Inc. of
Houston, Texas and its acquisition of Proler Steelworks L.L.C. of Jackson,
Mississippi (collectively "Proler"). The acquisition of Proler resulted in the
issuance of 1,750,000 shares of MTLM common stock, warrants to purchase 375,000
shares of MTLM common stock, $8.1 million of short-term notes, $2.4 million of
long-term notes and a cash payment of $7.5 million. In connection with the
acquisition, William T. Proler joined the Board of Directors.
Pending Acquisitions
The Company has signed various letters of intent to acquire 11 companies
located in Arizona, California, Connecticut, Mississippi, Tennessee, and Texas.
In connection with these acquisitions, which excludes the Cozzi merger, the
maximum consideration the Company expects to provide includes approximately 3.34
million shares of common stock, $45.1 million of cash and $700,000 of notes
payable. These pending acquisitions currently generate approximately $225
million of annual revenues.
The closing of the pending acquisitions are subject to, among other things,
execution of mutually acceptable definitive merger and related agreements,
successful completion of due diligence, obtaining corporate approvals, obtaining
government approvals as necessary, and other customary conditions to closing.
Certain acquisitions are also subject to the consummation of the Cozzi merger.
Preferred Stock Sale
On August 4, 1997, the Board of Directors authorized the Company to issue
up to 36,000 shares of Series A Preferred Stock. 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. Prior to execution of waivers and amendments of certain redemption
rights, the discount of $1.05 million was to be capitalized to preferred stock
through accretion over the 3 year term of the preferred stock. The Company
intends to utilize the proceeds principally to fund future acquisitions and to
repay certain debt obligations. 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
F-26
<PAGE> 147
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, by reason of the
Company's failure to hold its 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.
Short-term debt and Other
On August 9, 1997, the Company repaid a $6.5 million short-term note to a
commercial bank. On November 14, 1997, the Company obtained a $10.0 million
short-term loan from a commercial bank. The loan accrues interest at the prime
rate of interest and matures on December 15, 1997. The loan was guaranteed by
Gerard M. Jacobs, T. Benjamin Jennings and Donald F. Moorehead, Jr., directors
of the Company. The Company used the proceeds from the loan to repay $10.6
million of short-term debt obligations incurred from the Isaac acquisition.
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.
Pro forma financial information (unaudited)
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company, MacLeod, HouTex, Reserve,
Isaac, Proler and the subsequent financing and equity transactions (referred to
in Note 16 and above) as if these transactions had occurred on April 1, 1996.
These unaudited pro forma results have been prepared for comparative purposes
only and include certain
F-27
<PAGE> 148
adjustments, such as additional depreciation expense as a result of a step-up in
basis of fixed assets, additional amortization expense as a result of goodwill
and interest expense on acquisition debt. They do not purport to be indicative
of the results of operations which actually would have resulted had the
combination been in effect on April 1, 1996 (in thousands, except share data).
<TABLE>
<CAPTION>
UNAUDITED
YEAR ENDED
MARCH 31, 1997
--------------
<S> <C>
Net sales................................................... $428,871
Net loss from continuing operations before preferred
dividends................................................. (1,136)
Net loss from continuing operations applicable to common
stock..................................................... (2,636)
Net loss from continuing operations per common share........ $ (.17)
</TABLE>
<TABLE>
<CAPTION>
UNAUDITED
MARCH 31, 1997
--------------
<S> <C>
ASSETS
Current assets.............................................. $114,938
Property & equipment, net................................... 57,122
Other assets................................................ 1,823
Goodwill.................................................... 100,390
--------
Total assets........................................... $274,273
========
LIABILITIES & EQUITY
Current liabilities......................................... $ 97,525
Non-current liabilities..................................... 66,503
Stockholder's equity........................................ 110,245
--------
Total liabilities and equity........................... $274,273
========
</TABLE>
F-28
<PAGE> 149
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.
F-29
<PAGE> 150
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.
F-30
<PAGE> 151
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.
F-31
<PAGE> 152
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 tangible asset was
recorded and valued at $1.8 million.
F-32
<PAGE> 153
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)
<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>
F-33
<PAGE> 154
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
F-34
<PAGE> 155
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 annual meeting by such date. However, if the
convertibility provisions are not approved by the stockholders by
F-35
<PAGE> 156
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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>
F-36
<PAGE> 157
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
F-37
<PAGE> 158
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.
F-38
<PAGE> 159
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Cozzi Iron & Metal Inc.
Chicago, Illinois
We have audited the accompanying consolidated balance sheets of Cozzi Iron
& Metal Inc. and subsidiaries (the "Company") as of December 31, 1996 and 1995,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
April 22, 1997
F-39
<PAGE> 160
COZZI IRON & METAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND
(UNAUDITED)
SEPTEMBER 30, 1997
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, (UNAUDITED)
--------------------- SEPTEMBER 30,
1995 1996 1997
---- ---- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 58 $ 29 $ 59
Accounts receivable, net of allowance, $350............. 34,412 26,146 37,437
Current portion of notes receivable -- related party.... 309 622 352
Inventories............................................. 11,316 16,898 11,270
Refundable income taxes................................. 523 298
Prepaid expenses and other.............................. 1,022 769 606
Deferred income taxes................................... 694 1,003 978
------- -------- --------
Total current assets................................. 48,334 45,765 50,702
PROPERTY AND EQUIPMENT -- Net............................. 27,150 22,006 25,142
INVESTMENTS IN AND RECEIVABLE FROM JOINT VENTURES......... 182 8,848 8,462
INTANGIBLES AND OTHER ASSETS -- Net....................... 1,992 1,973 1,683
------- -------- --------
TOTAL..................................................... $77,658 $ 78,592 $ 85,989
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt.................... $ 3,385 $ 3,001 $ 3,263
Accounts payable........................................ 17,226 16,540 20,071
Accrued expenses........................................ 5,053 5,701 5,262
Income taxes payable.................................... 344
Customer deposits....................................... 2,961
------- -------- --------
Total current liabilities............................ 28,625 25,242 28,940
LONG-TERM DEBT -- Less current maturities................. 29,166 45,253 46,674
DEFERRED INCOME TAXES..................................... 389 748 675
COMMITMENTS AND CONTINGENCIES (Note 10)...................
STOCKHOLDERS' EQUITY:
Common stock, no par value; 1,000 shares authorized;
190 shares issued.................................... 13 13 13
Retained earnings....................................... 19,880 21,470 23,821
Less treasury stock, at cost (1995 -- 6.25 shares; 1996
and 1997 -- 81.25 shares)............................ (415) (14,134) (14,134)
------- -------- --------
Total stockholders' equity........................... 19,478 7,349 9,700
------- -------- --------
TOTAL..................................................... $77,658 $ 78,592 $ 85,989
======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-40
<PAGE> 161
COZZI IRON & METAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
(UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(in thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SALES..................................... $199,717 $231,409 $215,908 $167,104 $191,296
COST OF GOODS SOLD........................ 174,704 206,504 195,365 149,815 172,147
-------- -------- -------- -------- --------
Gross profit.................... 25,013 24,905 20,543 17,289 19,149
-------- -------- -------- -------- --------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSE................................. 13,491 15,916 14,595 11,486 13,695
INTEREST EXPENSE -- Net................... 1,664 1,985 1,762 1,564 2,105
LOSS (GAIN) ON FUTURES
CONTRACTS............................... 251 392 (84)
EQUITY IN NET LOSS (INCOME) OF JOINT
VENTURES................................ 725 1,145 400 (368)
-------- -------- -------- -------- --------
15,155 18,626 17,753 13,842 15,348
-------- -------- -------- -------- --------
INCOME BEFORE INCOME TAXES................ 9,858 6,279 2,790 3,447 3,801
PROVISION FOR INCOME TAXES................ 3,746 2,398 1,200 1,401 1,450
-------- -------- -------- -------- --------
NET INCOME................................ $ 6,112 $ 3,881 $ 1,590 $ 2,046 $ 2,351
======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-41
<PAGE> 162
COZZI IRON & METAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
(UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 1997
(in thousands)
<TABLE>
<CAPTION>
COMMON RETAINED TREASURY
STOCK EARNINGS STOCK TOTAL
------ -------- -------- -----
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994............................... $13 $ 9,887 $ 9,900
Purchase of treasury stock........................... $ (415) (415)
Net income........................................... 6,112 6,112
--- ------- -------- --------
BALANCE, DECEMBER 31, 1994............................. 13 15,999 (415) 15,597
Net income........................................... 3,881 3,881
--- ------- -------- --------
BALANCE, DECEMBER 31, 1995............................. 13 19,880 (415) 19,478
Purchase of treasury stock........................... (13,719) (13,719)
Net income........................................... 1,590 1,590
--- ------- -------- --------
BALANCE, DECEMBER 31, 1996............................. 13 21,470 (14,134) 7,349
Net income........................................... 2,351 2,351
--- ------- -------- --------
BALANCE, SEPTEMBER 30, 1997 (UNAUDITED)................ $13 $23,821 $(14,134) $ 9,700
=== ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-42
<PAGE> 163
COZZI IRON & METAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
(UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(in thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- -----------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 6,112 $ 3,881 $ 1,590 $ 2,046 $ 2,351
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization.................. 3,082 2,855 2,412 1,800 1,999
Loss (gain) on sale of property and
equipment.................................... (310) 60 (278) (38) (42)
Provision (credit) for deferred income taxes... 799 (104) 50 (115) (48)
Equity in net loss (income) of unconsolidated
affiliates................................... (12) 725 1,145 400 (368)
Changes in assets and liabilities:
Accounts receivable............................ (13,085) (10,834) 8,266 10,162 (11,291)
Inventories.................................... (5,709) 2,366 (5,582) (5,207) 5,350
Refundable income taxes........................ (196) 80 225 770 642
Prepaid expenses and other..................... (110) (291) 253 1,797 391
Accounts payable............................... 6,877 (750) (686) 680 3,531
Accrued expenses and other liabilities......... 2,279 1,136 649 (30) (439)
Customer deposits.............................. 2,961 (2,961) (2,961)
-------- -------- -------- -------- --------
Net cash flows from operating activities..... (273) 2,085 5,083 9,304 2,076
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............. (907) (7,400) (9,282) (6,131) (5,659)
Proceeds from sale of property and equipment..... 322 164 7,584 38 488
Investments in and issuance of receivables from
joint ventures................................. (181) (4,994) (2,800) 1,231
Repayment (issuance) of note receivable.......... 1,524 517 (404) (728) 270
Purchase of noncompetition covenant.............. (80)
-------- -------- -------- -------- --------
Net cash flows from investing activities..... 859 (6,900) (7,096) (9,621) (3,670)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt................... 4,146 10,664 39,901 32,218 19,853
Repayments of debt............................... (4,587) (6,024) (36,709) (30,682) (18,229)
Purchase of treasury stock....................... (208) (1,208) (1,208)
-------- -------- -------- -------- --------
Net cash flows from financing activities..... (649) 4,640 1,984 328 1,624
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH.................... (63) (175) (29) 11 30
CASH AND CASH EQUIVALENTS -- Beginning of period... 296 233 58 58 29
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS -- End of
period........................................... $ 233 $ 58 $ 29 $ 69 $ 59
======== ======== ======== ======== ========
SUPPLEMENTAL INFORMATION:
Cash paid for interest........................... $ 1,854 $ 2,000 $ 2,657 $ 2,296 $ 2,968
Cash paid for income taxes....................... 2,798 2,531 925 368 856
Noncash investing and financing activities:
Equipment acquired under debt agreements....... 1,890 4,039 5,023 420 337
Payments of debt in installments of
inventory.................................... 405 498 911 439 278
Treasury stock acquired under debt agreement... 415 12,719 12,719
Equipment sold to joint venture under debt
agreements................................... 4,818 477
</TABLE>
See notes to consolidated financial statements.
F-43
<PAGE> 164
COZZI IRON & METAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
The Company transports, processes, and markets recyclable ferrous and
nonferrous scrap metals. The accompanying consolidated financial statements
include the accounts of Cozzi Iron & Metal Inc. and its subsidiaries (the
"Company" or "Cozzi"). All material intercompany transactions and balances have
been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS -- The Company defines cash equivalents as highly
liquid investments with a maturity of three months or less when purchased.
INVENTORIES -- The Company accounts for its inventories using the last-in,
first-out ("LIFO") method. Management believes the use of the LIFO method better
matches current costs with current revenues. If the inventories had been valued
using the first-in, first-out method, the value would have been approximately
$3,827,000, $1,055,000, and $3,313,000 higher at December 31, 1995, December 31,
1996 and September 30, 1997, respectively.
During 1995 and 1996, certain inventory quantities decreased. This
reduction resulted in a liquidation of LIFO inventory quantities carried at
lower costs prevailing in prior years as compared with the cost of current
purchases, the effect of which decreased cost of goods sold and increased income
before income taxes by approximately $413,000 and $53,000, respectively.
PROPERTY AND EQUIPMENT -- Property and equipment are recorded at cost.
Depreciation is provided using straight-line and accelerated methods over the
estimated useful lives of the assets, which range from ten to 40 years for
buildings and improvements and three to 20 years for machinery and equipment,
vehicles, and furniture and fixtures.
INVESTMENTS -- Investments in which the Company has the ability to exercise
significant influence are accounted for under the equity method.
INTANGIBLES AND OTHER ASSETS -- Unamortized noncompete agreements are being
amortized over the lives of the associated agreements (generally five years).
The remaining intangibles and other assets consist primarily of the excess of
the purchase price over the net assets of acquired businesses, which is being
amortized over 40 years. Accumulated amortization of intangible assets was
approximately $639,000, $712,000, and $795,000 at December 31, 1995, December
31, 1996, and September 30, 1997, respectively.
FUTURES CONTRACTS -- The Company enters into futures contracts to reduce
risk related to price fluctuations in its raw materials inventory. Unrealized
gains and losses are accrued when the market value differs from the contract
price, unless the contract is hedging a specific transaction, in which case it
is deferred and included in the cost of the contract. Realized gains and losses
are recognized upon contract liquidation.
REVENUE RECOGNITION -- Revenue is recognized when goods have been received
by the customer and the customer has accepted the condition and quality.
F-44
<PAGE> 165
COZZI IRON & METAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
INCOME TAXES -- The Company provides for income taxes under the asset and
liability method of accounting for income taxes. Under this method, deferred
income taxes are provided for temporary differences between the financial
statement bases and tax bases of the Company's assets and liabilities. An
allowance is provided when management believes it is more likely than not that
tax benefits will not be utilized.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying amounts for cash and
cash equivalents and debt approximate fair value. The fair value of debt is
estimated based on current borrowing rates for loans with similar terms and
maturities.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Land............................................ $ 3,198 $ 3,371 $ 3,646
Buildings and improvements...................... 6,838 6,887 7,533
Machinery and equipment......................... 34,222 36,287 38,171
Vehicles........................................ 4,475 3,984 4,103
Furniture and fixtures.......................... 1,470 1,785 1,857
Construction in progress........................ 6,400 552 2,631
-------- -------- --------
56,603 52,866 57,941
Less accumulated depreciation................... (29,453) (30,860) (32,799)
-------- -------- --------
Property and equipment -- net................... $ 27,150 $ 22,006 $ 25,142
======== ======== ========
</TABLE>
The costs of construction in progress of certain long-term assets include
capitalized interest which will be amortized over the estimated useful life of
the related asset. The Company capitalized interest costs of approximately
$280,000 and $791,000 in 1995 and 1996, respectively.
4. INVESTMENTS IN JOINT VENTURES
Investments in joint ventures consist principally of the Company's 50%
ownership interests in PerlCo LLC ("PerlCo") and Salt River Recycling LLC ("Salt
River").
The Company also has a 50% interest in MetricMetals, a scrap brokerage
joint venture which was formed in 1994, commenced operations in 1995, and
discontinued operations in 1996. The Company's initial capital contribution was
$250,000 and its share of 1995 loss was approximately $120,000.
PerlCo was formed and commenced operations in 1995. The joint venture
company acquires, processes, and resells scrap metals. The Company's investment
at December 31, 1996 includes its capital contribution of $50,000 and advances
of $2,675,000. In 1996, the Company sold equipment to PerlCo in exchange for a
note receivable of $4,818,000. No gain or loss resulted from the sale.
Salt River was formed and commenced operations in 1996. The joint venture
company acquires, processes, and resells scrap metals. The Company's investment
includes its capital contribution of $1,000,000 and advances of $1,678,375.
F-45
<PAGE> 166
COZZI IRON & METAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
Summarized financial information of investments in significant joint
ventures at September 30, 1997, December 31, 1996, and December 31, 1995 were as
follows (in thousands):
<TABLE>
<CAPTION>
SALT RIVER
PERLCO RECYCLING
FINANCIAL POSITION LLC LLC TOTAL
------------------ ------ ---------- -----
<S> <C> <C> <C>
1997:
Current assets...................................... $ 7,832 $2,309 $10,141
Property and equipment -- net....................... 8,445 3,998 12,443
Other assets........................................ 4,268 38 4,306
------- ------- -------
20,545 6,345 26,890
Liabilities......................................... 22,635 4,809 27,444
------- ------- -------
Members' capital (deficiency)....................... $(2,090) $1,536 $ (554)
======= ======= =======
Company's share of capital (deficiency)............. $(1,045) $ 768 $ (277)
======= ======= =======
1996:
Current assets...................................... $ 8,244 $1,694 $ 9,938
Property and equipment -- net....................... 7,532 4,281 11,813
Other assets........................................ 4,485 32 4,517
------- ------- -------
20,261 6,007 26,268
Liabilities......................................... 23,044 4,625 27,669
------- ------- -------
Members' capital (deficiency)....................... $(2,783) $1,382 $(1,401)
======= ======= =======
Company's share of capital (deficiency)............. $(1,392) $ 691 $ (701)
======= ======= =======
1995:
Current assets...................................... $ 5,738
Property and equipment -- net....................... 1,974
Other assets........................................ 148
-------
7,860
Liabilities......................................... 8,971
-------
Members' (deficiency)............................... $(1,111)
=======
</TABLE>
<TABLE>
<CAPTION>
SALT RIVER
PERLCO RECYCLING
RESULTS OF OPERATIONS LLC LLC TOTAL
--------------------- ------ ---------- -----
<S> <C> <C> <C>
Nine months ended September 30, 1997:
Revenue............................................. $32,145 $6,811 $38,956
Costs and expenses.................................. 31,563 6,656 38,219
------- ------- -------
Net income.......................................... $ 582 $ 155 $ 737
======= ======= =======
Company's share of net income....................... $ 291 $ 77 $ 368
======= ======= =======
Nine months ended September 30, 1996:
Revenue............................................. $20,137 $1,391 $21,528
Costs and expenses.................................. 20,599 1,729 22,328
------- ------- -------
Net loss............................................ $ (462) $ (338) $ (800)
======= ======= =======
Company's share of net loss......................... $ (231) $ (169) $ (400)
======= ======= =======
</TABLE>
F-46
<PAGE> 167
COZZI IRON & METAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
<TABLE>
<CAPTION>
APRIL 26, 1996
(INCEPTION DATE)
YEAR ENDED TO
DECEMBER 31, DECEMBER 31,
1996 1996
------------ ----------------
<S> <C> <C> <C>
1996:
Revenue............................................. $28,734 $2,537 $31,272
Costs and expenses.................................. 30,406 3,155 33,562
------- ------- -------
Net loss............................................ $(1,672) $ (618) $(2,290)
======= ======= =======
Company's share of net loss......................... $ (836) $ (309) $(1,145)
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1995
(INCEPTION DATE)
DECEMBER 31,
1995
----------------
<S> <C>
1995:
Revenue............................................. $16,798
Costs and expenses.................................. 18,009
-------
Net loss............................................ $(1,211)
=======
Company's share of net loss......................... $ (605)
=======
</TABLE>
5. FUTURES CONTRACTS
The Company enters into futures contracts for aluminum commodities. The
contracts are financial instruments (with off-balance-sheet market risk), as
they are required to be settled in cash and not by delivery of any underlying
commodity of the Company. The aggregate notional amount of open positions was
approximately $1,180,000, $1,530,000, and $575,000 at December 31, 1995,
December 31, 1996, and September 30, 1997, respectively. The fair value of the
contracts approximated cost at December 31, 1995.
6. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Salaries, wages and benefits.......................... $2,122 $2,014 $2,437
Workers' compensation................................. 1,238 1,794 1,794
Other................................................. 1,693 1,893 1,031
------ ------ ------
Total................................................. $5,053 $5,701 $5,262
====== ====== ======
</TABLE>
F-47
<PAGE> 168
COZZI IRON & METAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
7. BORROWINGS
Borrowings consist of the following (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Secured lines of credit............................ $23,000 $24,400 $27,000
Secured installment notes.......................... 6,253 8,070 6,839
Installment notes.................................. 2,693 2,515 2,378
Demand notes payable to stockholders............... 605 550 1,001
Note payable for treasury stock purchase........... 12,719 12,719
------- ------- -------
32,551 48,254 49,937
Less short-term debt and current maturities of
long-term debt................................... 3,385 3,001 3,263
------- ------- -------
Long-term portion.................................. $29,166 $45,253 $46,674
======= ======= =======
</TABLE>
Maturities of debt subsequent to December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997........................................................ $ 3,001
1998........................................................ 1,832
1999........................................................ 18,334
2000........................................................ 9,942
2001........................................................ 712
Thereafter.................................................. 14,433
-------
Total.................................................. $48,254
=======
</TABLE>
The secured lines of credit represent borrowings from a commercial bank.
These borrowings are collateralized by accounts receivable and inventories.
Except as otherwise noted, all of the Company's borrowings bear interest at a
floating annual rate equal to the bank's prime rate or LIBOR plus 200 basis
points, payable quarterly. The applicable prime rate was 8.5%, 8.25% and 8.5% at
December 31, 1995, December 31, 1996, and September 30, 1997, respectively. The
loan agreements contain certain restrictions on dividends, acquisitions, and
repurchases of stock, among other things.
Under the terms of the secured lines of credit agreements, which expire in
2000, the Company may borrow an aggregate of $35,000,000 (subject to bank
approval and collateral limitations based on accounts receivable and
inventories), reduced by outstanding letters of credit (none outstanding at
December 31, 1996 and September 30, 1997).
Secured installment notes represent notes payable secured by machinery and
equipment, payable in both monthly and quarterly installments with various
maturity dates ranging from demand to 2006; interest rates range between 6.5%
and 9.5% (one installment note is payable at prime plus 1%; another is payable
at the variable base rate established by a bank, plus 1.5%). One such note is
repayable by the delivery of processed scrap to the payee on a monthly basis
plus interest at 6.5%, until the contract is completed. The value of the scrap
is stipulated in the contract.
Installment notes at December 31, 1996 consist of two notes. The first
installment note is a $985,000 balance due to the former owner of a facility
acquired by the Company, which is collateralized by real property having a cost
of $2,300,000. Monthly principal payments of $10,000 plus interest are due
through June 1999, with a final payment of $685,000 due in July 1999. Interest
is at prime (8.25%) plus 1/2% limited to an annual maximum of 13% and a minimum
of 9%. The Company has the option to prepay the note upon 60 days' notice
provided the entire balance then outstanding is retired. The second installment
note is a $1,529,992 balance
F-48
<PAGE> 169
COZZI IRON & METAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
due to the former owner of a facility acquired in September 1995. Monthly
payments of $15,267 are due through September 2010. Interest is at 8%.
The demand notes payable to stockholders bear interest at prime (8.25%)
plus 1%, payable monthly.
During 1996, the Company purchased 75 shares of common stock at a cost of
$13,719,096 in a privately negotiated transaction. The Company paid $1,000,000
in 1996 and signed a note payable for the remaining balance. The note is payable
in two installments of $1,000,000 in 1998 and $11,719,096 in the year 2006.
8. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ---------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Current:
Federal........................................... $2,300 $2,021 $ 940 $1,247 $1,228
State............................................. 647 481 210 269 270
------ ------ ------ ------ ------
2,947 2,502 1,150 1,516 1,498
Deferred............................................ 799 (104) 50 (115) (48)
------ ------ ------ ------ ------
Total............................................... $3,746 $2,398 $1,200 $1,401 $1,450
====== ====== ====== ====== ======
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
rate was as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate........................... 35% 35% 35%
State taxes, net of federal benefit......................... 5 5 5
Other....................................................... (2) (2) 3
-- -- --
Total....................................................... 38% 38% 43%
== == ==
</TABLE>
F-49
<PAGE> 170
COZZI IRON & METAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
The components of deferred tax assets (liabilities) are as follows (In
thousands):
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets -- current:
Accounts receivable....................................... $ 143 $ 143 $ 133
Inventories............................................... 66 77 52
Accrued liabilities....................................... 627 783 802
------- ------- -------
836 1,003 978
Deferred tax liability -- current:
Prepaid insurance......................................... (142)
------- ------- -------
Net deferred taxes -- current............................... $ 694 $ 1,003 $ 978
Deferred tax assets -- noncurrent:
Intangibles............................................... $ 327 $ 333 $ 325
Deferred compensation..................................... 393 323 428
------- ------- -------
720 656 753
Deferred tax liabilities -- noncurrent:
Depreciation.............................................. (1,109) (1,404) (1,428)
------- ------- -------
Net deferred taxes -- noncurrent............................ $ (389) $ (748) $ (675)
======= ======= =======
</TABLE>
9. EMPLOYEE BENEFIT PLANS
The Company has a profit-sharing plan covering substantially all employees.
The plan allows participants to contribute up to 15% of their compensation with
discretionary Company matching contributions. During 1994, 1995 and 1996, the
Company made matching contributions of approximately $77,000, $90,000 and
$81,000, respectively. At the discretion of the Board of Directors, the Company
may also make contributions each year for the benefit of all eligible employees.
During 1994, 1995 and 1996, the Company made such discretionary contributions of
$360,000, $409,000 and $340,000, respectively.
An unfunded Executive Long-Term Incentive Compensation Plan (the "Plan")
for key executives is designed to encourage the retention and motivation of key
employees and to contribute to the Company's long-term growth and success by
providing them with performance-based incentives. The Plan's committee,
appointed by the Board of Directors of the Company, selects employees to
participate in the Plan and determines the number of appreciation units to be
granted. Holders of units are entitled to receive cash equal in value to the
difference between the initial unit values and the unit values at the date the
units are vested and surrendered. During 1994, 1995 and 1996, incentive
compensation charged to operations was approximately $443,000, $313,000 and
$170,000, respectively.
The Company is obligated under various labor contracts to contribute
amounts to multiemployer health and welfare plans administered by the unions and
to the Individual Retirement Accounts ("IRAs") established by certain employees.
The Company's liability is limited to contributions to be made at stipulated
hourly or monthly rates for actual time worked by union employees. The Company
incurred expenses related to such plans of approximately $785,000, $770,000 and
$632,000 in 1994, 1995 and 1996, respectively.
F-50
<PAGE> 171
COZZI IRON & METAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
10. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under long-term
operating leases. Rental expense under all leases was approximately $422,000,
$649,000 and $661,000 for the years ended December 31, 1994, 1995 and 1996,
respectively.
The future minimum rental commitments as of December 31, 1996 were as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
----------
<S> <C>
1997........................................................ $1,201
1998........................................................ 1,194
1999........................................................ 1,184
2000........................................................ 1,184
Thereafter.................................................. 4,707
------
Total.................................................. $9,470
======
</TABLE>
The Company is a party to various legal actions and proceedings incident to
its normal business operations. Management believes that the outcome of the
Company's litigation will not have a material adverse effect on its financial
condition or results of operations.
11. MAJOR CUSTOMERS
The Company's sales in the aggregate to its three largest customers
accounted for approximately 57%, 47% and 42% of consolidated sales for each of
the years ended December 31, 1994, 1995 and 1996, respectively. One customer
accounted for 33%, 30% and 23% of sales for each of the years ended December 31,
1994, 1995 and 1996, respectively. Another customer accounted for 11% of sales
in each of the same years.
The Company does not have long-term contracts with its customers, but has
long-established relationships with many of them. A significant concentration of
the Company's business activity is with steel companies and scrap brokers, whose
ability to meet their obligations with the Company is dependent upon prevailing
economic conditions within the steel industry.
12. SUBSEQUENT EVENT
On March 14, 1997, the Company and its stockholders entered into a letter
of intent with Metal Management, Inc. setting forth a transaction whereby the
Company would become a wholly owned subsidiary of Metal Management, Inc. and the
Company's stockholders would receive approximately 11.5 million shares of common
stock of Metal Management, Inc. Such agreement is subject to the approval of
Metal Management, Inc.'s stockholders. Completion of such transaction may
require the payment of up to approximately $3,000,000 in additional
consideration for the treasury stock purchase described in Note 7.
F-51
<PAGE> 172
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and management of Metal Management, Inc.
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations and of cash flows present fairly, in all
material respects, the financial position of Proler Southwest Inc. and Proler
Steelworks L.L.C. at December 31, 1996, and the results of their operations and
their cash flows for the year in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Companies'
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Cleveland, Ohio
April 17, 1997
F-52
<PAGE> 173
PROLER SOUTHWEST INC. AND PROLER STEELWORKS L.L.C.
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
UNAUDITED
DECEMBER 31, JUNE 30,
1996 1997
------------ ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 96,719 $ 197,403
Accounts receivable....................................... 1,672,157 2,289,326
Inventories............................................... 178,861 342,898
Prepaid expenses and deposit.............................. 144,729 35,242
Current portion capital lease receivable.................. 156,528 159,555
---------- ----------
Total current assets................................... 2,248,994 3,024,424
CAPITAL LEASE RECEIVABLE.................................... 217,632 137,512
PROPERTY AND EQUIPMENT...................................... 1,849,503 1,733,941
DEFERRED TAX................................................ 100,566 17,907
OTHER ASSETS................................................ 3,370 3,370
---------- ----------
Total assets........................................... $4,420,065 $4,917,154
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Revolving loan............................................ $ 700,000 $ 700,000
Current portion of long-term debt
Related party term note................................ 147,000 140,250
Bank term note......................................... 72,000 72,000
Current portion of capital lease obligation............... 156,528 159,555
Accounts payable.......................................... 2,256,009 1,714,680
Income taxes payable...................................... -- 579,778
Accrued compensation...................................... 782,465 --
---------- ----------
Total current liabilities.............................. 4,114,002 3,366,263
RELATED PARTY TERM NOTE..................................... 111,250 44,500
BANK TERM NOTE.............................................. 132,831 90,831
CAPITAL LEASE OBLIGATION.................................... 217,632 137,512
OWNERS' EQUITY (DEFICIT)
Proler Southwest Inc. common stock -- $.10 par value,
10,000 shares authorized, issued and outstanding....... 1,000 1,000
Proler Steelworks L.L.C. invested units -- 1,000 units
authorized, issued and outstanding..................... 1,000 1,000
---------- ----------
Retained earnings (deficit)............................... (157,650) 1,276,048
---------- ----------
Total owners' equity (deficit)......................... (155,650) 1,278,048
---------- ----------
Total liabilities and owners' equity...................... $4,420,065 $4,917,154
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-53
<PAGE> 174
PROLER SOUTHWEST INC. AND PROLER STEELWORKS L.L.C.
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
UNAUDITED
SIX MONTHS ENDED
YEAR ENDED ---------------------------
DECEMBER 31, JUNE 30, JUNE 30,
1996 1996 1997
------------ -------- --------
<S> <C> <C> <C>
Net sales............................................ $ 30,755,267 $ 15,130,420 $ 15,771,140
Costs and expenses:
Cost of materials and other operating expenses..... (25,845,623) (12,427,132) (12,664,691)
Selling, general and administrative expenses....... (5,505,381) (1,428,080) (1,197,857)
------------ ------------ ------------
Income (loss) from operations........................ (595,737) 1,275,208 1,908,592
Other income (expense):
Warehousing income................................. 377,422 550 233,381
Interest income.................................... 29,156 0 0
Interest expense................................... (76,840) (28,037) (43,047)
Other, net......................................... (47,387) (1,594) (2,790)
------------ ------------ ------------
282,351 (29,081) 187,544
------------ ------------ ------------
Income (loss) before tax............................. (313,386) 1,246,127 2,096,136
Income tax (expense) benefit......................... 100,566 (434,433) (662,437)
------------ ------------ ------------
Net income (loss).................................... $ (212,820) $ 811,694 $ 1,433,699
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements
F-54
<PAGE> 175
PROLER SOUTHWEST INC. AND PROLER STEEL WORKS L.L.C.
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
UNAUDITED
SIX MONTHS ENDED
YEAR ENDED ------------------------
DECEMBER 31, JUNE 30, JUNE 30,
1996 1996 1997
------------ -------- --------
<S> <C> <C> <C>
Operating Activities:
Net income (loss)...................................... $(212,820) $ 811,694 $ 1,433,699
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization....................... 359,517 180,000 180,000
Changes in assets and liabilities:
Accounts receivable................................. 3,565 (293,555) (567,631)
Other current assets................................ (10,469) (100,000) 0
Inventories......................................... (116,621) (156,951) (164,037)
Accounts payable and accrued expenses............... 409,442 (100,449) (1,263,845)
Deferred tax........................................ (100,566) 4,199 82,659
Federal income tax.................................. 0 430,234 579,778
Prepaids............................................ (71,804) (63,081) 59,949
--------- --------- -----------
Cash provided by operating activities............... 260,244 712,091 340,572
--------- --------- -----------
Investing Activities:
Purchase of property and equipment..................... (336,930) (27,670) (64,439)
Collection on long-term capital lease receivable....... 147,435 72,615 77,093
--------- --------- -----------
Cash provided (used) in investing activities........ (189,495) 44,945 12,654
--------- --------- -----------
Financing Activities:
Net borrowings (payments) under revolving credit
agreements.......................................... 300,000 (356,195) (59,949)
Proceeds from term notes............................... 210,636 0 0
Principal payments on term notes....................... (383,188) (292,142) (115,500)
Principal payments of capital lease obligation......... (147,435) (72,615) (77,093)
--------- --------- -----------
Cash used by financing activities................... (19,987) (720,952) (252,542)
--------- --------- -----------
Net increase in cash..................................... 50,762 36,084 100,684
Cash, beginning of period................................ 45,957 45,957 96,719
--------- --------- -----------
Cash, end of period...................................... $ 96,719 $ 82,041 $ 197,403
========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements
F-55
<PAGE> 176
PROLER SOUTHWEST INC. AND PROLER STEELWORKS L.L.C.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF COMBINATION
The accompanying financial statements present the combined financial
position and results of operations for Proler Southwest Inc. and Proler
Steelworks L.L.C. (collectively, the Companies). The Companies are affiliated
through common ownership. All significant intercompany transactions have been
eliminated.
Earnings per share data is not reported in these financial statements as
they are a combination of a taxable and non taxable entity. Therefore, the
resultant earnings per share information would not be meaningful.
NATURE OF BUSINESS
The Company is engaged in the business of purchasing, processing, reselling
and brokering scrap steel and non-ferrous metals. The Company's sales are
primarily to steel companies which concentrates the Company's credit exposure in
one industry.
INCOME TAXES
Deferred income tax assets and liabilities are established to reflect the
future tax consequences carryforwards and differences between the tax bases and
financial bases of assets and liabilities for Proler Southwest Inc. which is a
taxable entity based upon its conversion from S-corporation to C-corporation
status as of January 1, 1996.
No deferred income tax assets and liabilities have been established for
Proler Steelworks LLC as it is a tax conduit passing all taxable income and
deductions through to its owners. Income before tax and book and tax basis
differences are insignificant for Proler Steelworks LLC.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the combined balance sheet for cash and
cash equivalents, accounts receivable, accounts payable and accruals approximate
fair value. The carrying amounts for debt approximates fair value because of the
variable interest rate terms.
INVENTORIES
Inventories consist principally of processed and unprocessed scrap steel
and non-ferrous metals and are stated at the lower of actual cost or market
value.
