<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: October 5, 1998
(Date of earliest event reported)
METAL MANAGEMENT, INC.
(Exact name of registrant as specified in the charter)
Delaware
(State or other 94-2835068
jurisdiction 0-14836 (IRS Employer
of incorporation) (Commission File No.) Identification No.)
500 North Dearborn Street, Suite 405
Chicago, Illinois 60610
(Address of Principal Executive Offices)
(312) 645-0700
(Registrant's telephone number including area code)
N/A
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 5. OTHER EVENTS.
On May 28, 1998, Metal Management, Inc., a Delaware corporation (the
"Company"), through a wholly owned subsidiary of the Company, merged with R&P
Holdings, Inc., a Delaware corporation ("R&P"), in a transaction accounted for
as a pooling of interests (the "Merger"). The accompanying consolidated
financial statements and Management Discussion and Analysis of Financial
Condition and Results of Operations for the fiscal year ended March 31, 1998
give retroactive effect to the Merger.
As a result of recent adverse market conditions in the steel and metals
sectors and the effect of such conditions on the Company's results of
operations, effective as of September 30, 1998, the Company and its bank group
amended the Company's $250 million Senior Credit Facility to, among other
things, modify the Company's minimum interest coverage test. Pursuant to the
amendment, the Company's interest coverage ratio tests (i) for the quarters
ending September 30, 1998 and December 31, 1998 were replaced with tests of
minimum aggregate six- and nine-month EBITDA amounts, respectively and (ii) for
the quarters ending March 31, 1999 and June 30, 1999 were amended to apply to
only the respective six- and nine-month periods then ended. While the Company
expects to be able to comply with the interest coverage tests, as amended, the
ability of the Company to comply with such tests will be affected by general
economic conditions and conditions in the steel and metals sectors and the other
factors discussed under the heading "Investment Considerations" in the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1998.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) Exhibits
Exhibit 10.1 Amendment No.3A to Credit Agreement
Exhibit 23.1 Consent of Independent Accountants
Exhibit 99.1 Financial Statements
(a) Report of Independent Accountants (dated May 28, 1998,
from Price Waterhouse LLP to the Board of Directors and
Stockholders of the Company)
(b) Consolidated Statements of Operations
(c) Consolidated Balance Sheets
(d) Consolidated Statements of Cash Flows
(e) Consolidated Statements of Stockholders' Equity
(f) Notes to Consolidated Financial Statements
Exhibit 99.2 Management's Discussion and Analysis of Financial
Condition and Results of Operations for the fiscal
year ended March 31, 1998.
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
METAL MANAGEMENT, INC.
By: /s/ Robert C. Larry
-----------------------------------------
Robert C. Larry
Vice President of Finance, Assistant
Secretary, Treasurer and Chief
Financial Officer
Date: October 5, 1998
<PAGE> 4
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DOCUMENT DESCRIPTION PAGE NO.
- ------- -------------------- --------
<S> <C> <C>
10.1 Amendment No. 3A to Credit Agreement
23.1 Consent of Independent Accountants
99.1 Financial Statements
(a) Report of Independent Accountants (dated
May 28, 1998, from Price Waterhouse LLP to
the Board of Directors and Stockholders of
the Company) F-1
(b) Consolidated Statements of Operations F-2
(c) Consolidated Balance Sheets F-3
(d) Consolidated Statements of Cash Flows F-4
(e) Consolidated Statements of Stockholders' Equity F-5
(f) Notes to Consolidated Financial Statements F-6
99.2 Management's Discussion and Analysis of Financial
Condition and Results of Operations for the fiscal year
ended March 31, 1998.
</TABLE>
<PAGE> 1
EXHIBIT 10.1
AMENDMENT NO. 3A
TO
CREDIT AGREEMENT
THIS AMENDMENT NO. 3A TO CREDIT AGREEMENT ("AMENDMENT") is dated as of
September 30, 1998, by and among METAL MANAGEMENT, INC., a Delaware corporation
("MTLM"), each of the corporations and other entities set forth on ANNEX 1
hereto (MTLM and each of such corporations and other entities sometimes
hereinafter are referred to individually as a "BORROWER" and collectively as
"BORROWERS"); MTLM, acting in its capacity as funds administrator for itself and
the other Borrowers (in such capacity, the "FUNDS ADMINISTRATOR"); BT COMMERCIAL
CORPORATION, a Delaware corporation (in its individual capacity, hereinafter
referred to as "BTCC") and the other financial institutions signatories hereto
as lenders (BTCC and each of such other financial institutions hereinafter are
referred to individually as a "LENDER" and collectively as "LENDERS"); and BTCC,
acting in its capacity as agent (in such capacity, hereinafter referred to as
the "AGENT") for itself and the other Lenders. Capitalized terms used herein but
not otherwise defined herein shall have the respective meanings assigned to such
terms in the Credit Agreement.
WITNESSETH:
WHEREAS, the Borrowers, the Funds Administrator, the Agent and the
Lenders have entered into that certain Credit Agreement dated as of March 31,
1998, as amended (the "CREDIT AGREEMENT"), pursuant to which the Lenders have
agreed to make certain loans and other financial accommodations to or for the
account of the Borrowers;
WHEREAS, the Borrowers, the Funds Administrator, the Agent and the
Lenders have entered into that certain Amendment No. 3 to Credit Agreement dated
as of August 7, 1998 (the "THIRD AMENDMENT");
WHEREAS, certain conditions precedent to effectiveness of the Third
Amendment were not satisfied, including, without limitation, consummation of the
"Miller Stock Purchase" and the "Samuels Stock Purchase" (in each case as
defined in the Third Amendment) no later than September 30, 1998, the Third
Amendment did not become effective; and
WHEREAS, the Borrowers, the Agent and the Lenders have agreed to
further amend the Credit Agreement, on the terms and subject to the conditions
hereinafter set forth;
<PAGE> 2
NOW, THEREFORE, in consideration of the premises set forth above, the
terms and conditions contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
respective parties hereto hereby agree as follows:
1. AMENDMENT TO CREDIT AGREEMENT. Effective as of the date hereof, upon
satisfaction of the conditions precedent set forth in SECTION 2 below, and in
reliance upon the representations and warranties of the respective Borrowers and
the Funds Administrator set forth herein, the Credit Agreement is hereby amended
as follows:
1.1 The Credit Agreement is hereby amended by inserting
therein the following language immediately following SECTION 6.23
thereof:
6.24 YEAR 2000. The Borrowers have reviewed the areas
within their respective businesses and operations which could
be adversely affected by, and have developed or are developing
a program to address on a timely basis, the "Year 2000
Problem" (that is, the risk that computer applications and
embedded microchips in non-computing devices used by the
Borrowers may be unable to recognize and perform properly
date-sensitive functions involving certain dates prior to and
any date after December 31, 1999). Based on such review and
program, the Borrowers reasonably believe that the "Year 2000
Problem" will not have a Material Adverse Effect.
1.2 The Credit Agreement is hereby amended by inserting
therein the following language immediately following SECTION 7.15
thereof:
7.16 YEAR 2000. The Borrowers shall provide the Agent
with the such information about its year 2000 computer
readiness (including, without limitation, information as to
contingency plans, budgets and testing results) as the Agent
shall reasonably request.
-2-
<PAGE> 3
1.3 SECTION 8.1 of the Credit Agreement is hereby deleted in
its entirety and the following language is hereby substituted therefor:
8.1 FINANCIAL COVENANTS.
(A) MINIMUM EBITDA. The Borrowers shall not permit
EBITDA, (I) determined as of September 30, 1998, for the six
(6) month period ending as of such date, to be less than
$1,500,000, and (II) determined as of December 31, 1998, for
the nine (9) month period ending as of such date, to be less
than $6,000,000.
(B) MINIMUM INTEREST COVERAGE RATIO. The Borrowers
shall not permit the Interest Coverage Ratio to be less than
1.0 to 1.0, as determined as of: (I) March 31, 1999, for the
six (6) month period ending as of such date; (II) June 30,
1999, for the nine (9) month period ending as of such date;
and (III) September 30, 1999 and the end of each fiscal
quarter of the Consolidated Entity ending thereafter, in each
case for the twelve (12) month period ending as of such date.
1.4 SECTION 8.7(V) of the Credit Agreement is hereby deleted
in its entirety and the following language is hereby substituted
therefor:
(V) so long as, in each case, before and after giving
effect to each such repurchase or redemption, no Default or
Event of Default shall have occurred and be continuing, MTLM
may repurchase or redeem shares of its capital stock and/or
Subordinated Notes (including refinancings thereof) at any
time with Equity Offering Proceeds constituting Unallocated
Equity Offering Proceeds at such time; PROVIDED, that,
concurrently with the making of any repurchase or redemption
with Unallocated Equity Offering Proceeds, the Funds
Administrator shall have delivered to the Agent an Equity
Offering Proceeds Allocation Certificate with respect thereto.
-3-
<PAGE> 4
2. CONDITIONS PRECEDENT. This Amendment shall become effective as of
the date hereof, upon satisfaction of each of the following conditions:
(A) the Agent shall have received six (6) copies of this
Amendment, duly executed by the Majority Lenders, each of the Borrowers
and the Funds Administrator; and
(B) the Agent shall have received in immediately available
funds for the ratable account of the Lenders a fee in the amount of
$100,000.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS.
3.1 Each of the Borrowers and the Funds Administrator
hereby represents and warrants to the Agent and each of the Lenders
that, after giving effect to this Amendment:
(A) All representations and warranties contained in
the Credit Agreement and the other Credit Documents are true
and correct in all material respects on and as of the date of
this Amendment, in each case as if then made, other than
representations and warranties that expressly relate solely to
an earlier date (in which case such representations and
warranties remain true and accurate on and as of such earlier
date);
(B) No Default or Event of Default has occurred which
is continuing;
(C) This Amendment, and the Credit Agreement, as
amended hereby, constitute legal, valid and binding
obligations of the Borrowers and the Funds Administrator,
respectively, and are enforceable against each of the
Borrowers and the Funds Administrator in accordance with their
respective terms; and
(D) The execution and delivery by the Borrowers and
the Funds Administrator of this Amendment does not require the
consent or approval of any Person, except such consents and
approvals as have been obtained.
-4-
<PAGE> 5
4. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER CREDIT
DOCUMENTS.
4.1 Upon the effectiveness of this Amendment, each
reference in the Credit Agreement to "this Agreement", "hereunder",
"hereof", "herein" or words of like import, and each reference in each
of the other Credit Documents to the "Credit Agreement" shall in each
case mean and be a reference to the Credit Agreement as amended hereby.
4.2 Except as expressly set forth herein, (I) the
execution and delivery of this Amendment shall in no way affect any of
the respective rights, powers or remedies of the Agent or any of the
Lenders with respect to any Event of Default nor constitute a waiver of
any provision of the Credit Agreement or any of the other Credit
Documents and (II) all of the respective terms and provisions of the
Credit Agreement, the other Credit Documents and all other documents,
instruments, amendments and agreements executed and/or delivered by any
of the Borrowers and/or the Funds Administrator pursuant thereto or in
connection therewith shall remain in full force and effect and are
hereby ratified and confirmed in all respects. The execution and
delivery of this Amendment by the Agent and each of the Lenders shall
in no way obligate the Agent or any of the Lenders, at any time
hereafter, to consent to any other amendment or modification of any
term or provision of the Credit Agreement or any of the other Credit
Documents, whether of a similar or different nature.
5. GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS
AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL
LAWS AND DECISIONS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICT OF LAWS
PRINCIPLES.
6. HEADINGS. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
7. COUNTERPARTS. This Amendment may be executed in any number of
counterparts and by the different parties hereto in separate counterparts, each
of which when so executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. Any such counterpart
which may be delivered by facsimile transmission shall be deemed the equivalent
of an originally signed counterpart and shall be fully admissible in any
enforcement proceedings regarding this Agreement.
-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their proper and duly authorized officers as of
the date first set forth above.
BT COMMERCIAL CORPORATION, in its
individual capacity as a
Lender and in its capacity as Agent
By: __________________________
Name: ____________________________
Title: ____________________________
HELLER FINANCIAL, INC.
By: __________________________
Name: ____________________________
Title: ____________________________
SANWA BUSINESS CREDIT CORPORATION
By: __________________________
Name: ____________________________
Title: ____________________________
FLEET CAPITAL CORPORATION
By: __________________________
Name: ____________________________
Title: ____________________________
LASALLE NATIONAL BANK
By: __________________________
Name: ____________________________
Title: ____________________________
CONGRESS FINANCIAL CORP. (CENTRAL)
By: __________________________
Name: ____________________________
Title: ____________________________
<PAGE> 7
FINOVA CAPITAL CORPORATION
By: __________________________
Name: ____________________________
Title: ____________________________
NATIONAL CITY COMMERCIAL FINANCE,
INC.
By: __________________________
Name: ____________________________
Title: ____________________________
PNC BUSINESS CREDIT
By: __________________________
Name: ____________________________
Title: ____________________________
IBJ SCHRODER BUSINESS CREDIT
CORPORATION
By: __________________________
Name: ____________________________
Title: ____________________________
NATIONAL BANK OF CANADA
By: __________________________
Name: ____________________________
Title: ____________________________
BANKBOSTON, N.A.
By: __________________________
Name: ____________________________
Title: ____________________________
METAL MANAGEMENT, INC., a Delaware
corporation, in its individual
capacity as a Borrower and in its
capacity as Funds Administrator
By: _______________________________
Name: _____________________________
Title: ____________________________
<PAGE> 8
AEROSPACE METALS, INC.
AMERICAN SCRAP PROCESSING, INC.
BRIQUETTING CORPORATION OF AMERICA
C SHREDDING CORP.
CALIFORNIA METALS RECYCLING, INC.
CIM TRUCKING, INC.
COMETCO CORP.
COZZI BUILDING CORPORATION
COZZI IRON & METAL, INC.
EMCO TRADING, INC.
FERREX TRADING CORPORATION
FIRMA, INC.
FIRMA PLASTIC CO., INC.
HOUSTON COMPRESSED STEEL CORP.
HOUTEX METALS COMPANY, INC.
THE ISAAC CORPORATION
P. JOSEPH IRON & METAL, INC.
KANKAKEE SCRAP CORPORATION
MAC LEOD METALS CO.
METAL MANAGEMENT ARIZONA, INC.
METAL MANAGEMENT REALTY, INC.
PAULDING RECYCLING,INC.
PROLER SOUTHWEST INC.
PROLER STEELWORKS L.L.C.
SALT RIVER RECYCLING, L.L.C.
SCRAP PROCESSING, INC.
SUPERIOR FORGE, INC.
TROJAN TRADING CO.
USA SOUTHWESTERN CARRIER, INC.
138 SCRAP ACQUISITION CORP.
R & P HOLDINGS, INC.
R & P REAL ESTATE, INC.
CHARLES BLUESTONE COMPANY
METAL MANAGEMENT GULF COAST, INC.
