<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-14836
METAL MANAGEMENT, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-2835068
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
</TABLE>
500 N. DEARBORN ST., SUITE 405,
CHICAGO, IL 60610
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (312) 645-0700
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _
As of November 2, 1999, the Registrant had 53,429,271 shares of Common Stock
outstanding.
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets -- September 30, 1999
(unaudited) and March 31, 1999 1
Condensed Consolidated Statements of Operations -- three and
six months ended September 30, 1999 and 1998 (unaudited) 2
Condensed Consolidated Statements of Cash Flows -- six
months ended September 30, 1999 and 1998 (unaudited) 3
Condensed Consolidated Statements of Stockholders' Equity --
six months ended September 30, 1999 (unaudited) 4
Notes to Condensed Consolidated Financial Statements
(unaudited) 5
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk 21
PART II: OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K 22
SIGNATURES 23
Exhibit Index 24
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
METAL MANAGEMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, 1999 MARCH 31, 1999
------------------ --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,301 $ 2,482
Accounts receivable, net 126,556 103,760
Inventories 60,385 60,443
Prepaid expenses and other assets 12,208 11,405
Deferred taxes 3,182 3,303
-------- --------
Total current assets 204,632 181,393
Property and equipment, net 165,971 171,240
Goodwill, net 284,868 290,362
Deferred financing costs and other intangibles, net 13,839 13,228
Deferred taxes 7,436 3,261
Investments in joint ventures 3,924 4,525
Other assets 3,115 3,727
-------- --------
TOTAL ASSETS $683,785 $667,736
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 4,310 $ 5,308
Accounts payable 67,726 62,230
Accrued interest 8,746 8,638
Other accrued liabilities 16,427 19,323
-------- --------
Total current liabilities 97,209 95,499
Long-term debt, less current portion 355,175 330,154
Other liabilities 4,248 2,879
-------- --------
TOTAL LIABILITIES 456,632 428,532
Stockholders' equity:
Convertible preferred stock:
Series A 0 4,020
Series B 7,626 10,877
Series C 5,100 5,100
Common Stock 533 489
Warrants 40,745 40,745
Additional paid-in-capital 265,106 259,878
Accumulated deficit (91,957) (81,905)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 227,153 239,204
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $683,785 $667,736
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
1
<PAGE> 4
METAL MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $211,466 $217,256 $410,148 $432,207
Cost of sales 186,908 207,369 359,759 402,571
-------- -------- -------- --------
Gross profit 24,558 9,887 50,389 29,636
OPERATING EXPENSES:
General and administrative 12,782 16,092 27,609 27,637
Depreciation and amortization 6,669 6,252 13,301 10,650
Non-cash and non-recurring expense
(income) (Note 3) 5,014 (2,575) 5,014 (3,361)
-------- -------- -------- --------
Total operating expenses 24,465 19,769 45,924 34,926
-------- -------- -------- --------
Operating income (loss) from continuing
operations 93 (9,882) 4,465 (5,290)
Loss from joint ventures (90) (771) (31) (931)
Interest expense 9,258 8,658 17,994 13,591
Interest and other income, net 305 747 362 1,316
-------- -------- -------- --------
Loss from continuing operations before
income taxes and extraordinary charge (8,950) (18,564) (13,198) (18,496)
Benefit for income taxes (3,050) (4,323) (4,194) (3,783)
-------- -------- -------- --------
Loss from continuing operations before
extraordinary charge (5,900) (14,241) (9,004) (14,713)
DISCONTINUED OPERATIONS:
Gain on sale of discontinued operations,
net of taxes 27 27 27 74
-------- -------- -------- --------
Loss before extraordinary charge (5,873) (14,214) (8,977) (14,639)
Extraordinary charge for early retirement
of debt, net of taxes 0 0 0 862
-------- -------- -------- --------
NET LOSS (5,873) (14,214) (8,977) (15,501)
Premium paid on redemption of preferred
stock 616 0 616 0
Preferred stock dividends 225 415 459 856
-------- -------- -------- --------
NET LOSS APPLICABLE TO COMMON STOCK $ (6,714) $(14,629) $(10,052) $(16,357)
======== ======== ======== ========
BASIC LOSS PER SHARE:
Loss from continuing operations $ (0.13) $ (0.38) $ (0.19) $ (0.43)
Gain on sale of discontinued operations 0.00 0.00 0.00 0.00
Extraordinary charge 0.00 0.00 0.00 (0.02)
-------- -------- -------- --------
Net loss applicable to Common Stock $ (0.13) $ (0.38) $ (0.19) $ (0.45)
======== ======== ======== ========
Weighted average shares outstanding 53,210 38,991 52,915 36,647
DILUTED LOSS PER SHARE:
Loss from continuing operations $ (0.13) $ (0.38) $ (0.19) $ (0.43)
Gain on sale of discontinued operations 0.00 0.00 0.00 0.00
Extraordinary charge 0.00 0.00 0.00 (0.02)
-------- -------- -------- --------
Net loss applicable to Common Stock $ (0.13) $ (0.38) $ (0.19) $ (0.45)
======== ======== ======== ========
Weighted average diluted shares
outstanding 53,210 38,991 52,915 36,647
</TABLE>
The accompanying notes are an integral part of these financial statements
2
<PAGE> 5
METAL MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
----------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $ (9,004) $ (14,713)
Adjustments to reconcile net loss from continuing operations
to cash flows from operating activities:
Depreciation and amortization 13,301 10,650
Deferred income taxes (4,175) (2,908)
Amortization of debt issuance costs and bond discount 1,637 935
Non-cash and non-recurring expense (income) 142 (6,775)
Discontinued operations 27 135
Penalties paid on early retirement of debt 0 (973)
Other 401 (681)
Changes in assets and liabilities, net of acquisitions:
Accounts and notes receivable (22,244) 27,553
Inventories 58 2,392
Accounts payable 5,496 (1,904)
Other (3,996) 7,026
--------- ---------
Cash flows provided by (used in) operating activities (18,357) 20,737
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,657) (11,281)
Proceeds from sale of property and equipment 1,885 670
Acquisitions, net of cash acquired 0 (182,631)
Costs of operating lease buyouts 0 (10,623)
Other 555 2,742
--------- ---------
Net cash used in investing activities (2,217) (201,123)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuances of long-term debt 485,532 974,574
Repayments of long-term debt (460,220) (785,124)
Fees paid to issue long-term debt (1,841) (10,715)
Redemption of convertible preferred stock (3,078) 0
Issuances of Common Stock, net 0 797
--------- ---------
Net cash provided by financing activities 20,393 179,532
--------- ---------
Net decrease in cash and cash equivalents (181) (854)
Cash and cash equivalents at beginning of period 2,482 4,464
--------- ---------
Cash and cash equivalents at end of period $ 2,301 $ 3,610
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 16,275 $ 5,889
Income taxes paid, net $ 261 $ 1,449
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE> 6
METAL MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited, in thousands, except shares)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------------------- --------------------
NUMBER ADDITIONAL
OF PAID-IN-
SERIES A SERIES B SERIES C SHARES AMOUNT WARRANTS CAPITAL
-------- -------- -------- ------ ------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1999 $ 4,020 $10,877 $5,100 48,890,898 $489 $40,745 $259,878
Conversion of preferred stock (1,558) (3,251) 0 4,320,865 43 0 5,021
Cash redemption of preferred
stock (2,462) 0 0 0 0 0 0
Preferred stock dividends 0 0 0 100,182 1 0 203
Other 0 0 0 (25,239) 0 0 4
Net loss 0 0 0 0 0 0 0
------- ------- ------ ---------- ---- ------- --------
BALANCE AT SEPTEMBER 30, 1999 $ 0 $ 7,626 $5,100 53,286,706 $533 $40,745 $265,106
======= ======= ====== ========== ==== ======= ========
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
----------- -----
<S> <C> <C>
BALANCE AT MARCH 31, 1999 $(81,905) $239,204
Conversion of preferred stock 0 255
Cash redemption of preferred
stock (616) (3,078)
Preferred stock dividends (459) (255)
Other 0 4
Net loss (8,977) (8,977)
-------- --------
BALANCE AT SEPTEMBER 30, 1999 $(91,957) $227,153
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE> 7
METAL MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
include the accounts of Metal Management, Inc. and its subsidiaries (herein
referred to as "MTLM" or the "Company") and have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). All significant intercompany accounts, transactions and profits have
been eliminated. Certain information related to the Company's organization,
significant accounting policies and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These unaudited condensed
consolidated financial statements reflect, in the opinion of management, all
material adjustments (which include only normal recurring adjustments) necessary
to fairly state the financial position and the results of operations for the
periods presented and the disclosures herein are adequate to make the
information presented not misleading. Operating results for interim periods are
not necessarily indicative of the results that can be expected for a full year.
These interim financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended March 31, 1999.
In order to maintain consistency and comparability between periods
presented, certain amounts have been reclassified from the previously reported
financial statements in order to conform to the financial statement presentation
of the current period.
