<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-14836
METAL MANAGEMENT, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<C> <C>
DELAWARE 94-2835068
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
500 N. DEARBORN ST., SUITE 405,
CHICAGO, IL 60610
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (312) 645-0700
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
As of August 14, 1997, the Registrant had 14,800,078 shares of Common Stock
outstanding.
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INDEX
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PAGE
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PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements
Consolidated Condensed Balance Sheets -- June 30, 1997
(unaudited) and
March 31, 1997.............................................. 1
Consolidated Condensed Statements of Operations -- three
months ended June 30, 1997 and 1996 (unaudited)............. 2
Consolidated Condensed Statements of Cash Flows -- three
months ended June 30, 1997 and 1996 (unaudited)............. 3
Notes to Consolidated Condensed Financial Statements
(unaudited)................................................. 4
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results
of Operations............................................... 10
PART II: OTHER INFORMATION
ITEM 1: Legal Proceedings........................................... 27
ITEM 2: Changes in Securities....................................... 27
ITEM 6: Exhibits and Reports on Form 8-K............................ 28
SIGNATURES.................................................. 29
Exhibit Index............................................... 30
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
METAL MANAGEMENT INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1997 MARCH 31, 1997
------------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,832 $ 5,718
Accounts receivable, net.................................. 54,334 9,560
Notes receivable from related parties..................... 0 406
Inventories............................................... 43,762 8,415
Prepaid expenses and other assets......................... 4,905 1,609
-------- -------
Total current assets................................. 106,833 25,708
Property and equipment, net................................. 53,054 20,208
Goodwill and other intangibles, net......................... 80,892 23,484
Other assets................................................ 1,579 725
-------- -------
Total assets......................................... $242,358 $70,125
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Operating lines-of-credit................................. $ 12,696 $ 7,887
Accounts payable.......................................... 47,295 5,246
Other accrued liabilities................................. 8,604 2,746
Current portion of notes payable to related parties....... 24,423 12,575
Current portion of long-term debt......................... 9,670 10,809
-------- -------
Total current liabilities............................ 102,688 39,263
Long-term notes payable to related parties, less current
portion................................................... 26,158 1,430
Long-term debt, less current portion........................ 28,131 3,740
Deferred taxes.............................................. 7,467 1,411
Other liabilities........................................... 2,021 1,133
-------- -------
Total liabilities.................................... 166,465 46,977
Stockholders' equity:
Common stock.............................................. 148 102
Warrants.................................................. 13,876 1,351
Additional paid-in-capital................................ 56,480 16,628
Retained earnings......................................... 5,389 5,067
-------- -------
Total stockholders' equity........................... 75,893 23,148
-------- -------
Total liabilities and stockholders' equity........... $242,358 $70,125
======== =======
</TABLE>
The accompanying notes are an integral part of the financial statements
1
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METAL MANAGEMENT INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-----------------------------
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
(UNAUDITED, IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
Net sales................................................... $54,435 $15,978
Cost of sales............................................... 48,461 13,978
---------- ---------
Gross profit................................................ 5,974 2,000
Operating expenses:
General and administrative................................ 3,099 1,278
Depreciation and amortization............................. 1,251 522
---------- ---------
Total operating expenses............................. 4,350 1,800
---------- ---------
Operating income from continuing operations................. 1,624 200
Interest expense............................................ (1,248) (233)
Other income (expense)...................................... 61 38
---------- ---------
Income from continuing operations before income taxes and
discontinued operations................................... 437 5
Provision for income taxes.................................. 216 0
---------- ---------
Income from continuing operations........................... 221 5
Discontinued operations:
Gain on sale of assets on former product lines of GPAR,
net of income taxes of $67 in 1997 and $0 in 1996...... 101 0
Income from operations of former product lines of GPAR,
net of income taxes of $0 in 1996...................... 0 146
---------- ---------
Net income.................................................. $ 322 $ 151
========== =========
Primary earnings per share for:
Continuing operations..................................... $ 0.02 $ 0.00
Gain on sale of discontinued operations................... $ 0.00 $ 0.00
Discontinued operations................................... $ 0.00 $ 0.02
Net income................................................ $ 0.02 $ 0.02
Weighted average primary shares outstanding................. 13,952,000 9,370,000
Fully diluted earnings per share for:
Continuing operations..................................... $ 0.02 $ 0.00
Gain on sale of discontinued operations................... $ 0.00 $ 0.00
Discontinued operations................................... $ 0.00 $ 0.02
Net income................................................ $ 0.02 $ 0.02
Weighted average fully diluted shares outstanding........... 14,559,000 9,370,000
</TABLE>
The accompanying notes are an integral part of the financial statements
2
<PAGE> 5
METAL MANAGEMENT INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
------------------------------
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
(UNAUDITED, IN THOUSANDS)
<S> <C> <C>
Cash flows from continuing operations:
Net income from continuing operations....................... $ 221 $ 5
Adjustments to reconcile net income from continuing
operations to cash flows from continuing operations:
Depreciation and amortization.......................... 1,251 522
Other.................................................. 89 0
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, net............................... (4,276) (880)
Inventories............................................ 1,917 55
Accounts payable....................................... 209 (1,525)
Other.................................................. (3,127) 1,334
-------- -------
Cash flows from continuing operations....................... (3,716) (489)
Cash flows used by investing activities:
Marketable securities sold................................ 0 962
Purchases of property and equipment....................... (952) (712)
Acquisitions, net of cash acquired........................ (6,288) (792)
Other..................................................... 302 0
-------- -------
Net cash used by investing activities....................... (6,938) (542)
Cash flows provided (used) by financing activities:
Net borrowings on lines-of-credit......................... 5,640 148
Issuances of long-term debt............................... 158 0
Repayments of long-term debt.............................. (10,844) (1,093)
Issuances of common stock................................. 13,557 0
Other..................................................... 156 0
-------- -------
Net cash provided (used) by financing activities............ 8,667 (945)
-------- -------
Cash flows from discontinued operations..................... 101 591
Net decrease in cash and cash equivalents................... (1,886) (1,385)
Cash and cash equivalents at beginning of period............ 5,718 3,093
-------- -------
Cash and cash equivalents at end of period.................. $ 3,832 $ 1,708
======== =======
</TABLE>
The accompanying notes are an integral part of the financial statements
3
<PAGE> 6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
include the accounts of Metal Management, Inc. and its subsidiaries (herein
referred to as "MTLM" or the "Company") and have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
All significant intercompany accounts, transactions and profits have been
eliminated. Certain information related to the Company's organization,
significant accounting policies and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These unaudited condensed
consolidated financial statements reflect, in the opinion of management, all
material adjustments (which include only normal recurring adjustments) necessary
to fairly state the financial position and the results of operations for the
periods presented and the disclosures herein are adequate to make the
information presented not misleading. Operating results for interim periods are
not necessarily indicative of the results that can be expected for a full year.
These interim financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto included
in the Company's most recent Annual Report on Form 10-K.
In order to maintain consistency and comparability between periods
presented, certain amounts have been reclassified from the previously reported
financial statements in order to conform with the financial statement
presentation of the current period.
The accompanying financial statements include the financial position and
results of operations of Reserve Iron & Metal, L.P. ("Reserve"), which the
Company acquired on May 1, 1997 and The Isaac Group, which the Company acquired
on June 23, 1997 (see Note 2 -- Acquisitions). These acquisitions have been
accounted for using the purchase method of accounting and, accordingly, the
results of these acquisitions are included in the consolidated financial
statements since the dates of acquisition.
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 ("GPAR") to Metal Management, Inc.
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 the first quarter
of fiscal 1998 is reflected as an addition to gain on sale.
NOTE 2 -- ACQUISITIONS
Acquisitions completed during the three months ended June 30, 1997
On May 1, 1997, the Company acquired 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. The Company entered into
ten-year employment agreements with certain former shareholders of Reserve. The
acquisition of Reserve resulted in a preliminary allocation of excess purchase
price over the fair value of net assets acquired of $7.2 million.
On June 23, 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 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, at
exercise prices ranging from $10.80 to $11.70 per share, $20,582,300 of
short-term notes, and $15,964,601 of long-term notes. In addition, the Company
guaranteed
4
<PAGE> 7
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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 and a non-compete agreement which
extends for 3 years beyond the term of the employment agreement. As part of the
employment agreement, Mr. Isaac was granted 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. The acquisition of Isaac resulted in a preliminary allocation
of excess purchase price over the fair value of net assets acquired of $48.2
million and a preliminary allocation of an intangible asset from a noncompete
agreement valued at $1.8 million.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company, Reserve and Isaac as if these
acquisitions had occurred on April 1, 1997 and a summary of consolidated results
of operations of the Company, MacLeod Group ("MacLeod"), HouTex Metals Company,
Inc. ("HouTex"), Reserve and Isaac as if these acquisitions had occurred on
April 1, 1996. The MacLeod and HouTex acquisitions were completed by the Company
during the fourth quarter of fiscal 1997. 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, 1997 and 1996,
respectively (in thousands, except share data).
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996
------------------ ------------------
<S> <C> <C>
Net sales...................................... $108,100 $103,890
Net loss from continuing operations............ $ (1,130) $ (234)
Net loss per share from continuing
operations................................... $ (0.08) $ (0.02)
</TABLE>
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 11.5 million shares of common stock, 1.5
million warrants to purchase common stock, and $6.0 million in cash.
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 subject to increase
based on Proler's earnings prior to March 18, 1997, a $2.0 million promissory
note subject to certain adjustments for income taxes, 1.75 million shares of
common stock and warrants to purchase 375,000 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.
On July 30, 1997, the Company signed a binding letter of intent to acquire
Houston Compressed Steel Corp. ("Houston Compressed"), headquartered in Houston,
Texas. The shareholders of Houston Compressed
5
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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 either 100,000 shares of common stock or $1,500,000
in cash, at Newell Phoenix, L.L.C.'s election.
On August 4, 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
$7,150,000 in cash, 112,500 shares of common stock, and warrants to purchase an
aggregate of 150,000 shares of common stock.
On August 5, 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 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
$2,000,000 owed to it from PerlCo.
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 are
also subject to the consummation of the Cozzi merger.
NOTE 3 -- INVENTORIES
Inventories consisted of the following at (in thousands):
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1997 1997
-------- ---------
<S> <C> <C>
Ferrous metals............................................. $36,269 $2,707
Non-ferrous metals......................................... 6,448 4,754
Other...................................................... 1,045 954
------- ------
$43,762 $8,415
======= ======
</TABLE>
NOTE 4 -- DEBT AND EQUITY TRANSACTIONS COMPLETED DURING THE QUARTER ENDED JUNE
30, 1997
During the quarter ended June 30, 1997, the Company completed several
financing and capital transactions which raised additional cash and refinanced
or paid down existing 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
per share (the "Private Placement"), including the sale
6
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
of 260,000 shares, collectively, to five directors of the Company,
including Gerard M. Jacobs, T. Benjamin Jennings, Donald F. Moorehead, Jr.,
George O. Moorehead and Harold Rubenstein. The Company raised approximately
$14.7 million in cash through the Private Placement. A purchaser of the
restricted stock who is not a director or employee of the Company exchanged
consideration comprised of cash and a short term note. At June 30, 1997,
the balance due on the note was $1.75 million plus accrued interest. The
Company received payment of the note and accrued interest on July 3, 1997.
2. On April 15, 1997, Clend Investment converted $1.0 million of its
note payable into 182,481 restricted shares of common stock of the Company.
3. On April 30, 1997, the Company paid its $960,000 and $695,000 notes
payable due to Mike and Zalman Melnik, respectively.
4. On May 21, 1997, Mike and Zalman Melnik exercised certain warrants
("Limited Warrants") to purchase 150,000 shares of restricted common stock
in exchange for aggregate cash payments to the Company of $600,000. Also,
on May 21, 1997, Clend Investment exercised its Limited Warrants to
purchase 180,000 shares of restricted common stock in exchange for a
$720,000 reduction of the amount owed by the Company pursuant to the Clend
Note.
5. On May 29, 1997, the Company made a payment of all principal and
interest due on a $3.0 million mortgage note payable. 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 a $5.6 million note ("Promissory Note A") due to Ian
MacLeod. 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%.
6. 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 May 30, 1998 and
bear interest 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 a $600,000 note payable to Ian MacLeod, and for working
capital purposes.
7. On June 23, 1997, in connection with the acquisition of Isaac, the
Company entered into a credit agreement with a commercial lender which
provides a revolving line of credit up to an amount of $37 million, subject
to certain terms and conditions. The line expires on June 23, 1998 and
borrowings are secured by substantially all of Isaac's assets. The credit
agreement also provides Isaac shareholders with an irrevocable letter of
credit that secures an aggregate of $27.4 million of notes issued by MTLM
to the former Isaac shareholders and the Isaac notes payable to
shareholders.
7
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 5 -- CHANGES IN STOCKHOLDERS' EQUITY
Changes in stockholders' equity during the three months ended June 30, 1997
are as follows ($ 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...... 1,942,857 20 11,513 21,030 0 32,563
Conversion of debt to equity........ 342,481 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
Net income for the three months
ended June 30, 1997.............. 0 0 0 0 322 322
---------- ---- ------- ------- ------ -------
Balance at June 30, 1997.............. 14,800,078 $148 $13,876 $56,480 $5,389 $75,893
========== ==== ======= ======= ====== =======
</TABLE>
Equity Transactions Subsequent to June 30, 1997
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 were $19.95 million. The discount of
$1.05 million will 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.
Dividends on the Convertible Preferred Stock accrue, whether or not
declared by the Board of Directors, at an annual rate of 6% of the Stated Value
of each outstanding share of Convertible Preferred Stock. The Conversion
features of the Preferred Stock are subject to shareholder approval and vary
based on conditions, including the price of the common stock, at the time of
conversion. The Company expects to classify the preferred stock as temporary
equity.
NOTE 6 -- SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is summarized as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Interest paid......................................... $1,369 $251
Income taxes paid..................................... $ 784 $ 8
</TABLE>
8
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
In connection with the Company's acquisitions, the net cash paid was as
follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
JUNE 30, 1997
-------------
<S> <C>
Fair value of assets acquired............................... $167,159
Liabilities assumed......................................... (90,011)
Stock and warrants issued................................... (32,563)
Promissory notes and other consideration issued............. (38,089)
--------
Cash paid................................................... 6,496
Less: cash acquired....................................... (208)
--------
Net cash paid for acquisitions.............................. $ 6,288
========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
JUNE 30, 1997
-------------
<S> <C>
Non cash investing and financing activities:
Conversion of debt to stock and warrants.................. $2,720
Exchange of a note receivable for common stock............ $1,750
</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 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.
For the quarter ended June 30, 1996, common share equivalents were excluded from
this computation since they did not have a dilutive effect of 3% or more.
9
<PAGE> 12
This Form 10-Q includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements in this Form 10-Q which address
activities, events or developments that the Company expects or anticipates will
or may occur in the future, including such things as future acquisitions
(including the amount and nature thereof), business strategy, expansion and
growth of the Company's business and operations and other such matters are
forward-looking statements. Although the Company believes the expectations
expressed in such forward-looking statements are based on reasonable assumptions
within the bounds of its knowledge of its business, a number of factors could
cause actual results to differ materially from those expressed in any
forward-looking statements, whether oral or written, made by or on behalf of the
Company. Many of these factors have previously been identified in filings or
statements made by or on behalf of the Company. See also "Factors Influencing
Future Results and Accuracy of Forward Looking Statements" below.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included under
Item 1. In addition, reference should be made to the audited consolidated
financial statements and notes thereto and related Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's most recent Annual Report on Form 10-K.
GENERAL OVERVIEW
The Company was founded in 1981 and re-incorporated in Delaware in June
1986. Prior to April 11, 1996, the Company was called General Parametrics
Corporation and operated as a manufacturer and marketer of color thermal and dye
sublimation printers and related consumables, including ribbons, transparencies
and paper. This business was discontinued by the Company during fiscal 1997. On
April 9, 1996, the Company's stockholders approved an amendment to the Company's
Certificate of Incorporation to change the name of the Company from General
Parametrics Corporation to Metal Management, Inc. Effective April 15, 1996, the
Company formally changed its NASDAQ stock symbol to "MTLM". On April 25, 1996,
the Board of Directors of the Company approved a change in the Company's fiscal
year end from October 31 to March 31, effective April 1, 1996.
The Company entered the scrap metal recycling industry on April 11, 1996,
through its merger with EMCO Recycling Corp. ("EMCO"), headquartered in Phoenix,
Arizona. As part of the strategic redirection, in April 1996, management
announced plans to exit the Spectra*Star printer and consumables business. On
July 16 1996, Mannesmann Tally ("Tally") acquired the inventory and related
production equipment of the Spectra*Star business for approximately $1.3 million
in cash and provided additional contingent consideration in the form of
royalties on future sales of Spectra*Star printers and related consumables. The
Company discontinued and sold its VideoShow and related products lines business
("VideoShow") in December 1996 for consideration substantially in the form of
royalties on future sales of VideoShow equipment. The VideoShow consideration is
not expected to be material to the Company.
The Company and its wholly-owned subsidiaries are engaged in the business
of dismantling, processing, marketing, brokering and recycling of both ferrous
and non-ferrous metals with the goal of becoming one of the largest recyclers of
scrap metal in North America. The Company operates twenty-four recycling centers
in six states, including those operated through joint ventures, and resells
processed scrap metal and other materials to domestic and foreign customers.
MTLM intends to continue its expansion principally through acquisition to
consolidate the highly fragmented scrap metal recycling industry. The Company
believes that no single company is a significant processor of scrap metal on a
national scale, although certain companies are
10
<PAGE> 13
significant processors on a local or regional scale. The Company's business
operations, as of June 30, 1997, consisted of the following:
<TABLE>
<CAPTION>
SUBSIDIARY LOCATION(S) DATE ACQUIRED
---------- ----------- -------------
<S> <C> <C>
EMCO..................................... Phoenix, Arizona April 11, 1996
MacLeod.................................. Los Angeles, California January 1, 1997
HouTex................................... Houston, Texas January 7, 1997
Reserve.................................. Cleveland, Ohio and Chicago, Illinois May 1, 1997
Isaac.................................... Maumee, Defiance, Bryan, Dayton and June 23, 1997
Cleveland, Ohio
</TABLE>
Pending acquisitions as of August 14, 1997 include:
<TABLE>
<CAPTION>
COMPANY LOCATION(S)
------- -----------
<S> <C>
Cozzi.................................. Chicago, Illinois and Pittsburgh, Pennsylvania
Proler................................. Houston, Texas and Jackson, Mississippi
Superior............................... Huntington Beach, California
Houston Compressed..................... Houston, Texas
Salt River............................. Phoenix, Arizona
Goldin Companies....................... Gulfport, Mississippi, Mobile, Alabama and
New Orleans, Louisiana
PerlCo................................. Memphis, Tennessee
</TABLE>
ACQUISITION STRATEGY
MTLM believes that similar to the solid waste industry, the scrap metal
recycling industry has recently begun to experience market consolidation due to,
among other things: (1) significant capital requirements caused by expanding
equipment needs and by more stringent environmental regulations; and (2) the
desire of owners of independent scrap metal processors to sell closely-held
businesses to companies with access to public capital markets.
MTLM seeks to acquire significant processors of scrap metal in large
metropolitan markets which will serve as regional platform companies and to
follow these acquisitions with "tuck-in" acquisitions of smaller processors.
MTLM believes that this consolidation strategy will allow MTLM to improve its
operating margins and profitability by: (1) increasing its market share, which
is expected to enhance customer relationships and enhance supply capabilities;
(2) spreading the cost of management and administrative staff, and utilizing
equipment and other assets, across larger operations; and (3) transferring
technology and best demonstrated processing and marketing strategies among
acquired recycling operations. The Company is continuously evaluating
acquisition opportunities.
RESULTS OF OPERATIONS (Q1 FISCAL 1998 VS. Q1 FISCAL 1997)
During the quarter ended June 30, 1997 ("Q1 fiscal 1998"), the Company
acquired Reserve Iron & Metal, L.P. ("Reserve") and four companies under common
ownership comprising The Isaac Group ("Isaac"). Reserve was acquired on May 1,
1997 and Isaac was acquired on June 23, 1997. Both acquisitions are accounted
for under the purchase method of accounting, and accordingly, their results from
operations are included from the dates of acquisition. The Company's results
from operations during the quarter ended June 30, 1996 ("Q1 fiscal 1997") only
include the operations of EMCO which was acquired on April 11, 1996.
11
<PAGE> 14
Consolidated net sales for the quarter ended June 30, 1997 and 1996 in
broad product categories were as follows ($ in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------------------- -------------------------------
COMMODITY WEIGHT NET SALES % WEIGHT NET SALES %
--------- ------ --------- - ------ --------- -
<S> <C> <C> <C> <C> <C> <C>
Ferrous metals (tons)................ 216,587 $26,385 49% 42,000 $ 4,944 31%
Non-ferrous metals (pounds).......... 28,273,526 17,636 32% 19,000,000 10,835 68%
Brokerage (tons)..................... 142,709 9,111 17% -- 0 0%
Other................................ -- 1,303 2% -- 199 1%
------- ---- ------- ----
$54,435 100% $15,978 100%
======= ==== ======= ====
</TABLE>
Ferrous sales represented 49% and 31% of consolidated net sales for the
three months ended June 30, 1997 and 1996, respectively. The increase in ferrous
sales, both in tons sold and as a percentage of total net sales, is due to the
acquisitions of HouTex, Reserve and Isaac, which primarily sell ferrous metals.
This increase in ferrous sales was partially offset by a $1.1 million decrease
in ferrous sales at EMCO during the quarter ended June 30, 1997 as compared to
same quarter last year attributable primarily to pricing pressures in the
Phoenix market as a result of increased competition. The average selling price
per ton for ferrous metals was $121.82 and $117.71 for the three months ended
June 30, 1997 and 1996, respectively.
Non-ferrous sales increased primarily due to the acquisition of MacLeod,
which primarily sells non-ferrous metals. Non-ferrous sales at EMCO decreased by
$2.0 million during the quarter ended June 30, 1997 compared to the comparable
period in 1996 because of a reduction in volume due to increased competition.
The average selling price per pound for non-ferrous metals was $.62 and $.57 for
the three months ended June 30, 1997 and 1996, respectively. The increase in
price per pound is attributable to the volume of copper sold by MacLeod, which
generally sells for a higher price per pound compared to other 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,
requiring no processing of the metals and no inventory holding cost. For the
three months ended June 30, 1997, the Company realized a 9% gross profit margin
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 for the three months ended June 30, 1997 was $6.0
million, or 11% of net sales compared to $2.0 million, or 12.5% of net sales for
the comparable period in 1996. The Company believes the change in gross margin
reflects the broadening of its business from one operation in the quarter ended
June 30, 1996 to five operations in the quarter ended June 30, 1997. The price
of scrap metal is affected by regional and seasonal variations. Furthermore,
prices for scrap metal are also impacted by broad and global cyclical movements
and as such equilibrates supply and demand.
Consolidated general and administrative expenses were $3.1 million and $1.3
million for the three months ended June 30, 1997 and 1996, respectively. The
increase in general and administrative expenses reflects the incremental
expenses incurred from the Company's 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 pace the Company is
pursuing.