PROPERTY AND EQUIPMENT
The Company provides for the depreciation of property and equipment using
the straight-line method over the estimated useful lives of the assets ranging
from two to forty years.
F-56
<PAGE> 177
PROLER SOUTHWEST INC. AND PROLER STEELWORKS L.L.C.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-LIVED ASSETS
The Company reviews the costs assigned to long-lived assets, such as
property and equipment and intangibles, to determine whether any impairments are
other than temporary. If an impairment charge is required, it is recorded by
measuring the difference between the fair value and carrying costs of such
assets.
REVENUE RECOGNITION
The Company recognizes revenue for ferrous, nonferrous and brokered sales
when title passes to the customer, which is generally at the time of shipment.
CONCENTRATIONS WITH MAJOR CUSTOMERS
During 1996, three customers represented approximately $7.1 million, $5.3
million and $5.0 million of sales of which approximately $416,000, $113,000, and
$93,000 is included in accounts receivable at December 31, 1996.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited balance sheet as of June 30, 1997, and the
related unaudited statements of operations and cash flows for the six months
ended June 30, 1996 and 1997, respectively, have been prepared by the Companies
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. However, in the opinion of management, the interim
financial statements include all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of results of the
periods presented.
NOTE 2 -- INVENTORIES:
Inventories consist of the following at:
<TABLE>
<CAPTION>
UNAUDITED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -------------
<S> <C> <C>
Scrap steel................................................. $ 68,048 $240,808
Non-ferrous material........................................ 110,813 102,090
-------- --------
$178,861 $342,898
======== ========
</TABLE>
NOTE 3 -- PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at :
<TABLE>
<CAPTION>
UNAUDITED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -------------
<S> <C> <C>
Land........................................................ $ 180,500 $ 180,500
Automobiles................................................. 184,479 245,313
Production equipment........................................ 1,892,384 1,892,384
Buildings and improvements.................................. 1,052,374 1,052,374
Office equipment............................................ 73,994 77,599
----------- -----------
3,383,731 3,448,170
Less: accumulated depreciation.............................. (1,534,228) (1,714,229)
----------- -----------
$ 1,849,503 $ 1,733,941
=========== ===========
</TABLE>
F-57
<PAGE> 178
PROLER SOUTHWEST INC. AND PROLER STEELWORKS L.L.C.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- REVOLVING LOAN:
The Company has a revolving loan agreement with a bank which provides for
short term borrowings, due on demand, up to a maximum amount limited to the
lesser of $2,100,000 or an amount based on available collateral as defined. The
bank has a security interest in all accounts receivable, inventory and certain
personal property. The bank revolving loan and term note (Note 5) agreements
require compliance with certain financial loan covenants. The Company was in
violation of these covenants at December 31, 1996. A waiver of the violations
was subsequently obtained from the Company's bank through May 31, 1997. The
Company was in compliance of the covenants at June 30, 1997. Advances bore
variable rate interest of prime and prime plus one-half at June 30, 1997.
Borrowings of $700,000 and $700,000 were outstanding at December 31, 1996 and
June 30, 1997, respectively.
NOTE 5 -- LONG-TERM DEBT:
Long-term debt consists of the following at:
<TABLE>
<CAPTION>
UNAUDITED
DECEMBER 31, JUNE 30,
1996 1997
------------ ---------
<S> <C> <C>
Related party term note -- Principal and interest payable
monthly through October 1998, secured by the financed
property and equipment, 8.5% fixed interest rate.......... $ 258,250 $ 184,750
Less: current portion....................................... (147,000) (140,250)
--------- ---------
$ 111,250 $ 44,500
========= =========
Bank term note -- Principal and interest payable monthly
through November 1999, secured by the financed property
and equipment, 8.25% fixed interest rate.................. $ 204,831 $ 162,831
Less: current portion....................................... (72,000) (72,000)
--------- ---------
$ 132,831 $ 90,831
========= =========
</TABLE>
The Company has acquired certain transportation equipment under 60-month
capital leases and subleased the equipment under identical terms to a trucking
company which provides trucking services. Interest expense and income are
imputed at an interest rate of 6%.
Aggregate maturities of long term debt and future minimum capital lease
payments are as follows at December 31, 1996:
<TABLE>
<CAPTION>
CAPITAL
YEAR LOANS LEASES TOTAL
---- ----- ------- -----
<S> <C> <C> <C>
1997..................................................... $219,000 $174,720 $393,720
1998..................................................... 183,250 171,120 354,370
1999..................................................... 60,832 53,588 114,420
2000..................................................... 0 2,784 2,784
Amounts representing interest............................ 0 (28,052) (28,052)
-------- -------- --------
$463,082 $374,160 $837,242
======== ======== ========
</TABLE>
Cash paid for interest totaled $76,840 for the year ended December 31, 1996
and $28,037 and $43,047 for the six months ended June 30, 1996 and 1997,
respectively.
F-58
<PAGE> 179
PROLER SOUTHWEST INC. AND PROLER STEELWORKS L.L.C.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- INCOME TAXES
The states in which the companies operate do not impose corporate income
taxes. The federal income tax provision (benefit) consisted of the following:
<TABLE>
<CAPTION>
UNAUDITED
DECEMBER 31, JUNE 30,
1996 1997
------------ ---------
<S> <C> <C>
Current..................................................... $ 0 $579,778
Deferred.................................................... (100,566) 82,659
--------- --------
$(100,566) $662,437
========= ========
</TABLE>
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes for Proler Southwest Inc.
Significant temporary differences which give rise to Proler Southwest Inc.'s
noncurrent deferred tax assets are as follows:
<TABLE>
<CAPTION>
UNAUDITED
DECEMBER 31, JUNE 30,
1996 1997
------------ ---------
<S> <C> <C>
Property and equipment...................................... $ (43,000) $(29,057)
Net operating loss carryforwards............................ 77,456 0
Impact of cash to accrual conversion........................ 66,110 46,964
--------- --------
$ 100,566 $ 17,907
========= ========
</TABLE>
NOTE 7 -- EMPLOYEE SAVINGS PLANS
Proler Southwest Inc. maintains a 401(k) profit sharing plan and a money
purchase option plan, both of which cover all Proler Southwest Inc. employees
over 21 years of age and with one or more years of service. Employee
contributions to the 401 (k) plan through salary deferral are voluntary, and
participants may contribute up to 7.5% of their compensation on a pretax basis.
Employee contributions are fully matched by the employer. The plan allows an
additional discretionary employer contribution not to exceed 7.5% of the
compensation paid to all participants in the Plan.
The money purchase option plan allows Proler Southwest Inc. to contribute
4.64% of total compensation plus 4.64% of compensation in excess of social
security wage base. The Proler Southwest Inc. plan expense was $174,668 for the
year ended December 31, 1996 and $44,251 and $62,353 for the six months ended
June 30, 1996 and 1997, respectively.
Proler Steelworks L.L.C. maintains a 401(k) profit sharing plan which
covers all employees over 21 years of age and with one half year of service or
more. Employee contributions through salary deferral are voluntary, and
participants may contribute up to 20% of their compensation on a pretax basis.
Participants are immediately fully vested in their own and the Proler Southwest
Inc. contributions to each plan.
NOTE 8 -- COMMITMENTS AND CONTINGENCIES:
The Companies have recorded liabilities for claims arising in the ordinary
course of business including inventory purchases and operating expense accruals.
No accruals have been made for contingent claims as management does not consider
such claims probable of assertion as of December 31, 1996. Contingent claims
could be asserted by environmental and tax agencies or third party litigants. It
is possible that circumstances could change and effect management's estimates
regarding such claims. Management is unable to estimate a possible range of
loss, if any, related to these contingencies.
F-59
<PAGE> 180
PROLER SOUTHWEST INC. AND PROLER STEELWORKS L.L.C.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- SUBSEQUENT EVENT:
On August 27, 1997, the stockholders of Proler Southwest Inc. and
unitholders of Proler Steelworks L.L.C. closed its pending merger with Metal
Management, Inc. pursuant to which the stockholders and unitholders sold all
shares and units to Metal Management, Inc.
F-60
<PAGE> 181
ANNEX A
AGREEMENT AND PLAN OF MERGER
DATED MAY 16, 1997
AMONG
COZZI IRON & METAL, INC. AND ITS SHAREHOLDERS
METAL MANAGEMENT, INC.
AND
CIM ACQUISITION, CO.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I THE MERGER................................................. A-5
1.1 Merger...................................................... A-5
1.2 Filing and Effective Time................................... A-5
1.3 Effects of the Merger....................................... A-5
1.4 Conversion Formula.......................................... A-6
1.5 Conversion of Merger Sub Shares............................. A-6
1.6 Exchange of Certificates; Payment of Merger Consideration... A-6
1.7 The Closing................................................. A-6
1.8 Estate of James H. Cozzi Adjustment......................... A-6
ARTICLE II REPRESENTATIONS AND WARRANTIES OF MTLM.................... A-7
2.1 Corporate Status............................................ A-7
2.2 Corporate Power and Authority............................... A-7
2.3 Enforceability.............................................. A-7
2.4 No Commissions.............................................. A-7
2.5 Records..................................................... A-7
2.6 Capitalization.............................................. A-8
2.7 No Violation................................................ A-8
2.8 MTLM Subsidiaries........................................... A-8
2.9 Financial Statements........................................ A-8
2.10 Liabilities................................................. A-9
2.11 Litigation.................................................. A-9
2.12 Compliance with Laws........................................ A-9
2.13 Permits..................................................... A-10
2.14 Contracts................................................... A-10
2.15 Good Title to and Condition of Assets....................... A-10
2.16 Labor and Employment Matters................................ A-10
2.17 Tax Matters................................................. A-11
2.18 Receivables................................................. A-11
2.19 SEC Filings; Accuracy of Information Furnished by MTLM...... A-12
2.20 Inventory................................................... A-12
2.21 Restrictions................................................ A-12
2.22 Full Disclosure............................................. A-12
2.23 No Material Adverse Change.................................. A-12
2.24 Environmental Matters....................................... A-12
2.25 Employee Benefit Plans...................................... A-15
2.26 Insurance................................................... A-16
</TABLE>
A-1
<PAGE> 182
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
2.27 Real Estate................................................. A-16
2.28 Conduct of Business Since March 31, 1997.................... A-16
ARTICLE III REPRESENTATIONS AND WARRANTIES OF MERGECO................ A-17
3.1 Corporate Status............................................ A-17
3.2 Corporate Power and Authority............................... A-17
3.3 Enforceability.............................................. A-17
3.4 No Violation................................................ A-17
3.5 No Commissions.............................................. A-18
3.6 Mergeco Capitalization...................................... A-18
3.7 Business Activity........................................... A-18
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS AND
THE COMPANY................................................. A-18
4.1 Corporate Status............................................ A-18
4.2 Power and Authority......................................... A-18
4.3 Enforceability.............................................. A-19
4.4 Capitalization.............................................. A-19
4.5 Shareholders of the Company................................. A-19
4.6 No Violation................................................ A-19
4.7 Records..................................................... A-19
4.8 Subsidiaries................................................ A-20
4.9 Financial Statements........................................ A-20
4.10 Changes Since the Current Balance Sheet Date................ A-20
4.11 Liabilities................................................. A-21
4.12 Litigation.................................................. A-21
4.13 Environmental Matters....................................... A-21
4.14 Real Estate................................................. A-23
4.15 Good Title to and Condition of Assets....................... A-25
4.16 Compliance with Laws........................................ A-25
4.17 Labor and Employment Matters................................ A-26
4.18 Employee Benefit Plans...................................... A-26
4.19 Tax Matters................................................. A-28
4.20 Insurance................................................... A-28
4.21 Receivables................................................. A-29
4.22 Permits..................................................... A-29
4.23 Adequacy of the Assets; Relationships with Customers and
Suppliers;
Affiliated Transactions..................................... A-29
4.24 Intellectual Property....................................... A-29
4.25 Contracts................................................... A-30
4.26 Customer Lists and Recurring Revenue........................ A-30
4.27 Accuracy of Information Furnished by the Shareholders....... A-30
4.28 Investment Intent; Accredited Investor Status; Securities
Documents................................................... A-30
4.29 Business Locations.......................................... A-31
4.30 Names; Prior Acquisitions................................... A-31
4.31 No Commissions.............................................. A-31
4.32 Inventory................................................... A-31
4.33 Identification, Acquisition and Disposition of Material
Assets...................................................... A-31
4.34 Restrictions................................................ A-31
4.35 Full Disclosure............................................. A-31
</TABLE>
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ARTICLE V CONDUCT OF BUSINESS PENDING THE CLOSING.................... A-32
5.1 Conduct of Business of the Company Pending the Closing...... A-32
5.2 Conduct of Business of MTLM Pending the Closing............. A-33
ARTICLE VI ADDITIONAL AGREEMENTS..................................... A-34
6.1 Further Assurances.......................................... A-34
6.2 Compliance with Covenants................................... A-34
6.3 Cooperation................................................. A-34
6.4 Access to Information....................................... A-34
6.5 Notification of Certain Matters............................. A-34
6.6 Tax Treatment............................................... A-34
6.7 Confidentiality; Publicity.................................. A-34
6.8 No Other Discussions........................................ A-34
6.9 Restrictive Covenants....................................... A-35
6.10 Environmental Assessment.................................... A-35
6.11 Trading in MTLM's Common Stock.............................. A-36
6.12 Other Agreements............................................ A-36
6.13 HSR Act Compliance.......................................... A-36
6.14 Corporate Authority......................................... A-37
6.15 Certification of Tax Status................................. A-37
6.16 Purchase of Joint Venture Interest.......................... A-37
6.17 Meeting of Shareholders..................................... A-37
6.18 Pre-Clear Merger............................................ A-37
6.19 Financing................................................... A-37
6.20 Conduct of MTLM's Business.................................. A-37
6.21 Disclosure Supplements...................................... A-38
ARTICLE VII CONDITIONS TO THE OBLIGATIONS OF MTLM AND MERGECO........ A-39
7.1 Accuracy of Representations and Warranties and Compliance
with Obligations............................................ A-39
7.2 Financing................................................... A-39
7.3 Corporate Certificate....................................... A-39
7.4 Opinions of Counsel......................................... A-39
7.5 Governmental Approvals...................................... A-40
7.6 No Adverse Litigation....................................... A-40
7.7 MTLM's Approvals............................................ A-40
7.8 Fairness Opinion............................................ A-40
7.9 Other Closing Deliveries.................................... A-40
7.10 Dissenting Shareholders..................................... A-40
7.11 Cozzi Building Corporation.................................. A-40
7.12 Estate of James H. Cozzi.................................... A-40
7.13 No Material Adverse Change.................................. A-40
7.14 MetricMetal................................................. A-40
7.15 East Chicago Indiana Revenue Bonds.......................... A-41
ARTICLE VIII CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND
THE SHAREHOLDERS............................................ A-41
8.1 Accuracy of Representations and Warranties and Compliance
with Obligations............................................ A-41
8.2 Merger Consideration........................................ A-41
8.3 No Adverse Litigation....................................... A-41
8.4 Opinion of Counsel.......................................... A-41
8.5 Tax Opinion................................................. A-42
</TABLE>
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PROLER SOUTHWEST INC. AND PROLER STEELWORKS L.L.C.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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8.6 Consents.................................................... A-42
8.7 Other Closing Deliveries.................................... A-42
8.8 No Material Adverse Change.................................. A-42
ARTICLE IX INDEMNIFICATION........................................... A-42
9.1 Agreement by the Shareholders to Indemnify.................. A-42
9.2 Agreement by MTLM to Indemnify.............................. A-43
9.3 Conditions of Indemnification............................... A-44
9.4 Security for the Shareholders's Indemnification
Obligation.................................................. A-44
9.5 The James H. Cozzi Estate Special Indemnification........... A-44
ARTICLE X SECURITIES LAW MATTERS..................................... A-45
10.1 Disposition of MTLM Shares.................................. A-45
10.2 Legend...................................................... A-45
ARTICLE XI DEFINITIONS............................................... A-45
11.1 Defined Terms............................................... A-45
11.2 Other Definitional Provisions............................... A-49
ARTICLE XII TERMINATION, AMENDMENT AND WAIVER........................ A-49
12.1 Termination................................................. A-49
12.2 Effect of Termination....................................... A-50
ARTICLE XIII GENERAL PROVISIONS...................................... A-50
13.1 Notices..................................................... A-50
13.2 Entire Agreement............................................ A-51
13.3 Expenses.................................................... A-51
13.4 Amendment; Waiver........................................... A-51
13.5 Binding Effect; Assignment.................................. A-51
13.6 Counterparts................................................ A-51
13.7 Interpretation.............................................. A-51
13.8 Governing Law; Interpretation............................... A-51
13.9 Arm's Length Negotiations................................... A-51
</TABLE>
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AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "AGREEMENT") is entered into
effective as of May 16, 1997, by and among Metal Management, Inc., a Delaware
corporation ("MTLM"); CIM Acquisition, Co., an Illinois corporation, and a
wholly owned subsidiary of MTLM ("MERGECO"); Cozzi Iron & Metal, Inc., an
Illinois corporation ("COZZI" or "COMPANY"); Albert A. Cozzi, Frank J. Cozzi and
Gregory P. Cozzi, being the sole shareholders of the Company (collectively the
"SHAREHOLDERS," and individually, a "SHAREHOLDER"). Certain other capitalized
terms used herein are defined in Article XI or elsewhere throughout this
Agreement.
RECITALS
A. The Shareholders own, and until the Closing (as defined herein) will
own, all of the issued and outstanding equity securities of the Company (the
"COZZI SHARES");
B. MTLM desires to acquire all of the Cozzi Shares in exchange for shares
of common stock, $.01 par value per share, of MTLM (the "MTLM SHARES") and a
cash payment, upon the terms and subject to the conditions set forth herein;
C. MTLM and the Company have agreed to accomplish this transaction through
a reverse triangular merger whereby Mergeco will merge with and into Cozzi, and
Cozzi will be the surviving corporation (the "MERGER");
D. Each of the Boards of Directors of MTLM, the Company and Mergeco have
approved this Agreement, the Shareholders of the Company have approved this
Agreement and the Board of Directors of MTLM have directed that this Agreement
be submitted to its shareholders for approval; and
E. It is intended that the Merger qualify as a reorganization within the
meaning of the appropriate subsection of Section 368 of the Internal Revenue
Code of 1986, as amended.
TERMS OF AGREEMENT
In consideration of the mutual representations, warranties, covenants and
agreements contained herein, the parties hereto agree as follows:
ARTICLE I
THE MERGER
1.1 MERGER. Upon and subject to the terms and conditions set forth in
this Agreement and in accordance with the Illinois Business Corporation Act of
1983, as amended (the "BCA"), Mergeco shall be merged with and into Cozzi.
Following the Merger, Cozzi shall continue to exist as the surviving corporation
(sometimes referred to as the "SURVIVING CORPORATION") and the separate
corporate existence of Mergeco shall cease.
1.2 FILING AND EFFECTIVE TIME. At the Closing, Mergeco and Cozzi shall
file with the Secretary of State of the State of Illinois the Articles of
Merger, appropriately completed and executed in accordance with Section 11.25 of
the BCA. The Merger shall become effective upon filing and the issuance of the
certificate of merger, in accordance with Section 11.40 of the BCA (the
"EFFECTIVE TIME," and the date thereof hereinafter referred to as the "EFFECTIVE
DATE").
1.3 EFFECTS OF THE MERGER. The Merger shall have the effects set forth
in Section 11.50 of the BCA. In addition:
(a) The Articles of Incorporation of Cozzi as in effect at the
Effective Time shall be and constitute the Articles of Incorporation of the
Surviving Corporation until amended or changed in accordance with
applicable law;
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(b) The bylaws of Cozzi as in effect at the Effective Time shall be
and constitute the bylaws of the Surviving Corporation until amended or
changed in accordance with applicable law; and
(c) The officers and directors of the Surviving Corporation shall be
as follows:
Directors: T. Benjamin Jennings
Frank J. Cozzi
Gerard M. Jacobs
Albert A. Cozzi
Officers: Frank J. Cozzi -- President
1.4 CONVERSION FORMULA. At the Effective Time, each Cozzi Share, issued
and outstanding at and as of the Effective Time, by virtue of the Merger and
without any further action on the part of the holder thereof, shall be converted
into 105,747 shares of MTLM Shares, and a right to receive $55,172.41 per share
payable upon the shareholder's surrender of his stock certificate(s), subject to
adjustment as provided for in Section 1.8. None of the equity securities of the
Company held in the Company's treasury at the Effective Time shall be converted
into MTLM Shares and the right to receive a cash payment. At the Effective Time
of the Merger, all of such equity securities of the Company shall be canceled.
1.5 CONVERSION OF MERGER SUB SHARES. At and as of the Effective Time, by
virtue of the Merger and without any further action on the part of MTLM, each
share of no par value common stock of Mergeco issued and outstanding to MTLM
immediately prior to the Effective Time shall by virtue of the Merger be
converted into one share of common stock of the Surviving Corporation.
1.6 EXCHANGE OF CERTIFICATES; PAYMENT OF MERGER CONSIDERATION. At the
closing, the Shareholders shall surrender to MTLM their stock certificates
representing their Cozzi Shares. Upon receipt of the stock certificates, MTLM
shall cancel such stock certificates and MTLM shall promptly pay the cash
portion of the Merger consideration and issue a certificate representing the
MTLM Shares into which such Cozzi Shares previously represented by the
surrendered certificate shall have been converted at the Effective Time;
provided, however, MTLM shall withhold from each Shareholder his pro-rata
portion of 1,150,000 MTLM Shares (collectively, the "ESCROW SHARES") and shall
deliver a certificate representing the Escrow Shares to an escrow agent
acceptable to MTLM and the Shareholders (the "ESCROW AGENT"). The Escrow Agent
shall hold the Escrow Shares in escrow pursuant to an escrow agreement in the
form attached hereto as Exhibit A (the "ESCROW AGREEMENT"). Until so
surrendered, the certificates representing the Cozzi Shares shall, at and after
the Effective Time, be deemed for all purposes to represent and evidence only
the right to receive the per share consideration set forth in Section 1.4, for
each share represented by such certificates, and no interest shall be paid or
accrued on such amount and the holders of such Cozzi stock certificates shall
cease to have any rights as common shareholders of the Company.
1.7 THE CLOSING. The Closing of the Merger (the "CLOSING") shall take
place as promptly as practicable (and in any event within five business days)
after satisfaction or waiver of the conditions set forth in Articles VII and
VIII (the "CLOSING DATE"), at the offices of MTLM's counsel in Chicago,
Illinois, or such other place as the parties may otherwise agree.
1.8 ESTATE OF JAMES H. COZZI ADJUSTMENT. The consideration set forth in
Section 1.4 shall be decreased for any payments made by the Company between the
date hereof and the Closing Date or required to be made by the Company or MTLM
after the Closing Date of (i) "Additional Consideration" due under that certain
Sales Agreement dated June 25, 1996 by and between Irene Cozzi, as executor of
the estate of James H. Cozzi, and the Company (the "JAMES H. COZZI SALES
AGREEMENT"), or (ii) any other amounts payable pursuant to the James H. Cozzi
Sales Agreement or any other documents or instruments executed in connection
therewith in excess of the amount reflected on the Company's Current Balance
Sheet. The parties hereto shall make such appropriate adjustments to the cash
and non-cash portion of the Merger consideration that reasonably reflect the
amount and type of settlement paid to the estate of James H. Cozzi, as mutually
agreed to by the parties hereto.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF MTLM
As a material inducement to the Company and the Shareholders to enter into
this Agreement and to consummate the transactions contemplated hereby, MTLM
makes the following representations and warranties to the Company and the
Shareholders:
2.1 CORPORATE STATUS. MTLM is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. MTLM has
the requisite power and authority to own or lease its property and to carry on
its business as now being conducted. MTLM is legally qualified to transact
business as a foreign corporation in all jurisdictions where the nature of its
property and the conduct of its business requires such qualification and is in
good standing in each of the jurisdictions in which it is so qualified, except
where the failure to so qualify would not have a Material Adverse Effect on
MTLM. There is no pending or threatened proceeding for the dissolution,
liquidation, insolvency or rehabilitation of MTLM. Each entity listed as a
subsidiary of MTLM on Schedule 2.8 hereto (each a "MTLM SUBSIDIARY" and
collectively the "MTLM SUBSIDIARIES") is a corporation duly organized, validly
existing and in good standing under the laws of its state of incorporation. Each
MTLM Subsidiary has the requisite power and authority to own or lease its
property and to carry on its business as now being conducted. Each MTLM
Subsidiary is legally qualified to transact business as a foreign corporation in
all jurisdictions where the nature of its property and the conduct of its
business requires such qualification (all of which jurisdictions are listed on
Schedule 2.1) and is in good standing in each of the jurisdictions in which it
is so qualified. There is no pending or threatened proceeding for the
dissolution, liquidation, insolvency or rehabilitation of any MTLM Subsidiary.
MTLM owns all of the issued and outstanding capital stock of each MTLM
Subsidiary.
2.2 CORPORATE POWER AND AUTHORITY. MTLM has the corporate power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder and will have, at the time of Closing, the corporate power and
authority to consummate the transactions contemplated hereby. MTLM has taken all
action necessary by its board of directors to authorize its execution and
delivery of this Agreement and the performance of its obligations hereunder and
will have, at the time of Closing, taken all actions necessary (including
stockholder approval) to authorize the consummation of the transactions
contemplated hereby.
2.3 ENFORCEABILITY. This Agreement has been duly executed and delivered
by MTLM and constitutes a legal, valid and binding obligation of MTLM,
enforceable against MTLM in accordance with its terms, except as the same may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights generally and
general equitable principles regardless of whether such enforceability is
considered in a proceeding at law or in equity.
2.4 NO COMMISSIONS. Neither MTLM nor any MTLM Subsidiary has incurred
any obligation for any finder's or broker's or agent's fees or commissions or
similar compensation in connection with the transactions contemplated hereby.
2.5 RECORDS. The copies of the respective articles of incorporation and
bylaws of MTLM which were provided to the Shareholders are true, accurate and
complete and reflect all amendments made through the date of this Agreement. The
minute books for MTLM provided to the Shareholders for review were correct and
complete as of the date of such review, no further entries have been made
through the date of this Agreement, such minute books contain the true
signatures of the persons purporting to have signed them, and such minute books
contain an accurate record of all corporate actions of the shareholders and
directors (and any committees thereof) of MTLM taken by written consent or at a
meeting since incorporation. All material corporate actions taken by MTLM have
been duly authorized or ratified. All accounts, books, ledgers and official and
other records of MTLM have been fully, properly and accurately kept and
completed in all material respects, and there are no material inaccuracies or
discrepancies of any kind contained therein. The stock ledgers of MTLM, as
previously provided to the Shareholders, or as reflected in Schedule 2.6,
contain accurate and complete records of all issuances, transfers and
cancellations of shares of the capital stock of MTLM.
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<PAGE> 188
2.6 CAPITALIZATION. Schedule 2.6 sets forth, with respect to MTLM, (i)
the number of authorized shares of each class of its capital stock, (ii) the
number of issued and outstanding shares of each class of its capital stock, and
(iii) the number of shares of each class of its capital stock which are held in
treasury. All of the issued and outstanding shares of capital stock of MTLM and
each MTLM Subsidiary (i) have been duly authorized and validly issued and are
fully paid and non-assessable, (ii) were issued in compliance with all
applicable state and federal securities laws, and (iii) were not issued in
violation of any preemptive rights or rights of first refusal. No preemptive
rights or rights of first refusal exist with respect to the shares of capital
stock of MTLM or any MTLM Subsidiary, and no such rights arise by virtue of or
in connection with the transactions contemplated hereby. Except as set forth on
Schedule 2.6, there are no outstanding or authorized rights, options, warrants,
convertible securities, subscription rights, conversion rights, exchange rights
or other agreements or commitments of any kind that could require MTLM or any
MTLM Subsidiary to issue or sell any shares of its capital stock (or securities
convertible into or exchangeable for shares of its capital stock). There are no
outstanding stock appreciation, phantom stock, profit participation or other
similar rights with respect to MTLM or any MTLM Subsidiary. Except as set forth
on Schedule 2.6, there are no proxies, voting rights or other agreements or
understandings with respect to the voting or transfer of the capital stock of
MTLM or any MTLM Subsidiary. Neither MTLM nor any MTLM Subsidiary is obligated
to redeem or otherwise acquire any of its outstanding shares of capital stock.
2.7 NO VIOLATION. Except as set forth on Schedule 2.7 and any applicable
requirements of the Hart Scott-Rodino Antitrust Improvements Act of 1976 and the
rules and regulations promulgated thereunder (the "HSR ACT"), the execution and
delivery of this Agreement by MTLM, the performance by it of its obligations
hereunder and the consummation of the transactions contemplated by this
Agreement will not (i) contravene any provision of the certificate of
incorporation or bylaws of MTLM, (ii) violate or conflict with any law, statute,
ordinance, rule, regulation, decree, writ, injunction, judgment or order of any
Governmental Authority or of any arbitration award which is either applicable
to, binding upon or enforceable against MTLM; (iii) conflict with, result in any
breach of, or constitute a default (or an event which would, with the passage of
time or the giving of notice or both, constitute a default) under, or give rise
to a right to terminate, amend, modify, abandon or accelerate, any Contract
which is applicable to, binding upon or enforceable against MTLM, (iv) result in
or require the creation or imposition of any Lien upon or with respect to any of
the property or assets of MTLM, or (v) require the consent, approval,
authorization or permit of, or filing with or notification to, any Governmental
Authority, any court or tribunal or any other Person, except the SEC or other
filings required to be made by MTLM.
2.8 MTLM SUBSIDIARIES. Except as set forth on Schedule 2.8, MTLM does
not own, directly or indirectly, more than fifty percent (50%) of any
outstanding voting securities of or other interests in, or control, any other
corporation, partnership, joint venture or other business entity. In addition,
Schedule 2.8 lists every other business entity in which MTLM or its MTLM
Subsidiaries has any ownership interest. Except as set forth on Schedule 2.8,
MTLM does not have any liabilities or obligations, whether accrued, absolute,
contingent or otherwise, arising from its interest in the entities set forth on
such schedule.
2.9 FINANCIAL STATEMENTS. MTLM has delivered to the Shareholders (i) the
consolidated financial statements of MTLM as of October 31, 1995 and 1994,
including the notes thereto, audited by Price Waterhouse L.L.P. and (ii) the
March 31, 1997 unaudited consolidated financial statements of MTLM
(collectively, the "MTLM FINANCIAL STATEMENTS"), copies of which are attached as
Schedule 2.9 hereto. The balance sheet dated as of March 31, 1997 included in
the MTLM Financial Statements is referred to herein as the "MTLM CURRENT BALANCE
SHEET". The MTLM Financial Statements fairly present the combined and
consolidated financial position of MTLM and the MTLM Subsidiaries at each of the
balance sheet dates and the results of operations for the periods covered
thereby, and have been prepared in accordance with GAAP consistently applied
throughout the periods indicated. The books and records of MTLM and each MTLM
Subsidiary fully and fairly reflect the transactions, properties, assets and
liabilities of MTLM and each MTLM Subsidiary. Unless noted therein, there are no
material special or non-recurring items of income or expense during the periods
covered by the MTLM Financial Statements, and the balance sheets included in the
MTLM Financial Statements do not reflect any writeup or revaluation increasing
the book value of any assets, except as specifically disclosed in the notes
thereto or otherwise in accordance with
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<PAGE> 189
GAAP. The MTLM Financial Statements reflect all adjustments necessary for a fair
presentation of the financial information contained therein.
2.10 LIABILITIES. Except as set forth in the SEC Filings or on Schedule
2.10, neither MTLM nor any MTLM Subsidiary has any liabilities or obligations,
whether accrued, absolute, contingent or otherwise, except (i) to the extent
reflected or taken into account in the MTLM Current Balance Sheet (and the notes
thereto) and not heretofore paid or discharged, (ii) to the extent specifically
set forth in or incorporated by express reference in any of the Schedules
attached hereto, (iii) liabilities incurred in the ordinary course of business
consistent with past practice since the date of the MTLM Current Balance Sheet
(none of which relates to breach of contract, breach of warranty, tort,
infringement or violation of law, or which arose out of any action, suit, claim,
governmental investigation or arbitration proceeding), (iv) normal accruals,
reclassifications, and audit adjustments which would be reflected on an audited
financial statement and which would not be material in the aggregate, and (v)
liabilities incurred in the ordinary course of business prior to the date of the
MTLM Current Balance Sheet which, in accordance with GAAP consistently applied,
were not recorded thereon. For purposes of this Agreement, the phrase "IN THE
ORDINARY COURSE OF BUSINESS" (or words having similar meaning) used in reference
to MTLM's business, shall be deemed to include all of MTLM's activities relating
to acquiring businesses in the scrap metal industry, and all related financing
or borrowing activities, including issuing additional MTLM Shares, notes,
debentures or other securities.
2.11 LITIGATION. Except as set forth on Schedule 2.11, there is no action,
suit, or other legal or administrative proceeding or governmental investigation,
pending or, to the best of MTLM's knowledge, threatened, anticipated or
contemplated against, by or affecting MTLM or any MTLM Subsidiary or any of
their properties or assets, or which question the validity or enforceability of
this Agreement or the transactions contemplated hereby, and there is no basis
for any of the foregoing. There are no outstanding orders, decrees or
stipulations issued by any Governmental Authority in any proceeding to which
MTLM or any MTLM Subsidiary is or was a party which have not been complied with
in full or which continue to impose any material obligations on MTLM or any MTLM
Subsidiary.
2.12 COMPLIANCE WITH LAWS.
(a) Except as set forth in the SEC Filings, MTLM and each MTLM
Subsidiary is in material compliance with all laws, regulations and orders
applicable to it, its respective business and operations (as currently
conducted) and its properties and assets (in each case currently owned or
used by it). Except as set forth in the SEC Filings or on Schedule 2.12,
neither MTLM nor any MTLM Subsidiary has been cited, fined or otherwise
notified of any present material failure to comply with any material laws,
regulations or orders and no proceeding with respect to any such material
violation is pending or, to the best of MTLM's knowledge, threatened.
(b) Neither MTLM nor any MTLM Subsidiary has made any payment of
funds in connection with its business which is prohibited by law, and no
funds have been set aside to be used in connection with its business for
any payment prohibited by law.
(c) MTLM and each MTLM Subsidiary is in material compliance with the
terms and provisions of the Immigration Reform and Control Act of 1986, as
amended (the "IMMIGRATION ACT"). With respect to each Employee (as defined
in 8 C.F.R. 274a.1(f)) of MTLM for whom compliance with the Immigration Act
as employer is required, to the best of MTLM's knowledge, MTLM and each
MTLM Subsidiary has on file a true, accurate and complete copy of (i) each
Employee's Form I-9 (Employment Eligibility Verification Form) and (ii) all
other records, documents or other papers prepared, procured and/or retained
by MTLM and each MTLM Subsidiary pursuant to the Immigration Act. Neither
MTLM nor any MTLM Subsidiary has been cited, fined, served with a Notice of
Intent to Fine or with a Cease and Desist Order, nor has any action or
administrative proceeding been initiated or threatened against it, by the
Immigration and Naturalization Service by reason of any actual or alleged
failure to comply with the Immigration Act.
(d) Except as fully described in the SEC Filings or on Schedule 2.12,
neither MTLM nor any MTLM Subsidiary is subject to any Contract, decree or
injunction which restricts the continued
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<PAGE> 190
operation of any business or the expansion thereof to other geographical
areas, customers and suppliers or lines of business.
