<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended December 31, 1998
[ ] 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 of incorporation (I.R.S. Employer Identification Number)
or organization)
</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 February 3, 1999, the Registrant had 44,194,122 shares of Common
Stock outstanding.
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
PART I: FINANCIAL INFORMATION -------
<S> <C> <C>
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets -- December 31, 1998
(unaudited) and March 31, 1998............................ 1
Condensed Consolidated Statements of Operations -- three and
nine months ended December 31, 1998 and 1997
(unaudited)............................................... 2
Condensed Consolidated Statements of Cash Flows -- nine
months ended
December 31, 1998 and 1997 (unaudited).................... 3
Condensed Consolidated Statements of Stockholders' Equity --
March 31, 1998 and December 31, 1998 (unaudited).......... 4
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................... 5
ITEM 2: Management's Discussion and Analysis of Financial Condition
and
Results of Operations..................................... 14
PART II: OTHER INFORMATION
ITEM 2: Changes in Securities....................................... 24
ITEM 4: Submission of Matters to a Vote of Security Holders......... 24
ITEM 5: Other Information........................................... 24
ITEM 6: Exhibits and Reports on Form 8-K............................ 25
SIGNATURES.................................................. 27
Exhibit Index............................................... 28
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
METAL MANAGEMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1998
----------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,430 $ 4,464
Accounts receivable, net.................................. 91,885 122,404
Inventories............................................... 70,604 61,942
Prepaid expenses and other assets......................... 9,281 8,569
-------- --------
Total current assets................................... 174,200 197,379
Property and equipment, net................................. 190,548 109,886
Goodwill, net............................................... 308,062 181,219
Deferred financing costs and other intangibles, net......... 13,419 5,284
Long-term deferred tax asset................................ 2,148 0
Investments in joint ventures............................... 1,775 7,496
Other assets................................................ 1,280 1,162
-------- --------
Total assets........................................... $691,432 $502,426
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 60,967 $ 66,845
Other accrued liabilities................................. 22,740 17,076
Current portion of notes payable to related parties....... 2,794 10,830
Current portion of long-term debt......................... 2,125 1,047
-------- --------
Total current liabilities.............................. 88,626 95,798
Long-term notes payable to related parties, less current
portion................................................... 3,988 31,762
Long-term debt, less current portion........................ 334,202 107,827
Long-term deferred tax liability............................ 0 11,922
Other liabilities........................................... 2,523 2,339
-------- --------
Total liabilities...................................... 429,339 249,648
Stockholders' equity:
Convertible preferred stock -- Series A................... 8,419 13,981
Convertible preferred stock -- Series B................... 15,801 19,027
Convertible preferred stock -- Series C................... 5,100 0
Common stock.............................................. 429 341
Warrants.................................................. 46,248 45,870
Additional paid-in-capital and other...................... 251,702 200,150
Accumulated deficit....................................... (65,606) (26,591)
-------- --------
Total stockholders' equity............................. 262,093 252,778
-------- --------
Total liabilities and stockholders' equity........... $691,432 $502,426
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
1
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METAL MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales........................................ $178,752 $145,837 $610,959 $355,196
Cost of sales.................................... 167,607 133,305 570,178 324,026
-------- -------- -------- --------
Gross profit..................................... 11,145 12,532 40,781 31,170
Operating expenses:
General and administrative..................... 14,670 7,354 42,307 17,678
Depreciation and amortization.................. 7,546 3,122 18,221 6,901
Non-recurring expenses......................... 6,452 33,710 9,866 33,710
-------- -------- -------- --------
Total operating expenses......................... 28,668 44,186 70,394 58,289
-------- -------- -------- --------
Operating loss from continuing operations........ (17,523) (31,654) (29,613) (27,119)
Income (loss) from joint ventures................ (695) 79 (1,626) 268
Interest expense................................. 9,043 2,832 22,634 6,937
Interest and other income, net................... 568 374 1,884 859
-------- -------- -------- --------
Loss from continuing operations before income
taxes, discontinued operations and
extraordinary charge........................... (26,693) (34,033) (51,989) (32,929)
Benefit for income taxes......................... (8,269) (3,871) (15,292) (3,282)
-------- -------- -------- --------
Loss from continuing operations before
discontinued operations and extraordinary
charge......................................... (18,424) (30,162) (36,697) (29,647)
Discontinued operations:
Gain (loss) on sale of discontinued operations,
net of taxes................................. 21 (42) 95 166
-------- -------- -------- --------
Loss before extraordinary charge................. (18,403) (30,204) (36,602) (29,481)
Extraordinary charge for early retirement of
debt, net of taxes............................. 76 0 938 0
-------- -------- -------- --------
Net loss......................................... (18,479) (30,204) (37,540) (29,481)
Accretion of preferred stock to redemption
value.......................................... 0 0 0 57
Non-cash beneficial conversion feature of
convertible preferred stock.................... 0 5,592 0 5,592
Preferred stock dividends........................ 619 580 1,475 895
-------- -------- -------- --------
Net loss applicable to Common Stock.............. $(19,098) $(36,376) $(39,015) $(36,025)
======== ======== ======== ========
Basic earnings (loss) per common share for:
Continuing operations applicable to Common
Stock........................................ $ (0.46) $ (1.67) $ (1.02) $ (2.12)
Discontinued operations........................ $ 0.00 $ (0.01) $ 0.00 $ 0.01
Extraordinary charge........................... $ 0.00 $ 0.00 $ (0.02) $ 0.00
-------- -------- -------- --------
Net loss applicable to Common Stock............ $ (0.46) $ (1.68) $ (1.04) $ (2.11)
======== ======== ======== ========
Weighted average shares outstanding.............. 41,381 21,699 37,506 17,067
Diluted earnings (loss) per share for:
Continuing operations applicable to Common
Stock........................................ $ (0.46) $ (1.68) $ (1.02) $ (2.12)
Discontinued operations........................ $ 0.00 $ (0.01) $ 0.00 $ 0.01
Extraordinary charge........................... $ 0.00 $ 0.00 $ (0.02) $ 0.00
-------- -------- -------- --------
Net loss applicable to Common Stock............ $ (0.46) $ (1.68) $ (1.04) $ (2.11)
======== ======== ======== ========
Weighted average diluted shares outstanding...... 41,381 21,699 37,506 17,067
</TABLE>
The accompanying notes are an integral part of these financial statements
2
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METAL MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM CONTINUING OPERATIONS:
Net loss from continuing operations......................... $ (36,697) $(29,647)
Adjustments to reconcile net loss from continuing operations
to cash flows from continuing operations:
Discontinued operations................................... 182 387
Extraordinary charge on retirement of debt................ (938) 0
Depreciation and amortization............................. 18,221 6,901
Deferred taxes............................................ (14,096) (2,731)
Amortization of debt issuance costs....................... 1,538 0
Non-recurring charges..................................... 6,252 32,055
Other..................................................... 1,653 (477)
Changes in assets and liabilities, net of effects of
acquisitions:
Accounts receivable, net.................................. 62,030 3,578
Inventories............................................... 15,791 17,037
Accounts payable.......................................... (14,890) (20,413)
Other..................................................... (429) (3,698)
----------- --------
Cash flows from continuing operations....................... 38,617 2,992
CASH FLOWS USED BY INVESTING ACTIVITIES:
Purchases of property and equipment....................... (15,451) (4,332)
Costs of operating lease buyouts.......................... (10,623) 0
Acquisitions, net of cash acquired........................ (184,542) (23,153)
Other..................................................... 1,386 1,100
----------- --------
Net cash used by investing activities....................... (209,230) (26,385)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net borrowings on lines-of-credit......................... 0 (1,028)
Issuances of long-term debt............................... 1,227,357 16,402
Repayments of long-term debt.............................. (1,047,473) (50,712)
Fees paid to issue long-term debt......................... (11,056) 0
Penalties paid on early retirement of debt................ (973) 0
Issuances of convertible preferred stock.................. 0 42,908
Issuances of Common Stock................................. 724 40,208
----------- --------
Net cash provided by financing activities................... 168,579 47,778
----------- --------
Net increase (decrease) in cash and cash equivalents........ (2,034) 24,385
Cash and cash equivalents at beginning of period............ 4,464 5,768
----------- --------
Cash and cash equivalents at end of period.................. $ 2,430 $ 30,153
=========== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................... $ 18,792 $ 6,368
Income taxes paid (refunded)................................ $ (125) $ 1,841
</TABLE>
The accompanying notes are an integral part of these financial statements
3
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METAL MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited, in thousands, except shares)
<TABLE>
<CAPTION>
PREFERRED STOCK
--------------------------------
SERIES A SERIES B SERIES C
-------- -------- --------
<S> <C> <C> <C>
Balance at March 31, 1998................................... $13,981 $19,027 $ 0
Conversion of preferred stock............................... (5,562) (3,226) 0
Equity issued for acquisitions.............................. 0 0 5,100
Preferred stock dividends................................... 0 0 0
Exercise of options/warrants................................ 0 0 0
Other....................................................... 0 0 0
Net loss.................................................... 0 0 0
------- ------- ------
Balance at December 31, 1998................................ $ 8,419 $15,801 $5,100
======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
NUMBER ADDITIONAL
OF PAID-IN- ACCUMULATED
SHARES AMOUNT WARRANTS CAPITAL DEFICIT TOTAL
---------- ------ -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1998........ 34,080,830 $341 $45,870 $200,150 $(26,591) $252,778
Conversion of preferred stock.... 4,167,167 41 0 9,172 0 425
Equity issued for acquisitions... 4,492,851 45 699 41,718 0 47,562
Preferred stock dividends........ 0 0 0 0 (1,475) (1,475)
Exercise of options/warrants..... 186,741 2 (449) 1,130 0 683
Other............................ 18,294 0 128 (468) 0 (340)
Net loss......................... 0 0 0 0 (37,540) (37,540)
---------- ---- ------- -------- -------- --------
Balance at December 31, 1998..... 42,945,883 $429 $46,248 $251,702 $(65,606) $262,093
========== ==== ======= ======== ======== ========
</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, 1998
and in the Company's Current Report on Form 8-K dated October 5, 1998.
In order to maintain consistency and comparability between periods
presented, certain amounts have been reclassified from the previously reported
financial statements in order to conform with the financial statement
presentation of the current period.
