METAL MANAGEMENT INC - 10-Q Quarterly Report

Back to GetFilings.com

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO________

COMMISSION FILE NO. 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 NORTH DEARBORN ST., SUITE 405, CHICAGO, IL 60610
(Address of principal executive offices)

Registrant's telephone number, including area code: (312) 645-0700
---------------------------

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No X

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No ___

As of August 7, 2003, the registrant had 10,591,964 shares of common stock
outstanding.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

INDEX

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

METAL MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)

See accompanying notes to consolidated financial statements

1

METAL MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)

See accompanying notes to consolidated financial statements

2

METAL MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

See accompanying notes to consolidated financial statements

3

METAL MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited, in thousands)

See accompanying notes to consolidated financial statements

4

METAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Metal
Management, Inc., a Delaware corporation, and its wholly owned subsidiaries (the
"Company") have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). All significant intercompany
accounts, transactions and profits have been eliminated. Certain information
related to the Company's organization, significant accounting policies and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. These unaudited consolidated financial statements reflect, in the
opinion of management, all material adjustments (which include only normal
recurring adjustments) necessary to fairly state the financial position and the
results of operations for the periods presented. Certain amounts have been
reclassified from the previously reported financial statements in order to
conform to the financial statement presentation of the current period.

Operating results for interim periods are not necessarily indicative of the
results that can be expected for a full year. These interim financial statements
should be read in conjunction with the Company's audited consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended March 31, 2003.

New Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This statement addresses, among other items, the
classification of gains and losses from extinguishment of debt. Under the
provisions of SFAS No. 145, gains and losses from extinguishment of debt can
only be classified as extraordinary items if they meet the criteria set forth in
APB Opinion No. 30. The Company adopted this statement on April 1, 2003. The
adoption of this statement will result in the reclassification of the
extraordinary gains on the debt extinguishments recognized during the year ended
March 31, 2003 and the extraordinary gain on debt discharge recognized during
the three months ended June 30, 2001 as other income in the Company's statement
of operations.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires certain
guarantees be recorded at fair value as opposed to the current practice of
recording a liability only when a loss is probable and reasonably estimable. FIN
45 also requires a guarantor to make significant new guaranty disclosures, even
when the likelihood of making any payments under the guarantee is remote. The
Company adopted this statement on December 31, 2002. The adoption of this
statement resulted in additional disclosures made by the Company which are
included in this Report.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51 and applies immediately to any variable
interest entities created after January 31, 2003 and to variable interest
entities in which an interest is obtained after that date. FIN 46 will be
applicable to the Company in the second quarter of fiscal 2004, for interests
acquired in variable interest entities prior to February 1, 2003. The Company
does not have any variable interest entities and therefore adoption of this
interpretation will have no impact on its consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" to provide
clarification on the financial accounting and reporting of derivative
instruments and hedging activities and requires that contracts with similar
characteristics be accounted for on a comparable basis. The provisions of SFAS
No. 149 are effective for contracts entered into or modified after June 30,
2003, and for hedging relationships designated after June 30, 2003. The Company
does not expect this statement to impact its consolidated financial statements.

5

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards on the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. The
provisions of SFAS No. 150 are effective for financial instruments entered into
or modified after May 31, 2003 and to all other instruments that exist as of the
beginning of the first interim financial reporting period beginning after June
15, 2003 (our second quarter of fiscal 2004). The Company does not expect this
statement to impact its consolidated financial statements.

Stock Based Compensation
The Company accounts for its stock-based compensation plans under the
recognition and measurement principles of APB No. 25, "Accounting for Stock
Issued to Employees," and related interpretations and complies with the
disclosure-only provisions of SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure." Pursuant to APB No. 25, no
stock-based compensation cost is recognized with respect to options and warrants
granted that have an exercise price equal or greater than the market value of
the common stock on the date of grant. During the three months ended June 30,
2002, the Company recognized stock compensation expense for warrants granted to
a consultant.

During the three months ended June 30, 2003, the Company granted 20,776
shares of restricted stock under its 2002 Incentive Stock Plan to certain
employees, giving them the rights of stockholders, except that they may not
sell, assign, pledge or otherwise encumber such shares. Such shares are subject
to forfeiture if certain employment conditions are not met. The restricted stock
vests through March 31, 2006.

The fair value of the restricted shares at the date of grant is amortized
to expense ratably over the vesting period. The Company recorded stock
compensation expense of approximately $32,000 related to restricted stock in the
three months ended June 30, 2003.

Net income, as reported, includes the after-tax impact of stock
compensation expense related to the restricted stock issued. The following table
illustrates the pro forma effects on net income and earnings per share if the
Company had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee compensation
(in thousands, except for earnings per share):

6

NOTE 2 -- EARNINGS PER SHARE

Basic earnings per common share ("EPS") is computed by dividing net income
by the weighted average common shares outstanding. Diluted EPS reflects the
potential dilution that could occur from the exercise of stock options and
warrants. The following is a reconciliation of the numerators and denominators
used in computing EPS (in thousands, except for earnings per share):

For the three months ended June 30, 2003 and 2002, approximately 1.2
million and 2.3 million potential common shares, respectively, related to stock
options and warrants were excluded from the diluted EPS calculation as the
option and warrant exercise prices were greater than the average market price of
the Company's common stock for the period.

NOTE 3 -- SUPPLEMENTAL BALANCE SHEET INFORMATION

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 at (in thousands):

7

Property and Equipment
Property and equipment consisted of the following at (in thousands):

Other Accrued Liabilities
Other accrued liabilities consisted of the following at (in thousands):

NOTE 4 -- GOODWILL AND OTHER INTANGIBLES

Goodwill and other intangibles consisted of the following at (in
thousands):

Total amortization expense for other intangibles during the three months
ended June 30, 2003 was $36,000. Based on the other intangibles recorded as of
June 30, 2003, annual amortization expense for other intangibles will be
approximately $0.1 million for each of the next five fiscal years.

During the three months ended June 30, 2003, the Company reduced goodwill
by $3.2 million as a result of the utilization of pre-emergence deferred tax
assets (see Note 6 -- Income Taxes).

8

NOTE 5 -- LONG-TERM DEBT

Long-term debt consisted of the following at (in thousands):

Credit Agreement
On August 13, 2003, the Company entered into an amended and restated credit
facility (the "Credit Agreement") with Deutsche Bank Trust Company Americas, as
agent for the lenders thereunder. The Credit Agreement provides for maximum
borrowings of $130 million and expires on July 1, 2007. $110 million of the
Credit Agreement is available as a revolving loan and letter of credit facility
and $20 million was committed as a term loan to be funded upon repurchase of the
Junior Secured Notes. In consideration for the Credit Agreement, the Company
paid fees and expenses of approximately $2.5 million. The Credit Agreement is
available to fund working capital needs, for general corporate purposes and to
repurchase and redeem the Junior Secured Notes.

