METAL MANAGEMENT INC - 10-Q Quarterly Report

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

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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, 2004

[ ] 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

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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

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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 X No ___

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 July 15, 2004, the registrant had 23,488,268 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 -- GENERAL

Business
Metal Management, Inc., a Delaware corporation, and its wholly owned
subsidiaries (the "Company") are principally engaged in the business of
collecting and processing ferrous and non-ferrous metals. The Company collects
industrial scrap metal and obsolete scrap metal, processes it into reusable
forms, and supplies the recycled metals to its customers, including electric-arc
furnace mills, integrated steel mills, foundries, secondary smelters and metals
brokers. These services are provided through the Company's recycling facilities
located in 13 states. The Company's 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. The Company also
processes non-ferrous metals, including aluminum, stainless steel and other
nickel-bearing metals, copper, brass, titanium and high-temperature alloys,
using similar techniques and through application of certain of the Company's
proprietary technologies.

Basis of Presentation
The accompanying unaudited consolidated financial statements of 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, 2004.

Recent Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board (the "FASB")
issued Interpretation No. 46-R, "Consolidation of Variable Interest Entities"
("FIN 46-R"), which replaces Interpretation No. 46, "Consolidation of Variable
Interest Entities." FIN 46-R addresses how to identify variable interest
entities and the criteria that requires a company to consolidate such entities
in its financial statements. The adoption of this interpretation had no impact
on the Company's consolidated financial statements.

In December 2003, the FASB revised Statement of Financial Accounting
Standards ("SFAS") No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." This revised statement retains the requirements of the
original SFAS No. 132 but requires additional disclosures concerning the
economic resources and obligations related to pension plans and other
postretirement benefits. The Company has revised its disclosures to meet the
requirements under this standard.

In December 2003, the SEC issued Staff Accounting Bulleting ("SAB") No.
104, "Revenue Recognition," which supercedes SAB No. 101, "Revenue Recognition
in Financial Statements." SAB No. 104 rescinds accounting guidance in SAB No.
101 related to multiple-element revenue arrangements as this guidance has been
superceded with the issuance of Emerging Issue Task Force Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." The adoption
of SAB No. 104 had no impact on the Company's consolidated financial statements.

5

Stock Split
On March 8, 2004, the Company's Board of Directors approved a two-for-one
stock split in the form of a stock dividend. As a result of the stock split, the
Company's stockholders received one additional share for each share of common
stock held on the record date of April 5, 2004. The additional shares of common
stock were distributed on April 20, 2004. All share and per share amounts have
been retroactively adjusted in this report to reflect the stock split.

Restricted Stock
Restricted stock grants consist of shares of the Company's common stock
which are awarded to employees. The grants are restricted such that they are
subject to substantial risk of forfeiture and to restrictions on their sale or
other transfer by the employee.

Total shares of restricted stock outstanding at June 30, 2004 and 2003 was
530,838 and 41,552, respectively. At June 30, 2004, the amount of related
deferred compensation reflected in Stockholders' Equity in the consolidated
balance sheet was $7.5 million. An aggregate of 12,000 shares of restricted
stock were granted during the three months ended June 30, 2004. The Company
recorded amortization of deferred compensation of approximately $1.1 million and
$32,000 related to restricted stock during the three months ended June 30, 2004
and 2003, respectively.

Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Compensation expense for stock
options and warrants is measured as the excess, if any, of the quoted market
price of the Company's common stock at the date of grant over the exercise price
of the stock option or warrant. Compensation expense for restricted stock awards
is measured at fair value on the date of grant based on the number of shares
granted and the quoted market price of the Company's common stock. Such value is
recognized as expense over the vesting period of the award. The vesting period
ranges from 2 to 4 years. To the extent restricted stock awards are forfeited
prior to vesting, the previously recognized expense is reversed to stock-based
compensation expense.

The following table illustrates the pro forma effects on net income and
earnings per common share if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" to
stock-based 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, 2004 and 2003, approximately 0.5
million and 1.6 million, respectively, of the Company's 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 respective periods.

NOTE 3 -- OTHER FINANCIAL 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
consist of the following at (in thousands):

7

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

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

Accrued Severance and Other Charges
During the year ended March 31, 2004, the Company implemented a management
realignment that resulted in the recognition of $6.2 million of charges
consisting mainly of employee termination benefits. The Company recorded the
following activity during the three months ended June 30, 2004 to the accrued
severance and other charges liability (in thousands):

Approximately $1.2 million of the June 30, 2004 reserve balance is included
in other long-term liabilities on the Company's consolidated balance sheet as
the obligations are scheduled to be paid in July 2005. The remaining $0.1
million of the June 30, 2004 reserve balance is included in other accrued
expenses on the Company's consolidated balance sheet.

8

NOTE 4 -- GOODWILL AND OTHER INTANGIBLES

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

In October 2002, the Company acquired certain assets of a scrap metals
recycling company. A portion of the purchase consideration was contingent
consideration of $0.2 million. The contingency was settled in May 2004 for $0.1
million, resulting in a corresponding reduction of goodwill. In November 2003,
the Company acquired certain assets of H. Bixon and Sons. A portion of the
purchase consideration was contingent consideration of up to $0.3 million per
year for three years based on the achievement of certain earnout targets.

