<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
(Mark one)
[x] Quarterly report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 for the quarterly
period ended September 30, 1996.
[ ] Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
Commission file number:
METAL MANAGEMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2835068
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 N. DEARBORN STREET, SUITE 405
CHICAGO, IL 60610
(Address of principal executive office including zip code)
Registrant's telephone number, including area code: (312) 645-0700
101 W. GRAND AVENUE, SUITE 200
CHICAGO, IL 60610
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods as the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days
YES X NO
----- -----
Number of Shares of Common Stock outstanding as of November 11, 1996: 8,938,000
<PAGE> 2
PURPOSE OF AMENDMENT
This Amendment Number 1 to the Quarterly Report on Form 10-Q for the
Quarter ended September 30, 1996, is being filed to amend certain financial
information contained in the original Report on Form 10-Q that was filed on
November 11, 1996. Such Form 10-Q is being restated for an accounting error at
the Registrant's EMCO Recycling Corporation ("EMCO") Subsidiary. See Note 1 of
the "Notes to Consolidated Condensed Financial Statements."
INDEX
PART I
FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
ITEM 1: Financial Statements (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Condensed Balance Sheets
September 30, 1996 and March 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Condensed Statements of Operations
For the three months ended September 30, 1996 and October 31, 1995;
for the three months ended September 30, 1995 for EMCO Recycling Corp.
and combined pro forma for the three months ended October 31, 1995 . . . . . . . . . . . . 5
Consolidated Condensed Statements of Operations For the
six months ended September 30, 1996 and October 31, 1995;
for the six months ended September 30, 1995 for EMCO Recycling Corp.
and combined pro forma for the six months ended October 31, 1995 . . . . . . . . . . . . . 6
Consolidated Condensed Statements of Cash Flows
For the six months ended September 30, 1996 and October 31, 1995;
for the six months ended September 30, 1995 for EMCO Recycling
Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Notes to Consolidated Condensed Financial Statements . . . . . . . . . . . . . . . . . . . 8
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
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<PAGE> 3
PART II
OTHER INFORMATION
ITEM 1: Legal Proceedings
ITEM 6: Exhibits and Reports on Form 8-K
SIGNATURES
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<PAGE> 4
METAL MANAGEMENT, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
PART I
FINANCIAL INFORMATION
ITEM 1:
<TABLE>
<CAPTION>
September 30, March 31,
1996 1996 (NOTE 2)
------------ ------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents (Note 1) $ 4,348,000 $ 3,093,000
Marketable securities (Note 8) 415,000 2,644,000
Accounts receivable, net (Note 1) 5,700,000 1,488,000
Loan to EMCO Recycling Corp. -- 1,000,000
Inventories (Note 7) 1,887,000 1,359,000
Prepaid expenses 1,187,000 58,000
Refundable income taxes -- 70,000
Net assets held for sale (Note 4) -- --
------------ ------------
Total current assets 13,537,000 9,712,000
Marketable securities (Note 8) -- 115,000
Property and equipment, net 9,350,000 478,000
Goodwill and other intangibles, net (Note 3) 10,973,000 44,000
------------ ------------
Total Assets $ 33,860,000 $ 10,349,000
============ ============
LIABILITIES AND SHAREHOLDERS EQUITY:
Current Liabilities:
Operating line of credit $ 3,725,000 --
Accounts payable (Note 1) 3,756,000 282,000
Other accrued liabilities 1,610,000 459,000
Current portion of long term debt 1,133,000 --
------------ ------------
Total current liabilities 10,224,000 741,000
Long term debt, less current portion 3,735,000 --
Other liabilities 1,553,000 --
------------ ------------
Total Liabilities 15,512,000 741,000
Stockholders' equity
Common stock 98,000 53,000
</TABLE>
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<PAGE> 5
<TABLE>
<S> <C> <C>
Additional paid-in-capital 12,637,000 3,325,000
Retained earnings (Note 1) 5,613,000 6,230,000
----------- -----------
Total equity 18,348,000 9,608,000
----------- -----------
Total Liabilities and equity $33,860,000 $10,349,000
=========== ===========
</TABLE>
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<PAGE> 6
METAL MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
METAL MANAGEMENT, INC.
FOR THE THREE MONTHS ENDED EMCO RECYCLING CORP. PRO FORMA COMBINED
-------------------------------- FOR THE THREE MONTHS FOR THE THREE MONTHS
SEPTEMBER 30, OCTOBER 31, ENDED SEPTEMBER 30, ENDED OCTOBER 31,
1996 1995 1995 1995
-------------- -------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $ 13,963,000 $ 0 $ 16,692,000 $ 16,692,000
Cost of sales (Note 1) 13,140,000 $ 0 $ 14,162,000 $ 14,162,000
-------------- -------------- ------------------ ------------------
Gross profit 823,000 0 2,530,000 2,530,000
Operating expenses
Marketing and sales 151,000 0 113,000 113,000
General & Administrative 1,695,000 457,000 1,020,000 1,581,000
-------------- -------------- ------------------ ------------------
Total operating expenses 1,846,000 457,000 1,133,000 1,694,000
Income (loss) from continued
operations (1,023,000) (457,000) 1,397,000 836,000
Interest expense 216,000 0 423,000 423,000
Other (income) expense (70,000) (73,000) (5,000) (78,000)
-------------- -------------- ------------------ ------------------
Income (loss) from continuing
operations before income tax
and discontinued operations (1,169,000) (384,000) 979,000 491,000
Provision (benefit) for income tax (254,000) (296,000) 345,000 19,000
-------------- -------------- ------------------ ------------------
Income (loss) from continuing
operations (915,000) (88,000) 634,000 472,000
Discontinued Operations (Note 4)
Income (loss) from operations
of discontinued Spectra*Star
Products Division, net of
income taxes (benefit) of $0 in
1996 and ($296) in 1995 147,000 (2,097,000) 0 (2,097,000)
-------------- -------------- ------------------ ------------------
Net income (loss) $ (768,000) $ (2,185,000) $ 634,000 $ (1,625,000)
============== ============== ================== ==================
Net income (loss) per share for:
Continuing operations (.102) (0.017) n/a 0.053
Discontinued operations .016 (0.402) n/a (0.235)
Weighted average number of shares
outstanding 8,925,000 5,214,000 n/a 8,925,000
</TABLE>
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<PAGE> 7
METAL MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
METAL MANAGEMENT, INC.
