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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file no. 0-14836
METAL MANAGEMENT, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction
of incorporation or organization)
94-2835068
(I.R.S. Employer
Identification Number)
500 N. DEARBORN ST., SUITE 405,
CHICAGO, IL 60610
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (312) 645-0700
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value for the Registrant's voting stock held by
non-affiliates of the Registrant based upon the closing sale price of the Common
Stock on June 18, 1997 as reported on the NASDAQ National Market System, was
approximately $86,194,000. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of June 18, 1997, the Registrant had 12,857,222 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the Annual Meeting of Stockholders is incorporated
into this Form 10-K Part III by reference.
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TABLE OF CONTENTS
PAGE
PART I
Item 1: Business.................................................... 1
Item 2: Properties.................................................. 6
Item 3: Legal Proceedings........................................... 6
Item 4: Submission of Matters to a Vote of Security Holders......... 7
PART II
Item 5: Market for the Registrant's Common Stock and Related
Stockholder Matters......................................... 8
Item 6: Selected Consolidated Financial Data........................ 9
Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
Item 8: Financial Statements and Supplementary Data................. 26
Item 9: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 26
PART III
Item 10: Directors and Executive Officers of the Registrant.......... 27
Item 11: Executive Compensation...................................... 27
Item 12: Security Ownership of Certain Beneficial Owners and
Management.................................................. 27
Item 13: Certain Relationships and Related Transactions.............. 27
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 28
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This Form 10-K includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements in this Form 10-K which address
activities, events or developments that the Company expects or anticipates will
or may occur in the future, including such things as future acquisitions
(including the amount and nature thereof), business strategy, expansion and
growth of the Company's business and operations and other such matters are
forward-looking statements. Although the Company believes the expectations
expressed in such forward-looking statements are based on reasonable assumptions
within the bounds of its knowledge of its business, a number of factors could
cause actual results to differ materially from those expressed in any
forward-looking statements, whether oral or written, made by or on behalf of the
Company. Many of these factors have previously been identified in filings or
statements made by or on behalf of the Company. See also "Factors Influencing
Future Results and Accuracy of Forward Looking Statements" below.
PART I
ITEM 1. BUSINESS
GENERAL
Metal Management, Inc. (herein, "MTLM" or the "Company") was founded in
1981 and re-incorporated in Delaware in June 1986. Prior to April 11, 1996, the
Company was called General Parametrics Corporation and operated as a
manufacturer and marketer of color thermal and dye sublimation printers and
related consumables, including ribbons, transparencies and paper. This business
was discontinued by the Company during fiscal 1997. On April 9, 1996, the
Company's stockholders approved an amendment to the Company's Certificate of
Incorporation to change the name of the Company from General Parametrics
Corporation to Metal Management, Inc. Effective April 15, 1996, the Company
formally changed its Nasdaq stock symbol to "MTLM". On April 25, 1996, the Board
of Directors of the Company approved a change in the Company's fiscal year end
from October 31 to March 31, effective April 1, 1996.
MTLM entered the scrap metal recycling industry on April 11, 1996, through
its merger with EMCO Recycling Corp. ("EMCO"), headquartered in Phoenix,
Arizona. As part of the strategic redirection, in April 1996, management
announced plans to exit the Spectra*Star printer and consumables business. On
July 16, 1996, Mannesmann Tally ("Tally") acquired the inventory and related
production equipment of the Spectra*Star business for approximately $1.3 million
in cash and provided additional contingent consideration in the form of
royalties on future sales of Spectra*Star printers and related consumables. The
Company discontinued and sold its VideoShow and related products lines business
("VideoShow") in December 1996 for consideration substantially in the form of
royalties on future sales of VideoShow equipment. The VideoShow consideration is
not expected to be material to the Company. On January 1, 1997, the Company
acquired the MacLeod Group of Companies ("MacLeod") headquartered in South Gate,
California. On January 7, 1997, the Company acquired HouTex Metals Company, Inc.
("HouTex"), headquartered in Houston, Texas. On May 1, 1997, the Company
acquired Reserve Iron & Metal, L.P. ("Reserve"), headquartered in Cleveland,
Ohio, with operations in Ohio, Illinois and Alabama. EMCO, MacLeod, HouTex and
Reserve are referred to herein as the "Acquired Companies" and "Recycling
Operations."
The Company and its wholly-owned subsidiaries are engaged in the business
of dismantling, processing, marketing, brokering and recycling of both ferrous
and non-ferrous metals with the goal of becoming one of the largest recyclers of
scrap metal in North America. Giving effect to the acquisition of the Acquired
Companies, MTLM operates twenty recycling centers in five states and resells
processed scrap metal and other materials to domestic and foreign customers.
MTLM intends to continue its expansion principally through acquisition to
consolidate the highly fragmented scrap metal recycling industry. MTLM believes
that no single company is a significant processor of scrap metal on a national
scale, although certain companies are significant processors on a local or
regional scale.
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ACQUISITION STRATEGY
MTLM believes that similar to the solid waste industry, the scrap metal
recycling industry has recently begun to experience market consolidation due to,
among other things: (1) significant capital requirements caused by expanding
equipment needs and by more stringent environmental regulations; and (2) desire
of owners of independent scrap metal processors to sell closely-held businesses
to companies with access to public capital markets.
MTLM seeks to acquire significant processors of scrap metal in large
metropolitan markets which will serve as regional platform companies and to
follow these acquisitions with "tuck-in" acquisitions of smaller processors.
MTLM believes that this consolidation strategy will allow MTLM to improve its
operating margins and profitability by: (1) increasing its market share, which
is expected to enhance customer relationships and enhance supply capabilities;
(2) spreading the cost of management and administrative staff, and utilizing
equipment and other assets, across larger operations; and (3) transferring
technology and best demonstrated processing and marketing strategies among
acquired recycling operations. The Company is continuously evaluating
acquisition opportunities.
RECYCLING OPERATIONS
The Recycling Operations are engaged in buying, processing, and selling
scrap metals. The principal forms in which scrap metals are generated include
industrial scrap and obsolete scrap. Industrial scrap results from residual
materials from manufacturing processes. Obsolete scrap consists primarily of
residual metals from old or obsolete consumer and industrial products such as
appliances and automobiles.
FERROUS OPERATIONS
Ferrous Scrap Purchasing
The Company purchases ferrous scrap from two primary sources: (1)
manufacturers who generate steel and iron ("industrial scrap"); and (2)
junkyards, demolition firms, railroads, the military and others who generate
steel and iron scrap ("obsolete scrap"). In addition to these sources, the
Company purchases, at auction, furnace iron from integrated steel mills and
obsolete steel and iron from government and large industrial accounts. Finally,
the Company purchases materials from small dealers, peddlers and auto wreckers
who deliver directly to the Company's processing facilities. Prices are
determined primarily by market demand and the composition, quality, size, and
weight of the materials.