NOTE 2 -- PRIOR YEAR ACQUISITIONS
In July 1998, the Company acquired the common stock of Naporano Iron &
Metal Co. and Nimco Shredding Co. (collectively "Naporano"). The purchase
consideration for Naporano consisted of approximately 1.9 million shares of
common stock, par value $.01 per share ("Common Stock") and $86.6 million of
cash (including transaction costs). The Common Stock issued to Naporano was
valued at $18.5 million for financial reporting purposes. The following
unaudited pro forma statement of operations information presents a summary of
the consolidated results of operations of the Company and Naporano as if the
acquisition of Naporano had occurred on April 1, 1998. The unaudited pro forma
statement of operations information includes certain adjustments, such as
additional depreciation expense as a result of a step-up in basis of the fixed
assets acquired, additional amortization expense as a result of goodwill and
interest expense related to cash portions of purchase consideration and assumed
debt. The unaudited pro forma statement of operations information also includes
non-cash and non-recurring income of $3.4 million. The unaudited pro forma
results do not purport to be indicative of the financial results which actually
would have resulted had the Naporano acquisition been in effect on April 1, 1998
(in thousands, except per share data):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30, 1998
------------------
(UNAUDITED)
<S> <C>
PRO FORMA STATEMENT OF OPERATIONS
- ------------------------------------------------------------
Net sales $472,363
Net loss from continuing operations applicable to Common
Stock $(18,394)
Basic and diluted net loss from continuing operations
applicable to Common Stock $ (0.46)
</TABLE>
During the six months ended September 30, 1998, the Company acquired
various other businesses in the scrap metals industry. The total purchase
consideration for these acquisitions consisted of approximately $99.7 million of
cash (including transaction costs), 2.6 million shares of Common Stock, warrants
to purchase 150,000 shares of Common Stock and promissory notes aggregating
$750,000. The Common Stock and
5
<PAGE> 8
METAL MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
warrants to purchase Common Stock were valued at $23.3 million and $0.7 million,
respectively, for financial reporting purposes.
The allocation of the purchase consideration for all these acquisitions at
September 30, 1998 was as follows (in thousands):
<TABLE>
<S> <C>
Fair value of tangible assets acquired $120,287
Goodwill 126,668
Liabilities assumed (17,916)
Common Stock and warrants issued (42,462)
Promissory notes issued (750)
--------
Cash paid 185,827
Less: cash acquired (3,200)
--------
Net cash paid for acquisitions $182,627
========
</TABLE>
These acquisitions 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 acquisition. The purchase price was allocated based on
estimates of the fair value of assets acquired and liabilities assumed. These
estimates were revised during the allocation period when information regarding
contingencies became available to define and quantify the assets acquired and
liabilities assumed.
NOTE 3 -- NON-CASH AND NON-RECURRING EXPENSES (INCOME)
During the three and six months ended September 30, 1999, the Company
recorded non-cash and non-recurring expenses of $5.0 million consisting of the
following (in thousands):
<TABLE>
<CAPTION>
THREE AND SIX
MONTHS ENDED
SEPTEMBER 30,
1999
-------------
<S> <C>
Severance and other benefits $4,701
Other 313
------
$5,014
======
</TABLE>
Severance and other benefits
Effective July 15, 1999, T. Benjamin Jennings resigned as the Company's
Chairman of the Board, Chief Executive Officer and Chief Development Officer, as
a director of the Company and as an officer and director of all of the Company's
subsidiaries for which he served in such capacities. In connection with his
resignation, the Company entered into a settlement agreement and general release
with Mr. Jennings (the "Jennings Settlement Agreement"). Mr. Jennings'
employment agreement was terminated and superseded by the terms of the Jennings
Settlement Agreement. Pursuant to the terms of the Jennings Settlement
Agreement, Mr. Jennings received approximately $2.1 million in a lump-sum cash
payment from the Company, and continues to receive health, dental and life
insurance and certain other benefits as set forth in the Jennings Settlement
Agreement. The Company also agreed to forgive an outstanding $500,000 loan to
Mr. Jennings, plus accrued interest thereon, effective as of January 2, 2000,
provided Mr. Jennings substantially complies with the terms of the Jennings
Settlement Agreement. In addition, Mr. Jennings agreed to release, waive and
renounce his interest under and pursuant to the amended and restated
stockholders' agreement, dated February 12, 1999. The Company and Mr. Jennings
agreed to mutual general releases from any and all liabilities arising out of
any matter or event occurring on or prior to the date of the Jennings Settlement
Agreement. The Company recorded a $2.8 million non-recurring expense related to
the Jennings Settlement Agreement.
6
<PAGE> 9
METAL MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Effective August 1, 1999, George A. Isaac, III resigned as the Company's
Executive Vice President and as an officer and director of all of the Company's
subsidiaries for which he served in such capacities. Mr. Isaac continues to
serve as a member of the Company's Board of Directors. In connection with his
resignation, Mr. Isaac invoked what he believed to be a contractual entitlement
to certain "change of control" payments and other benefits included in his
employment agreement with the Company which were triggered by the resignation of
Gerard M. Jacobs as the Company's Chief Executive Officer. In connection with
his resignation and the invocation of the "change of control" provisions of his
employment agreement, the Company entered into a settlement agreement and
general release with Mr. Isaac (the "Isaac Settlement Agreement"). Mr. Isaac's
employment agreement was terminated and superseded by the terms of the Isaac
Settlement Agreement. Pursuant to the terms of the Isaac Settlement Agreement,
Mr. Isaac received a lump-sum cash payment of approximately $768,000 from the
Company. In addition, Mr. Isaac received $415,000 to be paid in six equal
monthly payments beginning on September 1, 1999. The Company also agreed to
continue to employ Mr. Isaac as a non-officer, part-time employee without an
employment agreement through January 31, 2000 at a salary of $120,000 per year
($60,000 aggregate compensation for the six-month employment period). Mr. Isaac
will continue to be covered by the Company's medical, dental and life insurance
plans through June 23, 2002. The Company agreed to provide Mr. Isaac, at the
Company's expense, use of his current office space and the services of an
administrative assistant through June 23, 2002. The Company and Mr. Isaac agreed
to mutual general releases from any and all liabilities arising out of any
matter or event occurring on or prior to the date of the Isaac Settlement
Agreement. The Company recorded a $1.4 million non-recurring expense related to
the Isaac Settlement Agreement.
During the three and six months ended September 30, 1999, the Company also
incurred severance and other termination benefits relating to twelve employees
totaling $0.5 million as a result of consolidation and integration of its
various businesses.
Facility abandonment, shutdown and integration
In connection with facility abandonments and other termination
arrangements, during the year ended March 31, 1999, the Company recorded
severance, facility closure and other charges totaling approximately $1.8
million, of which $1.5 million remained unpaid at March 31, 1999. The primary
components of this charge were $0.6 million of severance and $1.2 million for
lease cancellation, facility clean-up and other exit costs. Through September
30, 1999, the Company paid approximately $0.7 million related to severance,
facility closure and other charges. At September 30, 1999, approximately $0.3
million of unpaid severance and $0.5 million of unpaid lease cancellation,
facility clean-up and other exit costs remain in accrued liabilities. Certain
terminated employees are being paid in installments and these payments will be
made by the end of the fiscal year. The final clean-up and shutdown of all
abandoned facilities is expected to be completed by December 31, 1999.
During the three and six months ended September 30, 1998, the Company
recorded non-cash and non-recurring income of $2.6 million and $3.4 million,
respectively, consisting of the following (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1998
------------- -------------
<S> <C> <C>
Pooling related merger expenses $ 753 $ 1,685
Non-cash warrant compensation expense (income) (5,057) (6,775)
Terminated merger expenses 1,082 1,082
Other 647 647
------- -------
$(2,575) $(3,361)
======= =======
</TABLE>
7
<PAGE> 10
METAL MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Pooling merger expenses
In connection with a merger which was a pooling of interests, the Company
recognized merger expenses consisting primarily of fees and expenses for
accountants, attorneys, and investment bankers. The merger expenses also
included a charge of $750,000 related to the buy-out of existing contracts which
was recorded in the three months ended September 30, 1998.
Non-cash warrant compensation income
On May 1, 1997, the Company issued warrants to purchase 1,400,000 shares of
Common Stock to the former general partners of Reserve Iron & Metal Limited
Partnership (the "Reserve Warrants"). The Reserve Warrants have initial exercise
prices of $3.50 or $4.00 per share, subject to a $0.50 per share increase in the
event that the Company's stock price exceeds $10.00 per share on the date of
exercise. The Reserve Warrants have terms that range from 30 to 60 months and
vest over 6 month, 12 month, 18 month and 24 month intervals for each group of
350,000 warrants, respectively, beginning on May 1, 1997. The decrease in the
Company's stock price during the three and six months ended September 30, 1998
resulted in the reversal of $5.1 million and $6.7 million of previously
recognized non-cash warrant compensation expense, respectively. Since the
Reserve Warrants are considered variable instruments under APB No. 25, the
Company will record non-cash warrant compensation expense or income throughout
the term of the warrants depending on the fair market value of its Common Stock.
At September 30, 1999, warrants to purchase 910,000 shares of Common Stock
remained outstanding under the Reserve Warrants.