Total amortization expense for other intangibles was $36,000 during both
the three months ended June 30, 2004 and 2003. Based on the other intangibles
recorded as of June 30, 2004, annual amortization expense for other intangibles
will be approximately $0.1 million for each of the next five fiscal years.

NOTE 5 -- LONG-TERM DEBT

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

Credit Agreement
On June 28, 2004, the Company entered into a new credit agreement with a
consortium of lenders led by LaSalle Bank, N.A. (the "Credit Agreement"). The
Credit Agreement provides for maximum borrowings of $200 million with a maturity
date of June 28, 2008. In consideration for the Credit Agreement, the Company
incurred fees and expenses of approximately $1.4 million.

The Credit Agreement is a revolving credit and letter of credit facility
that will support the Company's working capital requirements and is also
available for general corporate purposes. Borrowing costs are based on variable
rates tied to the prime rate plus a margin or the London Interbank Offered Rate
plus a margin. The margin is based on the Company's leverage ratio (as defined
in the Credit Agreement) as determined for the trailing four fiscal quarters.
Proceeds from the Credit Agreement were utilized to repay the amounts
outstanding under the Company's prior credit agreement and an $18 million term
loan.

Borrowings under the Credit Agreement are generally subject to borrowing
base limitations based upon a formula equal to 85% of eligible accounts
receivable plus the lesser of $65 million or 70% of eligible inventory.

9

Inventories cannot represent more than 40% of the borrowing base. 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 on the undrawn portion of the facility that is determined by
the leverage ratio. As of June 30, 2004, that fee is .30% per annum.

Under the Credit Agreement, the Company is required to satisfy specified
financial covenants, including a maximum leverage ratio of 2.50 to 1.00, a
minimum consolidated fixed charge coverage ratio of 1.50 to 1.00 and a minimum
tangible net worth of not less than the sum of $110 million plus 25% of
consolidated net income earned in each fiscal quarter. The leverage ratio and
consolidated fixed charge coverage ratio are tested for the twelve-month period
ending each fiscal quarter. The Credit Agreement also limits capital
expenditures to $20 million for the twelve-month period ending each fiscal
quarter.

The Credit Agreement contains restrictions which, among other things, limit
the Company's ability to (i) incur additional indebtedness; (ii) pay dividends
under certain conditions; (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) engage in other
matters customarily restricted in such agreements.

As a result of the repayment of amounts outstanding under the Company's
prior credit agreement, the Company recognized a loss on debt extinguishment of
approximately $1.7 million during the three months ended June 30, 2004. This
amount represents a write-off of unamortized deferred financing costs associated
with the prior credit agreement.

NOTE 6 -- EMPLOYEE BENEFIT PLANS

The Company sponsors three defined benefit pension plans for employees at
certain of its subsidiaries. The Company's funding policy for the pension plans
is to contribute amounts required to meet regulatory requirements. The
components of net pension costs were as follows (in thousands):

The Company expects to make cash funding contributions to its pension plans
of approximately $1.9 million in the year ending March 31, 2005, of which $0.4
million was contributed during the three months ended June 30, 2004.

NOTE 7 -- COMMITMENTS AND CONTINGENCIES

Environmental Matters
The Company is subject to comprehensive local, state, federal and
international regulatory and statutory environmental requirements relating to,
among others, the acceptance, storage, treatment, handling and disposal of solid
waste and hazardous waste, the discharge of materials into air, the management
and treatment of wastewater and storm water, the remediation of soil and
groundwater contamination, the restoration of natural resource damages and the
protection of employees' health and safety. The Company believes that it and its
subsidiaries are in material compliance with currently applicable statutes and
regulations governing the protection of human health and the environment,
including employee health and

10

safety. 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 have received notices from the United
States Environmental Protection Agency ("EPA"), state agencies or third parties
that the subsidiary has been identified as potentially responsible for the cost
of investigation and cleanup of landfills or other sites where the subsidiary's
material was shipped. In most cases, many other parties are also named as
potentially responsible parties. The Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA" or "Superfund") enables EPA and state
agencies to recover from owners, operators, generators and transporters the cost
of investigation and cleanup of sites which pose serious threats to the
environment or public health. In certain circumstances, a potentially
responsible party can be held jointly and severally liable for the cost of
cleanup. In other cases, a party who is liable may only be liable for a
divisible share. Liability can be imposed even if the party shipped materials in
a lawful manner at the time of shipment and the liability for investigation and
cleanup costs can be significant, particularly in cases where joint and several
liability may be imposed.

Recent amendments to CERCLA have limited the exposure of scrap metal
recyclers for sales of certain recyclable material under certain circumstances.
However, the recycling defense is subject to a number of exceptions. Because
CERCLA can be imposed retroactively on shipments that occurred many years ago,
and because EPA and state agencies are still discovering sites that present
problems to public heath or the environment, the Company can provide no
assurance that it will not become liable in the future for significant costs
associated with investigation and remediation of CERCLA waste sites.