FOR THE SIX MONTHS ENDED EMCO RECYCLING CORP. PRO FORMA COMBINED
------------------------------ FOR THE SIX MONTHS FOR THE SIX MONTHS
SEPTEMBER 30, OCTOBER 31, ENDED SEPTEMBER 30, ENDED OCTOBER 31,
1996 1995 1995 1995
------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales $ 29,942,000 $ 0 $ 34,191,000 $ 34,191,000
Cost of sales (Note 1) $ 27,118,000 $ 0 $ 29,872,000 $ 29,872,000
------------- ------------- ----------------- -----------------
Gross profit 2,824,000 0 4,319,000 4,319,000
------------- ------------- ----------------- -----------------
Operating expenses
Marketing and sales 293,000 0 216,000 216,000
General & Administrative 3,355,000 714,000 1,811,000 2,836,000
------------- ------------- ----------------- -----------------
Total operating expenses 3,648,000 714,000 2,027,000 3,052,000
Income (loss) from continued
operations (824,000) (714,000) 2,292,000 1,267,000
Interest expense 450,000 0 782,000 782,000
Other (income) expense (109,000) (162,000) (18,000) (180,000)
------------- ------------- ----------------- -----------------
Income (loss) from continuing
operations before income tax
and discontinued operations (1,165,000) (552,000) 1,528,000 665,000
Provision (benefit) for income tax (254,000) (381,000) 615,000 152,000
------------- ------------- ----------------- -----------------
Income (loss) from continuing
operations (911,000) (171,000) 913,000 513,000
Discontinued Operations (Note 4)
Income (loss) from operations
of discontinued Spectra*Star
Products Division, net of
income taxes (benefit) of $0 in
1996 and (296) in 1995 294,000 (2,269,000) 0 (2,269,000)
------------- ------------- ----------------- -----------------
Net income (loss) $ (617,000) $ (2,440,000) $ 913,000 $ (1,756,000)
============= ============= ================= =================
Net income (loss) per share for:
Continuing operations (.102) (0.033) n/a 0.057
Discontinued operations 0.033 (0.435) n/a (0.254)
Weighted average number of shares
outstanding 8,925,000 5,215,000 n/a 8,925,000
</TABLE>
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<PAGE> 8
METAL MANAGEMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
METAL MANAGEMENT, INC. EMCO RECYCLING
---------------------------------------- ------------------
FOR THE SIX
FOR THE SIX MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 1996 OCTOBER 31, 1995 SEPTEMBER 30, 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
Cash provided (used) by operating
activities:
Net income (loss) ($617,000) ($2,440,000) $913,000
Adjustments to reconcile net
income to cash provided by operating
activities Depreciation, amortization
and deferred income taxes 912,000 170,000 492,000
Restructuring costs 0 1,437,000 0
Other 0 716,000 0
Changes in assets and liabilities net
of effects of purchase of EMCO Recycling Corp.:
Accounts receivable 1,497,000 521,000 (1,468,000)
Inventory 1,303,000 978,000 523,000
Accounts payable (198,000) (65,000) 615,000
Accrued liabilities 1,035,000 1,000 (882,000)
Other, net (94,000) (245,000) 0
------------------ ------------------ ------------------
Net cash provided by operating activities 3,838,000 1,073,000 193,000
Cash flows provided (used) by investing
activities:
Marketable securities 2,229,000 1,202,000 0
Purchase of property and equipment (1,502,000) (8,000) (697,000)
Capitalized software development cost 0 (147,000) 0
Payment for purchase of EMCO, net
of cash acquired of $660,000 (909,000) 0 0
------------------ ------------------ ------------------
Net cash provided (used) by investing
activities (182,000) 1,047,000 (697,000)
Cash flows provided (used) by financing
activities:
Common stock issued under employees stock
purchase, employee stock option plan 224,000 256,000 0
Payment of cash dividends 0 (307,000) 0
Borrowings on line of credit, net (790,000) 0 2,038,000
Repayment of borrowings, net (1,835,000) 0 (1,873,000)
------------------ ------------------ ------------------
Net cash provided (used) by financing (2,401,000) (51,000) 165,000
activities
Net increase (decrease) in cash and equivalents 1,255,000 2,069,000 (339,000)
Cash and equivalents, beginning of period 3,093,000 963,000 566,000
------------------ ------------------ ------------------
Cash and equivalents, end of period $4,348,000 $3,032,000 $227,000
================== ================== ==================
</TABLE>
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<PAGE> 9
METAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF ACCOUNTING ERROR
This Amendment Number 1 to the Report on Form 10-Q for the quarter
ended September 30, 1996, is being filed to restate certain financial
information contained in the original Report on Form 10-Q that was filed on
November 11, 1996. The restatement is a result of an accounting error that
occurred at the Company's EMCO subsidiary. The accounting error occurred as a
result of system processing problems encountered by EMCO due to the
implementation of a new management information system during the quarter. The
error was discovered by EMCO management as it prepared for the annual audit of
its records. The following is a comparison of second quarter results as
previously reported and as restated.
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
---------------------------------- ----------------------------------
PREVIOUSLY AS PREVIOUSLY AS
STATEMENT OF OPERATIONS REPORTED RESTATED REPORTED RESTATED
- ---------------------------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Sales $ 13,963,000 $ 13,963,000 $ 29,942,000 $ 29,942,000
Gross Profit 1,191,000 823,000 3,192,000 2,824,000
Loss from continuing operations before
income tax and discontinued
operations (801,000) (1,169,000) (797,000) (1,165,000)
Net Loss $ (400,000) $ (768,000) $ (249,000) $ (617,000)
============== ============== ============== ==============
Net Income (loss) per share:
continuing operations $ (.06) $ (.10) $ (.06) $ (.10)
============== ============== ============== ==============
Discontinued operations $ .02 $ .02 $ .03 $ .03
============== ============== ============== ==============
Weighted average number of shares
outstanding 8,925,000 8,925,000 8,925,000 8,925,000
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------------------
PREVIOUSLY AS
BALANCE SHEET REPORTED RESTATED
------------------------------------------- --------------- ---------------
<S> <C> <C>
Current Assets $ 13,997,000 13,537,000
Total Assets $ 34,320,000 $ 33,860,000
=============== ===============
Current Liabilities $ 10,316,000 $ 10,224,000
Total Liabilities 15,604,000 15,512,000
Total Equity 18,716,000 18,348,000
Total Liabilities and Equity $ 34,320,000 $ 33,860,000
=============== ===============
</TABLE>
NOTE 2 - BASIS OF PRESENTATION
In accordance with its previously announced business strategy, the
business of Metal Management, Inc. (hereinafter referred to as "Metal
Management" or the "Company") has changed significantly during the past year.
