<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[x] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended December 31, 1996.
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
Commission file number:
METAL MANAGEMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2835068
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 N. DEARBORN STREET, SUITE 405
CHICAGO, IL 60610
(Address of principal executive office including zip code)
Registrant's telephone number, including area code: (312) 645-0700
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods as the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days
YES X NO
----- -----
Number of Shares of Common Stock outstanding as of February 11, 1997:
10,150,000.
<PAGE> 2
INDEX
PART I
FINANCIAL INFORMATION
ITEM 1: Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets December 31, 1996 and March
31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Condensed Statements of Operations for the three
months ended December 31, 1996 and January 31, 1996; for the
three months ended December 31, 1995 for EMCO Recycling Corp.
and pro forma for the three months ended January 31, 1996 . . . . 4
Consolidated Condensed Statements of Operations for the nine
months ended December 31, 1996 and January 31, 1996; for the
nine months ended December 31, 1995 for EMCO Recycling Corp.
and pro forma for the nine months ended January 31, 1996 . . . . 5
Consolidated Condensed Statements of Cash Flows for the nine
months ended December 31, 1996 and January 31, 1996; for the
nine months ended December 31, 1995 for EMCO Recycling Corp.. . . 6
Notes to Consolidated Condensed Financial Statements . . . . . . 7
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . 12
PART II
OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 26
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . 28
<PAGE> 3
METAL MANAGEMENT, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
PART I
FINANCIAL INFORMATION
<TABLE>
December 31, March 31,
1996 1996 (Note 1)
------------ -------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 1,277,000 $ 3,093,000
Marketable securities (Note 7) 0 2,644,000
Accounts receivable, net 4,552,000 1,488,000
Loan to EMCO Recycling Corp. -- 1,000,000
Inventories (Note 6) 1,549,000 1,359,000
Prepaid expenses 1,655,000 58,000
Refundable income taxes 0 70,000
Deposits for Purchase of MacLeod (Note 8) 1,001,000 --
Deferred charges (Note 8) 1,102,000 --
------------ ------------
Total current assets 11,136,000 9,712,000
Marketable securities (Note 7) 0 115,000
Property and equipment, net 9,122,000 44,000
Goodwill and other intangibles, net (Note 2) 11,115,000 478,000
------------ ------------
Total Assets $ 31,373,000 $ 10,349,000
============ ============
LIABILITIES AND SHAREHOLDERS EQUITY:
Current Liabilities:
Operating line of credit $ 2,539,000 $ --
Accounts payable 3,539,000 282,000
Income tax payable 183,000 --
Other accrued liabilities 424,000 459,000
Current portion of long term debt 1,093,000 --
------------ ------------
Total current liabilities 7,778,000 741,000
Long term dets, less current portion 4,480,000 --
Other liabilities 1,465,000 --
------------ ------------
Total Liabilities 13,723,000 741,000
Stockholders' equity
Common stock 99,000 53,000
Additional paid-in-capital 12,705,000 3,325,000
Retained earnings 4,846,000 6,230,000
------------ ------------
Total equity 17,650,000 9,608,000
------------ ------------
Total Liabilities and equity $ 31,373,000 $ 10,349,000
============ ============
</TABLE>
See Accompanying Footnotes
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<PAGE> 4
METAL MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
EMCO Recycling
Corp. Pro Forma Combined
Metal Management, Inc. For the three For the three
For the three months ended months ended months
December 31, January 31, December 31, ended January 31,
1996 1996 1995 1996 (Note 1)
-------------- ------------ ---------------- ------------------
<S> <C> <C> <C> <C>
Net sales $ 10,402,000 $ 0 $ 18,435,000 $ 18,435,000
Cost of sales 10,020,000 0 17,793,000 17,793,000
-------------- ----------- ---------------- ----------------
Gross profit 382,000 0 642,000 642,000
Operating expenses
Marketing and sales 143,000 0 70,000 70,000
General & Administrative 1,336,000 411,000 1,464,000 1,978,000
-------------- ----------- ---------------- ----------------
Total operating expenses 1,479,000 411,000 1,534,000 2,048,000
Income (loss) from continued
operations (1,097,000) (411,000) (892,000) (1,406,000)
Interest expense 224,000 0 393,000 393,000
Other (income) expense (42,000) (83,000) (251,000) (334,000)
-------------- ----------- ---------------- ----------------
Income (loss) from continuing
operations before income tax and
discontinued operations (1,279,000) (328,000) (1,034,000) (1,465,000)
Provision (benefit) for income tax (119,000) 0 (415,000) (440,000)
-------------- ----------- ---------------- ----------------
Income (loss) from continuing
operations (1,160,000) (328,000) (619,000) (1,025,000)
Discontinued Operations (Note 3)
Income (loss) from operations of
discontinued Spectra*Star
Products Division, net of income
taxes (benefit) of $0 in 1996 25,000 376,000 0 376,000
-------------- ----------- ---------------- ----------------
Net income (loss) $ (1,135,000) $ 48,000 $ (619,000) $ (649,000)
============== =========== ================ ================
Net income (loss) per share for:
Continuing operations (0.13) (0.06) n/a (.11)
Discontinued operations 0.00 .07 n/a 0.04
Weighted average number of shares
outstanding 8,949,000 5,327,000 n/a 8,949,000
</TABLE>
See Accompanying Footnotes.
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METAL MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Metal Management, Inc. EMCO Recycling Corp. Pro Forma Combined
For the nine months ended For the nine months For the nine months
December 31, January 31, ended December 31, ended January 31,
1996 1996 1995 1996 (Note 1)
--------------- ------------ -------------------- --------------------
<S> <C> <C> <C> <C>
Net sales $ 40,344,000 $ 0 $ 52,625,000 $ 52,625,000
Cost of sales 36,770,000 0 47,665,000 47,665,000
------------ ----------- -------------- --------------
Gross profit 3,574,000 0 4,960,000 4,960,000
Operating expenses
Marketing and sales 436,000 0 287,000 287,000
General & Administrative 4,691,000 1,125,000 3,275,000 4,814,000
------------ ----------- -------------- --------------
Total operating expenses 5,127,000 1,125,000 3,562,000 5,101,000
Income (loss) from continued
operations (1,553,000) (1,125,000) 1,398,000 (141,000)
Interest expense 674,000 0 1,174,000 1,174,000
Other (income) expense (151,000) (245,000) (269,000) (514,000)
------------ ----------- -------------- --------------
Income (loss) from continuing
operations before income tax
and discontinued operations (2,076,000) (880,000) 493,000 (801,000)
Provision (benefit) for income tax (373,000) (381,000) 200,000 (284,000)
------------ ----------- -------------- --------------
Income (loss) from continuing
operations (1,703,000) (499,000) 293,000 (517,000)
Discontinued Operations (Note 3)
Income (loss) from operations of
discontinued Spectra*Star
Products Division, net of income
taxes (benefit) of $381 in 1996 319,000 (1,893,000) 0 (1,893,000)
------------ ----------- -------------- --------------
Net income (loss) $ (1,384,000) $(2,392,000) $ 293,000 $ (2,410,000)
------------ ----------- -------------- --------------
Net income (loss) per share for:
Continuing operations (0.19) (0.09) n/a (.06)
Discontinued operations .04 (.36) n/a (.21)
Weighted average number of shares
outstanding 8,949,000 5,327,000 n/a 8,949,000
</TABLE>
See Accompanying Footnotes
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<PAGE> 6
METAL MANAGEMENT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION> Metal Management, Inc. EMCO Recycling
------------------------------------- ----------------------
For the nine months
For the nine months ended ended
December 31, 1996 January 31, 1996 December 31, 1995
----------------- ----------------- -------------------
<S> <C> <C> <C>
Cash provided (used) by operating
activities:
Net income (loss) $ (1,384,000) $ (2,392,000) $ 293,000
Adjustments to reconcile net
income to cash
provided by (used in) operating activities
Depreciation, amortization,
deferred charges, and
deferred income taxes 1,227,000 185,000 (118,000)
Restructuring costs -- 1,437,000 --
Other Charges -- 716,000 135,000
Changes in assets and liabilities net
of effects
of purchase of EMCO Recycling Corp.:
Accounts receivable 2,645,000 454,000 (2,353,000)
Inventory 1,641,000 1,285,000 1,475,000
Accounts payable (82,000) (143,000) 1,105,000
Accrued liabilities (458,000) 6,000 (1,128,000)
Other, net (2,612,000) (106,000) (345,000)
------------ ------------ --------------
Net cash provided (used) by operations 977,000 1,442,000 (936,000)
Cash flows provided (used) by investing
activities:
Marketable securities 2,644,000 776,000 0
Purchase of property and equipment (1,654,000) (19,000) (1,350,000)
Capitalized software development cost -- (147,000) 0
Payment for purchase of EMCO, net
of cash
acquired of $660,000 (971,000) 0 0
Other investments -- -- 155,000
------------ ------------ --------------
Net cash provided (used) by investing 19,000 610,000 (1,195,000)
activities
Cash flows provided (used) by financing
activities:
Common stock issued under employees stock
purchase, employee stock option plan 293,000 500,000 0
Payment of cash dividends 0 (307,000) 0
Borrowings on line of credit, net (1,975,000) -- 3,727,000
Repayment of borrowings, net (1,130,000) 0 (1,847,000)
------------ ------------ --------------
Net cash provided (used) by financing
activities (2,812,000) 193,000 1,880,000
Net increase (decrease) in cash and
equivalents (1,816,000) 2,245,000 (251,000)
Cash and equivalents, beginning of
period 3,093,000 963,000 566,000
------------ ------------ --------------
Cash and equivalents, end of period 1,277,000 3,208,000 315,000
============ ============ ==============
</TABLE>
See Accompanying Footnotes.