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.

The Company has engaged in settlement discussions with Joseph A. Schiavone
Corp., Schiavone and the Connecticut DEP regarding the possible characterization
of the North Haven Facility, and the subsequent remediation thereof should
contamination be present at concentrations that require remedial action. The
Company is currently working with an independent environmental consultant to
develop an acceptable characterization plan. The Company cannot provide
assurances that it will be able to reach an acceptable settlement of this matter
with the other parties.

During the period from September 2002 to the present, the Arizona
Department of Environmental Quality ("ADEQ") issued five Notices of Violations
("NOVs") to Metal Management Arizona, L.L.C. ("MTLM-Arizona"), a subsidiary of
the Company, for alleged violations at MTLM-Arizona's Tucson and Phoenix
facilities including: (i) not developing and submitting a "Solid Waste Facility
Site Plan"; (ii) placing

11

shredder residue on a surface that does not meet Arizona's permeability
specifications; (iii) alleged failure to follow ADEQ protocol for sampling and
analysis of waste from the shredding of motor vehicles at the Phoenix facility;
and (iv) use of excavated soil to stabilize railroad tracks adjacent to the
Phoenix facility. On September 5, 2003, MTLM-Arizona was notified that ADEQ had
referred the outstanding NOV issues to the Arizona Attorney General. Certain of
these NOVs have now been resolved, and MTLM-Arizona is cooperating fully with
ADEQ and the Arizona Attorney General's office with respect to the remaining
issues. The Company believes that MTLM-Arizona's potential liability and costs
of any required remediation in connection with the remaining issues will not be
material.

On April 29, 1998, Metal Management Midwest, Inc. ("MTLM-Midwest"), a
subsidiary of the Company, acquired substantially all of the operating assets of
138 Scrap, Inc. ("138 Scrap") that were used in its scrap metal recycling
business. Most of these assets were located at a recycling facility in
Riverdale, Illinois (the "Facility"). In early November 2003, MTLM-Midwest was
served with a Notice of Intent to Sue (the "Notice") by The Jeff Diver Group,
L.L.C., on behalf of the Village of Riverdale, alleging, among other things,
that the release or disposal of hazardous substances within the meaning of
CERCLA has occurred at an approximately 57 acre property in the Village of
Riverdale (which includes the 8.8 acre Facility that was leased by MTLM-Midwest
until December 31, 2003). The Notice indicates that the Village of Riverdale
intends to file suit against MTLM-Midwest (directly and as a successor to 138
Scrap) and numerous other third parties under one or both of CERCLA and the
Resource Conservation and Recovery Act. At this preliminary stage, the Company
cannot predict MTLM-Midwest's potential liability, if any, in connection with
such lawsuit or any required remediation. The Company believes that it has
meritorious defenses to certain of the claims outlined in the Notice and
MTLM-Midwest intends to vigorously defend itself against any claims ultimately
asserted by the Village of Riverdale. In addition, although the Company believes
that it would be entitled to indemnification from the sellers of 138 Scrap for
some or all of the obligations that may be imposed on MTLM-Midwest in connection
with this matter under the agreement governing its purchase of the operating
assets of 138 Scrap, the Company cannot provide assurances that any of the
sellers will have sufficient resources to fund any indemnifiable claims to which
the Company may be entitled.

Legal Proceedings
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. To date, the Company has incurred approximately
$0.5 million in legal fees associated with responding to this subpoena.

As a result of internal audits conducted by the Company, the Company
determined that current and former employees of certain business units have
engaged in activities relating to cash payments to individual industrial account
suppliers of scrap metal that may have involved violations of federal and state
law. In May 2004, the Company voluntarily disclosed its concerns regarding such
cash payments to the U.S. Department of Justice. The Board of Directors has
appointed a special committee, consisting of all of its independent directors,
to conduct an investigation of these activities. The Company is cooperating with
the U.S. Department of Justice. The Company has implemented policies to
eliminate such cash payments to industrial customers. During the year ended
March 31, 2004, such cash payments to industrial customers represented
approximately 0.7% of the Company's consolidated ferrous and non-ferrous yard
shipments. The fines and penalties under applicable statutes contemplate
qualitative as well as quantitative factors that are not readily assessable at
this stage of the investigation, but could be material. The Company is not able
to predict at this time the outcome of any actions by the U.S. Department of
Justice or other governmental authorities or their effect on the Company, if
any, and accordingly, the Company has not recorded any amounts in the financial
statements. As of June 30, 2004, the Company has incurred legal and other costs
of approximately $1.7 million related to this matter. These expenses are
included in general and administrative expenses on the Company's consolidated
statement of operations for the three months ended June 30, 2004.

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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.

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," "our" 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, 2004, 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, 2004 ("Annual Report").

BUSINESS OVERVIEW
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 scrap 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 scrap metals, including aluminum, copper, stainless steel
and other nickel-bearing metals, 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.

