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 DECEMBER 31, 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

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

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 Sections 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 January 14, 2005, the registrant had 24,152,541 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
(UNAUDITED)

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.

The Company has one reportable segment operating in the scrap metal
recycling industry, as determined in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosure about Segments of an
Enterprise and Related Information."

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
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 November 2004, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 151, "Inventory Costs -- an amendment of ARB No. 43, Chapter 4."
SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material (spoilage), requiring that
these items be recognized as current-period charges and not capitalized in
inventory overhead. In addition, this statement requires that allocation of
fixed production overhead to the costs of conversion be based on the normal
capacity of the production facilities. The provisions of this statement are
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. The Company does not expect this statement to materially impact its
consolidated financial statements.

In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets -- an amendment of APB Opinion No. 29." SFAS No. 153 eliminates the
exception from fair value measurement for nonmonetary exchanges of similar
productive assets and replaces it with an exception for exchanges that do not
have commercial substance. This statement specifies that a nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The provisions of this
statement are effective for nonmonetary asset exchanges occurring in fiscal
periods

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beginning after June 15, 2005. The Company does not expect this statement to
impact its consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment."
The revised statement eliminates the ability to account for share-based
compensation transactions using Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees." This statement instead requires
share-based compensation transactions to be accounted for and recognized in the
statement of operations based on fair value. SFAS No. 123(R) will be effective
for the Company as of July 1, 2005. SFAS No. 123(R) offers alternative methods
for adopting this standard. The Company has not yet determined which method it
will use and the resulting impact on its financial position or results of
operations.

In December 2004, the FASB issued Staff Position ("FSP") No. 109-1,
"Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004." FSP No. 109-1 requires that the deduction received on
qualified production activities should be accounted for as a special deduction
in accordance with SFAS No. 109 and not as a tax-rate reduction. The Company is
currently evaluating whether it will qualify for this deduction and the
resulting impact on its effective tax rate.

Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with APB
Opinion No. 25 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 periods
range 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 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 per share amounts):

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For the three and nine months ended December 31, 2004, options and warrants
to purchase 305,000 and 399,699 weighted average shares of common stock,
respectively, were excluded from the diluted EPS calculation. For the nine
months ended December 31, 2003, options and warrants to purchase 1,223,269
weighted average shares of common stock were excluded from the diluted EPS
calculation. These shares 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 three respective periods referenced above,
and therefore their inclusion would have been anti-dilutive. For the three
months ended December 31, 2003, all outstanding options and warrants were
included in the diluted EPS calculation as the option and warrant exercise
prices were less than the average market price of the Company's common stock for
this period.

NOTE 3 -- SUPPLEMENTAL 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):

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):

8

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 in the nine months ended December 31, 2004 to the accrued
severance and other charges liability (in thousands):

As of December 31, 2004, the entire reserve balance is included in other
accrued liabilities (classified as a current liability) on the Company's
consolidated balance sheet as the obligations are scheduled to be paid by July
2005.

NOTE 4 -- GOODWILL AND OTHER INTANGIBLES

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

The increase in goodwill and other intangibles in the nine months ended
December 31, 2004 was due to settlements relating to contingent consideration
payable in connection with two acquisitions.

Total amortization expense for other intangibles in the three and nine
months ended December 31, 2004 was $47,000 and $120,000, respectively. Based on
the other intangibles recorded as of December 31, 2004, annual amortization
expense for other intangibles will be approximately $0.2 million in fiscal year
2006 and $0.1 million for each of the fiscal years 2007 through 2010.

NOTE 5 -- LONG-TERM DEBT

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

9

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 $1.5 million.

The Credit Agreement is a revolving credit and letter of credit facility
that supports 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 a previously outstanding $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.
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 December 31, 2004, that fee is .25% 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 in the nine months ended December 31, 2004. This
amount represents the write-off of a portion of the 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):

10

In the nine months ended December 31, 2004, the Company made cash
contributions of $1.2 million to its pension plans. Based on estimates provided
by its actuaries, the Company expects to make cash funding contributions to its
pension plans of approximately $0.1 million by March 31, 2005 and $1.0 million
for the year ending March 31, 2006.

