METAL MANAGEMENT INC, 10-Q, 1998-02-17

METAL MANAGEMENT INC
10-Q, 1998-02-17
MISC DURABLE GOODS

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<PAGE> 1

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934

For the quarterly period ended December 31, 1997

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934

COMMISSION FILE NO. 0-14836

METAL MANAGEMENT, INC.
(Exact name of Registrant as specified in its charter)

DELAWARE 94-2835068
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)

500 N. DEARBORN ST., SUITE 405,
CHICAGO, IL 60610
(Address of principal executive offices including zip code)

Registrant's telephone number, including area code: (312) 645-0700

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

As of February 9, 1998, the Registrant had 30,633,809 shares of Common
Stock outstanding.
<PAGE> 2

INDEX

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements
Consolidated Condensed Balance Sheets -- December 31, 1997
(unaudited) and March 31, 1997............................ 1
Consolidated Condensed Statements of Operations -- three
months and nine months ended December 31, 1997 and 1996
(unaudited)............................................... 2
Consolidated Condensed Statements of Cash Flows -- nine
months ended
December 31, 1997 and 1996 (unaudited).................... 3
Consolidated Statement of Stockholders' Equity -- December
31, 1997 (unaudited) and March 31, 1997................... 4
Notes to Consolidated Condensed Financial Statements
(unaudited)............................................... 5
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 14
PART II: OTHER INFORMATION
ITEM 1: Legal Proceedings........................................... 31
ITEM 2: Changes in Securities....................................... 31
ITEM 4: Submission of Matters to a Vote of Security Holders......... 32
ITEM 5: Other Information........................................... 33
ITEM 6: Exhibits and Reports on Form 8-K............................ 33
SIGNATURES.................................................. 34
Exhibit Index............................................... 35
</TABLE>
<PAGE> 3

PART I: FINANCIAL INFORMATION

ITEM 1 -- FINANCIAL STATEMENTS

METAL MANAGEMENT, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1997
------------ ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 30,134 $ 5,718
Accounts receivable, net.................................. 85,900 9,560
Notes receivable from related parties..................... 300 406
Inventories............................................... 43,350 8,415
Prepaid expenses and other assets......................... 6,052 1,609
-------- -------
Total current assets................................... 165,736 25,708
Property and equipment, net................................. 94,532 20,208
Goodwill and other intangibles, net......................... 166,619 23,484
Other assets................................................ 10,027 725
-------- -------
Total assets........................................... $436,914 $70,125
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Operating lines-of-credit................................. $ 7,610 $ 7,887
Accounts payable.......................................... 53,823 5,246
Other accrued liabilities................................. 14,272 2,746
Current portion of notes payable to related parties....... 23,496 12,575
Current portion of long-term debt......................... 6,252 10,809
-------- -------
Total current liabilities.............................. 105,453 39,263
Long-term notes payable to related parties, less current
portion................................................... 39,693 1,430
Long-term debt, less current portion........................ 56,579 3,740
Deferred taxes.............................................. 11,534 1,411
Other liabilities........................................... 836 1,133
-------- -------
Total liabilities...................................... 214,095 46,977
Stockholders' equity:
Convertible preferred stock - Series A.................... 24,217 0
Convertible preferred stock - Series B.................... 19,063 0
Common Stock.............................................. 297 102
Warrants.................................................. 39,903 1,351
Additional paid-in-capital................................ 161,898 16,628
Retained earnings (accumulated deficit)................... (22,559) 5,067
-------- -------
Total stockholders' equity............................. 222,819 23,148
-------- -------
Total liabilities and stockholders' equity............. $436,914 $70,125
======== =======
</TABLE>

The accompanying notes are an integral part of the financial statements

1
<PAGE> 4

METAL MANAGEMENT, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales.................................... $126,007 $10,402 $283,353 $40,344
Cost of sales................................ 114,361 10,020 255,579 37,138
-------- ------- -------- -------
Gross profit................................. 11,646 382 27,774 3,206
Operating expenses:
General and administrative................. 6,413 1,164 14,610 3,900
Depreciation and amortization.............. 3,059 315 6,712 1,227
Non-recurring expenses..................... 25,456 0 25,456 0
-------- ------- -------- -------
Total operating expenses..................... 34,928 1,479 46,778 5,127
-------- ------- -------- -------
Operating loss from continuing operations.... (23,282) (1,097) (19,004) (1,921)
Interest expense............................. (2,601) (224) (6,166) (674)
Income from joint ventures................... 32 0 195 0
Other income................................. 314 42 562 151
-------- ------- -------- -------
Loss from continuing operations before income
taxes and discontinued operations.......... (25,537) (1,279) (24,413) (2,444)
Benefit for income taxes..................... (3,763) (119) (3,165) (373)
-------- ------- -------- -------
Loss from continuing operations.............. (21,774) (1,160) (21,248) (2,071)
Discontinued operations:
Gain (loss) on sale of assets on former
product lines of GPAR, net of income
taxes................................... (42) 179 166 317
Income (loss) from operations of former
product lines of GPAR, net of income
taxes................................... 0 (154) 0 2
-------- ------- -------- -------
Net loss..................................... (21,816) (1,135) (21,082) (1,752)
Accretion of preferred stock to redemption
value...................................... 0 0 57 0
Non-cash beneficial conversion feature of
convertible preferred stock................ 5,592 0 5,592 0
Preferred stock dividends.................... 580 0 895 0
-------- ------- -------- -------
Net loss applicable to Common Stock.......... $(27,988) $(1,135) $(27,626) $(1,752)
======== ======= ======== =======
Basic earnings (loss) per common share for:
Continuing operations applicable to Common
Stock................................... $ (1.35) $ (0.13) $ (1.73) $ (0.24)
Gain (loss) on sale of discontinued
operations.............................. $ (0.00) $ 0.02 $ 0.01 $ 0.04
Income (loss) from discontinued
operations.............................. $ 0.00 $ (0.02) $ 0.00 $ 0.00
Net loss applicable to Common Stock........ $ (1.35) $ (0.13) $ (1.72) $ (0.20)
Weighted average shares outstanding.......... 20,664 8,940 16,032 8,775
Diluted earnings (loss) per common share for:
Continuing operations applicable to Common
Stock................................... $ (1.35) $ (0.13) $ (1.73) $ (0.24)
Gain (loss) on sale of discontinued
operations.............................. $ (0.00) $ 0.02 $ 0.01 $ 0.04
Income (loss) from discontinued
operations.............................. $ 0.00 $ (0.02) $ 0.00 $ 0.00
Net loss applicable to Common Stock........ $ (1.35) $ (0.13) $ (1.72) $ (0.20)
Weighted average diluted shares
outstanding................................ 20,664 8,940 16,032 8,775
</TABLE>

The accompanying notes are an integral part of the financial statements

2
<PAGE> 5

METAL MANAGEMENT, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)

<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
---------------------------
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from continuing operations:
Net loss from continuing operations......................... $ (21,248) $(2,071)
Adjustments to reconcile net loss from continuing operations
to cash flows from continuing operations:
Depreciation and amortization.......................... 6,712 1,227
Non-recurring charges.................................. 23,801 0
Other.................................................. (2,671) 0
Changes in assets and liabilities, net of acquisitions:
Accounts receivable and other receivables, net......... 2,730 1,092
Inventories............................................ 17,211 204
Accounts payable....................................... (19,608) (1,470)
Other.................................................. (3,603) 60
--------- -------
Cash flows from continuing operations....................... 3,324 (958)
Cash flows provided (used) by investing activities:
Marketable securities sold................................ 10 2,644
Purchases of property and equipment....................... (4,350) (1,654)
Acquisitions, net of cash acquired........................ (23,153) (971)
Other..................................................... 1,090 0
--------- -------
Net cash provided (used) by investing activities............ (26,403) 19
Cash flows provided (used) by financing activities:
Repayments on lines-of-credit............................. (936) (1,975)
Issuances of long-term debt............................... 15,641 0
Repayments of long-term debt.............................. (50,425) (1,130)
Issuances of Common Stock................................. 40,207 293
Issuances of convertible preferred stock.................. 42,908 0
Other..................................................... (287) 0
--------- -------
Net cash provided (used) by financing activities............ 47,108 (2,812)
--------- -------
Cash flows from discontinued operations..................... 387 1,525
--------- -------
Net increase (decrease) in cash and cash equivalents........ 24,416 (2,226)
Cash and cash equivalents at beginning of period............ 5,718 3,093
--------- -------
Cash and cash equivalents at end of period.................. $ 30,134 $ 867
========= =======
</TABLE>

The accompanying notes are an integral part of the financial statements

3
<PAGE> 6

METAL MANAGEMENT, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED, IN THOUSANDS, EXCEPT SHARES OF COMMON STOCK)

<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- ------------------- PAID-IN RETAINED
SERIES A SERIES B SHARES AMOUNT CAPITAL WARRANTS EARNINGS TOTAL
-------- -------- ------ ------ ---------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997... $ 0 $ 0 10,154,740 $102 $ 16,628 $ 1,351 $ 5,067 $ 23,148
Issuance of Series A
preferred stock, net...... 23,844 -- -- -- -- -- -- 23,844
Issuance of Series B
preferred stock, net...... -- 19,063 -- -- -- -- -- 19,063
Issuance of Common Stock and
warrants in private
offerings, net............ -- -- 3,495,588 35 35,070 4,451 39,556
Equity issued for
acquisitions.............. -- -- 15,347,843 153 100,326 20,662 -- 121,141
Common Stock issued upon
exercise of options,
warrants and conversion of
debt...................... -- -- 687,481 7 4,282 (891) -- 3,398
Dividends declared on
Preferred Stock........... 316 -- -- -- -- -- (895) (579)
Non-cash dividend recognized
on beneficial conversion
feature of Preferred
Stock..................... -- -- -- -- 5,592 -- (5,592) 0
Warrants issued to
employees................. -- -- -- -- -- 14,330 -- 14,330
Accretion of Preferred Stock
discount to redemption
value..................... 57 -- -- -- -- -- (57) 0
Net loss for the period..... -- -- -- -- -- -- (21,082) (21,082)
------- ------- ---------- ---- -------- ------- -------- --------
Balance at December 31,
1997...................... $24,217 $19,063 29,685,652 $297 $161,898 $39,903 $(22,559) $222,819
======= ======= ========== ==== ======== ======= ======== ========
</TABLE>

4
<PAGE> 7

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 -- INTERIM FINANCIAL STATEMENTS

The accompanying unaudited consolidated condensed financial statements
include the accounts of Metal Management, Inc. and its subsidiaries (herein
referred to as "MTLM" or the "Company") and have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
All significant intercompany accounts, transactions and profits have been
eliminated. Certain information related to the Company's organization,
significant accounting policies and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These unaudited condensed
consolidated financial statements reflect, in the opinion of management, all
material adjustments (which include only normal recurring adjustments) necessary
to fairly state the financial position and the results of operations for the
periods presented and the disclosures herein are adequate to make the
information presented not misleading. Operating results for interim periods are
not necessarily indicative of the results that can be expected for a full year.
These interim financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the Company's fiscal year ended
March 31, 1997.

In order to maintain consistency and comparability between periods
presented, certain amounts have been reclassified from the previously reported
financial statements in order to conform with the financial statement
presentation of the current period.

During the first quarter of fiscal 1997 (ended June 30, 1996), the Company
discontinued its Spectra*Star and consumables business and its VideoShow product
and related product lines businesses. During the second quarter of fiscal 1997,
the Spectra*Star inventory and related production equipment was sold for
approximately $1.3 million in cash and other contingent consideration in the
form of royalties on future revenues from the sale of Spectra*Star printers and
related consumables. The VideoShow business was sold in the third quarter of
fiscal 1997 for consideration in the form of royalties on future revenues from
the sale of VideoShow products. The royalties earned during fiscal 1998, net of
related costs incurred, are reflected as an addition to gain on sale.

NOTE 2 -- ACQUISITIONS

Significant acquisitions completed during the nine months ended December 31,
1997

- On December 1, 1997, the Company acquired Cozzi Iron & Metal, Inc.
("Cozzi"), headquartered in Chicago, Illinois. Cozzi operates facilities
in Chicago, Illinois, East Chicago, Indiana, Phoenix, Arizona and the
Pittsburgh, Pennsylvania area as well as a joint venture interest (50%)
in Memphis, Tennessee. In connection with the acquisition of Cozzi,
Albert A. Cozzi joined the Company as a Director, President and Chief
Operating Officer. Frank J. Cozzi joined the Company as a Director and a
Vice-President and Gregory P. Cozzi joined the Company as a Director. On
December 18, 1997, the Company, through Cozzi acquired Kankakee Scrap
Corporation, located in Kankakee, Illinois.

- In August 1997, the Company acquired Proler Southwest, Inc. and Proler
Steelworks, L.L.C. (collectively "Proler"). Proler operates a facility in
Houston, Texas and a site in Jackson, Mississippi. In connection with the
acquisition, William T. Proler joined the Company as a Director.

- In June 1997, the Company acquired four companies under common ownership
comprising The Isaac Group ("Isaac"), headquartered in Maumee, Ohio. The
Isaac Group is comprised of Ferrex Trading Corporation, the Isaac
Corporation, Paulding Recycling, Inc. and Briquetting Corporation of
America. In connection with the acquisition, George A. Isaac III joined
the Company as a Director and Executive Vice-President.

5
<PAGE> 8
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

- In May 1997, the Company acquired Reserve Iron & Metal L.P. ("Reserve").
Reserve operates two processing facilities in Cleveland, Ohio and Chicago,
Illinois and has a 50% interest in a joint venture operating in Attalla,
Alabama.

The purchase consideration for each of the transactions was as follows (in
thousands, except shares and warrants):

<TABLE>
<CAPTION>
RESERVE ISAAC PROLER COZZI
------- ----- ------ -----
<S> <C> <C> <C> <C>
Shares of restricted Common Stock issued........ -- 1,942,857 1,750,000 11,499,986
Warrants to purchase Common Stock issued........ 1,400,000 462,500 375,000 1,500,002
Cash paid, including transaction costs.......... $ 6,568 $ 528 $ 7,747 $ 7,506
Value of Common Stock issued.................... -- 21,049 11,130 65,864
Value of warrants issued........................ 8,118 3,028 1,574 7,505
Promissory notes issued......................... 1,542 36,547 10,500 --
--------- --------- ---------- ----------
Total purchase consideration............... $16,228... $ 61,152 $ 30,951 $ 80,875
========= ========= ========== ==========
</TABLE>

The purchase consideration is allocated as follows (in thousands):

<TABLE>
<CAPTION>
RESERVE ISAAC PROLER COZZI
------- ----- ------ -----
<S> <C> <C> <C> <C>
Current assets....................................... $ 38,822 $ 39,225 $ 3,199 $ 52,881
Noncurrent assets.................................... 12,345 21,577 5,722 44,184
Current liabilities.................................. (16,185) (32,570) (4,514) (32,471)
Noncurrent liabilities............................... (25,964) (15,556) (1,533) (50,360)
Goodwill............................................. 7,210 48,476 28,077 66,641
-------- -------- ------- --------
Total purchase consideration.................... $ 16,228 $ 61,152 $30,951 $ 80,875
======== ======== ======= ========
</TABLE>

In consideration for entering into a non-compete agreement, the Company
granted Mr. Isaac additional warrants to purchase 287,500 shares of MTLM Common
Stock at an exercise price of $11.70 per share. A non-compete intangible asset
was recorded and valued at $1.8 million.