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RECENT DEVELOPMENTS
On March 8, 2004, our Board of Directors approved a two-for-one stock split
in the form of a stock dividend. The stock dividend was paid on April 20, 2004
to shareholders of record on April 5, 2004. All share and per share amounts have
been retroactively adjusted in this report to reflect the stock split.

As a result of internal audits that we conducted, we determined that
current and former employees of certain business units have engaged in
activities relating to cash payments to individual industrial account suppliers
of scrap metal that may have involved violations of federal and state law. In
May 2004, we voluntarily disclosed our concerns regarding such cash payments to
the U.S. Department of Justice. Our Board of Directors appointed a special
committee, consisting of all of our independent directors, to conduct an
investigation of these activities. We are cooperating with the U.S. Department
of Justice. We have implemented policies to eliminate such cash payments to
industrial customers. The fines and penalties under applicable statutes
contemplate qualitative as well as quantitative factors that are not readily
assessable at this stage of the investigation, but could be material. We are not
able to predict at this time the outcome of any actions by the U.S. Department
of Justice or other governmental authorities or their effect on us, if any, and
accordingly, we have not recorded any amounts in the financial statements.

On June 28, 2004, we entered into a new credit agreement with a consortium
of lenders led by LaSalle Bank, N.A. (the "Credit Agreement"). The Credit
Agreement provides for maximum borrowings of $200 million with a maturity date
of June 28, 2008. Proceeds from the Credit Agreement were utilized to repay the
amounts outstanding under our prior credit agreement and an $18 million term
loan.

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
Our primary source of revenue is from the sale of processed ferrous and
non-ferrous scrap metals. We also generate revenue from the brokering of scrap
metals or from services performed including, but not limited to, tolling,
stevedoring and dismantling. Revenues from processed ferrous and non-ferrous
scrap metal sales are recognized when title passes to the customer. Revenues
relating to brokered sales are recognized upon receipt of the materials by the
customer. Revenues from services are recognized as the service is 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 $1.4 million and $1.7 million at June 30, 2004 and March 31, 2004,
respectively. Our determination of the allowance for uncollectible accounts
receivable includes a number of factors, including the age of the balance, past
experience with the customer account, changes in collection patterns and general
industry conditions.

As indicated in our Annual Report under the section entitled "Risk
Factors -- Potential credit losses from our significant customers could
adversely affect our results of operations or financial condition," the general
weakness in the steel and metals sectors during the period from 1998 to 2001
previously 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,
15

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 apply the provisions of Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets," and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," in assessing
the carrying values of our long-lived assets. SFAS No. 142 and SFAS No. 144 both
require that a company consider whether circumstances or conditions exist that
suggest that the carrying value of a long-lived asset might be impaired. 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.

Self-Insured Reserves
We are self-insured for medical claims for most of our employees. Since
April 1, 2003, we have also been self-insured for workers' compensation claims
that involve a loss of less than $250,000 per claim. Our exposure to claims is
protected by stop-loss insurance policies. We record a reserve for reported but
unpaid claims and the estimated cost of incurred but not reported ("IBNR")
claims. IBNR reserves are based on either a lag estimate (for medical claims) or
on actuarial assumptions (for workers' compensation claims).

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.

We had previously recorded a full valuation allowance against our net
deferred tax assets, including net operating loss ("NOL") carryforwards, due to
the uncertainty regarding their ultimate realization. During the year ended
March 31, 2004, we reversed most of the valuation allowance recorded against our
net deferred tax assets because we now believe it is more likely than not that
these deferred tax assets will be realized. Significant judgment is required in
these evaluations, and differences in future results from our estimates could
result in material differences in the realization of these assets.

As a result of the utilization of NOL carryforwards, our cash taxes paid
are significantly less than our income tax expense. However, our ability to
utilize NOL carryforwards could become subject to annual limitations under
Section 382 of the Internal Revenue Code if a change of control occurs, as
defined by the Internal Revenue Code, and could result in increased income tax
payment obligations.

Contingencies
We accrue reserves for estimated liabilities, which include environmental
remediation, potential legal claims and IBNR 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
16

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, 2004 and June
30, 2003 in broad product categories were as follows ($ in thousands):

Consolidated net sales increased by $140.2 million (61.8%) to $367.2
million in the three months ended June 30, 2004 compared to consolidated net
sales of $227.0 million in the three months ended June 30, 2003. The increase in
consolidated net sales was due to higher average selling prices and increased
sales volumes.

Ferrous Sales
Ferrous sales increased by $109.0 million (71.0%) to $262.6 million in the
three months ended June 30, 2004 compared to ferrous sales of $153.6 million in
the three months ended June 30, 2003. The increase was attributable to higher
average selling prices and increased sales volumes. In the three months ended
June 30, 2004, the average selling price for ferrous products was approximately
$219 per ton, an increase of $77 per ton (54.2%) from the three months ended
June 30, 2003. 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 $195.48 per ton for the three
months ended June 30, 2004 compared to $101.36 per ton for the three months
ended June 30, 2003. Ferrous volumes increased by 10.4% to 1.2 million tons in
the three months ended June 30, 2004 due to increased flows of obsolete scrap
into our yards.