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<PAGE> 7
METAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
In accordance with its previously announced business strategy, the
business of Metal Management, Inc. (hereinafter referred to as "Metal
Management" or the "Company") has changed significantly during the past year.
The Company completed its first of a number of planned acquisitions in the
scrap metal recycling industry with the purchase of EMCO Recycling Corp.
("EMCO") in April 1996 (see below); it discontinued its Spectra*Star and
consumables business during the first quarter of fiscal 1997 and its VideoShow
product and related product lines in the fourth quarter of fiscal 1995, and
changed its fiscal year end from October 31 to March 31, effective April 1,
1996. As a result of the above changes, no prior year quarterly information is
truly comparable to the Company's current operating activities. In an effort to
provide meaningful comparable information for the prior year's quarter, without
incurring unreasonable expense, the Company has included three- and nine-month
information for the periods ended January 31, 1996, because it is the most
comparable quarter in terms of timing. In addition, such quarterly information
is supplemented by unaudited financial information for EMCO for the three
months and nine months ended December 31, 1995, which is presented for
informational purposes. The pro forma income statement information for the
quarter and nine months ended January 31, 1996, assumes the acquisition of EMCO
was consummated as of April 1, 1995, and includes amortization of goodwill and
other intangibles ($103,000 for the three months ended January 31, 1996, and
$414,000 for the nine months ended January 31, 1996) arising from the
acquisition. The balance sheet dated March 31, 1996, includes assets,
liabilities and shareholders equity with balances that exclude EMCO Recycling
Corporation, which was acquired April 11, 1996.
NOTE 2 - ACQUISITION OF EMCO RECYCLING CORP.
On April 11, 1996, the Company completed the acquisition of EMCO, a
scrap metal recycling company based in Phoenix, Arizona, for a purchase price
of approximately $12.8 million ($2.0 million in cash, 3.5 million shares of
common stock valued at $8.8 million, 600,000 warrants at $4.48 per share,
400,000 warrants at $6.48 per share valued at $0.3 million and $1.7 million in
other long-term liabilities that bear interest at 7%). In connection with the
acquisition the Company also acquired land used in the scrap metal business
that was indirectly owned by one of the principal former owners of EMCO for
$1.1 million ($150,000 in cash and $950,000 in notes payable in three years
that bear interest at 9%). The acquisition of EMCO was accounted for using the
purchase method of accounting, and accordingly its results are included in the
consolidated financial statements from the date of purchase. The excess of the
purchase price over the fair value of the net tangible assets acquired has been
allocated to covenants-not-to-compete ($1.7 million, which is amortized over 10
years) with the remainder to goodwill ($9.6 million, which is amortized over 40
years). Effective as of July 1, 1996, the Company changed its estimated life
for goodwill, increasing the amortization period from 15 years to 40 years.
The change in amortization period more appropriately reflects the anticipated
benefit period for acquisitions of scrap metal recycling companies. A summary
of the tangible assets acquired and liabilities assumed is as follows:
-7-
<PAGE> 8
<TABLE>
<S> <C>
Current assets $ 8,877,000
Noncurrent assets 7,767,000
Current liabilities (9,148,000)
Non current liabilities (5,785,000)
-----------
Intangible assets, including goodwill of $9.6
million and covenants not to compete of $1.7
million 11,261,000
-----------
$12,972,000
===========
</TABLE>
NOTE 3 - DISCONTINUED OPERATIONS: SALE OF SPECTRA*STAR PRODUCTS
DIVISION/VIDEOSHOW PRODUCT LINE
During the first quarter of fiscal 1997, management made the decision
to exit the Spectra*Star printer and consumables business. On July 16, 1996,
Mannesmann Tally ("Tally") acquired the inventory and related production
equipment for approximately $1.3 million in cash and other contingent
consideration in the form of royalties on future revenues from the sale of
Spectra*Star printers and related consumables by Tally. Consequently, the
printer and consumables business is reported as a discontinued operation for
all periods presented. The operating results of the division have been netted
and reported as a single line item in the income statement entitled "Income
(loss) from discontinued operations, net of income taxes." The Company
recognized income net of expenses in the third quarter of fiscal 1997 of
$25,000 from discontinued operations. A reserve was recorded in the third
quarter of $122,000 for uncollectible accounts receivable from the Spectra*Star
business, which was charged to discontinued operations. Royalty income of
$178,000 was recognized as income from discontinued operations in the third
quarter of fiscal 1997, and $279,000 of royalty income is recognized in the
nine months ended December 31, 1996. Additional consideration from royalty
income will be recorded when it becomes known and collected and will be
reported as income from discontinued operations. Also reported as discontinued
operations are the VideoShow and related product lines ("VideoShow"), which
were discontinued in the fourth quarter of fiscal 1995 and were subsequently
sold in the third quarter of fiscal 1997 for consideration that was not
considered material to the Company. VideoShow together with the Spectra*Star
printer and consumables business formed the Company's presentation products
business segment. Consequently, with the sale of the printer and consumables
business and the VideoShow, both are included in discontinued operations in the
accompanying financial statements.
NOTE 4 - FINANCIAL STATEMENTS
The accompanying Consolidated Condensed Balance Sheets of Metal
Management, Inc. at December 31 and March 31, 1996, and the Consolidated
Condensed Statements of Operations for the three months and nine months ended
December 31, 1996, and January 31, 1996, respectively, and the Consolidated
Condensed Statements of Cash Flows for the nine months ended December 31, 1996,
and January 31, 1996, respectively, have not been audited by independent
accountants. However, in the opinion of management, all necessary adjustments,
consisting only of normal, recurring adjustments necessary for a fair statement
of the results of operations for the interim periods, have been made.
The Consolidated Condensed Financial Statements included in this Form
10-Q should be read in conjunction with the audited Consolidated Financial
Statements and Notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 1995, with the Company's
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<PAGE> 9
Definitive Joint Proxy Statement dated March 8, 1996, the Transitional 10-Q for
the five months ended March 31, 1996, the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996, and Forms 10-Q/A filed as of October 2, 1996, and
November 19, 1996, the Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, the Forms 8-K and 8-K/A dated April 11, 1996, and the Forms
8-K dated July 16, 1996, August 7, 1996, January 1, 1997, and January 7, 1997,
filed with the Commission.
NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION
During the first quarter of fiscal 1997, in connection with the
acquisition of EMCO, the Company issued 3,500,000 shares of common stock,
600,000 warrants at $4.48 and 400,000 warrants at $6.48 to acquire the
Company's common stock in connection with the acquisition. In conjunction with
the acquisition, liabilities were assumed as follows:
Fair value of assets acquired $27,905,000
Cash paid of $1.9 million, loan of $1 million and
other consideration 13,772,000
-----------
Liabilities assumed $14,133,000
===========
In a related transaction accomplished in April 1996, the Company issued a
$950,000 three-year note that bears interest at 9% to acquire land used by
Ellis Metals, Inc. in the scrap metal recycling business. Ellis Metals, Inc.
is an entity principally owned by Harold Rubenstein and is a supplier of scrap
metals to EMCO.
In the nine-month period ended December 31, 1996, and the pro forma
nine-month period ended January 31, 1996, the Company paid interest expense and
paid income taxes (collected income tax refunds) in amounts as follows
($000's):
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------------
EMCO
December 31, January 31, December 31,
1996 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
Interest Paid $ 810 $ 0 $ 1,189
Income taxes paid (refunds received) $ (128) $ (585) $ 1,695
</TABLE>
NOTE 6 - INVENTORIES
Inventories of EMCO consisted of ferrous, nonferrous, and other inventories as
follows ($000's):
<TABLE>
<CAPTION>
December 31, 1996 March 31, 1996
----------------- --------------
<S> <C> <C>
Ferrous $ 321 $ 416
Non Ferrous - Processed 649 762
Non Ferrous - Unprocessed 498 575
Other 81 0
-------- --------
$ 1,549 $ 1,753
======== ========
</TABLE>
-9-
<PAGE> 10
NOTE 7 - MARKETABLE SECURITIES
Marketable securities are stated at cost, which approximates market
value. Marketable securities maturing within one year are classified as
current assets. The Company's marketable securities are classified in
accordance with Financial Accounting Standards Board Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Under SFAS
No. 115, management is required to determine the appropriate classification of
its securities at the time of purchase and reevaluate such designation as of
each balance sheet. Held-to-maturity securities are reported at amortized cost.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses, net reported in a separate component of shareholders' equity until
disposition. Realized gains and losses and declines in value judged to be other
than temporary are included in other (income) expense.
The Company had none of its cash balances invested in marketable
securities as of December 31, 1996.
NOTE 8 - COMPLETED AND PENDING ACQUISITIONS
On January 1, 1997, the Company completed the acquisition of
California Metals Recycling, Inc. ("CA Metals"), Firma, Inc. ("Firma"), MacLeod
Metals, Co. ("MacLeod Metals"), Firma Plastics Co., Inc. ("Plastics") and
Trojan Trading Co. ("Trojan Trading" and together with Firma, CA Metals,
MacLeod Metals and Plastics, the "MacLeod Companies"). The Company acquired
all of the outstanding shares of CA Metals, Firma, MacLeod Metals and Plastics
directly from Ian and Marilyn MacLeod, the former Shareholders of such
companies. The acquisition of Trojan Trading was accomplished by means of a
merger of a wholly owned subsidiary of the Company with and into Trojan
Trading. The acquisition of the MacLeod Companies was accomplished pursuant to
an acquisition agreement dated January 1, 1997 (the "Agreement"), among the
Company, MMI Acquisition, Inc., Metal Management Realty, Inc., the MacLeod
Companies, Ian and Marilyn MacLeod and the MacLeod Family Trust dated January
30, 1993 (the "Trust"). Pursuant to the Agreement, the Company through its
wholly owned subsidiary Metal Management Realty, Inc. purchased two parcels of
real property located in South Gate, California.
