<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-14836
METAL MANAGEMENT, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-2835068
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
</TABLE>
500 N. DEARBORN ST., SUITE 405,
CHICAGO, IL 60610
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (312) 645-0700
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _
As of August 1, 2000, the Registrant had 57,769,536 shares of Common Stock
outstanding.
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements
Consolidated Balance Sheets - June 30, 2000 (unaudited) and
March 31, 2000 1
Consolidated Statements of Operations -- three months ended
June 30, 2000 and 1999 (unaudited) 2
Consolidated Statements of Cash Flows -- three months ended
June 30, 2000 and 1999 (unaudited) 3
Consolidated Statements of Stockholders' Equity -- three
months ended June 30, 2000 (unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 5
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk 16
PART II: OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K 17
SIGNATURES 18
Exhibit Index 19
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
METAL MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, 2000 MARCH 31, 2000
------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,353 $ 1,396
Accounts receivable, net 142,796 155,935
Inventories 70,844 70,275
Prepaid expenses and other assets 8,884 9,082
Deferred taxes 6,090 6,090
--------- --------
Total current assets 229,967 242,778
Property and equipment, net 163,757 165,197
Goodwill, net 280,466 282,418
Deferred financing costs and other intangibles, net 13,955 12,300
Deferred taxes 6,111 2,201
Investments in joint ventures 3,636 3,473
Other assets 489 2,613
--------- --------
TOTAL ASSETS $ 698,381 $710,980
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,329 $ 2,109
Accounts payable 71,939 76,094
Accrued interest 3,182 8,524
Other accrued liabilities 13,086 15,618
--------- --------
Total current liabilities 90,536 102,345
Long-term debt, less current portion 390,174 382,601
Other liabilities 3,733 3,900
--------- --------
TOTAL LIABILITIES 484,443 488,846
Stockholders' equity:
Convertible preferred stock:
Series B 1,177 1,177
Series C 5,100 5,100
Common stock 578 577
Treasury stock, at cost (67) 0
Warrants 40,428 40,428
Additional paid-in-capital 270,901 270,696
Accumulated deficit (104,179) (95,844)
--------- --------
TOTAL STOCKHOLDERS' EQUITY 213,938 222,134
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 698,381 $710,980
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements
1
<PAGE> 4
METAL MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
<TABLE>
THREE MONTHS ENDED
--------------------
JUNE 30, JUNE 30,
2000 1999
-------- --------
<S> <C> <C>
NET SALES $241,909 $198,682
Cost of sales 218,928 172,851
-------- --------
Gross profit 22,981 25,831
OPERATING EXPENSES:
General and administrative 15,201 14,827
Depreciation and amortization 6,917 6,632
Non-cash and non-recurring expense 2,639 0
-------- --------
Total operating expenses 24,757 21,459
-------- --------
Operating income (loss) (1,776) 4,372
OTHER INCOME (EXPENSE):
Income (loss) from joint ventures (134) 59
Interest expense (10,328) (8,736)
Interest and other income, net 109 57
-------- --------
Loss before income taxes (12,129) (4,248)
Benefit for income taxes (3,910) (1,144)
-------- --------
NET LOSS (8,219) (3,104)
Preferred stock dividends 116 234
-------- --------
NET LOSS APPLICABLE TO COMMON STOCK $ (8,335) $ (3,338)
======== ========
Basic and diluted loss per share $ (0.14) $ (0.06)
======== ========
Shares used in computation of basic and diluted loss
per share 57,773 52,617
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
2
<PAGE> 5
METAL MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net loss $ (8,219) $ (3,104)
Adjustments to reconcile net loss to cash flows from
operations:
Depreciation and amortization 6,917 6,632
Deferred income taxes (3,910) (1,144)
Amortization of debt issuance costs and bond discount 858 778
Non-cash and non-recurring expense 2,639 0
Other 271 304
Changes in assets and liabilities
Accounts and notes receivable 13,459 (7,157)
Inventories (569) 5,461
Accounts payable (4,155) (2,922)
Other (8,909) (5,028)
--------- ---------
Cash flows from operations (1,618) (6,180)
CASH FLOWS USED BY INVESTING ACTIVITIES:
Purchases of property and equipment (3,482) (2,572)
Proceeds from sale of property and equipment 213 965
Other (160) 88
--------- ---------
Net cash used by investing activities (3,429) (1,519)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Issuances of long-term debt 292,452 252,729
Repayments of long-term debt (284,772) (243,889)
Fees paid to issue long-term debt (2,609) (1,841)
Repurchase of common stock (67) 0
--------- ---------
Net cash provided by financing activities 5,004 6,999
--------- ---------
Net decrease in cash and cash equivalents (43) (700)
Cash and cash equivalents at beginning of period 1,396 2,482
--------- ---------
Cash and cash equivalents at end of period $ 1,353 $ 1,782
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 14,812 $ 11,632
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE> 6
METAL MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited, in thousands, except shares)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------- --------------------
NUMBER ADDITIONAL
OF TREASURY PAID-IN-
SERIES B SERIES C SHARES AMOUNT STOCK WARRANTS CAPITAL
-------- -------- ------ ------ -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 2000 $1,177 $5,100 57,711,427 $577 $ 0 $40,428 $270,696
Preferred stock dividends 0 0 108,109 1 0 0 205
Repurchase of common stock 0 0 (50,000) 0 (67) 0 0
Net loss 0 0 0 0 0 0 0
------ ------ ---------- ---- ---- ------- --------
BALANCE AT JUNE 30, 2000 $1,177 $5,100 57,769,536 $578 $(67) $40,428 $270,901
====== ====== ========== ==== ==== ======= ========
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
----------- -----
<S> <C> <C>
BALANCE AT MARCH 31, 2000 $ (95,844) $222,134
Preferred stock dividends (116) 90
Repurchase of common stock 0 (67)
Net loss (8,219) (8,219)
--------- --------
BALANCE AT JUNE 30, 2000 $(104,179) $213,938
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE> 7
METAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- INTERIM FINANCIAL STATEMENTS
The accompanying 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"). The March 31,
2000 balance sheet information has been derived from the Company's audited
financial statements. 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. The interim financial data
for the three months ended June 30, 2000 and June 30, 1999 is unaudited;
however, in the opinion of management, the interim data includes all material
adjustments (which include only normal recurring adjustments) necessary for a
fair statement of 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, 2000.