Borrowings under the Credit Agreement are subject to certain borrowing base
limitations based upon a formula equal to 85% of eligible accounts receivable,
the lesser of $45 million or 70% of eligible inventory, a fixed asset sublimit
of $12.7 million as of August 13, 2003, and a term loan of $20.0 million (the
"Term Loan"). The fixed asset sublimit amortizes by $2.5 million on a quarterly
basis and under certain other conditions. Upon the full amortization of the
fixed asset sublimit, the Term Loan will then amortize by $2.5 million on a
quarterly basis and under certain other conditions. A security interest in
substantially all of the assets and properties of the Company, including pledges
of the capital stock of the Company's subsidiaries, has been granted to the
agent for the lenders as collateral against the obligations of the Company under
the Credit Agreement. Pursuant to the Credit Agreement, the Company pays a fee
of .375% on the undrawn portion of the facility.

Borrowings on all outstanding balances under the Credit Agreement (other
than the Term Loan) bear interest, at the Company's option, either at the prime
rate (as specified by Deutsche Bank AG, New York Branch) plus a margin or LIBOR
plus a margin. The margin on prime rate loans range from 0.50% to 1.00% and the
margin on LIBOR loans range from 2.50% to 3.00%. The margin is based on the
leverage ratio (as defined in the Credit Agreement) achieved by the Company for
the preceding quarter. Borrowings under the Term Loan bear interest at LIBOR
plus 6.00% (with a floor on LIBOR equal to 2.50%).

Under the Credit Agreement, the Company is required to satisfy specified
financial covenants, including a minimum fixed charge coverage ratio of 1.25 to
1.00 and a maximum leverage ratio of 3.00 to 1.00, through December 31, 2004.
After December 31, 2004, the maximum leverage ratio is 2.25 to 1.00. Both ratios
are tested for the twelve-month period ending each fiscal quarter. The Credit
Agreement also limits capital expenditures to $16 million for the twelve-month
period ending each fiscal quarter.

The Credit Agreement also contains restrictions which, among other things,
limit the Company's ability to (i) incur additional indebtedness; (ii) pay
dividends; (iii) enter into transactions with affiliates; (iv) enter into
certain asset sales; (v) engage in certain acquisitions, investments, mergers
and consolidations; (vi) prepay certain other indebtedness; (vii) create liens
and encumbrances on the Company's assets; and (viii) other matters customarily
restricted in such agreements.

9

The Company's ability to meet financial ratios and tests in the future may
be affected by events beyond its control, including fluctuations in operating
cash flows and working capital. While the Company currently expects to be in
compliance with the covenants and satisfy the financial ratios and tests in the
future, there can be no assurance that the Company will meet such financial
ratios and tests or that it will be able to obtain future amendments or waivers
to the Credit Agreement, if so needed, to avoid a default. In the event of a
default, the lenders could elect to not make loans available to the Company and
declare all amounts borrowed under the Credit Agreement to be due and payable.

Junior Secured Notes
The Junior Secured Notes bear interest at 12 3/4% and are due on June 15,
2004. A second priority lien on substantially all of the Company's real and
personal property and equipment has been pledged as collateral against the
Junior Secured Notes.

On August 12, 2003, the Company and five note holders entered into Note
Purchase Agreements whereby the Company will purchase approximately $30.5
million par amount of Junior Secured Notes at a price of 101% of the principal
amount, plus accrued and unpaid interest. The Company will use availability
under the Credit Agreement to fund the repurchase of the Junior Secured Notes.
In addition, in accordance with the Indenture governing the Junior Secured
Notes, the Company will provide notice to the trustee to redeem the remaining
$1.0 million par amount of Junior Secured Notes at a price of 100% of the
principal amount, plus accrued and unpaid interest. The Company expects the
final redemption of the remaining Junior Secured Notes to occur on or around
September 30, 2003. The Junior Secured Notes will be cancelled following their
repurchase and redemption.

The Junior Secured Notes are classified as long-term debt on the Company's
unaudited balance sheet as of June 30, 2003 as they have been or will be repaid
with proceeds available under the Credit Agreement.

NOTE 6 -- INCOME TAXES

The Company recorded income tax expense of $4.4 million in the three months
ended June 30, 2003. The effective income tax rate differs from the statutory
tax rate due primarily to the effects of state income taxes. During the three
months ended June 30, 2003, the Company recorded tax benefits of $1.0 million,
related to exercise of stock warrants, as an increase to additional paid-in
capital. The tax benefits from the exercise of stock warrants resulted in a
lower utilization of net operating loss ("NOL") carryforwards, but had no impact
on the effective tax rate.

Upon emergence from bankruptcy on June 29, 2001, the Company had available
NOL carryforwards of approximately $112 million, which expire through 2022, and
net deferred tax assets (including NOL carryforwards) of approximately $75
million. In accordance with SFAS No. 109, "Accounting for Income Taxes,"
realization of net deferred tax assets that existed as of the emergence date
will first reduce goodwill until exhausted and thereafter are reported as an
increase to additional paid-in capital. In addition, the use of emergence date
net deferred tax assets during the three months ended June 30, 2003 resulted in
the recognition of income tax expense without the corresponding payment of cash
taxes. The Company has recorded a valuation allowance against the emergence date
net deferred tax assets, including NOL carryforwards remaining at June 30, 2003,
due to the uncertainty regarding their ultimate realization. Realization is
dependent upon generating sufficient future taxable income and the release of
the valuation allowance is dependent on the Company's ability to forecast future
results. When the Company is able to demonstrate a pattern of predictable level
of profitability and thereby sufficiently reduce the uncertainty relating to the
realization of the NOL carryforwards, the valuation allowance will be reversed
and recorded first as a reduction of goodwill until exhausted and then as an
increase to additional paid-in capital.

NOTE 7 -- COMMITMENTS AND CONTINGENCIES

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

10

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. However,
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.

Certain of the Company's subsidiaries receive from, time to time, notices
from the United States Environmental Protection Agency that these companies and
numerous other parties are considered potentially responsible parties and may be
obligated under Superfund, or similar state regulatory schemes, to pay a portion
of the cost of remedial investigation, feasibility studies and, ultimately,
remediation to correct alleged releases of hazardous substances at various third
party sites. 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 these 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.

Although recent amendments to the Superfund law have limited the exposure
of scrap metal recyclers under Superfund for sales of recyclable material, the
Company can provide no assurance that it will not become liable in the future
for significant costs or penalties associated with the investigation and
remediation of Superfund sites. The only Superfund site in which the Company is
currently involved as a potentially responsible party is the Jack's Creek
Superfund site in Pennsylvania. As part of the Company's Chapter 11 bankruptcy
proceedings, the Company agreed to pay the Jack's Creek PRP Group approximately
$153,000 (of which approximately $57,000 remains to be paid) to discharge its
obligations in connection with this Superfund site.