NEWELL RECYCLING WEST, INC..
NAPORANO IRON & METAL CO.
NIMCO SHREDDING CO.
MICHAEL SCHIAVONE & SONS, INC.
TORRINGTON SCRAP COMPANY
KIMERLING ACQUISITION CORP.
NICROLOY ACQUISITION CORP.
By: __________________________
Name: _________________________
Title: ________________________
<PAGE> 9
RESERVE IRON & METAL LIMITED
PARTNERSHIP
By: P. JOSEPH IRON & METAL, INC., its
general partner
By: __________________________
Name: _________________________
Title: ________________________
<PAGE> 10
ANNEX 1
TO
AMENDMENT NO. 3A
DATED AS OF SEPTEMBER 30, 1998
OTHER BORROWERS
1. AEROSPACE METALS, INC.
2. AMERICAN SCRAP PROCESSING, INC.
3. BRIQUETTING CORPORATION OF AMERICA
4. C SHREDDING CORP.
5. CALIFORNIA METALS RECYCLING, INC.
6. CIM TRUCKING, INC.
7. COMETCO CORP.
8. COZZI BUILDING CORPORATION
9. COZZI IRON & METAL, INC.
10. EMCO TRADING, INC.
11. FERREX TRADING CORPORATION
12. FIRMA, INC.
13. FIRMA PLASTIC CO., INC.
14. HOUSTON COMPRESSED STEEL CORP.
15. HOUTEX METALS COMPANY, INC.
16. THE ISAAC CORPORATION
17. P. JOSEPH IRON & METAL, INC.
18. KANKAKEE SCRAP CORPORATION
19. MAC LEOD METALS CO.
20. METAL MANAGEMENT ARIZONA, INC.
21. METAL MANAGEMENT REALTY, INC.
22. PAULDING RECYCLING,INC.
23. PROLER SOUTHWEST INC.
24. PROLER STEELWORKS L.L.C.
25. SALT RIVER RECYCLING, L.L.C.
26. SCRAP PROCESSING, INC.
27. SUPERIOR FORGE, INC.
28. TROJAN TRADING CO.
29. USA SOUTHWESTERN CARRIER, INC.
30. RESERVE IRON & METAL LIMITED PARTNERSHIP
31. 138 SCRAP ACQUISITION CORP.
32. R & P HOLDINGS, INC.
33. R & P REAL ESTATE, INC.
34. CHARLES BLUESTONE COMPANY
35. METAL MANAGEMENT GULF COAST, INC.
36. NEWELL RECYCLING WEST, INC..
37. NAPORANO IRON & METAL CO.
38. NIMCO SHREDDING CO.
39. MICHAEL SCHIAVONE & SONS, INC.
40. TORRINGTON SCRAP COMPANY
41. KIMERLING ACQUISITION CORP.
42. NICROLOY ACQUISITION CORP.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-10487), in the Prospectus constituting part of
the Registration Statements on Form S-3 (No. 333-45913 and No. 333-43423) and in
the Prospectus constituting part of the Registration Statement on Form S-4 (No.
333-58875) of Metal Management, Inc., of our report dated May 28, 1998,
appearing in this Form 8-K.
PricewaterhouseCoopers LLP
Chicago, Illinois
October 5, 1998
<PAGE> 1
EXHIBIT-99.1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Metal Management, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of stockholders'
equity present fairly, in all material respects, the financial position of
Metal Management, Inc. and its subsidiaries at March 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the two years
in the period ended March 31, 1998, the five months ended March 31, 1996 and
for the year ended October 31, 1995, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Chicago, Illinois
May 28, 1998
F-1
<PAGE> 2
METAL MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED FIVE MONTHS ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 1995 MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1998
---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
NET SALES $ 112,775 $ 36,366 $ 141,830 $ 570,035
Cost of sales 104,960 34,907 130,423 517,894
-------------- -------------- -------------- --------------
Gross profit 7,815 1,459 11,407 52,141
OPERATING EXPENSES:
General and administrative 6,291 2,311 10,387 28,191
Depreciation and amortization 154 110 2,525 10,271
Non-recurring expenses (Note 5) 0 0 0 33,710
-------------- -------------- -------------- --------------
Total operating expenses 6,445 2,421 12,912 72,172
-------------- -------------- -------------- --------------
Operating income (loss) from continuing
operations 1,370 (962) (1,505) (20,031)
Income (loss) from joint ventures 1,038 (362) 436 370
Interest expense (1,223) (514) (2,304) (9,995)
Interest and other income, net 627 233 363 366
-------------- -------------- -------------- --------------
Income (loss) from continuing operations before
income taxes and discontinued operations 1,812 (1,605) (3,010) (29,290)
Provision (benefit) for income taxes 674 (652) (903) (527)
-------------- -------------- -------------- --------------
Income (loss) from continuing operations 1,138 (953) (2,107) (28,763)
Discontinued operations (Note 4):
Gain on sale of discontinued operations,
net of income taxes 0 0 502 200
Income (loss) from discontinued operations,
net of income taxes (2,698) 22 345 0
-------------- -------------- -------------- --------------
Net loss (1,560) (931) (1,260) (28,563)
Accretion of preferred stock to redemption
value 0 0 0 (57)
Non-cash beneficial conversion feature of
convertible preferred stock 0 0 0 (5,592)
Preferred stock dividends 0 0 0 (1,451)
-------------- -------------- -------------- --------------
Net loss applicable to Common Stock $ (1,560) $ (931) $ (1,260) $ (35,663)
============== ============== ============== ==============
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations $ 0.18 $ (0.15) $ (0.21) $ (1.73)
Gain on sale of discontinued operations 0.00 0.00 0.05 0.01
Income (loss) from discontinued operations (0.44) 0.00 0.04 0.00
-------------- -------------- -------------- --------------
Net loss applicable to Common Stock $ (0.26) $ (0.15) $ (0.12) $ (1.72)
============== ============== ============== ==============
Weighted average shares outstanding 6,160 6,334 10,141 20,762
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations $ 0.18 $ (0.15) $ (0.21) $ (1.73)
Gain on sale of discontinued operations 0.00 0.00 0.05 0.01
Income (loss) from discontinued operations (0.44) 0.00 0.04 0.00
-------------- -------------- -------------- --------------
Net loss applicable to Common Stock $ (0.26) $ (0.15) $ (0.12) $ (1.72)
============== ============== ============== ==============
Weighted average diluted shares outstanding 6,160 6,334 10,141 20,762
Dividends declared per share of Common Stock $ 0.15 $ 0.00 $ 0.00 $ 0.00
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-2
<PAGE> 3
METAL MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
MARCH 31, 1997 MARCH 31, 1998
-------------- --------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,768 $ 4,464
Accounts receivable, net 26,972 122,404
Inventories 13,408 61,942
Prepaid expenses and other assets 2,232 5,961
Deferred taxes 351 2,608
-------------- --------------
Total current assets 48,731 197,379
Property and equipment, net 21,262 109,886
Goodwill and other intangibles, net 23,484 186,503
Investments in joint ventures 622 7,496
Other assets 602 1,162
-------------- ---------------
Total assets $ 94,701 $ 502,426
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Operating lines of credit $ 19,056 $ 0
Accounts payable 13,098 66,845
Other accrued liabilities 2,896 17,076
Current portion of notes payable to related parties 12,575 10,830
Current portion of long-term debt 10,813 1,047
-------------- ---------------
Total current liabilities 58,438 95,798
Long-term notes payable to related parties, less current portion 1,620 31,762
Long-term debt, less current portion 3,974 107,827
Deferred taxes 1,674 11,922
Other liabilities 1,815 2,339
-------------- ---------------
Total liabilities 67,521 249,648
Commitments and contingencies (Note 15)
Stockholders' equity:
Preferred Stock, $.01 par value -- 4,000,000 shares authorized:
Convertible preferred stock -- Series A, $1,000 stated value;
25,759 shares issued; 15,094 shares outstanding 0 13,981
Convertible preferred stock-- Series B, $1,000 stated value;
20,000 shares issued and outstanding 0 19,027
Common Stock, $.01 par value-- 80,000,000 shares authorized;
11,189,566 and 34,080,830 issued and outstanding at March 31,
1997 and 1998, respectively 112 341
Warrants, 2,015,038 and 8,224,540 exercisable into Common
Stock at March 31, 1997 and 1998, respectively 1,351 45,870
Additional paid-in-capital 16,688 200,180
Minimum pension liability (43) (30)
Retained earnings (deficit) 9,072 (26,591)
-------------- ---------------
Total stockholders' equity 27,180 252,778
-------------- ---------------
Total liabilities and stockholders' equity $ 94,701 $ 502,426
============== ===============
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-3
<PAGE> 4
METAL MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED FIVE MONTHS
OCTOBER 31, ENDED YEAR ENDED YEAR ENDED
1995 MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1998
----------- ------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM CONTINUING OPERATIONS:
Net income (loss) from continuing operations $1,138 $ (953) $(2,107) $ (28,763)
Adjustments to reconcile net income (loss)
from continuing operations to cash flows
from continuing operations:
Depreciation and amortization 154 110 2,525 10,271
Non-cash, non-recurring expenses 0 0 0 32,055
Deferred income taxes 601 (63) (1,012) (2,614)
Undistributed partnership earnings (1,038) 362 (436) (370)
Other (25) 5 284 960
Changes in assets and liabilities, net of
acquisitions:
Accounts and notes receivable (8,806) 5,034 (3,982) (1,843)
Inventories (4,176) 3,313 886 17,226
Accounts payable 2,663 (1,635) 790 (21,498)
Other 77 (149) 1,309 (3,430)
------ -------- ------- ---------
Cash flows from continuing operations (9,412) 6,024 (1,743) 1,994
CASH FLOWS PROVIDED (USED) BY INVESTING
ACTIVITIES:
Marketable securities matured 1,524 637 2,794 10
Purchases of property and equipment, net (668) (76) (3,281) (7,569)
Acquisitions, net of cash acquired 0 0 (2,545) (43,905)
Other 867 0 67 675
------ ------- ------- ---------
Net cash provided (used) by investing activities 1,723 561 (2,965) (50,789)
CASH FLOWS PROVIDED (USED) BY FINANCING
ACTIVITIES:
Net borrowings (repayments) on lines-of-credit 277 (44) (1,052) 15,200
Issuances of long-term debt 9,191 0 7,985 21,343
Repayments of long-term debt 0 (5,930) (2,699) (74,546)
Issuances of Common Stock, net 276 288 317 42,196
Issuances of convertible preferred stock, net 0 0 0 42,846
Payment of cash dividends (920) 0 0 0
------ ------- ------- ---------
Net cash provided (used) by financing activities 8,824 (5,686) 4,551 47,039
------ ------- ------- ---------
CASH FLOWS FROM DISCONTINUED OPERATIONS, NET
OF DIVESTITURE PROCEEDS 1,285 (831) 2,751 452
----- ----- ------- ---------
Net increase (decrease) in cash and cash
equivalents 2,420 68 2,594 (1,304)
Cash and cash equivalents at beginning of
period 686 3,106 3,174 5,768
------ ------- ------- ---------
Cash and cash equivalents at end of period $3,106 $ 3,174 $ 5,768 $ 4,464
====== ======= ======= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $1,243 $ 467 $ 1,925 $ 9,719
Income taxes paid (refunded) $ 36 $ (119) $(1,124) $ 2,715
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-4
<PAGE> 5
METAL MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except shares)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------- ------------
NUMBER ADDITIONAL
SERIES SERIES OF PAID-IN-
A B SHARES AMOUNT WARRANTS CAPITAL
-------- -------- ------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1994 $ 0 $ 0 6,132,717 $ 61 $ 0 $ 2,823
Exercise of stock options 0 0 92,000 1 0 244
Pension Plan Adjustment 0 0 0 0 0 0
Common Stock issued under
Employee Stock Purchase Plan 0 0 24,927 0 0 31
Payment of cash dividends 0 0 0 0 0 0
Net loss 0 0 0 0 0 0
---------- ---------- ---------- ---------- ---------- ----------
Balance at October 31, 1995 0 0 6,249,644 62 0 3,098
Exercise of stock options 0 0 108,636 1 0 271
Common Stock issued under
Employee Stock Purchase Plan 0 0 11,199 0 0 16
Pension plan adjustment 0 0 0 0 0 0
Net loss 0 0 0 0 0 0
---------- ---------- ---------- ---------- ---------- ----------
Balance at March 31, 1996 0 0 6,369,479 63 0 3,385
Equity issued for Acquisitions 0 0 4,700,000 47 1,049 12,759
Exercise of stock options 0 0 103,850 2 0 281
Common Stock issued under
Employee Stock Purchase Plan 0 0 16,237 0 0 34
Tax benefit on option exercises 0 0 0 0 0 107
Other 0 0 0 0 302 122
Net loss 0 0 0 0 0 0
---------- ---------- ---------- ---------- ---------- ----------
Balance at March 31, 1997 0 0 11,189,566 112 1,351 16,688
Issuance of preferred stock, net 23,819 19,027 0 0 0 0
Conversion of preferred stock (10,211) 0 1,032,874 10 0 10,971
Issuance of Common Stock and
warrants in private offerings, net 0 0 3,495,588 35 4,450 34,940
Equity issued for acquisitions 0 0 16,980,579 170 22,496 121,252
Common Stock issued upon
conversion of debt 0 0 524,569 5 0 3,634
Exercise of stock options
and warrants 0 0 857,654 9 (3,177) 6,590
Preferred stock dividends 316 0 0 0 0 0
Non-cash dividend on beneficial
conversion feature of preferred
stock 0 0 0 0 0 5,592
Warrants issued to employees and
consultants 0 0 0 0 20,750 0
Other 57 0 0 0 0 513
Net loss 0 0 0 0 0 0
---------- ---------- ---------- ---------- ---------- ----------
Balance at March 31, 1998 13,981 19,027 34,080,830 $ 341 $ 45,870 $ 200,180
========== ========== ========== ========== ========== ==========
<CAPTION>
MINIMUM RETAINED
PENSION EARNINGS
LIABILITY (DEFICIT) TOTAL
--------- ----------- --------
<S> <C> <C> <C>
Balance at October 31, 1994 $ 0 $ 13,743 $ 16,627
Exercise of stock options 0 0 245
Pension Plan Adjustment (61) 0 (61)
Common Stock issued under
Employee Stock Purchase Plan 0 0 31
Payment of cash dividends 0 (920) (920)
Net loss 0 (1,560) (1,560)
--------- ---------- ----------
Balance at October 31, 1995 (61) 11,263 14,362
Exercise of stock options 0 0 272
Common Stock issued under
Employee Stock Purchase Plan 0 0 16
Pension plan adjustment 16 0 16
Net loss 0 (931) (931)
--------- ---------- ----------
Balance at March 31, 1996 (45) 10,332 13,735
Equity issued for Acquisitions 0 0 13,855
Exercise of stock options 0 0 283
Common Stock issued under
Employee Stock Purchase Plan 0 0 34
Tax benefit on option exercises 0 0 107
Other 2 0 426
Net loss 0 (1,260) (1,260)
--------- ---------- ----------
Balance at March 31, 1997 (43) 9,072 27,180
Issuance of preferred stock, net 0 0 42,846
Conversion of preferred stock 0 0 770
Issuance of Common Stock and
warrants in private offerings, net 0 0 39,425
Equity issued for acquisitions 0 0 143,918
Common Stock issued upon
conversion of debt 0 0 3,639
Exercise of stock options
and warrants 0 0 3,422
Preferred stock dividends 0 (1,451) (1,135)
Non-cash dividend on beneficial
conversion feature of preferred
stock 0 (5,592) 0
Warrants issued to employees and
consultants 0 0 20,750
Other 13 (57) 526
Net loss 0 (28,563) (28,563)
--------- ---------- ----------
Balance at March 31, 1998 $ (30) $ (26,591) $ 252,778
========= ========== ==========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-5
<PAGE> 6
METAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Description of business
Metal Management, Inc., (herein referred to as the "Company" or "MTLM"),
formerly General Parametrics Corporation ("GPAR"), a Delaware corporation, and
its wholly-owned subsidiaries are principally engaged in the business of
collection and processing of ferrous and non-ferrous metals for resale to metals
brokers, steel producers, and producers and processors of other metals. The
Company collects industrial scrap and obsolete scrap, processes it into reusable
forms, and supplies the recycled metals to its customers, including mini-mills,
integrated steel mills, foundries and metals brokers. These services are
provided through the Company's 54 recycling facilities located in 12 states. The
Company's ferrous products primarily include shredded, sheared, hot briquetted,
cold briquetted, bundled scrap and broken furnace iron. The Company also
processes non-ferrous metals, including aluminum, stainless steel, copper,
brass, titanium and high-temperature alloys, using similar techniques and
through application of certain of the Company's proprietary technologies. Prior
to April 1996, the Company was engaged in the business of designing,
manufacturing and marketing color printers and related color printer consumable
products (see Note 4 -- Discontinued Operations).