Ferrous Scrap Processing
The Company prepares ferrous scrap metal for resale through a variety of
methods including sorting, shredding, shearing or cutting, baling, or breaking
and processes a number of differently sized and shaped products depending upon
customer specifications and market demand.
Sorting: After purchasing ferrous scrap metal, the Company inspects the
material to determine how it should be processed to maximize profitability. In
some instances, scrap may be sorted and sold without requiring processing. The
Company's sorting operations separate scrap for further processing according to
its size and composition with conveyor systems, front-end loaders, crane-mounted
electromagnets or claw-like grapples.
Shredding: Obsolete consumer scrap such as automobiles, home appliances and
other consumer goods, as well as certain light gauge industrial scrap, is
processed in the Company's shredding operation. These items are fed into a
shredder that quickly breaks the scrap down into fist-size pieces of ferrous
metal. The shredding process uses magnets to separate ferrous, non-ferrous and
non-metallic materials. The ferrous material is sold to the Company's customers
including mini-mills and the non-metallic by-product of the shredding
operations, referred to as "shredder fluff," is disposed of in third party
landfills. The Company operates a shredder at its EMCO subsidiary in Phoenix.
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Shearing or Cutting: Pieces of oversized ferrous scrap which are too large
for other processing, such as obsolete steel girders and used drill pipe, are
cut with hand torches, crane-mounted alligator shears and/or stationary
guillotine shears. After being reduced to more manageable size, the scrap is
then sold to customers who can accommodate larger materials, such as mini-mills.
The Company operates a shear in Chicago at its Reserve subsidiary and has made
deposits with a vendor to purchase a shear for its EMCO subsidiary.
Baling: The Company processes light gauge ferrous metals such as clips and
sheet iron, and by-products from industrial manufacturing processes, such as
stampings, clippings and excess trimmings, by baling these materials into large,
uniform blocks. The Company uses cranes, front-end loaders and conveyors to feed
the metal into hydraulic presses which compress the materials into uniform
blocks at high pressure.
Breaking of Furnace Iron: The Company processes furnace iron which includes
blast furnace iron, steel pit scrap, steel skulls, beach iron and pit scrap.
Large pieces of iron are broken down by the impact of 8 to 10 ton forged steel
balls dropped from cranes. The fragments are then sorted and screened according
to size and iron content.
Ferrous Scrap Sales
The Company sells processed ferrous scrap to end users such as mini-mills,
integrated steel makers and foundries and to brokers who aggregate materials for
other large end users. Most of the Company's customers purchase processed
ferrous scrap according to a monthly plan which establishes the quantity
purchased for the month. The Company interacts with end users and brokers
through its sales force of approximately 15 people. The price for ferrous scrap
depends upon market demand, as well as quality and grade. The Company believes
profitability may be enhanced by offering a broad product line to its customers;
however, no assurance can be provided in that regard. The Company believes that
its consolidation strategy will allow it to be a premier supplier of scrap since
it will be able to fill larger quantity orders due to increased ability to
source large amounts of raw materials. The Company's sales of processed ferrous
scrap accounted for 32% of the Company's revenues for the twelve months ended
March 31, 1997, representing approximately 152,000 tons of ferrous metals.
NON-FERROUS OPERATIONS
Non-Ferrous Scrap Purchasing
The Company purchases non-ferrous scrap from three primary sources: (1)
manufacturers and other non-ferrous scrap sources who generate or sell waste
aluminum, copper, stainless steel, brass, high-temperature alloys and other
metals; (2) telecommunications, aerospace, defense, and recycling companies that
generate obsolete scrap consisting primarily of copper wire, exotic metal alloys
and used aluminum beverage cans; and (3) peddlers who deliver to the Company
material which they collect from a variety of sources. While peddlers usually
deliver their scrap to the Company, the Company collects non-ferrous scrap from
others sources by placing retrieval bins near these sources. Once full, the bins
are transported to the Company's strategically located processing facilities.
The Company also generates non-ferrous scrap as a by-product of its ferrous
scrap processing. Non-ferrous scrap is recovered from the Company's ferrous
operations through two primary activities: (1) non-ferrous materials, generally
a mixture of aluminum, zinc, die-cast metal, stainless steel and copper, are
recovered as a by-product of the shredding process; and (2) non-ferrous
materials are identified visually and by using hand-held magnets.
A number of factors can influence the continued availability of non-ferrous
scrap such as the level of economic activity and the quality of the Company's
supplier relationships. Consistent with industry practice, the Company has
certain long-standing supply relationships that management believes will improve
as a result of implementing its consolidation strategy; however, no assurance
can be provided in that regard.
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Non-Ferrous Scrap Processing
The Company prepares non-ferrous scrap metal for resale by sorting,
shearing, cutting, chopping and/or baling.
Sorting: The Company's sorting operations separate non-ferrous scrap using
conveyor systems and front-end loaders. In addition, many non-ferrous metals are
sorted and identified using grinders, hand torches and spectrometers. The
Company's ability to identify metallurgical composition is critical to
maintaining margins and profitability. Due to the high value of many non-ferrous
metals, the Company can afford to utilize more labor intensive sorting
techniques than are employed in its ferrous operations. The Company sorts
non-ferrous scrap for further processing according to type, grade, size and
chemical composition. Throughout the sorting process, the Company determines
whether the material requires further processing before being sold.
Copper: Copper scrap may be processed in several ways. The Company
processes copper scrap predominately by using wire choppers which grind the wire
into small pellets. During chopping operations, the plastic casing of the wire
is separated from the copper using a variety of techniques. In addition to wire
chopping, the Company processes scrap copper by baling and other repacking to
meet customer specifications. For the twelve months ended March 31, 1997, the
Company sold approximately 22.6 million pounds of copper.
Aluminum: The Company processes aluminum based on the size of the pieces
and customer specifications. Large pieces of aluminum are cut using crane
mounted alligator shears and stationary guillotine shears and are baled along
with small aluminum stampings to produce large bales of aluminum. Smaller pieces
of aluminum are repackaged to meet customer specifications. For the twelve
months ended March 31, 1997, the Company sold approximately 34.4 million pounds
of aluminum.
Other Non-Ferrous Materials: The Company processes other non-ferrous metals
using similar cutting, baling and repacking techniques as it uses to process
aluminum. Among other significant non-ferrous metals the Company processes
include brass and high-temperature alloys.
Non-Ferrous Scrap Sales
The Company sells processed non-ferrous scrap to end users such as
specialty steel-makers, foundries, aluminum sheet and ingot manufacturers,
copper refineries and smelters, and brass and bronze ingot manufacturers. The
Company interacts with end users and brokers through its sales force of 15
people. Prices for the majority of non-ferrous scrap metals change based upon
the daily publication of spot and futures prices on the COMEX or London Metal
Exchange. The Company's sales of processed non-ferrous scrap accounted for 67%
of the Company's revenues for the twelve months ended March 31, 1997,
representing approximately 65 million pounds of non-ferrous metals.