Terminated merger expenses
During the three months ended September 30, 1998, the Company elected, due
to adverse scrap metals market conditions, to terminate all negotiations and
related due diligence processes with potential acquisition candidates. The
terminated merger expenses recognized represented all incurred transaction costs
associated with acquisitions that the Company was pursuing.
NOTE 4 -- INVENTORIES
Inventories for all periods presented are stated at the lower of cost or
market. Cost is determined principally utilizing the average cost method.
Inventories consisted of the following categories at (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 MARCH 31, 1999
------------------ --------------
<S> <C> <C>
Ferrous metals $32,631 $37,679
Non-ferrous metals 24,807 19,791
Other 2,947 2,973
------- -------
$60,385 $60,443
======= =======
</TABLE>
8
<PAGE> 11
METAL MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 5 -- DEBT
Long-term debt consisted of the following at (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 MARCH 31, 1999
------------------ --------------
<S> <C> <C>
Senior Credit Facility $143,583 $144,410
Notes payable to related parties 2,228 3,688
12 3/4% Senior Secured Notes 27,159 0
10% Senior Subordinated Notes 180,000 180,000
Other debt 6,515 7,364
-------- --------
359,485 335,462
Less: current portion (4,310) (5,308)
-------- --------
$355,175 $330,154
======== ========
</TABLE>
Senior Credit Facility
On March 31, 1998, the Company and its subsidiaries entered into a three
year credit facility (the "Senior Credit Facility"), as amended, which provides
for a revolving credit and letter of credit facility of $250.0 million, subject
to borrowing base limitations. A security interest on substantially all of the
assets and properties of the Company and its subsidiaries, including pledges of
the capital stock of the Company's subsidiaries, are pledged as collateral
against the obligations of the Company and its subsidiaries under the Senior
Credit Facility.
Pursuant to the Senior Credit Facility, the Company is required to satisfy
a minimum EBITDA (as defined in the Senior Credit Facility) to interest coverage
ratio test. The minimum interest coverage tests (i) for the nine month period
ending December 31, 1999, (ii) for the twelve month period ending March 31, 2000
and (iii) for the end of each subsequent fiscal quarter thereafter for the
twelve month period then ending require that the Company satisfy an interest
coverage ratio of not less than 1.0 to 1.0. In addition, the Senior Credit
Facility places contractual restrictions on the Company's ability to make
interest payments on its Senior Subordinated Notes (defined below) unless during
the thirty day period ending on the date on which the interest payment is to be
made, there exists average undrawn availability under the Senior Credit Facility
of not less than $12.0 million plus the amount of interest ($9.0 million) which
is then due and payable on the Senior Subordinated Notes.
Senior Secured Notes
On May 7, 1999, the Company issued $30.0 million principal amount of
12 3/4% Senior Secured Notes due on June 15, 2004 (the "Senior Secured Notes").
Interest on the Senior Secured Notes is payable semi-annually. The Senior
Secured Notes were issued at 90% of their principal amount and are redeemable by
the Company, in whole or in part, at 100% of their principal amount at any time
after June 15, 2000. The Senior Secured Notes are secured by a second priority
lien on substantially all of the Company's personal property, plant (to the
extent it constitutes fixtures) and equipment that secures the Senior Credit
Facility. The Senior Secured Notes are senior obligations of the Company,
ranking equally with all of its existing and future unsubordinated debt,
including indebtedness under the Senior Credit Facility, and senior to all of
its existing and future subordinated debt, including the Senior Subordinated
Notes. The Company's payment obligation is jointly and severally guaranteed by
the Company's current and future subsidiaries. The Company received net proceeds
of approximately $25.5 million, after the 10% original issue discount and
transaction fees and expenses. Net proceeds were used to reduce amounts
outstanding under the Senior Credit Facility. The Senior Secured Notes are
traded on the PORTAL system.
9
<PAGE> 12
METAL MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Senior Subordinated Notes
On May 13, 1998, the Company issued $180.0 million principal amount of 10%
Senior Subordinated Notes due on May 15, 2008 (the "Senior Subordinated Notes")
and received net proceeds of $174.6 million. Interest on the Senior Subordinated
Notes is payable semi-annually. The Senior Subordinated Notes are general
unsecured obligations of the Company and are subordinated in right of payment to
all senior debt of the Company, including the indebtedness of the Company under
the Senior Credit Facility and the Senior Secured Notes. The Company's payment
obligation is jointly and severally guaranteed by the Company's current and
certain future subsidiaries. The Senior Subordinated Notes are redeemable at the
Company's option at specified redemption prices and redemption events. The
Senior Subordinated Notes are traded on the PORTAL system.
The Senior Credit Facility, the Indenture governing the Senior Secured
Notes and the Indenture governing the Senior Subordinated Notes contain
covenants that, among other things, restrict the Company and most of its
subsidiaries' ability to:
- incur additional indebtedness;
- pay dividends;
- prepay subordinated indebtedness;
- dispose of some types of assets;
- make capital expenditures;
- create liens and make some types of investments or acquisitions; and
- engage in some fundamental corporate transactions.
In addition, under the Senior Credit Facility, the Company is required to
satisfy specified financial covenants, including an interest coverage ratio and
ratio of capital expenditures to consolidated revenues. The Company's ability to
comply with these provisions may be affected by general economic conditions,
industry conditions, and other events or circumstances beyond its control. A
breach of any of these covenants could result in a default under the Senior
Credit Facility. In the event of a default, depending on the actions taken by
the lenders under the Senior Credit Facility, the lenders could elect to declare
all amounts borrowed under the Senior Credit Facility, together with accrued
interest, to be due and payable. In addition, a default under the Indenture
governing the Senior Secured Notes or the Indenture governing the Senior
Subordinated Notes would constitute a default under the Senior Credit Facility
and any instruments governing our other indebtedness.
Both the Indenture governing the Senior Secured Notes and the Indenture
governing the Senior Subordinated Notes contain restrictions on the Company's
ability to incur, subject to certain exceptions, additional indebtedness, unless
the Company meets an EBITDA (as defined in the Indenture) to fixed charge
coverage ratio of 2.0 to 1.0 for the immediately preceding four calendar
quarters. Because of recent financial performance, the Company currently would
not satisfy the fixed charge coverage ratio test, and, accordingly, is unable
and will remain unable in the foreseeable future to incur significant amounts of
additional indebtedness. As a result, if the Company experiences a liquidity
shortfall, the ability to incur additional indebtedness to cover the shortfall
will be severely limited.
Extraordinary charge on early retirement of debt
During the six months ended September 30, 1998, the Company borrowed under
the Senior Credit Facility to (i) refinance existing secured debt, (ii) buyout
certain operating leases and (iii) pay prepayment
10
<PAGE> 13
METAL MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
penalties associated with the early retirement of debt. In connection with the
refinancing of debt, the Company recognized extraordinary charges consisting of
the following (in thousands):
<TABLE>
<S> <C>
Cash prepayment penalties $ 973
Write-off of related unamortized financing costs 487
------
Extraordinary charge before income tax benefit 1,460
Income tax benefit 598
------
Net extraordinary charge $ 862
======
</TABLE>
NOTE 6 -- STOCKHOLDERS' EQUITY
Convertible preferred stock
The Company's Amended and Restated Certificate of Incorporation allows for
the issuance of up to 4,000,000 shares of preferred stock. During the year ended
March 31, 1998, the Company issued 25,000 shares of convertible preferred stock
(designated as Series A) and 20,000 shares of convertible preferred stock
(designated as Series B). In November 1998, the Company issued 6,000 shares of
convertible preferred stock (designated as Series C) in connection with an
acquisition. The Series A, Series B and Series C convertible preferred stock
each have a par value of $.01 per share and a stated value of $1,000 per share.
Dividends on the Series A, Series B and Series C convertible preferred
stock accrue, whether or not declared by the Board of Directors, at an annual
rate of 6.0%, 4.5% and 6.9%, respectively, of the stated value of each
outstanding share of Series A, Series B and Series C convertible preferred
stock. Dividends are payable in cash, or at the Company's option, in additional
shares of preferred stock, or Common Stock in the case of the Series C
convertible preferred stock.
On September 29, 1999, the Company redeemed all of the outstanding shares
of its Series A convertible preferred stock at a price equal to 125% of the
aggregate stated value plus all accrued and unpaid dividends thereon. As a
result, the Company recognized a special dividend of $0.6 million representing
the premium paid on the redemption. The aggregate price paid by the Company for
the redemption of all remaining shares of Series A convertible preferred stock
was approximately $3.1 million. Upon redemption, the shares of Series A
convertible preferred stock were cancelled by the Company. These shares are not
subject to reissuance by the Company.
The holders of Series B convertible preferred stock are able to convert
their shares into Common Stock at a price equal to the lower of: (i) $24.60;
(ii) 92.5% of the average closing bid price for the Common Stock for the five
trading days prior to the conversion date; or (iii) the lowest traded price of
the Common Stock during the time when the Common Stock is not listed on a
national securities exchange. The holders of the Series C convertible preferred
stock are able to convert their shares into Common Stock at a price equal to
$9.00 per share of Common Stock until November 2003, and thereafter, at a price
equal to the average closing bid price for the Common Stock for the five trading
days prior to the conversion date.