Depreciation and amortization expense increased from $522,000 for the three
months ended June 30, 1996 to $1.3 million for the three months ended June 30,
1997. The increase is attributed to the significant acquisitions of Isaac and
Reserve.
Interest expense increased from $233,000 for the three months ended June
30, 1996 to $1.2 million for the three months ended June 30, 1997 due to the
issuance and assumption of debt associated with the acquisitions of MacLeod,
Reserve and Isaac.
Income tax expense for the three months ended June 30, 1997 was $216,000
for an effective tax rate of 49%. The effective tax rate is higher than the
statutory rate primarily due to the permanent difference represented by
non-deductible goodwill amortization.
12
<PAGE> 15
Net income from continuing operations was $221,000 ($.02 per share) for the
three months ended June 30, 1997 as compared to $5,000 ($0.00 per share) for the
comparable prior period. The increase reflects that the Company operated with
five operations during the quarter ended June 30, 1997 compared to only one
operation in the comparable prior period.
Income from discontinued operations was $101,000 ($.00 per share) for the
three months ended June 30, 1997 as compared to $146,000 ($.02 per share) for
the comparable prior period. Income during the quarter ended June 30, 1997
mainly reflects the royalty income received by the Company from the sale of its
Spectra*Star business, net of certain expenses paid. The quarter ended June 30,
1996 includes the full operation of the Spectra*Star business which was sold
during July 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to pursue acquisitions in the scrap metal recycling
industry and anticipates financing these acquisitions through the issuance of
debt or 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, or, in the event that it is, that it
will be available in the amounts and on terms acceptable to the Company.
CASH FLOWS FROM CONTINUING OPERATIONS
The Company's net cash flows from continuing operations decreased during
the three months ended June 30, 1997 from the comparable period in 1996. The
decrease mainly reflects an increase in accounts receivable and the exchange of
a note receivable for $1.75 million in connection with the Private Placement.
This note was collected with accrued interest on July 3, 1997.
CASH FLOWS FROM INVESTING ACTIVITIES
During the three months ended June 30, 1997, the Company purchased
approximately $.9 million of property and equipment and utilized cash of
approximately $6.3 million for the acquisitions of and transaction costs related
to Reserve and Isaac. 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 quarter ended June 30, 1997, the Company received proceeds from
a private offering of 2,025,000 shares of restricted common stock which
aggregated to $13.0 million. Subsequent to the end of the quarter, the Company
received payment of $1.75 million which brought total proceeds raised from the
private offering to approximately $14.7 million. The proceeds from the private
offering were used to fund the acquisition of Reserve and used to pay debt
associated with the acquisitions of MacLeod and HouTex. Borrowings on
lines-of-credit increased to fund working capital requirements. The Company
anticipates growing through acquisitions and will require additional debt or
equity to fund pending acquisitions.
CASH FLOWS FROM DISCONTINUED OPERATIONS
The Company's cash flows from discontinued operations for the quarter ended
June 30, 1997 reflects royalty income received from the sale of the Spectra*Star
business. Cash flows during the comparable period last year reflect the cash
generated by the operations of the Spectra*Star business.
FINANCIAL CONDITION
The Company's principal sources of funding are its existing cash and cash
equivalents balances, collection of accounts receivable and proceeds from lines
of credit and other borrowing agreements. At June 30, 1997, the Company had $3.8
million in cash and cash equivalents versus $5.7 million at March 31, 1997.
13
<PAGE> 16
Significant Cash Transactions During the Quarter
During the quarter, the Company completed certain significant debt and
equity transactions. The Company raised approximately $13.0 million in cash
during the quarter from the Private Placement. 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. During the quarter, the Company paid
approximately $10.0 million of notes which were issued in connection with the
acquisition of MacLeod and HouTex and utilized $5.9 million of cash for the
acquisition of Reserve.
Significant Cash Transactions Subsequent to June 30, 1997
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 were $19.95 million. On July 3, 1997,
the Company also collected a $1.75 million short-term note receivable which was
received in connection with the Private Placement.
Cash Requirements for Pending Acquisitions
In connection with each of the pending acquisitions, the Company has agreed
that the cash portion (excluding transaction costs) of the purchase price will
not exceed (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Cozzi....................................................... $ 6,000
Proler...................................................... 15,000
Superior.................................................... 1,800
Salt River.................................................. 1,500
Goldin Companies............................................ 7,150
-------
Total....................................................... $31,450
=======
</TABLE>
There can be no assurance that any of these acquisitions will close. The
Company's existing cash and cash equivalents will not be sufficient to fund all
of these acquisitions. The Company is seeking other financing sources to meet
such obligations but no assurances can be provided that such financing will be
available when needed, or that, if available, it will be on satisfactory terms.
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 has
guaranteed $8.5 million of notes recorded by Isaac 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. 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 $54.3 million at June 30, 1997 due to the recent acquisitions of Reserve and
Isaac. Accounts receivable at EMCO, MacLeod and HouTex remained unchanged during
the two periods. Accounts payable increased from $5.2 million at March 31, 1997
to $47.3 million at June 30, 1997 due to the recent acquisitions.
14
<PAGE> 17
Inventory levels vary at each of the Company's subsidiaries based on levels
determined by managers of each respective subsidiary. Inventory on hand
consisted of the following ($ in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997 MARCH 31, 1997
--------------- --------------
COMMODITY VALUE % VALUE %
--------- ----- - ----- -
<S> <C> <C> <C> <C>
Ferrous metals.............................................. $36,269 83% $2,707 32%
Non-ferrous metals.......................................... 6,448 15% 4,754 57%
Other....................................................... 1,045 2% 954 11%
------- ---- ------ ----
$43,762 100% $8,415 100%
======= ==== ====== ====
</TABLE>
The increase in value of ferrous metals is primarily due to the
acquisitions of Reserve and Isaac which mainly sell ferrous metals. The value of
non-ferrous metals also increased due to the acquisition of Reserve as well as
an increase in inventory levels at certain of the Company's businesses since
March 31, 1997.
Property and equipment increased from $20.2 million at March 31, 1997 to
$53.1 million at June 30, 1997, as a result of various business acquisitions and
increased capital expenditures at the Company's existing 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 June 30, 1997, the Company had
approximately $8.1 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 June 30, 1997, the Company advanced approximately $6.5 million
to EMCO for working capital requirements. As a result, the Company will seek
equity or debt financing to fund future improvements and expansion of its scrap
metal recycling businesses as well as to make other acquisitions of scrap metal
recycling facilities. There can be no assurance that such financing will be
available when needed, or that, if available, it will be on satisfactory terms.
The failure to obtain financing may cause the Company to default on certain
existing debt obligations and would hinder the Company's ability to make
continued investments in capital equipment and pursue expansions, which could
materially adversely affect results of operations and financial condition. Any
equity financing which is undertaken would result in dilution to the
then-existing stockholders of the Company. See "Factors Influencing Future
Results -- Risk of Dilution to Existing Stockholders."
FACTORS INFLUENCING FUTURE RESULTS AND ACCURACY OF
FORWARD-LOOKING STATEMENTS
In the normal course of its business, the Company, in an effort to help
keep its stockholders and the public informed about the Company's operations,
may from time to time issue or make certain statements, either in writing or
orally, that are or contain forward-looking statements, as that term is defined
in the U.S. federal securities laws. Generally, these statements relate to
business plans or strategies, projected or anticipated benefits from
acquisitions made by or to be made by the Company, or projections involving
anticipated revenues, earnings, or other aspects of operating results. The words
"expect," "believe," "anticipate," "project," "estimate," and similar
expressions are intended to identify forward-looking statements. The Company
cautions readers that such statements are not guarantees of future performance
or events and are subject to a number of factors that may tend to influence the
accuracy of the statements and the projections upon which the statements are
based, including but not limited to those discussed below. As noted elsewhere in
this report, all phases of the Company's operations are subject to a number of
uncertainties, risks, and other influences, many of which are outside the
control of the Company, and any one of which, or a
15
<PAGE> 18
combination of which, could materially affect the results of the Company's
operations and whether forward-looking statements made by the Company ultimately
prove to be accurate.
The following discussion outlines certain factors that could affect the
Company's consolidated results of operations for fiscal 1998 and beyond and
cause them to differ materially from those that may be set forth in
forward-looking statements made by or on behalf of the Company.
GENERAL
The Company's Board of Directors intends to actively pursue acquisitions
and mergers in scrap metal recycling. Depending on the nature and size of
potential acquisitions, mergers and other transactions, if any, the Company's
cash flows from operating and investing activities, together with its cash, cash
equivalents and marketable securities may not be sufficient in the future.
Therefore, the Company will have to supplement these sources of liquidity with
additional sources of funds such as borrowings or stock offerings. No assurance
can be provided that such financing will be available or available on reasonable
terms.
LIMITED OPERATING HISTORY
Prior to the EMCO merger in April 1996, the Company had no history of
operations in the scrap metal recycling industry. The acquired companies have
not previously operated as subsidiaries of a public holding company subject to
formal accounting and reporting requirements. Consequently, in order to
transition the acquired companies, the Company will have to continue to
establish information systems, internal controls, and hire managers with
appropriate skills to insure the timeliness and accuracy of financial reports.
During fiscal 1997, the Company announced restatement of certain financial
results and amended its second and third quarter reports on Form 10-Q due to
accounting errors at EMCO. In addition, the acquired companies have historically
been organized in a manner in which its management and ownership were the same.
The management of the acquired companies have not previously reported to
management responsible for diverse operations and have had limited experience in
executing consolidation strategies on the scale being pursued by the Company.
Furthermore, the success of the consolidation strategy is dependent in part on
the ability of the Company's management to oversee diverse operations and to
successfully integrate processing, marketing and other resources of the acquired
companies. The Company's management team has not previously had experience in
such capacity.
IMMEDIATE AND FUTURE CAPITAL REQUIREMENTS
The Company is pursuing an aggressive acquisition strategy which requires
substantial amounts of capital. For example, to accomplish only the acquisitions
of Cozzi and Proler, the Company will be required to have $21.0 million to fund
the cash portions of purchase consideration. The Company is evaluating various
financing strategies and alternatives to obtain sufficient capital to close the
acquisitions of Cozzi and Proler and to provide working capital support and to
fund future acquisitions; however, no assurance can be provided that sufficient
funds on acceptable terms will become available. Failure to raise sufficient
capital to close the Cozzi and Proler acquisitions, or other acquisitions could
adversely affect the Company and its stock price.
SHORT TERM BORROWING STRATEGIES TO FUND ACQUISITIONS
The Company intends to continue an acquisition strategy which will utilize
seller note obligations with short term as well as long term maturities. The
issuances of seller notes may provide restrictive covenants on the Company. For
example, the seller notes issued to acquire HouTex, MacLeod, Reserve and Isaac
provided restrictions on the ability of the Company to unilaterally direct or
control the operations of HouTex, MacLeod, Reserve or Isaac until the seller
notes were repaid. The seller notes issued also provided pledges of the stock of
the acquired entities and certain other restrictive covenants. The seller notes
issued to acquire Reserve and Isaac remain unpaid, and no assurance can be
provided that the Company will access capital on acceptable terms in adequate
time frames to repay these notes or other seller note obligations issued in the
future. An inability to repay seller note obligations would have adverse
consequences to the Company.
16
<PAGE> 19
SUBSTANTIAL LEVERAGE
As a result of the recent mergers and acquisitions, the Company, as of June
30, 1997, had approximately $166.5 million in consolidated liabilities. In order
to pursue expansion and acquisition opportunities, the Company expects to incur
additional debt, either through bank or credit lines or the sale of debt
securities in registered or unregistered transactions, as well as any additional
equity financing it may undertake. The servicing of such present and future debt
of the Company will utilize cash either in the form of cash on hand or cash
generated by operating and financing activities.
As of June 30, 1997, the Company had a long-term debt (including current
portions of long-term debt) to total capital ratio of 54%. The degree to which
the Company is leveraged could have adverse consequences to the Company
including the following: (1) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions,
general corporate purposes or other purposes may be impaired; (2) a substantial
portion of the Company's cash flow from operations will be dedicated to the
payment of principal and interest; and (3) the Company will be more vulnerable
to an economic downturn in the scrap metal recycling industry which has
historically been sensitive to changes in general economic conditions.
RISK OF EXPANSION AND CONSOLIDATION STRATEGIES
The Company currently plans to continue to pursue additional acquisitions
in the scrap metal recycling industry. There can be no assurance that any
previously announced or unannounced mergers will be consummated nor that, if
they are, the Company will be able to effectively manage disparate business
enterprises. The ability of the Company to achieve its expansion objectives and
to manage its growth effectively depends on a variety of factors, including the
ability to identify appropriate acquisition targets and to negotiate acceptable
terms for their acquisition, the integration of new businesses into the
Company's operations and the availability of capital. The inability to control
or manage growth effectively or to successfully integrate future new business
into the Company's operations would have a material adverse effect on the
Company's financial condition and results of operations. There can be no
assurance that the Company will be able to successfully expand or that growth
and expansion will result in profitability. There can be no assurance that the
Company will be able to realize any of the other anticipated benefits of future
mergers or acquisitions that it may undertake or achieve its financial goals and
operational objectives in execution of its consolidation strategy.
COMPANY MANAGEMENT FACTORS
Due to the limited experience of the Company's management in the scrap
metal recycling business, the Company relies substantially on the scrap metal
recycling experience of the current management teams at each of its wholly-owned
subsidiaries. While certain of the management personnel of the acquired
facilities have executed employment agreements, there can be no assurance that
such personnel will continue to serve at the acquired businesses. The loss of a
significant number of management personnel of the Company's acquired businesses
could have a material adverse effect on the Company's efforts to effectively
manage and integrate these operations. In addition, the loss of executive
officers of the Company would also adversely impact the Company's performance
and ability to successfully expand the business.
A condition of the Cozzi merger agreement contemplates the Company
appointing Albert A. Cozzi to be the President and Chief Operating Officer of
the Company. While Mr. Cozzi has substantial experience in the scrap metal
industry and would be an important part of the Company's senior management team,
no assurance can be provided that the Cozzi merger will close.
POTENTIAL CHANGES IN MANAGEMENT AND GOVERNANCE
Changes in Management
Upon the closing of the Cozzi merger, material changes will occur in the
management and governance structure of the Company. The Cozzi merger agreement
contemplates that T. Benjamin Jennings will remain
17
<PAGE> 20
as the Chairman of the Board and Chief Development Officer of the Company,
Gerard M. Jacobs will remain as Chief Executive Officer of the Company, Robert
C. Larry will remain as Chief Financial Officer of the Company, and Albert A.
Cozzi will be appointed President and Chief Operating Officer of the Company. In
addition, the Cozzi merger agreement contemplates that an Executive Committee
will be formed comprised of Messrs. Albert A. Cozzi, Jacobs, Jennings, and
possibly other individuals. The Company has not previously operated with a Chief
Operating Officer or with an Executive Committee. There can be no assurance that
these changes in management structure will be successful in carrying out the
acquisition and operating plans of the Company.
Changes in Governance
Upon the closing of the Cozzi merger, the Cozzi merger agreement
contemplates that the Company's Board of Directors will likely be comprised of
directors equally nominated by the shareholders of Cozzi and by Messrs. Jacobs
and Jennings. The Cozzi merger agreement contemplates that two outside directors
will be nominated who are mutually agreeable to both sides of the Cozzi merger.
The Cozzi merger is an example of the willingness of the Company to rapidly
change the management and governance of the Company, if necessary or desirable.
No assurance can be provided that the proposed changes in management and
governance as contemplated in the Cozzi merger agreement will occur or that a
subsequent acquisition or merger will not similarly change the management and
governance structure of the Company nor can there be assurance that any changes
to the corporate governance will be advantageous to the Company.
CONTROL OF COMPANY BY MANAGEMENT, PRINCIPAL STOCKHOLDERS AND MEMBERS OF THE
BOARD OF DIRECTORS
As a result of the acquisitions, Messrs. Jacobs and Jennings, together with
other members of the Board of Directors and other Principal Stockholders, have
sufficient voting power to control the outcome of all matters (including the
election of directors and future mergers, acquisitions or sale of assets)
submitted to stockholders for approval and may be deemed to have effective
control over the affairs and management of the Company. Messrs. Jacobs and
Jennings along with the existing members of the Board of Directors of the
Company, currently beneficially own approximately 40% of the Company's issued
and outstanding common stock. To date, the Directors of the Company have voted
in support of initiatives recommended by Messrs. Jacobs and Jennings. There can
be no assurance that such support will continue in the future with respect to
voting by Directors. The Cozzi merger, if consummated, will result in 66%
ownership of the Company's common stock by management, members of the Board of
Directors and Cozzi shareholders which further concentrates ownership and
control among principals of the Company.
IMPACT OF THE COZZI DEFINITIVE AGREEMENTS ON MANAGEMENT OF THE COMPANY AND
STRATEGIC ACTIONS CONSIDERED BY THE COMPANY PRIOR TO CLOSING OF THE COZZI MERGER
On May 16, 1997, the Company executed a definitive agreement to merge a
subsidiary of the Company with Cozzi. The definitive agreement requires the
Company to seek approval from Cozzi shareholders prior to executing certain
strategic actions up to the closing of the Cozzi merger or termination thereof.
Actions that require approval by the Cozzi shareholders included but are not
limited to:
1. Amendments to or changes of the Company's charter or bylaws.
2.Issuance of equity, except those contemplated by Section 5.2(b) of the
merger agreement.
3.Changes in management of the Company or changes in the compensation
provided to officers and directors of the Company.
4.Acquisitions of companies, except those contemplated by Section 5.2(e) of
the merger agreement.
5. Incurrence of any indebtedness or other significant financing
transactions.
No assurance can be provided that the Cozzi merger will be consummated.
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CYCLICALITY OF OPERATING RESULTS
The operating results of the scrap metal recycling processing industry in
general, are highly cyclical in nature as they tend to reflect and amplify the
general national economic condition. In periods of national recession or periods
of minimal economic growth, the operations of scrap metal recycling companies
have been materially adversely affected. During recessions or periods of minimal
economic growth, the automobile and the construction industries typically
experience major cutbacks in production, resulting in decreased demand for
steel, copper and aluminum supplies. For example, the scrap metal recycling
industry was adversely affected for a period of five years from approximately
1988 to 1993. Future economic downturns would materially and adversely affect
the operating results of the Company. The ability of the Company to withstand
significant economic downturns in the future will depend in part on the amount
of cash maintained and availability under lines of credit for the Company.
Recently, EMCO has required substantial cash infusions from the Company. The
Company believes that EMCO will require additional working capital funding
during fiscal 1998.
PRICE FLUCTUATIONS
The Company's results of operations have been in the past, and the results
of operations of the overall Company are expected to be, subject to price
fluctuations that occur in the metals commodities markets. A further decline in
commodity prices could further reduce revenues and net income prospectively.
Such losses could have a material adverse effect on the Company's results of
operations and liquidity of the Company.
DEPENDENCE ON SCRAP SUPPLIERS
The Company's scrap recycling operations are dependent upon the supply of
scrap materials from its suppliers. Few of such suppliers are bound by long-term
supply arrangements, and therefore they have no obligation to continue to supply
scrap materials to the Company. In the event that substantial numbers of scrap
suppliers cease supplying scrap materials to the Company, the financial
condition and results of operations of the Company would be materially and
adversely affected.
CONCENTRATION OF CUSTOMERS AND CREDIT RISK
For the three months ended June 30, 1997, the Company's ten largest
customers represented 49.9% of consolidated net sales and 39.8% of net accounts
receivable. Customers which represented at least 10% of net sales for the three
months ended June 30, 1997 were David J. Joseph and Company (10.7% of net sales
and 5.7% of accounts receivable) and Republic Engineered Steel, Inc. (10.1% of
net sales and 15.0% of accounts receivable). The loss of any one of the
Company's significant customers could affect the Company's results of operations
and cash flows.
Financial instruments that potentially subject the Company to significant
concentration of credit risk are primarily trade accounts receivable. The
Company sells its products primarily to scrap metal brokers and steel mills
located in the United States. Generally, the Company does not require collateral
or other security to support customer receivables. Historically, the Company's
wholly-owned subsidiaries have not experienced material losses from the
noncollection of receivables, however, certain of the Company's subsidiaries
have significant balances owing from customers that operate in cyclical
industries and leveraged conditions which may impair the collectibility of
receivables.
OPERATING LOSSES AT EMCO
EMCO has incurred operating losses and required capital infusions since the
April 1996 merger. Management believes that the losses have resulted primarily
from unfavorable market conditions in Arizona, from operation of antiquated and
inefficient machinery and equipment, from lack of certain machinery and
equipment, and from certain operational issues. During fiscal 1997, in an effort
to abate such operating losses,
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the Company initiated efforts to restructure the operations of EMCO. The
restructuring has reduced expenses by primarily eliminating the utilization of
certain leased equipment, reducing the size of the workforce, and reducing the
cost of outside processing from certain vendors. In addition, as a part of the
restructuring program, EMCO management initiated a review of the buying and
selling departments. The Company is not certain whether it will be able to
accomplish a successful restructuring of EMCO's business.
As part of the Cozzi merger, the Company will own 50% of the Salt River
joint venture owned by Cozzi in Phoenix, Arizona. On August 4, 1997, the Company
signed a letter of intent to purchase the other 50% interest of the joint
venture from Newell Phoenix L.L.C. It is the Company's intention to combine the
operations of Salt River with the EMCO operations. There can be no assurance
that either the Cozzi or the Newell Phoenix transaction will close, or if both
transactions close, there can be no assurance that any integration or
consolidation of EMCO's business with Salt River will be successful.
RISK OF DILUTION TO EXISTING STOCKHOLDERS
The Company's strategy of expansion and additional acquisitions will
require it to issue additional shares of common stock or securities convertible
into common stock as consideration for additional acquisitions. Common stock may
be issued at a discount to the market price and issuance of a material amount of
common stock or such securities would result in significant dilution to the
then-existing stockholders of the Company. For example, the Cozzi merger, if
consummated, will result in the issuance of an additional 11.5 million shares of
common stock and warrants to purchase at least 3.0 million shares of common
stock. The Company expects to be required to seek equity financing to meet
future capital requirements, which would also result in additional dilution. See
"Immediate and Future Capital Requirements."
VOLATILITY OF STOCK PRICE
The Company's stock price has been, and in the future is expected to be,
volatile and to experience market fluctuation as a result of a number of
factors, including, but not limited to, merger and acquisition announcements and
developments, current and anticipated results of operations, future product
offerings by the Company or its competitors and factors unrelated to the
operating performance of the Company. The trading price of the Company's Common
Stock may also vary as a result of changes in the business, operations or
financial results of the Company, prospects of general market and economic
conditions, additional future proposed acquisitions by the Company and other
factors. Failure in any quarter to meet the investment community's revenues or
earnings expectations, if any, could have an adverse impact on the Company's
stock price, as could sales of large amounts of stock by existing stockholders.
In addition, sales of substantial amounts of the Company's common stock in the
public market could adversely affect the market price of the Company's common
stock. In the event the market price were adversely affected by such sales, the
Company's access to equity capital markets could be adversely affected and
issuances of common stock by MTLM in connection with acquisitions, or otherwise,
could dilute future earnings per share.
Management believes that the investment public has factored the closing of
the Cozzi and Proler mergers as well as potential future acquisitions into the
Company's current stock price. If the Cozzi, Proler or any future acquisitions
do not close, an adverse impact may occur on the Company's stock price.
