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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-14836
METAL MANAGEMENT, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2835068
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
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
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value for the Registrant's voting stock held by
non-affiliates of the Registrant based upon the closing sale price of the Common
Stock on June 15, 1998 as reported on the NASDAQ National Market System, was
approximately $175.8 million. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of June 15, 1998, the Registrant had 34,333,963 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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TABLE OF CONTENTS
PAGE
PART I
Item 1: Business.................................................... 1
Item 2: Properties.................................................. 11
Item 3: Legal Proceedings........................................... 12
Item 4: Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5: Market for the Registrant's Common Stock and Related
Stockholder Matters......................................... 13
Item 6: Selected Consolidated Financial Data........................ 16
Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 17
Item 7A: Quantitative and Qualitative Disclosures About Market
Risk........................................................ 32
Item 8: Financial Statements and Supplementary Data................. 32
Item 9: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 32
PART III
Item 10: Directors and Executive Officers of the Registrant.......... 33
Item 11: Executive Compensation...................................... 36
Item 12: Security Ownership of Certain Beneficial Owners and
Management.................................................. 41
Item 13: Certain Relationships and Related Transactions.............. 42
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 46
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PART I
Certain statements contained in this Form 10-K under Item 1, in addition to
certain statements contained elsewhere in this Form 10-K, including statements
qualified by the words "believes," "intends," "anticipates," "expects" and words
of similar import, are "forward-looking statements" and are thus prospective.
These statements reflect the current expectations of Metal Management, Inc.
(herein, "Metal Management" or the "Company") regarding (i) the future
profitability of the Company and its subsidiaries, (ii) the benefits to be
derived from the Company's execution of its industry consolidation strategy and
(iii) other future developments in the affairs of the Company or the industry in
which it conducts business. All such forward-looking statements are subject to
risks, uncertainties and other factors that could cause actual results to differ
materially from future results expressed or implied by such forward-looking
statements. These and other risks, uncertainties and other factors are discussed
under the heading "Investment Considerations" in Part II, Item 7 of this report.
ITEM 1. BUSINESS.
GENERAL
Metal Management is one of the largest and fastest-growing full service
metals recyclers in the United States, with 54 recycling facilities in 12
states. The Company is a leading consolidator in the metals recycling industry
and has achieved this position primarily through the implementation of its
national strategy of completing and integrating regional acquisitions. The
Company believes that its consolidation strategy will enhance the competitive
position and profitability of the operations that it acquires through improved
managerial and financial resources and increased economies of scale.
Metal Management is primarily engaged in the collection and processing of
ferrous and non-ferrous metals for resale to metals brokers, steel producers,
and producers and processors of other metals. The Company collects industrial
scrap and obsolete scrap, processes it into reusable forms, and supplies the
recycled metals to its customers, including mini-mills, integrated steel mills,
foundries and metals brokers. The Company believes that it provides 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. For the year
ended March 31, 1998, the Company sold approximately 3.1 million tons of ferrous
scrap and approximately 178.1 million pounds of non-ferrous scrap.
The Company's predecessor was incorporated on September 24, 1981 as a
California corporation under the name General Parametrics Corporation, and was
re-incorporated as a Delaware corporation in June 1986 under the same name.
Prior to April 1996, the Company manufactured and marketed color thermal and dye
sublimation printers and related consumables, including ribbons, transparencies
and paper. The Company sold this business in two separate transactions in July
and December of 1996 for $1.3 million in cash and future royalty streams which
the Company does not anticipate will result in material payments to the Company.
On April 12, 1996, the Company changed its name to "Metal Management, Inc."
The Company's common stock, par value $.01 per share ("Common Stock"), is
traded on the NASDAQ Stock Market under the trading symbol "MTLM". The Company's
principal executive offices are located at 500 North Dearborn Street, Suite 405,
Chicago, Illinois 60610, and its telephone number is (312) 645-0700.
INDUSTRY OVERVIEW
According to government sources, total revenues generated in the metals
recycling industry in 1995 were approximately $19.3 billion. The Company
believes that the scrap metals industry is composed of more than 3,000
independent metals recyclers. Many of these companies are family-owned and
operate only in local or regional markets. The Company believes that no single
scrap metals recycler has a significant share of the domestic market, although
certain recyclers may have significant shares of their local or regional
markets.
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Within this industry framework, a consolidation is taking place. Several factors
account for the consolidation: (i) the reduction in purchasing, processing,
transportation, labor and selling, general and administrative costs associated
with large, integrated companies; (ii) the desire of the owners of closely-held
family businesses to gain liquidity by merging with large, public companies
while maintaining managerial input; and (iii) the ability of large, public
companies to attract the capital necessary to make the significant investments
in plant and equipment that are required due to increasingly stringent
environmental regulation and the need to upgrade processing facilities.
Ferrous Scrap Industry. Ferrous scrap is the primary raw material for
mini-mill steel producers that utilize electric arc furnance ("EAF") technology.
According to industry sources, domestic ferrous scrap production is
approximately 75 to 80 million tons, of which 8 to 10 million tons is exported.
In addition, approximately 1 to 3 million tons of ferrous scrap are imported
annually. Demand for processed ferrous scrap is highly dependent on the overall
strength of the domestic steel industry, particularly production utilizing EAF
technology.
Much of the growth in the scrap metals industry in recent years has
occurred as a result of the proliferation of mini-mill steel producers which
utilize EAF technology. EAF production has increased from 14.8 million tons
(11.1% of total domestic steel production) in 1966 to 46.4 million tons (43.2%
of total domestic steel production) in 1997. The Company expects this trend to
continue in the next few years as several new EAF facilities start production.
The Company believes that as a large, reliable supplier of scrap metals it is
well positioned to take advantage of the growth in this industry.
The growth in EAF production has been fueled by the historically low price
of prepared ferrous scrap, which gives EAF producers a product cost advantage
over integrated steel producers which operate blast furnaces whose primary raw
materials are coke and iron ore, although some of this cost advantage has been
eroded by increases in ferrous scrap prices in recent years. As the price of
ferrous scrap metals increase, EAF operators look for alternatives to prepared
steel scrap, such as pre-reduced iron pellets or pig iron, to supply their EAF
operations. The Company does not believe that these alternatives to ferrous
scrap will replace ferrous scrap in EAF operations, but will be used as
supplemental feedstock thereby allowing EAF operators to utilize lower grades of
prepared scrap. Industry analysts continue to predict rising demand for ferrous
scrap over the next several years.
Due to its low price-to-weight ratio, raw ferrous scrap is generally
purchased locally from industrial companies, demolition firms, junk yards,
railroads, the military, scrap dealers and various other sources, typically in
the form of automobile bodies, appliances and structural steel. Ferrous scrap
prices are local and regional in nature; however, where there are overlapping
regional markets, the prices do not tend to differ significantly between the
regions due to the ability of companies to ship scrap cost-effectively from one
region to the other. The most significant limitation on the size of the
geographic market for ferrous scrap is the transportation cost for the raw or
processed scrap. Therefore, scrap processing facilities are typically located on
or near key modes of transportation, such as railways, interstate highways or
waterways.
Non-Ferrous Scrap Industry. Non-ferrous metals include aluminum, copper,
brass, stainless steel, high-temperature alloys and other exotic metals. The
geographic markets for non-ferrous scrap tend to be larger than those for
ferrous scrap due to the higher selling prices of non-ferrous metals, which
justify the cost of shipping over greater distances. Non-ferrous scrap is sold
on a spot basis, either directly or through brokers, to intermediate or
end-users, which include smelters, foundries and aluminum sheet and ingot
manufacturers. Prices for non-ferrous scrap are driven by demand for finished
non-ferrous metal goods and by the general level of economic activity, with
prices generally pegged to the price of the primary metal on the London Metals
Exchange or COMEX. Suppliers and consumers of non-ferrous metals can also use
these exchanges to hedge against future price fluctuations by buying or selling
futures contracts.
Secondary smelters, utilizing processed non-ferrous scrap as raw material,
can produce non-ferrous metals at a lower cost than primary smelters producing
such metals from ore. This is due to the savings in energy consumption,
environmental compliance, and labor costs enjoyed by the secondary smelters.
These cost advantages, and the long lead-time necessary to construct new
non-ferrous primary smelting capacity, have
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resulted in sustained demand and strong prices for processed non-ferrous scrap
during periods of high demand for finished non-ferrous metal products.
Raw non-ferrous scrap is typically generated and supplied by: (i)
manufacturers and other sources that generate or sell non-ferrous metals; (ii)
telecommunications, aerospace, defense and recycling companies that generate
obsolete scrap consisting primarily of copper wire, used beverage cans and other
non-ferrous metal alloys; and (iii) ferrous scrap operations that recover
aluminum, zinc, die-cast metal, stainless steel and copper as by-products of
their processing of ferrous scrap. The most widely recycled non-ferrous metals
are aluminum, copper and stainless steel. According to industry sources,
domestic recyclers annually process approximately 3.5 million tons of aluminum,
1.5 million tons of copper and 0.9 million tons of stainless steel.
COMPANY STRENGTHS
Market Leadership in Major Metropolitan and Regional Markets. In executing
its acquisition strategy, the Company has focused on establishing a significant
presence in major metropolitan or regional markets, where sources of prime
industrial and obsolete scrap (i.e., automobiles and industrial equipment) are
more readily available and from where the Company believes that it can provide
better service to its customers. As a result, the Company has become one of the
leading metals recyclers in the Chicago, Phoenix, Cleveland, Houston, Pittsburgh
and Los Angeles metropolitan markets.
Strong Operational Management. The Company believes that the scrap metals
recycling business is, and will continue to be, locally and regionally based. As
a result, Metal Management has adopted a philosophy of decentralized operational
management, which it believes promotes the continued successful management of
its acquired companies. In considering its core regional acquisitions, the
Company has targeted regional leaders in the scrap metals industry with proven
operational management capabilities. Following these acquisitions, the Company
has generally retained the services of the acquired companies' senior management
teams through the use of multi-year employment agreements and provided
incentives for such managers to contribute to the growth and profitability of
the Company through the use of stock options and warrants.
Proven Integration Synergies. The Company believes that the operations of
its acquired companies have benefited, and will continue to benefit, from
joining the Metal Management group of companies. The Company believes that the
metals recycling industry is becoming more capital-intensive and that production
efficiencies are best realized by, among other things, the purchase and
maintenance of sophisticated equipment (such as automobile shredders) and the
sharing of information concerning sources of raw scrap, production technologies
and customer needs. Accordingly, the Company believes that its regional "hub and
spoke" acquisition strategy has benefited, and will continue to benefit, the
operations of its acquired companies by making available to such companies,
often for the first time, access to greater financial resources, complementary
regional management, purchasing strength in raw scrap and increased distribution
channels. As a further effort to identify synergies, the Company has created the
Office of the President, in which its senior management and regional managers
participate to provide a forum for the sharing of "best practices" and the
exchange of other ideas among the Company's regional operations.
Favorable Distribution Channels. The Company believes that its facilities
are situated in locations that afford the Company competitive advantages in
distribution efficiency, both in terms of cost and reliability. The Company
believes that water transportation is the most cost-effective manner to ship
scrap metals over long distances. A significant portion of the Company's
revenues are generated by operations that have direct or convenient access to
water or rail transportation. Such water or rail access significantly expands
the markets for the Company's products, particularly the markets for ferrous
scrap.
Broad Product Offering. The Company has a broad range of product offerings
in both ferrous and non-ferrous metals. The Company's ferrous products include
shredded, sheared, hot briquetted, cold briquetted and bundled scrap and broken
furnace iron. The Company's non-ferrous products include aluminum, copper,
stainless steel, brass and high temperature alloys. The Company believes it
currently offers one of the most comprehensive lines of products available
within its markets. By offering a broad range of products, the Company's
customers are able to purchase all of their scrap metal needs from one supplier,
thereby reducing the administrative and logistical burden associated with
supporting multiple supplier relationships. In addition,
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the Company's size and processing capabilities allow it to offer pre-packaged
blends of scrap metals that are immediately available for melting upon delivery
to customers, thereby eliminating the time and space required for customers to
purchase and blend various metals themselves to meet particular chemistry
requirements. The Company also continually seeks to develop and introduce new
products. For example, the Company has invested in sophisticated processing
equipment capable of producing the type of "clean" ferrous scrap that is
increasingly demanded by companies using EAF technology. This "clean" ferrous
scrap, which contains fewer contaminants such as lead, copper and other
non-ferrous metals, commands a premium over the prices charged for other ferrous
products. The Company is currently a significant supplier to companies such as
Nucor Corporation, United States Steel International, Inc., Inland Steel
Industries Inc., North Star Steel Co. and General Motors Corporation. By working
with its major customers to provide a reliable and broad product mix and
applying the knowledge gained to the rest of its business, the Company believes
that it can better develop mutually beneficial partnerships with its customers.
BUSINESS STRATEGY
Continue Regional-Based Acquisitions. The Company intends to continue to
grow by implementing its national strategy of completing and integrating
regional acquisitions. The Company's acquisition strategy is to acquire scrap
metals processors in large metropolitan or regional markets that will serve as
platform companies for subsequent "tuck-in" acquisitions of smaller metals
processors. The Company believes that the highly fragmented nature of the scrap
metals recycling industry offers significant opportunities for acquisitions that
meet these criteria and allows for the execution of its acquisition strategy. By
aggressively pursuing this consolidation strategy within the highly fragmented
and growing metals recycling industry, the Company believes that it can enhance
the competitive position and profitability of the operations that it acquires
through improved managerial and financial resources and increased economies of
scale. The Company also believes that the geographic diversity resulting from
the implementation of its acquisition strategy will reduce its vulnerability to
the dynamics of any particular local or regional market. Furthermore, the
Company believes that multi-regional and national steel manufacturers and other
customers for the Company's ferrous and non-ferrous scrap will increasingly
prefer to do business with processed scrap suppliers, such as Metal Management,
that can provide a dependable quantity and quality of processed scrap, as well
as a high degree of service.
Develop and Foster Mutually Beneficial Customer Relationships. The Company
believes that scrap metals recyclers have historically competed primarily on the
basis of price, seeking the highest possible price for processed scrap through
negotiation and attempting to sell more processed scrap when the market prices
for scrap are highest. The Company believes, however, that competing in such a
manner focuses on short-term gain at the expense of long-term profitability. The
Company's strategy, instead, focuses on establishing long-term customer
relationships. The Company believes that it can develop better relationships
with customers by using its numerous processing facilities to provide them with
a consistent supply of high-quality processed scrap, thereby building
"partnership-type" relationships that the Company believes will be
longer-lasting, more stable and profit enhancing.
Maximize Inventory Turnover. In order to maximize the efficiency and
profitability of its processing operations, the Company's business strategy is
to maximize the turnover of its scrap metals inventory, as opposed to collecting
scrap and holding it in speculation of higher unit prices. The Company believes
that this strategy of reducing cycle time serves to reduce exposure to price
fluctuations in the markets for scrap metals. The Company also believes that
this strategy is beneficial to customer relationships, because it allows
customers to depend on a reliable and steady supply of scrap metals that is not
subject to volume limitations during periods of changing prices.
Decentralized Management and Incentives. An important element of the
Company's acquisition strategy is to identify companies with strong, stable and
well-respected management. Metal Management recognizes that business practices
and strategies in the scrap metals industry differ, sometimes significantly,
among metropolitan and regional markets. As a result, the Company manages its
recycling operations on a decentralized basis. To secure the continuity of
strong local management, the Company generally seeks to execute multi-year
employment agreements with the senior management of the "hub" acquisitions for
each
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particular metropolitan or regional market. In addition, the Company often pays
a significant portion of the purchase price for its acquisitions in restricted
Common Stock and also makes use of warrants and options to acquire Common Stock,
resulting in the Company's management having significant incentive to maximize
the operating performance of the Company's subsidiaries.
ACQUISITION STRATEGY
Since entering the scrap metals recycling business in April 1996, the
Company has consummated 18 acquisitions (herein, the "Completed Acquisitions")
and now operates recycling facilities at 54 locations in 12 states. In pursuing
its acquisition strategy, the Company seeks to identify companies that meet
certain acquisition criteria which the Company believes suggest a strong
potential for future growth.
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.
Set forth below is a table identifying the recycling operations acquired by
the Company from April 1996 through June 15, 1998:
LOCATION OF
PRINCIPAL PROCESSING DATE OF
NAME FACILITIES ACQUISITION
- ---- -------------------- -----------
EMCO Recycling Corp. ("EMCO Recycling")(1) Phoenix, Arizona April 1996
California Metals Recycling, Inc., Firma, Inc., Firma Los Angeles County, California January 1997
Plastic Co., Inc., MacLeod Metals Co. and Trojan
Trading Co. (collectively, the "MacLeod Companies")
HouTex Metals Company, Inc. ("HouTex") Houston, Texas January 1997
Reserve Iron & Metal Limited Partnership ("Reserve Cleveland, Ohio May 1997
Iron & Metal")(2) Chicago, Illinois
Attalla, Alabama
Briquetting Corporation of America, Ferrex Trading Bryan, Ohio June 1997
Corporation, The Isaac Corporation and Paulding Cleveland, Ohio
Recycling, Inc. (collectively, the "Isaac Group") Dayton, Ohio
Defiance, Ohio
Proler Southwest Inc. and Proler Steelworks L.L.C. Houston, Texas August 1997
(collectively, "Proler Southwest") Jackson, Mississippi
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LOCATION OF
PRINCIPAL PROCESSING DATE OF
NAME FACILITIES ACQUISITION
- ---- -------------------- -----------
Cozzi Iron & Metal, Inc. ("Cozzi Iron & Metal")(3) Chicago, Illinois December 1997
East Chicago, Indiana
Pittsburgh, Pennsylvania
Memphis, Tennessee
Kankakee Scrap Corporation ("Kankakee Scrap") Kankakee, Illinois December 1997
Houston Compressed Steel Corp. ("Houston Compressed") Houston, Texas January 1998
Aerospace Metals, Inc. ("Aerospace") Hartford, Connecticut January 1998
Salt River Recycling, L.L.C. ("Salt River")(4) Phoenix, Arizona January 1998
Accurate Iron & Metal Co. ("Accurate Iron & Metal")(5) Franklin Park, Illinois February 1998
Superior Forge, Inc. ("Superior Forge") Huntington Beach, California March 1998
Ellis Metals, Inc. ("Ellis Metals") Tucson, Arizona March 1998
Midwest Industrial Metals Corp. ("Midwest Chicago, Illinois April 1998
Industrial")(5)
138 Scrap, Inc. and Katrick, Inc. ("138 Scrap") Riverdale, Illinois May 1998
Charles Bluestone Company, R&P Holdings, Inc. and R&P Elizabeth, Pennsylvania May 1998
Real Estate, Inc. (collectively, "Bluestone")(6) Sharon, Pennsylvania
Goldin Industries, Inc., Goldin Industries Louisiana, Gulfport, Mississippi June 1998
Inc. and Goldin of Alabama, Inc. (collectively, the Mobile, Alabama
"Goldin Companies")(7) Harvey, Louisiana
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(1) On March 12, 1998, EMCO Recycling changed its legal name to Metal Management
Arizona, Inc. ("Metal Management Arizona").
(2) The Attalla, Alabama recycling facility is operated through a joint venture
in which the Company's subsidiary, Reserve Iron & Metal, holds a 50%
interest.
(3) The Memphis, Tennessee recycling facility is operated through a joint
venture in which the Company's subsidiary, Cozzi Iron & Metal, holds a 50%
interest.
(4) At the time it was acquired by the Company, Cozzi Iron & Metal held a 50%
joint venture interest in Salt River.
(5) The Company purchased substantially all of the assets of Accurate Iron &
Metal and certain of the assets of Midwest Industrial, both of which have
been integrated into the Company's Cozzi Iron & Metal operations.
(6) The Sharon, Pennsylvania recycling facility is operated through a joint
venture in which the Company's subsidiary, Bluestone, holds a 50% interest.
(7) A new subsidiary, Metal Management Gulf Coast, Inc. ("Metal Management Gulf
Coast"), was formed with which the Company purchased substantially all of
the scrap metal assets of the Goldin Companies.
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PENDING ACQUISITIONS
In addition to the Completed Acquisitions, the Company is in various stages
of negotiation to acquire a number of additional scrap metals recycling and
related operations. As of June 15, 1998, the Company has publicly announced
definitive agreements or binding letters of intent to acquire the recycling
operations of the following (herein, the "Pending Acquisitions"):
LOCATION OF
PRINCIPAL PROCESSING
NAME FACILITIES
- ---- --------------------
M. Kimerling & Sons, Inc. ("Kimerling").................. Birmingham, Alabama
Naporano Iron & Metal, Co. and NIMCO Shredding Co.
(collectively, "Naporano")............................. Newark, New Jersey
Newell Recycling of Denver, Inc. and Newell Recycling of Denver, Colorado
Utah, L.L.C. (collectively, "Newell Recycling")........ Colorado Springs, Colorado
Nicroloy Company ("Nicroloy")............................ Heidelberg, Pennsylvania
Michael Schiavone & Sons, Inc. ("Schiavone")............. North Haven, Connecticut
Universal Scrap Metals, Inc. ("Universal")............... Chicago, Illinois
All of the Pending Acquisitions are either subject to the negotiation of
definitive purchase agreements or are otherwise subject to definitive purchase
agreements with various closing conditions, accordingly, there can be no
assurance that all or any one of the Pending Acquisitions will be successfully
completed by the Company.
COMPANY RECYCLING OPERATIONS
The recycling operations of the Company involve buying, processing, and
selling scrap metals. The principal forms in which scrap metals are generated
include industrial scrap and obsolete scrap. Industrial scrap results from
residual materials from manufacturing processes. Obsolete scrap consists
primarily of residual metals from old or obsolete consumer and industrial
products such as appliances and automobiles.
Ferrous Operations
Ferrous Scrap Purchasing. The Company purchases ferrous scrap from two
primary sources: (i) manufacturers who process steel and iron ("industrial
scrap"); and (ii) junkyards, demolition firms, railroads, the military and
others who generate steel and iron scrap ("obsolete scrap"). In addition to
these sources, the Company purchases, at auction, furnace iron from integrated
steel mills and obsolete steel and iron from government and large industrial
accounts. The Company also purchases materials from small dealers, peddlers and
auto wreckers who deliver directly to the Company's processing facilities.
Prices are determined primarily by market demand and the composition, quality,
size, and weight of the materials.
Ferrous Scrap Processing. The Company prepares ferrous scrap metal for
resale through a variety of methods including sorting, shredding, shearing or
cutting, baling, briquetting or breaking. The Company produces a number of
differently sized and shaped products depending upon customer specifications and
market demand.
Sorting. After purchasing ferrous scrap metal, the Company inspects
the material to determine how it should be processed to maximize
profitability. In some instances, scrap may be sorted and sold without
further processing. The Company separates scrap for further processing
according to its size and composition by using conveyor systems, front-end
loaders, crane-mounted electromagnets or claw-like grapples.
Shredding. Obsolete consumer scrap such as automobiles, home
appliances and other consumer goods, as well as certain light gauge
industrial scrap, is processed in the Company's shredding operation. These
items are fed into a shredder that quickly breaks the scrap down into
fist-size pieces of ferrous
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metal. The shredding process uses magnets and other technologies to
separate ferrous, non-ferrous and non-metallic materials. The ferrous
material is sold to the Company's customers, including mini-mills, and the
non-metallic by-product of the shredding operations, referred to as
"shredder fluff", is disposed of in third-party landfills.
Shearing or Cutting. Pieces of oversized ferrous scrap, such as
obsolete steel girders and used drill pipes which are too large for other
processing, are cut with hand torches, crane-mounted alligator shears or
stationary guillotine shears. After being reduced to a more manageable
size, the scrap is then sold to those customers who can accommodate larger
materials, such as mini-mills.
Baling. The Company processes light-gauge ferrous metals such as clips
and sheet iron, and by-products from industrial manufacturing processes,
such as stampings, clippings and excess trimmings, by baling these
materials into large, uniform blocks. The Company uses cranes, front-end
loaders and conveyors to feed the metal into hydraulic presses which
compress the materials into uniform blocks at high pressure.
Briquetting. The Company processes borings and turnings made of steel
and iron into briquettes using both hot and cold briquetting methods, and
subsequently sells these briquettes to steel mills or foundries. The
Company possesses the technology to control the metallurgical content of
briquettes to meet customer specifications. The majority of the Company's
cold briquetting capacity is located at the Isaac Group's facility in
Defiance, Ohio.
Breaking of Furnace Iron. The Company processes furnace iron which
includes blast furnace iron, steel pit scrap, steel skulls and beach iron.
Large pieces of iron are broken down by the impact of eight- to ten-ton
forged steel balls dropped from cranes. The fragments are then sorted and
screened according to size and iron content.
Ferrous Scrap Sales. The Company sells processed ferrous scrap to end-users
such as mini-mills, integrated steel makers and foundries, and brokers who
aggregate materials for other large users. Most of the Company's customers
purchase processed ferrous scrap according to a monthly plan which establishes
the quantity purchased for the month. The Company sells its products to
end-users and brokers through its sales force. The price charged by the Company
for ferrous scrap depends upon market demand, as well as quality and grade of
the scrap. The Company believes offering a broad product line to its customers
may enhance profitability. The Company believes that its consolidation strategy
will allow it to be a premier supplier of scrap, since it will be able to fill
larger quantity orders due to increased ability to secure large amounts of raw
materials.
Non-Ferrous Operations
Non-Ferrous Scrap Purchasing. The Company purchases non-ferrous scrap from
three primary sources: (i) manufacturers and other non-ferrous scrap sources who
generate or sell aluminum, copper, stainless steel, brass, high-temperature
alloys and other metals; (ii) telecommunications, aerospace, defense, and
recycling companies that generate obsolete scrap consisting primarily of copper
wire, exotic metal alloys and used aluminum beverage cans; and (iii) peddlers
who deliver directly to the Company's facilities material which they collect
from a variety of sources. The Company collects non-ferrous scrap from sources
other than those that deliver directly to the Company's processing facilities by
placing retrieval bins near these sources. Periodically, the bins are
transported to the Company's processing facilities.
The Company also generates non-ferrous scrap as a by-product of its ferrous
scrap processing operations. Non-ferrous scrap is recovered from the Company's
ferrous operations through two primary activities: (i) non-ferrous materials,
generally a mixture of aluminum, zinc, die-cast metal, stainless steel and
copper, are recovered as a by-product of the shredding process; and (ii)
non-ferrous materials are identified visually and by using magnets.
A number of factors can influence the continued availability of non-ferrous
scrap such as the level of manufacturing activity and the quality of the
Company's supplier relationships. Consistent with industry
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practice, the Company has certain long-standing supply relationships (generally
not the subject of written agreements) that management believes will improve as
a result of implementing its consolidation strategy.
Non-Ferrous Scrap Processing. The Company prepares non-ferrous scrap
metals, principally copper, aluminum and stainless steel, for resale by sorting,
shearing, cutting, chopping or baling.
Sorting. The Company's sorting operations separate non-ferrous scrap
by using conveyor systems and front-end loaders. In addition, many
non-ferrous metals are sorted and identified by using grinders, hand
torches, eddy current separation systems and spectrometers. The Company's
ability to identify metallurgical composition is critical to realizing high
margins and profitability. Due to the high value of many non-ferrous
metals, the Company can afford to utilize more labor-intensive sorting
techniques than are employed in its ferrous operations. The Company sorts
non-ferrous scrap for further processing according to type, grade, size and
chemical composition. Throughout the sorting process, the Company
determines whether the material requires further processing before being
sold.
Copper. Copper scrap may be processed in several ways. The Company
processes copper scrap predominately by using wire choppers which grind the
wire into small pellets. During chopping operations, the plastic casing of
the wire is separated from the copper using a variety of techniques. In
addition to wire chopping, the Company processes scrap copper by baling and
other repacking methods to meet customer specifications.
Aluminum. The Company processes aluminum based on the size of the
pieces and customer specifications. Large pieces of aluminum are cut using
crane-mounted alligator shears and stationary guillotine shears and are
baled along with small aluminum stampings to produce large bales of
aluminum. Smaller pieces of aluminum are repackaged to meet customer
specifications.
Other Non-Ferrous Materials. The Company processes other non-ferrous
metals using similar cutting, baling and repacking techniques as it uses to
process aluminum. Among other significant non-ferrous metals the Company
processes are stainless steel, titanium, brass and high-temperature alloys.
Non-Ferrous Scrap Sales. The Company sells processed non-ferrous scrap to
end-users such as specialty steelmakers, foundries, aluminum sheet and ingot
manufacturers, copper refineries and smelters, and brass and bronze ingot
manufacturers. The Company sells its products to end-users and brokers through
its sales force. Prices for the majority of non-ferrous scrap metals change
based upon the daily publication of spot and futures prices on the COMEX or
London Metals Exchange.
SEASONALITY
The Company believes that its operations can be adversely affected by
protracted periods of inclement weather, which could reduce the volume of
material processed at its facilities. In addition, periodic maintenance
shutdowns by the Company's larger customers may have a temporary adverse impact
on the Company's operations.
CENTRALIZED FUNCTIONS
Although the Company's operations are regionally organized and managed,
certain overlapping functions are centrally administered out of the Company's
headquarters in Chicago, Illinois. These functions include acquisitions,
financial reporting, investor relations, insurance, treasury, and certain legal
and financial services. The Company believes that by centralizing these
functions it is able to complement the operational strengths and expertise of
its regional operations and thereby improve operating efficiency and control
administrative expenses.