Change of company name and fiscal year
On April 9, 1996, the Company changed its name 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.
NOTE 2 -- ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements have been prepared to reflect the
merger, accounted for as a pooling of interests with R&P Holdings, Inc. on May
28th, 1998. These consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
accounts, transactions and profits have been eliminated in consolidation.
Investments in three joint ventures engaged in ferrous and non-ferrous scrap
metals recycling, in which the Company, through its subsidiaries, owns 50%
interests, are accounted for using the equity method.
Reclassifications
In order to maintain consistency and comparability between periods, certain
prior year financial information has been reclassified to conform to the current
year presentation. Such reclassifications had no material effect on the
previously reported consolidated balance sheet, results of operations or cash
flows of the Company.
Uses of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from these
estimates.
Revenue recognition
The Company recognizes revenue from processed product sales at the time of
shipment. Revenue relating to brokered sales are generally recognized upon
receipt of the materials by the customer.
Income taxes
F-6
<PAGE> 7
The Company utilizes the liability method of accounting for income taxes,
as set forth in Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." Under this method, deferred income taxes are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse. Income tax benefits related to
non-qualified stock option exercises are credited to additional paid-in-capital
when realized.
Earnings (loss) per common share
During fiscal 1998, the Company adopted SFAS No. 128, "Earnings Per Share."
SFAS No. 128 established requirements for the computation of basic earnings per
share and diluted earnings per share. Earnings per share amounts for prior
periods have been restated to conform with SFAS No. 128.
Cash and cash equivalents
Highly liquid investments with original maturities of three months or less
are classified as cash equivalents.
Accounts receivable
Accounts receivable represents amounts due from customers on product and
broker sales. Reserves for uncollectible accounts and for tonnage variances
were approximately $0.1 million and $1.6 million at March 31, 1997 and 1998,
respectively.
Property and equipment
Property and equipment is recorded at cost less accumulated depreciation.
Major renewals and improvements are capitalized while repairs and maintenance
are expensed as incurred. Property and equipment acquired in purchase
transactions are recorded at its estimated fair value at the time of the
acquisition. Depreciation is determined for financial reporting purposes using
the straight-line method over the following estimated useful lives: 10 to 40
years for buildings and improvements, 3 to 15 years for operating machinery and
equipment, 2 to 10 years for furniture and fixtures and 3 to 15 years for
automobiles and trucks. When assets are sold or otherwise disposed of, the cost
and related accumulated depreciation are removed from the accounts and any gain
or loss is included in results of operations.
Goodwill and other intangible assets
Goodwill represents the excess of purchase consideration paid over the fair
value of net assets acquired. Goodwill is amortized on a straight-line basis
over a period of 40 years. Non-compete agreements are amortized on a
straight-line basis over the period of the non-compete agreements, generally 8
to 10 years. Other intangible assets are amortized on a straight-line basis over
the lesser of their legal or estimated useful lives. The following items
comprised the balance at March 31 (in thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Goodwill $ 21,653 $ 184,167
Non-compete agreements 1,403 3,236
Deferred financing costs 0 890
Other intangibles 979 1,778
--------------- ---------------
24,035 190,071
Less-- accumulated amortization (551) (3,568)
--------------- ---------------
$ 23,484 $ 186,503
=============== ===============
</TABLE>
Amortization expense for the year ended March 31, 1997 and 1998 was $0.5
million and $3.5 million, respectively. The Company assesses the recoverability
of its goodwill and intangible assets on an annual basis or whenever events or
changes in circumstances or business climate indicate that expected undiscounted
future cash flows may not be sufficient to recover the recorded goodwill and
intangible assets. During fiscal 1998, the Company recognized a charge of
approximately $9.3 million relating to unamortized goodwill resulting from the
Company's acquisition of its EMCO subsidiary.
Impairment of long-lived assets
During fiscal 1997, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of."
SFAS No. 121 requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 is applicable for most long-lived assets,
identifiable intangibles and goodwill related to
F-7
<PAGE> 8
those assets.
Financial instruments
The carrying values of financial instruments including cash and cash
equivalents, accounts receivable and accounts payable approximate the related
fair values because of the relatively short maturity of these instruments. The
carrying values of line of credit borrowings, notes payable to related parties
and long-term debt, including the current portion, approximate the related fair
values as the stated interest rates approximate market rates.
Concentration of credit risk
Financial instruments that potentially subject the Company to significant
concentration of credit risk are primarily trade accounts receivable. The
Company sells its products primarily to scrap metal brokers and steel mills
located in the United States. Generally, the Company does not require collateral
or other security to support customer receivables. Historically, the Company's
wholly-owned subsidiaries have not experienced material losses from the
noncollection of accounts receivables.
For the year ended March 31, 1998, the Company's 10 largest customers
represented approximately 37.6% of consolidated net sales. These customers
comprised approximately 33.1% of accounts receivable at March 31, 1998. No
single customer accounted for more than 10% of consolidated net sales.
Recent Accounting Standards
SFAS No. 130, "Reporting Comprehensive Income," was issued by the Financial
Accounting Standards Board ("FASB") in June 1997. This Statement requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The Company
will adopt SFAS No. 130 in fiscal 1999 and does not expect the impact to be
material to the Company.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued by the FASB in June 1997. This Statement establishes
standards for reporting of selected information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company is currently evaluating the
impact of SFAS No. 131.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," was issued by the FASB in February 1998. This
Statement revises employers' disclosures about pension and other postretirement
benefit plans. The Company will adopt SFAS No. 132 in fiscal 1999 and does not
expect the impact to be material to the Company.
NOTE 3 -- MERGERS AND ACQUISITIONS
Mergers accounted as Pooling of Interests
On May 28, 1998, R&P Holdings, Inc., ("Bluestone") merged with the Company
through a tax free stock for stock exchange. The Company issued 1,034,826 shares
of Common Stock in exchange for all the outstanding common stock of Bluestone.
The merger was accounted for as a pooling of interests and the consolidated
financial statements of the Company has been restated to reflect the merger with
Bluestone. Accordingly, except for adjustments to reflect conformed accounting
policies, the historical financial statements of the two companies have been
combined in the consolidated financial statements. Merger related expenses will
be recognized as a one time charge in the first quarter of fiscal 1999.
The following presents net sales and net income (loss) applicable to Common
Stock for the periods presented. The only conforming accounting adjustment
changes Bluestone's inventory valuation methodology from a LIFO basis to a FIFO
basis (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER FIVE MONTHS YEAR ENDED YEAR ENDED
31, 1995 MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1998
-------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
NET SALES:
The Company - historical $ 0 $ 0 $ 65,196 $ 479,707
Bluestone 112,775 36,366 76,634 90,328
-------------- -------------- -------------- --------------
Combined $ 112,775 $ 36,366 $ 141,830 $ 570,035
============== ============== ============== ==============
</TABLE>
F-8
<PAGE> 9
<TABLE>
<S> <C> <C> <C> <C>
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK:
Net income (loss) from continuing operations
The Company - historical $ 261 $ (16) $ (2,010) $ (35,713)
Bluestone (538) (535) 516 340
Conforming accounting adjustments, net of tax 1,415 (402) (613) (490)
-------------- -------------- -------------- --------------
Net income (loss) from continuing operations 1,138 (953) (2,107) (35,863)
Net income (loss) from discontinued operations (2,698) 22 847 200
-------------- -------------- -------------- --------------
Combined $ (1,560) $ (931) $ (1,260) $ (35,663)
============== ============== ============== ==============
BASIC AND DILUTED EARNINGS PER SHARE $ (0.48) $ 0.00 $ (0.13) $ (1.80)
The Company - historical ============== ============== ============== ==============
Combined $ (0.26) $ (0.15) $ (0.12) $ (1.72)
============== ============== ============== ==============
</TABLE>
Mergers and Acquisitions accounted as Purchase transactions during fiscal 1997:
- In April 1996, the Company merged with EMCO Recycling Corp. ("EMCO"),
headquartered in Phoenix, Arizona.
- In January 1997, the Company acquired five companies comprising the
MacLeod Group ("MacLeod"), headquartered in SouthGate, California. The
MacLeod Group is comprised of MacLeod Metals Co., California Metals
Recyling, Inc., Trojan Trading Co., Firma, Inc. and Firma Plastics Co.,
Inc.
- In January 1997, the Company acquired HouTex Metals Company, Inc.
("HouTex"), headquartered in Houston, Texas.
The purchase consideration for the acquisitions completed during fiscal 1997
was as follows (in thousands):
<TABLE>
<CAPTION>
EMCO MACLEOD HOUTEX TOTAL
<S> <C> <C> <C> <C>
Shares of restricted Common Stock issued 3,500 725 475 4,700
Warrants issued to purchase Common Stock 1,000 175 310 1,485
Cash paid, including transaction costs $ 2,219 $ 1,119 $ 1,121 $ 4,459
Value of Common Stock issued 8,807 2,330 1,669 12,806
Value of warrants issued 316 137 596 1,049
Promissory notes issued 0 6,600 6,655 13,255
Other liabilities incurred 1,403 0 0 1,403
--------------- -------------- --------------- ---------------
Total purchase consideration $ 12,745 $ 10,186 $ 10,041 $ 32,972
=============== ============== =============== ===============
</TABLE>
Mergers and Acquisitions accounted as Purchase transactions during fiscal 1998:
- 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
which operates in Atalla, Alabama.
- 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 August 1997, the Company acquired Proler Southwest, Inc. and Proler
Steelworks, L.L.C. (collectively "Proler"). Proler operates a facility
in Houston, Texas and Jackson, Mississippi.
- In December 1997, the Company acquired Cozzi Iron & Metal, Inc.
("Cozzi") headquartered in Chicago, Illinois. Cozzi also operates
facilities in East Chicago, Indiana and Pittsburgh, Pennslyvania and
has a 50% interest in a joint venture which operates in Memphis,
Tennessee. In December 1997, the Company, through its Cozzi subsidiary,
acquired Kankakee Scrap Corporation, located in Kankakee, Illinois.
- In January 1998, the Company acquired Houston Compressed Steel Corp.,
headquartered in Houston, Texas.
- In January 1998, the Company, through its Cozzi subsidiary, purchased
Newell Phoenix, L.L.C.'s 50% membership interest in Salt River
Recycling, L.L.C. ("Salt River"). At the time of the acquisition, Cozzi
owned a 50% membership interest in Salt River.
F-9
<PAGE> 10
- In January 1998, the Company purchased substantially all of the assets
of Aerospace Metals, Inc. ("Aerospace"), and certain of its affiliates
headquartered in Hartford, Connecticut.
- In February 1998, the Company, through its Cozzi subsidiary, acquired
substantially all of the assets of Accurate Iron and Metal, located in
Chicago, Illinois.
- In March 1998, the Company, through its Metal Management Arizona
subsidiary, acquired certain assets of Ellis Metals, Inc., ("Ellis
Metals") headquartered in Tucson, Arizona.
- In March 1998, the Company acquired Superior Forge, Inc., headquartered
in Huntington Beach, California.
The purchase consideration for the acquisitions completed during fiscal 1998
was as follows (in thousands):
<TABLE>
<CAPTION>
RESERVE ISAAC PROLER COZZI AEROSPACE OTHER TOTAL
------- ----- ------ ----- --------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Shares of restricted
Common Stock issued 0 1,943 1,750 11,500 403 1,385 16,981
Warrants issued to purchase
Common Stock 1,400 462 375 1,500 0 120 3,857
Cash paid, including
transaction costs $ 6,589 $ 536 $ 7,760 $ 7,807 $ 14,802 $ 7,866 $ 45,360
Value of Common Stock
issued 0 21,049 11,130 65,864 5,318 18,060 121,421
Value of warrants issued 8,118 4,862 1,574 7,505 0 368 22,427
Promissory notes issued 1,542 36,547 10,500 0 0 1,991 50,580
----------- ----------- ----------- ----------- ----------- ------------ -----------
Total purchase
consideration $ 16,249 $ 62,994 $ 30,964 $ 81,176 $ 20,120 $ 28,285 $ 239,788
=========== =========== =========== =========== =========== ============ ===========
</TABLE>
The purchase consideration was allocated as follows at March 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Fair value of tangible assets acquired $ 35,399 $ 262,426
Goodwill 21,653 170,422
Identifiable intangibles 1,403 1,834
Liabilities assumed (25,483) (195,569)
Stock and warrants issued (13,855) (143,848)
Promissory notes and other consideration issued (14,658) (50,580)
--------------- ---------------
Cash paid 4,459 44,685
Less: cash acquired (1,914) (780)
--------------- ---------------
Net cash paid for acquisitions $ 2,545 $ 43,905
=============== ===============
</TABLE>
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 may be revised as necessary when information becomes available
to finalize amounts allocated to assets acquired and liabilities assumed. The
allocation period varies by acquisition but does not usually exceed one year. It
is not expected that the finalization of purchase accounting will have any
significant effect on the financial position or results of operations of the
Company.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company, MacLeod, HouTex, Reserve,
Isaac, Proler, Cozzi, and Aerospace after giving effect to the merger of
Bluestone and as if these acquisitions had occurred on April 1, 1996. The
unaudited pro forma results have been prepared for comparative purposes only
and include certain adjustments, such as additional depreciation expense as a
result of a step-up in basis of the fixed assets and additional amortization
expense as a result of goodwill. The unaudited pro forma information for the
years ended March 31, 1997 and 1998 was as follows (in thousands, except per
share data):
F-10
<PAGE> 11
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Net sales $ 773,671 $ 857,053
Net income (loss) from continuing operations
applicable to Common Stock $ 626 $ (38,046)
Basic and diluted net income (loss) from continuing
operations applicable to Common Stock $ 0.02 $ (1.12)
</TABLE>
The pro forma results do not purport to be indicative of the results of
operations which actually would have resulted had the acquisitions been in
effect on April 1, 1996. In addition to the completed acquisitions, the Company
is in various stages of negotiation to acquire a number of additional scrap
metals recycling and related operations.