11
<PAGE> 14
METAL MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The following presents a summary of the Series A, Series B and Series C
convertible preferred stock activity during the six months ended September 30,
1999:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
-------- -------- --------
<S> <C> <C> <C>
Shares outstanding at March 31, 1999 4,020 10,877 6,000
Shares converted into Common Stock (1,560) (3,347) 0
Shares redeemed for Cash (2,462) 0 0
Shares issued for dividends 2 96 0
------ ------ -----
Shares outstanding at September 30, 1999 0 7,626 6,000
====== ====== =====
</TABLE>
NOTE 7 -- RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued by the FASB in June 1998 and is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company is evaluating
SFAS No. 133 to determine its impact on the consolidated financial statements.
NOTE 8 -- LOSS PER COMMON SHARE
Basic and diluted earnings per share (EPS) are calculated in accordance
with SFAS No. 128, "Earnings Per Share." Basic EPS is computed by dividing
reported net income (loss) applicable to Common Stock by the weighted average
shares outstanding. Diluted EPS includes the incremental shares issuable upon
the assumed exercise of stock options and warrants, using the treasury stock
method and the assumed conversion of preferred stock. The following is a
reconciliation of the numerators and denominators of the basic and diluted EPS
from continuing operations per share computations (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
LOSS (NUMERATOR):
Loss from continuing operations $(5,900) $(14,241) $ (9,004) $(14,713)
Premium paid on redemption of preferred stock (616) 0 (616) 0
Dividends on convertible preferred stock (225) (415) (459) (856)
------- -------- -------- --------
Net loss applicable to Common Stock $(6,741) $(14,656) $(10,079) $(15,569)
======= ======== ======== ========
SHARES (DENOMINATOR):
Weighted average number of shares outstanding during
the period 53,210 38,991 52,915 36,647
Incremental common shares attributable to dilutive
stock options and warrants 0 0 0 0
------- -------- -------- --------
Diluted number of shares outstanding during the
period 53,210 38,991 52,915 36,647
======= ======== ======== ========
Basic loss per common share $ (0.13) $ (0.38) $ (0.19) $ (0.43)
======= ======== ======== ========
Diluted loss per common share $ (0.13) $ (0.38) $ (0.19) $ (0.43)
======= ======== ======== ========
</TABLE>
The effect of dilutive stock options and warrants were not included as
their effect would have been anti-dilutive for all periods presented. Also, the
potentially dilutive effect of the Company's convertible preferred stock was not
used in the diluted earnings per share calculation as its effect was also
anti-dilutive.
12
<PAGE> 15
This Form 10-Q includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements in this Form 10-Q which address
activities, events or developments that the Company expects or anticipates will
or may occur in the future, including such things as future acquisitions
(including the amount and nature thereof), business strategy, expansion and
growth of the Company's business and operations and other such matters are
forward-looking statements. Although the Company believes the expectations
expressed in such forward-looking statements are based on reasonable assumptions
within the bounds of its knowledge of its business, a number of factors could
cause actual results to differ materially from those expressed in any
forward-looking statements. These and other risks, uncertainties and other
factors are discussed under "Investment Considerations" appearing in the
Company's Annual Report on Form 10-K for the year ended March 31, 1999, as the
same may be amended from time to time.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included under
Item 1. In addition, reference should be made to the audited consolidated
financial statements and notes thereto and related Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's Annual Report on Form 10-K for the year ended March 31, 1999.
GENERAL OVERVIEW
Metal Management is one of the largest and fastest-growing full-service
metals recyclers in the United States, with approximately 50 recycling
facilities in 15 states. In addition, Metal Management holds a 28.5% member
interest in Southern Recycling, the largest scrap metal recycler in the Gulf
Coast region. The Company is a leading consolidator in the metals recycling
industry. The Company has achieved its leading position in the metals recycling
industry primarily by implementing a 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 it acquires because of improved managerial and financial resources
and increased economies of scale.
The Company 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 one 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 other processed scrap,
such as turnings, cast 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.
The Company's predecessor was incorporated on September 24, 1981 as a
California corporation under the name General Parametrics Corporation, and was
reincorporated as a Delaware corporation in September 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. On April 12, 1996, the Company changed its name to "Metal Management,
Inc."
The Company's Common Stock is traded on the NASDAQ SmallCap Market under
the 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.
13
<PAGE> 16
RESULTS OF OPERATIONS
The Company's consolidated net sales consist primarily of revenues derived
from the sale of processed and brokered scrap metals. The Company recognizes
revenues from processed product sales at the time of shipment. Revenues related
to brokerage sales are 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,
utilities 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-cash and non-recurring expenses include costs recognized relating to
severance, stock based compensation, facility abandonment and merger related
expenses.
The Company's results of operations for the three and six months ended
September 30, 1998 include the operations of Superior Forge, Inc. ("Superior
Forge"), which was sold in March 1999. Superior Forge derived substantially all
of its revenues from non-ferrous metals. The Company's results of operations for
the six months ended September 30, 1999 include the results of operations of
businesses acquired by the Company subsequent to June 30, 1998. These
acquisitions include Naporano Iron & Metal Co. and Nimco Shredding Co.
(collectively, "Naporano") and Michael Schiavone & Sons, Inc. ("Schiavone")
which are primarily ferrous processors, and M. Kimerling & Sons, Inc.
("Kimerling") which is primarily a non-ferrous processor (collectively, the
"July 1998 Acquisitions"). The six month period ended September 30, 1998
reflects only a portion of activity relating to the July 1998 Acquisitions.
During the fiscal year ended March 31, 1999 ("Fiscal 1999"), the Company's
results of operations were negatively impacted by the adverse market conditions
prevalent in the steel and scrap metals sectors. These market conditions were
characterized by a significant decline in the price and demand for scrap metals.
This decline resulted in large part from the increase in steel imports flowing
into the United States, principally from Japanese, Brazilian, Russian and
Southeast Asian steel producers during the last six months of calendar 1998.
In the six months ended September 30, 1999, the Company experienced
improvements in its results of operations compared to the prior year as a result
of more stable conditions in the scrap metals industry. The Company's management
believes that improved pricing and demand demonstrated during the current fiscal
year represent the beginning of a return to more normalized market conditions in
the scrap metals industry. The Company believes that as a result of the
consolidation initiatives that it has undertaken during the adverse market
conditions prevalent in Fiscal 1999, and the integration initiatives that the
Company continues to develop and implement, it is well positioned to benefit
from improving market conditions.
Consolidated net sales for the three months ended September 30, 1999 and
1998 in broad product categories were as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
---------------------------- ----------------------------
COMMODITY WEIGHT NET SALES % WEIGHT NET SALES %
--------- ------ --------- - ------ --------- -
<S> <C> <C> <C> <C> <C> <C>
Ferrous metals (tons) 1,013 $109,954 52.0 1,023 $114,300 52.6
Non-ferrous metals (lbs) 126,159 62,564 29.6 128,523 64,036 29.5
Brokerage -- ferrous (tons) 295 29,347 13.9 293 29,123 13.4
Brokerage -- non ferrous (lbs) 16,699 4,257 2.0 28,107 7,452 3.4
Other 5,344 2.5 2,345 1.1
-------- ---- -------- ----
$211,466 100% $217,256 100%
======== ==== ======== ====
</TABLE>
14
<PAGE> 17
Consolidated net sales for the six months ended September 30, 1999 and 1998
in broad product categories were as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
---------------------------- ----------------------------
COMMODITY WEIGHT NET SALES % WEIGHT NET SALES %
--------- ------ --------- - ------ --------- -
<S> <C> <C> <C> <C> <C> <C>
Ferrous metals (tons) 2,051 $213,085 52.0 1,916 $224,472 52.0
Non-ferrous metals (lbs) 272,360 125,568 30.6 255,577 130,182 30.1
Brokerage -- ferrous (tons) 568 53,314 13.0 544 61,447 14.2
Brokerage -- non ferrous (lbs) 33,077 8,345 2.0 39,353 13,051 3.0
Other 9,836 2.4 3,055 0.7
-------- ---- -------- ----
$410,148 100% $432,207 100%
======== ==== ======== ====
</TABLE>
Consolidated net sales for the three and six months ended September 30,
1999 decreased by $5.8 million (2.7%) and $22.1 million (5.1%), respectively,
compared with consolidated net sales for the three and six months ended
September 30, 1998. The decrease in consolidated net sales from the prior
periods is principally due to lower realized scrap metal prices in the current
fiscal year on relatively similar volumes.
Ferrous sales for the three and six months ended September 30, 1999
decreased by $4.3 million and $11.4 million, respectively, compared with ferrous
sales for the three and six months ended September 30, 1998, principally due to
lower realized sales prices. Ferrous sales during the six months ended September
30, 1999 decreased, notwithstanding an increase of 135,000 tons of ferrous
metals sold by the Company over the prior six month period. The increase in
ferrous volumes in the six months ended September 30, 1999 was primarily
attributable to the inclusion of the sales of Naporano and Schiavone, each of
which was acquired subsequent to June 30, 1998 and are primarily engaged in the
ferrous business. The Company's average sales price for ferrous metals sold
decreased by 2.9% to $108.54 per ton and by 11.3% to $103.89 per ton in the
three and six months ended September 30, 1999, respectively, compared to the
three and six months ended September 30, 1998.