NOTE 2 -- NON-CASH AND NON-RECURRING EXPENSES
During the three months ended June 30, 2000, the Company recorded the
following non-cash and non-recurring expenses and related reserve activity (in
thousands):
<TABLE>
<CAPTION>
SEVERANCE, FACILITY MERGER ASSET
CLOSURE & OTHER RELATED COSTS IMPAIRMENT TOTAL
------------------- ------------- ---------- -----
<S> <C> <C> <C> <C>
Balance at March 31, 2000 $808 $413 $ 0 $ 1,221
Charge to income 0 0 2,639 2,639
Cash payments (242) (38) 0 (280)
Non-cash application 0 0 (2,639) (2,639)
---- ---- ------- -------
Balance at June 30, 2000 $566 $375 $ 0 $ 941
==== ==== ======= =======
</TABLE>
The Company believes the reserves at June 30, 2000 are adequate for the
remaining obligations associated with these activities.
ASSET IMPAIRMENT
During the three months ended June 30, 2000, the Company recognized a $2.6
million asset impairment charge related to a promissory note, including accrued
interest, received by the Company in conjunction with the sale of its former
Superior Forge subsidiary.
During this period, the Company determined it necessary to fully reserve
the note receivable and accrued interest based on factors including (i)
quarterly interest payments on the note receivable have not been paid since
September 1999, (ii)losses from operations exceeding those planned, and (iii)
the perceived inability of Superior Forge to obtain capital to refinance its
obligations. The Company intends to exert all its rights to maximize recovery of
the note receivable.
5
<PAGE> 8
METAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 3 -- 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 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 2000 MARCH 31, 2000
------------- --------------
<S> <C> <C>
Ferrous metals $34,635 $38,344
Non-ferrous metals 34,849 28,069
Other 1,360 3,862
------- -------
$70,844 $70,275
======= =======
</TABLE>
NOTE 4 -- DEBT
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 2000 MARCH 31, 2000
------------- --------------
<S> <C> <C>
Senior Credit Facility $178,186 $170,590
12 3/4% Senior Secured Notes 27,485 27,372
10% Senior Subordinated Notes 180,000 180,000
Other debt 6,832 6,748
-------- --------
392,503 384,710
Less: current portion (2,329) (2,109)
-------- --------
$390,174 $382,601
======== ========
</TABLE>
The Company has a credit facility (the "Senior Credit Facility") which
provides for a revolving credit and letter of credit facility of $250.0 million,
subject to borrowing base limitations. The maturity date for the Senior Credit
Facility is March 31, 2004. A security interest on substantially all of the
assets and properties of the Company, including pledges of the capital stock of
the Company's subsidiaries, are pledged as collateral against the obligations of
the Company under the Senior Credit Facility. 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 at the London Interbank Offered Rate
("LIBOR") plus a margin. Pursuant to the Senior Credit Facility, the Company
pays a fee of .375% on the undrawn portion of the facility. The Senior Credit
Facility is available for working capital and general corporate purposes,
including acquisitions.
Pursuant to the Senior Credit Facility, the Company is required to satisfy
a minimum EBITDA (as defined in the Senior Credit Facility) interest test
defined as a coverage ratio. The minimum interest coverage required at the end
of each fiscal quarter for the twelve month period then ending requires that the
Company satisfy an interest coverage ratio of not less than 1.0 to 1.0. The
Senior Credit Facility also places limits on the Company's annual investment in
capital expenditures which aggregate investments may not exceed 2% of
consolidated sales.
On May 7, 1999, the Company issued $30.0 million principal amount of 12
3/4% Senior Secured Notes due on June 15, 2004 (the "Senior Secured Notes").