The accompanying financial statements have been prepared on the presumption
that the Company will continue its operations as a going concern. As discussed
in Note 5 to the condensed consolidated financial statements, the Company may
not have sufficient availability under its Senior Credit Facility to make its
scheduled May 15, 1999 interest payment on its Senior Subordinated Notes. The
inability of the Company to make this interest payment may result in adverse
consequences to the Company, its stockholders, and holders of the Notes
including but not limited to the impairment of the Company to continue as a
going concern. As discussed in Note 5, management continues to evaluate
alternative sources of capital including potential equity offerings, the sale of
assets or other measures. The financial statements do not include any
adjustments that might result from an adverse outcome regarding this
uncertainty.
NOTE 2 -- MERGERS AND ACQUISITIONS
MERGERS ACCOUNTED FOR AS POOLING-OF-INTERESTS
On May 28, 1998, a subsidiary of the Company merged with R&P Holdings,
Inc., the parent of Charles Bluestone Company and R&P Real Estate, Inc.
(hereinafter, "Bluestone") through a tax-free stock-for-stock exchange. In
connection with the merger, the Company issued 1,034,826 shares of common stock,
par value $.01 per share ("Common Stock") in exchange for all the outstanding
common stock of Bluestone. The merger is accounted for as a pooling-of-interests
under Accounting Principles Board (APB) Opinion No. 16, "Business Combinations."
All financial data of the Company, including the Company's previously issued
financial statements presented in this Form 10-Q, have been restated to include
the historical financial information of Bluestone. Certain reclassifications
were made to Bluestone's financial statements to conform to the Company's
presentation.
5
<PAGE> 8
The following table presents net sales and net loss applicable to Common
Stock for the nine months ended December 31 for the Company and Bluestone up to
the date of the merger. The only conforming accounting adjustment reflected is
to change Bluestone's inventory valuation methodology from a LIFO basis to an
average cost basis (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
NET SALES:
The Company -- historical................................... $600,426 $283,353
Bluestone................................................... 10,533 71,843
-------- --------
Combined.................................................... $610,959 $355,196
======== ========
NET LOSS APPLICABLE TO COMMON STOCK:
The Company -- historical................................... $(37,846) $(36,046)
Bluestone................................................... (326) 222
Conforming accounting adjustments, net of tax............... 0 (367)
-------- --------
Net loss from continuing operations......................... (38,172) (36,191)
Net income from discontinued operations..................... 95 166
Extraordinary charge on early retirement of debt............ (938) 0
-------- --------
Combined.................................................... $(39,015) $(36,025)
======== ========
</TABLE>
In connection with the Bluestone merger, the Company recognized merger
expenses of $1.7 million (see Note 3 -- Non-recurring expenses).
ACQUISITIONS COMPLETED DURING THE NINE MONTHS ENDED DECEMBER 31, 1998
- - In April 1998, the Company, through its Cozzi Iron & Metal, Inc. ("Cozzi")
subsidiary, acquired certain assets of Midwest Industrial Metals Corp.,
located in Chicago, Illinois.
- - In May 1998, the Company acquired substantially all of the assets of 138
Scrap, Inc. and Katrick, Inc., located in Riverdale, Illinois.
- - In June 1998, the Company acquired certain assets related to the scrap metal
businesses of Goldin Industries, Inc., Goldin of Alabama, Inc., and Goldin of
Louisiana, Inc. (collectively "Goldin"). Goldin's operations (now operated
under the name Metal Management Gulf Coast, Inc.) are located in Gulfport,
Mississippi, Mobile, Alabama and Harvey, Louisiana.
- - In June 1998, a wholly owned subsidiary of the Company merged with and into
Newell Recycling of Denver, Inc., which subsequently changed its name to
Newell Recycling West, Inc. ("Newell"). Newell operates facilities in Denver
and Colorado Springs, Colorado. In June 1998, Newell acquired substantially
all of the assets of Newell Recycling of Utah, LLC, in a related transaction.
- - In July 1998, the Company acquired the common stock of Naporano Iron & Metal
Co. and Nimco Shredding Co. (collectively "Naporano"), located in Newark, New
Jersey.
- - In July 1998, the Company acquired substantially all of the assets of Michael
Schiavone & Sons, Inc. and related entities, located in North Haven and
Torrington, Connecticut.
- - In July 1998, the Company acquired substantially all of the assets of M.
Kimerling & Sons, Inc., located in Birmingham, Alabama.
- - In July 1998, the Company acquired substantially all of the assets of
Nicroloy Company, located in Heidelberg, Pennsylvania.
- - In July 1998, the Company, through its Cozzi subsidiary, acquired certain
assets of Midwest Metallics, L.P., located in Chicago, Illinois.
6
<PAGE> 9
- - In November 1998, a wholly owned subsidiary of the Company merged with FPX,
Inc. The sole asset of FPX, Inc. is a 50% joint venture interest in PerlCo,
L.L.C. ("PerlCo"). The Company's Cozzi subsidiary had previously owned the
other 50% of PerlCo. PerlCo is a scrap metal recycling operation located in
Memphis, Tennessee.
The purchase consideration for the acquisitions completed during the nine
months ended December 31, 1998 was as follows (in thousands):
<TABLE>
<CAPTION>
NAPORANO OTHERS TOTAL
-------- -------- --------
<S> <C> <C> <C>
Shares of restricted Common Stock issued.................... 1,939 2,554 4,493
Shares of Series C Convertible Preferred Stock issued....... 0 6 6
Warrants issued to purchase Common Stock.................... 0 150 150
Cash paid, including transaction costs...................... $ 86,554 $101,721 $188,275
Value of Common Stock issued................................ 18,497 23,266 41,763
Value of Series C Convertible Preferred Stock issued........ 0 5,100 5,100
Value of warrants issued.................................... 0 699 699
Promissory notes issued..................................... 0 1,250 1,250
-------- -------- --------
Total purchase consideration.............................. $105,051 $132,036 $237,087
======== ======== ========
</TABLE>
The preliminary allocation of purchase consideration was as follows at
December 31, 1998 (in thousands):
<TABLE>
<S> <C>
Fair value of tangible assets acquired...................... $132,999
Goodwill.................................................... 133,018
Liabilities assumed......................................... (29,423)
Common Stock and warrants issued............................ (42,462)
Convertible preferred stock issued.......................... (5,100)
Promissory notes issued..................................... (1,250)
--------
Cash paid................................................... 187,782
Less: cash acquired....................................... (3,240)
--------
Net cash paid for acquisitions.............................. $184,542
========
</TABLE>
The above transactions have been accounted for by the purchase method of
accounting and are included in the Company's results of operations from the
effective date of each respective acquisition. The purchase price was allocated
based on estimates of the fair value of assets acquired and liabilities assumed.
These estimates are revised during the allocation period as necessary when
information regarding contingencies becomes available to define and quantify
assets acquired and liabilities assumed. The allocation period varies by
acquisition but does not usually exceed one year. It is not expected that the
finalization of purchase accounting will have any significant effect on the
financial position or results of operations of the Company.
The following unaudited pro forma statement of operations presents a
summary of consolidated results of operations of the Company, Reserve Iron &
Metal L.P. ("Reserve"), the Isaac Corporation and Ferrex Trading Corporation
(collectively "Isaac"), Proler Southwest Inc. and Proler Steelworks L.L.C.
(collectively "Proler"), Cozzi, Aerospace Metals, Inc. ("Aerospace") and
Naporano (collectively, the "Pro Forma Acquisitions") as if these acquisitions
had occurred on April 1, 1997. The Reserve, Isaac, Proler, Cozzi and Aerospace
acquisitions were completed by the Company during fiscal 1998. The unaudited pro
forma statement of operations have been prepared for comparative purposes only
and include certain adjustments, such as additional depreciation expense as a
result of a step-up in basis of the fixed assets acquired, additional
amortization expense as a result of goodwill and interest expense related to
cash portions of purchase consideration and assumed debt. The pro forma
statement of operations includes non-recurring expenses of $12.6 million for the
nine months ended December 31, 1998 and $33.7 million for the twelve months
ended
7
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March 31, 1998. The pro forma statement of operations for the twelve months
ended March 31, 1998 also includes a charge for a $5.6 million non-cash dividend
on the beneficial conversion feature of convertible preferred stock. The pro
forma results do not purport to be indicative of the financial results which
actually would have occurred had the Pro Forma Acquisitions been in effect on
April 1, 1997 (in thousands, except share data).
<TABLE>
<CAPTION>
NINE MONTHS TWELVE MONTHS
ENDED ENDED
DECEMBER 31, MARCH 31,
1998 1998
------------ -------------
UNAUDITED UNAUDITED
<S> <C> <C>
STATEMENT OF OPERATIONS
Net sales................................................... $651,115 $1,020,030
Net loss from continuing operations applicable to Common
Stock..................................................... $(40,997) $ (38,781)
Basic and diluted net loss per share from continuing
operations................................................ $ (0.95) $ (1.04)
</TABLE>
NOTE 3 -- NON-RECURRING EXPENSES
During the three and nine months ended December 31, 1998, the Company
recorded the following expenses which have been classified as non-recurring
elements of total operating expenses (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED 12/31/98 ENDED 12/31/98
-------------- --------------
<S> <C> <C>
Impairment of goodwill...................................... $6,000 $6,000
Bluestone merger expenses................................... 37 1,721
Terminated merger expenses.................................. 371 1,453
Severance and other benefits................................ 24 131
Integration, facility closure charges and other............. 20 561
------ ------
$6,452 $9,866
====== ======
</TABLE>
On February 12, 1999, the Company signed a definitive purchase agreement to
sell Superior Forge Inc. ("SFI") (see Note 9). In accordance with Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of", the Company
determined that a portion of the goodwill associated with the Company's original
acquisition of Superior Forge was impaired. The Company recorded a $6.0 million
non-cash and non-recurring charge to reflect the impairment of its goodwill
related to Superior Forge at December 31, 1998.
In connection with the Company's merger with Bluestone, 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 at
Bluestone.
In September 1998, the Company elected, due to adverse scrap metals market
conditions, to terminate all then pending negotiations and related due diligence
processes with potential acquisition candidates. The terminated merger expenses
recognized represent incurred transaction costs associated with acquisitions
that the Company was pursuing.