POTENTIAL REDEMPTION OF SERIES A PREFERRED STOCK
On August 8, 1997, the Company issued 21,000 shares of Series A Convertible
Preferred Stock, par value $.01 per share (stated value of $1,000 per share)
(the "Series A Preferred Stock"). If the convertibility provisions of the Series
A Preferred Stock are not approved by the Stockholders, the Company will be
required to redeem the Series A Preferred Stock at a redemption price equal to
the sum of $1,000 per share plus all accrued and unpaid dividends plus interest
at an annual rate of 15% on the stated value of $1,000 per share from the date
the Series A Preferred Stock was purchased to the redemption date. If the
Company has obtained Stockholder approval ("Stockholder Approval") of the
convertibility provisions of the Series A Preferred Stock, but has not filed a
registration statement (the "Registration Statement") covering the common stock
issuable upon conversion of the Series A Preferred Stock, within thirty days of
receiving
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Stockholder Approval, or if the Registration Statement is not declared effective
within 120 days after Stockholder Approval is obtained, then the Company will be
obligated to pay the holders of the Series A Preferred Stock a fee of $420,000
per month, equal to 2.0% of the stated value of the Series A Preferred Stock, in
cash or in the form of additional shares of Preferred Stock.
The Company also will be obligated to redeem the shares of Series A
Preferred Stock at a redemption price equal to 120% of the sum of $1,000 per
share plus all accrued and unpaid dividends if any of the following occur: (i)
the Registration Statement is not declared effective within 120 days after
Stockholder Approval is obtained or if it has been declared effective but the
effectiveness lapses for any reason other than due to factors solely within the
control of the holders of the Series A Preferred Stock; (ii) the Company
breaches in any material respect certain agreements entered into in connection
with the sale of the Series A Preferred Stock; (iii) the Company sells all or
substantially all of its assets, engages in a transaction in which more than 50%
of the voting power of the Company is disposed of, or merges or consolidates
with any entity other than Cozzi, immediately following which the Company's
prior stockholders do not own at least 50% of the surviving entity; or (iv) the
Common Stock is no longer listed for quotation on the NASDAQ National Market
System or another national securities exchange. There can be no assurances that
if the Company were required to redeem the shares of Series A Preferred Stock,
it would have sufficient cash, or be able to obtaining financing on reasonable
terms, if at all, to fund this redemption. If the Company were unable to redeem
the shares of Series A Preferred Stock, then the Company would be obligated to
pay additional dividends and fees to the holders of the Series A Preferred
Stock. The payment of these additional dividends and fees could have a material
adverse effect on the Company's financial condition and results of operations.
ENVIRONMENTAL MATTERS
COMPREHENSIVE REGULATORY REQUIREMENTS
The Company and its subsidiaries are subject to significant government
regulation including stringent environmental laws and regulations. Among other
things, these laws and regulations impose comprehensive local, state, federal,
foreign and supranational statutory and regulatory requirements concerning,
among other matters, the treatment, acceptance, identification, storage,
handling, transportation and disposal of industrial by-products, hazardous and
solid waste materials, waste water, stormwater effluent, air emissions, soil
contamination, surface and ground water pollution, employee health and safety,
operating permit standards, monitoring and spill containment requirements,
zoning, and land use, among others. Various laws and regulations set
prohibitions or limits on the release of contaminants into the environment. Such
laws and regulations also require permits to be obtained and manifests to be
completed and delivered in connection with any shipment of prescribed materials
so that the movement and disposal of such material can be traced and the persons
responsible for any mishandling of such material can be identified. This
regulatory framework imposes significant compliance burdens, costs and risks on
the Company and its subsidiaries. Violation of such laws and regulations may
give rise to significant liability of the Company, including fines, damages,
fees and expenses.
Releases of certain industrial by-products and waste materials are subject
to particular laws and regulations. While the specific provisions of releases
related laws and regulations vary among jurisdictions, such laws and regulations
typically require that the relevant authorities be notified promptly, that the
release be cleaned up promptly, and that remedial action be taken by the
responsible party and/or owner of the site to restore the environment to levels
protective of human health and the environment. Generally, the governmental
authorities are empowered to act to clean up and remediate releases and
environmental damage and to charge the costs of such cleanup to one or more of
the owners of the property, the person responsible for the spill, the generator
of the contaminant and certain other parties or to direct the responsible party
to take such action. Such authorities may also impose a tax or other liens to
secure such parties' reimbursement obligations. Environmental laws and
regulations impose strict operational requirements on the performance of certain
aspects of hazardous or toxic substances remedial work. These requirements
specify complex methods for identification, monitoring, storage, treatment and
disposal of waste materials managed during a project. Failure to meet these
requirements could result in substantial fines and other penalties.
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Environmental legislation and regulations have changed rapidly in recent
years, and it is likely that the Company and its subsidiaries will be subject to
even more stringent environmental standards in the future. For example, the
ultimate effect of the regulations to be implemented under the Clean Air Act
Amendments of 1990 (the "Clean Air Act") on the Company and its subsidiaries,
and the actual amount of any capital expenditures required thereby, will depend
on how the Clean Air Act is interpreted and implemented pursuant to regulations
that are currently being developed and on such additional factors as the
evolution of environmental control technologies and the economic viability of
such operations at the time. For these reasons, future capital expenditures for
environmental control facilities cannot be predicted with accuracy; however, one
may expect that environmental control standards will become increasingly
stringent and that the expenditures necessary to comply with them could increase
substantially.
Local, state, federal, foreign and supranational governments and agencies
have also from time to time proposed or adopted other types of laws, regulations
or initiatives with respect to the scrap metal recycling industry. Included
among them are laws, regulations and initiatives intended to ban or restrict the
intrastate, interstate or international shipment of wastes, to impose higher
taxes or fees on certain shipments of waste, or to classify or reclassify
certain categories of non-hazardous wastes as hazardous. Certain local, state,
federal, foreign and international governments and agencies have promulgated
"flow control" or other regulations, which attempt to require that all waste (or
certain types of waste) generated within the jurisdiction in question must go to
certain disposal sites. From time to time legislation is considered that would
enable or facilitate such laws, regulations or initiatives. Due to the
complexity of regulation of the industry and to public and political pressure,
implementation of existing or future laws, regulations or initiatives by
different levels of governments may be inconsistent and are difficult to
foresee.
The principal services of the Company and its subsidiaries are detailed in
and regulated by various permits and licenses governing their scrap metal
recycling operations. Government agencies continually monitor the performance of
a permit or license holder in relation to the terms of its permit or license.
The Company and its subsidiaries' facilities are subject to periodic unannounced
inspection by local, state and federal authorities to ensure compliance with
permit and license terms and applicable laws and regulations. The Company and
its subsidiaries work with the authorities to remedy any deficiencies found
during such inspections. If serious violations are found or deficiencies, if
any, are not remedied, the Company and its subsidiaries could incur substantial
fines and could be required to close a site.
Governmental authorities have a wide variety of powerful administrative
enforcement actions and remedial orders available to them to cause compliance
with environmental laws or to remedy or punish violations of such laws. Such
orders may be directed to various parties, including present or former owners or
operators of the concerned sites, or parties that have or had control over the
sites. In certain instances, fines and treble damages may be imposed. In the
event that administrative actions fail to cure a perceived problem or where the
relevant regulatory agency so desires, an injunction or temporary restraining
order or damages may be sought in a court proceeding. Some laws give private
parties the right, in addition to existing common laws claims, to file claims
for injunctive relief or damages against the owners or operators of the site.
The Company believes that with heightened legal, political and citizen
awareness and concerns, all companies in the scrap metal recycling industry may
be faced, in the normal course of operating their businesses, with fines and
penalties and the need to expend substantial funds for capital projects,
remedial work and operating activities, such as environmental contamination
monitoring, and related activities. Regulatory or technological developments
relating to the environment may require companies engaged in the scrap metal
recycling industry to modify, supplement or replace equipment and facilities at
costs which may be substantial. Because the scrap metal recycling industry has
the potential for discharge of materials into the environment, a material
portion of the capital expenditures by the Company and its subsidiaries is
expected to relate, directly or indirectly, to such equipment and facilities.
Moreover, it is possible that future developments, such as increasingly strict
requirements of environmental laws and regulations, and enforcement policies
will require even more significant capital investments in this regard.
Due to the nature of the scrap metal recycling business, it is possible
that inquiries or claims based upon environmental laws may be made in the future
by governmental bodies or individuals against the Company
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and any other scrap metal recycling entities that the Company may acquire. The
location of the Company's facilities in large urban areas may increase the risk
of scrutiny and claims. The Company is unable to predict whether any such future
inquiries or claims will in fact arise or the outcome of such matters.
Additionally, it is not possible to predict the total size of all capital
expenditures or the amount of any increases in operating costs or other expenses
that may be incurred by the Company to comply with the environmental
requirements applicable to the Company and its operations, or whether all such
cost increases can be passed on to customers through product price increases.
Moreover, environmental legislation has been enacted, and may in the future be
enacted, to create liability for past actions that were lawful at the time taken
but that have been found to affect the environment and to create public rights
of action for environmental conditions and activities. As is the case with scrap
recyclers in general, if damage to persons or the environment has been caused,
or is in the future caused, by hazardous materials activities of the Company or
its subsidiaries, the Company or its subsidiaries may be fined and held liable
for such damage. In addition, the Company and such subsidiaries may be required
to remedy such conditions and/or change procedures. Thus, there can be no
assurance that potential liabilities, expenditures, fines and penalties
associated with environmental laws and regulations will not be imposed on the
Company in the future or that such liabilities, expenditures, fines or penalties
will not have a material adverse effect on the Company.
In addition, public interest groups, local citizens, local municipalities
and other persons or organizations may have a right to seek relief from court
for purported violations of law. In some jurisdictions, recourse to the courts
for individuals under common law principles such as trespass or nuisance have
been or may be enhanced by legislation providing members of the public with
statutory rights of action to protect the environment. In such cases, even if a
scrap metals recycling facility is operated in full compliance with applicable
laws and regulations, local citizens and other persons and organizations may
seek compensation for damages caused by the operation of the facility. In some
cases, the operation of scrap metal recycling facilities is subjected to
heightened public scrutiny because of residential or other non-industrial
property uses that have developed around such facilities. So-called "Not In My
Backyard" ("NIMBY") grass roots community opposition to such facilities can
materially interfere with such facilities' on-going operations and growth.
SIGNIFICANT POTENTIAL ENVIRONMENTAL LIABILITY
General
The Company and its subsidiaries are subject to potential liability and may
also be required from time to time to clean up or take certain remediation
action with regard to sites currently or formerly used in connection with their
operations. Furthermore, the Company and its subsidiaries may be required to pay
for all or a portion of the costs of clean up or remediation at sites the
Company and its subsidiaries never owned or on which they never operated if they
are found to have arranged for transportation, treatment or disposal of
pollutants or hazardous substances on or to such sites. The Company and its
subsidiaries are also subject to potential liability for environmental damage
that their assets or operations may cause nearby landowners, particularly as a
result of any contamination of drinking water sources or soil, including damage
resulting from conditions existing prior to the acquisition of such assets or
operations. Any substantial liability for environmental damage could materially
adversely affect the operating results and financial condition of the Company,
and could materially adversely affect the marketability and price of the
Company's stock. Risk factors include the following:
Incompleteness of Site Investigations
As part of its pre-transaction "due diligence" investigations, the Company
typically hires an environmental consulting firm to conduct transaction screen
reviews, or Phase I and/or Phase II site assessments of the sites owned or
leased by particular acquisition or merger candidates (the "Pre-Transaction Site
Assessments"). However, such Pre-Transaction Site Assessments have not covered
(and will not in the future cover) all of the sites owned or leased by the
companies which are acquired by or merge with the Company or its subsidiaries.
Moreover, such Pre-Transaction Site Assessments which have occurred have not
been designed or expected (and will not in the future be designed or expected)
to disclose all material contamination that may be present. For example, the
Company does not include soil sampling or core borings
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as a standard part of its Pre-Transaction Site Assessments, even though such
sampling and core borings might increase the chances of finding contamination on
a particular site. Failure to conduct soil sampling and core borings on a
particular site could result in the Company failing to identify a seriously
contaminated site prior to an acquisition or merger, and could materially
adversely affect the Company.
Likelihood of Contamination at Some Sites
Pre-Transaction Site Assessments of the Company's current subsidiaries'
sites conducted by independent environmental consulting firms have revealed that
some soil, surface water and/or groundwater contamination is likely at certain
of such sites, and have recommended that certain additional investigations and
remediation be conducted. Based upon its review of these reports, the Company
believes that it is likely that contamination exists at certain of its
subsidiaries' sites and that it is likely that additional investigation,
monitoring and remediation will be required at some of the sites. Also based
upon its review of these reports, the Company believes that such contamination
is likely to include, but not be limited to: polychlorinated biphenyls (PCBs);
total petroleum hydrocarbons; volatile organic compounds (VOCs); antimony;
arsenic; cadmium; copper; lead; mercury; silver; zinc; waste oil; toluene; meta-
and para-xylenes; baghouse dust; and/or aluminum dross. The ultimate extent of
such contamination cannot be stated with any certainty at this point, and there
can be no assurance that the cost of remediation will be immaterial. The
existence of such contamination could result in federal, state, local or private
enforcement or cost recovery actions against the Company, possibly resulting in
disruption of Company operations, and substantial fines, penalties, damages,
costs and expenses being imposed against the Company and its subsidiaries.
The Company has supplied its Pre-Transaction Site Assessments to the
management of its subsidiaries, who are responsible for reviewing them,
examining ongoing operations, and taking any necessary steps to achieve and/or
maintain compliance with the environmental laws, including but not limited to
any necessary remedial measures or operational changes. The Company expects to
require future cash outlays as it incurs the actual costs relating to the
remediation of environmental liabilities. No assurance can be provided that such
costs will not be significant. The Company and its subsidiaries expect cash
flows from operations to provide the funds for environmental capital, operating
and remediation expenditures; however, no assurance can be given that such cash
flows will be adequate for this purpose.
Uncertain Costs of Environmental Compliance and Remediation
It must be emphasized that, as a result of certain factors which impact
upon the Company and its subsidiaries' future expenditures to comply with
environmental requirements -- such as new local, state and federal laws and
regulations; the developing nature of administrative standards promulgated under
Superfund and other environmental laws, and changing interpretations of such
laws; uncertainty regarding adequate control levels, testing and sampling
procedures, new pollution control technology and cost benefit analysis based on
market conditions; the incompleteness of information regarding the condition of
certain sites; the lack of standards and information for use in the
apportionment of remedial responsibilities; the numerous choices and costs
associated with diverse technologies that may be used in remedial actions at
such sites; the possible ability to recover indemnification or contribution from
third parties; and the time periods over which eventual remediation may occur --
the estimated costs for future environmental compliance (capital expenditures or
increases in operating costs or other expenditures) and remediation cannot be
accurately predicted and are necessarily imprecise; however, such costs could be
material to future quarterly or annual results of operations of the Company. In
addition to not being possible to predict the amount or timing of future costs
of environmental compliance and remediation, it is not possible to predict
whether or not such costs can be passed on to customers through price increases.
Lack of Environmental Impairment Insurance
The Company and its subsidiaries do not carry environmental impairment
liability insurance. The Company and its subsidiaries operate under general
liability insurance policies, which Company management considers to be adequate
to protect the Company and its subsidiaries' assets and operations from other
risks but which does not cover environmental damage. If the Company and its
subsidiaries were to incur significant
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liability for environmental damage not covered by environmental impairment
insurance, or for other claims in excess of its general liability insurance and
umbrella coverage, the Company's financial condition could be materially
adversely affected.
Risks Associated With Certain By-Products
While the majority of the Company's metal products are currently exempt
from applicable solid waste regulations, the scrap metal recycling operations of
the Company's subsidiaries produce significant amounts of by-products.
Heightened environmental risk is associated with certain of these by-products
For example, the Company's EMCO subsidiary operates a shredder for which the
primary feed materials are automobile hulks and obsolete household appliances.
Approximately twenty percent (20%) of the weight of an automobile hulk consists
of material (shredder fluff) which remains after the segregation of ferrous and
saleable non-ferrous metals. Federal environmental regulations require shredder
fluff to pass a toxic leaching test to avoid classification as a hazardous
waste. The Company's EMCO subsidiary endeavors to have hazardous contaminants
removed from the feed material prior to shredding and as a result the Company
believes the shredder fluff generated is properly not considered a hazardous
waste. Should the laws, regulations or testing methods change with regard to
shredder fluff disposal, the Company and its EMCO subsidiary may incur
additional significant expenditures.
Potential Superfund Liability
The Company's Reserve subsidiary has received a notice from the United
States Environmental Protection Agency (the "EPA") that Reserve and numerous
other parties are considered potentially responsible parties (a "PRP") and may
be obligated under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("Superfund" or "CERCLA") to pay a portion of the cost of
remedial investigation, feasibility studies and ultimately remediation to
correct alleged releases of hazardous substances at the Standard Scrap
Metal/Chicago International Exporting Removal Action Site. Superfund may impose
joint and several liability for the costs of remedial investigations and actions
on the entities that arranged for disposal of certain wastes, the waste
transporters that selected the disposal sites, and the owners and operators of
such sites. Responsible parties (or any one of them) may be required to bear all
of such costs regardless of fault, legality of the original disposal, or
ownership of the disposal site. Based upon its analysis of the situation, the
management of Reserve currently does not expect such potential liability to be
in excess of $100,000.
Unregistered Storage Tanks
Underground storage tanks (UST's) exist at several of the Company's
subsidiaries' sites. UST's are subject to various federal, state and local laws
on their operation. In the event a release of regulated product has occurred,
the Company may incur significant costs to investigate and remediate the
release.
Environmental consultants to the Company have reported that an underground
storage tank (UST) located at one of the Company's EMCO subsidiary's yards had
not been reported to the Arizona environmental authorities as required by law.
EMCO, as the lessee, reported the matter to the owner of the property, and
believes that such report is the extent of its obligations with respect to this
matter. However, there can be no assurance that any failure of the owner to
report will not result in liability or the assessment of penalties against the
Company or EMCO. Environmental consultants to the Company have also reported
that an above-ground storage tank at the Company's HouTex subsidiary is required
to be registered but is not yet registered.
Employee Health and Safety Issues
The Company and its subsidiaries are regulated by federal, state and local
agencies responsible for employee health and safety, including OSHA. A total of
two accidental deaths of, and one serious accidental injury to, employees have
occurred at the Company's HouTex and Reserve subsidiaries during the past three
years. Reserve has been fined by OSHA in regard to such incidents. HouTex has
also been cited and fined by
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OSHA for alleged failure to establish energy control procedures and employee
training in regard to mobile shearing equipment. No assurance can be given that
potential liabilities of the Company or its subsidiaries in regard to such death
and injuries, or in regard to any future deaths of or injuries to employees of
the Company's subsidiaries, will not be material.
Recommendations of Environmental Consultants
Environmental consultants to the Company have recommended that a variety of
remedial actions be undertaken in regard to its subsidiaries, including: the
sampling of soil, surface and ground water at its various facilities; the
remediation of any existing contamination under applicable regulations; the
development of Spill Prevention Control and Countermeasure Plans ("SPCC"); the
completion of certain actions in regard to Storm Water Pollution Prevention
Plans; the timely completion and/or filing of certain annual reports and
summaries required by governmental agencies; the completion of Oil Discharge and
Response Plans; and the remediation of certain materials suspected of containing
asbestos. If these recommendations were to be not followed by the Company and
its subsidiaries for an indefinite period of time, one or more of the sites
might, potentially, be subject to a governmental enforcement action, the
imposition of fines, penalties and damages, and/or require remediation at some
future time at a cost which the Company cannot guarantee would not be material.
COMPLIANCE HISTORY
The Company's subsidiaries have, in the past, been found not to be in
compliance with certain environmental laws and regulations, and have incurred
fines associated with such violations which have not been material in amount.
The Company's subsidiaries have also paid a portion of the costs of certain
remediation actions at certain sites. No assurance can be given that additional
compliance issues and liabilities will not occur in the future, or that the
fines, penalties, damages and expenses might not be material.
EFFECT OF ANTITAKEOVER PROVISIONS OF DELAWARE LAW, THE COMPANY'S CHARTER
DOCUMENTS AND EMPLOYMENT AGREEMENTS
The Company is a corporation governed by the laws of the state of Delaware.
Certain provisions of Delaware law and the charter documents of the Company may
have the effect of delaying, deferring or preventing changes in control or
management of the Company. Specifically, the Company's Board of Directors may
issue shares of Preferred Stock without stockholder approval on such terms as
the Board may determine. The rights of the holders of Common Stock of the
Company are subject to, and may be adversely affected by, the rights of any
Preferred Stock that may be issued in the future. The Company is subject to the
provisions of Section 203 of the Delaware General Corporation Law, which has the
effect of making changes in control of a company more difficult. The Company
entered into employment agreements with Gerard M. Jacobs, T. Benjamin Jennings
and George O. Moorehead. Such agreements provide for certain payments to be made
to such persons in the event of a change of control of the Company. The effects
of the antitakeover protections of Delaware corporate law, the Company charter
documents and these employment agreements could be to make it more difficult for
a third party to acquire, or could discourage a third party from acquiring, a
majority of the outstanding stock of Company.
The Cozzi merger, if consummated, contemplates a shareholder agreement
among Messrs. Jacobs, Jennings and the Cozzi shareholders which could discourage
a third party from acquiring a majority of the outstanding common stock of the
Company. Upon closing of the Cozzi merger, the Company expects to enter into
employment agreements with Albert, Frank and Greg Cozzi as well as new
employment agreements with Gerard M. Jacobs and T. Benjamin Jennings. Prior to
the closing, the Cozzi merger agreement forbids the Company from initiating
discussions or negotiations with third parties or responding to solicitations by
third persons relating to any merger, sale or other disposition of any
substantial part of the Company's assets, without an approval from Cozzi.
26
<PAGE> 29
PART II -- OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company's Reserve subsidiary is currently involved in a legal
proceeding in which Reserve Iron & Metal Limited Partnership (a Delaware Limited
Partnership) and P. Joseph Iron & Metal, Inc. (its sole general partner) are
named as defendants. The court in which such proceedings are pending and the
date of the proceeding is: George Abboud v. Reserve Iron & Metal Limited
Partnership, Cuyahoga County Court of Common Pleas, Case No. 304772, George
Abboud v. P. Joseph Iron & Metal, Inc., Cuyahoga County Court of Common Pleas,
Case No. 304772, March 27, 1996.
Claimant George Abboud has alleged that Reserve Iron & Metal, as his
employer, intentionally required Mr. Abboud to work under conditions in which an
injury to Mr. Abboud was substantially certain to occur. Reserve Iron & Metal
has denied this allegation and believes evidence will show that Mr. Abboud
negligently performed his work, which caused his injury. Claimant George Abboud
seeks money damages in an amount in excess of $25,000 to be determined at trial.
No trial date has been set. Discovery is still pending.