On July 1, 1998, Metal Management Connecticut, Inc. ("MTLM-Connecticut"), a
subsidiary of the Company, acquired the scrap metal recycling assets of Joseph
A. Schiavone Corp. (formerly known as Michael Schiavone & Sons, Inc.). The
acquired assets include real property in North Haven, Connecticut upon which
MTLM-Connecticut's scrap metal recycling operations are currently performed (the
"North Haven Facility"). The owner of Joseph A. Schiavone Corp. was Michael
Schiavone ("Schiavone"). On March 31, 2003, the Connecticut Department of
Environmental Protection filed suit against Joseph A. Schiavone Corp.,
Schiavone, and MTLM-Connecticut in the Superior Court of the State of
Connecticut -- Judicial District of Hartford. The suit alleges, among other
things, that the North Haven Facility discharged and continues to discharge
contaminants, including oily material, into the environment and has failed to
comply with the terms of certain permits and other filing requirements. The suit
seeks injunctions to restrict MTLM-Connecticut from maintaining discharges and
to require MTLM-Connecticut to remediate the facility. The suit also seeks civil
penalties from all of the defendants in accordance with Connecticut
environmental statutes. At this stage, the Company is not able to predict
MTLM-Connecticut's potential liability in connection with this action or any
required investigation and/or remediation. The Company believes that
MTLM-Connecticut has meritorious defenses to certain of the claims asserted in
the suit and MTLM-Connecticut intends to vigorously defend itself against the
claims. In addition, the Company believes it is entitled to indemnification from
Joseph A. Schiavone Corp. and Schiavone for some or all of the obligations and
liabilities that may be imposed on MTLM-Connecticut in connection with this
matter under the various agreements governing its purchase of the North Haven
Facility from Joseph A. Schiavone Corp. The Company cannot provide assurances
that Joseph A. Schiavone Corp. or Schiavone will have sufficient resources to
fund any or all indemnifiable claims that the Company may assert.

Legal Proceedings
In May 2003, a former employee of Metal Management Memphis, L.L.C.
("MTLM-Memphis"), a subsidiary of the Company, filed suit individually and on
behalf of his minor children (Callicutt v. Metal Management Memphis LLC) in the
Circuit Court of Shelby County, Tennessee for the 30th Judicial District at
Memphis, alleging that he was exposed to hazardous concentrations of toxic
substances, including lead dust, as an employee of MTLM-Memphis. Plaintiff
further claims that his minor children have sustained neuro-cognitive and brain
injuries allegedly as a result of lead contamination being transferred from his
clothing to the children. The suit seeks $1.5 million in compensatory damages,
an unspecified amount of punitive

11

damages and for the establishment by MTLM-Memphis of a fund to provide
plaintiffs with on-going medical treatment. The Company intends to vigorously
defend these allegations; however, initial discovery has not yet begun, and the
Company is not able at this preliminary stage to estimate MTLM-Memphis'
potential liability, if any, in connection with this action.

In January 2003, the Company received a subpoena requesting that it provide
documents to a grand jury that is investigating scrap metal purchasing practices
in the four state region of Ohio, Illinois, Indiana and Michigan. The Company is
fully cooperating with the subpoena and the grand jury's investigation. The
Company is unable at this preliminary stage to determine future legal costs or
other costs to be incurred in responding to such subpoena or other impact to the
Company of such investigation.

From time to time, the Company is involved in various litigation matters
involving ordinary and routine claims incidental to its business. A significant
portion of these matters result from environmental compliance issues and workers
compensation related claims arising from the Company's operations. There are
presently no legal proceedings pending against the Company which, in the opinion
of the Company's management, is likely to have a material adverse effect on its
business, financial condition or results of operations.

Purchase of Real Property
In November 2001, the Company amended its lease agreement for land on which
it operates a scrap metals recycling facility in Houston, Texas. The lease
agreement expires on October 31, 2006 and provides for, among other things, an
option for the lessor to sell the land to the Company beginning on the 22nd
month of the lease at an amount which approximates fair value. The Company has
an option to purchase the land beginning on the 22nd month of the lease (August
2003). The Company exercised its purchase option and expects to acquire the land
for $4.0 million. The land purchase should close on or about September 29, 2003.

Indemnification
In connection with a prior acquisition, the Company has agreed to indemnify
the selling shareholders in that acquisition for, among other things, breaches
of representations, warranties and covenants and for guarantees provided by
certain shareholders of commercial agreements. The selling shareholders' ability
to assert indemnification claims expires in November 2003. No indemnification
claims have been asserted against the Company to date. The amount that the
Company could be required to pay under its indemnification obligations could
range from $0 to a maximum amount of approximately $2 million, excluding
interest and collection costs.

NOTE 8 -- STOCKHOLDERS' EQUITY

In accordance with the Company's plan of reorganization (the "Plan"), the
Company was required to distribute 10,000,000 shares of common stock and
warrants to purchase 750,000 shares of common stock (designated as "Series A
Warrants") as follows:

The Series A Warrants are immediately exercisable at an exercise price of
$21.19 per share and expire on June 29, 2006. Preferred stockholders and common
stockholders of the predecessor company were required to return their old
preferred and common stock certificates in order to receive a distribution of
the Company's common stock and Series A Warrants. Pursuant to the Plan, any
claims which were not made by the second anniversary of the Plan (June 29, 2003)
were deemed to have been forfeited. The Company has cancelled 7,221 shares of
common stock and Series A Warrants to acquire 53,281 shares of common stock
which were

12

issuable to predecessor company preferred stockholders and common stockholders
and not timely claimed. All 9,900,000 shares of common stock were distributed to
the Company's unsecured creditors.

13

This Form 10-Q includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements in this Form 10-Q which address
activities, events or developments that Metal Management, Inc. (herein, "Metal
Management," the "Company," "we," "us" or other similar terms) expects or
anticipates will or may occur in the future, including such things as future
acquisitions (including the amount and nature thereof), business strategy,
expansion and growth of our business and operations, general economic and market
conditions and other such matters are forward-looking statements. Although we
believe the expectations expressed in such forward-looking statements are based
on reasonable assumptions within the bounds of our knowledge of our business, a
number of factors could cause actual results to differ materially from those
expressed in any forward-looking statements. These and other risks,
uncertainties and other factors are discussed under "Risk Factors" appearing in
our Annual Report on Form 10-K for the year ended March 31, 2003, as the same
may be amended from time to time.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included under Item 1 of
this Report. In addition, reference should be made to the audited consolidated
financial statements and notes thereto and related Management's Discussion and
Analysis of Financial Condition and Results of Operations included in our Annual
Report on Form 10-K for the year ended March 31, 2003 ("Annual Report").

GENERAL
We are one of the largest full-service metals recyclers in the United
States, with recycling facilities located in 13 states. We enjoy leadership
positions in many major metropolitan markets, including Birmingham, Chicago,
Cleveland, Denver, Hartford, Houston, Memphis, Newark, Phoenix, Salt Lake City,
Toledo and Tucson. We have a 28.5% equity ownership position in Southern
Recycling, L.L.C. ("Southern"), one of the largest scrap metals recyclers in the
Gulf Coast region. Our operations primarily involve the collection and
processing of ferrous and non-ferrous metals. We collect industrial scrap metal
and obsolete scrap metal, process it into reusable forms and supply the recycled
metals to our customers, including electric arc furnace mills, integrated steel
mills, foundries, secondary smelters and metal brokers. In addition to buying,
processing and selling ferrous and non-ferrous scrap metals, we are periodically
retained as demolition contractors in certain of our large metropolitan markets
in which we dismantle obsolete machinery, buildings and other structures
containing metal and, in the process, collect both the ferrous and non-ferrous
metals from these sources. At certain of our locations adjacent to commercial
waterways, we provide stevedoring services. We also operate a bus dismantling
business combined with a bus replacement parts business at our Northeast
operations.