See Note 17 -- Subsequent Events and Note 18 -- Events (Unaudited)
Subsequent to Date of Accountants' Report
NOTE 4 -- DISCONTINUED OPERATIONS
During the second and third quarter of fiscal 1997, the Company sold
its computer printer and related products business for approximately $1.3
million in cash and other contingent consideration in the form of royalties on
future product sales. Accordingly, the operating results and gain on sale have
been classified as discontinued operations for all periods presented in the
financial statements.
Net revenues recognized for the discontinued operations were $9.5 million,
$3.1 million and $2.3 million for the year ended October 31, 1995, the five
months ended March 31, 1996 and the year ended March 31, 1997, respectively.
Additional consideration from royalty income is being recognized as earned and
is reported as an additional gain on sale of discontinued operations.
Income tax provision (benefit) for the discontinued operations were
approximately ($551,000), $52,000, and ($307,000) for the year ended October 31,
1995, the five months ended March 31, 1996 and the year ended March 31, 1997,
respectively. Income tax provision (benefit) for the gain on sale of assets of
discontinued operations was ($15,000) and $133,000 for the years ended March 31,
1997 and 1998, respectively.
NOTE 5 -- NON-RECURRING EXPENSES
During fiscal 1998, the Company recorded the following non-recurring pre-tax
charges (in thousands):
<TABLE>
<S> <C>
Non-cash warrant compensation expense $ 19,050
Severance and other termination benefits 2,814
EMCO shutdown 11,846
---------------
$ 33,710
===============
</TABLE>
On December 1, 1997, the Company issued 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 certain officers, employees and an
outside director. The warrants, for accounting purposes, were valued using the
"intrinsic value method" as prescribed under Accounting Practice Board (APB) No.
25 "Accounting for Stock Based Compensation".
On December 1, 1997, the Company entered into a Separation Agreement and a
Stock Warrant Settlement Agreement with a former officer resulting in a
non-recurring charge totaling $2.8 million comprised of (a) $0.9 million of cash
payments, (b) an accrual of $0.2 million for other benefits under the Separation
Agreement, and (c) $1.7 million representing the value (calculated in accordance
with APB No. 25) of warrants issued to purchase 200,000 shares of Common Stock.
Upon completion of the Cozzi acquisition in December 1997, the Company
adopted a formal plan to shut down its EMCO operations and to transfer certain
of EMCO's assets to Salt River Recycling, which the Company will operate under
the name of Metal Management Arizona. In connection with the plan to shut down
EMCO, the Company recorded a pre-tax charge of approximately $11.8 million,
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
costs of transferring EMCO's remaining assets to Metal Management Arizona will
be expensed as incurred. The exit plan is expected to be
F-11
<PAGE> 12
completed by December 31, 1998.
NOTE 6 -- INVENTORIES
Inventories for all periods presented are stated at the lower of cost or
market. Cost is determined principally on the average cost method. Inventories
consisted of the following categories and amounts at March 31 (in thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Ferrous metals $ 2,707 $ 35,934
Non-ferrous metals 9,747 25,222
Other 954 786
--------------- ---------------
$ 13,408 $ 61,942
=============== ===============
</TABLE>
NOTE 7 -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following categories and amounts at
March 31 (in thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Land and improvements $ 5,790 $ 18,915
Buildings and improvements 3,749 16,143
Operating machinery and equipment 13,747 73,167
Automobiles and trucks 3,063 10,569
Furniture and fixtures 1,300 2,306
Construction in progress 0 1,749
--------------- ---------------
27,649 122,849
Less-- accumulated depreciation (6,387) (12,963)
--------------- ---------------
$ 21,262 $ 109,886
=============== ===============
</TABLE>
Depreciation expense for property and equipment was $2.0 million and $7.4
million for the years ended March 31, 1997 and 1998, respectively. During the
current fiscal year, the Company wrote off approximately $2.0 million of net
fixed assets at its EMCO subsidiary. See Note 5 -- Non-recurring expenses.
NOTE 8 - INVESTMENT IN JOINT VENTURES
During fiscal 1998, the Company owned 50% interests in three joint ventures
which processed and sold ferrous and nonferrous metals. Individually and in the
aggregate, these joint ventures were not material to the Company's fiscal 1998
consolidated financial position or results of operations.
Prior to fiscal 1998, the Company, through Bluestone, owned a 50% interest
in one joint venture. At March 31, 1997, the Company had accounts receivable of
approximately $2.2 million from the joint venture and had accounts payable of
approximately $0.8 million to the joint venture. In addition, sales from the
Company to the joint venture were $10.1 million, $1.4 million and $4.4 million
for the year ended October 31, 1995, the five months ended March 31, 1996 and
the year ended March 31, 1997, respectively. Sales from the joint venture to the
Company were approximately $1.8 million, $0.6 million and $3.0 million for the
year ended October 31, 1995, the five months ended March 31, 1996 and the year
ended March 31, 1997, respectively. Summarized financial information for the
joint venture follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31, FIVE MONTHS YEAR ENDED
1995 MARCH 31, 1996 MARCH 31, 1997
---- -------------- --------------
<S> <C> <C> <C>
Net sales $ 20,888 $ 4,498 $ 15,727
Cost of sales and other expense 18,812 5,222 14,855
-------------- -------------- --------------
Net income (loss) $ 2,076 $ (724) $ 872
============== ============== ==============
Company's share of net income (loss) $ 1,038 $ (362) $ 436
============== ============== ==============
</TABLE>
F-12
<PAGE> 13
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------
<S> <C>
Current assets $ 5,367
Other assets 3
--------------
5,370
Liabilities 4,126
--------------
Members' capital $ 1,244
==============
Company's share of capital $ 622
==============
</TABLE>
NOTE 9 -- DEBT
Lines-of-credit
At March 31, 1997 and 1998, the Company and its wholly-owned subsidiaries
had various revolving lines of credit with commercial lenders which provided for
revolving credit at interest rates that ranged from 8.5% to 16.5%. The weighted
average interest rate on the borrowings outstanding at March 31, 1997 and 1998
was 9.1% and 9.5%, respectively. The lines were secured by substantially all of
the assets and stock of the Company's subsidiaries. Availability under the lines
of credit is determined primarily based on levels of inventory and accounts
receivable. Average borrowings under the various lines of credit during fiscal
1997 and 1998 were approximately $13.9 million and $28.5 million, respectively.
Amounts outstanding under the various lines of credit ranged from $10.4 million
to $17.5 million during fiscal 1997 and $18.0 million to $57.6 million during
fiscal 1998. At March 31, 1998, the Company was in compliance with all covenants
under its various lines of credit. These lines were repaid with proceeds from a
new long-term credit facility and were terminated subsequent to March 31, 1998,
or were consolidated with the new facility. As a result, outstanding balances
are classified within long-term debt at March 31, 1998. See subsequent debt
transactions below.
Notes payable to related parties
Notes payable to related parties were issued by the Company for acquisitions
or for the purchase of real estate. The Company also assumed notes payable to
related parties in connection with certain acquisitions. At March 31, notes
payable to related parties were issued to the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Notes issued for acquisitions:
Former shareholder of MacLeod (interest rate of 8.0% in 1997 and
8.5% in 1998) $ 6,400 $ 2,981
Former shareholders of HouTex (interest rate of 6.0% in 1997),
secured by a stock pledge agreement 6,655 0
Former shareholder of Ellis Metals (interest rate of 9.0%) 0 1,691
Former shareholders of Isaac, due 2/15/00, (interest rate of 8.5% in
1998), secured by a letter of credit 0 15,965
Former shareholders of Proler (interest rate of 7.0% in 1998) 0 2,400
Notes assumed in connection with acquisitions:
Former shareholders of Isaac, due 2/15/00, (interest rate of 8.5% in
1998), secured by a letter of credit 0 5,696
Former shareholder of Cozzi, (interest rate of 6.4% in 1998) 0 12,719
Former shareholder of Bluestone, (interest rate of 5% in 1997 and 1998) 190 190
Notes issued for real estate purchases:
Former shareholder of Ellis Metals (interest rate of 9.0% in 1997 and
1998), secured by real property 950 950
--------------- ---------------
14,195 42,592
Less: current portion (12,575) (10,830)
--------------- ---------------
Long-term notes payable to related parties $ 1,620 $ 31,762
=============== ===============
</TABLE>
During fiscal 1998, certain selling shareholders converted an aggregate
$3.6 million of notes payable into 524,569 shares of Common Stock of the
Company.
Scheduled maturities of notes payable to related parties are as follows
(in thousands):
FISCAL YEAR ENDING, MARCH 31,
F-13
<PAGE> 14
<TABLE>
<C> <C>
1999 $ 10,830
2000 10,831
2001 0
2002 0
2003 and thereafter 20,931
---------------
$ 42,592
===============
</TABLE>
Long-term debt
At March 31, long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Term loans, due 1998 to 2001, average interest rate of
8.45%, secured by equipment or personal guarantees $ 7,405 $ 40,221
Operating lines of credit, average interest rate of 9.5%,
reclassed to long-term debt 0 58,494
Mortgage loans, due 1998 to 2009, average interest rate
of 8.23%, secured by real property 4,462 2,102
Other debt, due 1998 to 2006, average interest rate of
7.85%, generally secured by equipment 2,920 8,057
--------------- ---------------
14,787 108,874
Less current portion (10,813) (1,047)
--------------- ---------------
Long-term debt $ 3,974 $ 107,827
=============== ===============
</TABLE>
See subsequent debt transactions below. Scheduled maturities of long-term
debt are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDING, MARCH 31
- ----------------------------
<C> <C>
1999 $ 1,047
2000 1,485
2001 757
2002 219
2003 and thereafter 105,366
---------------
$ 108,874
===============
</TABLE>
Subsequent debt transactions
On March 31, 1998, the Company and its subsidiaries entered into a
three year Senior Credit Facility. The Senior Credit Facility, as amended,
provides for a revolving credit and letter of credit facility of $250.0
million, subject to borrowing base limitations. The Senior Credit Facility
bears interest at a floating rate per annum equal to (at the Company's option):
(i) 1.75% over LIBOR or (ii) 0.5% over the agent lender's prime rate. The
Company pays a unused line fee of .375% and is subject to debt covenants
including an interest coverage ratio and limitations with respect to capital
expenditures. The Senior Credit Facility is available for working capital and
general corporate purposes, including acquisitions. The obligations of the
Company and its subsidiaries under the Senior Credit Facility are secured by a
security interest in substantially all of the assets and properties of the
Company and its subsidiaries including pledges of stock of subsidiaries.
Availability of loans and letters of credit under the Senior Credit Facility is
generally limited to a borrowing base of 85% of eligible accounts receivable,
70% of eligible inventory and a $40 million fixed asset sublimit that amortizes
on a quarterly basis.
On April 1, 1998, the Company borrowed $106.8 million under the Senior
Credit Facility to: (i) repay outstanding secured debt of approximately of $96.5
million; (ii) buyout operating leases of approximately $9.3 million; and (iii)
pay prepayment penalties of approximately $1.0 million. The prepayment penalties
will be reflected as an extraordinary charge in the first quarter of fiscal
1999. Borrowings outstanding under the Senior Credit Facility bore interest at
9.0% as of April 1, 1998.
On May 13, 1998, the Company issued $180.0 million, 10.0% Senior
Subordinated Notes due on May 15, 2008 (the "Notes") in a private placement (the
"Subordinated Debt Placement"). Interest on the Notes will be payable
semi-annually. The Company received net proceeds of $174.6 million in the
Subordinated Debt Placement. The Notes are general unsecured obligations of the
Company and are subordinated in right to payment to all senior debt of the
Company, including the indebtedness of the Company under the Senior Credit
Facility. The Company's payment obligations are jointly and severally guaranteed
by the Company's current and certain future
F-14
<PAGE> 15
subsidiaries. The proceeds of the Notes were used to repay approximately $119.0
million outstanding under the Company's Senior Credit Facility and approximately
$19.1 million of notes payable to related parties. The balance of the proceeds
were invested in marketable securities held for working capital and general
corporate purposes, including acquisitions.
Except as described below, the Notes are not redeemable at the Company's
option prior to May 15, 2003. After May 15, 2003, the Notes are redeemable by
the Company at the redemption prices (expressed as a percentage of the principal
amount) plus accrued and unpaid interest, if redeemed during the twelve month
period beginning on May 15 of each of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003 105%
2004 103%
2005 102%
2006 and thereafter 100%
</TABLE>
Also, prior to March 15, 2001, the Company may redeem up to 35% of the
aggregate principal amount of the Notes at a redemption price of 110% of the
principal amount of the Notes, plus accrued and unpaid interest from the
proceeds of one or more sales of Common Stock. The Notes are also redeemable at
the option of the holder thereof at a repurchase price of 101% of the principal
amount thereof, plus accrued and unpaid interest in the event of certain change
of control events with respect to the Company.
The Indenture governing the Notes (the "Indenture") contains certain
covenants that limit, among other things, the ability of the Company and its
subsidiaries to (i) incur additional indebtedness (including by way of
guarantee), subject to certain exceptions, unless the Company meets a fixed
charge ratio of 2 to 1 or certain other conditions apply; (ii) issue certain
types of securities containing mandatory redemption rights or which otherwise
are redeemable at the option of the holder thereof prior to the maturity of the
Notes; (iii) pay dividends or distributions, or make certain types of
investments or other payments, unless the Company meets a fixed charge coverage
ratio of 2 to 1 and the amount of the dividend or distribution, investment or
other payment (together with all such other dividend, distributions, investments
or other payments made through the date thereof) is less than 50% of the
consolidated net income of the Company from the beginning of the fiscal quarter
immediately following the date of the Indenture through the most recently ended
fiscal quarter plus the aggregate amount of net equity proceeds received by the
Company in such period; (iv) enter into certain transactions with affiliates;
(v) dispose of certain assets, (vi) incur liens securing pari passu or
subordinated indebtedness of the Company or (vii) engage in certain mergers and
consolidations.