The above transactions have been accounted for by the purchase method of
accounting and are included in the Company's results of operations from the
effective date of each respective acquisition. The purchase price was allocated
based on estimates of the fair value of assets acquired and liabilities assumed.
These estimates are revised during the allocation period as necessary when
information regarding contingencies becomes available to define and quantify
assets acquired and liabilities assumed. The allocation period varies by
acquisition but does not exceed one year, except with respect to certain tax
related contingencies. To the extent contingencies such as preacquisition
environmental matters or preacquisition tax matters are resolved or settled
during the allocation period such items are included in the revised allocation
of purchase price. After the allocation period, the effect of changes in such
contingencies is included in results of operations in the periods in which
adjustments are determined.

Acquisitions completed subsequent to December 31, 1997

- On January 8, 1998, the Company acquired Houston Compressed Steel Corp.
("HCS"), headquartered in Houston, Texas. HCS operates one processing
facility in Houston, Texas.

- On January 20, 1998, AMI Acquisition Co. ("AMI"), a wholly owned
subsidiary of the Company, purchased substantially all of the assets of
Aerospace Metals, Inc. ("Aerospace"), and certain of its affiliates
headquartered in Hartford, Connecticut. Pursuant to the Asset Purchase
Agreement, the Company issued 402,893 shares of restricted Common Stock
and paid approximately $14.4 million in cash as purchase consideration.

6
<PAGE> 9
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

- On January 30, 1998, the Company, through Cozzi, purchased Newell
Phoenix, L.L.C.'s ("Newell") 50% membership interest in Salt River
Recycling, L.L.C. ("Salt River"), an Arizona limited liability company.
Prior to acquisition on January 30, 1998, Cozzi owned a 50% interest in
Salt River. On December 19, 1997, the Company loaned $300,000 to Newell at
the prime rate of interest. On January 30, 1998, the Company received a
payment of $73,000 on the loan. The loan is due on or about May 1, 1998
and is secured by 18,000 shares of the Company's Common Stock issued to
Newell.

The acquisitions of HCS, Aerospace and Salt River will be accounted for by
the purchase method of accounting and will be included in the Company's results
of operations from the dates of acquisition.

The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company, MacLeod Group ("MacLeod"),
HouTex Metals Company, Inc. ("HouTex"), Reserve, Isaac, Proler, Cozzi, Aerospace
and the sale of convertible Preferred Stock (see Note 5) and Common Stock (see
Note 6) as if these transactions had occurred on April 1, 1996. The MacLeod and
HouTex acquisitions were completed by the Company during the fourth quarter of
fiscal 1997. The unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments, such as additional depreciation
expense as a result of a step-up in basis of the fixed assets, additional
amortization expense as a result of goodwill and interest expense related to
acquisition debt. The pro forma results do not purport to be indicative of the
results of operations which would have resulted had the acquisitions been in
effect on April 1, 1996 (in thousands, except share data).

<TABLE>
<CAPTION>
NINE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1997
----------------- -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net sales.................................................. $565,406 $695,834
Net loss from continuing operations applicable to Common
Stock.................................................... $(20,615) $ (4,792)
Diluted net loss from continuing operations applicable to
Common Stock............................................. $ (0.69) $ (0.16)
</TABLE>

Potential acquisitions

- On July 23, 1997, the Company signed a binding letter of intent to
acquire Superior Forge, Inc. ("Superior"), of Huntington Beach,
California. Superior uses and generates aluminum and aluminum scrap in its
various operations. In the transaction, the shareholders of Superior will
likely receive 867,667 shares of Common Stock and $5.0 million in cash.
The Company has agreed to issue to Xavier Hermosillo, the Company's
Secretary, as a finders fee in connection with the Superior acquisition,
and conditioned upon closing of the Superior acquisition, warrants to
purchase 20,000 shares of Common Stock at an exercise price of $15.00 per
share.

- On August 5, 1997, the Company signed a binding letter of intent to
purchase all of the scrap metal-related business operations and assets,
excluding real estate, of Goldin Industries, Inc., Goldin Industries
Louisiana, Inc., and Goldin of Alabama, Inc. (the "Goldin Companies"). The
Goldin Companies, headquartered in Gulfport, Mississippi, operate five
facilities, including one near New Orleans, Louisiana, two in Mobile,
Alabama, and two in Gulfport, and principally processes industrial ferrous
and non-ferrous metals. In the transaction, the shareholders of the Goldin
Companies will receive $7.15 million in cash, 112,500 shares of Common
Stock, and warrants to purchase an aggregate of 150,000 shares of Common
Stock.

- On August 6, 1997, the Company signed a binding letter of intent to
acquire, in a merger, FPX, Inc. ("FPX"), which has a 50% ownership
interest in PerlCo, L.L.C. ("PerlCo"), a Tennessee limited liability
company. The Company currently owns a 50% interest in PerlCo through
Cozzi. The Company will also acquire, through merger, Southern Tin
Compress Corporation ("Southern Tin"), which owns the real estate and
certain equipment associated with the PerlCo operations. In the

7
<PAGE> 10
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

transaction, the shareholders of FPX and Southern Tin will receive an
aggregate of 789,740 shares of Common Stock (subject to adjustment in
certain circumstances) and warrants to purchase an aggregate of 125,000
shares of Common Stock. Also at closing, certain affiliates of the FPX
shareholders will be repaid up to $2.0 million due from PerlCo.

- On August 28, 1997, the Company signed binding letters of intent to
acquire Gold Metal Recyclers, Yonack Iron & Metal, Atlas Recycling,
Spectrum Metals and Yonack Services ("Texas Acquisitions"). These
businesses have scrap metal operations in Texas and Arkansas. The
aggregate consideration for these five acquisitions is composed of $16.64
million in cash, $700,000 in promissory notes, and 670,944 shares of
Common Stock. The Common Stock to be issued is subject to adjustment.

- On December 11, 1997, the Company entered into a binding letter of intent
to purchase certain assets of Accurate Iron & Metal Co., an Illinois
corporation, which operates a facility in Franklin Park, Illinois.

- On December 12, 1997, the Company entered into a letter of intent to
purchase substantially all of the assets of 138 Scrap Inc. and of Katrick
Inc., Illinois corporations headquartered in Riverdale, Illinois.

The closing of the potential acquisitions are subject to, among other
things, execution of mutually acceptable definitive merger and related
agreements, successful completion of due diligence, obtaining corporate
approvals, government approvals as necessary, and other customary conditions to
closing. No assurance can be made that all or any one of the potential
acquisitions will be completed.

NOTE 3 -- NON-RECURRING EXPENSES

During the quarter ended December 31, 1997, the Company recorded the
following non-recurring pre-tax charges totaling $25.5 million (in thousands):

<TABLE>
<S> <C>
Non-cash warrant compensation............................... $10,596
Severance and other termination benefits.................... 3,014
EMCO Shut-down.............................................. 11,846
-------
$25,456
=======
</TABLE>

On December 1, 1997, the Company issued non-recurring, fully vested
warrants to purchase 1,655,000 shares of Common Stock at exercise prices ranging
from $4.00 per share to $12.00 per share. These warrants were issued to
employees and an outside director, including T. Benjamin Jennings, Chairman of
the Board and Chief Development Officer, Gerard M. Jacobs, Chief Executive
Officer, and Donald F. Moorehead, Vice-Chairman of the Board. Messrs. Jacobs and
Jennings each received warrants to purchase 375,000 shares of Common Stock at an
exercise price of $5.91 per share and warrants to purchase 350,000 shares of
Common Stock at an exercise price of $12.00 per share. Donald F. Moorehead and
certain individuals associated with him received warrants to purchase an
aggregate of 150,000 shares of Common Stock at an exercise price of $12.00 per
share. The non-cash warrant compensation expense for these warrants was
calculated using the "intrinsic value method" as prescribed under Accounting
Principles Board (APB) Opinion No. 25 "Accounting for Stock Issued to
Employees".

On December 1, 1997, the Company and George O. Moorehead entered into two
agreements, a Separation Agreement and a Stock Warrant Settlement Agreement
resolving all outstanding issues between the Company and Mr. Moorehead. Pursuant
to the Separation Agreement, Mr. Moorehead (a) resigned from his employment with
the Company, from his employment with EMCO and from his directorship of EMCO
effective December 1, 1997, and (b) delivered a Non-Compete, Non-Solicitation
and Confidentiality Covenant and Agreement. In consideration for entering into
the Separation Agreement, the Company

8
<PAGE> 11
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

(a) paid Mr. Moorehead $250,000 on December 1, 1997, (b) agreed to provide Mr.
Moorehead certain insurance and other benefits during a five-year period
commencing on December 1, 1997, (c) agreed to pay certain legal fees to Mr.
Moorehead's counsel, and (d) permitted Mr. Moorehead to exercise certain
warrants to acquire Common Stock previously granted to him, on a "net cashless"
basis, subject to the Company's right to refuse "net cashless" exercises under
certain circumstances. Pursuant to the Stock Warrant Settlement Agreement, the
Company issued to Mr. Moorehead fully-vested warrants to purchase 200,000 shares
of Common Stock at $12.00 per share, exercisable for a period of five years, and
agreed to pay Mr. Moorehead amounts totalling $665,000. To date the Company has
paid $207,500 to Mr. Moorehead under the Stock Warrant Settlement Agreement. The
Company recorded a non-recurring charge totaling $3,014,000 comprised of (a)
$915,000 of cash payments, (b) an accrual of $199,000 for other benefits to Mr.
Moorehead under the Separation Agreement, and (c) $1,900,000 representing the
value (calculated in accordance with APB No. 25) of the warrants to purchase
200,000 shares of Common Stock issued to Mr. Moorehead.

In December 1997, the Company adopted a formal plan to shut down its EMCO
operations and to transfer certain of EMCO's assets to newly-acquired Salt River
Recycling, which the Company will operate under the name of Metal Management of
Arizona. As disclosed in prior periods, EMCO has incurred operating losses since
its acquisition and has required substantial unanticipated working capital
infusions. In connection with the plan to shut down EMCO, the Company recorded a
pre-tax charge of approximately $11.8 million in the third quarter, comprised of
$9.3 million for the impairment of EMCO goodwill, $2.0 million for the
write-down to fair value (less selling costs) of the EMCO fixed assets to be
sold or otherwise abandoned, and $0.5 million for other exit-related costs. The
cost of transferring EMCO's remaining assets to Metal Management of Arizona will
be expensed as incurred. The exit plan is expected to be completed by December
31, 1998.

NOTE 4 -- INVENTORIES

Inventories consisted of the following at the dates indicated below (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1997
----------------- --------------
<S> <C> <C>
Ferrous metals................................... $36,319 $2,707
Non-ferrous metals............................... 6,374 4,754
Other............................................ 657 954
------- ------
$43,350 $8,415
======= ======
</TABLE>

NOTE 5 -- CONVERTIBLE PREFERRED STOCK -- SERIES A AND SERIES B

In the quarter ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 129, "Disclosure of Information about
Capital Structure." This statement establishes standards for disclosing
information about the Company's capital structure.

In accordance with Emerging Issues Task Force (EITF) Topic No. D-60,
"Accounting for the Issuance of Convertible Preferred Stock and Debt Securities
with a Nondetachable Conversion Feature", the Company recorded a one-time
non-cash dividend of approximately $5.6 million in the third quarter. The
dividend represents a beneficial conversion feature required to be recognized if
preferred stock is convertible into Common Stock at the lower of a conversion
rate fixed at the date of issue or a fixed discount to the Common Stock's market
price at the date of conversion.

On August 8, 1997, the Company issued 21,000 shares of Series A Convertible
Preferred Stock and between August 21, 1997 and September 8, 1997, the Company
issued 4,000 shares of Series A Convertible Preferred Stock, par value $.01 per
share (stated value of $1,000 per share) (the "Series A Preferred Stock"). An
aggregate of 2,500 shares of the Series A Preferred Stock were purchased by
Gerard M. Jacobs,

9
<PAGE> 12
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

T. Benjamin Jennings and Donald F. Moorehead, directors of the Company. On
December 1, 1997, the Company issued an aggregate of 20,000 shares of Series B
Convertible Preferred Stock, par value $.01 per share (stated value of $1,000
per share) (the "Series B Preferred Stock"). Net cash proceeds totaled $23.8
million and $19.1 million, respectively, for the Series A Preferred Stock and
the Series B Preferred Stock.

The Series A Preferred Stock and the Series B Preferred Stock have a
"Liquidation Preference" equal to $1,000 per share plus any accrued and unpaid
dividends. Upon the liquidation, dissolution or winding up of the Company,
holders of the Series A and Series B Preferred Stock are entitled to receive
payment of the Liquidation Preference on a pro rata basis based on the
Liquidation Preference of the Preferred Stock held by each holder before any
payment is made to holders of Common Stock or any stock of the Company junior to
the Series A and Series B Preferred Stock.

Dividends on the Series A Preferred Stock accrue, whether or not declared
by the Board of Directors, at an annual rate of 6% of the Stated Value of each
outstanding share of Series A Preferred Stock. Dividends are payable in cash or,
at the Company's option, and upon satisfaction of certain conditions, in
additional shares of Series A Preferred Stock. Dividends on the Series B
Preferred Stock accrue, whether or not declared by the Board of Directors, at an
annual rate of 4.5% of the Stated Value of each outstanding share of Series B
Preferred Stock. Dividends are payable in cash or, at the Company's option, and
upon satisfaction of certain conditions, in additional shares of Series B
Preferred Stock.

The holders of Series A Preferred Stock will be able to convert the shares
of Series A Preferred Stock into Common Stock at a price equal to the lower of:
(i) $18.30 (to be adjusted to reflect stock splits, stock dividends or similar
events); or (ii) 85% of the average closing bid price for the Common Stock for
the five trading days prior to the date of the conversion notice. Since the
conversion price for the Series A Preferred Stock may vary depending on when the
holder delivers a conversion notice, it is not possible to specify the maximum
number of shares of Common Stock that the Company might be required to issue
upon conversion of the Series A Preferred Stock. In addition, if at any time
before April 14, 1998, the Company issues convertible stock with a lower
conversion price than the then-applicable conversion price of the Series A
Preferred Stock, or with limitations on conversion rights that are
proportionately less restrictive than those imposed on the holders of the Series
A Preferred Stock, then the conversion price of the Series A Preferred Stock
will be adjusted, or the limitations on conversion rights will be modified, to
be consistent with those of the additional convertible stock.