The Company completed its first of many planned acquisitions in the scrap metal
recycling industry with the purchase of EMCO Recycling Corp. ("EMCO") in April
1996 (see below); it discontinued its Spectra*Star and consumables business
during the first quarter of fiscal 1997 and its VideoShow product and related
product lines in the fourth quarter of fiscal 1995, and changed its fiscal year
end from October 31 to March 31, effective April 1, 1996. As a result of the
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<PAGE> 10
above changes, no prior year quarterly information is truly comparable to the
Company's current operating activities. In an effort to provide meaningful
comparable information for the prior year's quarter, without incurring
unreasonable expense, the Company has included three- and six-month information
for the periods ended October 31, 1995, because it is the most comparable
quarter in terms of timing. In addition, such quarterly information is
supplemented by unaudited financial information for EMCO for the three months
and six months ended September 30, 1995, which is presented for informational
purposes. The pro forma income statement information for the quarter ended
October 31, 1995 assumes the acquisition of EMCO was consummated as of April 1,
1995 and includes amortization of goodwill and other intangibles ($104,000 for
the three months ended October 31, 1995 and $311,000 for the six months ended
October 31, 1995) arising from the acquisition.
NOTE 3 - ACQUISITION OF EMCO RECYCLING CORP.
On April 11, 1996, the Company completed the acquisition of EMCO, a
scrap metal recycling company based in Phoenix, AZ, for a purchase price of
approximately $12.8 million ($2.0 million in cash, 3.5 million shares of common
stock valued at $8.8 million, 600,000 warrants at $4.48 per share, 400,000
warrants at $6.48 per share valued at $0.3 million and $1.7 million in other
long term liabilities which bear interest at 7%). In connection with the
acquisition the Company also acquired land used in the scrap metal business
which was indirectly owned by one of the principal former owners of EMCO for
$1.1 million ($150,000 in cash and $900,000 in notes payable in three years
which bear interest at 9%). The acquisition of EMCO was accounted for using
the purchase method of accounting and accordingly its results are included in
the consolidated financial statements from the date of purchase. The excess of
the purchase price over the fair value of the net tangible assets acquired has
been allocated to covenants-not-to-compete ($1.7 million which is amortized
over 10 years) with the remainder to goodwill ($9.6 million which is amortized
over 40 years). Effective as of July 1, 1996 the Company changed its estimated
life for goodwill increasing the amortization period from 15 years to 40 years.
The change in amortization period more appropriately reflects the anticipated
benefit period for acquisitions of scrap metal recycling companies. A summary
of the tangible assets acquired and liabilities assumed is as follows:
<TABLE>
<S> <C>
Current assets $ 8,877,000
Noncurrent assets 7,767,000
Current liabilities (9,348,000)
Non current liabilities (5,785,000)
------------
Intangible assets, including goodwill of $9.6 3,511,000
million and covenants not to compete of $1.7
million 11,261,000
------------
$ 12,772,000
============
</TABLE>
NOTE 4 - DISCONTINUED OPERATIONS: SALE OF SPECTRA*STAR PRODUCTS
DIVISION/VIDEOSHOW PRODUCT LINE
During the first quarter of fiscal 1997, management made the decision
to exit the Spectra*Star printer and consumables business. On July 16, 1996
Mannesmann Tally ("Tally") acquired the inventory and related production
equipment for approximately $1.3 million in cash and other contingent
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<PAGE> 11
consideration in the form of royalties on future revenues from the sale of
Spectra*Star printers and related consumables by Tally. Consequently, the
printer and consumables business is reported as a discontinued operation for
all periods presented. The operating results of the division have been netted
and reported as a single line item in the income statement entitled "Income
(loss) from discontinued operations, net of income taxes." The Company
recognized a net gain in the second quarter of fiscal 1997 (after transaction
related expenses and placing no value on the other contingent consideration) of
$46,000 from the sale of the division. Royalty income of $101,000 was
recognized in the second quarter of fiscal 1997. Additional consideration will
be recorded when it becomes known and will be reported as additional gain on
sale of the printer and consumables business. Also reported as discontinued
operations are the VideoShow and related product lines ("VideoShow") which were
discontinued in the fourth quarter of fiscal 1995. VideoShow together with the
Spectra*Star printer and consumables business formed the Company's presentation
products business segment. Consequently, with the sale of the printer and
consumables business, and the discontinuance of VideoShow, both are included in
discontinued operations in the accompanying financial statements.
NOTE 5 - FINANCIAL STATEMENTS
The accompanying Consolidated Condensed Balance Sheets of Metal
Management, Inc. at September 30 and March 31, 1996, 1996 and the Consolidated
Condensed Statements of Operations for the three months and six months ended
September 30, 1996 and October 31, 1995, respectively, and the Consolidated
Condensed Statements of Cash Flows for the six months ended September 30, 1996
and October 31, 1995, respectively, have not been audited by independent
accountants. However, in the opinion of management, all adjustments, consisting
only of normal, recurring adjustments necessary for a fair statement of the
results of operations for the interim periods, have been made.
The Consolidated Condensed Financial Statements included in this Form
10-Q should be read in conjunction with the audited Consolidated Financial
Statements and Notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 1995, with the Company's Definitive
Joint Proxy Statement dated March 8, 1996, the Transitional 10-Q for the five
months ended March 31, 1996, the Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996, and related Forms 10-Q/A filed as of October 2, 1996, and
November 19, 1996, the Form 8-K dated April 11, 1996, and related Form 8-K/A
filed June 20, 1996, and the Forms 8-K dated July 16, 1996, and August 7, 1996,
filed with the Commission.
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
During the first quarter of fiscal 1997, in connection with the
acquisition of EMCO, the Company issued 3,500,000 shares of common stock,
600,000 warrants at $4.48 and 400,000 warrants at $6.48 to acquire the
Company's common stock in connection with the acquisition. In conjunction with
the acquisition, liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired $27,905,000
Cash paid of $1.9 million, loan of
$1 million and other consideration 13,772,000
-----------
Liabilities assumed $14,133,000
===========
</TABLE>
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<PAGE> 12
In a related transaction, the Company also issued $950,000 of three-year notes
which bear interest at 9% to acquire land used in EMCO's scrap metal recycling
business.
In the three-month periods ended September 30, 1996 and October 31,
1995, the Company paid interest expense and paid income taxes (collected income
tax refunds) in amounts as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------
EMCO
-------------
SEPTEMBER 30, OCTOBER 31, SEPTEMBER 30,
1996 1995 1995
------------ ---------- -------------
<S> <C> <C> <C>
Interest Paid $ 216,000 $ 0 $423,000
Income taxes paid (refunds received) $(458,000) $ 0 $253,000
</TABLE>
NOTE 7 - INVENTORIES
Inventories consisted of:
<TABLE>
<CAPTION>
September 30, March 31,
1996 1996
------------ -----------
<S> <C> <C>
Ferrous $ 463,000 $ 363,000
Non Ferrous - Processed 535,000 148,000
Unprocessed 889,000 848,000
------------ -----------
$ 1,887,000 $ 1,359,000
============ ===========
</TABLE>
NOTE 8 - 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 in
accordance with Financial Accounting Standards Board Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Under SFAS
No. 115, management is required to determine the appropriate classification of
its securities at the time of purchase and reevaluate such designation as of
each balance sheet. Held-to-maturity securities are reported at amortized
cost. Available-for-sale securities are carried at fair value, with unrealized
gains and losses, net reported in a separate component of shareholders' equity
until disposition. Realized gains and losses and declines in value judged to be
other than temporary are included in other (income) expense.