TRANSPORTATION
The Company's subsidiaries operate trucks, trailers and roll-off containers
to transport material from suppliers and to customers. In addition, the Company
utilizes railroad and independent trucking for a portion of its inbound and
outbound hauling.
ENVIRONMENTAL MATTERS
Information with respect to Environmental Matters is included in the
section "Factors Influencing Future Results and Accuracy of Forward Looking
Statements -- Environmental Matters".
SEASONALITY
The Company's subsidiaries have, in the past, experienced lower sales in
July and December. The Company's operations can be adversely affected by
protracted periods of inclement weather or unexpected closing or shutdown of
customer's plants, which could reduce the volume of material processed at its
facilities.
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PERSONNEL
As of March 31, 1997, the Company employed 376 people, of whom 11 are in
the Corporate office. 365 employees work in the Company's recycling centers, of
which 191 are full-time and 174 are part-time employees. None of the Company's
employees are represented by a labor union. The Company considers relations with
its employees to be satisfactory.
RESEARCH AND DEVELOPMENT
The Company is not currently involved in any research and development
projects.
EXPORT SALES
The Company's MacLeod subsidiary generated approximately $2.5 million (3%
of consolidated net sales) from foreign sales for the year ended March 31, 1997.
Foreign sales are denominated in U.S. dollars.
COMPETITION
The scrap metal recycling industry is highly competitive, with the
principal competitive factors being price and availability of scrap metal.
Competition in the industry is intense in part because the barriers to entry
into the scrap metal collection business are relatively low. Additionally, the
Company faces competition from producers of finished steel products, many of
whom have substantially greater financial resources than the Company, who may
vertically integrate by entering the scrap metal recycling business. There can
be no assurance that the Company will be able to obtain or maintain a market
share necessary to achieve its financial goals or to effectively compete in its
markets.
RECENT DEVELOPMENTS
On May 16, 1997, the Company signed a definitive agreement to merge a
wholly-owned subsidiary with and into Cozzi Iron & Metal, Inc. ("Cozzi"),
headquartered in Chicago, Illinois. Cozzi will be the surviving entity and will
operate as a wholly-owned subsidiary of the Company following the merger. The
closing of the Cozzi merger is subject to shareholder and government approvals
and is also subject to certain other conditions precedent. At the closing of
this merger, the shareholders of Cozzi will receive 11.5 million shares of the
Company's common stock, warrants to purchase 1.5 million shares of common stock,
and $6.0 million in cash. Further, at the effective time of the merger, the
Company intends to appoint Albert A. Cozzi as President and Chief Operating
Officer of the Company. T. Benjamin Jennings will remain Chairman of the Board
and Chief Development Officer, and Gerard M. Jacobs will remain the Chief
Executive Officer of the Company. Contemporaneous with closing, Albert A. and
Frank J. Cozzi, as well as T. Benjamin Jennings and Gerard M. Jacobs, anticipate
entering into five-year employment agreements with the Company. In addition,
Albert A., Frank J. and Gregory P. Cozzi and T. Benjamin Jennings and Gerard M.
Jacobs intend to enter into a ten-year stockholder agreement to, among other
things, vote their respective shares in a common fashion in regard to elections
of directors and officers and in certain other circumstances. No assurance can
be provided that the Cozzi merger will close and failure of such transaction to
close for any reason could have an adverse affect on the Company and its stock
price. See "Factors Influencing Future Results and Accuracy of Forward-Looking
Statements."
On March 18, 1997, the Company signed a binding Letter of Intent to acquire
Proler Southwest Inc., and Proler Steelworks LLC ("Proler"). Proler Southwest,
Inc. and Proler Steelworks LLC have operations in Houston, Texas and Jackson,
Mississippi, respectively. The transaction is expected to be effected by the
Company acquiring all of the equity interests in Proler Southwest Inc., and
Proler Steelworks LLC in exchange for $15.0 million in cash, a $2.0 million
promissory note, 1.75 million shares of common stock of the Company and warrants
to purchase 375,000 shares of common stock. No assurance can be provided that
the Proler transaction will close and failure of such transaction to close for
any reason could have an adverse affect on the Company and its stock price.
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Effective May 28, 1997, Raymond F. Zack voluntarily resigned from his
position as a Director of the Company.
ITEM 2. PROPERTIES
The Company's principal offices are located in an office building at 500
North Dearborn St., Suite 405, Chicago, Illinois, which the Company leases. As
of June 19, 1997, the Company owned or leased 20 locations. The Company's
recycling operations are performed in the following locations:
The Company's EMCO subsidiary owns a 25 acre site in an industrial area of
Phoenix, Arizona, at which it performs its main administrative activities and
principal processing operations. In addition, EMCO leases nine collection
centers in the Phoenix metropolitan area and collection centers in Prescott,
Arizona and Yuma, Arizona.
The Company's Metal Management Realty, Inc. subsidiary owns two parcels of
real property in Tucson, Arizona. This property is leased to Ellis Metals, Inc.,
which is principally owned by Harold Rubenstein, a Director of the Company.
The Company's Metal Management Realty, Inc. subsidiary also owns a seven
acre site in South Gate, California where the main offices and principal
processing operations of MacLeod are located. In addition, MacLeod leases three
additional sites in the Los Angeles metropolitan area.
The Company's HouTex subsidiary leases a 45 acre processing site located in
Houston, Texas from a limited partnership affiliated with Mike Melnik, a
Director of the Company. The facility is located on the Houston shipping channel
and all of the HouTex operations are performed on this facility.
The Company's Reserve subsidiary lease sites in Cleveland, Ohio and
Chicago, Illinois. Reserve owns a 50% interest in a joint venture with
operations in Attalla, Alabama. The joint venture leases the site on which its
operations are performed.
Giving effect to the Reserve acquisition, the Company's scrap metal
recycling operations will be conducted from facilities in Alabama, Arizona,
California, Illinois, Ohio and Texas.
The Company's lease relating to its former offices in Berkeley, California
has been terminated and the final lease payment was made in April 1997. The cost
relating to the termination of the Berkeley lease is recorded as part of
discontinued operations.
ITEM 3. LEGAL PROCEEDINGS
The Company's Reserve subsidiary is currently involved in a legal
proceeding in which Reserve Iron & Metal Limited Partnership (a Delaware Limited
Partnership) and P. Joseph Iron & Metal, Inc. (its sole general partner) are
named as defendants. The court in which such proceedings are pending and the
date of the proceeding is: George Abboud v. Reserve Iron & Metal Limited
Partnership, Cuyahoga County Court of Common Pleas, Case No. 304772, George
Abboud v. P. Joseph Iron & Metal, Inc., Cuyahoga County Court of Common Pleas,
Case No. 304772, March 27, 1996.