If the conversion of the Series A Preferred Stock would result in the
holders receiving more than 2,500,000 shares of Common Stock, then the Company
may redeem any shares of Series A Preferred Stock in excess of 2,500,000 shares
at a redemption price equal to: (i) 117% of the Stated Value of the shares; plus
(ii) any accrued and unpaid dividends on such shares. Any shares of Series A
Preferred Stock which have not been converted on or before August 8, 2000 (the
"Maturity Date") will automatically be converted to shares of Common Stock at
the Maturity Date. However, if, at the Maturity Date any of the Mandatory
Conversion Conditions is not satisfied, then the Company will be required to pay
to the holders of Series A Preferred Stock, in cash, an amount equal to the
Liquidation Preference for the shares of Series A Preferred Stock which they
own. "Mandatory Conversion Conditions" include: (i) the market value of the
outstanding shares of Common Stock (other than those issuable upon conversion of
the Series A Preferred Stock) being greater than $75,000,000; (ii) the Common
Stock had an average daily trading volume of more than 30,000 shares during the
six-month period ending on the 15th day of the calendar month immediately prior
to the calendar month in which the Maturity Date occurs; (iii) the Common Stock
is designated for quotation on the Nasdaq National Market, the New York Stock
Exchange or another national securities exchange; and (iv) a registration
statement covering the resale of all of the shares of Common Stock issuable upon
conversion of the Series A Preferred Stock shall be effective, or such resale
may be made under Rule 144(k) under the Securities Act. The Mandatory Conversion
Conditions identified in (i) through (iii) above is referred to as the
"Specified Mandatory Conversion Conditions."

10
<PAGE> 13
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

As of October 24, 1997, all of the holders of the Series A Preferred Stock
executed a Waiver of Mandatory Conversion Conditions, Waiver of Redemption
Event, and Consent to Amendment. Pursuant to this waiver, the holders waived any
rights to avoid a mandatory conversion of such holder's Series A Preferred Stock
into Common Stock at the Maturity Date by reason of the Company's failure to
satisfy any of the Specified Mandatory Conversion Conditions. In addition, the
holders waived any rights to require the Company to redeem their Series A
Preferred Stock in the event the Common Stock is no longer designated for
quotation on the Nasdaq National Market or another national securities exchange
(a "Listed Stock Event"). If the Common Stock fails to be designated for
quotation on the Nasdaq National Market or listed on the New York Stock Exchange
or other national securities exchange (the "Listed Stock Condition") or there is
an occurrence of the Listed Stock Event, the holders, at their option, may
convert their shares of Series A Preferred Stock into the number of shares of
Common Stock obtained by dividing the Stated Value of the Series A Preferred
Stock to be converted by the Delisting Price as of the conversion date. The
"Delisting Price" would be the lowest traded price of the Common Stock during
the time when the Common Stock is not listed on the Nasdaq National Market or
listed on another national securities exchange.

The Series A Preferred Stock does not grant holders voting rights except
that, so long as shares of Series A Preferred Stock are outstanding, without the
prior approval of the holders of at least a majority of all shares of the Series
A Preferred Stock outstanding at the time, the Company may not: (i) increase the
number of shares of Series A Preferred Stock which the Company is authorized to
issue; (ii) alter or change the rights, preferences or privileges of the Series
A Preferred Stock or any other capital stock of the Company so as to adversely
affect the Series A Preferred Stock; or (iii) create any new class or series of
capital stock having a preference over the Series A Preferred Stock as to
distribution of assets upon liquidation, dissolution or winding up of the
Company. Approval of holders of the Series A Preferred Stock as to actions
described in (ii) and (iii) above will not be required if the average closing
price for the Common Stock on the five trading days immediately preceding the
effective date of such a change is equal to or exceeds $27.45.

The holders of Series B Preferred Stock will be able to convert the shares
of Series B Preferred Stock into Common Stock at a price equal to the lowest of:
(i) 120% of the closing bid price for the Common Stock on the date of purchase
of the Series B Preferred Stock (to be adjusted to reflect stock splits, stock
dividends or similar events) (the "Fixed Conversion Price"); (ii) 92.5% of the
average closing bid price for the Common Stock for the five trading days prior
to the date of the conversion notice; or (iii) if applicable, the lowest traded
price of the Common Stock during the time when the Common Stock is not listed on
the Nasdaq National Market or listed on the New York Stock Exchange or other
national securities exchange. Since the conversion price for the Series B
Preferred Stock may vary depending on when the holder delivers a conversion
notice, it is not possible to specify the maximum number of shares of Common
Stock that the Company might be required to issue upon conversion of the Series
B Preferred Stock. In addition, if at any time before April 14, 1998, the
Company issues convertible stock with a lower conversion price than the
then-applicable conversion price of the Series B Preferred Stock, or with
limitations on conversion rights that are proportionately less restrictive than
those imposed on the holders of the Series B Preferred Stock, then the
conversion price of the Series B Preferred Stock will be adjusted, or the
limitations on conversion rights will be modified, to be consistent with those
of the additional convertible stock.

If the conversion of the Series B Preferred Stock would result in the
holders receiving more than 2,000,000 Shares of Common Stock, then the Company
may redeem any shares of Series B Preferred Stock in excess of 2,000,000 shares
at a redemption price equal to: (i) 117% of the Stated Value of the shares; plus
(ii) any accrued and unpaid dividends on such shares. Any shares of Series B
Preferred Stock which have not been converted on or before three years after the
date the Series B Preferred Stock was issued (the "Maturity Date") will
automatically be converted to shares of Common Stock at the Maturity Date.
However, if, at the Maturity Date, a registration statement covering the resale
of all of the shares of Common Stock issuable upon conversion of the Series B
Preferred Stock is not effective, and such resale may not be made under Rule
144(k) under the Securities Act, then the Company will be required to pay to the
holders of Series B

11
<PAGE> 14
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

Preferred Stock, in cash, an amount equal to the Liquidation Preference for the
shares of Series B Preferred Stock which they own.

The Series B Preferred Stock does not grant holders voting rights except
that, so long as shares of Series B Preferred Stock are outstanding, without the
prior approval of the holders of at least a majority of all shares of the Series
B Preferred Stock outstanding at the time, the Company may not: (i) increase the
number of shares of Series B Preferred Stock which the Company is authorized to
issue; (ii) alter or change the rights, preferences or privileges of the Series
B Preferred Stock or any other capital stock of the Company so as to adversely
affect the Series B Preferred Stock; or (iii) create any new class or series of
capital stock having a preference over the Series B Preferred Stock as to
distribution of assets upon liquidation, dissolution or winding up of the
Company. Approval of holders of the Series B Preferred Stock as to actions
described in (ii) and (iii) above will not be required if the average closing
price for the Common Stock on the five trading days immediately preceding the
effective date of such a change is equal to or exceeds 150% of the Fixed
Conversion Price.

NOTE 6 -- COMMON STOCK

Issuances of Common Stock

On December 19, 1997, the Company issued to Samstock, L.L.C., a Delaware
limited liability company ("Samstock"), 1,470,588 shares of the Company's Common
Stock, par value $.01 per Share (the "Samstock Shares"), pursuant to a
Securities Purchase Agreement (the "Purchase Agreement") between the Company and
Samstock. The Company also issued to Samstock a Warrant (the "Samstock Warrant")
exercisable at any time prior to December 18, 2002 for: (i) 400,000 Shares at an
exercise price of $20.00 per Share; and (ii) 200,000 Shares at an exercise price
of $23.00 per Share. The aggregate purchase price of the Samstock Shares and
Samstock Warrant was approximately $25.0 million.

Computation of Earnings per Share (EPS)

In the quarter ended December 31, 1997, the Company adopted SFAS No. 128,
"Earnings Per Share." SFAS No. 128 requires the replacement of previously
reported primary and fully diluted earnings per share required by APB Opinion
No. 15 with basic earnings per share and diluted earnings per share. The
calculation of basic earnings per share excludes any dilutive effect of stock
options, warrants or other potentially dilutive securities, while diluted
earnings per share includes the effect of all potentially dilutive securities.
Per share amounts for the quarter and nine-month period ended December 31, 1996
have been restated to conform to the requirements of SFAS No. 128.

Common Stock equivalents are determined assuming the exercise of all
dilutive stock options and warrants adjusted for the assumed repurchase of
Common Stock, at the average market price, from the exercise proceeds. Due to
the net loss applicable to Common Stock for all periods presented, the effect of
dilutive stock options and warrants were not included as their inclusion would
have been anti-dilutive. Also, the potentially dilutive effect of the Company's
Series A Preferred Stock and Series B Preferred Stock was not used in the
diluted earnings per share calculation as its effect was anti-dilutive.

NOTE 7 -- SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information is summarized as follows (in thousands):

<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------
DECEMBER 31 DECEMBER 31
1997 1996
----------- -----------
<S> <C> <C>
Interest paid.......................................... $5,539 $ 810
Income taxes paid (refunds received)................... $1,835 $(128)
</TABLE>

12
<PAGE> 15
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

In connection with all the Company's acquisitions, the net cash paid for
the nine months ended December 31, 1997 was as follows (in thousands):

<TABLE>
<S> <C>
Fair value of assets acquired............................... $ 373,176
Liabilities assumed......................................... (179,728)
Stock and warrants issued................................... (121,072)
Promissory notes and other consideration issued............. (48,589)
---------
Cash paid................................................... 23,787
Less: cash acquired....................................... (634)
---------
Net cash paid for acquisitions.............................. $ 23,153
=========
</TABLE>

The promissory notes and other consideration issued is composed of the
following (in thousands):

<TABLE>
<CAPTION>
DATE TRANSACTION AMOUNT
---- ----------- ------
<C> <S> <C>
8/28/97 Variable interest rate note payable issued to the former
Shareholders of Proler, repaid on 1/7/98................... $ 8,100
8/28/97 7% note payable issued to the former shareholders of Proler
due on 9/1/99.............................................. 2,400
6/23/97 8.5% note payable issued to the former shareholders of
Isaac, repaid on 11/15/97.................................. 10,600
6/23/97 8.5% note payable issued to the former shareholders of
Isaac due on or before 2/15/2000, $10 million repaid on
2/13/98.................................................... 25,947
5/1/97 9% note payable issued to the former shareholders of
Reserve, converted into 182,087 shares of Common Stock at a
conversion price of $9.00 per share on 1/14/98............. 1,542
-------
$48,589
=======
</TABLE>

Non cash investing and financing activities for the nine months ended
December 31, 1997 were as follows (in thousands):

<TABLE>
<S> <C>
Conversion of debt to Common Stock.......................... $2,720
Non-cash dividend recognized on beneficial conversion
feature of preferred stock................................ $5,592
</TABLE>

NOTE 8 -- RECENTLY ISSUED ACCOUNTING STANDARDS

SFAS No. 130 -- Reporting Comprehensive Income, and SFAS No. 131 --
Disclosures about Segments of an Enterprise and Related Information, were issued
by the FASB in June 1997 and are effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 establishes standards for the reporting and
display of comprehensive income, which includes net income and changes in equity
except those resulting from investments by, or distributions to, stockholders.
SFAS No. 131 establishes standards for disclosures related to business operating
segments. The Company is currently evaluating the impact that these statements
will have on the consolidated financial statements.

13
<PAGE> 16

This Form 10-Q includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements in this Form 10-Q which address
activities, events or developments that the Company expects or anticipates will
or may occur in the future, including such things as future acquisitions
(including the amount and nature thereof), business strategy, expansion and
growth of the Company's business and operations and other such matters are
forward-looking statements and are thus prospective. Although the Company
believes the expectations expressed in such forward-looking statements are based
on reasonable assumptions within the bounds of its knowledge of its business, a
number of factors could cause actual results to differ materially from those
expressed in any forward-looking statements, whether oral or written, made by or
on behalf of the Company. Many of these factors have previously been identified
in filings or statements made by or on behalf of the Company. See also "Factors
Influencing Future Results and Accuracy of Forward-Looking Statements" below.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included under
Item 1. In addition, reference should be made to the audited consolidated
financial statements and notes thereto and related Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's Annual Report on Form 10-K for the Company's fiscal year ended March
31, 1997.

GENERAL OVERVIEW

The Company was founded in 1981 and re-incorporated in Delaware in June
1986. Prior to April 11, 1996, the Company was called General Parametrics
Corporation and operated as a manufacturer and marketer of color thermal and dye
sublimation printers and related consumables, including ribbons, transparencies
and paper. This business was discontinued by the Company during fiscal 1997. On
April 9, 1996, the Company's stockholders approved an amendment to the Company's
Certificate of Incorporation to change the name of the Company from General
Parametrics Corporation to Metal Management, Inc. Effective April 15, 1996, the
Company formally changed its NASDAQ stock symbol to "MTLM". On April 25, 1996,
the Board of Directors of the Company approved a change in the Company's fiscal
year end from October 31 to March 31, effective April 1, 1996.

The Company entered the scrap metal recycling industry on April 11, 1996,
through its merger with EMCO Recycling Corp. ("EMCO"), headquartered in Phoenix,
Arizona. As part of the strategic redirection, in April 1996, management
announced plans to exit the Spectra*Star printer and consumables business. On
July 16, 1996, Mannesmann Tally ("Tally") acquired the inventory and related
production equipment of the Spectra*Star business for approximately $1.3 million
in cash and provided additional contingent consideration in the form of
royalties on future sales of Spectra*Star printers and related consumables. The
Company discontinued and sold its VideoShow and related products lines business
("VideoShow") in December 1996 for consideration substantially in the form of
royalties on future sales of VideoShow equipment. The VideoShow consideration is
not expected to be material to the Company.