Non-ferrous sales for the three and six months ended September 30, 1999
decreased by $1.5 million and $4.6 million, respectively, compared with
non-ferrous sales for the three and six months ended September 30, 1998. The
decrease was due to slightly lower volumes during the three months ended
September 30, 1999 and lower scrap metals prices during the six months ended
September 30, 1999. Non-ferrous volumes for the six months ended September 30,
1999 increased by 16.8 million pounds compared with the six months ended
September 30, 1998, primarily due to the inclusion of the sales of Kimerling,
which is primarily a processor of non-ferrous metals and which was acquired in
July 1998. The Company's average selling price for non-ferrous metals decreased
by 9.5% to $0.46 per pound during the six months ended September 30, 1999
compared to the six months ended September 30, 1998. The Company's average
selling price for non-ferrous sales are impacted by market conditions and the
product mix of non-ferrous metals sold. The majority of the Company's
non-ferrous sales are derived from copper, aluminum and stainless steel.
Brokerage ferrous sales and volumes remained relatively constant during the
three months ended September 30, 1999 compared with brokerage ferrous sales and
volumes during the three months ended September 30, 1998. However, brokerage
ferrous sales decreased by $8.1 million during the six months ended September
30, 1999 compared with brokerage ferrous sales for the six months ended
September 30, 1998. The decrease was principally due to lower average sales
prices realized for brokered ferrous metals during the three months ended June
30, 1999. The average sales price for brokered ferrous metals decreased by 16.9%
to $93.86 per ton during the six months ended September 30, 1999 compared with
the six months ended September 30, 1998. Variations in the average selling price
of brokered materials are caused by both changes in market conditions and from
product mix variations.
Brokerage non-ferrous sales represented 2.0% of consolidated net sales for
the three and six months ended September 30, 1999 compared with 3.4% and 3.0% of
consolidated net sales for the three and six months ended September 30, 1998,
respectively. The decrease is due to lower volumes and lower realized sales
prices compared with the prior year periods. The Company's average sales price
for brokered non-ferrous metals decreased to $0.25 per pound during the three
and six months ended September 30, 1999 compared with $0.27
15
<PAGE> 18
per pound and $0.33 per pound during the three and six months ended September
30, 1998, respectively due to changes in market conditions and product mix
variations.
Gross profit was $24.6 million (11.6% of consolidated net sales) and $50.4
million (12.3% of consolidated net sales) for the three and six months ended
September 30, 1999, respectively, compared with gross profit of $9.9 million
(4.6% of consolidated net sales) and $29.6 million (6.9% of consolidated net
sales) for the three and six months ended September 30, 1998, respectively. The
improvement in the gross profit margin reflects improved material margins
realized by the Company from more stable market conditions, better purchasing
practices and the benefits from consolidation and integration initiatives
undertaken during Fiscal 1999. Gross profit for the three and six months ended
September 30, 1998 was adversely impacted by inventory write-downs recorded
principally to reflect lower of cost or market adjustments.
General and administrative expenses were $12.8 million (6.0% of
consolidated net sales) and $27.6 million (6.7% of consolidated net sales) for
the three and six months ended September 30, 1999, respectively, compared with
$16.1 million (7.4% of consolidated net sales) and $27.6 million (6.4% of
consolidated net sales) for the three and six months ended September 30, 1998,
respectively. The decrease in general and administrative expenses during the
three months ended September 30, 1999 reflect reductions in executive and
administrative personnel and other cost containment initiatives undertaken by
the Company. General and administrative expenses for the six months ended
September 30, 1999 remained unchanged at $27.6 million compared with the six
months ended September 30, 1998, reflecting the impact of cost containment
initiatives, offset in part by the exclusion of general and administrative
expenses of the July 1998 Acquisitions for the three months ended June 30, 1998.
Depreciation and amortization expense was $6.7 million (3.2% of
consolidated net sales) and $13.3 million (3.2% of consolidated net sales) for
the three and six months ended September 30, 1999, respectively, compared with
$6.3 million (2.9% of consolidated net sales) and $10.7 million (2.5%
consolidated net sales) for the three and six months ended September 30, 1998,
respectively. The increase for the six months ended September 30, 1999, both in
dollars and as a percentage of consolidated net sales, is attributed to the
inclusion of goodwill amortization and depreciation of fixed assets of the
businesses comprising the July 1998 Acquisitions.
During the three and six months ended September 30, 1999, the Company
recorded non-cash and non-recurring expenses of $5.0 million. During the three
and six months ended September 30, 1998, the Company recorded non-cash and
non-recurring income of $2.6 million and $3.4 million, respectively. See Note 3
to the condensed consolidated financial statements included in Item 1 of this
Report.
Interest expense was $9.3 million (4.4% of consolidated net sales) and
$18.0 million (4.4% of consolidated net sales) for the three and six months
ended September 30, 1999, respectively, compared with $8.7 million (4.0% of
consolidated net sales) and $13.6 million (3.1% of consolidated net sales) for
the three and six months ended September 30, 1998, respectively. The increase is
primarily attributable to an increase in the Company's overall borrowings to
fund the Company's operations and an increase in the applicable base interest
rates payable by the Company under the Senior Credit Facility.
Net loss from continuing operations, after preferred stock dividends, was
$6.7 million ($0.13 per share) and $10.1 million ($0.19 per share) for the three
and six months ended September 30, 1999, respectively, compared with a net loss
from continuing operations, after preferred stock dividends, of $14.6 million
($0.38 per share) and $15.6 million ($0.43 per share) for the three and six
months ended September 30, 1998, respectively. The decrease in the net loss is
due to more stable scrap metals market conditions prevalent in the current
period compared with the prior year and also due to realization of facility
consolidation benefits. These benefits are evident by the improvement in the
Company's gross profit margins and reduced general and administrative expenses
compared with the prior year periods.
The Company's effective tax rate differs from the statutory rate primarily
due to permanent differences represented by non-deductible goodwill amortization
and certain non-deductible, non-cash and non-recurring expenses.
16
<PAGE> 19
During the six months ended September 30, 1998, the Company recognized an
extraordinary charge of $0.9 million, net of taxes, related to the early
retirement of debt and other costs principally incurred in connection with the
closing of the Senior Credit Facility (see Note 5 to the condensed consolidated
financial statements included in Item 1 of this Report).
LIQUIDITY AND CAPITAL RESOURCES
The Company has required significant amounts of capital to fund its
operations, capital expenditures and acquisition program. The Company has funded
these cash needs principally through cash generated from operating activities,
borrowings under the Senior Credit Facility, and the issuance of equity
securities, the Senior Subordinated Notes and the Senior Secured Notes. During
Fiscal 1999, as a result of adverse market conditions and the impact of such
adverse conditions on the Company's liquidity, the Company also sold its
Superior Forge aluminum forging operation.
The Company anticipates that it will continue to have significant capital
requirements to fund its operations, capital expenditures and consolidation
strategy. The Company believes that cash generated from operations and undrawn
borrowing availability under the Senior Credit Facility provide it with
sufficient liquidity to fund its operations, capital expenditure and debt
service requirements. However, limiting conditions provided for in the
documentation governing the Senior Credit Facility, the Senior Subordinated
Notes and the Senior Secured Notes will limit the Company's ability to incur
significant additional debt to fund significant acquisition or expansion
opportunities unless and until the Company's results of operations show
significant improvement for four consecutive quarters.
Cash Flows from Operating Activities
During the six months ended September 30, 1999, the Company used $18.3
million of cash for operating activities. During this period, working capital
increased by $20.7 million principally due to higher accounts receivable
balances. Pursuant to separation agreements with two former officers, the
Company made cash payments totaling $4.0 million (see Note 3 to the condensed
consolidated financial statements included in Item 1 of this Report). During the
six months ended September 30, 1999, the Company also made a $9.0 million
interest payment on the Senior Subordinated Notes.
Cash Flows from Investing Activities
During the six months ended September 30, 1999, the Company used $2.2
million of cash for investing activities. Purchases of property and equipment
were $4.7 million, while the Company generated $1.9 million of cash from the
sale of redundant fixed assets. Proceeds from the sale of property and equipment
include assets sold as part of the Company's plan to abandon and consolidate
certain facilities.
Cash Flows from Financing Activities
During the six months ended September 30, 1999, the Company's financing
activities provided $20.4 million of cash, principally from increased borrowings
under the Senior Credit Facility. On May 7, 1999, the Company issued $30.0
million aggregate principal amount of Senior Secured Notes, and received net
proceeds of $25.5 million after the 10% discount, transaction fees and expenses.
Proceeds from the Senior Secured Notes were used to repay amounts outstanding
under the Senior Credit Facility. The Company also used $3.1 million of cash to
redeem 2,462 shares of Series A convertible preferred stock at 125% of par
value.