Certain of the sellers of Reserve (the "Indemnifying Parties") have agreed
to indemnify the Company and its affiliates against a portion of specified
potential liabilities. As is customary with certain types of potential
liabilities, Reserve's insurance carriers have accepted the defense of Reserve,
but have done so subject to reserving their respective rights to deny coverage
under certain circumstances. Assuming, for hypothetical purposes, that insurance
coverage would not be available or would be inadequate, such potential
liabilities, were they to become actual liabilities, could be significant. Any
amounts payable by the Indemnifying Parties will be funded by reducing the
purchase price note owed by the Company and/or by increasing the exercise price
on warrants issued to such Indemnifying Parties as part of the original terms of
the Purchase Agreement and the ten-year employment agreements, respectively.
With reference to these certain potential liabilities, Reserve has advised the
Company it believes it has adequate insurance coverage and has denied any
liability for these potential liabilities. There can be no assurance, however,
that Reserve will not suffer actual liability or that it will have adequate
insurance to cover the liability and in such case, the Company could be
materially and adversely affected.
ITEM 2: CHANGES IN SECURITIES
(c) Sales and/or Issuances of unregistered shares during the three months
ended June 30, 1997: Each of the private placements of common stock described
below was made to a limited number of investors, including accredited investors,
in reliance on the exemption from registration provided by Section 4(2) of the
Securities Act.
On April 15, 1997, Clend Investment, beneficially owned, in part, by Mike
Melnik, a director of the Company, converted $1.0 million of its note payable
into 182,481 shares of unregistered common stock. On May 29, 1997, Ian MacLeod,
a director of the Company, converted $1.0 million of a note payable into 160,000
shares of unregistered common stock.
In April 1997, the Board of Directors approved a private placement of up to
2,025,000 shares unregistered common stock at $7.25 per share (the "Private
Placement"). The Private Placement was fully subscribed and all shares available
for sale have been issued. Five directors of the Company, including Gerard M.
Jacobs, T. Benjamin Jennings, Donald F. Moorehead, Jr., George O. Moorehead and
Harold Rubenstein collectively purchased 260,000 shares in the Private
Placement. A purchaser of 1.0 million shares of unregistered common stock in the
Private Placement, who is not a director or employee, provided consideration
comprised of $5.0 million in cash and a short term note. The note and all
accrued interest was collected on July 3, 1997.
In connection with the Company's acquisition of Reserve on May 1, 1997, the
Company issued warrants to purchase 1.575 million shares of unregistered 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.
27
<PAGE> 30
In connection with the Company's acquisition of Isaac on June 23, 1997, the
Company issued 1,942,857 shares of unregistered common stock valued at $21.1
million and warrants to purchase 462,500 shares of unregistered common stock at
exercise prices ranging from $10.80 to $11.70 per share. A total of 540,856
shares of the unregistered common stock and all 462,500 warrants were issued to
George A. Isaac, III, a director of the Company.
On June 23, 1997, the Company and George A. Isaac III entered into a 5 year
employment agreement whereby warrants to purchase 76,923 shares of unregistered
Common stock were issued at an exercise price of $13.00 per share. Also, the
Company granted Mr. Isaac warrants to purchase 287,500 shares of unregistered
common stock at an exercise price of $11.70 per share in consideration for
entering into a non-compete agreement which extends 3 years beyond the final
date of employment.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the first quarter
of fiscal 1998:
(1) Form 8-K dated April 30, 1997 reporting the terms of the Reserve,
Cozzi and Proler acquisitions.
(2) Amendment Number 2 on Form 8-K on April 26, 1997, dated January 1,
1997, to provide interim financial statements and pro forma financial
information relating to the acquisition of the MacLeod Companies.
(3) Amendment Number 2 on Form 8-K on April 26, 1997, dated January 7,
1997, to provide interim financial statements and pro forma financial
information relating to the acquisition of the HouTex Metals Company, Inc.
(4) Form 8-K on May 15, 1997, dated May 1, 1997, disclosing the terms
of the acquisition agreement with Reserve Iron & Metal, L.P.
(5) Form 8-K dated June 2, 1997 reporting the signing of a definitive
merger agreement with Cozzi Iron and Metal.
(6) Form 8-K on July 8, 1997, dated June 23, 1997, disclosing the
terms of the acquisition agreement with the Isaac Group.
28
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
METAL MANAGEMENT, INC.
By: /s/ GERARD M. JACOBS
------------------------------------
Gerard M. Jacobs
Director, President and
Chief Executive Officer
By: /s/ T. BENJAMIN JENNINGS
------------------------------------
T. Benjamin Jennings
Director, Chairman of the Board
and Chief Development Officer
By: /s/ ROBERT C. LARRY
------------------------------------
Robert C. Larry
Vice President, Finance
and Chief Financial Officer
Date: August 14, 1997
29
<PAGE> 32
METAL MANAGEMENT, INC.
EXHIBIT INDEX
NUMBER AND DESCRIPTION OF EXHIBIT
- ---------------------------------
2.1 Purchase Agreement, dated as of March 10, 1997, between
Registrant and BancBoston Ventures, Inc. (incorporated by
reference to Exhibit 2.1 of the Registrant's report on Form
8-K dated May 15, 1997).
2.2 Purchase Agreement, dated as of January 17, 1997, among
Registrant, P. Joseph Iron & Metal, Inc., the sole general
partner of Reserve Iron & Metal Limited Partnership, and
Paul D. Joseph, Steven Joseph and Scott Joseph (incorporated
by reference to Exhibit 2.2 of the Registrant's report on
Form 8-K dated May 15, 1997).
2.3 First Amendment to Purchase Agreement, dated as of March 6,
1997, among Registrant, P. Joseph Iron & Metal, Inc., the
sole general partner of Reserve Iron & Metal Limited
Partnership, and Paul D. Joseph, Steven Joseph and Scott
Joseph (incorporated by reference to Exhibit 2.3 of the
Registrant's report on Form 8-K dated May 15, 1997).
2.4 Second Amendment to Purchase Agreement, dated May 1, 1997,
among Registrant, P. Joseph Iron & Metal, Inc., the sole
general partner of Reserve Iron & Metal Limited Partnership,
and Paul D. Joseph, Steven Joseph and Scott Joseph
(incorporated by reference to Exhibit 2.4 of the
Registrant's report on Form 8-K dated May 15, 1997).
2.5 Merger agreement dated May 16, 1997 among the Registrant,
CIM Acquisition, Co., Cozzi Iron & Metal, Inc., Albert A.
Cozzi, Frank J. Cozzi and Gregory P. Cozzi (sole
shareholders of Cozzi) (incorporated by reference to Exhibit
2.10 of the Registrant's report on Form 10-K for the year
ended March 31, 1997).
2.6 Form of Stockholders Agreement for Metal Management Inc.
(incorporated by reference to Exhibit 2.11 of the
Registrant's report on Form 10-K for the year ended March
31, 1997).
2.7 Purchase Agreement -- Common Stock of The Isaac Corporation,
Ferrex Trading Corporation, Paulding Recycling, Inc. and
Briquetting Corporation of America and Plan of Merger By and
Among Registrant, Isaac Acquisition Corporation and Ferrex
Trading Corporation, dated June 23, 1997 (incorporated by
reference to Exhibit 2.1 of the Registrant's report on Form
8-K dated July 8, 1997).
3.1 Amended and Restated Bylaws, as amended through May 24, 1997
(incorporated by reference to Exhibit 3.1 of the
Registrant's report on Form 10-K for the year ended March
31, 1997).
3.2 Certificate of Designations, Preferences and Rights of
Series A Convertible Preferred Stock of the Registrant.
4.1 Securities Purchase Agreement, dated August 8, 1997, between
the Registrant and Proprietary Convertible Investment Group,
Inc. and Advantage Fund Limited.
4.2 Registration Rights Agreement, dated August 8, 1997, between
the Registrant and Proprietary Convertible Investment Group,
Inc. and Advantage Fund Limited.
10.1 Employment Agreement dated May 1, 1997 between the
Registrant and Paul D. Joseph (incorporated by reference to
Exhibit 10.19 of the Registrant's report on Form 10-K for
the year ended March 31, 1997).
10.2 Employment Agreement dated June 23, 1997 between the
Registrant and George A. Isaac, III (incorporated by
reference to Exhibit 2.2 of the Registrant's report on Form
8-K dated July 8, 1997).
10.3 Credit Agreement among The Isaac Corporation, Ferrex Trading
Corporation, Paulding Recycling, Inc. and Briquetting
Corporation of America and BT Commercial Corporation, dated
as of June 23, 1997 (incorporated by reference to Exhibit
2.3 of the Registrant's report on Form 8-K dated July 8,
1997).
11.1 Computation of Net income per share.
27.1 Financial Data Schedule.
30
<PAGE> 1
EXHIBIT 3.2
CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS
OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
METAL MANAGEMENT, INC.
PURSUANT TO SECTION 151 OF THE
DELAWARE GENERAL CORPORATION LAW
Metal Management, Inc., a corporation organized and existing under the
laws of the State of Delaware (the "Company"), hereby certifies that the
following resolutions were adopted by the Board of Directors of the Company
pursuant to the authority of the Board of Directors as required by Section 151
of the Delaware General Corporation Law.
RESOLVED, that pursuant to the authority granted to the Board of
Directors in accordance with the provisions of the Company's Certificate of
Incorporation, the Board of Directors hereby authorizes a series of the
Company's previously authorized Preferred Stock, par value $.01 per share (the
"Preferred Stock"), and hereby states the designation and number of shares, and
fixes the relative rights, preferences, privileges and restrictions thereof as
follows:
1. DESIGNATION AND AMOUNT.
The designation of this series, which consists of 36,000 shares (the
"Preferred Shares") of Preferred Stock, is the Series A Convertible Preferred
Stock (the "Series A Preferred Stock") and the face amount shall be One
Thousand Dollars ($1,000) per share (the "Stated Value").
2. DIVIDENDS.
(a) Payment of Dividends. The holders of shares of Series A
Preferred Stock (each, a "Holder" and collectively, the "Holders") shall be
entitled to receive cumulative dividends ("Dividends") on the Series A
Preferred Stock accruing on each share thereof at an annual rate of (A) prior
to the date (the "Approval Date") on which Stockholder Approval (as defined
below) is obtained, nine percent (9%) and (B) on or after the Approval Date,
six percent (6%), in each such case, times the Stated Value per share (such
rate subject to ratable adjustment in the event of any stock split or
combination and to equitable adjustment in the event of a reclassification or
other similar event). Dividends shall accrue, whether or not declared, on each
share of Series A Preferred Stock from the date of original issuance thereof
(the "Purchase Date") through the date on which such Dividends are paid.
Accrued but unpaid Dividends shall be payable in cash or, at the option of the
Company (the "Stock Payment Option") and upon satisfaction of the conditions
set forth in paragraph 2(c) below, in shares (the "Dividend Payment Shares") of
Series A Preferred
<PAGE> 2
Stock, on each Conversion Date and Mandatory Redemption Date and on the
Maturity Date (each as defined below, a "Dividend Payment Date").
(b) Delivery of Dividend Payment Shares. If the Company elects to
exercise the Stock Payment Option upon a conversion by a Holder, the Company
shall deliver to such Holder, on or before the third business day following the
applicable Dividend Payment Date, one or more certificates representing the
aggregate number of whole Dividend Payment Shares that is determined by
dividing (x) the amount of the Dividend which has accrued with respect to all
of the Preferred Shares held by such Holder and would otherwise be payable in
cash on the applicable Dividend Payment Date by (y) one thousand dollars
($1,000). No fractional Dividend Payment Shares shall be issued; the Company
shall, in lieu thereof, either issue a number of Dividend Payment Shares which
reflects a rounding up to the next whole number of shares or pay such amount in
cash. The Dividend Payment Shares shall be fully paid and non-assessable, free
and clear of any liens, claims, preemptive rights or encumbrances imposed by or
through the Company, entitled to all of the rights, preferences and privileges
set forth herein, and shall be issued and delivered to the Holder on or before
the third business day following the applicable Dividend Payment Date. The
Company agrees to inform the Holder at least five (5) Trading Days prior to the
first day of each calendar quarter in which the Company intends to exercise the
Stock Payment Option.
(c) Conditions to Stock Payment Option. If the Company wishes to
exercise the Stock Payment Option with respect to Dividends payable to a
Holder, it may do so only if each of the following conditions has been
satisfied as of the applicable Dividend Payment Date:
(i) the number of shares of Series A Preferred Stock
authorized, unissued and unreserved for all other purposes, or held in the
Company's treasury, is sufficient to pay such Dividends in Dividend Payment
Shares;
(ii) the Company's common stock, par value $.01 per share
(the "Common Stock"), is authorized for quotation on the Nasdaq National Market
or for listing or quotation on the New York Stock Exchange or any other
national securities exchange;
(iii) (x) the registration statement required to be
maintained by the Company (the "Registration Statement") pursuant to a
registration rights agreement by and among the Company and the Purchasers named
therein (the "Registration Rights Agreement") is effective and available for
the sale of the Dividend Payment Shares issuable pursuant to such exercise and
of all Conversion Shares (as defined below) then held by or issuable to the
Holders, or (y) sales of such Dividend Payment Shares may be made pursuant to
Rule 144(k); provided, however, that the Registration Statement will not be
deemed unavailable during a Standstill Period (as defined in the Registration
Rights Agreement).
(iv) a Mandatory Redemption Event or a Liquidation Event
(each as defined herein) has not occurred and is continuing; and
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<PAGE> 3
(v) the Company has delivered to the Holder a
certificate, signed by an executive officer of the Company, setting forth:
- the amount of the Dividend to which the
Holder is entitled;
- the number of Dividend Payment Shares to be
delivered in payment of such Dividend, and
the calculation therefor; and
- a statement to the effect that all of the
conditions set forth in paragraphs 2(c)(i) -
(iv) have been satisfied.
3. PRIORITY.
(a) Payment upon Dissolution, Etc.. Upon the occurrence and
continuance of (x) any insolvency or bankruptcy proceedings, or any
receivership, liquidation, reorganization or other similar proceedings in
connection therewith, commenced by the Company or by its creditors, as such, or
relating to its assets or (y) the dissolution or other winding up of the
Company whether total or partial, whether voluntary or involuntary and whether
or not involving insolvency or bankruptcy proceedings, or (z) any assignment
for the benefit of creditors or any marshaling of the material assets or
material liabilities of the Company (a "Liquidation Event"), no distribution
shall be made to the holders of any shares of capital stock (other than capital
stock that ranks pari passu with the Series A Preferred Stock) of the Company
unless prior thereto each Holder shall have received the Liquidation Preference
(as defined below) with respect to each share of Series A Preferred Stock then
held by such Holder. In the event that upon the occurrence of a Liquidation
Event, the assets available for distribution to the Holders of the Series A
Preferred Stock and to the holders of such pari passu securities are
insufficient to pay the Liquidation Preference with respect to all of the
outstanding shares of Series A Preferred Stock and of such pari passu
securities, such assets shall be distributed ratably among such shares in
proportion to the ratio that the liquidation preference payable on each such
share bears to the aggregate liquidation preference payable on all such shares.
(b) Liquidation Preference. The "Liquidation Preference" with
respect to a share of Series A Preferred Stock shall mean an amount equal to
the Stated Value of such share plus any accrued and unpaid Dividends thereon.
4. CONVERSION.
(a) Right to Convert. Subject to the limitations contained in
paragraph 4(h) below, each Holder shall have the right to convert at any time
and from time to time after the earlier to occur of (i) the ninetieth (90th)
day following the date on which the Series A Preferred Stock is issued and (ii)
the effectiveness of the Registration Statement, each of its shares of Series A
Preferred Stock into such number of fully paid and non-assessable shares of
Common Stock, free and clear of any liens, claims, preemptive rights or
encumbrances imposed by or through the Company (the "Conversion Shares"), as is
computed in accordance with the terms hereof (a "Conversion");
-3-
<PAGE> 4
provided, however, that the right of such Holder to convert the Series A
Preferred Stock into Conversion Shares shall not become effective unless and
until the Company has obtained the approval of the transactions contemplated
hereby, including without limitation the conversion of the Preferred Stock into
shares of Common Stock in accordance with the terms hereof, by a majority of
the holders of shares of its Common Stock entitled to vote thereon
("Stockholder Approval").
(b) Reservation of Common Stock Issuable Upon Conversion. The
Company shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock, free from any preemptive rights, solely for
the purpose of effecting Conversions hereunder, such number of its shares of
Common Stock (the "Reserved Amount") as shall from time to time be sufficient
to effect the Conversion of the Series A Preferred Stock. If at any time the
Reserved Amount is less than 125% of the number of shares of Common Stock
issuable upon Conversion of the then outstanding shares of Series A Preferred
Stock, the Company shall take immediate action (including seeking shareholder
authorization of additional shares of Common Stock) to increase the Reserved
Amount to 175% of the number of shares of Common Stock into which the
outstanding shares of Series A Preferred Stock are then convertible. If the
Company shall issue any securities or make any change in its capital structure
which would change the number of Conversion Shares deliverable upon the
Conversion of the outstanding shares of Series A Preferred Stock, the Company
shall at the same time also make proper provision so that thereafter there
shall be a sufficient number of shares of Common Stock authorized and reserved,
free from any preemptive rights, for such Conversion.
(c) Conversion Notice. In order to convert shares of Series A
Preferred Stock, or any portion thereof, the Holder shall send by facsimile
transmission (with a hard copy to follow by first class mail), at any time
prior to 11:59 p.m., eastern time, on the date on which the Holder wishes to
effect such Conversion (the "Conversion Date"), (i) a notice of conversion to
the Company and to its designated transfer agent for the Common Stock (the
"Transfer Agent") stating the number of shares of Series A Preferred Stock to
be converted, the amount of Dividends accrued on the shares of Series A
Preferred Stock then held by the Holder up to and including the Conversion
Date, the applicable Conversion Price and a calculation of the number of shares
of Common Stock issuable upon such Conversion (a "Conversion Notice") and (ii)
a copy of the certificate or certificates representing the Series A Preferred
Stock being converted. The Holder shall thereafter send the original of such
certificate or certificates by overnight mail to the Company. In the case of a
dispute as to the calculation of the Conversion Price or the number of
Conversion Shares issuable upon a Conversion, the Company shall promptly issue
to the Holder the number of Conversion Shares that are not disputed and shall
submit the disputed calculations to its independent accountants within one (1)
business day of receipt of the Holder's Conversion Notice. The Company shall
cause such accountant to calculate the Conversion Price as provided herein and
to notify the Company and the Holder of the results in writing no later than
two business days following the day on which it received the disputed
calculations. Such accountant's calculation shall be deemed conclusive absent
manifest error. The fees of any such accountant shall be borne by the Company.
(d) Number of Conversion Shares; Conversion Price. The number of
Conversion Shares to be delivered by the Company pursuant to a Conversion shall
be determined by dividing the Stated
-4-
<PAGE> 5
Value of the Series A Preferred Stock to be converted by the Conversion Price
(as defined herein) in effect on the Conversion Date. The "Conversion Price"
shall be the lesser of (A) the price determined by multiplying (x) the average
of the Closing Bid Prices (as defined below) for the Common Stock on the five
(5) Trading Days (as defined below) occurring immediately prior to (but not
including) the Conversion Date times (y) 85% (the "Floating Conversion Price")
and (B) $18.30 (the "Fixed Conversion Price"). "Trading Day" shall mean any day
on which the Common Stock is traded for any period on the Nasdaq National
Market or on the principal securities exchange or market on which the Common
Stock is then traded. "Closing Bid Price" means, with respect to a security,
the closing bid price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg
Financial Markets or a comparable reporting service of national reputation
selected by the Company and reasonably acceptable to holders of a majority of
the then outstanding shares of Series A Preferred Stock if Bloomberg Financial
Markets is not then reporting closing bid prices of such security
(collectively, "Bloomberg"), or if the foregoing does not apply, the last
reported sale price of such security in the over-the-counter market on the
electronic bulletin board for such security as reported by Bloomberg, or, if no
sale price is reported for such security by Bloomberg, the average of the bid
prices of any market makers for such security as reported in the "pink sheets"
by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be
calculated for such security on such date on any of the foregoing bases, the
Closing Bid Price of such security on such date shall be the fair market value
as reasonably determined by an independent investment banking firm selected by
the Holders of a majority of the then outstanding shares of Series A Preferred
Stock, and reasonably acceptable to the Company, with the costs of such
appraisal to be borne by the Company.
(e) Delivery of Common Stock Upon Conversion. Upon receipt of a
Conversion Notice pursuant to paragraph 4(c) above, the Company shall, no later
than the close of business on the later to occur of (i) the third (3rd)
business day following the Conversion Date set forth in such Conversion Notice
and (ii) the business day following the day on which the original certificate
or certificates representing the shares of Series A Preferred Stock being
converted are received by the Company (the "Delivery Date"), issue and deliver
or caused to be delivered to the Holder the number of Conversion Shares as
shall be determined as provided herein. Conversion Shares delivered to the
Holder shall not contain any restrictive legend as long as the sale of such
Conversion Shares is covered by an effective Registration Statement or may be
made pursuant to Rule 144(k) under the Securities Act of 1933, as amended (the
"Securities Act") or any successor rule or provision.
(f) Failure to Deliver Conversion Shares.
(i) In the event that the Company fails for any reason to
deliver to the Holder certificates representing the number of Conversion Shares
specified in the applicable Conversion Notice on or before the Delivery Date
therefor (a "Conversion Default"), the Company shall pay to the Holder payments
("Conversion Default Payments") in the amount of (i) (N/365) multiplied by (ii)
the aggregate Stated Value of the shares of Series A Preferred Stock
represented by the Conversion Shares which remain the subject of such
Conversion Default multiplied by (iii) the lower of twenty-four percent (24%)
and the maximum interest rate permitted by applicable law,
-5-
<PAGE> 6
where "N" equals the number of days elapsed between the original Delivery Date
of such Conversion Shares and the earlier to occur of (A) the date on which all
of such Conversion Shares are issued and delivered to the Holder and (B) the
date on which such shares are redeemed pursuant to the terms of this
Certificate of Designations. Cash amounts payable hereunder shall be paid on
or before the fifth (5th) business day of the calendar month following the
calendar month in which such amount has accrued. In the event that there occurs
a dispute between the Company and a Holder as to the number of Conversion
Shares issuable pursuant to a Conversion as described in paragraph 4(c) above,
and it is finally determined that such Holder is not entitled to receive
certain Conversion Shares, the Company shall not owe Conversion Default
Payments to such Holder with respect to such Conversion Shares.
(ii) Nothing herein shall limit the Holder's right to
pursue actual damages for the Company's failure to issue and deliver Conversion
Shares on the applicable Delivery Date (including, without limitation, damages
relating to any purchase of shares of Common Stock by the Holder to make
delivery on a sale effected in anticipation of receiving Conversion Shares upon
Conversion, such damages to be in an amount equal to the difference between (A)
the aggregate purchase price for the shares of Common Stock so purchased and
(B) the aggregate number of net proceeds received by the Holder from the sale
of the Conversion Shares issued by the Company pursuant to such Conversion),
and the Holder shall have the right to pursue all other remedies available to
it at law or in equity (including, without limitation, a decree of specific
performance and/or injunctive relief).
(g) Conversion at Maturity.