Claimant George Abboud has alleged that Reserve Iron & Metal, as his
employer, intentionally required Mr. Abboud to work under conditions in which an
injury to Mr. Abboud was substantially certain to occur. Reserve Iron & Metal
has denied this allegation and believes evidence will show that Mr. Abboud
negligently performed his work, which caused his injury. Claimant George Abboud
seeks money damages in an amount in excess of $25,000 to be determined at trial.
No trial date has been set. Discovery is still pending.
Certain of the sellers of Reserve (the "Indemnifying Parties") have agreed
to indemnify the Company and its affiliates against a portion of specified
potential liabilities. As is customary with certain types of potential
liabilities, Reserve's insurance carriers have accepted the defense of Reserve,
but have done so subject to reserving their respective rights to deny coverage
under certain circumstances. Assuming, for hypothetical purposes, that insurance
coverage would not be available or would be inadequate, such potential
liabilities, were they to become actual liabilities, could be significant. Any
amounts payable by the
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Indemnifying Parties will be funded by reducing the purchase price note owed by
the Company and/or by increasing the exercise price on warrants issued to such
Indemnifying Parties as part of the original terms of the Purchase Agreement and
the ten-year employment agreements, respectively. With reference to these
certain potential liabilities, Reserve has advised the Company it believes it
has adequate insurance coverage and has denied any liability for these potential
liabilities. There can be no assurance, however, that Reserve will not suffer
actual liability or that it will have adequate insurance to cover the liability
and in such case, the Company could be materially and adversely affected.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the shareholders of Metal Management, Inc.
during the fourth quarter of fiscal 1997.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
Metal Management Inc. common stock, par value $.01, has been traded on the
NASDAQ National Market System under the symbol MTLM since April 1996.
Previously, the Company traded under the symbol GPAR. The following table sets
forth the high and low closing prices for the Company's common stock for the
periods indicated, as reported by the NASDAQ National Market System. They
reflect inter-dealer prices, without retail mark-up, mark-down or commission.
HIGH LOW
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FISCAL 1997 (YEAR ENDED 3/31/97)
Fourth Quarter.............................................. $10.38 $3.81
Third Quarter............................................... 4.19 3.38
Second Quarter.............................................. 4.50 3.25
First Quarter............................................... 5.56 4.38
FISCAL 1996 (FIVE MONTHS ENDED 3/31/96)
Second Quarter (2/1/96 to 3/31/96).......................... $ 5.00 $4.25
First Quarter (11/1/95 to 1/31/96).......................... 5.00 3.00
FISCAL 1995 (YEAR ENDED 10/31/95)
Fourth Quarter.............................................. $ 3.63 $1.75
Third Quarter............................................... 2.13 1.44
Second Quarter.............................................. 2.00 1.50
First Quarter............................................... 1.88 1.25
The number of registered stockholders of record of the Company's Common
Stock, based on the transfer records of the Company at June 18, 1997, was 240.
On June 18, 1997, the closing price per share of the Company's Common Stock as
reported on the NASDAQ National Market System was $11.875.
On August 31, 1995, the Company announced that its Board of Directors
elected to discontinue the payment of cash dividends. The Company presently has
no intention of paying dividends in the foreseeable future and intends to
utilize its cash and investments for the intended new direction of the Company.
The Company last paid a cash dividend in fiscal 1995, of $0.18 per share (three
quarterly cash dividend payments of $.06 per share).
SALES OF UNREGISTERED SECURITIES DURING THE YEAR ENDED MARCH 31, 1997
In connection with the Company's merger with EMCO on April 11, 1996, the
Company issued 3,500,000 shares of unregistered Common Stock valued at $8.8
million and warrants to purchase 1,000,000 shares of unregistered Common Stock,
at exercise prices ranging from $4.48 to $6.48 per share.
In connection with the Company's acquisition of MacLeod on January 1, 1997,
the Company issued 725,000 shares of unregistered Common Stock valued at $2.3
million and warrants to purchase 175,000 shares of unregistered Common Stock, at
exercise prices ranging from $3.96 to $4.75 per share.
In connection with the Company's acquisition of HouTex on January 7, 1997,
the Company issued 475,000 shares of unregistered Common Stock valued at $1.7
million and warrants to purchase 250,000 shares of unregistered Common Stock at
an exercise price of $4.00 per share. Also, certain provisions in the HouTex
acquisition agreements required the Company to issue, subsequent to closing,
additional warrants to purchase 180,000 shares of unregistered Common Stock at
an exercise price of $4.00 per share. On May 21, 1997, warrants to purchase
330,000 shares of unregistered Common Stock were exercised by the former
shareholders of HouTex including warrants to purchase 87,000 shares by Mike
Melnik, a Director of the Company.
On January 7, 1997, the Company obtained a $10.0 million loan from a
commercial bank. This loan is secured by personal guarantees provided by five
current directors and one former director of the Company,
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including Gerard M. Jacobs, T. Benjamin Jennings, Donald F. Moorehead, Jr.,
George O. Moorehead, Harold Rubenstein and Raymond F. Zack and pledges of
certain assets of its HouTex subsidiary. In consideration for providing the
personal guarantees, the Company granted these directors warrants to purchase an
aggregate 500,000 shares of unregistered Common Stock at an exercise price of
$4.00 per share.
On April 15, 1997, Clend Investment, beneficially owned, in part, by Mike
Melnik, a director of the Company, converted $1.0 million of its note payable
into 182,482 shares of unregistered Common Stock. On May 29, 1997, Ian MacLeod,
a director of the Company, converted $1.0 million of a note payable into 160,000
shares of unregistered Common Stock.
In April 1997, the Board of Directors approved a private placement of up to
2,025,000 shares unregistered Common Stock at $7.25 per share (the "Private
Placement"). The Private Placement is fully subscribed and all shares available
for sale have been issued. Five directors of the Company, including Gerard M.
Jacobs, T. Benjamin Jennings, Donald F. Moorehead, Jr., George O. Moorehead and
Harold Rubenstein collectively purchased 260,000 shares in the Private
Placement. A purchaser of 1.0 million shares of unregistered Common Stock in the
Private Placement, who is not a director or employee, provided consideration
comprised of $5.0 million in cash and a $2.25 million short term note. The short
term note accrues interest at prime rate and all principal and interest is due
and payable on or before June 30, 1997. On June 16, 1997, the Company received a
$500,000 payment on the note. The Private Placement was accomplished by the
Company directly with accredited investors and did not involve the use of any
underwriters or advisors or the payment of any fees or commissions.
In connection with the Company's acquisition of Reserve on May 1, 1997, the
Company issued warrants to purchase 1.575 million shares of unregistered Common
Stock, at exercise prices ranging from $3.50 to $9.90 per share (exercise prices
are subject to adjustment). A total of 840,000 of the warrants were issued to
Paul D. Joseph, a Director of the Company.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share and employee data)
Financial results for the current fiscal year and prior years reflect the
divested businesses as discontinued operations. For information about principal
acquisitions and divestitures see notes 2, 3 and 16 to the consolidated
financial statements included in Part II, Item 8 of this report.