FINANCIAL CONDITION
Cash Requirements for Maturing Debt Obligations and Interest Payments
On November 15, 1999, the Company is required to make a semi-annual
interest payment of $9.0 million on the Senior Subordinated Notes. The Company's
amended Senior Credit Facility allows the Company to make interest payments on
the Senior Subordinated Notes, but requires the Company to maintain average
unused availability equal to the sum of (x) the interest payment and (y) $12.0
million for a period of thirty
17
<PAGE> 20
days prior to the payment date. On December 15, 1999, the Company is required to
make a semi-annual interest payment of approximately $2.5 million on the Senior
Secured Notes. The Company is also required to pay current obligations under
other long-term borrowings totaling $4.3 million.
The Company believes, based on its current financial condition and
liquidity and its current projections of cash flows, that it will be able to
meet all interest payment and maturing debt obligations coming due in the
current fiscal year.
Working Capital Availability and Requirements
Accounts receivable balances of the Company increased from $103.8 million
at March 31, 1999 to $126.6 million at September 30, 1999. The increase is
primarily due to increases in sales realized by the Company during the three
months ended September 30, 1999 compared with the three months ended March 31,
1999, and in particular, increases in sales of stainless steel metals to
customers with longer payment terms.
Accounts payable balances of the Company increased from $62.2 million at
March 31, 1999 to $67.7 million at September 30, 1999 due to improved support
from and relations with suppliers engaged in trade markets which provide
materials to the Company.
Inventory levels can vary significantly among the Company's operations and
with changes in market conditions. Inventories consisted of the following
categories at (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 MARCH 31, 1999
------------------ --------------
<S> <C> <C>
Ferrous metals $32,631 $37,679
Non-ferrous metals 24,807 19,791
Other 2,947 2,973
------- -------
$60,385 $60,443
======= =======
</TABLE>
The Company's ferrous inventory levels have decreased as the Company
continues to implement its goal of reducing inventory levels to reduce interest
costs and to reduce the Company's exposure to changing market prices for scrap
metals. Non-ferrous inventories increased due to an increase of inventory units
and an increase in purchase prices for non-ferrous scrap metals due to changes
in non-ferrous metals markets during the current fiscal year.
COMPANY INDEBTEDNESS
The Company's principal indebtedness is represented by borrowings under the
Senior Credit Facility, the Senior Subordinated Notes and the Senior Secured
Notes.
Senior Credit Facility
The Credit Agreement, dated March 31, 1998, among the Company, BT
Commercial Corporation, as agent and the lenders thereunder (as amended, the
"Senior Credit Facility") provides for a revolving credit and letter of credit
facility of $250.0 million, subject to borrowing base limitations. The Company's
obligations under the Senior Credit Facility are secured by substantially all of
the Company's assets and properties, including pledges of the capital stock of
the Company's 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 (subject to a cap of
$100.0 million) and a fixed asset sublimit ($51.6 million as of September 30,
1999) that amortizes on a quarterly basis.
The Senior Credit Facility provides the Company with the option of
borrowing at an interest rate equal to either the Bankers Trust Company's prime
rate plus a margin or the London Interbank Offered Rate ("LIBOR") plus a margin.
As of November 1, 1999, the interest rate margins are 1.25% for prime rate
borrowings and 2.25% for LIBOR borrowings. The margins applicable to both prime
and LIBOR rate loans, however, decrease to the extent that the Company is able
to satisfy interest coverage tests in subsequent fiscal periods or has excess
availability of at least $40.0 million for a period of 30 consecutive days.
18
<PAGE> 21
The Senior Credit Facility also contains certain financial covenants,
including a minimum interest coverage ratio, imposes certain limitation on the
Company's ability to make capital expenditures and incur additional
indebtedness, and restricts payments of dividends and equity redemptions. The
Senior Credit Facility limits capital expenditures to 2% of consolidated net
sales for the fiscal year ending March 31, 2000.
The interest coverage test of the Senior Credit Facility requires the
Company to maintain an interest coverage ratio of not less than 1.0 to 1.0
(EBITDA (as defined in the Senior Credit Facility) to interest expense) (i) for
the nine months ending December 31, 1999, (ii) for the twelve months ending
March 31, 2000 and (iii) for the end of each fiscal quarter thereafter, for the
twelve-month period then ending. The Company is in compliance as of September
30, 1999 with the covenants established in the Credit Agreement underlying the
Senior Credit Facility. Based on its current projections, the Company expects to
be in compliance with all covenants under the Senior Credit Facility during the
fiscal year ending March 31, 2000.
At September 30, 1999, the Company had outstanding borrowings under its
Senior Credit Facility of approximately $143.6 million. As of November 4, 1999,
the Company had undrawn availability of approximately $30.0 million under the
Senior Credit Facility.
The Senior Credit Facility also restricts the Company's ability to make
interest payments on the Senior Subordinated Notes with respect to the interest
payment due on November 15, 1999 and on each subsequent interest payment date
thereafter unless the Company maintains average undrawn availability of $12.0
million plus the amount of the interest payment for the 30-day period ending on
the interest payment date.
10% Senior Subordinated Notes due 2008
On May 13, 1998, the Company issued $180.0 million of 10% Senior
Subordinated Notes due on May 15, 2008 (the "Senior Subordinated Notes") in a
private placement pursuant to exemptions under the Securities Act of 1933.
Interest on the Senior Subordinated Notes is payable semi-annually during May
and November of each year. The Company received net proceeds of $174.6 million
in the offering of the Senior Subordinated Notes. The Senior Subordinated Notes
are the Company's general unsecured obligations and are subordinated in right of
payment to all of the Company's senior debt, including the Company's
indebtedness under the Senior Credit Facility and the Senior Secured Notes. The
Company's payment obligations are jointly and severally guaranteed by all of the
Company's current and certain future subsidiaries.
Except as described below, the Senior Subordinated Notes are not redeemable
at the Company's option prior to May 15, 2003. After May 15, 2003, the Senior
Subordinated Notes are redeemable by the Company at the redemption prices
(expressed as a percentage of the principal amount and rounded to the nearest
whole percentage) 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 May 15, 2001, the Company may redeem up to 35% of the
aggregate principal amount of the Senior Subordinated Notes at a redemption
price of 110% of the principal amount of the Senior Subordinated Notes, plus
accrued and unpaid interest, from the proceeds of one or more sales of Common
Stock. The Senior Subordinated Notes are also redeemable at the option of the
holders of such notes 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. Subject to certain exceptions, the
Senior Subordinated Notes are redeemable at the option of the holders of such
notes at a repurchase price of 100% of the principal amount thereof, plus
accrued and unpaid interest, in the event of certain asset sales made by the
Company.
19
<PAGE> 22
The Indenture governing the Senior Subordinated Notes contains certain
covenants that limit, among other things, the Company's ability to: (i) incur
additional indebtedness (including by way of guarantee), subject to certain
exceptions, unless the Company meets a fixed charge coverage ratio of 2.0 to 1.0
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 prior to the maturity of the Senior Subordinated Notes;
(iii) pay dividends or distributions, or make certain types of investments or
other restricted payments, unless the Company meets certain specified
conditions; (iv) enter into certain transactions with affiliates; (v) dispose of
certain assets; (vi) incur liens securing indebtedness that is pari passu or
subordinated to the Senior Subordinated Notes; or (viii) engage in certain
mergers and consolidations.
12 3/4% Senior Secured Notes due 2004
On May 7, 1999, the Company issued $30.0 million aggregate principal amount
of its Senior Secured Notes (the "Senior Secured Notes") in a private placement
pursuant to Rule 144A under the Securities Act of 1933. The Senior Secured Notes
were issued at 90% of their stated principal amount at maturity. The Senior
Secured Notes mature on September 15, 2004 and bear interest at the rate of
12 3/4% per annum. Interest on the Senior Secured Notes is payable semi-annually
during September and December of each year. The Company received net proceeds of
$25.5 million in the offering of the Senior Secured Notes. The Senior Secured
Notes are senior obligations of the Company and will rank equally in right of
payment with all of the Company's unsubordinated debt, including the Company's
indebtedness under the Senior Credit Facility, and senior in right of payment to
all of the Company's subordinated debt, including the Senior Subordinated Notes.
The Company's payment obligations are jointly and severally guaranteed by
all of the Company's current and future subsidiaries. The Senior Secured Notes
are also secured by a second priority lien on substantially all of the Company's
personal property, plant (to the extent it constitutes fixtures) and equipment
that secure the Senior Credit Facility. The liens that secure the Senior Secured
Notes are subordinated to the liens that secure the indebtedness under the
Senior Credit Facility.
The Senior Secured Notes are not redeemable at the Company's option prior
to June 15, 2000. Thereafter, the Company may redeem some or all of the Senior
Secured Notes (in multiples of $10.0 million) at a redemption price of 100% of
the principal amount thereof, plus accrued and unpaid interest. The Senior
Secured Notes are redeemable at the option of the holders of such notes at a
repurchase price of 101% of the principal amount thereof, plus accrued and
unpaid interest, in the event of a change of control with respect to the
Company. Subject to certain exceptions, the Senior Secured Notes are redeemable
at the option of the holders of such notes at a repurchase price of 100% of the
principal amount thereof, plus accrued and unpaid interest, in the event of
certain asset sales made by the Company.