2.13 PERMITS. MTLM and each MTLM Subsidiary possess all material licenses
and required governmental or official approvals, permits or authorizations
(collectively, the "PERMITS") for its business and operations, including the
operation of its properties (whether owned or leased). All such Permits are
valid and in full force and effect, MTLM and each MTLM Subsidiary is in material
compliance with the requirements thereof, and no proceeding is pending or
threatened to revoke or amend any of them. None of such Permits is or will be
impaired or in any way affected by the execution and delivery of this Agreement
or the consummation of the transactions contemplated hereby.
2.14 CONTRACTS. The SEC Filings set forth a list of each Contract which is
required to be disclosed pursuant to Item 601(b)(10) of Regulation S-K (the
"DISCLOSED CONTRACTS"), true and correct copies of which have been provided to
the Company. Except as set forth in the SEC Filings or on Schedule 2.14 no event
has occurred which constitutes, or after notice or the passage of time, or both,
would constitute, a material default by MTLM or any MTLM Subsidiary under any
Disclosed Contract, and no such event has occurred which constitutes or would
constitute a material default by any other party. Neither MTLM nor any MTLM
Subsidiary is subject to any material liability or payment resulting from
renegotiation of amounts paid it under any Disclosed Contract.
2.15 GOOD TITLE TO AND CONDITION OF ASSETS.
(a) Except as set forth on Schedule 2.15, MTLM and each MTLM
Subsidiary has good and marketable title to all of its respective MTLM
Assets (as hereinafter defined), free and clear of any Liens or
restrictions on use. For purposes of this Agreement, the term "MTLM ASSETS"
means all of the properties and assets of MTLM and its MTLM Subsidiaries,
other than owned real property and leased real property, whether personal
or mixed, tangible or intangible, wherever located.
(b) To the best of MTLM's knowledge, the MTLM Fixed Assets (as
hereinafter defined) currently in use or necessary for the business and
operations of MTLM and its MTLM Subsidiaries are in good operating
condition, normal wear and tear excepted, and have been maintained in
accordance with sound industry practices. For purposes of this Agreement,
the term "MTLM FIXED ASSETS" means all vehicles, machinery, equipment,
tools, supplies, leasehold improvements, furniture and fixtures used by or
located on the premises of MTLM or any MTLM Subsidiary or set forth on the
MTLM Current Balance Sheet or acquired by MTLM or any MTLM Subsidiary since
the date of the MTLM Current Balance Sheet.
2.16 LABOR AND EMPLOYMENT MATTERS. Except as set forth on Schedule 2.16,
neither MTLM nor any MTLM Subsidiary is a party to or bound by any collective
bargaining agreement or any other agreement with a labor union, and there have
been no efforts by any labor union during the 24 months prior to the date hereof
to organize any employees of MTLM or any MTLM Subsidiary into one or more
collective bargaining units. There is no pending, or to the best of MTLM's
knowledge, threatened labor dispute, strike or work stoppage which affects or
which may affect the business of MTLM or any MTLM Subsidiary which may interfere
with its continued operations. Neither MTLM nor any MTLM Subsidiary has within
the last 24 months committed any unfair labor practice as defined in the
National Labor Relations Act, as amended, and there is no pending or, to the
best of MTLM's knowledge, threatened charge or complaint against MTLM or any
MTLM Subsidiary by or with the National Labor Relations Board or any
representative thereof. There has been no strike, walkout or work stoppage
involving any of the employees of MTLM or any MTLM Subsidiary during the 24
months prior to the date hereof. MTLM is not aware that any executive or key
employee or group of employees has any plans to terminate his, her or their
employment with MTLM or any MTLM Subsidiary as a result of this Agreement or
otherwise; provided, that there may be transitioning of responsibilities as a
result of Albert A. Cozzi assuming the position of Chief Operating Officer of
MTLM. MTLM and each MTLM Subsidiary has complied in all material respects with
applicable laws, rules and regulations relating to employment, civil rights and
equal employment opportunities, including but not limited to, the Civil Rights
Act of 1964, the Fair Labor Standards Act and the Worker Adjustment and
Retraining Notification Act of 1988.
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2.17 TAX MATTERS. Except as set forth in Schedule 2.17 hereto, all Tax
Returns required to be filed prior to the date hereof with respect to MTLM, the
MTLM Subsidiaries or any of their income, properties, franchises or operations
have been filed, each such Tax Return has been prepared in compliance with all
applicable laws and regulations, and all such Tax Returns are true, complete and
accurate in all material respects. All Taxes due and payable by or with respect
to MTLM and the MTLM Subsidiaries have been paid or accrued on the MTLM Current
Balance Sheet or will be accrued on its books and records as of the Closing.
Except as set forth in Schedule 2.17 hereto: (i) with respect to each taxable
period of MTLM and each MTLM Subsidiary after January 1, 1992, no taxable period
has been audited by the relevant taxing authority; (ii) no deficiency or
proposed adjustment which has not been settled or otherwise resolved for any
amount of Taxes has been asserted or assessed by any taxing authority; (iii)
neither MTLM nor any MTLM Subsidiary has consented to extend the time in which
any Taxes may be assessed or collected by any taxing authority; (iv) neither
MTLM nor any MTLM Subsidiary has requested or been granted an extension of the
time for filing any Tax Return to a date later than the Closing Date; (v) there
is no action, suit, taxing authority proceeding, or audit or claim for refund
now in progress, pending or threatened against or with respect to MTLM or any
MTLM Subsidiary regarding Taxes; (vi) neither MTLM nor any MTLM Subsidiary has
made an election or filed a consent under Section 341(f) of the Internal Revenue
Code of 1986, as amended (the "CODE") (or any corresponding provision of state,
local or foreign law) on or prior to the Closing Date; (vii) there are no Liens
for Taxes (other than for current Taxes not yet due and payable) upon the assets
of MTLM or any MTLM Subsidiary; (viii) neither MTLM nor any MTLM Subsidiary will
be required (A) as a result of a change in method of accounting for a taxable
period ending on or prior to the Closing Date, to include any adjustment under
Section 481(c) of the Code (or any corresponding provision of state, local or
foreign law) in taxable income for any taxable period (or portion thereof)
beginning after the Closing Date or (B) as a result of any "CLOSING AGREEMENT,"
as described in Section 7121 of the Code (or any corresponding provision of
state, local or foreign law), to include any item of income or exclude any item
of deduction from any taxable period (or portion thereof) beginning after the
Closing Date; (ix) neither MTLM nor any MTLM Subsidiary is a party to or bound
by any tax allocation or tax sharing agreement or has any current or potential
contractual obligation to indemnify any other Person with respect to Taxes; (x)
there is no basis for any assessment, deficiency notice, 30-day letter or
similar notice with respect to any Tax to be issued to MTLM or any MTLM
Subsidiary with respect to any period on or before the Closing Date; (xi)
neither MTLM nor any MTLM Subsidiary has made any payments, and is or will not
become obligated (under any contract entered into on or before the Closing Date)
to make any payments, that will be non-deductible under Section 280G of the Code
(or any corresponding provision of state, local or foreign law); (xii) neither
MTLM nor any MTLM Subsidiary has been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code (or any
corresponding provision of state, local or foreign law) during the applicable
period specified in Section 897(c)(1)(a)(ii) of the Code (or any corresponding
provision of state, local or foreign law); (xiii) no claim has ever been made by
a taxing authority in a jurisdiction where MTLM or a MTLM Subsidiary, as the
case may be, does not file Tax Returns that is or may be subject to Taxes
assessed by such jurisdiction; (xiv) MTLM and the MTLM Subsidiaries do not have
any permanent establishment in any foreign country, as defined in the relevant
tax treaty between the United States of America and such foreign country; (xv)
true, correct and complete copies of all income and sales Tax Returns filed by
or with respect to MTLM and the MTLM Subsidiaries for the past two years have
been furnished or made available to the Shareholders; and (xvi) MTLM and the
MTLM Subsidiaries will not be subject to any Taxes pursuant to Section 1374 or
Section 1375 of the Code (or any corresponding provision of state, local or
foreign law) for the period ending at the Closing Date for any period for which
a Tax Return has not been filed.
2.18 RECEIVABLES. All of the MTLM Receivables (as hereinafter defined) are
valid and legally binding, represent bona fide transactions and arose in the
ordinary course of business of MTLM and the MTLM Subsidiaries. Except as set
forth on Schedule 2.18, all of the MTLM Receivables are good and collectible
receivables, and will be collected in full in accordance with the terms of such
receivables (and in any event within six months following the Closing), without
set off or counterclaims, subject to the allowance for doubtful accounts, if
any, set forth on the MTLM Current Balance Sheet as reasonably adjusted since
the date of the MTLM Current Balance Sheet in the ordinary course of business
consistent with past practice.
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For purposes of this Agreement, the term "MTLM RECEIVABLES" means all
receivables of MTLM and the MTLM Subsidiaries, including all trade account
receivables arising from the provision of services or sale of inventory but
excluding notes receivable, and insurance proceeds receivable.
2.19 SEC FILINGS; ACCURACY OF INFORMATION FURNISHED BY MTLM. Except as set
forth on Schedule 2.19, MTLM has made all filings required to be made by it with
the SEC. No representation, statement or information made or furnished by MTLM
to the Shareholders or any of the Shareholders' representatives, including those
contained in this Agreement, and the various Schedules attached hereto and the
other information and statements referred to herein and previously furnished by
MTLM and the MTLM Subsidiaries or made in the SEC Filings, contains or shall
contain any untrue statement of a material fact or omits or shall omit any
material fact necessary to make the information contained therein not misleading
in light of the circumstances in which they were made. MTLM has provided the
Shareholders with true, accurate and complete copies of all documents listed or
described in the SEC Filings or on the various Schedules attached hereto.
2.20 INVENTORY. All MTLM Assets that consist of inventory (including raw
materials and work-in-progress): (i) were acquired in the ordinary course of
business consistent with past practice; (ii) are, in the aggregate, of a
quality, quantity, and condition useable or saleable in the ordinary course of
business within MTLM and the MTLM Subsidiaries' normal inventory turnover
experience; and (iii) are valued at the lower of cost or net realizable market
value. Neither MTLM nor any MTLM Subsidiary has any material liability with
respect to the return or repurchase of any goods in the possession of any
customer.
2.21 RESTRICTIONS. Schedule 2.21 sets forth a list of all non-competition,
non-solicitation, confidentiality and other restrictive covenants to which MTLM
and/or any MTLM Subsidiary is a party or otherwise bound. Except as set forth on
Schedule 2.21, there are no contracts or other conditions, circumstances, events
or agreements which would in any way limit or restrict the rights of MTLM,
MTLM's Affiliates, or the MTLM Subsidiaries from engaging in any business
anywhere in the world.
2.22 FULL DISCLOSURE. No statement by MTLM contained in this Article II,
the SEC Filings and the Schedules hereto or any written statement or certificate
furnished to the Shareholders as of its respective date contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements contained herein or therein not materially and
adversely misleading in light of the circumstances under which they were made.
2.23 NO MATERIAL ADVERSE CHANGE. Since March 31, 1997, there has been no
Material Adverse Change in the assets, liabilities, business or financial
condition of MTLM or a Material Adverse Effect on the ability of MTLM to
consummate the transactions contemplated hereby. For purposes of this Section
2.23 and Section 8.8, a "MATERIAL ADVERSE CHANGE" or a "MATERIAL ADVERSE EFFECT"
shall not include (i) the acquisition of or agreement to acquire any companies
or the assets of any companies; (ii) the termination of any agreement to acquire
or the unwind or sale of any companies or the assets of any companies; (iii) the
employment of any executive officers; (iv) the placement of, or entering into or
termination of any agreement to place, any debt or equity securities of MTLM;
(v) any change in the trading price of the MTLM Shares; or (vi) any change in
the Board of Directors of MTLM.
2.24 ENVIRONMENTAL MATTERS. Except as set forth on Schedule 2.24:
(a) To the best of MTLM's knowledge, MTLM and each MTLM Subsidiary is
in material compliance with all Environmental, Health and Safety Laws (as
defined herein) governing its business, operations, properties and assets.
Neither MTLM nor any MTLM Subsidiary is currently liable for any penalties,
fines or forfeitures for failure to comply with any Environmental, Health
and Safety Laws.
(b) MTLM and each MTLM Subsidiary has obtained, or caused to be
obtained, and to the best of the MTLM's knowledge, is in material
compliance with, all applicable and material licenses, certificates,
permits, approvals and registrations required by the Environmental, Health
and Safety Laws (collectively "LICENSES"). Copies of such Licenses have
been made available to the Shareholders. There are no administrative or
judicial investigations, notices, claims or other proceedings pending or
threatened by any Governmental Authority or third parties against MTLM or
any MTLM Subsidiary, their respective
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businesses, operations, properties, or assets, which question the validity
or entitlement of MTLM or any MTLM Subsidiary to any License wherein an
unfavorable decision, ruling or finding could have a Material Adverse
Effect on MTLM or any MTLM Subsidiary.
(c) Neither MTLM nor any MTLM Subsidiary has received or is aware of
any non-compliance order, warning letter, investigation, notice of
violation, claim, suit, action, judgment, or administrative or judicial
proceeding pending or threatened against or involving MTLM or any MTLM
Subsidiary, issued by any Governmental Authority or third party with
respect to any Environmental, Health and Safety Laws, which has not been
resolved to the satisfaction of the issuing Governmental Authority or third
party and which could have a Material Adverse Effect on MTLM or any MTLM
Subsidiary.
(d) To the best of the MTLM's knowledge, neither MTLM nor any MTLM
Subsidiary has generated, manufactured, used, transported, transferred,
stored, handled, treated, Discharged, Released or disposed of, nor has it
allowed or arranged for any third parties to generate, manufacture, use,
transport, transfer, store, handle, treat, Discharge, Release or dispose
of, Hazardous Substances or other Waste (as defined herein) to or at any
location other than a site lawfully permitted to receive such Hazardous
Substances or other waste for such purposes, nor has it performed, arranged
for or allowed by any method or procedure such generation, manufacture,
use, transportation, transfer, storage, treatment, spillage, leakage,
dumping, Discharge, Release or disposal in material contravention of any
Environmental, Health and Safety Laws. To the best of the MTLM's knowledge,
neither MTLM nor any MTLM Subsidiary has generated, manufactured, used,
stored, handled, treated, Discharged, Released or disposed of, or allowed
or arranged for any third parties to generate, manufacture, use, store,
handle, treat, spill, leak, dump, discharge, release or dispose of, any
material quantities of Hazardous Substances or other waste upon property
currently or previously owned or leased by it, except as permitted by law.
For purposes of this Agreement, the term "HAZARDOUS SUBSTANCES" means any
toxic or hazardous substance, material, or waste, and any other
contaminant, pollutant or constituent thereof, whether liquid, solid,
semi-solid, sludge and/or gaseous, including without limitation, chemicals,
compounds, metals, by-products, pesticides, asbestos containing materials,
petroleum or petroleum products, and polychlorinated biphenyls, the
presence of which requires investigation or remediation under any
Environmental, Health and Safety Laws or which are or become regulated,
listed or controlled by, under or pursuant to any Environmental Health and
Safety Laws. For purposes of this Agreement, the term "WASTE" means
agricultural wastes, biomedical wastes, biological wastes, bulky wastes,
construction and demolition debris, garbage, household wastes, industrial
solid wastes, liquid wastes, recyclable materials, sludge, solid wastes,
special wastes, used oils, white goods, and yard trash.
(e) To the best of MTLM's knowledge, neither MTLM nor any MTLM
Subsidiary has caused, nor allowed to be caused or permitted, either by
action or inaction, a Release or Discharge, or threatened Release or
Discharge, of any material quantity of Hazardous Substance on, into or
beneath the surface of any parcel of the MTLM Owned Properties or the MTLM
Leased Premises or to any properties adjacent thereto which would have a
Material Adverse Effect on MTLM or the MTLM Subsidiaries. To the best of
MTLM's knowledge, there has not occurred, nor is there presently occurring,
a Release or Discharge, or, threatened Release or Discharge, of any
material quantity of Hazardous Substances on, into or beneath the surface
of any parcel of the MTLM Owned Properties or the MTLM Leased Premises or
to any properties adjacent thereto which would have a Material Adverse
Effect on MTLM or the MTLM Subsidiaries. For purposes of this Agreement,
the terms "RELEASE" and "DISCHARGE" shall have the meanings given them in
the Environmental, Health and Safety Laws.
(f) To the best of MTLM's knowledge, neither MTLM nor any MTLM
Subsidiary has generated, handled, manufactured, treated, stored, used,
shipped, transported, transferred, or disposed of, nor has it allowed or
arranged, by contract, agreement or otherwise, for any third parties to
generate, handle, manufacture, treat, store, use, ship, transport, transfer
or dispose of, any Hazardous Substances or other Waste to or at a site
which, pursuant to CERCLA or any similar state law has been placed or been
proposed for placement on the National Priorities List or its state
equivalent. Neither MTLM nor any MTLM Subsidiary has received notice, and
neither MTLM nor any MTLM Subsidiary has knowledge of any facts which could
give rise to any notice, that MTLM or any MTLM Subsidiary is a potentially
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responsible party for a federal or state environmental cleanup site or for
corrective action under Environmental Health and Safety Laws. Neither MTLM
nor any MTLM Subsidiary has submitted or was required to submit any notice
pursuant to Section 103(c) of CERCLA with respect to the MTLM Leased
Premises or the MTLM Owned Properties. Neither MTLM nor any MTLM Subsidiary
has received any written request for information in connection with any
federal or state environmental cleanup site, or in connection with any of
the real property or premises where MTLM or any MTLM Subsidiary has
transported, transferred or disposed of other Wastes. Neither MTLM nor any
MTLM Subsidiary has been required to or has undertaken any response or
remedial actions or clean-up actions of any kind at the request of any
Governmental Authorities or at the request of any other third party. To the
best of MTLM's knowledge, neither MTLM nor any MTLM Subsidiary has any
material liability under any Environmental, Health and Safety Laws for
personal injury, property damage, natural resource damage, or clean up
obligations.
(g) To the best of MTLM's knowledge, there are no Aboveground Storage
Tanks or Underground Storage Tanks on the MTLM Owned Properties or the MTLM
Leased Premises. For purposes of this Agreement, the terms "ABOVEGROUND
STORAGE TANKS" and "UNDERGROUND STORAGE TANKS" shall have the meanings
given them in Section 6901 et seq., as amended, of RCRA, or any applicable
state or local statute, law, ordinance, code, rule, regulation, order
ruling, or decree governing Aboveground Storage Tanks or Underground
Storage Tanks.
(h) Schedule 2.24 identifies (i) all material environmental audits,
assessments or occupational health studies, of which MTLM is aware,
undertaken by MTLM, the MTLM Subsidiaries or their agents, or by any
Governmental Authority, or by any third party, relating to or affecting
MTLM, the MTLM Subsidiaries or any of the MTLM Leased Premises or the MTLM
Owned Properties; and (ii) all material citations issued under OSHA, or
similar state or local statutes, laws, ordinances, codes, rules,
regulations, orders, rulings, or decrees, relating to or affecting MTLM or
any MTLM Subsidiary or any of the MTLM Leased Premises or the MTLM Owned
Properties.
(i) Schedule 2.24 contains a list of the assets of MTLM and the MTLM
Subsidiaries which have been confirmed to contain "ASBESTOS" or
"ASBESTOS-CONTAINING MATERIAL" (as such terms are identified under the
Environmental, Health and Safety Laws). MTLM and each of the MTLM
Subsidiaries has operated and continues to operate in material compliance
with all Environmental, Health and Safety Laws governing the handling, use
and exposure to and disposal of asbestos or asbestos-containing materials.
There are no claims, actions, suits, governmental investigations or
proceedings before any Governmental Authority or third party pending, or
threatened against or directly affecting MTLM, the MTLM Subsidiaries, or
any of their respective assets or operations relating to the use, handling
or exposure to and disposal of asbestos or asbestos-containing materials in
connection with their assets and operations.
(j) As used in this Agreement, "ENVIRONMENTAL, HEALTH AND SAFETY
LAWS" means all federal, state, regional or local statutes, laws, rules,
regulations, codes, orders, plans, injunctions, decrees, rulings, and
changes or ordinances or judicial or administrative interpretations
thereof, any of which govern (or purport to govern) or relate to pollution,
protection of the environment, public health and safety, air emissions,
water discharges, hazardous or toxic substances, solid or hazardous waste
or occupational health and safety, as any of these terms are or may be
defined in such statutes, laws, rules, regulations, codes, orders, plans,
injunctions, decrees, rulings and changes or ordinances, or judicial or
administrative interpretations thereof, including, without limitation, the
United States Department of Transportation Table (49 CFR 172, 101) or by
the Environmental Protection Agency as hazardous substances (40 CFR Part
302) and any amendments thereto; the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the Superfund
Amendment and Reauthorization Act of 1986, 42 U.S.C. sec.9601, et seq.
(hereinafter collectively "CERCLA"); the Solid Waste Disposal Act, as
amended by the Resource Conversation and Recovery Act of 1976 and
subsequent Hazardous and Solid Waste Amendments of 1984, 42 U.S.C. sec.6901
et seq. (hereinafter, collectively "RCRA"); the Hazardous Materials
Transportation Act, as amended, 49 U.S.C. sec.1801, et seq.; the Clean
Water Act, as amended, 33 U.S.C. sec.1311, et seq.; the Clean Air Act, as
amended (42 U.S.C. sec.7401-7642); Toxic Substances
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Control Act, as amended, 15 U.S.C. sec.2601 et seq.; the Federal
Insecticide, Fungicide, and Rodenticide Act as amended, 7 U.S.C.
sec.136-136y ("FIFRA"); the Emergency Planning and Community Right-to-Know
Act of 1986 as amended, 42 U.S.C. sec.11001, et seq. (Title III of SARA)
("EPCRA"); the Occupational Safety and Health Act of 1970, as amended, 29
U.S.C. sec.651, et seq. ("OSHA"); any similar state statute, or regulations
implementing such statutes, laws, ordinances, codes, rules, regulations,
orders, rulings, or decrees, or which has been or shall be determined or
interpreted at any time by any Governmental Authority to be a hazardous or
toxic substance regulated under any other statute, law, regulation, order,
code, rule, order, or decree.
(k) Schedule 2.24 identifies the operations and activities, and
locations thereof, which have been conducted and are being conducted by
MTLM or any MTLM Subsidiary on any of the MTLM Owned Properties or the MTLM
Leased Premises which have involved the generation, accumulation, storage,
treatment, transportation, labeling, handling, manufacturing, use,
spilling, leaking, dumping, discharging, release or disposal of any
material quantities of Hazardous Substances.
(l) To the best of MTLM's knowledge, none of the MTLM Owned
Properties or MTLM Leased Premises presently includes, or has been
constructed upon, any "WETLANDS" as defined under applicable Environmental,
Health and Safety Laws.
(m) As used in this Section 2.24, the term "MTLM" is deemed to refer
to MTLM or any of the MTLM Subsidiaries.
(n) As used in Section 2.24, the terms "MTLM OWNED PROPERTIES" and
"MTLM LEASED PREMISES" are deemed to refer only to the properties currently
owned or leased by MTLM.
2.25 EMPLOYEE BENEFIT PLANS.
(a) Compliance with Law. With respect to each MTLM Employee Benefit
Plan (as defined below) (i) each has been administered in all material
respects in compliance with its terms and with all applicable laws,
including, but not limited to, the Employee Retirement Income and Security
Act of 1974, as amended ("ERISA") and the Code; (ii) no actions, suits,
claims or disputes are pending or, to the best of MTLM's knowledge,
threatened; (iii) no audits, inquiries, reviews, proceedings, claims, or
demands are pending with any governmental or regulatory agency; (iv) there
are no facts which could give rise to any material liability in the event
of any such investigation, claim, action, suit, audit, review, or other
proceeding; (v) all material reports, returns, and similar documents
required to be filed with any governmental agency or distributed to any
plan participant have been duly or timely filed or distributed; and (vi) no
"PROHIBITED TRANSACTION" which could give rise to any material liability of
MTLM or any MTLM Subsidiary has occurred within the meaning of the
applicable provisions of ERISA or the Code. As used in this Section 2.25,
MTLM Employee Benefit Plan means any employee benefit plan or arrangement
of MTLM and each MTLM Subsidiary, including but not limited to employee
pension benefit plans, as defined in Section 3(2) of ERISA, multiemployer
plans, as defined in Section 3(37) of ERISA, employee welfare benefit
plans, as defined in Section 3(1) of ERISA, deferred compensation plans,
stock option plans, bonus plans, stock purchase plans, hospitalization,
disability and other insurance plans, severance or termination pay plans
and policies, whether or not described in Section 3(3) of ERISA, in which
employees, their spouses or dependents, of MTLM or any MTLM Subsidiary
participate.
(b) Multiemployer Plans. With respect to any multiemployer plan, as
described in Section 4001(a)(3) of ERISA ("MPPA PLAN") (i) all
contributions required to be made with respect to employees of MTLM or any
MTLM Subsidiary have been timely paid; (ii) neither MTLM nor any MTLM
Subsidiary has incurred or is expected to incur, directly or indirectly,
any withdrawal liability under ERISA with respect to any such plan (whether
by reason of the transactions contemplated by the Agreement or otherwise);
(iii) Schedule 2.25 sets forth (A) the withdrawal liability under ERISA to
each MPPA Plan, (B) the date as of which such amount was calculated, and
(C) the method for determining the withdrawal liability; and (iv) no such
plan is (or is expected to be) insolvent or in reorganization and no
accumulated funding deficiency (as defined in Section 302 of ERISA and
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Section 412 of the Code), whether or not waived, exists or is expected to
exist with respect to any such plan.
(c) Welfare Plans. Other than as disclosed in Schedule 2.25, (i)
neither MTLM nor any MTLM Subsidiary is obligated under any employee
welfare benefit plan as described in Section 3(1) of ERISA ("WELFARE
PLAN"), whether or not disclosed in Schedule 2.25, to provide medical or
death benefits with respect to any employee or former employee of MTLM, any
MTLM Subsidiary or their predecessors after termination of employment,
other than as required by Section 4980B of the Code; (ii) MTLM and each
MTLM Subsidiary have complied in all material respects with the notice and
continuation coverage requirements of Section 4980B of the Code and the
regulations thereunder with respect to each Welfare Plan that is, or was
during any taxable year for which the statute of limitations on the
assessment of federal income taxes remains, open, by consent or otherwise,
a group health plan within the meaning of Section 5000(b)(1) of the Code,
and (iii) there are no reserves, assets, surplus or prepaid premiums under
any Welfare Plan which is an Employee Benefit Plan. The consummation of the
transactions contemplated by this Agreement will not entitle any individual
to severance pay, and, will not accelerate the time of payment or vesting,
or increase the amount of compensation, due to any individual.
2.26 INSURANCE. MTLM and each MTLM Subsidiary is covered by valid,
outstanding and enforceable policies of insurance issued to it by reputable
insurers covering its properties, assets and businesses against risks of the
nature normally insured against by businesses in the same or similar lines of
business and in coverage amounts typically and reasonably carried by such
businesses (the "MTLM INSURANCE POLICIES"), provided, however, MTLM and the MTLM
Subsidiaries generally do not insure their machinery and equipment except as
MTLM or the MTLM Subsidiaries may be required to insure such assets by third
party lenders or lessors. Such MTLM Insurance Policies are in full force and
effect, and all premiums due thereon have been paid. As of the Closing Date each
of the MTLM Insurance Policies will be in full force and effect. None of the
MTLM Insurance Policies will lapse or terminate as a result of the transactions
contemplated by this Agreement. MTLM and each MTLM Subsidiary has complied with
the provisions of such MTLM Insurance Policies. Schedule 2.26 contains (i) a
complete and correct list of all MTLM Insurance Policies and all amendments and
riders thereto (copies of which have been provided to the Shareholders) and (ii)
a detailed description of each pending claim under any of the MTLM Insurance
Policies for an amount in excess of $50,000 that relates to loss or damage to
the properties, assets or businesses of MTLM or any MTLM Subsidiary. Neither
MTLM nor any MTLM Subsidiary has failed to give, in a timely manner, any notice
required under any of the MTLM Insurance Policies to preserve its rights
thereunder.
2.27 REAL ESTATE. Attached hereto as Schedule 2.27(a) are true and correct
copies of all schedules listing each parcel of real property owned (the "MTLM
OWNED PROPERTIES") or leased (the "MTLM LEASED PROPERTIES") by MTLM or the MTLM
Subsidiaries that were given to MTLM in connection with MTLM's acquisition of
(i) HouTex; (ii) MacLeod; (iii) Reserve; and (iv) EMCO, together with the
corresponding representations and warranties contained in the respective
purchase agreements. Other than (i) the properties listed in such schedules,
(ii) MTLM principal office located at 500 N. Dearborn Street, and (iii) the
properties listed on Schedule 2.27(b), MTLM and the MTLM Subsidiaries do not own
or lease any parcel of property. To the best of MTLM's knowledge, nothing has
occurred since the respective closing dates of the acquisitions of (i) HouTex
(ii) MacLeod (iii) Reserve and (iv) EMCO to cause the representations and
warranties contained in the respective purchase agreements to become inaccurate
in any material respects.
2.28 CONDUCT OF BUSINESS SINCE MARCH 31, 1997. Except as set forth on
Schedule 2.28, MTLM between March 31, 1997 and the date of this Agreement has
conducted the businesses of MTLM and each MTLM Subsidiary only in the ordinary
course of business, consistent with past practice. By way of amplification and
not limitation, except as set forth on Schedule 2.28, the SEC Filings, or as
otherwise contemplated by this Agreement neither MTLM nor any MTLM Subsidiary
has directly or indirectly, done or agreed to do any of the following:
(a) amended or otherwise changed its charter or bylaws;
(b) issued, sold, pledged, disposed of, granted, encumbered, or
authorized the issuance, sale, pledge, disposition, grant or encumbrance of
(i) with respect to MTLM or any MTLM Subsidiary, any
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shares of its capital stock of any class, or any options, warrants,
convertible securities or other rights of any kind to acquire any shares of
such capital stock, or any other ownership interest, of it, or, (ii) any of
their respective assets, tangible or intangible, except in the ordinary
course of business consistent with past practice;
(c) increased the compensation payable or to become payable to its
respective officers or directors, or, except as presently bound to do,
granted any severance or termination pay to, or entered into any employment
or severance agreement with, any of its respective directors or officers,
or established, adopted, entered into or amended or took any action to
accelerate any rights or benefits under any collective bargaining, bonus,
profit sharing, trust, compensation, stock option, restricted stock,
pension, retirement, deferred compensation, employment, termination,
severance or other plan, agreement, trust, fund, policy or arrangement for
the benefit of any directors, officers or employees;
(d) taken any action other than in the ordinary course of business
and in a manner consistent with past practice with respect to accounting
policies or procedures; or
(e) (i) acquired (including, without limitation, for cash or shares
of stock, by merger, consolidation, or acquisition of stock or assets) any
interest in any corporation, partnership or other business organization or
division thereof of any assets, or made any investment either by purchase
of stock or securities, contributions of capital or property transfer, or,
except in the ordinary course of business, consistent with past practice,
purchase any property or assets of any other Person, (ii) incurred any
indebtedness for borrowed money or issued any debt securities or assumed,
guaranteed or endorsed or otherwise as an accommodation became responsible
for, the obligations of any Person, or made any loans or advances, or (iii)
entered into any Contract other than in the ordinary course of business,
consistent with past practice.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF MERGECO
As a material inducement to the Company and the Shareholders to enter into
this Agreement and to consummate the transactions contemplated hereby, MTLM and
Mergeco jointly and severally make the following representations and warranties
to the Company and the Shareholders:
3.1 CORPORATE STATUS. Mergeco is a corporation duly organized, validly
existing and in good standing under the laws of the State of Illinois.
3.2 CORPORATE POWER AND AUTHORITY. Mergeco has the corporate power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder and will have, at the time of Closing, the corporate power and
authority to consummate the transactions contemplated hereby. Mergeco has taken
all action necessary to authorize its execution and delivery of this Agreement
and the performance of its obligations hereunder and will have, at the time of
Closing, taken all actions necessary to authorize the consummation of the
transactions contemplated hereby.
3.3 ENFORCEABILITY. This Agreement has been duly executed and delivered
by Mergeco and constitutes a legal, valid and binding obligation of Mergeco,
enforceable against Mergeco in accordance with its terms, except as the same may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights generally and
general equitable principles regardless of whether such enforceability is
considered in a proceeding at law or in equity.
3.4 NO VIOLATION. Except for any applicable requirements of the HSR Act,
the execution and delivery of this Agreement by Mergeco, the performance by it
of its obligations hereunder and the consummation by it of the transactions
contemplated by this Agreement will not (i) contravene any provision of the
articles of incorporation or bylaws of Mergeco, (ii) violate or conflict with
any law, statute, ordinance, rule, regulation, decree, writ, injunction,
judgment or order of any Governmental Authority or of any arbitration award
which is either applicable to, binding upon or enforceable against Mergeco,
(iii) conflict
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with, result in any breach of, or constitute a default (or an event which would,
with the passage of time or the giving of notice or both, constitute a default)
under, or give rise to a right to terminate, amend, modify, abandon or
accelerate, any Contract which is applicable to, binding upon or enforceable
against Mergeco, (iv) result in or require the creation or imposition of any
Lien upon or with respect to any of the property or assets of Mergeco, or (v)
require the consent, approval, authorization or permit of, or filing with or
notification to, any Governmental Authority, any court or tribunal or any other
Person, except the Secretary of State of the State of Illinois, or the SEC or
other filings required to be made by MTLM.
3.5 NO COMMISSIONS. Mergeco has incurred no obligation for any finder's
or broker's or agent's fees or commissions or similar compensation in connection
with the transactions contemplated hereby.
3.6 MERGECO CAPITALIZATION. Mergeco's authorized capital stock consists
of one thousand (1000) shares of common stock, no par value, of which one
hundred (100) shares are issued and outstanding all of which are validly issued,
fully paid and non-assessable. Except for this Agreement, there are no options,
warrants, preemptive rights, conversion privileges or other contracts which give
any Person the right to acquire any capital stock of Mergeco or any interest
therein. MTLM is the beneficial and record owner of all of the outstanding
shares of common stock of Mergeco, free and clear of all Liens.
3.7 BUSINESS ACTIVITY. Mergeco has not engaged in any business activity
of any nature prior to the date of this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
THE SHAREHOLDERS AND THE COMPANY
As a material inducement to MTLM to enter into this Agreement and to
consummate the transactions contemplated hereby, the Shareholders and the
Company hereby jointly and severally make the following representations and
warranties to MTLM:
4.1 CORPORATE STATUS. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Illinois.
The Company has the requisite power and authority to own or lease its property
and to carry on its business as now being conducted. The Company is legally
qualified to transact business as a foreign corporation in all jurisdictions
where the nature of its property and the conduct of its business requires such
qualification (all of which jurisdictions are listed on Schedule 4.1) and is in
good standing in each of the jurisdictions in which it is so qualified, except
where the failure to so qualify would not have a Material Adverse Effect on the
Company. There is no pending or threatened proceeding for the dissolution,
liquidation, insolvency or rehabilitation of the Company. Each entity listed as
a subsidiary of the Company on Schedule 4.8 hereto (each a "SUBSIDIARY" and
collectively the "SUBSIDIARIES") is a corporation duly organized, validly
existing and in good standing under the laws of its state of incorporation. Each
Subsidiary has the requisite power and authority to own or lease its property
and to carry on its business as now being conducted. Each Subsidiary is legally
qualified to transact business as a foreign corporation in all jurisdictions
where the nature of its property and the conduct of its business requires such
qualification (all of which jurisdictions are listed on Schedule 4.1) and is in
good standing in each of the jurisdictions in which it is so qualified. There is
no pending or threatened proceeding for the dissolution, liquidation, insolvency
or rehabilitation of any Subsidiary. Except as set forth on Schedule 4.8, the
Company owns all of the issued and outstanding capital stock of each Subsidiary.