OFFICE OF THE PRESIDENT
The Company has established an Office of the President as a forum for the
Company's regional management to share "best practices" with one another, as
well as discuss operational issues, market conditions, equipment needs, and
marketing and cross-selling opportunities. Formal meetings of the Office of
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the President are held on a monthly basis and typically include participation
from the management of each of the Company's regional operations, as well as the
Company's Chairman and Chief Development Officer, Chief Executive Officer,
President and Chief Operating Officer and Chief Financial Officer.
EMPLOYEES
As of March 31, 1998, the Company had 1,360 employees, 520 of which were
represented by unions. The Company considers relations with its employees to be
satisfactory.
ENVIRONMENTAL MATTERS
The Company's operations are subject to environmental regulation by
federal, state and local authorities. For information about these regulations
and other environmental matters, see "Risk Factors -- Comprehensive Regulatory
Requirements" and "Investment Considerations -- Potential Environmental
Liability" in Part II, Item 7 of this report.
RESEARCH AND DEVELOPMENT
The Company's expenditures on research and development have not been
material for any of the years ended March 31, 1998 and 1997, the five months
ended March 31, 1996 or the year ended October 31, 1995, and the Company is not
currently involved in any significant research and development projects.
SIGNIFICANT CUSTOMERS
The Company's ten largest customers represented 40.6% of consolidated net
sales for the year ended March 31, 1998. For the year ended March 31, 1998, no
single customer represented more than 10% of the Company's consolidated net
sales. The loss of any one of the Company's significant customers could have a
material and adverse effect on the Company's results of operations and financial
condition.
COMPETITION
The markets for scrap metals are regionally competitive, both in the
purchase of raw scrap and the sale of processed scrap. With regard to the
purchase of raw scrap, the Company competes with numerous independent recyclers,
as well as smaller scrap yards. Competition is based primarily on the price
offered by the purchaser for the raw scrap and the proximity of the processing
facility to the source of the raw scrap. With regard to the sale of processed
scrap, the Company competes with other regional and local scrap metals
recyclers. Competition for sales of processed scrap is based primarily on the
price and quality of the scrap metals, as well as the level of service provided
in terms of reliability and timing of delivery. The Company believes that its
ability to handle substantial volumes, broad product line, geographic diversity
and ability to provide value-added services will provide it with a competitive
advantage.
The Company faces potential competition for sales of processed scrap from
producers of steel products, such as integrated steel mills and mini-mills,
which may vertically integrate their current operations by entering the scrap
metals recycling business. Many of these producers have substantially greater
financial, marketing, and other resources than the Company. Scrap metals
processors also face competition from substitutes for prepared ferrous scrap,
such as pre-reduced iron pellets, hot briquetted iron, pig iron, iron carbide
and other forms of processed iron. The availability of substitutes for ferrous
scrap could result in a decreased demand for processed ferrous scrap, which
could result in lower prices for such products. See "Investment
Considerations -- Use of Scrap Alternatives".
In addition, in pursuing its acquisition strategy, the Company faces
significant competition from other consolidators in the scrap metals recycling
industry. The Company believes that during fiscal 1998 Philip Services
Corporation, Recycling Industries, Inc., Commercial Metals Corporation,
Omnisource Corporation, David J. Joseph Company and Schnitzer Steel Industries
Inc. are each pursuing, to varying degrees, consolidation of the recycling
industry. Some of these competitors may have greater resources than the Company.
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BACKLOG
The processing time for scrap metals is generally sufficiently short so as
to permit the Company to fill orders for most of its products in a short time
period. Accordingly, the Company does not consider backlog to be material to its
business.
PATENTS AND TRADEMARKS
Although the Company and its subsidiaries own certain patents and
trademarks, the Company does not believe that its business is dependent on its
intellectual property rights.
ITEM 2. PROPERTIES.
The Company's facilities generally are comprised of: (i) administrative
offices; (ii) warehouses for the storage of repair parts and certain types of
raw and processed scrap; (iii) covered and open storage areas for raw and
processed scrap; (iv) a machine or repair shop for the maintenance and repair of
the facility's vehicles and equipment; (v) scales for weighing scrap; and (vi)
loading and unloading facilities. Facilities generally have specialized
equipment for processing all grades of raw scrap which may include a heavy duty
automotive shredder to process both ferrous and non-ferrous scrap, crane-mounted
alligator or stationary guillotine shears to process large pieces of heavy
scrap, wire stripping and chopping equipment, baling equipment and torch cutting
facilities.
The following table sets forth information regarding the principal
properties of the Company as of June 15, 1998:
LOCATION OPERATION SQUARE FEET LEASED/OWNED
- -------- --------- ----------- ------------
Aerospace
500 Flatbush Ave., Hartford, CT.................... Office/Processing 1,481,040 Leased
Bluestone
2045 Lincoln Blvd., Elizabeth, PA.................. Office/Processing/Maintenance 413,820 Owned
200 Stewart Ave., Sharon, PA....................... Office/Processing 1,742,400 Leased
Corporate Headquarters
500 N. Dearborn St., Chicago, IL .................. Corporate Offices 11,200 Leased
Cozzi Iron & Metal
2232 S. Blue Island Ave., Chicago, IL.............. Office 10,095 Owned
2305/2500 S. Paulina St., Chicago,IL............... Office/Warehouse/Shear 560,295 Owned
2425/2451 S. Wood St., Chicago, IL................. Office/Maintenance/Baler 281,882 Owned
350 N. Artesian Ave., Chicago, IL.................. Office/Maintenance/Shredder 348,480 Owned
6660 S. Nashville Ave., Bedford Park, IL........... Office/Warehouse/Baler 304,223 Owned
3601 Canal St., East Chicago, IN................... Maintenance/Balers(2)/Shear 588,784 Owned
77 E. Railroad Street, Mononghahela, PA............ Office/Warehouse/Baler/Shear 174,240 Owned
1509 W. Cortland St., Chicago, IL.................. Warehouse 162,540 Owned
1831 N. Elston Ave., Chicago, IL................... Warehouse 35,695 Owned
26th and Paulina Streets, Chicago, IL.............. Office/Maintenance/Baler/Crusher 323,848 Owned
9331 S. Ewing Ave., Chicago, IL.................... Office/Maintenance/Shredder 293,087 Owned
3200 E. 96th St., Chicago, IL...................... Office/Maintenance/Eddy Current 364,969 Owned
Separation System
3151 S. California Ave., Chicago, IL............... Office/Maintenance/Shredder 513,500 Leased
1000 N. Washington, Kankakee, IL................... Office/Maintenance/Warehouse 217,800 Owned
564 N. Entrance Ave., Kankakee, IL................. Office/Warehouse 206,910 Owned
1201 W. 138th St., Riverdale, IL................... Office/Warehousing/Dismantling 9,000 Leased
3640 S. 35th Ave., Phoenix, AZ..................... Shear/Shredder 1,121,670 Leased
526 Weakly St., Memphis, TN........................ Warehouse/Baler/Shear/Shredder 1,038,470 Leased
HouTex
15-21 Japhet, Houston, TX.......................... Office/Warehouse/Barge 1,960,200 Leased
Terminal/Processing
Houston Compressed
100 Yale, Houston, TX.............................. Office/Warehouse/Processing 174,240 Leased
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LOCATION OPERATION SQUARE FEET LEASED/OWNED
- -------- --------- ----------- ------------
Isaac Group
Rte. 281 East, Defiance, OH........................ Office/Maintenance/Briquetting 3,267,000 Owned
1645 Indian Wood Circle, Maumee, OH................ Office 24,000 Leased
715 E. Perry St., Bryan, OH........................ Warehouse/Briquetting 187,308 Owned
15360 State Rte. 613 East, Paulding, OH............ Office/Warehouse 130,680 Leased
18899 Snow Rd., Brook Park, OH..................... Office/Maintenance/Briquetting 1,437,480 Owned
MacLeod Companies
833 W. 182nd St., Gardena, CA...................... Office/Warehouse/Processing 4,700 Leased
1022 W. Lomita Blvd., Harbor City, CA.............. Warehouse 19,223 Leased
1675 E. Maurentania Blvd., Wilmington, CA.......... Warehouse 20,000 Leased
8973 Kendall Ave., Southgate, CA................... Office/Processing 10,800 Leased
9309 Rayo Ave., Southgate, CA...................... Warehouse/Processing 304,920 Owned
Metal Management Arizona
3700 W. Lower Buckeye Rd., Phoenix, AZ............. Office/Shredder/Baler 1,089,000 Owned
6962 NW Grand Ave., Glendale, AZ................... Feeder Yard 10,890 Leased
4457 Gila Ridge Rd., Yuma, AZ...................... Feeder Yard 217,800 Leased
Bell Rd. and 31st St., Maricopa County, AZ......... Feeder Yard 10,890 Leased
12 W. Southern, Mesa, AZ........................... Feeder Yard 10,890 Leased
3501 NW Grand Ave., Phoenix, AZ.................... Feeder Yard 10,890 Leased
1800 N. Stone, Tucson, AZ.......................... Office/Warehouse 152,460 Owned
1804 S. Euclid, Tuscon, AZ......................... Feeder Yard 10,890 Owned
1900 Rio Solado Parkway, Tempe, AZ................. Feeder Yard 108,900 Owned
5851 E. 22nd St., Tucson, AZ....................... Feeder Yard 10,890 Owned
201-205 E. Main St., Casa Grande, AZ............... Feeder Yard 21,780 Leased
1327 N. Hwy 89, Prescott, AZ....................... Feeder Yard 1,070 Leased
4117 N. 23rd Ave., Phoenix, AZ..................... Feeder Yard 65,340 Leased
2651 S. 19th Ave., Phoenix, AZ..................... Feeder Yard 10,890 Leased
9601 N. 19th Ave., Phoenix, AZ..................... Feeder Yard 10,890 Leased
513 E. Chicago Circle, Chandler, AZ................ Feeder Yard 10,890 Leased
Metal Management Gulf Coast
12440 Seaway Road, Gulport, MS..................... Office/Processing 435,600 Leased
Seaway Road at Goldin Lane, Gulfport, MS........... Barge Terminal 435,600 Owned
1360 Conception St., Mobile, AL.................... Office/Processing 522,720 Leased
Industrial Canal Road, Mobile, AL.................. Barge Terminal 215,622 Leased
400 Peters Road, Harvey, LA........................ Barge Terminal 696,960 Leased
Proler Southwest
90 Hirsch Rd., Houston, TX......................... Office/Warehouse/Processing 378,972 Owned
120/121 Apache Dr., Jackson, MS.................... Office/Processing 522,720 Owned
Reserve Iron & Metal
4431 W. 130th St., Cleveland, OH................... Iron Breaking/Aluminum 2,178,000 Leased
12701 S. Doty Ave., Chicago, IL.................... Shear/Iron Breaking 784,080 Leased
1007 Lake Rhea Rd., Attalla, Alabama............... Iron Breaking 19,950 Leased
Superior Forge
5322 Oceanus Drive, Huntington Beach, CA........... Office/Processing 21,780 Leased
5271 Argosy Drive, Huntington Beach, CA............ Maintenance/Processing 47,916 Leased
The Company believes that its facilities are suitable for their present and
intended purposes and have adequate capacity for the Company's current levels of
operation.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is involved in various litigation matters
involving ordinary and routine claims incidental to the Company's business.
There are presently no legal proceedings pending against the Company which, in
the opinion of management, are likely to have a material adverse effect on the
Company's business, financial position or results of operations. These legal
proceedings include the following proceedings related to environmental matters:
(a) The Company's Reserve Iron & Metal, Cozzi Iron & Metal and Kankakee
Scrap subsidiaries have received notices from the United States Environmental
Protection Agency (the "EPA") that each such
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company and numerous other parties are considered potentially responsible
parties ("PRPs") and may be obligated under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("Superfund" or "CERCLA") to
pay a portion of the cost of remedial investigation, feasibility studies and,
ultimately, remediation to correct alleged releases of hazardous substances at
the Standard Scrap Metal/ Chicago International Exporting Removal Action Site.
Superfund may impose joint and several liability for the costs of remedial
investigations and actions on the entities that arranged for disposal of certain
wastes, the waste transporters that selected the disposal sites, and the owners
and operators of such sites. Responsible parties (or any one of them) may be
required to bear all of such costs regardless of fault, legality of the original
disposal, or ownership of the disposal site. Based upon their analysis of the
situation, the management of Reserve Iron & Metal, Cozzi Iron & Metal and
Kankakee Scrap currently do not expect their aggregate potential liability to be
in excess of $175,000. There can be no assurance, however, that their aggregate
potential liability may not be greater than $175,000.
(b) Cozzi Iron & Metal has received a notice from the EPA that Cozzi Iron &
Metal is a PRP under Superfund in regard to the site referred to as H&H
Recycling in Gary, Indiana. Cozzi Iron & Metal believes that a settlement may be
reached with respect to the H&H Recycling site which would result in a cost of
approximately $600,000. There can be no assurance that such potential liability
will not be material.
(c) Bluestone has received notice from the EPA that it is a PRP under
Superfund in regard to the site referred to as the Jacks Creek/Sitkin Smelting
Facility Superfund Site in Mifflin County, Pennsylvania. Bluestone joined a PRP
group which has submitted a good faith offer to the EPA to enter into a consent
decree. Based on its analysis of the situation, Bluestone expects that its share
of the cleanup costs at this site will not exceed $250,000. Although Bluestone
has reserved funds to address such cleanup costs and has obtained an indemnity
from the previous owners of the company for costs which exceed this reserve,
there can be no assurance that Bluestone may not be required to make additional
expenditures in connection with this site.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the shareholders of Metal Management during
the fourth quarter of fiscal 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock has traded on the NASDAQ National Market System
under the symbol MTLM since April 1996. Previously, the Common Stock traded
under the symbol GPAR. The following table sets forth the high and low bid
information for the Common Stock for the periods indicated, as reported by the
NASDAQ National Market System. They reflect inter-dealer prices, without retail
mark-up, mark-down or commission.
HIGH LOW
------ ------
FISCAL 1998 (YEAR ENDED 3/31/98)
Fourth Quarter.............................................. $17.38 $11.13
Third Quarter............................................... 29.38 14.50
Second Quarter.............................................. 29.50 13.88
First Quarter............................................... 15.00 8.13
FISCAL 1997 (YEAR ENDED 3/31/97)
Fourth Quarter.............................................. $10.38 $ 3.63
Third Quarter............................................... 4.00 3.25
Second Quarter.............................................. 4.38 3.13
First Quarter............................................... 5.44 4.25
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The number of registered stockholders of record of the Company's Common
Stock, based on the transfer records of the Company at March 31, 1998, was 333.
On March 31, 1998, the closing price per share of the Company's Common Stock as
reported on the NASDAQ National Market System was $14.375.
On August 31, 1995, the Company announced that its Board of Directors
elected to discontinue the payment of cash dividends. The Company presently has
no intention of paying dividends in the foreseeable future and intends to
utilize its cash and investments for its business operations.
UNREGISTERED SALES OF SECURITIES
The following discusses all unregistered sales of the Company's Common
Stock during the last fiscal year.
On April 1, 1997, the Company issued warrants to purchase 60,000 shares of
Common Stock at $4.00 per share to a Clend Investment, Inc. The warrants were
issued as contingent purchase consideration for the HouTex acquisition and were
valued at $216,000 for financial reporting purposes.
On April 15, 1997, the Company issued 182,482 shares of Common Stock to
Clend Investment, Inc. in exchange for a note payable in the aggregate principal
amount of $1,000,000.
From April 28, 1997 through June 4, 1997, the Company sold an aggregate of
2,025,000 shares of Common Stock for an aggregate price of $14,681,000 to
certain individuals, including 260,000 shares of Common Stock to certain
officers and directors of the Company, the proceeds of which were used to fund
certain acquisitions and for general corporate purposes.
On May 1, 1997, the Company issued warrants to purchase 60,000 shares of
Common Stock at $4.00 per share to Clend Investment, Inc. The warrants were
issued as contingent purchase consideration for the HouTex acquisition and were
valued at $220,800 for financial reporting purposes.
On May 1, 1997, the Company issued warrants to purchase an aggregate of
700,000 shares of Common Stock at $3.50 per share and warrants to purchase an
aggregate of 700,000 shares of Common Stock at $4.00 per share, each subject to
adjustment, to the former limited partners of Reserve Iron & Metal as partial
consideration for the Company's acquisition of their partnership interests. The
warrants were valued at $8,118,000 for financial reporting purposes.
On May 1, 1997, the Company issued warrants to purchase an aggregate of
175,000 shares of Common Stock at $9.90 per share to certain employees in
consideration for services rendered or to be rendered.
On May 29, 1997, the Company issued 160,000 shares of Common Stock to Ian
MacLeod in exchange for a note payable in the aggregate principal amount of
$1,000,000.
On June 23, 1997, the Company issued an aggregate of 1,942,857 shares of
Common Stock and warrants to purchase an aggregate 462,500 shares of Common
Stock at exercise prices ranging from $10.80 to $11.70 per share to the former
shareholders of the Isaac Group in partial consideration for the Company's
acquisition of the Isaac Group's stock. The Common Stock and warrants were
valued at $25,911,000 for financial reporting purposes. The Company issued
warrants to purchase 287,500 shares of Common Stock at $11.70 per share to a
former shareholder of the Isaac Group in consideration for entering into a
non-compete agreement with the Company. The warrants were valued at $1,833,963
for financial reporting purposes. The Company also issued warrants to purchase
76,923 shares of Common Stock at $13.00 per share to a former shareholder of the
Isaac Group in consideration for services rendered or to be rendered.
On August 28, 1997, the Company issued an aggregate of 1,750,000 shares of
Common Stock and warrants to purchase an aggregate 375,000 shares of Common
Stock at $6.00 per share to the former shareholders of Proler Southwest as
partial consideration for the Company's acquisition of Proler Southwest's stock.
The Common Stock and warrants were valued at $12,704,000 for financial reporting
purposes.
On December 1, 1997, the Company issued an aggregate of 11,499,986 shares
of Common Stock, warrants to purchase 750,001 shares of Common Stock at $5.91
per share and warrants to purchase 750,001 shares of Common Stock at $15.84 per
share to the former shareholders of Cozzi Iron & Metal as
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partial consideration for the Company's acquisition of the stock of Cozzi Iron &
Metal. The Common Stock and warrants were valued at $73,369,000 for financial
reporting purposes.
On December 1, 1997, the Company issued warrants to purchase an aggregate
of 1,855,000 shares of Common Stock at exercise prices ranging from $4.00 to
$12.00 per share to certain employees and directors of the Company for services
rendered. In accordance with an APB No. 25, the Company recognized expense of
$20,750,000.
On December 1, 1997, the Company issued warrants to purchase an aggregate
of 120,000 shares of Common Stock at exercise prices ranging from $7.25 to
$26.00 per share to certain consultants for services performed on behalf of the
Company. The warrants were valued at $1,479,000 for financial reporting
purposes.
On December 18, 1997, the Company issued an aggregate of 155,000 shares of
Common Stock to the former shareholders of Kankakee Scrap as partial
consideration for the Company's acquisition of Kankakee Scrap's stock. The
Common Stock was valued at $2,437,000 for financial reporting purposes.
On December 19, 1997, the Company sold 1,470,558 shares of Common Stock,
warrants to purchase 200,000 shares of Common Stock at $23.00 per share and
warrants to purchase 400,000 shares of Common Stock at $20.00 per share for an
aggregate price of approximately $25,000,000 to Samstock, L.L.C. The proceeds
were used to fund certain acquisitions and for general corporate purposes.
On January 7, 1998, the Company issued an aggregate of 253,176 shares of
Common Stock to the former shareholders of Houston Compressed as consideration
for the Company's acquisition of Houston Compressed's stock. The Common Stock
was valued at $4,010,000 for financial reporting purposes.
On January 14, 1998, the Company issued an aggregate of 182,087 shares of
Common Stock to certain former limited partners of Reserve Iron & Metal as the
result of the conversion of a note payable and accrued interest in the aggregate
amount of $1,639,000.
On January 20, 1998, the Company issued an aggregate of 402,983 shares of
Common Stock to the former shareholders of Aerospace as partial consideration
for the Company's acquisition of certain assets of Aerospace. The Common Stock
was valued at $5,318,000 for financial reporting purposes. The Company also
issued warrants to purchase an aggregate of 5,000 shares of Common Stock at
$15.75 per share to a former shareholder of Aerospace in consideration for
services rendered under an employment agreement.
On January 30, 1998, the Company issued 100,000 shares of Common Stock to
the members of Newell Phoenix, L.L.C. ("Newell Phoenix") as consideration for
the Company's acquisition of the 50% membership interest in Salt River held by
Newell Phoenix. The Common Stock was valued at $1,224,000 for financial
reporting purposes.
On February 26, 1998, the Company issued an aggregate of 10,000 shares of
Common Stock to the shareholders of Accurate Iron & Metal as partial
consideration for the Company's acquisition of certain assets of Accurate Iron &
Metal. The Common Stock was valued at $111,000 for financial reporting purposes.
The Company also issued warrants to purchase 20,000 shares of Common Stock at
$13.00 per share to a former shareholder of Accurate Iron & Metal in
consideration for services rendered to be rendered.
On March 17, 1998, the Company issued an aggregate of 866,667 shares of
Common to the former shareholders of Superior Forge as partial consideration for
the Company's acquisition of Superior Forge's stock. The Common Stock was valued
at $10,279,000 for financial reporting purposes.
On March 18, 1998, the Company issued warrants to purchase 20,000 shares of
Common Stock at $15.00 per share to an employee of the Company for services
rendered.
None of these sales was underwritten, and all of the shares issued were
taken for investment purposes by the entity or individual to whom they were
issued. The Company believes all of the securities issued were exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended. As to
approximately 33% of the shares issued in the above transactions, such shares
have been subsequently registered for resale, or the Rule 144 holding period
restricting the sale of such shares has lapsed.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
(in thousands, except per share and employee data)
The following table sets forth selected consolidated financial data of the
Company for the periods indicated. The information contained in this table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
related notes thereto included in Part IV, Item 14 of this report. The financial
data included in the table below reflect the results of the Company's prior
operations of designing, manufacturing and marketing electronic presentation
products and color printers and related consumable products as discontinued
operations. The Company sold the assets relating to these operations in July and
December 1996. For information about principal acquisitions and divestitures,
see notes 2 and 3 to the consolidated financial statements included in Part IV,
Item 14 of this report. The historical results are not necessarily indicative of
results to be expected for any future period.
FOR THE
FOR THE YEARS ENDED FIVE MONTHS FOR THE YEARS ENDED
OCTOBER 31, ENDED MARCH 31,
--------------------------- MARCH 31, -------------------
1993 1994 1995 1996 1997 1998
------- ------- ------- ----------- -------- --------
INCOME STATEMENT DATA
Net sales......................... $ 0 $ 0 $ 0 $ 0 $ 65,196 $479,707
Gross profit...................... 0 0 0 0 6,872 47,760
General and administrative
expenses........................ 0 0 0 210 6,174 24,396
Depreciation and amortization..... 0 0 0 0 2,282 10,019
Non-recurring expenses............ 0 0 0 0 0 33,710
Interest expense.................. 0 0 0 0 1,449 9,018
Interest and other income, net.... 310 229 312 142 181 363
Net income (loss) from continuing
operations applicable to Common
Stock........................... 310 228 261 (16) (2,010) (35,713)
Income (loss) from discontinued
operations...................... (202) (440) (2,698) 22 847 200
Net income (loss) applicable to
Common Stock.................... $ 108 $ (212) $(2,437) $ 6 $ (1,163) $(35,513)
Basic income (loss) per share
applicable to Common Stock:
Continuing operations............. $ .06 $ .04 $ .05 $ .00 $ (.22) $ (1.81)
Discontinued operations........... (.04) (.08) (.53) .00 .09 .01
------- ------- ------- ------- -------- --------
Net income (loss)............... $ .02 $ (.04) $ (.48) $ .00 $ (.13) $ (1.80)
======= ======= ======= ======= ======== ========
Weighted average shares
outstanding..................... 5,051 5,087 5,125 5,299 9,106 19,727
Diluted income (loss) per share
applicable to Common Stock:
Continuing operations............. $ .06 $ .04 $ .05 $ .00 $ (.22) $ (1.81)
Discontinued operations........... (.04) (.08) (.53) .00 .09 .01
------- ------- ------- ------- -------- --------
Net income (loss)............... $ .02 $ (.04) $ (.48) $ .00 $ (.13) $ (1.80)
======= ======= ======= ======= ======== ========
Weighted average diluted shares
outstanding..................... 5,095 5,091 5,125 5,299 9,106 19,727
BALANCE SHEET DATA
(AT END OF PERIOD)
Working capital (deficit)......... $ 7,983 $ 8,130 $ 9,141 $ 9,086 $(13,555) $ 88,438
Total assets...................... 15,304 13,486 10,130 10,313 70,125 480,811
Long-term debt, including
current......................... 0 0 0 0 36,441 141,135
Convertible preferred stock....... 0 0 0 0 0 33,008
Stockholders' equity.............. 13,759 12,395 9,314 9,608 23,148 248,882
Cash dividends declared per share
of Common Stock................. $ 0.24 $ 0.24 $ 0.18 $ 0.00 $ 0.00 $ 0.00
Number of employees............... 71 62 41 37 376 1,360
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Form 10-K includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements in this Form 10-K which address
activities, events or developments that the Company expects or anticipates will
or may occur in the future, including such things as future acquisitions
(including the amount and nature thereof), business strategy, expansion and
growth of the Company's business and operations and other such matters are
forward-looking statements. Although the Company believes the expectations
expressed in such forward-looking statements are based on reasonable assumptions
within the bounds of its knowledge of its business, a number of factors could
cause actual results to differ materially from those expressed in any
forward-looking statements, whether oral or written, made by or on behalf of the
Company. Many of these factors have previously been identified in filings or
statements made by or on behalf of the Company. See also "Investment
Considerations" below.
The purpose of the following discussion is to facilitate the understanding
and assessment of significant changes and trends related to the results of
operations and financial condition of the Company, including changes arising
from recent acquisitions by the Company, the timing and nature of which have
significantly affected the Company's results of operations. The following
discussion and analysis does not include a comparison of the financial condition
and results of operation for the year ended March 31, 1997 to any prior periods.
The Company's prior operations of designing, manufacturing and marketing
electronic presentation products and color printers and related consumable
products were sold in July and December 1996 and since April 1996, the Company
consummated 18 acquisitions and now operates 54 recycling facilities in 12
states. In the opinion of management, any comparison of the results of
operations for the year ended March 31, 1997 to prior periods would not provide
information relevant to an assessment of the financial condition or results of
operations of the Company. This discussion should be read in conjunction with
the consolidated financial statements and notes thereto included in Part IV,
Item 14 of this report.
GENERAL
Metal Management is one of the largest and fastest-growing full-service
metals recyclers in the United States, with 54 recycling facilities in 12
states. 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
and obsolete scrap, processes it into reusable forms and supplies the recycled
metals to its approximately 800 customers, including mini-mills, integrated
steel mills, foundries and metals brokers. Since April 1996 the Company has
experienced significant growth, principally through acquisitions.
The Company's revenues consist primarily of revenues derived from the sale
and brokerage of scrap metals. The Company recognizes revenues from processed
product sales at the time of shipment. Revenues related to brokerage sales are
generally recognized upon receipt of the material by the customer.
Cost of sales consists primarily of the cost of metals sold, direct and
indirect labor and related taxes and benefits, repairs and maintenance, and
freight.
General and administrative expenses include management salaries, clerical
and administrative costs, professional services, facility rentals and related
insurance and utility costs, as well as costs related to the Company's marketing
and business development activities.
Non-recurring expenses include costs recognized during December 1997 that
were principally non-cash and which were incurred with respect to write-offs of
certain of its investments in EMCO Recycling, severance benefits for a former
officer, and the cost of certain compensatory warrants which were issued on
December 1, 1997.
Other income and expense consists principally of interest income, gains or
losses on the sale of fixed assets, and income and losses from joint ventures
which represent an allocation of income and losses
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attributable to investments made by the Company in two joint ventures. Both
joint ventures are accounted for under the equity method of accounting.
RESULTS OF OPERATIONS
Year Ended March 31, 1998 Compared to Year Ended March 31, 1997
Consolidated net sales for the years ended March 31, 1998 and 1997 in broad
product categories were as follows ($ in thousands):
3/31/98 (FISCAL 1998) 3/31/97 (FISCAL 1997)
----------------------------- ---------------------------
COMMODITY WEIGHT NET SALES % WEIGHT NET SALES %
--------- --------- --------- ----- ------- --------- -----
Ferrous metals
(tons)............. 2,126,834 $266,372 55.5 151,782 $20,744 31.8
Non-ferrous metals
(pounds, in
000's)............. 178,102 97,665 20.4 64,898 43,531 66.8
Brokerage (tons)..... 956,054 113,585 23.7 -- -- --
Other................ -- 2,085 0.4 -- 921 1.4
-------- ----- ------- -----
$479,707 100.0 $65,196 100.0
======== ===== ======= =====
Consolidated net sales for the year ended March 31, 1998 were $479.7
million compared with consolidated net sales of $65.2 million for the year ended
March 31, 1997. The significant increase in consolidated net sales is
principally due to the inclusion of the net sales of the companies acquired by
Metal Management during the year ended March 31, 1998.
Ferrous sales represented 55.5% of consolidated net sales for the year
ended March 31, 1998, as compared to 31.8% of consolidated net sales for the
year ended March 31, 1997. The significant increase in ferrous sales, both in
tons sold and as a percentage of total net sales, is due primarily to the
inclusion of ferrous sales of HouTex, Reserve Iron & Metal, the Isaac Group,
Proler Southwest and Cozzi Iron & Metal, each of which is primarily engaged in
the sale of ferrous metals.