(i) On the date which is three years from the Purchase
Date (the "Maturity Date"), and assuming the satisfaction of the Mandatory
Conversion Conditions (as defined below) the remaining shares of Series A
Preferred Stock then held by each Holder shall be automatically converted into
the number of shares of Common Stock equal to the Liquidation Preference of
such shares divided by the then applicable Conversion Price (a "Mandatory
Conversion"), and the Maturity Date shall be deemed to be the Conversion Date
with respect to such Mandatory Conversion. If a Mandatory Conversion occurs,
the Company and the Holder shall follow the procedures for Conversion set forth
in this Section 4; provided, however, that the Holder shall not be required to
send the Conversion Notice contemplated by paragraph 4(c). In the event that
the Mandatory Conversion Conditions are not satisfied as of the Maturity Date,
the Company shall, within five (5) business days of the Maturity Date, pay an
amount in cash to each Holder equal to the Liquidation Preference for the
shares of Series A Preferred Stock then held by such Holder.
(ii) The "Mandatory Conversion Conditions" are as follows:
(1) the market value of the outstanding shares of
Common Stock on the Maturity Date (not including any such shares represented by
the then outstanding shares of Series A Preferred Stock) shall be greater than
seventy-five million dollars ($75,000,000);
(2) the Common Stock shall have an average daily
trading volume of at
-6-
<PAGE> 7
least thirty (30) thousand shares during the period of one hundred and eighty
(180) days ending on the fifteenth (15th) day of the calendar month immediately
prior to the calendar month in which the Maturity Date occurs;
(3) the Common Stock shall be designated for
quotation on the Nasdaq National Market or listed on the New York Stock
Exchange or other national securities exchange; and
(4) a Registration Statement covering the resale
of all of the Conversion Shares issuable pursuant to such Mandatory Conversion
shall be effective, or such resale may be made pursuant to Rule 144(k).
(h) Limitations on Right to Convert.
(i) In the event that the number of Preferred Shares to
be converted by a Holder pursuant to a Conversion Notice exceeds that number of
Preferred Shares (the "Preferred Share Conversion Limit") which, if converted
in full, would result in the issuance of a number of Conversion Shares that
would equal such Holder's Cap Amount (as defined below), the Company shall have
the option, in lieu of converting the Preferred Shares which would exceed such
Holder's Preferred Share Conversion Limit, to redeem such Preferred Shares at
the Optional Redemption Price (as defined below)(an "Optional Redemption"). In
order to effect an Optional Redemption, the Company shall, within two (2)
business days of receiving a Conversion Notice from a Holder pursuant to which
the Preferred Shares to be converted thereby exceeds such Holder's Preferred
Share Conversion Limit, deliver a written notice to such Holder that the
Company intends to redeem such excess Preferred Shares (an "Optional Redemption
Notice"). In the event that the Company does not deliver an Optional Redemption
Notice within such two business day period, the Company will convert the
Preferred Shares represented by such Conversion Notice in accordance with the
terms of this Certificate. A Holder shall have the right, upon converting
Preferred Shares in a number that equals or exceeds 99% of such Holder's
Preferred Share Conversion Limit, to deliver a written notice to the Company
requesting whether the Company intends to redeem such Holder's Preferred Shares
in excess of such Holder's Preferred Share Conversion Limit. If the Company
fails to deliver an Optional Redemption Notice within five (5) business days of
its receipt of such request, the Company will not be entitled thereafter to
exercise its right to an Optional Redemption with respect to the Preferred
Shares held by such Holder. A Holder's "Cap Amount" at any given time shall be
the number of shares of Common Stock equal to, (A) for a Holder which purchased
Preferred Shares from the Company, (i) the aggregate Stated Value of all of the
Preferred Shares purchased by such Holder on or before such date, divided by
(ii) ten dollars ($10), and (B) for a Holder which purchased Preferred Shares
from another Holder, a pro rata portion of such other Holder's Cap Amount, in
which case such other Holder's Cap Amount shall be appropriately reduced. In
the event that a Holder converts all of such Holder's Preferred Shares into a
number of shares of Common Stock which, in the aggregate, is less than such
Holder's Cap Amount, then the difference between such Holder's Cap Amount and
the number of shares of Common Stock actually issued to such Holder shall be
allocated pro rata to the Cap Amounts of the other Holders based on the number
of Preferred Shares then held by such Holders. The Optional Redemption
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<PAGE> 8
Price for each Preferred Share redeemed pursuant to an Optional Redemption
shall be equal to (x) the Stated Value of such Preferred Share times 117.5%
plus (y) the amount of all Dividends accrued (and any other amounts payable
pursuant to this Certificate of Designations) on such Preferred Shares up to
and including the date on which the Company pays the Optional Redemption Price
to the applicable Holder. Upon delivering an Optional Redemption Notice to a
Holder, the Company shall pay the Optional Redemption Price to such Holder
within ninety (90) days of such delivery (such ninetieth day being referred to
as the "Optional Redemption Date"). If the Optional Redemption Price is not
paid to such Holder on or before the Optional Redemption Date, interest shall
accrue thereon in the amount of (i) (N/365) multiplied by (ii) the Optional
Redemption Price multiplied by (iii) the lower of twenty-four percent (24%) and
the maximum interest rate permitted by applicable law, where "N" equals the
number of days elapsed between the Optional Redemption Date and the date on
which such payment is made in full.
(ii) In no event shall a Holder be permitted to convert any
shares of Series A Preferred Stock in excess of that number of such shares upon
the Conversion of which (x) the number of shares of Common Stock beneficially
owned by such Holder (other than shares of Common Stock which may be deemed
beneficially owned except for being subject to a limitation on conversion or
exercise analogous to the limitation contained in this subparagraph (ii) plus
(y) the number of shares of Common Stock issuable upon the Conversion of such
shares is equal to or exceeds (z) 4.99% of the number of shares of Common Stock
then issued and outstanding. Delivery by a Holder of a Conversion Notice shall
be deemed to represent the determination by such Holder that the Conversion
represented thereby will not violate the provisions of this subparagraph (ii),
and the Company shall have neither the right nor the obligation to confirm such
determination. Nothing contained herein shall be deemed to restrict the right
of a Holder to convert such shares of Series A Preferred Stock at such time as
such Conversion will not violate the provisions of this subparagraph (ii).
5. ADJUSTMENTS TO CONVERSION PRICE.
(a) Adjustment to Fixed Conversion Price Due to Stock Split, Stock
Dividend, Etc. If (A) the number of outstanding shares of Common Stock is
increased by a stock split, stock dividend, reclassification, the distribution
to holders of Common Stock of rights or warrants entitling them to subscribe
for or purchase Common Stock at less than the then current market price thereof
or other similar event, the Fixed Conversion Price shall be proportionately
reduced, or (B) the number of outstanding shares of Common Stock is decreased
by a reverse stock split, combination or reclassification of shares or other
similar event, the Fixed Conversion Price shall be proportionately increased.
In such event, the Company shall notify the Transfer Agent of such change on or
before the effective date thereof. For purposes hereof, the market price per
share of Common Stock on any date shall be the average of the closing sale
prices for the Common Stock as reported by Nasdaq, or by the principal
securities market on which the Common Stock is then traded, on the five (5)
consecutive Trading Days (as defined below) selected by the Company not later
than, the earlier of the date in question and the Trading Day before the "ex"
date, if any, with respect to the issuance or distribution requiring such
computation. The term "'ex' date", when used with respect
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<PAGE> 9
to any issuance or distribution, means the first Trading Day on which the
Common Stock trades regular way in the market from which such average closing
price is then to be determined without the right to receive such issuance or
distribution. In the absence of one or more such quotations, the Company shall
determine the current market price on the basis of such quotations as it
considers appropriate.
(b) Adjustment to Conversion Price. If, prior to the Conversion
of all of the shares of Series A Preferred Stock, the number of outstanding
shares of Common Stock is increased or decreased by a stock split, stock
dividend, combination, reclassification or other similar event, which event
shall have taken place during the reference period for determination of the
Conversion Price for any Conversion thereof, the Conversion Price shall be
calculated giving appropriate effect to the stock split, stock dividend,
combination, reclassification or other similar event for all Trading Days
immediately preceding the Conversion Date.
(c) Adjustment Due to Merger, Consolidation, Etc. If, prior to
the Conversion of all of the shares of Series A Preferred Stock, there shall be
any merger, consolidation, exchange of shares, recapitalization,
reorganization, redemption or other similar event, as a result of which shares
of Common Stock shall be changed into the same or a different number of shares
of the same or another class or classes of stock or securities of the Company
or another entity or there is a sale of all or substantially all the Company's
assets or there is a change of control transaction with respect to which, in
any such case, a Holder does not exercise its right to a Mandatory Redemption
(as defined below) of the Series A Preferred Stock, then such Holder shall
thereafter have the right to receive upon Conversion of the shares of Series A
Preferred Stock, upon the terms and conditions specified herein and in lieu of
the shares of Common Stock immediately theretofore issuable upon Conversion,
such stock, securities and/or other assets, if any, which such Holder would
have been entitled to receive in such transaction had such shares been
converted immediately prior to such transaction, and in any such case
appropriate provisions shall be made with respect to the rights and interests
of such Holder to the end that the provisions hereof (including, without
limitation, provisions for the adjustment of the Conversion Price and of the
number of shares issuable upon a Conversion) shall thereafter be applicable as
nearly as may be practicable in relation to any securities thereafter
deliverable upon the exercise hereof. The Company shall not effect any
transaction described in this subsection 5(c) unless (i) it first gives to each
Holder prior notice of such merger, consolidation, exchange of shares,
recapitalization, reorganization, redemption or other similar event, and makes
a public announcement of such event at the same time that it gives such notice
and (ii) the resulting successor or acquiring entity (if not the Company)
assumes by written instrument the obligations of the Company under this
Certificate of Designation, including the terms of this subsection 5(c).
(d) Distribution of Assets. If the Company shall declare or make
any distribution of its assets (or rights to acquire its assets) to holders of
Common Stock as a partial liquidating dividend, by way of return of capital or
otherwise, including any dividend or distribution in shares of capital stock of
a subsidiary of the Company (collectively, a "Distribution"), then, upon a
Conversion by a Holder occurring after the record date for determining
shareholders entitled to such Distribution but prior to the effective date of
such Distribution, the Holder shall be entitled to receive the
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<PAGE> 10
amount of such assets which would have been payable to such Holder had such
Holder been the holder of such shares of Common Stock on the record date for
the determination of shareholders entitled to such Distribution. The Fixed
Conversion Price for shares of Series A Preferred Stock not converted prior to
the effective date of a Distribution shall be reduced to a price determined by
decreasing the Fixed Conversion Price in effect immediately prior to the record
date of the Distribution by an amount equal to the fair market value of the
assets so distributed, as determined by mutual agreement of the Company and
each Holder.
(e) No Fractional Shares. If any adjustment under this Section 5
would create a fractional share of Common Stock or a right to acquire a
fractional share of Common Stock, such fractional share shall be disregarded
and the number of shares of Common Stock issuable upon Conversion shall be the
next higher number of shares or, at the option of the Company, shall be paid in
cash in an amount calculated by multiplying the amount of the fractional share
times the Closing Bid Price used to calculate the Conversion Price for such
Conversion.
6. MANDATORY REDEMPTION.
(a) Mandatory Redemption. In the event that a Mandatory
Redemption Event (as defined below) occurs, each Holder shall have the right,
upon written notice to the Company, to have all or any portion of the shares of
Series A Preferred Stock held by such Holder redeemed by the Company (a
"Mandatory Redemption") at the Mandatory Redemption Price (as defined herein)
in same day funds. Such notice shall specify the effective date of such
Mandatory Redemption (the "Mandatory Redemption Date") and the number of such
shares to be redeemed.
(b) Mandatory Redemption Price. The "Mandatory Redemption Price"
shall be equal to the Liquidation Preference of the shares of Series A
Preferred Stock being redeemed multiplied by one hundred and twenty percent
(120%); provided that in the event of a Mandatory Redemption Event specified in
subparagraph 6(d)(vii) below, the Mandatory Redemption Price shall be equal to
fifteen percent (15%) times the Stated Value of such shares times N/365, where
N means the number of days elapsed between the Purchase Date and the Mandatory
Redemption Date.
(c) Payment of Mandatory Redemption Price.
(i) The Company shall pay the Mandatory Redemption Price
to the Holder exercising its right to redemption within five (5) business days
of the Mandatory Redemption Date. Upon redemption of a share of Series A
Preferred Stock, the Holder will return such share to the Company for
cancellation against payment of the Mandatory Redemption Price.
(ii) If Company fails to pay the Mandatory Redemption
Price to the Holder within five (5) business days of the Mandatory Redemption
Date, the Holder shall be entitled to interest thereon at an annual rate equal
to the lower of (x) the "prime" rate (as published in the Wall Street Journal)
on such fifth business day plus three percent (3%) and (y) the highest rate
permitted by applicable law from the Mandatory Redemption Date until the
Mandatory Redemption Price has been paid in full.
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<PAGE> 11
(d) Mandatory Redemption Event. Each of the following events
shall be deemed a "Mandatory Redemption Event":
(i) the Company fails for any reason (other than as a
result of not having a sufficient number of shares of Common Stock authorized
and reserved for issuance) to issue shares of Common Stock and to transfer
certificates representing such shares to the Holder in accordance with the
provisions of this Certificate of Designations upon Conversion of any shares of
Series A Preferred Stock, and such failure continues for fifteen (15) business
days following written notice thereof by the Holder to the Company and to
counsel designated by the Company;
(ii) the Company is unable to issue shares of Common Stock
upon Conversion of any shares of Series A Preferred Stock as a result of not
having a sufficient number of shares of Common Stock authorized and reserved
for issuance, and such inability continues for a period of thirty (30) days
thereafter;
(iii) the Company breaches, in a material respect, any
covenant or other material term or condition of the Securities Purchase
Agreement between the Company and the Purchasers named therein pursuant to
which the Series A Preferred Stock may be issued and sold (the "Securities
Purchase Agreement"), the Registration Rights Agreement or any other
Transaction Document (as defined in the Securities Purchase Agreement) and such
breach continues for a period of ten (10) business days after written notice
thereof to the Company from the Holder; provided that, if the Company is then
using its best efforts to cure any such breach, such ten business day period
shall be extended for another ten (10) business days;
(iv) the Registration Statement is not declared effective
by the Registration Deadline (as defined in the Registration Rights Agreement)
or, if the Registration Statement has been declared effective by such date, and
the effectiveness of the Registration Statement lapses for any reason
(including without limitation, the issuance of a stop order) or is unavailable
to the Holder for sale of Conversion Shares in accordance with the terms of the
Registration Rights Agreement, and such lapse or unavailability continues for a
period of ten (10) business days; provided that the Registration Statement will
not be considered unavailable for the number of days occurring during a
Standstill Period (as defined in the Registration Rights Agreement);
(v) the Common Stock is no longer quoted on the Nasdaq
National Market or listed on a national securities exchange;
(vi) the sale, conveyance or disposition of all or
substantially all of the assets of the Company, the effectuation of a
transaction or series of related transactions, in which more than 50% of the
voting power of the Company is disposed of, or the consolidation, merger or
other business combination of the Company with or into any other entity (other
than the Company's merger transaction with Cozzi Iron & Metal, Inc.),
immediately following which the prior stockholders of the Company fail to own,
directly or indirectly, at least fifty percent (50%) of the surviving entity;
and
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<PAGE> 12
(vii) the Company fails to obtain Stockholder Approval within
one hundred and twenty (120) days of the Purchase Date.
7. MISCELLANEOUS.
(a) Transfer of Series A Preferred Stock. A Holder may sell,
transfer or otherwise dispose of all or any portion of the shares of Series A
Preferred Stock to any person or entity as long as such sale, transfer or
disposition is the subject of an effective registration statement under the
Securities Act or such Holder delivers an opinion of counsel to the effect that
such sale, transfer or disposition is exempt from registration thereunder;
provided that no such opinion shall be required in the event of a sale by such
Holder to an affiliate thereof or pursuant to Rule 144 under the Securities
Act. From and after the date of such sale, transfer or disposition, the
transferee hereof shall be deemed to be a Holder. Upon any such sale, transfer
or disposition, the Company shall, promptly following the return of the
certificate or certificates representing the shares of Series A Preferred Stock
that are the subject of such sale, transfer or disposition, issue and deliver
to such transferee a new Certificate in the name of such transferee.
(b) Lost or Stolen Certificate. Upon receipt by the Company of
evidence of the loss, theft, destruction or mutilation of a certificate
representing shares of Series A Preferred Stock, and (in the case of loss,
theft or destruction) of indemnity or security reasonably satisfactory to the
Company, and upon surrender and cancellation of such certificate if mutilated,
the Company shall execute and deliver to the Holder a new certificate identical
in all respects to the original certificate.
(c) No Voting Rights. The Holders of the Series A Preferred Stock
shall have no voting rights with respect to the business, management or affairs
of the Company; provided that the Company shall provide each Holder with prior
notification of each meeting of shareholders (and copies of proxy statements
and other information sent to such shareholders).
(d) Cancellation of Preferred Shares. Upon the conversion or
redemption of a Preferred Share, the Company shall immediately cancel such
Preferred Share and shall not reissue such Preferred Share.
(e) Notices. Except as otherwise specified herein, any notice,
demand or request required or permitted to be given pursuant to the terms of
this Certificate of Designations shall be in writing and shall be deemed given
(i) when delivered personally or by verifiable facsimile transmission (with a
hard copy to follow) on or before 5:00 p.m., eastern time, on a business day
or, if such day is not a business day, on the next succeeding business day,
(ii) on the next business day after timely delivery to an overnight courier and
(iii) on the third business day after deposit in the U.S. mail (certified or
registered mail, return receipt requested, postage prepaid), addressed as
follows:
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If to the Company:
Metal Management, Inc.
500 North Dearborn Street, Suite 405
Chicago, Illinois 60610
Attn: Gerard M. Jacobs
Fax: 312-645-0714
With a copy to:
Shefsky & Froelich Ltd.
444 North Michigan Avenue
Chicago, Illinois 60611
Attn: Stuart M. Savitz, Esq.
Fax: 312-527-5921
and if to any Holder, to such address as shall be designated by such Holder in
writing to the Company.
(f) Protective Provisions
So long as shares of Series A Preferred Stock are outstanding,
the Company shall not, without first obtaining the approval of the Holders of
at least a majority of the then outstanding shares of Series A Preferred Stock:
(a) 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 affect adversely the Series A Preferred Stock;
(b) create any new class or series of capital
stock having a preference over the Series A Preferred Stock as to distribution
of assets upon a Liquidation Event or any other liquidation, dissolution or
winding up of the Company; or
(c) increase the authorized number of shares of
Series A Preferred Stock;
provided, however, that such approval shall not be required in the event that
the average Closing Bid Price of the Common Stock on the five (5) trading days
immediately preceding the effective date of such change is equal to or exceeds
one hundred and fifty percent (150%) of the Fixed Conversion Price.
In the event that Holders of at least a majority of the then
outstanding shares of Series A Preferred Stock agree to allow the Company to
alter or change the rights, preferences or privileges of the shares of Series A
Preferred Stock, pursuant to the terms hereof, so as to affect the Series A
Preferred Stock, then the Company will deliver notice of such approved change
to the
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<PAGE> 14
holders of the Series A Preferred Stock that did not agree to such alteration
or change (the "Dissenting Holders") and the Dissenting Holders shall have the
right for a period of thirty (30) days to convert their shares of Series A
Preferred Stock into Conversion Shares pursuant to the terms of this
Certificate of Designations as they existed prior to such alteration or change
and without regard to the limitations on Conversion contained in paragraph
4(h)(i) hereof, or continue to hold their shares of Series A Preferred Stock.
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<PAGE> 15
IN WITNESS WHEREOF, the Company has executed this Certificate of
Designations as of the 7th day of August, 1997.
METAL MANAGEMENT, INC.
By:____________________________
Name:
Title:
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<PAGE> 16
EXHIBIT 4.1
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of August
8, 1997, by and among Metal Management, Inc., a Delaware corporation
(the "Company"), Proprietary Convertible Investment Group, Inc., a Delaware
corporation ("PCIG"), and Advantage Fund Limited, a corporation organized under
the laws of the British Virgin Islands ("Advantage"). PCIG and Advantage are
each referred to herein as a "Purchaser" and, together, as the "Purchasers".
The Company wishes to sell to each Purchaser, and each Purchaser
wishes to buy, on the terms and subject to the conditions set forth in this
Agreement, the number of shares (the "Preferred Shares") of the Company's
Series A Convertible Preferred Stock (the "Series A Preferred Stock") set forth
below such Purchaser's name on the signature pages hereof. The Preferred
Shares are convertible into shares (the "Conversion Shares") of the Company's
Common Stock, $.01 par value per share (the "Common Stock"). The Company has
agreed to effect the registration of the Conversion Shares under the Securities
Act of 1933, as amended (the "Securities Act"), pursuant to a Registration
Rights Agreement of even date herewith among the Company and the Purchasers
(the "Registration Rights Agreement").
The rights, preferences and privileges of the Series A Preferred
Stock, including the terms upon which the Series A Preferred Stock is
convertible into Conversion Shares, are set forth in the form of Certificate of
Designations, Preferences and Rights attached hereto as Exhibit A (the
"Certificate of Designation"). The Preferred Shares and the Conversion Shares
are collectively referred to herein as the "Securities" and each as a
"Security".
The sale of the Preferred Shares by the Company to the Purchasers will
be effected in reliance upon the exemption from securities registration
afforded by the provisions of Regulation D ("Regulation D"), as promulgated by
the Securities and Exchange Commission (the "Commission") under the Securities
Act.
The Company and the Purchasers hereby agree as follows:
1. PURCHASE AND SALE OF PREFERRED SHARES.
1.1 Agreement to Purchase and Sell. Upon the terms and subject to
the satisfaction of the conditions set forth herein, the Company agrees to sell
at the First Closing (as defined below), and each Purchaser agrees to purchase,
the number of Preferred Shares set forth below such Purchaser's name on the
signature page hereof at a purchase price equal to one thousand dollars
($1,000) per share (the "Purchase Price").
1.2 Closing. Subject to the satisfaction of the conditions set
forth herein, the closing of the purchase and sale of the Preferred Shares will
be deemed to occur when this Agreement and the other Transaction Documents (as
defined below), have been executed and delivered by the Company and each
Purchaser, and full payment of the Purchase Price has been made by each
Purchaser by wire transfer of immediately available funds to an account
designated by the
<PAGE> 17
Company against delivery by the Company of duly executed certificates to each
Purchaser representing the Preferred Shares purchased by such Purchaser
hereunder (the "First Closing"). The date on which the First Closing is deemed
to take place is referred to herein as the "Closing Date". The aggregate
Purchase Price for all of the Preferred Shares to be purchased by the
Purchasers at the First Closing (assuming the satisfaction of the conditions
described in Section 5 below) shall be twenty-one million dollars
($21,000,000). The Company may sell up to an additional twenty-nine million
dollars ($29,000,000) of preferred stock, up to nine million dollars
($9,000,000) of which may be shares of Series A Preferred Stock and the balance
of which shall be shares of the Company's preferred stock to be designated as
Series B Preferred Stock (the "Series B Preferred Stock") at a purchase price
of one thousand dollars ($1,000) per share at one or more additional closings
following the Closing Date (each, an "Additional Closing" and together the
"Additional Closings"). The shares of Series A Preferred Stock to be issued at
the Additional Closing or Additional Closings and the shares of Series B
Preferred Stock are collectively referred to herein as the "Additional
Preferred Shares".