4.2 POWER AND AUTHORITY. The Company has the power and authority to
execute and deliver this Agreement, to perform its obligations hereunder and to
consummate the transactions contemplated hereby. The Company has taken all
action necessary to authorize the execution and delivery of this Agreement, the
performance of its respective obligations hereunder and the consummation of the
transactions contemplated hereby. Each of the Shareholders is a resident of the
State of Illinois and has the requisite competence to execute and deliver this
Agreement and to perform his obligations hereunder and to consummate the
transactions contemplated hereby.
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4.3 ENFORCEABILITY. This Agreement has been duly executed and delivered
by the Company and each of the Shareholders and constitutes the legal, valid and
binding obligation of each of them, enforceable against them in accordance with
its terms, except as the same may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights generally and general equitable principles regardless of
whether such enforceability is considered in a proceeding at law or in equity.
4.4 CAPITALIZATION. Schedule 4.4 sets forth, with respect to the Company
and each Subsidiary, (i) the number of authorized shares of each class of its
capital stock, (ii) the number of issued and outstanding shares of each class of
its capital stock, and (iii) the number of shares of each class of its capital
stock which are held in treasury. All of the issued and outstanding shares of
capital stock of the Company and each Subsidiary (i) have been duly authorized
and validly issued and are fully paid and non-assessable, (ii) were issued in
compliance with all applicable state and federal securities laws, and (iii) were
not issued in violation of any preemptive rights or rights of first refusal. No
preemptive rights or rights of first refusal exist with respect to the shares of
capital stock of the Company or any Subsidiary, and no such rights arise by
virtue of or in connection with the transactions contemplated hereby. There are
no outstanding or authorized rights, options, warrants, convertible securities,
subscription rights, conversion rights, exchange rights or other agreements or
commitments of any kind that could require the Company or any Subsidiary to
issue or sell any shares of its capital stock (or securities convertible into or
exchangeable for shares of its capital stock). Except as set forth on Schedule
4.4, there are no outstanding stock appreciation, phantom stock, profit
participation or other similar rights with respect to the Company or any
Subsidiary. Other than pursuant to the James H. Cozzi Sales Agreement, there are
no proxies, voting rights or other agreements or understandings with respect to
the voting or transfer of the capital stock of the Company or any Subsidiary.
Neither the Company nor any Subsidiary is obligated to redeem or otherwise
acquire any of its outstanding shares of capital stock.
4.5 SHAREHOLDERS OF THE COMPANY. Schedule 4.5 sets forth, with respect
to the Company, (i) the name, address and federal taxpayer identification number
of, and the number of outstanding shares of each class of its capital stock
owned by, each shareholder of record as of the close of business on the date of
this Agreement; and (ii) the name, address and federal taxpayer identification
number of, and number of shares of each class of its capital stock beneficially
owned by, each beneficial owner of outstanding shares of capital stock (to the
extent that record and beneficial ownership of any such shares are different).
The Shareholders are the holders of all issued and outstanding shares of capital
stock of the Company, and the Shareholders own such shares as set forth on
Schedule 4.5, free and clear of all Liens, restrictions and claims of any kind,
except as set forth on Schedule 4.5. Such shares are not subject to any voting
trust agreement, proxy or other Contract.
4.6 NO VIOLATION. Except as set forth on Schedule 4.6 and any applicable
requirements of the HSR Act, the execution and delivery of this Agreement by the
Company and the Shareholders, the performance by each of them of their
respective obligations hereunder and the consummation by them of the
transactions contemplated by this Agreement will not (i) contravene any
provision of the articles of incorporation or bylaws of the Company, (ii)
violate or conflict with any law, statute, ordinance, rule, regulation, decree,
writ, injunction, judgment or order of any Governmental Authority or of any
arbitration award which is either applicable to, binding upon or enforceable
against the Company or the Shareholders; (iii) conflict with, result in any
breach of, or constitute a default (or an event which would, with the passage of
time or the giving of notice or both, constitute a default) under, or give rise
to a right to terminate, amend, modify, abandon or accelerate, any Contract
which is applicable to, binding upon or enforceable against the Company or the
Shareholders, (iv) result in or require the creation or imposition of any Lien
upon or with respect to any of the property or assets of the Company, or (v)
require the consent, approval, authorization or permit of, or filing with or
notification to, any Governmental Authority, any court or tribunal or any other
Person, except the Secretary of State of the State of Illinois.
4.7 RECORDS. The copies of the respective articles of incorporation and
bylaws of the Company which were provided to MTLM are true, accurate and
complete and reflect all amendments made through the date of this Agreement. The
minute books for the Company provided to MTLM for review were correct and
complete as of the date of such review, no further entries have been made
through the date of this Agreement, such minute books contain the true
signatures of the persons purporting to have signed them, and such minute
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books contain an accurate record of all corporate actions of the shareholders
and directors (and any committees thereof) of the Company taken by written
consent or at a meeting since incorporation. All material corporate actions
taken by the Company have been duly authorized or ratified. All accounts, books,
ledgers and official and other records of the Company have been fully, properly
and accurately kept and completed in all material respects, and there are no
material inaccuracies or discrepancies of any kind contained therein. The stock
ledgers of the Company, as previously provided to MTLM, contain accurate and
complete records of all issuances, transfers and cancellations of shares of the
capital stock of the Company.
4.8 SUBSIDIARIES. Except as set forth on Schedule 4.8, the Company does
not own, directly or indirectly, more than fifty percent (50%) of any
outstanding voting securities of or other interests in, or control, any other
corporation, partnership, joint venture or other business entity. In addition,
Schedule 4.8 lists every other business entity in which the Company or its
Subsidiaries has any ownership interest. Except as set forth on Schedule 4.8,
the Company does not have any liabilities or obligations, whether accrued,
absolute, contingent or otherwise, arising from its interest in the entities set
forth on such schedule.
4.9 FINANCIAL STATEMENTS. The Shareholders have delivered to MTLM (i)
the consolidated financial statements of the Company as of December 31, 1996 and
1995, including the notes thereto, audited by Deloitte & Touche LLP and (ii) the
March 31, 1997 unaudited consolidated financial statements of the Company
(collectively, the "FINANCIAL STATEMENTS"), copies of which are attached as
Schedule 4.9 hereto. The balance sheet dated as of March 31, 1997 included in
the Financial Statements is referred to herein as the "CURRENT BALANCE SHEET".
The Financial Statements fairly present the combined and consolidated financial
position of the Company and the Subsidiaries at each of the balance sheet dates
and the results of operations for the periods covered thereby, and have been
prepared in accordance with GAAP consistently applied throughout the periods
indicated; provided, however, the parties hereto acknowledge that the March 31,
1997 consolidated financial statements omit footnotes. The books and records of
the Company and each Subsidiary fully and fairly reflect the transactions,
properties, assets and liabilities of the Company and each Subsidiary. Unless
noted therein, there are no material special or non-recurring items of income or
expense during the periods covered by the Financial Statements, and the balance
sheets included in the Financial Statements do not reflect any writeup or
revaluation increasing the book value of any assets, except as specifically
disclosed in the notes thereto or otherwise in accordance with GAAP. The
Financial Statements reflect all adjustments necessary for a fair presentation
of the financial information contained therein.
4.10 CHANGES SINCE THE CURRENT BALANCE SHEET DATE. Except as disclosed in
Schedule 4.10, since the date of the Current Balance Sheet, neither the Company
nor any Subsidiary has (i) issued any capital stock or other securities; (ii)
made any distribution of or with respect to its capital stock or other
securities or purchased or redeemed any of its securities; (iii) paid any bonus
to or increased the rate of compensation of any of its officers or salaried
employees or amended any other terms of employment of such persons; (iv) sold,
leased or transferred any of its properties or assets other than in the ordinary
course of business consistent with past practice; (v) made or obligated itself
to make capital expenditures out of the ordinary course of business consistent
with past practice; (vi) made any payment in respect of its liabilities other
than in the ordinary course of business consistent with past practice; (vii)
incurred any obligations or liabilities (including any indebtedness) or entered
into any transaction or series of transactions involving in excess of $100,000
in the aggregate out of the ordinary course of business, except for this
Agreement and the transactions contemplated hereby; (viii) suffered any theft,
damage, destruction or casualty loss, not covered by insurance and for which a
timely claim was filed, in excess of $100,000 in the aggregate; (ix) suffered
any extraordinary losses (whether or not covered by insurance); (x) waived,
canceled, compromised or released any rights having a value in excess of
$100,000 in the aggregate; (xi) made or adopted any change in its accounting
practice or policies; (xii) made any adjustment to its books and records other
than in respect of the conduct of its business activities in the ordinary course
consistent with past practice; (xiii) entered into any transaction with any
Affiliate other than intercompany transactions in the ordinary course of
business consistent with past practice; (xiv) entered into any employment
agreement; (xv) terminated, amended or modified any agreement involving an
amount in excess of $100,000; (xvi) imposed any security interest or other Lien
on any of its assets other than in the ordinary course of business consistent
with past practice; (xvii) delayed paying any account payable which is due and
payable except to the extent being contested in good faith and except in the
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ordinary course of its business; (xviii) made or pledged any charitable
contribution other than in the ordinary course of business consistent with past
practice; (xix) entered into any other transaction or been subject to any event
which has or may have a Material Adverse Effect on the Company or any
Subsidiary; or (xx) agreed to do or authorized any of the foregoing.
4.11 LIABILITIES. Except as set forth on Schedule 4.11, neither the
Company nor any Subsidiary has any liabilities or obligations, whether accrued,
absolute, contingent or otherwise, except (i) to the extent reflected or taken
into account in the Current Balance Sheet and not heretofore paid or discharged,
(ii) to the extent specifically set forth in or incorporated by express
reference in any of the Schedules attached hereto, (iii) liabilities incurred in
the ordinary course of business consistent with past practice since the date of
the Current Balance Sheet (none of which relates to breach of contract, breach
of warranty, tort, infringement or violation of law, or which arose out of any
action, suit, claim, governmental investigation or arbitration proceeding), (iv)
normal accruals, reclassifications, and audit adjustments which would be
reflected on an audited financial statement and which would not be material in
the aggregate, and (v) liabilities incurred in the ordinary course of business
prior to the date of the Current Balance Sheet which, in accordance with GAAP
consistently applied, were not recorded thereon. The consolidated net worth of
the Company and its Subsidiaries will be no less than $7.5 million as of the
Closing Date.
4.12 LITIGATION. Except as set forth on Schedule 4.12, there is no action,
suit, or other legal or administrative proceeding or governmental investigation,
pending or, to the best of the Shareholders' knowledge, threatened, anticipated
or contemplated against, by or affecting the Company or any Subsidiary or any of
their properties or assets, or the Shareholders, or which question the validity
or enforceability of this Agreement or the transactions contemplated hereby, and
there is no basis for any of the foregoing. There are no outstanding orders,
decrees or stipulations issued by any Governmental Authority in any proceeding
to which the Company or any Subsidiary is or was a party which have not been
complied with in full or which continue to impose any material obligations on
the Company or any Subsidiary.
4.13 ENVIRONMENTAL MATTERS. Except as set forth on Schedule 4.13:
(a) To the best of the Shareholders' knowledge, the Company and each
Subsidiary is in material compliance with all Environmental, Health and
Safety Laws (as defined herein) governing its business, operations,
properties and assets. Neither the Company nor any Subsidiary is currently
liable for any penalties, fines or forfeitures for failure to comply with
any Environmental, Health and Safety Laws.
(b) The Company and each Subsidiary has obtained, or caused to be
obtained, and to the best of the Shareholders' knowledge, is in material
compliance with, all applicable and material Licenses. Copies of such
Licenses have been provided to MTLM. There are no administrative or
judicial investigations, notices, claims or other proceedings pending or
threatened by any Governmental Authority or third parties against the
Company or any Subsidiary, their respective businesses, operations,
properties, or assets, which question the validity or entitlement of the
Company or any Subsidiary to any License wherein an unfavorable decision,
ruling or finding could have a Material Adverse Effect on the Company or
any Subsidiary.
(c) Neither the Company nor any Subsidiary has received or is aware
of any non-compliance order, warning letter, investigation, notice of
violation, claim, suit, action, judgment, or administrative or judicial
proceeding pending or threatened against or involving the Company or any
Subsidiary, issued by any Governmental Authority or third party with
respect to any Environmental, Health and Safety Laws, which has not been
resolved to the satisfaction of the issuing Governmental Authority or third
party and which could have a Material Adverse Effect on the Company or any
Subsidiary.
(d) To the best of the Shareholders' knowledge, neither the Company
nor any Subsidiary has generated, manufactured, used, transported,
transferred, stored, handled, treated, Discharged, Released or disposed of,
nor has it allowed or arranged for any third parties to generate,
manufacture, use, transport, transfer, store, handle, treat, Discharge,
Release or dispose of, Hazardous Substances or other Waste (as defined
herein) to or at any location other than a site lawfully permitted to
receive such Hazardous Substances or other waste for such purposes, nor has
it performed, arranged for or allowed by
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any method or procedure such generation, manufacture, use, transportation,
transfer, storage, treatment, spillage, leakage, dumping, Discharge,
Release or disposal in material contravention of any Environmental, Health
and Safety Laws. To the best of the Shareholders' knowledge, neither the
Company nor any Subsidiary has generated, manufactured, used, stored,
handled, treated, Discharged, Released or disposed of, or allowed or
arranged for any third parties to generate, manufacture, use, store,
handle, treat, spill, leak, dump, discharge, release or dispose of, any
material quantities of Hazardous Substances or other waste upon property
currently or previously owned or leased by it, except as permitted by law.
(e) To the best of the Shareholders' knowledge, neither the Company
nor any Subsidiary has caused, nor allowed to be caused or permitted,
either by action or inaction, a Release or Discharge, or threatened Release
or Discharge, of any material quantity of Hazardous Substance on, into or
beneath the surface of any parcel of the Owned Properties or the Leased
Premises or to any properties adjacent thereto which would have a Material
Adverse Effect on the Company and its Subsidiaries. To the best of
Shareholders' knowledge, there has not occurred, nor is there presently
occurring, a Release or Discharge, or threatened Release or Discharge, of
any material quantity of Hazardous Substances on, into or beneath the
surface of any parcel of the Owned Properties or the Leased Premises or to
any properties adjacent thereto which would have a Material Adverse Effect
on the Company and its Subsidiaries.
(f) To the best of the Shareholders' knowledge, neither the Company
nor any Subsidiary has generated, handled, manufactured, treated, stored,
used, shipped, transported, transferred, or disposed of, nor has it allowed
or arranged, by contract, agreement or otherwise, for any third parties to
generate, handle, manufacture, treat, store, use, ship, transport, transfer
or dispose of, any Hazardous Substances or other Waste to or at a site
which, pursuant to CERCLA or any similar state law has been placed or been
proposed for placement on the National Priorities List or its state
equivalent. Neither the Company, any Subsidiary nor the Shareholders has
received notice, and neither the Company, any Subsidiary nor the
Shareholders has knowledge of any facts which could give rise to any
notice, that the Company or any Subsidiary is a potentially responsible
party for a federal or state environmental cleanup site or for corrective
action under Environmental Health and Safety Laws. Neither the Company nor
any Subsidiary has submitted or was required to submit any notice pursuant
to Section 103(c) of CERCLA with respect to the Leased Premises or the
Owned Properties. Neither the Company nor any Subsidiary has received any
written request for information in connection with any federal or state
environmental cleanup site, or in connection with any of the real property
or premises where the Company or any Subsidiary has transported,
transferred or disposed of other Wastes. Neither the Company nor any
Subsidiary has been required or has undertaken any response or remedial
actions or clean-up actions of any kind at the request of any Governmental
Authorities or at the request of any other third party. To the best of the
Shareholders' knowledge, neither the Company nor any Subsidiary has any
material liability under any Environmental, Health and Safety Laws for
personal injury, property damage, natural resource damage, or clean up
obligations.
(g) To the best of the Shareholders' knowledge, there are no
Aboveground Storage Tanks or Underground Storage Tanks on the Owned
Properties or the Leased Premises.
(h) Schedule 4.13 identifies (i) all material environmental audits,
assessments or occupational health studies, of which the Company or the
Shareholders are aware, undertaken by the Company, the Subsidiaries or
their agents, or by the Shareholders, or by any Governmental Authority, or
by any third party, relating to or affecting the Company, the Subsidiaries
or any of the Leased Premises or the Owned Properties; and (ii) all
material citations issued under OSHA, or similar state or local statutes,
laws, ordinances, codes, rules, regulations, orders, rulings, or decrees,
relating to or affecting the Company or any Subsidiary or any of the Leased
Premises or the Owned Properties.
(i) Schedule 4.13 contains a list of the assets of the Company and
the Subsidiaries which have been confirmed to contain "ASBESTOS" or
"ASBESTOS-CONTAINING MATERIAL" (as such terms are identified under the
Environmental, Health and Safety Laws). The Company and each of the
Subsidiaries has operated and continues to operate in material compliance
with all Environmental, Health and Safety Laws governing the handling, use
and exposure to and disposal of asbestos or asbestos-containing
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materials. There are no claims, actions, suits, governmental investigations
or proceedings before any Governmental Authority or third party pending, or
threatened against or directly affecting the Company, the Subsidiaries, or
any of their respective assets or operations relating to the use, handling
or exposure to and disposal of asbestos or asbestos-containing materials in
connection with their assets and operations.
(j) Schedule 4.13 identifies the operations and activities, and
locations thereof, which have been conducted and are being conducted by the
Company or any Subsidiary on any of the Owned Properties or the Leased
Premises which have involved the generation, accumulation, storage,
treatment, transportation, labeling, handling, manufacturing, use,
spilling, leaking, dumping, discharging, release or disposal of any
material quantities of Hazardous Substances.
(k) To the best of Shareholders' knowledge, none of the Owned
Properties or Leased Premises presently includes, or has been constructed
upon, any "WETLANDS" as defined under applicable Environmental, Health and
Safety Laws.
(l) As used in this Section 4.13, the term "COMPANY" is deemed to
refer to the Company or any of its Subsidiaries.
(m) As used in Section 4.13, the terms "OWNED PROPERTIES" and "LEASED
PREMISES" are deemed to refer to only the properties currently owned or
leased by the Company.
4.14 REAL ESTATE.
(a) Neither the Company nor any Subsidiary owns any real property or
any interest therein except as set forth on Schedule 4.14(a) (the "OWNED
PROPERTIES"), which Schedule sets forth the location and size of, and
principal improvements and buildings on, the Owned Properties. Except as
set forth on Schedule 4.14(a), with respect to each such parcel of Owned
Property:
(i) the Company or a Subsidiary has good and marketable title to
each parcel of its Owned Property, free and clear of any Lien other than
(x) liens for real estate taxes not yet due and payable; (y) recorded
easements, covenants, and other restrictions which do not materially
impair the current use, occupancy or value of the property subject
thereto, and (z) encumbrances and restrictions described in the title
insurance policies therefor, all of which policies have been previously
delivered to MTLM.
(ii) there are no pending or, to the best of the Shareholders'
knowledge, threatened condemnation proceedings, suits or administrative
actions relating to the Owned Properties or other matters affecting
adversely the current use, occupancy or value thereof;
(iii) to the best of the Shareholders' knowledge, (w) the legal
descriptions for the parcels of Owned Property contained in the deeds
thereof describe such parcels fully and adequately; (x) the buildings
and improvements are located within the boundary lines of the described
parcels of land, are not in violation of applicable setback
requirements, local comprehensive plan provisions, zoning laws and
ordinances (and none of the properties or buildings or improvements
thereon are subject to "PERMITTED NON-CONFORMING USE" or "PERMITTED
NON-CONFORMING STRUCTURE" classifications), building code requirements,
permits, licenses or other forms of approval by any Governmental
Authority, and do not encroach on any easement which may burden the
land; (y) the land does not serve any adjoining property for any purpose
inconsistent with the use of the land; and (z) the Owned Properties are
not located within any flood plain (such that a mortgagee would require
a mortgagor to obtain flood insurance) or subject to any similar type
restriction for which any permits or licenses necessary to the use
thereof have not been obtained;
(iv) to the best of the Shareholders' knowledge, all facilities
have received all material approvals of Governmental Authorities
(including licenses and permits) required in connection with the
ownership or operation thereof and have been operated and maintained in
material compliance with applicable laws, ordinances, rules and
regulations;
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(v) there are no Contracts granting to any party or parties the
right of use or occupancy of any portion of the parcels of Owned
Property, except as set forth on Schedule 4.14(b);
(vi) there are no outstanding options or rights of first refusal to
purchase the parcels of Owned Property, or any portion thereof or
interest therein;
(vii) there are no parties (other than the Company and its
Subsidiaries) in possession of the parcels of Owned Property, other than
tenants under any leases disclosed in Schedule 4.14(b) who are in
possession of space to which they are entitled;
(viii) all facilities located on the parcels of Owned Property are
supplied with utilities and other services necessary for the operation
of such facilities, including gas, electricity, water, telephone,
sanitary sewer and storm sewer, all of which services, to the best of
the Shareholders' knowledge, are adequate in accordance with all
applicable laws, ordinances, rules and regulations, and, to the best of
the Shareholders' knowledge, are provided via public roads or via
permanent, irrevocable, appurtenant easements benefitting the parcels of
Owned Property;
(ix) each parcel of Owned Property abuts on and has direct
vehicular access to a public road, or has access to a public road via a
permanent, irrevocable, appurtenant easement benefitting the parcel of
Owned Property; access to the property is provided by paved public
right-of-way; and there is no pending or, to the best of the
Shareholders' knowledge, threatened termination of the foregoing access
rights;
(x) to the best of the Shareholders' knowledge, all improvements
and buildings on the Owned Property are in good repair (normal wear and
tear excepted) and are safe for occupancy and use, free from termites or
other wood-destroying organisms; the roofs thereof are watertight; and
the structural components and systems (including plumbing, electrical,
air conditioning/heating, and sprinklers) are in good working order and
adequate for the use of such Owned Property in the manner in which
presently used; and
(xi) there are no service contracts, management agreements or
similar agreements which affect the parcels of Owned Property, except as
set forth on Schedule 4.14(a).
(b) Schedule 4.14(b) sets forth a list of all material leases,
licenses or similar agreements ("LEASES") to which the Company or any
Subsidiary is a party (copies of which have previously been furnished to
MTLM), in each case, setting forth (A) the lessor and lessee thereof and
the date and term of each of the Leases, (B) the legal description or
street address of each property covered thereby, and (C) a brief
description of the principal improvements and buildings thereon (the
"LEASED PREMISES"), all of which are within the property set-back and
building lines of the respective property. The Leases are in full force and
effect and have not been amended except as set forth on Schedule 4.14(b),
and, to the best of the Shareholders' knowledge, no party thereto is in
default or breach under any such Lease. No event has occurred which, with
the passage of time or the giving of notice or both, would cause a material
breach of or default under any of such Leases. To the best of the
Shareholders' knowledge, there is no breach or anticipated breach by any
other party to such Leases. Except as set forth on Schedule 4.14(b), with
respect to each such Leased Premises:
(i) the Company or the Subsidiary has valid leasehold interests
in the Leased Premises leased by it, which leasehold interests are free
and clear of any Liens;
(ii) the portions of the buildings located on the Leased Premises
that are used in the business of the Company or a Subsidiary are in good
repair and condition, normal wear and tear excepted, and are in the
aggregate sufficient to satisfy the Company or such Subsidiary's current
and reasonably anticipated normal business activities as conducted
thereat;
(iii) each of the Leased Premises (a) has direct access to public
roads or access to public roads by means of a perpetual access easement,
such access being sufficient to satisfy the current and reasonably
anticipated normal transportation requirements of the Company or such
Subsidiary's respective business as presently conducted at such parcel;
and (b) is served by all utilities in
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such quantity and quality as are sufficient to satisfy the current
normal business activities as conducted at such parcel; and
(iv) neither the Company nor any Subsidiary has received notice of
(a) any condemnation proceeding with respect to any portion of the
Leased Premises or any access thereto, and, to the best of Shareholders'
knowledge, no such proceeding is contemplated by any Governmental
Authority; or (b) any special assessment which may affect any of the
Leased Premises and, to the best of the Shareholders' knowledge, no such
special assessment is contemplated by any Governmental Authority.
4.15 GOOD TITLE TO AND CONDITION OF ASSETS.
(a) Except as set forth on Schedule 4.15, the Company and each
Subsidiary has good and marketable title to all of its respective Assets
(as hereinafter defined), free and clear of any Liens or restrictions on
use. For purposes of this Agreement, the term "ASSETS" means all of the
properties and assets of the Company and its Subsidiaries, other than the
Owned Properties and the Leased Premises, whether personal or mixed,
tangible or intangible, wherever located.
(b) To the best of the Shareholders' knowledge, the Fixed Assets (as
hereinafter defined) currently in use or necessary for the business and
operations of the Company and its Subsidiaries are in good operating
condition, normal wear and tear excepted, and have been maintained in
accordance with sound industry practices. For purposes of this Agreement,
the term "FIXED ASSETS" means all vehicles, machinery, equipment, tools,
supplies, leasehold improvements, furniture and fixtures used by or located
on the premises of the Company or set forth on the Current Balance Sheet or
acquired by the Company or any Subsidiary since the date of the Current
Balance Sheet. Schedule 4.15 lists the vehicles owned, leased or used by
the Company or any Subsidiary to transport, transfer, handle, dispose or
haul Waste materials.
4.16 COMPLIANCE WITH LAWS.
(a) The Company and each Subsidiary is in material compliance with
all laws, regulations and orders applicable to it, its respective business
and operations (as currently conducted), the Assets, the Owned Properties
and the Leased Premises and any other properties and assets (in each case
currently owned or used by it). Except as set forth on Schedule 4.16,
neither the Company nor any Subsidiary has been cited, fined or otherwise
notified of any present material failure to comply with any material laws,
regulations or orders and no proceeding with respect to any such material
violation is pending or, to the best of the Shareholders' knowledge,
threatened.
(b) Neither the Company nor any Subsidiary has made any payment of
funds in connection with its business which is prohibited by law, and no
funds have been set aside to be used in connection with its business for
any payment prohibited by law.
(c) The Company and each Subsidiary is in material compliance with
the terms and provisions of the Immigration Act. With respect to each
Employee (as defined in 8 C.F.R. 274a.1(f)) of the Company for whom
compliance with the Immigration Act as employer is required, to the best of
the Shareholders' knowledge, the Company and each Subsidiary has on file a
true, accurate and complete copy of (i) each Employee's Form I-9
(Employment Eligibility Verification Form) and (ii) all other records,
documents or other papers prepared, procured and/or retained by the Company
and each Subsidiary pursuant to the Immigration Act. Neither the Company
nor any Subsidiary has been cited, fined, served with a Notice of Intent to
Fine or with a Cease and Desist Order, nor has any action or administrative
proceeding been initiated or threatened against it, by the Immigration and
Naturalization Service by reason of any actual or alleged failure to comply
with the Immigration Act.
(d) Except as fully described on Schedule 4.16, neither the Company
nor any Subsidiary is subject to any Contract, decree or injunction which
restricts the continued operation of any business or the expansion thereof
to other geographical areas, customers and suppliers or lines of business.
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4.17 LABOR AND EMPLOYMENT MATTERS. Except as set forth on Schedule
4.17(a), neither the Company nor any Subsidiary is a party to or bound by
any collective bargaining agreement or any other agreement with a labor
union, and there have been no efforts by any labor union during the 24
months prior to the date hereof to organize any employees of the Company or
any Subsidiary into one or more collective bargaining units. There is no
pending or, to the best of the Shareholders' knowledge, threatened labor
dispute, strike or work stoppage which affects or which may affect the
business of the Company or any Subsidiary which may interfere with its
continued operations. Neither the Company nor any Subsidiary has within the
last 24 months committed any unfair labor practice as defined in the
National Labor Relations Act, as amended, and there is no pending or, to
the best of the Shareholders' knowledge, threatened charge or complaint
against the Company or any Subsidiary by or with the National Labor
Relations Board or any representative thereof. There has been no strike,
walkout or work stoppage involving any of the employees of the Company or
any Subsidiary during the 24 months prior to the date hereof. The
Shareholders are not aware that any executive or key employee or group of
employees has any plans to terminate his, her or their employment with the
Company or any Subsidiary as a result of this Agreement or otherwise.
Schedule 4.17(b) contains detailed information about each contract,
agreement or plan of the following nature, whether formal or informal, and
whether or not in writing, to which the Company or any Subsidiary is a
party or under which it has an obligation: (i) employment agreements, (ii)
employee handbooks, policy statements and similar plans, (iii)
noncompetition agreements, and (iv) consulting agreements. The Company and
each Subsidiary has complied in all material respects with applicable laws,
rules and regulations relating to employment, civil rights and equal
employment opportunities, including but not limited to, the Civil Rights
Act of 1964, the Fair Labor Standards Act and the Worker Adjustment and
Retraining Notification Act of 1988.
4.18 EMPLOYEE BENEFIT PLANS.
(a) Employee Benefit Plans. Schedule 4.18 contains a list setting
forth each employee benefit plan or arrangement of the Company and each
Subsidiary, including but not limited to employee pension benefit plans, as
defined in Section 3(2) of ERISA, multiemployer plans, as defined in
Section 3(37) of ERISA, employee welfare benefit plans, as defined in
Section 3(1) of ERISA, deferred compensation plans, stock option plans,
bonus plans, stock purchase plans, hospitalization, disability and other
insurance plans, severance or termination pay plans and policies, whether
or not described in Section 3(3) of ERISA, in which employees, their
spouses or dependents, of the Company or any Subsidiary participate
("EMPLOYEE BENEFIT PLANS") (true and accurate copies of which, together
with the most recent annual reports on Form 5500 and summary plan
descriptions with respect thereto, were furnished to MTLM).
(b) Compliance with Law. With respect to each Employee Benefit Plan
(i) each has been administered in all material respects in compliance with
its terms and with all applicable laws, including, but not limited to,
ERISA and the Internal Revenue Code of 1986, as amended (the "CODE"); (ii)
no actions, suits, claims or disputes are pending or, to the best of the
Shareholders' knowledge, threatened; (iii) no audits, inquiries, reviews,
proceedings, claims, or demands are pending with any governmental or
regulatory agency; (iv) there are no facts which could give rise to any
material liability in the event of any such investigation, claim, action,
suit, audit, review, or other proceeding; (v) all material reports,
returns, and similar documents required to be filed with any governmental
agency or distributed to any plan participant have been duly or timely
filed or distributed; and (vi) no "PROHIBITED TRANSACTION" which could give
rise to any material liability of the Company or any Subsidiary has
occurred within the meaning of the applicable provisions of ERISA or the
Code.
(c) Qualified Plans. With respect to each Employee Benefit Plan
intended to qualify under Code Section 401(a) or 403(a) (i) the Internal
Revenue Service has issued a favorable determination letter, true and
correct copies of which have been furnished to MTLM, that such plans are
qualified and exempt from federal income taxes, or an application therefor
has been filed with the Internal Revenue Service; (ii) no such
determination letter has been revoked nor has revocation been threatened,
nor has any amendment or other action or omission occurred with respect to
any such plan since the date of its most recent determination letter or
application therefor in any respect which would adversely affect its
qualification or materially increase its costs; (iii) no such plan has been
amended in a manner that would
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require security to be provided in accordance with Section 401(a)(29) of
the Code; (iv) no reportable event (within the meaning of Section 4043 of
ERISA) has occurred, other than one for which the 30-day notice requirement
has been waived; and (v) as of the Effective Date except as disclosed on
Schedule 4.18, the present value of all liabilities that would be "BENEFIT
LIABILITIES" under Section 4001(a)(16) of ERISA if benefits described in
Code Section 411(d)(6)(B) were included will not exceed the then current
fair market value of the assets of such plan (determined using the
actuarial assumptions used for the most recent actuarial valuation for such
plan); (vi) except as disclosed on Schedule 4.18, all contributions to, and
payments from and with respect to such plans, which have been required to
be made in accordance with such plans and, when applicable, Section 302 of
ERISA or Section 412 of the Code, have been timely made; (vii) all such
contributions to the plans, and all payments under the plans (except those
to be made from a trust qualified under Section 401(a) of the Code) and all
payments with respect to the plans (including, without limitation, PBGC and
insurance premiums) for any period ending before the Closing Date that are
not yet, but will be, required to be made are properly accrued and
reflected on the Current Balance Sheet or are disclosed on Schedule 4.18.
(d) Multiemployer Plans. With respect to any MPPA Plan (i) all
contributions required to be made with respect to employees of the Company
or any Subsidiary have been timely paid; (ii) neither the Company nor any
Subsidiary has incurred or is expected to incur, directly or indirectly,
any withdrawal liability under ERISA with respect to any such plan (whether
by reason of the transactions contemplated by the Agreement or otherwise);
(iii) Schedule 4.18 sets forth (A) the withdrawal liability under ERISA to
each MPPA Plan, (B) the date as of which such amount was calculated, and
(C) the method for determining the withdrawal liability; and (iv) no such
plan is (or is expected to be) insolvent or in reorganization and no
accumulated funding deficiency (as defined in Section 302 of ERISA and
Section 412 of the Code), whether or not waived, exists or is expected to
exist with respect to any such plan.
(e) Welfare Plans. Other than as disclosed in Schedule 4.18, (i)
neither the Company nor any Subsidiary is obligated under any Welfare Plan,
whether or not disclosed in Schedule 4.18, to provide medical or death
benefits with respect to any employee or former employee of the Company,
any Subsidiary or their predecessors after termination of employment, other
than as required by Section 4980B of the Code; (ii) the Company and each
Subsidiary have complied in all material respects with the notice and
continuation coverage requirements of Section 4980B of the Code and the
regulations thereunder with respect to each Welfare Plan that is, or was
during any taxable year for which the statute of limitations on the
assessment of federal income taxes remains, open, by consent or otherwise,
a group health plan within the meaning of Section 5000(b)(1) of the Code,
and (iii) there are no reserves, assets, surplus or prepaid premiums under
any Welfare Plan which is an Employee Benefit Plan. The consummation of the
transactions contemplated by this Agreement will not entitle any individual
to severance pay, and, will not accelerate the time of payment or vesting,
or increase the amount of compensation, due to any individual.
(f) Controlled Group Liability. Neither the Company, any Subsidiary
nor any entity that would be aggregated with them under Code Section
414(b), (c), (m) or (o): (i) has ever terminated or withdrawn from an
employee benefit plan under circumstances resulting (or expected to result)
in liability to the Pension Benefit Guaranty Corporation ("PBGC"), the fund
by which the employee benefit plan is funded, or any employee or
beneficiary for whose benefit the plan is or was maintained (other than
routine claims for benefits); (ii) has any assets subject to (or expected
to be subject to) a lien for unpaid contributions to any employee benefit
plan; (iii) has failed to pay premiums to the PBGC when due; (iv) is
subject to (or expected to be subject to) an excise tax under Code Section
4971; (v) has engaged in any transaction which would give rise to liability
under Section 4069 or Section 4212(c) of ERISA; or (vi) has violated in any
material respect Code Section 4980B or Section 601 through 608 of ERISA.
(g) Other Liabilities. Except as set forth on Schedule 4.18, (i)
none of the Employee Benefit Plans obligates the Company or any Subsidiary
to pay separation, severance, termination or similar benefits solely as a
result of any transaction contemplated by this Agreement or solely as a
result of
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a "CHANGE OF CONTROL" (as such term is defined in Section 280G of the
Code), (ii) all required or discretionary (in accordance with historical
practices) payments, premiums, contributions, reimbursements, or accruals
for all periods ending prior to or as of the Effective Date shall have been
made or properly accrued on the Current Balance Sheet or will be properly
accrued on the books and records of the Company and the Subsidiaries as of
the Effective Date, and (iii) none of the Employee Benefit Plans has any
unfunded liabilities which are not reflected on the Current Balance Sheet
or the books and records of the Company and the Subsidiaries.