Non-ferrous sales represented 20.4% of consolidated net sales for the year
ended March 31, 1998 as compared to 66.8% of consolidated net sales in the
comparable prior period. The decrease in percentage of non-ferrous sales is due
to substantial amounts of ferrous sales resulting from the acquisitions of
HouTex, Reserve Iron & Metal, the Isaac Group, Proler Southwest and Cozzi Iron &
Metal, which primarily sell ferrous metals. The increase in pounds of
non-ferrous metals sold is due to the inclusion of non-ferrous sales of MacLeod
and Aerospace, which are primarily engaged in the sale of non-ferrous metals.
A portion of Reserve Iron & Metal, the Isaac Group and Cozzi Iron & Metal's
businesses involve the brokering of scrap iron and other metals for sale to
foundries, mills and other brokers. Brokered metals are shipped directly to the
customer from the supplier, thereby, eliminating processing costs and inventory
holding costs. Brokerage revenues are principally derived from ferrous metals.
For the year ended March 31, 1998, the Company realized a 5.2% gross profit
margin on brokered sales. Gross profits on brokered sales will vary depending on
the type of metals and markets in which metals are brokered.
Consolidated gross profit was $47.8 million (10.0% of consolidated net
sales) for the year ended March 31, 1998 compared with consolidated gross profit
of $6.9 million (10.5% of consolidated net sales) for the year ended March 31,
1997. The price of scrap metal is affected by regional and seasonal variations.
Furthermore, prices for scrap metal are also impacted by broad and global
cyclical movements and as such equilibrates supply and demand.
Consolidated general and administrative expenses were $24.4 million (5.1%
of consolidated net sales) for the year ended March 31, 1998 compared with $6.2
million (9.5% of consolidated net sales) for the year ended March 31, 1997. The
increase in general and administrative expenses primarily reflects the inclusion
of a full year of administrative expenses for those operations acquired during
the year ended March 31, 1997 and the inclusion of a partial year of
administrative expenses for the operations acquired by the Company during the
year ended March 31, 1998. Corporate overhead has also increased due to
additions in corporate staff and
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corporate expenses (i.e. legal, audit, travel, etc.) to support the acquisition
strategy the Company is pursuing. The reduction in general and administrative
expenses as a percent of consolidated net sales reflects the large scale of
operations at Reserve Iron & Metal, the Isaac Group and Cozzi Iron & Metal that
provides for more efficient allocation of administrative expenses.
Depreciation and amortization expense was $10.0 million (2.1% of
consolidated net sales) for the year ended March 31, 1998, compared with $2.3
million (3.5% of consolidated net sales) for the year ended March 31, 1997. The
increase is attributed to the inclusion of goodwill amortization and
depreciation of fixed assets of those operations acquired by the Company since
the year ended March 31, 1997.
During the year ended March 31, 1998, the Company recorded the following
non-recurring pre-tax charges, totaling $33.7 million (7.0% of consolidated net
sales) ($ in thousands):
Non-cash warrant compensation expense....................... $19,050
Severance and other termination benefits.................... 2,814
EMCO Recycling Shut-down.................................... 11,846
-------
$33,710
=======
See Note 4 to the Consolidated Financial Statements included in Part IV,
Item 14 of this report.
Interest expense was $9.0 million (1.9% of consolidated net sales) for the
year ended March 31, 1998, versus $1.4 million (2.2% of consolidated net sales)
for the year ended March 31, 1997. This increase is due to the issuance of notes
to sellers and the incurrence and/or assumption of debt associated with the
Completed Acquisitions.
Net loss from continuing operations, after preferred stock dividends and
accretion, was $35.7 million ($1.81 per share) for the year ended March 31, 1998
compared to a net loss of $2.0 million ($.22 per share) for the year ended March
31, 1997. The increase in the net loss is primarily attributable to the
non-recurring charges recorded by the Company in the third quarter of the year
ended March 31, 1998. Net loss from continuing operations excluding the
non-recurring charges and the one-time non-cash dividend charge was $0.2 million
($.01 per share) for the year ended March 31, 1998 compared to $2.0 million
($.22 per share) for the year ended March 31, 1997.
Income from discontinued operations was $0.2 million ($.01 per share) for
the year ended March 31, 1998 compared to $0.8 million ($.09 per share) for the
comparable prior period. Income during the current fiscal year mainly reflects
the royalty income recognized by the Company from the sale of its discontinued
operations, net of certain expenses paid. Prior year results reflect three
months of operations of the discontinued operations as well as the gain on sale
of the discontinued operations.
Income tax benefit for the year ended March 31, 1998 was $0.4 million (0.1%
of consolidated net sales), which yields an effective tax rate of 1.4%. The
effective tax rate differs from the statutory rate primarily due to the
permanent differences represented by non-deductible goodwill amortization and
certain non-deductible, non-recurring expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company will continue to pursue acquisitions in the scrap metal
recycling industry and anticipates financing these acquisitions through a
combination of cash and the issuance of debt and equity. The Company will
require substantial capital to fund future acquisitions and current operations.
There can be no assurance that any additional financing will be available on
terms acceptable to the Company, if at all.
Cash Flows from Continuing Operations
The Company generated $0.6 million of cash flows from continuing operations
during the year ended March 31, 1998 compared with cash outflows of $1.7 million
during the year ended March 31, 1997. The increase mainly reflects cash flows
generated from operations acquired during the year ended March 31, 1998.
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Cash Flows from Investing Activities
The Company made capital expenditures of approximately $7.6 million during
the year ended March 31, 1998, compared with capital expenditures of $3.2
million during the year ended March 31, 1997. The Company utilized cash of
approximately $43.9 million to complete the acquisitions of, and transaction
costs related to, the operations acquired by the Company during the year ended
March 31, 1998. Management anticipates continuing to make acquisitions, make
capital expenditures for new equipment, and upgrade and expand existing
equipment and facilities. The Company expects that these expenditures may
increase in the future due to the internal and external growth of the Company.
Cash Flows from Financing Activities
During the year ended March 31, 1998, the Company issued 3,495,588 shares
of restricted Common Stock and warrants to purchase 600,000 shares of Common
Stock in two private offerings which aggregated $39.7 million and received
proceeds from the issuance of 45,000 shares of Series A Preferred Stock and
Series B Preferred Stock which aggregated $42.8 million (collectively, the
"Private Placements"). The proceeds from the Private Placements were used to
fund purchase consideration with respect to acquisitions, repay debt and provide
working capital. The Company anticipates growing through acquisitions and will
require additional debt or equity to fund its potential and future acquisitions.
Cash Flows from Discontinued Operations
The Company's cash flows from discontinued operations for the year ended
March 31, 1998 reflects royalty income recognized from the sale of the assets of
the discontinued operations, net of expenses paid. Cash flows during the year
ended March 31, 1997 reflect the cash generated by the discontinued operations
as well as the proceeds related to the sale of the discontinued operations.
FINANCIAL CONDITION
The Company's principal sources of cash are its existing cash and cash
equivalents balances, collection of accounts receivable and proceeds from lines
of credit and other borrowings. At March 31, 1998, the Company had $4.4 million
in cash and cash equivalents, compared with cash and cash equivalents of $5.7
million at March 31, 1997.
Significant Transactions
During the year ended March 31, 1998, the Company completed certain
significant debt and equity transactions. The Company raised approximately $39.7
million from the issuance of restricted Common Stock and raised approximately
$42.8 million from the issuance of convertible preferred stock (see Note 9 to
the Consolidated Financial Statements included in Part IV, Item 14 of this
report). The Company utilized a portion of the cash to pay approximately $36.0
million of notes which were issued in connection with certain acquisitions, to
pay a $6.5 million term loan and to fund $33.8 million of the cash portion of
the purchase price for certain acquisitions.
Cash Requirements for Maturing Debt Obligations
In connection with the acquisition of the Isaac Group, the Company issued
and assumed notes payable. The notes require quarterly interest payments and
require principal payments of $10.8 million on February 15, 1999 and $10.8
million on February 15, 2000.
Cash Requirements for Pending Acquisitions
The Company expects that the cash component of purchase price for Pending
Acquisitions, if all such acquisitions are completed, will be $155.1 million.
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Working Capital Availability and Requirements
Accounts receivable balances increased from $9.6 million at March 31, 1997
to $107.8 million at March 31, 1998, primarily as a result of the inclusion of
the accounts receivable of the operations acquired by the Company since March
31, 1997. Accounts payable increased from $5.2 million at March 31, 1997 to
$60.2 million at March 31, 1998, primarily as a result of such acquisitions.
Inventory levels can vary significantly among the Company's subsidiaries.
Inventory on hand at March 31, 1998 and March 31, 1997, respectively, consisted
of the following categories and amounts (in thousands):
1998 1997
------- ------
Ferrous metals............................................. $35,933 $2,707
Non-ferrous metals......................................... 20,075 4,754
Other...................................................... 786 954
------- ------
$56,794 $8,415
======= ======
The increase in the value of inventory is primarily due to the inclusion of
the inventories of Reserve Iron & Metal, the Isaac Group, Aerospace and Cozzi
Iron & Metal, all of which were acquired during the year ended March 31, 1998.
The Company expects to make substantial investments in additional equipment
and property for expansion, for replacement of assets, and in connection with
future acquisitions.
At March 31, 1998, the Company and its wholly-owned subsidiaries had
outstanding borrowings with commercial lenders under various short-term
revolving lines of credit in the aggregate principal amount of $48.6 million.
The facilities provided for revolving credit at interest rates that range from
8.5% to 16.5%.
On March 31, 1998, the Company and its subsidiaries entered into a credit
facility (the "Senior Credit Facility") with BT Commercial Corporation, as agent
for the lenders (the "Agent"), and certain commercial lending institutions
providing for a revolving credit and letter of credit facility of $200.0
million. On June 19, 1998, the Senior Credit Facility was amended to increase
the facility to $250.0 million. The Senior Credit Facility matures on March 31,
2001. The Senior Credit Facility bears interest at a floating rate per annum
equal to (at the Company's option): (i) 1.75% over LIBOR or (ii) 0.5% over
Bankers Trust Company's prime rate as in effect from time to time. The Senior
Credit Facility is available for working capital and general corporate purposes,
including acquisitions. The Company and its subsidiaries are required under the
Senior Credit Facility to pay the Agent and the lenders certain fees and
expenses which include an unused line fee on a monthly basis. The obligations of
the Company and its subsidiaries under the Senior Credit Facility are secured by
a security interest in substantially all of the assets and properties of the
Company and its subsidiaries. Availability of loans and letters of credit under
the Senior Credit Facility is generally limited to a borrowing base constituted
of 85% of eligible accounts receivable, 70% of eligible inventory and a $40
million fixed asset sublimit that amortizes on a quarterly basis.
On April 1, 1998, the Company made borrowings of $106.8 million under the
Senior Credit Facility to: (i) repay outstanding secured debt of approximately
$96.5 million; (ii) buyout operating leases of approximately $9.3 million; and
(iii) pay prepayment penalties of approximately $1.0 million, leaving the
Company with approximately $17.3 million available under the Senior Credit
Facility as of such date. Borrowings outstanding under the Senior Credit
Facility as of April 1, 1998 bore interest at 9.0%.
On May 13, 1998, the Company sold, in a Rule 144A private offering and
pursuant to Regulation S under the Securities Act of 1933, as amended, $180
million of senior subordinated notes (the "Notes"). The Notes mature on May 15,
2008 and bear interest at the rate of 10% per annum. The proceeds of the
offering were used in part to repay indebtedness of the Company, with the
remainder used for acquisitions and general corporate purposes.
The weighted average interest rate on the borrowings outstanding under the
Company's working capital lines of credit at March 31, 1998 was 9.6%. Average
borrowings under the various working capital lines of
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credit during fiscal 1998 were approximately $17.1 million. During fiscal 1998,
amounts outstanding under the various working capital lines of credit ranged
from $7.3 million to $48.6 million.
YEAR 2000 LIABILITY
The Company is in the process of reviewing its existing computer software
systems, and in connection with that process is analyzing whether or not the
Company faces a "Year 2000" problem, a problem that is expected to arise with
respect to computer programs that use only two digits to identify a year in the
date field, and which were designed and developed without considering the impact
of the upcoming change in the century. Although the Company has not yet made a
final determination as to whether the various computer systems at its operations
will give rise to a "Year 2000" problem, the Company believes that any such
problem, if it arises in the future, should not be material to the Company's
operations.
INVESTMENT CONSIDERATIONS
In the normal course of its business, the Company, in an effort to help
keep its stockholders and the public informed about the Company's operations,
may from time to time issue or make certain statements, either in writing or
orally, that are or contain forward-looking statements, as that term is defined
in the U.S. federal securities laws. Generally, these statements relate to
business plans or strategies, projected or anticipated benefits from
acquisitions made by or to be made by the Company, projections involving
anticipated revenues, earnings, profitability or other aspects of operating
results or other future developments in the affairs of the Company or the
industry in which it conducts business. The words "expect," "believe,"
"anticipate," "project," "estimate" and similar expressions are intended to
identify forward-looking statements. The Company cautions readers that such
statements are not guarantees of future performance or events and are subject to
a number of factors that may tend to influence the accuracy of the statements
and the projections upon which the statements are based, including but not
limited to those discussed below. All phases of the Company's operations are
subject to a number of uncertainties, risks, and other influences, many of which
are outside the control of the Company, and any one of which, or a combination
of which, could materially affect the financial condition or results of
operations of the Company, the trading price of the Company's Common Stock, and
whether forward-looking statements made by the Company ultimately prove to be
accurate.
The following discussion outlines certain factors that could affect the
Company's financial condition, results of operations or future prospects and
cause them to differ materially from those that may be set forth in
forward-looking statements made by or on behalf of the Company.
LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS; CAPITAL REQUIREMENTS
As reflected in the Company's periodic reports filed from time to time
under the Securities Exchange Act of 1934, as amended, the Company is, and may
continue to be, highly leveraged. The degree to which the Company is leveraged
could have important consequences to the Company, including, but not limited to,
the following: (i) a substantial portion of the Company's cash flow from
operations will be required to be dedicated to debt service and will not be
available to the Company for its operations; (ii) the Company's ability to
obtain additional financing in the future for acquisitions, capital
expenditures, working capital or general corporate purposes could be limited;
(iii) the Company will have increased vulnerability to adverse general economic
and scrap metals industry conditions; and (iv) the Company may be vulnerable to
higher interest rates because borrowings under certain of its credit
arrangements are at variable rates of interest. The Company's ability to make
scheduled payments of principal, to pay interest on or to refinance its
indebtedness depends on its future performance and financial results, which, to
a certain extent, are subject to general economic, financial, competitive,
legislative, regulatory and other factors beyond the Company's control. There
can be no assurance that the Company's business will generate sufficient cash
flow from operations or that future working capital borrowings will be available
in an amount sufficient to enable the Company to service its indebtedness or
make necessary capital expenditures.
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Implementing the Company's acquisition strategy will require substantial
amounts of capital. The Company will need large amounts of cash in order to fund
the cash portion of current pending and future acquisitions. There can be no
assurance that sufficient funds for these acquisitions will be available on
acceptable terms, if at all. Failure to raise sufficient capital when required
or needed could adversely affect the implementation of the Company's acquisition
strategy.
RESTRICTIONS IMPOSED BY INDEBTEDNESS
The Company's Senior Credit Facility and the Indenture governing the Notes
(the "Indenture") contain, and future financings of the Company are likely to
contain, covenants that, among other things and subject to certain exceptions,
restrictions on ability of the Company to incur additional indebtedness, pay
dividends, prepay subordinated indebtedness, dispose of certain assets, create
liens and make certain investments or acquisitions, and otherwise restrict
corporate activities. In addition, under the Senior Credit Facility, the Company
is required to satisfy specified financial covenants, including an interest
coverage ratio and ratio of capital expenditures to consolidated revenues. The
ability of the Company to comply with such provisions may be affected by general
economic conditions and other events beyond the Company's control. The breach of
any of these covenants could result in a default under the Senior Credit
Facility. In the event of any such default, depending on the actions taken by
the lenders under the Senior Credit Facility, such lenders could elect to
declare all amounts borrowed under the Senior Credit Facility, together with
accrued interest, to be due and payable. A default under the Senior Credit
Facility may cause a cross-default under the Indenture.
POTENTIAL SUBSTANTIAL DILUTION TO EXISTING STOCKHOLDERS; REGISTRATION RIGHTS
The Company's amended certificate of incorporation authorizes the issuance
of: (i) 80,000,000 shares of Common Stock, of which 33,046,004 were issued and
outstanding as of March 31, 1998; (ii) 4,000,000 shares of "blank check"
preferred stock ("Preferred Stock"), of which 59,000 have been designated as
either Series A or Series B Preferred Stock (as defined herein) and 35,904 of
which were outstanding as of March 31, 1998. The Company's board of directors
has the authority to issue additional shares of common or preferred shares, or
securities convertible or exercisable into such shares such as options or
warrants, as the case may be for a variety of purposes including as
consideration for additional acquisitions. These additional shares may be
issued, or be subject to exercise, at prices below prevailing market prices of
the Common Stock or at prices below the Company's book value. Common Stock sold
at such a discount would result in dilution to the then-existing stockholders of
the Company as well as reduce each stockholders' percentage ownership interest
in the Company. Further, the Company may issue additional shares of preferred
stock on terms and conditions which may discourage, impede or prevent a merger,
tender offer or proxy contest even though such an event may be favorable to the
interest of stockholders as a whole. Any registration statement filed by the
Company relating to the Common Stock will increase the number of shares
available for sale in the public market and may have an adverse impact on the
market price of the Common Stock.
POTENTIAL INABILITY TO CONTROL OR MANAGE GROWTH OR TO SUCCESSFULLY INTEGRATE
ACQUIRED BUSINESSES
The Company intends to continue to actively pursue mergers and acquisitions
in the scrap metals recycling industry. There can be no assurance that the
Company will be successful in acquiring other entities or that it will be able
to effectively manage these acquired entities. The Company's ability to achieve
its expansion objectives and to manage its growth effectively depends on a
variety of factors, including the ability to identify appropriate acquisition
targets and to negotiate acceptable terms for their acquisition, the integration
of new businesses into the Company's operations, the achievement of cost savings
and the availability of capital. The inability to control or manage growth
effectively or to successfully integrate new businesses into the Company's
operations would have a material adverse effect on the Company's results of
operations and financial condition. Depending on the nature and size of these
transactions, if any, the Company may experience working capital and liquidity
shortages. There can be no assurance that additional financing will be available
on terms and conditions acceptable to the Company, if at all.
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LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES
The Company has only recently entered the scrap metals recycling industry.
Accordingly, past financial performance should not be considered as a reliable
indicator of future performance, and historical trends should not be used to
anticipate results or trends in future periods. Due to the limited experience of
management in effecting a consolidation strategy on the scale being pursued by
the Company, there can be no assurance that the Company will be able to
successfully effect its consolidation strategy, even if the Company is able to
acquire other entities on acceptable terms and conditions. In addition, none of
the Company's existing subsidiaries has, and only a limited number of the
Company's future acquisitions likely will have, experience operating as a
subsidiary of a public holding company subject to formal accounting and
reporting requirements. The Company will be required to continue to devote
significant management time and capital to enhance information systems and to
improve and monitor internal controls, as well as to recruit managers with
appropriate skills to insure the timeliness and accuracy of financial reports.
The success of the consolidation strategy depends in part on the ability of the
Company's management to oversee diverse operations and to successfully integrate
processing, marketing and other resources.
In addition, the Company's Metal Management Arizona subsidiary has incurred
operating losses and required capital infusions since its acquisition in April
1996. There can be no assurance that the Company will not be required to provide
additional funding to Metal Management Arizona. Further, there can be no
assurance that existing or future subsidiaries will not require similar
infusions or that the Company will be able to provide such fundings if needed.
The need to provide this funding or its inability to do so could have a material
adverse effect on the Company's results of operations or financial condition.
CYCLICALITY OF THE METALS RECYCLING INDUSTRY
The operating results of the scrap metals recycling industry in general,
and the Company's operations specifically, are highly cyclical in nature as they
tend to reflect and be amplified by general economic conditions. Historically,
in periods of national recession or periods of minimal economic growth, the
operations of scrap metals recycling companies have been materially and
adversely affected. For example, during recessions or periods of minimal
economic growth, the automobile and the construction industries typically
experience major cutbacks in production, resulting in decreased demand for
steel, copper and aluminum and significant fluctuations in demand and pricing
for the Company's products. Future economic downturns in the national economy
would likely materially and adversely affect the Company's results of operations
and financial condition. The ability of the Company to withstand significant
economic downturns in the future will depend in part on the level of the
Company's capital and liquidity.
POTENTIAL INABILITY TO COMPLETE PENDING ACQUISITIONS
The Company engages in discussions with third parties regarding potential
acquisitions of companies or businesses in the metals recycling industry. If the
parties are able to agree generally on the nature, terms and conditions of a
transaction, a letter of intent is typically prepared to reflect this
understanding. In many cases, these letters of intent are structured as "binding
letters of intent" to purchase the business, although each such letter of intent
is still generally subject to a number of terms and conditions, including but
not limited to negotiation and execution of definitive purchase agreements. In
addition, each potential acquisition may be subject to additional contingencies
specific to that acquisition. There can be no assurance that any such potential
acquisition will result in the execution of a definitive agreement or that such
acquisition will be completed on terms and conditions acceptable to the Company,
if at all.
COMMODITY PRICE RISK
Although the Company has a policy of turning over its inventory of raw or
processed scrap metals as rapidly as possible, the Company is exposed to
commodity price risk during the period that it has title to products that are
held in inventory for processing and/or resale. Prices of commodities can be
volatile due to numerous factors beyond the Company's control, including general
economic conditions, labor costs, competition, availability of scrap metal
substitutes, import duties, tariffs and currency exchange rates. In an
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increasing price environment, competitive conditions may limit the Company's
ability to pass on price increases to its customers. In a decreasing price
environment, the Company may not have the ability to fully recoup the cost of
raw scrap it processes and sells to its customers. The lack of long-term
purchase agreements with the Company's significant customers also may exacerbate
this risk.
COMPREHENSIVE REGULATORY REQUIREMENTS
The Company is subject to significant government regulation, including
stringent environmental laws and regulations. Among other things, these laws and
regulations impose comprehensive local, state, federal, foreign and
supranational statutory and regulatory requirements concerning, among other
matters, the treatment, acceptance, identification, storage, handling,
transportation and disposal of industrial by-products, hazardous and solid waste
materials, waste water, stormwater effluent, air emissions, soil contamination,
surface and groundwater pollution, employee health and safety, operating permit
standards, monitoring and spill containment requirements, zoning, and land use,
among others. Various laws and regulations set prohibitions or limits on the
release of contaminants into the environment. Such laws and regulations also
require permits to be obtained and manifests to be completed and delivered in
connection with any shipment of prescribed materials so that the movement and
disposal of such material can be traced and the persons responsible for any
mishandling of such material can be identified. This regulatory framework
imposes significant compliance burdens, costs and risks on the Company.
Violation of such laws and regulations may give rise to significant liability to
the Company, including fines, damages, fees and expenses.
Releases of certain industrial by-products and waste materials are subject
to particular laws and regulations. Although the specific provisions of laws and
regulations related to such releases vary among jurisdictions, such laws and
regulations typically require that the relevant authorities be notified
promptly, that the release be cleaned up promptly, and that remedial action be
taken by the responsible party and/or owner of the site to restore the
environment to levels protective of human health and the environment. Generally,
the governmental authorities are empowered to act to clean up and remediate
releases and environmental damage and to charge the costs of such cleanup to one
or more of the owners of the property, the person responsible for the spill, the
generator of the contaminant and certain other parties or to direct the
responsible party to take such action. These authorities may also impose a tax
or other liens to secure such parties' reimbursement obligations. Environmental
laws and regulations impose strict operational requirements on the performance
of certain aspects of hazardous or toxic substance remediation. These
requirements specify complex methods for identification, monitoring, storage,
treatment and disposal of waste materials managed during a project. Failure to
meet these requirements could result in substantial fines and other penalties.
Environmental legislation and regulations have changed rapidly in recent
years, and it is likely that the Company will be subject to even more stringent
environmental standards in the future. For example, the ultimate effect of the
regulations to be implemented under the Clean Air Act Amendments of 1990 (the
"Clean Air Act"), and the actual amount of any capital expenditures required
thereby, will depend on how the Clean Air Act is interpreted and implemented
pursuant to regulations that are currently being developed and on additional
factors such as the evolution of environmental control technologies and the
economic viability of these technologies. For these reasons, future capital
expenditures for environmental control facilities cannot be predicted with
accuracy; however, one may expect that environmental control standards will
become increasingly stringent and that the expenditures necessary to comply with
them could increase substantially.
Local, state, federal, foreign and supranational governments and agencies
have also from time to time proposed or adopted other types of laws, regulations
or initiatives with respect to the scrap metals recycling industry, including
laws, regulations and initiatives intended to ban or restrict the intrastate,
interstate or international shipment of wastes, to impose higher taxes or fees
on certain shipments of waste, or to classify or reclassify certain categories
of non-hazardous wastes as hazardous. Certain local, state, federal, foreign and
international governments and agencies have promulgated "flow control" or other
regulations, which attempt to require that all waste (or certain types of waste)
generated within the jurisdiction in question must go to certain disposal sites.
Due to the complexity of regulation of the industry and to public and political
pressure, implementation of existing or future laws, regulations or initiatives
by different levels of governments may be inconsistent and difficult to foresee.
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The Company requires, and must comply with, various permits and licenses to
conduct its operations. Government agencies continually monitor compliance with
permits and licenses and the Company's facilities are subject to periodic
unannounced inspection by local, state and federal authorities. Violations of
any permit or license, if not remedied, could result in the Company incurring
substantial fines, suspension of operations or closure of a site.
Governmental authorities have a wide variety of powerful administrative
enforcement actions and remedial orders available to them to cause compliance
with environmental laws or to remedy or punish violations of such laws. Such
orders may be directed to various parties, including present or former owners or
operators of the concerned sites, or parties that have or had control over the
sites. In certain instances, fines and treble damages may be imposed. In the
event that administrative actions fail to cure a perceived problem or where the
relevant regulatory agency so desires, an injunction or temporary restraining
order or damages may be sought in a court proceeding.
Some laws also give private parties the right, in addition to existing
common laws claims, to file claims for injunctive relief or damages against the
owners or operators of the site. Public interest groups, local citizens, local
municipalities and other persons or organizations may have a right to seek
judicial relief for purported violations of law or releases of pollutants into
the environment. In some jurisdictions, recourse to the courts by individuals
under common law principles such as trespass or nuisance have been or may be
enhanced by legislation providing members of the public with statutory rights of
action to protect the environment. In such cases, even if a scrap metals
recycling facility is operated in full compliance with applicable laws and
regulations, local citizens and other persons and organizations may seek
compensation for damages allegedly caused by the operation of the facility. In
some cases, the operation of scrap metals recycling facilities is subjected to
heightened public scrutiny because of residential or other non-industrial
property uses that have developed around such facilities. So-called "Not In My
Backyard" ("NIMBY") grass roots community opposition to such facilities can
materially interfere with such facilities' on-going operations and growth.
The Company believes that, with heightened legal, political and citizen
awareness and concerns, all companies in the scrap metals recycling industry may
be faced, in the normal course of operating their businesses, with fines and
penalties and the need to expend substantial funds for capital projects,
remedial work and operating activities, such as environmental contamination
monitoring, soil removal, groundwater treatment, creation of engineered
barriers, establishing institutional controls and related activities. Regulatory
or technological developments relating to the environment may require companies
engaged in the scrap metals recycling industry to modify, supplement or replace
equipment and facilities at costs which may be substantial. Because the scrap
metals recycling industry has the potential for discharge of materials into the
environment, a material portion of the capital expenditures by the Company is
expected to relate, directly or indirectly, to such equipment and facilities.
Moreover, it is possible that future developments, such as increasingly strict
requirements of environmental laws and regulations, and enforcement policies
will require even more significant capital investments in this regard.
POTENTIAL ENVIRONMENTAL LIABILITY
General. The Company is subject to potential liability and may also be
required from time to time to clean up or take certain remedial action with
regard to sites currently or formerly used in connection with its operations.
Furthermore, the Company may be required to pay for all or a portion of the
costs to clean up or remediate sites the Company never owned or on which it
never operated if it is found to have arranged for transportation, treatment or
disposal of pollutants or hazardous or toxic substances on or to such sites. The
Company also is subject to potential liability for environmental damage that its
assets or operations may cause nearby landowners, particularly as a result of
any contamination of drinking water sources or soil, including damage resulting
from conditions existing prior to the acquisition of such assets or operations.
Any substantial liability for environmental damage could materially adversely
affect the operating results and financial condition of the Company, and could
materially adversely affect the marketability and price of the Company's stock.
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Incompleteness of Site Investigations. As part of its pre-transaction "due
diligence" investigations, the Company typically hires an environmental
consulting firm to conduct transaction screen reviews, or Phase I and/or Phase
II site assessments of the sites owned or leased by particular acquisition or
merger candidates (the "Pre-Transaction Site Assessments"). However, such
Pre-Transaction Site Assessments have not covered (and will not in the future
cover) all of the sites owned or leased by the companies which are acquired by
or merge with the Company. Moreover, such Pre-Transaction Site Assessments which
have occurred have not been designed or expected (and will not in the future be
designed or expected) to disclose all material contamination or liability that
may be present. For example, the Company does not include soil sampling or core
borings as a standard part of the Phase I portion of its Pre-Transaction Site
Assessments, even though such sampling and core borings might increase the
chances of finding contamination on a particular site. Failure to conduct soil
sampling and core borings on a particular site could result in the Company
failing to identify a seriously contaminated site prior to an acquisition or
merger, and could materially adversely affect the Company.