Interest on the Senior Secured Notes is payable semi-annually. The Senior
Secured Notes were issued at 90% of their principal amount and are redeemable by
the Company, in whole or in part, at 100% of their principal amount at any time
after June 15, 2000. A second priority lien on substantially all of the
Company's personal property, plant (to the extent it constitutes fixtures) and
equipment has been pledged as collateral against the Senior Secured Notes. The
Senior Secured Notes are senior obligations of the Company, ranking equally with
all of its existing and future unsubordinated debt, including indebtedness under
the Senior Credit Facility, and senior to all of its existing and future
subordinated debt, including the Senior Subordinated Notes (defined below). The
Company's payment
6
<PAGE> 9
METAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
obligation is jointly and severally guaranteed by the Company's current and
future subsidiaries. The Company received net proceeds of approximately $25.5
million, after the 10% original issue discount and transaction fees and
expenses. Net proceeds were used to reduce borrowings outstanding under the
Senior Credit Facility.
On May 13, 1998, the Company issued $180.0 million, 10% Senior Subordinated
Notes due on May 15, 2008 (the "Senior Subordinated Notes") and received net
proceeds of $174.6 million. Interest on the Senior Subordinated Notes is payable
semi-annually. The Senior Subordinated Notes are general unsecured obligations
of the Company and are subordinated in right to payment to all senior debt of
the Company, including the indebtedness of the Company under the Senior Credit
Facility and the Senior Secured Notes. The Company's payment obligations are
jointly and severally guaranteed by the Company's current and certain future
subsidiaries. The Senior Subordinated Notes are redeemable at the Company's
option at specified redemption prices and redemption events. The net proceeds
were used to reduce borrowings outstanding under the Senior Credit Facility,
reduce notes payable to related parties and for general corporate purposes,
including acquisitions.
The Senior Credit Facility, the Indenture governing the Senior Subordinated
Notes and the Indenture governing the Senior Secured Notes contain covenants
that, among other things, restrict the Company and most of its subsidiaries'
ability to:
- incur additional indebtedness;
- pay dividends;
- prepay subordinated indebtedness;
- dispose of some types of assets;
- make capital expenditures;
- create liens and make some types of investments or acquisitions; and
- engage in some fundamental corporate transactions.
The Company's ability to comply with these provisions may be affected by
general economic conditions, industry conditions, and other events or
circumstances beyond the Company's control. A breach of any of these covenants
could result in a default under the Senior Credit Facility. In the event of a
default, depending on the actions taken by the lenders under the Senior Credit
Facility, the lenders could elect to declare all amounts borrowed under the
Senior Credit Facility, together with accrued interest, to be due and payable.
In addition, a default under the Indenture for the Senior Secured Notes or the
Indenture for the Senior Subordinated Notes would constitute a default under the
Senior Credit Facility and any instruments governing our other indebtedness.
Both the Indenture governing the Senior Subordinated Notes and the
Indenture governing the Senior Secured Notes contain restrictions on the
Company's ability to incur, subject to certain exceptions, additional
indebtedness, unless the Company meets a fixed charge coverage ratio of 2.0 to
1.0 for the immediately preceding four calendar quarters. Because of recent
financial performance, the Company currently would not satisfy the fixed-charge
coverage ratio test, and, accordingly, is unable and expects to remain unable
for the foreseeable future to incur significant amounts of additional
indebtedness.
NOTE 5 -- RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," was issued by the FASB in
June 1998 and is effective for fiscal years beginning after June 15, 2000. SFAS
No. 133 established 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 balance sheet
and measure those instruments at fair value. The Company has not yet determined
the impact of the adoption of SFAS No. 133 on its consolidated financial
statements.
7
<PAGE> 10
METAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 6 -- LOSS PER COMMON SHARE
Basic and diluted earnings per share (EPS) are calculated in accordance
with SFAS No. 128, "Earnings Per Share." Basic EPS is computed by dividing
reported net income (loss) applicable to Common Stock by the weighted average
shares outstanding. Diluted EPS includes the incremental shares issuable upon
the assumed exercise of stock options and warrants, using the treasury stock
method. The following is a reconciliation of the numerators and denominators of
the basic and diluted per share computations (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------
2000 1999
---- ----
<S> <C> <C>
LOSS (NUMERATOR):
Net loss $(8,219) $(3,104)
Dividends on convertible preferred stock (116) (234)
------- -------
Net loss applicable to Common Stock $(8,335) $(3,338)
======= =======
SHARES (DENOMINATOR):
Weighted average number of shares outstanding during the
period 57,773 52,617
Incremental common shares attributable to dilutive stock
options and warrants 0 0
------- -------
Diluted number of shares outstanding during the period 57,773 52,617
======= =======
Basic loss per common share $ (0.14) $ (0.06)
======= =======
Diluted loss per common share $ (0.14) $ (0.06)
======= =======
</TABLE>
The effect of dilutive stock options and warrants were not included as
their effect would have been anti-dilutive for both periods presented. 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.