1.3 Certain Definitions. When used herein, (A) "business day"
shall mean any day on which the New York Stock Exchange and commercial banks in
the city of New York are open for business, (B) an "affiliate" of a party shall
mean any person or entity controlling, controlled by or under common control
with that party and (C) "control" shall mean, with respect to an entity, the
ability to direct the business, operations or management of such entity,
whether through an equity interest therein or otherwise.
2. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS.
Each Purchaser, solely with respect to it, hereby makes the following
representations and warranties to the Company (which shall be true as of the
date hereof and as of the Closing Date) and agrees with the Company that:
2.1 Authorization; Enforceability. Such Purchaser is duly and
validly organized, validly existing and in good standing as a corporation under
the laws of the state of its incorporation with full power and authority to
purchase the Preferred Shares and to execute and deliver this Agreement. This
Agreement constitutes such Purchaser's valid and legally binding obligation,
enforceable in accordance with its terms, except as such enforcement may be
limited by (i) applicable bankruptcy, insolvency, reorganization or other laws
of general application relating to or affecting the enforcement of creditors'
rights generally and (ii) general principles of equity.
2.2 Accredited Investor; Investment Intent. Such Purchaser is an
accredited investor as that term is defined in Rule 501 of Regulation D, and is
acquiring the Preferred Shares solely for its own account for investment
purposes as a principal and not with a present view to the public resale or
distribution of all or any part thereof, except pursuant to sales that are
exempt from the registration requirements of the Securities Act and/or sales
registered under the Securities Act; provided, however that in making such
representation, such Purchaser does not agree to hold the Securities for any
minimum or specific term and reserves the right to sell,
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<PAGE> 18
transfer or otherwise dispose of the Securities at any time in accordance with
the provisions of this Agreement and with Federal and state securities laws
applicable to such sale, transfer or disposition.
2.3 Information. The Company has provided such Purchaser with, and
such Purchaser has reviewed, the written information regarding the Company set
forth on Schedule 2.3, and has granted to such Purchaser the opportunity to ask
questions of and receive answers from representatives of the Company, its
officers, directors, employees and agents concerning the business, operations
and financial condition of the Company and materials relating to the terms and
conditions of the purchase and sale of the Preferred Shares hereunder. Neither
such information nor any other investigation conducted by such Purchaser or any
of its representatives shall modify, amend or otherwise affect such Purchaser's
right to rely on the Company's representations and warranties contained in this
Agreement.
2.4 Limitations on Disposition. Such Purchaser acknowledges that,
except as provided in the Registration Rights Agreement, the Securities have
not been and are not being registered under the Securities Act and may not be
transferred or resold without registration under the Securities Act or unless
pursuant to an exemption therefrom. Such Purchaser agrees not to sell, transfer
or otherwise dispose of the Securities unless and until:
(a) there is then in effect a registration statement
under the Securities Act covering such proposed disposition and such
disposition is made in accordance with such registration statement; or
(b) (i) such Purchaser shall have notified the Company in
advance of the proposed disposition, and (ii) if reasonably requested
by the Company, such Purchaser shall have furnished the Company with
an opinion of counsel (the cost of which shall be borne by the
Purchaser), reasonably satisfactory to the Company, that such
disposition will not require registration under the Securities Act. It
is agreed that no opinion of counsel will be required for the transfer
of the Securities to an affiliate of such Purchaser or with respect to
a sale thereof made pursuant to Rule 144 under the Securities Act
("Rule 144").
2.5 Legend. Such Purchaser understands that the certificates
representing the Securities may bear at issuance a restrictive legend in
substantially the following form:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Securities Act"), or any state securities laws, and may not
be sold, transferred or assigned in the absence of an
effective registration statement under the Securities Act and
any such state law or an exemption from the registration
requirements thereunder."
Notwithstanding the foregoing, it is agreed that, as long as
the sale of the Conversion Shares is registered pursuant to an effective
registration statement or such shares are
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<PAGE> 19
eligible for resale under Rule 144(k), the Conversion Shares shall be issued
upon a conversion of the Preferred Shares pursuant to the terms of the
Certificate of Designation, or in payment of a dividend thereon, without any
legend or other restrictive language. The legend set forth above shall be
removed and the Company shall issue a new certificate without such legend to
the holder of any Security upon which it is stamped if (i) the sale of such
Security is registered under the Securities Act, (ii) such holder provides the
Company with an opinion of counsel, in form, substance and scope customary for
opinions of counsel in comparable transactions (the cost of which shall be
borne by the Purchaser) to the effect that such Security can be sold publicly
without registration under the Securities Act or (iii) such holder provides the
Company with reasonable assurances that such Security can be sold pursuant to
Rule 144 without any restriction as to the number of shares of such Security
that can then be immediately resold.
2.6 No Reliance by Purchaser. Such Purchaser acknowledges that
(i) it has such knowledge in business and financial matters as to be fully
capable of evaluating this Agreement, the other Transaction Documents (as
defined below) and the transactions contemplated hereby and thereby, (ii) it is
not relying on any advice or representation of the Company in connection with
entering into this Agreement, the other Transaction Documents or such
transactions (other than the representations made by the Company in this
Agreement and the other Transaction Documents, and in the written information
described in paragraph 2.3 above), (iii) it has not received from the Company
any assurance or guarantee as to the merits (whether legal, regulatory, tax,
financial or otherwise) of entering into this Agreement or the other
Transaction Documents or the performance of its obligations hereunder and
thereunder, and (iv) it has consulted with its own legal, regulatory, tax,
business, investment, financial and accounting advisors to the extent that it
has deemed necessary, and has entered into this Agreement and the other
Transaction Documents based on its own independent judgment and on the advice
of its advisors as it has deemed necessary, and not on any view (whether
written or oral) expressed by the Company.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby makes the following representations and warranties
to each Purchaser (which shall be true as the date hereof and as of the Closing
Date, provided that the representations and warranties made by the Company in
paragraph 3.18 hereof shall be true as of the date specified therein) and
agrees with such Purchaser that:
3.1 Organization, Good Standing and Qualification. Each of the
Company and its subsidiaries is an entity duly organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation or
organization and has all requisite power and authority, corporate and
otherwise, to carry on its business as now conducted. Each of the Company and
its subsidiaries is duly qualified to transact business and is in good standing
in each jurisdiction in which the failure so to qualify would have a material
adverse effect on the consolidated business or financial condition of the
Company and its subsidiaries taken as a whole. For purposes of this Agreement,
the term "subsidiaries" shall mean entities in which the Company has an equity
interest of 50% or greater.
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<PAGE> 20
3.2 Authorization; Consents. The Company has the requisite
corporate power and authority to enter into and perform this Agreement and the
Registration Rights Agreement, to issue and sell the Preferred Shares to such
Purchaser in accordance with the terms hereof, and to issue the Conversion
Shares upon conversion of the Preferred Shares in accordance with the
Certificate of Designation. All corporate action on the part of the Company by
its officers, directors and stockholders necessary for (A) the authorization,
execution and delivery of, and the performance by the Company of its
obligations under, (i) this Agreement, (ii) the Registration Rights Agreement
and (iii) all other agreements, documents, certificates or other instruments
delivered by the Company at the First Closing (the instruments described in
(i), (ii) and (iii) being collectively referred to herein as the "Transaction
Documents"), and (B) the authorization, execution and filing of, and the
performance by the Company of its obligations under, the Certificate of
Designation, has been obtained and no further consent or authorization of the
Company, its Board of Directors or its stockholders is required (other than the
Stockholder Approval (as defined in paragraph 4.1.10 below)).
3.3 Enforcement. The Transaction Documents and the Certificate of
Designation constitute valid and legally binding obligations of the Company,
enforceable in accordance with their respective terms, except as such
enforcement may be limited by (i) applicable bankruptcy, insolvency,
reorganization or other laws of general application relating to or affecting
the enforcement of creditors' rights generally and (ii) general principles of
equity. Except as otherwise provided in the Transaction Documents, the Company
has obtained all governmental or regulatory consents and approvals required for
it to execute, deliver and perform its obligations under the Transaction
Documents and under the Certificate of Designation.
3.4 Disclosure Documents; Material Agreements; Other Information.
The Company has filed with the Commission: (i) the Company's Annual Report on
Form 10-K for the year ended March 31, 1997, (ii) Quarterly Reports on Form
10-Q and 10-Q/A for the quarters ended January 31, 1996, March 31, 1996, June
30, 1996, September 30, 1996, and December 31, 1996, (iii) all Current Reports
on Form 8-K required to be filed with the Commission since January 31, 1996,
and (iv) the Company's definitive Proxy Statement for its 1995 Annual Meeting
of Shareholders, (v) any amendments to the foregoing and (vi) all schedules and
exhibits attached thereto (collectively, the "Disclosure Documents"). Except as
set forth on Schedule 3.4 hereto, and except for the transactions contemplated
hereby, the Company is not aware of any event that would require the filing of
a Form 8-K within fifteen (15) days following the Closing Date. Each Disclosure
Document, as of the date of the filing thereof with the Commission, conformed
in all material respects to the requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the rules and regulations thereunder
and, as of the date of such filing or, if such Disclosure Document was
subsequently amended, as of the date of the filing of any amendment thereto
with the Commission, such Disclosure Document did not contain an untrue
statement of material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. All material
agreements required to be filed as exhibits to the Disclosure Documents have
been filed as required. The written information provided to such Purchaser as
described in paragraph 2.3 above does not
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contain an untrue statement of material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. Except
as set forth in the financial statements of the Company included in the
Disclosure Documents, the Company has no liabilities, contingent or otherwise,
other than liabilities incurred in the ordinary course of business which, under
generally accepted accounting principles, are not required to be reflected in
such financial statements and which, individually or in the aggregate, are not
material to the business, operations or financial condition of the Company and
its subsidiaries taken as a whole.
3.5 Capitalization. The capitalization of the Company as of the
date hereof, including the authorized capital stock, the number of shares
issued and outstanding, the number of shares reserved for issuance pursuant to
the Company's stock option plans, the number of shares reserved for issuance
pursuant to securities (other than the Preferred Stock) exercisable for, or
convertible into or exchangeable for any shares of Common Stock and the number
of shares initially to be reserved for issuance upon conversion of the
Preferred Shares is set forth on Schedule 3.5 hereto. All of such outstanding
shares of capital stock have been, or upon issuance will be, validly issued,
fully paid and non- assessable. No shares of the capital stock of the Company
are subject to preemptive rights or any other similar rights of the
stockholders of the Company or any liens or encumbrances created by or through
the Company. Except as disclosed on Schedule 3.5, or as contemplated herein, as
of the date of this Agreement and as of the Closing Date, there are no
outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exercisable or exchangeable for, any shares of capital
stock of the Company or any of its subsidiaries.
3.6 Valid Issuance. The Preferred Shares are duly authorized and,
when issued, sold and delivered in accordance with the terms hereof, (i) will
be duly and validly issued, fully paid and nonassessable, free and clear of any
taxes, liens, claims, preemptive or similar rights or encumbrances imposed by
or through the Company, (ii) based in part upon the representations of such
Purchaser in this Agreement, will be issued, sold and delivered in compliance
with all applicable Federal and state securities laws and (iii) will be
entitled to all of the rights, preferences and privileges set forth in the
Certificate of Designation. The Conversion Shares are duly authorized and
reserved for issuance and, upon conversion of the Preferred Shares in
accordance with the terms of the Certificate of Designation, will be duly and
validly issued, fully paid and nonassessable, free and clear of any taxes,
liens, claims, preemptive or similar rights or encumbrances imposed by or
through the Company.
3.7 No Conflict with Other Instruments. Neither the Company nor
any of its subsidiaries is in violation of any provisions of its Certificate of
Incorporation or Bylaws as amended and in effect on and as of the date hereof;
the Company is not in default (and no event has occurred which, with notice or
lapse of time or both, would constitute a default) under any material provision
of any material instrument or contract to which it is a party or by which it is
bound, or of any provision of any Federal or state judgment, writ, decree,
order, statute, rule or governmental regulation applicable to the Company,
which would have a material adverse
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effect on the business, operations or financial condition of the Company and
its subsidiaries taken as a whole. The execution, delivery and performance of
this Agreement and the other Transaction Documents, and the consummation of the
transactions contemplated hereby and thereby (including without limitation the
issuance and reservation for issuance of the Conversion Shares) will not result
in any such violation or be in conflict with or constitute, with or without the
passage of time and giving of notice, either a default under any such
provision, instrument or contract or an event which results in the creation of
any lien, charge or encumbrance upon any assets of the Company.
3.8 Financial Condition; Taxes; Litigation.
3.8.1 The Company's financial condition is, in all material
respects, as described in the Disclosure Documents, except for changes in the
ordinary course of business and normal year-end adjustments that are not, in
the aggregate, materially adverse to the Company. Except as otherwise
described in the Disclosure Documents, as of the date hereof and as of the
First Closing there has been no material adverse change to the Company's
business, operations, properties, financial condition or results of operations
since the date of the Company's most recent audited financial statements
contained in the Disclosure Documents.
3.8.2 The Company has filed all tax returns required to be
filed by it and paid all taxes which are due, except for taxes which it
reasonably disputes or which could not reasonably be expected to have a
material adverse effect on the consolidated business or financial condition of
the Company.
3.8.3 Except as set forth on Schedule 3.8.3, the Company is
not the subject of any pending or, to its knowledge, threatened investigation
or administrative or legal proceeding by the Internal Revenue Service, the
taxing authorities of any state or local jurisdiction, the Commission or any
state securities commission or other governmental entity which could reasonably
be expected to have a material adverse effect on the business, operations or
financial condition of the Company and its subsidiaries taken as a whole.
3.8.4 Except as set forth on Schedule 3.8.4, there is no
material claim, litigation or administrative proceeding pending, or, to the
best of the Company's knowledge, threatened, against the Company or against any
officer, director or employee of the Company in connection with such person's
employment therewith. The Company is not a party to or subject to the
provisions of, any order, writ, injunction, judgment or decree of any court or
government agency or instrumentality which could reasonably be expected to have
a material adverse effect on the business, operations or financial condition of
the Company and its subsidiaries taken as a whole.
3.9 Reporting Company; Form S-3. The Company is subject to the
reporting requirements of the Exchange Act, has a class of securities
registered under Section 12 of the Exchange Act, and has filed all reports
required thereby. The Company is eligible to register
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<PAGE> 23
for resale shares of its Common Stock on a registration statement on Form S-3
under the Securities Act.
3.10 No Reliance by Company. The Company acknowledges that (i) it
has such knowledge in business and financial matters as to be fully capable of
evaluating this Agreement, the other Transaction Documents and the transactions
contemplated hereby and thereby, (ii) it is not relying on any advice or
representation of such Purchaser in connection with entering into this
Agreement, the other Transaction Documents or such transactions (other than the
representations made by such Purchaser in this Agreement and the other
Transaction Documents), (iii) it has not received from such Purchaser any
assurance or guarantee as to the merits (whether legal, regulatory, tax,
financial or otherwise) of entering into this Agreement or the other
Transaction Documents or the performance of its obligations hereunder and
thereunder, and (iv) it has consulted with its own legal, regulatory, tax,
business, investment, financial and accounting advisors to the extent that it
has deemed necessary, and has entered into this Agreement and the other
Transaction Documents based on its own independent judgment and on the advice
of its advisors as it has deemed necessary, and not on any view (whether
written or oral) expressed by such Purchaser.
3.11 Acknowledgment of Dilution. The Company acknowledges that the
issuance of the Conversion Shares upon conversion of the Preferred Shares in
accordance with the terms of the Certificate of Designation may result in
dilution of the outstanding shares of Common Stock, which dilution may be
substantial under certain market conditions. The Company further acknowledges
that its obligation to issue Conversion Shares upon conversion of the Preferred
Shares in accordance with the terms of the Certificate of Designation is
unconditional and absolute regardless of the effect of any such dilution.
3.12 Registration Rights; Rights of Participation. Except as
described on Schedule 3.12 hereto, (A) the Company has not granted or agreed to
grant to any person or entity any rights (including "piggy-back" registration
rights) to have any securities of the Company registered with the Commission or
any other governmental authority and (B) no person or entity, including, but
not limited to, current or former shareholders of the Company, underwriters,
brokers, agents or other third parties, has any right of first refusal,
preemptive right, right of participation, or any similar right to participate
in the transactions contemplated by this Agreement or any other Transaction
Document which has not been waived.
3.13 Trading on Nasdaq. The Common Stock is authorized for
quotation on the Nasdaq National Market, and trading in the Common Stock on
Nasdaq has not been suspended as of the date hereof and as of the Closing Date.
3.14 Solicitation. Neither the Company nor any of its subsidiaries
or affiliates, nor any person acting on its or their behalf, (i) has engaged in
any form of general solicitation or general advertising (within the meaning of
Regulation D) in connection with the offer or sale of the Preferred Shares or
(ii) has, directly or indirectly, made any offers or sales of any security or
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<PAGE> 24
solicited any offers to buy any security, under any circumstances that would
require registration of the Preferred Shares under the Securities Act.
3.15 Fees. The Company is not obligated to pay any compensation or
other fee, cost or related expenditure to any underwriter, broker, agent or
other representative, other than Wharton Capital Partners, Ltd., in connection
with the transactions contemplated hereby.
3.16 Foreign Corrupt Practices. Neither the Company, nor any of
its subsidiaries nor any director, officer, agent, employee or other person
acting on behalf of the Company or any subsidiary has (i) used any corporate
funds for any unlawful contribution, gift, entertainment or other unlawful
expenses relating to political activity, (ii) made any direct or indirect
unlawful payment to any foreign or domestic government official or employee,
(iii) violated any provision of the Foreign Corrupt Practices Act of 1977, as
amended, or made any bribe, rebate, payoff, influence payment, kickback or
other unlawful payment to any foreign or domestic government official or
employee.
3.17 Pending Acquisitions. With respect to any acquisition of
assets or securities by the Company or any of its subsidiaries, the agreement
for which has been executed as of the date of this Agreement, the closing of
such acquisition, and the obligations of the parties thereunder, are not
conditioned in any respect on the maintenance at any given level of the closing
bid, ask or sale price of the Common Stock as quoted by Nasdaq.
3.18 Environmental Matters. Except as set forth in the Disclosure
Documents or on Schedule 3.18 hereof, the following representations and
warranties shall be true with respect to the Company and its subsidiaries as of
May 16, 1997:
3.18.1 To the best of the Company's knowledge, the Company
and each of its subsidiaries is in material compliance with all Environmental,
Health and Safety Laws (as defined below) governing its business, operations,
properties and assets. Neither the Company nor any of its subsidiaries is
currently liable for any penalties, fines or forfeitures for failure to comply
with any Environmental, Health and Safety Laws.
3.18.2 The Company and each of its subsidiaries has
obtained, or caused to be obtained, and to the best of the Company'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"). 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 of its subsidiaries, their respective businesses,
operations, properties or assets, which question the validity or entitlement of
the Company or any of its subsidiaries to any License wherein an unfavorable
decision, ruling or finding could have a material adverse effect on the Company
or any of its subsidiaries.
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<PAGE> 25
3.18.3 Neither the Company nor any of its subsidiaries 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 of its subsidiaries, 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 of its subsidiaries.
3.18.4 To the best of the Company's knowledge, neither the
Company nor any of its subsidiaries 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 below) 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 Company's knowledge, neither the
Company nor any of its subsidiaries 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, 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.
3.18.5 To the best of the Company's knowledge, neither the
Company nor any of its subsidiaries 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 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 or its subsidiaries. To the best of the
Company'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 Owned Properties or the Leased Premises or to any properties
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<PAGE> 26
adjacent thereto which would have a material adverse effect on the Company or
its subsidiaries. For purposes of this Agreement, the terms "Release" and
"Discharge" shall have the meanings given them in the Environmental, Health and
Safety Laws.
3.18.6 To the best of the Company's knowledge, neither the
Company nor any of its subsidiaries 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 nor any of its subsidiaries has received notice, and
neither the Company nor any of its subsidiaries has knowledge of any facts
which could give rise to any notice, that the Company or any of its
subsidiaries 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 of its subsidiaries 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 of its subsidiaries 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
of its subsidiaries has transported, transferred or disposed of other Wastes.
Neither the Company nor any of its subsidiaries 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 the Company's knowledge, neither the Company nor
any of its subsidiaries has any material liability under any Environmental,
Health and Safety Laws for personal injury, property damage, natural resource
damage, or clean up obligations.
3.18.7 To the best of the Company's knowledge, there are no
Aboveground Storage Tanks or Underground Storage Tanks on the Owned Properties
or the 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.
3.18.8 Schedule 3.18 identifies (i) all material
environmental audits, assessments or occupational health studies, of which the
Company is aware, undertaken by the Company, its subsidiaries or their agents,
or by any governmental authority, or by any third party, relating to or
affecting the Company, its 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 of its
subsidiaries or any of the Leased Premises or the Owned Properties.
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3.18.9 Schedule 3.18 contains a list of the assets of the
Company and its 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 its
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 the Company, any of its 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.
3.18.10 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. Section 9601, et seq. (collectively, "CERCLA"); the Solid Waste
Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976
and subsequent Hazardous and Solid Waste Amendments of 1984, 42 U.S.C. section
6901 et seq. (collectively "RCRA"); the Hazardous Materials Transportation
Act, as amended, 49 U.S.C. Section 1801, et seq.; the Clean Water Act, as
amended, 33 U.S.C. Section 1311, et seq.; the Clean Air Act, as amended (42
U.S.C. Section 7401-7642); Toxic Substances Control Act, as amended, 15 U.S.C.
Section 2601 et seq.; the Federal Insecticide, Fungicide, and Rodenticide Act
as amended, 7 U.S.C. Section 136-136y ("FIFRA"); the Emergency Planning and
Community Right-to-Know Act of 1986 as amended, 42 U.S.C. Section 11001, et
seq. (Title III of SARA) ("EPCRA"); the Occupational Safety and Health Act of
1970, as amended, 29 U.S.C. Section 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.
3.18.11 Schedule 3.18 identifies the operations and
activities, and locations thereof, which have been conducted and are being
conducted by the Company or any of its subsidiaries on any of the Owned
Properties or the Leased Premises which have involved the generation,
accumulation, storage, treatment, transportation, labeling, handling,
manufacturing,
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<PAGE> 28
use, spilling, leaking, dumping, discharging, release or disposal of any
material quantities of Hazardous Substances.
3.18.12 To the best of the Company's 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.
3.18.13 As used in Section 3.18, the terms "Owned Properties"
and "Leased Premises" are deemed to refer only to the properties currently
owned or leased by the Company.
4. COVENANTS.
4.1 Covenants of the Company. The Company hereby agrees and
covenants with each Purchaser as follows:
4.1.1 Corporate Existence. The Company shall, so long as a
Purchaser beneficially owns any Securities (but in no event longer than three
(3) years from the Closing Date), maintain its corporate existence in good
standing and shall pay all its taxes when due except for taxes which the
Company reasonably disputes or which could not reasonably be expected to have a
material adverse effect on the business, operations or financial condition of
the Company and its subsidiaries taken as a whole.
4.1.2 Form D; Blue-Sky Qualification. The Company agrees
to file a Form D with respect to the Securities as required under Regulation D
and to provide a copy thereof to each Purchaser promptly after such filing. The
Company shall, on or before the First Closing, take such action as is necessary
to qualify the Preferred Shares for sale under applicable state or "blue-sky"
laws or obtain an exemption therefrom, and shall provide evidence of any such
action to the Purchasers at or prior to the First Closing.