4.19 TAX MATTERS. Except as set forth in Schedule 4.19 hereto, all Tax
Returns required to be filed prior to the date hereof with respect to the
Company, its Subsidiaries or any of its income, properties, franchises or
operations have been filed, each such Tax Return has been prepared in compliance
with all applicable laws and regulations, and all such Tax Returns are true,
complete and accurate in all material respects. All Taxes due and payable by or
with respect to the Company and its subsidiaries have been paid or accrued on
the Current Balance Sheet or will be accrued on its books and records as of the
Closing. Except as set forth in Schedule 4.19 hereto: (i) with respect to each
taxable period of the Company and each Subsidiary after January 1, 1992, no
taxable period has been audited by the relevant taxing authority; (ii) no
deficiency or proposed adjustment which has not been settled or otherwise
resolved for any amount of Taxes has been asserted or assessed by any taxing
authority; (iii) neither the Company nor any Subsidiary has consented to extend
the time in which any Taxes may be assessed or collected by any taxing
authority; (iv) neither the Company nor any Subsidiary has requested or been
granted an extension of the time for filing any Tax Return to a date later than
the Closing Date; (v) there is no action, suit, taxing authority proceeding, or
audit or claim for refund now in progress, pending or threatened against or with
respect to the Company or any Subsidiary regarding Taxes; (vi) neither the
Company nor any Subsidiary has made an election or filed a consent under Section
341(f) of the Code (or any corresponding provision of state, local or foreign
law) on or prior to the Closing Date; (vii) there are no Liens for Taxes (other
than for current Taxes not yet due and payable) upon the assets of the Company
or any Subsidiary; (viii) neither the Company nor any Subsidiary will be
required (A) as a result of a change in method of accounting for a taxable
period ending on or prior to the Closing Date, to include any adjustment under
Section 481(c) of the Code (or any corresponding provision of state, local or
foreign law) in taxable income for any taxable period (or portion thereof)
beginning after the Closing Date or (B) as a result of any "CLOSING AGREEMENT,"
as described in Section 7121 of the Code (or any corresponding provision of
state, local or foreign law), to include any item of income or exclude any item
of deduction from any taxable period (or portion thereof) beginning after the
Closing Date; (ix) neither the Company nor any Subsidiary is a party to or bound
by any tax allocation or tax sharing agreement or has any current or potential
contractual obligation to indemnify any other Person with respect to Taxes; (x)
there is no basis for any assessment, deficiency notice, 30-day letter or
similar notice with respect to any Tax to be issued to the Company or any
Subsidiary with respect to any period on or before the Closing Date; (xi)
neither the Company nor any Subsidiary has made any payments, and is or will not
become obligated (under any contract entered into on or before the Closing Date)
to make any payments, that will be non-deductible under Section 280G of the Code
(or any corresponding provision of state, local or foreign law); (xii) neither
the Company nor any Subsidiary has been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code (or any
corresponding provision of state, local or foreign law) during the applicable
period specified in Section 897(c)(1)(a)(ii) of the Code (or any corresponding
provision of state, local or foreign law); (xiii) no claim has ever been made by
a taxing authority in a jurisdiction where the Company or a Subsidiary, as the
case may be, does not file Tax Returns that is or may be subject to Taxes
assessed by such jurisdiction; (xiv) the Company and its Subsidiaries do not
have any permanent establishment in any foreign country, as defined in the
relevant tax treaty between the United States of America and such foreign
country; (xv) true, correct and complete copies of all income and sales Tax
Returns filed by or with respect to the Company and its Subsidiaries for the
past two years has been furnished or made available to MTLM; and (xvi) the
Company and its Subsidiaries will not be subject to any Taxes pursuant to
Section 1374 or Section 1375 of the Code (or any corresponding provision of
state, local or foreign law) for the period ending at the Closing Date for any
period for which a Tax Return has not been filed.
4.20 INSURANCE. The Company and each Subsidiary is covered by valid,
outstanding and enforceable policies of insurance issued to it by reputable
insurers covering its properties, assets and businesses against
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risks of the nature normally insured against by businesses in the same or
similar lines of business and in coverage amounts typically and reasonably
carried by such businesses (the "INSURANCE POLICIES"), provided, however, the
Company and its Subsidiaries generally do not insure their machinery and
equipment except as the Company or its Subsidiaries may be required to insure
such assets by third party lenders or lessors. Such Insurance Policies are in
full force and effect, and all premiums due thereon have been paid. As of the
Closing Date each of the Insurance Policies will be in full force and effect.
None of the Insurance Policies will lapse or terminate as a result of the
transactions contemplated by this Agreement. The Company and each Subsidiary has
complied with the provisions of such Insurance Policies. Schedule 4.20 contains
(i) a complete and correct list of all Insurance Policies and all amendments and
riders thereto (copies of which have been provided to MTLM) and (ii) a detailed
description of each pending claim under any of the Insurance Policies for an
amount in excess of $50,000 that relates to loss or damage to the properties,
assets or businesses of the Company or any Subsidiary. Neither the Company nor
any Subsidiary has failed to give, in a timely manner, any notice required under
any of the Insurance Policies to preserve its rights thereunder.
4.21 RECEIVABLES. All of the Receivables (as hereinafter defined) are
valid and legally binding, represent bona fide transactions and arose in the
ordinary course of business of the Company and its Subsidiaries. Except as set
forth on Schedule 4.21, all of the Receivables are good and collectible
receivables, and will be collected in full in accordance with the terms of such
receivables (and in any event within six months following the Closing), without
set off or counterclaims, subject to the allowance for doubtful accounts, if
any, set forth on the Current Balance Sheet as reasonably adjusted since the
date of the Current Balance Sheet in the ordinary course of business consistent
with past practice. For purposes of this Agreement, the term "RECEIVABLES" means
all receivables of the Company and the Subsidiaries, including all trade account
receivables arising from the provision of services or sale of inventory, but
excluding notes receivable, and insurance proceeds receivable.
4.22 PERMITS. Except as set forth on Schedule 4.22, the Company and each
Subsidiary possess all material Permits for its business and operations,
including the operation of the Owned Properties and Leased Premises. All such
Permits are valid and in full force and effect, the Company and each Subsidiary
is in material compliance with the requirements thereof, and no proceeding is
pending or threatened to revoke or amend any of them. None of such Permits is or
will be impaired or in any way affected by the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby.
4.23 ADEQUACY OF THE ASSETS; RELATIONSHIPS WITH CUSTOMERS AND SUPPLIERS;
AFFILIATED TRANSACTIONS. The Assets, Owned Properties and Leased Premises
constitute, in the aggregate, all of the assets and properties necessary for the
conduct of the business of the Company and the Subsidiaries in the manner in
which and to the extent to which such business is currently being conducted. To
the best knowledge of the Shareholders, no current supplier to the Company or
any Subsidiary of items essential to the conduct of its business will or has
threatened to terminate its respective business relationship with it for any
reason. Except as set forth on Schedule 4.23, neither the Company nor any
Subsidiary has any direct or indirect interest in any customer, supplier or
competitor of the Company or any Subsidiary, or in any person from whom or to
whom the Company or any Subsidiary leases real or personal property. Except as
set forth on Schedule 4.23, no officer, director or shareholder of the Company
or any Subsidiary, nor any person related by blood or marriage to any such
person, nor any entity in which any such person owns any beneficial interest, is
a party to any Contract or transaction with the Company or any Subsidiary or has
any interest in any property used by the Company.
4.24 INTELLECTUAL PROPERTY. The Company and its Subsidiaries has full
legal right, title and interest in and to all trademarks, servicemarks,
tradenames, copyrights, know-how, patents, trade secrets, licenses (including
licenses for the use of computer software programs), and other intellectual
property used in the conduct of their respective businesses (the "INTELLECTUAL
PROPERTY"). The conduct of the business of the Company and its Subsidiaries as
presently conducted, and the unrestricted conduct and the unrestricted use and
exploitation of the Intellectual Property, does not infringe or misappropriate
any rights held or asserted by any Person, and to the best of the Shareholders'
knowledge, no Person is infringing on the Intellectual Property. No payments are
required for the continued use of the Intellectual Property. None of the
Intellectual Property has ever been declared invalid or unenforceable, or is the
subject of any pending
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or, to the best of the Shareholders' knowledge, threatened action for
opposition, cancellation, declaration, infringement, or invalidity,
unenforceability or misappropriation or like claim, action or proceeding.
4.25 CONTRACTS. Schedule 4.25 sets forth a list of each Contract to which
the Company and its Subsidiaries is a party or by which its properties and
assets are bound and which is material to its business, assets, properties or
prospects (the "DESIGNATED CONTRACTS"), true and correct copies of which have
been provided to MTLM. The copy of each Designated Contract furnished to MTLM is
a true and complete copy of the document it purports to represent and reflects
all amendments thereto made through the date of this Agreement. Except as set
forth on Schedule 4.25, neither the Company nor any Subsidiary has violated any
of the material terms or conditions of any Designated Contract or any term or
condition which would permit termination or material modification of any
Designated Contract, and, to the best of the Shareholders' knowledge, all of the
covenants to be performed by any other party thereto have been fully performed
and there are no claims for breach or indemnification or notice of default or
termination under any Designated Contract. Except as set forth on Schedule 4.25,
no event has occurred which constitutes, or after notice or the passage of time,
or both, would constitute, a material default by the Company or any Subsidiary
under any Designated Contract, and no such event has occurred which constitutes
or would constitute a material default by any other party. Neither the Company
nor any Subsidiary is subject to any material liability or payment resulting
from renegotiation of amounts paid it under any Designated Contract. As used in
this Section, Designated Contracts shall include, without limitation, (a) loan
agreements, indentures, mortgages, pledges, hypothecations, deeds of trust,
conditional sale or title retention agreements, security agreements, equipment
financing obligations or guaranties, or other sources of contingent liability in
respect of any indebtedness or obligations to any other Person, or letters of
intent or commitment letters with respect to same; (b) contracts obligating the
Company to purchase or sell products or services; (c) leases of real property,
and leases of personal property not cancelable without penalty on notice of 60
days or less or calling for payment of an annual gross rental exceeding $50,000;
(d) distribution, sales agency or franchise or similar agreements, or agreements
providing for an independent contractor's services, or letters of intent with
respect to same; (e) employment agreements, management service agreements,
consulting agreements, confidentiality agreements, non-competition agreements
and any other agreements relating to any employee, officer or director of the
Company or any Subsidiary; (f) licenses, assignments or transfers of trademarks,
trade names, service marks, patents, copyrights, trade secrets or know how, or
other agreements regarding proprietary rights or intellectual property; (g) any
Contract relating to pending capital expenditures by the Company or any
Subsidiary; and (h) other material Contracts or understandings, irrespective of
subject matter and whether or not in writing, not entered into in the ordinary
course of business by the Company or any Subsidiary and not otherwise disclosed
on the Schedules.
4.26 CUSTOMER LISTS AND RECURRING REVENUE. The Company and the
Shareholders have made available to MTLM for MTLM's review, a true, correct and
complete list of each of the Company and each Subsidiary's 20 largest customers
("MATERIAL CUSTOMERS") and suppliers together with the applicable percentage of
total sales or purchases, as applicable. True, correct and complete copies of
any agreements with such customers or suppliers which are anticipated to endure
beyond the Closing have been furnished by the Shareholders to MTLM. Other than
Material Customers, no customer of the Company or any Subsidiary as of the date
of this Agreement accounts for more than 1% of its combined annual revenue.
4.27 ACCURACY OF INFORMATION FURNISHED BY THE SHAREHOLDERS. No
representation, statement or information made or furnished by the Shareholders
to MTLM or any of MTLM's representatives, including those contained in this
Agreement and the various Schedules attached hereto and the other information
and statements referred to herein and previously furnished by the Company, the
Subsidiaries and the Shareholders, contains or shall contain any untrue
statement of a material fact or omits or shall omit any material fact necessary
to make the information contained therein not misleading in light of the
circumstances in which they were made. The Shareholders have provided MTLM with
true, accurate and complete copies of all documents listed or described in the
various Schedules attached hereto.
4.28 INVESTMENT INTENT; ACCREDITED INVESTOR STATUS; SECURITIES
DOCUMENTS. Each of the Shareholders is acquiring his interest in the MTLM
Shares for his own account for investment and not with a view to, or for the
sale in connection with, any distribution of his interest, except in compliance
with applicable state and
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federal securities laws. Each of the Shareholders has been provided, to his
satisfaction, the opportunity to discuss the transactions contemplated hereby
with MTLM and has had the opportunity to obtain such information pertaining to
MTLM as has been requested, including but not limited to filings made by MTLM
with the SEC under the Exchange Act. Each of the Shareholders is an "ACCREDITED
INVESTOR" within the meaning of Regulation D promulgated under the Securities
Act. Each of the Shareholders has such knowledge and experience in business and
financial matters that he is capable of evaluating the merits and risks of an
investment in MTLM Shares, and is capable of bearing the economic risks of such
investment and is able to bear a complete loss of his investment in MTLM Shares.
Each of the Shareholders acknowledges that MTLM Shares have not been registered
under the Securities Act and understands that MTLM Shares must be held
indefinitely unless they are subsequently registered under the Securities Act or
such sale is permitted pursuant to an available exemption from such registration
requirement.
4.29 BUSINESS LOCATIONS. As of the date hereof, neither the Company nor
any Subsidiary has any office or place of business other than as identified on
Schedules 4.14(a) and 4.14(b) and the Company and each Subsidiary's principal
place of business and chief executive office (as such terms are used in
subsection 9-401 of the Uniform Commercial Code as enacted in the State of
Illinois as of the date hereof) are indicated on Schedule 4.14(a) or 4.14(b),
and, all locations where the equipment, inventory, chattel paper and books and
records of the Company and the Subsidiaries are located as of the date hereof
are fully identified on Schedules 4.14(a) and 4.14(b).
4.30 NAMES; PRIOR ACQUISITIONS. All names under which the Company and each
Subsidiary does business as of the date hereof are specified on Schedule 4.30.
Except as set forth on Schedule 4.30, neither the Company nor any Subsidiary has
changed its name or used any assumed or fictitious name, or been the surviving
entity in a merger, acquired any business or changed its principal place of
business or chief executive office, within the past 10 years.
4.31 NO COMMISSIONS. Except as set forth on Schedule 4.31, neither the
Company, any Subsidiary nor the Shareholders have incurred any obligation for
any finder's or broker's or agent's fees or commissions or similar compensation
in connection with the transactions contemplated hereby.
4.32 INVENTORY. All Assets that consist of inventory (including raw
materials and work-in-progress): (i) were acquired in the ordinary course of
business consistent with past practice; (ii) are, in the aggregate, of a
quality, quantity, and condition useable or saleable in the ordinary course of
business within the Company and the Subsidiary's normal inventory turnover
experience; and (iii) are valued at the lower of cost or net realizable market
value. Neither the Company nor any Subsidiary has any material liability with
respect to the return or repurchase of any goods in the possession of any
customer.
4.33 IDENTIFICATION, ACQUISITION AND DISPOSITION OF MATERIAL
ASSETS. Schedule 4.33 sets forth a listing of all material Assets (including
real, personal and mixed) acquired or disposed of by the Company or any
Subsidiary since December 31, 1996.
4.34 RESTRICTIONS. Schedule 4.34 sets forth a list of all non-competition,
non-solicitation, confidentiality and other restrictive covenants to which the
Company, any Subsidiary and/or any Shareholder is a party or otherwise bound.
Except as set forth on Schedule 4.34, there are no contracts or other
conditions, circumstances, events or agreements which would in any way limit or
restrict the rights of MTLM, MTLM's Affiliates, the Company or its Subsidiaries
from engaging in any business anywhere in the world.
4.35 FULL DISCLOSURE. No statement by the Company contained in this
Article IV and the Schedules hereto or any written statement or certificate
furnished to MTLM as of its respective date contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements contained herein or therein not materially and adversely misleading
in light of the circumstances under which they were made.
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ARTICLE V
CONDUCT OF BUSINESS PENDING THE CLOSING
5.1 CONDUCT OF BUSINESS OF THE COMPANY PENDING THE CLOSING. Except as
set forth on Schedule 5.1, the Company covenants and agrees that, between the
date of this Agreement and the Closing Date, the business of the Company and
each Subsidiary shall be conducted only in, and the Company and each Subsidiary
shall not take any action except in, the ordinary course of business, consistent
with past practice and in compliance with all rules, regulations and laws. The
Company and each Subsidiary shall use its best efforts to preserve intact its
respective business organization, to keep available the services of its
respective current officers, employees and consultants, and to preserve its
respective present relationships with customers, suppliers and other persons
with which it has significant business relations. By way of amplification and
not limitation, except as contemplated by this Agreement, neither the Company
nor any Subsidiary shall, between the date of this Agreement and the Closing
Date, directly or indirectly, do or propose or agree to do any of the following
without the prior written consent of MTLM, which consent shall not be
unreasonably withheld:
(a) amend or otherwise change its articles of incorporation or
bylaws;
(b) issue, sell, pledge, dispose of, encumber, or, authorize the
issuance, sale, pledge, disposition, grant or encumbrance of (i) with
respect to the Company or any Subsidiary, any shares of its capital stock
of any class, or any options, warrants, convertible securities or other
rights of any kind to acquire any shares of such capital stock, or any
other ownership interest, of it, or, (ii) any of their respective assets,
tangible or intangible, except in the ordinary course of business
consistent with past practice;
(c) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect
to any of its capital stock;
(d) reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock;
(e) (i) acquire (including, without limitation, for cash or shares of
stock, by merger, consolidation, or acquisition of stock or assets) any
interest in any corporation, partnership or other business organization or
division thereof or any assets, or make any investment either by purchase
of stock or securities, contributions of capital or property transfer, or,
except in the ordinary course of business, consistent with past practice,
purchase any property or assets of any other Person, (ii) incur any
indebtedness for borrowed money or issue any debt securities or assume,
guarantee or endorse or otherwise as an accommodation become responsible
for, the obligations of any Person, or make any loans or advances, or (iii)
enter into any Contract other than in the ordinary course of business,
consistent with past practice;
(f) increase the compensation payable or to become payable to its
respective officers or directors, or, except as presently bound to do,
grant any severance or termination pay to, or enter into any employment or
severance agreement with, any of its respective directors or officers, or
establish, adopt, enter into or amend or take any action to accelerate any
rights or benefits under any collective bargaining, bonus, profit sharing,
trust, compensation, stock option, restricted stock, pension, retirement,
deferred compensation, employment, termination, severance or other plan,
agreement, trust, fund, policy or arrangement for the benefit of any
directors, officers or employees;
(g) take any action other than in the ordinary course of business and
in a manner consistent with past practice with respect to accounting
policies or procedures;
(h) pay, discharge or satisfy any existing claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the
ordinary course of business and consistent with past practice of due and
payable liabilities reflected or reserved against in its financial
statements, as appropriate, or liabilities incurred after the date hereof
in the ordinary course of business and consistent with past practice and
other than the payment of a pending claim by Employers Insurance of Wausau
(as described on Schedule 4.12) in an amount not to exceed $1.4 million;
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(i) increase or decrease prices charged to its respective customers,
except for previously announced price changes or except in the ordinary
course of business, or take any other action which might reasonably result
in any material increase in the loss of customers through non-renewal or
termination of contracts or other causes; or
(j) agree, in writing or otherwise, to take or authorize any of the
foregoing actions or any action which would make any representation or
warranty in Article IV untrue or incorrect.
5.2 CONDUCT OF BUSINESS OF MTLM PENDING THE CLOSING. Except as set forth
on Schedules 2.28 and 5.2, MTLM covenants and agrees that, between the date of
this Agreement and the Closing Date, the business of MTLM and each MTLM
Subsidiary shall be conducted only in, and MTLM and each MTLM Subsidiary shall
not take any action except in, the ordinary course of business, consistent with
past practice and in material compliance with all rules, regulations and laws.
MTLM and each MTLM Subsidiary shall use its best efforts to preserve intact its
respective business organization, to keep available the services of its
respective current officers, employees and consultants, and to preserve its
respective present relationships with customers, suppliers and other persons
with which it has significant business relations. By way of amplification and
not limitation, except as contemplated by this Agreement, neither MTLM nor any
MTLM Subsidiary shall, between the date of this Agreement and the Closing Date,
directly or indirectly, do or propose or agree to do any of the following
without the prior written consent of the Shareholders, which consent shall not
be unreasonably withheld:
(a) amend or otherwise change its charter or bylaws;
(b) except for the issuance of common stock in connection with any of
the mergers, acquisitions or other transactions contemplated by Section
5.2(e) below, private placements of common stock not to exceed $15 million
in the aggregate, the private placement of up to $10 million of securities
convertible into or exchangeable for common stock of MTLM and/or the sale
of non-convertible high yield debt of MTLM of up to $200 million, or the
incurrence of a non-convertible bridge loan which will be repaid with the
proceeds of the foregoing, issue, sell, pledge, dispose of, grant,
encumber, or authorize the issuance, sale, pledge, disposition, grant or
encumbrance of (i) with respect to MTLM or any MTLM Subsidiary, any shares
of its capital stock of any class, or any options, warrants, convertible
securities or other rights of any kind to acquire any shares of such
capital stock, or any other ownership interest, of it, or, (ii) any of
their respective assets, tangible or intangible, except in the ordinary
course of business consistent with past practice;
(c) increase the compensation payable or to become payable to its
respective officers or directors, or, except as presently bound to do,
grant any severance or termination pay to, or enter into any employment or
severance agreement with, any of its respective directors or officers, or
establish, adopt, enter into or amend or take any action to accelerate any
rights or benefits under any collective bargaining, bonus, profit sharing,
trust, compensation, stock option, restricted stock, pension, retirement,
deferred compensation, employment, termination, severance or other plan,
agreement, trust, fund, policy or arrangement for the benefit of any
directors, officers or employees;
(d) take any action other than in the ordinary course of business and
in a manner consistent with past practice with respect to accounting
policies or procedures; or
(e) except for mergers or acquisitions by MTLM of The Isaac
Corporation and its affiliates, Kankakee Scrap Corporation and its
affiliates, Proler Southwest Inc. and Proler Steelworks L.L.C., and a joint
venture or acquisition of a joint venture interest from Perlco, L.L.C.
(each substantially on the terms and conditions set forth in the respective
letters of intent relating thereto, true and complete copies of which have
been given to the Shareholders) and any acquisitions involving
consideration of less than $5 million, and any contracts, agreements and
transactions related thereto, (i) acquire (including, without limitation,
for cash or shares of stock, by merger, consolidation, or acquisition of
stock or assets) any interest in any corporation, partnership or other
business organization or division thereof or any assets, or make any
investment either by purchase of stock or securities, contributions of
capital or property transfer, or, except in the ordinary course of business
of a MTLM Subsidiary, consistent with
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past practice, purchase any property or assets of any other Person, (ii)
incur any indebtedness for borrowed money or issue any debt securities or
assume, guarantee or endorse or otherwise as an accommodation become
responsible for, the obligations of any Person, or make any loans or
advances, or (iii) enter into any Contract other than in the ordinary
course of business of a MTLM Subsidiary, consistent with past practice;
(f) agree, in writing or otherwise, to take or authorize any of the
foregoing actions or any action which would make any representation or
warranty in Article II untrue or incorrect.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 FURTHER ASSURANCES. Each party shall execute and deliver such
additional instruments and other documents and shall take such further actions
as may be necessary or appropriate to effectuate, carry out and comply with all
of the terms of this Agreement and the transactions contemplated hereby.
6.2 COMPLIANCE WITH COVENANTS. The Shareholders shall cause the Company
to comply with all of the respective covenants of the Company under this
Agreement.
6.3 COOPERATION. Each of the parties agrees to cooperate with the other
in the preparation and filing of all forms, notifications, reports and
information, if any, required or reasonably deemed advisable pursuant to any
law, rule or regulation or the rules of any exchange on which the Common Stock
is listed (the Nasdaq Stock Market) in connection with the transactions
contemplated by this Agreement and to use their respective best efforts to agree
jointly on a method to overcome any objections by any Governmental Authority to
any such transactions.
6.4 ACCESS TO INFORMATION. From the date hereof to the Closing Date, the
Company and MTLM shall (and shall cause its respective directors, officers,
employees, auditors, counsel and agents to) afford each other and their
officers, employees, auditors, counsel and agents reasonable access at all
reasonable times to its properties, offices, and other facilities, to its
officers and employees and to all books and records, and shall furnish such
persons with all financial, operating and other data and information as may be
requested. No information provided to or obtained by any of the parties hereto
shall affect any representation or warranty in this Agreement.
6.5 NOTIFICATION OF CERTAIN MATTERS. The Shareholders and MTLM shall
give prompt notice to the other of the occurrence or non-occurrence of any event
which would likely cause any representation or warranty contained herein to be
untrue or inaccurate, or any covenant, condition, or agreement contained herein
not to be complied with or satisfied.
6.6 TAX TREATMENT. Each party to this Agreement has sought and received
its own advice as to the tax treatment of the transactions covered by this
Agreement and is not relying on any opinions of the other parties or their
respective advisers with respect thereto. All parties hereto agree to fully and
completely comply with the reporting requirements of the Internal Revenue
Service.
6.7 CONFIDENTIALITY; PUBLICITY. Except as may be required by law or as
otherwise permitted or expressly contemplated herein, no party hereto or their
respective Affiliates, employees, agents and representatives shall disclose to
any third party this Agreement or the subject matter or terms hereof without the
prior consent of the other parties hereto. No press release or other public
announcement related to this Agreement or the transactions contemplated hereby
shall be issued by any party hereto without the prior approval of the other
parties, except that MTLM may make such public disclosure which MTLM believes in
good faith is required by law or by the terms of any listing agreement with or
requirements of a securities exchange.
6.8 NO OTHER DISCUSSIONS. Neither the Company, nor the Shareholders, and
their respective Affiliates, employees, agents or representatives shall (i)
initiate or encourage the initiation by others of discussions or negotiations
with third parties or respond to solicitations by third persons relating to any
merger, sale or other disposition of any substantial part of the assets,
business or properties of the Company (whether
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by merger, consolidation, sale of stock or otherwise) or (ii) enter into any
agreement or commitment (whether or not binding) with respect to any of the
foregoing transactions. The Shareholders will immediately notify MTLM if any
third party attempts to initiate any solicitation, discussion or negotiation
with respect to any of the foregoing transactions.
6.9 RESTRICTIVE COVENANTS. In order to assure that MTLM will realize the
benefits of this Agreement and in consideration of the transactions set forth in
this Agreement, the Shareholders agree with MTLM that they shall not for a
period of thirty-six (36) months from the later of the Closing Date or the date
each such Shareholder ceases to be an employee, officer or director of MTLM or
the Company (with regard to each Shareholder, a "TERMINATION DATE"):
(a) directly or indirectly, alone or as a partner, joint venturer,
officer, director, employee, consultant, agent, independent contractor or
stockholder of any company or business, engage in any business activity in
the Restricted Territory (as defined below), and which is directly or
indirectly in competition with the business conducted by the Company at the
Closing Date; provided, however, that, the beneficial ownership of less
than 5% of the shares of stock of any corporation having a class of equity
securities actively traded on a national securities exchange or
over-the-counter market shall not be deemed, in and of itself, to violate
the prohibitions of this Section. As used in this Section 6.9, the term
"RESTRICTED TERRITORY" means (i) with respect to Albert A. Cozzi, all
states in which MTLM or any of its Subsidiaries operates a facility on the
Termination Date, and (ii) with respect to Frank J. Cozzi and Gregory P.
Cozzi, all states in which the Surviving Corporation or its Subsidiaries
operates a facility on the Termination Date;
(b) directly or indirectly (i) induce any Person which is a customer
of the Company or any Subsidiary at the Closing Date to patronize any
business directly or indirectly in competition with the business conducted
by the Company and its Subsidiaries; (ii) canvass, solicit or accept from
any Person which is a customer of the Company or any Subsidiary, any such
competitive business, or (iii) request or advise any Person which is a
customer of the Company or any Subsidiary at the Closing Date to withdraw,
curtail or cancel any such customer's business with the Company or any
Subsidiary;
(c) directly or indirectly employ, or knowingly permit any company or
business directly or indirectly controlled by him, to employ, any person
who was employed by the Company or any Subsidiary at or within six months
prior to the Closing Date, or in any manner seek to induce any such Person
to leave his or her employment;
(d) directly or indirectly, at any time following the Closing Date,
in any way utilize, disclose, copy, reproduce or retain in his possession
any of the Company or any Subsidiary's proprietary rights or records,
including, but not limited to, any of their customer lists.
The Shareholders agree and acknowledge that the restrictions contained in this
Section 6.9 are reasonable in scope and duration and are necessary to protect
MTLM after the Closing Date. If any provision of this Section as applied to any
party or to any circumstance is adjudged by a court to be invalid or
unenforceable, the same will in no way affect any other circumstance or the
validity or enforceability of this Agreement. If any such provision, or any part
thereof, is held to be unenforceable because of the duration of such provision
or the area covered thereby, the parties agree that the court making such
determination shall have the power to reduce the duration and/or area of such
provision, and/or to delete specific words or phrases, and in its reduced form,
such provision shall then be enforceable and shall be enforced. The parties
agree and acknowledge that the breach of this Section will cause irreparable
damage to MTLM and upon breach of any provision of this Section, MTLM shall be
entitled to injunctive relief, specific performance or other equitable relief;
provided, however, that this shall in no way limit any other remedies which MTLM
may have (including, without limitation, the right to seek monetary damages).
6.10 ENVIRONMENTAL ASSESSMENT. MTLM shall be entitled to have conducted
prior to Closing an environmental assessment and compliance review of the Owned
Properties and Leased Premises (hereinafter referred to as the "ENVIRONMENTAL
ASSESSMENT") and Cozzi's operations. The Environmental Assessment may include a
physical examination of the Owned Properties or Leased Premises, and any
structures, facilities, or
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equipment located thereon, review of pertinent permits, reports and records,
documents, and Licenses of the Company and its Subsidiaries. MTLM shall not be
entitled to take any soil samples, ground and surface water samples, or storage
tank testing unless MTLM obtains Cozzi's prior written consent. The Shareholders
shall provide MTLM or its designated agents or consultants with the access to
such property and all permits, records and reports which MTLM, their respective
agents or consultants require to conduct the Environmental Assessment. If the
Environmental Assessment identifies any conditions or environmental
contamination which requires remediation or further evaluation under the
Environmental, Health, and Safety Laws or if the results of the Environmental
Assessment are otherwise not satisfactory to MTLM in its sole discretion, and if
the Company elects not to remediate or otherwise satisfy MTLM (in the sole
discretion of MTLM), then MTLM may elect not to close the transactions
contemplated by this Agreement as provided in Section 12.1.
6.11 TRADING IN MTLM'S COMMON STOCK. Except as otherwise expressly
consented to by MTLM, from the date of this Agreement until the Closing Date,
neither the Company, nor the Shareholders (nor any Affiliates thereof) will
directly or indirectly purchase or sell (including short sales) any shares of
the Common Stock in any transactions effected on the Nasdaq Stock Market or
otherwise.
6.12 OTHER AGREEMENTS. Upon the Closing, each party shall cause their
respective affiliates to execute and deliver the following agreements
(collectively, the "COLLATERAL AGREEMENTS"):
(a) an employment agreement for each of (i) Albert A. Cozzi, (ii)
Frank J. Cozzi, (iii) Gerard M. Jacobs, (iv) T. Benjamin Jennings, and (v)
Gregory P. Cozzi in a form reasonably acceptable to the parties hereto,
which form shall be agreed upon on or prior to May 30, 1997 and attached to
this Agreement as an exhibit. The parties agree that the employment
agreements will contain non-competition covenants and that such covenants
are an integral part of this Agreement;
(b) the Stockholders' Agreement in the form attached hereto as
Exhibit B (the "STOCKHOLDERS AGREEMENT");
(c) the Escrow Agreement;
(d) warrants in the form of Exhibit C to be issued to each of the
Shareholders pursuant to their employment agreements as follows:
(i) Albert A. Cozzi shall receive warrants exercisable for
755,172 MTLM Shares for a period of five (5) years, half of which will
have an exercise price of $5.91 per share and half of which will have an
exercise price per share equal to seventy-five percent (75%) of the last
sales price of a MTLM Share on the day before the Closing Date;
(ii) Frank J. Cozzi shall receive warrants exercisable for 582,759
MTLM Shares for a period of five (5) years, half of which will have an
exercise price of $5.91 per share and half of which will have an
exercise price per share equal to seventy-five percent (75%) of the last
sales price of a MTLM Share on the day before the Closing Date; and
(iii) Gregory P. Cozzi shall receive warrants exercisable for
162,069 MTLM Shares for a period of five (5) years, half of which will
have an exercise price of $5.91 per share and half of which will have an
exercise price per share equal to seventy-five percent (75%) of the last
sales price of a MTLM Share on the day before the Closing Date.
(e) the Registration Rights Agreement in the form attached hereto as
Exhibit D.
6.13 HSR ACT COMPLIANCE. The Company, the Shareholders and MTLM will as
promptly as practicable, but in no event later than 10 business days following
the execution and delivery of this Agreement, file or cause to be filed with the
United States Federal Trade Commission (the "FTC") and the United State
Department of Justice (the "DOJ") the notification and report form required for
the transactions contemplated hereby and any supplemental information requested
in connection therewith pursuant to the HSR Act. Any such notification and
report form and supplemental information will be in substantial compliance with
the requirements of the HSR Act. Each of MTLM, the Company and the Shareholders
will furnish to the others such necessary information and reasonable assistance
as the others may request in connection with the
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preparation of any filing or submission which is necessary under the HSR Act.
Each of the Company, the Shareholders and MTLM will keep each other apprised of
the status of any communications with, and inquiries or requests for additional
information addressed to the entity that filed a notification and report form as
an acquired or acquiring person from, the FTC or the DOJ and shall comply or
cause its respective filing person to comply promptly with any such inquiry or
request. Each of the Company, the Shareholders and MTLM will use commercially
reasonable efforts to obtain any clearance required under the HSR Act for the
purchase and sale of the Cozzi Shares.
6.14 CORPORATE AUTHORITY. MTLM, the Company and the Shareholders agree to
use their individual best efforts to obtain the authorizations required for each
to execute and deliver this Agreement and to perform each of their respective
obligations hereunder and to consummate the transactions contemplated hereby.
6.15 CERTIFICATION OF TAX STATUS. The Shareholders shall deliver to MTLM
either: (i) a Certificate of Nonforeign Status under Treasury Regulation Section
1.1445-2(b)(1), or (ii) a Certificate meeting the requirements of Treasury
Regulation Sections 1.987-2(g) and 1.897-2(h)(2) that the Cozzi Shares do not
constitute a U.S. real property interest.
6.16 PURCHASE OF JOINT VENTURE INTEREST. The Company will use its best
efforts to negotiate and enter into agreements for the acquisition by the
Surviving Corporation of all interests held by the Company's joint venture
partners in both of (i) Perlco, L.L.C. and (ii) Salt River Recycling, L.L.C. The
agreements shall provide that the closings will occur as promptly as possible
after the Effective Time of the Merger. Prior to the Closing Date, the Company
shall obtain releases and/or waivers of any restrictive covenants, which would,
following the Merger, bind MTLM, the Surviving Corporation or any of their
Affiliates, other than a covenant not to compete in favor of MetricMetal, L.L.C.
and a covenant not to compete in favor of Fulton Street Trading Company. The
Company shall obtain MTLM's prior written approval of the price, terms and
conditions of any acquisition of such interests and releases or waivers of any
restrictive covenants.