The Company and its wholly-owned subsidiaries are engaged in the business
of dismantling, processing, marketing, brokering and recycling of both ferrous
and non-ferrous metals with the objective of becoming one of the largest
recyclers of scrap metal in North America. The Company operates thirty-eight
recycling centers in ten states, including those operated through joint
ventures, and resells processed scrap metal and other materials to domestic and
foreign customers. The Company plans to continue to follow a regional-based
acquisition strategy, by acquiring a larger "hub" company in selected
metropolitan areas and complementing that company's operations and management
with smaller "tuck-in" acquisitions. The Company's objective is to become one of
the largest metals recyclers in North America through targeted acquisitions of
independent metals recyclers. The Company believes that no single company is a
significant processor of scrap metal on a national scale, although certain
companies are significant processors on a local or regional scale. Since
entering

14
<PAGE> 17

the scrap metals recycling business in April 1996, the company has acquired the
following businesses (collectively, the "Acquired Companies"):

<TABLE>
<CAPTION>
SUBSIDIARY LOCATION(S) MONTH ACQUIRED
---------- ----------- --------------
<S> <C> <C>
EMCO Phoenix, Arizona April 1996
MacLeod Los Angeles, California January 1997
HouTex Houston, Texas January 1997
Reserve Cleveland, Ohio and Chicago, Illinois May 1997
Isaac Maumee, Defiance, Bryan, Dayton and June 1997
Cleveland, Ohio
Proler Houston, Texas and Jackson, Mississippi August 1997
Cozzi Chicago, Illinois and Pittsburgh, Pennsylvania December 1997
Kankakee Scrap Kankakee, Illinois December 1997
Acquisitions completed subsequent to December 31, 1997 include the following:
Houston Compressed Houston, Texas January 1998
Aerospace Hartford, Connecticut January 1998
Salt River Phoenix, Arizona January 1998
</TABLE>

Potential Acquisitions as of February 9, 1998 include:

<TABLE>
<CAPTION>
COMPANY LOCATION(S)
------- -----------
<S> <C>
Superior Huntington Beach, California
Goldin Companies Gulfport, Mississippi, Mobile, Alabama and New Orleans,
Louisiana
PerlCo Memphis, Tennessee
Atlas Recycling Corpus Christi and Del Rio, Texas
Yonack Iron & Metal Dallas, Texas and Lonoke, Arkansas
Yonack Services Forney, Texas
Gold Metal Recyclers Dallas, Texas
Spectrum Metal Recycling Houston, Texas
Accurate Iron & Metal Franklin Park, Illinois
138 Scrap Inc. Riverdale, Illinois
</TABLE>

The Potential Acquisitions include acquisitions for which the Company has
executed a binding acquisition agreement or a binding or non-binding letter of
intent. Each Potential Acquisition is subject to a number of conditions which
may or may not be satisfied (see Note 2). There can be no assurance that all or
any of these acquisitions will be consummated.

ACQUISITION STRATEGY

The Company believes that similar to the solid waste industry, the scrap
metal recycling industry has recently begun to experience market consolidation
due to, among other things: (i) significant capital requirements caused by
expanding equipment needs and by more stringent environmental regulations; and
(ii) the desire of owners of independent scrap metal processors to sell
closely-held businesses to companies with access to public capital markets.

The Company seeks to acquire significant processors of scrap metal in large
metropolitan markets which will serve as regional platform companies and to
follow these acquisitions with "tuck-in" acquisitions of smaller processors.
MTLM believes that this consolidation strategy will allow the Company to improve
its operating margins and profitability by: (i) increasing its market share,
which is expected to enhance customer relationships and enhance supply
capabilities; (ii) spreading the cost of management and administrative staff,
and utilizing equipment and other assets, across larger operations; and (iii)
transferring technology and best demonstrated processing and marketing
strategies among acquired recycling operations. The Company is continuously
evaluating acquisition opportunities.

15
<PAGE> 18

RESULTS OF OPERATIONS

The Company's results of operations for the three and nine months ended
December 31, 1997 include the operations of the Acquired Companies since the
effective date of each respective acquisition. The Company's results of
operations during the three and nine months ended December 31, 1996 only include
the operations of EMCO which was acquired in April 1996.

Consolidated net sales for the three months ended December 31, 1997 and
1996 in broad product categories were as follows ($ in thousands):

<TABLE>
<CAPTION>
12/31/97 (FISCAL 1998) 12/31/96 (FISCAL 1997)
--------------------------- --------------------------
COMMODITY WEIGHT NET SALES % WEIGHT NET SALES %
--------- ------ --------- - ------ --------- -
<S> <C> <C> <C> <C> <C> <C>
Ferrous metals (tons)................... 577,718 $ 67,771 54% 31,620 $ 3,114 30%
Non-ferrous metals (pounds in 000's).... 37,590 20,028 16 15,375 7,186 69
Brokerage (tons)........................ 283,401 36,938 29 -- -- --
Other................................... -- 1,270 1 -- 102 1
-------- --- ------- ---
$126,007 100% $10,402 100%
======== === ======= ===
</TABLE>

Consolidated net sales for the nine months ended December 31, 1997 and 1996
in broad product categories were as follows ($ in thousands):

<TABLE>
<CAPTION>
12/31/97 (FISCAL 1998) 12/31/96 (FISCAL 1997)
--------------------------- --------------------------
COMMODITY WEIGHT NET SALES % WEIGHT NET SALES %
--------- ------ --------- - ------ --------- -
<S> <C> <C> <C> <C> <C> <C>
Ferrous metals (tons)................... 1,252,472 $147,763 52% 103,520 $12,764 32%
Non-ferrous metals (pounds in 000's).... 99,752 56,008 20 56,875 27,021 67
Brokerage (tons)........................ 672,776 74,723 26 -- -- --
Other................................... -- 4,859 2 -- 559 1
-------- --- ------- ---
$283,353 100% $40,344 100%
======== === ======= ===
</TABLE>

Net sales were $126.0 million and $283.4 million in the three and nine
month periods ended December 31, 1997 as compared to $10.4 million and $40.3
million in the year ago comparable periods. The increase in net sales is
principally due to acquisitions which have closed during fiscal 1998.

Ferrous sales represented 54% and 52% of consolidated net sales for the
three and nine months ended December 31, 1997, respectively, as compared to 30%
and 32% of consolidated net sales in the comparable prior period. The increase
in ferrous sales, both in tons sold and as a percentage of total net sales, is
due to the acquisitions of HouTex, Reserve, Isaac, Proler and Cozzi, which
primarily sell ferrous metals.

Non-ferrous sales represented 16% and 20% of consolidated net sales for the
three and nine months ended December 31, 1997, respectively, as compared to 69%
and 67% of consolidated net sales in the comparable prior period. The decrease
in percentage of non-ferrous sales is due to the acquisitions of HouTex,
Reserve, Isaac, Proler and Cozzi, which sell mainly ferrous metals. The increase
in pounds of non-ferrous metals sold is primarily due to the acquisition of
MacLeod, which mainly sells non-ferrous metals.

A portion of Reserve, Isaac and Cozzi's business involves the brokering of
scrap iron and other metals for sale to foundries, mills and other brokers.
Brokered metals are shipped directly to the customer from the supplier, thereby,
eliminating processing costs and inventory holding costs. Brokerage revenues are
principally derived from ferrous metals. For the three and nine months ended
December 31, 1997, the Company realized a 4% and 5% gross profit margin,
respectively, on brokered sales. Gross margins on brokered sales will vary
depending on the type of metals and markets in which metals are brokered.

Consolidated gross profit represented 9% and 10% of consolidated net sales
for the three and nine months ended December 31, 1997, respectively, versus 4%
and 8% for the comparable prior periods. Results for the three and nine months
ended December 31, 1996 only reflect the operations of EMCO which operated in a
particularly competitive market during the comparable prior periods with
substantial productive inefficiencies.

16
<PAGE> 19

The price of scrap metal is affected by regional and seasonal variations.
Furthermore, prices for scrap metal are also impacted by broad and global
cyclical movements and as such equilibrates supply and demand.

Consolidated general and administrative expenses were $6.4 million (5% of
net sales) and $14.6 million (5% of net sales) for the three and nine months
ended December 31, 1997, respectively, versus $1.2 million (11% of net sales)
and $3.9 million (10% of net sales) for the comparable prior periods. The
increase in general and administrative expenses in absolute dollar amounts
reflects the administrative expenses incurred principally at the operations of
the Company's recent acquisitions. Corporate overhead has also increased due to
additions in corporate staff and corporate expenses to support the acquisition
strategy the Company is pursuing. The reduction in general and administrative
expenses as a percent of consolidated net sales reflects the large scale of
operations at Reserve, Isaac and Cozzi that provides for more efficient
allocation of administrative expenses.

Depreciation and amortization expense was $3.1 million and $6.7 million for
the three and nine months ended December 31, 1997, respectively, versus $.3
million and $1.2 million for the comparable prior periods. The increase is
attributed to goodwill amortization and depreciation of fixed assets arising
from the acquisitions completed since the fourth quarter of fiscal 1997.

During the quarter ended December 31, 1997, the Company recorded the
following non-recurring pre-tax charges totaling $25.5 million (in thousands),
(See Note 3):

Interest expense was $2.6 million and $6.2 million for the three and nine
months ended December 31, 1997, respectively, versus $224,000 and $674,000 for
the comparable prior periods. This increase is principally due to the issuance
of promissory notes to certain of the sellers of the Acquired Companies and the
assumption of debt associated with the acquisitions of the Acquired Companies.

Income from joint ventures was $32,000 and $195,000 for the three and nine
month periods ended December 31,1997, respectively, as compared to $0 and $0 in
the prior year comparable periods. The increase represents income from interests
in three joint ventures which have been acquired in the Reserve and Cozzi
acquisitions which closed during fiscal 1998.

Other income increased to $314,000 and $562,000 for the three and nine
month periods ended December 31, 1997, respectively, versus $42,000 and $151,000
in the prior year comparable periods. This increase is primarily attributed to
the gain on sale of fixed assets and interest income.

Income tax benefit for the three and nine months ended December 31, 1997
was $3.8 million and $3.2 million, respectively, which yields an effective tax
rate of 13% for the nine months ended December 31, 1997. The effective tax rate
differs from the statutory rate primarily due to the permanent difference
represented by non-deductible goodwill amortization and certain non-deductible,
non-recurring expenses recorded during the quarter.

Net loss from continuing operations, after preferred stock dividends and
non-cash beneficial conversion feature of convertible preferred stock, was $27.9
million, or $1.35 per share, for the three months ended December 31, 1997
compared to a loss of $1.1 million, or $0.13 per share, for the three months
ended December 31, 1996. For the nine months ended December 31, 1997, net loss
from continuing operations, after preferred stock dividends, non-cash beneficial
conversion feature of convertible preferred stock and accretion was $27.8
million, or $1.73 per share, versus a loss of $2.1 million, or $0.24 per share,
for the nine months ended December 31, 1996. Net loss from continuing operations
excluding the non-recurring charges and the one-time non-cash dividend charge
was $.7 million, or $0.03 per share, and $.5 million, or $0.03 per share,
respectively, for the three and nine months ended December 31, 1997 compared
with a loss of $1.1 million, or

17
<PAGE> 20

$0.13 per share, and $2.1 million, or $0.24 per share, respectively, for the
three and nine month periods ended December 31, 1996.

Loss from discontinued operations was $42,000, or $0.00 per share, for the
three months ended December 31, 1997 compared to income of $25,000, or $0.00 per
share, for the comparable prior period. For the nine months ended December 31,
1997, income from discontinued operations was $166,000, or $0.01 per share,
compared to $319,000, or $0.04 per share, for the comparable prior period.
Income during the current fiscal year mainly reflects the royalty income
recognized by the Company from the sale of its Spectra*Star business, net of
certain expenses incurred. The three and nine months ended December 31, 1996
includes the full operation of the Spectra*Star business through its sale in
July 1996, and the related gain recognized on the sale of the Spectra*Star
business.

LIQUIDITY AND CAPITAL RESOURCES

The Company will continue to pursue acquisitions in the scrap metal
recycling industry and anticipates financing these acquisitions through a
combination of cash and the issuance of debt and equity. The Company will
require substantial capital to fund future acquisitions and current operations.
There can be no assurance that any additional financing will be available on
terms acceptable to the Company, if at all.

Nine Months Ended December 31, 1997 to Nine Months Ended December 31, 1996

Cash Flows from Continuing Operations. The Company generated $3.3 million
of cash flows from continuing operations during the nine months ended December
31, 1997 versus $1.0 million of cash flows from operating activities which were
used in the comparable period in 1996. The increase mainly reflects cash flows
generated from operations acquired during fiscal 1998.

Cash Flows from Investing Activities. During the nine months ended December
31, 1997, the Company purchased approximately $4.4 million of property and
equipment and utilized cash of approximately $23.2 million for the acquisitions
of and transaction costs related to acquisitions completed during the period.
Management anticipates the Company will continue to make acquisitions, make
capital expenditures for new equipment, and upgrade and expand existing
equipment and facilities. The Company expects that these expenditures may
increase in the future due to internal and external growth of the Company.

Cash Flows from Financing Activities. During the nine months ended December
31, 1997, the Company issued 3,495,588 shares of restricted Common Stock and
warrants to purchase 600,000 shares in two private offerings which aggregated
$39.7 million and received proceeds from the issuance of 45,000 shares of Series
A Preferred Stock and Series B Preferred Stock which aggregated $42.9 million
(collectively, the "Private Placements"). The proceeds from the Private
Placements were used to fund the acquisitions of Reserve, Proler and Cozzi and
used to pay debt associated with the acquisitions of MacLeod, HouTex and Isaac.
The Company also repaid a $6.5 million term loan from a commercial bank. The
Company anticipates growing through acquisitions and will require additional
debt or equity to fund its potential and future acquisitions.

Cash Flows from Discontinued Operations. The Company's cash flows from
discontinued operations for the nine months ended December 31, 1997 reflects
royalty income recognized from the sale of the Spectra*Star business. Cash flows
during the comparable period last year reflect the cash generated by the
operations of the Spectra*Star business as well as the proceeds related to the
sale of the Spectra*Star business.

FINANCIAL CONDITION

The Company's principal sources of funding are its existing cash and cash
equivalents balances, collection of accounts receivable and proceeds from lines
of credit and other borrowings. At December 31, 1997, the Company had $30.1
million in cash and cash equivalents compared with cash and cash equivalents of
$5.7 million at March 31, 1997.

18
<PAGE> 21

Significant Cash Transactions During the Nine Months ended December 31, 1997

During the nine months ended December 31, 1997, the Company completed
certain significant debt and equity transactions. The Company raised
approximately $39.7 million in cash from the issuance of restricted Common Stock
and raised approximately $42.9 million in cash from the issuance of convertible
preferred stock (see Note 5 and Note 6). The Company utilized a portion of the
cash to pay approximately $20.6 million of notes which were issued in connection
with the acquisitions of MacLeod, HouTex and Isaac, to pay a $6.5 million term
loan from a commercial bank and to fund $19.4 million of the cash consideration
for the acquisitions of Reserve, Proler and Cozzi.

Significant Cash Transactions since December 31, 1997

On January 8, 1998, the Company repaid $8.1 million of short term notes
issued in the Proler acquisition. On January 20, 1998, the Company paid
approximately $14.4 million to acquire substantially all of the assets of
Aerospace Metals, Inc. On February 13, 1998, the Company made payments of
approximately $12.8 million on notes issued in connection with the Isaac
acquisition.