The purchase price for the MacLeod Companies and the parcels of real
property was as follows. An aggregate of 725,000 shares of common stock was
issued to Ian and Marilyn MacLeod in connection with the acquisition of Trojan
Trading. The purchase price for the stock of the remaining MacLeod Companies
consisted of (i) $7,100,000 ($6,600,000 of which was in the form of promissory
notes) and (ii) warrants to purchase 175,000 shares of Common Stock. The
purchase price for the parcels of real property was $3,000,000 in the form of a
promissory note issued by Metal Management Realty, Inc. and guaranteed by the
Company and $500,000 in cash. The promissory notes issued to acquire MacLeod
and related real estate have due dates with aggregate principal amounts
maturing as follows: $6,000,000 due on March 14, 1997, which can be extended
until May 31, 1997, and $600,000 due on or before January 1, 2001.
On January 7, 1997, the Company acquired all of the assets of HouTex
Metals Company, Inc. ("HouTex") by means of a reverse triangular merger in
which the Company's wholly owned subsidiary MTLM Merger, Inc. ("Sub") was
merged with and into HouTex with HouTex remaining as the surviving corporation
pursuant to a merger agreement dated as of December 10, 1996 (collectively the
"Merger
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<PAGE> 11
Agreement"), among the Company, HouTex and the beneficial owners of the common
stock of HouTex (the "Acquisition"). In the Acquisition the purchase
consideration paid to the former shareholders of HouTex consisted of an
aggregate of (i) 475,000 shares of common stock of the Company, (ii) warrants
to purchase an aggregate of an additional 250,000 shares of common stock of the
Company, (iii) promissory notes for an aggregate of $1,655,268 due on April 30,
1997, payable to certain former shareholders of HouTex, (iv) a promissory note
for $5,000,000 due on June 30, 1997, payable to a corporation indirectly
controlled by the former shareholders of HouTex, and (v) $750,000 in cash.
The MacLeod and HouTex acquisitions will be accounted for under the
purchase method of accounting.
The Company is also negotiating to acquire several other scrap metal
recycling companies and has retained legal, accounting and environmental
consulting firms to perform due diligence activities. Disbursements to firms
that have performed due diligence for the Company have been capitalized as
deferred charges. As of December 31, 1996, approximately $1,101,000 had been
recorded as deferred charges in connection with due diligence performed for the
Company and for deposits made by the Company in connection with certain
financing proposals. In addition, the Company had deposited approximately
$1,000,000 toward the purchase of the MacLeod Companies and related real
property as of December 31, 1996. Closing of pending acquisitions is
contingent upon execution of definitive agreements, completion of due
diligence, approvals by regulatory agencies and raising of capital to fund the
cash portions of the purchase prices. There can be no assurance that the
Company will be able to realize any anticipated benefits of future acquisitions
that it may undertake.
NOTE 9 - SUBSEQUENT EVENTS
On January 7, 1997, the Company and HouTex obtained a $10 million
short-term financing facility from LaSalle National Bank, Chicago, Illinois.
The credit facility consists of a $6.5 million term loan to the Company (the
"Company Loan") at an interest rate of LIBOR plus 1.75%, and a revolving credit
facility of $3.5 million to HouTex (the "HouTex Loan") at an interest rate of
the prime rate plus 1%. Both loans are due June 30, 1997, but they may be
extended until September 30, 1997, under certain circumstances. The HouTex
Loan was secured by a first lien on the assets of HouTex, as well as personal
guaranties by certain officers and directors of the Company. The Company Loan
was unsecured, except for personal guaranties from certain officers and
directors of the Company. The officers and directors guaranteeing the loans to
the Company and HouTex have received warrants to purchase an aggregate of
500,000 shares of Common Stock of the Company for a price of $4.00 per share in
consideration for making such guaranties. In connection with the Company Loan,
the Company made available to HouTex an additional $1 million pursuant to a
Revolving Credit Note due contemporaneously with the other loans at an interest
rate of the prime rate plus 1%, and subordinated such loan to the HouTex Loan.
-11-
<PAGE> 12
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain matters discussed throughout this Form 10-Q filing are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those projected. Such
risks and uncertainties include, but are not limited to, the following:
cyclicality of the scrap metal recycling industry, price fluctuations in
commodity markets, adverse economic conditions, inability to successfully
access capital, unavailability of suitable acquisition opportunities, the risk
that announced mergers are not consummated, the risk of challenges from the
Company's competition, and the risk that the Company will face difficulties in
consolidating and controlling operations of diverse geographic locations, as
well as other risk factors discussed in "Factors Affecting Future Results"
below.
On April 11, 1996, the Company acquired EMCO, an Arizona corporation,
pursuant to a Merger Agreement dated as of December 1, 1995, and as amended
through March 7, 1996. The Consolidated Condensed Financial Statements included
in this Form 10-Q should be read in conjunction with the audited Consolidated
Financial Statements and Notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended October 31, 1995, the Company's
Definitive Joint Proxy Statement dated March 8, 1996, the Transitional 10-Q for
the five months ended March 31, 1996, the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996 (as amended by Forms 10-Q/A filed as of October 2,
1996, and November 19, 1996), and the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996, the Forms 8-K and 8-K/A dated April 11, 1996,
and the Forms 8-K dated July 16, 1996, August 7, 1996, January 1, 1997, and
January 7, 1997, filed with the Commission.
-12-
<PAGE> 13
RESULTS OF OPERATIONS
With the acquisition of EMCO on April 11, 1996, and the sale on July
16, 1996, of the Spectra*Star Division, the operating results for the Company
during fiscal 1997 combine a closing out of the previous technology-related
business operations in the second fiscal quarter with the commencement of the
new direction of the Company into the metals recycling industry. The Company
has provided financial results for a pro forma period that represents three
months' activity for a comparable period one year ago for comparative purposes
(Note 1). Management believes that comparisons of financial data associated
with discontinued operations would not be meaningful or relevant and,
accordingly, the following information and comparisons are, to the extent
possible, related primarily to EMCO's operations.
Sales for the quarter ended December 31, 1996 and 1995 are shown in
the following comparative table ($000's):
<TABLE>
<CAPTION>
1996 1995
-------------------------------------- ---------------------------------------
% Total % Total
Commodity Weight Amount Sales Weight Amount Sales
- --------------- ---------- ----------- -------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Ferrous (tons) 31,620 $ 3,114 30% 42,809 $ 4,777 26%
Nonferrous (lbs.) 15,374,814 7,186 69% 31,136,778 13,531 73%
Other -- 102 1% -- 127 1%
---------- --- --------- ---
Totals $ 10,402 100% $ 18,435 100%
========== === ========= ===
</TABLE>
Total sales in the quarter ended December 31, 1996, declined by $8.0
million, or 43%, from the pro forma period as a consequence of unfavorable
market conditions that reduced the volume of ferrous and nonferrous scrap
metals processed and sold and constrained unit pricing. The major cause of
declining revenue trends is attributable to commodity prices that have
generally declined for scrap metals for the past five fiscal quarters. Spot
copper prices moved down from $1.27/lb at December 31, 1995, to $1.03/lb at
December 31, 1996, a 19% drop. Similarly, aluminum spot prices declined from
$.77/lb at December 31, 1995, to $.69/lb at December 31, 1996, down 10%.
Prices for ferrous scrap metals have also generally declined during calendar
1996. In addition, the Company believes the scrap metal recycling markets
reacted negatively to the much publicized speculative trading losses sustained
by a major copper trader. Total sales in the nine months ended December 31,
1996, declined to $40.3 million from $52.6 million in the pro forma period due
to unfavorable market conditions, as described above.
During the current quarter and for the three previous quarters EMCO
has kept inventories at minimum working levels ($1,549,000 at December 31,
1996, and $1,753,000 as of March 31, 1996).
Gross margins for the quarter were $382,000, down from $642,000 for
the pro forma period, primarily as a result of reduced sales and unfavorable
market conditions, as discussed above. Gross margins for the nine months ended
December 31, 1996, declined from $4,960,000 in the pro forma period to
$3,574,000 in 1996 due to reduced sales and unfavorable market conditions.
-13-
<PAGE> 14
Selling expenses in the three months ended December 31, 1996,
increased $73,000 as compared to the pro forma period. This increase is due to
hiring of additional purchasing and marketing staff in 1996. It is anticipated
that further increases will be reflected in future operations as increased
emphasis is placed on business development.* Selling expenses increased from
$287,000 in the pro forma period to $436,000 for the nine months ended December
31, 1996, for the reasons described above.
General and administrative expenses declined from $1,978,000 in the
pro forma period to $1,336,000 in 1996. The majority of the decrease is
attributable to reduced overhead spending at EMCO in 1996 as a result of
elimination of administrative expenses that were incurred in the pro forma
period arising from the merger with the Company and elimination of costs
through reductions in administrative personnel at EMCO (page 20 - Operational
Restructuring at EMCO). General and administrative expenses for the nine
months ended December 31, 1996, were $4,691,000 as compared to $4,814,000 for
the pro forma period. The decrease is due to changes in the corporate
structure and reduced administrative expenses at EMCO as discussed above.
Pretax loss from continuing operations improved from $(1,465,000) in
the pro forma period to $(1,279,000) for the quarter ended December 31, 1996.
The improvement in pretax loss from continuing operations in the third fiscal
quarter of 1997 is primarily due to reduced operating losses at EMCO that
primarily occurred as a consequence of reduced administrative expenses at EMCO.
Pretax loss from continuing operations increased to $(2,076,000) in the nine
months ended December 31, 1996, from $(801,000) in the pro forma period due to
unfavorable market conditions.
Interest expense declined as well, from $393,000 in the pro forma
period to $224,000 in the current quarter and from $1,174,000 to $674,000 in
the nine months ended December 31, 1996. The reduction in interest expense is
attributable to elimination of fees on a discontinued $2,000,000 stand-by line
of credit to EMCO and lesser borrowings in 1996.