6.17 MEETING OF SHAREHOLDERS. MTLM shall take all actions necessary, in
accordance with General Corporation Law of Delaware, its Certificate of
Incorporation and its By-laws, to duly call, give notice of, convene and hold a
meeting of its shareholders as promptly as practicable (or have executed a
written consent of its shareholders in lieu thereof), to adopt and approve the
Agreement and the Merger contemplated hereby, any amendments to the Articles of
Incorporation or By-laws of MTLM as required by this Agreement, and the other
transactions contemplated by the Agreement to the extent such approval is
required.
6.18 PRE-CLEAR MERGER. MTLM, Mergeco and the Company shall take all
necessary steps to pre-clear the Merger with the Secretary of State of the State
of Illinois, in order that on the Closing Date, the Articles of Merger may be
filed with the Secretary of State of the State of Illinois and become effective
upon filing.
6.19 FINANCING. MTLM will use reasonable efforts to raise at least $50.0
million of additional financing by offering convertible debentures, high-yield
debt, equity or some combination of the foregoing (a "FINANCING"). MTLM shall
use the funds from such Financing to retire existing indebtedness, provide for
working capital and finance acquisitions by MTLM. If MTLM has not received a
firm commitment for the placement of such Financing or closed such Financing on
or prior to June 30, 1997, the Company shall have the right to terminate this
Agreement.
6.20 CONDUCT OF MTLM'S BUSINESS. From and after the Effective Time of the
Merger and for so long as the Stockholders Agreement shall remain in effect:
(a) the Shareholders, acting as a group, shall have the right to
nominate that number of persons constituting one-half of the total number
of directors of MTLM; provided that one of such nominees shall be an
independent director reasonably acceptable to T. Benjamin Jennings and
Gerard M. Jacobs all as further provided in the Stockholders Agreement;
(b) T. Benjamin Jennings and Gerard M. Jacobs, acting as a group,
shall have the right to nominate that number of persons constituting
one-half of the total number of directors of MTLM;
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provided that one of such nominees, shall be an independent director
reasonably acceptable to the Shareholders, all as further provided in the
Stockholders Agreement;
(c) the directors of MTLM shall appoint the following persons to the
offices set forth opposite their names, all as further provided in the
Stockholders Agreement:
<TABLE>
<S> <C>
(i) Albert A. Cozzi: President, Chief Operating Officer
(ii) Gerard M. Jacobs: Chief Executive Officer
(iii) T. Benjamin Jennings: Chairman and Chief Development Officer
Vice President and President of the Surviving
(iv) Frank J. Cozzi: Corporation
</TABLE>
(d) the Board of Directors of MTLM will create an Executive Committee
of the Board of Directors, including Albert A. Cozzi, Gerard M. Jacobs and
T. Benjamin Jennings, which committee shall be delegated all the powers and
authority of the Board of Directors relating to the management of the
business and affairs of MTLM as permitted under Section 141(c)(l) of the
General Corporation Law of the State of Delaware; provided, that, in the
event of the death or disability of Albert A. Cozzi, Frank J. Cozzi shall
assume Albert A. Cozzi's position on such Executive Committee; provided,
further, that any action to be taken by the Executive Committee shall
require the unanimous consent of Albert A. Cozzi (or in the event of his
death or disability, Frank J. Cozzi), Gerard M. Jacobs and T. Benjamin
Jennings; and
(e) Albert A. Cozzi shall periodically convene a meeting of all
members of the Office of the President, which members shall consist of at
least one executive officer of each principal subsidiary of MTLM, and he
shall lead discussions regarding the strategic direction of MTLM and key
operating issues affecting MTLM at such time.
6.21 DISCLOSURE SUPPLEMENTS. From time to time prior to the Closing, the
Company and the Shareholders, on one hand, and MTLM and Mergeco, on the other
hand, shall supplement or amend the Schedules hereto with respect to any matter
hereafter arising which, if existing or occurring at or prior to the date of
this Agreement, would have been required to be set forth or described in any
such Schedule or which is necessary to complete or correct any information in
any such Schedule or in any representation or warranty of the Company and the
Shareholders, on one hand, or MTLM and Mergeco, on the other hand, which has
been rendered inaccurate thereby. For purposes of determining the satisfaction
of the conditions set forth in Sections 7.1 and 8.1 hereof, no such supplement
or amendment shall be given effect unless expressly agreed so by each of the
parties hereto.
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ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF MTLM AND MERGECO
The obligations of MTLM and Mergeco to effect the Transaction shall be
subject to the fulfillment at or prior to the Closing Date of the following
conditions, any or all of which may be waived in whole or in part by MTLM:
7.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES AND COMPLIANCE WITH
OBLIGATIONS. The representations and warranties of the Shareholders contained
in this Agreement shall be true and correct at and as of the Closing Date with
the same force and effect as though made at and as of that time except (i) for
changes specifically permitted by or disclosed pursuant to this Agreement, and
(ii) that those representations and warranties which address matters only as of
a particular date shall remain true and correct as of such date. The Company and
the Shareholders shall have performed and complied with all of their respective
obligations required by this Agreement to be performed or complied with at or
prior to the Closing Date. The Company and the Shareholders shall have delivered
to MTLM a certificate, dated as of the Closing Date, duly signed (in the case of
the Company by its respective chief executive officer and chief financial
officer), stating that such representations and warranties are true and correct
and that all such obligations have been performed and complied with.
7.2 FINANCING. MTLM shall have received the written consent of Bank of
America, Illinois to the transactions contemplated hereby on terms and
conditions reasonably satisfactory to MTLM.
7.3 CORPORATE CERTIFICATE. The Shareholders shall have delivered to MTLM
(i) copies of the articles of incorporation and bylaws of the Company as in
effect immediately prior to the Closing Date, (ii) copies of resolutions adopted
by the Board of Directors of the Company and the Shareholders authorizing the
transactions contemplated by this Agreement, and (iii) certificates of good
standing of the Company issued by the State of Illinois and each other state in
which each of them is qualified to do business as of a date not more than thirty
days prior to the Closing Date, certified in each case as of the Closing Date by
the Secretary as being true, correct and complete.
7.4 OPINIONS OF COUNSEL. MTLM shall have received opinions dated as of
the Closing Date from counsels for the Company and the Shareholders, in form and
substance acceptable to MTLM, to the aggregate effect that:
(i) the Company and each Subsidiary is a corporation duly
organized and existing and in good standing under the laws of its state
of incorporation, and each of them is authorized to carry on the
business now conducted by it and to own or lease the properties now
owned or leased by it;
(ii) the Company has obtained all necessary authorizations and
consents of its governing board to effect the transactions contemplated
in this Agreement;
(iii) all issued and outstanding shares of capital stock of the
Company and each Subsidiary are owned as set forth on Schedule 4.5
hereto;
(iv) except as set forth in Schedule 4.12, counsel has no actual
knowledge (without any independent investigation of any sort) of any
litigation, proceeding or investigation pending or threatened which
might result in any material adverse change in the properties, business
or prospects or in the condition of the Company or the Subsidiaries, or
which questions the validity of this Agreement;
(v) counsel has no actual knowledge (without any independent
investigation of any sort) that any event has occurred or state of facts
exist which would constitute a breach of any of the representations and
warranties made by the Shareholders pursuant to Article IV of this
Agreement; and
(vi) this Agreement is a valid and binding obligation of the
Company and the Shareholders, as the case may be, and enforceable
against each of them in accordance with its terms, except as enforcement
may be limited by bankruptcy, insolvency, reorganization, moratorium or
other laws
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affecting the enforcement of creditors' rights generally and general
equitable principles regardless of whether such enforceability is
considered in a proceeding at law or in equity.
7.5 GOVERNMENTAL APPROVALS. All consents, authorizations and approvals
from, and all declarations, filings and registrations with any governmental
authority required to consummate the transactions contemplated by this
Agreement, including those set forth on Schedule 4.6, shall have been obtained
or made without the imposition of any material conditions, and all applicable
waiting periods under the HSR Act shall have expired or terminated.
7.6 NO ADVERSE LITIGATION. There shall not be pending or threatened any
action or proceeding by or before any court or other governmental body which
shall seek to restrain, prohibit, invalidate or collect damages arising out of
the Agreement or any other transaction contemplated hereby, and which, in the
judgment of MTLM, makes it inadvisable to proceed with the Agreement and other
transactions contemplated hereby.
7.7 MTLM'S APPROVALS. The shareholders of MTLM shall have authorized and
approved this Agreement and the transactions contemplated hereby.
7.8 FAIRNESS OPINION. MTLM shall have received a fairness opinion, in
form and content acceptable to MTLM in its sole discretion, as to the fairness
of the transactions contemplated by this Agreement to MTLM and its shareholders
and such opinion shall not have been withdrawn prior to Closing.
7.9 OTHER CLOSING DELIVERIES. At Closing, MTLM shall have received:
(a) a current commitment for title insurance insuring title to the
real property owned by the Company and the Subsidiaries as set forth on
Schedule 4.14(a) which shows no Liens other than current real
estate/general taxes and Liens disclosed on such Schedule 4.14(a);
(b) each Collateral Agreement executed by the Company, the
Shareholders and/or their Affiliates, as the case may be, who is a party
thereto;
(c) resignations effective as of the Closing Date from such officers
and directors of the Company and the Subsidiaries as MTLM shall have
requested in writing;
(d) the stock books, stock ledgers, minute books, and other books and
records of the Company; and
(e) all other previously undelivered agreements, certificates,
documents, instruments or writings required to be delivered by the Company
and/or the Shareholders at or prior to the Closing pursuant to this
Agreement or otherwise in connection herewith, duly executed by the Company
and/or the Shareholders, as the case may be, who is a party thereto.
7.10 DISSENTING SHAREHOLDERS. No shareholders of the Company shall have
elected to exercise any appraisal rights with respect to the Merger as provided
for under Section 11.65 of the BCA.
7.11 COZZI BUILDING CORPORATION. The Company shall own all of the issued
and outstanding shares of Cozzi Building Corporation.
7.12 ESTATE OF JAMES H. COZZI. The Company shall have obtained a general
release from the Estate of James H. Cozzi and Irene Cozzi releasing the Company,
MTLM and their respective affiliates from all claims, obligations, liabilities,
promises, agreements, suits, demands or debts, other than the amount reflected
in the Company's Current Balance Sheet, that they may have against such entities
and persons, in a form and substance satisfactory to MTLM, in its sole
discretion.
7.13 NO MATERIAL ADVERSE CHANGE. Between the date hereof and the Closing
Date, there has been no Material Adverse Change to the Company.
7.14 METRICMETAL. The Company shall have taken all action necessary to
cause the dissolution of MetricMetal, L.L.C.
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7.15 EAST CHICAGO INDIANA REVENUE BONDS. The Company shall have received
the written consent of G.E. Capital Public Finance, Inc. to the transactions
contemplated hereby under that certain Loan Agreement dated July 1, 1996 among
G.E. Capital Public Finance, Inc., the City of East Chicago, Indiana, and
American Scrap Processing, Inc.
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF
THE COMPANY AND THE SHAREHOLDERS
The obligations of the Company and each of the Shareholders to effect the
Transaction shall be subject to the fulfillment at or prior to the Closing Date
of the following conditions, any or all of which may be waived in whole or in
part by the Company and the Shareholders:
8.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES AND COMPLIANCE WITH
OBLIGATIONS. The representations and warranties of MTLM and Mergeco contained
in this Agreement shall be true and correct at and as of the Closing Date with
the same force and effect as though made at and as of that time except (i) for
changes specifically permitted by or disclosed pursuant to this Agreement, and
(ii) that those representations and warranties which address matters only as of
a particular date shall remain true and correct as of such date. Each of MTLM
and Mergeco shall have performed and complied with all of their obligations
required by this Agreement to be performed or complied with at or prior to the
Closing Date. Each of MTLM and Mergeco shall have delivered to the Shareholders
a certificate, dated as of the Closing Date, and signed by an executive officer
(in the case of MTLM by its respective chairman and chief financial officer),
certifying that such representations and warranties are true and correct and
that all such obligations have been performed and complied with.
8.2 MERGER CONSIDERATION. At the Closing, MTLM shall have delivered to
the Shareholders the merger consideration provided for in Section 1.4.
8.3 NO ADVERSE LITIGATION. There shall not be pending or threatened any
action or proceeding by or before any court or other governmental body which
shall seek to restrain, prohibit, invalidate or collect damages arising out of
the Agreement or any of the transactions contemplated hereby, and which in the
judgment of the Shareholders makes it inadvisable to proceed with the Agreement
or any other transaction contemplated hereby.
8.4 OPINION OF COUNSEL. The Shareholders shall have received an opinion
dated as of the Closing Date from counsel for MTLM, in form and substance
acceptable to the Shareholders, to the effect that:
(i) MTLM is a corporation duly organized and existing and in good
standing under the laws of the State of Delaware and is authorized to
carry on the business now conducted by it and to own or lease the
properties now owned or leased by it;
(ii) Mergeco is a corporation duly organized and existing and in
good standing under the laws of the State of Illinois, and is authorized
to carry on the business now conducted by it and to own or lease the
properties now owned or leased by it;
(iii) Each of MTLM and Mergeco has obtained all necessary
authorizations and consents of its Board of Directors and Shareholders
to effect the transactions contemplated in this Agreement;
(iv) such counsel has no actual knowledge (without any independent
investigation of any sort) of any litigation, proceeding or
investigation pending or threatened which might result in any material
adverse change in the properties, business or prospects or in the
condition of MTLM, or which questions the validity of this Agreement;
(v) such counsel has no actual knowledge (without any independent
investigation of any sort) that any event has occurred or state of facts
exists which would constitute a breach of any of the representations and
warranties made by MTLM or Mergeco pursuant to Article II and III of
this Agreement; and
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(vi) this Agreement is a valid and binding obligation of each of
MTLM and Mergeco, and enforceable against it in accordance with its
terms, except as enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium or other laws affecting the enforcement of
creditors' rights generally and general equitable principles regardless
of whether such enforceability is considered in a proceeding at law or
in equity.
8.5 TAX OPINION. The Shareholders shall have received an opinion from
its counsel to the effect that the merger will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code.
8.6 CONSENTS. The Company shall have received the written consent of
Bank of America Illinois to the transactions contemplated hereby, on the terms
and conditions reasonably satisfactory to MTLM, including, the Company shall not
be required to pay any fees or other costs in exchange for such consent and the
Shareholders shall not be required to personally guaranty any indebtedness owed
by the Company to Bank of America Illinois.
8.7 OTHER CLOSING DELIVERIES. At Closing, the Companies and the
Shareholders shall have received each Collateral Agreement to which MTLM and/or
its Affiliates are a party, duly executed by MTLM and/or its Affiliates, as the
case may be.
8.8 NO MATERIAL ADVERSE CHANGE. Between the date hereof and the Closing
Date, there has been no Material Adverse Change (as defined in Section 2.23) to
MTLM.
ARTICLE IX
INDEMNIFICATION
9.1 AGREEMENT BY THE SHAREHOLDERS TO INDEMNIFY. The Shareholders agree,
jointly and severally, to indemnify, defend and hold MTLM harmless from and
against the aggregate of all Indemnifiable Damages (as defined below) if and
when such Indemnifiable Damages exceed $500,000 in the aggregate, and then only
to the extent of such excess.
(a) For purposes of this Agreement, "INDEMNIFIABLE DAMAGES" means,
without duplication, the aggregate of all expenses, losses, costs,
deficiencies, liabilities and damages (including, without limitation,
related counsel and paralegal fees and expenses) incurred or suffered by
MTLM, on a pre-tax consolidated basis, to the extent (i) resulting from any
breach of a representation or warranty made by the Company or the
Shareholders in or pursuant to this Agreement, (ii) resulting from any
breach of the covenants or agreements made by the Company or the
Shareholders pursuant to this Agreement, or (iii) resulting from any
inaccuracy in any certificate or environmental report delivered by the
Company or any Shareholders pursuant to this Agreement.
(b) Without limiting the generality of the foregoing, with respect to
the measurement of Indemnifiable Damages, MTLM shall have the right to be
put in the same pre-tax consolidated financial position as MTLM would have
been in had each of the representations and warranties of the Shareholders
hereunder been true and correct and had the covenants and agreements of the
Company and the Shareholders hereunder been performed in full.
(c) Each of the representations and warranties made by the
Shareholders in this Agreement or pursuant hereto shall survive for a
period of twelve (12) months after the Closing Date except as follows: (i)
the representations and warranties of the Shareholders contained in Section
4.19 (Tax Matters) and Section 4.18 (ERISA), and to the extent relating to
tax attributes or liabilities with respect to Taxes of the Company, shall
expire at the time the period of limitations (including any extensions
thereof pursuant to the delivery of waivers of the applicable period of
limitations) expires for the assessment by the taxing authority of
additional Taxes with respect to which the representations and warranties
relate; and (ii) the representations and warranties of the Shareholders
contained in Sections 4.1, 4.2, 4.3, 4.4, and 4.5 shall not expire, but
shall continue indefinitely. No claim for the recovery of Indemnifiable
Damages may be asserted by MTLM against the Shareholders after such
representations and warranties shall thus expire,
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provided, however, that claims for Indemnifiable Damages first asserted
within the applicable period shall not thereafter be barred.
Notwithstanding any knowledge of facts determined or determinable by any
party by investigation, each party shall have the right to fully rely on
the representations, warranties, covenants and agreements of the other
parties contained in this Agreement or in any other documents or papers
delivered in connection herewith. Each representation, warranty, covenant
and agreement of the parties contained in this Agreement is independent of
each other representation, warranty, covenant and agreement.
(d) In the event that MTLM believes it is entitled to a claim for any
Indemnifiable Damages hereunder, MTLM shall promptly give written notice to
the Shareholders of such claim and the amount or the estimated amount of
such claim, and the basis for such claim. If the Shareholders do not pay
the amount of the claim for Indemnifiable Damages to MTLM within ten (10)
days, then MTLM may exercise its respective rights under Section 9.4 and/or
take any action or exercise any remedy available to them by appropriate
legal proceedings to collect the Indemnifiable Damages.
9.2 AGREEMENT BY MTLM TO INDEMNIFY. MTLM agrees to indemnify, defend and
hold the Shareholders harmless from and against the Shareholders Indemnifiable
Damages (as defined below) if and when such Shareholders Indemnifiable Damages
exceed $500,000 in the aggregate and then only to the extent of such excess.
(a) For purposes of this Agreement, "SHAREHOLDERS INDEMNIFIABLE
DAMAGES" means, without duplication, the aggregate of all expenses, losses,
costs, deficiencies, liabilities and damages (including, without
limitation, related counsel and paralegal fees and expenses) incurred or
suffered by the Shareholders, on a pre-tax consolidated basis, to the
extent (i) resulting from any breach of a representation or warranty made
by MTLM or Mergeco in or pursuant to this Agreement, (ii) resulting from
any breach of the covenants or agreements made by MTLM or Mergeco in or
pursuant to this Agreement, or (iii) resulting from any inaccuracy in any
certificate delivered by MTLM or Mergeco pursuant to this Agreement.
(b) Without limiting the generality of the foregoing, with respect to
the measurement of Shareholders Indemnifiable Damages, the Shareholders
have the right to be put in the same pre-tax consolidated financial
position as he would have been in had each of the representations and
warranties of MTLM hereunder been true and correct and had the covenants
and agreements of MTLM hereunder been performed in full.
(c) Each of the representations and warranties made by MTLM and
Mergeco in this Agreement or pursuant hereto shall survive for a period of
twelve (12) months after the Closing Date, notwithstanding any
investigation at any time made by or on behalf of the Shareholders, and
upon expiration of such twelve (12) month period, such representations and
warranties shall expire, except as follows: (i) the representations and
warranties of MTLM contained in Section 2.17 (Tax Matters) and Section 2.25
(ERISA), and to the extent relating to tax attributes or liabilities with
respect to Taxes of MTLM, shall expire at the time the period of
limitations (including any extensions thereof pursuant to the delivery of
waivers of the applicable period of limitations) expires for the assessment
by the taxing authority of additional Taxes with respect to which the
representation and warranties relate; and (ii) the representations
contained in Sections 2.1, 2.2, 2.3 and 2.6 and Article III shall survive
and continue indefinitely. No claim for the recovery of Shareholders
Indemnifiable Damages may be asserted by the Shareholders against MTLM
after such representations and warranties shall thus expire, provided,
however, that claims for Indemnifiable Damages first asserted within the
applicable period shall not thereafter be barred. Notwithstanding any
knowledge of facts determined or determinable by any party by
investigation, each party shall have the right to fully rely on the
representations, warranties, covenants and agreements of the other parties
contained in this Agreement or in any other documents or papers delivered
in connection herewith. Each representation, warranty, covenant and
agreement of the parties contained in this Agreement is independent of each
other representation, warranty, covenant and agreement.
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(d) In the event that the Shareholders believe they are entitled to a
claim for any Shareholder Indemnifiable Damages hereunder, the Shareholders
shall promptly give written notice to MTLM of such claim and the amount or
the estimated amount of such claim, and the basis for such claim. If MTLM
does not pay the amount of the claim for Shareholder Indemnifiable Damages
to the Shareholders within ten (10) days, then the Shareholders may take
any actions or exercise any remedy available to them by appropriate legal
proceeding to collect the Shareholder Indemnifiable Damages.
9.3 CONDITIONS OF INDEMNIFICATION. The obligations and liabilities of
the Shareholders and MTLM hereunder with respect to their respective indemnities
pursuant to this Article IX resulting from any claim or other assertion of
liabilities by third parties (hereinafter called collectively "CLAIMS"), shall
be subject to the following terms and conditions:
(a) the party seeking indemnification (the "INDEMNIFIED PARTY") must
give the other party or parties, as the case may be (the "INDEMNIFYING
PARTY"), notice of any such Claim twenty (20) days after the Indemnified
Party receives notice thereof;
(b) the Indemnifying Party shall have the right to undertake, by
counsel or other representatives of its own choosing, the defense of such
Claim; provided, however, if a Claim is made against MTLM which exceeds the
value of the Escrow Shares at such time, MTLM shall have the right to
control the defense of the Claim;
(c) in the event that the Indemnifying Party shall elect not to
undertake such defense, or within a reasonable time after notice of any
such Claim from the Indemnified Party shall fail to defend, the Indemnified
Party (upon further written notice to the Indemnifying Party) shall have
the right to undertake the defense, compromise or settlement of such Claim,
by counsel or other representatives of its own choosing, on behalf of and
for the account and risk of the Indemnifying Party (subject to the right of
the Indemnifying Party to assume defense of such Claim at any time prior to
settlement, compromise or final determination thereof);
(d) anything in this Section 9.3 to the contrary notwithstanding, (A)
the Indemnified Party shall have the right, at its own cost and expense, to
have its own counsel to protect its own interests and participate in the
defense, compromise or settlement of the Claim, (B) the Indemnifying Party
shall not, without the Indemnified Party's written consent, settle or
compromise any Claim or consent to entry of any judgement which does not
include as an unconditional term thereof the giving by the claimant or the
plaintiff to the Indemnified Party, its officers, directors and agents of a
release from all liability in respect of such Claim, and (C) the
Indemnified Party, by counsel or other representatives of its own choosing
and at its sole cost and expense, shall have the right to consult with the
Indemnifying Party and its counsel or other representatives concerning such
Claim, and the Indemnifying Party and the Indemnified Party and their
respective counsel shall cooperate with respect to such Claim.
9.4 SECURITY FOR THE SHAREHOLDERS'S INDEMNIFICATION OBLIGATION. As
security for the agreement by the Shareholders to indemnify and hold MTLM
harmless as described in Section 9.1, MTLM shall have the right to offset any
Indemnifiable Damages against the Escrow Shares. Notwithstanding anything
contained herein to the contrary, the aggregate Indemnifiable Damages which the
Shareholders are obligated to indemnify and hold harmless MTLM against pursuant
to Section 9.1 shall be limited to the Escrow Shares.
9.5 THE JAMES H. COZZI ESTATE SPECIAL INDEMNIFICATION. In addition to
the agreement of the Shareholders set forth in Section 9.1 and without regard to
any limitations thereon contained in Section 9.1 or Section 9.4, if MTLM waives
its condition set forth in Section 7.12, the Shareholders jointly and severally
agree to indemnify, defend and hold MTLM, the Company and their respective
Affiliates harmless from and against all expenses, losses, costs, deficiencies,
liabilities and damages (including, without limitation, related counsel and
paralegal fees and expenses) incurred or suffered by any of them arising out of
or resulting from (i) any payment required to be made by MTLM or the Company of
Additional Consideration (as that term is defined in the James H. Cozzi Sales
Agreement which is not reflected in the adjustment pursuant to Section 1.8
hereof, or (ii) any breach or alleged breach by the Company or MTLM of any
agreement, covenant, or obligation in favor of the Estate of James H. Cozzi, or
any beneficiary thereof; provided, however,
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that the Shareholders shall have no obligation to indemnify MTLM, the Company or
their Affiliates for any amount reflected on the Company's Current Balance
Sheet. Albert A. Cozzi, for and on behalf of MTLM and the Company, shall have
the exclusive power and authority to defend, conduct, control, compromise and
settle all matters, claims and controversies relating to the James H. Cozzi
Sales Agreement, including the power and authority to cause MTLM and the Company
to pay any obligations relating thereto. Any amounts paid or otherwise validly
demanded to be paid by MTLM or the Company for which MTLM, the Company or their
Affiliates are entitled to indemnification pursuant to this Section 9.5, shall
be immediately paid by the Shareholders to MTLM or the Company as the case may
be, upon written demand therefor, without deduction or setoff.
ARTICLE X
SECURITIES LAW MATTERS
The parties agree as follows with respect to the sale or other disposition
after the Closing Date of MTLM Shares:
10.1 DISPOSITION OF MTLM SHARES. Each of the Shareholders represents and
warrants that each of the MTLM Shares being acquired by him hereunder is being
acquired and will be acquired for his own account and will not be sold or
otherwise disposed of, except pursuant to (i) an exemption from the registration
requirements under the Securities Act, which does not require the filing by MTLM
with the SEC of any registration statement, offering circular or other document,
in which case the Shareholders shall first supply to MTLM an opinion of counsel
(which counsel and opinions shall be satisfactory to MTLM) that such exception
is available, or (ii) an effective registration statement filed by MTLM with the
SEC under the Securities Act.
10.2 LEGEND. Each of MTLM Shares shall bear the following legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE MAY
NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF BY THE HOLDER
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FILED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, WITH RESPECT
THERETO OR IN ACCORDANCE WITH AN OPINION OF COUNSEL IN FORM AND
SUBSTANCE SATISFACTORY TO THE ISSUER THAT AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE.
MTLM may, unless a registration statement is in effect covering MTLM Shares,
place stop transfer orders with its transfer agents with respect to such
certificates in accordance with federal securities laws.
ARTICLE XI
DEFINITIONS
11.1 DEFINED TERMS. As used herein, the following terms shall have the
following meanings:
"Aboveground Storage Tanks" defined in Section 2.24 (g).
"Affiliate" shall have the meaning ascribed to it in Rule 12b-2 of
the General Rules and Regulations under the Exchange Act, as in effect on
the date hereof.
"Agreement" defined in the introductory paragraph of this Agreement.
"Asbestos" or "Asbestos-containing material" defined in Section 2.24
(i).
"Assets" defined in Section 4.15 (a).
"BCA" defined in Section 1.1.
"CERCLA" defined in Section 2.24 (j).
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"Claims" defined in Section 9.3.
"Closing" defined in Section 1.7.
"Closing Date" defined in Section 1.7.
"Code" defined in Section 2.17.
"Common Stock" means the common stock, par value of $.01 per share,
of MTLM.
"Collateral Agreements" defined in Section 6.12.
"Company" defined in the introductory paragraph and for purposes of
Section 4.13, more particularly defined in Section 4.13 (l).
"Contract" means any indenture, lease, sublease, license, loan
agreement, mortgage, note, restriction, will, trust, commitment, obligation
or other contract, agreement or instrument, whether written or oral.
"Cozzi" defined in the introductory paragraph of this Agreement.
"Cozzi Shares" defined in the Recitals hereto.
"Current Balance Sheet" defined in Section 4.9.
"Designated Contracts" defined in Section 4.25.
"Discharge" defined in Section 2.24 (e).
"Disclosed Contracts" defined in Section 2.14.
"DOJ" defined in Section 6.13.
"Effective Date" defined in Section 1.2.
"Effective Time" defined in Section 1.2.
"EMCO" means EMCO Recycling Corp.
"Employee Benefit Plans" defined in Section 4.18 (a).
"Environmental Assessment" defined in Section 6.10.
"Environmental, Health and Safety Laws" defined in Section 2.24 (j).
"EPCRA" defined in Section 2.24 (j).
"ERISA" defined in Section 2.25 (a).
"Escrow Agreement" defined in Section 1.6.
"Escrow Agent" defined in Section 1.6.
"Escrow Shares" defined in Section 1.6.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"FIFRA" defined in Section 2.24 (j).
"FTC" defined in Section 6.13.
"Financial Statements" defined in Section 4.9.
"Financing" defined in Section 6.19.
"Fixed Assets" defined in Section 4.15 (b).
"GAAP" means generally accepted accounting principles in effect in
the United States of America from time to time.
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"Governmental Authority" means any nation or government, any state,
regional, local or other political subdivision thereof, and any entity or
official exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"Hazardous Substances" defined in Section 2.24 (d).
"HSR Act" defined in Section 2.7.
"HouTex" means HouTex Metals Company, Inc.
"Immigration Act" defined in Section 2.12 (c).
"Indemnifiable Damages" defined in Section 9.1 (a).
"Indemnified Party" defined in Section 9.3 (a).
"Indemnifying Party" defined in Section 9.3 (a).
"Insurance Policies" defined in Section 4.20.
"Intellectual Property" defined in Section 4.24.
"In the ordinary course of business" as used in reference to MTLM's
business, is defined in Section 2.9.
"James H. Cozzi Sales Agreement" defined in Section 1.8.
"Leased Premises" defined in Section 4.14 (b) and for purposes of
Section 4.13, more particularly defined in Section 4.13 (m).
"Leases" defined in Section 4.14 (b).
"Licenses" defined in Section 2.24 (b).
"Lien" means any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (including, but not limited to, any conditional
sale or other title retention agreement, any lease in the nature thereof,
and the filing of or agreement to give any financing statement under the
Uniform Commercial Code or comparable law of any jurisdiction in connection
with such mortgage, pledge, security interest, encumbrance, lien or
charge).
"Material Adverse Change (or Effect)" means a change (or effect), in
the condition (financial or otherwise), properties, assets, liabilities,
rights, obligations, operations, business or prospects which change (or
effect) individually or in the aggregate, is materially adverse to such
condition, properties, assets, liabilities, rights, obligations,
operations, business or prospects.
"Material Customers" defined in Section 4.26.
"MacLeod" means MacLeod Metals Company.
"Mergeco" defined in the introductory paragraph of this Agreement.
"Merger" defined in the Recitals.
"MPPA Plan" defined in Section 2.25 (b).
"MTLM" defined in the introductory paragraph of this Agreement and
for purposes of Section 2.24, more particularly defined in Section 2.24
(m).
"MTLM Assets" defined in Section 2.15.
"MTLM Current Balance Sheet" defined in Section 2.9.
"MTLM Financial Statements" defined in Section 2.9.
"MTLM Fixed Assets" defined in Section 2.15.
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"MTLM Insurance Policy" defined in Section 2.26.
"MTLM Leased Premises" defined in Section 2.27 and for purposes of
Section 2.24, more particularly defined in Section 2.24(n).
"MTLM Owned Properties" defined in Section 2.27 and for purposes of
Section 2.24, more particularly defined in Section 2.24(n).
"MTLM Receivables" defined in Section 2.18.
"MTLM Shares" defined in the Recitals.
"MTLM Subsidiary" defined in Section 2.1.
"OSHA" defined in Section 2.24(j).
"Owned Properties" defined in Section 4.14(a) and for purposes of
Section 4.13, more particularly defined in Section 4.13(m).
"Permits" defined in Section 2.13.
"Person" means an individual, partnership, corporation, business
trust, joint stock company, estate, trust, unincorporated association,
joint venture, limited liability company, Governmental Authority or other
entity, of whatever nature.
"PBGC" defined in Section 4.18(f).
"RCRA" defined in Section 2.24(j).
"Receivables" defined in Section 4.21.
"Release" defined in Section 2.24(e).
"Reserve" means Reserve Iron & Metals L.P.
"Restricted Territory" defined in Section 6.9(a).
"SEC" means the Securities and Exchange Commission.
"SEC Filings" means the documents listed on Schedule 11.1.
"Securities Act" means the Securities Act of 1933, as amended.
"Shareholders" defined in the introductory paragraph of this
Agreement
"Stockholders Agreement" defined in Section 6.12(b).
"Shareholders Indemnifiable Damages" defined in Section 9.2(a).
"Subsidiary" is defined in Section 4.1.
"Surviving Corporation" defined in Section 1.1.
"Tax Return" means any tax return, filing or information statement
required to be filed in connection with or with respect to any Taxes; and
"Taxes" means all taxes, fees or other assessments, including, but
not limited to, income, excise, property, sales, franchise, intangible,
withholding, social security and unemployment taxes imposed by any federal,
state, local or foreign governmental agency, and any interest or penalties
related thereto.
"Termination Date" defined in Section 6.9.
"Underground Storage Tanks" defined in Section 2.24(g).
"Waste" defined in Section 2.24(d).
"Welfare Plan" defined in Section 2.25(c).
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11.2 OTHER DEFINITIONAL PROVISIONS.
(a) All terms defined in this Agreement shall have the defined
meanings when used in any certificates, reports or other documents made or
delivered pursuant hereto or thereto, unless the context otherwise
requires.
(b) Terms defined in the singular shall have a comparable meaning
when used in the plural, and vice versa.
(c) All matters of an accounting nature in connection with this
Agreement and the transactions contemplated hereby shall be determined in
accordance with GAAP applied on a basis consistent with prior periods,
where applicable.
(d) As used herein, the neuter gender shall also denote the
masculine and feminine, and the masculine gender shall also denote the
neuter and feminine, where the context so permits.
(e) As used herein, the term "to the best knowledge of MTLM" or any
similar term relating to the knowledge of MTLM means the actual knowledge,
after reasonably inquiry, of any of the officers of MTLM or the MTLM
Subsidiaries. "Reasonable inquiry" shall mean communication by any of the
officers of MTLM or the MTLM Subsidiaries with the other officers of MTLM
or the relevant MTLM Subsidiary with responsibility for the matter in
question and to counsel with respect to matters involving questions or law,
requesting such individual to review specified provisions of this Agreement
and to advise such person of any matter relevant to the specified
representation, warranty or provision.
(f) As used herein, the term "to the best of the Shareholders'
knowledge" or any similar term relating to the knowledge of the
Shareholders means the actual knowledge, after reasonable inquiry, of any
of the officers of the Company and the Subsidiaries. "Reasonable inquiry"
shall mean communication by any of the officers of the Company or the
Subsidiaries with the other officers of the Company or relevant Subsidiary
with responsibility for the matter in question and to counsel with respect
to matters involving questions or law, requesting such individual to review
specified provisions of this Agreement and to advise such person of any
matter relevant to the specified representation, warranty or provision.
ARTICLE XII
TERMINATION, AMENDMENT AND WAIVER
12.1 TERMINATION. This Agreement may be terminated:
(a) at any time prior to the Closing Date, by mutual written consent
of all of the parties hereto at any time prior to the Closing;
(b) at any time prior to the Closing Date, by MTLM in the event of a
material breach by the Company or the Shareholders of any provision of this
Agreement;
(c) at any time prior to the Closing Date, by the Shareholders in
the event of a material breach by MTLM or Mergeco of any provision of this
Agreement;
(d) at any time prior to the Closing Date, by MTLM in the event (i)
MTLM is not satisfied, in its sole discretion, with the results of the
Environmental Assessment; (ii) MTLM does not receive authorization and
approval of this Agreement and the transactions contemplated hereby by its
shareholders at the meeting referred to in Section 6.17; (iii) MTLM has not
received from its investment advisor a written opinion satisfactory to MTLM
in its sole discretion, that this Agreement and the transactions set forth
herein are fair to MTLM and its shareholders;
(e) at any time prior to the Closing Date, by the Shareholders if
the Shareholders have not received from their tax counsel an opinion to the
effect that the Merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code;
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(f) at any time prior to the Closing Date, by any of MTLM or the
Shareholders if the Closing shall not have occurred by September 30, 1997;
provided, however, that neither MTLM, nor the Shareholders shall be
entitled to terminate this Agreement pursuant to this Section 12.1(f), if
such party's knowing or willful breach of this Agreement has prevented the
consummation of the transactions contemplated hereby; or
(g) by the Company, as provided in Section 6.19.