Fiscal 1992 to 1995 represents the twelve month period ended October 31 of
each year. Fiscal 1996 represents the five month period from November 1, 1995 to
March 31, 1996. Fiscal 1997 represents the twelve month period ended March 31.
Results for fiscal 1992 through 1995 and the five month period ended March 31,
1996 have been restated to reflect the results of the disposed businesses as
discontinued operations.
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See "Factors Affecting Future Results and Accuracy of Forward-Looking Statements
- -- Recent Change in Strategic Direction and Limited Operating History."
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
INCOME STATEMENT DATA
Net sales.............................. $ 0 $ 0 $ 0 $ 0 $ 0 $ 65,196
Gross profit........................... 0 0 0 0 0 6,872
Total operating expenses............... 0 0 0 0 210 8,456
Interest and other income (expense),
net.................................. 968 310 229 312 142 (1,268)
Net income (loss) from continuing
operations........................... 968 310 228 261 (16) (2,010)
Income (loss) from discontinued
operations........................... 78 (202) (440) (2,698) 22 847
Net income (loss)...................... 1,046 108 (212) (2,437) 6 (1,163)
Income (loss) per share from:
Continuing operations................ $.13 $.06 $.04 $.05 $.00 $(.22)
Discontinued operations.............. $.01 $(.04) $(.08) $(.53) $.00 $.09
Weighted average shares outstanding.... 7,336 5,095 5,098 5,125 5,299 9,106
BALANCE SHEET DATA
Working capital (deficit).............. $11,343 $ 7,983 $ 8,130 $ 9,141 $ 9,086 $(13,555)
Total assets........................... 16,665 15,304 13,486 10,130 10,313 70,125
Long-term debt, including current 0 0 0 0 0 5,170
Stockholders' equity................... 14,506 13,759 12,395 9,314 9,608 23,148
Cash dividends declared per common
share................................ $0.24 $0.24 $0.24 $0.18 $0.00 $0.00
Number of employees.................... 82 71 62 41 37 376
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following factors should be considered carefully in evaluating the
Company and its business. The risk factors described below contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ materially from the results discussed in the
forward-looking statements.
The purpose of the following discussion is to facilitate the understanding
and assessment of significant changes and trends related to the results of
operations and financial condition of the Company, including changes arising
from recent acquisitions by the Company, the timing and nature of which have
significantly affected the Company's results of operations. This discussion
should be read in conjunction with the consolidated financial statements and
notes thereto included in Part II, Item 8 of the Form 10-K.
GENERAL
During the current fiscal year, the Company changed its strategic direction
by pursuing consolidation of the scrap metal recycling business. In conjunction
with this new strategy, the Company divested its color printers and related
businesses during the year by selling the Spectra*Star & VideoShow businesses.
The operations of these businesses are treated as discontinued operations in the
Company's financial statements. All prior year information has been restated to
conform to reflect the results of the disposed businesses as discontinued
operations.
In April 1996, the Company completed its first acquisition in the scrap
metal recycling business by merging with EMCO. This was followed by the
acquisitions of MacLeod and HouTex in January 1997. These transactions were
accounted for by the purchase method of accounting and their results are
included in the Company's consolidated results for the year ended March 31, 1997
from the time of acquisition. On May 1, 1997, the Company acquired Reserve also
to be accounted for under the purchase method of accounting. On May 16, 1997,
the Company executed a definitive agreement to merge a subsidiary of the Company
with Cozzi. In March 1997, the Company announced that it signed a binding letter
of intent to acquire Proler. The Cozzi and Proler transactions are expected to
close during the second quarter of fiscal 1998 and will be
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accounted for under the purchase method of accounting, but no assurance can be
provided that either transaction will close.
FISCAL YEAR ENDED MARCH 31, 1997
RESULTS OF OPERATIONS
Consolidated revenues for the year ended March 31, 1997 in broad product
categories were as follows: ($ in thousands):
COMMODITY WEIGHT AMOUNT %
- --------- ------ ------ -
Ferrous Metals (tons)............................... 151,782 $20,744 32%
Non-ferrous metals (pounds)......................... 64,898,364 43,531 67%
Other............................................... -- 921 1%
------- ---
$65,196 100%
======= ===
Consolidated revenues for the year ended March 31, 1997 reflect twelve
months of results for EMCO and three months for MacLeod and HouTex,
respectively. Revenues in the scrap metal industry during fiscal 1997 were
negatively impacted by market conditions that reduced prices for scrap metals.
Prices for ferrous scrap metals declined significantly in the third quarter of
fiscal 1997. In addition, prices for non-ferrous metals consisting principally
of copper and aluminum also declined during fiscal 1997.
The price of scrap metal is impacted by regional and seasonal variations.
Furthermore, prices for scrap metal are also impacted by broad and global
cyclical movements and as such equilibrates supply and demand. The Company
believes one of the factors that contributed to the price decline in fiscal 1997
for nonferrous metals was the negative reaction caused by the much publicized
speculative trading losses sustained by a major copper trader. The Company
believes one of the factors that contributed to the price decline in ferrous
metals during the third quarter was weaknesses in export markets for ferrous
metals.
Consolidated gross margin for fiscal 1997 was $6.8 million, or 10.4% of net
sales. As indicated above, gross margins for scrap processors were negatively
impacted in fiscal 1997 by general declines in scrap prices. Gross margins were
also impacted by losses at the Company's EMCO subsidiary. During the third
quarter, the Company initiated efforts to restructure the operations at EMCO and
intends to reduce future operating expenses through the restructuring plan. No
provisions were recorded on the balance sheet for the restructuring costs.
Restructuring costs are being expensed as incurred. For further discussion, see
section entitled "Factors Affecting Future Results and Accuracy of
Forward-Looking Statements."
Consolidated operating expenses of $8.5 million consists of general and
administrative costs of $6.2 million and depreciation and amortization of $2.3
million. Approximately $2.0 million of the general and administrative costs
represents corporate overhead. As mentioned earlier, the Company's EMCO
subsidiary has initiated an operational restructuring plan that management
believes will reduce certain overhead expenses.
Net interest and other expense for the year was $1.3 million. This was
comprised of $1.6 million in interest expense, offset by $.2 million in interest
income and $.1 million of other income. In the prior fiscal years, the Company
had excess cash invested in government and corporate bonds which generated
interest income for the Company. During the current fiscal year, the Company
began to incur interest expense associated with the financing of its
acquisitions. See the section titled "Liquidity and Capital Resources" for
further discussion.
Net loss from continuing operations was $2.0 million ($.22 per share). The
net loss from continuing operations was mainly due to losses incurred at the
Company's EMCO subsidiary and corporate overhead costs, partially offset by
operating income at the Company's HouTex and MacLeod subsidiaries. The financial
results for HouTex and MacLeod are only included from their acquisition dates in
January 1997. Losses at EMCO were mainly due to unfavorable market conditions,
inefficient operating processes and inefficient machinery and equipment.