NOTE 7 -- STOCKHOLDERS' EQUITY

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.

Cash Dividend
On November 24, 2004, the Company's Board of Directors approved a quarterly
dividend of $0.075 per share of common stock, or approximately $1.8 million,
which was paid on December 30, 2004 to shareholders of record at the close of
business on December 14, 2004.

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 December 31, 2004 and March
31, 2004 were 538,338 and 518,938, respectively. At December 31, 2004, the
amount of related deferred stock-based compensation reflected in Stockholders'
Equity in the consolidated balance sheet was $5.3 million. An aggregate of
19,500 shares of restricted stock were granted in the nine months ended December
31, 2004. There were no restricted stock grants made in the three months ended
December 31, 2004. The Company recorded stock-based compensation expense related
to restricted stock of approximately $1.1 million and $3.3 million in the three
and nine months ended December 31, 2004, respectively, and $46,000 and $116,000
in the three and nine months ended December 31, 2003, respectively.

NOTE 8 -- 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 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

11

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 health 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 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

12

(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 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. The Company has incurred legal and other costs related to this
matter of approximately $0.1 million and $2.2 million in the three and nine
months ended December 31, 2004, respectively. These expenses are included in
general and administrative expenses on the Company's consolidated statement of
operations.

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.

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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 in Newark,
New Jersey.

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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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 $2.4 million and $1.7 million at December 31, 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, 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.
15

Self-insured accruals
We are self-insured for medical claims for most of our employees. We are
self-insured for workers' compensation claims that involve a loss of less than
$350,000 per claim. Our exposure to claims is protected by stop-loss insurance
policies. We record an accrual for reported but unpaid claims and the estimated
cost of incurred but not reported ("IBNR") claims. IBNR accruals 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. In the year ended March
31, 2004, we reversed most of the valuation allowance recorded against our net
deferred tax assets because we believed it was more likely than not that these
deferred tax assets would 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 record accruals 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 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 December 31, 2004 and
2003 in general product categories were as follows ($ in thousands):

16

Consolidated net sales for the nine months ended December 31, 2004 and 2003
in general product categories were as follows ($ in thousands):

Consolidated net sales increased by $189.9 million (73.7%) and $525.0
million (73.5%) to $447.6 million and $1.2 billion in the three and nine month
periods ended December 31, 2004, respectively, compared to consolidated net
sales of $257.7 million and $714.7 million in the three and nine month periods
ended December 31, 2003, respectively. The increase in consolidated net sales
was primarily due to higher average selling prices and increased volumes.

Ferrous Sales
Ferrous sales increased by $153.3 million (84.0%) and $399.4 million
(79.6%) to $335.8 million and $901.3 million in the three and nine months ended
December 31, 2004, respectively, compared to ferrous sales of $182.5 million and
$501.9 million in the three and nine months ended December 31, 2003,
respectively. The increase in the three months ended December 31, 2004 over the
comparable prior year period was due to higher average selling prices, which
increased by $125 per ton (72.8%) to $297 per ton and sales volumes which
increased by 69,000 tons (6.5%). The increase in the nine months ended December
31, 2004 over the comparable prior year period was due to higher average selling
prices, which increased by $109 per ton (71.1%) to $263 per ton and sales
volumes which increased by 162,000 tons (5.0%).

The increase in selling prices for ferrous scrap is evident in data
published by the American Metal Market ("AMM"). According to AMM data, the
average price for #1 Heavy Melting Steel Scrap -- Chicago (which is a common
indicator for ferrous scrap) was approximately $236 per ton and $221 per ton for
the three and nine months ended December 31, 2004, respectively, compared to
$140 per ton and $118 per ton for the three and nine months ended December 31,
2003, respectively.