During the current fiscal year, and as a result of the adverse market
conditions, the Company closed certain facilities resulting in the write-off of
equipment which became impaired and the recording of severance accruals for
employee termination. The Company continues its ongoing review of all of its
facilities and will take actions as required in response to market conditions.
During the nine months ended December 31, 1997, the Company recorded
non-recurring expenses of $33.7 million. These expenses related to severance
paid to a former officer of the Company, the value of
8
<PAGE> 11
warrants to purchase Common Stock issued to certain officers and directors of
the Company, and costs associated with the shutdown of the Company's EMCO
Recycling subsidiary.
NOTE 4 -- INVENTORIES
Inventories for all periods presented are stated at the lower of cost or
market. Cost is determined principally on the average cost method. Inventories
consisted of the following categories at (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1998
----------------- --------------
<S> <C> <C>
Ferrous metals.............................................. $42,672 $35,934
Non-ferrous metals.......................................... 25,178 25,222
Other....................................................... 2,754 786
------- -------
$70,604 $61,942
======= =======
</TABLE>
NOTE 5 -- DEBT
SENIOR CREDIT FACILITY
On March 31, 1998, the Company and its subsidiaries entered into a three
year credit facility (the "Senior Credit Facility") with BT Commercial
Corporation, as agent for the lenders (the "Agent") and certain commercial
lending institutions. The Senior Credit Facility, as amended, provides for a
revolving credit and letter of credit facility of $250.0 million, subject to
borrowing base limitations. The obligations of the Company and its subsidiaries
under the Senior Credit Facility are secured by a security interest in
substantially all of the assets and properties of the Company and its
subsidiaries, including pledges of 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 and a fixed asset sublimit ($60.6
million as of December 31, 1998) that amortizes on a quarterly basis. At
December 31, 1998, the Company had borrowings of $147.5 million outstanding and
letters of credit aggregating $8.9 million outstanding under the Senior Credit
Facility.
Pursuant to the Senior Credit Facility, the Company pays a fee of .375% on
the undrawn portion of the facility. The Senior Credit Facility also contains
certain financial covenants, including an interest coverage ratio, imposes
certain limitations on the Company's ability to make to capital expenditures,
and restricts payments of dividends and equity redemptions. The Senior Credit
Facility is available for working capital and general corporate purposes,
including acquisitions.
As a result of recent market conditions in the steel and metal sector and
the impact thereof on the results of operations of the Company, effective as of
December 31, 1998, the Company and its bank group amended the Senior Credit
Facility to, among other things, modify the Company's minimum interest coverage
tests (the "Amendment"). Pursuant to the Amendment, the Company's interest
coverage ratio tests (i) for the nine months ended December 31, 1998 and (ii)
for the twelve months ending March 31, 1999 were replaced with minimum EBITDA
tests for the respective nine and twelve month periods then ended, which (as so
amended) the Company met for the nine-month period ended December 31, 1998. In
addition, the minimum interest coverage tests (i) for the three month period
ended June 30, 1999, (ii) for the six month period ended September 30, 1999,
(iii) for the nine month period ended December 31, 1999, (iv) for the twelve
month period ended March 31, 2000 and (v) for the end of each subsequent fiscal
quarter thereafter for the twelve month period then ending have each been reset
to require an interest coverage ratio of not less than 1.0 to 1.0.
The Senior Credit Facility provides the Company with the option of
borrowing based either on the Bankers Trust Company's prime rate plus a margin
or LIBOR plus a margin. Through December 31, 1998, the interest rate margins
were set at 0.5% for Bankers Trust Company's prime rate and 1.75% for LIBOR.
Pursuant to the Amendment, the interest rate margins were increased to 1.5% for
Bankers Trust Company's prime rate and 2.5% 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 its interest coverage tests in subsequent
fiscal periods or has excess availability of at least $40.0 million for a period
of 30 consecutive days. In addition,
9
<PAGE> 12
the Amendment places contractual restrictions on the Company's ability to make
interest payments on its Notes (as defined herein) unless during the thirty day
period ending on the date on which the interest payment is to be made, there
exists undrawn availability under the Senior Credit Facility of not less than
$20 million plus the amount of interest which is then due and payable on the
Notes.
As disclosed in the Company's Form 10-Q dated September 30, 1998 and in the
Company's Form 8-K dated October 5, 1998, the Company and its bank group had
previously amended the Senior Credit Facility to modify the Company's minimum
interest coverage test.
SENIOR SUBORDINATED NOTES
On May 13, 1998, the Company issued $180.0 million of 10.0% Senior
Subordinated Notes due on May 15, 2008 (the "Notes") in a private placement
under Rule 144A of the Securities Act (the "Subordinated Debt Placement").
Interest on the Notes is payable semi-annually during May and November of each
year. The Company received net proceeds of $174.6 million in the Subordinated
Debt Placement. The Notes are general unsecured obligations of the Company and
are subordinated in right to payment to all senior debt of the Company,
including the indebtedness of the Company under the Senior Credit Facility. The
Company's payment obligations are jointly and severally guaranteed by all of the
Company's current and certain future subsidiaries. The proceeds of the Notes
were used to repay approximately $119.0 million then outstanding under the
Company's Senior Credit Facility and approximately $19.1 million of notes
payable to related parties.
Pursuant to the Amendment to the Senior Credit Facility (described above),
the Company must meet a certain availability target in order to be contractually
permitted to make scheduled interest payments on the Notes. Specifically, in
accordance with the Amendment, the Company will be required to maintain excess
availability under the Senior Credit Facility of at least $20.0 million plus the
interest payment to be made on the Notes for each of 30 days preceding scheduled
interest payments on the Notes (the "Minimum Availability Test"). The next
scheduled interest payment on the Notes is May 15, 1999 ("Payment Date"). If the
Company's availability during 30 day period preceding the Payment Date does not
exceed that amount, unless the Company's lenders under the Senior Credit
Facility agree otherwise, the Company will be unable to make the scheduled
interest payment. The Company anticipates that it will require cash infusions
from equity issuances or business/asset sales in order to satisfy the Minimum
Availability Test. No assurance can be provided that the Company will be able to
satisfy the Minimum Availability Test and that it will be able to make the next
scheduled interest payment on the Notes. If the Company is unable to satisfy the
Minimum Availability Test or is otherwise unable to make any scheduled payments
on its Notes, there would be adverse consequences to the Company, its
stockholders and holders of the Notes. If the Company is unable to make
scheduled interest payments on the Notes, the Company may initiate or be
required to restructure the Company's balance sheet and financial affairs which
could be adverse to the Company, its stockholders, and holders of the Notes.
Except as described below, the Notes are not redeemable at the Company's
option prior to May 15, 2003. After May 15, 2003, the Notes are redeemable by
the Company at the redemption prices (expressed as a percentage of the principal
amount 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 Notes at a redemption price of 110% of the
principal amount of the Notes, plus accrued and unpaid interest from the
proceeds of one or more sales of Common Stock. The Notes are also redeemable at
the
10
<PAGE> 13
option of the holder thereof at a repurchase price of 101% of the principal
amount thereof, plus accrued and unpaid interest in the event of certain change
of control events with respect to the Company.
The Indenture governing the Notes (the "Indenture") contains certain
covenants that limit, among other things, the ability of the Company and its
subsidiaries to (i) incur additional indebtedness (including by way of
guarantee), subject to certain exceptions, unless the Company meets a fixed
charge coverage ratio of 2 to 1 or certain other conditions apply; (ii) issue
certain types of securities containing mandatory redemption rights or which
otherwise are redeemable at the option of the holder thereof prior to the
maturity of the Notes; (iii) pay dividends or distributions, or make certain
types of investments or other restricted payments, unless the Company meets a
fixed charge coverage ratio of 2 to 1 and the amount of the dividend or
distribution, investment or other payment (together with all such other
dividend, distributions, investments or other payments made through the date
thereof) is less than 50% of the consolidated net income of the Company from the
beginning of the fiscal quarter immediately following the date of the Indenture
through the most recently ended fiscal quarter plus the aggregate amount of net
equity proceeds received by the Company in such period, subject to certain
exceptions; (iv) enter into certain transactions with affiliates; (v) dispose of
certain assets; (vi) incur liens securing pari passu or subordinated
indebtedness of the Company; or (vii) engage in certain mergers and
consolidations.
EXTRAORDINARY CHARGE ON EARLY RETIREMENT OF DEBT
The Company borrowed under the Senior Credit Facility to refinance existing
secured debt (including notes payable to related parties), buyout certain
operating leases and pay prepayment 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>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED 12/31/98 ENDED 12/31/98
-------------- --------------
<S> <C> <C>
Cash prepayment penalties................................... $ 0 $ 973
Value of warrants to purchase 106,797 shares of Common Stock
issued as a prepayment penalty............................ 128 128
Write-off of related unamortized financing costs............ 0 487
---- ------
Extraordinary charge before income tax benefit.............. 128 1,588
Income tax benefit.......................................... 52 650
---- ------
Net extraordinary charge.................................... $ 76 $ 938
==== ======
</TABLE>
The warrants are exercisable at $6.50 per share over a 3 year period and
were issued as a prepayment penalty in connection with the repayment of certain
notes issued in an acquisition. The value of the warrants was determined using
the Black-Scholes model.
NOTE 6 -- STOCKHOLDERS EQUITY
COMMON STOCK
On November 2, 1998, the Company's stockholders approved:
- an amendment to the Company's Certificate of Incorporation to, among
other things, increase the number of authorized shares of Common Stock
from 80,000,000 to 140,000,000;
- an amendment to the Company's 1995 Stock Plan to increase the number of
shares of Common Stock authorized for issuance thereunder;
- the Company's 1998 Director Compensation Plan; and
- the Company's 1998 Employee Stock Purchase Plan.
11
<PAGE> 14
During January 1999, the Company completed a private sale of 192,000 shares
of the Company's Common Stock, par value $.01 per share, at a purchase price of
$2.00 per share to certain officers and directors of the Company. The issuance
of these shares is subject to the approval of the Company's stockholders at the
next annual or special meeting of the stockholders of the Company. The Company
received proceeds of approximately $0.4 million in that transaction. There were
no fees or commissions paid in the transaction.
The Company received notice from the NASDAQ Stock Market, Inc. ("NASDAQ")
indicating that the Company is not in compliance with certain maintenance
standards required for continued listing on the NASDAQ National Market System.