8
<PAGE> 11
This Form 10-Q includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements in this Form 10-Q which address
activities, events or developments that Metal Management, Inc. (herein, "Metal
Management," the "Company," "we," "us" or other similar terms) 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 our business and operations and other such matters are
forward-looking statements. Although we believe the expectations expressed in
such forward-looking statements are based on reasonable assumptions within the
bounds of our knowledge of our business, a number of factors could cause actual
results to differ materially from those expressed in any forward-looking
statements. These and other risks, uncertainties and other factors are discussed
under "Investment Considerations" appearing in our Annual Report on Form 10-K
for the year ended March 31, 2000, as the same may be amended from time to time.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
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 our Annual Report on
Form 10-K for the year ended March 31, 2000.
GENERAL
We are one of the largest full-service metals recyclers in the United
States, with approximately 50 recycling facilities in 14 states. We have a
leadership position in many major metropolitan markets, including Chicago,
Cleveland, Denver, Hartford, Houston, Memphis, Newark, Phoenix and Pittsburgh.
Through an equity ownership position in Southern Recycling, L.L.C. ("Southern
Recycling"), the largest scrap metals recycler in the Gulf Coast region, we have
a leading share of this strategically important market. We also hold leading
market positions in several important product segments, including stainless
steel, copper and aluminum generated from electric utility applications and
titanium and other high-temperature nickel alloys generated by the aerospace
industry.
We have achieved a leading position in the metals recycling industry
primarily by implementing a national strategy of completing and integrating
regional acquisitions. Since April 1996, we have completed 27 acquisitions and,
in the process, added in excess of $900 million in revenues. In making
acquisitions, we have focused on major metropolitan markets where prime
industrial and obsolete scrap (automobiles, appliances and industrial equipment)
is readily available and from where we believe we can better serve our customer
base. In pursuing this strategy, we have sought to acquire regional platform
companies with strong operational management and a history of successful
financial performance to serve as platforms into which subsequent acquisitions
can be integrated. We believe that through consolidation, we will be able to
enhance the competitive position and profitability of the operations we acquire
because of broader distribution channels, improved managerial and financial
resources, greater purchasing power and increased economies of scale.
Our operations consist primarily of the collection and processing of
ferrous and non-ferrous metals for resale to metals brokers, steel producers,
and producers and processors of other metals. We collect industrial scrap and
obsolete scrap, process it into reusable forms and supply the recycled metals to
our customers, including steel mini-mills, integrated steel mills, foundries,
secondary smelters and metals brokers. We believe that we provide one of the
most comprehensive offerings of both ferrous and non-ferrous scrap metals in the
industry. Our ferrous products primarily include shredded, sheared, hot
briquetted, cold briquetted and bundled scrap and other purchased scrap, such as
turnings, cast and broken furnace iron. We also process non-ferrous metals,
including aluminum, copper, stainless steel, brass, titanium and high
temperature alloys, using similar techniques and through application of our
proprietary technologies.
9
<PAGE> 12
Our common stock, par value $.01 per share ("Common Stock") is traded on
the NASDAQ SmallCap Market under the symbol "MTLM." Our principal executive
offices are located at 500 North Dearborn Street, Suite 405, Chicago, Illinois
60610, and our telephone number is (312) 645-0700.
RESULTS OF OPERATIONS
Our consolidated net sales consist primarily of revenues derived from the
sale and brokerage of scrap metals. We recognize revenues from processed product
sales at the time of shipment. Revenues related to brokerage sales are
recognized upon receipt of the material by the customer.
Cost of sales consists primarily of the cost of metals sold, direct and
indirect labor and related taxes and benefits, repairs and maintenance,
utilities and freight.
General and administrative expenses include management salaries, clerical
and administrative costs, professional services, facility rentals and related
insurance and utility costs, as well as costs related to our marketing and
business development activities.
Other income and expense consists principally of interest expense, interest
income, gains or losses on the sale of fixed assets, and income and losses from
joint ventures which represent an allocation of income and losses attributable
to investments made by us in joint ventures. The joint ventures are accounted
for under the equity method of accounting.
The following table presents certain items from our statements of
operations as a percentage of net sales for the three months ended June 30, 2000
and 1999:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 90.5% 87.0%
----- -----
Gross profit 9.5% 13.0%
Operating expenses:
General and administrative 6.2% 7.5%
Depreciation and amortization 2.9% 3.3%
Non-cash and non-recurring expense 1.1% 0.0%
Operating income (loss) (0.7)% 2.2%
Interest expense 4.3% 4.4%
Net loss (3.4)% (1.6)%
</TABLE>
Consolidated net sales for the three months ended June 30, 2000 and 1999 in
broad product categories were as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
---------------------------- ----------------------------
COMMODITY WEIGHT NET SALES % WEIGHT NET SALES %
--------- ------ --------- - ------ --------- -
<S> <C> <C> <C> <C> <C> <C>
Ferrous metals (tons) 1,182 $133,838 55.3 1,038 $103,131 51.9
Non-ferrous metals (lbs) 152,010 83,991 34.7 146,201 63,004 31.7
Brokerage - ferrous (tons) 125 14,240 5.9 273 23,967 12.1
Brokerage - non ferrous (lbs) 15,280 6,030 2.5 16,378 4,088 2.1
Other 3,810 1.6 4,492 2.2
-------- ---- -------- ----
$241,909 100% $198,682 100%
======== ==== ======== ====
</TABLE>
Consolidated net sales increased $43.2 million (21.8%) to $241.9 million
during the three months ended June 30, 2000 from $198.7 million during the three
months ended June 30, 1999. The increase in consolidated net sales is
principally due to higher per unit sales prices and higher sales volumes caused
primarily by increased production rates for new steel during the quarter ended
June 30, 2000 compared to the quarter ended June 30, 1999.