Cash Requirements for Potential Acquisitions

In connection with each of the Company's Potential Acquisitions, the
Company has agreed that the cash portion (excluding transaction costs) of the
purchase price will not exceed (in thousands):

<TABLE>
<S> <C>
Superior................................................... $ 5,000
Goldin Companies........................................... 7,150
Atlas Recycling............................................ 2,760
Yonack Iron & Metal........................................ 10,880
Yonack Services............................................ 350
Gold Metal Recyclers....................................... 2,650
Other...................................................... 550
-------
Total................................................. $29,340
=======
</TABLE>

There can be no assurance that any of these acquisitions will close. The
Company's existing cash and cash equivalents will not be sufficient to fund all
of these acquisitions and ongoing working capital needs. The Company is seeking
other financing sources to meet such obligations but no assurances can be
provided that such financing will be available when needed, or that, if
available, it will be on satisfactory terms.

Working Capital Availability and Requirements

Accounts receivable balances increased from $9.6 million at March 31, 1997
to $85.9 million at December 31, 1997 primarily as a result of the acquisitions
completed by the Company since March 31, 1997. Accounts payable increased from
$5.2 million at March 31, 1997 to $53.8 million at December 31, 1997 primarily
as a result of such acquisitions.

Inventory levels vary at each of the Company's subsidiaries based on levels
determined by managers of each respective subsidiary. Inventory on hand
consisted of the following ($ in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1997
----------------- ---------------
COMMODITY VALUE % VALUE %
--------- ----- - ----- -
<S> <C> <C> <C> <C>
Ferrous metals............................................. $36,319 84% $2,707 32%
Non-ferrous metals......................................... 6,374 15% 4,754 57%
Other...................................................... 657 1% 954 11%
------- --- ------ ---
$43,350 100% $8,415 100%
======= === ====== ===
</TABLE>

The increase in value of inventory at December 31, 1997 is primarily due to
the acquisitions of Reserve, Isaac and Cozzi which mainly sell ferrous metals
and carry significant amounts of inventory.
19
<PAGE> 22

Property and equipment increased from $20.2 million at March 31, 1997 to
$94.5 million at December 31, 1997, as a result of the recent acquisitions and
increased capital expenditures at the Company's businesses. The Company expects
to make substantial investments in additional equipment and property for
expansion, for replacement of assets, and in connection with future
acquisitions.

At December 31, 1997, the Company and its wholly-owned subsidiaries had
outstanding borrowings with commercial lenders under various short-term and
long-term revolving lines of credit in the aggregate principal amount of $7.6
million and $47.5 million, respectively. The facilities provide for revolving
credit at interest rates that range from 0% to 2.25% in excess of the lenders'
prime or LIBOR rates. The Company's ability to borrow additional amounts under
the lines of credit is based primarily on its accounts receivable and inventory
balances. At December 31, 1997, the Company had approximately $12.5 million
available under its various lines of credit. Additionally, the Company entered
into a $14.0 million credit facility through Aerospace on January 30, 1998.

Scrap metal recycling companies have substantial ongoing working capital
and capital equipment requirements in order to continue to operate and grow. For
example, through December 31, 1997, the Company advanced approximately $7.2
million to EMCO for working capital and equipment requirements. As a result, the
Company will seek equity or debt financing to fund future improvements and
expansion of its scrap metal recycling businesses as well as to make other
acquisitions of scrap metal recycling facilities. There can be no assurance that
such financing will be available when needed, or that, if available, it will be
on satisfactory terms. The failure to obtain financing may cause the Company to
default on certain existing debt obligations and would hinder the Company's
ability to make continued investments in capital equipment and pursue
expansions, which could materially adversely affect its results of operations
and financial condition. Any equity financing which is undertaken will result in
dilution to the then-existing stockholders of the Company. See "Factors
Influencing Future Results and Accuracy of Forward-Looking Statements --
Potential Substantial Dilution to Existing Stockholders; Registration Rights."

The Company is in the process of reviewing existing computer software
systems at its recently acquired operations, and in connection with that process
is analyzing whether or not the Company faces a "Year 2000" problem, a problem
that is expected to arise with respect to computer programs that use only two
digits to identify a year in the date field, and which were designed and
developed without considering the impact of the upcoming change in the century.
Although the Company has not yet made a final determination as to whether the
various computer systems at its operations will give rise to a "Year 2000"
problem, the Company believes that any such problem, if it arises in the future,
should not be material to the Company's operations.

FACTORS INFLUENCING FUTURE RESULTS AND
ACCURACY OF FORWARD-LOOKING STATEMENTS

In the normal course of its business, the Company, in an effort to help
keep its stockholders and the public informed about the Company's operations,
may from time to time issue or make certain statements, either in writing or
orally, that are or contain forward-looking statements, as that term is defined
in the U.S. federal securities laws. Generally, these statements relate to
business plans or strategies, projected or anticipated benefits from
acquisitions made by or to be made by the Company, or projections involving
anticipated revenues, earnings, or other aspects of operating results. The words
"expect," "believe," "anticipate," "project," "estimate," and similar
expressions are intended to identify forward-looking statements. The Company
cautions readers that such statements are not guarantees of future performance
or events and are subject to a number of factors that may tend to influence the
accuracy of the statements and the projections upon which the statements are
based, including but not limited to those discussed below. As noted elsewhere in
this report, all phases of the Company's operations are subject to a number of
uncertainties, risks, and other influences, many of which are outside the
control of the Company, and any one of which, or a combination of which, could
materially affect the results of the Company's operations and whether forward-
looking statements made by the Company ultimately prove to be accurate.

20
<PAGE> 23

The following discussion outlines certain factors that could affect the
Company's consolidated results of operations for fiscal 1998 and beyond and
cause them to differ materially from those that may be set forth in
forward-looking statements made by or on behalf of the Company.

POTENTIAL INABILITY TO CONTROL OR MANAGE GROWTH OR TO SUCCESSFULLY INTEGRATE
ACQUIRED BUSINESS

The Company intends to actively pursue acquisitions and mergers in the
scrap metal recycling industry. There can be no assurance that the Company will
be successful in acquiring other entities or that it will be able to effectively
manage these acquired entities. The Company's ability to achieve its expansion
objectives and to manage its growth effectively depends on a variety of factors,
including the ability to identify appropriate acquisition targets and to
negotiate acceptable terms for their acquisition, the integration of new
businesses into the Company's operations, the achievement of cost savings and
the availability of capital. The inability to control or manage growth
effectively or to successfully integrate future new businesses into the
Company's operations would have a material adverse effect on the Company's
results of operations and financial condition. Depending on the nature and size
of these transactions, if any, the Company may experience working capital and
liquidity shortages. There can be no assurance that additional financing will be
available on terms and conditions acceptable to the Company, if at all.

RECENT CHANGE IN STRATEGIC DIRECTION AND LIMITED OPERATING HISTORY

The Company has undergone a significant change in strategic direction and
emphasis in the last twelve to eighteen months. Given this substantial change,
past financial performance should not be considered a reliable indicator of
future performance and historical trends should not be used to anticipate
results or trends in future periods. Prior to the EMCO merger in April 1996, the
Company had no history of operations in the scrap metal recycling industry. Due
to the limited experience of management in effecting a consolidation strategy,
there can be no assurance that the Company will be able to successfully effect
its consolidation strategy even if the Company is able to acquire other entities
on acceptable terms and conditions. In addition, until being acquired by the
Company, none of the Completed Acquisitions, the Potential Acquisitions nor, in
some cases, potential future acquisitions have or will have previously operated
as subsidiaries of a public holding company subject to formal accounting and
reporting requirements. The Company will be required to continue devoting
additional management time and capital to enhance information systems and to
improve and monitor internal controls, as well as to recruit managers with
appropriate skills to insure the timeliness and accuracy of financial reports.
Further, the Company's management has limited experience in executing
consolidation strategies on the scale being pursued by the Company. The success
of the consolidation strategy depends in part on the ability of the Company's
management to oversee diverse operations and to successfully integrate
processing, marketing and other resources.

POTENTIAL INABILITY TO COMPLETE POTENTIAL ACQUISITIONS

From time to time the Company engages in discussions with third parties
regarding potential acquisitions of companies or businesses in the same or
substantially similar lines of business as the Company. If the parties are able
to agree generally on the nature, terms and conditions of a transaction, a
letter of intent is prepared to reflect this understanding. In many cases, these
letters of intent are structured as "binding intents" to purchase the business,
although each letter is still subject to a number of terms and conditions
including but not limited to negotiation and execution of definitive purchase
agreements. In addition, each potential acquisition may be subject to additional
contingencies specific to that acquisition. There can be no assurance that any
such potential acquisition will result in execution of a definitive agreement or
that such acquisition will be completed on terms and conditions acceptable to
the Company, if at all.

LACK OF CAPITAL AND LEVERAGE

Implementing the Company's aggressive acquisition strategy requires
substantial amounts of capital. For example, to complete the Potential
Acquisitions, the Company needs to fund the cash portions of the purchase
consideration, approximately $29.4 million. There can be no assurance that
sufficient funds for these

21
<PAGE> 24

acquisitions will become available on acceptable terms, if at all. Failure to
raise sufficient capital when required or needed could adversely affect the
Company's results of operations and financial condition.

The Company intends to continue its strategy of financing its acquisitions
in part by incurring indebtedness to sellers of acquired entities. This method
of financing may require the Company to agree to certain restrictions on its
operations which may adversely effect the Company's ability to integrate the
acquired entities into the Company's structure. For example, in connection with
the Proler, Isaac and Reserve acquisitions, the Company incurred short-term
indebtedness to the sellers of these entities. These short-term notes restricted
the Company's ability to unilaterally direct or control the operations of
Proler, Isaac or Reserve until the notes were repaid. Failure to repay similar
notes that the Company may issue in the future would have a material adverse
effect on the Company's results of operations and financial condition and could
cause the Company to cede control in or ownership of the acquired entity. As of
December 31, 1997, the Company had approximately $214.1 million of total
liabilities, including approximately $63.2 million of indebtedness owed in
connection with the acquisitions of MacLeod, Reserve, Isaac, Proler and Cozzi.
The degree to which the Company is leveraged could have adverse consequences to
the Company including the following: (i) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired; (ii)
a substantial portion, if not all, of the Company's cash flow will be required
to pay principal and interest; and (iii) the Company will be more vulnerable to
an economic downturn in the scrap metal recycling industry which has
historically been sensitive to changes in general economic conditions.

FAILURE TO COMPLY OR THE COST OF COMPLYING WITH ENVIRONMENTAL LAWS

The Company is subject to extensive Federal, State and local laws,
including various rules and regulations relating to environmental matters.
Failure to comply, or the cost of complying, with these rules and regulations
could have a material adverse effect on the Company's results of operations and
financial condition. For a discussion of these rules and regulations as well as
others governing the Company's business, see "Environmental Matters".

ABILITY OF CERTAIN INDIVIDUALS TO IMPACT OWNERSHIP AND GOVERNANCE OF THE COMPANY

Pursuant to a stockholder's agreement (the "Stockholders Agreement"),
between Albert A. Cozzi, Frank J. Cozzi, Gregory P. Cozzi (collectively, the
"Cozzi Shareholders"), Samstock, L.L.C. ("Samstock"), T. Benjamin Jennings,
Gerard M. Jacobs, and the Company, the Company's Board of Directors is comprised
of five directors nominated by the Cozzi Shareholders and five directors
nominated by Messrs. Jacobs and Jennings, and one director nominated by
Samstock. Further, the Cozzi Shareholders, Samstock and Messrs. Jacobs and
Jennings own approximately 46% of the Company's issued and outstanding shares of
Common Stock. The Cozzi Shareholders, Samstock and Messrs. Jacobs and Jennings
have significant influence on the outcome of all matters (including the election
of directors and future mergers, acquisitions or sale of assets) and may be
deemed to have effective control over the affairs and management of the Company.
This influence may not be consistent with the interests of the Company's
stockholders. Further, the changes made in the Company's governance structure to
effect the merger with Cozzi and the private equity placement to Samstock are
examples of the Company's willingness to rapidly change the management and
governance of the Company if necessary or desirable. There can be no assurance
that recent changes in management and governance or those that may occur in
connection with subsequent acquisitions or mergers will be favorable and in the
best interests of the Company's stockholders.

The parties to the Stockholders Agreement also have agreed to vote for
proposals, if and when presented by the Company, to amend the Company's
organizational documents to require the approval of at least two-thirds of the
Board of Directors to, among other things: (i) amend the Company's certificate
of incorporation or bylaws; (ii) liquidate or merge the Company; (iii) sell
substantially all of the Company's assets; (iv) elect or remove officers; (v)
adopt an annual budget; (vi) borrow funds, sell assets or make capital
expenditures exceeding $5 million; (vii) issue or register the Company's
securities; or (viii) declare or pay any dividends or distributions. If the
Company's organizational documents are amended to reflect these restrictions,
and the Directors cannot agree on the Company's strategic direction, a minority
of four dissenting Directors could
22
<PAGE> 25

prevent the Company from taking any of the actions listed above. Should the
Board be unable to act because a minority of dissenting Directors prevents the
Board from taking a significant action, this could have a material adverse
effect on the Company's results of operations and financial condition.

CYCLICALITY OF OPERATING RESULTS/OPERATING LOSSES

The operating results of the scrap metal recycling processing industry in
general, and the Company's operations specifically, are highly cyclical in
nature as they tend to reflect and be amplified by general economic conditions.
In periods of national recession or periods of minimal economic growth, the
operations of scrap metal recycling companies have been materially adversely
affected. For example, during recessions or periods of minimal economic growth,
the automobile and the construction industries typically experience major
cutbacks in production, resulting in decreased demand for steel, copper and
aluminum and significant fluctuations in demand and pricing for the Company's
products. Future economic downturns in the national economy would materially and
adversely affect the Company's results of operations and financial condition.
The ability of the Company to withstand significant economic downturns in the
future will depend in part on the level of the Company's capital and liquidity.

The Company's EMCO subsidiary has incurred operating losses and required
capital infusions since the April 1996 merger which led to the Company's
decision to establish a formal plan to shutdown EMCO's operations. There can be
no assurance that the Company will not be required to provide additional funding
to its Phoenix operations. Further, there can be no assurance that existing or
future subsidiaries will not require similar infusions, or that the Company will
be able to provide such fundings if needed. The need to provide this funding or
the inability to do so could have a material adverse effect on the Company's
results of operations and financial condition.