On March 18, 1999, the Company will have a hearing before a NASDAQ Panel to
evaluate the Company's ability to satisfy the maintenance standards established
by NASDAQ. If the NASDAQ panel makes an adverse determination regarding the
Company's continued listing, the Company's stock may not continue to be listed
on the NASDAQ National Market System. In that circumstance, the Company will
seek to have its Common Stock continue to trade on NASDAQ's Small Cap Market or
on another appropriate trading exchange or market. The failure of the Company's
Common Stock to be listed on the NASDAQ Stock Market could adversely affect the
liquidity of the Company's Common Stock.
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 fiscal 1998,
the Company issued 25,000 shares of Series A Convertible Preferred Stock, par
value $.01 per share, stated value $1,000 per share (the "Series A Preferred
Stock"), and 20,000 shares of Series B Convertible Preferred Stock, par value
$.01 per share, stated value $1,000 per share (the "Series B Preferred Stock").
In connection with the acquisition of FPX, Inc., the Company issued 6,000 shares
of Series C Convertible Preferred Stock, par value $.01 per share, stated value
$1,000 per share (the "Series C Preferred Stock"). The fair value of the Series
C Preferred Stock was estimated at $5.1 million.
Dividends on the Series A Preferred Stock, Series B Preferred Stock and
Series C 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 Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock. Dividends are payable in cash, or at the
Company's option, in additional shares of preferred stock.
The holders of Series A Preferred Stock are able to convert the shares into
Common Stock at a price equal to the lower of: (i) $18.30; or (ii) 85% of the
average closing bid price for the Common Stock for the five trading days prior
to the date of the conversion notice. The holders of Series B Preferred Stock
are able to convert the shares into Common Stock at a price equal to the lower
of: (i) 120% of the closing bid price for the Common Stock on the date of
purchase of the Series B Preferred Stock; (ii) 92.5% of the average closing bid
price for the Common Stock for the five trading days prior to the date of the
conversion notice; or (iii) if applicable, the lowest traded price of the Common
Stock during the time when the Common Stock is not listed on a national
securities exchange. The holders of the Series C Preferred Stock are able to
convert the shares into Common Stock at a price equal to $9.00 per share of
Common Stock.
The following presents a summary of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock issued and converted during the
nine months ended December 31, 1998:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
-------- -------- --------
<S> <C> <C> <C>
Shares outstanding at March 31, 1998........................ 15,094 20,000 0
Shares converted into Common Stock.......................... (6,971) (4,660) 0
Shares issued for acquisitions.............................. 0 0 6,000
Shares issued for dividends................................. 292 461 0
------ ------ -----
Shares outstanding at December 31, 1998..................... 8,415 15,801 6,000
====== ====== =====
</TABLE>
12
<PAGE> 15
NOTE 7 -- RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued by the FASB in September 1998 and is effective for
fiscal years beginning after September 15, 1999. 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
The following table presents the calculation of loss per common share from
continuing operations (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
LOSS (NUMERATOR):
Net loss from continuing operations................... $(18,424) $(30,162) $(36,697) $(29,647)
Dividends on convertible preferred stock.............. 619 6,172 1,475 6,544
-------- -------- -------- --------
Net loss applicable to Common Stock................... $(19,043) $(36,334) $(38,172) $(36,191)
======== ======== ======== ========
SHARES (DENOMINATOR):
Weighted average number of shares outstanding
during the period................................... 41,381 21,699 37,506 17,067
Incremental common shares attributable to dilutive
stock options and warrants.......................... 0 0 0 0
-------- -------- -------- --------
Diluted number of shares outstanding during the
period.............................................. 41,381 21,699 37,506 17,067
======== ======== ======== ========
Basic loss per common share........................... $(0.46) $(1.67) $(1.02) $(2.12)
======== ======== ======== ========
Diluted loss per common share......................... $(0.46) $(1.67) $(1.02) $(2.12)
======== ======== ======== ========
</TABLE>
The effect of dilutive stock options and warrants were not included as
their effect would have been anti-dilutive. However, if the Company would have
reported net earnings, the incremental shares attributable to dilutive stock
options and warrants would have been approximately 3,000 and 1,244,000 for the
three and nine months ended December 31, 1998, respectively and 4,252,000 and
3,257,000 for the three and nine months ended December 31, 1997, respectively.
Also, the potentially dilutive effect of the Company's convertible preferred
stock were not used in the diluted earnings per share calculation as its effect
was also anti-dilutive.
NOTE 9 -- SUBSEQUENT EVENT
On February 12, 1999, the Company signed a definitive purchase agreement
providing for the sale of SFI to a group of investors led by Gerard M. Jacobs,
the Company's former chief executive officer. The transaction is subject to
financing contingencies and certain government approvals. Upon closing of the
SFI definitive purchase agreement, the Company expects to record a one-time
charge of $2.2 million for income taxes on the closing of the sale of SFI. The
Company expects the SFI transaction to close in its fourth quarter.
13
<PAGE> 16
This Form 10-Q/A 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/A which address
activities, events or developments that the Company expects or anticipates will
or may occur in the future, including such things as future acquisitions
(including the amount and nature thereof), business strategy, expansion and
growth of the Company's business and operations and other such matters are
forward-looking statements. Although the Company believes the expectations
expressed in such forward-looking statements are based on reasonable assumptions
within the bounds of its knowledge of its business, a number of factors could
cause actual results to differ materially from those expressed in any
forward-looking statements, whether oral or written, made by or on behalf of the
Company. These factors are set forth under the caption "Investment
Considerations" appearing in the Company's Annual Report on Form 10-K for the
year ended March 31, 1998, as the same may be amended time to time. Some of the
factors which could affect the Company's performance include, among other
things: the effects of leverage on the Company, immediate and future capital
requirements, risk of dilution to existing shareholders, potential inability to
control growth or to successfully integrate acquired businesses, limited
operating history, cyclicality of the metals recycling industry, potential
inability to complete pending acquisitions, commodity price fluctuations,
compliance with environmental, health and safety and other regulatory
requirements applicable to the Company, potential environmental liability, risk
of deterioration in relations with labor unions, control by principal
stockholders and dependence on key management, dependence on suppliers of scrap
metals, concentration of customer risk, competition in the scrap metals
industry, availability of scrap alternatives, stock market volatility and year
2000 compliance.
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, 1998 and in
the Company's Current Report on Form 8-K dated October 5, 1998.
GENERAL OVERVIEW
Metal Management is one of the largest and fastest-growing full service
metals recyclers in the United States, with 57 recycling facilities in 15
states. The Company is a leading consolidator in the metals recycling industry
and has achieved this position primarily through the implementation of its
national strategy of completing and integrating regional acquisitions. The
Company believes that its consolidation strategy will enhance the competitive
position and profitability of the operations that it acquires through improved
managerial and financial resources and increased economies of scale.
Metal Management is primarily engaged in the collection and processing of
ferrous and non-ferrous metals for resale to metals brokers, steel producers,
and producers and processors of other metals. The Company collects industrial
scrap and obsolete scrap, processes it into reusable forms, and supplies the
recycled metals to its customers, including mini-mills, integrated steel mills,
foundries and metals brokers. The Company believes that it provides 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 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
re-incorporated 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. The Company sold that business in two separate transactions in July
and December of 1996 for $1.3 million in cash and
14
<PAGE> 17
future royalty streams which the Company does not anticipate will result in
material payments to the Company. On April 12, 1996, the Company changed its
name to "Metal Management, Inc."
The Company's Common Stock, is traded on the NASDAQ Stock Market under the
trading symbol "MTLM" (see Note 6 to the Condensed Consolidated Financial
Statements). 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.
ACQUISITION STRATEGY
In pursuing its acquisition strategy, the Company seeks to identify
companies that (i) have a successful operating history; (ii) are located in
major metropolitan or regional markets (population of 1,000,000 or more) and
present synergies with existing or planned acquisition candidates in a
particular region; (iii) offer strong management which can be retained following
an acquisition; (iv) complement the Company's regional and national customer
base; (v) have a history of high integrity in their management and operations;
(vi) have convenient access to water or rail transportation facilities; (vii) do
not present serious environmental or regulatory issues; and (viii) either have
existing shredder operations or the ability to support the installation of such
equipment. While a target company does not have to meet all of the acquisition
criteria, it is important that a metropolitan or regional "hub" company meet
most of the criteria and that other acquisition candidates that can complement
the operations of the "hub" company are identified within a region.
Once an acquisition candidate has been identified, the Company conducts
financial, legal and operational due diligence investigations of the target
company. This due diligence investigation will generally include an
environmental site assessment and a review of the target company's environmental
compliance procedures and practices, a review of the legal and regulatory
affairs of the target, and a review of the target company's financial books and
records, including an independent audit of its financial statements, in certain
cases.
The Company generally enters into multi-year employment contracts with
certain senior managers of the acquired company which often provide for
incentive compensation in the form of stock options and warrants. In addition, a
significant portion of the purchase price for an acquired company is often paid
in restricted Common Stock. The Company believes that these arrangements provide
strong incentives for the management of the regional operations to maximize the
operating performance of the Company's subsidiaries.
In September 1998, the Company terminated all acquisitions that were under
a letter of intent, other than the acquisition of a 50% membership interest in
PerlCo which was completed on November 2, 1998. In connection with the
termination of such mergers, the Company recognized a $1.4 million pre-tax
charge to continuing operations relating to acquisition and transaction costs.
The Company's decision to terminate its proposed acquisitions was primarily due
to adverse and unprecedented market conditions.
Set forth below is a table identifying the recycling operations (the
"Acquired Operations") acquired by the Company since April 1996:
<TABLE>
<CAPTION>
LOCATION OF
PRINCIPAL PROCESSING DATE OF
NAME FACILITIES ACQUISITION
- ---- ------------------------------ -------------
<S> <C> <C>
Metal Management Arizona, Inc. Phoenix, Arizona April 1996
("MTLM Arizona")
California Metals Recycling, Inc., Firma, Los Angeles County, California January 1997
Inc.