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Income from discontinued operations was $847,000 ($.09 per share). During
the fiscal year, the Company realized an after-tax gain, including royalty
income of $351,000, of $500,000 on the sale of assets of the Spectra*Star and
VideoShow businesses. The results of discontinued operations reflect the
operations of the Spectra*Star business up to the divestiture date (July 16,
1996) as well as severance and other costs incurred to discontinue the business.
Severance costs were not material to the Company.
FISCAL 1996 TO FISCAL 1995
Fiscal 1996 represents the five month period from November 1, 1995 to March
31, 1996. Net loss from continuing operations represents certain corporate
overhead costs offset by interest income and a tax benefit.
Interest and other income remained consistent during fiscal 1996 as
compared to fiscal 1995. Interest and other income was $142,000 for the five
months ended March 31, 1996, an average of $28,000 per month compared to
interest and other income of $312,000 for fiscal 1995, an average of $26,000 per
month.
Income from discontinued operations was $22,000 ($.00 per share) for the
five months ended March 31, 1996, versus a loss of $2.7 million ($.53 per share)
in fiscal 1995. Fiscal 1995 results reflect one time charges of $2.2 million
relating to restructuring of the color printer business and the discontinuance
of a portion of the electronic presentation business. The results for fiscal
1996 were impacted by lower shipments of the Company's products due to
competitive pressures in the market. This was slightly offset by lower operating
expenses as a result of planned reductions in payroll and related expenditures
as well as less time and costs spent by the Company on research and development.
FISCAL 1995 TO FISCAL 1994
Income from continuing operations of $261,000 ($.05 per share) represents
interest income and a provision for income taxes. Interest income was $312,000
during fiscal 1995, compared to $229,000 during fiscal 1994. The increase was
primarily attributed to the recording of a loss during fiscal 1994 of $78,000
for certain of the Company's investments.
Loss from discontinued operations was $2.7 million ($.53 per share) in
fiscal 1995 versus a loss of $440,000 ($.08 per share) in fiscal 1994. Fiscal
1995 results reflect one time charges of approximately $2.2 million relating to
the restructuring of the color printer business and the discontinuance of a
portion of the electronic presentation business. Without the one time charges,
net loss from discontinued operations for fiscal 1995 would have been $500,000.
The Company's color printer business remained flat with the prior year. The
electronic presentation business experienced weakness due to competitive product
pressures, softness in governmental purchases and lower sales outside the United
States. The Company was able to control expenses through reductions in staff and
less time and costs spent on research and development.
LIQUIDITY AND CAPITAL RESOURCES
As previously discussed, the Company will continue to pursue acquisitions
in the scrap metal recycling industry and anticipates financing acquisitions
with debt and equity transactions. The Company will require substantial capital
to fund future acquisitions and current operations. There can be no assurance
that any additional financing will be available, or, in the event that it is,
that it will be available in the amounts and on terms acceptable to the Company.
CASH FLOWS FROM CONTINUING OPERATIONS
The Company's net cash flows from continuing operations decreased
significantly during fiscal 1997 as a result of significant losses incurred by
EMCO and an increase in accounts receivable balances as a result of the
acquisitions of EMCO, MacLeod and HouTex.
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CASH FLOWS FROM INVESTING ACTIVITIES
The Company made capital expenditures of approximately $5.7 million during
fiscal 1997 which included purchases of property and equipment ($3.2 million)
and cash paid for the acquisitions of EMCO, MacLeod and HouTex ($2.5 million).
These cash outflows were partially offset by $2.8 million of proceeds received
from the sale of marketable securities. Management anticipates continuing to
make acquisitions, capital expenditures for new equipment, and upgrading and
expanding existing equipment and facilities. The Company expects that these
expenditures may increase in the future due to the internal growth of the
Company and business combinations.
CASH FLOWS FROM FINANCING ACTIVITIES
During fiscal 1997, the Company obtained $7.8 million from issuances of
term debt. $6.5 million of the term debt is due on June 30, 1997, but may be
extended at the Company's option and for a fee, to July 1, 1998. Proceeds from
the term debt were utilized to fund capital expenditures, acquisitions and make
payments on existing debt. The Company also made net payments of $926,000 on its
various lines of credits. At March 31, 1997, the Company had utilized
predominately all the availability under its lines of credit. Management
anticipates obtaining additional debt financing to fund its acquisition strategy
as well as provide additional working capital for its existing operations. See
"Factors Affecting Future Results and Accuracy of Forward-Looking Statements --
Immediate and Future Capital Requirements; Short-term Borrowing Strategies to
Fund Acquisitions; and Substantial Leverage."
CASH FLOWS FROM DISCONTINUED OPERATIONS
The Company generated $2.7 million of cash flows from discontinued
operations during fiscal 1997. The cash flows generated are a result of proceeds
received from the sale of assets of the Spectra*Star business, royalty income
received from the sale of products from the discontinued businesses and
collection of accounts receivable related to the discontinued operations.
FINANCIAL CONDITION
The Company's principal sources of cash are its existing cash and cash
equivalents balances, collection of accounts receivable and proceeds from lines
of credit and other borrowing agreements. At March 31, 1997, the Company had
$5.7 million in cash, cash equivalents and marketable securities.
Significant Cash Transactions Subsequent to Year-End
On June 19, 1997, the Company concluded its private sale of 2,025,000
shares of restricted common stock which to date has raised approximately $13.0
million in cash. The Company expects to receive an additional $1.75 million from
the collection of a short term note provided by a purchaser of common stock in
the private placement. In connection with the Company's acquisition of Reserve
on May 1, 1997, a cash payment of $5.9 million was made.
Cash Requirements for Maturing Debt Obligations
The Company has a loan from a commercial bank in the principal amount of
$10.0 million ($9.5 million is currently outstanding) which is due and payable
on June 30, 1997, but can be extended, at the Company's option, to July 1, 1998,
for a fee. The Company also has an $5.0 million line of credit ($3.4 million is
currently outstanding and available) which matures in August 1998. In connection
with the Reserve acquisition, the Company assumed certain debt of approximately
$26.0 million of which $1.5 million is currently outstanding. The Company made
arrangements with Reserve's lender to provide for the existing loans to remain
in place without changes to terms and conditions of the credit agreement.
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Cash Requirements for Pending Acquisitions
The Cozzi and Proler acquisitions will require cash payments to sellers at
closing of approximately $6.0 million and $15.0 million, respectively. Both
acquisitions are expected to close during the second quarter of fiscal 1998,
although no assurance can be provided that either transaction will close. The
Company's existing cash and cash equivalents will not be sufficient to fund the
Cozzi and Proler acquisitions. The Company is seeking other financing sources to
meet such obligations but no assurances can be provided that such financing will
be available when needed, or that, if available, it will be on satisfactory
terms. See "Business -- Recent Developments."