Likelihood of Contamination at Some Sites. Pre-Transaction Site Assessments
of the Company's current sites conducted by independent environmental consulting
firms have revealed that some soil, surface water and/or groundwater
contamination is likely at certain of these sites, and have recommended that
certain additional investigations and remediation be conducted. Based upon its
review of these reports, the Company believes that it is likely that
contamination exists at certain of its sites and that it is likely that
additional investigation, monitoring and remediation will be required at some of
the sites. Also based upon its review of these reports, the Company believes
that such contamination is likely to include, but not be limited to:
polychlorinated biphenyls (PCBs); total petroleum hydrocarbons; volatile organic
compounds (VOCs); antimony; arsenic; cadmium; copper; lead; mercury; silver;
zinc; waste oil; toluene; meta-and para-xylenes; baghouse dust; and/or aluminum
dross. The ultimate extent of such contamination cannot be stated with any
certainty at this point, and there can be no assurance that the cost of
remediation will be immaterial, and it is not unlikely that the Company will
establish one or more reserves relating to environmental remediation in the
future. The existence of such contamination could result in federal, state,
local or private enforcement or cost recovery actions against the Company,
possibly resulting in disruption of Company operations, the need for proactive
remedial measures, and substantial fines, penalties, damages, costs and expenses
being imposed against the Company.
The Company expects to require future cash outlays as it incurs the actual
costs relating to the remediation of environmental liabilities. The incurrence
of the costs may have a material adverse effect on the Company's results of
operation and financial condition.
In connection with the acquisition of the assets of Aerospace Metals, Inc.
("Aerospace"), the Company has identified certain on-site contamination which
will require remediation in accordance with a remediation plan prepared by an
independent engineering firm. The costs of such remediation will be paid by the
seller of the assets of Aerospace from an escrow fund established for such
purpose out of the purchase consideration paid by the Company for such assets.
Uncertain Costs of Environmental Compliance and Remediation. Many factors
affect the level of expenditures the Company will be required to make in the
future to comply with environmental requirements, including: (i) new local,
state and federal laws and regulations; (ii) the developing nature of
administrative standards promulgated under Superfund and other environmental
laws, and changing interpretations of such laws; (iii) uncertainty regarding
adequate control levels, testing and sampling procedures, new pollution control
technology and cost benefit analyses based on market conditions; (iv) the
incompleteness of information regarding the condition of certain sites; (v) the
lack of standards and information for use in the apportionment of remedial
responsibilities; (vi) the numerous choices and costs associated with diverse
technologies that may be used in remedial actions at such sites; (vii) the
possible ability to recover indemnification or contribution from third parties;
and (viii) the time periods over which eventual remediation may occur.
Therefore, the estimated costs, and the timing of such costs, for future
environmental compliance (capital expenditures or increases in operating costs
or other expenditures) and remediation cannot be accurately predicted and are
necessarily imprecise; however, such costs could be material to future quarterly
or
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annual results of operations of the Company. In addition, it is not possible to
predict whether or not such costs can be passed on to customers through price
increases.
Lack of Environmental Impairment Insurance. In general, the Company's
subsidiaries do not carry environmental impairment liability insurance. In
general, the Company's subsidiaries operate under general liability insurance
policies, which do not cover environmental damage. If one or more of the
Company's subsidiaries were to incur significant liability for environmental
damage not covered by environmental impairment insurance, or for other claims in
excess of its general liability insurance and umbrella coverage, the Company's
results of operations and financial condition could be materially adversely
affected.
Risks Associated With Certain By-Products. Although the majority of the
Company's metal products are currently exempt from applicable solid waste
regulations, the Company's scrap metals recycling operations produce significant
amounts of by-products. Heightened environmental risk is associated with certain
of these by-products. For example, certain of the Company's subsidiaries operate
shredders for which the primary feed materials are automobile hulks and obsolete
household appliances. Approximately 20% of the weight of an automobile hulk
consists of material ("shredder fluff") which remains after the segregation of
ferrous and saleable non-ferrous metals. Federal environmental regulations
require shredder fluff to pass a toxic leaching test to avoid classification as
a hazardous waste. The Company endeavors to have hazardous contaminants from the
feed material removed prior to shredding and, as a result, the Company believes
the shredder fluff generated is properly not considered a hazardous waste.
Should the laws, regulations or testing methods change with regard to shredder
fluff disposal, the Company may incur additional significant expenditures.
Potential Superfund Liability. (a) The Company's Reserve Iron & Metal,
Cozzi Iron & Metal and Kankakee Scrap subsidiaries have received notices from
the EPA that each such company and numerous other parties are considered PRPs
and may be obligated under Superfund to pay a portion of the cost of remedial
investigation, feasibility studies and, ultimately, remediation to correct
alleged releases of hazardous substances at the Standard Scrap Metal/Chicago
International Exporting Removal Action Site. Superfund may impose joint and
several liability for the costs of remedial investigations and actions on the
entities that arranged for disposal of certain wastes, the waste transporters
that selected the disposal sites, and the owners and operators of such sites.
Responsible parties (or any one of them) may be required to bear all of such
costs regardless of fault, legality of the original disposal, or ownership of
the disposal site. Based upon their analysis of the situation, the management of
Reserve Iron & Metal, Cozzi Iron & Metal and Kankakee Scrap currently do not
expect their aggregate potential liability to be in excess of $175,000. There
can be no assurance, however, that their aggregate potential liability may not
be greater than $175,000.
(b) Cozzi Iron & Metal has received a notice from the EPA that Cozzi Iron &
Metal is a PRP under Superfund in regard to the site referred to as H&H
Recycling in Gary, Indiana. Cozzi Iron & Metal believes that a settlement may be
reached with respect to the H&H Recycling site which would result in a cost of
approximately $600,000. There can be no assurance that such potential liability
will not be material.
(c) Cozzi Iron & Metal was served in a private cost recovery action
alleging that Cozzi Iron & Metal is a PRP under Superfund in regard to the site
referred to as Gould Battery Site in Pennsylvania. Based upon its analysis of
the situation, including transaction documentation and indemnifications, Cozzi
Iron & Metal currently expects that its ultimate liability in regard to this
matter will be de minimus, but there can be no assurance this will be the case.
(d) Cozzi Iron & Metal has received a notice from the Port Refinery Joint
Defense Group that an entity known as Riverside Trading has been joined as a
defendant in a cost recovery action brought on behalf of the EPA under
Superfund. Cozzi Iron & Metal is the parent of a subsidiary that operates a
facility known as Riverside Iron & Steel. Based upon its analysis of the
situation, including transaction documentation, Cozzi Iron & Metal currently
expects that its ultimate liability in regard to this matter will be de minimus,
but there can be no assurance this will be the case.
(e) Bluestone has received notice from the EPA that it is a PRP under
Superfund in regard to the site referred to as the Metcoa Site in Pulaski,
Pennsylvania. Bluestone has entered into a settlement agreement with the EPA
regarding the cleanup of this site and has paid its initial settlement share
under the settlement
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agreement. However, the aggregate costs of cleaning up this site are likely to
exceed the original estimate of the aggregate cleanup costs upon which the
initial settlement amount paid by Bluestone was based. Based on its current
analysis of the situation, Bluestone expects that its share of the additional
cleanup costs at this site will not exceed $100,000. Although Bluestone has
reserved funds to address additional cleanup costs and has obtained an indemnity
from the previous owners of the company for costs which exceed this reserve,
there can be no assurance that Bluestone may not be required to make additional
expenditures in connection with this site.
(f) Bluestone has received notice from the EPA that it is a PRP under
Superfund in regard to the site referred to as the Jacks Creek/Sitkin Smelting
Facility Superfund Site in Mifflin County, Pennsylvania. Bluestone joined a PRP
group which has submitted a good faith offer to the EPA to enter into a consent
decree. Based on its analysis of the situation, Bluestone expects that its share
of the cleanup costs at this site will not exceed $250,000. Although Bluestone
has reserved funds to address such cleanup costs and has obtained an indemnity
from the previous owners of the company for costs which exceed this reserve,
there can be no assurance that Bluestone may not be required to make additional
expenditures in connection with this site.
Underground Storage Tanks ("USTs") exist at several of the Company's sites.
USTs are subject to various federal, state and local laws on their operation. In
the event a release of regulated product has occurred, the Company may incur
significant costs to investigate and remediate the release.
Recommendations of Environmental Consultants. Environmental consultants to
the Company have recommended that a variety of preventative and/or remedial
actions be undertaken, including: the sampling of soil, surface and groundwater
at its various facilities; the remediation of any existing contamination under
applicable regulations; the development of Spill Prevention Control and
Countermeasure Plans ("SPCC"); the completion of certain actions in regard to
Storm Water Pollution Prevention Plans; the timely completion and/or filing of
certain annual reports and summaries required by governmental agencies; the
completion of Oil Discharge and Response Plans; and the remediation of certain
materials suspected of containing asbestos. If the Company fails to follow these
recommendations for an indefinite period of time, one or more of the sites
might, potentially, be subject to a governmental enforcement action, the
imposition of fines, penalties and damages, and/or require remediation at some
future time at a cost which may have an adverse effect on the Company's results
of operations and financial condition.
Compliance History. The Company has, in the past, been found not to be in
compliance with certain environmental laws and regulations, and has incurred
fines associated with such violations which have not been material in amount and
may in the future incur additional fines associated with such violations. The
Company has also paid a portion of the costs of certain remediation actions at
certain sites. No assurance can be given that material fines, penalties, damages
and expenses resulting from additional compliance issues and liabilities will
not be imposed on the Company in the future.
EMPLOYEE HEALTH AND SAFETY
The Company's operations are subject to regulation by federal, state and
local agencies responsible for employee health and safety, including the
Occupational Safety and Health Administration ("OSHA"). A total of four
accidental deaths of, and two serious accidental injuries to, employees have
occurred at the Company's Cozzi Iron & Metal, HouTex and Reserve Iron & Metal
subsidiaries during the past four years. Cozzi Iron & Metal and Reserve Iron &
Metal have been fined by OSHA in regard to such incidents. HouTex has also been
cited and fined by OSHA for alleged failure to establish energy control
procedures and employee training in regard to mobile shearing equipment. No
assurance can be given that potential liabilities of the Company in regard to
such deaths and injuries, or in regard to any future deaths of or injuries to
the Company's employees, will not be material.
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LABOR RELATIONS
Many of the Company's active employees are represented by various labor
unions, including the Teamsters Union, the United Steel Workers Union and the
United Auto Workers. As the Company's (and its subsidiaries') agreements with
these unions expire, there can be no assurance that the Company will be able to
negotiate extensions or replacements thereof on terms favorable to the Company,
or at all, or that the Company will not experience strikes, lockouts or other
actions from time to time. There can be no assurance that new labor agreements
will be reached with the Company's unions as such labor contracts expire. Any
labor action resulting from the foregoing may have a material adverse effect on
the Company or its results of operations.
CONTROL BY PRINCIPAL STOCKHOLDERS; POTENTIAL CONFLICTS OF INTEREST
Pursuant to the stockholder's agreement (the "Stockholders Agreement"),
among Albert A. Cozzi, Frank J. Cozzi and Gregory P. Cozzi (the "Cozzi
Shareholders"), T. Benjamin Jennings and Gerard M. Jacobs (the "MTLM
Shareholders"), Samstock, L.L.C. ("Samstock") and the Company, the Company's
Board of Directors is comprised of five directors nominated by the Cozzi
Shareholders, five directors nominated by the MTLM Shareholders, and one
director nominated by Samstock. Further, the Cozzi Shareholders, the MTLM
Shareholders and Samstock as of March 31, 1998 owned approximately 43% of the
issued and outstanding shares of Common Stock. As a result of their
shareholdings, the Cozzi Shareholders, the MTLM Shareholders and Samstock may be
deemed to have effective control over the affairs and management of the Company.
There can be no assurance that this influence will be used in a manner that is
consistent with the interests of the other holders of the Company's securities.
The parties to the Stockholders Agreement also have agreed to vote for
proposals, if and when presented by the Company, to amend the Company's
organizational documents to require the approval of at least two-thirds of the
Board of Directors to take certain actions. If the Company's organizational
documents are amended to reflect these restrictions, and the Board of Directors
cannot agree on the Company's strategic direction, a minority of four dissenting
directors could prevent the Company from taking certain actions. Should the
Board of Directors be unable to act because a minority of dissenting directors
prevents it from taking a significant action, this impasse could have a material
adverse effect on the Company's results of operations and financial condition.
Certain decisions concerning the operations or financial structure of the
Company may present conflicts of interest between the Company's shareholders and
its creditors. For example, if the Company encounters financial difficulties or
is unable to pay its debts as they become due, the interests of the Company's
shareholders might conflict with those of its creditors. The Company's
shareholders also may have an interest in pursuing acquisitions, divestitures,
financings or other transactions that could enhance their equity investment,
even though such transactions might involve risk to the Company's creditors.
Because the members of the Company's senior management team are significant
shareholders of the Company, any such conflict of interest may be resolved in
favor of the Company's shareholders to the detriment of the Company's creditors.
DEPENDENCE ON KEY PERSONNEL
The Company's operations to date have depended in large part on the skills
and efforts of its senior management team, including T. Benjamin Jennings, its
Chairman and Chief Development Officer, Gerard M. Jacobs, its Chief Executive
Officer, and Albert A. Cozzi, its President and Chief Operating Officer. In
addition, because the Company's senior management team (other than Mr. Cozzi)
has limited experience in the scrap metals recycling business, the Company
relies substantially on the experience of the management of its subsidiaries
with regard to day-to-day operations. While the Company has employment
agreements with Messrs. Jennings, Jacobs and Cozzi and certain members of its
management team at the subsidiary level, there can be no assurance that the
Company will be able to retain the services of any of the foregoing. The loss of
any member of its senior management team or a significant number of managers
could have a material
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adverse effect on the Company's efforts to manage and integrate acquisitions and
may also adversely impact the Company's ability to implement its consolidation
strategy.
DEPENDENCE ON SCRAP SUPPLIERS
The profitability of the Company's scrap recycling operations depends, in
part, on the availability of an adequate source of supply. The Company acquires
its scrap inventory from numerous sources. These suppliers generally are not
bound by long-term contracts and have no obligation to continue selling scrap
materials to the Company. If a substantial number of scrap suppliers cease
selling scrap metals to the Company, the Company's results of operations or
financial condition would be materially and adversely affected.
CONCENTRATION OF CUSTOMERS AND CREDIT RISK
The Company's ten largest customers represented approximately 40.6% of
consolidated net sales for the year ended March 31, 1998. Accounts receivable
balances from these customers represented approximately 36.1% of consolidated
accounts receivable at March 31, 1998. The loss of any one of the Company's
significant customers could adversely affect the Company's results of operations
or financial condition.
In connection with the sale of the Company's products, the Company
generally does not require collateral as security for customer receivables.
Certain of the Company's subsidiaries have significant balances owing from
customers that operate in cyclical industries and under leveraged conditions
that may impair the collectibility of these receivables. Failure to collect a
significant portion of amounts due on these receivables could have a material
adverse effect on the Company's results of operations or financial condition.
COMPETITION
The metals recycling industry is highly competitive and subject to
significant changes in overall market conditions. Certain of the Company's
competitors may have greater financial, marketing and other resources. There can
be no assurance that the Company will be able to obtain its desired market share
or compete effectively in its markets.
USE OF SCRAP ALTERNATIVES
The increased demand for scrap metals by the expanding mini-mill industry
has caused a tightness in the supply and demand balance for ferrous scrap. The
relative scarcity of ferrous scrap, particularly the "cleaner" grades, and its
high price have created opportunities for producers of alternatives to scrap
metals. Although these alternatives have not been a major factor in the industry
to date, there can be no assurance that the use of alternatives to scrap metals
will not proliferate if the prices for scrap metals continue to rise and if the
levels of available unprepared ferrous scrap continue to decrease. Any
significant increase in the use of scrap metals alternatives by current
consumers of processed scrap metals could have a material adverse effect on the
Company.
POTENTIAL RESTRICTIONS ON MERGERS AND OTHER ACTIONS
Section 203 of the Delaware General Corporation Law (the "Delaware Business
Combination Statute") prohibits, under certain circumstances, "business
combinations" between a Delaware corporation whose stock is publicly-traded and
an "interested stockholder" of such corporation. The provisions prohibiting
"business combinations" could delay or frustrate the removal of incumbent
directors or a change in control of the Company. The provisions could also
discourage, impede, or prevent a merger, tender offer or proxy contest, even if
such an event would be favorable to the interest of stockholders. In addition,
the Company's certificate of incorporation authorizes the issuance of 4,000,000
shares of undesignated Preferred Stock, which the Board of Directors may cause
the Company to issue in one or more series. The Board of Directors has
designated 36,000 and 23,000 shares, respectively, of the Preferred Stock for
issuance as Series A Convertible Preferred Stock ("Series A Preferred Stock")
and Series B Convertible Preferred Stock ("Series B Preferred Stock"). The Board
of Directors has the authority to fix the number of shares of Preferred Stock
and determine or alter for each series, the voting powers, designations,
preferences and rights of such shares. If the Company should
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ever issue Preferred Stock in addition to the Convertible Preferred Stock, such
Preferred Stock could contain voting or other rights which could discourage,
impede, or prevent a merger, tender offer or proxy contest which could be
favorable to the interests of the stockholders.
So long as shares of Series A or Series B Preferred Stock are outstanding,
the Company is required to obtain the prior approval of the holders of at least
a majority of all shares of the applicable Series of Preferred Stock outstanding
at the time before: (i) increasing the authorized number of shares of such
Series of Preferred Stock; (ii) altering or changing the rights, preferences or
privileges of such Series of Preferred Stock or any other capital Stock of the
Company so as to adversely affect such Series of Preferred Stock; or (iii)
creating any new class or series of capital Stock having a preference over such
Series of Preferred Stock as to distribution of assets upon liquidation,
dissolution or winding up of the Company. This restriction could prevent the
Company from taking actions which could be favorable to the interests of the
stockholders.
VOLATILITY OF TRADING PRICE
The trading price of the Common Stock has been, and in the future is
expected to be, volatile and subject to market fluctuation as a result of a
number of factors, including, but not limited to, merger and acquisition
announcements and developments, current and anticipated results of operations,
execution of private or public equity or debt placements, filing and
effectiveness of registration statements relating to the Common Stock, future
product offerings by the Company or its competitors and factors unrelated to the
operating performance of the Company. The trading price of the Common Stock may
also vary as a result of changes in the business, operations, prospects or
financial results of the Company, general market and economic conditions,
additional future proposed acquisitions by the Company and other factors.
Failure in any fiscal quarter to meet the investment community's revenues or
earnings expectations, if any, could have an adverse impact on the trading price
of the Common Stock, as could sales of large amounts of Common Stock by existing
stockholders. In addition, sales of substantial amounts of Common Stock in the
public market could adversely affect the market price of the Common Stock. In
the event the market price of Common Stock were adversely affected by such
sales, the Company's access to equity capital markets could be adversely
affected and issuances of Common Stock in connection with acquisitions, or
otherwise, could dilute future earnings per share. Management believes that the
Company's stock price reflects an assumption that its existing pending
acquisitions will be completed. If these acquisitions are not completed, the
trading price of the Common Stock could be adversely affected.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See "Index to Consolidated Financial Statements of Metal Management, Inc.
and Subsidiaries" set forth in Part IV, Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information concerning the executive
officers and directors of the Company as of June 22, 1998.
NAME AGE POSITIONS
---- --- ---------
T. Benjamin Jennings........... 34 Director, Chairman of the Board, Member of the Executive
Committee and Chief Development Officer
Gerard M. Jacobs............... 43 Director, Member of the Executive Committee and Chief Executive
Officer
Albert A. Cozzi................ 52 Director, Member of the Executive Committee, President and Chief
Operating Officer
George A. Isaac III............ 45 Director, Member of the Executive Committee, Executive Vice
President and President and Chief Executive Officer of the
Isaac Group
Frank J. Cozzi................. 48 Director, Vice President and President of Cozzi Iron & Metal
Gregory P. Cozzi............... 43 Director and Executive Vice President of Cozzi Iron & Metal
Rod F. Dammeyer................ 57 Director
Christopher G. Knowles......... 55 Director
Donald F. Moorehead............ 47 Director
William T. Proler.............. 50 Director and President and Chief Executive Officer of Proler
Southwest
Harold Rubenstein.............. 70 Director
Daniel B. Burgess.............. 34 Executive Vice President
David A. Carpenter............. 35 Vice President, General Counsel and Secretary
Xavier Hermosillo.............. 48 Vice President, Investor Relations and Corporate Communications
Robert C. Larry................ 37 Vice President, Finance, Treasurer and Chief Financial Officer
T. Benjamin Jennings has served as Director, Chairman of the Board and
Chief Development Officer of the Company and its predecessor, General
Parametrics Corporation ("GPC"), since April 1996 and as a member of the
Executive Committee of the Board of Directors since June 1996. From August 1995
through April 1996, Mr. Jennings served as Co-Chairman of the Board,
Co-President and Co-Chief Executive Officer of the Company. From 1993 through
1995, Mr. Jennings was a Director of First Southwest Company, a private
investment banking firm based in Dallas, Texas. From 1990 to 1993, Mr. Jennings
was a Vice President of Kidder Peabody & Co. Inc., where he concentrated on
asset management, investment banking, private debt and equity placements, and
related financing activities. Mr. Jennings is a graduate of Rice University and
serves as Chairman of Chicago Inner-City Games Foundation and is also a Director
of the YMCA of Metropolitan Chicago.
Gerard M. Jacobs has served as Director and Chief Executive Officer of the
Company and its predecessor, GPC, since April 1996 and as a member of the
Executive Committee of the Board of Directors since June 1996. From April 1996
through December 1997, Mr. Jacobs also served as President of the Company. From
August 1995 through April 1996, Mr. Jacobs served as Co-Chairman of the Board,
Co-President and Co-Chief Executive Officer of the Company. From 1983 to 1995,
Mr. Jacobs developed resource recovery, landfill and hydroelectric projects for
his own account and for the investment banking firm of Russell, Rea & Zappala,
Inc. in Pittsburgh, Pennsylvania. From 1978 to 1983 Mr. Jacobs practiced
securities, corporate and banking law with the firms of Reed, Smith, Shaw &
McClay and Manion, Alder & Cohen, P.C., both in Pittsburgh, Pennsylvania. Mr.
Jacobs is a Director of Crown Group, Inc., a publicly traded company engaged in
various businesses. Mr. Jacobs is a graduate of Harvard University, where he was
elected to Phi Beta Kappa, and The University of Chicago School of Law, which he
attended as Weymouth Kirkland Law Scholar. Mr. Jacobs is an elected member of
the Board of Education of District 200, Oak Park and River Forest High School,
Oak Park, Illinois and is a Director of Chicago Inner-City Games Foundation.
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Albert A. Cozzi joined the Board of Directors, including its Executive
Committee, and became President of the Company in December 1997 following the
Company's merger with Cozzi Iron & Metal. Mr. Cozzi was employed by Cozzi Iron &
Metal from 1963 to December 1997, and from 1980 to December 1997 served as its
President. Mr. Cozzi became Chief Operating Officer and Senior Vice President of
the Company on September 1, 1997. Mr. Cozzi received an MBA from the University
of Chicago in 1988. From 1990 to 1992 he served as Chairman of the Ferrous
Committee of the Institute of Scrap Recycling Industries ("ISRI"), an industry
association. Mr. Cozzi is the brother of Frank J. Cozzi and Gregory P. Cozzi.
George A. Isaac III joined the Board of Directors of the Company, including
the Executive Committee, and became an Executive Vice President of the Company
in June 1997, following the Company's acquisition of the Isaac Group. Since
1988, he has served as President and Chief Executive Officer of the four
companies in the Isaac Group. From 1977 through 1988 he worked as a management
consultant at Deloitte and Touche LLP, where he was elected a partner. Mr. Isaac
is on the Board of Directors/Advisors of several companies in the Toledo, Ohio
area including Capital Bank, N.A. (a public bank holding company), Stonebridge
Associates (a private acquisition holding company) and Betco, Inc. (a
manufacturer of chemicals). He received a B.S. and an MBA with distinction from
the University of Michigan.
Frank J. Cozzi joined the Board of Directors of the Company in December
1997 following the Company's merger with Cozzi Iron & Metal. Mr. Cozzi has been
employed by Cozzi Iron & Metal since 1967 and became President in December 1997.
From 1981 to December 1997, Mr. Cozzi served as Cozzi Iron & Metal's Treasurer
and Secretary. From 1990 to 1991 he served as President of the Chicago Chapter
of ISRI, and from 1988 to 1990 was national chairman of ISRI's transportation
committee. Mr. Cozzi completed Harvard University's Owner President Management
executive program in 1991. He also has served local and national positions with
ISRI. Mr. Cozzi is the brother of Albert A. Cozzi and Gregory P. Cozzi.
Gregory P. Cozzi joined the Board of Directors of the Company in December
1997 following the Company's merger with Cozzi Iron & Metal. Mr. Cozzi has been
employed by Cozzi Iron & Metal since 1977 and became Executive Vice President
and Secretary in December 1997. From 1977 to December 1997, Mr. Cozzi was a Vice
President of Cozzi Iron & Metal. Mr. Cozzi is a graduate of Northern Michigan
University. Mr. Cozzi is the brother of Albert A. Cozzi and Frank J. Cozzi.
Rod F. Dammeyer joined the Board of Directors of the Company in January
1998. Mr. Dammeyer is currently the Vice Chairman of Anixter International, Inc.
("Anixter"), a distributor of networking and cabling products, where he has been
employed since 1985. From 1985 to February 1998, Mr. Dammeyer served as
President of Anixter. From 1993 to February 1998, he also served as Chief
Executive Officer of Anixter. He is also the managing partner of Equity Group
Investments, Inc. which has, among other things, investments in approximately 30
companies, several of which are public entities. Mr. Dammeyer is a Director of
Anixter International, Inc., Antec Corporation, CNA Surety Corporation, Group
Azucarero Mexico (GAM), IMC Global Inc., Jacor Communications, Inc., Lukens,
Inc., Stericycle, Inc., TeleTech Holdings, Inc. and Transmedia Network Inc. He
is also a trustee of Van Kampen American Capital, Inc. closed-end funds.
Christopher G. Knowles joined the Board of Directors of the Company in
December 1997 following the Company's merger with Cozzi Iron & Metal. Mr.
Knowles was employed by Insurance Auto Auctions, Inc. from January 1994 through
March 1996 and from April 1994 through March 1996 served as its President and
Chief Operating Officer. From 1980 to 1994 he was Chairman, Chief Executive
Officer and principal owner of Underwriters Salvage Company. Mr. Knowles
graduated from Indiana University. Mr. Knowles is a Director of Insurance Auto
Auctions, Inc. and Zebra Technologies Corporation.
Donald F. Moorehead joined the Board of Directors of the Company in April
1996 following the Company's merger with EMCO Recycling Corp. Mr. Moorehead is
the founder of USA Waste Services, Inc. ("USA Waste"). USA Waste is the third
largest solid waste management company in the United States as ranked by gross
revenues. He served as Chief Executive Officer of USA Waste from 1990 through
1994 and as Chief Development Officer and Vice Chairman from 1994 through August
1997. Mr. Moorehead currently is serving as a consultant to USA Waste. From 1985
through 1990, he served as Chairman of the Board and Chief Executive Officer of
MidAmerican Waste Systems, Inc. Mr. Moorehead is a graduate of the University of
Tulsa. Mr. Moorehead served as Vice Chairman of the Board of the Company until
his resignation from
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that position on June 19, 1998 and he has resigned from the Board of Directors
of the Company effective July 1, 1998.
William T. Proler joined the Board of Directors of the Company in August
1997 following the Company's acquisition of Proler Southwest. Since 1992, he has
served as President and Chief Executive Officer of Proler Southwest Inc., and
since 1994, he has served as a managing member of Proler Steelworks L.L.C.
Harold Rubenstein joined the Board of Directors of the Company in April
1996 following the Company's merger with EMCO Recycling. Prior to April 1996, he
served as President and Chief Executive Officer of Empire Scrap Metals, Inc.
("Empire"). Mr. Rubenstein has over 40 years of experience in owning and
managing scrap metal operations.
Daniel B. Burgess has served as an Executive Vice President of the Company
since September 1995. Prior to July 1996, Mr. Burgess was the Executive Vice
President responsible for business operations which were subsequently
discontinued by the Company. From June 1992 until September 1995, Mr. Burgess
served as a Global Account and Marketing Manager for AT&T Corp. Mr. Burgess
graduated from Rice University and earned an MBA from Southern Methodist
University.
David A. Carpenter joined the Company in March 1998 as Vice President,
General Counsel and Secretary. From October 1987 through March 1998, Mr.
Carpenter was a corporate and securities law practitioner in the Chicago and
London offices of Mayer, Brown & Platt, where he was a partner from and after
January 1, 1997. Mr. Carpenter is a graduate of the University of Illinois and
DePaul University College of Law. Mr. Carpenter is a Director of Metropolitan
Family Services and a member of the Chicago Bar Association.