See Note 18 - Events (Unaudited) Subsequent to Date of Accountants Report.
NOTE 10 -- INCOME TAXES
The provision (benefit) for federal and state income taxes from continuing
operations is as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31, MARCH 31, MARCH 31, MARCH 31,
1995 1996 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Federal:
Current $ 40 $ (469) $ (33) $ 1,179
Deferred 512 (73) (895) (1,831)
-------------- -------------- --------------- ---------------
552 (542) (928) (652)
-------------- -------------- --------------- ---------------
State:
Current 11 (99) 142 908
Deferred 111 (11) (117) (783)
-------------- -------------- --------------- ---------------
122 (110) 25 125
-------------- -------------- --------------- ---------------
Total tax provision (benefit) $ 674 $ (652) $ (903) $ (527)
============== ============== =============== ===============
</TABLE>
F-15
<PAGE> 16
The deferred tax liabilities, net of deferred tax assets, are comprised of
the following at March 31 (in thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Cash to accrual adjustment $ 251 $ 389
Non-compete agreements 0 795
Depreciation 2,320 15,237
Inventory 304 0
Other 20 70
--------------- ---------------
Gross deferred income tax liabilities 2,895 16,491
--------------- ---------------
Accounts receivable reserves 0 (315)
Inventory 0 (54)
Deferred compensation (49) (759)
Employee benefit accruals (66) (403)
Workers compensation 0 (793)
NOL carryforward (792) 0
Accrued liabilities (449) (342)
Stock based compensation (109) (4,389)
Other (107) (122)
--------------- ---------------
Gross deferred income tax assets (1,572) (7,177)
--------------- ---------------
Deferred tax asset valuation allowance 0 0
--------------- ---------------
$ 1,323 $ 9,314
=============== ===============
</TABLE>
Realization of deferred tax assets is dependent upon generating sufficient
future taxable income in the periods in which the assets reverse or the benefits
expire. Although realization is not assured, management believes it is more
likely than not that the Company's deferred tax assets will be realized through
future taxable earnings. The fiscal 1997 U.S. federal net operating loss
carryforward was utilized in fiscal 1998.
The reconciliation of income tax from continuing operations computed at the
U.S. federal statutory tax rate to the Company's effective rate is as follows ($
in thousands):
<TABLE>
<CAPTION>
YEAR ENDED 5 MONTHS ENDED
OCTOBER 31, 1995 % MARCH 31, 1996 %
---------------- - -------------- -
<S> <C> <C> <C> <C>
Normal statutory rate $ 616 34.0 $ (546) (34.0)
State income taxes, net of federal benefit 101 5.6 (96) (6.0)
Tax exempt interest (66) (3.6) (18) (1.1)
Other 23 1.2 8 0.5
------------- ------ ------------- ------
Provision (benefit) for income taxes $ 674 37.2 $ (652) (40.6)
============= ====== ============= ======
<CAPTION>
YEAR ENDED MARCH YEAR ENDED MARCH
31, 1997 % 31, 1998 %
-------- - -------- -
<S> <C> <C> <C> <C>
Normal statutory rate $ (1,053) (35.0) $ (10,251) (35.0)
State income taxes, net of federal benefit (128) (4.3) 230 0.8
Non-deductible goodwill 145 4.8 887 3.0
Non-deductible goodwill write-off 0 0.0 3,259 11.1
Non-deductible stock based compensation 0 0.0 4,968 17.0
Other 133 4.5 380 1.3
------------- ------ ------------- ------
Provision (benefit) for income taxes $ (903) (30.0) $ (527) (1.8)
============= ====== ============= ======
</TABLE>
NOTE 11 -- STOCKHOLDERS' EQUITY
Common Stock
On November 29, 1997, the Company's stockholders approved an amendment to
the Company's Certificate of Incorporation to increase the number of authorized
shares of the Company's Common Stock from 40,000,000 to 80,000,000.
F-16
<PAGE> 17
During April and May 1997, the Company completed a private sale of 2,025,000
shares of the Company's Common Stock, par value $.01 per share, at $7.25 per
share (the "Private Placement"), including the sale of 260,000 shares to certain
officers and directors of the Company. The Company received net proceeds of
approximately $14.7 million in the Private Placement.
On December 19, 1997, the Company issued to Samstock, L.L.C., a Delaware
limited liability corporation ("Samstock") 1,470,588 shares of the Company's
Common Stock, (the "Samstock Shares"), pursuant to a Securities Purchase
Agreement between the Company and Samstock. The Company also issued warrants to
Samstock exercisable at any time prior to December 18, 2002 for: (i) 400,000
shares of Common Stock at an exercise price of $20.00 per share; and (ii)
200,000 shares of Common Stock at an exercise price of $23.00 per share. The
aggregate purchase price of the Samstock Shares and warrants issued to Samstock
was approximately $25.0 million.
Convertible Preferred Stock
The Company's Certificate of Incorporation allows the issuance of up to
4,000,000 shares of preferred stock.
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. EITF Topic No. D-60 requires that a
beneficial conversion feature 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 time of
conversion.
On August 8, 1997, the Company issued 21,000 shares and between August 21,
1997 and September 8, 1997, the Company issued 4,000 shares of Series A
Convertible Preferred Stock, par value $.01 per share, stated value of $1,000
per share, (the "Series A Preferred Stock"). Two thousand five hundred shares of
the Series A Preferred Stock were purchased by certain officers and a director
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").
Dividends on the Series A Preferred Stock and Series B Preferred Stock
accrue, whether or not declared by the Board of Directors, at an annual rate of
6.0% and 4.5%, respectively, of the Stated Value of each outstanding share of
Series A Preferred Stock and Series B Preferred Stock. Dividends are payable in
cash or, at the Company's option, in additional shares of Preferred Stock.
Dividends in arrears at March 31, 1998 for the Series A Preferred Stock and
Series B Preferred Stock were approximately $63,000 and $298,000, respectively.
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 Preferred Stock and Series B Preferred Stock are
entitled to receive payment of the Liquidation Preference before any payment is
made to holders of Common Stock or any stock of the Company junior to the Series
A Preferred Stock and Series B Preferred Stock.
The holders of Series A Preferred Stock are able to convert the shares into
Common Stock at a price equal to the lower of: (i) $18.30; 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. At March 31, 1998, the outstanding shares
of the Series A Preferred Stock would have converted into approximately 1.3
million shares of Common Stock, if all holders converted on that date.
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,
at its option and under certain circumstances, 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 based
on the above conversion price. However, if, at the Maturity Date a Registration
Statement covering the resale of the shares issuable upon conversion is not
effective or a resale of the shares issuable upon conversion cannot be made
pursuant to Rule 144(k), 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 which they own.
The Series A Preferred Stock does not grant holders voting rights except
that, so long as shares of Series A Preferred Stock are
F-17
<PAGE> 18
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 are able to convert the shares 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 (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 a national
securities exchange. At March 31, 1998, the outstanding shares of the Series B
Preferred Stock would have converted into approximately 1.6 million shares of
Common Stock, if all holders converted on that date.
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 at its option and under certain circumstances 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 based on the above conversion price.
However, if at the Maturity Date a Registration Statement covering the resale of
the shares issuable upon conversion is not effective or a resale of the shares
issuable upon conversion cannot be made pursuant to Rule 144(k), then the
Company will be required to pay to the holders of Series B Preferred Stock, in
cash, an amount equal to the Liquidation Preference for the shares 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.
The following presents a summary of the Series A Preferred Stock and Series
B Preferred Stock issued and converted during fiscal 1998:
<TABLE>
<CAPTION>
SERIES A SERIES B
-------- --------
<S> <C> <C>
Beginning balance 0 0
Shares issued 25,000 20,000
Shares converted into Common Stock (10,665) 0
Shares issued for dividends 759 0
--------- --------
Shares outstanding at March 31, 1998 15,094 20,000
========= ========
</TABLE>
NOTE 12 -- EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. Diluted earnings (loss) per common share includes the incremental shares
issuable upon the assumed exercise of stock options and warrants, using the
treasury stock method.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings (loss) from continuing operations per share
computations (in thousands, except per share amounts):
F-18
<PAGE> 19
<TABLE>
<CAPTION>
FIVE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 1995 MARCH 31, 1996 MARCH 31, 1997 MARCH 31 ,1998
---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INCOME (NUMERATOR):
Net income (loss) from continuing
operations $ 1,138 $ (953) $ (2,107) $ (28,763)
Dividends and accretion applicable to
convertible preferred stock 0 0 0 (7,100)
-------------- -------------- -------------- --------------
Net income (loss) applicable to Common
Stock $ 1,138 $ (953) $ (2,107) $ (35,863)
============== ============== ============== ==============
SHARES (DENOMINATOR):
Weighted average number of shares
outstanding during the period 6,160 6,334 10,141 20,762
Incremental common shares attributable
to dilutive options and warrants 0 0 0 0
-------------- -------------- -------------- --------------
Diluted shares outstanding during the
period 6,160 6,334 10,141 20,762
============== ============== ============== ==============
Basic earnings (loss) per share $ 0.18 $ (0.15) $ (0.21) $ (1.73)
============== ============== ============== ==============
Diluted earnings (loss) per share $ 0.18 $ (0.15) $ (0.21) $ (1.73)
============== ============== ============== ==============
</TABLE>
Due to the net loss applicable to Common Stock for the five months ended
March 31, 1996 and the years ended March 31, 1997 and 1998, the effect of
dilutive stock options and warrants were not included as their effect would have
been anti-dilutive. However, if the Company would have reported net earnings,
the incremental shares attributable to dilutive stock options and warrants would
have been 125,656 for the five months ended March 31, 1996, 236,469 for the year
ended March 31, 1997 and 3,388,202 for the year ended March 31, 1998. Also, the
potentially dilutive effect of the Company's convertible preferred stock were
not used in the diluted earnings per share calculation as its effect was
anti-dilutive.
NOTE 13 -- STOCK OPTIONS AND WARRANTS
Stock option plans
On November 29, 1997, the Company's stockholders approved an amendment to
the Company's 1996 Director Option Plan (the "Director Plan") to reserve an
additional 100,000 shares for an aggregate 200,000 shares of Common Stock which
can be issued under the Director Plan. The Director Plan provides for options to
be granted to outside directors of the Company. Under the Director Plan, each
outside director is automatically granted an option to purchase 10,000 shares on
the date on which such person first becomes an outside director. Thereafter,
each outside director is automatically granted an option to purchase 2,500
shares on January 15th of each year, as long as such outside director has served
on the Board of Directors for at least one month. The options are granted at
100% of the market price on the date of the grant, become fully vested and
exercisable on such date and expire 10 years from the date of the grant.
On November 29, 1997, the Company's stockholders approved an amendment to
the Company's 1995 Stock Option Plan (the "1995 Plan") to reserve an additional
1,300,000 shares of Common Stock for an aggregate 2,600,000 shares of Common
Stock which can be issued under the 1995 Plan. The 1995 Plan allows the Board of
Directors to grant options to purchase shares to officers and employees in the
form of either incentive stock options (ISO's) or nonstatutory stock options
(NSO's). The Board of Directors determines, within limits set forth in the 1995
Plan, the term of each option, the option exercise price, the number of shares
subject to each option and the times at and conditions under which each option
is or becomes exercisable.
During fiscal 1995, the Board of Directors terminated the 1986 Stock Option
Plan with respect to future grants. The following summarizes the activity of the
Director Plan, 1995 Plan and the 1986 Plan for the year ended October 31, 1995,
the five months ended March 31, 1996 and the years ended March 31, 1997 and
1998, respectively:
F-19
<PAGE> 20
<TABLE>
<CAPTION>
DIRECTOR & 1995 PLAN
-------------------------------------------------------------------------------------------
1995 1996 1997 1998
-------------------- --------------------- ---------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning balance 0 $ 0.00 51,000 $ 3.22 716,750 $ 3.92 752,500 $ 4.03
Granted 51,000 $ 3.22 665,750 $ 3.97 110,000 $ 4.53 1,218,650 $ 16.01
Exercised 0 $ 0.00 0 $ 0.00 (16,750) $ 2.90 (150,000) $ 4.00
Canceled 0 $ 0.00 0 $ 0.00 (57,500) $ 3.89 0 $ 0.00
------- ------ ------- ------ ------- ------ --------- -------
Ending balance 51,000 $ 3.22 716,750 $ 3.92 752,500 $ 4.03 1,821,150 $ 12.05
======= ====== ======= ====== ======= ====== ========= =======
Exercisable at end of
period 25,000 $ 2.50 669,750 $ 3.91 667,500 $ 3.96 649,333 $ 5.28
======= ====== ======= ====== ======= ====== ========= =======
Options available for
grant 449,000 83,250 630,750 812,100
======= ======= ======= =========
<CAPTION>
1986 PLAN
---------------------------------------------------------
1995 1996
-------------------------- -------------------------
WEIGHTED
OPTION AVERAGE
PRICE PER EXERCISE
SHARES SHARE SHARES PRICE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Beginning balance 572,800 $1.90 - $6.00 304,800 $ 2.71
Granted 1,500 $1.57 - $1.63 0 $ 0.00
Exercised (92,000) $2.34 - $2.98 (108,636) $ 2.55
Canceled (177,500) $2.23 - $3.56 (39,314) $ 2.77
-------- ------------- -------- ------
Ending balance 304,800 $1.57 - $6.00 156,850 $ 2.82
======== ============= ======== ======
Exercisable at end of period 277,497 $1.88 - $6.00 141,788 $ 2.87
======== ============= ======== ======
Options available for grant 0 0
======== ========
<CAPTION>
1986 PLAN
----------------------------------------------------
1997 1998
-------------------------- ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Beginning balance 156,850 $ 2.82 5,000 $ 2.50
Granted 0 $ 0.00 0 $ 0.00
Exercised (87,100) $ 2.65 (5,000) $ 2.50
Canceled (64,750) $ 3.07 0 $ 0.00
-------- -------
Ending balance 5,000 $ 2.50 0 $ 0.00
======== =======
Exercisable at end of period 5,000 $ 2.50 0 $ 0.00
======== =======
Options available for grant 0 0
======== =======
</TABLE>
The following table summarizes information about stock options outstanding
at March 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE (YRS) PRICE SHARES PRICE
------------------------ ------ ---------- ----- ------ -----
<S> <C> <C> <C> <C> <C>
$2.50 to $7.00 606,000 6.9 $ 4.05 578,500 $ 4.00
$10.00 to $15.13 697,900 4.7 $ 13.01 50,833 $ 13.38
$16.50 to $22.13 517,250 4.9 $ 20.20 20,000 $ 21.50
---------- ---------
1,821,150 649,333
========== =========
</TABLE>
F-20
<PAGE> 21
Warrants
The Company issues warrants to purchase restricted Common Stock in
connection with acquisitions or for issuance to employees or consultants for
services. The summary of warrant activity for the year ended October 31, 1995,
the five months ended March 31, 1996 and the years ended March 31, 1997 and
1998, respectively, is as follows:
<TABLE>
<CAPTION>
1995 1996 1997 1998
--------------------- --------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning balance 0 $ 0.00 10,000 $ 3.00 20,000 $ 3.50 2,015,038 $ 4.65
Granted 10,000 $ 3.00 10,000 $ 4.00 1,995,038 $ 4.66 7,016,925 $ 9.69
Exercised 0 $ 0.00 0 $ 0.00 0 $ 0.00 (702,654) $ 4.14
Canceled 0 $ 0.00 0 $ 0.00 0 $ 0.00 (104,769) $ 12.72
------ ------ ------ ------ --------- ------ --------- -------
Ending balance 10,000 $ 3.00 20,000 $ 3.50 2,015,038 $ 4.65 8,224,540 $ 8.89
====== ====== ====== ====== ========= ====== ========= =======
</TABLE>
To facilitate a loan to the Company from a commercial bank, on January 7,
1997, Gerard M. Jacobs, T. Benjamin Jennings, Donald F. Moorehead, George O.