Sales volumes benefited from higher domestic demand for our ferrous scrap.
Domestic demand was favorable due to tighter supplies of prompt industrial
grades of scrap metal. Domestic demand for scrap metal has also been favorably
impacted by higher prices for scrap substitute products such as DRI and HBI
relative to obsolete grades of scrap metal, and by lower levels of imports of
scrap metal to the U.S. Exports of ferrous scrap were up slightly in the three
months ended June 30, 2004 compared to the three months ended June 30, 2003.
International demand continues to benefit from the weak U.S. dollar (which makes
U.S. scrap more attractive to overseas buyers).

Non-ferrous Sales
Non-ferrous sales increased by $38.5 million (77.5%) to $88.2 million in
the three months ended June 30, 2004 compared to non-ferrous sales of $49.7
million in the three months ended June 30, 2003. The increase was due to higher
average selling prices coupled with an increase in sales volumes. In the three
months ended June 30, 2004, non-ferrous sales volumes increased by 21.9 million
pounds (22.8%) and average selling price for non-ferrous products increased by
approximately $.23 per pound (44.2%) to $0.75 per pound compared to the three
months ended June 30, 2003. Non-ferrous volumes increased, in part, due to an

17

export vessel of stainless scrap shipped in June 2004. We did not have any
export vessel shipments of non-ferrous products during the three months ended
June 30, 2003.

Our non-ferrous operations have benefited from rising prices for aluminum,
copper and stainless steel (nickel base metal). The increase in non-ferrous
prices is evident in data published by the London Metals Exchange ("LME") and
COMEX. According to LME data, average prices for nickel and aluminum were 49%
and 22%, respectively, higher in the three months ended June 30, 2004 compared
to the three months ended June 30, 2003. According to COMEX data, average prices
for copper were 65% higher in the three months ended June 30, 2004 compared to
the three months ended June 30, 2003.

Our non-ferrous sales volumes increased due to more demand from our
consumers. During the three months ended June 30, 2003, domestic demand was
impacted by lower output from U.S. industrial production and international
demand was low. The recent improvement in the U.S. economy, coupled with
improving economies in other countries, led to increased demand for non-ferrous
products, mainly in copper and stainless steel.

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 decreased by $7.0 million (37.6%) to $11.6 million
in the three months ended June 30, 2004 compared to brokerage ferrous sales of
$18.6 million in the three months ended June 30, 2003. The decrease was a result
of a 103,000 ton (68.2%) decrease in brokered ferrous tons. Brokerage ferrous
tons sold decreased primarily due to our decision to broker less scrap as a
consequence of the significant volatility experienced in ferrous scrap markets
over the last nine months. In addition, the three months ended June 30, 2003
included one-time brokerage sales of approximately 41,000 tons which were
exported on vessels.

The decrease in brokerage ferrous tons sold was offset by higher average
selling prices for brokered ferrous 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 decrease in other sales in the three months ended June 30, 2004
is primarily a result of lower stevedoring revenue.

GROSS PROFIT
Gross profit was $43.4 million (11.8% of sales) in the three months ended
June 30, 2004 compared to gross profit of $30.0 million (13.2% of sales) in the
three months ended June 30, 2003. The improvement in the gross profit earned was
due to higher material margins per ton realized on both ferrous and non-ferrous
products sold, offset partially by higher processing expenses.

Gross profit as a percent of sales declined in the three months ended June
30, 2004 compared to the three months ended June 30, 2003. The decline was due
to higher material costs recognized as a result of inventories on hand at March
31, 2004 being sold into lower ferrous scrap markets in April and May 2004.
However, our gross profit per ton sold increased by almost $10 per ton in the
three months ended June 30, 2004 compared to the three months ended June 30,
2003.

Processing costs on a per unit basis increased mainly due to higher
freight, labor, repairs, maintenance and waste removal costs. Freight expenses
were higher due to increases in ocean vessel costs. The increase in labor costs
were due to additional headcount and overtime resulting from the increasing
demand for our products. The increase in repairs, maintenance and waste removal
costs resulted from additional tons of scrap metal processed.

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GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $17.5 million (4.8% of sales) in
the three months ended June 30, 2004 compared to general and administrative
expenses of $12.6 million (5.5% of sales) in the three months ended June 30,
2003. The $4.9 million increase is mainly due to higher compensation expense and
professional fees. The increase in compensation expense is primarily the result
of accruals recorded in connection with employee incentive compensation plans.
The compensation plans are generally measured as a function of return on net
assets. We recorded $2.9 million of expense in connection with the employee
incentive compensation plans during the three months ended June 30, 2004
compared to $0.8 million of expense during the three months ended June 30, 2003.