The Indenture governing the Senior Secured Notes contains substantially the
same operating restrictions as those contained in the Indenture governing the
Senior Subordinated Notes. These include limits on, among other things, the
Company's ability to: (i) incur additional indebtedness; (ii) pay dividends or
distributions on the Company's capital stock or repurchase its capital stock;
(iii) issue stock of subsidiaries; (iv) make certain investments; (v) create
liens on the Company's assets; (vi) enter into transactions with affiliates;
(vii) merge or consolidate with another company; and (viii) transfer and sell
assets or enter into sale and leaseback transactions.
YEAR 2000
Year 2000 issues arise because computer programs recognize only the last
two digits rather than four digits to define the applicable year. Use of
non-year 2000 compliant programs can result in system failures, miscalculations
or errors causing disruptions of operations or other business failures,
including, a potential inability to process invoices or transactions or engage
in other normal business activities. As it relates to the Company's internal
systems, the Company believes that, as a result of its efforts to resolve
potential year 2000 issues, actual year 2000 issues affecting the Company should
not be material. No assurance can be made, however, that this will be the case.
20
<PAGE> 23
The Company has experienced tremendous growth as a result of having
completed 26 acquisitions since April 1996. Essentially all of the companies and
businesses the Company has acquired operated on separate computer hardware,
software, systems and processes ("Information Systems") before being acquired.
In order to address potential year 2000 issues, among other computer-related
challenges facing the Company, in Fiscal 1998, the Company created an MIS
Steering Committee. The MIS Steering Committee developed a plan for year 2000
compliance which included four major phases -- assessment, remediation, testing
and implementation.
The Company completed its assessment of the impact of year 2000 issues on
its Information Systems. The Company has also completed all of its remediation
and testing phases and has implemented 92% of the required remediation for
significant Information Systems. The Company will complete software upgrades
and/or replacements during the third quarter of the current fiscal year. The
cost of the assessment, remediation, and testing of the Company's Information
Systems has not resulted in the incurrence of material expenditures by the
Company.
The Company has substantially completed its assessment phase of the impact
of year 2000 issues on its non-information technology systems such as
telephones, processing equipment and other equipment containing embedded
technology such as microcontrollers ("Non-IT Systems"). As part of the
assessment, the Company created an equipment inventory database of its Non-IT
Systems to help with the assessment. The Company believes that it will
substantially complete its remediation, testing and implementation phases for
Non-IT Systems by the end of the third quarter of the current fiscal year. The
Company does not expect the cost of making its Non-IT Systems year 2000
compliant to have a material adverse impact on its financial position or results
of operations in future periods.
The Company has identified third parties, such as suppliers, service
providers and customers, with which it has a significant relationship that, in
the event of a year 2000 failure, could have a material adverse impact on its
financial position or results of operations. The Company has distributed a
questionnaire to many of these third parties to determine their year 2000
readiness. Based on responses to surveys and other analyses performed to date,
the Company is not aware of any significant disruptions to its business as a
result of third party year 2000 readiness. The Company will continue to follow
up with its service providers and suppliers during the third fiscal quarter to
determine the potential year 2000 risks. However, while the Company believes
that its actions should significantly lessen year 2000 risks, the Company is
unable to eliminate these risks or to estimate their ultimate effect on its
operating results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to financial risk resulting from fluctuations in
interest rates and commodity prices. The Company seeks to minimize these risks
through regular operating and financing activities and, where appropriate,
through use of derivative financial instruments. The Company's use of derivative
financial instruments is limited and related solely to hedges of certain
non-ferrous inventory positions. Reference is made to the Company's quantitative
disclosures about market risk as of March 31, 1999 included under Item 7A of the
Company's most recent Annual Report on Form 10-K.
21
<PAGE> 24
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
See Exhibit Index
(B) REPORTS ON FORM 8-K
The following reports on Form 8-K were filed during the quarter ended
September 30, 1999:
(1) Form 8-K dated July 15, 1999, filed July 20, 1999, disclosing that T.
Benjamin Jennings resigned as the Chairman of the Board, a director and
Chief Executive Officer of the Company, in order to pursue other
personal and business interests.
22
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
METAL MANAGEMENT, INC.
By: /s/ ALBERT A. COZZI
------------------------------------
Albert A. Cozzi
Director, Chairman of the Board,
and Chief Executive Officer
(Principal Executive Officer)
By: /s/ ROBERT C. LARRY
------------------------------------
Robert C. Larry
Executive Vice President, Finance,
Chief Financial Officer and
Assistant Secretary
(Principal Financial Officer)
By: /s/ AMIT N. PATEL
------------------------------------
Amit N. Patel
Vice President, Finance and
Controller
(Principal Accounting Officer)
Date: November 12, 1999
23
<PAGE> 26
METAL MANAGEMENT, INC.
EXHIBIT INDEX
NUMBER AND DESCRIPTION OF EXHIBIT
<TABLE>
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the
Company, as filed with the Secretary of State of the State
of Delaware on November 2, 1998 (incorporated by reference
to Exhibit 3.1 of the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998).
3.2 Certificate of Designations, Preferences and Rights of
Series C Convertible Preferred Stock of the Company, as
filed with the Secretary of State of the State of Delaware
on November 2, 1998 (incorporated by reference to Exhibit
3.2 of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998).
3.3 Restated By-Laws of the Company, as amended through March
31, 1999 (incorporated by reference to Exhibit 3.3 of the
Company's Annual Report on Form 10-K for the year ended
March 31, 1999).
10.1 Settlement Agreement and General Release, dated July 21,
1999, between the Company and T. Benjamin Jennings
(incorporated by reference to Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1999).
10.2 Settlement Agreement and General Release, dated August 6,
1999, between the Company and George A. Isaac, III
(incorporated by reference to Exhibit 10.6 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1999).
10.3 Letter Agreement, dated September 24, 1999, between Marshall
Capital Management, Inc. and the Company (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K dated September 24, 1999).
10.4 Employment Agreement, dated September 7, 1999, between the
Company and Michael W. Tryon.
27.1 Financial Data Schedule.
</TABLE>
24
<PAGE> 1
Ex 10.4
November 10, 1999
Mr. Michael W. Tryon
[ADDRESS]
Dear Michael:
This letter confirms the terms on which you have agreed to become the
President and Chief Operating Officer of Metal Management, Inc.
1. Term and Duties. The initial term of your employment with Metal
Management, Inc. ("MTLM") will be for one year, beginning on September
7, 1999. The term of your employment will automatically be extended for
successive one year periods unless, at least 90 days prior to the
expiration of the then current one year term, either party gives
written notice to the other party of an intention not to renew the
term. During the term of your employment you will serve as the
President and Chief Operating Officer of MTLM with the duties incumbent
with that office as determined from time to time by the Chairman and
Chief Executive Officer and/or the Board of Directors of MTLM.
2. Compensation. During the term of your employment, while you are
employed by MTLM, you will be entitled to the following compensation:
(a) You will be paid a salary at the annual rate of not less than
$320,000. Your salary will be payable in accordance with
MTLM's normal payroll practices.
(b) You will be eligible to participate in employee benefit plans,
policies and programs maintained from time to time by MTLM for
the general benefit of other similarly situated salaried
employees of MTLM, upon the terms and conditions contained in
such plans.
(c) You will be entitled to annual and long-term bonus
compensation as determined from time to time by MTLM based on
MTLM's bonus policy as in effect from time to time. For your
information, I have attached hereto a copy of our current RONA
plan for your information.
(d) You will be entitled to a monthly car allowance of $1,000.
(e) MTLM will grant to you concurrently with the commencement of
your employment, stock options under the Metal Management,
Inc. 1995 Stock Plan giving you the right to purchase
150,000 shares of MTLM common stock, par value $.01. The
stock options will have exercise prices of (i) $2.00 for
50,000 of the shares subject to the option ("Group 1"), (ii)
$2.50 per share for 50,000 of the shares subject to the
option ("Group 2") , and (iii) $3.00 per share for the
remaining 50,000 shares subject to the option ("Group 3")
and that the Group 1 portion of the stock option will vest
immediately upon commencement of
<PAGE> 2
employment, that the Group 2 portion of the stock option
will vest on the second anniversary of the grant date and
that the Group 3 portion of the stock option will vest on
the third anniversary of the grant date. You will be
required to enter into a standard form of option agreement
used by MTLM with respect to awards under the Stock Plan for
similarly situated employees.
3. Place of Employment. Your primary work location will be Chicago,
Illinois and, as such, the terms of your employment will be governed by
the laws of the state of Illinois. You will be entitled to relocation
expenses associated with your move to Chicago. Attached hereto is our
current policy on relocation. As I mentioned to you, this policy is not
written in stone and we would expect to cover your reasonable
relocation expenses.
If you agree with the foregoing, please sign and return the enclosed copy of
this letter and the enclosed confidentiality and noncompetition agreement to me.
We look forward to having you join us on September 7.
Sincerely yours,
/s/ ALBERT A. COZZI
Agreed: Chairman of the Board
and Chief Executive Officer
Date: September 10, 1999
------------
/s/ MICHAEL W. TRYON
- -----------------------------
Michael W. Tryon
<PAGE> 3
CONFIDENTIALITY AND NONCOMPETITION AGREEMENT
--------------------------------------------
This Agreement is made effective as of the 7th day of September, 1999
by and between Metal Management, Inc. ("MTLM") and Michael W. Tryon (the
"Employee").