Moorehead, Harold Rubenstein and Raymond F. Zack, each of whom is or was a
director at the time of the loan, provided personal guaranties to a bank. In
consideration for the guaranties, the Company issued warrants to these
individuals to purchase an aggregate of 500,000 shares of restricted Common
Stock of the Company at $4.00 per share (subject to certain restrictions). The
value of the warrants were recorded as other financing costs and the Company
recognized an expense of $151,000 for both the years ended March 31, 1997 and
1998 for the estimated fair value of the loan guaranty.
In fiscal 1998, the Company recognized approximately $20.7 million of
non-cash compensation expense associated with the issuance of warrants to
certain employees, officers and directors. See Note 5 -- Non-recurring expenses.
The following table summarizes information about compensation based warrants
outstanding at March 31, 1998:
<TABLE>
<CAPTION>
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
-------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES SHARES LIFE (YRS) PRICE SHARES PRICE
- ------------------ ------------ ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
$4.00 to $5.91 805,000 4.67 $ 5.81 805,000 $ 5.81
$9.90 to $15.75 1,346,923 4.30 $ 11.86 1,195,673 $ 12.05
</TABLE>
Pro forma disclosures
The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation." The Company continues to account for
stock-based compensation under the provisions of APB 25, "Accounting for Stock
Issued to Employees," and accordingly does not recognize compensation cost for
options and warrants with exercise prices equal to market value at the date of
grant. As required by SFAS No. 123, the following disclosure of pro forma
information provides the effects on net loss and net loss per share as if the
Company had accounted for its employee stock based compensation under the fair
value method prescribed by SFAS No. 123 (in thousands, except per share data and
assumptions):
<TABLE>
<CAPTION>
FIVE MONTHS ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Pro forma net loss $ (1,493) $ (1,387) $ (41,676)
Pro forma basic and diluted net loss per
share $ (0.24) $ (0.14) $ (2.01)
Assumptions:
Expected life (years) 3 3 3
Expected volatility 34.2% 60.0% 63.7%
Dividend yield -- -- --
Risk-free interest rate 5.89% 6.52% 5.65%
</TABLE>
F-21
<PAGE> 22
For the years ended March 31, 1997 and 1998, the weighted average fair value
of options and warrants granted was as follows:
<TABLE>
<CAPTION>
1997 1998
---- ----
SHARES FAIR VALUE SHARES FAIR VALUE
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Exercise price > Market price 95,000 $ 1.59 338,750 $ 4.37
Exercise price = Market price 15,000 $ 2.07 1,173,323 $ 7.24
Exercise price < Market price n/a n/a 1,858,500 $ 14.10
</TABLE>
The fair value of each option and warrant grant is estimated on the date of
grant using the Black-Scholes option-pricing model. The Black-Scholes option
valuation model was originally developed for use in estimating the fair value of
traded options, which have different characteristics than the Company's employee
stock options and warrants. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. As a result, it is management's opinion that the Black-Scholes model
may not necessarily provide a reliable single measure of the fair value of
employee stock options and warrants.
NOTE 14 -- EMPLOYEE BENEFIT PLANS
401K and Profit Sharing Plans
The Company and its wholly-owned subsidiaries sponsor qualified 401(k) plans
and profit sharing plans covering certain eligible employees. Participants can
elect to contribute up to a certain percentage of their qualified pre-tax
compensation. Certain of the qualified 401(k) plans allow the Company to match a
percentage of the contributions of participating employees as specified in the
respective plans and also enable the Company to make a discretionary
contribution based on the plan provisions. For the year ended October 31, 1995,
the five months ended March 31, 1996 and the years ended March 31, 1997 and
1998, expense under the Company's 401(k) and profit sharing plans were
approximately $14,000, $5,000, $68,000 and $382,000, respectively.
Defined Benefit Plans
The Company's Bluestone subsidiary has a defined benefit pension plan
covering certain employees and groups of employees. During fiscal 1998, the
Company completed acquisitions in which it provided for the continuation of two
defined benefit pension plans covering certain employees and groups of
employees. Under the Company's pension plans, benefits are generally based on
years of service and the employees' ending compensation. The Company's
general funding policy is to contribute annually an amount that falls within
the range determined to be deductible for federal tax purposes. Plan assets
consist primarily of stocks, bonds and a receivable from the seller for a fully
funded plan.
Net pension cost includes the following components (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED FIVE MONTHS ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 1995 MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1998
---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Service cost $ 22 $ 9 $ 27 $ 119
Interest cost 34 16 49 341
Actual return on plan assets (41) (35) (10) (545)
Net amortization and deferral 13 23 (25) 247
--------------- --------------- ---------------- ---------------
Net pension cost $ 28 $ 13 $ 41 $ 162
=============== =============== =============== ===============
</TABLE>
F-22
<PAGE> 23
The following table sets forth the plans' funded status and the amounts
recognized in the Company's consolidated balance sheets at (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31, MARCH 31, MARCH 31, MARCH 31,
1995 1996 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 513 $ 548 $ 591 $ 7,797
Non-vested benefit obligation 23 117 86 304
-------------- --------------- --------------- ---------------
Accumulated benefit obligation 536 665 677 8,101
Excess of projected benefit obligation over
accumulated benefit obligation 0 0 0 1,653
-------------- --------------- --------------- ---------------
Projected benefit obligation 536 665 677 9,754
Plan assets at fair value 511 566 551 8,586
--------------- --------------- --------------- ---------------
Projected benefit obligation in excess of
plan assets 25 99 126 1,168
Unrecognized net gain (loss) (61) (45) (44) 197
Prior service cost not yet recognized in net
periodic pension cost (55) (134) (122) (111)
Unrecognized transition obligation (9) (8) (7) (6)
Adjustment required to recognized minimum
liability 125 187 173 148
--------------- --------------- --------------- ---------------
Accrued pension liabilities $ 25 $ 99 $ 126 $ 1,396
=============== =============== =============== ===============
</TABLE>
Significant assumptions used in determining the accumulated benefit
obligations are:
<TABLE>
<CAPTION>
OCTOBER 31, MARCH 31, MARCH 31, MARCH 31,
1995 1996 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Discount rate 7.50% 7.50% 7.50% 7.50%
Expected long-term rate of return on assets 7.75% 7.75% 7.75% 7.50 - 9.00%
</TABLE>
NOTE 15 -- COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain facilities and equipment under operating leases
expiring at various dates. Rent expense was $0.6 million and $3.1 million for
the years ended March 31, 1997 and 1998, respectively. Most of the operating
leases contain renewal options. Future minimum lease payments are as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDING, MARCH 31
<C> <C>
1999 $ 3,448
2000 3,360
2001 3,069
2002 2,487
2003 and thereafter 7,808
</TABLE>
Environmental matters
The Company is subject to comprehensive local, state, federal and
international regulatory and statutory requirements relating to the acceptance,
storage, handling and disposal of solid waste and waste water, air emissions,
soil contamination and employee health, among others. The Company believes that
it and its subsidiaries are in material compliance with currently applicable
environmental and other applicable laws and regulations. The Company and its
subsidiaries may, however, be required from time to time to engage in certain
remedial activities with regard to sites owned or leased by the Company or its
subsidiaries in connection with their business. Furthermore, the Company and
its subsidiaries may be required to pay for a portion of the costs of certain
remedial activities in regard to certain sites owned by third parties under
applicable Federal Superfund laws and regulations. While it is not possible
to predict the ultimate costs of resolving environmental matters, such
costs are not expected to have a material effect on the consolidated financial
condition or results of operations of the Company based on information
currently available to the Company. However, there can be no
F-23
<PAGE> 24
assurance that potential damages, liabilities, expenditures, fines, and
penalties will not have a material adverse effect on the Company's financial
condition or results of operations. In addition, environmental legislation may
in the future be enacted and create liability for past actions and the Company
or its subsidiaries may be fined or held liable for damages.
Purchase of real property
On January 7, 1997, the Company's HouTex subsidiary entered into a 10 year
lease agreement with 15/21 Japhet Realty Ltd. ("Japhet"), which is principally
owned by former HouTex shareholders. The lease agreement allows Japhet to sell
the property to the Company for $4.0 million between the 54th month and the 89th
month of the lease term. The Company also has an option to buy the property for
$4.0 million during the same period.
Futures contracts
The Company utilizes futures contracts in conjunction with the purchase of
certain metals. The Company uses these contracts to hedge its firm sales price
to customers. Such sales commitments amounted to approximately $1.0 million,
$0.6 million, $0.5 million and $0.3 million for the year ended October 31, 1995,
the five months ended March 31, 1996 and the years ended March 31, 1997 and
1998, respectively. Gains and losses on futures contracts are included in cost
of sales in the period of sale. Gains and losses on futures contracts to hedge
excess supply of inventory are recorded as a component of inventory cost.
Outstanding futures contracts at March 31, 1997 and 1998 were not significant.
NOTE 16 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain unaudited quarterly financial
information for the Company's last eight fiscal quarters (in thousands, except
per share amounts)
<TABLE>
<CAPTION>
QUARTER ENDED
-------------
JUNE 30 SEPT. 30 DEC. 31 MAR. 31
------- -------- ------- -------
<S> <C> <C> <C> <C>
FISCAL 1997
Net sales $ 34,525 $ 30,846 $ 28,519 $ 47,940
Gross profit 2,826 1,530 1,448 5,603
Net income (loss) from continuing operation (218) (1,207) (1,223) 541
Net income from discontinued operations 146 148 25 528
Net income (loss) (72) (1,059) (1,198) 1,069
Basic earnings (loss) per share:
Continuing operations $ (.02) $ (.12) $ (.12) $ .05
Discontinued operations .01 .01 .00 .05
Net income (loss) (.01) (.11) (.12) .10
Diluted earnings (loss) per share:
Continuing operations $ (.02) $ (.12) $ (.12) $ .05
Discontinued operations .01 .01 .00 .04
Net income (loss) (.01) (.11) (.12) .09
<CAPTION>
QUARTER ENDED
-------------
JUNE 30 SEPT. 30 DEC. 31 MAR. 31
------- -------- ------- -------
<S> <C> <C> <C> <C>
FISCAL 1998
Net sales $ 82,105 $ 127,254 $ 145,837 $ 214,839
Gross profit 7,374 11,264 12,532 20,971
Non-recurring expenses 0 0 (33,710) 0
Net income (loss) from continuing operations* 286 228 (30,162) 885
Net income from discontinued operations 101 107 (42) 34
Net income (loss)* 387 (37) (36,375) 362
Basic earnings (loss) per share:
Continuing operations* $ .02 $ (.01) $ (1.67) $ .01
Discontinued operations .01 .01 (.01) .00
Net income (loss)* .03 .00 (1.68) .01
</TABLE>
F-24
<PAGE> 25
<TABLE>
<S> <C> <C> <C> <C>
Diluted earnings (loss) per share:
Continuing operations* $ .02 $ (.01) $ (1.67) $ .01
Discontinued operations .01 .01 ( .01) .00
Net income (loss)* .03 .00 (1.68) .01
</TABLE>
- ----------
* amounts include preferred stock dividends, accretion of preferred stock
discount to redemption value and non-cash beneficial conversion feature of
convertible preferred stock.
NOTE 17 -- SUBSEQUENT EVENTS
Purchase transactions
- - In April 1998, the Company, through its Cozzi subsidiary, acquired certain
assets of Midwest Industrial Scrap, Inc., located in Chicago, Illinois.
- - In May 1998, the Company acquired substantially all of the assets of 138
Scrap, Inc. and Katrick, Inc., headquartered in Riverdale, Illinois.
NOTE 18 -- EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF ACCOUNTANTS REPORT
Purchase transactions
- - In June 1998, a wholly owned subsidiary of the Company acquired certain
assets related to the scrap metal businesses of Goldin Industries, Inc.,
Goldin of Alabama, Inc., and Goldin of Louisiana, Inc.
- - In June 1998, a wholly owned subsidiary of the Company merged with and into
Newell Recycling of Denver, Inc. ("Newell Denver"). Newell Denver acquired
substantially all of the assets of Newell Recycling of Utah, LLC.
- - In July 1998 a wholly owned subsidiary of the Company acquired the
common stock of Naporano Iron and Metal, Inc. and Nimco Shredding Co.
- - In July 1998, the Company acquired substantially all of the assets of
Michael Schiavone & Sons, Inc. and related entities, located in North Haven
and Torrington, Connecticut.
- - In July 1998, the Company acquired substantially all of the assets of M.
Kimerling & Sons, Inc., located in Birmingham, Alabama.
- - In July 1998, the Company acquired substantially all of the assets of
Nicroloy Company, located in Heidelberg, Pennsylvania.
- - In July 1998, the Company through its Cozzi subsidiary, acquired certain
assets of Midwest Metallics, L.P., located in Chicago, Illinois.
Senior Credit Facility
- - On September 30, 1998 the Company and its bank group amended its $250
million Senior Credit Facility to modify the interest coverage ratio tests
set forth therein.
F-25
<PAGE> 1
EXHIBIT 99.2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS Form 8-K 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 8-K which address
activities, events or developments that the Company expects or anticipates will
or may occur in the future, including such things as future acquisitions
(including the amount and nature thereof), business strategy, expansion and
growth of the Company's business and operations and other such matters are
forward-looking statements. Although the Company believes the expectations
expressed in such forward-looking statements are based on reasonable assumptions
within the bounds of its knowledge of its business, a number of factors could
cause actual results to differ materially from those expressed in any
forward-looking statements, whether oral or written, made by or on behalf of the
Company. These factors are set forth under the caption "Investment
Considerations" appearing in the Company's annual report on Form 10-K for the
year ended March 31, 1998, as the same may be amended from time to time. Some of
the factors which could affect the Company's performance include, among other
things: the effects of leverage on the Company, immediate and future capital
requirements, risk of dilution to existing shareholders, potential inability to
control growth or to successfully integrate acquired businesses, limited
operating history, cyclicality of the metals recycling industry, potential
inability to complete pending acquisitions, commodity price fluctuations,
compliance with environmental, health and safety and other regulatory
requirements applicable to the Company, potential environmental liability, risk
of deterioration in relations with labor unions, control by principal
stockholders and dependence on key management, dependence on suppliers of scrap
metals, concentration of customer risk, competition in the scrap metals
industry, availability of scrap alternatives, stock market volatility and year
2000 compliance.