Professional fees were $1.9 million higher during the three months ended
June 30, 2004 compared to the three months ended June 30, 2003. The increase was
due to $1.7 million of legal fees and related costs incurred resulting from the
investigations performed in connection with our voluntary disclosure to the U.S.
Department of Justice regarding cash payments made to certain industrial account
suppliers (see the section entitled "Legal Proceedings" in Part II of this
report).

DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $4.5 million (1.2% of sales) in
the three months ended June 30, 2004 compared to depreciation and amortization
expense of $4.6 million (2.0% of sales) in the three months ended June 30, 2003.
Our depreciation expense remained unchanged due to our decision to replace older
material handling equipment with new equipment financed through operating leases
which contain attractive terms compared to purchasing the equipment.

STOCK-BASED COMPENSATION
Stock-based compensation expense was $1.1 million in the three months ended
June 30, 2004 compared to stock-based compensation expense of $32,000 in the
three months ended June 30, 2003. The increase is due to expense associated with
restricted stock grants made since June 30, 2003. Stock-based compensation
expense is recognized for restricted stock awards over the vesting period, which
is generally 2 to 4 years.

INCOME FROM JOINT VENTURES
Income from joint ventures was $3.2 million (0.9% of sales) in the three
months ended June 30, 2004 compared to income from joint ventures of $0.9
million (0.4% of sales) in the three months ended June 30, 2003. The income from
joint ventures primarily represents our 28.5% share of income from Southern.
Southern is primarily a processor of ferrous metals and its results have
benefited from increased demand and higher selling prices.

INTEREST EXPENSE
Interest expense was $1.3 million (0.4% of sales) in the three months ended
June 30, 2004 compared to interest expense of $2.3 million (1.0% of sales) in
the three months ended June 30, 2003. The decrease was a result of lower
borrowings and interest rates. Average borrowings under our credit facilities
were approximately $50.4 million in the three months ended June 30, 2004 which
was $20.5 million less than average borrowings under our credit facilities in
the three months ended June 30, 2003.

In the three months ended June 30, 2003, we recognized interest expense
associated with our $31.5 million, 12.75% junior secured notes. These junior
secured notes were repurchased in August and September 2003, partially through a
term loan of $20 million bearing interest at 8.50%.

LOSS ON DEBT EXTINGUISHMENT
During the three months ended June 30, 2004, we recognized a loss on debt
extinguishment of $1.7 million associated with the repayment of our previous
credit agreement with proceeds from the Credit Agreement (see "Financial
Condition -- Indebtedness" below). This amount represents a write-off of
unamortized deferred financing costs associated with the previous credit
agreement.

19

INCOME TAXES
In the three months ended June 30, 2004, we recognized income tax expense
of $8.0 million resulting in an effective tax rate of 38.9%. In the three months
ended June 30, 2003, our income tax expense was $4.4 million resulting in an
effective tax rate of 38.7%. The effective tax rate differs from the federal
statutory rate mainly due to state taxes and permanent tax items.

NET INCOME
Net income was $12.5 million in the three months ended June 30, 2004
compared to net income of $7.0 million in the three months ended June 30, 2003.
Net income in the three months ended June 30, 2004 was higher due to higher
operating income, income from joint ventures and lower interest expense, offset
by the loss on debt extinguishment.

FINANCIAL CONDITION

Cash Flows
In the three months ended June 30, 2004, our operating activities used net
cash of $1.4 million compared to net cash used of $12.8 million in the three
months ended June 30, 2003. The use of cash in the three months ended June 30,
2004 was due to an increase in working capital of $25.9 million, which offset
the $24.5 million of cash generated from net income, adjusted for non-cash
items. The working capital increase was mainly due to lower accounts payable
($33.0 million). Accounts payable decreased due to lower purchase prices for
scrap metal in June 2004 as compared to March 2004. In addition, other working
capital cash outflows during the three months ended June 30, 2004 included the
payment of $11.4 million of incentive compensation that was accrued for at March
31, 2004. An aggregate of 220 employees participated in this payment.

We used $2.3 million in net cash for investing activities in the three
months ended June 30, 2004 compared to the use of net cash of $1.4 million in
the three months ended June 30, 2003. In the three months ended June 30, 2004,
purchases of property and equipment were $2.7 million, while we generated $0.3
million of cash from the sale of redundant fixed assets.

We generated $3.9 million in net cash from financing activities in the
three months ended June 30, 2004 compared to net cash generated of $14.5 million
in the three months ended June 30, 2003. We increased borrowings under our
credit facilities by $22.8 million in order to repay an $18 million term loan,
fund increases in our working capital and for capital expenditures. We also
received $0.5 million of cash from the exercise of stock warrants.

Indebtedness
At June 30, 2004, our total indebtedness was $49.0 million, an increase of
$4.7 million from March 31, 2004. Our primary source of financing is our cash
generated from operations supplemented by borrowings under the Credit Agreement.

The Credit Agreement that we entered into on June 28, 2004 provides for
maximum borrowings of $200 million with a maturity date of June 28, 2008. In
consideration for the Credit Agreement, we incurred fees and expenses of
approximately $1.4 million.