10
<PAGE> 13
Ferrous sales increased by $30.7 million (29.8%) during the three months
ended June 30, 2000 compared to ferrous sales in the three months ended June 30,
1999. Our average sales price for ferrous metals increased by 14.0% to $113 per
ton during the three months ended June 30, 2000 compared to the three months
ended June 30, 1999.
Non-ferrous sales increased by $21.0 million (33.3%) during the three
months ended June 30, 2000 compared to non-ferrous sales in the three months
ended June 30, 1999. The increase was due to higher volumes and average realized
selling prices. Our average selling price for non-ferrous metals increased by
28.2% to $0.55 per pound during the three months ended June 30, 2000 compared to
the three months ended June 30, 1999. Our average selling price for the
non-ferrous product category is impacted by market conditions and the product
mix of non-ferrous metals sold. The majority of our non-ferrous sales are
derived from copper, aluminum and stainless steel.
Brokerage ferrous sales represented 5.9% of consolidated net sales for the
three months ended June 30, 2000 compared to 12.1% of consolidated net sales for
the three months ended June 30, 1999. Although our average sales price for
brokered ferrous metals increased by 29.8% to $114 per ton during the three
months ended June 30, 2000 compared to the three months ended June 30, 1999,
overall ferrous brokerage sales declined due to decreased tons of ferrous metals
brokered.
Brokerage non-ferrous sales represented 2.5% of consolidated net sales for
the three months ended June 30, 2000 compared to 2.1% of consolidated net sales
for the three months ended June 30, 1999. Although pounds of non-ferrous metals
brokered decreased by 1.1 million pounds, brokerage non-ferrous sales increased
due to higher realized selling prices. Our average sales price for brokered
non-ferrous metals increased by 58.1% to $0.39 per pound during the three months
ended June 30, 2000 compared to the three months ended June 30, 1999.
Consolidated gross profit was $23.0 million for the three months ended June
30, 2000 (a decrease of 11% over the prior year period) compared to consolidated
gross profit of $25.8 million for the three months ended June 30, 1999. The $2.8
million decrease in consolidated gross profit reflects increased operating costs
compared with the prior year period and weakening market conditions for scrap
metals towards the end of the three month period ended June 30, 2000.
Consolidated general and administrative expenses were $15.2 million for the
three months ended June 30, 2000 compared to $14.8 million for the three months
ended June 30, 1999. The increase in general and administrative expenses is
principally the result of increased labor and related costs compared with the
prior year period.
Depreciation and amortization expense was $6.9 million for the three months
ended June 30, 2000 compared to $6.6 million for the three months ended June 30,
1999. The increase reflects depreciation expense recognized for capital
expenditures made after June 30, 1999.
Non-cash and non-recurring expense was recorded in the amount of $2.6
million in the three months ended June 30, 2000. An impairment charge was
established with respect to a note receivable for which we determined on the
basis of circumstances learned during the three months ended June 30, 2000, that
it became probable that payments of principal and interest would not be
received. The promissory note was issued in conjunction with the sale of our
former Superior Forge Subsidiary.
Interest expense was $10.3 million for the three months ended June 30, 2000
compared to $8.7 million for the three months ended June 30, 1999. The increase
is primarily due to additional borrowings made under the Senior Credit Facility
to fund our operating and investing activities, an increase in the applicable
base interest rates payable under the Senior Credit Facility and the issuance of
the Senior Secured Notes in May 1999.
Net loss, after preferred stock dividends, was $8.3 million ($0.14 per
share) for the three months ended June 30, 2000 compared to a net loss, after
preferred stock dividends, of $3.3 million ($0.06 per share) during
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<PAGE> 14
the three months ended June 30, 1999. The increase in the net loss is primarily
due to lower gross margins, an increase in interest expense and the recognition
of $2.6 million of non-cash and non-recurring expenses.
We recorded an income tax benefit of $3.9 million during the three months
ended June 30, 2000 which yields an effective tax rate of 32.2% compared to an
income tax benefit of $1.1 million during the three months ended June 30, 1999
which yielded an effective tax rate of 26.9%. Our effective tax rate differs for
the statutory rate primarily due to permanent differences caused by
non-deductible goodwill amortization and certain other non-deductible and
non-cash expenses.