Firma Plastic Co. Inc., MacLeod Metals Co
and Trojan Trading Co. (collectively,
"MacLeod")
HouTex Metals Company, Inc. ("HouTex") Houston, Texas January 1997
Reserve Iron & Metal Limited Cleveland, Ohio May 1997
Partnership ("Reserve")(1) Chicago, Illinois
Attalla, Alabama
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
LOCATION OF
PRINCIPAL PROCESSING DATE OF
NAME FACILITIES ACQUISITION
- ---- ------------------------------ -------------
<S> <C> <C>
Briquetting Corporation of America, Ferrex Bryan, Ohio June 1997
Trading Corporation, The Isaac Cleveland, Ohio
Corporation and Paulding Recycling, Inc. Dayton, Ohio
(collectively, "Isaac") Defiance, Ohio
Proler Southwest Inc. and Proler Steelworks Houston, Texas August 1997
L.L.C (collectively, "Proler") Jackson, Mississippi
Cozzi Iron & Metal, Inc. ("Cozzi") Chicago, Illinois December 1997
East Chicago, Indiana
Pittsburgh, Pennsylvania
Kankakee Scrap Corporation Kankakee, Illinois December 1997
Houston Compressed Steel Corp. Houston, Texas January 1998
Aerospace Metals, Inc. ("Aerospace") Hartford, Connecticut January 1998
Salt River Recycling L.L.C. ("Salt Phoenix, Arizona January 1998
River")(2)
Accurate Iron & Metal Co.(3) Franklin Park, Illinois February 1998
Superior Forge, Inc. ("Superior") Huntington Beach, California March 1998
Ellis Metals, Inc. Tucson, Arizona March 1998
Midwest Industrial Metals Corp.(3) Chicago, Illinois April 1998
138 Scrap, Inc. and Katrick, Inc. Riverdale, Illinois May 1998
R&P Holdings, Inc., Charles Bluestone Elizabeth, Pennsylvania May 1998
Company, and R&P Real Estate, Inc.(4) Sharon, Pennsylvania
(collectively, "Bluestone")
Goldin Industries, Inc., Goldin Industries Gulfport, Mississippi June 1998
Louisiana, Inc. and Goldin of Alabama, Mobile, Alabama
Inc.(5) (collectively, "Goldin") Harvey, Louisiana
Newell Recycling of Denver, Inc. and Newell Denver, Colorado June 1998
Recycling of Utah, L.L.C.(6) Colorado Springs, Colorado
Naporano Iron & Metal Co. and Nimco Newark, New Jersey July 1998
Shredding Co. (collectively "Naporano")
Michael Schiavone & Sons, Inc. and related North Haven, Connecticut July 1998
entities ("Schiavone") Torrington, Connecticut
M. Kimerling & Sons, Inc. ("Kimerling") Birmingham, Alabama July 1998
Nicroloy Company ("Nicroloy") Heidelberg, Pennsylvania July 1998
Midwest Metallics L.P.(3) Chicago, Illinois July 1998
PerlCo, L.L.C. ("PerlCo")(7) Memphis, Tennessee November 1998
</TABLE>
- ---------------
(1) The Attalla, Alabama recycling facility is operated through a joint venture
in which the Company's subsidiary, Reserve, holds a 50% interest.
(2) At the time it was acquired by the Company, Cozzi held a 50% joint venture
interest in Salt River.
(3) The Company purchased substantially all of the assets of Accurate Iron &
Metal Co. and certain of the assets of Midwest Industrial Metals Corp. and
Midwest Metallics L.P., all of which have been integrated into the Company's
Cozzi operations.
(4) The Sharon, Pennsylvania recycling facility is operated through a joint
venture in which the Company's subsidiary, Bluestone, holds a 50% interest.
16
<PAGE> 19
(5) A new subsidiary, Metal Management Gulf Coast, Inc. was formed with which
the Company purchased substantially all of the scrap metal assets of Goldin.
(6) A new subsidiary, Newell Recycling West, Inc. was formed and merged with
Newell Recycling of Denver, Inc. (with Newell Recycling West, Inc. surviving
the merger). Concurrently therewith, Newell Recycling West, Inc. purchased
substantially all of the scrap metal assets of Newell Recycling of Utah,
L.L.C.
(7) At the time the PerlCo acquisition was completed, the Company's Cozzi
subsidiary held a 50% joint venture interest in PerlCo.
RESULTS OF OPERATIONS
On May 28, 1998, the Company merged with Bluestone through a tax-free,
stock-for-stock exchange. The merger was accounted for as a
pooling-of-interests. All information set forth below includes the historical
information of the Company and Bluestone on a pooled basis for all periods
presented.
Consolidated net sales for the three months ended December 31, 1998 and
1997 in broad product categories were as follows (in thousands):
<TABLE>
<CAPTION>
12/31/98 12/31/97
--------------------------- ---------------------------
COMMODITY WEIGHT NET SALES % WEIGHT NET SALES %
- --------- ------- --------- ----- ------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Ferrous metals (tons)...................... 859 $ 81,456 45.6 578 $ 68,752 47.1
Non-ferrous metals (lbs)................... 147,301 60,526 33.9 72,961 35,373 24.3
Brokerage -- ferrous (tons)................ 337 26,040 14.6 282 36,938 25.3
Brokerage -- non ferrous (lbs)............. 22,625 5,110 2.8 16,166 4,404 3.0
Other...................................... -- 5,620 3.1 -- 370 0.3
-------- ----- -------- -----
$178,752 100.0 $145,837 100.0
======== ===== ======== =====
</TABLE>
Consolidated net sales for the nine months ended December 31, 1998 and 1997
in broad product categories were as follows (in thousands):
<TABLE>
<CAPTION>
12/31/98 12/31/97
--------------------------- ---------------------------
COMMODITY WEIGHT NET SALES % WEIGHT NET SALES %
- --------- ------- --------- ----- ------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Ferrous metals (tons)...................... 2,775 $305,928 50.1 1,253 $150,814 42.5
Non-ferrous metals (lbs)................... 402,878 190,708 31.2 217,081 109,836 30.9
Brokerage - ferrous (tons)................. 881 87,487 14.3 671 74,723 21.0
Brokerage - non ferrous (lbs).............. 61,978 18,161 3.0 52,571 17,907 5.1
Other...................................... -- 8,675 1.4 -- 1,916 0.5
-------- ----- -------- -----
$610,959 100.0 $355,196 100.0
======== ===== ======== =====
</TABLE>
Consolidated net sales for the three and nine months ended December 31,
1998 were $178.8 million and $610.9 million, respectively, compared with
consolidated net sales of $145.8 million and $355.2 million for the three and
nine months ended December 31, 1997, respectively. Since December 1997, the
Company has acquired 17 companies, including Naporano and Schiavone, which are
primarily ferrous processors, and Kimerling which is primarily a non-ferrous
processor. The acquisitions are the primary reason for the increase in sales
from the prior year period. However, as a result of adverse market conditions in
the scrap metal industry, the Company's consolidated net sales were
significantly lower than expected.
The results for the three and nine months ended December 31, 1998 reflect
the continued adverse impact on the Company of certain adverse changes in market
fundamentals in the scrap metal industry. Management believes that these
difficult market conditions are characterized by unusually high levels of supply
due to, among other things, the disruption in the scrap metal export market
arising from the international financial
17
<PAGE> 20
crisis and resulting trade imbalances coupled with a strong supply of scrap
metal from high levels of manufacturing in the U.S. In addition, domestic steel
mills significantly reduced their purchases of scrap metal during the six months
ended December 31, 1998 as record imports of low priced steel into the U.S.
curtailed domestic production at integrated steel producers and mini-mills.
Ferrous sales of processed materials represented 45.6% and 50.1% of
consolidated net sales for the three and nine months ended December 31, 1998,
respectively, compared to 47.1% and 42.5% of consolidated net sales for the
three and nine months ended December 31, 1997, respectively. The increase in
ferrous sales is primarily due to the inclusion of the sales of Cozzi, Naporano
and Schiavone from their respective dates of acquisition. Each of these
subsidiaries derive their sales principally from ferrous metals.
Non-ferrous sales of processed materials represented 33.9% and 31.2% of
consolidated net sales for the three and nine months ended December 31, 1998,
respectively, compared to 24.3% and 30.9% of consolidated net sales for the
three and nine months ended December 31, 1997, respectively. While the sale of
non-ferrous metals increased during the three and nine months ended December 31,
1998 in absolute dollar terms as a result of the inclusion of the sales of
Aerospace, Superior and Kimerling, they decreased as a percentage of overall
sales as a result of the acquisition of companies with significant ferrous
sales.
Brokerage ferrous sales represented 14.6% and 14.3% of consolidated net
sales for the three and nine months ended December 31, 1998, respectively,
compared to 25.3% and 21.0% of consolidated net sales for the three and nine
months ended December 31, 1997, respectively. Although, the volume of brokered
ferrous sales during the three months ended December 31, 1998 increased versus
the comparable prior period, the Company realized lesser brokered sales during
the current quarter as a result of lower prices realized on brokerage ferrous
sales. Brokered ferrous sales increased in the nine months ended December 31,
1998 due to the inclusion of 9 months of sales from Isaac in the current year as
compared to only 6 months of sales following the acquisition of Isaac in the
comparable year ago period.
Brokerage non-ferrous sales represented 2.8% and 3.0% of consolidated net
sales for the three and nine months ended December 31, 1998, respectively,
compared to 3.0% and 5.1% of consolidated net sales for the three months and
nine months ended December 31, 1997, respectively.
Consolidated gross profit was $11.1 million (6.2% of consolidated net
sales) and $40.8 million (6.7% of consolidated net sales) for the three and nine
months ended December 31, 1998, respectively, compared with consolidated gross
profit of $12.5 million (8.6% of consolidated net sales) and $31.2 million (8.8%
of consolidated net sales) for the three and nine months ended December 31,
1997, respectively. The decrease in consolidated gross profit margin for the
three and nine months ended December 31, 1998 resulted primarily from adverse
market conditions which caused sales and metal margins to decline significantly.
Consolidated general and administrative expenses were $14.7 million (8.2%
of consolidated net sales) and $42.3 million (6.9% of consolidated net sales)
for the three and nine months ended December 31, 1998, respectively, compared
with $7.4 million (5.0% of consolidated net sales) and $17.7 million (5.0% of
consolidated net sales) for the three and nine months ended December 31, 1997,
respectively. The increase in general and administrative expenses over the prior
year period is due to the inclusion of general and administrative expenses of
those operations acquired by the Company since December 1997. The increase in
consolidated general and administrative expenses as a percentage of consolidated
net sales for the periods presented primarily reflects the decrease in the
Company's consolidated net sales from expected levels due to adverse market
conditions. The Company has reduced overhead spending as a result of these
market conditions.