The Credit Agreement is a revolving credit and letter of credit facility
that will support our working capital requirements and is also available for
general corporate purposes. Borrowing costs are based on variable rates tied to
the prime rate plus a margin or the London Interbank Offered Rate plus a margin.
The margin is based on our leverage ratio (as defined in the Credit Agreement)
as determined for the trailing four fiscal quarters.

Borrowings under the Credit Agreement are generally subject to borrowing
base limitations based upon a formula equal to 85% of eligible accounts
receivable plus the lesser of $65 million or 70% of eligible inventory.
Inventories cannot represent more than 40% of the total borrowing base. 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
20

Agreement, we pay a fee on the undrawn portion of the facility that is
determined by the leverage ratio. As of June 30, 2004, that fee is .30% per
annum.

Under the Credit Agreement, we are required to satisfy specified financial
covenants, including a maximum leverage ratio of 2.50 to 1.00, a minimum
consolidated fixed charge coverage ratio of 1.50 to 1.00 and a minimum tangible
net worth of not less than the sum of $110 million plus 25% of consolidated net
income earned in each fiscal quarter. The leverage ratio and consolidated fixed
charge coverage ratio are tested for the twelve-month period ending each fiscal
quarter. The Credit Agreement also limits capital expenditures to $20 million
for the twelve-month period ending each fiscal quarter.

The Credit Agreement contains restrictions which, among other things, limit
our ability to (i) incur additional indebtedness; (ii) pay dividends under
certain conditions; (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) engage in other matters
customarily restricted in such agreements. As of June 30, 2004, we were in
compliance with all financial covenants contained in the Credit Agreement. As of
July 27, 2004, we had outstanding borrowings of approximately $62 million under
the Credit Agreement and undrawn availability of approximately $93 million.

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. Capital expenditures are planned to be
approximately $14 million to $15 million in fiscal 2005.

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 53 operating leases for equipment which
would have cost approximately $13.9 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, CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

Off-Balance Sheet Arrangements
Other than operating leases, we do not have any significant off-balance
sheet arrangements that are likely to have a current or future effect on our
financial condition, result of operations or cash flows.

Contractual Obligations
We have various financial obligations and commitments assumed 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, 2004, and the effect such obligations are expected to have on our liquidity
and cash flow in future periods (in thousands):

21

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 2005. Our minimum required
pension contributions for fiscal 2005 will be approximately $1.9 million, of
which we contributed $0.4 million during the three months ended June 30, 2004.

We also enter into letters of credit in the ordinary course of operating
and financing activities. As of July 27, 2004, we had outstanding letters of
credit of $5.7 million.

In connection with the management realignment implemented during January
2004 (principally involving our Midwest operations), we paid severance and other
expenses of approximately $0.2 million during the three months ended June 30,
2004. The remaining severance and other benefits to be paid is approximately
$1.3 million, most of which is payable in July 2005.

Recent Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board (the "FASB")
issued Interpretation No. 46-R, "Consolidation of Variable Interest Entities"
("FIN 46-R"), which replaces Interpretation No. 46, "Consolidation of Variable
Interest Entities." FIN 46-R addresses how to identify variable interest
entities and the criteria that requires a company to consolidate such entities
in its financial statements. The adoption of this interpretation had no impact
on our consolidated financial statements.

In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This revised statement
retains the requirements of the original SFAS No. 132 but requires additional
disclosures concerning the economic resources and obligations related to pension
plans and other postretirement benefits. We have revised our disclosures to meet
the requirements under this standard.

In December 2003, the SEC issued Staff Accounting Bulleting ("SAB") No.
104, "Revenue Recognition," which supercedes SAB No. 101, "Revenue Recognition
in Financial Statements." SAB No. 104 rescinds accounting guidance in SAB No.
101 related to multiple-element revenue arrangements as this guidance has been
superceded with the issuance of Emerging Issues Task Force Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." The adoption
of SAB No. 104 had no impact on our consolidated financial statements.

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. We do not use derivative financial
instruments. Refer to Item 7A of the Annual Report.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of our Disclosure Controls and Internal Controls.
As of the end of the period covered by this report, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")). This controls evaluation
was done under the supervision and with the participation of management,
including Daniel W. Dienst, our Chairman of the Board and Chief Executive
Officer ("CEO"), and Robert C. Larry, our Executive Vice President, Finance and
Chief Financial Officer ("CFO"). Rules adopted by the SEC require that in this
section of the quarterly report, we present the conclusions of our CEO and CFO
about the effectiveness of our disclosure controls based on and as of the date
of the controls evaluation.

22

CEO and CFO Certifications.
As an exhibit to this report, there are "Certifications" of the CEO and
CFO. The first form of Certification is required in accordance with Section 302
of the Sarbanes-Oxley Act of 2002. This section of the quarterly report is the
information concerning the controls evaluation referred to in the Section 302
Certifications and this information should be read in conjunction with the
Section 302 Certifications for a more complete understanding of the topics
presented.