Sales volumes in the three and nine months ended December 31, 2004
benefited from higher domestic demand for our ferrous scrap. Domestic demand and
scrap prices continue to be favorable partly 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. occasioned by considerations including a
relatively weaker U.S. dollar. Exports of ferrous scrap in the current fiscal
year have decreased compared to the prior year due to lower demand from certain
countries and more favorable domestic markets for ferrous scrap.

Non-ferrous Sales
Non-ferrous sales increased by $29.2 million (45.9%) and $117.8 million
(70.5%) to $92.8 million and $284.8 million in the three and nine months ended
December 31, 2004, respectively, compared to non-ferrous sales of $63.6 million
and $167.0 million in the three and nine months ended December 31, 2003,
respectively. In the three and nine months ended December 31, 2004, non-ferrous
sales volumes increased by 6.3 million pounds (5.8%) and 58.4 million pounds
(18.9%), respectively, and average selling price for non-ferrous products
increased by approximately $.22 per pound (37.9%) and $.23 per pound (42.6%),
respectively, compared to the three and nine months ended December 31, 2003.

17

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 were 13.9% and 34.7%
higher and average prices for aluminum were 20.8% and 20.4% higher in the three
and nine months ended December 31, 2004, respectively, compared to the three and
nine months ended December 31, 2003. According to COMEX data, average prices for
copper were 48.1% and 57.1% higher in the three and nine months ended December
31, 2004, respectively, compared to the three and nine months ended December 31,
2003.

Our non-ferrous sales volumes increased due to our efforts to expand that
product line and reflected greater demand from our non-ferrous consumers. In the
nine months ended December 31, 2003, domestic supply of non-ferrous metals was
impacted by lower output from U.S. industrial production and international
demand was lower than the nine months ended December 31, 2004. The recent
improvement in the U.S. economy, coupled with improving economies in other
countries, led to increased supply and demand for non-ferrous products, mainly
in copper, aluminum 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 increased by $6.3 million (83.4%) and $6.2 million
(19.8%) to $13.8 million and $37.7 million in the three and nine months ended
December 31, 2004, respectively, compared to brokerage ferrous sales of $7.5
million and $31.5 million in the three and nine months ended December 31, 2003,
respectively. The increase was due to higher average selling prices. In the
three and nine months ended December 31, 2004, the average sales price for
ferrous brokerage products increased by $151 per ton (126.5%) and $124 per ton
(97.3%), respectively, compared to the three and nine months ended December 31,
2003.

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. Stevedoring is a fee for service business. The increase in other
sales in the three and nine months ended December 31, 2004 is primarily a result
of higher stevedoring revenue, which increased by $1.0 million and $1.6 million,
respectively, from the three and nine months ended December 31, 2003.

GROSS PROFIT
Gross profit was $70.3 million (15.7% of sales) and $188.7 million (15.2%
of sales) during the three and nine months ended December 31, 2004,
respectively, compared to gross profit of $35.5 million (13.8% of sales) and
$97.1 million (13.6% of sales) during the three and nine months ended December
31, 2003. The improvement in the amount of gross profit earned was due to higher
material margins per ton realized on both ferrous and non-ferrous products sold,
partially offset by higher processing expenses.

Processing costs on a per unit basis increased mainly due to higher
freight, labor, repairs, maintenance, fuel and operating supplies costs. Freight
expenses were higher due to a greater percentage of sales being made on
delivered terms. 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, fuel and operating supplies resulted from additional
tons of scrap metal processed.

GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $18.4 million (4.1% of sales) and
$53.1 million (4.3% of sales) in the three and nine months ended December 31,
2004, respectively, compared to general and administrative
18

expenses of $16.5 million (6.4% of sales) and $42.2 million (5.9% of sales) in
the three and nine months ended December 31, 2003, respectively. The increase in
the three months ended December 31, 2004 results from higher compensation
expense and medical claims expense. The increase in the nine months ended
December 31, 2004 results from higher compensation expense and professional
fees.