LIQUIDITY AND CAPITAL RESOURCES
Our future cash needs are expected to be driven by working capital
requirements, planned capital expenditures, interest payments and related
obligations and acquisition objectives. Capital expenditures were approximately
$3.5 million for the three months ended June 30, 2000, as compared to
approximately $2.6 million for the three months ended June 30, 1999. Capital
expenditures are being carefully evaluated and we are generally approving only
replacement projects on an as required basis. Capital projects which are
intended to expand capacity will be limited until we see substantial improvement
in liquidity. Also, our Board of Directors authorized the repurchase of up to
$2.0 million of our Common Stock for which we have purchased 50,000 shares for
$67,000 to date.
We expect to fund our working capital needs (including interest payments),
capital expenditures and share repurchases, if any, with cash provided from
operations, supplemented by borrowings under our Senior Credit Facility. We
project that these sources of capital will be sufficient to fund our
requirements for the foreseeable future, although there can be no assurance that
this will be the case. Our ability to continue to be able to fund our cash
requirements will be dependent upon there not being a downturn in our markets
causing cash flow results below recent levels, and upon there continuing to be
undrawn borrowing availability under the Senior Credit Facility. Adverse market
conditions could be expected to further reduce borrowing availability under the
Senior Credit Facility and make it difficult for us to satisfy financial
covenants provided for in the Senior Credit Facility or to continue to be able
to fund our working capital needs. In addition, the instruments governing the
Senior Credit Facility, the Senior Subordinated Notes and the Senior Secured
Notes limit our ability to incur additional debt to fund operating activities or
significant acquisition or expansion opportunities unless and until our results
of operations show significant improvement for four consecutive quarters.
Cash Flows from Operations
Net cash used in operating activities of $1.6 million during the three
months ended June 30, 2000 resulted primarily from the loss from operations for
the period. During this period, working capital decreased by $0.2 million
principally due to a decrease in accounts payable and accrued interest balances.
Cash Flows from Investing Activities
During the three months ended June 30, 2000, we used $3.4 million of cash
for investing activities. Purchases of property and equipment were $3.5 million,
while we generated $0.2 million of cash from the sale of certain equipment.
Cash Flows from Financing Activities
During the three months ended June 30, 2000, our financing activities
provided $5.0 million of cash, principally from increased borrowings under the
Senior Credit Facility. We also repurchased 50,000 shares of Common Stock for
$67,000.
FINANCIAL CONDITION
Working Capital Availability and Requirements
Our accounts receivable balances decreased from $155.9 million at March 31,
2000 to $142.8 million at June 30, 2000 principally due to lower sales in the
three months ended June 30, 2000 compared to the three months ended March 31,
2000.
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<PAGE> 15
Our accounts payable balances decreased from $76.1 million at March 31,
2000 to $71.9 million at June 30, 2000. The decrease in accounts payable
resulted principally from a reduction in the amount of material purchases during
the latter part of the three months ended June 30, 2000.
Inventory levels can vary significantly among our operations and with
changes in market conditions. Inventories consisted of the following categories
(in thousands):
<TABLE>
<CAPTION>
JUNE 30, 2000 MARCH 31, 2000
------------- --------------
<S> <C> <C>
Ferrous metals $34,635 $38,344
Non-ferrous metals 34,849 28,069
Other 1,360 3,862
------- -------
$70,844 $70,275
======= =======
</TABLE>
Ferrous inventory dollars decreased during the quarter primarily due to
lower average purchase costs per ton as of June 30, 2000 compared to March 31,
2000. Non-ferrous inventory increased during the quarter due to increased units
of non-ferrous materials on hand at June 30, 2000 compared to March 31, 2000.
COMPANY INDEBTEDNESS
Our principal indebtedness is represented by borrowings under the Senior
Credit Facility, the Senior Subordinated Notes and the Senior Secured Notes. At
June 30, 2000, we had $392.5 million of debt outstanding compared to $384.7
million at March 31, 2000. Our level of indebtedness has several important
effects on our operations, including (i) a substantial portion of our cash flows
from operations must be dedicated to the payment of interest, (ii) covenants
contained in our various indentures require us to satisfy certain financial
tests, and contain other restrictions that limit our ability to borrow
additional funds, and (iii) our ability to obtain additional financing in the
future may be impaired.
Senior Credit Facility
The Credit Agreement, dated March 31, 1998, among BT Commercial
Corporation, as agent, the lenders and us (as amended, the "Senior Credit
Facility") provides for a revolving credit and letter of credit facility of
$250.0 million, subject to borrowing base limitations. Our obligations under the
Senior Credit Facility are secured by substantially all of our assets and
properties, including pledges of the capital stock of our subsidiaries.
Availability of loans and letters of credit under the Senior Credit Facility is
generally limited to a borrowing base of 85% of eligible accounts receivable,
70% of eligible inventory (subject to a cap of $100.0 million) and a fixed asset
sublimit ($45.6 million as of June 30, 2000) that amortizes on a quarterly
basis.
On May 31, 2000, the Senior Credit Facility was amended whereby its
maturity date was extended until March 31, 2004. The covenants pertaining to
interest coverage ratio and capital expenditures were not changed by the
amendment.