Xavier Hermosillo has served as Vice President, Investor Relations and
Corporate Communications since December 1997. From August 1995 through March
1998, he served as Secretary of the Company. From August 1995 through September
1997, he served as a Director of the Company. From August 1995 through November
1997, he also provided investor and public relations services to the Company
through Xavier Hermosillo & Associates, a public relations, marketing and
government affairs firm which Mr. Hermosillo founded in 1985.
Robert C. Larry has served as Vice President, Finance, Treasurer and Chief
Financial Officer of the Company since August 1996. He served as Director of
Finance and Investments for Caremark International, Inc., a diversified,
publicly traded company engaged in providing health care services, from March
1995 to August 1996. In 1991, Mr. Larry co-founded The Grabscheid Group, Ltd., a
professional services firm which specialized in financial restructuring and
recapitalization services for private and publicly held firms. Mr. Larry served
as an accountant and consultant at Ernst & Young, L.L.P., an international
professional services firm, from 1983 to 1991. He graduated from Purdue
University and received an MBA from the University of Chicago. Mr. Larry is a
certified public accountant.
Each Director participated in at least 75% of the board meetings held
during the time such individual served as a Director of the Company during
fiscal 1998, except that Michael Melnik attended only one of two board meetings
during the period of fiscal 1998 that he was a Director.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of the relationship on Form 3 and changes in
ownership on Forms 4 or 5 with the Securities and Exchange Commission (the
"SEC") and the NASDAQ. These officers, directors and ten percent shareholders
are also required by SEC rules to furnish the Company with copies of all forms
they file.
Based solely on its review of the copies of such forms received by the
Company, or written representations from certain reporting persons, the Company
believes that its officers, directors and ten percent shareholders complied with
the requirements of Section 16(a) of the Exchange Act for the fiscal year ended
March 31,
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1998, except that Harold Rubenstein, a director of the Company, was delinquent
in filing reports on Form 4 showing sales of an aggregate of 60,000 shares of
Common Stock in eight separate transactions during February and March of 1998.
All such sales were subsequently reported on a Form 5, filed on May 14, 1998.
ITEM 11. EXECUTIVE COMPENSATION.
The following tables set forth information with respect to those persons
who: (i) served as the chief executive officer of the Company during the fiscal
year ended March 31, 1998; and (ii) were the most highly compensated executive
officers of the Company at March 31, 1998 whose total annual salary and bonus
exceeded $100,000 for the year. Compensation paid to these individuals for the
years ended March 31, 1998 and 1997, and the five months ended March 31, 1996 is
as follows:
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
-----------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------ ------------------------ --------
OTHER SECURITIES ALL
ANNUAL RESTRICTED UNDERLYING OTHER
COMPEN- STOCK OPTIONS/ LTIP COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS SATION AWARD(S) WARRANTS(#) PAYOUTS SATION
--------------------------- ---- -------- -------- -------- ---------- ----------- -------- -------
T. Benjamin Jennings(1).......... 1998 $269,180 $118,750 $ -- $ -- 725,000 $ -- $19,613(5)
Chairman of the Board and 1997 177,500 -- -- -- 200,000 -- 9,841
Chief Development Officer 1996 30,000 75,000 -- -- -- -- 1,623
Gerard M. Jacobs(1).............. 1998 269,180 118,750 -- -- 725,000 -- 19,550(6)
Chief Executive Officer 1997 177,500 -- -- -- 200,000 -- 8,450
1996 30,000 75,000 -- -- -- -- 1,623
George A. Isaac III(2)........... 1998 221,539 68,750 -- -- 76,923 -- 25,049(7)
Executive Vice President 1997 N/A
1996 N/A
Robert C. Larry (3).............. 1998 134,708 74,500 -- -- 30,000 -- 5,219(8)
Vice President, Finance,
Treasurer 1997 72,500 -- -- -- 25,000 -- 3,215
and Chief Financial Officer 1996 N/A
Daniel B. Burgess (4)............ 1998 128,500 64,500 -- -- 37,500 -- 5,238(9)
Executive Vice President 1997 105,000 17,750 -- -- 30,000 -- 4,296
1996 42,500 -- -- -- 50,000 -- 1,790
- ---------------
(1) Messrs. Jacobs and Jennings served without compensation from the Company
during the time from their appointment to their respective positions in
August 1995 through December 31, 1995. During the five months ended March
31, 1996, the Company paid Messrs. Jacobs and Jennings each a $75,000 bonus
for their services during the period August 1995 through December 31, 1995.
(2) Mr. Isaac joined the Company on June 23, 1997 following the Company's
acquisition of the Isaac Group.
(3) Mr. Larry joined the Company in August 1996.
(4) Mr. Burgess joined the Company in September 1995.
(5) During fiscal 1998, the Company paid on behalf of Mr. Jennings the
following: $3,747 in auto reimbursement, $5,724 of health insurance
premiums, $7,777 of other health benefits and $2,365 of membership dues.
During fiscal 1997, the Company paid on behalf of Mr. Jennings $945 in auto
reimbursement, $5,574 of health insurance premiums, $2,902 of other health
benefits and $420 of long-term disability insurance premiums. During fiscal
1996, the Company paid on behalf of Mr. Jennings $1,623 of health insurance
benefits.
(6) During fiscal 1998, the Company paid on behalf of Mr. Jacobs the following:
$4,473 in auto reimbursement, $7,128 of health insurance premiums, $6,784 of
other health benefits and $1,165 of membership dues. During fiscal 1997, the
Company paid on behalf of Mr. Jacobs the following: $945 in auto
reimbursement, $6,941 of health insurance premiums, and $564 of long-term
disability insurance premiums. During fiscal 1996, the Company paid on
behalf of Mr. Jacobs $1,623 of health insurance benefits.
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(7) During fiscal 1998, the Company paid on behalf of Mr. Isaac the following:
$2,018 of long-term disability insurance premiums, $1,305 in auto
reimbursements, $11,698 of life insurance premiums, $5,388 of membership
dues, $1,440 in 401(k) matching contributions and $3,200 of contributions to
a profit sharing plan.
(8) During fiscal 1998, the Company paid on behalf of Mr. Larry the following:
$4,940 of health insurance premiums and $279 of other health benefits.
During fiscal 1997, the Company paid on behalf of Mr. Larry the following:
$2,990 of health insurance premiums and $225 of other health benefits.
(9) During fiscal 1998, 1997 and 1996, the Company paid on behalf of Mr. Burgess
$5,238, $3,744 and $1,560, respectively, in health insurance premiums, and
$0, $552 and $230, respectively, in long-term disability premiums.
OPTION AND WARRANT GRANTS IN FISCAL 1998
The following table sets forth information concerning grant of stock
options and warrants during fiscal 1998.
NUMBER OF POTENTIAL REALIZABLE VALUE AT
SECURITIES PERCENT OF TOTAL ASSUMED ANNUAL RATES OF
UNDERLYING OPTIONS/WARRANTS STOCK APPRECIATION FOR
OPTIONS AND GRANTED TO OPTION TERM(2)
WARRANTS EMPLOYEES IN EXERCISE EXPIRATION -----------------------------
NAME GRANTED(1) FISCAL YEAR PRICE DATE 5% 10%
---- ------------ ---------------- -------- ---------- ------------ -------------
T. Benjamin Jennings... 375,000 11.1% $ 5.91 12/1/02 $7,595,165 $10,164,546
350,000 10.4% 12.00 12/1/02 4,957,320 7,355,409
Gerard M. Jacobs....... 375,000 11.1% 5.91 12/1/02 7,595,165 10,164,546
350,000 10.4% 12.00 12/1/02 4,957,320 7,355,409
George A. Isaac III.... 76,923 2.3% 13.00 2/15/98 27,198 48,809
Robert C. Larry........ 25,000 0.7% 12.00 4/29/02 0 62,365
5,000 0.1% 19.00 1/15/03 0 14,716
Daniel B. Burgess...... 7,500 0.2% 19.00 1/15/03 0 22,074
30,000 0.9% 4.00 12/1/02 664,913 870,464
- ---------------
(1) All options/warrants are exercisable immediately, except for all shares
granted to Mr. Larry which vest over 2 years, and 7,500 shares granted to
Mr. Burgess which vest over 2 years.
(2) In accordance with SEC rules, these columns show gains that might exist for
the respective options and warrants, assuming the market price of the
Company's Common Stock appreciates from the date of grant over the term of
the option/warrant at the annualized rates of five and ten percent,
respectively. If the stock price does not increase above the exercise price
at the time of exercise, realized value to these named executives will be
zero.
AGGREGATED OPTION AND WARRANT EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION AND WARRANT VALUES
The following table sets forth the employee stock options and warrants
exercised during fiscal year 1998 by the executive officers listed below and the
number and value of securities underlying unexercised options and warrants held
by the executive officers at March 31, 1998.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AND WARRANTS OPTIONS AND WARRANTS
ACQUIRED ON VALUE AT FISCAL YEAR-END AT FISCAL YEAR-END
NAME EXERCISE REALIZED EXERCISABLE/ UNEXERCISABLE EXERCISABLE/ UNEXERCISABLE
---- ----------- -------- -------------------------- ---------------------------------
(1) (2)
T. Benjamin Jennings........ 0 $0 925,000/0 6,0$80,625/0
Gerard M. Jacobs............ 0 0 925,000/0 6,080,625/0
George A. Isaac III......... 0 0 0/0 0/0
Robert C. Larry............. 0 0 33,333/21,667 279,166/39,584
Daniel B. Burgess........... 0 0 110,000/7,500 1,178,750/0
- ---------------
(1) Value Realized is determined by multiplying the number of shares by the
difference between the closing price on the trade date and the exercise
price.
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(2) Based on March 31, 1998 closing price of Common Stock of $14.375.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with T. Benjamin
Jennings, Gerard M. Jacobs, Albert A. Cozzi, Frank J. Cozzi and George A. Isaac
III (each, an "Executive"). The terms of each Executive's employment agreement
are substantially the same. Each agreement provides for a minimum annual base
salary of $275,000, plus a minimum cash bonus equal to 25% of the Executive's
then-current base salary. The agreements with Messrs. Jennings and Jacobs
provide that each will receive an identical salary, bonus, vacation, disability
and other benefits. Each employment agreement also restricts the Executive's
ability to compete with the Company during the term of the agreement and for
three years following the termination of his employment. However, the employment
agreements with Messrs. Jennings and Jacobs acknowledge that they may devote a
portion of their time to entities other than the Company.
The employment agreement of each Executive has a term of five years,
beginning on December 1, 1997 or, in the case of Mr. Isaac, June 23, 1997. The
employment agreements with Messrs. Jennings, Jacobs, A. Cozzi and F. Cozzi
provide that on each anniversary the term is automatically extended for one
additional year unless either the Company or the Executive elects prior to such
anniversary not to extend the term. The employment agreement with Mr. Isaac
provides that, after the initial five-year term, the agreement is automatically
extended by one-year periods unless either the Company or Mr. Isaac elects prior
to such anniversary not to extend the term.
As additional compensation under their employment agreements, the Company
issued warrants to each Executive to purchase Common Stock. Each of Messrs.
Jennings and Jacobs received warrants to purchase: (i) 375,000 shares of Common
Stock at an exercise price of $5.91 per share, exercisable until December 1,
2002; and (ii) 350,000 shares of Common Stock at an exercise price of $12.00 per
share, exercisable until December 1, 2002. Each of Messrs. A. Cozzi and F. Cozzi
received warrants to purchase: (a) 377,586 and 291,380 shares of Common Stock,
respectively, at an exercise price of $5.91 per share, exercisable until
December 1, 2002; and (b) 377,586 and 291,380 shares of Common Stock,
respectively, at an exercise price of $15.84 per share, exercisable until
December 1, 2002. Mr. Isaac received warrants to purchase: (x) 76,923 shares of
Common Stock at an exercise price of $13.00 per share, which expired
unexercised; and (y) 287,500 shares of Common Stock at an exercise price of
$11.70 per share, exercisable until June 23, 2002.
Each employment agreement also contains certain provisions in the event the
Executive is terminated due to a "change in control" of the Company (as such
term is defined in each employment agreement). The employment agreements with
Messrs. Jennings, Jacobs, A. Cozzi and F. Cozzi provide that such Executives
will be entitled to receive, in addition to other benefits, a cash payment equal
to: (i) any accrued but unpaid salary, pro-rated bonus, pro-rated vacation and
any other amounts accrued but unpaid at the time of termination, and (ii) a
lump-sum payment equal to the greater of: (A) the Executive's then-current
salary and annual cash bonus for the balance of the term of the employment
agreement, or (B) the product of 5.00 multiplied by the highest total annual
cash compensation earned in any one of the previous three calendar years. The
employment agreement with Mr. Isaac provides that he will be entitled to
receive, in addition to other benefits, a cash payment equal to the greater of:
(a) Mr. Isaac's then-current salary and annual cash bonus for the balance of the
term of the employment agreement; or (b) the product of 2.99 multiplied by the
highest total annual cash compensation earned in any one of the previous three
calendar years. However, in no event will the formula used to calculate this
cash payment to Mr. Isaac be less than that for any other member of the
Executive Committee.
The Company has also entered into an employment agreement with Robert C.
Larry. The employment agreement has a term of forty-eight (48) months, beginning
on August 26, 1996. The agreement provides for a minimum base salary of
$120,000, subject to adjustments, plus a cash bonus of up to 25% of his
then-current base salary. As additional compensation under the employment
agreement, the Company issued Mr. Larry incentive stock options under the
Company's 1995 Stock Option Plan to purchase 25,000 shares of Common Stock. The
employment agreement also contains certain provisions in the event Mr. Larry is
terminated following a "change in control" of the Company (as such term is
defined in his employment agreement). The
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employment agreement provides that Mr. Larry will be entitled to receive, in
addition to other benefits, a cash payment equal to twice his then-current base
salary and that all options and warrants to purchase Common Stock then held by
Mr. Larry will immediately and fully vest.
In addition to the employment agreements discussed above, the Company has
entered into numerous other employment agreements with certain key employees of
the companies it has acquired. The employment agreements have durations of one
to ten years and generally contain provisions concerning the employee's duties,
salary, bonus and benefits. Each employment agreement contains a confidentiality
provision and also restricts the employee's ability to compete with the Company
during the term of the agreement and for two to five years after employment is
terminated. Furthermore, each employment agreement allows the Company to
terminate the employee for "cause" (as such term is defined in each employment
agreement), and certain employment agreements allow the Company or the employee
to terminate the agreement without cause upon thirty to ninety days' prior
written notice to the other party.
DIRECTOR COMPENSATION
Directors are paid a fee of $1,000 for each board or committee meeting
attended in person (other than board and committee meetings held on the same
day) and are reimbursed for their reasonable expenses in attending such
meetings. Under the Company's 1996 Director Option Plan, each non-employee
director of the Company is automatically granted an option to purchase 10,000
shares of Common Stock on the date of his or her election or appointment to the
board plus an annual option, awarded on January 15 of each year, to purchase
2,500 shares of Common Stock. The Board of Directors is currently reviewing its
Director compensation policies.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Executive Compensation Committee is comprised of Messrs. Jennings,
Knowles and Dammeyer. Mr. Jennings currently serves as a Director, Chairman of
the Board and Chief Development Officer of the Company. Messrs. Knowles and
Dammeyer currently serve as Directors of the Company.
Messrs. Donald F. Moorehead, Kenneth Merlau and Harold Rubenstein also
served on the Executive Compensation Committee during the year ended March 31,
1998. Mr. Merlau is a former Director of the Company. Messrs. Moorehead and
Rubenstein currently serve as Directors of the Company. Mr. Moorehead resigned
from the Executive Compensation Committee effective June 19, 1998.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company, with the advice of the Executive Compensation Committee and
outside compensation consultants, is currently effecting an extensive review of
its compensation practices.
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STOCK PRICE PERFORMANCE GRAPH
The following graph compares total return of the Company's Common Stock
during the five year period beginning March 31, 1993, with the NASDAQ Composite
Index and the Russell 2000 Index. Each index assumes $100 invested at the close
of trading on March 31, 1993, and reinvestment of dividends.
Measurement Period
(Fiscal Year Covered) MTLM NASDAQ Russell 2000
1993 100 100 100
1994 95.30 107.73 109.53
1995 73.48 118.41 113.77
1996 206.51 159.98 144.31
1997 396.04 117.03 152.24
1998 650.63 265.99 209.71
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 31, 1998 by: (i) each person
who is known by the Company to own more than 5% of the Company's Common Stock;
(ii) the directors, the chief executive officer and each of the executive
officers of the Company named in the Summary Compensation Table; and (iii) all
current officers and directors as a group. Share amounts and percentages shown
for each person or entity are adjusted to give effect to shares of the Company's
Common Stock that are not outstanding but may be acquired by a person or entity
upon exercise of all options and warrants exercisable by such entity or person
within 60 days March 31, 1998. However, those shares of Common Stock are not
deemed to be outstanding for the purpose of computing the percentage of
outstanding shares beneficially owned by any other person.
NAME AND ADDRESS PERCENT OF
OF BENEFICIAL OWNER(1) NUMBER OF SHARES TOTAL SHARES
---------------------- ---------------- ------------
Albert A. Cozzi.......................................... 6,496,873(2) 19.2%
2232 South Blue Island Ave.
Chicago, IL 60608
Frank J. Cozzi........................................... 5,013,570(3) 14.9%
2232 South Blue Island Ave.
Chicago, IL 60608
Harold Rubenstein........................................ 2,677,083(4) 7.9%
2010 W. Lower Buckeye Dr.
Phoenix, AZ 85009
Samstock, L.L.C.......................................... 2,070,588(5) 6.2%
2 North Riverside Plaza, Suite 600
Chicago, IL 60606
Gerard M. Jacobs......................................... 1,688,051(6) 5.0%
500 North Dearborn, Suite 405
Chicago, IL 60610
T. Benjamin Jennings..................................... 1,687,849(7) 5.0%
500 North Dearborn, Suite 405
Chicago, IL 60610
Gregory P. Cozzi......................................... 1,394,307(8) 4.2%
2232 South Blue Island Ave.
Chicago, IL 60608
George A. Isaac III...................................... 1,296,856(9) 3.8%
1645 Indian Wood Circle
Maumee, OH 43537
William T. Proler........................................ 743,750 2.3%
90 Hirsh Road
Houston, TX 77020
Donald F. Moorehead...................................... 360,405(10) 1.1%
2141 Looscan Lane
Houston, TX 77019
Daniel B. Burgess........................................ 115,056(11) *
500 North Dearborn, Suite 405
Chicago, IL 60610
Robert C. Larry.......................................... 41,666(12) *
500 North Dearborn, Suite 405
Chicago, IL 60610
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NAME AND ADDRESS PERCENT OF
OF BENEFICIAL OWNER(1) NUMBER OF SHARES TOTAL SHARES
---------------------- ---------------- ------------
Christopher G. Knowles................................... 12,500(13) *
305 Ridge Road
Barrington Hills, IL 60010
Rod F. Dammeyer.......................................... 12,500(13) *
2 North Riverside Plaza, Suite 600
Chicago, IL 60606
All current officers and directors as a group (15
persons)............................................... 21,615,466 56.1%
- ---------------
* Less than 1%
(1) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable and the information
contained in the footnotes to this table.
(2) Consists of warrants to purchase 755,172 shares and 5,741,701 shares issued
to Mr. Cozzi in connection with the Company's acquisition of Cozzi Iron &
Metal.
(3) Consists of warrants to purchase 582,760 shares and 4,430,810 shares issued
to Mr. Cozzi in connection with the Company's acquisition of Cozzi Iron &
Metal.
(4) Consists of warrants to purchase 83,333 shares, 32,500 shares purchased by
Mr. Rubenstein, 70,000 shares issued to Mr. Rubenstein in a private
offering, warrants to purchase 562,900 shares issued to Empire, and
1,928,350 shares beneficially owned by Empire and a trust established by
Mr. Rubenstein.
(5) Consists of warrants to purchase 600,000 shares and 1,470,588 shares issued
to Samstock in a private offering.
(6) Consists of warrants to purchase 808,333 shares, 99,718 shares issued upon
conversion of Series A preferred stock, 510,000 shares purchased by Mr.
Jacobs, 70,000 shares issued to Mr. Jacobs in a private offering, and
options to purchase 200,000 shares.
(7) Consists of warrants to purchase 808,333 shares, 99,516 shares issued upon
conversion of Series A preferred stock, 510,000 shares purchased by Mr.
Jennings, 70,000 shares issued to Mr. Jennings in a private offering, and
options to purchase 200,000 shares.
(8) Consists of warrants to purchase 162,070 shares and 1,232,237 shares issued
to Mr. Cozzi in connection with the Company's acquisition of Cozzi Iron &
Metal.
(9) Consists of warrants to purchase 750,000 shares, 540,856 shares issued to
the George A. Isaac III Second Revocable Trust in connection with the
Company's acquisition of the Isaac Group and 6,000 shares purchased by Mr.
Isaac.
(10) Consists of warrants to purchase 251,913 shares, 43,492 shares issuable
upon conversion of Series A preferred stock, 50,000 shares purchased by Mr.
Moorehead and options to purchase 15,000 shares. Mr. Moorehead resigned
from the Board of Directors of the Company effective July 1, 1998.
(11) Consists of warrants to purchase 30,000 shares, 5,056 shares purchased by
Mr. Burgess and options to purchase 80,000 shares.
(12) Consists of options to purchase 41,666 shares.
(13) Consists of options to purchase 12,500 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
STOCKHOLDERS AGREEMENTS
The Cozzi Shareholders, the MTLM Shareholders and Samstock (collectively,
the "Shareholders") together own approximately 43% of the Company's issued and
outstanding Common Stock (without giving effect to the issuance of Common Stock
issuable upon exercise of warrants and options granted by the Company).
42
45
Under the Stockholders Agreement, the Shareholders have agreed that the
Cozzi Shareholders and the MTLM Shareholders will each have the right to
nominate: (i) at any time the total number of directors is an even number,
one-half of the total number of directors slated for election, or (ii) at any
time the total number of directors is an odd number, one-half of the next lowest
even number of directors slated for election, provided in any case that each
group must nominate one individual, independent and unaffiliated from the
Shareholders or the Company. The Stockholders Agreement also provides that, so
long as the Purchaser Condition is satisfied, Samstock has the right to
designate either Sam Zell or Rod F. Dammeyer as a nominee for director, and has
so nominated Rod F. Dammeyer. The Purchaser Condition is satisfied if both: (i)
the date is prior to December 19, 2000, and (ii) Samstock and its Permitted
Transferees (as such term is defined in the Stockholders Agreement) have not
sold or transferred more than one-third of their shares (including shares
issuable upon the exercise of warrants). The Stockholders Agreement further
requires each Shareholder to vote for the other parties' nominees for election
to the Board of Directors.
The parties to the Stockholders Agreement also have agreed to vote for
proposals, if and when presented by the Company, to amend the Company's
organizational documents to require the approval of at least two-thirds of the
Board of Directors to, among other things: (i) amend the Company's certificate
of incorporation or bylaws; (ii) liquidate or merge the Company; (iii) sell
substantially all of the Company's assets; (iv) elect or remove officers; (v)
adopt an annual budget; (vi) borrow funds, sell assets or make capital
expenditures exceeding $5 million; (vii) issue or register the Company's
securities; (viii) declare or pay any dividends or distributions; (ix) change
the compensation of or modify or terminate any written agreement with any of the
Cozzi Shareholders or the MTLM Shareholders; or (x) create or change any
committee of the Board of Directors.
Under the Stockholders Agreement, the Cozzi Shareholders and the MTLM
Shareholders are prohibited from transferring or disposing of their shares, or
any interest therein, for the term of the agreement except in accordance with
the terms of the Stockholders Agreement. Samstock is prohibited from
transferring or disposing of its shares, or any interest therein, for a period
of one year except in accordance with the terms of the Stockholders Agreement.
If any of the Cozzi Shareholders or the MTLM Shareholders desire to sell their
respective shares of Common Stock, the selling shareholder must generally offer
its shares to members of its own shareholder group, members of the other
shareholder group (excluding Samstock), and the Company, in that order, before
selling to a third party. Also, if either group receives an offer to buy its
shares from a third party, it generally must offer the other Shareholders
(including Samstock) the right to participate in the offer on the same terms and
conditions.
In connection with the Company's acquisition of Proler Southwest, the
former equity owners of Proler Southwest Inc. (the "Proler Shareholders") have
entered into a two-year stockholders agreement with T. Benjamin Jennings, dated
August 27, 1997, pursuant to which the parties agree to vote their shares of
Common Stock in favor of William T. Proler (or, if he is unable to serve,
another individual chosen by the Proler Shareholders) as a Director of the
Company.
RESIGNATION OF GEORGE O. MOOREHEAD
On December 1, 1997, the Company and George O. Moorehead, a former Director
and Executive Vice President of the Company, entered into two agreements, a
Separation Agreement and a Stock Warrant Settlement Agreement, resolving all
outstanding issues between the Company and Mr. Moorehead. Pursuant to the
Separation Agreement: (i) Mr. Moorehead resigned as an officer and employee of
the Company and EMCO Recycling, and as a director of EMCO Recycling, effective
December 1, 1997; (ii) Mr. Moorehead delivered to the Company a Non-Compete,
Non-Solicitation and Confidentiality Covenant and Agreement; and (iii) the
Company (a) paid Mr. Moorehead $250,000 on December 1, 1997, (b) agreed to
provide Mr. Moorehead certain insurance and other benefits for a period of five
years, (c) paid certain legal fees to Mr. Moorehead's counsel, and (d) agreed to
permit Mr. Moorehead to exercise certain warrants to acquire Common Stock
previously granted to him on a "net cashless" basis, subject to the Company's
right to refuse "net cashless" exercises under certain circumstances. Pursuant
to the Stock Warrant Settlement Agreement, the Company issued Mr. Moorehead
warrants to purchase 200,000 shares of Common Stock at an exercise
43
46
price of $12.00 per share, exercisable until December 1, 2002, and paid Mr.
Moorehead approximately $665,000.
ISAAC GROUP NOTES
In connections with the Company's acquisition of the Isaac Group on June
23, 1997, the Company incurred $45.0 million of indebtedness to former Isaac
Group shareholders, of which $21.6 million remains outstanding (the "Isaac
Notes"). The Isaac Notes bear interest at 8.5% per annum, payable quarterly, and
mature in two equal installments on February 15, 1999 and February 15, 2000. The
Isaac Notes are secured by a letter of credit that is provided under the Senior
Credit Facility and is applied against the Company's availability thereunder.
OTHER RELATED PARTY TRANSACTIONS
From August 1995 to November 1997, Xavier Hermosillo, an employee of the
Company, provided investor relations services for the Company through his firm,
Xavier Hermosillo & Associates. Under an agreement with Mr. Hermosillo's firm,
the Company paid up to $4,000 per month for these services. The Company paid
fees of $36,000 for the year ended March 31, 1998 for these services. On
December 1, 1997, Mr. Hermosillo became an employee of the Company. As a
finder's fee in connection with the Superior Forge acquisition, the Company
issued to Xavier Hermosillo warrants to purchase 20,000 shares of Common Stock
at an exercise price of $15.00 per share, exercisable for three years from the
date of issuance, and also made a cash payment to him of $25,000.
On April 11, 1996, the Company and Harold Rubenstein, a Director of the
Company and one of the Company's largest shareholders, entered into a five-year
consulting agreement. Under this Agreement, Mr. Rubenstein provides the Company
with consulting and management assistance with respect to operations, strategic
planning and other aspects of the Company's business. Fees paid for these
services amounted to $84,000 for each of the years ended March 31, 1997 and
1998.
The Company issued a promissory note, due April 11, 1999, bearing interest
at 9% per year and a balance outstanding as of March 31, 1998 of approximately
$547,000, to H&S Broadway, an entity principally owned by Harold Rubenstein. The
Company has also issued a promissory note, due April 11, 1999, bearing interest
at 9% per year, with a balance outstanding as of March 31, 1998 of approximately
$403,000, to Harold Rubenstein. During the year ended March 31, 1998, the
Company paid $85,501 of interest to H&S Broadway and Harold Rubenstein. On May
14, 1998, the Company repaid both obligations.
On March 13, 1998, the Company purchased certain of the assets of Ellis
Metals, which was principally owned by Harold Rubenstein. Prior to the
acquisition date, the Company had entered into various transactions with Ellis
Metals, including a five-year exclusive supply agreement, whereby Ellis Metals
sold all of its inventory to EMCO Recycling or to EMCO Recycling's customers
through a direct shipment arrangement. In the latter arrangement, EMCO Recycling
received a brokerage fee. In consideration for entering into the agreement,
Ellis Metals received a fee of $2,500 per month. The Company paid Ellis Metals
$30,000 and $27,500 under the terms of the agreement for the years ended March
31, 1997 and March 31, 1998, respectively. Inventory purchases from Ellis Metals
were $3.9 million for the year ended March 31, 1997 and $2.7 million for the
year ended March 31, 1998. The Company had sales to Ellis Metals of $0.3 million
for the year ended March 31, 1997. Sales to Ellis Metals were insignificant for
the year ended March 31, 1998. The Company also advanced $300,000 to Ellis
Metals under an unsecured promissory note, due April 12, 2001, bearing an
interest rate of 9% per year. This note was discharged in connection with the
Company's acquisition of the assets of Ellis Metals.
The Company has also entered into various transactions with Empire Scrap
Metals, Inc. ("Empire"), which is principally owned by Harold Rubenstein. The
Company purchases inventory from Empire, from time to time, at prices equivalent
to market value. Inventory purchases from Empire were insignificant for the year
ended March 31, 1998 and $0.3 million for the year ended March 31, 1997.