Other income declined from $334,000 in the pro forma period to $42,000
for the comparable period in 1996 and declined to $151,000 in the nine months
ended December 31, 1996, from $514,000 in the pro forma period due to lower
invested cash and marketable securities balances.
A benefit of $119,000 for income taxes has been recorded for the
current quarter and $373,000 for the nine months ended December 31, 1996, as
compared to benefits of $440,000 and $284,000 in the pro forma periods ended
January 31, 1996.
The income from discontinued operations recorded for the Spectra*Star
Products Division for the quarter ended December 31, 1996, was $25,000 ($.003
per share), compared to income of $376,000 ($.04 per share) in the pro forma
period. Income from discontinued operations was $319,000 ($.04 per share) in
the nine months ended December 31, 1996, as compared to a loss of $1,893,000
($.21 per share) in the pro forma period. The substantial loss from
discontinued operations in the pro forma period was a result of significant
charges recorded upon the Company's decision to terminate its electronic
presentation products and a one-time charge to restructuring costs and special
charges totaling $2,153,000 ($.24 per share). The Company recognized royalty
income of approximately $178,000 in the third quarter of fiscal 1997 and
$279,000 in the nine months ended December 31, 1996.
- ----------------------------------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Stockholders are
strongly encouraged to review the section entitled "Factors Affecting
Future Results" commencing on Page 18 for a discussion of factors that
could affect future performance.
-14-
<PAGE> 15
Net loss for the quarter ended December 31, 1996, including
discontinued operations, amounted to $(1,135,000) ($.13 per share) compared to
$(649,000) ($.07 per share) for the pro forma period . Net loss for the nine
months ended December 31, 1996, is $(1,384,000) ($.15 per share) as compared to
a net loss of $(2,410,000) ($.27 per share) in the pro forma period.
-15-
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of cash are its existing cash and cash
equivalents balances, collection of outstanding accounts receivable from EMCO,
and proceeds from the loan from LaSalle National Bank (Note 9). At December
31, 1996, the Company had $1.3 million in cash and cash equivalents compared to
cash, cash equivalents, and marketable securities of $5.7 million at March 31,
1996. The reduction is primarily attributable to loans made to EMCO and
disbursements and deposits made in connection with completed and pending
acquisitions net of proceeds realized from the sale of the assets of the
Spectra*Star Products Division. Excluding any mergers, the cash and cash
equivalents combined with proceeds from the loan from LaSalle National Bank
(Note 9) appear to be adequate to meet the Company's operating needs for the
remainder of the fiscal year ending March 31, 1997.* In the event the Company
undertakes any mergers with a cash component, it will be required to seek
financing earlier than such time. The Company has entered into short-term
notes payable in connection with the HouTex and MacLeod acquisitions
("Acquisition Notes"). The Acquisition Notes have principal amounts
outstanding that aggregate to approximately $16.3 million. The Acquisition
Notes require payments in aggregate amounts of $12.7 million from March 14,
1997, through June 30, 1997. The Company's existing cash and cash equivalents
and proceeds available under the loan from LaSalle National Bank are not
sufficient to fund the required payments under the Acquisition Notes. The
Acquisition Notes are secured by stock pledges provided to the sellers of
HouTex and MacLeod. The loan from LaSalle National Bank is due and payable on
June 30, 1997, but can be extended until September 30, 1997, under certain
circumstances.
Accounts receivable balances increased from $1.5 million as of March
31, 1996, to $4.6 million as of December 31, 1996. The increase in accounts
receivable as of December 31, 1996, is attributable to the acquisition of EMCO
net of reductions in accounts receivable attributable to the sale of the
Spectra*Star Products Division and the subsequent collection of the accounts
receivable from that business. As of December 31, 1996, the net book value of
accounts receivable remaining to be collected from the Spectra*Star Product
Line was approximately $21,000. The Company increased its reserve for
uncollectible accounts from the Spectra*Star Division by $122,000 in the third
quarter of fiscal 1997. Accounts payable increased from $0.3 million as of
March 31, 1996, to $3.5 million as of December 31, 1996. The increase in
accounts payable is primarily attributable to the acquisition of EMCO and
includes liabilities incurred with respect to professional fees incurred as
described in Note 8.
The Company through its EMCO subsidiary has an operating line of
credit of up to $8 million that is based on qualifying accounts receivable and
inventories of EMCO. As of December 31, 1996, EMCO had substantially utilized
the available capacity under the line. The Company entered into a loan
agreement with LaSalle National Bank on January 7, 1997, that provides a
short-term financing facility for the Company. The credit facility consists of
(1) a $6.5 million loan to the Company that will be utilized for working
capital and will also provide funds to be utilized for future acquisitions and
(2) $3.5 million to be used by the Company to refinance certain liabilities of
HouTex (refer to Note 9 - Subsequent Events).
The Company's Board of Directors intends to continue to cause the
Company 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
- ----------------------------------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Stockholders are
strongly encouraged to review the section entitled "Factors Affecting
Future Results" commencing on Page 18 for a discussion of factors that
could affect future performance.
-16-
<PAGE> 17
investing activities, together with its cash and cash equivalents, will not be
sufficient in the future to meet future operating, investing, and financing
activities beyond March 14, 1997. Therefore the Company will have to supplement
these sources of liquidity with additional sources of funds such as borrowings
or stock offerings. Refer also to the section below titled "Factors Affecting
Future Results."
-17-
<PAGE> 18
FACTORS AFFECTING FUTURE RESULTS
The following factors should be considered carefully in evaluating the
Company and its business. The risk factors described below contain
forward-looking statements that involve risks and uncertainties. The Company's
and EMCO's actual results may differ materially from the results discussed in
the forward-looking statements.
RECENT MERGERS AND ACQUISITIONS, SALE AND SIGNIFICANT CHANGE IN STRATEGIC
DIRECTION
In the past year, the Company has undergone a significant change in
strategic direction and emphasis. Immediately prior to April 11, 1996, the
Company's business had consisted of designing, manufacturing and marketing
color printers and related consumables, including ribbons, transparencies and
paper. Then, on April 11, 1996, the Company acquired EMCO, an Arizona
corporation engaged in scrap metal recycling (the "Merger"). In addition, the
Company purchased two parcels of land owned directly or beneficially by Harold
M. Rubenstein, the former principal beneficial shareholder and former Chairman
of the Board of EMCO. On July 16, 1996, the Company sold to Mannesmann Tally
the inventory and related production equipment of its Spectra*Star printer and
consumables business. On January 1, 1997, and January 7, 1997, the Company
acquired the MacLeod Companies in California and HouTex Metals Company in
Texas, respectively. Refer to Note 8 for more information regarding the
acquisitions of HouTex and MacLeod. The Company anticipates future acquisitions
of other companies in the scrap metal recycling industry and potentially also
in other industries. Reflective of the Company's overall change in emphasis is
its corporate name change on April 12, 1996, from General Parametrics
Corporation ("GPC") to Metal Management, Inc. The ramifications of the changes
in the Company's business are discussed in greater detail below.
Given the substantial changes in the Company's business in the past
year, past financial performance should not be considered a reliable indicator
of future performance. Potential purchasers should not use historical trends to
anticipate results or trends in future periods.
CYCLICALITY OF OPERATING RESULTS
The operating results of the scrap metal recycling industry in general
and the Company's EMCO subsidiary in particular are highly cyclical in nature
as they tend to reflect and amplify the general national economic condition. In
periods of national recession or periods of minimal economic growth, the
operations of scrap metal recycling companies have been materially adversely
affected. During recessions or periods of minimal economic growth, the
automobile and the construction industries typically experience major cutbacks
in production, resulting in decreased demand for steel, copper and aluminum
supplies. For example, from approximately 1988 to 1993, the scrap metal
recycling industry was adversely affected for a period of five years. Due in
part to this effect, the predecessors of EMCO, Empire Metals, Inc. ("Empire")
and Copperstate Metals, Inc. ("Copperstate"), entered bankruptcy proceedings in
1990 and 1991, respectively. Future economic downturns may be expected to
materially and adversely affect the operating results of the Company. The
ability of the Company to withstand significant economic downturns in the
future will depend in part on the amount of available cash held by the Company.
Recently, EMCO has required cash infusions from the Company to support its
working capital needs. The Company believes that EMCO will require additional
cash infusions for at least the remainder of the fiscal year ending March 31,
1997. There can be no assurance, however, that liquidity constraints will not
continue or worsen.
-18-
<PAGE> 19
LIMITED OPERATING HISTORY
Prior to the EMCO merger in April 1996, the Company had no history of
operations in the scrap metal recycling industry.
SUBSTANTIAL LEVERAGE
As a result of the April 1996 Merger and the January 1997 acquisitions
of MacLeod and HouTex, the Company has approximately $38 million in
consolidated liabilities owed either to the sellers in the Company's completed
acquisitions or to third parties. In particular, the Company issued an
aggregate of approximately $16 million principal amount in promissory notes to
the sellers of MacLeod and HouTex. An aggregate of approximately $1.7 million
of this amount will become due and payable on April 30, 1997. An aggregate of
$6 million will become due and payable on March 14, 1997, which due date may be
extended to April 30, 1997, if a payment of $200,000 is made by March 14, 1997,
and extended further to May 31, 1997, if a second payment of $200,000 is made
by April 30, 1997. An aggregate of $5 million will become due and payable on
June 30, 1997. In order to pursue expansion and acquisition opportunities, the
Company expects to incur additional debt, either through bank or credit lines
or the sale of debt securities in registered or unregistered transactions, in
addition to 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 December 31, 1996, prior to the MacLeod and HouTex acquisitions,
the Company had a long-term debt to capitalization ratio of 32%. The ratio of
debt to total capital is greatly increased by the acquisitions of HouTex and
MacLeod in which the Company issued promissory notes (Note 8) and assumed
liabilities. The degree to which the Company is leveraged could have adverse
consequences to the Company including the following: (i) the Company's ability
to obtain additional financing in the future for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes may be
impaired; (ii) a substantial portion of the Company's cash flow from operations
will be dedicated to the payment of principal and interest; and (iii) the
Company will be more vulnerable to a downturn in the scrap metal recycling
industry, which has historically been sensitive to changes in general economic
conditions.