Disclosure Controls and Internal Controls.
Disclosure controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in our reports filed under
the Exchange Act, such as this report, is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
Disclosure controls are also designed with the objective of ensuring that such
information is accumulated and communicated to our management, including the 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 the 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.

Scope of the Controls Evaluation.
The evaluation of our disclosure controls by our CEO and CFO included a
review of the controls' objectives and design, the controls' implementation by
the Company and the effect of the controls on the information generated for use
in this report. Based upon the controls evaluation, our CEO and our CFO have
concluded that, subject to the limitations noted above, our disclosure controls
and procedures are reasonably effective in enabling us to record, process,
summarize, and report information required to be included in our periodic SEC
filings within the required time period. During the three months ended June 30,
2004, the Company identified a material weakness in the design of its system of
internal accounting control that may have permitted employees at certain company
locations to circumvent federal and state laws relating to the reporting of
certain cash payments. The Company voluntarily reported these findings to the
U.S. Department of Justice in May 2004 and has implemented a company-wide policy
to eliminate cash transactions for the purchase of scrap metals from industrial
customers. The Company is cooperating with the U.S. Department of Justice. The
Company also identified weaknesses, which collectively constituted a reportable
condition, in the design and operation of internal accounting controls over
industrial account scrap metal procurement in its Midwest operations relating to
segregation of duties, approval of vendors, monitoring of pricing adjustments
and check signing procedures. New policies and procedures have been implemented
to address each of these weaknesses, including, among other things, by
transferring oversight responsibility and control over the Company's industrial
accounts payable function to the Company's finance department.
23

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Voluntary Disclosure to Department of Justice
As a result of internal audits that we conducted, we determined that
current and former employees of certain business units have engaged in
activities relating to cash payments to individual industrial account suppliers
of scrap metal that may have involved violations of federal and state law. In
May 2004, we voluntarily disclosed our concerns regarding such cash payments to
the U.S. Department of Justice. The Board of Directors has appointed a special
committee, consisting of all of our independent directors, to conduct an
investigation of these activities. We are cooperating with the U.S. Department
of Justice. We have implemented policies to eliminate such cash payments to
industrial customers. During fiscal 2004, such cash payments to industrial
customers represented approximately 0.7% of our consolidated ferrous and
non-ferrous yard shipments. The fines and penalties under applicable statutes
contemplate qualitative as well as quantitative factors that are not readily
assessable at this stage of the investigation, but could be material. We are not
able to predict at this time the outcome of any actions by the U.S. Department
of Justice or other governmental authorities or their effect on us, if any, and
accordingly, we have not recorded any amounts in the financial statements. As of
June 30, 2004, we have incurred legal and other costs of approximately $1.7
million related to this matter.

During the period from September 2002 to the present, the Arizona
Department of Environmental Quality ("ADEQ") issued five Notices of Violations
("NOVs") to our subsidiary Metal Management Arizona, L.L.C. ("MTLM-Arizona"),
for alleged violations at MTLM-Arizona's Tucson and Phoenix facilities
including: (i) not developing and submitting a "Solid Waste Facility Site Plan";
(ii) placing shredder residue on a surface that does not meet Arizona's
permeability specifications; (iii) alleged failure to follow ADEQ protocol for
sampling and analysis of waste from the shredding of motor vehicles at the
Phoenix facility; and (iv) use of excavated soil to stabilize railroad tracks
adjacent to the Phoenix facility. On September 5, 2003, MTLM-Arizona was
notified that ADEQ had referred the outstanding NOV issues to the Arizona
Attorney General. Certain of these NOVs have now been resolved, and MTLM-Arizona
is cooperating fully with ADEQ and the Arizona Attorney General's office with
respect to the remaining issues. We believe that MTLM-Arizona's potential
liability and costs of any required remediation in connection with the remaining
issues will not be material.

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. Management currently
believes that the ultimate outcome of these proceedings, individually and in the
aggregate, will not have a material adverse effect on our results of operations
or financial condition. Please refer to Item 3 of the Annual Report for a
description of the litigation in which we are currently involved.

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES

Unregistered sales of common stock
During the three months ended June 30, 2004, we sold 120,000 shares of our
common stock pursuant to exercise of warrants held by current and former
employees. There were three exercise transactions during the three months ended
June 30, 2004 and the average exercise price for each transaction was $4.28 per
share. We received proceeds of $513,750 from these sales and used the proceeds
to repay borrowings outstanding under our former credit facility. The sales are
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933,
as amended, as the grant of warrants, and the issuance of shares of common stock
upon exercise of such warrants, were made to a limited number of our employees
and directors without public solicitation.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

See Exhibit Index
24

(b) Reports on Form 8-K

We filed a Current Report on Form 8-K dated June 28, 2004, which announced
that the Company entered into a new credit agreement with a consortium of
lenders led by LaSalle Bank N.A.

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/ Daniel W. Dienst
---------------------------------
Daniel W. Dienst
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: July 28, 2004

26

METAL MANAGEMENT, INC.
EXHIBIT INDEX