We believe that we provide one of the most comprehensive product offerings
of both ferrous and non-ferrous scrap metals. Our ferrous products primarily
include shredded, sheared, cold briquetted and bundled scrap metal, and other
purchased scrap metal, such as turnings, cast and broken furnace iron. We also
process non-ferrous metals, including aluminum, copper, stainless steel, brass,
titanium and high-temperature alloys, using similar techniques and through
application of our proprietary technologies.

We have achieved a leading position in the metals recycling industry
primarily by implementing a national strategy of completing and integrating
regional acquisitions. In making acquisitions, we have focused on major
metropolitan markets where prime industrial and obsolete scrap metals
(automobiles, appliances and industrial equipment) are readily available and
from where we believe we can better serve our customer base. In pursuing this
strategy, we acquired certain large regional companies to serve as platforms
into which subsequent acquisitions would be integrated. We believe that through
the integration of our acquired businesses, we have enhanced our competitive
position and profitability of the operations because of broader distribution
channels, improved managerial and financial resources, enhanced purchasing power
and increased economies of scale.

14

CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of our financial statements requires the use of
estimates and judgments that affect the reported amounts and related disclosures
of commitments and contingencies. We rely on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances to make judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ materially from these estimates.

We believe the following critical accounting policies, among others, affect
the more significant judgments and estimates used in the preparation of our
consolidated financial statements.

Revenue Recognition
Revenues for processed product sales are recognized when title passes to
the customer. Revenue relating to brokered sales are recognized upon receipt of
the materials by the customer. Revenues from services, including stevedoring and
tolling, are recognized as they are performed. Sales adjustments related to
price and weight differences and allowances for uncollectible receivables are
accrued against revenues as incurred.

Accounts Receivable and Allowance for Uncollectible Accounts Receivable
Accounts receivable consist primarily of amounts due from customers from
product and brokered sales. The allowance for uncollectible accounts receivable
totaled $0.9 million and $1.0 million at June 30, 2003 and March 31, 2003,
respectively. Our determination of the allowance for uncollectible accounts
receivable includes a number of factors, including the age of the accounts, past
experience with the accounts, changes in collection patterns and general
industry conditions.

As indicated in our Annual Report under the section entitled "Risk
Factors -- The loss of any significant customers could adversely affect our
results of operations or financial condition," the weakening business cycle in
the steel and metals sectors during our fiscal 2001 led to bankruptcy filings by
many of our customers which caused us to recognize additional allowances for
uncollectible accounts receivable. While we believe our allowance for
uncollectible accounts is adequate, changes in economic conditions or any
weakness in the steel and metals industry could adversely impact our future
earnings.

Inventory
Our inventories primarily consist of ferrous and non-ferrous scrap metals
and are valued at the lower of average purchased cost or market. Quantities of
inventories are determined based on our inventory systems and are subject to
periodic physical verification using estimation techniques including
observation, weighing and other industry methods. As indicated in our Annual
Report under the section entitled "Risk Factors -- Prices of commodities we own
may be volatile," we are exposed to risks associated with fluctuations in the
market price for both ferrous and non-ferrous metals, which are at times
volatile. We attempt to mitigate this risk by seeking to rapidly turn our
inventories.

Valuation of Long-lived Assets and Goodwill
We regularly review the carrying value of certain long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be realizable. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset are compared
to the asset's carrying amount to determine if an impairment of such asset is
necessary. The effect of any impairment would be to expense the difference
between the fair value of such asset and its carrying value.

Effective June 30, 2001, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," which requires that goodwill be reviewed at least annually
for impairment based on the fair value method.

Self-Insured Reserves
We are self-insured for medical claims for most of our employees. Our
exposure to medical claims is protected by a stop-loss insurance policy. We
record a reserve for reported but unpaid claims and the

15

estimated cost of incurred but not reported ("IBNR") claims. Our estimate is
based on a lag estimate calculated by our insurance plan administrator and our
historical claims experience. The lag accrual that we establish is based on
recent actual claims paid.

Effective April 1, 2003, we began to self-insure for workers' compensation
claims. We have a large deductible insurance policy that provides a stop-loss
for individual workers' compensation claims that exceed $250,000. We record a
reserve for IBNR claims. Our reserve is based on an actuarial analysis performed
by our insurance carrier. In connection with our large deductible workers'
compensation insurance policy, we provide a letter of credit for the benefit of
the insurance carrier.

Pension Plans
Pension benefits are based on formulas that, among other things, reflect
the employees' years of service and compensation levels during their employment
period. Pension benefit obligations and related expense are actuarially computed
based on certain assumptions, including the long-term rate of return on plan
assets, the discount rate used to determine the present value of future pension
benefits, and the rate of compensation increases. Actual results will often
differ from actuarial assumptions because of economic and other factors.

In accordance with the provisions of SFAS No. 87, "Employers' Accounting
for Pensions," the discount rate that we assume is required to reflect the rates
of high-quality debt instruments that would provide the future cash flows
necessary to pay benefits when they come due. We reduced our discount rate from
7.25% at March 31, 2002 to 6.75% at March 31, 2003 to reflect market interest
rate reductions. The effect of a lower discount rate increased the present value
of benefit obligations and has increased pension expense in fiscal 2004.

To determine the expected long-term rate of return on pension plan assets,
we consider the current and expected asset allocations, as well as historical
returns on plan assets. We assumed that long-term returns on pension assets were
9.00% during fiscal 2003. Based on the negative returns of the stock market and
our pension plan assets, we have reduced our expected long-term rate of return
assumption in fiscal 2004 to 8.00%.

Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

Upon emergence from bankruptcy on June 29, 2001, we had available NOL
carryforwards of approximately $112 million, which expire through 2022, and net
deferred tax assets (including NOL carryforwards) of approximately $75 million.
In accordance was SFAS No., 109, "Accounting for Income Taxes," realization of
net deferred tax assets that existed as of the emergence date will first be
recorded as a reduction of goodwill until exhausted and, thereafter, will be
reported as an increase to additional paid-in capital. In addition, our use of
emergence date net deferred tax assets during the three months ended June 30,
2003 resulted in the recognition of income tax expense without a corresponding
payment of cash taxes. We have recorded a valuation allowance against the
emergence date net deferred tax assets, including NOL carryforwards remaining at
June 30, 2003, due to the uncertainty regarding their ultimate realization.
Realization is dependent upon generating sufficient future taxable income and
the release of the valuation allowance is dependent on our ability to forecast
future results. When we are able to demonstrate a pattern of predictable level
of profitability and thereby sufficiently reduce the uncertainty relating to the
realization of the NOL carryforwards, the valuation allowance will be reversed
and recorded first as a reduction of goodwill until exhausted and then as an
increase to additional paid-in capital.