All marketable securities are classified as available-for-sale
securities as of September 30, 1996. Gross unrealized losses were not material
to the financial statements taken as a whole as of September 30, 1996.
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<PAGE> 13
NOTE 9 - PENDING ACQUISITIONS
On August 7, 1996, the Company announced that it had signed a Letter
of Intent to acquire a group of scrap metal recycling companies in southern
California for a combination of cash of $6.5 million, 725,000 shares of common
stock and other consideration. Closing of the acquisition is contingent upon
execution of definitive agreements, completion of due diligence, meeting
certain regulatory filing requirements and raising of capital to fund the cash
portion of the purchase price.
The Company is also negotiating to acquire several other scrap metal
recycling companies and has retained legal, accounting, and environmental
consulting firms to perform due diligence activities. Disbursements to firms
performing due diligence for the Company have been capitalized as prepaid
expenses. As of September 30, 1996 approximately $540,000 has been recorded as
prepaid expenses in connection with due diligence performed for the Company.
Closing of these other acquisitions is contingent upon execution of definitive
agreements, completion of due diligence, approvals by regulatory agencies and
raising of capital to fund the cash portions of the purchase prices.
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<PAGE> 14
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain matters discussed throughout this Form 10-Q filing are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those projected. Such
risks and uncertainties include, but are not limited to, the following: the
risk that announced mergers are not consummated, the risk of challenges from
the Company's competition, and the risk that the Company will face difficulties
in consolidating and controlling operations of diverse geographic locations, as
well as other risk factors discussed in "Factors Affecting Future Results"
below.
On April 11, 1996, the Company acquired EMCO, an Arizona corporation,
pursuant to a Merger Agreement dated as of December 1, 1995, and as amended
through March 7, 1996. The Consolidated Condensed Financial Statements included
in this Form 10-Q should be read in conjunction with the audited Consolidated
Financial Statements and Notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended October 31, 1995, the Company's
Definitive Joint Proxy Statement dated March 8, 1996, the Transitional 10-Q for
the five months ended March 31, 1996, the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996, as amended by Forms 10-Q/A filed as of October 2,
1996, and November 19, 1996, the Form 8-K dated April 11, 1996, as amended by
the Form 8-K/A filed June 20, 1996, and the Forms 8-K dated July 16, 1996, and
August 7, 1996, filed with the Commission.
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<PAGE> 15
RESULTS OF OPERATIONS
With the acquisition of EMCO on April 11, 1996 and the sale on July
16, 1996 of the Spectra*Star Division, the operating results for the quarter
combine a closing out of the previous technology-related business operations in
the same quarter with the commencement of the new direction of the Company into
the metals recycling industry. Management believes that comparisons of
financial data associated with discontinued operations would not be meaningful
or relevant and, accordingly, the following information and comparisons are, to
the extent possible, related primarily to EMCO's operations.
Sales for the quarter ended September 30, 1996 and 1995 are shown in
the following comparative table:
<TABLE>
<CAPTION>
1996 1995
---------------------------------------- ---------------------------------------
(Tons) % Total (Tons) % Total
Commodity Weight Amount Sales Weight Amount Sales
- ----------------- ---------- ----------- ------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Ferrous 44,000 $ 4,706,000 33.7% 29,900 $ 3,167,000 19.0%
Nonferrous 10,800 9,000,000 64.5% 10,300 13,368,000 80.0%
Other 257,000 1.8% 157,000 1.0%
---------- ----------- ------- --------- ------------ --------
Totals 54,800 $13,963,000 100% 40,200 $ 16,692,000 100.0%
========== =========== ======= ========= ============ ========
</TABLE>
Total sales in the quarter ended September 30, 1996 declined by
$2,729,000, or 16.4%, from the comparable period in 1995 as a consequence of
unfavorable market conditions. The major cause of the decrease was attributable
to commodity prices which have generally declined for nonferrous commodity
products for the past four quarters. Spot copper prices moved down from $1.30/lb
at September 30, 1995 to $0.88/lb at September 30, 1996, a 32.3% drop.
Similarly, aluminum spot prices declined from $0.79/lb at September 30, 1995 to
$0.63/lb at September 30, 1996, down 20.3%. In addition, the markets have
reacted negatively to the much publicized speculative trading losses sustained
by a major copper trader.
During the current quarter and for the two previous quarters EMCO has
kept inventories at minimum working levels ($1,887,000 at September 30, 1996
and $1,359,000 as of March 31, 1996).
Gross margins for the quarter were $823,000, down from $2,530,000 for
the comparable period in 1995, primarily as a result of reduced sales and
unfavorable market conditions, as discussed above. Gross margins for the six
months ended September 30, 1996 declined from $4,319,000 in the comparable
period for 1995 to $2,824,000 in 1996.
Selling expenses increased $38,000 as compared to the same quarter in
1995. This increase is due to additional purchasing/marketing staff added to
build overall volumes. It is anticipated that further increases will be
reflected in future operations as increased emphasis is being placed on
business development. Selling expenses increased from $216,000 in 1995 to
$293,000 for the six months ended September 30, 1996 for the reasons described
above.*
- ------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Stockholders are strongly encouraged to
review the section entitled "Factors Affecting Future Results" commencing on
Page 17 for a discussion of factors that could affect future performance.
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<PAGE> 16
General and administrative expenses rose from $1,581,000 in the second
quarter of 1995 to $1,695,000 in 1996. The majority of that increase was
attributable to changes in the corporate structure, legal expenses, and
development costs related to the change in business activity and direction of
the Company during the past year. General and administrative expenses for the
six months ended September 30, 1996 were $3,355,000 as compared to $2,836,000
for the comparable six-month period in 1995. The increase was due to changes
in the corporate structure and development costs discussed above.
Pretax income (loss) from continuing operations declined from $491,000
in 1995 to $(1,169,000) for the quarter ended September 30, 1996 due to
unfavorable market conditions and increased selling and administrative expenses
described above. Pretax income (loss) from continuing operations declined to
$(1,165,000) in the six months ended September 30, 1996 from $665,000 in the
comparable period in 1995 due to unfavorable market conditions and increased
selling and administrative expenses.