FAILURE TO ACQUIRE JOINT VENTURE INTEREST

The Company is a member of, with a 50% interest, in a limited liability
company with operations in Memphis, Tennessee (PerlCo). The Company has signed a
binding letter of intent to acquire the remaining 50% interest in the PerlCo
joint venture. However, there can be no assurance that the Company will acquire
the remaining interest. If the Company is unable to acquire the joint venture
interest, then the Company may be unable to realize some of the operational
efficiencies anticipated in connection with the merger with Cozzi and may be
prohibited by the agreements governing the joint venture from taking actions
with respect to the joint ventures' assets or liabilities that may be in the
Company's best interest.

DEPENDENCE ON SCRAP SUPPLIERS

The profitability of the Company's scrap recycling operations depends, in
part, on the availability of an adequate source of supply. The Company acquires
its scrap inventory from numerous sources. These suppliers typically are not
bound by long-term contracts and have no obligation to continue sending scrap
materials to the Company. Decisions by a substantial number of scrap suppliers
to cease sending scrap materials to the Company would have a material adverse
effect on the Company's results of operations and financial condition.

CONCENTRATION OF CUSTOMERS AND CREDIT RISK

The Company's five largest customers represented approximately 30.1% of
consolidated revenues for the nine months ended December 31, 1997. Accounts
receivable balances from these customers represented approximately 26.7% of
consolidated accounts receivable at December 31, 1997. The loss of any one of
the Company's significant customers, could adversely affect the Company's
results of operations and financial condition.

In connection with the sale of the Company's products, the Company
generally does not require collateral as security for customer receivables.
Certain of the Company's subsidiaries have significant balances owing from
customers that operate in cyclical industries and under leveraged conditions
that may impair the collectibility of these receivables. Failure to collect
amounts due on these receivables could have a material adverse effect on the
Company's results of operations and financial condition.
23
<PAGE> 26

POTENTIAL SUBSTANTIAL DILUTION TO EXISTING STOCKHOLDERS; REGISTRATION RIGHTS

The Company's Amended Certificate of Incorporation authorizes the issuance
of: (i) 80,000,000 shares of Common Stock, of which 30,633,809 are issued and
outstanding as of February 9, 1998; (ii) 4,000,000 shares of "blank check"
preferred stock, of which 59,000 have been designated as either Series A or
Series B Preferred Stock and 45,000 of which are issued and outstanding as of
February 9, 1998. The Company's board of directors has the authority to issue
additional shares of common or preferred shares, or securities convertible or
exercisable into such shares such as options or warrants, as the case may be for
a variety of purposes including as consideration for additional acquisitions.
These additional shares may be issued, or be subject to exercise, at prices
below prevailing market prices of the Common Stock or at prices below the
Company's book value. Common Stock sold at such a discount would result in
dilution to the then-existing Stockholders of the Company as well as reduce each
Stockholders' percentage interest in the Company. Further, the Company may issue
additional shares of preferred stock on terms and conditions which may
discourage, impede or prevent a merger, tender offer or proxy contest even
though such an event may be favorable to the interest of stockholders as a
whole. On January 14, 1998, the Company had a registration statement on Form S-3
declared effective. On February 9, 1998, the Company filed a registration
statement which has not yet been declared effective. The registration statements
and any subsequent registration statements will increase substantially the
number of shares available for sale in the public market and may have an adverse
impact on the market price of the Common Stock.

VOLATILITY OF TRADING PRICE

The trading price of the Common Stock has been, and in the future is
expected to be, volatile and subject to market fluctuation as a result of a
number of factors, including, but not limited to, merger and acquisition
announcements and developments, current and anticipated results of operations,
future product offerings by the Company or its competitors and factors unrelated
to the operating performance of the Company. The trading price of the Company's
Common Stock may also vary as a result of changes in the business, operations,
prospects or financial results of the Company, general market and economic
conditions, additional future proposed acquisitions by the Company and other
factors. Failure in any fiscal quarter to meet the investment community's
revenues or earnings expectations, if any, could have an adverse impact on the
trading price of the Common Stock, as could sales of large amounts of Common
Stock by existing Stockholders. In addition, sales of substantial amounts of the
Company's Common Stock in the public market could adversely affect the market
price of the Company's Common Stock. In the event the market price of Common
Stock were adversely affected by such sales, the Company's access to equity
capital markets could be adversely affected and issuances of Common Stock in
connection with acquisitions, or otherwise, could dilute future earnings per
share. Management believes that the Company's stock price reflects an assumption
that the Potential Acquisitions will be completed. If the Potential Acquisitions
are not completed, the trading price of the Common Stock could be adversely
affected.

POTENTIAL RESTRICTIONS ON MERGERS AND OTHER ACTIONS

Section 203 of the Delaware General Corporation Law (the "Delaware Business
Combination Statute") prohibits, under certain circumstances, "business
combinations" between a Delaware corporation whose stock is publicly-traded and
an "interested stockholder" of such corporation. The provisions prohibiting
"business combinations" could delay or frustrate the removal of incumbent
directors or a change in control of the Company. The provisions also could
discourage, impede, or prevent a merger, tender offer or proxy contest, even if
such event would be favorable to the interest of stockholders. In addition, the
Company's certificate of incorporation authorizes the issuance of 4,000,000
shares of undesignated preferred stock (the "Preferred Stock"), which the Board
of Directors may cause the Company to issue in one or more series. The Board of
Directors has designated 36,000 shares and 23,000 shares, respectively, of the
Preferred Stock for issuance as Series A Convertible Preferred Stock ("Series A
Preferred Stock") and Series B Convertible Preferred Stock ("Series B Preferred
Stock"). The Board of Directors has the authority to fix the number of shares of
Preferred Stock and determine or alter for each series, the voting powers,
designations, preferences and rights of such shares. If the Company should ever
issue Preferred Stock in addition to the Series A and Series B

24
<PAGE> 27

Preferred Stock, such Preferred Stock could contain voting or other rights which
could discourage, impede, or prevent a merger, tender offer or proxy contest
which could be favorable to the interests of the stockholders.

So long as shares of Series A Preferred Stock or Series B Preferred Stock
are outstanding, the Company is required, subject to certain limitations, to
obtain the prior approval of the holders of at least a majority of all shares of
the applicable Series of Preferred Stock outstanding at the time before: (i)
increasing the authorized number of shares of such Series of Preferred Stock;
(ii) altering or changing the rights, preferences or privileges of such Series
of Preferred Stock or any other capital stock of the Company so as to adversely
affect such Series of Preferred Stock; or (iii) creating any new class or series
of capital stock having a preference over such Series of Preferred Stock as to
distribution of assets upon liquidation, dissolution or winding up of the
Company. This restriction could prevent the Company from taking actions which
could be favorable to the interests of the stockholders.

ENVIRONMENTAL MATTERS

COMPREHENSIVE REGULATORY REQUIREMENTS.

The Company is subject to significant government regulation including
stringent environmental laws and regulations. Among other things, these laws and
regulations impose comprehensive local, state, federal, foreign and
supranational statutory and regulatory requirements concerning, among other
matters, the treatment, acceptance, identification, storage, handling,
transportation and disposal of industrial by-products, hazardous and solid waste
materials, waste water, storm water effluent, air emissions, soil contamination,
surface and ground water pollution, employee health and safety, operating permit
standards, monitoring and spill containment requirements, zoning, and land use,
among others. Various laws and regulations set prohibitions or limits on the
release of contaminants into the environment. Such laws and regulations also
require permits to be obtained and manifests to be completed and delivered in
connection with any shipment of prescribed materials so that the movement and
disposal of such material can be traced and the persons responsible for any
mishandling of such material can be identified. This regulatory framework
imposes significant compliance burdens, costs and risks on the Company.
Violation of such laws and regulations may give rise to significant liability to
the Company, including fines, damages, fees and expenses.

Releases of certain industrial by-products and waste materials are subject
to particular laws and regulations. Although the specific provisions of laws and
regulations related to such releases vary among jurisdictions, such laws and
regulations typically require that the relevant authorities be notified
promptly, that the release be cleaned up promptly, and that remedial action be
taken by the responsible party and/or owner of the site to restore the
environment to levels protective of human health and the environment. Generally,
the governmental authorities are empowered to act to clean up and remediate
releases and environmental damage and to charge the costs of such cleanup to one
or more of the owners of the property, the person responsible for the spill, the
generator of the contaminant and certain other parties or to direct the
responsible party to take such action. These authorities may also impose a tax
or other liens to secure the parties' reimbursement obligations. Environmental
laws and regulations impose strict operational requirements on the performance
of certain aspects of hazardous or toxic substances remedial work. These
requirements specify complex methods for identification, monitoring, storage,
treatment and disposal of waste materials managed during a project. Failure to
meet these requirements could result in substantial fines and other penalties.

Environmental legislation and regulations have changed rapidly in recent
years, and it is likely that the Company will be subject to even more stringent
environmental standards in the future. For example, the ultimate effect on the
Company of the regulations to be implemented under the Clean Air Act Amendments
of 1990 (the "Clean Air Act"), and the actual amount of any capital expenditures
required thereby, will depend on how the Clean Air Act is interpreted and
implemented pursuant to regulations that are currently being developed and on
additional factors such as the evolution of environmental control technologies
and the economic viability of these technologies. For these reasons, future
capital expenditures for environmental control facilities cannot be predicted
with accuracy; however, one may expect that environmental control standards will
become increasingly stringent and that the expenditures necessary to comply with
them could increase substantially.

25
<PAGE> 28

Local, state, federal, foreign and supranational governments and agencies
have also from time to time proposed or adopted other types of laws, regulations
or initiatives with respect to the scrap metal recycling industry, including
laws, regulations and initiatives intended to ban or restrict the intrastate,
interstate or international shipment of wastes, to impose higher taxes or fees
on certain shipments of waste, or to classify or reclassify certain categories
of non-hazardous wastes as hazardous. Certain local, state, federal, foreign and
international governments and agencies have promulgated "flow control" or other
regulations, which attempt to require that all waste (or certain types of waste)
generated within the jurisdiction in question must go to certain disposal sites.
From time to time legislation is considered that would enable or facilitate such
laws, regulations or initiatives. Due to the complexity of regulation of the
industry and to public and political pressure, implementation of existing or
future laws, regulations or initiatives by different levels of governments may
be inconsistent and are difficult to foresee.

The Company requires, and must comply with, various permits and licenses to
conduct its operations. Government agencies continually monitor compliance with
these permits or licenses and the Company's facilities are subject to periodic
unannounced inspection by local, state and federal authorities. Violations of
any permit or license, if not remedied, could result in the Company incurring
substantial fines, suspension of operations or closure of a site.

Governmental authorities have a wide variety of powerful administrative
enforcement actions and remedial orders available to cause compliance with
environmental laws or to remedy or punish violations of such laws. Such orders
may be directed to various parties, including present or former owners or
operators of the concerned sites, or parties that have or had control over the
sites. In certain instances, fines and treble damages may be imposed. In the
event that administrative actions fail to cure a perceived problem or where the
relevant regulatory agency so desires, an injunction or temporary restraining
order or damages may be sought in a court proceeding. Some laws give private
parties the right, in addition to existing common laws claims, to file claims
for injunctive relief or damages against the owners or operators of the site.

The Company believes that with heightened legal, political and citizen
awareness and concerns, all companies in the scrap metal recycling industry may
be faced, in the normal course of operating their businesses, with fines and
penalties and the need to expend substantial funds for capital projects,
remedial work and operating activities, such as environmental contamination
monitoring, soil removal, groundwater treatment, creation of engineered
barriers, establishing institutional controls and related activities. Regulatory
or technological developments relating to the environment may require companies
engaged in the scrap metal recycling industry to modify, supplement or replace
equipment and facilities at costs which may be substantial. Because the scrap
metal recycling industry has the potential for discharge of materials into the
environment, a material portion of the capital expenditures by the Company is
expected to relate, directly or indirectly, to such equipment and facilities.
Moreover, it is possible that future developments, such as increasingly strict
requirements of environmental laws and regulations, and enforcement policies
will require even more significant capital investments in this regard.

Due to the nature of the scrap metal recycling business, it is possible
that inquiries or claims based upon environmental laws may be made in the future
by governmental bodies or individuals against the Company and any other scrap
metal recycling entities that the Company may acquire. The location of the
Company's facilities in large urban areas may increase the risk of scrutiny and
claims. The Company is unable to predict whether any such future inquiries or
claims will in fact arise or the outcome of such matters. Additionally, it is
not possible to predict the total size of all capital expenditures or the amount
of any increases in operating costs or other expenses that may be incurred by
the Company to comply with the environmental requirements applicable to the
Company and its operations, or whether these costs can be passed on to customers
through product price increases. Moreover, environmental legislation has been
enacted, and may in the future be enacted, to create liability for past actions
that were lawful at the time taken but that have been found to affect the
environment and to create public rights of action for environmental conditions
and activities. As is the case with scrap recyclers in general, if damage to
persons or the environment has been caused, or is in the future caused, by
hazardous materials activities of the Company, the Company may be fined and held
liable for such damage. In addition, the Company may be required to remedy such
conditions and/or change procedures. Thus, there can be no assurance that
potential liabilities, expenditures, fines and penalties associated with
26
<PAGE> 29

environmental laws and regulations will not be imposed on the Company in the
future or that such liabilities, expenditures, fines or penalties will not have
a material adverse effect on the Company's results of operations and financial
condition.

In addition, public interest groups, local citizens, local municipalities
and other persons or organizations may have a right to seek judicial relief for
purported violations of law. In some jurisdictions, recourse to the courts by
individuals under common law principles such as trespass or nuisance have been
or may be enhanced by legislation providing members of the public with statutory
rights of action to protect the environment. In such cases, even if a scrap
metal recycling facility is operated in full compliance with applicable laws and
regulations, local citizens and other persons and organizations may seek
compensation for damages allegedly caused by the operation of the facility. In
some cases, the operation of scrap metal recycling facilities is subjected to
heightened public scrutiny because of residential or other non-industrial
property uses that have developed around such facilities. So-called "Not In My
Backyard" ("NIMBY") grass roots community opposition to such facilities can
materially interfere with such facilities' on-going operations and growth.

SIGNIFICANT POTENTIAL ENVIRONMENTAL LIABILITY

The Company is subject to potential liability and may also be required from
time to time to clean up or take certain remedial action with regard to sites
currently or formerly used in connection with its operations. Furthermore, the
Company may be required to pay for all or a portion of the costs to clean up or
remediate sites the Company never owned or on which it never operated if it is
found to have arranged for transportation, treatment or disposal of pollutants
or hazardous or toxic substances on or to such sites. The Company also is
subject to potential liability for environmental damage that their assets or
operations may cause nearby landowners, particularly as a result of any
contamination of drinking water sources or soil, including damage resulting from
conditions existing prior to the acquisition of such assets or operations. Any
substantial liability for environmental damage could materially adversely affect
the operating results and financial condition of the Company, and could
materially adversely affect the marketability and price of the Company's stock.