Depreciation and amortization expense was $7.5 million (4.2% of
consolidated net sales) and $18.2 million (3.0% of consolidated net sales) for
the three and nine months ended December 31, 1998, respectively, compared with
$3.1 million (2.1% of consolidated net sales) and $6.9 million (1.9% of
consolidated net sales) for the three and nine months ended December 31, 1997,
respectively. The increase is attributed to the inclusion of goodwill
amortization and depreciation of fixed assets of those operations acquired by
the Company since December 1997. The increase in depreciation and amortization
expense as a percentage of consolidated net sales is primarily due to the
reduced sales volumes resulting from adverse market conditions.
18
<PAGE> 21
During the nine months ended December 31, 1998, the Company recorded
non-recurring expenses of $9.9 million (see Note 3 to the Condensed Consolidated
Financial Statements). During the nine months ended December 31, 1997, the
Company recorded non-recurring expenses of $33.7 million. These expenses related
to severance paid to a former officer of the Company, the value of warrants to
purchase Common Stock issued to certain officers and directors of the Company,
and costs associated with the shutdown of the Company's EMCO Recycling
subsidiary.
Interest expense was $9.0 million (5.1% of consolidated net sales) and
$22.6 million (3.7% of consolidated net sales) for the three and nine months
ended December 31, 1998, respectively, compared to $2.8 million (1.9% of
consolidated net sales) and $6.9 million (2.0% of consolidated net sales) for
the three and nine months ended December 31, 1997, respectively. The increase is
primarily due to the issuance of the Notes and additional borrowings made by the
Company under the Senior Credit Facility to fund acquisitions and operations.
Net loss from continuing operations, after preferred stock dividends, was
$19.0 million ($0.46 per share) and $38.2 million ($1.02 per share) for the
three and nine months ended December 31, 1998, respectively. The net loss was
primarily due to unprecedented weakness in the scrap metal industry during the
period, which resulted in lower than anticipated sales volumes and lower
realized scrap prices during the quarter, and the recognition of pre-tax
non-recurring expenses of $6.4 million and $9.9 million for the three and nine
months ended December 31, 1998, respectively.
Income tax benefit for the nine months ended December 31, 1998 was $15.3
million, which yields an effective tax rate of 29%. The effective tax rate
differs from the statutory rate primarily due to the permanent differences
represented by non-deductible goodwill amortization, other non-deductible
expenses, and the reversal of $1.5 million of tax benefits previously
established for warrant compensation expense resulting from the decline in the
quoted market value of the Company's Common Stock.
During the nine months ended December 31, 1998, the Company recognized an
extraordinary charge of $0.9 million, net of taxes, related to the early
retirement of debt and other costs incurred in connection with the closing of
the Senior Credit Facility (see Note 5 to the Condensed Consolidated Financial
Statements).
OUTLOOK
As a result of the adverse scrap market conditions during the current
fiscal, the Company has initiated a number of cost cutting measures and
accelerated the integration of its businesses in an effort to reduce annual
operating expenses by at least $30.0 million. No assurance can be provided that
the Company will be successful in achieving the cost reductions or that it will
be accomplished without adversely affecting its operations.
The cost cutting efforts include an overall reduction in labor costs due in
large part to a reduction of more than 450 employees or approximately 20% of the
Company's workforce. The Company is currently evaluating the operations at each
of its facilities in response to market conditions. The Company also continues
to consolidate its insurance, retirement plan administration, purchasing,
freight and logistics and telecommunications programs in order to take advantage
of economies of scale, with further cost savings to be achieved through
consolidation.
While the Company has seen indications of firming in scrap prices in
certain regions of the U.S. and for certain grades of scrap metal, the Company
cannot predict when the scrap metals markets will stabilize. Any further
decreases in scrap metal prices could cause the Company to adjust downward the
value of its inventory, thereby reducing margins and sales and would put the
Company at risk of violating the covenants as established in the Senior Credit
Facility. Once the scrap metals markets do stabilize, the Company expects that
its efforts to reduce costs and improve operating controls at the Company's
operations will allow it to expand profit margins.
The Company recently entered into the Amendment to the Senior Credit
Facility to, among other things, reset certain interest coverage tests and
establish a Minimum Availability Test which places contractual restrictions on
the Company's ability to make future scheduled interest payments on the Senior
Subordinated
19
<PAGE> 22
Notes (the "Notes") unless certain conditions are met. If the Company is not
able to make future scheduled interest payments on the Notes, there would be
adverse consequences to the Company, its stockholders and the holders of the
Notes. If the Company is unable to make scheduled interest payments on the
Notes, the Company may initiate or be required to restructure the Company's
balance sheet and financial affairs.
On February 12, 1999, the Company signed a definitive purchase agreement
providing for the sale of its Superior Forge, Inc. (SFI) subsidiary to a group
of investors led by Gerard M. Jacobs, the Company's former chief executive
officer. The transaction is subject to financing contingencies and certain
government approvals. The Company expects to record a one-time charge of $2.2
million for income taxes on the closing of the sale of SFI. The Company expects
the SFI transaction to close in its fourth quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of cash are derived from its operations and
from borrowings under the Senior Credit Facility. The Company has financed its
operations, acquisitions and capital expenditures primarily from the issuance of
the Notes and from borrowings under the Senior Credit Facility. At December 31,
1998, the Company had $2.4 million in cash and cash equivalents, compared with
cash and cash equivalents of $4.5 million at March 31, 1998. As of January 29,
1999, the Company had undrawn availability of approximately $8 million under the
Senior Credit Facility, which the Company believes may not be adequate to
support working capital needs and may require the Company to accept capital
infusions on terms that may not otherwise be deemed acceptable.
The Company believes that it will need to achieve additional liquidity to
meet its near term operating and capital requirements, including a $9.0 million
interest payment due on the Notes on May 15, 1999. If the Company is unable to
satisfy the Minimum Availability Test (see Note 5 to the Condensed Consolidated
Financial Statements) as defined in the Amendment, it may be unable to make its
next scheduled interest payment on the Notes. There would be adverse
consequences to the Company and its stockholders if the Company is unable to
make the interest payment on the Notes. If the Company is unable to make
scheduled interest payments on the Notes, the Company may initiate or be
required to restructure the Company's balance sheet and financial affairs.
On February 12, 1999, the Company entered into a definitive purchase
agreement (the "Purchase Agreement") providing for the sale of its Superior
Forge, Inc. ("SFI"), west coast aluminum forging operations to a group of
investors led by Gerard M. Jacobs, the Company's former Chief Executive Officer.
If completed, the sale will result in cash proceeds to the company of $13.6
million, and the issuance of a promissory note payable to the Company in the
amount of $2.5 million. In addition, the Purchase Agreement provides for the
payment of an additional $1.0 million to the Company if certain EBITDA targets
are met by SFI. The closing of the sale of SFI is subject to financing
contingencies and certain government approvals. Although the Company expects
that this transaction will increase its availability under the Senior Credit
Facility by approximately $8 million, the increase will not, without other asset
sales or equity infusions, be sufficient to allow the Company to meet the
Minimum Availability Test.
If the SFI sale closes under the current terms, the Company anticipates
recognizing a one-time charge of $2.2 million for income taxes upon the closing
of the sale of SFI. The Company expects the SFI sale to close in the fourth
quarter of fiscal 1999. If the sale is not completed, the Company will
re-evaluate SFI and perhaps other operations to determine if such operations
will be retained or sold to raise additional capital. The Company is not
currently negotiating with another potential buyer of SFI. Additionally, the
Company has not signed any letters of intent or any other agreements which would
represent a commitment to sell other operations or investments.
The Company continues to evaluate the prospects of raising capital through
the issuance of equity, the potential sale of assets or businesses or the
potential for sale and leaseback of certain assets. No assurance can be made
that the Company will be able to raise capital through equity issuances, the
sale of assets or businesses or through the sale and leaseback of assets or on
terms that would be acceptable to the Company. If maturing debt obligations
require the Company to sell assets to raise capital, such sales may result in
losses.
20
<PAGE> 23
NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1997
Cash Flows from Continuing Operations. The Company generated $38.6 million
of cash from continuing operations during the nine months ended December 31,
1998 versus $3.0 million of cash flows generated by continuing operations during
the nine months ended December 31, 1997. The Company generated cash flows from
continuing operations mainly from the collection of accounts receivable and
reduced inventory carrying values.
Cash Flows from Investing Activities. During the nine months ended
December 31, 1998, the Company purchased $15.4 million of property and equipment
and utilized cash of $10.6 million to buyout operating leases. The Company also
used cash of $184.5 million for the acquisitions of and transaction costs
related to acquisitions completed during the nine months ended December 31,
1998. During the nine months ended December 31, 1997, the Company purchased $4.3
million of property and equipment and utilized cash of $23.2 million for
acquisitions. The increase in cash used for investing activities during the
period is a result of acquisitions completed during the nine months ended
December 31, 1998. Management anticipates the Company will continue to make
capital expenditures for new equipment, and upgrade and expand existing
equipment and facilities, although the Company is presently limiting such
investments by delaying and deferring discretionary capital investments due to
adverse market conditions.
Cash Flows from Financing Activities. During the nine months ended
December 31, 1998, the Company borrowed under its Senior Credit Facility to
refinance substantially all existing secured debt. The Company also issued
$180.0 million of Notes and received net proceeds of approximately $174.4
million. In connection with the debt issuances, the Company incurred
approximately $11.1 million in fees and $1.0 million of pre-payment penalties.
The Company anticipates that it will require additional capital to fund future
operating and capital investment requirements.
FINANCIAL CONDITION
SIGNIFICANT TRANSACTIONS
During the nine months ended December 31, 1998, the Company completed
certain significant debt transactions. The Company entered into a $250.0 million
Senior Credit Facility, which refinanced substantially all of the Company's
existing indebtedness. On May 13, 1998, the Company sold, in a Rule 144A private
placement and pursuant to Regulation S under the Securities Act of 1933, $180.0
million of Notes. The Notes mature on May 15, 2008 and bear interest at the rate
of 10% per annum. The net proceeds of the Notes were used, in part, to repay
indebtedness of the Company, with the remainder used for acquisitions.