During the three months ended December 31, 2004, compensation expense
increased by $0.8 million compared to the three months ended December 31, 2003
due to additional headcount. Medical claims were higher by $0.5 million in the
three months ended December 31, 2004 compared to the three months ended December
31, 2003. We are self-insured for health insurance for most of our employees.
Compensation expense during the nine months ended December 31, 2004 increased by
$3.5 million due to accruals recorded in connection with employee incentive
compensation plans and $2.4 million due to higher salaries compared to the nine
months ended December 31, 2003. The employee incentive compensation plans are
generally measured as a function of return on net assets. We recorded $11.6
million of expense in connection with the employee incentive compensation plans
in the nine months ended December 31, 2004 compared to $8.1 million of expense
in the nine months ended December 31, 2003.

Professional fees were $3.0 million higher in the nine months ended
December 31, 2004 compared to the nine months ended December 31, 2003. The
increase was due to $2.2 million of legal fees and related costs 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 Part II, Item 3 of the Annual Report) and $0.8 million of
professional fees incurred in connection with Sarbanes-Oxley compliance.

DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $4.7 million (1.0% of sales) and
$13.9 million (1.1% of sales) in the three and nine months ended December 31,
2004, respectively, compared to depreciation and amortization expense of $4.5
million (1.7% of sales) and $13.5 million (1.9% of sales) in the three and nine
months ended December 31, 2003, respectively. Our depreciation expense remained
relatively unchanged due to our decision to acquire new material handling
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 and $3.3 million in the
three and nine months ended December 31, 2004, respectively, compared to
stock-based compensation expense of $46,000 and $124,000 in the three and nine
months ended December 31, 2003, respectively. The increase is due to expense
associated with restricted stock grants made since December 31, 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 $3.9 million (0.9% of sales) and $11.8
million (1.0% of sales) in the three and nine months ended December 31, 2004,
respectively, compared to income from joint ventures of $1.8 million (0.7% of
sales) and $3.7 million (0.5% of sales) in the three and nine months ended
December 31, 2003, respectively. 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 operating results have also benefited from
increased demand and strong market conditions.

INTEREST EXPENSE
Interest expense was $0.6 million (0.1% of sales) and $2.9 million (0.2% of
sales) in the three and nine months ended December 31, 2004, respectively,
compared to interest expense of $1.4 million (0.6% of sales) and $5.6 million
(0.8% of sales) in the three and nine months ended December 31, 2003,
respectively. The decrease in the three months ended December 31, 2004 was a
result of less debt. The decrease in the nine months ended December 31, 2004 was
a result of less debt and lower effective interest rates. Average debt was
approximately $25.9 million and $46.7 million in the three and nine months ended
December 31, 2004,

19

respectively, compared to average debt of approximately $77.0 million and $76.0
million in the three and nine months ended December 31, 2003, respectively.

Our effective interest rate was lower due to lower margins on our Credit
Agreement compared to our previous credit agreement and the elimination of
interest associated with our $31.5 million, 12.75% junior secured notes which
were repurchased in August 2003 and September 2003.

LOSS ON DEBT EXTINGUISHMENT
In the nine months ended December 31, 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 "Liquidity and
Capital Resources -- Indebtedness" below). This amount represents a write-off of
a portion of the unamortized deferred financing costs associated with the
previous credit agreement.

In the nine months ended December 31, 2003, we recognized a loss on debt
extinguishment of $0.4 million associated with the repurchase and redemption of
our $31.5 million, 12.75% junior secured notes in August 2003 and September
2003. This amount represents a premium paid to accomplish a repurchase of a
junior secured note.