44
47
The Company also leased certain land to Ellis Metals. The Company received
$85,500 and $78,000 in rent payments from Ellis Metals for the years ended March
31, 1998 and March 31, 1997, respectively.
To facilitate a loan to the Company from a commercial bank, on January 7,
1997, Gerard M. Jacobs, T. Benjamin Jennings, Donald F. Moorehead, George O.
Moorehead, Harold Rubenstein and Raymond F. Zack, each of whom is or was a
Director at the time of the loan, provided personal guaranties to the bank. In
consideration of the guaranties, the Company issued warrants to these
individuals (the "Guaranty Warrants") to purchase an aggregate of 500,000 shares
of Common Stock at $4.00 per share (subject to certain restrictions). The
Guaranty Warrants expire on or about January 7, 2002. For a description of
certain other transactions with officers of the Company, see "Employment
Agreements" in Part III, Item 11 of this report.
The Isaac Group leases certain property from a company in which George A.
Isaac III, a Director and Executive Vice President of the Company, is a
shareholder. The property is subject to a lease which commenced with the
acquisition of the Isaac Group on June 23, 1997. The annual base rent for the
property is approximately $317,000.
HouTex leases a 45-acre processing facility located in Houston, Texas from
a limited partnership affiliated with Mike Melnik, a former Director of the
Company for an annual rent of $228,000.
45
48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
METAL MANAGEMENT, INC. AND SUBSIDIARIES
PAGE
----
Report of Independent Accountants........................... F-1
Consolidated Statements of Operations for the year ended
October 31, 1995, the five months ended March 31, 1996,
and the years ended March 31, 1997 and 1998............... F-2
Consolidated Balance Sheets at March 31, 1997 and 1998...... F-3
Consolidated Statements of Cash Flows for the year ended
October 31, 1995, the five months ended March 31, 1996,
and the years ended March 31, 1997 and 1998............... F-4
Consolidated Statements of Stockholders' Equity for the year
ended October 31, 1995, the five months ended March 31,
1996, and the years ended March 31, 1997 and 1998......... F-5
Notes to Consolidated Financial Statements.................. F-6
(a)(2) FINANCIAL STATEMENT SCHEDULES:
Schedule II -- Valuation and qualifying accounts -- for the
year ended October 31, 1995, the five months ended March
31, 1996, and the years ended March 31, 1997 and 1998..... F-27
Schedules not listed above have been omitted because they are not required
or they are inapplicable.
(a)(3) EXHIBITS:
A list of the exhibits included as part of this Form 10-K is set forth in
the Exhibit Index that immediately precedes such exhibits, which is incorporated
herein by reference.
(b) REPORTS ON FORM 8-K:
The following reports on Form 8-K were filed during the fourth quarter of
fiscal 1998:
(1) The Company filed a report on Form 8-K on January 2, 1998, dated
December 18, 1997, disclosing the Securities Purchase Agreement
between the Company and Samstock, L.L.C.
(2) The Company filed a report on Form 8-K on January 22, 1998, dated
January 8, 1998, disclosing the terms of the acquisition of
Houston Compressed Steel Corp.
(3) The Company filed a report on Form 8-K on February 4, 1998, dated
January 20, 1998, disclosing the terms of the acquisition of
Aerospace Metals, Inc., Aerospace Parts Security, Inc. and The
Suisman Titanium Corporation.
46
49
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, in Chicago, Illinois
on June 23, 1998.
METAL MANAGEMENT, INC.
By: /s/ GERARD M. JACOBS
-----------------------------------------
Gerard M. Jacobs
Director and Chief Executive Officer
By: /s/ T. BENJAMIN JENNINGS
-----------------------------------------
T. Benjamin Jennings
Director, Chairman of the Board and
Chief Development Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on June 23, 1998.
SIGNATURE TITLE
--------- -----
/s/ GERARD M. JACOBS Director and Chief Executive Officer
- ----------------------------------------------------- (Principal Executive Officer)
Gerard M. Jacobs
/s/ T. BENJAMIN JENNINGS Director, Chairman of the Board and Chief
- ----------------------------------------------------- Development Officer
T. Benjamin Jennings
/s/ ALBERT A. COZZI Director, President and Chief Operating
- ----------------------------------------------------- Officer
Albert A. Cozzi
/s/ GEORGE A. ISAAC III Director and Executive Vice President
- -----------------------------------------------------
George A. Isaac III
/s/ DONALD F. MOOREHEAD Director
- -----------------------------------------------------
Donald F. Moorehead
/s/ FRANK J. COZZI Director and Vice President
- -----------------------------------------------------
Frank J. Cozzi
/s/ GREGORY P. COZZI Director
- -----------------------------------------------------
Gregory P. Cozzi
/s/ WILLIAM T. PROLER Director
- -----------------------------------------------------
William T. Proler
/s/ HAROLD RUBENSTEIN Director
- -----------------------------------------------------
Harold Rubenstein
/s/ CHRISTOPHER G. KNOWLES Director
- -----------------------------------------------------
Christopher G. Knowles
/s/ ROD F. DAMMEYER Director
- -----------------------------------------------------
Rod F. Dammeyer
/s/ ROBERT C. LARRY Vice President, Finance, Treasurer and Chief
- ----------------------------------------------------- Financial Officer (Principal Financial and
Robert C. Larry Accounting Officer)
47
50
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Stockholders of Metal Management, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of stockholders' equity
present fairly, in all material respects, the financial position of Metal
Management, Inc. and its subsidiaries at March 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the two years in
the period ended March 31, 1998, the five months ended March 31, 1996 and for
the year ended October 31, 1995, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion of these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Chicago, Illinois
May 28, 1998
F-1
51
METAL MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
YEAR ENDED FIVE MONTHS ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, MARCH 31, MARCH 31, MARCH 31,
1995 1996 1997 1998
----------- ----------------- ---------- ----------
Net sales................................... $ 0 $ 0 $65,196 $479,707
Cost of sales............................... 0 0 58,324 431,947
------- ------- ------- --------
Gross profit................................ 0 0 6,872 47,760
Operating expenses:
General and administrative................ 0 210 6,174 24,396
Depreciation and amortization............. 0 0 2,282 10,019
Non-recurring expenses (Note 4)........... 0 0 0 33,710
------- ------- ------- --------
Total operating expenses.................... 0 210 8,456 68,125
------- ------- ------- --------
Operating loss from continuing operations... 0 (210) (1,584) (20,365)
Income from joint ventures.................. 0 0 0 135
Interest expense............................ 0 0 (1,449) (9,018)
Interest and other income, net.............. 312 142 181 228
------- ------- ------- --------
Income (loss) from continuing operations
before
income taxes and discontinued
operations................................ 312 (68) (2,852) (29,020)
Provision (benefit) for income taxes........ 51 (52) (842) (407)
------- ------- ------- --------
Income (loss) from continuing operations.... 261 (16) (2,010) (28,613)
Discontinued operations (Note 3):
Gain on sale of discontinued operations,
net of
income taxes........................... 0 0 502 200
Income (loss) from discontinued
operations, net of income taxes........ (2,698) 22 345 0
------- ------- ------- --------
Net income (loss)........................... (2,437) 6 (1,163) (28,413)
Accretion of preferred stock to redemption
value..................................... 0 0 0 (57)
Non-cash beneficial conversion feature of
convertible preferred stock............... 0 0 0 (5,592)
Preferred stock dividends................... 0 0 0 (1,451)
------- ------- ------- --------
Net income (loss) applicable to Common
Stock..................................... $(2,437) $ 6 $(1,163) $(35,513)
======= ======= ======= ========
Basic earnings (loss) per share:
Income (loss) from continuing
operations............................. $ 0.05 $ 0.00 $ (0.22) $ (1.81)
Gain on sale of discontinued operations... 0.00 0.00 0.05 0.01
Income (loss) from discontinued
operations............................. (0.53) 0.00 0.04 0.00
------- ------- ------- --------
Net income (loss) applicable to Common
Stock.................................. $ (0.48) $ 0.00 $ (0.13) $ (1.80)
======= ======= ======= ========
Weighted average shares outstanding....... 5,125 5,299 9,106 19,727
Diluted earnings (loss) per share:
Income (loss) from continuing
operations............................. $ 0.05 $ 0.00 $ (0.22) $ (1.81)
Gain on sale of discontinued operations... 0.00 0.00 0.05 0.01
Income (loss) from discontinued
operations............................. (0.53) 0.00 0.04 0.00
------- ------- ------- --------
Net income (loss)......................... $ (0.48) $ 0.00 $ (0.13) $ (1.80)
======= ======= ======= ========
Weighted average diluted shares
outstanding............................ 5,125 5,299 9,106 19,727
Dividends declared per share of Common
Stock..................................... $ .18 $ .00 $ .00 $ .00
See accompanying notes to Consolidated Financial Statements.
F-2
52
METAL MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
MARCH 31, MARCH 31,
1997 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,718 $ 4,443
Accounts receivable, net.................................. 9,560 107,805
Inventories............................................... 8,415 56,794
Prepaid expenses and other assets......................... 1,911 5,969
Deferred taxes............................................ 104 2,558
------- --------
Total current assets.............................. 25,708 177,569
Property and equipment, net................................. 20,208 109,086
Goodwill and other intangibles, net......................... 23,484 186,503
Investments in joint ventures............................... 0 6,639
Other assets................................................ 725 1,014
------- --------
Total assets...................................... $70,125 $480,811
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Operating lines of credit................................. $ 7,887 $ 0
Accounts payable.......................................... 5,246 60,187
Other accrued liabilities................................. 2,746 17,078
Current portion of notes payable to related parties....... 12,575 10,830
Current portion of long-term debt......................... 10,809 1,036
------- --------
Total current liabilities......................... 39,263 89,131
Long-term notes payable to related parties, less current
portion................................................... 1,430 31,572
Long-term debt, less current portion........................ 3,740 97,697
Deferred taxes.............................................. 1,411 11,997
Other liabilities........................................... 1,133 1,532
------- --------
Total liabilities................................. 46,977 231,929
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred Stock, $.01 par value -- 4,000,000 shares
authorized:
Convertible preferred stock -- Series A, $1,000 stated
value; 25,759 shares issued; 15,094 shares
outstanding............................................ 0 13,981
Convertible preferred stock -- Series B, $1,000 stated
value; 20,000 shares issued and outstanding............ 0 19,027
Common Stock, $.01 par value -- 80,000,000 shares
authorized; 10,154,740 and 33,046,004 issued and
outstanding at March 31, 1997 and 1998, respectively...... 102 330
Warrants, 2,015,038 and 8,224,540 exercisable into Common
Stock at March 31, 1997 and 1998, respectively............ 1,351 45,870
Additional paid-in-capital.................................. 16,628 200,120
Retained earnings (deficit)................................. 5,067 (30,446)
------- --------
Total stockholders' equity........................ 23,148 248,882
------- --------
Total liabilities and stockholders' equity............. $70,125 $480,811
======= ========
See accompanying notes to Consolidated Financial Statements.
F-3
53
METAL MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED FIVE MONTHS
OCTOBER 31, ENDED YEAR ENDED YEAR ENDED
1995 MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1998
----------- -------------- -------------- --------------
Cash flows from continuing operations:
Net income (loss) from continuing
operations................................ $ 261 $ (16) $(2,010) $(28,613)
Adjustments to reconcile net income (loss)
from continuing operations to cash flows
from continuing operations:
Depreciation and amortization........... 0 0 2,273 10,019
Non-cash, non-recurring expenses........ 0 0 0 32,055
Deferred income taxes................... 0 0 (733) (2,472)
Other................................... 0 0 254 567
Changes in assets and liabilities, net of
acquisitions:
Accounts and notes receivable........... 0 0 (1,413) (4,654)
Inventories............................. 0 0 42 17,382
Accounts payable........................ 0 0 (1,099) (20,304)
Other................................... 0 0 938 (3,348)
------ ------ ------- --------
Cash flows from continuing operations....... 261 (16) (1,748) 632
Cash flows provided (used) by investing
activities:
Marketable securities matured............. 1,524 637 2,794 10
Purchases of property and equipment,
net..................................... 0 0 (3,209) (7,573)
Acquisitions, net of cash acquired........ 0 0 (2,545) (43,905)
Other..................................... (33) 0 67 675
------ ------ ------- --------
Net cash provided (used) by investing
activities................................ 1,491 637 (2,893) (50,793)
Cash flows provided (used) by financing
activities:
Net borrowings (repayments) on
lines-of-credit......................... 0 0 (926) 15,323
Issuances of long-term debt............... 0 0 7,806 21,343
Repayments of long-term debt.............. 0 0 (2,699) (73,274)
Issuances of Common Stock, net............ 276 288 317 42,196
Issuances of convertible preferred stock,
net..................................... 0....... 0 0 42,846
Payment of cash dividends................. (920) 0 0 0
------ ------ ------- --------
Net cash provided (used) by financing
activities................................ (644) 288 4,498 48,434
------ ------ ------- --------
Cash flows from discontinued operations, net
of divestiture proceeds................... 1,285 (831) 2,751 452
Net increase (decrease) in cash and cash
equivalents............................... 2,393 78 2,608 (1,275)
Cash and cash equivalents at beginning of
period.................................... 639 3,032 3,110 5,718
------ ------ ------- --------
Cash and cash equivalents at end of
period.................................... $3,032 $3,110 $ 5,718 $ 4,443
====== ====== ======= ========
Supplemental Cash Flow Information:
Interest paid............................... $ 0 $ 0 $ 1,085 $ 8,655
Income taxes paid (refunded)................ $ (320) $ (256) $(1,184) $ 2,709
See accompanying notes to Consolidated Financial Statements.
F-4
54
METAL MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except shares)
PREFERRED STOCK COMMON STOCK
------------------- -------------------
NUMBER ADDITIONAL RETAINED
OF PAID-IN- EARNINGS
SERIES A SERIES B SHARES AMOUNT CAPITAL WARRANTS (DEFICIT) TOTAL
------- ------- ---------- ---- -------- ------- -------- --------
Balance at October 31,
1994...................... $ 0 $ 0 5,097,891 $ 51 $ 2,763 $ 0 $ 9,581 $ 12,395
Exercise of stock options... 0 0 92,000 1 244 0 0 245
Common Stock issued under
Employee Stock Purchase
Plan...................... 0 0 24,927 0 31 0 0 31
Payment of cash dividends... 0 0 0 0 0 0 (920) (920)
Net loss.................... 0 0 0 0 0 0 (2,437) (2,437)
------- ------- ---------- ---- -------- ------- -------- --------
Balance at October 31,
1995...................... 0 0 5,214,818 52 3,038 0 6,224 9,314
Exercise of stock options... 0 0 108,636 1 271 0 0 272
Common Stock issued under
Employee Stock Purchase
Plan...................... 0 0 11,199 0 16 0 0 16
Net income.................. 0 0 0 0 0 0 6 6
------- ------- ---------- ---- -------- ------- -------- --------
Balance at March 31, 1996... 0 0 5,334,653 53 3,325 0 6,230 9,608
Equity issued for
acquisitions.............. 0 0 4,700,000 47 12,759 1,049 0 13,855
Exercise of stock options... 0 0 103,850 2 281 0 0 283
Common Stock issued under
Employee Stock Purchase
Plan 0 0 16,237 0 34 0 0 34
Tax benefit on option
exercises................. 0 0 0 0 107 0 0 107
Other....................... 0 0 0 0 122 302 0 424
Net loss.................... 0 0 0 0 0 0 (1,163) (1,163)
------- ------- ---------- ---- -------- ------- -------- --------
Balance at March 31, 1997... 0 0 10,154,740 102 16,628 1,351 5,067 23,148
Issuance of preferred stock,
net....................... 23,819 19,027 0 0 0 0 0 42,846
Conversion of preferred
stock..................... (10,211) 0 1,032,874 10 10,971 0 0 770
Issuance of Common Stock and
warrants in private
offerings, net............ 0 0 3,495,588 35 34,940 4,450 0 39,425
Equity issued for
acquisitions.............. 0 0 16,980,579 170 121,252 22,496 0 143,918
Common Stock issued upon
conversion of debt........ 0 0 524,569 5 3,634 0 0 3,639
Exercise of stock options
and warrants.............. 0 0 857,654 8 6,590 (3,177) 0 3,421
Preferred stock dividends... 316 0 0 0 0 0 (1,451) (1,135)
Non-cash dividend on
beneficial conversion
feature of preferred
stock..................... 0 0 0 0 5,592 0 (5,592) 0
Warrants issued to employees
and consultants........... 0 0 0 0 0 20,750 0 20,750
Other....................... 57 0 0 0 513 0 (57) 513
Net loss.................... 0 0 0 0 0 0 (28,413) (28,413)
------- ------- ---------- ---- -------- ------- -------- --------
Balance at March 31, 1998... $13,981 $19,027 33,046,004 $330 $200,120 $45,870 $(30,446) $248,882
======= ======= ========== ==== ======== ======= ======== ========
See accompanying notes to Consolidated Financial Statements.
F-5
55
METAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ACCOUNTING POLICIES
Description of business
Metal Management, Inc., (herein referred to as "Company" or "MTLM"),
formerly General Parametrics Corporation ("GPAR"), a Delaware corporation, and
its wholly-owned subsidiaries are principally engaged in the business of
collection and processing of ferrous and non-ferrous metals for resale to metals
brokers, steel producers, and producers and processors of other metals. The
Company collects industrial scrap and obsolete scrap, processes it into reusable
forms, and supplies the recycled metals to its customers, including mini-mills,
integrated steel mills, foundries and metals brokers. These services are
provided through the Company's 54 recycling facilities located in 12 states. The
Company's ferrous products primarily include shredded, sheared, hot briquetted,
cold briquetted, bundled scrap and broken furnace iron. The Company also
processes non-ferrous metals, including aluminum, stainless steel, copper,
brass, titanium and high-temperature alloys, using similar techniques and
through application of certain of the Company's proprietary technologies. Prior
to April 1996, the Company was engaged in the business of designing,
manufacturing and marketing color printers and related color printer consumable
products (see Note 3 -- Discontinued Operations).
Change of company name and fiscal year
On April 9, 1996, the Company changed its name from General Parametrics
Corporation to Metal Management, Inc. Effective April 15, 1996, the Company
formally changed its Nasdaq stock symbol to "MTLM".
On April 25, 1996, the Board of Directors of the Company approved a change
in the Company's fiscal year end from October 31 to March 31, effective April 1,
1996.
Basis of presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts,
transactions and profits have been eliminated in consolidation. Investments in
two joint ventures engaged in ferrous and non-ferrous scrap metals recycling, in
which the Company through its subsidiaries own a 50% interest, are accounted for
using the equity method.
Reclassifications
In order to maintain consistency and comparability between periods, certain
prior year financial information has been reclassified to conform to the current
year presentation. Such reclassifications had no material effect on the
previously reported consolidated balance sheet, results of operations or cash
flows of the Company.
Uses of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from these
estimates.
Revenue recognition
The Company recognizes revenue from processed product sales at the time of
shipment. Revenue relating to brokered sales are generally recognized upon
receipt of the materials by the customer.
F-6
56
Income taxes
The Company utilizes the liability method of accounting for income taxes,
as set forth in Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." Under this method, deferred income taxes are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse. Income tax benefits related to
non-qualified stock option exercises are credited to additional paid-in-capital
when realized.
Earnings (loss) per common share
During fiscal 1998, the Company adopted SFAS No. 128, "Earnings Per Share."
SFAS No. 128 established requirements for the computation of basic earnings per
share and diluted earnings per share. Earnings per share amounts for prior
periods have been restated to conform with SFAS No. 128.
Cash and cash equivalents
Highly liquid investments with original maturities of three months or less
are classified as cash equivalents.
Accounts receivable
Accounts receivable represents amounts due from customers on product sales.
Reserves for uncollectible accounts and for tonnage variances were approximately
$0.1 million and $1.6 million at March 31, 1997 and 1998, respectively.
Property and equipment
Property and equipment are recorded at cost less accumulated depreciation.
Major renewals and improvements are capitalized while repairs and maintenance
are expensed as incurred. Property and equipment acquired in purchase
transactions are recorded at its estimated fair value at the time of the
acquisition. Depreciation is determined for financial reporting purposes using
the straight-line method over the following estimated useful lives: 10 to 40
years for buildings and improvements, 3 to 15 years for operating machinery and
equipment, 2 to 10 years for furniture and fixtures and 3 to 15 years for
automobiles and trucks. When assets are sold or otherwise disposed of, the cost
and related accumulated depreciation are removed from the accounts and any gain
or loss is included in results of operations.
Goodwill and other intangible assets
Goodwill represents the excess of purchase consideration paid over the fair
value of net assets acquired. Goodwill is amortized on a straight-line basis
over a period of 40 years. Non-compete agreements are amortized on a
straight-line basis over the period of the non-compete agreements, generally 8
to 10 years. Other intangible assets are amortized on a straight-line basis over
the lesser of their legal or estimated useful lives. The following items
comprised the balance at March 31 (in thousands):
1997 1998
-------- ---------
Goodwill................................................ $ 21,653 $ 184,167
Non-compete agreements.................................. 1,403 3,236
Deferred financing costs................................ 0 890
Other intangibles....................................... 979 1,778
-------- ---------
24,035 190,071
Less -- accumulated amortization........................ (551) (3,568)
-------- ---------
$ 23,484 $ 186,503
======== =========
F-7
57
Amortization expense for the year ended March 31, 1997 and 1998 was $0.5
million and $3.5 million, respectively. The Company assesses the recoverability
of its goodwill and intangible assets on an annual basis or whenever adverse
events or changes in circumstances or business climate indicate that expected
undiscounted future cash flows may not be sufficient to recover the recorded
goodwill and intangible assets. During fiscal 1998, the Company recognized a
charge of approximately $9.3 million relating to unamortized goodwill resulting
from the Company's acquisition of its EMCO subsidiary.
Impairment of long-lived assets
During fiscal 1997, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of."
SFAS No. 121 requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 is applicable for most long-lived assets,
identifiable intangibles and goodwill related to those assets.
Financial instruments
The carrying values of financial instruments including cash and cash
equivalents, accounts receivable and accounts payable approximate the related
fair values because of the relatively short maturity of these instruments. The
carrying values of line of credit borrowings, notes payable to related parties
and long-term debt, including the current portion, approximate the related fair
values as the stated interest rates approximate market rates.
Concentration of credit risk
Financial instruments that potentially subject the Company to significant
concentration of credit risk are primarily trade accounts receivable. The
Company sells its products primarily to scrap metal brokers and mills located in
the United States. Generally, the Company does not require collateral or other
security to support customer receivables. Historically, the Company's
wholly-owned subsidiaries have not experienced material losses from the
noncollection of accounts receivables.
For the year ended March 31, 1998, the Company's 10 largest customers
represented approximately 40.6% of consolidated net sales. These customers
comprised approximately 36.1% of accounts receivable at March 31, 1998. No
single customer accounted for more than 10% of consolidated net sales.
Recent Accounting Standards
SFAS No. 130, "Reporting Comprehensive Income," was issued by the Financial
Accounting Standards Board ("FASB") in June 1997. This Statement requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The Company
will adopt SFAS No. 130 in fiscal 1999 and does not expect the impact to be
material to the Company.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued by the FASB in June 1997. This Statement establishes
standards for reporting of selected information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company is currently evaluating the
impact of SFAS No. 131.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," was issued by the FASB in February 1998. This
Statement revises employers' disclosures about pension and other postretirement
benefit plans. The Company will adopt SFAS No. 132 in fiscal 1999 and does not
expect the impact to be material to the Company.
F-8
58
NOTE 2 -- ACQUISITIONS
Acquisitions completed during fiscal 1997
- In April 1996, the Company merged with EMCO Recycling Corp. ("EMCO"),
headquartered in Phoenix, Arizona.
- In January 1997, the Company acquired five companies comprising the
MacLeod Group ("MacLeod"), headquartered in SouthGate, California. The
MacLeod Group is comprised of MacLeod Metals Co., California Metals
Recyling, Inc., Trojan Trading Co., Firma, Inc. and Firma Plastics Co.,
Inc.
- In January 1997, the Company acquired HouTex Metals Company, Inc.
("HouTex"), headquartered in Houston, Texas.
The purchase consideration for the acquisitions completed during fiscal
1997 was as follows (in thousands):
EMCO MACLEOD HOUTEX TOTAL
---- ------- ------ -----
Shares of restricted Common Stock issued.............. 3,500 725 475 4,700
Warrants issued to purchase Common Stock.............. 1,000 175 310 1,485
Cash paid, including transaction costs................ $2,219 $1,119 $1,121 $4,459
Value of Common Stock issued.......................... 8,807 2,330 1,669 12,806
Value of warrants issued.............................. 316 137 596 1,049
Promissory notes issued............................... 0 6,600 6,655 13,255
Other liabilities incurred............................ 1,403 0 0 1,403
------- ------- ------- -------
Total purchase consideration................ $12,745 $10,186 $10,041 $32,972
======= ======= ======= =======
Acquisitions completed during fiscal 1998
- In May 1997, the Company acquired Reserve Iron & Metal L.P. ("Reserve").
Reserve operates two processing facilities in Cleveland, Ohio and Chicago,
Illinois and has a 50% interest in a joint venture which operates in
Atalla, Alabama.
- In June 1997, the Company acquired four companies under common ownership
comprising The Isaac Group ("Isaac"), headquartered in Maumee, Ohio. The
Isaac Group is comprised of Ferrex Trading Corporation, the Isaac
Corporation, Paulding Recycling, Inc. and Briquetting Corporation of
America.
- In August 1997, the Company acquired Proler Southwest, Inc. and Proler
Steelworks, L.L.C. (collectively "Proler"). Proler operates a facility in
Houston, Texas and Jackson, Mississippi.
- In December 1997, the Company acquired Cozzi Iron & Metal, Inc. ("Cozzi")
headquartered in Chicago, Illinois. Cozzi also operates facilities in East
Chicago, Indiana and Pittsburgh, Pennsylvania and has a 50% interest in a
joint venture which operates in Memphis, Tennessee. In December 1997, the
Company, through its Cozzi subsidiary, acquired Kankakee Scrap
Corporation, located in Kankakee, Illinois.
- In January 1998, the Company acquired Houston Compressed Steel Corp.,
headquartered in Houston, Texas.
- In January 1998, the Company, through its Cozzi subsidiary, purchased
Newell Phoenix, L.L.C.'s 50% membership interest in Salt River Recycling,
L.L.C. ("Salt River"). At the time of the acquisition, Cozzi owned a 50%
membership interest in Salt River.
- In January 1998, the Company purchased substantially all of the assets of
Aerospace Metals, Inc. ("Aerospace"), and certain of its affiliates
headquartered in Hartford, Connecticut.
- In February 1998, the Company, through its Cozzi subsidiary, acquired
substantially all of the assets of Accurate Iron and Metal, located in
Chicago, Illinois.
F-9
59
- In March 1998, the Company, through its Metal Management Arizona
subsidiary, acquired certain assets of Ellis Metals, Inc., ("Ellis
Metals") headquartered in Tucson, Arizona.
- In March 1998, the Company acquired Superior Forge, Inc., headquartered
in Huntington Beach, California.
The purchase consideration for the acquisitions completed during fiscal
1998 was as follows (in thousands):
RESERVE ISAAC PROLER COZZI AEROSPACE OTHER TOTAL
------- ----- ------ ----- --------- ----- -----
Shares of restricted Common
Stock issued.............. 0 1,943 1,750 11,500 403 1,385 16,981
Warrants issued to purchase
Common Stock.............. 1,400 462 375 1,500 0 120 3,857
Cash paid, including
transaction costs......... $ 6,589 $ 536 $ 7,760 $ 7,807 $14,802 $ 7,866 $ 45,360
Value of Common Stock
issued.................... 0 21,049 11,130 65,864 5,318 18,060 121,421
Value of warrants issued.... 8,118 4,862 1,574 7,505 0 368 22,427
Promissory notes issued..... 1,542 36,547 10,500 0 0 1,991 50,580
------- ------- ------- ------- ------- ------- --------
Total purchase
consideration... $16,249 $62,994 $30,964 $81,176 $20,120 $28,285 $239,788
======= ======= ======= ======= ======= ======= ========
The purchase consideration was allocated as follows at March 31 (in
thousands):
1997 1998
-------- ---------
Fair value of tangible assets acquired.................. $ 35,399 $ 262,426
Goodwill................................................ 21,653 170,422
Identifiable intangibles................................ 1,403 1,834
Liabilities assumed..................................... (25,483) (195,569)
Stock and warrants issued............................... (13,855) (143,848)
Promissory notes and other consideration issued......... (14,658) (50,580)
-------- ---------
Cash paid............................................... 4,459 44,685
Less: cash acquired................................... (1,914) (780)
-------- ---------
Net cash paid for acquisitions.......................... $ 2,545 $ 43,905
======== =========
The above transactions have been accounted for by the purchase method of
accounting and are included in the Company's results of operations from the
effective date of each respective acquisition. The purchase price was allocated
based on estimates of the fair value of assets acquired and liabilities assumed.
These estimates may be revised as necessary when information becomes available
to finalize amounts allocated to assets acquired and liabilities assumed. The
allocation period varies by acquisition but does not usually exceed one year. It
is not expected that the finalization of purchase accounting will have any
significant effect on the financial position or results of operations of the
Company.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company, MacLeod, HouTex, Reserve,
Isaac, Proler, Cozzi, and Aerospace as if these acquisitions had occurred on
April 1, 1996. The unaudited pro forma results have been prepared for
comparative purposes only and include certain adjustments, such as additional
depreciation expense as a result of a step-up in basis of the fixed assets and
additional amortization expense as a result of goodwill. The pro forma results
do not purport to be indicative of the results of operations which actually
would have resulted had the acquisitions been in effect on April 1, 1996 (in
thousands, except per share data).