During the nine months ended December 31, 1998, the Company utilized cash
of $184.5 million in connection with acquisitions.
On December 31, 1998 and January 4, 1999, the Company repaid approximately
$16.6 million and $3.2 million, respectively, of notes payable issued in
connection with the acquisition of Isaac. The funds utilized to make payments on
the Isaac notes were borrowed from the Senior Credit Facility. The payments on
the Isaac notes did not negatively affect the liquidity of the Company because
the principal owed on the Isaac notes were fully secured by a letter of credit
issued under the Senior Credit Facility and were fully reserved in determining
availability under the Senior Credit Facility. The Company arranged for the
prepayment of the Isaac Notes to reduce its overall financing costs.
CASH REQUIREMENTS FOR MATURING DEBT OBLIGATIONS AND INTEREST PAYMENTS
On May 15, 1999, the Company is required to make a semi-annual interest
payment of $9.0 million on the Notes. The Company's amended Senior Credit
Facility restricts the ability to make interest payments on the Notes unless,
during the preceding thirty day period ending on the date on which the interest
payment is to be made, there exists undrawn availability under the Senior Credit
Facility of not less than $20.0 million plus the interest payment on the Notes.
There can be no assurance that the Company will have sufficient availability
under the Senior Credit Facility to make the interest payments on the Notes as
they become due (See Note 5 to the condensed Consolidated Financial Statements).
Non-payment by the Company of the
21
<PAGE> 24
May 15, 1999 interest payment, unless waived by the holders of the Notes, will
result in an event of default under the Indenture governing the Notes. Such
default could result in the acceleration of the Company's payment obligation
with respect to the entire principal balance of the Notes.
WORKING CAPITAL AVAILABILITY AND REQUIREMENTS
Accounts receivable balances decreased from $122.4 million at March 31,
1998 to $91.9 million at December 31, 1998. Approximately $32.9 million of
accounts receivable were acquired in connection with acquisitions completed
during the current fiscal year. The Company generated approximately $62.0
million of cash from the collection of accounts receivable during the nine
months ended December 31, 1998. Accounts payable decreased from $66.8 million at
March 31, 1998 to $61.0 million at December 31, 1998.
Inventory levels can vary significantly among the Company's operations and
with changes in market conditions. Inventory on hand at December 31, 1998 and
March 31, 1998, respectively, consisted of the following categories and amounts
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1998
----------------- --------------
<S> <C> <C>
Ferrous metals.............................................. $42,672 $35,934
Non-ferrous metals.......................................... 25,178 25,222
Other....................................................... 2,754 786
------- -------
$70,604 $61,942
======= =======
</TABLE>
The Company acquired approximately $24.5 million of inventory in connection
with the acquisitions completed during the current fiscal year. The adverse
market conditions most prevalent in the most recent two quarters have slowed the
Company's inventory turns. During the nine months ended December 31, 1998, the
Company recorded significant inventory adjustments principally as a result of
adverse market conditions. The Company's inventory at December 31, 1998 is
stated at the lower of average cost or market.
Property and equipment increased from $109.9 million at March 31, 1998 to
$190.5 million at December 31, 1998. During the nine months ended December 31,
1998, the Company made capital expenditures of $15.4 million, bought-out certain
operating leases for $10.6 million, and acquired $68.1 million of property and
equipment in connection with the acquisitions completed during the current
fiscal year. Although discretionary spending has been significantly curtailed
pending an improvement in market conditions, the Company expects to continue to
make investments in additional equipment and property for expansion and for
replacement of assets.
At December 31, 1998, the Company had outstanding borrowings under its
Senior Credit Facility of approximately $147.5 million. Borrowings outstanding
on the Senior Credit Facility bore interest at a weighted average interest rate
of 7.2%. Amounts outstanding under the Senior Credit Facility ranged from $0.0
to $154.0 million during the nine months ended December 31, 1998.
As a result of recent market conditions in the steel and metal sector and
the impact thereof on the results of operations of the Company, effective as of
December 31, 1998, the Company and its bank group amended the Senior Credit
Facility to, among other things, modify the Company's minimum interest coverage
tests. Pursuant to the Amendment, the Company's interest coverage ratio tests
(i) for the nine months ended December 31, 1998 and (ii) for the twelve months
ended March 31, 1999 were replaced with minimum EBITDA tests for the respective
nine and twelve month periods then ended, which (as so amended) the Company met
for the nine-month period ended December 31, 1998. In addition, the minimum
interest coverage tests (i) for the three month period ended June 30, 1999, (ii)
for the six month period ended September 30, 1999, (iii) for the nine month
period ended December 31, 1999, (iv) for the twelve month period ended March 31,
2000 and (v) for the end of each subsequent fiscal quarter thereafter for the
twelve month period then ending have each been reset to require an interest
coverage ratio of not less than 1.0 to 1.0.
The Senior Credit Facility provides the Company with the option of
borrowing based either on the Bankers Trust Company's prime rate plus a margin
or LIBOR plus a margin. Through December 31, 1998, the interest rate margins
were set at 0.5% for Bankers Trust Company's prime rate and 1.75% for LIBOR.
22
<PAGE> 25
Pursuant to the Amendment, the interest rate margins were increased to 1.5% for
Bankers Trust Company's prime rate and 2.5% 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 its interest coverage tests in subsequent
fiscal periods or has excess availability of at least $40.0 million for a period
of 30 consecutive days. In addition, the Amendment restricts the Company's
ability to make future interest payments on its Notes unless during the thirty
day period ending on the date on which interest payments are to be made, there
exists undrawn availability under the Senior Credit Facility of not less than
$20 million plus the amount of interest which is then due and payable on the
Notes.
There can be no assurance that the Company will be able to meet the
interest coverage test, as amended, or that the Company will satisfy the Minimum
Availability Test under the Senior Credit Facility to make scheduled interest
payments on its Notes as they become due.
YEAR 2000 LIABILITY
A year 2000 problem arises because some existing computer programs only
recognize 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, among other things, a potential inability to process
invoices or transactions or engage in other normal business activities.
The Company has experienced tremendous growth as a result of having
completed 25 acquisitions since April 1996. Essentially all of the Acquired
Operations operated on separate computer hardware, software, systems and
processes ("Information Systems"). In order to address the potential year 2000
problem, among other Information Systems challenges faced by the Company, in
fiscal 1998, the Company created an MIS Steering Committee. The MIS Steering
Committee has developed a plan for year 2000 compliance which includes four
major phases -- assessment, remediation, testing and implementation.
The Company has substantially completed its assessment of the impact of the
year 2000 problem on its Information Systems. Based on this assessment, the
Company does not expect the cost of making the Company's Information Systems
year 2000 compliant to have a material adverse impact on the Company's financial
position or results of operations in future periods. The Company has completed
approximately 88% of its remediation phase for all of its significant
Information Systems, and estimates that it will complete software upgrades
and/or replacement by the end of the current fiscal year. To date, the Company
has completed approximately 59% of its testing and has implemented approximately
35% of the required remediation for such Information Systems. The testing and
implementation phases are targeted to be substantially complete by the end of
the second quarter of next fiscal year.
The Company has begun its assessment of the impact of year 2000 problems on
its non-information technology systems (such as telephones, processing equipment
or other equipment containing embedded technology such as microcontrollers)
("Non-IT Systems"). As part of the assessment, the Company has created an
equipment inventory database of Non-IT Systems to help with the assessment. The
Company believes assessment will be completed before the end of the current
fiscal year, and that remediation, testing and implementation will be completed
by the end of the second quarter of next fiscal year.
The Company is in the process of identifying third parties (i.e., suppliers
and service providers) with whom it has significant relationships that, in the
event of a year 2000 failure by any of the third parties, could have a material
adverse impact on the Company's financial position or results of operations. The
Company expects that this process will be on-going throughout the current and
next fiscal year.
The Company believes that, as a result of these efforts, any year 2000
problem that it may become subject to will not be material. However, there can
be no assurance that this will be the case. The Company is unable at this time
to state its "worst case" year 2000 scenario. A contingency plan in the event of
noncompliance is currently being developed.
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<PAGE> 26
PART II -- OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES
On November 2, 1998, the Company issued 6,000 shares of Series C Preferred
Stock to FPX, Inc. and Southern Tin Compress Corporation in exchange for the
common stock of FPX, Inc. and certain assets of Southern Tin Compress
Corporation. The Series C Preferred Stock is convertible into shares of Common
Stock at a price equal to $9.00 per share of Common Stock. The Series C
Preferred Stock was valued at approximately $5.1 million for financial reporting
purposes.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of the Stockholders of the Company was held on
November 2, 1998.
(b) The following directors were elected at the Annual Meeting of
Stockholders: Albert A. Cozzi, Frank J. Cozzi, Gregory P. Cozzi, Rod F.
Dammeyer, George A. Isaac III, Gerard M. Jacobs, T. Benjamin Jennings, Kenneth
A. Merlau, Joseph F. Naporano and William T. Proler.
(c) Of the 39,632,289 shares entitled to vote, 33,724,048 shares were
represented at the meeting by proxy or present in person. The stockholders
considered the following matters:
<TABLE>
<CAPTION>
PROPOSAL FOR AGAINST WITHHELD
- -------- ---------- --------- ---------
<S> <C> <C> <C>
1. Election of Directors:
a. Albert A. Cozzi.................................. 33,179,004 0 545,044
b. Frank J. Cozzi................................... 33,176,106 0 547,942
c. Gregory P. Cozzi................................. 33,178,006 0 546,042
d. Rod F. Dammeyer.................................. 33,178,144 0 545,904
e. George A. Isaac III.............................. 33,176,944 0 547,104
f. Gerard M. Jacobs................................ 33,161,004 0 563,044
g. T. Benjamin Jennings............................. 33,161,804 0 562,244
h. Kenneth A. Merlau................................ 33,175,984 0 548,064
i. Joseph F. Naporano.............................. 33,179,004 0 545,044
j. William T. Proler............................... 33,179,004 0 545,044
2. Approval of the Amended and Restated Certificate of
Incorporation which served to increase authorized
common stock from 80,000,000 to 140,000,000 and
eliminate the ability of stockholders to act by
written consent..................................... 27,412,676 1,188,324 5,123,048
3. Increase the number of shares authorized under the
1995 Stock Plan from 2,600,000 to 5,200,000......... 26,837,089 1,516,151 5,370,808
4. Approval of the 1998 Director Compensation Plan..... 27,786,053 775,270 5,162,725
5. Approval of the 1998 Employee Stock Purchase Plan... 28,005,298 585,361 5,133,389
6. Approval of PricewaterhouseCoopers LLP as
independent accountants............................. 33,587,227 70,640 66,181
</TABLE>
ITEM 5: OTHER INFORMATION
Directorships:
Effective November 2, 1998, Kenneth A. Merlau was appointed an Executive
Vice-President of the Company. Mr. Merlau currently serves on the Company's
Board of Directors.