Interest expense declined as well, from $423,000 in 1995 to $216,000
in the current quarter and from $782,000 to $450,000 in the six months ended
September 30, 1996. The reduction in interest expense is attributable to
elimination of fees on a discontinued $2,000,000 stand-by line of credit to
EMCO and lesser borrowings in 1996.
Other income declined from $78,000 in the first quarter of 1995 to
$70,000 for the comparable period in 1996 and declined to $109,000 in the six
months ended September 30, 1996 from $180,000 in the comparable period in 1995
due to lower invested cash balances.
A benefit of $254,000 for income taxes has been recorded for the
current quarter and six months ended September 30, 1996 as compared to a
provision of $19,000 and $152,000 in the three- and six-month pro forma periods
ended October 31, 1995.
The income from discontinued operations recorded for the Spectra*Star
Products Division for the quarter ended September 30, 1996 was $147,000 ($0.02
per share), compared to a loss for the same quarter in 1995 of $2,097,000
($0.23 per share). Income from discontinued operations was $294,000 ($0.03 per
share) in the six months ended September 30, 1996 as compared to a loss of
$2,269,000 ($0.25 per share) in 1995. The substantial loss from discontinued
operations in 1995 was a result of significant charges recorded upon the
Company's decision to terminate its electronic presentation products and a
one-time charge to restructuring costs and special charges totaling $2,153,000
($0.24 per share). The Company recognized a net gain of $46,000 on the sale of
the assets of the Spectra*Star Division and recognized royalty income of
approximately $101,000 in the second quarter of fiscal 1997.
Net loss for the quarter ended September 30, 1996, including
discontinued operations, amounted to $768,000 ($.09 per share) compared to
$1,625,000 ($0.18 per share) for the same period in 1995. Net loss for the six
months ended September 30, 1996 was $617,000 ($.07 per share) as compared to a
net loss of $1,756,000 ($0.20 per share) in the comparable period of 1995.
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<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of cash are its existing cash and
marketable securities balances, collection of outstanding accounts receivable
remaining from its discontinued Spectra*Star division and royalties expected to
be earned in future periods. At September 30, 1996, the Company had $4.8
million in cash, cash equivalents and marketable securities compared to $5.7
million at March 31, 1996. The reduction is primarily attributable to the
proceeds realized from the sale of the assets of the Spectra*Star Products
Division net of loans made to EMCO. Excluding any mergers, the cash, cash
equivalents and marketable securities available for operations appear to be
adequate to meet the Company's operating needs for the remainder of the fiscal
year ending March 31, 1997.* In the event the Company undertakes any mergers
with a cash component, it will be required to seek financing earlier than such
time.
Accounts receivable balances increased from $1.5 million as of March
31, 1996 to $5.7 million as of September 30, 1996. The increase in accounts
receivable as of September 30, 1996 is attributable to the acquisition of EMCO
net of reductions in accounts receivable attributable to the sale of the
Spectra*Star Products Division and the subsequent collection of the accounts
receivable from that business. As of September 30, 1996 the balance of
accounts receivable remaining to be collected from the Spectra*Star Product
Line was approximately $500,000. Accounts payable increased from $0.3 million
as of March 31, 1996 to $3.8 million as of September 30, 1996. The increase in
accounts payable is attributable to the acquisition of EMCO.
The Company has an operating line of credit of up to $8 million that
is based on qualifying accounts receivable and inventories of EMCO. As of
September 30, 1996, EMCO had substantially utilized the available capacity
under the line.
The Company's Board of Directors intends to continue to cause the
Company to actively pursue acquisitions and mergers in various fields,
including, but not limited to, scrap metal recycling and/or telecommunications.
Depending on the nature and size of potential acquisitions, mergers and other
transactions, if any, the Company's cash flows from operating and investing
activities, together with its cash, cash equivalents and marketable securities
will not be sufficient in the future. Therefore the Company will have to
supplement these sources of liquidity with additional sources of funds such as
borrowings or stock offerings. Refer also to the section below titled "Factors
Affecting Future Results."
The Company has a deferred tax asset valuation allowance that is
primarily attributable to U.S. federal and state deferred tax assets.
Realization of the deferred tax assets is dependent on generating sufficient
income to utilize future deductions and credits. Management believes sufficient
uncertainty exists regarding realization of deferred tax assets.
________________
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Stockholders are
strongly encouraged to review the section entitled "Factors Affecting Future
Results" commencing on Page 17 for a discussion of factors that could affect
future performance.
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<PAGE> 18
FACTORS AFFECTING FUTURE RESULTS
The following factors should be considered carefully in evaluating the
Company and its business. The risk factors described below contain
forward-looking statements that involve risks and uncertainties. The Company's
and EMCO's actual results may differ materially from the results discussed in
the forward-looking statements.
RECENT MERGER, SALE AND SIGNIFICANT CHANGE IN STRATEGIC DIRECTION
In the past year, the Company has undergone a significant change in
strategic direction and emphasis. Immediately prior to April 11, 1996, the
Company's business had consisted of designing, manufacturing and marketing
color printers and related consumables, including ribbons, transparencies and
paper. Then, on April 11, 1996, the Company acquired EMCO, an Arizona
corporation engaged in scrap metal recycling (the "Merger"). In addition, the
Company purchased two parcels of land owned directly or beneficially by Harold
M. Rubenstein, the former principal beneficial shareholder and former Chairman
of the Board of EMCO. On July 16, 1996, the Company sold to Mannesmann Tally
the inventory and related production equipment of its Spectra*Star printer and
consumables business. And on August 7, 1996, the Company announced the signing
of a Letter of Intent to acquire a group of scrap metal recycling companies in
Southern California. The Company anticipates future acquisitions of other
companies in the scrap metal recycling industry and potentially also in other
industries. Reflective of the Company's overall change in emphasis is its
corporate name change on April 12, 1996, from General Parametrics Corporation
("GPC") to Metal Management, Inc. The ramifications of the changes in the
Company's business are discussed in greater detail below.
Given the substantial changes in the Company's business in the past
year, past financial performance should not be considered a reliable indicator
of future performance. Potential purchasers should not use historical trends to
anticipate results or trends in future periods.
CYCLICALITY OF OPERATING RESULTS
The operating results of the scrap metal recycling processing industry
in general and the Company's EMCO subsidiary in particular are highly cyclical
in nature as they tend to reflect and amplify the general national economic
condition. In periods of national recession or periods of minimal economic
growth, the operations of scrap metal recycling companies have been materially
adversely affected. During recessions or periods of minimal economic growth,
the automobile and the construction industries typically experience major
cutbacks in production, resulting in decreased demand for steel, copper and
aluminum supplies. For example, from approximately 1988 to 1993, the scrap
metal recycling industry was adversely affected for a period of five years. Due
in part to this effect, the predecessors of EMCO, Empire Metals, Inc.