16

Contingencies
We establish reserves for estimated liabilities, which include
environmental remediation and potential litigation claims. A loss contingency is
accrued when our assessment indicates that it is probable that a liability has
been incurred and the amount of the liability can be reasonably estimated. Our
estimates are based upon currently available facts and presently enacted laws
and regulations. These estimated liabilities are subject to revision in future
periods based on actual costs or new information.

The above listing is not intended to be a comprehensive list of all of our
accounting policies. Please refer to our Annual Report, which contains
accounting policies and other disclosures required by generally accepted
accounting principles.

RESULTS OF OPERATIONS

SALES
Consolidated net sales for the three months ended June 30, 2003 and for the
three months ended June 30, 2002 in broad product categories were as follows ($
in thousands):

Consolidated net sales increased by $33.5 million (17.3%) to $227.0 million
in the three months ended June 30, 2003 compared to consolidated net sales of
$193.5 million in the three months ended June 30, 2002. The increase in
consolidated net sales was primarily due to higher average selling prices for
ferrous products.

Ferrous Sales
Ferrous sales increased by $31.2 million (25.5%) to $153.6 million in the
three months ended June 30, 2003 compared to ferrous sales of $122.4 million in
the three months ended June 30, 2002. The increase was attributable to higher
selling prices with consistent sales volumes. In the three months ended June 30,
2003, the average selling price for ferrous products was approximately $142 per
ton, an increase of $30 per ton (27.0%) from the three months ended June 30,
2002. The increase in selling prices for ferrous scrap is evident in data
published by the American Metal Market ("AMM"). According to AMM, the average
price for #1 Heavy Melting Steel Scrap - Chicago (which is a common indicator
for ferrous scrap) was approximately $101 per ton for the three months ended
June 30, 2003 compared to $92 per ton for the three months ended June 30, 2002.

Demand for our ferrous scrap continues to remain strong. International
demand remains favorable due to weakening of the U.S. dollar, which makes U.S.
scrap more attractive to overseas buyers and, in particular, strong demand from
China, Korea and Turkey. The strong international demand is evident in data
released by the U.S. Commerce Department, which shows that U.S. exports of
ferrous scrap for calendar 2003 (through May 2003) were approximately 5.1
million tons, an increase of 14% from the comparable period in calendar 2002.

Domestic demand remains favorable, although production levels by U.S. steel
mills have dropped slightly from their high levels in calendar 2002. According
to data published by the American Iron and Steel Institute,

17

U.S. steel mills operated at an average capacity utilization rate of between 81%
to 86% in calendar 2003 (through July 2003) compared to an average of 88.8% in
calendar 2002.

Non-ferrous Sales
Non-ferrous sales decreased by $2.2 million (4.2%) to $49.7 million in the
three months ended June 30, 2003 compared to non-ferrous sales of $51.9 million
in the three months ended June 30, 2002. The decrease was due to lower sales
volumes partially offset by higher average selling prices. In the three months
ended June 30, 2003, non-ferrous sales volumes decreased by 17.2 million pounds
and average selling price for non-ferrous products increased by approximately
$.06 per pound as compared to the three months ended June 30, 2002.

Although non-ferrous sales decreased in the three months ended June 30,
2003, our material margins on non-ferrous metals increased slightly as compared
to the three months ended June 30, 2002. Our non-ferrous operations continue to
be impacted in both the supply and demand for non-ferrous metals due to weakness
in the aerospace and telecommunications industries. The conditions of
non-ferrous markets in terms of volume, including our three major
products - aluminum, copper and stainless steel (nickel base metal) - are
generally weak. Prices for certain non-ferrous metals have begun to stabilize
and increase, but supply and demand still remains low.

Our non-ferrous sales are also impacted by the mix of non-ferrous metals
sold. Generally, prices for copper are higher than prices for aluminum and
stainless steel. In addition, the amount of high-temperature alloys that we sell
(generally from our Aerospace subsidiary) and the selling prices for these
metals will impact our non-ferrous sales as prices for these metals are
generally higher than other non-ferrous metals.

Brokerage Sales
Brokerage ferrous sales increased by $2.8 million (17.8%) to $18.6 million
in the three months ended June 30, 2003 compared to brokerage ferrous sales of
$15.8 million in the three months ended June 30, 2002. The increase was
primarily a result of a 22,000 ton increase in brokered ferrous tons. Since the
beginning of the calendar year, we have expanded our brokerage business at
certain operations as a result of strong export demand for ferrous scrap. The
increase in exported ferrous scrap offset lower demand from domestic customers
for grades of obsolete scrap. The average selling price for brokered metals is
significantly affected by the product mix, such as prompt industrial grades
versus obsolete grades, which can vary significantly between periods. Prompt
industrial grades of scrap metal are generally associated with higher unit
prices.

Other Sales
Other sales are primarily derived from our stevedoring and bus dismantling
operations. The increase in other sales in the three months ended June 30, 2003
is primarily a result of higher stevedoring revenue which increased by $1.5
million from the three months ended June 30, 2002.

GROSS PROFIT
Gross profit was $30.0 million (13.2% of sales) in the three months ended
June 30, 2003 compared to gross profit of $28.3 million (14.6% of sales) in the
three months ended June 30, 2002. The improvement in the amount of gross profit
earned was due to higher material margins realized on ferrous products sold in
the three months ended June 30, 2003, offset partially by higher processing
expenses. The higher material margins were realized as a result of higher
average selling prices for ferrous products. Additionally, we continue to
improve our performance through higher realization of Zorba (non-ferrous metals
recovered as a by-product from the shredding process) and from realizing
attractive prices for Zorba in the three months ended June 30, 2003.

Our processing cost on a per unit basis increased slightly in the three
months ended June 30, 2003 compared to the three months ended June 30, 2002. The
increase in processing costs was mainly attributable to higher repairs and
maintenance expenditures, lease expense and utilities.

The decrease in gross profit as a percentage of sales during the three
months ended June 30, 2003 compared to the three months ended June 30, 2002 is
due to higher processing expenses and increased freight
18

expenses associated with a greater percentage of sales being made on delivered
terms, most notably increased export sales which involve higher freight costs
than domestic shipments. Increased brokerage activity in the three months ended
June 30, 2003 also contributed to the lower gross profit as a percentage of
sales.

GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $12.6 million (5.5% of sales) in
the three months ended June 30, 2003 compared to general and administrative
expenses of $11.4 million (5.9% of sales) in the three months ended June 30,
2002. The $1.2 million increase is mainly due to higher health insurance costs
and increased professional fees. We are self-insured for health insurance for
most of our employees. Health insurance claims were higher by $0.4 million in
the three months ended June 30, 2003 compared to the three months ended June 30,
2002. Professional fees increased by $0.4 million in the three months ended June
30, 2003 primarily due to legal and investor relations activities. Since January
2003, we have incurred legal costs related to our cooperation with a subpoena
received from the Department of Justice. In late 2002, we retained an investor
relations firm and have recently begun to incur costs in connection with those
activities. Neither of these costs was incurred in the three months ended June
30, 2002.

DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $4.6 million (2.0% of sales) in
the three months ended June 30, 2003 compared to depreciation and amortization
expense of $4.4 million (2.3% of sales) in the three months ended June 30, 2002.
The increase is due to capital expenditures incurred since June 2002.

INCOME (LOSS) FROM JOINT VENTURES
Income from joint ventures was $0.9 million in the three months ended June
30, 2003 compared to loss from joint ventures of $30,000 in the three months
ended June 30, 2002. The income from joint ventures primarily represents our
28.5% share of income from Southern. In February 2003, Southern strengthened its
capitalization by accomplishing a long-term refinancing of its debt. In
addition, Southern benefited from the improving scrap markets which led to
profitability and the recovery of our investment which had been previously
reserved.

INTEREST EXPENSE
Interest expense was $2.3 million (1.0% of sales) in the three months ended
June 30, 2003 compared to interest expense of $3.0 million (1.6% of sales) in
the three months ended June 30, 2002. The decrease was a result of lower
borrowings and interest rates under our credit facility. Our average borrowings
under our credit facility in the three months ended June 30, 2003 were
approximately $30 million less than our average borrowings under our credit
facility in the three months ended June 30, 2002. The interest rate under our
credit facility was based on the prime rate of interest which was 4.75% during
the three months ended June 30, 2002. During the three months ended June 30,
2003, the prime rate of interest was 4.25% in April and May 2003 and 4.00% in
June 2003.

In addition, approximately $0.1 million of the reduction in interest
expense is due to lower interest expense on our Junior Secured Notes as a result
of the repurchase of approximately $2.4 million par amount of Junior Secured
Notes in the second and third quarter of fiscal 2003.

INCOME TAXES
In the three months ended June 30, 2003, we recognized income tax expense
of $4.4 million resulting in an effective tax rate of 38.7%. The recognition of
income tax expense results from the utilization of NOL carryforwards and other
deferred tax assets of our predecessor company, which are not offset by a
corresponding reversal of the related valuation allowance. Valuation allowance
reversals of the predecessor company, under generally accepted accounting
principles, are recorded first as a reduction in goodwill and then as an
increase to additional paid-in capital. The effective tax rate differs from the
statutory rate primarily due to the impact of state income taxes.

In the three months ended June 30, 2002, our income tax expense was $2.2
million resulting in an effective tax rate of 23.4%. During the three months
ended June 30, 2002, we estimated our income tax
19

expense assuming that our use of predecessor company NOL carryforwards would be
limited in their annual utilization. In December 2002, we finalized and filed
our federal income tax return and made an election that increased the amount of
predecessor company NOL carryforwards utilized. Consequently, our effective
income tax rate is higher due to the increase in the amount of predecessor
company NOL carryforwards utilized.

NET INCOME
Net income was $7.0 million in the three months ended June 30, 2003
compared to net income of $7.3 million in the three months ended June 30, 2002.
Net income in the three months ended June 30, 2002 was higher due to income tax
expense which was $2.2 million lower than the three months ended June 30, 2003.
Net income in the three months ended June 30, 2003 benefited from the
recognition of $0.9 million of income from joint ventures and interest expense
which was $0.7 million lower than the three months ended June 30, 2002.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows
In the three months ended June 30, 2003, our operating activities used net
cash of $12.8 million compared to net cash generated of $2.7 million in the
three months ended June 30, 2002. The use of cash in the three months ended June
30, 2003 was due to an increase in working capital of $28.3 million, which
offset the $15.5 million of cash generated from net income, adjusted for
non-cash items. The working capital increase was due to higher accounts
receivable ($13.8 million), higher inventory ($3.3 million) and lower accounts
payable ($4.7 million). Accounts receivable at March 31, 2003 was reduced
significantly from strong collections due to cargo sales and collections during
the month of March 2003. Inventory increased due to purchases of scrap in June
2003 to fill export sales to ship in July 2003. Accounts payable decreased due
to the timing of purchases of scrap metal and their subsequent payment terms. In
addition, other working capital cash outflows during the three months ended June
30, 2003 included the payment of $5.7 million of incentive compensation that was
accrued for at March 31, 2003 and the payment of a $2.0 million coupon scheduled
under the Junior Secured Notes.

We used $1.4 million in net cash for investing activities in the three
months ended June 30, 2003 compared to the use of net cash of $1.2 million in
the three months ended June 30, 2002. In the three months ended June 30, 2003,
purchases of property and equipment were $1.6 million, while we generated $0.2
million of cash from the sale of redundant fixed assets.

We generated $14.5 million in net cash from financing activities in the
three months ended June 30, 2003 compared to the use of net cash of $1.1 million
in the three months ended June 30, 2002. We increased borrowings under our
credit facility by $13.2 million in order to fund increases in our working
capital. We also received $1.7 million of cash from the exercise of warrants.

Indebtedness
At June 30, 2003, our total indebtedness was $102.8 million, an increase of
$13.1 million from March 31, 2003. Our primary source of financing is our
revolving credit and letter of credit facility.

On August 13, 2003, we entered into an amended and restated credit facility
(the "Credit Agreement") with Deutsche Bank Trust Company Americas, as agent for
the lenders thereunder. The Credit Agreement provides for maximum borrowings of
$130 million and expires on July 1, 2007. $110 million of the Credit Agreement
is available as a revolving loan and letter of credit facility and $20 million
was committed as a term loan to be funded upon repurchase of the Junior Secured
Notes. In consideration for the Credit Agreement, we paid fees and expenses of
approximately $2.5 million. The Credit Agreement is available to fund working
capital needs, for general corporate purposes and to repurchase and redeem the
Junior Secured Notes.

Borrowings under the Credit Agreement are subject to certain borrowing base
limitations based upon a formula equal to 85% of eligible accounts receivable,
the lesser of $45 million or 70% of eligible inventory, a fixed asset sublimit
of $12.7 million as of August 13, 2003, and a term loan of $20.0 million (the
"Term

20

Loan"). The fixed asset sublimit amortizes by $2.5 million on a quarterly basis
and under certain other conditions. Upon the full amortization of the fixed
asset sublimit, the Term Loan will then amortize by $2.5 million on a quarterly
basis and under certain other conditions. A security interest in substantially
all of our assets and properties, including pledges of the capital stock of our
subsidiaries, has been granted to the agent for the lenders as collateral
against our obligations under the Credit Agreement. Pursuant to the Credit
Agreement, we pay a fee of .375% on the undrawn portion of the facility.