IMMEDIATE AND FUTURE CAPITAL REQUIREMENTS
Scrap metal recycling companies have substantial ongoing working
capital and capital equipment requirements in order to continue to operate and
grow. During March 1996, the Company loaned EMCO $1,000,000 for short-term
working capital requirements. Upon closing of the Merger, the Company advanced
EMCO $950,000, and EMCO paid its demand note of $950,000 to Donald F.
Moorehead, a director of the Company and EMCO. Also, subsequent to March 31,
1996, the Company loaned EMCO an additional $3.3 million for additional working
capital purposes. The Company expects that EMCO will require additional cash
infusions for at least the remainder of the fiscal year ending March 31, 1997.
In order to remain competitive, EMCO will continue to make significant
investments in capital equipment. The Company also expects that HouTex may
require working capital loans from the Company in support of significant
inventory purchases that it may undertake. As a result, the Company will seek
equity or debt financing to fund future improvements and expansion of its scrap
metal recycling business as well as to make other acquisitions of scrap metal
recycling facilities. There can be no assurance that such financing will be
available when needed, or that, if available, it will be on satisfactory terms.
The failure to obtain financing would hinder the Company's ability to make
continued investments in capital equipment and pursue expansions, which could
materially adversely affect results of operations. Any such equity financing
would result in dilution to the then-existing stockholders of the Company.
-19-
<PAGE> 20
PRICE FLUCTUATIONS
EMCO's results of operations have been in the past, and the results of
operations of the overall Company are expected to be, subject to price
fluctuations that occur in the metals commodities markets. For example, prices
of non- ferrous metals have generally declined during the past five quarters,
which adversely affected revenues and net income in the quarter ended December
31, 1996. A further decline in commodity prices could further reduce revenues
and net income prospectively and will have a material adverse effect on the
Company's results of operations and liquidity of the Company.
RISK OF EXPANSION STRATEGY
The Company currently plans to continue to pursue additional
acquisitions in the scrap metal recycling industries. There can be no
assurance that any future mergers will be consummated. The ability of the
Company to achieve its expansion objectives and to manage its growth
effectively depends on a variety of factors, including the ability to identify
appropriate acquisition targets and to negotiate acceptable terms for their
acquisition, the integration of new businesses into the Company's operations
and the availability of capital. These difficulties will be exacerbated in the
event that the Company expands in states outside of Arizona, Texas, and
California. The inability to control or manage growth effectively or to
successfully integrate future new business into the Company's operations would
have a material adverse effect on the Company's financial condition and results
of operations. There can be no assurance that the Company will be able to
successfully expand or that growth and expansion will result in profitability.
There can be no assurance that the Company will be able to realize any of the
anticipated benefits of the Merger, the purchases of MacLeod and HouTex, or any
future acquisitions that it may undertake.
RISK OF DILUTION TO EXISTING STOCKHOLDERS
The Company's strategy of expansion and additional acquisitions will
require it to issue additional shares of Common Stock or securities convertible
into Common Stock as consideration for additional acquisitions. Issuance of a
material amount of Common Stock or such securities would result in significant
dilution to the then-existing stockholders of the Company. The Company expects
to be required to seek equity financing to meet future capital requirements,
which would also result in additional dilution. See "Immediate and Future
Capital Requirements."
COMPETITION IN THE SCRAP METAL INDUSTRY
The scrap metal recycling industry is highly competitive, with the
principal competitive factors being price and availability of scrap metal
supplied. Competition in the industry is intense in part because the barriers
to entry into the scrap metal collection business are relatively low.
Additionally, the Company faces competition from producers of finished steel
products, many of whom have substantially greater financial resources than the
Company, who may vertically integrate by entering the scrap metal recycling
business. The inability of the Company to compete in this environment would
have a material adverse effect on the Company's financial condition and results
of operations.
OPERATIONAL RESTRUCTURING OF EMCO
In October 1996, the Company initiated efforts to restructure the
operations of its EMCO subsidiary. The restructuring is expected to reduce
operating expenses by eliminating the utilization of certain leased equipment,
eliminating 25 jobs representing approximately 12% of the workforce, reducing
the cost of outside processing from certain vendors, and renegotiating
contracts for purchased services some of which are expiring. In addition, as a
part of the restructuring program, the Company has initiated
-20-
<PAGE> 21
a review of the buying and selling departments of EMCO and is continuing to
evaluate EMCO's operations in recognition of the difficult commodity markets in
which scrap metal recycling companies have been operating and are continuing to
operate. The Company is not certain whether it will be able to successfully
operate EMCO with fewer employees or effectively restructure lease and other
commitments to accomplish a successful restructuring of EMCO's business.
COMPANY MANAGEMENT FACTORS
The Company substantially relies on the scrap metal recycling
experience of the current management teams at each of the companies it acquires
due to the limited experience of the Company's management in the scrap metal
recycling business. While certain of the management personnel of the acquired
facilities have executed by 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.
Additionally, certain members of EMCO management have been involved in
bankruptcy proceedings in the past as a result of the bankruptcy proceedings of
EMCO's predecessor companies, Copperstate and Empire.
CONTROL OF COMPANY BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS
As a result of the Merger, Messrs. Jacobs and Jennings, together with
George O. Moorehead and Donald F. Moorehead, with whom Messrs. Jacobs and
Jennings have had substantial past business relationships, collectively own an
aggregate of approximately 19% of the outstanding Common Stock of the Company.
In addition, Harold Rubenstein, formerly the Chairman of the Board of EMCO,
owns approximately 20% of the outstanding Common Stock of the Company, while
Gerald Zack, Raymond F. Zack and David M. Zack, who are brothers, collectively
beneficially own directly and through their ownership of Copperstate an
aggregate of approximately 9% of the outstanding Common Stock of the Company.
Pursuant to demand registration rights of Copperstate, the Company registered
on Form S-3 (the "S-3 Registration Statement") the sale from time to time of
300,000 shares held by Copperstate. The S-3 Registration Statement became
effective on August 27, 1996. Accordingly, Messrs. Jennings and Jacobs,
together with the Mooreheads, Harold Rubenstein and the Zacks, will
collectively have sufficient voting power (approximately 48%) after the sale of
shares being registered to control the outcome of all matters (including the
election of a majority of the directors and any future merger, consolidation or
sale of assets of the Company) submitted to Company stockholders for approval
and may be deemed to have effective control over the affairs and management of
the Company. This assumes that the shares being offered by Copperstate will not
be purchased by any of the individuals in the aforementioned group. The sale of
some or all of the shares to such individuals would increase commensurately the
control of such individuals and the group over the Company. This controlling
interest in the Company may also have the effect of making certain transactions
more difficult or impossible, absent the support of Messrs. Jennings and Jacobs
and such other persons. Such transactions could include proxy contests, mergers
involving the Company, tender offers and open market purchase programs that
could give stockholders of the Company the opportunity to realize a premium
over the then-prevailing market price of their shares of Common Stock.
-21-
<PAGE> 22
CONCENTRATION OF CUSTOMERS AND CREDIT RISK
The Company's three largest customers for the three-month period ended
December 31, 1996, represented in the aggregate approximately 17% of the
Company's revenues for that period. The Company's results of operations are
substantially dependent upon continuing orders from such customers, and any
cancellation of or reduction in orders from such customers could have a
material adverse effect on the Company's results of operations. This risk is
exacerbated by the fact that most of the Company's customers are not bound by
long-term purchase contracts but instead do business with the Company on the
basis of short-term contracts.
One customer accounted for $424,000, or approximately 9%, of the
Company's total accounts receivable as of December 31, 1996.
SUPPLY RELATIONSHIP WITH ELLIS METALS, INC.
Ellis Metals, Inc. is principally owned by Harold Rubenstein and is a
significant supplier to EMCO. Harold Rubenstein is the Company's largest
stockholder. EMCO and Ellis Metals have a supply relationship that is defined
in a contract that requires Ellis Metals to either provide all of its inventory
to EMCO or directly to customers of EMCO through a direct ship arrangement. In
the latter arrangement EMCO realizes a brokerage fee, which can be less than
the amount of gross profit the Company realizes when inventory is shipped to
EMCO, processed and resold. From and after September 25, 1996, Ellis Metals
has elected to ship certain materials directly to customers of EMCO and has
indicated that it will continue to do so for the foreseeable future. As a
result, the Company's gross margin could be adversely affected.
DEPENDENCE ON SCRAP SUPPLIERS
EMCO's scrap recycling operations are dependent upon the supply of
scrap materials from its suppliers. Few of such suppliers are bound by
long-term supply agreements, and therefore they have no obligation to continue
to supply scrap materials to EMCO. In the event that substantial numbers of
scrap suppliers cease supplying scrap materials to EMCO, the Company's
financial condition and results of operations would be materially and adversely
affected.
ENVIRONMENTAL MATTERS
Like many other companies in the scrap metal recycling business, the
Company is subject to comprehensive local, state and international regulatory
and statutory requirements relating to the acceptance, storage, handling and
disposal of solid waste and waste water, air emissions, soil contamination and
employee health, among others. Environmental legislation and regulations have
changed rapidly in recent years, and it is likely that the Company, and its
present and future subsidiaries will be subject to even more stringent
environmental standards in the future.
The Company is currently aware of one ongoing environmental matter in
connection with EMCO's business. Environmental consultants to the Company
reported that an underground storage tank located at one of EMCO's yards had
not been reported to the Arizona environmental authorities as required by law.