INCOMPLETENESS OF SITE INVESTIGATIONS

As part of its pre-transaction "due diligence" investigations, the Company
typically hires an environmental consulting firm to conduct transaction screen
reviews, or Phase I and/or Phase II site assessments of the sites owned or
leased by particular acquisition or merger candidates (the "Pre-Transaction Site
Assessments"). However, such Pre-Transaction Site Assessments have not covered
(and will not in the future cover) all of the sites owned or leased by the
companies which are acquired by or merge with the Company. Moreover, such
Pre-Transaction Site Assessments which have occurred have not been designed or
expected (and will not in the future be designed or expected) to disclose all
material contamination or liability that may be present. For example, the
Company does not include soil sampling or core borings as a standard part of its
Pre-Transaction Site Assessments, even though such sampling and core borings
might increase the chances of finding contamination on a particular site.
Failure to conduct soil sampling and core borings on a particular site could
result in the Company failing to identify a seriously contaminated site prior to
an acquisition or merger, and could materially adversely affect the Company.

Likelihood of Contamination at Some Sites

Pre-Transaction Site Assessments of the Company's current sites conducted
by independent environmental consulting firms have revealed that some soil,
surface water and/or groundwater contamination is likely at certain of these
sites, and have recommended that certain additional investigations and
remediation be conducted. Based upon its review of these reports, the Company
believes that it is likely that contamination exists at certain of its sites and
that it is likely that additional investigation, monitoring and remediation will
be required at some of the sites. Also based upon its review of these reports,
the Company believes that such contamination is likely to include, but not be
limited to: polychlorinated biphenyls (PCBs); total petroleum hydrocarbons;
volatile organic compounds (VOCs); antimony; arsenic; cadmium; copper; lead;
mercury; silver; zinc; waste oil; toluene; meta-and para-xylenes; baghouse dust;
and/or aluminum dross. The ultimate extent of such contamination cannot be
stated with any certainty at this point, and there can be no assurance

27
<PAGE> 30

that the cost of remediation will be immaterial. The existence of such
contamination could result in federal, state, local or private enforcement or
cost recovery actions against the Company, possibly resulting in disruption of
Company operations, the need for proactive remedial measures, and substantial
fines, penalties, damages, costs and expenses being imposed against the Company.

The Company expects to require future cash outlays as it incurs costs
relating to the remediation of environmental liabilities. The incurrence of
these costs may have a material adverse effect on the Company's results of
operation and financial condition.

In connection with the acquisition of the assets of Aerospace, the Company
has identified certain on-site soils contamination which will require
remediation in accordance with a remediation plan prepared by an independent
engineering firm. The costs of such remediation will be paid by the seller of
the assets of Aerospace from an escrow fund established for such purpose out of
the purchase consideration paid by the Company for such assets.

Uncertain Costs of Environmental Compliance and Remediation

Many factors affect the level of expenditures the Company will be required
to make in the future to comply with environmental requirements, including: (i)
new local, state and federal laws and regulations; (ii) the developing nature of
administrative standards promulgated under Superfund and other environmental
laws, and changing interpretations of such laws; (iii) uncertainty regarding
adequate control levels, testing and sampling procedures, new pollution control
technology and cost benefit analysis based on market conditions; (iv) the
incompleteness of information regarding the condition of certain sites; (v) the
lack of standards and information for use in the apportionment of remedial
responsibilities; (vi) the numerous choices and costs associated with diverse
technologies that may be used in remedial actions at such sites; (vii) the
possible ability to recover indemnification or contribution from third parties;
and (viii) the time periods over which eventual remediation may occur. The
estimated costs, and the timing of such costs, for future environmental
compliance (capital expenditures or increases in operating costs or other
expenditures) and remediation cannot be accurately predicted and are necessarily
imprecise; however, such costs could be material to future quarterly or annual
results of operations of the Company. In addition, it is not possible to predict
whether or not such costs can be passed on to customers through price increases.

Lack of Environmental Impairment Insurance

The Company does not carry environmental impairment liability insurance.
The Company operates under general liability insurance policies which does not
cover environmental damage. If the Company were to incur significant liability
for environmental damage not covered by environmental impairment insurance, or
for other claims in excess of its general liability insurance and umbrella
coverage, the Company's results of operations and financial condition could be
materially adversely affected.

Risks Associated With Certain By-Products

Although the majority of the Company's metal products are currently exempt
from applicable solid waste regulations, the Company's scrap metal recycling
operations produce significant amounts of by-products. Heightened environmental
risk is associated with certain of these by-products. For example, certain of
the Company's subsidiaries operate shredders for which the primary feed
materials are automobile hulks and obsolete household appliances. Approximately
20% of the weight of an automobile hulk consists of material (shredder fluff)
which remains after the segregation of ferrous and saleable non-ferrous metals.
Federal environmental regulations require shredder fluff to pass a toxic
leaching test to avoid classification as a hazardous waste. The Company
endeavors to have hazardous contaminants removed from the feed material prior to
shredding and as a result the Company believes the shredder fluff generated is
properly not considered a hazardous waste. Should the laws, regulations or
testing methods change with regard to shredder fluff disposal, the Company may
incur additional significant expenditures.

28
<PAGE> 31

Potential Superfund Liabilities

(a) The Company's Reserve, Cozzi and Kankakee subsidiaries have received
notices from the United States Environmental Protection Agency (the "EPA") that
Reserve, Cozzi and Kankakee and numerous other parties are considered
potentially responsible parties (a "PRP") and may be obligated under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("Superfund" or "CERCLA") to pay a portion of the cost of remedial
investigation, feasibility studies and ultimately remediation to correct alleged
releases of hazardous substances at the Standard Scrap Metal/Chicago
International Exporting Removal Action Site. Superfund may impose joint and
several liability for the costs of remedial investigations and actions on the
entities that arranged for disposal of certain wastes, the waste transporters
that selected the disposal sites, and the owners and operators of such sites.
Responsible parties (or any one of them) may be required to bear all of such
costs regardless of fault, legality of the original disposal, or ownership of
the disposal site. Based upon their analysis of the situation, the managements
of Reserve, Cozzi and Kankakee currently do not expect their aggregate potential
liability to be in excess of $175,000. There can be no assurance, however, that
their aggregate potential liability may not be greater than $175,000.

(b) Cozzi has received a notice from the EPA that Cozzi is a PRP under
Superfund in regard to the site referred to as H&H Recycling in Gary, Indiana.
Cozzi is not currently in a position to determine its potential liability in
regard to this site. There can be no assurance that such potential liability
will not be material.

(c) Cozzi was served in a private cost recovery action alleging that Cozzi
is a PRP under Superfund in regard to the site referred to as Gould Battery Site
in Pennsylvania. Based upon its analysis of the situation, including transaction
documentation and indemnifications, Cozzi currently expects that its ultimate
liability in regard to this matter will be de minimus, but there can be no
assurance this will be the case.

Underground Storage Tanks

Underground storage tanks (UST's) exist at several of the Company's sites.
UST's are subject to various federal, state and local laws on their operation.
In the event a release of regulated product has occurred, the Company may incur
significant costs to investigate and remediate the release.

Employee Health and Safety Issues

The Company's operations are also subject to regulation by federal, state
and local agencies responsible for employee health and safety, including the
Occupational Safety and Health Act (the "OSHA"). A total of four accidental
deaths of, and two serious accidental injuries to, employees have occurred at
the Company's Cozzi, HouTex and Reserve subsidiaries during the past three
years. Cozzi and Reserve have been fined by OSHA in regard to such incidents.
HouTex has also been cited and fined by OSHA for alleged failure to establish
energy control procedures and employee training in regard to mobile shearing
equipment. No assurance can be given that potential liabilities of the Company
in regard to such death and injuries, or in regard to any future deaths of or
injuries to the Company's employees will not be material.

Recommendations of Environmental Consultants

Environmental consultants to the Company have recommended that a variety of
remedial actions be undertaken, including: the sampling of soil, surface and
ground water at its various facilities; the remediation of any existing
contamination under applicable regulations; the development of Spill Prevention
Control and Countermeasure Plans ("SPCC"); the completion of certain actions in
regard to Storm Water Pollution Prevention Plans; the timely completion and/or
filing of certain annual reports and summaries required by governmental
agencies; the completion of Oil Discharge and Response Plans; and the
remediation of certain materials suspected of containing asbestos. If the
Company fails to follow these recommendations for an indefinite period of time,
one or more of the sites might, potentially, be subject to a governmental
enforcement action, the imposition of fines, penalties and damages, and/or
require remediation at some future time at a cost which may have an adverse
effect on the Company's results of operations and financial condition.

29
<PAGE> 32

Compliance History

The Company has, in the past, been found not to be in compliance with
certain environmental laws and regulations, and has incurred fines associated
with such violations which have not been material in amount and may in the
future incur additional fines associated with such violations. The Company has
also paid a portion of the costs of certain remediation actions at certain
sites. No assurance can be given that material fines, penalties, damages and
expenses resulting from additional compliance issues and liabilities will not be
imposed on the Company in the future.

30
<PAGE> 33

PART II -- OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

The Company's Reserve subsidiary is currently involved in a legal
proceeding in which Reserve Iron & Metal Limited Partnership (a Delaware Limited
Partnership) and P. Joseph Iron & Metal, Inc. (its sole general partner) are
named as defendants. The court in which such proceedings are pending and the
date of the proceeding is: George Abboud v. Reserve Iron & Metal Limited
Partnership, Cuyahoga County Court of Common Pleas, Case No. 304772, George
Abboud v. P. Joseph Iron & Metal, Inc., Cuyahoga County Court of Common Pleas,
Case No. 304772, March 27, 1996.

Claimant George Abboud has alleged that Reserve Iron & Metal, as his
employer, intentionally required Mr. Abboud to work under conditions in which an
injury to Mr. Abboud was substantially certain to occur. Reserve Iron & Metal
has denied this allegation and believes evidence will show that Mr. Abboud
negligently performed his work, which caused his injury. Claimant George Abboud
seeks money damages in an amount in excess of $25,000 to be determined at trial.
No trial date has been set. Discovery is still pending.

Certain of the sellers of Reserve (the "Indemnifying Parties") have agreed
to indemnify the Company and its affiliates against a portion of specified
potential liabilities. As is customary with certain types of potential
liabilities, Reserve's insurance carriers have accepted the defense of Reserve,
but have done so subject to reserving their respective rights to deny coverage
under certain circumstances. Assuming, for hypothetical purposes, that insurance
coverage would not be available or would be inadequate, such potential
liabilities, were they to become actual liabilities, could be significant. Any
amounts payable by the Indemnifying Parties will be funded by reducing the
purchase price note owed by the Company and/or by increasing the exercise price
on warrants issued to such Indemnifying Parties as part of the original terms of
the Purchase Agreement and the ten-year employment agreements, respectively.
With reference to these certain potential liabilities, Reserve has advised the
Company it believes it has adequate insurance coverage and has denied any
liability for these potential liabilities. There can be no assurance, however,
that Reserve will not suffer actual liability or that it will have adequate
insurance to cover the liability and in such case, the Company could be
materially and adversely affected.

ITEM 2: CHANGES IN SECURITIES

Each of the private placements of stock described below was made to a
limited number of investors, including accredited investors, in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act (See
Note 5 to Consolidated Condensed Financial Statements).

In connection with the Company's acquisition of Cozzi on December 1, 1997,
the Company issued 11,499,986 shares of unregistered Common Stock valued at
$65.9 million and warrants to purchase 750,001 shares of unregistered Common
Stock at an exercise price of $5.91 per share and 750,001 shares of unregistered
Common Stock at an exercise price of $15.84 per share. A total of 11,404,748
shares of unregistered Common Stock and warrants to purchase 1,500,002 shares
were collectively issued to Albert A. Cozzi, Frank J. Cozzi and Gregory P.
Cozzi, directors of the Company.

On December 1, 1997, the Company issued 20,000 shares of Series B
Convertible Preferred Stock, par value $.01 per share (stated value of $1,000
per share), to two institutional investors for an aggregate purchase price of
$20.0 million. The net proceeds received by the Company from the institutional
investors was approximately $19.1 million.

On December 1, 1997, the Company issued warrants to purchase 1,975,000
shares of unregistered Common Stock at exercise prices ranging from $4.00 per
share to $26.00 per share. Warrants to purchase 725,000 shares of unregistered
Common Stock were issued each to T. Benjamin Jennings and Gerard M. Jacobs,
directors of the Company. Warrants to purchase 100,000 shares of unregistered
Common Stock were issued to Donald F. Moorehead, a director of the Company.

31
<PAGE> 34

In connection with the Company's acquisition of Kankakee Scrap Corporation
on December 18, 1997, the Company issued 155,000 shares of unregistered Common
Stock valued at $368,000.

On December 19, 1997, the Company issued to Samstock, L.L.C. ('Samstock"),
a Delaware limited liability company, 1,470,588 shares of unregistered Common
Stock, pursuant to a Securities Purchase Agreement (the "Purchase Agreement")
between the Company and Samstock. The Company also issued to Samstock a Warrant
(the "Warrant") exercisable at any time prior to December 18, 2002 for: (i)
400,000 unregistered shares of Common Stock at an exercise price of $20.00 per
Share; and (ii) 200,000 unregistered shares at an exercise price of $23.00 per
Share. The aggregate proceeds received by the Company was $24,999,996.

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a) The Annual Meeting of the Stockholders of the Company was held on
November 29, 1997.

(b) The following directors were elected at the Annual Meeting of
Stockholders: Albert A. Cozzi, Frank J. Cozzi, Gregory P. Cozzi, George A. Isaac
III, Gerard M. Jacobs, T. Benjamin Jennings, Christopher G. Knowles, Donald F.
Moorehead, William T. Proler and Harold Rubenstein.