12.2 EFFECT OF TERMINATION. Except as provided in Article VI, in the event
of termination of this Agreement pursuant to Section 12.1, this Agreement shall
forthwith become void; provided, however, that nothing herein shall relieve any
party from liability for the willful breach of any of its representations,
warranties, covenants or agreements set forth in this Agreement.
ARTICLE XIII
GENERAL PROVISIONS
13.1 NOTICES. All notices, requests, demands, claims, and other
communications hereunder shall be in writing and shall be delivered by certified
or registered mail (first class postage prepaid), guaranteed overnight delivery,
or facsimile transmission if such transmission is confirmed by delivery by
certified or registered mail (first class postage pre-paid) or guaranteed
overnight delivery, to the following addresses and telecopy numbers (or to such
other addresses or telecopy numbers which such party shall designate in writing
to the other party):
(a)IF TO MTLM TO:
Metal Management, Inc.
500 N. Dearborn Street
Suite 405
Chicago, IL 60610
Attn: Chief Executive Officer
Telecopy No.: (312) 645-0714
WITH A COPY TO:
Shefsky & Froelich Ltd.
444 N. Michigan Avenue
Suite 2400
Chicago, IL 60611
Attn: Erhard R. Chorle
Telecopy No.: (312) 527-5921
(b) IF TO THE COMPANY OR THE SHAREHOLDERS TO:
Albert A. Cozzi
Cozzi Iron & Metal, Inc.
2232 South Blue Island Avenue
Chicago, IL 60608
Telecopy No.: (773) 254-8201
WITH A COPY TO:
Winston & Strawn
35 West Wacker Drive
Chicago, IL 60601
Attn: M. Finley Maxson
Telecopy No.: (312) 558-5700
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13.2 ENTIRE AGREEMENT. This Agreement (including the Exhibits and
Schedules attached hereto) and other documents delivered at the Closing pursuant
hereto, contains the entire understanding of the parties in respect of its
subject matter and supersedes all prior agreements and understandings (oral or
written) between or among the parties with respect to such subject matter;
provided, however, that, notwithstanding the foregoing, the provisions of that
certain Exchange of Information and Nondisclosure Agreement dated as of October
23, 1996 by and between MTLM and the Company shall remain in full force and
effect. The Exhibits and Schedules constitute a part hereof as though set forth
in full above.
13.3 EXPENSES. Except as otherwise provided herein, MTLM, Mergeco and the
Company shall pay their own fees and expenses, including their own counsel fees,
incurred in connection with this Agreement or any transaction contemplated
hereby; provided, however, the Company shall not pay any fees and expenses
relating to the Shareholders' estate planning activities.
13.4 AMENDMENT; WAIVER. This Agreement may not be modified, amended,
supplemented, canceled or discharged, except by written instrument executed by
all parties. No failure to exercise, and no delay in exercising, any right,
power or privilege under this Agreement shall operate as a waiver, nor shall any
single or partial exercise of any right, power or privilege hereunder preclude
the exercise of any other right, power or privilege. No waiver of any breach of
any provision shall be deemed to be a waiver of any preceding or succeeding
breach of the same or any other provision, nor shall any waiver be implied from
any course of dealing between the parties. No extension of time for performance
of any obligations or other acts hereunder or under any other agreement shall be
deemed to be an extension of the time for performance of any other obligations
or any other acts. The rights and remedies of the parties under this Agreement
are in addition to all other rights and remedies, at law or equity, that they
may have against each other.
13.5 BINDING EFFECT; ASSIGNMENT. The rights and obligations of this
Agreement shall bind and inure to the benefit of the parties and their
respective successors and assigns. Nothing expressed or implied herein shall be
construed to give any other person any legal or equitable rights hereunder.
Except as expressly provided herein, the rights and obligations of this
Agreement may not be assigned by any of the Shareholders without the prior
written consent of MTLM.
13.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original but all of which together shall
constitute one and the same instrument.
13.7 INTERPRETATION. When a reference is made in this Agreement to an
article, section, paragraph, clause, schedule or exhibit, such reference shall
be deemed to be to this Agreement unless otherwise indicated. The headings
contained herein and on the schedules are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement or the
schedules. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation." Time shall be of the essence in this Agreement.
13.8 GOVERNING LAW; INTERPRETATION. This Agreement shall be construed in
accordance with and governed for all purposes by the laws of the State of
Illinois applicable to contracts executed and to be wholly performed within such
State.
13.9 ARM'S LENGTH NEGOTIATIONS. Each party herein expressly represents and
warrants to all other parties hereto that (a) before executing this Agreement,
said party has fully informed itself of the terms, contents, conditions and
effects of this Agreement; (b) said party has relied solely and completely upon
its own judgment in executing this Agreement; (c) said party has had the
opportunity to seek and has obtained the advice of counsel before executing this
Agreement; (d) said party has acted voluntarily and of its own free will in
executing this Agreement; (e) said party is not acting under duress, whether
economic or physical, in executing this Agreement; and (f) this Agreement is the
result of arm's length negotiations conducted by and among the parties and their
respective counsel.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the day and year first above written.
<TABLE>
<S> <C>
METAL MANAGEMENT, INC., A
DELAWARE CORPORATION
Date: 5-16-97 By: /s/ T. Benjamin Jennings
Name: T. Benjamin Jennings
Title: Chairman
CIM ACQUISITION, CO.,
AN ILLINOIS CORPORATION
Date: 5-16-97 By: /s/ Gerard M. Jacobs
Name: Gerard M. Jacobs
Title: President
COZZI IRON & METAL, INC.,
AN ILLINOIS CORPORATION
Date: 5-16-97 By: /s/ Albert A. Cozzi
Name: Albert A. Cozzi
Title: President
Date: 5-16-97 /s/ Albert A. Cozzi
ALBERT A. COZZI
Date: 5-16-97 /s/ Frank J. Cozzi
FRANK J. COZZI
Date: 5-16-97 /s/ Gregory P. Cozzi
GREGORY P. COZZI
306333
</TABLE>
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<PAGE> 233
AMENDMENT NO. 1
TO
AGREEMENT AND PLAN OF MERGER
This Amendment No. 1 to Agreement and Plan of Merger ("Amendment"), is
entered into effective as of June 30, 1997, by and among Metal Management, Inc.,
a Delaware corporation ("MTLM"); CIM Acquisition, Co., an Illinois corporation,
and a wholly owned subsidiary of MTLM ("Mergeco"); Cozzi Iron & Metal, Inc., an
Illinois corporation ("Cozzi" or "Company"); Albert A. Cozzi, Frank J. Cozzi and
Gregory P. Cozzi, being the sole shareholders of the Company (collectively, the
"Shareholders," and individually, a "Shareholders").
RECITALS:
A. MTLM, Mergeco, the Company and the Shareholders entered into that
certain Agreement and Plan of Merger, effective as of May 16, 1997 (the "Merger
Agreement");
B. The parties desire to amend the Merger Agreement as hereinafter set
forth.
NOW, THEREFORE, in consideration of the promises, covenants and agreements
contained herein, the parties do hereby agree as follows:
1. The Company does hereby waive the requirements of, and the parties do
hereby agree to and do hereby delete, Section 6.19 of the Merger Agreement,
relating to MTLM's efforts to raise at least $50 million of additional financing
and the Company's right to terminate the Merger Agreement in the event that MTLM
has not received a firm commitment for the placement of such financing or close
such financing on or prior to June 30, 1997.
2. Except as modified by this Amendment, all of the terms, covenants,
conditions and other provisions of the Merger Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
and year first above written.
<TABLE>
<S> <C>
METAL MANAGEMENT, INC. COZZI IRON & METAL, INC.
By: /s/ T. Benjamin Jennings By: /s/ Albert A. Cozzi
Its: Chairman Its: President
CIM ACQUISITION, CO. /s/ Albert A. Cozzi
By: /s/ Gerard M. Jacobs ALBERT A. COZZI
Its: President /s/ Frank J. Cozzi
FRANK J. COZZI
/s/ Gregory P. Cozzi
GREGORY P. COZZI
</TABLE>
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<PAGE> 234
AMENDMENT NO. 2
TO
AGREEMENT AND PLAN OF MERGER
This Amendment No. 2 to Agreement and Plan of Merger ("Amendment"), is
entered into effective as of June 30, 1997, by and among Metal Management, Inc.,
a Delaware corporation ("MTLM"); CIM Acquisition, Co., an Illinois corporation,
and a wholly owned subsidiary of MTLM ("Mergeco"); Cozzi Iron & Metal, Inc., an
Illinois corporation ("Cozzi" or "Company"); Albert A. Cozzi, Frank J. Cozzi and
Gregory P. Cozzi, being the sole shareholders of the Company (collectively, the
"Shareholders," and individually, a "Shareholder").
RECITALS:
A. MTLM, Mergeco, the Company and the Shareholders entered into that
certain Agreement and Plan of Merger, effective as of May 16, 1997, as amended
by that certain Amendment No. 1 to Agreement and Plan of Merger (the "Merger
Agreement");
B. The parties desire to amend the Merger Agreement as hereinafter set
forth.
NOW, THEREFORE, in consideration of the promises, covenants and agreements
contained herein, the parties do hereby agree as follows:
1. The amount of securities convertible into or exchangeable for common
stock of MTLM which MTLM is entitled to issue without the consent of the
Shareholders pursuant to Section 5.2(b) of the Merger Agreement is hereby
amended from "$10 million" to "$50 million."
2. Except as modified by this Amendment, all of the terms, covenants,
conditions and other provisions of the Merger Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
and year first above written.
<TABLE>
<S> <C>
METAL MANAGEMENT, INC. COZZI IRON & METAL, INC.
By: /s/ T. Benjamin Jennings By: /s/ Albert A. Cozzi
Its: Chairman Its: President
CIM ACQUISITION, CO. /s/ Albert A. Cozzi
By: /s/ Gerard M. Jacobs ALBERT A. COZZI
Its: President /s/ Frank J. Cozzi
FRANK J. COZZI
/s/ Gregory P. Cozzi
GREGORY P. COZZI
</TABLE>
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<PAGE> 235
AMENDMENT NO. 3
TO
AGREEMENT AND PLAN OF MERGER
This Amendment No. 3 to Agreement and Plan of Merger and Consent and Waiver
("Amendment"), is entered into effective as of September 25, 1997, by and among
Metal Management, Inc., a Delaware corporation ("MTLM"); CIM Acquisition, Co.,
an Illinois corporation, and a wholly owned subsidiary of MTLM ("Mergeco");
Cozzi Iron & Metal, Inc., an Illinois corporation ("Cozzi" or "Company"); Albert
A. Cozzi, Frank J. Cozzi and Gregory P. Cozzi, being the sole shareholders of
the Company (collectively, the "Shareholders," and individually, a
"Shareholder"). Any capitalized term not defined in this Amendment shall have
the same meaning assigned to it in the Agreement and Plan of Merger.
RECITALS:
A. MTLM, Mergeco, the Company and the Shareholders entered into that
certain Agreement and Plan of Merger, dated May 16, 1997, as amended by that
certain Amendment No. 1 to Agreement and Plan of Merger dated June 30, 1997 and
that certain Amendment No. 2 to Agreement and Plan of Merger dated June 30, 1997
(the "Merger Agreement");
B. The parties desire to further amend the Merger Agreement as hereinafter
set forth.
C. MTLM has taken certain actions that Cozzi desires to acknowledge and
approve pursuant to the Merger Agreement.
NOW, THEREFORE, in consideration of the promises, covenants and agreements
contained herein, the parties do hereby agree as follows:
1. Section 12.1(f) of the Merger Agreement is hereby amended to change
the termination date set forth therein from September 30, 1997 to November 15,
1997.
2. Section 7.11 is hereby deleted and Section 4.8 is hereby amended by
adding the following sentence to the end of such Section:
"The Company owns all of the issued and outstanding shares of Cozzi
Building Corporation free and clear of all Liens."
FURTHER, Schedule 4.8 is hereby amended by adding Cozzi Building
Corporation thereto.
3. Cozzi hereby acknowledges, consents to and irrevocably waives any
defaults resulting from MTLM's failure to obtain its prior written consent with
respect to the following transactions:
a. MTLM increased the salaries paid to T. Benjamin Jennings and Gerard M.
Jacobs to $275,000 per year, respectively.
b. MTLM executed letters of intent to purchase the following businesses:
Superior Forge, Inc.; Goldin Industries, Inc.; Houston Compressed Steel
Corporation; a 50% interest in Salt River Recycling, L.L.C.; a 50%
interest in PerlCo, L.L.C.; Aerospace Metals, Inc., Aerospace Parts
Security, Inc. and Suisman Titanium Corp. (collectively, "Aerospace");
Atlas Recycling, L.P.; Yonack Iron & Metal Co.; Yonack Services, Inc.;
Gold Metal Recyclers, Inc.; and, Spectrum Metal Recycling.
4. Except as modified by this Amendment, all of the terms, covenants,
conditions and other provisions of the Merger Agreement shall remain in full
force and effect.
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<PAGE> 236
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
and year first above written.
<TABLE>
<S> <C>
METAL MANAGEMENT, INC. COZZI IRON & METAL, INC.
By: /s/ T. Benjamin Jennings By: /s/ Albert A. Cozzi
Its: Chairman Its: President
CIM ACQUISITION, CO. /s/ Albert A. Cozzi
By: /s/ Gerard M. Jacobs ALBERT A. COZZI
Its: President /s/ Frank J. Cozzi
FRANK J. COZZI
/s/ Gregory P. Cozzi
GREGORY P. COZZI
</TABLE>
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<PAGE> 237
AMENDMENT NO. 4
TO
AGREEMENT AND PLAN OF MERGER
This Amendment No. 4 to Agreement and Plan of Merger ("Amendment"), is
entered into effective as of November 4, 1997, by and among Metal Management,
Inc., a Delaware corporation ("MTLM"); CIM Acquisition, Co., an Illinois
corporation, and a wholly owned subsidiary of MTLM ("Mergeco"); Cozzi Iron &
Metal, Inc., an Illinois corporation ("Cozzi" or "Company"); Albert A. Cozzi,
Frank J. Cozzi and Gregory P. Cozzi, being the sole shareholders of the Company
(collectively, the "Shareholders," and individually, a "Shareholder"). Any
capitalized term not defined in this Amendment shall have the same meaning
assigned to it in the Agreement and Plan of Merger.
RECITALS:
A. MTLM, Mergeco, the Company and the Shareholders entered into that
certain Agreement and Plan of Merger, dated May 16, 1997, as amended (the
"Merger Agreement");
B. The parties desire to further amend the Merger Agreement as hereinafter
set forth.
NOW, THEREFORE, in consideration of the promises, covenants and agreements
contained herein, the parties do hereby agree as follows:
1. Section 12.1(f) of the Merger Agreement is hereby amended to change
the termination date set forth therein from November 15, 1997 to December 15,
1997.
2. Except as modified by this Amendment, all of the terms, covenants,
conditions and other provisions of the Merger Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
and year first above written.
<TABLE>
<S> <C>
METAL MANAGEMENT, INC. COZZI IRON & METAL, INC.
By: /s/ T. Benjamin Jennings By: /s/ Albert A. Cozzi
Its: Chairman Its: President
CIM ACQUISITION, CO. /s/ Albert A. Cozzi
By: /s/ Gerard M. Jacobs ALBERT A. COZZI
Its: President /s/ Frank J. Cozzi
FRANK J. COZZI
/s/ Gregory P. Cozzi
GREGORY P. COZZI
</TABLE>
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<PAGE> 238
ANNEX B
SALOMON BROTHERS LETTERHEAD
Board of Directors
Metal Management, Inc.
500 North Dearborn Street
Suite 405
Chicago, Illinois 60610
Ladies and Gentlemen:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to Metal Management, Inc. (the "Company") of the
consideration to be paid by the Company in connection with the proposed merger
(the "Proposed Merger") of CIM Acquisition, Co. ("Mergeco"), a wholly owned
subsidiary of the Company, with Cozzi Iron & Metal, Inc. ("Subject"), pursuant
to the Agreement and Plan of Merger (the "Agreement"), dated as of May 16, 1997
as amended June 30, 1997, by and among the Company, Mergeco and Subject.
As more specifically set forth in the Agreement, and subject to the terms
and conditions thereof, Mergeco will merge with and into Subject, and each
issued and outstanding share of stock of Subject (other than shares held in
treasury of Subject) will be converted in the Proposed Merger into the right to
receive $55,172.41 in cash and 105,747 shares of common stock, $0.01 par value
per share, of the Company ("Company Common Stock"), subject to adjustment, for
an aggregate of $6,000,000 in cash and 11,500,000 shares of Company Common
Stock. In addition, in connection with the Proposed Merger, warrants to purchase
Company Common Stock will be issued to certain holders of Subject capital stock
pursuant to the terms of the respective employment agreements between Subject
and such holders. In total, the Company will issue Warrants to purchase
1,500,000 additional shares of Company Common Stock, one half of which shall
have an exercise price of $5.91 per share and the remaining one half of which
shall have an exercise price equal to 75% of the last sales price of a share of
Company Common Stock on the day before the consummation of the Propose Merger.
You have informed us that the Company will also acquire, in a separate
transaction, Proler Southwest Inc. and Proler Steelworks L.L.C. (collectively,
"Proler") for aggregate consideration consisting of $15,000,000 in cash, subject
to adjustment, a two-year promissory note in the principal amount of $2,000,000,
1,750,000 shares of Company Common Stock and warrants to purchase an additional
375,000 shares of Company Common Stock at an exercise price of $6.00 per share
(the "Proler Acquisition").
As you are aware, Salomon Brothers Inc will receive a fee for our services
in connection with rendering this opinion. In addition, in the ordinary course
of business, we may actively trade the debt and equity securities of the Company
for our own account and for the accounts of customers and, accordingly, may at
any time hold a long or short position in such securities.
In connection with rendering our opinion we have reviewed and analyzed,
among other things, the following: (i) the Agreement; (ii) a draft of the Proxy
Statement to be mailed to stockholders of the Company in connection with the
Proposed Merger, including the historical and pro forma financial statements
included therein; (iii) certain publicly available information concerning the
Company, including the Annual Reports on Form 10-K of the Company for the year
ended March 31, 1997; (iv) certain other internal information, primarily
financial in nature, including projections, concerning the business and
operations of the Company furnished to us by the Company for purposes of our
analysis; (v) certain publicly available information concerning the trading of,
and the trading market for, the Company Common Stock; (vi) certain internal
information, primarily financial in nature, including projections, concerning
the business and operations of Subject furnished to us by the Company and
Subject for purposes of our analysis; (vii) certain internal
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<PAGE> 239
[SALOMON BROTHERS INC LOGO]
information, primarily financial in nature, including projections, concerning
the business and operations of Proler furnished to us by the Company for
purposes of our analysis; (viii) the financial terms of the Proler Acquisition
as described above; (ix) certain publicly available information with respect to
certain other companies that we believe to be comparable to Subject or the
Company and the trading markets for certain of such other companies' securities;
and (x) publicly available information concerning the nature and terms of
certain other transactions that we consider relevant to our inquiry. We have
also considered such other information, financial studies, analyses,
investigations and financial, economic and market criteria that we deemed
relevant. We have also met with certain officers and employees of Subject and
the Company to discuss the foregoing, as well as other matters we believe
relevant to our inquiry.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided us or publicly available and have neither attempted
independently to verify nor assumed responsibility for verifying any of such
information. We have not conducted a physical inspection of any of the
properties or facilities of Subject or the Company, nor have we made or obtained
or assumed any responsibility for making or obtaining any independent
evaluations or appraisals of any of such properties or facilities. With respect
to projections, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
managements of Subject and the Company as to the future financial performance of
Subject and the Company and we express no view with respect to such projections
or the assumptions on which they were based. We have also assumed that the
conditions precedent to the Proposed Merger in the Agreement will be satisfied
and the Proposed Merger will be consummated in accordance with the terms of the
Agreement and that the Proler Acquisition will be consummated on the financial
terms described above.
In conducting our analysis and arriving at our opinion as expressed herein,
we have considered such financial and other factors as we have deemed
appropriate under the circumstances including, among others, the following: (i)
the historical and current financial position and results of operations of
Subject and the Company; (ii) the business prospects of Subject and the Company;
(iii) the historical and current market for the Company Common Stock and for the
equity securities of certain other companies that we believe to be comparable to
Subject or the Company; and (iv) the nature and terms of certain other
acquisition transactions that we believe to be relevant. We have also taken into
account our assessment of general economic, market and financial conditions as
well as our experience in connection with similar transactions and securities
valuation generally. Our opinion necessarily is based upon conditions as they
exist and can be evaluated on the date hereof and we assume no responsibility to
update or revise our opinion based upon circumstances or events occurring after
the date hereof. In that regard, we have not considered any acquisition or
similar transaction the Company might make, whether announced or not, that has
not closed prior to the date hereof other than the Proler Acquisition and the
Proposed Merger. Our opinion as expressed below does not constitute an opinion
or imply any conclusion as to the likely trading range for the Company Common
Stock following consummation of the Proposed Merger. Our opinion is, in any
event, limited to the fairness, from a financial point of view, of the
consideration to be paid by the Company in the Proposed Merger and does not
address the Proler Acquisition in any way or the Company's underlying business
decision to effect the Proposed Merger or constitute a recommendation to any
holder of Company Common Stock as to how such holder should vote with respect to
the Proposed Merger.
This opinion is intended solely for the benefit and use of the Company
(including its management and directors) in considering the transaction to which
it relates and may not be used for any other purpose or reproduced,
disseminated, quoted or referred to at any time, in any manner or for any
purpose, without the prior written consent of Salomon Brothers Inc.
Based upon and subject to the foregoing, we are of the opinion as
investment bankers that the consideration to be paid by the Company in the
Proposed Merger is fair, from a financial point of view, to the Company.
B-2
Very truly yours,
SALOMON BROTHERS INC
SALOMON BROTHERS INC
B-3
<PAGE> 240
ANNEX C
IRREVOCABLE PROXY
KNOW ALL MEN BY THESE PRESENTS, that I, [Name of Stockholder], do hereby
constitute and appoint Gerard M. Jacobs and T. Benjamin Jennings my true and
lawful attorneys for me and in my name and stead, to attend the annual or
special meeting (or adjournments thereof) of the stockholders of Metal
Management, Inc. (the "Company"), at which the Company's stockholders are asked
to approve the following actions:
- consider and vote upon a proposal to approve and adopt the Agreement and
Plan of Merger, dated as of May 16, 1997 (the "Merger Agreement") by and
among the Company, Cozzi Iron & Metal, Inc. ("Cozzi") and its
shareholders and CIM Acquisition, Co. ("Merger Sub") a wholly-owned
subsidiary of the Company. Pursuant to the Merger Agreement, Cozzi is to
merge with and into Merger Sub (the "Merger") with Cozzi continuing as
the surviving corporation and as a wholly-owned subsidiary of the
Company;
- consider and vote upon proposals to amend the Company's Certificate of
Incorporation to increase the number of authorized shares of common and
preferred stock;
- consider and vote upon nominees to the Company's Board of Directors,
including nominees named by the Cozzi shareholders; and
- consider and vote upon any other proposals in connection with the Merger
or the Merger Agreement where approval by the shareholders is required or
reasonably necessary;
and to vote on such proposals all shares of the capital stock of the Company
held by me, at any such meeting, or adjournments thereof, and also to sign my
name as such stockholder to any consent, certificate or other document relating
to the Company which the laws of Delaware may require or permit.
This Proxy shall remain in full force for two (2) years from the date
hereof. Except to the extent the power of revocation is expressly retained
herein, this Proxy is coupled with an interest and is irrevocable during its
term.
Dated at ______________________ , _______________________ , as of the
____ day of June, 1997.
------------------------------------
[NAME OF STOCKHOLDER]
WITNESS:
- ------------------------------------
C-1
<PAGE> 241
ANNEX D
IRREVOCABLE PROXY
KNOW ALL MEN BY THESE PRESENTS, that I, [Name of Stockholder], do hereby
constitute and appoint Kenneth Merlau my true and lawful attorney for me and in
my name and stead, to attend all annual or special meetings (or adjournments
thereof) of the stockholders of Metal Management, Inc. (the "Company"), at which
the Company's stockholders are asked to:
- consider and vote upon a proposal to approve and adopt the Agreement and
Plan of Merger, dated as of May 16, 1997 (the "Merger Agreement") by and
among the Company, Cozzi Iron & Metal, Inc. ("Cozzi") and its
shareholders and CIM Acquisition, Co. ("Merger Sub") a wholly-owned
subsidiary of the Company. Pursuant to the Merger Agreement, Cozzi is to
merge with and into Merger Sub (the "Merger") with Cozzi continuing as
the surviving corporation and as a wholly-owned subsidiary of the
Company;
and to vote on all proposals not covered by that certain irrevocable proxy of
even date herewith in favor of Gerard M. Jacobs and T. Benjamin Jennings all
shares of the capital stock of the Company held by me, at any such meetings, or
adjournments thereof, and also to sign my name as such stockholder to any
consent, certificate or other document relating to such proposals which the laws
of Delaware may require or permit.
This Proxy shall remain in full force for two (2) years from the date
hereof. Except to the extent the power of revocation is expressly retained
herein, this Proxy is coupled with an interest and is irrevocable during its
term.
Dated at ______________________ , _______________________ , as of the
____ day of June, 1997.
------------------------------------
[NAME OF STOCKHOLDER]
WITNESS:
- ------------------------------------
D-1
<PAGE> 242
ANNEX E
IRREVOCABLE PROXY
KNOW ALL MEN BY THESE PRESENTS, that we, T. Benjamin Jennings, Gerard M.
Jacobs, Donald F. Moorehead, Jr., Robert F. Smith, Ronald J. Proler, Empire
Metals, Inc., Ian MacLeod & Marilyn MacLeod Trust U/A 1/30/93 FBO Ian MacLeod &
Marilyn MacLeod, William T. Proler & Gaile Proler Management Trust DTD 4/29/96,
Ronald J. Proler, Copperstate Metals, Inc., and Clend Investment Holdings Ltd.
do hereby constitute and appoint each of Allan Weine, Chris Purrier and Andrew
Frost our true and lawful attorneys for us and in our names and stead, to attend
the annual or special meeting (or adjournments thereof) (the "Annual Meeting")
of the stockholders of Metal Management, Inc. (the "Company"), at which the
Company's stockholders are asked to approve the following action:
- consider and vote upon a proposal (the "Proposal") to approve the
conversion features of the Company's Series A and Series B Convertible
Preferred Stock and to authorize the Company to issue common stock, $.01
par value per share, in connection with the exercise of such Series A and
Series B Convertible Preferred Stock;
and to vote in favor of such Proposal, and only such Proposal, all shares of the
capital stock of the Company held by us, at such Annual Meeting, or adjournments
thereof, and also to sign our names as such stockholders to any consent,
certificate or other document relating to the Company which the laws of Delaware
may require or permit.
This Proxy shall remain in full force until the Company shall conduct such
Annual Meeting whereat the Proposal is voted upon by the Company's shareholders
eligible to vote thereon. Except to the extent the power of revocation is
expressly retained herein, this Proxy is coupled with an interest and is
irrevocable during its term.
Dated at Chicago, Illinois, as of the day of November, 1997.
- ------------------------------------------------------
T. Benjamin Jennings
- ------------------------------------------------------
Gerard M. Jacobs
EMPIRE METALS, INC.
By:
- ------------------------------------------------
Its:
- -------------------------------------------
COPPERSTATE METALS, INC.
By:
- ------------------------------------------------
Its:
- -------------------------------------------
- ------------------------------------------------------
Robert F. Smith
- ------------------------------------------------------
William T. Proler & Gaile Proler Management Trust DTD 4/29/96
- ------------------------------------------------------
Ronald J. Proler
- ------------------------------------------------------
Ian MacLeod & Marilyn MacLeod Trust U/A 1/30/93 FBO Ian MacLeod & Marilyn
MacLeod
- ------------------------------------------------------
Donald F. Moorehead, Jr.
CLEND INVESTMENT HOLDINGS LTD.
By:
- ------------------------------------------------
Its:
- -------------------------------------------
E-1
<PAGE> 243
ANNEX F
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
METAL MANAGEMENT, INC.
METAL MANAGEMENT, INC., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify as follows:
1. The Amended and Restated Certificate of Incorporation of the Corporation
was filed with the Secretary of State of the State of Delaware (the
"Secretary of State") on April 12, 1996.
2. Subparagraph (a) of Paragraph 4 of the Amended and Restated Certificate of
Incorporation is hereby amended by deleting the phrase "Forty Million
(40,000,000)" and substituting in its place the phrase "Eighty Million
(80,000,000)."
3. In accordance with Section 242 of the Delaware General Corporation Law, the
above statement of amendment has been duly approved by the board of
directors of Metal Management, Inc. at a meeting duly called and held on
, 1997, and by the stockholders of Metal Management, Inc. at
the Annual Meeting of Stockholders duly called and held on ,
1997. At the Annual Meeting, which was held upon notice duly given in
accordance with Section 222 of the General Corporation Law of the State of
Delaware, at least a majority of the shares issued and outstanding on the
record date for the meeting constituting the requisite vote as required by
statute were voted in favor of the Amendment.
IN WITNESS WHEREOF, said METAL MANAGEMENT, INC. has caused this Certificate
to be signed by Gerard M. Jacobs, its President and Chief Executive Officer, who
does make this certificate and declares and certifies under penalty of perjury
that this is the act and deed of the Corporation, and that the facts stated
herein are true, and accordingly have set his hand hereto this th day of
, 1997.
METAL MANAGEMENT, INC.
By:
Name: Gerard M. Jacobs
Title: President and Chief
Executive Officer
F-1
<PAGE> 244
ANNEX G
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
METAL MANAGEMENT, INC.
METAL MANAGEMENT, INC., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify as follows:
1. The Amended and Restated Certificate of Incorporation of the Corporation
was filed with the Secretary of State of the State of Delaware (the
"Secretary of State") on April 12, 1996.
2. Subparagraph (a) of Paragraph 4 of the Amended and Restated Certificate of
Incorporation is hereby amended by deleting the phrase "Two Million
(2,000,000)" and substituting in its place the phrase "Four Million
(4,000,000)."
3. In accordance with Section 242 of the Delaware General Corporation Law, the
above statement of amendment has been duly approved by the board of
directors of Metal Management, Inc. at a meeting duly called and held on
, 1997, and by the stockholders of Metal Management, Inc. at
the Annual Meeting of Stockholders duly called and held on ,
1997. At the Annual Meeting, which was held upon notice duly given in
accordance with Section 222 of the General Corporation Law of the State of
Delaware, at least a majority of the shares issued and outstanding on the
record date for the meeting constituting the requisite vote as required by
statute were voted in favor of the Amendment.
IN WITNESS WHEREOF, said METAL MANAGEMENT, INC. has caused this Certificate
to be signed by Gerard M. Jacobs, its President and Chief Executive Officer, who
does make this certificate and declares and certifies under penalty of perjury
that this is the act and deed of the Corporation, and that the facts stated
herein are true, and accordingly have set his hand hereto this th day of
, 1997.
METAL MANAGEMENT, INC.
By:
Name: Gerard M. Jacobs
Title: President and Chief
Executive Officer
G-1
<PAGE> 245
ANNEX H
METAL MANAGEMENT, INC.
1995 STOCK PLAN
1. Purposes of the Plan. The purposes of this Stock Plan are:
- to attract and retain the best available personnel for positions of
substantial responsibility,
- to provide additional incentive to Employees and Consultants, and
- to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant.
2. Definitions. As used herein, the following definitions shall apply:
a. "Administrator" means the Board or any of its Committees as shall be
administering the Plan, in accordance with Section 4 of the Plan.
b. "Applicable Laws" means the legal requirements relating to the
administration of stock option plans under state corporate and
securities laws and the Code.
c. "Board" means the Board of Directors of the Company.
d. "Code" means the Internal Revenue Code of 1986, as amended.
e. "Committee" means a Committee appointed by the Board in accordance
with Section 4 of the Plan.
f. "Common Stock" means the Common Stock of the Company.
g. "Company" means Metal Management, Inc., a Delaware corporation.
h. "Consultant" means any person, including an advisor, engaged by the
Company or a Parent or Subsidiary to render services and who is
compensated for such services. The term "Consultant" shall not include
Directors who are paid only a director's fee by the Company or who are
not compensated by the Company for their services as Directors.
i. "Continuous Status as an Employee or Consultant" means that the
employment or consulting relationship with the Company, any Parent, or
Subsidiary, is not interrupted or terminated. Continuous Status as an
Employee or Consultant shall not be considered interrupted in the case
of (i) any leave of absence approved by the Company or (ii) transfers
between locations of the Company or between the Company, its Parent, any
Subsidiary, or any successor. A leave of absence approved by the Company
shall include sick leave, military leave, or any other personal leave
approved by an authorized representative of the Company. For purposes of
Incentive Stock Options, no such leave may exceed 90 days, unless
reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved
by the Company is not so guaranteed, on the 91st day of such leave any
Incentive Stock Option held by the Optionee shall cease to be treated as
an Incentive Stock Option and shall be treated for tax purposes as a
Nonstatutory Stock Option.
j. "Director" means a member of the Board.
k. "Disability" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
l. "Employee" means any person, including Officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company.
Neither service as a Director nor payment of a director's fee by the
Company shall be sufficient to constitute "employment" by the Company.
m. "Exchange Act" means the Securities Exchange Act of 1934, as amended.
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<PAGE> 246
n. "Fair Market Value" means, as of any date, the value of Common Stock
determined as follows:
i. If the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the
Nasdaq National Market of the National Association of Securities
Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair
Market Value of a Share of Common Stock shall be the closing sales
price for such stock (or the closing bid, if no sales were
reported) as quoted on such system or exchange (or the exchange
with the greatest volume of trading in Common Stock) on the last
market trading day prior to the day of determination, as reported
in The Wall Street Journal or such other source as the
Administrator deems reliable;
ii. If the Common Stock is quoted on the NASDAQ System (but not on
the Nasdaq National Market thereof) or is regularly quoted by a
recognized securities dealer but selling prices are not reported,
the Fair Market Value of a Share of Common Stock shall be the mean
between the high bid and low asked prices for the Common Stock on
the last market trading day prior to the day of determination, as
reported in The Wall Street Journal or such other source as the
Administrator deems reliable;
iii. In the absence of an established market for the Common Stock,
the Fair Market Value shall be determined in good faith by the
Administrator.
o. "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and
the regulations promulgated thereunder.
p. "Nonstatutory Stock Option" means an Option not intended to qualify as
an Incentive Stock Option.
q. "Notice of Grant" means a written notice evidencing certain terms and
conditions of an individual Option. The Notice of Grant is part of the
Option Agreement.
r. "Officer" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
s. "Option" means a stock option granted pursuant to the Plan.
t. "Option Agreement" means a written agreement between the Company and
an Optionee evidencing the terms and conditions of an individual Option
grant. The Option Agreement is subject to the terms and conditions of
the Plan.
u. "Option Exchange Program" means a program whereby outstanding options
are surrendered in exchange for options with a lower exercise price.
v. "Optioned Stock" means the Common Stock subject to an Option.
w. "Optionee" means an Employee or Consultant who holds an outstanding
Option.
x. "Parent" means a "parent corporation", whether now or hereafter
existing, as defined in Section 424(e) of the Code.
y. "Plan" means this 1995 Stock Option Plan.
z. "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to
Rule 16b-3, as in effect when discretion is being exercised with respect
to the Plan.
aa. "Share" means a share of the Common Stock, as adjusted in accordance
with Section 12 of the Plan.
ab. "Subsidiary" means a "subsidiary corporation", whether now or hereafter
existing, as defined in Section 424(f) of the Code.