Working Capital Availability and Requirements
Accounts receivable balances increased from $1.5 million at March 31, 1996
to $9.6 million at March 31, 1997. The increase in accounts receivable is
attributable to the acquisitions of EMCO, MacLeod and HouTex, offset by
collections of accounts receivable from the Spectra*Star business. Accounts
payable increased from $0.3 million at March 31, 1996 to $5.2 million at March
31, 1997. The increase in accounts payable is attributable to the acquisitions
of EMCO, MacLeod and HouTex.
Inventory levels vary at each of the Company's subsidiaries. Inventory
levels are determined by managers of subsidiaries and can vary significantly
between subsidiaries. Inventory on hand at March 31, 1997 consisted of the
following ($ in thousands):
COMMODITY WEIGHT AMOUNT %
--------- ------ ------ -
Ferrous (tons)........................................ 39,983 $2,707 32%
Non-ferrous (pounds).................................. 9,073,387 4,754 57%
Other................................................. -- 954 11%
------ ---
$8,415 100%
====== ===
The Company expects to make substantial investments in additional equipment
and property for expansion, for replacement of assets, and in connection with
future acquisitions. In particular, the Company's EMCO subsidiary requires
substantial capital investment to replace old equipment and to put into service
additional processing equipment.
The Company and its wholly-owned subsidiaries have various revolving lines
of credit with commercial lenders which provide for revolving credit at interest
rates that range from 0% to 1.75% in excess of the lenders' prime rates. The
Company's ability to borrow under the lines of credit is based primarily on its
accounts receivable and inventory balances. As of March 31, 1997, the Company
had fully drawn predominately all of the availability under the lines of credit.
The lines expire at various dates through August 1998. On May 30, 1997, the
Company entered into a $6.0 million revolving and term loan agreement with a
commercial bank under which the Company received proceeds of $4.5 million which
is due on July 1, 1998. That loan has an interest rate equal to 1% above the
lenders' prime rate.
The weighted average interest rate on the borrowings outstanding at March
31, 1997 was 9.59%. Average borrowings under the various lines of credit during
fiscal 1997 were approximately $4.7 million. During fiscal 1997, amounts
outstanding under the various lines of credit ranged from $2.5 million to $7.9
million.
Scrap metal recycling companies have substantial ongoing working capital
and capital equipment requirements in order to continue to operate and grow. For
example, through March 31, 1997, the Company advanced approximately $4.7 million
to its EMCO subsidiary for short-term working capital requirements. As a result,
the Company will seek equity or debt financing to fund future improvements and
expansion of its scrap metal recycling business as well as to make other
acquisitions of scrap metal recycling facilities. There can be no assurance that
such financing will be available when needed, or that, if available, it will be
on satisfactory terms. The failure to obtain financing may cause the Company to
default on certain existing debt obligations and would hinder the Company's
ability to make continued investments in capital equipment and pursue
expansions, which could materially adversely affect results of operations and
financial condition. Any
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equity financing which is undertaken would result in dilution to the
then-existing stockholders of the Company. See "Factors Influencing Future
Results -- Risk of Dilution to Existing Stockholders."
FACTORS INFLUENCING FUTURE RESULTS AND ACCURACY OF FORWARD-LOOKING STATEMENTS
In the normal course of its business, the Company, in an effort to help
keep its stockholders and the public informed about the Company's operations,
may from time to time issue or make certain statements, either in writing or
orally, that are or contain forward-looking statements, as that term is defined
in the U.S. federal securities laws. Generally, these statements relate to
business plans or strategies, projected or anticipated benefits from
acquisitions made by or to be made by the Company, or projections involving
anticipated revenues, earnings, or other aspects of operating results. The words
"expect," "believe," "anticipate," "project," "estimate," and similar
expressions are intended to identify forward-looking statements. The Company
cautions readers that such statements are not guarantees of future performance
or events and are subject to a number of factors that may tend to influence the
accuracy of the statements and the projections upon which the statements are
based, including but not limited to those discussed below. As noted elsewhere in
this report, all phases of the Company's operations are subject to a number of
uncertainties, risks, and other influences, many of which are outside the
control of the Company, and any one of which, or a combination of which, could
materially affect the results of the Company's operations and whether forward-
looking statements made by the Company ultimately prove to be accurate.
The following discussion outlines certain factors that could affect the
Company's consolidated results of operations for fiscal 1998 and beyond and
cause them to differ materially from those that may be set forth in
forward-looking statements made by or on behalf of the Company.
GENERAL
The Company's Board of Directors intends to actively pursue acquisitions
and mergers in scrap metal recycling. Depending on the nature and size of
potential acquisitions, mergers and other transactions, if any, the Company's
cash flows from operating and investing activities, together with its cash, cash
equivalents and marketable securities may not be sufficient in the future.
Therefore, the Company will have to supplement these sources of liquidity with
additional sources of funds such as borrowings or stock offerings. No assurance
can be provided that such financing will be available or available on reasonable
terms.
RECENT CHANGE IN STRATEGIC DIRECTION AND LIMITED OPERATING HISTORY
In the past year, the Company has undergone a significant change in
strategic direction and emphasis. Immediately prior to April 11, 1996, the
Company's business had consisted of designing, manufacturing and marketing color
printers and related consumables, including ribbons, transparencies and paper.
Then, on April 11, 1996, the Company acquired EMCO, which was engaged in scrap
metal recycling. On July 16, 1996, the Company sold to Mannesmann Tally the
inventory and related production equipment of its Spectra*Star printer and
consumables business. This was followed by the acquisitions of MacLeod, HouTex
and Reserve. The Company anticipates future acquisitions of other companies in
the scrap metal recycling industry. Reflective of the Company's overall change
in emphasis is its corporate name change on April 9, 1996, from General
Parametrics Corporation ("GPC") to Metal Management, Inc. Given the substantial
changes in the Company's business in the past year, past financial performance
should not be considered a reliable indicator of future performance. Potential
purchasers should not use historical trends to anticipate results or trends in
future periods.
Prior to the EMCO merger in April 1996, the Company had no history of
operations in the scrap metal recycling industry. The Acquired Companies have
not previously operated as subsidiaries of a public holding company subject to
formal accounting and reporting requirements. Consequently, in order to
transition the Acquired Companies, the Company will have to establish
information systems, internal controls, and hire managers with appropriate
skills to insure the timeliness and accuracy of financial reports. During fiscal
1997,
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the Company announced restatement of certain financial results due to accounting
errors at its EMCO subsidiary. In addition, the Acquired Companies have
historically been organized in a manner in which its management and ownership
were the same. The management of the Acquired Companies have not previously
reported to management responsible for diverse operations and have had limited
experience in executing consolidation strategies on the scale being pursued by
the Company. Furthermore, the success of the consolidation strategy is dependent
in part on the ability of the Company's management to oversee diverse operations
and to successfully integrate processing, marketing and other resources of the
Acquired Companies. The Company's management team has not previously had
experience in such capacity.