("Empire") and Copperstate Metals, Inc. ("Copperstate"), entered bankruptcy
proceedings in 1990 and 1991, respectively. Future economic downturns may be
expected to materially and adversely affect the operating results of the
Company. The ability of the Company and EMCO to withstand significant economic
downturns in the future will depend in part on the amount of available cash
held by the Company. Recently, EMCO has required cash infusions from the
Company due to what it believes to be short-term liquidity requirements. The
Company believes that EMCO will require additional cash infusions for at least
the remainder of the fiscal year ending
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<PAGE> 19
March 31, 1997. There can be no assurance, however, that liquidity constraints
will not continue or worsen.
PRICE FLUCTUATIONS
EMCO's results of operations have been in the past, and the results of
operations of the overall Company are expected to be, subject to price
fluctuations that occur in the metals commodities markets. For example, prices
of non-ferrous metals have generally declined during the past four quarters,
which adversely affected revenues and net income in the quarter ended September
30, 1996. A further decline in commodity prices could further reduce revenues
and net income prospectively. Such losses could have a material adverse effect
on the Company's results of operations and liquidity of the Company.
RISK OF EXPANSION STRATEGY
The Company currently plans to continue to pursue additional
acquisitions in the scrap metal recycling area and, potentially, in other
related or unrelated fields, including but not limited to telecommunications.
There can be no assurance that any future mergers will be consummated or that,
if they are, the Company will be able to effectively manage disparate business
enterprises. The ability of the Company to achieve its expansion objectives
and to manage its growth effectively depends on a variety of factors, including
the ability to identify appropriate acquisition targets and to negotiate
acceptable terms for their acquisition, the integration of new businesses into
the Company's operations and the availability of capital. These difficulties
will be exacerbated in the event that the Company expands in states outside of
Arizona and California. The inability to control or manage growth effectively
or to successfully integrate future new business into the Company's operations
would have a material adverse effect on the Company's financial condition and
results of operations. There can be no assurance that the Company will be able
to successfully expand or that growth and expansion will result in
profitability. There can be no assurance that the Company will be able to
realize any of the other anticipated benefits of the Merger or any future
acquisitions that it may undertake.
EXISTING AND FUTURE DEBT OF THE COMPANY
As a result of the Merger, the Company has approximately $9 million in
consolidated debt. In order to pursue expansion and acquisition opportunities,
the Company expects to incur additional debt, either through bank or credit
lines or the sale of debt securities in registered or unregistered
transactions, in addition to any additional equity financing it may do. The
servicing of such present and future debt of the Company will utilize cash
either in the form of cash on hand or cash generated by operating activities.
RISK OF DILUTION TO EXISTING STOCKHOLDERS
The Company's strategy of expansion and additional acquisitions will
require it to issue additional shares of Common Stock or securities convertible
into Common Stock as consideration for additional acquisitions. Issuance of a
material amount of Common Stock or such securities would result in significant
dilution to the then-existing stockholders of the Company. The Company expects
to be required to seek equity financing to meet future capital requirements,
which would also result in additional dilution. See "Immediate and Future
Capital Requirements."
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<PAGE> 20
COMPETITION IN THE SCRAP METAL INDUSTRY
The scrap metal recycling industry is highly competitive, with the
principal competitive factors being price and availability of scrap metal
supplied. Competition in the industry is intense in part because the barriers
to entry into the scrap metal collection business are relatively low.
Additionally, EMCO faces competition from producers of finished steel products,
many of whom have substantially greater financial resources than EMCO and the
Company, who may vertically integrate by entering the scrap metal recycling
business. The inability of EMCO to compete in this environment would have a
material adverse effect on the Company's financial condition and results of
operations.
IMMEDIATE AND FUTURE CAPITAL REQUIREMENTS
Scrap metal recycling companies such as EMCO have substantial ongoing
working capital and capital equipment requirements in order to continue to
operate and grow. During March 1996, the Company loaned EMCO $1,000,000 for
short-term working capital requirements. Upon closing of the Merger, the
Company advanced EMCO $950,000, and EMCO paid its demand note of $950,000 to
Donald F. Moorehead, a director of the Company and EMCO. Also, subsequent to
March 31, 1996, the Company loaned EMCO an additional $1,500,000 for additional
working capital purposes. The Company expects that EMCO will require additional
cash infusions for at least the remainder of the fiscal year ending March 31,
1997. In order to remain competitive, EMCO must continue to make significant
investments in capital equipment. As a result, the Company will likely seek
equity or debt financing to fund future improvements and expansion of its scrap
metal recycling business 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 would hinder the Company's and EMCO's ability
to make continued investments in capital equipment and pursue expansions, which
could materially adversely affect results of operations. Any such equity
financing would result in dilution to the then-existing stockholders of the
Company.
OPERATIONAL RESTRUCTURING OF EMCO
In October 1996, the Company initiated efforts to restructure the
operations of its EMCO subsidiary. The restructuring is expected to reduce
operating expenses by eliminating the utilization of certain leased equipment,
eliminating 25 jobs representing approximately 12% of the workforce, reducing
the cost of outside processing from certain vendors, and renegotiating
contracts for purchased services some of which are expiring. In addition, as a
part of the restructuring program, the Company has initiated a review of the
buying and selling departments of EMCO and is continuing to evaluate EMCO's
operations in recognition of the difficult commodity markets in which scrap
metal recycling companies have been and are continuing to operate.
COMPANY MANAGEMENT FACTORS
While management team members who came from EMCO have experience with
scrap metal recycling operations, both they and the pre-Merger officers of
Metal Management may be outside their areas of experience in the event that the
Company pursues acquisition opportunities outside of scrap metal recycling.
Additionally, while T. Benjamin Jennings, the current Chairman of the Board and
Chief Development Officer, is currently devoting substantially all of his time
to such position, Gerard M.
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<PAGE> 21
Jacobs, the current President and Chief Executive Officer, has certain other
business interests and will be unable for some time to dedicate his full time
to the Company's operations. As a result, the success of the Company will
depend, in large part, upon the involvement of EMCO management. There can be no
assurance that the Company will be able to retain key management personnel.
Additionally, certain members of EMCO management have been involved in
bankruptcy proceedings in the past as a result of the bankruptcy proceedings of
EMCO's predecessor companies, Copperstate and Empire.
CONTROL OF COMPANY BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS
As a result of the Merger, Messrs. Jacobs and Jennings, together with
George O. Moorehead and Donald F. Moorehead, with whom Messrs. Jacobs and
Jennings have had substantial past business relationships, collectively own an
aggregate of approximately 28% of the outstanding Common Stock of the Company.