EMCO as lessee reported the matter to the owner of the property, and believes
that such report is the extent of its obligations with respect to this matter.
However, there can be no assurance that any failure of the owner to report will
not result in liability of or the assessment of penalties against the Company
and/or EMCO.
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<PAGE> 23
EMCO has a policy of not knowingly accepting, handling or discharging
hazardous waste products, and the Company and EMCO are not aware of any
material concentrations of hazardous waste located on any of EMCO's properties.
However, as part of a pre-Merger review, the Company hired an environmental
consulting firm to conduct Phase I or Phase II site assessments or transaction
screen reviews (the "Pre-Merger Site Assessments") of nearly all of the sites
owned or leased by EMCO in Arizona and the sites that were purchased from
Harold Rubenstein or his affiliates in Tucson. The environmental consultants
completed certain investigations of reviewed sites and delivered all final
transaction screen assessments, Phase I and/or Phase II reports, as
appropriate, that they were requested to deliver. Certain of these reports
revealed that some soil or groundwater contamination is likely at some sites
and recommended that certain additional investigations and remediation be
conducted. Based upon its review of the reports, the Company believes that it
is likely that contamination exists at certain of the sites and that it is
likely that remediation will be required at some of the sites. Also based upon
its review of these reports, the Company believes that such contamination is
likely to include, but not be limited to: polychlorinated biphenyls (PCBs);
total petroleum hydrocarbons; volatile organic compounds (VOCs), including
perchloroethylene, trichlorofluoromethane, trichloroethylene, trichloroethane
and dichloroethylene; antimony; arsenic, cadmium; copper; lead; mercury;
silver; zinc; waste oil; toluene; meta- and para-xylenes; baghouse dust; and
aluminum dross. The ultimate extent of contamination cannot be stated with any
certainty at this point, and there can be no assurance that the cost of
remediation will be immaterial.
The Company has supplied the Pre-Merger Site Assessments to EMCO, and
EMCO has retained a qualified environmental and chemical consulting firm in
Arizona to review them, to examine EMCO's ongoing operations, and to recommend
to EMCO's management and Board of Directors any steps EMCO should take to
achieve and/or maintain compliance, including but not limited to any necessary
remedial measures or operational changes. During the second quarter of the
current fiscal year, EMCO commenced action on certain of the recommendations of
the consulting firm, and subsequently EMCO established an environmental safety
fund of $15,000. The Company believes that the environmental safety fund will
have to be increased from time to time as additional recommendations from the
consultant become available. EMCO has also adopted the recommended procedural
program set forth by the consulting firm with respect to environmental
characteristics of any new sites to be purchased or leased.
In regard to the MacLeod and HouTex businesses, the Company believes
that such businesses are in material compliance with currently applicable
environmental regulations. However, the Company is continuing to evaluate
these businesses for compliance with environmental laws. There can be no
assurance that the Company's continuing review will not disclose material
issues that might result in liabilities, expenditures, fines or penalties that
could have a material adverse effect on the Company's financial condition or
results of operations.
Due to the nature of the scrap metal recycling business, it is
possible that inquiries or claims based upon environmental laws may be made in
the future by governmental bodies or individuals against the Company, EMCO, the
MacLeod companies, HouTex, 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 to comply with any
environmental requirements, or whether all such cost increases can be passed on
to customers through product price increases. Moreover, environmental
legislation has been enacted, and may in the future be enacted, to create
liability for past actions that were lawful at the time taken but that have
been found to affect the environment and to create public rights of action for
environmental conditions and activities. As is the case with scrap recyclers in
general, if damage to persons or the environment has been caused, or is in the
future caused, by hazardous materials activities
-23-
<PAGE> 24
of the Company or its subsidiaries or by hazardous substances now or hereafter
located at any subsidiaries' facilities, the Company or its subsidiaries may be
fined and held liable for such damage. In addition, the Company or its
subsidiaries may be required to remedy such conditions or change procedures.
The Company believes that it and its subsidiaries are in material compliance
with currently applicable environmental regulations and does not anticipate any
substantial capital expenditures for new environmental control facilities
during the remainder of fiscal 1997. There can be no assurance, however, that
potential liabilities, expenditures, fines and penalties associated with
environmental laws and regulations will not have a material adverse effect on
the Company's financial condition or results of operations.
VOLATILITY OF STOCK PRICE
The Company's stock price has been, and in the future is expected to
be, volatile and to experience market fluctuation as a result of a number of
factors, including, but not limited to, current and anticipated results of
operations, future product offerings by the Company or its competitors and
factors unrelated to the operating performance of the Company. The trading
price of the Company's Common Stock may also vary as a result of changes in the
business, operations, or financial results of the Company, prospects of general
market and economic conditions, additional future proposed acquisitions by the
Company and other factors. In addition, failure of revenues or earnings in any
quarter to meet the investment community's expectations, if any, could have an
adverse impact on the Company's stock price, as could sales of large amounts of
stock by existing stockholders.
FLUCTUATIONS IN OPERATING RESULTS
The Company's future operating results could be subject to significant
volatility, particularly on a quarterly basis. The Company's revenues and
operating results have fluctuated in the past and are likely to do so in the
future. The Company's quarterly operating results may continue to fluctuate
due to numerous factors, including but not limited to the demand for scrap
metal, the health of the national economy and competition.
EFFECT OF ANTITAKEOVER PROVISIONS OF DELAWARE LAW, THE COMPANY'S CHARTER
DOCUMENTS AND EMPLOYMENT AGREEMENTS
The Company is a corporation governed by the laws of Delaware. Certain
provisions of Delaware law and the charter documents of the Company may have
the effect of delaying, deferring or preventing changes in control or
management of the Company. Specifically, the Company's Board of Directors may
issue shares of Preferred Stock without stockholder approval on such terms as
the Board may determine. The rights of the holders of Common Stock of the
Company are subject to, and may be adversely affected by, the rights of any
Preferred Stock that may be issued in the future. The Company is subject to
the provisions of Section 203 of the Delaware General Corporation Law, which
has the effect of making changes in control of a company more difficult. In
connection with the Merger, the Company entered into employment agreements with
George O. Moorehead, Gerard M. Jacobs and T. Benjamin Jennings. Such agreements
provide for certain payments to be made to such persons in the event of a
change of control of the Company. The effects of the antitakeover protections
of Delaware law, the Company charter documents and these employment agreements
could be to make it more difficult for a third party to acquire, or could
discourage a third party from acquiring, a majority of the outstanding stock of
Company.
-24-
<PAGE> 25
RECENT ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and For
Long-Lived Assets to be Disposed Of." The statement must be adopted for its
fiscal year beginning April 1, 1996. Based upon its preliminary review,
management believes that there will be no material impact on the results of
operations or financial condition upon adoption.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation." The Company intends to adopt the disclosure
requirements for its fiscal year beginning April 1, 1996. Based upon its
preliminary review, management believes that there will be no material impact
on the results of operations or financial condition upon adoption.
-25-
<PAGE> 26
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a) Exhibits
10.1 Employment Agreement with Robert C. Larry
27.1 Financial Data Schedule
(b) The following reports on Form 8-K were filed during the quarter ended December 31, 1996:
None.
</TABLE>
-26-
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
METAL MANAGEMENT, INC.
Dated: February 13, 1997 By /s/ Robert C. Larry
-----------------------------------------
Vice President, Finance and Chief Financial
(Principal Financial and Accounting Officer)
By /s/ Gerard M. Jacobs
-----------------------------------------
President and CEO
By /s/ T. Benjamin Jennings
-----------------------------------------
Chairman of the Board and Chief Development
-27-
<PAGE> 28
EXHIBIT INDEX
10.1 Employment Agreement with Robert C. Larry
27.1 Financial Data Schedule
-28-
<PAGE> 1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of
August 26, 1996, by and between Metal Management, Inc., a Delaware corporation
(the "Corporation"), and Robert C. Larry (the "Employee").
WITNESSETH:
WHEREAS, the Employee desires to serve the Corporation in a position of
substantial responsibility; and
WHEREAS, the Board of Directors of the Corporation recognizes that the
efforts of certain employees identified by the Board as key management employees
will contribute to the growth and success of the Corporation; and
WHEREAS, the Board of Directors of the Corporation believes that, in
the best interests of the Corporation, it is essential that key management
employees, including Employee, be retained and that the Corporation be in a
position to rely on their dedication and commitment to render services to the
Corporation, irrespective of whether the Corporation is or may be acquired or
merged with or into another corporation;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the Corporation and Employee agree as follows:
1. Employment. The Corporation shall employ Employee and Employee shall
serve as an employee of the Corporation for a term of forty-eight (48) months
from the date hereof (the "Employment Period"). Employee shall serve as Vice
President and Chief Financial Officer of the Corporation and shall perform the
functions typically associated with such offices. Employee shall also perform
such other managerial, administrative, technical, and other services as may be
designated from time to time by the Board of Directors of the Corporation
appropriate for such officer position. Corporation shall not require Employee to
be based at an office location other than downtown Chicago, Illinois. Employee
shall devote time and attention to matters of the Corporation such that
Employee's services to the Corporation constitute his primary business activity.
2. Compensation.
(a) Employee shall receive as compensation for all services
performed by him hereunder (i) an annual base salary of not less than One
Hundred Ten Thousand and No/100 Dollars ($110,000) during the first twelve (12)
months of the Employment Period and (ii) an annual base salary of not less than
One Hundred Twenty Thousand and No/100 Dollars ($120,000) during the remaining
thirty-six (36) months of the Employment Period. Employee's salary hereunder
shall be
<PAGE> 2
reviewed and may be increased by the Board of Directors of the Corporation from
time to time. In addition to such annual base salary, Employee shall be eligible
to receive a cash bonus of up to 25% of Employee's then base salary as
determined in the sole discretion of the Executive Compensation Committee,
payable following each calendar year end. Employee's salary shall be paid
semi-monthly.