The Senior Credit Facility provides us with the option of borrowing at an
interest rate equal to either the Bankers Trust Company's prime rate plus a
margin or the London Interbank Offered Rate ("LIBOR") plus a margin.
The Senior Credit Facility also contains certain affirmative covenants,
including a minimum interest coverage ratio and imposes certain limitations on
our ability to make capital expenditures, redeem Senior Subordinated Notes or
Senior Secured Notes, incur additional indebtedness, and generally restricts
payments of dividends and equity redemptions. The Senior Credit Facility places
a limit on annual capital expenditures to not exceed 2% of consolidated net
sales.
The interest coverage test of the Senior Credit Facility requires us to
maintain an interest coverage ratio of not less than 1.0 to 1.0 (EBITDA (as
defined in the Senior Credit Facility) to interest expense) at the end of each
fiscal quarter for the twelve-month period then ending. We were in compliance as
of June 30, 2000, with this and other financial covenants set forth in the
Senior Credit Facility.
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<PAGE> 16
Working capital decreased in the three months ending June 30, 2000 by $1.0
million to approximately $139.4 million. At June 30, 2000, we had outstanding
borrowings under the Senior Credit Facility of approximately $178.2 million and
$3.8 million outstanding as issued letters of credit. Availability under the
Senior Credit Facility has been diminished by the payment of substantial debt
service in the form of interest, fees and loan amortization during the past
three months. Additionally, our sales during July 2000 were adversely affected
by weakening demand from consumers which reduced accounts receivable and
availability. As of August 3, 2000, we had undrawn availability of approximately
$11 million under the Senior Credit Facility.
10% Senior Subordinated Notes due 2008
On May 13, 1998, we issued $180.0 million of 10% Senior Subordinated Notes
due on May 15, 2008 (the "Senior Subordinated Notes") in a private placement
pursuant to exemptions under the Securities Act of 1933. Interest on the Senior
Subordinated Notes is payable semi-annually during May and November of each
year. We received net proceeds of $174.6 million in the offering of the Senior
Subordinated Notes. The Senior Subordinated Notes are our general unsecured
obligations and are subordinated in right of payment to all of our senior debt,
including our indebtedness under the Senior Credit Facility and the Senior
Secured Notes. Our payment obligations are jointly and severally guaranteed by
all of our current and certain future subsidiaries.
Except as described below, the Senior Subordinated Notes are not redeemable
at our option prior to May 15, 2003. After May 15, 2003, the Senior Subordinated
Notes are redeemable 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, we may redeem up to 35% of the aggregate
principal amount of the Senior Subordinated Notes at a redemption price of 110%
of the principal amount of the Senior Subordinated Notes, plus accrued and
unpaid interest, from the proceeds of one or more sales of Common Stock. The
Senior Subordinated Notes are also redeemable at the option of the holders of
such notes at a repurchase price of 101% of the principal amount thereof, plus
accrued and unpaid interest, in the event of certain change of control events
with respect to us. Subject to certain exceptions, the Senior Subordinated Notes
are redeemable at the option of the holders of such notes at a repurchase price
of 100% of the principal amount thereof, plus accrued and unpaid interest, in
the event we make certain asset sales.
The Indenture governing the Senior Subordinated Notes contains certain
covenants that limit, among other things, our ability to: (i) incur additional
indebtedness (including by way of guarantee), subject to certain exceptions,
unless we meet a fixed charge coverage ratio of 2.0 to 1.0 or certain other
conditions apply; (ii) issue certain types of securities containing mandatory
redemption rights or which otherwise are redeemable at the option of the holder
prior to the maturity of the Senior Subordinated Notes; (iii) pay dividends or
distributions, or make certain types of investments or other restricted
payments, unless we meet certain specified conditions; (iv) enter into certain
transactions with affiliates; (v) dispose of certain assets; (vi) incur liens
securing indebtedness that is pari passu or subordinated to the Senior
Subordinated Notes; or (viii) engage in certain mergers and consolidations.
12 3/4% Senior Secured Notes due 2004
On May 7, 1999, we issued $30.0 million aggregate principal amount of
Senior Secured Notes (the "Senior Secured Notes") in a private placement
pursuant to exemptions under the Securities Act of 1933.
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<PAGE> 17
The Senior Secured Notes were issued at 90% of their stated principal amount at
maturity. The Senior Secured Notes mature on June 15, 2004 and bear interest at
the rate of 12 3/4% per annum. Interest on the Senior Secured Notes is payable
semi-annually during September and December of each year. We received net
proceeds of $25.5 million in the offering of the Senior Secured Notes. The
Senior Secured Notes are our senior obligations and will rank equally in right
of payment with all of our unsubordinated debt, including our indebtedness under
the Senior Credit Facility, and senior in right of payment to all of our
subordinated debt, including the Senior Subordinated Notes.
Our payment obligations are jointly and severally guaranteed by all of our
current and future subsidiaries. The Senior Secured Notes are also secured by a
second priority lien on substantially all of our personal property, plant (to
the extent it constitutes fixtures) and equipment that secure the Senior Credit
Facility. The liens that secure the Senior Secured Notes are subordinated to the
liens that secure the indebtedness under the Senior Credit Facility.