In addition, Harold Rubenstein, formerly the Chairman of the Board of EMCO,
beneficially owns approximately 26% of the outstanding Common Stock of the
Company, while Gerald Zack, Raymond F. Zack and David M. Zack, who are
brothers, collectively beneficially own through their ownership of Copperstate
an aggregate of approximately 13% of the outstanding Common Stock of the
Company. Pursuant to demand registration rights of Copperstate, the Company
registered on Form S-3 (the "S-3 Registration Statement") 300,000 shares held
by Copperstate. The S-3 Registration Statement became effective on August 27,
1996. Inclusive of shares registered by the S-3 Registration Statement, the
Zacks collectively beneficially hold 10% of the Company's outstanding shares.
Accordingly, Messrs. Jennings and Jacobs, together with the Mooreheads, Harold
Rubenstein and the Zacks, will collectively have sufficient voting power
(approximately 58%) after the sale of shares being registered to control the
outcome of all matters (including the election of a majority of the directors
and any future merger, consolidation or sale of assets of the Company)
submitted to Company stockholders for approval and may be deemed to have
effective control over the affairs and management of the Company. This assumes
that the shares being offered by Copperstate will not be purchased by any of
the individuals in the aforementioned group. The sale of some or all of the
shares to such individuals would increase commensurately the control of such
individuals and the group over the Company. This controlling interest in the
Company may also have the effect of making certain transactions more difficult
or impossible, absent the support of Messrs. Jennings and Jacobs and such other
persons. Such transactions could include proxy contests, mergers involving the
Company, tender offers and open market purchase programs that could give
stockholders of the Company the opportunity to realize a premium over the
then-prevailing market price of their shares of Common Stock.
CONCENTRATION OF CUSTOMERS AND CREDIT RISK
The Company's three largest customers for the three-month period ended
September 30, 1996, represented in the aggregate approximately 16.9% of the
Company's revenues for that period. The Company's results of operations are
substantially dependent upon continuing orders from such customers, and any
cancellation of or reduction in orders from such customers could have a
material adverse effect on the Company's results of operations. This risk is
exacerbated by the fact that most of the Company's customers are not bound by
long-term purchase contracts but instead do business with the Company on the
basis of short-term contracts.
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<PAGE> 22
One customer accounted for $435,000, or approximately 10%, of the
Company's total accounts receivable as of September 30, 1996.
SUPPLY RELATIONSHIP WITH ELLIS METALS, INC.
Ellis Metals, Inc. is principally owned by Harold Rubenstein and is a
significant supplier to EMCO. Harold Rubenstein is the Company's largest
stockholder. EMCO and Ellis Metals have a supply relationship that is defined
in a contract that requires Ellis Metals to either provide all of its inventory
to EMCO or directly to customers of EMCO through a direct ship arrangement. In
the latter arrangement EMCO realizes a brokerage fee, which can be less than
the amount of gross profit the Company realizes when inventory is shipped to
EMCO, processed and resold. From and after September 25, 1996, Ellis Metals
has elected to ship certain materials directly to customers of EMCO and has
indicated that it will continue to do so for the foreseeable future. As a
result, the Company's gross margin could be adversely affected.
DEPENDENCE ON SCRAP SUPPLIERS
EMCO's scrap recycling operations are dependent upon the supply of
scrap materials from its suppliers. Few of such suppliers are bound by
long-term supply agreements, and therefore they have no obligation to continue
to supply scrap materials to EMCO. In the event that substantial numbers of
scrap suppliers cease supplying scrap materials to EMCO, the Company's
financial condition and results of operations would be materially and adversely
affected.
ENVIRONMENTAL MATTERS
Like many other companies in the scrap metal recycling business, EMCO
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. Environmental legislation and regulations have
changed rapidly in recent years, and it is likely that EMCO, and any other
scrap metal recycling subsidiaries the Company may acquire in the future, will
be subject to even more stringent environmental standards in the future.
The Company is currently aware of two ongoing environmental matters in
connection with EMCO's business. The first matter concerns certain operating
permits for an auto shredder and a furnace used in removing insulation from
copper wire. The Environmental Protection Agency concluded that Copperstate had
operated those two pieces of equipment while possessing only a temporary permit
from the Arizona Department of Environmental Quality ("ADEQ") when a permanent
permit should have been obtained. The EPA assessed a fine against Copperstate
and EMCO for failure to obtain a permit. EMCO has paid its fine totaling $9,000
and is awaiting formal dismissal by the EPA, which it expects to receive in the
near future. In the second matter, environmental consultants to the Company
reported that an underground storage tank located at one of EMCO's yards had
not been reported to the Arizona environmental authorities as required by law.
EMCO as 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 of or the assessment of penalties against the Company.
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<PAGE> 23
EMCO has a policy of not knowingly accepting, handling or discharging
hazardous waste products, and the Company and EMCO are not aware of any
material concentrations of hazardous waste located on any of EMCO's properties.
However, as part of a pre-Merger review, the Company hired an environmental
consulting firm to conduct Phase I or Phase II site assessments or transaction
screen reviews (the "Pre-Merger Site Assessments") of nearly all of the sites
owned or leased by EMCO in Arizona and the sites that were purchased from
Harold Rubenstein or his affiliates in Tucson. The environmental consultants
completed certain investigations of reviewed sites and delivered all final
transaction screen assessments, Phase I and/or Phase II reports, as
appropriate, that they were requested to deliver. Certain of these reports
revealed that some soil or groundwater contamination is likely at some sites
and recommended that certain additional investigations and remediation be
conducted. Based upon its review of the reports, the Company believes that it
is likely that contamination exists at certain of the sites and that it is
likely that 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), including
perchloroethylene, trichlorofluoromethane, trichloroethylene, trichloroethane
and dichloroethylene; antimony; arsenic, cadmium; copper; lead; mercury;
silver; zinc; waste oil; toluene; meta- and para-xylenes; baghouse dust; and
aluminum dross. The ultimate extent of 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 Company has supplied the Pre-Merger Site Assessments to EMCO, and
EMCO has retained a qualified environmental and chemical consulting firm in
Arizona to review them, to examine EMCO's ongoing operations, and to recommend
to EMCO's management and Board of Directors any steps EMCO should take to
achieve and/or maintain compliance, including but not limited to any necessary
remedial measures or operational changes. During the second quarter of the
current fiscal year, EMCO commenced action on certain of the recommendations of
the consulting firm, and subsequently EMCO established an environmental safety
fund of $15,000. The Company believes that the environmental safety fund will
have to be increased from time to time as additional recommendations from the
consultant become available. EMCO has also adopted the recommended procedural
program set forth by the consulting firm with respect to environmental
characteristics of any new sites to be purchased or leased.