(b) The Corporation shall recommend that the Board of Directors or
its Committee grant Employee an incentive stock option under the Corporation's
1995 Stock Option Plan to purchase an aggregate of 25,000 shares of Common Stock
pursuant to an option agreement in the form attached as Exhibit A hereto.
3. Fringe Benefits. Employee shall be entitled to not less than four
(4) weeks paid vacation per year. Employee shall receive sick leave and
short-term disability compensation pursuant to the Corporation's standard sick
leave and short-term disability policy. The Corporation shall reimburse Employee
for other ordinary and necessary business expenses incurred by Employee in the
course of his employment, as approved by the Chief Executive Officer. Employee
shall also receive such other fringe benefits as the Corporation's Board of
Directors may deem appropriate, including not less than those fringe benefits
set forth on Exhibit B attached hereto.
4. Termination Following a Change in Control of the Corporation.
(a) If following a Change in Control of the Corporation, Employee
shall terminate his employment with the Corporation for Good Reason or the
Corporation shall terminate Employee without Cause, Employee shall be entitled
to the benefits provided in Section 7 hereof.
(b) For purposes of this Agreement "Good Reason" shall mean, without
Employee's express written consent, the assignment to Employee of titles,
duties, responsibilities or status inconsistent with his present duties and
responsibilities as Vice President and Chief Financial Officer of the
Corporation or a material reduction or alteration in the nature or status of
Employee's duties and responsibilities from those in effect as of the date
hereof or a requirement that Employee be based at an office location other than
downtown Chicago, Illinois;
(c) For purposes of this Agreement, "Cause" shall mean any one of
the following:
(i) The willful and continued failure by Employee to
substantially perform his duties with the Corporation (other than any such
failure resulting from termination for Good Reason or Disability) after a demand
for substantial performance is delivered to Employee that specifically
identifies the manner in which the Corporation believes that Employee has not
substantially performed his duties, and Employee failing to resume substantial
performance of his duties on a continuous basis within fourteen (14) days of
receiving such demand; provided, that if it is not reasonably possible for
Employee to resume such substantial performance within such fourteen (14) days,
then such fourteen (14) day time period shall be extended to that minimum period
of time during which it is reasonably possible for Employee to resume such
substantial performance;
-2-
<PAGE> 3
(ii) The willful engaging by Employee in conduct which
is demonstrably and materially injurious to the Corporation, monetarily or
otherwise and Employee's failure to cease engaging in such conduct within
fourteen (14) days after a demand for such cessation is delivered to Employee by
the Corporation that specifically identifies such conduct; provided, however,
that if it is not reasonably possible for Employee to cease such conduct within
such fourteen (14) days, then such fourteen (14) day time period shall be
extended to that minimum period of time during which it is reasonably possible
for Employee to cease such conduct; or
(iii) Employee's conviction of a felony or conviction of
a misdemeanor which materially impairs Employee's ability substantially to
perform his duties with the Corporation. For purposes of this subsection, no
act, or failure to act, on Employee's part shall be deemed "willful" unless
done, or omitted to be done, by Employee not in good faith and without
reasonable belief that his action or omission was in the best interest of the
Corporation.
(d) For purposes of this Agreement a "Change of Control" shall have
occurred if:
(i) Any "person" (as defined in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934 (the "Exchange Act")), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Corporation representing fifty percent (50%)
or more of the combined voting power of the Corporation's then outstanding
securities computed on a fully diluted basis and entitled to vote in the
election of directors; or
(ii) The Board of Directors of the Corporation approves a plan
of dissolution or liquidation or sale of all or substantially all of the
Corporation's assets; or
(iii) As a result of a merger or consolidation of the
Corporation with any other corporation, other than a merger or consolidation
which would result in the voting securities of the Corporation outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least fifty percent (50%) of the combined voting power of the voting
securities of the Corporation or such surviving entity outstanding immediately
after such merger or consolidation, T. Benjamin Jennings and Gerard M. Jacobs
cease to serve as Chairman of the Board and Chief Executive Officer and members
of the Board of Directors of the Corporation.
5. Termination Generally. This Agreement and Employee's employment may
be terminated by the Corporation prior to its expiration in accordance with this
Section 5 as follows:
(a) Disability: Retirement. If, as a result of Employee's incapacity
due to physical or mental illness, Employee shall have been absent from the
performance of his duties with the Corporation for six (6) consecutive months
and, within thirty (30) days after written notice of termination is given,
Employee shall not have returned to the full-time performance of his duties, the
Corporation may terminate Employee's employment for "Disability."
-3-
<PAGE> 4
(b) Notice of Termination. Any termination by the Corporation for
Cause or by Employee for Good Reason shall be communicated by Notice of
Termination to the other party hereto. For purposes of this Agreement, a "Notice
of Termination" shall mean a written notice which shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Employee's employment under the provision so indicated.
(c) Date of Termination. "Date of Termination" shall mean the date
specified in the Notice of Termination where required or, in any other case, the
date upon which Employee ceases to perform services to the Corporation; provided
that if within thirty (30) days after any Notice of Termination one party
notifies the other party that a dispute exists concerning the termination, the
Date of Termination shall be the date finally determined to be the Date of
Termination, either by mutual written agreement of the parties or by the final,
nonappealable determination of a court of competent jurisdiction.
6. Compensation Upon Termination Prior to a Change in Control. Prior to
a Change in Control, Employee shall be entitled to the following benefits upon
termination and as compensation for the Covenant Not to Compete set forth in
Section 8 hereof as follows:
(a) During any portion of the Employment Period that Employee fails
to perform his full-term duties with the Corporation as a result of incapacity
due to physical or mental illness or other disability, Employee shall continue
to receive his Base Salary at the rate in effect at the commencement of any such
portion of the Employment Period, until Employee's employment is terminated
pursuant to subsection 5(a) hereof. Thereafter, Employee's benefits shall be
determined in accordance with the Corporation's retirement, insurance and other
applicable programs and plans then in effect.
(b) If Employee's employment shall be terminated by the Corporation
for Cause or if Employee voluntarily terminates his employment for any reason
other than for Good Reason, the Corporation shall pay Employee his full Base
Salary through the Date of Termination at the rate in effect at the time Notice
of Termination is given or on the Date of Termination if no Notice of
Termination is required hereunder, plus all other amounts to which Employee is
entitled under any compensation plan of the Corporation at the time such
payments are due, and the Corporation shall have no further obligations to
Employee under this Agreement.
(c) If Employee terminates his employment for Good Reason or the
Corporation terminates Employee without Cause, then Employee shall continue to
receive the amounts set forth in Section 1 for the remainder of the Employment
Period.
7. Compensation Upon Termination Following Change of Control. Following
a Change in Control, Employee shall be entitled to the following benefits upon
termination and as compensation for the Covenant Not to Compete set forth in
Section 8 hereof as follows:
-4-
<PAGE> 5
(a) During any portion of the Employment Period that Employee fails
to perform his full-term duties with the Corporation as a result of incapacity
due to physical or mental illness or other disability, Employee shall continue
to receive his Base Salary at the rate in effect at the commencement of any such
portion of the Employment Period, until Employee's employment is terminated
pursuant to subsection 5(a) hereof. Thereafter, Employee's benefits shall be
determined in accordance with the Corporation's retirement, insurance and other
applicable programs and plans then in effect.
(b) The Corporation shall pay Employee his full Base Salary through
the Date of Termination at the rate in effect at the time Notice of Termination
is given, or the Date of Termination where no Notice of Termination is required
hereunder.
(c) In the event Employee terminates for Good Reason or the
Corporation terminates his employment without Cause, then Employee shall receive
the following benefits:
(i) The Corporation shall pay to Employee as Severance
Benefits, and as compensation for the Covenant Not to Compete, not later than
the tenth day following the Date of Termination, the benefits listed on Exhibit
B hereto and a lump sum severance payment equal to twice (2x) the Employee's
annual Base Salary in effect immediately prior to the occurrence of the
circumstances giving rise to such termination.
(ii) All options and warrants to purchase common stock or other
securities of the Corporation, if any, granted to Employee under the
Corporation's Stock Option Plans or otherwise, together with any additional,
substitute or successor option program or plan as may be in effect from time to
time then held by Employee shall fully vest as of the Date of Termination and
shall remain outstanding and exercisable until the expiration date of such
options and warrants (without regard to any early termination of such option or
warrant resulting from Employee's termination of employment).
(iii) For a sixty (60) month period after such termination, the
Corporation will arrange to provide Employee, at the Corporation's expense, with
benefits under the Corporation's applicable employee fringe benefit plans, which
benefits shall be the same or substantially as those enjoyed by Employee
immediately prior to the Notice of Termination, but in no event shall Employee
be provided the benefits described herein after his Normal Retirement Date and
provided further that benefits otherwise receivable by Employee pursuant to this
subsection (iii) shall be reduced to the extent comparable benefits are actually
received by Employee during the sixty (60) month period following Employee's
termination, and any such benefits actually received by Employee shall be
reported to the Corporation.
(iv) In the event the amount of Severance Payments that
Employee would be entitled to receive hereunder upon termination of Employee's
employment would, under any applicable provision of law, render the validity,
legality or enforceability of this Agreement and the Severance Payments made
hereunder contingent upon this Agreement having first been approved by the
affirmative vote of a majority of the aggregate outstanding voting securities of
the Corporation:
-5-
<PAGE> 6
(A) The Severance Payments due Employee hereunder shall
be reduced to the extent necessary to avoid rendering this Agreement subject,
under any applicable provision of law, to prior shareholder approval as
specified above; or
(B) If Severance Payments have previously been made to
Employee hereunder, the amount of which Severance Payments would render this
Agreement subject to prior shareholder approval, as specified above, as a
condition precedent to its validity, legality or enforceability, Employee shall
immediately repay to the Corporation that portion of the Severance Payments
which served to render this Agreement subject to said prior shareholder
approval.