The purposes of the following discussion is to facilitate the understanding
and assessment of significant changes and trends related to the results of
operations and financial condition of the Company, including changes arising
from recent acquisitions by the Company, the timing and nature of which have
significantly affected the Company's results of operations. This discussion
should be read in conjunction with the consolidated financial statements and
notes thereto.
GENERAL OVERVIEW
Metal Management is one of the largest and fastest-growing full service
metals recyclers in the United States, with 54 recycling facilities in 12
states. The Company is a leading consolidator in the metals recycling industry
and has achieved this position primarily through the implementation of its
national strategy of completing and integrating regional acquisitions. The
Company believes that its consolidation strategy will enhance the competitive
position and profitability of the operations that it acquires through improved
managerial and financial resources and increased economies of scale.
Metal Management is primarily engaged in the collection and processing of
ferrous and non-ferrous metals for resale to metals brokers, steel producers,
and producers and processors of other metals. The Company collects industrial
scrap and obsolete scrap, processes it into reusable forms, and supplies the
recycled metals to its customers, including mini-mills, integrated steel mills,
foundries and metals brokers. The Company believes that it provides on of the
most comprehensive offerings of both ferrous and non-ferrous scrap metals in
the industry. The Company's ferrous products primarily include shredded,
sheared, hot briquetted, cold briquetted and bundled scrap and broken furnace
iron. The Company also processes non-ferrous metals, including aluminum, copper,
stainless steel, brass, titanium and high-temperature alloys, using similar
techniques and through application of the Company's proprietary technologies.
For the year ended March 31, 1998, the Company sold approximately 3.1 million
tons of ferrous scrap and approximately 400.2 million pounds of non-ferrous
scrap.
The Company's predecessor was incorporated on September 24, 1981, as a
California corporation under the name General Parametrics Corporation, and was
re-incorporated as a Delaware corporation in June 1986 under the same name.
Prior to April 1996, the Company manufactured and marketed color thermal and
dye sublimation printers and related consumables, including ribbons,
transparencies and paper. The Company sold this business in two separate
transactions in July and December 1996 for $1.3 million in cash and future
royalty streams which the Company does not anticipate will result in material
payments to the Company. On April 12, 1996, the Company changed its name to
"Metal Management, Inc."
The Company's common stock, par value $.01 per share ("Common Stock"), is
traded on the NASDAQ Stock Market under the trading symbol "MTLM". The
Company's principal executive offices are located at 500 North Dearborn Street,
Suite 405, Chicago, Illinois 60610, and its telephone number is (312) 645-0700.
On May 28, 1998, a wholly owned subsidiary of the Company merged with
R&P Holdings, Inc., the parent of Charles Bluestone Company and R&P Real
Estate, Inc. of Pittsburgh, Pennsylvania (collectively, "Bluestone"), through a
tax-free stock-for-stock exchange. The merger was accounted for as a pooling-of-
interests under Accounting Principles Board (APB) No. 16, "Business
Combinations." All information set forth below has been restated to include the
historical information of Bluestone and the Company on a pooled basis.
Set forth below is a table identifying the recycling operations acquired
by the Company from April 1996 through June 23, 1998:
<PAGE> 2
<TABLE>
<CAPTION>
LOCATION OF
PRINCIPAL PROCESSING DATE OF
NAME FACILITIES ACQUISITION
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Metal Management Arizona, Inc. (formerly EMCO Recycling Phoenix, Arizona April 1996
Corp. "EMCO") ("MTLM Arizona")
California Metals Recycling, Inc., Firma, Inc. Los Angeles County , California January 1997
Firma Plastic Co. Inc., MacLeod Metals Co and
Trojan Trading Co. (collectively, "MacLeod")
HouTex Metals Company, Inc. ("HouTex") Houston, Texas January 1997
Reserve Iron & Metal Limited Cleveland, Ohio May 1997
Partnership ("Reserve") (1) Chicago, Illinois
Attalla, Alabama
Briquetting Corporation of America, Ferrex Trading Bryan, Ohio June 1997
Corporation, The Isaac Corporation and Paulding Cleveland, Ohio
Recycling, Inc. (collectively, "Isaac") Dayton, Ohio
Defiance, Ohio
Proler Southwest Inc. and Proler Steelworks L.L.C. Houston, Texas August 1997
(collectively, "Proler") Jackson, Mississippi
Cozzi Iron & Metal, Inc. ("Cozzi") (2) Chicago, Illinois December 1997
East Chicago, Indiana
Pittsburgh, Pennsylvania
Memphis, Tennessee
Kankakee Scrap Corporation Kankakee, Illinois December 1997
Houston Compressed Steel Corp. Houston, Texas January 1998
Aerospace Metals, Inc. ("Aerospace") Hartford, Connecticut January 1998
Salt River Recycling L.L.C. (3) Phoenix, Arizona January 1998
Accurate Iron & Metal Co. (4) Franklin Park, Illinois February 1998
Superior Forge, Inc. ("Superior") Huntington Beach, California March 1998
Ellis Metals, Inc. Tucson, Arizona March 1998
Midwest Industrial Metals Corp. (4) Chicago, Illinois April 1998
138 Scrap, Inc. and Katrick, Inc. Riverdale, Illinois May 1998
R&P Holdings, Inc., Charles Bluestone Company, Elizabeth, Pennsylvania May 1998
and R&P Real Estate, Inc. (5)
Sharon, Pennsylvania
Goldin Industries, Inc., Goldin Industries Gulfport, Mississippi June 1998
Louisiana, Inc. and Goldin of Alabama, Inc. (6) Mobile, Alabama
(collectively, "Goldin") Harvey, Louisiana
Newell Recycling of Denver, Inc. and Denver, Colorado June 1998
Newell Recycling of Utah, L.L.C. (7) Colorado Springs, Colorado
- ---------------------------------------
</TABLE>
<PAGE> 3
(1) The Attalla, Alabama recycling facility is operated through a joint venture
in which the Company's subsidiary, Reserve, holds a 50% interest.
(2) The Memphis, Tennessee recycling facility is operated through a joint
venture in which the Company's subsidiary, Cozzi, holds a 50% interest.
(3) At the time it was acquired by the Company, Cozzi held a 50% joint venture
interest in Salt River.
(4) The Company purchased substantially all of the assets of Accurate Iron &
Metal Co. and certain of the assets of Midwest Industrial Metals Corp.,
both of which have been integrated into the Company's Cozzi operations.
(5) The Sharon, Pennsylvania recycling facility is operated through a joint
venture in which the Company's subsidiary, Bluestone, holds a 50% interest.
(6) A new subsidiary, Metal Management Gulf Coast, Inc. was formed with
which the Company purchased substantially all of the scrap metal assets
of Goldin.
(7) A new subsidiary, Newell Recycling West, Inc. was formed and merged
with Newell Recycling of Denver, Inc. (with Newell Recycling West, Inc.
surviving the merger). Concurrently therewith, Newell Recycling
West, Inc. purchased substantially all of the scrap metal assets of
Newell Recycling of Utah, L.L.C.
The Company's revenues consist primarily of revenues derived from the sale
and brokerage of scrap metals. The Company recognizes revenues from processed
product sales at the time of shipment. Revenues related to brokerage sales are
generally recognized upon receipt of the material by the customer.
Cost of sales consists primarily of the cost of metals sold, direct and
indirect labor and related taxes and benefits, repairs and maintenance, and
freight.
General and administrative expenses include management salaries, clerical
and administrative costs, professional services, facility rentals and related
insurance and utility costs, as well as costs related to the Company's marketing
and business development activities.
Non-recurring expenses include costs recognized during December 1997 that
were principally non-cash and which were incurred with respect to write-offs of
certain of its investments in EMCO Recycling, severance benefits for a former
officer, and the cost of certain compensatory warrants which were issued on
December 1, 1997.
Other income and expense consists principally of interest income, gains or
losses on the sale of fixed assets, and income and losses from joint ventures
which represent an allocation of income and losses attributable to investments
made by the Company in three joint ventures. These joint ventures are accounted
for under the equity method of accounting.
YEAR ENDED MARCH 31, 1998 COMPARED TO YEAR ENDED MARCH 31, 1997
Consolidated net sales for the years ended March 31, 1998 ("Fiscal 1998")
and 1997 ("Fiscal 1997") in broad product categories were as follows
(in thousands):
<PAGE> 4
<TABLE>
<CAPTION>
3/31/98 (Fiscal 1998) 3/31/97 (Fiscal 1997)
----------------------------------------- ---------------------------------
COMMODITY WEIGHT NET SALES % WEIGHT NET SALES %
- --------- ------ --------- -- ------ --------- --
<S> <C> <C> <C> <C> <C> <C>
Ferrous metals (tons) 2,127 $ 266,422 46.7 152 $ 20,774 14.6
Non-ferrous metals (lbs) 331,414 166,538 29.3 200,618 105,699 74.5
Brokerage - ferrous (tons) 952 113,039 19.8 0 0 0.0
Brokerage - non ferrous(lbs) 68,754 21,872 3.8 51,675 14,408 10.2
Other - 2,164 0.4 - 949 0.7
------------- ---- ------------- -------
$ 570,035 100% $ 141,830 100%
============= ==== ============= =======
</TABLE>
Consolidated net sales for the year ended March 31, 1998 were $570.0
million compared with consolidated net sales of $141.8 million for the year
ended March 31, 1997. The significant increase in consolidated net sales was
principally due to the inclusion of the net sales of the companies acquired by
Metal Management during the year ended March 31, 1998.
Ferrous sales of processed materials represented 46.7% of consolidated net
sales for the year ended March 31, 1998 compared to 14.6% of consolidated net
sales for the year ended March 31, 1997. The significant increase in ferrous
sales, both in tons sold and as a percentage of consolidated net sales, was due
primarily to the inclusion of ferrous sales of HouTex, Reserve, Isaac,
Proler and Cozzi, each of which is primarily engaged in the sale of ferrous
metals.
Non-ferrous sales of processed materials represented 29.3% of consolidated
net sales for the year ended March 31, 1998 compared to 74.5% of consolidated
net sales for the year ended March 31, 1997. The decrease in percentage of
non-ferrous sales was due to the acquisitions of HouTex, Reserve, Isaac, Proler
and Cozzi, which primarily sell ferrous metals. The increase in pounds of
non-ferrous metals sold was due to the inclusion of non-ferrous sales of MacLeod
and Aerospace, which are primarily engaged in the sale of non-ferrous metals.
Brokerage ferrous sales represented 19.8% of consolidated net sales for the
year ended March 31, 1998. The Company did not have any brokerage ferrous sales
for the year ended March 31, 1997. Brokerage ferrous sales are mainly generated
by Reserve, Isaac and Cozzi, each of which was acquired during the year ended
March 31, 1998.
Brokerage non-ferrous sales represented 3.8% of consolidated net sales for
the year ended March 31, 1998 compared to 10.2% of consolidated net sales for
the year ended March 31, 1997. The increase in pounds and dollars of brokerage
non-ferrous sales is due to the acquisitions of Isaac and Aerospace, each of
which was acquired during the year ended March 31, 1998.
Consolidated gross profit was $52.1 million (9.1% of consolidated net
sales) for the year ended March 31, 1998 compared with consolidated gross profit
of $11.4 million (8.0% of consolidated net sales) for the year ended March 31,
1997. The price of scrap metal is affected by regional and seasonal variations.
Furthermore, prices for scrap metal are also impacted by broad and global
cyclical movements and as such equilibrates supply and demand.
Consolidated general and administrative expenses were $28.2 million (4.9%
of consolidated net sales) for the year ended March 31, 1998 compared with $10.4
million (7.3% of consolidated net sales) for the year ended March 31, 1997. The
increase in general and administrative expenses primarily reflects the inclusion
of a full year of administrative expenses for those operations acquired during
the year ended March 31, 1997 and the inclusion of a partial year of
administrative expenses for the operations acquired by the Company during the
year ended March 31, 1998. Corporate overhead also increased due to
additions in corporate staff and corporate expenses (i.e. legal, audit, travel,
etc.) to support the acquisition strategy the Company is pursuing. The reduction
in general 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.
<PAGE> 5
Depreciation and amortization expense was $10.3 million (1.8% of
consolidated net sales) for the year ended March 31, 1998 compared with $2.5
million (1.8% of consolidated net sales) for the year ended March 31, 1997. The
increase was attributed to the inclusion of goodwill amortization and
depreciation of fixed assets of those operations acquired by the Company since
the year ended March 31, 1997.
During the year ended March 31, 1998, the Company recorded the following
non-recurring pre-tax charges, totaling $33.7 million (5.9% of consolidated net
sales) (in thousands):
<TABLE>
<S> <C>
Non-cash warrant compensation expense $ 19,050
Severance and other termination benefits 2,814
EMCO Recycling Shut-down 11,846
---------------
$ 33,710
===============
</TABLE>
See Note 5 to the Consolidated Financial Statements included in Exhibit
99.1.
Interest expense was $10.0 million (1.8% of consolidated net sales) for the
year ended March 31, 1998 compared to $2.3 million (1.6% of consolidated net
sales) for the year ended March 31, 1997. This increase was due to the issuance
of notes to sellers and the incurrence and/or assumption of debt associated with
the acquisitions completed since the year ended March 31, 1997.
Net loss from continuing operations, after preferred stock dividends and
accretion, was $35.9 million ($1.73 per share) for the year ended March 31, 1998
compared to a net loss of $2.1 million ($0.21 per share) for the year ended
March 31, 1997. The increase in the net loss was primarily attributable to the
non-recurring charges recorded by the Company in the third quarter of the year
ended March 31, 1998. Net loss from continuing operations excluding the
non-recurring charges and the one-time non-cash dividend charge was $0.3 million
($0.02 per share) for the year ended March 31, 1998.
Income from discontinued operations was $0.2 million ($0.01 per share) for
the year ended March 31, 1998 compared to $0.8 million ($0.09 per share) for the
year ended March 31, 1997. Income during the current fiscal year mainly reflects
the royalty income recognized by the Company from the sale of its discontinued
operations, net of certain expenses paid. Prior year results reflect three
months of operations of the discontinued businesses as well as the gain on sale
of the discontinued operations.
Income tax benefit for the year ended March 31, 1998 was $0.5 million (0.1%
of consolidated net sales), which yields an effective tax rate of 1.8%. The
effective tax rate differs from the statutory rate primarily due to the
permanent differences represented by non-deductible goodwill amortization and
certain non-deductible, non-recurring expenses.