The Senior Secured Notes are not redeemable at our option prior to June 15,
2000. Thereafter, we may redeem some or all of the Senior Secured Notes (in
multiples of $10.0 million) at a redemption price of 100% of the principal
amount thereof, plus accrued and unpaid interest. The Senior Secured Notes are
redeemable at the option of the holders of such notes at a repurchase price of
101% of the principal amount thereof, plus accrued and unpaid interest, in the
event we experience a change of control. Subject to certain exceptions, the
Senior Secured Notes are redeemable at the option of the holders of such notes
at a repurchase price of 100% of the principal amount thereof, plus accrued and
unpaid interest, in the event we make certain asset sales.
The Indenture governing the Senior Secured Notes contains substantially the
same operating restrictions as those contained in the Indenture governing the
Senior Subordinated Notes. These include limits on, among other things, our
ability to: (i) incur additional indebtedness; (ii) pay dividends or
distributions on our capital stock or repurchase its capital stock; (iii) issue
stock of subsidiaries; (iv) make certain investments; (v) create liens on our
assets; (vi) enter into transactions with affiliates; (vii) merge or consolidate
with another company; and (viii) transfer and sell assets or enter into sale and
leaseback transactions.
YEAR 2000
As previously disclosed, we implemented a plan to address the possible
exposures related to the impact of the Year 2000 on our computer systems and on
our non-information technology systems. Since entering the year 2000, we have
not experienced any major disruptions to our business nor are we aware of any
significant Year 2000 related disruptions impacting our customers and suppliers.
However, there is no guarantee that we have discovered all possible failure
points. Specific factors contributing to this uncertainty include failure to
identify all systems, non-ready third parties whose systems and operations
impact our operations, and other similar uncertainties. We will continue to
monitor our critical systems over the next several months, but we do not
anticipate any significant impacts due to Year 2000 exposures from our computer
systems, non-information technology systems as well as from the activities of
our suppliers and customers. Costs incurred to date associated with Year 2000
readiness have not been material to our financial position or results of
operations.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," was issued by the FASB in
June 1998 and is effective for fiscal years beginning after June 15, 2000. SFAS
No. 133 established 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 balance sheet
and measure those instruments at fair value. We have not yet determined the
impact of the adoption of SFAS No. 133 on our consolidated financial statements.
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<PAGE> 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to financial risk resulting from fluctuations in
interest rates and commodity prices. We seek to minimize these risks through
regular operating and financing activities and, where appropriate, through use
of derivative financial instruments. Our use of derivative financial instruments
is limited and related solely to hedges of certain non-ferrous inventory
positions. Reference is made to the quantitative disclosures about market risk
as of March 31, 2000 included under Item 7A of our most recent Annual Report on
Form 10-K.
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<PAGE> 19
PART II -- OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
See Exhibit Index
(B) REPORTS ON FORM 8-K
No reports were filed on Form 8-K during the quarter ended June 30, 2000.
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<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
METAL MANAGEMENT, INC.
By: /s/ ALBERT A. COZZI
------------------------------------
Albert A. Cozzi
Director, Chairman of the Board,
and Chief Executive Officer
(Principal Executive Officer)
By: /s/ MICHAEL W. TRYON
------------------------------------
Michael W. Tryon
President and Chief
Operating Officer
By: /s/ ROBERT C. LARRY
------------------------------------
Robert C. Larry
Executive Vice President, Finance,
and Chief Financial Officer
(Principal Financial Officer)
By: /s/ AMIT N. PATEL
------------------------------------
Amit N. Patel
Vice President, Finance and
Controller
(Principal Accounting Officer)
Date: August 3, 2000
18
<PAGE> 21
METAL MANAGEMENT, INC.
EXHIBIT INDEX
NUMBER AND DESCRIPTION OF EXHIBIT
<TABLE>
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the
Company, as filed with the Secretary of State of the State
of Delaware on November 2, 1998 (incorporated by reference
to Exhibit 3.1 of the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998).
3.2 Certificate of Designations, Preferences and Rights of
Series C Convertible Preferred Stock of the Company, as
filed with the Secretary of State of the State of Delaware
on November 2, 1998 (incorporated by reference to Exhibit
3.2 of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998).
3.3 Restated By-Laws of the Company, as amended through March
31, 1999 (incorporated by reference to Exhibit 3.3 of the
Company's Annual Report on Form 10-K for the year ended
March 31, 1999).
10.1 Amendment No. 7 to Credit Agreement, dated as of May 31,
2000, by and among the Company and its subsidiaries named
therein, BT Commercial Corporation and the other financial
institutions signatories thereto as lenders (incorporated by
reference to Exhibit 10.8 of the Company's Annual Report on
Form 10-K for the year ended March 31, 2000).
10.2 Employment Agreement, dated April 1, 2000, between Michael
W. Tryon and the Company (incorporated by reference to
Exhibit 10.15 of the Company's Annual Report on Form 10-K
for the year ended March 31, 2000).
27.1 Financial Data Schedule.
</TABLE>
19