WITNESSETH THAT:
WHEREAS, the Employee has agreed to enter into this Agreement as a
condition of the Employee's employment by MTLM;
NOW, THEREFORE, MTLM and the Employee hereby agree as follows:
1. Noncompetition. The Employee hereby covenants and agrees that, while
the Employee is employed by MTLM and during a period of twenty four
(24) months following the termination of the Employee's employment with
MTLM for any reason (the "Covenant Period"), the Employee will not,
directly or indirectly:
(a) alone, together or in association with others, either as a
principal, agent, owner, shareholder, officer, director, partner,
employee, lender, landlord, investor or in any other capacity, engage
in, have any financial interest in or be in any way connected or
affiliated with, or render advice or services to, any business engaged
in businesses or lines of business which MTLM or any of its affiliates
are engaged during the term of the Employee's employment with MTLM and
its affiliates or, with respect to periods after the Employee's
termination of employment, as of the termination date, within 100 miles
of any facility of MTLM or any of its affiliates;
(b) divert, take away, solicit, interfere with or attempt to
divert, take away, solicit, or interfere with any present or future
customer, referral source or account of MTLM or any of its affiliates,
or offer to provide, sell or lease to any such customer, referral
source or account of MTLM or any of its affiliates at any location,
goods or services of the type provided by MTLM or any of its affiliates
during the period that the Employee was employed by MTLM, except on
behalf of MTLM as an employee thereof; or
(c) solicit, induce, influence or attempt to solicit, induce
or influence any present employee or agent of MTLM to leave the
Employee's employment or engagement with MTLM or any of its affiliates;
or offer employment or engagement to or employ or engage any such
employee of MTLM or its affiliates or assist or attempt to assist any
such employee of MTLM or any of its affiliates in seeking other
employment.
The Employee hereby acknowledges that the nature of MTLM's business is
such that it may become engaged in such business in metropolitan areas
throughout the United States. The restrictions imposed by paragraph (a)
above will not apply to the ownership of five percent (5%) or less of
all of the outstanding
<PAGE> 4
securities of any entity whose securities are listed on a national
securities exchange.
2. Trade Secrets. The Employee acknowledges that the Employee will
acquire knowledge of and access to information of a confidential or
proprietary nature concerning the business and affairs of MTLM and its
affiliates, including without limitation, information relating to
customers, accounts, referral sources, contract prices, books and
records, sales, confidential methods, processes, techniques,
information and other trade secrets, all of which are hereinafter
collectively referred to as "Trade Secrets". The Employee recognizes
and agrees that the disclosure or improper use of such Trade Secrets
will cause serious and irreparable injury to MTLM and its affiliates.
Accordingly, the Employee hereby further covenants and agrees that,
during the Covenant Period and thereafter until such Trade Secrets
will become general public knowledge through no fault of the Employee,
the Employee will not:
(a) communicate, disclose or divulge to any person, firm
or other party, or use, directly or indirectly, for
the Employee's benefit or the benefit of others, any
Trade Secrets which the Employee may know now or
hereafter come to know; or
(b) except as required in the normal course of the
employment of the Employee, copy, remove from the
premises of MTLM or any of its affiliates or retain,
without the prior written consent of MTLM, any
written Trade Secrets (or Trade Secrets that are
capable of being reduced to written form, including,
but not limited to, Trade Secrets stored in
electronic form), including, but not limited to,
financial data, customer lists, pricing schedules or
information, memoranda or copies or extracts of any
of the foregoing.
Upon the Employee's termination of employment, the Employee will
deliver to MTLM all Trade Secrets and other confidential information
then in the Employee's possession or under the Employee's control.
3. Proprietary Matters. The Employee hereby covenants and agrees that:
(a) so long as the Employee is employed by MTLM, the Employee will
keep MTLM informed of any and all discoveries, improvements, trade
secrets, secret processes and other know-how (all of which are
hereinafter collectively referred to as "Proprietary Items") made or
developed by the Employee, in whole or in part, or conceived of by the
Employee, alone or with others, which result from any work the
Employee may do for or at the request of MTLM, or which relate to the
business, operations or activities of MTLM or any present or future
affiliate of MTLM, and (b) during the course of the Employee's
employment and thereafter, the Employee will disclose in writing
promptly to such persons as MTLM may from time to time designate, all
Proprietary Items that relate in any way to the business, operations
or activities of MTLM, and that are made or conceived by the Employee
alone or in collaboration with others during the period of the
Employee's employment, whether so made during working hours or
otherwise.
<PAGE> 5
The Employee understands that all Proprietary Items will become and
remain the sole property of MTLM, unless expressly released in writing
by MTLM, and MTLM will have all ownership rights in all the
Proprietary Items. The Employee agrees to execute appropriate
instruments documenting such ownership rights.
4. Time Fixed as to Restriction. As used in Sections 1, 2 and 3 with
respect to the Employee's obligations following termination of
employment with MTLM, the terms "customer", "account", "referral
source", "employee", "trade secrets", and "proprietary item" will mean
only the firm, firms, person, persons, trade secrets and proprietary
items existing as such on the Employee's termination date, or in the
case of a customer, account, referral source or employee, at any time
during the twenty-four (24) month period immediately preceding the
Employee's termination date. In no event are any of these items to be
construed so as to include any future firm, firms, person or persons,
trade secrets or proprietary items arising after the Employee's
termination date, unless otherwise included under the twenty-four (24)
month provision previously stated.
5. Remedies. The Employee expressly agrees and understands that the remedy
at law for any breach by the Employee of this Agreement will be
inadequate and that the damages flowing from such breach are not
readily susceptible to being measured in monetary terms. Accordingly,
it is acknowledged that upon adequate proof of the Employee's violation
of any legally enforceable provision of this Agreement, MTLM will be
entitled to immediate injunctive relief and may obtain a temporary
order restraining any threatened or further breach. Nothing in this
Agreement will be deemed to limit MTLM's remedies at law or in equity
for any breach by the Employee of any of the provisions of this
Agreement which may be pursued or availed of by MTLM.
6. Time. In the event the Employee will violate any legally enforceable
provision of this Agreement as to which there is a specific time period
during which the Employee is prohibited from taking certain actions or
from engaging in certain activities, as set forth in such provision,
then in such event, such violation will toll the running of such time
period from the date of such violation until such violation will cease.
7. Acknowledgment. The Employee has carefully considered the nature and
extent of the restrictions upon the Employee and the rights and
remedies of MTLM under this Agreement and hereby acknowledges and
agrees that the same are (a) reasonable in time and territory; (b) are
designed to eliminate competition which otherwise would be unfair to
MTLM; (c) are not designed to (and will not) stifle the inherent skill
and experience of the Employee; (d) would not operate as a bar to the
Employee's sole means of support; (e) are fully required to protect a
legitimate interest of MTLM; and (f) do not confer a benefit upon MTLM
disproportionate to the detriment to the Employee.
8. Invalidity of Provisions. In the event that any term or provision of
this Agreement will be declared by any court of competent jurisdiction
to be unreasonable or invalid, any such unreasonable term or provisions
will be
<PAGE> 6
modified and enforceable to the extent deemed reasonable by such
court; and any such invalidity will not affect any other term or
provision of this Agreement, all of which remaining terms and
provisions will continue in full force and effect.
9. Applicable Law. This Agreement will be governed by and construed in
accordance with the internal laws (as opposed to the conflicts of law
provisions) of the State of Illinois.
10. Amendment. This Agreement may not be altered, amended or modified
except in writing signed by each of the parties.
IN WITNESS WHEREOF, the parties have hereunto set their hands effective
as of the date first above written.
METAL MANAGEMENT, INC.
By: /s/ DAVID A. CARPENTER
-----------------------------
Name: David A. Carpenter
-----------------------------
Title: Executive Vice-President
-----------------------------
/s/ MICHAEL W. TRYON
-----------------------------------
MICHAEL W. TRYON
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,301,000
<SECURITIES> 0
<RECEIVABLES> 128,674,000
<ALLOWANCES> 2,118,000
<INVENTORY> 60,385,000
<CURRENT-ASSETS> 204,632,000
<PP&E> 202,621,000
<DEPRECIATION> 36,650,000
<TOTAL-ASSETS> 683,785,000
<CURRENT-LIABILITIES> 97,209,000
<BONDS> 207,159,000
0
12,726,000
<COMMON> 533,000
<OTHER-SE> 213,894,000
<TOTAL-LIABILITY-AND-EQUITY> 683,785,000
<SALES> 410,148,000
<TOTAL-REVENUES> 410,148,000
<CGS> 359,759,000
<TOTAL-COSTS> 359,759,000
<OTHER-EXPENSES> 45,924,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,994,000
<INCOME-PRETAX> (13,198,000)
<INCOME-TAX> (4,194,000)
<INCOME-CONTINUING> (9,004,000)
<DISCONTINUED> 27,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,052,000)
<EPS-BASIC> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