INCOME TAXES
In the three and nine months ended December 31, 2004, we recognized income
tax expense of $19.4 million and $49.1 million, respectively, resulting in an
effective tax rate of 39.7% and 39.2%, respectively. In the three and nine
months ended December 31, 2003, our income tax expense was $2.2 million and
$11.6 million, respectively, resulting in an effective tax rate of 15.1% and
30.0%, respectively. The effective tax rate differs from the federal statutory
rate mainly due to state taxes and permanent tax items.

Our cash taxes paid have been significantly lower than our income tax
expense due to the utilization of NOL carryforwards and other deferred tax
assets. As a result of our strong operating performance, we expect to fully
utilize our federal NOL carryforwards by March 31, 2005 which will increase our
cash tax payment obligations.

NET INCOME
Net income was $29.5 million and $76.1 million in the three and nine months
ended December 31, 2004, respectively, compared to net income of $12.6 million
and $27.1 million in the three and nine months ended December 31, 2003,
respectively. Net income was higher due to higher operating income, income from
joint ventures and lower interest expense, offset by the loss on debt
extinguishment.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows
During the nine months ended December 31, 2004, our operating activities
generated net cash of $37.6 million compared to net cash generated of $37.9
million in the nine months ended December 31, 2003. Cash provided by operating
activities during the nine months ended December 31, 2004 was due to cash
generated from net income, adjusted for non-cash items, of $119.3 million that
was offset by an $81.7 million increase in working capital. The working capital
increase was mainly due to higher accounts receivable ($29.9 million) and higher
inventories ($56.4 million). Inventories increased due to higher purchase prices
for scrap metals along with an increase in inventory units at December 31, 2004
compared to March 31, 2004. The increase in accounts receivable is due to higher
sales prices in the nine months ended December 31, 2004 coupled with an increase
in day's sales outstanding ("DSO") at December 31, 2004 compared to March 31,
2004. The increase in the DSO was due to slower collections from steel mills and
a lower concentration of export business in December 2004 compared to March
2004.

We used $8.0 million in net cash for investing activities in the nine
months ended December 31, 2004 compared to net cash used of $8.2 million in the
nine months ended December 31, 2003. In the nine months ended December 31, 2004,
purchases of property and equipment were $9.3 million, while we generated $1.2
million of cash from the sale of redundant fixed assets, including a small
parcel of land in Arizona.

20

During the nine months ended December 31, 2004, we used $29.3 million of
net cash for financing activities compared to net cash used of $28.6 million in
the nine months ended December 31, 2003. We reduced debt by $29.1 million
through cash generated from operations. We paid cash dividends of $1.8 million
and received $3.1 million of cash from the exercise of stock options and
warrants.

Indebtedness
At December 31, 2004, our total indebtedness was $15.2 million, a decrease
of $29.1 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 $1.5 million.

The Credit Agreement is a revolving credit and letter of credit facility
that supports 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 ("LIBOR") 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. Based on our
current leverage ratio, our LIBOR and prime rate margins are 125 basis points
and 0 basis points, respectively.

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 Agreement, we pay a fee on the undrawn portion
of the facility that is determined by the leverage ratio. As of December 31,
2004, that fee is .25% 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 December 31, 2004, we were in
compliance with all financial covenants contained in the Credit Agreement. As of
January 20, 2005, we had outstanding borrowings of approximately $5.7 million
under the Credit Agreement and undrawn availability of approximately $188.9
million.

Future capital requirements
We expect to fund our working capital needs, interest and dividend 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 $16 million in fiscal 2005, of which $9.3
million has been incurred in the nine months ended December 31, 2004. In
addition to these capital expenditures and other possible acquisitions that we
may make in the future, we have entered into a 50/50 joint venture that will
operate an existing recycling business in Bowling Green, Kentucky and will
establish and operate a new scrap recovery and recycling facility in Nashville,
Tennessee. We estimate that

21

our total capital commitment to this joint venture over the next twelve months
will be approximately $10 million to $12 million.

