<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: July 1, 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 supplementary
consolidated financial statements give retroactive effect to the Merger.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) Exhibits
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) Supplementary Consolidated Statements of Operations
(c) Supplementary Consolidated Balance Sheets
(d) Supplementary Consolidated Statements of Cash Flows
(e) Supplementary Consolidated Statements of Stockholders'
Equity
(f) Notes to Supplementary Consolidated Financial Statements
<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, Finance,
Treasurer and Chief Financial Officer
Date: July 1, 1998
<PAGE> 4
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DOCUMENT DESCRIPTION PAGE NO.
- ------- -------------------- --------
<S> <C> <C>
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) Supplementary Consolidated Statements
of Operations F-2
(c) Supplementary Consolidated Balance Sheets F-3
(d) Supplementary Consolidated Statements of
Cash Flows F-4
(e) Supplementary Consolidated Statements of
Stockholders' Equity F-5
(f) Notes to Supplementary Consolidated
Financial Statements F-6
</TABLE>
<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) and in the Prospectus constituting part
of the Registration Statements on Form S-3 (No. 333-45913 and No. 333-43423) of
Metal Management, Inc., of our report dated May 28, 1998, appearing in this
Form 8-K.
PricewaterhouseCoopers LLP
Chicago, Illinois
July 1, 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 consolidated balance sheets and the related consolidated
statements of operations, of cash flows and of stockholders' equity included in
the Company's Form 10-K for the year ended March 31, 1998 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.
As described in Note 15, on May 28, 1998 Metal Management, Inc. merged with R&P
Holdings, Inc. in a transaction accounted for as a pooling of interests. The
accompanying supplementary consolidated financial statements give retroactive
effect to the merger of Metal Management, Inc. and R&P Holdings, Inc.
In our opinion, based upon our audits, the accompanying supplementary
consolidated balance sheets and the related supplementary 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 supplementary financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these supplementary
financial statements based on our audits. We conducted our audits of these
supplementary statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the supplementary financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the supplementary 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.
SUPPLEMENTARY 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 Supplementary Consolidated Financial Statements.
F-2
<PAGE> 3
METAL MANAGEMENT, INC.
SUPPLEMENTARY 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 Supplementary Consolidated Financial Statements.
F-3
<PAGE> 4
METAL MANAGEMENT, INC.
SUPPLEMENTARY 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 Supplementary Consolidated Financial Statements.
F-4
<PAGE> 5
METAL MANAGEMENT, INC.
SUPPLEMENTARY 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 Supplementary Consolidated Financial Statements.
F-5
<PAGE> 6
METAL MANAGEMENT, INC.
NOTES TO SUPPLEMENTARY 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 supplementary consolidated financial statements have been prepared to
reflect the merger accounted for as a pooling of interest with R&P Holdings,
Inc. on May 28th, 1998. These supplementary 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. See
Note 3 - Mergers and Acquisitions.
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 is accounted for as a pooling of interests. Accordingly, except for
adjustments to reflect conformed accounting policies, the historical financial
statements of the two companies have been combined in the supplementary
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. See subsequent debt transactions below.
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.
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 (the "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.
- - On July 1, 1998 a wholly owned subsidiary of the Company acquired the
common stock of Naporano Iron and Metal, Inc. and Nimco Shredding Co.
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