Effective November 19, 1998, Timothy P. Orlowski was appointed a director
of the Company.
Effective January 11, 1999, Gene C. McCaffery was appointed a director of
the Company.
24
<PAGE> 27
Change of Chief Executive Officer.
On February 12, 1999, Gerard M. Jacobs ("Jacobs") and the Company entered
into a Settlement Agreement and General Release (the "Severance Agreement")
pursuant to which Jacobs resigned as the Company's Chief Executive Officer. The
Company's Board of Directors elected T. Benjamin Jennings, the Company's
Chairman and Chief Development Officer, as the Company's new Chief Executive
Officer. Simultaneously with the execution of the Severance Agreement, the
Company entered into a Stock Purchase Agreement (the "Stock Purchase Agreement")
with a newly formed corporation controlled by Jacobs ("Buyer"), pursuant to
which the Company agreed to sell the common stock of its Superior Forge, Inc.
subsidiary to the Buyer for $13,600,000 in cash and a $2,500,000 subordinated
promissory note. In addition, the Company will receive a $1,000,000 "success
fee" if Superior Forge, Inc. has EBITDA in excess of $6,250,000 in any of the
first five years after the closing. At the closing, Buyer will also purchase
Jacobs' $500,000 promissory note owed to the Company, for a cash amount equal to
the principal amount thereof plus accrued interest to the closing date.
The Severance Agreement provides that in the event (and only in the event
that) the Stock Purchase Agreement is terminated without Buyer purchasing
Superior Forge, Inc., Jacobs will be entitled to receive severance payments in
the amount of $672,677, $631,426, $625,176 and $618,926 on the six-month,
one-year, eighteen-month and two-year anniversaries of the date the Stock
Purchase Agreement is terminated. In such event, Jacobs will repay his $500,000
promissory note to the Company in four equal semi-annual installments of
$125,000 plus accrued and unpaid interest. The sale and purchase of Superior
Forge, Inc. pursuant to the Stock Purchase Agreement is subject to certain
conditions, including Buyer's ability to complete financing for the transaction.
The closing to the Stock Purchase Agreement is also subject to certain
government approvals.
In connection with the execution of the Severance Agreement and the Stock
Purchase Agreement, the parties to the Company's Stockholders' Agreement amended
and restated the same, to (among other things) remove Jacobs as a party thereto.
Copies of the Severance Agreement and the Amended and Restated Stockholders'
Agreement were attached as Exhibits 10.2 and 10.3, respectively on Form 10-Q
filed on February 16, 1999.
Filing of Form 12b-25.
On February 12, 1999, one business day prior to the filing date for the
Company's Quarterly Report on Form 10-Q for the quarterly period ended December
31, 1998 (the "Quarterly Report"), the Company entered into a Stock Purchase
Agreement (the "Stock Purchase Agreement") with a newly formed corporation
controlled by the Company's former Chief Executive Officer, Gerard M. Jacobs to
sell the common stock of the Company's subsidiary, Superior Forge, Inc.
("Superior Forge"). As a result of the execution of the Stock Purchase
Agreement, the Company was required to assess the effect of the pending sale of
Superior Forge on the financial statements to be contained in the Quarterly
Report. Because of the proximity of the execution date of the Stock Purchase
Agreement and the filing deadline of the Quarterly Report, this analysis could
not be completed without unreasonable effort or expense prior to such deadline.
On February 17, 1999, the Company filed a Form 12b-25 with the SEC for an
extension of time to report its results for the quarter ended December 31, 1998.
On February 16, 1999, the Company filed a 10-Q with the SEC which included Part
II of the Form 10-Q requirements. This quarterly report on Form 10-Q/A includes
the assessment of the pending Superior Forge sale which resulted in the Company
recognizing a one-time, non-cash and non-recurring charge of $6.0 million for
the carrying value of the goodwill arising out of the Company's investment in
Superior Forge.
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
December 31, 1998:
25
<PAGE> 28
(1) Form 8-K dated October 5, 1998, filed October 6, 1998 (providing
consolidated financial statements of the Company that give effect to the
Company's merger with R&P Holdings, Inc. accounted as a pooling of
interests and reporting certain amendments to the Company's $250.0 million
Senior Credit Facility).
(2) Form 8-K dated December 1, 1998, filed December 11, 1998 (relating
to the Company's stock option exchange plan).
26
<PAGE> 29
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, President and
Chief Operating Officer
By: /s/ T. BENJAMIN JENNINGS
--------------------------------------
T. Benjamin Jennings
Director, Chairman of the Board,
Chief Executive Officer,
and Chief Development Officer
By: /s/ ROBERT C. LARRY
--------------------------------------
Robert C. Larry
Executive Vice President of
Finance,
Treasurer, Chief Financial
Officer
and Assistant Secretary
Date: February 17, 1999
27
<PAGE> 30
METAL MANAGEMENT, INC.
EXHIBIT INDEX
NUMBER AND DESCRIPTION OF EXHIBIT
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 August 27, 1998
(incorporated by reference to Exhibit 3.3 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998).
4.1 Eight Supplemental Indenture, dated as of November 3, 1998, executed by
FPX, Inc., amending Indenture, dated as of May 13, 1998, among the
Company, the Guarantors and LaSalle National Bank, as Trustee
(incorporated by reference to Exhibit 4.3 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998).
4.2 Ninth Supplemental Indenture, dated as of November 3, 1998, executed by
PerlCo, L.L.C., amending Indenture, dated as of May 13, 1998, among the
Company, the Guarantors and LaSalle National Bank, as Trustee
(incorporated by reference to Exhibit 4.4 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998).
10.1 Amendment No. 4 to Credit Agreement, dated as of December 31, 1998, by
and among the Company and its subsidiaries named therein and BT
Commercial Corporation and the other financial institutions signatories
thereto as lenders (incorporated by reference to Exhibit 10.1 of the
Company's Current Report on Form 8-K dated January 28, 1999).
10.2 Settlement Agreement and General Release, dated February 12, 1999, by and
between Gerard M. Jacobs and the Company (incorporated by reference to
Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1998).
10.3 Amended and Restated Stockholders' Agreement, dated as of February 12,
1999, by and among T. Benjamin Jennings, Gerard M. Jacobs, Albert A.
Cozzi, Frank J. Cozzi, Gregory P. Cozzi, Samstock, L.L.C. and the Company
(incorporated by reference to Exhibit 10.3 of the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1998).
11.1 Computation of net income (loss) per share.
27.1 Financial Data Schedule.
28
<PAGE> 1
EXHIBIT 11.1
METAL MANAGEMENT, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Earnings:
Net loss from continuing operations
applicable to Common Stock............... $(19,043) $(36,334) $(38,172) $(36,191)
Gain (loss) on sale of discontinued
operations, net.......................... 21 (42) 95 166
Extraordinary charge, net................... (76) 0 (938) 0
-------- -------- -------- --------
Net loss applicable to Common Stock...... $(19,098) $(36,376) $(39,015) $(36,025)
======== ======== ======== ========
Basic earnings per share:
Weighted average common shares
outstanding.............................. 41,381 21,699 37,506 17,067
======== ======== ======== ========
Per share amounts:
Net loss from continuing operations
applicable to Common Stock............... $ (0.46) $ (1.67) $ (1.02) $ (2.12)
Gain (loss) on sale of discontinued
operations............................... $ 0.00 $ (0.01) $ (0.00) $ 0.01
Extraordinary charge, net................... $ 0.00 $ 0.00 $ (0.02) $ 0.00
-------- -------- -------- --------
Net loss applicable to Common Stock...... $ (0.46) $ (1.68) $ (1.04) $ (2.11)
======== ======== ======== ========
Diluted earnings per share:
Weighted average common shares
outstanding.............................. 41,381 21,699 37,506 17,067
Common stock equivalents(1)................. 0 0 0 0
-------- -------- -------- --------
Total.................................... 41,381 21,699 37,506 17,067
======== ======== ======== ========
Per share amounts:
Net loss from continuing operations
applicable to Common Stock............... $ (0.46) $ (1.67) $ (1.02) $ (2.12)
Gain (loss) on sale of discontinued
operations............................... $ 0.00 $ (0.01) $ (0.00) $ 0.01
Extraordinary charge, net................... $ 0.00 $ 0.00 $ (0.02) $ 0.00
-------- -------- -------- --------
Net loss applicable to Common Stock...... $ (0.46) $ (1.68) $ (1.04) $ (2.11)
======== ======== ======== ========
</TABLE>
- ---------------
(1) For all periods presented, common stock equivalents were not added to the
weighted average shares outstanding as the result would have been
anti-dilutive.
29
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,430,000
<SECURITIES> 0
<RECEIVABLES> 93,616,000
<ALLOWANCES> 1,731,000
<INVENTORY> 70,604,000
<CURRENT-ASSETS> 174,200,000
<PP&E> 215,784,000
<DEPRECIATION> 25,236,000
<TOTAL-ASSETS> 691,432,000
<CURRENT-LIABILITIES> 88,626,000
<BONDS> 180,000,000
<COMMON> 429,000
0
29,320,000
<OTHER-SE> 232,344,000
<TOTAL-LIABILITY-AND-EQUITY> 691,432,000
<SALES> 0
<TOTAL-REVENUES> 610,959,000
<CGS> 570,178,000
<TOTAL-COSTS> 570,178,000
<OTHER-EXPENSES> 70,394,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,634,000
<INCOME-PRETAX> (51,989,000)
<INCOME-TAX> (15,292,000)
<INCOME-CONTINUING> (36,697,000)
<DISCONTINUED> 95,000
<EXTRAORDINARY> (938,000)
<CHANGES> 0
<NET-INCOME> (39,015,000)
<EPS-PRIMARY> (1.04)
<EPS-DILUTED> (1.04)
</TABLE>