4.1.3 Reporting Status. As long as either Purchaser or any
affiliate of such Purchaser beneficially owns any Securities and until the date
on which any of the foregoing may be sold to the public pursuant to Rule 144(k)
(or any successor rule or regulation), (i) the Company shall timely file with
the Commission all reports required to be so filed pursuant to the Exchange Act
and (ii) the Company shall not terminate its status as an issuer required by
the Exchange Act to file reports thereunder even if the Exchange Act or the
rules or regulations thereunder would permit such termination. The Company will
issue a press release describing the transactions contemplated by this
Agreement no later than the business day following the Closing Date.
4.1.4 Use of Proceeds. The Company shall use the proceeds
from the sale of the Preferred Shares for general corporate purposes and shall
not use such proceeds to make a loan to or an investment in any other
corporation, partnership or other entity, provided that the Company may use
such proceeds as full or partial consideration for the purchase of more than
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<PAGE> 29
50% of the voting equity or substantially all of the assets of any corporation,
partnership or other entity.
4.1.5 Quotation on Nasdaq. The Company shall promptly
secure the designation and quotation of the Conversion Shares on the Nasdaq
National Market and shall use its best efforts to maintain the designation and
quotation, or listing, of the shares of Common Stock on the Nasdaq National
Market or, if not quoted on such market, the New York Stock Exchange or other
national securities exchange.
4.1.6 Use of Purchaser Name. The Company shall not use,
directly or indirectly, either Purchaser's name in any advertisement,
announcement, press release or other similar communication unless it has
received the prior written consent of such Purchaser for the specific use
contemplated, or except as it may be required to do so, in the reasonable
opinion of counsel to the Company, pursuant to applicable law or regulation.
4.1.7 Additional Equity Capital; Right of First Offer.
The Company agrees that, during the 270-day period following the Closing Date,
the Company will not issue or agree to issue any securities that are
convertible into or exercisable or exchangeable for, directly or indirectly,
Common Stock (other than Additional Preferred Shares that are issued at an
Additional Closing) if such securities provide for a conversion, exercise or
exchange price less than the market price for the Common Stock on the date of
such conversion, exercise or exchange (the "Capital Raising Limitation"). The
Capital Raising Limitation will not apply to (i) an offering that is registered
under the Securities Act, (ii) any transaction involving the issuance of
securities in connection with a merger, consolidation, acquisition or sale of
assets, or in connection with any strategic partnership or joint venture formed
for a bona fide commercial purpose (the primary purpose of which is not to
raise equity capital), or (iii) the granting of options, warrants or other
rights to acquire Common Stock to employees, consultants or directors of the
Company not in connection with a public or private offering of securities, or
the exercise thereof by any such individual. The Company agrees that it will
not issue or sell any Series B Preferred Stock, or any rights to purchase or
receive Series B Preferred Stock, unless and until the Company's planned merger
with Cozzi Iron & Metal, Inc. is consummated.
4.1.8 Right of First Offer. Prior to any offer or sale of
Additional Preferred Shares, the Company must first deliver to each Purchaser
written notice describing the proposed issuance, including the terms and
conditions thereof, and provide such Purchaser with an option during the five
(5) business day period following delivery of such notice to purchase up to its
proportionate share (based on the number of Preferred Shares purchased by such
Purchaser hereunder relative to the number of Preferred Shares purchased by the
Purchasers hereunder) of the Additional Preferred Shares being offered on the
same terms as contemplated by such issuance. In the event that Purchaser either
does not give notice within such five business day period that it intends to
exercise the foregoing option or informs the Company in writing that it does
not intend to participate in such issuance, the Company may offer to each of
its officers and directors the option to purchase up to, in the aggregate, the
amount of Additional Preferred Shares which were declined by such Purchaser, on
the same terms as were offered to such
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Purchaser. If any such officer or director declines to exercise such option,
the Company may offer to a third party the amount of Additional Preferred
Shares which were declined by such officer or director, on the same terms as
were offered to such officer or director.
4.1.9 Company's Instructions to Transfer Agent. On or prior
to the First Closing, the Company shall execute and deliver a letter to its
transfer agent (the "Transfer Agent"), thereby appointing the Transfer Agent as
the Company's conversion agent and irrevocably instructing the Transfer Agent
(i) to issue certificates representing the Conversion Shares upon conversion of
the Preferred Shares in accordance with the terms of the Certificate of
Designation upon receipt of a valid Conversion Notice (as defined in the
Certificate of Designation) from a Purchaser, (ii) to issue certificates
representing the number of Conversion Shares specified in such Conversion
Notice, free of any restrictive legend, in the name of such Purchaser or its
nominee as long as the sale of the Conversion Shares is registered pursuant to
an effective registration statement or such shares are eligible for resale
under Rule 144(k) and (iii) to deliver such certificates to such Purchaser no
later than the close of business on the later to occur of (i) the third (3rd)
business day following the Conversion Date (as defined in the Certificate of
Designation) and (ii) the business day following the day on which the original
certificate or certificates representing the shares of Series A Preferred Stock
being converted are received by the Company. As long as purchases and sales of
shares of Common Stock are eligible for settlement at the Depository Trust
Company ("DTC"), the Company may instruct the Transfer Agent that, in lieu of
delivering physical certificates to a Purchaser upon conversion of the
Preferred Shares, the Transfer Agent may effect delivery of Conversion Shares
by crediting the account of such Purchaser or its nominee at DTC for the number
of shares for which delivery is required hereunder within the time frame
specified above for delivery of certificates. The Company represents to and
agrees with each Purchaser that it will not give any instruction to the
Transfer Agent that will conflict with the foregoing instruction or otherwise
restrict such Purchaser's right to convert the Preferred Shares or receive
Conversion Shares in accordance with the terms of the Certificate of
Designation, the Registration Rights Agreement and this Agreement,
respectively. In the event the Company's relationship with the Transfer Agent
should be terminated for any reason, the Transfer Agent shall continue acting
as transfer agent pursuant to the terms hereof until such time that a successor
transfer agent is appointed by the Company and agrees to be bound by the terms
hereof.
4.1.10 Stockholder Meeting. The Company will cause, pursuant
to Section 211 of the Delaware General Corporation Law, a meeting of
stockholders to be held on or prior to the date which is four (4) months
following the Closing Date (the "Meeting Date") and will submit to the vote of
its stockholders at such meeting a proposal to approve (in accordance with the
applicable provisions of the Company's Certificate of Incorporation) the
transactions contemplated by the Transaction Documents and the Certificate of
Designation, including without limitation the conversion of Preferred Shares
into Conversion Shares ("Stockholder Approval"). The Company will deliver proxy
materials and other information with respect to such meeting of stockholders to
each Purchaser at the same time that the Company delivers such materials and
information to the holders of its Common Stock. During the period beginning on
the date of this Agreement and ending on the Meeting Date, the Company will not
issue any Common Stock or
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any securities, or rights or options to purchase Common Stock or any such
securities, whereby the number of votes represented by the Management Proxies
(as defined below) would be less than 51% of the votes eligible to be cast at
such meeting.
4.2 Covenant of Each Purchaser.
4.2.1 Short Sales. Each Purchaser hereby agrees and
covenants with the Company that neither such Purchaser, nor any affiliate of
such Purchaser, will engage in any short sales of shares of Common Stock during
the period from the date of this Agreement until the first date on which such
Purchaser no longer owns any Preferred Shares. Notwithstanding the foregoing,
nothing contained herein will be deemed to limit (i) the right of an affiliate
of PCIG to engage in short sales resulting from customer orders or which are
effected on a proprietary basis by trading personnel of such affiliate who are
not acting at the direction of PCIG or any employee of PCIG or (ii) the right
of such Purchaser to engage in bona fide hedging transactions that are effected
otherwise than through short sales of shares of Common Stock. As used herein,
the term "short sale" shall have the meaning specified in Rule 3b-3 under the
Exchange Act; provided, however, that such term shall not include any such sale
(x) effected as a result of a failure by the Company to issue Conversion Shares
or to deliver certificates representing such shares in accordance with the
terms of the Certificate of Designation or (y) which involves a number of
shares of Common Stock not to exceed the number of Conversion Shares for which
a Conversion Notice (as defined in the Certificate of Designation) has been, or
will be on the day on which such short sales are effected, submitted to the
Company.
4.2.2 Agreement to Vote Shares. Each of the Purchasers
agrees to attend (in person or by delivering its proxy) the meeting described
in paragraph 4.1.10 and to vote the shares of Common Stock which it is entitled
to vote pursuant to the Management Proxies (as defined in paragraph 5.1.4
below) in favor of the proposal described in paragraph 4.1.10.
5. CONDITIONS TO CLOSING.
5.1 Conditions to Purchaser's Obligations at First Closing. Each
Purchaser's obligations at the First Closing, including without limitation its
obligation to purchase the Preferred Shares, are conditioned upon the
fulfillment of each of the following events:
5.1.1 the representations and warranties of the Company set
forth in this Agreement shall be true and correct in
all material respects as of the date of the First
Closing as if made on such date; provided that the
representations and warranties made by the Company in
paragraph 3.18 shall be true and correct in all
material respects as of the date specified therein;
5.1.2 the Company shall have complied with or performed all
of the agreements, obligations and conditions set
forth in this Agreement that are
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required to be complied with or performed by the
Company on or before the First Closing;
5.1.3 the Company shall have delivered to such Purchaser a
certificate, signed by an officer of the Company,
certifying that the conditions specified in
paragraphs 5.1.1 and 5.1.2 above have been fulfilled;
5.1.4 the Company shall have delivered to the Purchasers an
executed irrevocable proxy, in substantially the form
of Exhibit 5.1.4 hereto (each, a " Management Proxy"
and collectively, the "Management Proxies"), from
each director of the Company who owns shares of
Common Stock as of the First Closing;
5.1.5 the Company shall have filed the Certificate of
Designation with the Secretary of State of the State
of Delaware, and shall have furnished such Purchaser
with a file-stamped copy thereof;
5.1.6 the Company shall have delivered to such Purchaser an
opinion of counsel for the Company, dated as of the
date of the First Closing, in the form attached as
Exhibit 5.1.6 hereto;
5.1.7 the Company shall have executed and delivered the
Registration Rights Agreement;
5.1.8 the Common Stock shall be designated for quotation
and actively traded on the Nasdaq National Market;
5.1.9 there shall have been no material adverse changes in
the consolidated business or financial condition of
the Company and its subsidiaries taken as a whole
since the date of the Company's most recent audited
financial statements contained in the Disclosure
Documents; and
5.1.10 the Company shall have authorized and reserved for
issuance upon conversion of the Preferred Shares
the number of shares of Common Stock specified in
the Registration Rights Agreement.
5.2 Conditions to Company's Obligations at Closing. The Company's
obligations at the First Closing are conditioned upon the fulfillment of each
of the following events:
5.2.1 the representations and warranties of each Purchaser
shall be true and correct in all material respects as
of the date of the First Closing as if made on such
date;
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5.2.2 each Purchaser shall have complied with or performed
all of the agreements, obligations and conditions set
forth in this Agreement that are required to be
complied with or performed by such Purchaser on or
before the First Closing; and
5.2.3 each Purchaser shall have delivered to the Company a
certificate, signed by an officer of such Purchaser,
certifying that the conditions specified in
paragraphs 5.2.1 and 5.2.2 above have been fulfilled.
6. INDEMNIFICATION.
The Company agrees to indemnify and hold harmless each Purchaser and
its officers, directors, employees and agents, and each person who controls
such Purchaser within the meaning of the Securities Act or the Exchange Act
(each, a "Purchaser Indemnified Party") against any losses, claims, damages,
liabilities or reasonable out-of-pocket expenses (including the reasonable fees
and disbursements of counsel) as incurred, joint or several, to which it, they
or any of them, may become subject and not otherwise reimbursed, arising out of
or in connection with the breach by the Company of any of its representations,
warranties or covenants made herein.
Each Purchaser agrees, severally and not jointly, to indemnify and
hold harmless the Company and its officers, directors, employees and agents,
and each person who controls the Company within the meaning of the Securities
Act or the Exchange Act (each, a "Company Indemnified Party") (a Purchaser
Indemnified Party and a Company Indemnified Party are each hereinafter referred
to as an "Indemnified Party") against any losses, claims, damages, liabilities
or expenses (including the fees and disbursements of counsel) as incurred,
joint or several, to which it, they or any of them, may become subject and not
otherwise reimbursed, arising out of or in connection with the breach by such
Purchaser of any of its representations, warranties or covenants made herein.
Promptly after receipt by an Indemnified Party of notice of the
commencement of any action pursuant to which indemnification may be sought
hereunder, such Indemnified Party will, if a claim in respect thereof is to be
made against the other party (the "Indemnifying Party"), deliver to the
Indemnifying Party a written notice of the commencement thereof and the
Indemnifying Party shall have the right to participate in and to assume the
defense thereof with counsel reasonably selected by the Indemnifying Party,
provided, however, that an Indemnified Party shall have the right to retain its
own counsel, with the reasonably incurred fees and expenses of such counsel to
be paid by the Company, if representation of such Indemnified Party by the
counsel retained by the Indemnifying Party would be inappropriate due to actual
or potential conflicts of interest under applicable standards of professional
conduct between such Indemnified Party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
Indemnifying Party within a reasonable time of the commencement of any such
action will not relieve the Indemnifying Party of any of its
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obligations hereunder with respect to such action except to the extent such
failure is prejudicial to the Indemnifying Party's ability to defend any such
action.
No Indemnifying Party shall, without the prior written consent of the
Indemnified Party, effect any settlement of pending or threatened action in
respect of which an Indemnified Party is or could have been a party and
indemnity could have been sought hereunder by such Indemnified Party unless
such settlement includes an unconditional release of such Indemnified Party
from all liability on any claims that are the subject matter of such action.
An Indemnifying Party will not be liable for any settlement of any action or
claim effected without its written consent.
7. MISCELLANEOUS.
7.1 Survival; Severability. The representations,
warranties, covenants and indemnities made by the parties herein shall survive
the First Closing until the sooner to occur of the date which is (i) eighteen
(18) months from the date hereof or (ii) the first date on which none of the
Purchasers owns any Preferred Shares, notwithstanding any due diligence
investigation made by or on behalf of the party seeking to rely thereon. In
the event that any provision of this Agreement becomes or is declared by a
court of competent jurisdiction to be illegal, unenforceable or void, this
Agreement shall continue in full force and effect without said provision;
provided that no such severability shall be effective if it materially changes
the economic benefit of this Agreement to either party.
7.2 Successors and Assigns. The terms and conditions of
this Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement. The Purchaser may assign its rights hereunder, in
connection with any private sale or transfer of the Preferred Shares, as long
as, as a condition precedent to such transfer, the transferee executes an
acknowledgment agreeing to be bound by the applicable provisions of this
Agreement, in which case the term "Purchaser" shall be deemed to refer to such
transferee as though such transferee were an original signatory hereto.
7.3 Injunctive Relief. The Company acknowledges that a
breach by it of its obligations hereunder will cause irreparable harm to each
Purchaser and that the remedy or remedies at law for any such breach will be
inadequate and agrees, in the event of any such breach, in addition to all
other available remedies, to an injunction restraining any breach and requiring
immediate and specific performance of such obligations without the necessity of
showing economic loss.
7.4 Governing Law; Jurisdiction. This Agreement shall be
governed by and construed under the laws of the State of Delaware without
regard to the conflict of laws provisions thereof. Each party hereby
irrevocably submits to the jurisdiction of the state and
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<PAGE> 35
federal courts sitting in the City of Wilmington, Delaware for the adjudication
of any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives, and
agrees not to assert in any suit, action or proceeding, any claim that it is
not personally subject to the jurisdiction of any such court, that such suit,
action or proceeding is brought in an inconvenient forum or that the venue of
such suit, action or proceeding is improper. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof to such party at the
address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any
right to serve process in any manner permitted by law.
7.5 Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, and all of
which together shall constitute one and the same instrument.
7.6 Headings. The headings used in this Agreement are
used for convenience only and are not to be considered in construing or
interpreting this Agreement.
7.7 Notices. Any notice, demand or request required or
permitted to be given by any party to any other party pursuant to the terms of
this Agreement shall be in writing and shall be deemed given (i) when delivered
personally or by verifiable facsimile transmission (with a hard copy to follow)
on or before 5:00 p.m., eastern time, on a business day or, if such day is not
a business day, on the next succeeding business day, (ii) on the next business
day after timely delivery to an overnight courier and (iii) on the third
business day after deposit in the U.S. mail (certified or registered mail,
return receipt requested, postage prepaid), addressed to the parties as
follows:
If to the Company:
Metal Management, Inc.
500 North Dearborn Street, Suite 405
Chicago, Illinois 60610
Attn: Gerard M. Jacobs
Fax: 312-645-0714
With a copy to:
Shefsky & Froelich Ltd.
444 North Michigan Avenue
Chicago, Illinois 60611
Attn: Stuart M. Savitz. Esq.
Fax: 312-527-5921
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<PAGE> 36
If to PCIG:
Proprietary Convertible Investment Group, Inc.
c/o Credit Suisse First Boston Corporation
Eleven Madison Avenue - Third Floor
New York, New York 10010
Attn: Allan Weine/John McAvoy
Fax: 212-325-6519
With a copy to:
Solomon, Zauderer, Ellenhorn, Frischer & Sharp
45 Rockefeller Plaza
New York, New York 10111
Attn: Richard T. Sharp, Esq.
Fax: 212-956-4068
If to Advantage :
Advantage Fund Limited
c/o Genesee International, Inc.
10500 N.E. 8th Street
Suite 1920
Bellevue, Washington 98004-4332
Fax: (206) 462-4645
or to such other address or fax number as any party shall specify in writing to
the other parties.
7.8 Expenses. Except as otherwise specified herein, each
of the Company and each Purchaser shall pay all costs and expenses that it
incurs in connection with the negotiation, execution, delivery and performance
of this Agreement; provided that the Company shall pay twenty thousand dollars
($20,000) to PCIG at the First Closing in reimbursement of expenses incurred by
PCIG hereunder.
7.9 Entire Agreement; Amendments. This Agreement and the
other Transaction Documents constitute the entire agreement between the parties
with regard to the subject matter hereof and thereof, superseding all prior
agreements or understandings, whether written or oral, between or among the
parties. Except as expressly provided herein, neither this Agreement nor any
term hereof may be amended except pursuant to a written instrument executed by
the Company and both Purchasers, and no provision hereof may be waived other
than by a written instrument signed by the party against whom enforcement of
any such waiver is sought.
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<PAGE> 37
7.10 Issuances of Additional Securities.
7.10.1 Issuance of Enhanced Securities. In the
event that, during the period from the Closing Date until the earlier to occur
of (i) one year from the Closing Date and (ii) ninety (90) Trading Days (as
such term is defined in the Certificate of Designation) from the effectiveness
of the Registration Statement (the "Limitation Period"), the Company issues any
securities convertible or exercisable into Common Stock (including without
limitation the Series B Preferred Stock), which securities either (i) provide a
conversion or exercise price which is lower than the Conversion Price, or (ii)
allow the holder thereof, without being subject to a redemption provision
substantially similar to that provided by paragraph 4(h)(i) of the Certificate
of Designation, to convert or exercise such securities into a number of shares
of Common Stock that is greater on an aggregate basis than the number of shares
of Common Stock into which such securities would be convertible or exercisable
at a conversion or exercise price of ten dollars ($10) (the "Enhanced
Securities"), the Company shall, in either such case, promptly (but in no event
later than thirty (30) days following the issuance of such Enhanced Securities)
take such action as may be necessary in order to amend the Certificate of
Designation to conform the terms thereof with those of the instrument governing
the Enhanced Securities to the extent necessary to confer the benefit of the
provisions of such Enhanced Securities on the holders of the Series A Preferred
Stock, and the provisions of the Certificate of Designation as so amended shall
apply to the Series A Preferred Stock from and after the date on which such
Enhanced Securities are issued. In addition, if the Company issues any
convertible securities during the Limitation Period and, in connection
therewith, the Company issues any warrants, options or similar securities for
little or no consideration to the purchasers of such convertible securities in
connection with such issuance, the Company shall at the same time issue to each
holder such warrants, options or similar securities in an amount which is
proportional to the Purchase Price of the Series A Preferred Stock purchased by
such Initial Purchaser at the First Closing relative to the aggregate purchase
price of such convertible securities purchased by such purchasers. The
provisions of this subparagraph 7.10.1 shall not apply to any transaction
involving the issuance of securities in connection with a merger,
consolidation, acquisition or sale or purchase of assets, or in connection with
any strategic partnership or joint venture formed for a bona fide commercial
purpose (the primary purpose of which is not to raise equity capital), or the
granting of options, warrants or other rights to acquire Common Stock to
employees, consultants or directors of the Company not in connection with a
public or private offering of securities, or the exercise thereof by any such
individual. The Company further agrees that, in the event of a stock split,
reverse stock split, reclassification or other similar event with respect to
the Common Stock, it will amend the Certificate of Designation so that the Cap
Amount (as defined in the Certificate of Designation) will be proportionately
increased or reduced, as the case may be.
7.10.2 Terms of Series B Preferred Stock. In the
event that the Company issues any Series B Preferred Stock, the Series B
Preferred Stock shall have terms which are identical in all material respects
to those of the Series A Preferred Stock, other than the Fixed Conversion Price
(as defined in the Certificate of Designation).
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<PAGE> 38
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first-above written.
METAL MANAGEMENT, INC.
By: __________________________
Name:
Title:
PROPRIETARY CONVERTIBLE INVESTMENT GROUP, INC.
By: _________________________
Name:
Title:
Number of Shares of Preferred Stock to be Purchased: 5,000
ADVANTAGE FUND LIMITED
By: _________________________
Name:
Title:
Number of Shares of Preferred Stock to be Purchased: 16,000
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<PAGE> 39
EXHIBIT 4.2
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this " Agreement"), dated as of August
8, 1997, by and among Metal Management, Inc., a Delaware corporation
(the "Company"), Proprietary Convertible Investment Group, Inc. ("PCIG") and
Advantage Fund Limited ("Advantage"). PCIG and Advantage are each referred to
herein as a "Purchaser" and, together, as the "Purchasers".
The Company has agreed, on the terms and subject to the conditions set
forth in the Securities Purchase Agreement of even date herewith (the
"Securities Purchase Agreement"), to issue and sell to each Purchaser the
number of shares (the "Preferred Shares") of Preferred Stock (the "Preferred
Stock") specified therein. The Preferred Shares are convertible into shares of
the Company's Common Stock, $.01 par value per share (the "Common Stock"),
pursuant to the Certificate of Designations, Rights and Privileges establishing
the Preferred Stock (the "Certificate of Designation"). In order to induce the
Purchasers to enter into the Securities Purchase Agreement, the Company has
agreed to provide certain registration rights under the Securities Act of 1933,
as amended (the "Securities Act"), and under applicable state securities laws.
Capitalized terms used herein and not otherwise defined shall have the
respective meanings set forth in the Securities Purchase Agreement.
In consideration of each Purchaser entering into the Securities
Purchase Agreement, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. DEFINITIONS.