Borrowings on all outstanding balances under the Credit Agreement (other
than the Term Loan) bear interest, at our option, either at the prime rate (as
specified by Deutsche Bank AG, New York Branch) plus a margin or LIBOR plus a
margin. The margin on prime rate loans range from 0.50% to 1.00% and the margin
on LIBOR loans range from 2.50% to 3.00%. The margin is based on our leverage
ratio (as defined in the Credit Agreement) for the preceding quarter. Borrowings
under the Term Loan bear interest at LIBOR plus 6.00% (with a floor on LIBOR
equal to 2.50%).

Under the Credit Agreement, we are required to satisfy specified financial
covenants, including a minimum fixed charge coverage ratio of 1.25 to 1.00 and a
maximum leverage ratio of 3.00 to 1.00, through December 31, 2004. After
December 31, 2004, the maximum leverage ratio is 2.25 to 1.00. Both ratios are
tested for the twelve-month period ending each fiscal quarter. The Credit
Agreement also limits capital expenditures to $16 million for the twelve-month
period ending each fiscal quarter.

The Credit Agreement also contains restrictions which, among other things,
limit our ability to (i) incur additional indebtedness; (ii) pay dividends;
(iii) enter into transactions with affiliates; (iv) enter into certain asset
sales; (v) engage in certain acquisitions, investments, mergers and
consolidations; (vi) prepay certain other indebtedness; (vii) create liens and
encumbrances on our assets; and (viii) other matters customarily restricted in
such agreements. We were in compliance with all financial covenants as of June
30, 2003 contained in the previous credit agreement. As of August 4, 2003, we
had outstanding borrowings of approximately $55.0 million under the previous
credit agreement and undrawn availability of approximately $54.2 million.

Our ability to meet financial ratios and tests in the future may be
affected by events beyond our control, including fluctuations in operating cash
flows and working capital. While we currently expect to be in compliance with
the covenants and satisfy the financial ratios and tests in the future, there
can be no assurance that we will meet such financial ratios and tests or that we
will be able to obtain future amendments or waivers to the Credit Agreement, if
so needed, to avoid a default. In the event of default, the lenders could elect
to not make loans to us and declare all amounts borrowed under the Credit
Agreement to be due and payable.

At June 30, 2003, our debt included $31.5 million of Junior Secured Notes
due on June 15, 2004. On August 12, 2003, we entered into Note Purchase
Agreements with five note holders to repurchase approximately $30.5 million par
amount of Junior Secured Notes at a price of 101% of the principal amount plus
accrued and unpaid interest. In addition, in accordance with the Indenture
governing the Junior Secured Notes, we will provide notice to the trustee to
redeem the remaining $1.0 million par amount of Junior Secured Notes at a price
of 100% of the principal amount, plus accrued and unpaid interest. We expect the
final redemption of the remaining Junior Secured Notes to occur on or around
September 30, 2003. The Junior Secured Notes will be cancelled following their
repurchase and redemption.

The Junior Secured Notes are classified as long-term debt on our unaudited
balance sheet as of June 30, 2003 as they have been or will be repaid with
proceeds available under the Credit Agreement.

Future Capital Requirements
We expect to fund our working capital needs, interest payments and capital
expenditures over the next twelve months with cash generated from operations,
supplemented by undrawn borrowing availability under the Credit Agreement. Our
future cash needs will be driven by working capital requirements, planned
capital expenditures and acquisition objectives, should attractive acquisition
opportunities present themselves. During the three months ended June 30, 2003,
we received $1.7 million of cash proceeds from exercise of warrants by
employees. We may also receive additional cash in the future from the exercise
of outstanding stock options and warrants.
21

Capital expenditures are planned to be approximately $12 million to $14
million in fiscal 2004, which includes costs to complete the installation of a
"Mega" Shredder, that we currently own, at our facility in Phoenix, Arizona. We
expect the "Mega" Shredder to be operational by October 2003.

In addition, due to favorable financing terms made available by equipment
manufacturing vendors, we have entered into operating leases for new equipment.
Since April 2002, we have entered into 21 operating leases for equipment which
would have cost approximately $5.7 million to purchase. These operating leases
are attractive to us since the implied interest rates are lower than interest
rates under our credit facilities. We expect to selectively use operating leases
for new material handling equipment or trucks required by our operations.

We believe these sources of capital will be sufficient to fund planned
capital expenditures, interest payments and working capital requirements for the
next twelve months, although there can be no assurance that this will be the
case.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
We do not have any off-balance sheet arrangements that are likely to have a
current or future effect on our results of operations, financial condition, or
cash flows. We have assumed various financial obligations and commitments in the
normal course of our operations and financing activities. Financial obligations
are considered to represent known future cash payments that we are required to
make under existing contractual arrangements, such as debt and lease agreements.

The following table sets forth our known contractual obligations as of June
30, 2003, and the effect such obligations are expected to have on our liquidity
and cash flow in future periods (in thousands):

Other Commitments
We are required to make contributions to our defined benefit pension plans.
These contributions are required under the minimum funding requirements of the
Employee Retirement Income Security Act (ERISA). However, due to uncertainties
regarding significant assumptions involved in estimating future required
contributions, such as pension plan benefit levels, interest rate levels and the
amount of pension plan asset returns, we are not able to reasonably estimate the
amount of future required contributions beyond fiscal 2004. Our minimum required
pension contributions for fiscal 2004 will be approximately $1.2 million.

We also enter into letters of credit in the ordinary course of operating
and financing activities. As of July 31, 2003, we had outstanding letters of
credit of $4.0 million which expire in fiscal 2004.

In November 2001, we amended our lease agreement for land on which we
operate a scrap metals recycling facility in Houston, Texas. The lease agreement
expires on October 31, 2006 and provides for, among other things, an option for
the lessor to sell the land to us beginning on the 22nd month of the lease. We
have an option to purchase the land beginning on the 22nd month of the lease
(August 2003). We exercised our purchase option to acquire the land for $4.0
million. The land purchase should close on or about September 29, 2003.

In connection with a prior acquisition, we agreed to indemnify the selling
shareholders in that acquisition for, among other things, breaches of
representations, warranties and covenants and for guarantees provided by certain
shareholders of commercial agreements. The selling shareholders' ability to
assert indemnification claims expires in November 2003. No indemnification
claims have been asserted against us to date. The

22

amount that we could be required to pay under the indemnification obligations
could range from $0 to a maximum amount of approximately $2 million, excluding
interest and collection costs.