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 65 operating leases for equipment which
would have cost approximately $18.6 million to purchase. These operating leases
are attractive to us since the implied interest rates are lower than interest
rates under the Credit Agreement. We expect to selectively use operating leases
for new material handling equipment or trucks required by our operations.

We anticipate that our Board of Directors will continue to declare
quarterly cash dividends; however, the continuance of cash dividends is not
guaranteed and dependent on many factors.

We believe these sources of capital will be sufficient to fund planned
capital expenditures, interest and dividend 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, results 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
December 31, 2004, 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 2006. Our minimum required
pension contributions for fiscal 2005 are approximately $1.3 million, of which
we paid $1.2 million in the nine months ended December 31, 2004. Our minimum
required pension contributions for fiscal 2006 will be approximately $1.0
million.

We also enter into letters of credit in the ordinary course of operating
and financing activities. As of January 20, 2005, we had outstanding letters of
credit of $5.5 million.

In connection with the management realignment implemented during January
2004 (principally involving our Midwest operations), we paid severance and other
expenses of approximately $0.3 million in the nine months ended December 31,
2004. The remaining severance and other benefits to be paid is approximately
$1.3 million, most of which is payable in July 2005.

22

Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 151, "Inventory Costs -- an amendment of ARB No. 43, Chapter 4."
SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material (spoilage), requiring that
these items be recognized as current-period charges and not capitalized in
inventory overhead. In addition, this statement requires that allocation of
fixed production overhead to the costs of conversion be based on the normal
capacity of the production facilities. The provisions of this statement are
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. We do not expect this statement to materially impact our consolidated
financial statements.

In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets -- an amendment of APB Opinion No. 29." SFAS No. 153 eliminates the
exception from fair value measurement for nonmonetary exchanges of similar
productive assets and replaces it with an exception for exchanges that do not
have commercial substance. This statement specifies that a nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The provisions of this
statement are effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. We do not expect this statement to impact
our consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment."
The revised statement eliminates the ability to account for share-based
compensation transactions using Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." This statement instead requires
share-based compensation transactions to be accounted for and recognized in the
statement of operations based on fair value. SFAS No. 123(R) will be effective
for us as of July 1, 2005. SFAS No. 123(R) offers alternative methods for
adopting this standard. We have not yet determined which method we will use and
the resulting impact on our financial position or results of operations.

In December 2004, the FASB issued Staff Position ("FSP") No. 109-1,
"Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004." FSP No. 109-1 requires that the deduction received on
qualified production activities should be accounted for as a special deduction
in accordance with SFAS No. 109 and not as a tax-rate reduction. We are
currently evaluating whether we will qualify for this deduction and the
resulting impact on our effective tax rate.

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, Chief Executive Officer
("CEO") and President, 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.

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

23

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 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 CFO have
concluded that, subject to the limitations noted above, (i) 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, and (ii) there has been no
change in our internal control over financial reporting during the three months
ended December 31, 2004 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

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PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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 Part II, 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
In the three months ended December 31, 2004, we sold 469,000 shares of our
common stock pursuant to exercise of warrants held by an aggregate of 10 current
and former employees. There were 27 exercise transactions with an average
exercise price for each transaction of $4.18 per share in the three months ended
December 31, 2004. We received proceeds of $2.0 million from these sales and
used the proceeds to repay borrowings outstanding under the Credit Agreement.
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

(b) Reports on Form 8-K

We filed a Current Report on Form 8-K on December 2, 2004, which
announced that our board of directors approved a quarterly cash dividend of
$0.075 per share of common stock payable on December 30, 2004 to shareholders of
record on December 14, 2004. The report also announced the unregistered sale of
287,500 shares of common stock pursuant to exercise of warrants held by current
and former employees during the period from October 1, 2004 to December 1, 2004.

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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,
Chief Executive Officer
and President
(Principal Executive 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: February 2, 2005

26

METAL MANAGEMENT, INC.
EXHIBIT INDEX