(v) The payments provided for in subsection (i) above shall
be made not later than the tenth day following the Date of Termination;
provided, however, that if the amounts of such payments cannot be finally
determined on or before such day, the Corporation shall pay to Employee on such
day an estimate as determined in good faith by the Corporation of the minimum
amount of such payments and shall pay the remainder of such payments (together
with interest at the rate provided in Section 1274(b)(2)(B) of the Internal
Revenue Code of 1986, as amended (the "Code") as soon as the amount thereof can
be determined but in no event later than the thirtieth day after the Date of
Termination. In the event that the amount of the estimated payments exceeds the
amount subsequently determined to have been due, such excess shall constitute a
loan by the Corporation to Employee payable on the tenth day after demand by the
Corporation (together with interest at the rate provided in Section
1274(b)(2)(B) of the Code).
(vi) The Severance Payments to be paid pursuant to subsection
(i) above are not intended as stipulated or liquidated damages for breach of any
promise of a term of employment, no such promise being made herein, but are
payments which shall be fully earned as of the Date of Termination and shall be
compensation for Employee's continued services rendered to the Corporation after
the date hereof and prior to such Date of Termination; for the Covenant Not to
Compete provision of Section 8 hereof; for the foregoing of other, possibly more
secure employment; for consequential losses which may result from such
termination, including, but not limited to, permanent injury to reputation, loss
of career development opportunities, and emotional stress; and for actual losses
which may result from such termination, including, but not limited to, lost
wages and expenses of securing other employment.
(vii) The Corporation shall have no obligation to provide or
cause to be provided to Employee the benefits described in this Agreement, other
than those provided in Section 6 hereof, if the Corporation or Employee shall
terminate Employee's employment prior to a Change of Control.
(viii) In the event that Employee becomes entitled to the
Severance Payments, if it is determined that any of the Severance Payments will
be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code (or
any similar tax that may hereafter be imposed), the Employee shall have the
option, but not the obligation, to reduce the amount of the Severance Payments
to an amount which will result in the Severance Payments not being subject to
-6-
<PAGE> 7
the Excise Tax. The Corporation will cooperate with Employee in every way
possible to restructure the Severance Payments to achieve such result.
(d) In the event the Corporation shall terminate Employee for Cause
or Employee shall terminate without Good Reason, the compensation of Employee
shall be as set forth in Section 6(b) hereof.
8. Restrictive Covenants. Employee agrees with the Corporation that he
will not for a period of five years from the date he ceases to be an officer,
director, employee or consultant of the Corporation:
(a) directly or indirectly, alone or as a partner, joint venturer,
officer, director, employee, consultant, agent, independent contractor or
stockholder of any company or business, engage in any business activity that is
directly in Competition with the Business conducted by EMCO Recycling Corp.
("EMCO") or the Corporation as of the date hereof; provided, however, that the
beneficial ownership of less than five percent (5 %) of the shares of stock of
any corporation having a class of equity securities actively traded on a
national securities exchange or over-the-counter market shall not be deemed, in
and of itself, to violate the prohibitions of this Section;
(b) directly or indirectly (i) induce any Person that is a customer
of EMCO or the Corporation as of date hereof to patronize any business directly
in Competition with the Business conducted by EMCO or the Corporation; (ii)
canvass, solicit or accept from any Person that is a customer of EMCO or the
Corporation, any such Competitive business, or (iii) request or advise any
Person that is a customer of EMCO or the Corporation as of the date hereof to
withdraw, curtail or cancel any such customer's business with EMCO or the
Corporation;
(c) directly or indirectly employ, or knowingly permit any company
or business directly or indirectly controlled by him, to employ, any Person who
was employed by EMCO or the Corporation at or within six months prior to the
date hereof, or in any manner seek to induce any such Person to leave his or her
employment;
For purposes of this Agreement, the term "Business" shall mean metal
recycling and the terms "Competitive" and "Competition" shall mean a business
whose primary activity is metal recycling.
Employee agrees and acknowledges that the restrictions contained
herein are reasonable in scope and duration and are necessary to protect EMCO
and the Corporation. If any provision of this Section, as applied to any party
or to any circumstance is adjudged by a court to be invalid or unenforceable,
the same will in no way affect any other circumstance or the validity or
enforceability of this Agreement. If any such provision, or any part thereof, is
held to be unenforceable because of the duration of such provision or the area
covered thereby, the parties agree that the court making such determination
shall have the power to reduce the duration and/or area of such provision,
and/or to delete specific words or phrases, and in its reduced form, such
provision shall then be enforceable and shall be enforced. The parties agree and
acknowledge that the breach of
-7-
<PAGE> 8
this Section will cause irreparable damage to EMCO and the Corporation and upon
breach of any provision of this Section, EMCO and the Corporation shall be
entitled to injunctive relief, specific performance or other equitable relief,
provided, however, that, this shall in no way limit any other remedies which
EMCO and the Corporation may have (including, without limitation, the right to
seek monetary damages). For purposes of this Section, "Person" means an
individual, partnership, corporation, business trust, joint stock company,
estate, trust, unincorporated association, joint venture, governmental authority
or other entity, of whatever nature.
9. Confidential Information. Employee shall not, during the Employment
Period or thereafter, disclose to any person any confidential information
obtained from or regarding the Corporation or its affiliates, including, without
limitation, contracts, business plans, forms, lists, manuals, or any budgetary,
sales, marketing, financial, procedural or operations materials or information,
or any other nonpublic information intended to be confidential prepared by or
for the benefit of the Corporation or its affiliates. If Employee shall leave
the employment of the Corporation for any reason, the Employee agrees not to
take with him any such documents, materials or information or other data of any
description or any copy or reproduction of any of the foregoing.
10. Enforceability. The failure of either party at any time to require
performance by the other party of any provision hereunder shall in no way affect
the right of that party thereafter to enforce the same, nor shall it affect any
other party's right to enforce the same, or to enforce any of the other
provisions in this Agreement; nor shall the waiver by either party of the breach
of any provision hereof be taken or held to be a waiver of any subsequent breach
of such provision or as a waiver of the provision itself.
11. Successors: Binding Agreement.
(a) The Corporation shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Corporation or of any
division or subsidiary thereof employing Employee to expressly assume and agree
to perform this Agreement in the same manner and to the same extent that the
Corporation would be required to perform it if no such succession had taken
place. Failure of the Corporation to obtain such assumption and agreement prior
to the effectiveness of any such succession shall be a breach of this Agreement
and shall entitle Employee to compensation from the Corporation in the same
amount and on the same terms as Employee would be entitled hereunder if Employee
terminated his employment for Good Reason prior to a Change of Control, except
that, for purposes of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of Termination.
(b) This Agreement shall inure to the benefit of and be enforceable
by Employee's personal or legal representatives, executors, administrator,
successors, heirs, distributees, devisees and legatees. If Employee should die
while any amount would still be payable to him hereunder if he had continued to
live, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to Employee's devisee, legatee or
other designees or, if there is no such designee, to Employee's estate.
-8-
<PAGE> 9
12. Modification. This Agreement may not be canceled, changed, modified
or amended, and no cancellation, change, modification or amendment will be
effective or binding unless in writing and signed by both parties to this
Agreement.
13. Severability; Survival. In the event any provision of this
Agreement is found to be void and unenforceable by a court of competent
jurisdiction, the remaining provisions of this Agreement shall nevertheless be
binding upon the parties with the same effect as though the void or
unenforceable part had been severed and deleted.
14. Applicable Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware, without regard to the
conflicts of laws principles thereof.
15. Counterparts. This Agreement may be executed simultaneously in
several counterparts, each of which will be an original, but all of which
together will constitute one and the same original.
16. Entire Agreement. This Agreement represents the entire agreement
between the Corporation and the Employee with respect to the subject matter
hereof, and all prior agreements relating to the relationship between the
Employee and the Corporation, written or oral, are nullified and superseded
hereby.
17. Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect the meaning or interpretation of
this Agreement.
-9-
<PAGE> 10
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
METAL MANAGEMENT, INC.
By: /s/ Gerard M. Jacobs
--------------------------------
Name: Gerard M. Jacobs
------------------------------
Title: President and Chief Executive
Officer
-----------------------------
EMPLOYEE:
/s/ Robert C. Larry
------------------------------------
Robert C. Larry
-10-
<PAGE> 11
EXHIBIT A
FORM OF STOCK OPTION AGREEMENT
<PAGE> 12
EXHIBIT B
1. $500 per month car allowance, plus one parking space provided by the
Company.
2. Cellular phone.
3. Eligible for Executive Benefits Package including but not limited to
health and dental insurance, 401(k) and other benefits as determined by
the Board of Directors.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997<F1>
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,277,000
<SECURITIES> 0
<RECEIVABLES> 4,552,000
<ALLOWANCES> 0
<INVENTORY> 1,549,000
<CURRENT-ASSETS> 11,136,000
<PP&E> 9,122,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 31,373,000
<CURRENT-LIABILITIES> 7,778,000
<BONDS> 0
0
0
<COMMON> 99,000
<OTHER-SE> 17,551,000
<TOTAL-LIABILITY-AND-EQUITY> 31,373,000
<SALES> 10,402,000
<TOTAL-REVENUES> 10,402,000
<CGS> 10,020,000
<TOTAL-COSTS> 10,020,000
<OTHER-EXPENSES> 1,479,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 224,000
<INCOME-PRETAX> (1,279,000)
<INCOME-TAX> (119,000)
<INCOME-CONTINUING> (1,160,000)
<DISCONTINUED> 25,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,135,000)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
<FN>
<F1><Period Start> and <Period End> reflect only the quarter ended 12/31/96 since
comparable balance sheets are included for 3/31/96, while the Statement of
Operations compares disparate quarters for the current and includes pro forma
presentation for the prior year.
</FN>
</TABLE>