F-10
60
UNAUDITED UNAUDITED
TWELVE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1998
------------------- -------------------
Net sales................................... $697,037 $766,724
Net income (loss) from continuing operations
applicable to Common Stock................ $ 723 $(37,897)
Basic and diluted net income (loss) from
continuing operations applicable to Common
Stock..................................... $ 0.02 $ (1.15)
In addition to the completed acquisitions, the Company is in various stages
of negotiation to acquire a number of additional scrap metals recycling and
related operations.
See Note 15 -- Subsequent Events.
NOTE 3 -- DISCONTINUED OPERATIONS
During the second and third quarter of fiscal 1997, the Company sold its
computer printer and related products business for approximately $1.3 million in
cash and other contingent consideration in the form of royalties on future
product sales. Accordingly, the operating results and gain on sale have been
classified as discontinued operations for all periods presented in the financial
statements.
Net revenues recognized for the discontinued operations were $9.5 million,
$3.1 million and $2.3 million for the year ended October 31, 1995, the five
months ended March 31, 1996 and the year ended March 31, 1997, respectively.
Additional consideration from royalty income is being recognized as earned and
is reported as an additional gain on sale of discontinued operations.
Income tax provision (benefit) for the discontinued operations were
approximately ($551,000), $52,000, and ($307,000) for the year ended October 31,
1995, the five months ended March 31, 1996 and the year ended March 31, 1997,
respectively. Income tax provision (benefit) for the gain on sale of assets of
discontinued operations was ($15,000) and $133,000 for the years ended March 31,
1997 and 1998, respectively.
NOTE 4 -- NON-RECURRING EXPENSES
During fiscal 1998, the Company recorded the following non-recurring
pre-tax charges (in thousands):
Non-cash warrant compensation expense....................... $19,050
Severance and other termination benefits.................... 2,814
EMCO shutdown............................................... 11,846
-------
$33,710
=======
On December 1, 1997, the Company issued warrants to purchase 1,655,000
shares of Common Stock at exercise prices ranging from $4.00 per share to $12.00
per share. These warrants were issued to certain officers, employees and an
outside director. The warrants, for accounting purposes, were valued using the
"intrinsic value method" as prescribed under Accounting Practice Board (APB) No.
25 "Accounting for Stock Based Compensation".
On December 1, 1997, the Company entered into a Separation Agreement and a
Stock Warrant Settlement Agreement with a former officer resulting in a
non-recurring charge totaling $2.8 million comprised of (a) $0.9 million of cash
payments, (b) an accrual of $0.2 million for other benefits under the Separation
Agreement, and (c) $1.7 million representing the value (calculated in accordance
with APB No. 25) of warrants issued to purchase 200,000 shares of Common Stock.
Upon completion of the Cozzi acquisition in December 1997, the Company
adopted a formal plan to shut down its EMCO operations and to transfer certain
of EMCO's assets to Salt River Recycling, which the Company will operate under
the name of Metal Management Arizona. In connection with the plan to shut
F-11
61
down EMCO, the Company recorded a pre-tax charge of approximately $11.8 million,
comprised of $9.3 million for the impairment of EMCO goodwill, $2.0 million for
the write-down to fair value (less selling costs) of the EMCO fixed assets to be
sold or otherwise abandoned, and $0.5 million for other exit-related costs. The
costs of transferring EMCO's remaining assets to Metal Management Arizona will
be expensed as incurred. The exit plan is expected to be completed by December
31, 1998.
NOTE 5 -- INVENTORIES
Inventories for all periods presented are stated at the lower of cost or
market. Cost is determined principally on the average cost method. Inventories
consisted of the following categories and amounts at March 31 (in thousands):
1997 1998
------ -------
Ferrous metals.............................................. $2,707 $35,933
Non-ferrous metals.......................................... 4,754 20,075
Other....................................................... 954 786
------ -------
$8,415 $56,794
====== =======
NOTE 6 -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following categories and amounts at
March 31 (in thousands):
1997 1998
-------- ---------
Land and improvements................................... $ 5,759 $ 18,883
Buildings and improvements.............................. 1,577 13,974
Operating machinery and equipment....................... 11,149 70,518
Automobiles and trucks.................................. 2,550 10,057
Furniture and fixtures.................................. 871 1,934
Construction in progress................................ 0 1,749
-------- ---------
21,906 117,115
Less -- accumulated depreciation........................ (1,698) (8,029)
-------- ---------
$ 20,208 $ 109,086
======== =========
Depreciation expense for property and equipment was $1.7 million and $7.1
million for the years ended March 31, 1997 and 1998, respectively. During the
current fiscal year, the Company wrote off approximately $2.0 million of net
fixed assets at its EMCO subsidiary. See Note 4 -- Non-recurring expenses.
NOTE 7 -- DEBT
Lines-of-credit
At March 31, 1997 and 1998, the Company and its wholly-owned subsidiaries
had various revolving lines of credit with commercial lenders which provided for
revolving credit at interest rates that ranged from 8.5% to 16.5%. The weighted
average interest rate on the borrowings outstanding at March 31, 1997 and 1998
was 9.6%. The lines were secured by substantially all of the assets and stock of
the Company's subsidiaries. Availability under the lines of credit is determined
primarily based on levels of inventory and accounts receivable. Average
borrowings under the various lines of credit during fiscal 1997 and 1998 were
approximately $4.7 million and $17.1 million, respectively. Amounts outstanding
under the various lines of credit ranged from $2.5 million to $7.9 million
during fiscal 1997 and $7.3 million to $48.6 million during fiscal 1998. At
March 31, 1998, the Company was in compliance with all covenants under its
various lines of credit. These lines were repaid with proceeds from a new
long-term credit facility and were terminated subsequent to March 31, 1998, or
were consolidated with the new facility. As a result, outstanding balances are
classified within long-term debt at March 31, 1998. See subsequent debt
transactions below.
F-12
62
Notes payable to related parties
Notes payable to related parties were issued by the Company for
acquisitions or for the purchase of real estate. The Company also assumed notes
payable to related parties in connection with certain acquisitions. At March 31,
notes payable to related parties were issued to the following (in thousands):
1997 1998
-------- --------
Notes issued for acquisitions:
Former shareholder of MacLeod (interest rate of 8.0% in
1997 and 8.5% in 1998)................................. $ 6,400 $ 2,981
Former shareholders of HouTex (interest rate of 6.0% in
1997), secured by a stock pledge agreement............. 6,655 0
Former shareholder of Ellis Metals (interest rate of
9.0%).................................................. 0 1,691
Former shareholders of Isaac, due 2/15/00, (interest rate
of
8.5% in 1998), secured by a letter of credit........... 0 15,965
Former shareholders of Proler (interest rate of 7.0% in
1998).................................................. 0 2,400
Notes assumed in connection with acquisitions:
Former shareholders of Isaac, due 2/15/00, (interest rate
of
8.5% in 1998), secured by a letter of credit........... 0 5,696
Former shareholder of Cozzi, (interest rate of 6.4% in
1998).................................................. 0 12,719
Notes issued for real estate purchases:
Former shareholder of Ellis Metals (interest rate of 9.0%
in 1997
and 1998), secured by real property.................... 950 950
-------- --------
14,005 42,402
Less: current portion.................................... (12,575) (10,830)
-------- --------
Long-term notes payable to related parties............... $ 1,430 $ 31,572
======== ========
See subsequent debt transactions below.
During fiscal 1998, certain selling shareholders converted an aggregate
$3.6 million of notes payable into 524,569 shares of Common Stock of the
Company.
Scheduled maturities of notes payable to related parties are as follows (in
thousands):
FISCAL YEAR ENDING, MARCH 31
----------------------------
1999........................................................ $10,830
2000........................................................ 10,831
2001........................................................ 0
2002........................................................ 0
2003 and thereafter......................................... 20,741
-------
$42,402
=======
Long-term debt
At March 31, long-term debt consisted of the following (in thousands):
1997 1998
-------- --------
Term loans, due 1998 to 2001, average interest rate of
8.45%,
secured by equipment or personal guarantees............ $ 7,405 $ 40,221
Operating lines of credit, average interest rate of 9.6%,
reclassed to
long-term debt......................................... 0 48,597
Mortgage loans, due 1998 to 1999, average interest rate
of 8.20%,
secured by real property............................... 4,374 2,019
Other debt, due 1998 to 2006, average interest rate of
7.87%,
generally secured by equipment......................... 2,770 7,896
-------- --------
14,549 98,733
Less current portion..................................... (10,809) (1,036)
-------- --------
Long-term debt........................................... $ 3,740 $ 97,697
======== ========
F-13
63
See subsequent debt transactions below. Scheduled maturities of long-term
debt are as follows (in thousands):
FISCAL YEAR ENDING, MARCH 31
----------------------------
1999........................................................ $ 1,036
2000........................................................ 1,485
2001........................................................ 757
2002........................................................ 219
2003 and thereafter......................................... 95,236
-------
$98,733
=======
Subsequent debt transactions
On March 31, 1998, the Company and its subsidiaries entered into a three
year Senior Credit Facility. The Senior Credit Facility provides for a revolving
credit and letter of credit facility of $200.0 million, subject to borrowing
base limitations. The Senior Credit Facility bears interest at a floating rate
per annum equal to (at the Company's option): (i) 1.75% over LIBOR or (ii) 0.5%
over the agent lender's prime rate. The Company pays a unused line fee of .375%
and is subject to debt covenants including an interest coverage ratio and
limitations with respect to capital expenditures. The Senior Credit Facility is
available for working capital and general corporate purposes, including
acquisitions. The obligations of the Company and its subsidiaries under the
Senior Credit Facility are secured by a security interest in substantially all
of the assets and properties of the Company and its subsidiaries including
pledges of stock of subsidiaries. Availability of loans and letters of credit
under the Senior Credit Facility is generally limited to a borrowing base of 85%
of eligible accounts receivable, 70% of eligible inventory and a $40 million
fixed asset sublimit that amortizes on a quarterly basis.
On April 1, 1998, the Company borrowed $106.8 million under the Senior
Credit Facility to: (i) repay outstanding secured debt of approximately of $96.5
million; (ii) buyout operating leases of approximately $9.3 million; and (iii)
pay prepayment penalties of approximately $1.0 million. The prepayment penalties
will be reflected as an extraordinary charge in the first quarter of fiscal
1999. Borrowings outstanding under the Senior Credit Facility bore interest at
9.0% as of April 1, 1998.
On May 13, 1998, the Company issued $180.0 million, 10.0% Senior
Subordinated Notes due on May 15, 2008 (the "Notes") in a private placement (the
"Subordinated Debt Placement"). Interest on the Notes will be payable
semi-annually. The Company received net proceeds of $174.6 million in the
Subordinated Debt Placement. The Notes are general unsecured obligations of the
Company and are subordinated in right to payment to all senior debt of the
Company, including the indebtedness of the Company under the Senior Credit
Facility. The Company's payment obligations are jointly and severally guaranteed
by the Company's current and certain future subsidiaries. The proceeds of the
Notes were used to repay approximately $119.0 million outstanding under the
Company's Senior Credit Facility and approximately $19.1 million of notes
payable to related parties. The balance of the proceeds were invested in
marketable securities held for working capital and general corporate purposes,
including acquisitions.
Except as described below, the Notes are not redeemable at the Company's
option prior to May 15, 2003. After May 15, 2003, the Notes are redeemable by
the Company at the redemption prices (expressed as a percentage of the principal
amount) plus accrued and unpaid interest, if redeemed during the twelve month
period beginning on May 15 of each of the years indicated below:
YEAR PERCENTAGE
---- ----------
2003........................ 105%
2004........................ 103%
2005........................ 102%
2006 and thereafter......... 100%
F-14
64
Also, prior to March 15, 2001, the Company may redeem up to 35% of the
aggregate principal amount of the Notes at a redemption price of 110% of the
principal amount of the Notes, plus accrued and unpaid interest from the
proceeds of one or more sales of Common Stock. The Notes are also redeemable at
the option of the holder thereof at a repurchase price of 101% of the principal
amount thereof, plus accrued and unpaid interest in the event of certain change
of control events with respect to the Company.
The Indenture governing the Notes (the "Indenture") contains certain
covenants that limit, among other things, the ability of the Company and its
subsidiaries to (i) incur additional indebtedness (including by way of
guarantee), subject to certain exceptions, unless the Company meets a fixed
charge ratio of 2 to 1 or certain other conditions apply; (ii) issue certain
types of securities containing mandatory redemption rights or which otherwise
are redeemable at the option of the holder thereof prior to the maturity of the
Notes; (iii) pay dividends or distributions, or make certain types of
investments or other payments, unless the Company meets a fixed charge coverage
ratio of 2 to 1 and the amount of the dividend or distribution, investment or
other payment (together with all such other dividend, distributions, investments
or other payments made through the date thereof) is less than 50% of the
consolidated net income of the Company from the beginning of the fiscal quarter
immediately following the date of the Indenture through the most recently ended
fiscal quarter plus the aggregate amount of net equity proceeds received by the
Company in such period; (iv) enter into certain transactions with affiliates;
(v) dispose of certain assets, (vi) incur liens securing pari passu or
subordinated indebtedness of the Company or (vii) engage in certain mergers and
consolidations.
NOTE 8 -- INCOME TAXES
The provision (benefit) for federal and state income taxes from continuing
operations is as follows (in thousands):
OCTOBER 31, MARCH 31, MARCH 31, MARCH 31,
1995 1996 1997 1998
----------- --------- --------- ---------
Federal:
Current............................... $40 $(41) $(170) $ 1,162
Deferred.............................. 0 0 (649) (1,740)
--- ---- ----- -------
40 (41) (819) (578)
--- ---- ----- -------
State:
Current............................... 11 (11) 61 903
Deferred.............................. 0 0 (84) (732)
--- ---- ----- -------
11 (11) (23) 171
--- ---- ----- -------
Total tax provision (benefit)........... $51 $(52) $(842) $ (407)
=== ==== ===== =======
F-15
65
The deferred tax liabilities, net of deferred tax assets, are comprised of
the following at March 31 (in thousands):
1997 1998
------- --------
Cash to accrual adjustment.............................. $ 255 $ 389
Non-compete agreements.................................. 0 795
Depreciation............................................ 2,329 15,281
Other................................................... 0 75
------- --------
Gross deferred income tax liabilities..................... 2,584 16,540
------- --------
Accounts receivable reserves............................ 0 (315)
Inventory............................................... (221) (97)
Deferred compensation................................... 0 (759)
Employee benefit accruals............................... (65) (403)
Workers compensation.................................... 0 (793)
NOL carryforward........................................ (792) 0
Stock based compensation................................ 0 (4,389)
Other................................................... (199) (345)
------- --------
Gross deferred income tax assets.......................... (1,277) (7,101)
------- --------
Deferred tax asset valuation allowance.................... 0 0
------- --------
$ 1,307 $ 9,439
======= ========
Realization of deferred tax assets is dependent upon generating sufficient
future taxable income in the periods in which the assets reverse or the benefits
expire. Although realization is not assured, management believes it is more
likely than not that the Company's deferred tax assets will be realized through
future taxable earnings. The fiscal 1997 U.S. federal net operating loss
carryforward was utilized in fiscal 1998.
The reconciliation of income tax from continuing operations computed at the
U.S. federal statutory tax rate to the Company's effective rate is as follows ($
in thousands):
5 MONTHS
YEAR ENDED ENDED
OCTOBER 31, MARCH 31,
1995 % 1996 %
----------- ----- -------------- -----
Normal statutory rate................................. $106 34.0 $(23) (34.0)
State income taxes, net of federal benefit............ 11 3.5 (11) (16.1)
Tax exempt interest................................... (66) (21.2) (18) (26.4)
---- ----- ---- -----
Provision (benefit) for income taxes.................. $ 51 16.3 $(52) (76.5)
==== ===== ==== =====
YEAR ENDED YEAR ENDED
MARCH 31, 1997 % MARCH 31, 1998 %
--------------- ------ -------------- ------
Normal statutory rate............................ $(998) (35.0) $(10,157) (35.0)
State income taxes, net of federal benefit....... (105) (3.7) 278 1.0
Non-deductible goodwill.......................... 145 5.1 887 3.1
Non-deductible goodwill write-off................ 0 0.0 3,259 11.2
Non-deductible stock based compensation.......... 0 0.0 4,968 17.1
Other............................................ 116 4.1 358 1.2
----- ------ -------- ------
Provision (benefit) for income taxes............. $(842) (29.5) $ (407) (1.4)
===== ====== ======== ======
F-16
66
NOTE 9 -- STOCKHOLDERS' EQUITY
Common Stock
On November 29, 1997, the Company's stockholders approved an amendment to
the Company's Certificate of Incorporation to increase the number of authorized
shares of the Company's Common Stock from 40,000,000 to 80,000,000.
During April and May 1997, the Company completed a private sale of
2,025,000 shares of the Company's Common Stock, par value $.01 per share, at
$7.25 per share (the "Private Placement"), including the sale of 260,000 shares
to certain officers and directors of the Company. The Company received net
proceeds of approximately $14.7 million in the Private Placement.
On December 19, 1997, the Company issued to Samstock, L.L.C., a Delaware
limited liability corporation ("Samstock") 1,470,588 shares of the Company's
Common Stock, (the "Samstock Shares"), pursuant to a Securities Purchase
Agreement (the "Purchase Agreement") between the Company and Samstock. The
Company also issued warrants to Samstock exercisable at any time prior to
December 18, 2002 for: (i) 400,000 shares of Common Stock at an exercise price
of $20.00 per share; and (ii) 200,000 shares of Common Stock at an exercise
price of $23.00 per share. The aggregate purchase price of the Samstock Shares
and warrants issued to Samstock was approximately $25.0 million.
Convertible Preferred Stock
The Company's Certificate of Incorporation allows the issuance of up to
4,000,000 shares of preferred stock.
In accordance with Emerging Issues Task Force (EITF) Topic No. D-60,
"Accounting for the Issuance of Convertible Preferred Stock and Debt Securities
with a Nondetachable Conversion Feature", the Company recorded a one-time non
cash dividend of approximately $5.6 million. EITF Topic No. D-60 requires that a
beneficial conversion feature be recognized if preferred stock is convertible
into common stock at the lower of a conversion rate fixed at the date of issue
or a fixed discount to the common stock's market price at the time of
conversion.
On August 8, 1997, the Company issued 21,000 shares and between August 21,
1997 and September 8, 1997, the Company issued 4,000 shares of Series A
Convertible Preferred Stock, par value $.01 per share, stated value of $1,000
per share, (the "Series A Preferred Stock"). Two thousand five hundred shares of
the Series A Preferred Stock were purchased by certain officers and a director
of the Company. On December 1, 1997, the Company issued an aggregate of 20,000
shares of Series B Convertible Preferred Stock, par value $.01 per share, stated
value of $1,000 per share (the "Series B Preferred Stock").
Dividends on the Series A Preferred Stock and Series B Preferred Stock
accrue, whether or not declared by the Board of Directors, at an annual rate of
6.0% and 4.5%, respectively, of the Stated Value of each outstanding share of
Series A Preferred Stock and Series B Preferred Stock. Dividends are payable in
cash or, at the Company's option, in additional shares of Preferred Stock.
Dividends in arrears at March 31, 1998 for the Series A Preferred Stock and
Series B Preferred Stock were approximately $63,000 and $298,000, respectively.
The Series A Preferred Stock and the Series B Preferred Stock have a
"Liquidation Preference" equal to $1,000 per share plus any accrued and unpaid
dividends. Upon the liquidation, dissolution or winding up of the Company,
holders of the Series A Preferred Stock and Series B Preferred Stock are
entitled to receive payment of the Liquidation Preference before any payment is
made to holders of Common Stock or any stock of the Company junior to the Series
A Preferred Stock and Series B Preferred Stock.
The holders of Series A Preferred Stock are able to convert the shares into
Common Stock at a price equal to the lower of: (i) $18.30; or (ii) 85% of the
average closing bid price for the Common Stock for the five trading days prior
to the date of the conversion notice. At March 31, 1998, the outstanding shares
of the Series A Preferred Stock would have converted into approximately 1.3
million shares of Common Stock, if all holders converted on that date.
F-17
67
If the conversion of the Series A Preferred Stock would result in the
holders receiving more than 2,500,000 Shares of Common Stock, then the Company,
at its option and under certain circumstances, may redeem any shares of Series A
Preferred Stock in excess of 2,500,000 shares at a redemption price equal to:
(i) 117% of the Stated Value of the shares; plus (ii) any accrued and unpaid
dividends on such shares. Any shares of Series A Preferred Stock which have not
been converted on or before August 8, 2000 (the "Maturity Date") will
automatically be converted to shares of Common Stock at the Maturity Date based
on the above conversion price. However, if, at the Maturity Date a Registration
Statement covering the resale of the shares issuable upon conversion is not
effective or a resale of the shares issuable upon conversion cannot be made
pursuant to Rule 144(k), then the Company will be required to pay to the holders
of Series A Preferred Stock, in cash, an amount equal to the Liquidation
Preference for the shares which they own.
The Series A Preferred Stock does not grant holders voting rights except
that, so long as shares of Series A Preferred Stock are outstanding, without the
prior approval of the holders of at least a majority of all shares of the Series
A Preferred Stock outstanding at the time, the Company may not: (i) increase the
number of shares of Series A Preferred Stock which the Company is authorized to
issue; (ii) alter or change the rights, preferences or privileges of the Series
A Preferred Stock or any other capital stock of the Company so as to adversely
affect the Series A Preferred Stock; or (iii) create any new class or series of
capital stock having a preference over the Series A Preferred Stock as to
distribution of assets upon liquidation, dissolution or winding up of the
Company. Approval of holders of the Series A Preferred Stock as to actions
described in (ii) and (iii) above will not be required if the average closing
price for the Common Stock on the five trading days immediately preceding the
effective date of such a change is equal to or exceeds $27.45.
The holders of Series B Preferred Stock are able to convert the shares into
Common Stock at a price equal to the lowest of: (i) 120% of the closing bid
price for the Common Stock on the date of purchase of the Series B Preferred
Stock (the "Fixed Conversion Price"); (ii) 92.5% of the average closing bid
price for the Common Stock for the five trading days prior to the date of the
conversion notice; or (iii) if applicable, the lowest traded price of the Common
Stock during the time when the Common Stock is not listed on a national
securities exchange. At March 31, 1998, the outstanding shares of the Series B
Preferred Stock would have converted into approximately 1.6 million shares of
Common Stock, if all holders converted on that date.
If the conversion of the Series B Preferred Stock would result in the
holders receiving more than 2,000,000 Shares of Common Stock, then the Company
may redeem any shares of Series B Preferred Stock in excess of 2,000,000 shares
at a redemption price equal at its option and under certain circumstances to:
(i) 117% of the Stated Value of the shares; plus (ii) any accrued and unpaid
dividends on such shares. Any shares of Series B Preferred Stock which have not
been converted on or before three years after the date the Series B Preferred
Stock was issued (the "Maturity Date") will automatically be converted to shares
of Common Stock at the Maturity Date based on the above conversion price.
However, if at the Maturity Date a Registration Statement covering the resale of
the shares issuable upon conversion is not effective or a resale of the shares
issuable upon conversion cannot be made pursuant to Rule 144(k), then the
Company will be required to pay to the holders of Series B Preferred Stock, in
cash, an amount equal to the Liquidation Preference for the shares which they
own.
The Series B Preferred Stock does not grant holders voting rights except
that, so long as shares of Series B Preferred Stock are outstanding, without the
prior approval of the holders of at least a majority of all shares of the Series
B Preferred Stock outstanding at the time, the Company may not: (i) increase the
number of shares of Series B Preferred Stock which the Company is authorized to
issue; (ii) alter or change the rights, preferences or privileges of the Series
B Preferred Stock or any other capital stock of the Company so as to adversely
affect the Series B Preferred Stock; or (iii) create any new class or series of
capital stock having a preference over the Series B Preferred Stock as to
distribution of assets upon liquidation, dissolution or winding up of the
Company. Approval of holders of the Series B Preferred Stock as to actions
described in (ii) and (iii) above will not be required if the average closing
price for the Common Stock on the five trading days immediately preceding the
effective date of such a change is equal to or exceeds 150% of the Fixed
Conversion Price.
F-18
68
The following presents a summary of the Series A Preferred Stock and Series
B Preferred Stock issued and converted during fiscal 1998:
SERIES A SERIES B
-------- --------
Beginning balance........................................... 0 0
Shares issued............................................... 25,000 20,000
Shares converted into Common Stock.......................... (10,665) 0
Shares issued for dividends................................. 759 0
------- ------
Shares outstanding at March 31, 1998........................ 15,094 20,000
======= ======
NOTE 10 -- EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. Diluted earnings (loss) per common share includes the incremental shares
issuable upon the assumed exercise of stock options and warrants, using the
treasury stock method.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings (loss) from continuing operations per share
computations (in thousands, except per share amounts):
FIVE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 1995 MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1998
---------------- -------------- -------------- --------------
Income (Numerator):
Net income (loss) from continuing
operations.......................... $ 261 $ (16) $(2,010) $(28,613)
Dividends and accretion applicable to
convertible preferred stock......... 0 0 0 (7,100)
------ ------- ------- --------
Net income (loss) applicable to Common
Stock............................... $ 261 $ (16) $(2,010) $(35,713)
====== ======= ======= ========
Shares (Denominator):
Weighted average number of shares
outstanding during the period....... 5,125 5,299 9,106 19,727
Incremental common shares attributable
to
dilutive options and warrants....... 0 0 0 0
------ ------- ------- --------
Diluted shares outstanding during the
period.............................. 5,125 5,299 9,106 19,727
====== ======= ======= ========
Basic earnings (loss) per share....... $ 0.05 $ 0.00 $ (0.22) $ (1.81)
====== ======= ======= ========
Diluted earnings (loss) per share..... $ 0.05 $ 0.00 $ (0.22) $ (1.81)
====== ======= ======= ========
Due to the net loss applicable to Common Stock for the five months ended
March 31, 1996 and the years ended March 31, 1997 and 1998, the effect of
dilutive stock options and warrants were not included as their effect would have
been anti-dilutive. However, if the Company would have reported net earnings,
the incremental shares attributable to dilutive stock options and warrants would
have been 125,656 for the five months ended March 31, 1996, 236,469 for the year
ended March 31, 1997 and 3,388,202 for the year ended March 31, 1998. Also, the
potentially dilutive effect of the Company's convertible preferred stock were
not used in the diluted earnings per share calculation as its effect was
anti-dilutive.
F-19
69
NOTE 11 -- STOCK OPTIONS AND WARRANTS
Stock option plans
On November 29, 1997, the Company's stockholders approved an amendment to
the Company's 1996 Director Option Plan (the "Director Plan") to reserve an
additional 100,000 shares for an aggregate 200,000 shares of Common Stock which
can be issued under the Director Plan. The Director Plan provides for options to
be granted to outside directors of the Company. Under the Director Plan, each
outside director is automatically granted an option to purchase 10,000 shares on
the date on which such person first becomes an outside director. Thereafter,
each outside director is automatically granted an option to purchase 2,500
shares on January 15th of each year, as long as such outside director has served
on the Board of Directors for at least one month. The options are granted at
100% of the market price on the date of the grant, become fully vested and
exercisable on such date and expire 10 years from the date of the grant.
On November 29, 1997, the Company's stockholders approved an amendment to
the Company's 1995 Stock Option Plan (the "1995 Plan") to reserve an additional
1,300,000 shares of Common Stock for an aggregate 2,600,000 shares of Common
Stock which can be issued under the 1995 Plan. The 1995 Plan allows the Board of
Directors to grant options to purchase shares to officers and employees in the
form of either incentive stock options (ISO's) or nonstatutory stock options
(NSO's). The Board of Directors determines, within limits set forth in the 1995
Plan, the term of each option, the option exercise price, the number of shares
subject to each option and the times at and conditions under which each option
is or becomes exercisable.