YEAR ENDED MARCH 31, 1997 COMPARED TO FIVE MONTHS ENDED MARCH 31, 1996
Consolidated net sales for the year ended March 31, 1997 and the five
months ended March 31, 1996 ("Fiscal 1996") in broad product categories were as
follows (in thousands):
<TABLE>
<CAPTION>
3/31/97 (Fiscal 1997) 3/31/96 (Fiscal 1996)
--------------------- --------------------
COMMODITY NET SALES % NET SALES %
- --------- --------- -- --------- -
<S> <C> <C> <C> <C>
Ferrous metals $ 20,774 14.6 $ 17 0.1
Non-ferrous metals 105,699 74.5 27,865 76.6
Brokerage 14,408 10.2 8,484 23.3
Other 949 0.7 0 0.0
------------- ---- ------------ ----
$ 141,830 100% $ 36,366 100%
============= ==== ============ ====
</TABLE>
Consolidated net sales for the year ended March 31, 1997 were $141.8
million compared with consolidated net sales of $36.4 million for the five
months ended March 31, 1996. The increase in consolidated net sales was due to
only five months of activity in fiscal 1996 versus twelve months of
activity in fiscal 1997. Consolidated net sales also increased due to the
acquisitions of EMCO, MacLeod and HouTex during fiscal 1997.
<PAGE> 6
Ferrous sales of processed materials represented 14.6% of consolidated net
sales for the year ended March 31, 1997 compared to 0.1% of consolidated net
sales for the five months ended March 31, 1996. The increase in ferrous sales
was due to the acquisitions of EMCO and HouTex during fiscal 1997.
Non-ferrous sales of processed materials represented 74.5% of consolidated
net sales for the year ended March 31, 1997 compared to 76.6% of consolidated
net sales for the five months ended March 31, 1996. Non-ferrous sales decreased
as a percentage of consolidated net sales due to the acquisitions of EMCO
and HouTex during fiscal 1997.
Brokerage non-ferrous sales represented 10.2% of consolidated net sales for
the year ended March 31, 1997 compared to 23.3% of consolidated net sales for
the five months ended March 31, 1996. The decrease in brokerage non-ferrous
sales as a percentage of consolidated net sales was due to the acquisitions
completed during fiscal 1997.
Consolidated gross profit was $11.4 million (8.0% of consolidated net
sales) for the year ended March 31, 1997 compared with consolidated gross profit
of $1.5 million (4.0% of consolidated net sales) for the five months ended March
31, 1996. 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 $10.4 million (7.3%
of consolidated net sales) for the year ended March 31, 1997 compared with $2.3
million (6.4% of consolidated net sales) for the five months ended March 31,
1996. The increase in general and administrative expenses was a result of the
acquisitions of EMCO, MacLeod and HouTex during fiscal 1997.
Depreciation and amortization expense was $2.5 million (1.8% of
consolidated net sales) for the year ended March 31, 1997 compared with $0.1
million (0.3% of consolidated net sales) for the five months ended March 31,
1996. The increase was attributed to the inclusion of goodwill amortization and
depreciation of fixed assets of those operations acquired by the Company during
fiscal 1997.
Income from joint ventures was $0.4 million (0.3% of consolidated net
sales) for the year ended March 31, 1997 compared with a loss from joint
ventures of $0.4 million (1.0% of consolidated net sales) for the five months
ended March 31, 1996.
Interest expense was $2.3 million (1.6% of consolidated net sales) for the
year ended March 31, 1997, versus $0.5 million (1.4% of consolidated net sales)
for the five months ended March 31, 1996. The increase in interest expense was
due to the issuance of notes to sellers and the incurrence and/or assumption of
debt associated with the acquisitions completed during fiscal 1997.
Net loss from continuing operations was $2.1 million ($0.21 per share) for
the year ended March 31, 1997 compared to a net loss of $0.9 million (0.15 per
share) for the five months ended March 31, 1996.
Income from discontinued operations was $0.8 million ($0.09 per share) for
the year ended March 31, 1997 compared to $0.0 million ($0.00 per share) for the
five months ended March 31, 1996. Income during fiscal 1997 reflects three
months of operations of the discontinued businesses as well as the gain on the
sale of the discontinued operations.
Income tax benefit for the year ended March 31, 1997 was $0.9 million (0.6%
of consolidated net sales), which yields an effective tax rate of 30%. The
effective tax rate differs from the statutory rate primarily due to the
permanent difference represented by non-deductible goodwill.
<PAGE> 7
FIVE MONTHS ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED OCTOBER 31, 1995
Consolidated net sales for the five months ended March 31, 1996 and the
year ended October 31, 1995 ("Fiscal 1995") in broad product categories were as
follows (in thousands):
<TABLE>
<CAPTION>
3/31/96 (Fiscal 1996) 10/31/95 (Fiscal 1995)
---------------------- ---------------------
COMMODITY NET SALES % NET SALES %
- --------- --------- -- --------- -
<S> <C> <C> <C> <C>
Ferrous metals $ 17 0.1 $ 25 0.1
Non-ferrous metals 27,865 76.6 90,516 80.3
Brokerage 8,484 23.3 22,234 19.6
------------- ---- ------------ ----
$ 36,366 100% $ 112,775 100%
============= ==== ============ ====
</TABLE>
Consolidated net sales for the five months ended March 31, 1996 were $36.4
million compared with consolidated net sales of $112.8 million for the year
ended October 31, 1995. The decrease in consolidated net sales is principally
due to the results for fiscal 1996 reflecting five months of activity versus
twelve months of activity in fiscal 1995.
Non-ferrous sales of processed materials represented 76.6% of consolidated
net sales for the five months ended March 31, 1996 compared to 80.3% of
consolidated net sales for the year ended October 31, 1995. The decrease in
sales in fiscal 1996 was due to seasonality and cyclical factors affecting
the industry.
Brokerage sales represented 23.3% of consolidated net sales for the five
months ended March 31, 1996 compared to 19.6% of consolidated net sales for the
year ended October 31, 1995. The increase in brokerage sales as a percent of
consolidated net sales was due to expansion of the Company's brokerage
operations.
Consolidated gross profit was $1.5 million (4.0% of consolidated net sales)
for the five months ended March 31, 1996 compared with consolidated gross profit
of $7.8 million (6.9% of consolidated net sales) for the year ended October 31,
1995. The decrease in consolidated gross profit margin in Fiscal 1996 was due to
the decline in consolidated net sales. The five month period ended March 31,
1996 reflects seasonal variations and slowness in the business (December through
February).
Consolidated general and administrative expenses were $2.3 million (6.4% of
consolidated net sales) for the five months ended March 31, 1996 compared with
$6.3 million (5.6% of consolidated net sales) for the year ended October 31,
1995. The increase in consolidated general & administrative expenses as a
percentage of consolidated net sales was mainly due to a lower revenues in
Fiscal 1996 as well as the recognition of certain administrative expenses.
Depreciation and amortization expense was $0.1 million (0.3% of
consolidated net sales) for the five months ended March 31, 1996 compared with
$0.2 million (0.1% of consolidated net sales) for the year ended October 31,
1995.
Loss from joint ventures was $0.4 million (0.1% of consolidated net sales)
for the five months ended March 31, 1996 compared with income from joint
ventures of $1.0 million (1.0% of consolidated net sales) for the year ended
October 31, 1995. The Company's joint venture experienced a loss in fiscal 1996
due to declining prices and weakening market conditions. The period in Fiscal
1996 reflects seasonal variations and slowness in the joint venture's
business.
Interest expense was $0.5 million (1.4% of consolidated net sales) for the
five months ended March 31, 1996, versus $1.2 million (1.1% of consolidated net
sales) for the year ended October 31, 1995.
Net loss from continuing operations was $0.9 million ($0.15 per share) for
the five months ended March 31, 1996 compared to net income from continuing
operations of $1.1 million ($0.18 per share) for the year ended October 31,
1995.
Income from discontinued operations was $0.0 million ($0.00 per share) for
the five months ended March 31, 1996 compared to a loss of $2.7 million ($0.44
per share) for the year ended October 31, 1995. Fiscal 1995 results reflect one
time charges of $2.2 million relating to restructuring of the color printer
business and the discontinuance of a portion of the electronic presentation
business. The results for fiscal 1995 were impacted by lower shipments of the
Company's products due to competitive pressures in the market. This was slightly
offset by lower operating expenses as a result of planned reductions in payroll
and related expenditures as well as less time and costs spent by the Company on
research and development.
<PAGE> 8
Income tax benefit for the five months ended March 31, 1996 was $0.6
million (1.8% of consolidated net sales), which yields an effective tax rate
of 40.6%.
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.
Cash Flows from Continuing Operations
The Company generated $2.0 million of cash flows from continuing operations
during the year ended March 31, 1998 compared with cash outflows of $1.7 million
during the year ended March 31, 1997. The increase mainly reflects cash flows
generated from operations acquired during the year ended March 31, 1998.
Cash Flows from Investing Activities
The Company made capital expenditures of approximately $7.6 million during
the year ended March 31, 1998, compared with capital expenditures of $3.3
million during the year ended March 31, 1997. The Company utilized cash of
approximately $43.9 million to complete the acquisitions of, and transaction
costs related to, the operations acquired by the Company during the year ended
March 31, 1998. Management anticipates continuing to make acquisitions, make
capital expenditures for new equipment, and upgrade and expand existing
equipment and facilities. The Company expects that these expenditures may
increase in the future due to the internal and external growth of the Company.
Cash Flows from Financing Activities
During the year ended March 31, 1998, the Company issued 3,495,588 shares
of restricted Common Stock and warrants to purchase 600,000 shares of Common
Stock 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 $42.8 million (collectively, the
"Private Placements"). The proceeds from the Private Placements were used to
fund purchase consideration with respect to acquisitions, repay debt and provide
working capital. 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 year ended
March 31, 1998 reflects royalty income recognized from the sale of the assets of
the discontinued operations, net of expenses paid. Cash flows during the year
ended March 31, 1997 reflect the cash generated by the discontinued operations
as well as the proceeds related to the sale of the discontinued operations.
FINANCIAL CONDITION
The Company's principal sources of cash are its existing cash and cash
equivalents balances, collection of accounts receivable and proceeds from lines
of credit and other borrowings. At March 31, 1998, the Company had $4.5 million
in cash and cash equivalents, compared with cash and cash equivalents of $5.8
million at March 31, 1997.
Significant Transactions
During the year ended March 31, 1998, the Company completed certain
significant debt and equity transactions. The Company raised approximately $39.7
million from the issuance of restricted Common Stock and raised approximately
$42.8 million from the issuance of convertible preferred stock. The
<PAGE> 9
Company utilized a portion of the cash to pay approximately $36.0 million of
notes which were issued in connection with certain acquisitions, to pay a $6.5
million term loan and to fund $33.8 million of the cash portion of the purchase
price for certain acquisitions.
Cash Requirements for Maturing Debt Obligations
In connection with the acquisition of Isaac, the Company issued and assumed
notes payable. The notes require quarterly interest payments and require
principal payments of $10.8 million on February 15, 1999 and $10.8 million on
February 15, 2000.
Cash Requirements for Pending Acquisitions
The Company expects that the cash component of purchase price for Pending
Acquisitions, if all such acquisitions are completed, will be $155.1 million.
Working Capital Availability and Requirements
Accounts receivable balances increased from $27.0 million at March 31, 1997
to $122.4 million at March 31, 1998, primarily as a result of the inclusion of
the accounts receivable of the operations acquired by the Company since March
31, 1997. Accounts payable increased from $13.1 million at March 31, 1997 to
$66.8 million at March 31, 1998, primarily as a result of such acquisitions.
Inventory levels can vary significantly among the Company's subsidiaries.
Inventory on hand at March 31, 1998 and March 31, 1997, respectively, consisted
of the following categories and amounts (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Ferrous metals $ 35,934 $ 2,707
Non-ferrous metals 25,222 9,747
Other 786 954
------------- -------------
$ 61,942 $ 13,408
============= =============
</TABLE>
The increase in the value of inventory is primarily due to the inclusion of
the inventories of Reserve, Isaac, Aerospace and Cozzi, all of which were
acquired during the year ended March 31, 1998.
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 March 31, 1998, the Company and its wholly-owned subsidiaries had
outstanding borrowings with commercial lenders under various short-term
revolving lines of credit in the aggregate principal amount of $58.5 million.
The facilities provided for revolving credit at interest rates that range from
8.5% to 16.5%.
On March 31, 1998, the Company and its subsidiaries entered into a credit
facility (the "Senior Credit Facility") with BT Commercial Corporation, as agent
for the lenders (the "Agent"), and certain commercial lending institutions
providing for a revolving credit and letter of credit facility of $200.0
million. On June 19, 1998, the Senior Credit Facility was amended to increase
the facility to $250.0 million. The Senior Credit Facility matures on March 31,
2001. The Senior Credit Facility bears interest at a floating rate per annum
equal to (at the Company's option): (i) 1.75% over LIBOR or (ii) 0.5% over
Bankers Trust Company's prime rate as in effect from time to time. The Senior
Credit Facility is available for working capital and general corporate purposes,
including acquisitions. The Company and its subsidiaries are required under the
Senior Credit Facility to pay the Agent and the lenders certain fees and
expenses which include an unused line fee on a monthly basis. The obligations of
the Company and its subsidiaries under the Senior Credit Facility are secured by
a security interest in substantially all of the assets and properties of the
Company and its subsidiaries. Availability of loans and letters of credit under
the Senior Credit
<PAGE> 10
Facility is generally limited to a borrowing base constituted of 85% of eligible
accounts receivable, 70% of eligible inventory and a fixed asset sublimit ($55.6
million as of June 23, 1998) that amortizes on a quarterly basis.
On April 1, 1998, the Company made borrowings of $106.8 million under the
Senior Credit Facility to: (i) repay outstanding secured debt of approximately
$96.5 million; (ii) buyout operating leases of approximately $9.3 million; and
(iii) pay prepayment penalties of approximately $1.0 million, leaving the
Company with approximately $17.3 million available under the Senior Credit
Facility as of such date. Borrowings outstanding under the Senior Credit
Facility as of April 1, 1998 bore interest at 9.0%.
On May 13, 1998, the Company sold, in a Rule 144A private offering and
pursuant to Regulation S under the Securities Act of 1933, as amended, $180
million of senior subordinated notes (the "Notes"). The Notes mature on May 15,
2008 and bear interest at the rate of 10% per annum. The proceeds of the
offering were used in part to repay indebtedness of the Company, with the
remainder used for acquisitions and general corporate purposes.
The weighted average interest rate on the borrowings outstanding under the
Company's working capital lines of credit at March 31, 1998 was 9.5%. Average
borrowings under the various working capital lines of credit during fiscal 1998
were approximately $28.5 million. During fiscal 1998, amounts outstanding under
the various working capital lines of credit ranged from $18.0 million to $57.6
million.
YEAR 2000 LIABILITY
The Company is in the process of reviewing its existing computer software
systems, 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.