(c) Of the 16,550,079 shares entitled to vote, 12,192,339 shares were
represented at the meeting by proxy or present in person. The stockholders
considered the following matters:

<TABLE>
<CAPTION>
ABSTENTIONS
AND BROKER
PROPOSAL FOR AGAINST WITHHELD NON-VOTES
-------- --- ------- -------- -----------
<C> <S> <C> <C> <C> <C>
1. Election of Directors:
a. Albert A. Cozzi............................ 12,184,839 7,500 0 4,357,740
b. Frank J. Cozzi............................. 12,184,839 7,500 0 4,357,740
c. Gregory P. Cozzi........................... 12,184,839 7,500 0 4,357,740
d. George A. Isaac III........................ 12,184,839 7,500 0 4,357,740
e. Gerard M. Jacobs........................... 12,184,839 7,500 0 4,357,740
f. T. Benjamin Jennings...................... 12,184,839 7,500 0 4,357,740
g. Christopher G. Knowles.................... 12,184,839 7,500 0 4,357,740
h. Donald F. Moorehead........................ 12,184,839 7,500 0 4,357,740
i. William T. Proler......................... 12,184,839 7,500 0 4,357,740
j. Harold Rubenstein......................... 10,422,189 1,770,150 0 4,357,740
2. Election of Price Waterhouse as independent
auditors.................................... 12,192,339 0 0 4,357,740
3. Approve merger agreement with Cozzi Iron &
Metal....................................... 12,192,339 0 0 4,357,740
4. Increase authorized Common Stock from
40,000,000 to 80,000,000.................... 12,192,339 0 0 4,357,740
5. Increase authorized shares of "blank check"
preferred stock from 2,000,000 to
4,000,000................................... 12,184,829 7,510 0 4,357,740
6. Increase number of shares authorized under the
1995 Stock Plan from 1,300,000 to
2,600,000................................... 11,881,533 7,510 303,296 4,357,740
7. Increase number of shares authorized under the
Director option plan from 100,000 to
200,000..................................... 11,881,533 7,510 303,296 4,357,740
8. Approve issuance of Common Stock upon
conversion of Series A Preferred Stock and
Series B Preferred Stock.................... 12,192,339 0 0 4,357,740
9. Ratify issuance of previously issued Common
Stock....................................... 11,881,533 7,500 303,306 4,357,740
10. Eliminate cumulative voting................... 9,748,483 2,140,560 303,296 4,357,740
</TABLE>

32
<PAGE> 35

<TABLE>
<CAPTION>
ABSTENTIONS
AND BROKER
PROPOSAL FOR AGAINST WITHHELD NON-VOTES
-------- --- ------- -------- -----------
<C> <S> <C> <C> <C> <C>
11. Amend Series A Preferred Stock Designations... 11,889,033 10 303,296 4,357,740
</TABLE>

ITEM 5: OTHER INFORMATION

On January 15, 1998, Rod Dammeyer joined the Company's board of directors.

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

See Exhibit Index

(b) Reports on Form 8-K

The following reports on Form 8-K were filed during the third quarter
of fiscal 1998:

(1) Form 8-K dated October 24, 1997 relating to the
reclassification of amounts received from the sale of Series A Preferred
Stock.

(2) Form 8-K dated December 1, 1997 relating to the Company's
acquisition of Cozzi Iron & Metal, Inc. and the issuance of 20,000
shares of Series B Preferred Stock.

(3) Form 8-K dated December 18, 1997 relating to the Company's
private equity placement with Samstock L.L.C.

33
<PAGE> 36

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

METAL MANAGEMENT, INC.

By: /s/ GERARD M. JACOBS
------------------------------------
Gerard M. Jacobs
Director and
Chief Executive Officer

By: /s/ T. BENJAMIN JENNINGS
------------------------------------
T. Benjamin Jennings
Director, Chairman of the Board and
Chief Development Officer

By: /s/ ROBERT C. LARRY
------------------------------------
Robert C. Larry
Vice President, Finance and
Chief Financial Officer

Date: February 17, 1998

34
<PAGE> 37

METAL MANAGEMENT, INC.

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
2.1 Agreement and Plan of Merger dated May 16, 1997 (as amended)
among Cozzi and its shareholders, the Company and CIM
Acquisition, Co. (incorporated by reference to Annex A to
the Company's Proxy Statement dated November 20, 1997).
3.1 Amendment to Certificate of Designations, Preferences and
Rights of Series A Convertible Preferred Stock of the
Registrant (incorporated by reference to Exhibit 3.3 of the
Registrant's report on Form 8-K dated October 24, 1997).
3.2 Certificate of Amendment of Certificate of Incorporation of
the Company, dated December 2, 1997 and filed with the
Secretary of State of Delaware on December 3, 1997
(incorporated by reference to Exhibit 3.1 of the
Registrant's report on Form 8-K dated December 1, 1997).
3.3 Certificate of Designations, Preferences and Rights of
Series B Convertible Preferred Stock of the Company dated
November 20, 1997 and filed with the Secretary of State of
Delaware on November 20, 1997 (incorporated by reference to
Exhibit 3.2 of the Registrant's report on Form 8-K dated
December 1, 1997).
4.1 Warrant, dated December 19, 1997, issued by the Company to
Samstock, L.L.C. exercisable for an aggregate of 600,000
Shares of Common Stock (incorporated by reference to Exhibit
4.1 of the Registrant's report on Form 8-K dated December
18, 1997).
4.2 Shelf Registration Rights Agreement, dated December 19,
1997, by and between the Company and Samstock, L.L.C
(incorporated by reference to Exhibit 4.2 of the
Registrant's report on Form 8-K dated December 18, 1997).
4.3 Amended and Restated Registration Rights Agreement, dated
December 19, 1997, by and among the Company and T. Benjamin
Jennings, Gerard M. Jacobs, Albert A. Cozzi, Frank J. Cozzi,
Gregory P. Cozzi and Samstock, L.L.C (incorporated by
reference to Exhibit 4.1 of the Registrant's report on Form
8-K dated December 18, 1997).
4.4 Registration Rights Agreement, dated December 18, 1997, by
and among the Company and Ronald I. Romano, Lolita A.
Romano, Ronald T. Romano and Ryan E. Romano (incorporated by
reference to Exhibit 4.4 of the Registrant's report on Form
8-K dated December 18, 1997).
10.1 Form of Stock Warrant Settlement Agreement, dated as of
November 7, 1997, by and among the Company, EMCO Recycling
Corp., a wholly-owned subsidiary of the Company, and George
O. Moorehead (incorporated by reference to Exhibit 10.1 of
the Registrant's report on Form 8-K dated December 1, 1997).
10.2 Form of Letter regarding Separation Agreement dated as of
November 7, 1997 between the Company and George O. Moorehead
(incorporated by reference to Exhibit 10.2 of the
Registrant's report on Form 8-K dated December 1, 1997).
10.3 Form of Non-Compete, Non-Solicitation and Confidentiality
Covenant and Agreement, dated as of November 7, 1997, by and
between the Company and George O. Moorehead (incorporated by
reference to Exhibit 10.3 of the Registrant's report on Form
8-K dated December 1, 1997).
10.4 Securities Purchase Agreement, dated as of November 20,
1997, by and among the Company, Proprietary Convertible
Investment Group, Inc., and Capital Ventures International
(incorporated by reference to Exhibit 10.4 of the
Registrant's report on Form 8-K dated December 1, 1997).
10.5 Registration Rights Agreement, dated as of November 20,
1997, by and among the Company, Proprietary Convertible
Investment Group, Inc., and Capital Ventures International
(incorporated by reference to Exhibit 10.5 of the
Registrant's report on Form 8-K dated December 1, 1997).
</TABLE>

35
<PAGE> 38
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
10.6 Employment Agreement, dated December 1, 1997, by and between
T. Benjamin Jennings and the Company (incorporated by
reference to Exhibit 10.6 of the Registrant's report on Form
8-K dated December 1, 1997).
10.7 Warrant to purchase 350,000 shares of Common Stock at an
exercise price of $12.00 per share, dated December 1, 1997,
issued by the Company to T. Benjamin Jennings (incorporated
by reference to Exhibit 10.7 of the Registrant's report on
Form 8-K dated December 1, 1997).
10.8 Warrant to purchase 375,000 shares of Common Stock at an
exercise price of $5.91 per share, dated December 1, 1997,
issued by the Company to T. Benjamin Jennings (incorporated
by reference to Exhibit 10.8 of the Registrant's report on
Form 8-K dated December 1, 1997).
10.9 Employment Agreement, dated December 1, 1997, by and between
Gerard M. Jacobs and the Company (incorporated by reference
to Exhibit 10.9 of the Registrant's report on Form 8-K dated
December 1, 1997).
10.10 Warrant to purchase 350,000 shares of Common Stock at an
exercise price of $12.00 per share, dated December 1, 1997
issued by the Company to Gerard M. Jacobs (incorporated by
reference to Exhibit 10.10 of the Registrant's report on
Form 8-K dated December 1, 1997).
10.11 Warrant to purchase 375,000 shares of Common Stock at an
exercise price of $5.91 per share, dated December 1, 1997,
issued by the Company to Gerard M. Jacobs (incorporated by
reference to Exhibit 10.11 of the Registrant's report on
Form 8-K dated December 1, 1997).
10.12 Employment Agreement, dated December 1, 1997, by and between
Albert A. Cozzi and the Company (incorporated by reference
to Exhibit 10.12 of the Registrant's report on Form 8-K
dated December 1, 1997).
10.13 Warrant to purchase 377,586 shares of Common Stock at an
exercise price of $5.91 per share, dated December 1, 1997,
issued by the Company to Albert A. Cozzi (incorporated by
reference to Exhibit 10.13 of the Registrant's report on
Form 8-K dated December 1, 1997).
10.14 Warrant to purchase 377,586 shares of Common Stock at an
exercise price of $15.84 per share, dated December 1, 1997,
issued by the Company to Albert A. Cozzi (incorporated by
reference to Exhibit 10.14 of the Registrant's report on
Form 8-K dated December 1, 1997).
10.15 Employment Agreement, dated December 1, 1997, by and between
Frank J. Cozzi and the Company (incorporated by reference to
Exhibit 10.15 of the Registrant's report on Form 8-K dated
December 1, 1997).
10.16 Warrant to purchase 291,380 shares of Common Stock at an
exercise price of $5.91 per share, dated December 1, 1997,
issued by the Company to Frank J. Cozzi (incorporated by
reference to Exhibit 10.16 of the Registrant's report on
Form 8-K dated December 1, 1997).
10.17 Warrant to purchase 291,380 shares of Common Stock at an
exercise price of $15.84 per share, dated December 1, 1997,
issued by the Company to Frank J. Cozzi (incorporated by
reference to Exhibit 10.17 of the Registrant's report on
Form 8-K dated December 1, 1997).
10.18 Employment Agreement, dated December 1, 1997, by and between
Gregory P. Cozzi and Cozzi Iron & Metal, Inc (incorporated
by reference to Exhibit 10.18 of the Registrant's report on
Form 8-K dated December 1, 1997).
10.19 Warrant to purchase 81,035 shares of Common Stock at an
exercise price of $5.91 per share, dated December 1, 1997,
issued by the Company to Gregory P. Cozzi (incorporated by
reference to Exhibit 10.19 of the Registrant's report on
Form 8-K dated December 1, 1997).
10.20 Warrant to purchase 81,035 shares of Common Stock at an
exercise price of $15.84 per share, dated December 1, 1997,
issued by the Company to Gregory P. Cozzi. (incorporated by
reference to Exhibit 10.20 of the Registrant's report on
Form 8-K dated December 1, 1997).
</TABLE>

36
<PAGE> 39
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
10.21 Securities Purchase Agreement, dated December 19, 1997, by
and between the Company and Samstock, L.L.C. (incorporated
by reference to Exhibit 10.1 of the Registrant's report on
Form 8-K dated December 18, 1997).
10.22 Amended and Restated Stockholders Agreement, dated December
19, 1997, by and among T. Benjamin Jennings, Gerard M.
Jacobs, Albert A. Cozzi, Frank J. Cozzi, Gregory P. Cozzi,
Samstock, L.L.C. and the Company (incorporated by reference
to Exhibit 10.2 of the Registrant's report on Form 8-K dated
December 18, 1997).
11.1 Computation of net income (loss) per share.
27.1 Financial Data Schedule.
</TABLE>

<PAGE> 1

EXHIBIT 11.1

METAL MANAGEMENT, INC.

COMPUTATION OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Earnings:
Net loss from continuing operations
applicable to Common Stock............. $(27,946) $(1,160) $(27,792) $(2,071)
Gain (loss) on sale of discontinued
operations............................. (42) 179 166 317
Net income (loss) from discontinued
operations............................. 0 (154) 0 2
-------- ------- -------- -------
Net loss applicable to Common Stock....... $(27,988) $(1,135) $(27,626) $(1,752)
======== ======= ======== =======
Basic earnings per share:
Weighted average shares outstanding......... 20,664 8,940 16,032 8,775
======== ======= ======== =======
Per share amounts:
Net loss from continuing operations
applicable to Common Stock............. $ (1.35) $ (0.13) $ (1.73) $ (0.24)
Gain (loss) on sale of discontinued
operations............................. (0.00) 0.02 0.01 0.04
Net income (loss) from discontinued
operations............................. 0.00 (0.02) 0.00 0.00
-------- ------- -------- -------
Net loss applicable to Common Stock....... $ (1.35) $ (0.13) $ (1.72) $ (0.20)
======== ======= ======== =======
Diluted earnings per share:
Weighted average shares outstanding......... 20,664 8,940 16,032 8,775
Common stock equivalents and other
potentially dilutive securities (1)....... 0 0 0 0
-------- ------- -------- -------
Total.................................. 20,664 8,940 16,032 8,775
======== ======= ======== =======
Per share amounts:
Net loss from continuing operations
applicable to Common Stock............. $ (1.35) $ (0.13) $ (1.73) $ (0.24)
Gain (loss) on sale of discontinued
operations............................. (0.00) 0.02 0.01 0.04
Net income (loss) from discontinued
operations............................. 0.00 (0.02) 0.00 0.00
-------- ------- -------- -------
Net loss applicable to Common Stock....... $ (1.35) $ (0.13) $ (1.72) $ (0.20)
======== ======= ======== =======
</TABLE>

- -------------------------
(1) For the three months and nine months ended December 31, 1997 and 1996,
common stock equivalents and other potentially dilutive securities were not
added to the weighted average shares outstanding as the result would have
been anti-dilutive.

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 30,134,000
<SECURITIES> 0
<RECEIVABLES> 86,889,000
<ALLOWANCES> 989,000
<INVENTORY> 43,350,000
<CURRENT-ASSETS> 165,736,000
<PP&E> 100,505,000
<DEPRECIATION> 5,973,000
<TOTAL-ASSETS> 436,914,000
<CURRENT-LIABILITIES> 105,453,000
<BONDS> 0
0
43,280,000
<COMMON> 297,000
<OTHER-SE> 179,242,000
<TOTAL-LIABILITY-AND-EQUITY> 436,914,000
<SALES> 283,353,000
<TOTAL-REVENUES> 283,353,000
<CGS> 255,579,000
<TOTAL-COSTS> 255,579,000
<OTHER-EXPENSES> 46,778,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,166,000
<INCOME-PRETAX> (24,413,000)
<INCOME-TAX> (3,165,000)
<INCOME-CONTINUING> (21,248,000)
<DISCONTINUED> 166,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,082,000)
<EPS-PRIMARY> (1.72)
<EPS-DILUTED> (1.72)

</TABLE>