During fiscal 1995, the Board of Directors terminated the 1986 Stock Option
Plan with respect to future grants. The following summarizes the activity of the
Director Plan, 1995 Plan and the 1986 Plan for the year ended October 31, 1995,
the five months ended March 31, 1996 and the years ended March 31, 1997 and
1998, respectively:
DIRECTOR & 1995 PLAN
-------------------------------------------------------------------------------------
1995 1996 1997 1998
------------------ ------------------ ------------------ ----------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ -------- ------ --------
Beginning balance..... 0 $0.00 51,000 $3.22 716,750 $3.92 752,500 $ 4.03
Granted............... 51,000 $3.22 665,750 $3.97 110,000 $4.53 1,218,650 $16.01
Exercised............. 0 $0.00 0 $0.00 (16,750) $2.90 (150,000) $ 4.00
Canceled.............. 0 $0.00 0 $0.00 (57,500) $3.89 0 $ 0.00
------- ----- ------- ----- ------- ----- ----------- ------
Ending balance........ 51,000 $3.22 716,750 $3.92 752,500 $4.03 1,821,150 $12.05
======= ===== ======= ===== ======= ===== =========== ======
Exercisable at end of
period.............. 25,000 $2.50 669,750 $3.91 667,500 $3.96 649,333 $ 5.28
======= ===== ======= ===== ======= ===== =========== ======
Options available for
grant............... 449,000 83,250 630,750 812,100
======= ======= ======= ===========
F-20
70
1986 PLAN
-----------------------------------------------------
1995 1996
------------------------ --------------------------
OPTION WEIGHTED
PRICE PER AVERAGE
SHARES SHARE SHARES EXERCISE PRICE
------ --------- ------ --------------
Beginning balance..................................... 572,800 $1.90 - $6.00 304,800 $2.71
Granted............................................... 1,500 $1.57 - $1.63 0 $0.00
Exercised............................................. (92,000) $2.34 - $2.98 (108,636) $2.55
Canceled.............................................. (177,500) $2.23 - $3.56 (39,314) $2.77
-------- ------------- --------- -----
Ending balance........................................ 304,800 $1.57 - $6.00 156,850 $2.82
======== ============= ========= =====
Exercisable at end of period.......................... 277,497 $1.88 - $6.00 141,788 $2.87
======== ============= ========= =====
Options available for grant........................... 0 0
======== =========
1986 PLAN
---------------------------------------------------
1997 1998
------------------------ ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ --------------
Beginning balance......................................... 156,850 $2.82 5,000 $2.50
Granted................................................... 0 $0.00 0 $0.00
Exercised................................................. (87,100) $2.65 (5,000) $2.50
Canceled.................................................. (64,750) $3.07 0 $0.00
------- -------
Ending balance............................................ 5,000 $2.50 0 $0.00
======= =======
Exercisable at end of period.............................. 5,000 $2.50 0 $0.00
======= =======
Options available for grant 0 0
======= =======
The following table summarizes information about stock options outstanding
at March 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- --------------------
WEIGHTED
AVERAGE WIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE (YRS) PRICE SHARES PRICE
------------------------ ------ ----------- -------- ------ --------
$2.50 to $7.00.............................. 606,000 6.9 $ 4.05 578,500 $ 4.00
$10.00 to $15.13............................ 697,900 4.7 $13.01 50,833 $ 13.38
$16.50 to $22.13............................ 517,250.. 4.9 $20.20 20,000 $ 21.50
--------- -------
1,821,150 649,333
========= =======
Warrants
The Company issues warrants to purchase restricted Common Stock in
connection with acquisitions or for issuance to employees or consultants for
services. The summary of warrant activity for the year ended October 31, 1995,
the five months ended March 31, 1996 and the years ended March 31, 1997 and
1998, respectively, is as follows:
F-21
71
1995 1996 1997 1998
----------------- ------------------ -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ -------- ------ --------
Beginning balance.... 0 $0.00 10,000 $3.00 20,000 $3.50 2,015,038 $ 4.65
Granted.............. 10,000 $3.00 10,000 $4.00 1,995,038 $4.66 7,016,925 $ 9.69
Exercised............ 0 $0.00 0 $0.00 0 $0.00 (702,654) $ 4.14
Canceled............. 0 $0.00 0 $0.00 0 $0.00 (104,769) $12.72
------ ----- ------- ----- --------- ----- --------- ------
Ending balance....... 10,000 $3.00 20,000 $3.50 2,015,038 $4.65 8,224,540 $ 8.89
====== ===== ======= ===== ========= ===== ========= ======
To facilitate a loan to the Company from a commercial bank, on January 7,
1997, Gerard M. Jacobs, T. Benjamin Jennings, Donald F. Moorehead, George O.
Moorehead, Harold Rubenstein and Raymond F. Zack, each of whom is or was a
director at the time of the loan, provided personal guaranties to a bank. In
consideration for the guaranties, the Company issued warrants to these
individuals to purchase an aggregate of 500,000 shares of restricted Common
Stock of the Company at $4.00 per share (subject to certain restrictions). The
value of the warrants were recorded as other financing costs and the Company
recognized an expense of $151,000 for both the years ended March 31, 1997 and
1998 for the estimated fair value of the loan guaranty.
In fiscal 1998, the Company recognized approximately $20.7 million of
non-cash compensation expense associated with the issuance of warrants to
certain employees, officers and directors. See Note 4 -- Non-recurring expenses.
The following table summarizes information about compensation based
warrants outstanding at March 31, 1998:
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
---------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE (YRS) PRICE SHARES PRICE
- ------------------------------------------- --------- ---- ------ --------- ------
$4.00 to $5.91............................. 805,000 4.67 $ 5.81 805,000 $ 5.81
$9.90 to $15.75............................ 1,346,923 4.30 $11.86 1,195,673 $12.05
Pro forma disclosures
The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation." The Company continues to account for
stock-based compensation under the provisions of APB 25, "Accounting for Stock
Issued to Employees," and accordingly does not recognize compensation cost for
options and warrants with exercise prices equal to market value at the date of
grant. As required by SFAS No. 123, the following disclosure of pro forma
information provides the effects on net loss and net loss per share as if the
Company had accounted for its employee stock based compensation under the fair
value method prescribed by SFAS No. 123 (in thousands, except per share data and
assumptions).
FIVE MONTHS ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1998
----------------- -------------- --------------
Pro forma net loss............................... $ (556) $(1,290) $(41,527)
Pro forma basic and diluted net loss per share... $ (.10) $ (.14) $ (2.11)
Assumptions:
Expected life (years)............................ 3 3 3
Expected volatility.............................. 34.2% 60.0% 63.7%
Dividend yield................................... -- -- --
Risk-free interest rate.......................... 5.89% 6.52% 5.65%
F-22
72
For the years ended March 31, 1997 and 1998, the weighted average fair
value of options and warrants granted was as follows:
1997 1998
------------------- ----------------------
SHARES FAIR VALUE SHARES FAIR VALUE
------ ----- --------- ------
Exercise price . Market price......................... 95,000 $1.59 338,750 $ 4.37
Exercise price = Market price......................... 15,000 $2.07 1,173,323 $ 7.24
Exercise price , Market price......................... n/a n/a 1,858,500 $14.10
The fair value of each option and warrant grant is estimated on the date of
grant using the Black-Scholes option-pricing model. The Black-Scholes option
valuation model was originally developed for use in estimating the fair value of
traded options, which have different characteristics than the Company's employee
stock options and warrants. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. As a result, it is management's opinion that the Black-Scholes model
may not necessarily provide a reliable single measure of the fair value of
employee stock options and warrants.
NOTE 12 -- EMPLOYEE BENEFIT PLANS
401K Plans
The Company and its wholly-owned subsidiaries sponsor qualified 401(k)
plans and profit sharing plans covering certain eligible employees. Participants
can elect to contribute up to a certain percentage of their qualified pre-tax
compensation. Certain of the qualified 401(k) plans allow the Company to match a
percentage of the contributions of participating employees as specified in the
respective plans and also enable the Company to make a discretionary
contribution based on the plan provisions. For the years ended March 31, 1997
and 1998, expense under the Company's 401(k) and profit sharing plans were
approximately $52,000 and $361,000, respectively.
Defined Benefit Plans
During fiscal 1998 , the Company completed acquisitions in which it
provided for the continuation of two defined benefit pension plans covering
certain employees and groups of employees. The benefits are generally based on
years of service and the employees' ending compensation. The Company's general
funding policy is to contribute annually an amount that falls within the range
determined to be deductible for federal tax purposes. Plan assets consist
primarily of stocks, bonds and a receivable from the seller for a fully funded
plan.
Net pension cost includes the following components at March 31, 1998 (in
thousands):
Service cost................................................ $ 95
Interest cost............................................... 291
Actual return on plan assets................................ (494)
Net amortization and deferral............................... 228
-----
Net pension cost............................................ $ 120
=====
F-23
73
The following table sets forth the plans' funded status and the amounts
recognized in the Company's consolidated balance sheet at March 31, 1998 (in
thousands):
Actuarial present value of benefit obligations:
Vested benefit obligation................................. $ 7,121
Non-vested benefit obligation............................. 258
-------
Accumulated benefit obligation............................ 7,379
Excess of projected benefit obligation over
accumulated benefit obligation......................... 1,653
-------
Projected benefit obligation.............................. 9,032
Plan assets at fair value................................. 7,982
-------
Projected benefit obligation in excess of
plan assets............................................ 1,050
Unrecognized net gain..................................... (228)
-------
Accrued pension liabilities $ 1,278
=======
In determining the actual actuarial present value of the projected benefit
obligation, the weighted average discount rate was 7.5% as of March 31, 1998;
the rate of increase in future compensation levels was 0%-5% as of March 31,
1998; and the expected long-term rate of return on assets was 7.5%-9.0% for
1998.
NOTE 13 -- COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain facilities and equipment under operating leases
expiring at various dates. Rent expense was $0.5 million and $3.0 million for
the years ended March 31, 1997 and 1998, respectively. Most of the operating
leases contain renewal options. Future minimum lease payments are as follows (in
thousands):
FISCAL YEAR ENDING, MARCH 31
----------------------------
1999........................................................ $3,380
2000........................................................ 3,310
2001........................................................ 3,028
2002........................................................ 2,458
2003 and thereafter......................................... 7,806
Environmental matters
The Company is subject to comprehensive local, state, federal and
international regulatory and statutory requirements relating to the acceptance,
storage, handling and disposal of solid waste and waste water, air emissions,
soil contamination and employee health, among others. The Company believes that
it and its subsidiaries are in material compliance with currently applicable
environmental and other applicable laws and regulations. The Company and its
subsidiaries may, however, be required from time to time to engage in certain
remedial activities with regard to sites owned or leased by the Company or its
subsidiaries in connection with their business. Furthermore, the Company and its
subsidiaries may be required to pay for a portion of the costs of certain
remedial activities in regard to certain sites owned by third parties under
applicable Federal Superfund laws and regulations. While it is not possible to
predict the ultimate costs of resolving environmental matters, such costs are
not expected to have a material effect on the consolidated financial condition
or results of operations of the Company based on information currently available
to the Company. However, there can be no assurance that potential damages,
liabilities, expenditures, fines, and penalties will not have a material adverse
effect on the Company's financial condition or results of operations. In
addition, environmental legislation may in the future be enacted and create
liability for past actions and the Company or its subsidiaries may be fined or
held liable for damages.
Purchase of real property
On January 7, 1997, the Company's HouTex subsidiary entered into a 10 year
lease agreement with 15/21 Japhet Realty Ltd. ("Japhet"), which is principally
owned by former HouTex shareholders. The lease
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74
agreement allows Japhet to sell the property to the Company for $4.0 million
between the 54th month and the 89th month of the lease term. The Company also
has an option to buy the property for $4.0 million during the same period.
NOTE 14 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain unaudited quarterly financial
information for the Company's last eight fiscal quarters (in thousands, except
per share amounts)
QUARTER ENDED
--------------------------------------
JUNE 30 SEPT. 30 DEC. 31 MAR. 31
------- -------- ------- -------
FISCAL 1997
Net sales............................................. $15,978 $13,964 $10,402 $24,852
Gross profit.......................................... 2,000 824 382 3,666
Net income (loss) from continuing operations.......... 5 (916) (1,160) 61
Net income from discontinued operations............... 146 148 25 528
Net income (loss)..................................... 151 (768) (1,135) 589
Basic earnings (loss) per share:
Continuing operations............................... $ .00 $ (.10) $ (.13) $ .01
Discontinued operations............................. .02 .02 .00 .05
Net income (loss)................................... .02 (.08) (.13) .06
Diluted earnings (loss) per share:
Continuing operations............................... $ .00 $ (.10) $ (.13) $ .00
Discontinued operations............................. .02 .02 .00 .05
Net income (loss)................................... .02 (.08) (.13) .05
QUARTER ENDED
----------------------------------------
JUNE 30 SEPT. 30 DEC. 31 MAR. 31
------- -------- ------- -------
FISCAL 1998
Net sales............................................ $54,435 $102,911 $126,007 $196,354
Gross profit......................................... 5,974 10,154 11,646 19,986
Non-recurring expenses............................... 0 0 (33,710) 0
Net income (loss) from continuing operations*........ 221 (67) (36,200) 333
Net income from discontinued operations.............. 101 107 (42) 34
Net income (loss)*................................... 322 40 (36,242) 367
Basic earnings (loss) per share:
Continuing operations*............................. $ .02 $ .00 $ (1.75) $ .01
Discontinued operations............................ .00 .01 .00 .00
Net income (loss)*................................. .02 .01 (1.75) .01
Diluted earnings (loss) per share:
Continuing operations*............................. $ .02 $ .00 $ (1.75) $ .01
Discontinued operations............................ .00 .01 .00 .00
Net income (loss)*................................. .02 .01 (1.75) .01
- ---------------
* amounts include preferred stock dividends, accretion of preferred stock
discount to redemption value and non-cash beneficial conversion feature of
convertible preferred stock.
NOTE 15 -- SUBSEQUENT EVENTS
Purchase transactions
In April 1998, the Company, through its Cozzi subsidiary, acquired certain
assets of Midwest Industrial Scrap, Inc., located in Chicago, Illinois. In May
1998, the Company acquired substantially all of the assets of 138 Scrap, Inc.
and Katrick, Inc., headquartered in Riverdale, Illinois.
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75
Pooling transactions
On May 28, 1998, the Company's wholly owned subsidiary, CB Acquisition
Corporation merged with R&P Holdings, Inc., ("Bluestone") in a tax free stock
for stock exchange. The Company issued approximately 1,035,000 shares of Common
Stock in connection with the merger. The merger will be accounted for using the
pooling-of-interests method of accounting. Beginning in fiscal 1999, the
Company's historical results will be restated to include the results of
Bluestone. Merger related expenses will be recognized as a one time charge in
the first quarter of fiscal 1999.
The following information summarizes the financial results of the Company
and Bluestone for the periods presented. These results include a conforming
accounting adjustment to change Bluestone's inventory valuation methodology from
LIFO to FIFO (in thousands, except share data).
YEAR ENDED
OCTOBER 31, FIVE MONTHS YEAR ENDED YEAR ENDED
1995 MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1998
----------- -------------- -------------- --------------
Net sales...................................... $112,775 $36,366 $141,830 $570,035
Net income (loss) from continuing operations
applicable to Common Stock................... $ 1,138 $ (953) $ (2,108) $(35,863)
Basic and diluted net income (loss) per share
from continuing operations applicable to
Common Stock................................. $ 0.18 $ (0.15) $ (0.21) $ (1.73)
MARCH 31, 1997 MARCH 31, 1998
-------------- --------------
ASSETS
Current assets.............................................. $48,873 $196,443
Property & equipment, net................................... 21,262 109,886
Other assets................................................ 1,845 8,923
Goodwill.................................................... 23,484 186,503
------- --------
Total assets...................................... $95,464 $501,755
======= ========
LIABILITIES & EQUITY
Current liabilities......................................... $58,879 $106,485
Non-current liabilities..................................... 9,404 143,210
Stockholder's equity........................................ 27,181 252,060
------- --------
Total liabilities and equity...................... $95,464 $501,755
======= ========
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METAL MANAGEMENT, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Fiscal 1995 represents the twelve month period ended October 31. Fiscal
1996 represents the five month period from November 1, 1995 to March 31, 1996.
Fiscal 1997 and 1998 represents the twelve month period ended March 31.
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT
FISCAL BEGINNING COSTS AND OTHER NET OF END OF
YEAR DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RECOVERIES PERIOD
- ------ ----------- ---------- ---------- ---------- ----------- ----------
Allowance for doubtful
1998 accounts....................... $101,000 $ 641,000 $1,013,000 $(126,000) $1,629,000
Allowance for doubtful
1997 accounts....................... $474,000 $ 223,000 $ 0 $(596,000) $ 101,000
Tax valuation allowance $505,000 $(505,000) $ 0 $ 0 $ 0
Allowance for doubtful
1996 accounts....................... $414,000 $ 60,000 $ 0 $ 0 $ 474,000
Tax valuation allowance........ $505,000 $ $ 0 $ 0 $ 505,000
Allowance for doubtful
1995 accounts....................... $373,000 $ 231,000 $ 10,000 $(200,000) $ 414,000
Tax valuation allowance........ $ 0 $ 505,000 $ 0 $ 0 $ 505,000
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METAL MANAGEMENT, INC.
EXHIBIT INDEX
NUMBER AND DESCRIPTION OF EXHIBIT
2.1 Purchase Agreement, dated as of March 10, 1997, between the
Company and BancBoston Ventures, Inc. (incorporated by
reference to Exhibit 2.1 of the Company's report on Form 8-K
dated May 2, 1997).
2.2 Purchase Agreement, dated as of January 17, 1997, among the
Company, P. Joseph Iron & Metal, Inc., the sole general
partner of Reserve Iron & Metal Limited Partnership, and
Paul D. Joseph, Steven Joseph and Scott Joseph (incorporated
by reference to Exhibit 2.2 of the Company's report on Form
8-K dated May 2, 1997).
2.3 First Amendment to Purchase Agreement, dated as of March 6,
1997, among the Company, P. Joseph Iron & Metal, Inc., the
sole general partner of Reserve Iron & Metal Limited
Partnership, and Paul D. Joseph, Steven Joseph and Scott
Joseph (incorporated by reference to Exhibit 2.3 of the
Company's report on Form 8-K dated May 2, 1997).
2.4 Second Amendment to Purchase Agreement, dated May 1, 1997,
among the Company, P. Joseph Iron & Metal, Inc., the sole
general partner of Reserve Iron & Metal Limited Partnership,
and Paul D. Joseph, Steven Joseph and Scott Joseph
(incorporated by reference to Exhibit 2.4 of the Company's
report on Form 8-K dated May 2, 1997).
2.5 Purchase Agreement, dated as of June 23, 1997, among the
Company, Isaac Corporation, Ferrex Trading Corporation,
Paulding Recycling, Inc. and Briquetting Corporation of
America (incorporated by reference to Exhibit 2.1 of the
Company's report on Form 8-K dated June 23, 1997).
2.6 Agreement and Plan of Merger, dated as of August 27, 1997,
by and among the Company, Proler Acquisition, Inc., Proler
Southwest Inc. and the Shareholders of Proler Southwest Inc.
(incorporated by reference to Exhibit 2.1 of the Company's
report on Form 8-K dated August 28, 1997).
2.7 Purchase Agreement for Membership Interests of Proler
Steelworks L.L.C., dated as of August 27, 1997, by and among
the Company, Proler Steelworks L.L.C. and the Members of
Proler Steelworks L.L.C. (incorporated by reference to
Exhibit 2.2 of the Company's report on Form 8-K dated August
28, 1997).
2.8 Agreement and Plan of Merger, dated May 16, 1997 (as
amended), among Cozzi Iron & Metal, Inc. and its
shareholders, the Company and CIM Acquisition, Co.
(incorporated by reference to Exhibit 2.1 of the Company's
report on Form 8-K dated December 1, 1997).
2.9 Asset Purchase Agreement, dated as of January 20, 1998,
between the Company, AMI Acquisition Co., Aerospace Metals,
Inc., Aerospace Parts Security, Inc., Suisman Titanium
Corporation, and Michael Suisman, the sole shareholder of
Aerospace Metals, Inc. and Aerospace Parts Security, Inc.
(incorporated by reference to Exhibit 2.1 of the Company's
report on Form 8-K dated January 20, 1998).
3.1* Certificate of Incorporation of the Company, as amended
through June 23, 1998.
3.2* Amended and Restated Bylaws of the Company.
4.1 Specimen of Stock Certificate (incorporated by reference to
Exhibit 4.1 of the Company's Annual Report on Form 10-K for
the year ended March 31, 1997).
4.2 1995 Stock Plan and Form of Option Agreement (incorporated
by reference to Exhibit 4.2 of the Company's Annual Report
on Form 10-K for the year ended March 31, 1997).
4.3 1996 Director Option Plan and Form of Option Agreement
(incorporated by reference to Exhibit 4.3 of the Company's
Annual Report on Form 10-K for the year ended March 31,
1997).
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4.4* Registration Rights Agreement, dated as of June 23, 1997, by and between the Company and the George A.
Isaac, III Second Revocable Trust.
4.5 Registration Rights Agreement, dated as of November 20, 1997, by and among the Company, Proprietary
Convertible Investment Group, Inc., and Capital Ventures International (incorporated by reference to
Exhibit 10.5 of the Company's report on Form 8-K dated December 1, 1997).
4.6 Shelf Registration Rights Agreement, dated December 19, 1997, between the Company and Samstock, L.L.C.
(incorporated by reference to Exhibit 4.2 of the Company's report on Form 8-K dated December 18, 1997).
4.7 Amended and Restated Registration Rights Agreement, dated December 19, 1997, among the Company, T.
Benjamin Jennings, Gerard M. Jacobs, Albert A. Cozzi, Frank J. Cozzi, Gregory P. Cozzi and Samstock,
L.L.C. (incorporated by reference to Exhibit 4.3 of the Company's report on Form 8-K dated December 18,
1997).
4.8 Registration Rights Agreement, dated December 18, 1997, between the Company and Ronald I. Romano, Lolita
A. Romano, Ronald T. Romano and Ryan E. Romano (incorporated by reference to Exhibit 4.4 of the Company's
report on Form 8-K dated January 2, 1998).
4.9 Registration Rights Agreement, dated January 20, 1998, by and between the Company and Aerospace Metals,
Inc. (incorporated by reference to Exhibit 10.3 of the Company's report on Form 8-K dated January 20,
1998).
4.10 Registration Rights Agreement, dated January 30, 1998, by and between the Company and Newell Phoenix,
L.L.C. (incorporated by reference to Exhibit 4.5 of the Company's registration statement on Form S-3
dated February 10, 1998).
4.11 Indenture, dated as of May 13, 1998, among the Company, the Guarantors (as defined therein) and LaSalle
National Bank, as Trustee (incorporated by reference to Exhibit 10.2 of the Company's report on Form 8-K
dated May 13, 1998).
4.12* First Supplemental Indenture, dated as of May 31, 1998, executed by R&P Holdings, Inc., Charles Bluestone
Company and R&P Real Estate, Inc., amending Indenture, dated as of May 13, 1998, among the Company, the
Guarantors and LaSalle National Bank, as Trustee.
4.13* Second Supplemental Indenture, dated as of June 19, 1998, executed by Metal Management Gulf Coast, Inc.,
amending Indenture, dated as of May 13, 1998, among the Company, the Guarantors and LaSalle National
Bank, as Trustee.
4.14 Exchange and Registration Rights Agreement, dated as of May 13, 1998, by and among the Company, the
Guarantors, Goldman, Sachs & Co., BT Alex. Brown Incorporated and Salomon Brothers Inc (incorporated by
reference to Exhibit 10.3 of the Company's report on Form 8-K dated May 13, 1998).
10.1 Employment Agreement, dated August 26, 1996, between the Company and Robert C. Larry (incorporated by
reference to Exhibit 10.1 of the Company's report on Form 10-Q for the quarter ended December 31, 1996).
10.2 Employment Agreement, dated June 23, 1997, between the Company and George A. Isaac III (incorporated by
reference to Exhibit 2.2 of the Company's report on Form 8-K dated June 23, 1997).
10.3* Warrant to Purchase 462,500 shares of Common Stock, dated June 23, 1997, issued by the Company to the
George A. Isaac, III Second Revocable Trust.
10.4 Warrant to purchase 105,000 shares of Common Stock, dated May 1, 1997, issued by the Company to Paul D.
Joseph (incorporated by reference to Exhibit 4.5 of the Company's registration statement on Form S-3
dated January 13, 1998).
10.5 Employment Agreement, dated as of August 27, 1997, by and between the Company and William T. Proler
(incorporated by reference to Exhibit 10.1 of the Company's report on Form 8-K dated August 28, 1997).
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79
10.6 Form of Stock Warrant Settlement Agreement, dated as of
November 7, 1997, between the Company, EMCO Recycling Corp.
and George O. Moorehead (incorporated by reference to
Exhibit 10.1 of the Company's report on Form 8-K dated
December 1, 1997).
10.7 Form of Letter regarding Separation Agreement, dated as of
November 7, 1997, between the Company and George O.
Moorehead (incorporated by reference to Exhibit 10.2 of the
Company's report on Form 8-K dated December 1, 1997).
10.8 Form of Non-Compete, Non-Solicitation and Confidentiality
Covenant and Agreement, dated as of November 7, 1997, by and
between the Company and George O. Moorehead (incorporated by
reference to Exhibit 10.3 of the Company's report on Form
8-K dated December 1, 1997).
10.9 Securities Purchase Agreement, dated as of November 20,
1997, among the Company, Proprietary Convertible Investment
Group, Inc., and Capital Ventures International
(incorporated by reference to Exhibit 10.4 of the Company's
report on Form 8-K dated December 1, 1997).
10.10 Employment Agreement, dated December 1, 1997, between the
Company and T. Benjamin Jennings (incorporated by reference
to Exhibit 10.6 of the Company's report on Form 8-K dated
December 1, 1997).
10.11 Employment Agreement, dated December 1, 1997, between the
Company and Gerard M. Jacobs (incorporated by reference to
Exhibit 10.9 of the Company's report on Form 8-K dated
December 1, 1997).
10.12 Employment Agreement, dated December 1, 1997, between the
Company and Albert A. Cozzi (incorporated by reference to
Exhibit 10.12 of the Company's report on Form 8-K dated
December 1, 1997).
10.13 Employment Agreement, dated December 1, 1997, between the
Company and Frank J. Cozzi (incorporated by reference to
Exhibit 10.15 of the Company's report on Form 8-K dated
December 1, 1997).
10.14 Warrant to purchase 350,000 shares of Common Stock at an
exercise price of $12.00 per share, dated December 1, 1997,
issued by the Company to T. Benjamin Jennings (incorporated
by reference to Exhibit 10.7 of the Company's report on Form
8-K dated December 1, 1997).
10.15 Warrant to purchase 375,000 shares of Common Stock at an
exercise price of $5.91 per share, dated December 1, 1997,
issued by the Company to T. Benjamin Jennings (incorporated
by reference to Exhibit 10.8 of the Company's report on Form
8-K dated December 1, 1997).
10.16 Warrant to purchase 350,000 shares of Common Stock at an
exercise price of $12.00 per share, dated December 1, 1997,
issued by the Company to Gerard M. Jacobs (incorporated by
reference to Exhibit 10.10 of the Company's report on Form
8-K dated December 1, 1997).
10.17 Warrant to purchase 375,000 shares of Common Stock at an
exercise price of $5.91 per share, dated December 1, 1997,
issued by the Company to Gerard M. Jacobs (incorporated by
reference to Exhibit 10.11 of the Company's report on Form
8-K dated December 1, 1997).
10.18 Warrant to purchase 377,586 shares of Common Stock at an
exercise price of $5.91 per share, dated December 1, 1997,
issued by the Company to Albert A. Cozzi (incorporated by
reference to Exhibit 10.13 of the Company's report on Form
8-K dated December 1, 1997).
10.19 Warrant to purchase 377,586 shares of Common Stock at an
exercise price of $15.84 per share, dated December 1, 1997,
issued by the Company to Albert A. Cozzi (incorporated by
reference to Exhibit 10.14 of the Company's report on Form
8-K dated December 1, 1997).
10.20 Warrant to purchase 291,380 shares of Common Stock at an
exercise price of $5.91 per share, dated December 1, 1997,
issued by the Company to Frank J. Cozzi (incorporated by
reference to Exhibit 10.16 of the Company's report on Form
8-K dated December 1, 1997).
10.21 Warrant to purchase 291,380 shares of Common Stock at an
exercise price of $15.84 per share, dated December 1, 1997,
issued by the Company to Frank J. Cozzi (incorporated by
reference to Exhibit 10.17 of the Company's report on Form
8-K dated December 1, 1997).
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10.22 Warrant to purchase 81,035 shares of Common Stock at an
exercise price of $5.91 per share, dated December 1, 1997,
issued by the Company to Gregory P. Cozzi (incorporated by
reference to Exhibit 10.19 of the Company's report on Form
8-K dated December 1, 1997).
10.23 Warrant to purchase 81,035 shares of Common Stock at an
exercise price of $15.84 per share, dated December 1, 1997,
issued by the Company to Gregory P. Cozzi (incorporated by
reference to Exhibit 10.20 of the Company's report on Form
8-K dated December 1, 1997).
10.24 Warrant to purchase 600,000 shares of Common Stock, dated
December 19, 1997, issued by the Company to Samstock, L.L.C.
(incorporated by reference to Exhibit 4.1 of the Company's
report on Form 8-K dated December 18, 1997).
10.25 Securities Purchase Agreement, dated December 19, 1997,
between the Company and Samstock, L.L.C. (incorporated by
reference to Exhibit 10.1 of the Company's report on Form
8-K dated December 18, 1997).
10.26 Amended and Restated Stockholders Agreement, dated December
19, 1997, 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
10.2 of the Company's report on Form 8-K dated December 18,
1997).
10.27 Credit Agreement, dated March 31, 1998, by and among the
Company and its subsidiaries named therein and BT Commercial
Corporation (incorporated by reference to Exhibit 10.1 of
the Company's report on Form 10-K dated March 31, 1998).
10.28* Amendment No. 1 to Credit Agreement, dated as of June 12,
1998, by and among the Company and its subsidiaries named
therein and BT Commercial Corporation.
10.29* Amendment No. 2 to Credit Agreement, dated as of June 19,
1998, by and among the Company and its subsidiaries named
therein and BT Commercial Corporation.
10.30 Purchase Agreement, dated May 8, 1998, among the Company,
the Guarantors, Goldman, Sachs & Co., BT Alex. Brown
Incorporated and Salomon Brothers Inc (incorporated by
reference to Exhibit 10.1 of the Company's report on Form
8-K dated May 13, 1998).
11.1* Computation of Earnings Per Share.
21.1* Subsidiaries of the Company.
23.1* Consent of Price Waterhouse LLP.
27.1* Financial Data Schedule.
- -------------------------
* Included with this Annual Report on Form 10-K.
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