For purposes of this Agreement, the following terms shall have the
meanings specified:
(a) "Closing" shall have the meaning specified in the
Securities Purchase Agreement;
(b) "Closing Bid Price" shall have the meaning specified
in the Certificate of Designation;
(c) "Conversion Price" shall have the meaning specified
in the Certificate of Designation;
(d) "Filing Deadline" means the date which is thirty (30)
days following the date on which Stockholder Approval is
obtained in accordance with the terms of the Securities
Purchase Agreement;
(e) "Registration Deadline" means the date which is one
hundred and twenty (120) days following the date on which
Stockholder Approval is obtained in accordance with the terms
of the Securities Purchase Agreement;
<PAGE> 40
(f) "Holder" means any person owning or having the right
to acquire, through conversion of Preferred Shares,
Registrable Securities, including initially each Purchaser and
thereafter any permitted assignee thereof;
(g) "Register", "registered" and "registration" refer to
a registration effected by preparing and filing a registration
statement or statements in compliance with the Securities Act
and pursuant to Rule 415 under the Securities Act ("Rule 415")
or any successor rule providing for the offering of securities
on a continuous basis ("Registration Statement"), and the
declaration or ordering of effectiveness of the Registration
Statement by the Securities and Exchange Commission (the
"Commission");
(h) "Registrable Securities" means (i) the shares of
Common Stock issued or issuable either upon conversion of the
Preferred Shares or otherwise in accordance with the
Certificate of Designation, and (ii) any shares of capital
stock issued or issuable from time to time (with any
adjustments) in replacement of, in exchange for or otherwise
in respect of such shares;
(i) "Stockholder Approval" shall have the meaning
specified in the Securities Purchase Agreement; and
(j) "Trading Days" shall have the meaning specified in
the Certificate of Designation.
2. MANDATORY REGISTRATION.
(a) On or before Filing Deadline, the Company shall
prepare and file a Registration Statement on Form S-3 (or, if Form S-3 is not
available, on such form of Registration Statement as is then available to
effect a registration of the Registrable Securities as a "shelf" registration
statement under Rule 415) covering the resale of at least 175% of the number of
shares of Common Stock which would be issuable if the Preferred Shares were
converted into shares of Common Stock at a Conversion Price equal to (A) the
average Closing Bid Price over the five Trading Days immediately preceding, but
not including the Closing Date times (B) 85%. The Registration Statement shall
state, to the extent permitted by Rule 416 under the Securities Act, that it
also covers such indeterminate number of shares of Common Stock as may be
required to effect conversion of the Preferred Shares to prevent dilution
resulting from stock splits, stock dividends or similar events, or by reason of
changes in the Conversion Price in accordance with the terms of the Certificate
of Designation.
(b) The Company shall cause the Registration Statement to
become effective as soon as practicable following the filing thereof but in no
event later than the Registration Deadline, and shall submit to the Commission,
within five (5) business days after the Company learns that no review of the
Registration Statement will be made by the staff of the Commission or that the
staff of the Commission has no further comments on the Registration Statement,
as the case may
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<PAGE> 41
be, a request for acceleration of the effectiveness of the Registration
Statement to a time and date not later than forty-eight (48) hours after the
submission of such request, and maintain the effectiveness of the Registration
Statement until the earlier to occur of (i) the date on which all of the
Registrable Securities have been sold and (ii) the date on which all of the
remaining Registrable Securities (in the reasonable opinion of counsel to the
Purchaser) may be immediately sold to the public without registration and
without regard to the amount of Registrable Securities which may be sold by a
Holder thereof at a given time (the "Registration Period").
(c) The Filing Deadline and the Registration Deadline
shall be extended by the number of days (not exceeding an aggregate for both
such dates, when taken together, of thirty (30) days) during (i) any period in
which the Company has been advised by its outside counsel that the Registration
Statement will not be accepted for filing by the Commission as a result of the
Company then having on file a registration statement which has not yet gone
effective or a proxy statement that is then being reviewed by the Commission (a
"Filing Delay Period"), and (ii) any period in which the Board of Directors of
the Company determines in good faith (A) that an amendment or supplement to the
Registration Statement or prospectus contained therein is necessary in order to
correct a material misstatement made therein or to include information the
absence of which would render the Registration Statement or such prospectus
materially misleading and (B) that the disclosure of such information at such
time would be detrimental to the business or prospects of the Company; provided
that no such period specified in this clause (ii) may exceed ten (10) days
unless, prior to the end of such ten day period, the Company obtains the
written advice of its outside legal counsel that an amendment or supplement to
the Registration Statement or prospectus contained therein is necessary in
order to correct a material misstatement made therein or to include information
the absence of which would render the Registration Statement or such prospectus
materially misleading (a "Standstill Period").
(d) If (A) the Registration Statement (i) is not filed by
the Filing Deadline or (ii) is not declared effective by the Commission on or
before the Registration Deadline, (B) after the Registration Statement has been
declared effective by the Commission, sales of Registrable Securities cannot be
made by a Holder under the Registration Statement for any reason not within the
exclusive control of such Holder, or (C) the Common Stock is not included for
quotation on the Nasdaq National Market ("Nasdaq") or listed on the New York
Stock Exchange (the "NYSE") or other national securities exchange at any time
after the Registration Deadline, the Company shall pay to such Holder an amount
equal to the lesser of (x) two percent (2%) per month and (y) the highest rate
permitted by applicable law, times the aggregate purchase price of the
Preferred Shares held by such Holder, accruing daily and compounded monthly,
(I) from the Filing Deadline until the date on which the Registration Statement
is filed with the Commission, (II) from the Registration Deadline until the
date on which the Registration Statement is declared effective, (III) from the
date on which the Registration Statement is unavailable for sales of
Registrable Securities by a Holder until the Registration Statement becomes
available for sales of Registrable Securities; provided that the Registration
Statement will not be considered unavailable for the number of days occurring
during a Standstill Period which takes place after the effectiveness of the
Registration Statement, or (IV) from the date on which the Common Stock is no
longer quoted or listed on Nasdaq, the NYSE or such other exchange until the
date on which the Common Stock becomes so
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<PAGE> 42
listed or quoted, as the case may be. The amounts paid or payable by the
Company hereunder shall be in addition to any other remedies available to the
Purchaser at law or in equity or pursuant to the terms of any other Transaction
Document. Payments of cash pursuant hereto shall be made within five (5) days
after the end of each period that gives rise to such obligation, provided that,
if any such period extends for more than thirty (30) days, payments shall be
made at the end of each thirty-day period.
3. PIGGYBACK REGISTRATION.
If at any time prior to the expiration of the Registration
Period, (i) the Company proposes to register shares of Common Stock under the
Securities Act in connection with the public offering of such shares for cash
(other than a registration relating solely to the sale of securities to
participants in a Company stock plan or a registration on Form S-4 under the
Securities Act or any successor or similar form registering stock issuable upon
a reclassification, a business combination involving an exchange of securities
or an exchange offer for securities of the issuer or another entity) (a
"Proposed Registration") and (ii) a registration statement covering the sale of
all of the Registrable Securities is not then effective and available for sales
thereof by the Holders, the Company shall, at such time, promptly give each
Holder written notice of such Proposed Registration. Each Holder shall have
thirty (30) days from its receipt of such notice to deliver to the Company a
written request specifying the amount of Registrable Securities that such
Holder intends to sell and such Holder's intended method of distribution. Upon
receipt of such request, the Company shall use its best efforts to cause all
Registrable Securities which the Company has been requested to register to be
registered under the Securities Act to the extent necessary to permit their
sale or other disposition in accordance with the intended methods of
distribution specified in the request of such Holder; provided, however, that
the Company shall have the right to postpone or withdraw any registration
effected pursuant to this Section 3 without obligation to the Holder.
4. OBLIGATIONS OF THE COMPANY.
In addition to performing its obligations under paragraphs 2(a) and
(b) above, the Company shall:
(a) prepare and file with the Commission such amendments
and supplements to such Registration Statement and the prospectus used in
connection with such Registration Statement as may be necessary to comply with
the provisions of the Securities Act or to maintain the effectiveness of the
Registration Statement during the Registration Period, or as may be reasonably
requested by a Holder in order to incorporate information concerning such
Holder or such Holder's intended method of distribution;
(b) in the event that the number of shares available
under the Registration Statement filed by the Company hereunder is insufficient
during any period of three consecutive trading days to cover 125% of the
Registrable Securities then issued or issuable, the Company shall promptly
amend the Registration Statement, or file a new Registration Statement, or
both, so as to cover 175% of such Registrable Securities, in any event as soon
as practicable, but not later than
4
<PAGE> 43
the tenth business day following the last day of such three day period. Any
Registration Statement filed pursuant to this Section 4 shall state that, to
the extent permitted by Rule 416 under the Securities Act, such Registration
Statement also covers such indeterminate number of additional shares of Common
Stock as may become issuable upon conversion of the Preferred Shares. Unless
and until such amendment or new Registration Statement becomes effective, each
Holder shall have the rights described in Section 2(d) above;
(c) secure the designation and quotation of the
Registrable Securities on the Nasdaq National Market;
(d) furnish to each Holder such number of copies of the
prospectus included in such Registration Statement, including a preliminary
prospectus, in conformity with the requirements of the Securities Act, and such
other documents as such Holder may reasonably request in order to facilitate
the disposition of such Holder's Registrable Securities;
(e) use its best efforts to register or qualify the
Registrable Securities under the securities or "blue sky" laws of such
jurisdictions within the United States as shall be reasonably requested from
time to time by a Holder, and do any and all other acts or things which may be
necessary or advisable to enable such Holder to consummate the public sale or
other disposition of the Registrable Securities in such jurisdictions; provided
that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such jurisdiction;
(f) in the event of an underwritten public offering of
the Registrable Securities, enter into and perform its obligations under an
underwriting agreement, in usual and customary form reasonably acceptable to
the Company, with the managing underwriter of such offering;
(g) notify each Holder immediately upon the occurrence of
any event as a result of which the prospectus included in such Registration
Statement, as then in effect, contains an untrue statement of material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances then
existing, and as promptly as practicable, prepare, file and furnish to each
Holder a reasonable number of copies of a supplement or an amendment to such
prospectus as may be necessary so that such prospectus does not contain an
untrue statement of material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing;
(h) use its best efforts to prevent the issuance of any
stop order or other order suspending the effectiveness of such Registration
Statement and, if such an order is issued, to obtain the withdrawal thereof at
the earliest possible time and to notify each Holder of the issuance of such
order and the resolution thereof;
(i) furnish to each Holder, on the date that such
Registration Statement becomes effective, (x) an opinion, dated such date, of
outside counsel representing the Company addressed
5
<PAGE> 44
to such Holder and in form and substance as is customarily given to
underwriters in an underwritten public offering, and (y) in the case of an
underwriting, a letter, dated such date, from the Company's independent
certified public accountants, in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering, addressed to the underwriters, if any, and to each Holder; and
(j) permit counsel for each Holder to review such
Registration Statement and all amendments and supplements thereto, and provide
such counsel with the opportunity to conduct a reasonable inquiry of the
Company's financial and other records during normal business hours and make
available its officers, directors and employees for questions regarding
information contained in such Registration Statement, amendments or
supplements, a reasonable period of time prior to the filing thereof with the
Commission.
5. OBLIGATIONS OF EACH HOLDER.
In connection with the registration of the Registrable Securities
pursuant to the Registration Statement, each Holder shall:
(a) furnish to the Company such information regarding itself
and the intended method of disposition of Registrable Securities as the Company
shall reasonably request in order to effect the registration thereof; and
(b) upon receipt of any notice from the Company of the
happening of any event of the kind described in paragraph 4(g) or 4(h) above,
immediately discontinue disposition of Registrable Securities pursuant to the
Registration Statement until the Registration has been amended in accordance
with paragraph 4(g) or until withdrawal of the stop order referred to in
paragraph 4(h), as the case may be.
6. INDEMNIFICATION.
In the event that any Registrable Securities are included in a
Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company shall
indemnify and hold harmless each Holder, the officers, directors, employees,
agents and representatives of such Holder, and each person, if any, who
controls such Holder within the meaning of the Securities Act or the Securities
Exchange Act of 1934, as amended (the "1934 Act"), against any losses, claims,
damages, liabilities or reasonable out-of- pocket expenses (whether joint or
several) (collectively, including legal or other expenses reasonably incurred
in connection with investigating or defending same, "Losses"), insofar as any
such Losses arise out of or are based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in such Registration Statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, or (ii) the omission or alleged omission
to state therein a material fact required to be stated therein, or necessary to
make the statements therein, in light of the circumstances under which they
6
<PAGE> 45
were made, not misleading (collectively, "Violations"). The Company will
reimburse such Holder, and each such officer, director, employee, agent,
representative or controlling person for any legal or other expenses as
reasonably incurred by any such entity or person in connection with
investigating or defending any Loss; provided, however, that the foregoing
indemnity shall not apply to amounts paid in settlement of any Loss if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld), nor shall the Company be obligated to indemnify
any person for any Loss to the extent that such Loss arises out of or is based
upon and in conformity with written information furnished by such person
expressly for use in such Registration Statement; and provided, further, that
the Company shall not be required to indemnify any person to the extent that
any Loss results from such person selling Registrable Securities (i) to a
person to whom there was not sent or given, at or prior to the written
confirmation of the sale of such shares, a copy of the prospectus, as most
recently amended or supplemented, if the Company has previously furnished or
made available copies thereof or (ii) during any period following written
notice by the Company to such Holder of an event described in Section 4(g) or
4(h).
(b) To the extent permitted by law, each Holder, acting
severally and not jointly, shall indemnify and hold harmless the Company, the
officers, directors, employees, agents and representatives of the Company, and
each person, if any, who controls the Company within the meaning of the
Securities Act or the 1934 Act, against any Losses to the extent (and only to
the extent) that any such Losses arise out of or are based upon and in
conformity with written information furnished by such Holder expressly for use
in such Registration Statement; and such Holder will reimburse any legal or
other expenses as reasonably incurred by the Company and any such officer,
director, employee, agent, representative, or controlling person, in connection
with investigating or defending any such Loss; provided, however, that the
foregoing indemnity shall not apply to amounts paid in settlement of any such
Loss if such settlement is effected without the consent of such Holder, which
consent shall not be unreasonably withheld; provided, that, in no event shall
any indemnity under this subsection 6(b) exceed the net purchase price of
securities sold by such Holder under the Registration Statement.
(c) Promptly after receipt by an indemnified party under
this Section 6 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 6,
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in and to assume
the defense thereof with counsel mutually satisfactory to the parties;
provided, however, that an indemnified party shall have the right to retain its
own counsel, with the reasonably incurred fees and expenses of one such counsel
to be paid by the indemnifying party, if representation of such indemnified
party by the counsel retained by the indemnifying party would be inappropriate
under applicable standards of professional conduct due to actual or potential
conflicting interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement
of any such action, to the extent prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 6 with respect to such action, but the
7
<PAGE> 46
omission so to deliver written notice to the indemnifying party will not
relieve it of any liability that it may have to any indemnified party otherwise
than under this Section 6 or with respect to any other action.
(d) In the event that the indemnity provided in paragraph
(a) or (b) of this Section 6 is unavailable or insufficient to hold harmless an
indemnified party for any reason, the Company and each Holder agree, severally
and not jointly, to contribute to the aggregate Losses to which the Company or
such Holder may be subject in such proportion as is appropriate to reflect the
relative fault of the Company and such Holder in connection with the statements
or omissions which resulted in such Losses; provided, however, that in no case
shall such Holder be responsible for any amount in excess of the net purchase
price of securities sold by it under the Registration Statement. Relative
fault shall be determined by reference to whether any alleged untrue statement
or omission relates to information provided by the Company or by such Holder.
The Company and each Holder agree that it would not be just and equitable if
contribution were determined by pro rata allocation or any other method of
allocation which does not take account of the equitable considerations referred
to above. Notwithstanding the provisions of this paragraph (d), no person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who is
not guilty of such fraudulent misrepresentation. For purposes of this Section
6, each person who controls a Holder within the meaning of either the
Securities Act or the 1934 Act and each officer, director, employee, agent or
representative of such Holder shall have the same rights to contribution as
such Holder, and each person who controls the Company within the meaning of
either the Securities Act or the Exchange Act and each officer, director,
employee, agent or representative of the Company shall have the same rights to
contribution as the Company, subject in each case to the applicable terms and
conditions of this paragraph (d).
(e) The obligations of the Company and each Holder under
this Section 6 shall survive the conversion or redemption, if any, of the
Preferred Shares, the completion of any offering of Registrable Securities
pursuant to a Registration Statement under this Agreement, or otherwise.
7. REPORTS.
With a view to making available to each Holder the benefits of
Rule 144 under the Securities Act ("Rule 144") and any other rule or regulation
of the Commission that may at any time permit such Holder to sell securities of
the Company to the public without registration, the Company agrees to:
(a) make and keep public information available, as those
terms are understood and defined in Rule 144;
(b) file with the Commission in a timely manner all
reports and other documents required of the Company under the Securities Act
and the 1934 Act; and
8
<PAGE> 47
(c) furnish to such Holder, so long as such Holder owns
any Registrable Securities, and until such Registrable Securities are eligible
for sale pursuant to Rule 144(k), forthwith upon request (i) a written
statement by the Company, if true, that it has complied with the reporting
requirements of Rule 144, the Securities Act and the 1934 Act, (ii) a copy of
the most recent annual or quarterly report of the Company and such other
reports and documents so filed by the Company, and (iii) such other information
as may be reasonably requested in availing such Holder of any rule or
regulation of the Commission which permits the selling of any such securities
without registration.
8. MISCELLANEOUS.
(a) Expenses of Registration. All expenses, other than
underwriting discounts and commissions and fees and expenses of counsel to each
Holder, incurred in connection with the registrations, filings or
qualifications described herein, including (without limitation) all
registration, filing and qualification fees, printers' and accounting fees, the
fees and disbursements of counsel for the Company, and the fees and
disbursements incurred in connection with the opinion and letter described in
paragraph 4(i) hereof, shall be borne by the Company.
(b) Amendment; Waiver. Any provision of this Agreement
may be amended only pursuant to a written instrument executed by the Company
and each Holder. Any waiver of the provisions of this Agreement may be made
only pursuant to a written instrument executed by the party against whom
enforcement is sought. Any amendment or waiver effected in accordance with
this paragraph shall be binding upon each Holder, each future Holder, and the
Company.
(c) Notices. Any notice, demand or request required or
permitted to be given by the Company or a Holder pursuant to the terms of this
Agreement shall be in writing and shall be deemed given (i) when delivered
personally or when sent by verifiable facsimile transmission (with a hard copy
to follow), (ii) on the next business day after timely delivery to an overnight
courier and (iii) on the third business day after deposit in the U.S. mail
(certified or registered mail, return receipt requested, postage prepaid),
addressed to the parties as follows:
If to the Company:
Metal Management, Inc.
500 North Dearborn Street, Suite 405
Chicago, Illinois 60610
Attn: Gerard M. Jacobs
Fax: 312-645-0714
9
<PAGE> 48
With a copy to:
Shefsky & Froelich Ltd.
444 North Michigan Avenue
Chicago, Illinois 60611
Attn: Stuart M. Savitz. Esq.
Fax: 312-527-5921
If to PCIG:
Proprietary Convertible Investment Group, Inc.
Eleven Madison Avenue
New York, New York 10010
Attn: Allan Weine/John McAvoy
Fax: 212-325-6519
With a copy to:
Solomon, Zauderer, Ellenhorn, Frischer & Sharp
45 Rockefeller Plaza
New York, New York 10111
Attn: Richard T. Sharp, Esq.
If to Advantage:
Advantage Fund Limited
c/o Genesee International, Inc.
10500 N.E. 8th Street, Suite 1920
Bellevue, Washington 98004-4332
Attn:
Fax: (206) 462-4645
or to such other address or fax number as any party shall notify the others in
accordance herewith.
(d) Termination. This Agreement shall terminate on the
earlier to occur of (a) the end of the Registration Period and (b) the date on
which all of the Registrable Securities have been publicly distributed; but any
such termination shall be without prejudice to (i) the parties' rights and
obligations arising from breaches of this Agreement occurring prior to such
termination and (ii) the indemnification obligations under this Agreement.
(e) Assignment. The rights of a Holder hereunder shall
be assigned automatically to any transferee of the Preferred Shares or
Registrable Securities from such Holder as long as: (i) the Company is, within
a reasonable period of time following such transfer, furnished with written
notice of the name and address of such transferee, (ii) the transferee agrees
in writing with the
10
<PAGE> 49
Company to be bound by all of the provisions hereof and (iii) such transfer is
made in accordance with the applicable requirements of the Securities Purchase
Agreement.
(f) Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of Delaware, without
regard to the conflict of laws provisions thereof.
11
<PAGE> 50
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first-above written.
METAL MANAGEMENT, INC.
By: __________________________
Name:
Title:
PROPRIETARY CONVERTIBLE INVESTMENT GROUP, INC.
By: _________________________
Name:
Title:
ADVANTAGE FUND LIMITED
By: _________________________
Name:
Title:
12
<PAGE> 1
EXHIBIT 11.1
METAL MANAGEMENT
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Earnings:
Net income from continuing operations..................... $ 221 $ 5
Gain on sale of discontinued operations................... 101 0
Net income from discontinued operations................... 0 146
------ -----
Net income........................................... $ 322 $ 151
====== =====
Primary earnings per share:
Weighted average common shares outstanding.................. 11,921 9,370
Common stock equivalents (1)................................ 2,031 0
------ -----
Total primary shares................................... 13,952 9,370
====== =====
Per share amounts:
Net income from continuing operations..................... $ 0.02 $0.00
Gain on sale of discontinued operations................... 0.00 0.00
Net income from discontinued operations................... 0.00 0.02
------ -----
Net income........................................... $ 0.02 $0.02
====== =====
Fully diluted earnings per share:
Weighted average common shares outstanding.................. 11,921 9,370
Common stock equivalents (1)................................ 2,638 0
------ -----
Total............................................. 14,559 9,370
====== =====
Per share amounts:
Net income from continuing operations..................... $ 0.02 $0.00
Gain on sale of discontinued operations................... 0.00 0.00
Net income from discontinued operations................... 0.00 0.02
------ -----
Net income........................................... $ 0.02 $0.02
====== =====
</TABLE>
- -------------------------
(1) For the three months ended June 30, 1996, common stock equivalents were less
than 3% of the weighted average shares outstanding and therefore, were not
added to weighted average shares outstanding.
31
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,832,000
<SECURITIES> 14,000
<RECEIVABLES> 54,334,000
<ALLOWANCES> 0
<INVENTORY> 43,762,000
<CURRENT-ASSETS> 106,833,000
<PP&E> 55,777,000
<DEPRECIATION> 2,723,000
<TOTAL-ASSETS> 242,358,000
<CURRENT-LIABILITIES> 102,688,000
<BONDS> 0
0
0
<COMMON> 148,000
<OTHER-SE> 75,745,000
<TOTAL-LIABILITY-AND-EQUITY> 75,893,000
<SALES> 54,435,000
<TOTAL-REVENUES> 54,435,000
<CGS> 48,461,000
<TOTAL-COSTS> 48,461,000
<OTHER-EXPENSES> 4,350,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,248,000
<INCOME-PRETAX> 437,000
<INCOME-TAX> 216,000
<INCOME-CONTINUING> 221,000
<DISCONTINUED> 101,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 322,000
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