H-2
<PAGE> 247
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of the
Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 1,300,000 Shares. The Shares may be authorized, but unissued,
or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been exercised
in full, or is surrendered pursuant to an Option Exchange Program, the
unpurchased Shares which were subject thereto shall become available for future
grant or sale under the Plan (unless the Plan has terminated); provided,
however, that Shares that have actually been issued under the Plan, whether upon
exercise of an Option, shall not be returned to the Plan and shall not become
available for future distribution under the Plan, except that if Shares of
Restricted Stock are repurchased by the Company at their original purchase
price, and the original purchaser of such Shares did not receive any benefits of
ownership of such Shares, such Shares shall become available for future grant
under the Plan. For purposes of the preceding sentence, voting rights shall not
be considered a benefit of Share ownership.
4. Administration of the Plan.
a. Procedure.
i. Multiple Administrative Bodies. If permitted by Rule 16b-3, the
Plan may be administered by different bodies with respect to
Directors, Officers who are not Directors, and Employees who are
neither Directors nor Officers.
ii. Administration With Respect to Directors and Officers Subject to
Section 16(b). With respect to Option grants made to Employees who
are also Officers or Directors subject to Section 16(b) of the
Exchange Act, the Plan shall be administered by (A) the Board, if
the Board may administer the Plan in compliance with the rules
governing a plan intended to qualify as a discretionary plan under
Rule 16b-3; provided, however, that the Board may grant Options to
Employees who are also Officers or Directors subject to Section
16(b) of the Exchange Act if the Board is unable to administer the
Plan in compliance with the rules governing a plan intended to
qualify as a discretionary plan under Rule 16b-3 (provided,
however, that in such a case, the grant of Options to Employees who
are Officers or Directors subject to Section 16(b) of the Exchange
Act will constitute a non-exempt purchase under Section 16(b)), or
(B) a committee designated by the Board to administer the Plan,
which committee shall be constituted to comply with the rules
governing a plan intended to qualify as a discretionary plan under
Rule 16b-3. Once appointed, such Committee shall continue to serve
in its designated capacity until otherwise directed by the Board.
From time to time the Board may increase the size of the Committee
and appoint additional members, remove members (with or without
cause) and substitute new members, fill vacancies (however caused),
and remove all members of the Committee and thereafter directly
administer the Plan, all to the extent permitted by the rules
governing a plan intended to qualify as a discretionary plan under
Rule 16b-3.
iii. Administration With Respect to Other Persons. With respect to
Option grants made to Employees or Consultants who are neither
Directors nor Officers of the Company, the Plan shall be
administered by (A) the Board or (B) a committee designated by the
Board, which committee shall be constituted to satisfy Applicable
Laws. Once appointed, such Committee shall serve in its designated
capacity until otherwise directed by the Board. The Board may
increase the size of the Committee and appoint additional members,
remove members (with or without cause) and substitute new members,
fill vacancies (however caused), and remove all members of the
Committee and thereafter directly administer the Plan, all to the
extent permitted by Applicable Laws.
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<PAGE> 248
b. Powers of the Administrator. Subject to the provisions of the Plan,
and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the
authority, in its discretion:
i. to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(n) of the Plan;
ii. to select the Consultants and Employees to whom Options may be
granted hereunder;
iii. to determine whether and to what extent Options are granted
hereunder;
iv. to determine the number of shares of Common Stock to be covered
by each Option granted hereunder;
v. to approve forms of agreement for use under the Plan;
vi. to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any award granted hereunder. Such terms and
conditions include, but are not limited to, the exercise price, the
time or times when Options may be exercised (which may be based on
performance criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation
regarding any Option or the shares of Common Stock relating
thereto, based in each case on such factors as the Administrator,
in its sole discretion, shall determine;
vii. to reduce the exercise price of any Option to the then current
Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option shall have declined since the date the
Option was granted;
viii. to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
ix. to prescribe, amend and rescind rules and regulations relating
to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax
treatment under foreign tax laws;
x. to modify or amend each Option (subject to Section 14(c) of the
Plan), including the discretionary authority to extend the
post-termination exercisability period of Options longer than is
otherwise provided for in the Plan;
xi. to authorize any person to execute on behalf of the Company any
instrument required to effect the grant of an Option previously
granted by the Administrator;
xii. to institute an Option Exchange Program;
xiii. to determine the terms and restrictions applicable to Options;
and
xiv. to make all other determinations deemed necessary or advisable
for administering the Plan.
c. Effect of Administrator's Decision. The Administrator's decisions,
determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options.
5. Eligibility. Nonstatutory Stock Options may be granted to Employees and
Consultants. Incentive Stock Options may be granted only to Employees. If
otherwise eligible, an Employee or Consultant who has been granted an Option may
be granted additional Options.
6. Limitations.
a. Each Option shall be designated in the Notice of Grant as either an
Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair
Market Value:
i. of Shares subject to an Optionee's Incentive Stock Options
granted by the Company, any Parent or Subsidiary, which
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<PAGE> 249
ii. become exercisable for the first time during any calendar year
(under all plans of the Company or any Parent or Subsidiary)
exceeds $100,000, such excess Options shall be treated as Nonstatutory
Stock Options. For purposes of this Section 6(a), Incentive Stock
Options shall be taken into account in the order in which they were
granted, and the Fair Market Value of the Shares shall be determined as
of the time of grant.
b. Neither the Plan nor any Option shall confer upon an Optionee any
right with respect to continuing the Optionee's employment or consulting
relationship with the Company, nor shall they interfere in any way with
the Optionee's right or the Company's right to terminate such employment
or consulting relationship at any time, with or without cause.
c. The following limitations shall apply to grants of Options to
Employees:
i. No Employee shall be granted, in any fiscal year of the Company,
Options to purchase more than 500,000 Shares.
ii. The foregoing limitations shall be adjusted proportionately in
connection with any change in the Company's capitalization as
described in Section 12.
iii. If an Option is canceled in the same fiscal year of the Company
in which it was granted (other than in connection with a
transaction described in Section 12), the canceled Option will be
counted against the limit set forth in Section 6(c)(i). For this
purpose, if the exercise price of an Option is reduced, the
transaction will be treated as a cancellation of the Option and the
grant of a new Option.
7. Term of Plan. Subject to Section 18 of the Plan, the Plan shall become
effective upon the earlier to occur of its adoption by the Board or its approval
by the shareholders of the Company as described in Section 18 of the Plan. It
shall continue in effect for a term of ten (10) years unless terminated earlier
under Section 14 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Notice of
Grant; provided, however, that in the case of an Incentive Stock Option, the
term shall be ten (10) years from the date of grant or such shorter term as may
be provided in the Notice of Grant. Moreover, in the case of an Incentive Stock
Option granted to an Optionee who, at the time the Incentive Stock Option is
granted, owns stock representing more than ten percent (10%) of the voting power
of all classes of stock of the Company or any Parent or Subsidiary, the term of
the Incentive Stock Option shall be five (5) years from the date of grant or
such shorter term as may be provided in the Notice of Grant.
9. Option Exercise Price and Consideration.
a. Exercise Price. The per share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
i. In the case of an Incentive Stock Option
(1) granted to an Employee who, at the time the Incentive Stock
Option is granted, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of
the Company or any Parent or Subsidiary, the per Share
exercise price shall be no less than 110% of the Fair Market
Value per Share on the date of grant.
(2) granted to any Employee other than an Employee described in
paragraph (A) immediately above, the per Share exercise price
shall be no less than 100% of the Fair Market Value per Share
on the date of grant.
ii. In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator.
b. Waiting Period and Exercise Dates. At the time an Option is granted,
the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be
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<PAGE> 250
satisfied before the Option may be exercised. In so doing, the
Administrator may specify that an Option may not be exercised until the
completion of a service period.
c. Form of Consideration. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the
method of payment. In the case of an Incentive Stock Option, the
Administrator shall determine the acceptable form of consideration at
the time of grant. Such consideration may consist entirely of:
i. cash;
ii. check;
iii. promissory note;
iv. other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more
than six months on the date of surrender, and (B) have a Fair
Market Value on the date of surrender equal to the aggregate
exercise price of the Shares as to which said Option shall be
exercised;
v. delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Option and
delivery to the Company of the sale or loan proceeds required to
pay the exercise price;
vi. a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation
program or arrangement;
vii. any combination of the foregoing methods of payment; or
viii. such other consideration and method of payment for the issuance
of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
a. Procedure for Exercise; Rights as a Shareholder. Any Option granted
hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator
and set forth in the Option Agreement.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i) written
notice of exercise (in accordance with the Option Agreement) from the person
entitled to exercise the Option, and (ii) full payment for the Shares with
respect to which the Option is exercised. Full payment may consist of any
consideration and method of payment authorized by the Administrator and
permitted by the Option Agreement and the Plan. Shares issued upon exercise of
an Option shall be issued in the name of the Optionee or, if requested by the
Optionee, in the name of the Optionee and his or her spouse. Until the stock
certificate evidencing such Shares is issued (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of the
Company), no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock, notwithstanding the
exercise of the Option. The Company shall issue (or cause to be issued) such
stock certificate promptly after the Option is exercised. No adjustment will be
made for a dividend or other right for which the record date is prior to the
date the stock certificate is issued, except as provided in Section 12 of the
Plan.
Exercising an Option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for sale under the
Option, by the number of Shares as to which the Option is exercised.
b. Termination of Employment or Consulting Relationship. Upon termination
of an Optionee's Continuous Status as an Employee or Consultant, other
than upon the Optionee's death or Disability, the Optionee may exercise
his or her Option, but only within such period of time as is
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specified in the Notice of Grant, and only to the extent that the
Optionee was entitled to exercise it at the date of termination (but in
no event later than the expiration of the term of such Option as set
forth in the Notice of Grant). In the absence of a specified time in the
Notice of Grant, the Option shall remain exercisable for 90 days
following the Optionee's termination of Continuous Status as an Employee
or Consultant. In the case of an Incentive Stock Option, such period of
time shall not exceed ninety (90) days from the date of termination. If,
at the date of termination, the Optionee is not entitled to exercise his
or her entire Option, the Shares covered by the unexercisable portion of
the Option shall revert to the Plan. If, after termination, the Optionee
does not exercise his or her Option within the time specified by the
Administrator, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
c. Disability of Optionee. In the event that an Optionee's Continuous
Status as an Employee or Consultant terminates as a result of the
Optionee's Disability, the Optionee may exercise his or her Option at
any time within twelve (12) months from the date of such termination,
but only to the extent that the Optionee was entitled to exercise it at
the date of such termination (but in no event later than the expiration
of the term of such Option as set forth in the Notice of Grant). If, at
the date of termination, the Optionee is not entitled to exercise his or
her entire Option, the Shares covered by the unexercisable portion of
the Option shall revert to the Plan. If, after termination, the Optionee
does not exercise his or her Option within the time specified herein,
the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
d. Death of Optionee. In the event of the death of an Optionee, the
Option may be exercised at any time within twelve (12) months following
the date of death (but in no event later than the expiration of the term
of such Option as set forth in the Notice of Grant), by the Optionee's
estate or by a person who acquired the right to exercise the Option by
bequest or inheritance, but only to the extent that the Optionee was
entitled to exercise the Option at the date of death. If, at the time of
death, the Optionee was not entitled to exercise his or her entire
Option, the Shares covered by the unexercisable portion of the Option
shall immediately revert to the Plan. If, after death, the Optionee's
estate or a person who acquired the right to exercise the Option by
bequest or inheritance does not exercise the Option within the time
specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
e. Rule 16b-3. Options granted to individuals subject to Section 16 of
the Exchange Act ("Insiders") must comply with the applicable provisions
of Rule 16b-3 and shall contain such additional conditions or
restrictions as may be required thereunder to qualify for the maximum
exemption from Section 16 of the Exchange Act with respect to Plan
transactions.
11. Non-Transferability of Options. An Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
12. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset
Sale.
a. Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock
covered by each outstanding Option, and the number of shares of Common
Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to
the Plan upon cancellation or expiration of an Option, as well as the
price per share of Common Stock covered by each such outstanding Option,
shall be proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock resulting from a stock split,
reverse stock split, stock dividend, combination or reclassification of
the Common Stock, or any other increase or decrease in the number of
issued shares of Common Stock effected without receipt of consideration
by the Company; provided, however, that conversion of any convertible
securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the
Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities
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convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number
or price of shares of Common Stock subject to an Option.
b. Dissolution or Liquidation. In the event of the proposed dissolution
or liquidation of the Company, to the extent that an Option has not been
previously exercised, it will terminate immediately prior to the
consummation of such proposed action. The Board may, in the exercise of
its sole discretion in such instances, declare that any Option shall
terminate as of a date fixed by the Board and give each Optionee the
right to exercise his or her Option as to all or any part of the
Optioned Stock, including Shares as to which the Option would not
otherwise be exercisable.
c. Merger or Asset Sale. In the event of a merger of the Company with or
into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option may be assumed or an equivalent
option may be substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. The Administrator may, in lieu
of such assumption or substitution, provide for the Optionee to have the
right to exercise the Option as to all or a portion of the Optioned
Stock, including Shares as to which it would not otherwise be
exercisable. If the Administrator makes an Option exercisable in lieu of
assumption or substitution in the event of a merger or sale of assets,
the Administrator shall notify the Optionee that the Option shall be
fully exercisable for a period of fifteen (15) days from the date of
such notice, and the Option will terminate upon the expiration of such
period. For the purposes of this paragraph, the Option shall be
considered assumed if, following the merger or sale of assets, the
option confers the right to purchase, for each Share of Optioned Stock
subject to the Option immediately prior to the merger or sale of assets,
the consideration (whether stock, cash, or other securities or property)
received in the merger or sale of assets by holders of Common Stock for
each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen
by the holders of a majority of the outstanding Shares); provided,
however, that if such consideration received in the merger or sale of
assets was not solely common stock of the successor corporation or its
Parent, the Administrator may, with the consent of the successor
corporation, provide for the consideration to be received upon the
exercise of the Option, for each Share of Optioned Stock subject to the
Option, to be solely common stock of the successor corporation or its
Parent equal in fair market value to the per share consideration
received by holders of Common Stock in the merger or sale of assets.
13. Date of Grant. The date of grant of an Option shall be, for all purposes,
the date on which the Administrator makes the determination granting such
Option, or such other later date as is determined by the Administrator. Notice
of the determination shall be provided to each Optionee within a reasonable time
after the date of such grant.
14. Amendment and Termination of the Plan.
a. Amendment and Termination. The Board may at any time amend,alter,
suspend or terminate the Plan.
b. Shareholder Approval. The Company shall obtain shareholder approval of
any Plan amendment to the extent necessary and desirable to comply with
Rule 16b-3 or with Section 422 of the Code (or any successor rule or
statute or other applicable law, rule or regulation, including the
requirements of any exchange or quotation system on which the Common
Stock is listed or quoted). Such shareholder approval, if required,
shall be obtained in such a manner and to such a degree as is required
by the applicable law, rule or regulation.
c. Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any
Optionee, unless mutually agreed otherwise between the Optionee and the
Administrator, which agreement must be in writing and signed by the
Optionee and the Company.
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15. Conditions Upon Issuance of Shares.
a. Legal Compliance. Shares shall not be issued pursuant to the exercise
of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with all relevant provisions of
law, including, without limitation, the Securities Act of 1933, as
amended, the Exchange Act, the rules and regulations promulgated
thereunder, Applicable Laws, and the requirements of any stock exchange
or quotation system upon which the Shares may then be listed or quoted,
and shall be further subject to the approval of counsel for the Company
with respect to such compliance.
b. Investment Representations. As a condition to the exercise of an
Option, the Company may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares
are being purchased only for investment and without any present
intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required.
16. Liability of Company.
a. Inability to Obtain Authority. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of
any liability in respect of the failure to issue or sell such Shares as
to which such requisite authority shall not have been obtained.
b. Grants Exceeding Allotted Shares. If the Optioned Stock covered by an
Option exceeds, as of the date of grant, the number of Shares which may
be issued under the Plan without additional shareholder approval, such
Option shall be void with respect to such excess Optioned Stock, unless
shareholder approval of an amendment sufficiently increasing the number
of Shares subject to the Plan is timely obtained in accordance with
Section 14(b) of the Plan.
17. Reservation of Shares. The Company, during the term of this Plan, will at
all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
18. Shareholder Approval. Continuance of the Plan shall be subject to approval
by the shareholders of the Company within twelve (12) months before or after the
date the Plan is adopted. Such shareholder approval shall be obtained in the
manner and to the degree required under applicable federal and state law.
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ANNEX I
METAL MANAGEMENT, INC.
1996 DIRECTOR OPTION PLAN
1. Purposes of the Plan. The purposes of this 1996 Director Option Plan are
to attract and retain the best available personnel for service as Outside
Directors (as defined herein) of the Company, to provide additional incentive to
the Outside Directors of the Company to serve as Directors, and to encourage
their continued service on the Board.
All options granted hereunder shall be nonstatutory stock options.
2. Definitions. As used herein, the following definitions shall apply:
a. "Board" means the Board of Directors of the Company.
b. "Code" means the Internal Revenue Code of 1986, as amended.
c. "Common Stock" means the Common Stock of the Company.
d. "Company" means Metal Management, Inc., a Delaware corporation.
e. "Continuous Status as a Director" means the absence of any
interruption or termination of service as a Director.
f. "Director" means a member of the Board.
g. "Employee" means any person, including officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. The
payment of a Director's fee by the Company shall not be sufficient in
and of itself to constitute "employment" by the Company.
h. "Exchange Act" means the Securities Exchange Act of 1934, as amended.
i. "Fair Market Value" means, as of any date, the value of Common Stock
determined as follows:
i. If the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the
Nasdaq National Market of the National Association of Securities
Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair
Market Value of a Share of Common Stock shall be the closing sales
price for such stock (or the closing bid, if no sales were
reported) as quoted on such system or exchange (or the exchange
with the greatest volume of trading in Common Stock) on the date of
determination, as reported in The Wall Street Journal or such other
source as the Board deems reliable;
ii. If the Common Stock is quoted on the NASDAQ System (but not on
the National Market thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between
the high bid and low asked prices for the Common Stock on the date
of determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable, or;
iii. In the absence of an established market for the Common Stock,
the Fair Market Value thereof shall be determined in good faith by
the Board.
j. "Option" means a stock option granted pursuant to the Plan.
k. "Optioned Stock" means the Common Stock subject to an Option.
l. "Optionee" means an Outside Director who receives an Option.
m. "Outside Director" means a Director who is not an Employee.
n. "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
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o. "Plan" means this 1996 Director Option Plan.
p. "Share" means a share of the Common Stock, as adjusted in accordance
with Section 10 of the Plan.
q. "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Internal Revenue
Code of 1986.
3. Stock Subject to the Plan. Subject to the provisions of Section 10 of the
Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 100,000 Shares of Common Stock (the "Pool"). The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been exercised
in full, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
the Plan shall not be returned to the Plan and shall not become available for
future distribution under the Plan.
4. Administration and Grants of Options under the Plan.
a. Procedure for Grants. The provisions set forth in this Section 4(a)
shall not be amended more than once every six months, other than to
comport with changes in the Code, the Employee Retirement Income
Security Act of 1974, as amended, or the rules thereunder. All grants of
Options to Outside Directors under this Plan shall be automatic and
nondiscretionary and shall be made strictly in accordance with the
following provisions:
i. No person shall have any discretion to select which Outside
Directors shall be granted Options or to determine the number of
Shares to be covered by Options granted to Outside Directors.
ii. Each Outside Director shall be automatically granted an Option
to purchase 10,000 Shares (the "First Option") on the date on which
the later of the following events occurs: (A) the effective date of
this Plan, as determined in accordance with Section 6 hereof, or
(B) the date on which such person first becomes an Outside
Director, whether through election by the stockholders of the
Company or appointment by the Board to fill a vacancy; provided,
however, that no First Option shall be granted to an Outside
Director who, immediately prior to becoming an Outside Director,
was a Director.
iii. After the First Option has been granted to an Outside Director,
such Outside Director shall thereafter be automatically granted an
Option to purchase 2,500 Shares (a "Subsequent Option") on January
15 of each year, if on such date, he or she shall have served on
the Board for at least one (1) month.
iv. Notwithstanding the provisions of subsections (ii) and (iii)
hereof, any exercise of an Option made before the Company has
obtained stockholder approval of the Plan in accordance with
Section 16 hereof shall be conditioned upon obtaining such
stockholder approval of the Plan in accordance with Section 16
hereof.
v. The terms of a First Option granted hereunder shall be as
follows:
(1) the term of the First Option shall be ten (10) years.
(2) the First Option shall be exercisable only while the Outside
Director remains a Director of the Company, except as set forth
in Section 8 hereof.
(3) the exercise price per Share shall be the Fair Market Value per
Share on the date of grant of the First Option. In the event
that the date of grant of the First Option is not a trading
day, the exercise price per Share shall be the Fair Market
Value on the next trading day immediately following the date of
grant of the First Option.
(4) the First Option shall be fully vested and exercisable the date
of grant.
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vi. The terms of a Subsequent Option granted hereunder shall be as
follows:
(1) the term of the Subsequent Option shall be ten (10) years.
(2) the Subsequent Option shall be exercisable only while the
Outside Director remains a Director of the Company, except as
set forth in Section 8 hereof.
(3) the exercise price per Share shall be the Fair Market Value per
Share on the date of grant of the Subsequent Option. In the
event that the date of grant of the Subsequent Option is not a
trading day, the exercise price per Share shall be the Fair
Market Value on the next trading day immediately following the
date of grant of the Subsequent Option.
(4) the Subsequent Option shall be fully vested and exercisable the
date of grant.
vii. In the event that any Option granted under the Plan would cause
the number of Shares subject to outstanding Options plus the number
of Shares previously purchased under Options to exceed the Pool,
then the remaining Shares available for Option grant shall be
granted under Options to the Outside Directors on a pro rata basis.
No further grants shall be made until such time, if any, as
additional Shares become available for grant under the Plan through
action of the Board or the stockholders to increase the number of
Shares which may be issued under the Plan or through cancellation
or expiration of Options previously granted hereunder.
5. Eligibility. Options may be granted only to Outside Directors. All Options
shall be automatically granted in accordance with the terms set forth in Section
4 hereof. An Outside Director who has been granted an Option may, if he or she
is otherwise eligible, be granted an additional Option or Options in accordance
with such provisions.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate his or her directorship at any time.
6. Term of Plan. The Plan shall become effective upon the earlier to occur of
its adoption by the Board or its approval by the stockholders of the Company as
described in Section 16 of the Plan. It shall continue in effect for a term of
ten (10) years unless sooner terminated under Section 11 of the Plan.
7. Form of Consideration. The consideration to be paid for the Shares to be
issued upon exercise of an Option, including the method of payment, shall
consist of (i) cash, (ii) check, (iii) other shares which (x) in the case of
Shares acquired upon exercise of an Option, have been owned by the Optionee for
more than six (6) months on the date of surrender, and (y) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised, (iv) delivery of a properly
executed exercise notice together with such other documentation as the Company
and the broker, if applicable, shall require to effect an exercise of the Option
and delivery to the Company of the sale or loan proceeds required to pay the
exercise price, or (v) any combination of the foregoing methods of payment.
8. Exercise of Option.
a. Procedure for Exercise; Rights as a Stockholder. Any Option granted
hereunder shall be exercisable at such times as are set forth in Section
4 hereof; provided, however, that no Options shall be exercisable until
stockholder approval of the Plan in accordance with Section 16 hereof
has been obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of
the Option by the person entitled to exercise the Option and full
payment for the Shares with respect to which the Option is exercised has
been received by the Company. Full payment may consist of any
consideration and method of payment
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allowable under Section 7 of the Plan. Until the issuance (as evidenced
by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company) of the stock certificate
evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. A share certificate
for the number of Shares so acquired shall be issued to the Optionee as
soon as practicable after exercise of the Option. No adjustment shall be
made for a dividend or other right for which the record date is prior to
the date the stock certificate is issued, except as provided in Section
10 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to
which the Option is exercised.
b. Rule 16b-3. Options granted to Outside Directors must comply with the
applicable provisions of Rule 16b-3 promulgated under the Exchange Act
or any successor thereto and shall contain such additional conditions or
restrictions as may be required thereunder to qualify Plan transactions,
and other transactions by Outside Directors that otherwise could be
matched with Plan transactions, for the maximum exemption from Section
16 of the Exchange Act.
c. Termination of Continuous Status as a Director terminates (other than
upon the Optionee's death or total and permanent disability (as defined
in Section 22(e)(3) of the Code)), the Optionee may exercise his or her
Option, but only within twelve (12) months following the date of such
termination, and only to the extent that the Optionee was entitled to
exercise it on the date of such termination (but in no event later than
the expiration of its ten (10) year term). To the extent that the
Optionee was not entitled to exercise an Option on the date of such
termination, and to the extent that the Optionee does not exercise such
Option (to the extent otherwise so entitled) within the time specified
herein, the Option shall terminate.
d. Disability of Optionee. In the event Optionee's Continuous Status as a
Director terminates as a result of total and permanent disability (as
defined in Section 22(e)(3) of the Code), the Optionee may exercise his
or her Option, but only within twelve (12) months following the date of
such termination, and only to the extent that the Optionee was entitled
to exercise it on the date of such termination (but in no event later
than the expiration of its ten (10) year term). To the extent that the
Optionee was not entitled to exercise an Option on the date of
termination, or if he or she does not exercise such Option (to the
extent otherwise so entitled) within the time specified herein, the
Option shall terminate.
e. Death of Optionee. In the event of an Optionee's death, the Optionee's
estate or a person who acquired the right to exercise the Option by
bequest or inheritance may exercise the Option, but only within twelve
(12) months following the date of death, and only to the extent that the
Optionee was entitled to exercise it on the date of death (but in no
event later than the expiration of its ten (10) year term). To the
extent that the Optionee was not entitled to exercise an Option on the
date of death, and to the extent that the Optionee's estate or a person
who acquired the right to exercise such Option does not exercise such
Option (to the extent otherwise so entitled) within the time specified
herein, the Option shall terminate.
9. Non-Transferability of Options. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
10. Adjustments Upon Changes in Capitalization, Dissolution, Merger, Asset Sale
or Change of Control.
a. Changes in Capitalization. Subject to any required action by the
stockholders of the Company, the number of Shares covered by each
outstanding Option, the number of Shares which have been authorized for
issuance under the Plan but as to which no Options have yet been granted
or which have been returned to the Plan upon cancellation or expiration
of an Option, as well as the price per Share covered by each such
outstanding Option, and the number of Shares issuable pursuant to the
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automatic grant provisions of Section 4 hereof shall be proportionately
adjusted for any increase or decrease in the number of issued Shares
resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other
increase or decrease in the number of issued Shares effected without
receipt of consideration by the Company; provided, however, that
conversion of any convertible securities of the Company shall not be
deemed to have been "effected without receipt of consideration." Except
as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be
made with respect to, the number or price of Shares subject to an
Option.
b. Dissolution or Liquidation. In the event of the proposed dissolution
or liquidation of the Company, to the extent that an Option has not been
previously exercised, it shall terminate immediately prior to the
consummation of such proposed action.
c. Merger or Asset Sale. In the event of a merger of the Company with or
into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option may be assumed or an equivalent
option may be substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation does not agree to assume the Option or to substitute an
equivalent option, each outstanding Option shall become fully vested and
exercisable, including as to Shares as to which it would not otherwise
be exercisable. If an Option becomes fully vested and exercisable in the
event of a merger or sale of assets, the Board shall notify the Optionee
that the Option shall be fully exercisable for a period of thirty (30)
days from the date of such notice, and the Option shall terminate upon
the expiration of such period. For the purposes of this paragraph, the
Option shall be considered assumed if, following the merger or sale of
assets, the Option confers the right to purchase, for each Share of
Optioned Stock subject to the Option immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other
securities or property) received in the merger or sale of assets by
holders of Common Stock for each Share held on the effective date of the
transaction (and if holders were offered a choice of consideration, the
type of consideration chosen by the holders of a majority of the
outstanding Shares).
11. Amendment and Termination of the Plan.
a. Amendment and Termination. Except as set forth in Section 4, the Board
may at any time amend, alter, suspend, or discontinue the Plan, but no
amendment, alteration, suspension, or discontinuation shall be made
which would impair the rights of any Optionee under any grant
theretofore made, without his or her consent. In addition, to the extent
necessary and desirable to comply with Rule 16b-3 under the Exchange Act
(or any other applicable law or regulation), the Company shall obtain
stockholder approval of any Plan amendment in such a manner and to such
a degree as required.
b. Effect of Amendment or Termination. Any such amendment or termination
of the Plan shall not affect Options already granted and such Options
shall remain in full force and effect as if this Plan had not been
amended or terminated.
12. Time of Granting Options. The date of grant of an Option shall, for all
purposes, be the date determined in accordance with Section 4 hereof.
13. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to
the exercise of an Option unless the exercise of such Option and the issuance
and delivery of such Shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933, as
amended, the Exchange Act, the rules and regulations promulgated thereunder,
state securities laws, and the requirements of any stock exchange upon which the
Shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for
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investment and without any present intention to sell or distribute such Shares,
if, in the opinion of counsel for the Company, such a representation is required
by any of the aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
14. Reservation of Shares. The Company, during the term of this Plan, will at
all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
15. Option Agreement. Options shall be evidenced by written option agreements in
such form as the Board shall approve.
16. Stockholder Approval. Continuance of the Plan shall be subject to approval
by the stockholders of the Company at or prior to the first annual meeting of
stockholders held subsequent to the granting of an Option hereunder. Such
stockholder approval shall be obtained in the degree and manner required under
applicable state and federal law.
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ANNEX J
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
METAL MANAGEMENT, INC.
METAL MANAGEMENT, INC., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify as follows:
1. The Amended and Restated Certificate of Incorporation of the Corporation
was filed with the Secretary of State of the State of Delaware (the
"Secretary of State") on April 12, 1996.
2. The Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock be and it hereby is amended by deleting in
their entirety Sections 4(g)(ii)(1), 4(g)(ii)(2), 4(g)(ii)(3), 6(d)(v) and
6(d)(vii).
3. In accordance with Section 242 of the Delaware General Corporation Law, the
above statement of amendment has been duly approved by the board of
directors of Metal Management, Inc. at a meeting duly called and held on
September 7, 1997, and by the stockholders of Metal Management, Inc. at the
Annual Meeting of Stockholders duly called and held on November 29, 1997.
At the Annual Meeting, which was held upon notice duly given in accordance
with Section 222 of the General Corporation Law of the State of Delaware,
at least a majority of the shares issued and outstanding on the record date
for the meeting constituting the requisite vote as required by statute were
voted in favor of the Amendment.
IN WITNESS WHEREOF, said METAL MANAGEMENT, INC. has caused this Certificate
to be signed by Gerard M. Jacobs, its President and Chief Executive Officer, who
does make this certificate and declares and certifies under penalty of perjury
that this is the act and deed of the Corporation, and that the facts stated
herein are true, and accordingly have set his hand hereto this th day of
, 1997.
METAL MANAGEMENT, INC.
By:
------------------------------------
Name: Gerard M. Jacobs
Title: President and Chief
Executive Officer
J-1
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PROXY
METAL MANAGEMENT, INC.
[X] Please mark your votes
as in this example.
<TABLE>
<CAPTION>
<S><C> <C> <C> <C>
FOR WITHHELD PROPOSAL to elect ten Directors to hold office until the next Annual
1. Election of Directors [ ] [ ] Meeting of Stockholders, or otherwise as provided in the Company's
Certificate of Incorporation (check one box).
Nominees: Albert A. Cozzi T. Benjamin Jennings
Frank J. Cozzi Christopher G. Knowles
Gregory P. Cozzi Donald R. Moorehead, Jr.
George A. Isaac, III William T. Proler
Gerard M. Jacobs Harold Rubenstein
For, except vote withheld from the following nominees(s):_____________________________________________________
2. Selection of Independent Auditors FOR AGAINST ABSTAIN PROPOSAL to concur in the appointment of Price
[ ] [ ] [ ] Waterhouse LLP as the Company's principal independent
accountants for the fiscal year ending March 31, 1998
(check one box).
3. Merger FOR AGAINST ABSTAIN PROPOSAL to approve the Merger Agreement and the Merger
[ ] [ ] [ ] pursuant to which Cozzi Iron & Metal, Inc. will become a
wholly-owned subsidiary of the Company (check one box).
4. Amendment of Certificate of FOR AGAINST ABSTAIN PROPOSAL to amend the Company's Certificate of
Incorporation (Common Stock [ ] [ ] [ ] Incorporation to increase the number of authorized
increase) shares of Common Stock from 40,000,000 to 80,000,000
(check one box).
5. Amendment of Certificate of FOR AGAINST ABSTAIN PROPOSAL to amend the Company's Certificate of
Incorporation (preferred stock [ ] [ ] [ ] Incorporation to increase the number of authorized
increase) shares of "blank check" preferred stock from 2,000,000 to
4,000,000 (check one box).
6. Amendment of 1995 Stock Plan FOR AGAINST ABSTAIN PROPOSAL to increase the number of shares authorized for
for Employees and Consultants [ ] [ ] [ ] issuance under the Company's 1995 Stock Plan for Employees
and Consultants from 1,300,000 to 2,600,000 (check one
box).
7. Amendment of 1996 Director FOR AGAINST ABSTAIN PROPOSAL to increase the number of shares authorized for
Option Plan [ ] [ ] [ ] issuance under the Company's 1996 Director Option Plan
from 100,000 to 200,000 (check one box).
8. Approval of Common Stock FOR AGAINST ABSTAIN PROPOSAL to approve the issuance of Common Stock issuable
[ ] [ ] [ ] on conversions of Series A and Series B Convertible
Preferred Stock (check one box).
9. Ratification of issuance of FOR AGAINST ABSTAIN PROPOSAL to ratify the issuance of Common Stock previously
Common Stock [ ] [ ] [ ] issued or issuable in private placements by the Company to,
among others, officers, directors and affiliates of the
Company (check one box).
10. Amendment of Certificate of FOR AGAINST ABSTAIN PROPOSAL to amend the Company's Certificate of Incorporation
Incorporation to eliminate [ ] [ ] [ ] to eliminate cumulative voting (check one box).
cumulative voting
11. Amendment of Certificate of FOR AGAINST ABSTAIN PROPOSAL to amend the Company's Certificate of Incorporation
Incorporation to amend the [ ] [ ] [ ] by amending the Series A Preferred Stock Certificate of
Series A Preferred Stock Designations (check one box).
Certificate of Designations
</TABLE>
PLEASE PROMPTLY MARK, DATE, SIGN AND RETURN THIS CARD USING THE ENCLOSED
ENVELOPE. PLEASE CONTACT ROBERT C. LARRY AT (312) 645-0700 WITH ANY QUESTIONS
REGARDING THE ABOVE.
Dated ______________________________, 1997
___________________________________________
Signature
___________________________________________
Signature (if held jointly)
NOTE: Sign exactly as name appears above. If joint tenant, both should sign.
If attorney, executor, administrator, trustee or guardian, give full
title as such. If a corporation, please sign corporate name by
President or authorized officer. If partnership, sign in full
partnership name by authorized person.