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, EMCO and
any other scrap metal recycling entities that the Company may acquire. The
location of EMCO'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 to comply with any environmental requirements, 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 EMCO or other Company subsidiaries or by hazardous substances now
or hereafter located at any subsidiaries'
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<PAGE> 24
facilities, the Company and such subsidiaries may be fined and held liable for
such damage. In addition, the Company and such subsidiaries may be required to
remedy such conditions or change procedures. While the Company believes EMCO is
in material compliance with currently applicable environmental regulations and
does not anticipate any substantial capital expenditures for new environmental
control facilities during fiscal 1996, there can be no assurance that potential
liabilities, expenditures, fines and penalties associated with environmental
laws and regulations will not have a material adverse effect on the Company.
VOLATILITY OF STOCK PRICE
The Company's stock price has been, and in the future is expected to
be, volatile and to experience market fluctuation as a result of a number of
factors, including, but not limited to, 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. This volatility
may be increased as a result of the fact that by consummating the recent
Merger, the Company has entered into a new business market. The trading price
of the Company's Common Stock may also vary as a result of changes in the
business, operations, or financial results of the Company, prospects of general
market and economic conditions, additional future proposed acquisitions by the
Company and other factors. In addition, failure of revenues or earnings in any
quarter to meet the investment community's expectations, if any, could have an
adverse impact on the Company's stock price, as could sales of large amounts of
stock by existing stockholders.
FLUCTUATIONS IN OPERATING RESULTS
The Company's future operating results could be subject to significant
volatility, particularly on a quarterly basis. The Company's revenues and
operating results have fluctuated in the past and are likely to do so in the
future. The Company's quarterly operating results may continue to fluctuate due
to numerous factors, including but not limited to the demand for scrap metal,
the health of the national economy and competition.
RECENT CHANGES IN MANAGEMENT OF THE COMPANY
The Company has undergone multiple changes in its management in the
past year. Most recently, certain EMCO representatives were appointed Company
directors and/or officers in conjunction with the Merger. On April 9, 1996,
Donald F. Moorehead, then a director of EMCO, was elected to the Company's
Board of Directors. Immediately following the Merger, George O. Moorehead,
Harold Rubenstein and Raymond F. Zack, all officers and/or directors of EMCO,
were appointed to the Board of the Company. Also in conjunction with the
Merger, George O. Moorehead was appointed Executive Vice President of the
Company.
EFFECT OF ANTITAKEOVER PROVISIONS OF DELAWARE LAW, THE COMPANY'S CHARTER
DOCUMENTS AND EMPLOYMENT AGREEMENTS
The Company is a corporation governed by the laws of Delaware. Certain
provisions of Delaware law and the charter documents of the Company may have
the effect of delaying, deferring or preventing changes in control or
management of the Company. Specifically, the Company's Board of Directors may
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<PAGE> 25
issue shares of Preferred Stock without stockholder approval on such terms as
the Board may determine. The rights of the holders of Common Stock of the
Company are subject to, and may be adversely affected by, the rights of any
Preferred Stock that may be issued in the future. The Company is subject to the
provisions of Section 203 of the Delaware General Corporation Law, which has
the effect of making changes in control of a company more difficult. In
connection with the Merger, the Company entered into employment agreements with
George O. Moorehead, Gerard M. Jacobs and T. Benjamin Jennings. Such
agreements provide for certain payments to be made to such persons in the event
of a change of control of the Company. The effects of the antitakeover
protections of Delaware law, the Company charter documents and these employment
agreements could be to make it more difficult for a third party to acquire, or
could discourage a third party from acquiring, a majority of the outstanding
stock of Company. Stockholders should not use historical trends to anticipate
results or trends in future periods. Further, the Company's stock price is
subject to volatility. Any of these factors discussed above could have an
adverse impact on the Company's stock price. In addition, failure of revenues
or earnings in any quarter to meet the investment community's expectations, if
any, as well as broader market trends unrelated to the Company's performance
could have an adverse impact on the Company's stock price.
RECENT ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and For
Long-Lived Assets to be Disposed Of." The statement must be adopted for its
fiscal year beginning April 1, 1996. Based upon its preliminary review,
management believes that there will be no material impact on the results of
operations or financial condition upon adoption.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation." The Company intends to adopt the disclosure
requirements for its fiscal year beginning April 1, 1996. Based upon its
preliminary review, management believes that there will be no material impact
on the results of operations or financial condition upon adoption.
-25-
<PAGE> 26
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See disclosure contained in corresponding item of Form 10-Q Transitional Report
for the five months ended March 31, 1996, filed by the Registrant.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1* Restated Certificate of Incorporation, as amended through
April 12, 1996.
3.2* Amended and Restated Bylaws, as amended through April 9, 1996.
10.1* Office Lease between Friedman Properties, Ltd., and Metal
Management, Inc.
27.1 Amended Financial Data Schedule
(b) The following reports on Form 8-K were filed during the quarter ended
June 30, 1996:
1. On July 31, 1996, the Company filed a Form 8-K dated July 16,
1996, reporting the sale of substantially all of the assets
related to its Spectra*Star Division to Mannesmann Tally
Corporation pursuant to an Asset Purchase and Sale Agreement
dated as of July 16, 1996 (Item 5). The Company filed
unaudited pro forma financial statements giving effect to the
sale for the year ended October 31, 1995, and the five months
ended March 31, 1996 (Item 7). The Form 8-K provided the Form
of Asset Purchase and Sale Agreement, and related press
release dated July 11, 1996 (Item 7).
2. On August 9, 1996, the Company filed a Form 8-K dated August
7, 1996, reporting the execution by the Company of a Letter of
Intent dated August 6, 1996, to acquire the MacLeod Group of
Companies, and the issuance of a press release regarding the
Letter of Intent on August 7, 1996 (Item 5). The Form 8-K
provided a copy of the press release (Item 7).
* Previously filed with Quarterly Report on Form 10-Q for quarter ended
September 30, 1996.
-26-
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
METAL MANAGEMENT, INC.
Dated: May 1, 1997 By /s/ Robert C. Larry
-------------------------------------------
Vice President, Finance and Chief Financial
Officer (Principal Financial and Accounting
Officer)
By /s/ Gerard M. Jacobs
-------------------------------------------
President and CEO
By /s/ T. Benjamin Jennings
-------------------------------------------
Chairman of the Board and
Chief Development Officer
-27-
<PAGE> 28
EXHIBIT INDEX
3.1* Restated Certificate of Incorporation, as amended through April 12,
1996.
3.2* Amended and Restated Bylaws, as amended through April 9, 1996.
10.1* Office Lease between Friedman Properties, Ltd., and Metal Management,
Inc.
27.1 Amended Financial Data Schedule
* Previously filed with Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996.
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