Recent Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement addresses, among other items, the classification of
gains and losses from extinguishment of debt. Under the provisions of SFAS No.
145, gains and losses from extinguishment of debt can only be classified as
extraordinary items if they meet the criteria set forth in APB Opinion No. 30.
We adopted this statement on April 1, 2003. The adoption of this statement will
result in the reclassification of the extraordinary gains on the debt
extinguishments recognized during the year ended March 31, 2003 and the
extraordinary gain on debt discharge recognized during the three months ended
June 30, 2001 as other income in our statement of operations.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires certain
guarantees be recorded at fair value as opposed to the current practice of
recording a liability only when a loss is probable and reasonably estimable. FIN
45 also requires a guarantor to make significant new guaranty disclosures, even
when the likelihood of making any payments under the guarantee is remote. We
adopted this statement on December 31, 2002. The adoption of this statement
resulted in additional disclosures made by us which are included in this Report.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative
methods of transition to the fair value method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting used for stock-based
employee compensation and the effect on reported net income and earnings per
share. We have not changed the way we account for stock-based employee
compensation, although we did adopt the disclosure-only provisions of SFAS No.
148 on December 31, 2002.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51 and applies immediately to any variable
interest entities created after January 31, 2003 and to variable interest
entities in which an interest is obtained after that date. FIN 46 will be
applicable to us in the second quarter of fiscal 2004, for interests acquired in
variable interest entities prior to February 1, 2003. We do not have any
variable interest entities and therefore adoption of this interpretation will
have no impact on our consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" to provide
clarification on the financial accounting and reporting of derivative
instruments and hedging activities and requires that contracts with similar
characteristics be accounted for on a comparable basis. The provisions of SFAS
No. 149 are effective for contracts entered into or modified after June 30,
2003, and for hedging relationships designated after June 30, 2003. We do not
expect this statement to impact our consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards on the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. The
provisions of SFAS No. 150 are effective for financial instruments entered into
or modified after May 31, 2003 and to all other instruments that exist as of the
beginning of the first interim financial reporting period beginning after June
15, 2003 (our second quarter of fiscal 2004). We do not expect this statement to
impact our consolidated financial statements.

23

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial risk resulting from fluctuations in interest
rates and commodity prices. We seek to minimize these risks through regular
operating and financing activities and, where appropriate, through use of
derivative financial instruments. Our use of derivative financial instruments is
limited and related solely to hedges of certain non-ferrous inventory positions
and purchase and sales commitments. Refer to Item 7A of the Annual Report.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. Under the supervision
and with the participation of our management, including Albert A. Cozzi, our
Vice-Chairman of the Board and Chief Executive Officer (CEO), and Robert C.
Larry, our Executive Vice-President, Finance and Chief Financial Officer (CFO),
we have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the fiscal quarter covered
by this Report. Based on their evaluation, our CEO and CFO have concluded that,
as of that date, these controls and procedures were adequate and effective to
ensure that material information relating to our company and our consolidated
subsidiaries would be made known to them by others within those entities.

(b) Changes in internal controls. There were no significant changes in our
internal controls or in other factors that could significantly affect our
disclosure controls and procedures subsequent to the date of their evaluation,
nor were there any significant deficiencies or material weaknesses in our
internal controls. As a result, no corrective actions were required or
undertaken.

Disclosure Controls and Internal Controls. Disclosure controls and
procedures are our controls and other procedures that are designed with the
objective of ensuring that information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act of 1934 (the
"Exchange Act") is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us in
the reports that we file under the Exchange Act is accumulated and communicated
to our management, including our CEO and CFO, as appropriate to allow timely
decisions regarding required disclosure. Internal controls are procedures which
are designed with the objective of providing reasonable assurance that:

- our transactions are properly authorized;
- our assets are safeguarded against unauthorized or improper use; and
- our transactions are properly recorded and reported,

all to permit the preparation of our financial statements in conformity with
generally accepted accounting principles.

Limitations on the Effectiveness of Controls. Our management, including our
CEO and CFO, does not expect that our disclosure controls or our internal
controls will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.

24

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

USEPA v. Metal Management Midwest, Inc. ("MTLM-Midwest")

Our subsidiary, MTLM-Midwest, operates seven facilities in the Chicago area
which were the subject of a series of inspections and document requests in the
mid-1990s by, among other agencies, the United States Environmental Protection
Agency ("USEPA") pursuant to the so-called Greater Chicagoland Initiative to
perform multimedia and multi-agency inspections of scrap yards in the Chicago
Area (the "USEPA Initiative"). As a result of the USEPA Initiative, USEPA
alleged that MTLM Midwest's facilities had violated certain provisions of the
Resource Conservation and Recovery Act, the Clean Air Act, the Clean Water Act,
the Oil Pollution Standards and the Toxic Substances Control Act. In January
2003, we entered into a Consent Decree with USEPA pursuant to which, without
admitting liability with respect to the alleged violations, we agreed (i) to
distribute to USEPA an allowed class 6 unsecured claim in our Chapter 11
bankruptcy proceedings to be satisfied through the issuance of shares of our
common stock allocated in our plan of reorganization to class 6 creditors, and
(ii) to perform environmental compliance audits at several of our MTLM-Midwest
facilities. The Consent Decree became final on July 17, 2003.

Callicutt v. Metal Management Memphis, L.L.C. ("MTLM-Memphis")

In May 2003, a former employee of our subsidiary, MTLM-Memphis, filed suit
individually and on behalf of his minor children in the Circuit Court of Shelby
County, Tennessee for the 30th Judicial District at Memphis, alleging that he
was exposed to hazardous concentrations of toxic substances, including lead
dust, as an employee of MTLM-Memphis. Plaintiff further claims that his minor
children have sustained neuro-cognitive and brain injuries allegedly as a result
of lead contamination being transferred from his clothing to the children. The
suit seeks $1.5 million in compensatory damages, an unspecified amount of
punitive damages and for the establishment by MTLM-Memphis of a fund to provide
plaintiffs with on-going medical treatment. We intend to vigorously defend these
allegations; however, initial discovery has not yet begun, and we are not able
at this preliminary stage to estimate MTLM-Memphis' potential liability, if any,
in connection with this action.

From time to time, we are involved in various litigation matters involving
ordinary and routine claims incidental to our business. A significant portion of
these matters result from environmental compliance issues and workers
compensation related claims applicable to our operations. There are presently no
other legal proceedings pending against us, which, in the opinion of our
management, are likely to have a material adverse effect on our business,
financial condition or results of operations. Please refer to Item 3 of the
Annual Report for a description of the litigation in which we are currently
involved.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

See Exhibit Index

(b) Reports on Form 8-K

We filed a Current Report on Form 8-K on May 28, 2003, which described an
amendment to our credit agreement.

We filed a Current Report on Form 8-K on April 8, 2003, which updated our
previous disclosure on a lawsuit filed by the Connecticut Department of
Environmental Protection against our Metal Management Connecticut subsidiary.

25

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

METAL MANAGEMENT, INC.

By: /s/ Albert A. Cozzi
------------------------------
Albert A. Cozzi
Vice-Chairman of the
Board and Chief
Executive Officer
(Principal Executive
Officer)

By: /s/ Michael W. Tryon
------------------------------
Michael W. Tryon
President and Chief
Operating Officer

By: /s/ Robert C. Larry
------------------------------
Robert C. Larry
Executive Vice President,
Finance and Chief
Financial Officer
(Principal Financial
Officer)

By: /s/ Amit N. Patel
------------------------------
Amit N. Patel
Vice President, Finance
and Controller
(Principal Accounting
Officer)
Date: August 14, 2003

26

METAL MANAGEMENT, INC.
EXHIBIT INDEX