IMMEDIATE AND FUTURE CAPITAL REQUIREMENTS
The Company is pursuing an aggressive acquisition strategy which requires
substantial amounts of capital. For example, to accomplish the acquisitions of
Cozzi and Proler, the Company will need to obtain $21.0 million to fund the cash
portions of purchase consideration. The Cozzi merger agreement also requires the
Company to either have received a capital infusion or a commitment be made for a
capital infusion of $50.0 million on terms acceptable to the Cozzi shareholders.
The Company is evaluating various financing strategies and alternatives to
obtain sufficient capital to close the acquisition of Cozzi and Proler and to
provide working capital support and to fund future acquisitions; however, no
assurance can be provided that sufficient funds on acceptable terms will become
available. Failure to raise sufficient capital to close the Cozzi and Proler, or
other acquisitions could adversely affect the Company and its stock price.
SHORT TERM BORROWING STRATEGIES TO FUND ACQUISITIONS
The Company intends to continue an acquisition strategy which will utilize
seller note obligations with short term as well as long term maturities. The
issuances of seller notes may provide restrictive covenants on the Company. For
example, the seller notes issued to acquire HouTex and MacLeod provided
restrictions on the ability of the Company to unilaterally direct or control the
operations of HouTex or MacLeod until the seller notes were repaid. The seller
notes issued to HouTex and MacLeod also provided pledges of the stock of the
acquired entities and certain other restrictive covenants. No assurance can be
provided that the Company will access capital on acceptable terms in adequate
time frames to repay seller note obligations issued in the future. An inability
to repay seller note obligations would have adverse consequences to the Company.
Subsequent to closing the HouTex and MacLeod acquisitions, and prior to the
various maturity dates on the seller notes issued in the acquisitions of MacLeod
and HouTex, the Company arranged for funds to be available to repay principal
and interest on such seller notes. However, no assurance can be provided that
the Company will be able to pay future seller notes when due. The Company has
provided a $1.541 million note payable to certain sellers of Reserve. The note
is due on May 1, 1998 and places restrictions on the ability of the Company to
unilaterally direct or control the operations of Reserve until the note is
repaid. The $1.541 million seller note to Reserve is secured by a stock pledge
agreement.
SUBSTANTIAL LEVERAGE
As a result of the recent mergers and acquisitions, the Company, as of
March 31, 1997, had approximately $36.4 million in consolidated liabilities owed
either to the sellers of the Company's completed acquisitions or to third
parties. In particular, the Company issued an aggregate of approximately $16.0
million principal amount in promissory notes to the sellers of MacLeod and
HouTex. All seller notes payable to the former shareholders of MacLeod and
HouTex which became payable were extinguished through payments made in March
1997, April 1997 and May 1997 and the execution of a note for $3.0 million due
in 2002. $1.5 million of promissory notes were issued in connection with the
Reserve acquisition, which are due in May 1998. In order to pursue expansion and
acquisition opportunities, the Company expects to incur additional debt, either
through bank or credit lines or the sale of debt securities in registered or
unregistered transactions, in addition to additional equity financing it may
undertake. The servicing of such present and future debt of the Company will
utilize cash either in the form of cash on hand or cash generated by operating
and financing activities.
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As of March 31, 1997, the Company had a debt to equity ratio of 157%. The
degree to which the Company is leveraged could have adverse consequences to the
Company including the following: (1) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions,
general corporate purposes or other purposes may be impaired; (2) a substantial
portion of the Company's cash flow from operations will be dedicated to the
payment of principal and interest; and (3) the Company will be more vulnerable
to an economic downturn in the scrap metal recycling industry which has
historically been sensitive to changes in general economic conditions.
RISK OF EXPANSION AND CONSOLIDATION STRATEGIES
The Company currently plans to continue to pursue additional acquisitions
in the scrap metal recycling industry. There can be no assurance that any
previously announced or unannounced mergers will be consummated nor that, if
they are, the Company will be able to effectively manage disparate business
enterprises. The ability of the Company to achieve its expansion objectives and
to manage its growth effectively depends on a variety of factors, including the
ability to identify appropriate acquisition targets and to negotiate acceptable
terms for their acquisition, the integration of new businesses into the
Company's operations and the availability of capital. The inability to control
or manage growth effectively or to successfully integrate future new business
into the Company's operations would have a material adverse effect on the
Company's financial condition and results of operations. There can be no
assurance that the Company will be able to successfully expand or that growth
and expansion will result in profitability. There can be no assurance that the
Company will be able to realize any of the other anticipated benefits of future
mergers or acquisitions that it may undertake or achieve its financial goals and
operational objectives in execution of its consolidation strategy.
COMPANY MANAGEMENT FACTORS
Due to the limited experience of the Company's management in the scrap
metal recycling business, the Company relies substantially on the scrap metal
recycling experience of the current management teams at each of its wholly-owned
subsidiaries. While certain of the management personnel of the acquired
facilities have executed employment agreements, there can be no assurance that
such personnel will continue to serve at the acquired businesses. The loss of a
significant number of management personnel of the Company's acquired businesses
could have a material adverse effect on the Company's efforts to effectively
manage and integrate these operations. In addition, the loss of executive
officers of the Company would also adversely impact the Company's performance
and ability to successfully expand the business.
A condition of the Cozzi merger agreement contemplates the Company
appointing Albert A. Cozzi to be the President and Chief Operating Officer of
the Company. While Mr. Cozzi has substantial experience in the scrap metal
industry and would be an important part of the Company's senior management team,
no assurance can be provided that the Cozzi merger will close.
POTENTIAL CHANGES IN MANAGEMENT AND GOVERNANCE
Changes in Management
Upon the closing of the Cozzi merger, material changes will occur in the
management and governance structure of the Company. The Cozzi merger agreement
contemplates that T. Benjamin Jennings will remain as the Chairman of the Board
and Chief Development Officer of the Company, Gerard M. Jacobs will remain as
Chief Executive Officer of the Company, Robert C. Larry will remain as Chief
Financial Officer of the Company, and Albert A. Cozzi will be appointed
President and Chief Operating Officer of the Company. In addition, the Cozzi
merger agreement contemplates that an Executive Committee will be formed
comprised of Messrs. Albert A. Cozzi, Jacobs, Jennings, and possibly other
individuals. The Company has not previously operated with a Chief Operating
Officer or with an Executive Committee. There can be no assurance that these
changes in management structure will be successful in carrying out the
acquisition and operating plans of the Company.
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Changes in Governance
Upon the closing of the Cozzi merger, the Cozzi merger agreement
contemplates that the Company's Board of Directors will likely be comprised of
directors equally nominated by the shareholders of Cozzi and by Messrs. Jacobs
and Jennings. The Cozzi merger agreement contemplates that two outside directors
will be nominated who are mutually agreeable to both sides of the Cozzi merger.
The Cozzi merger is an example of the willingness of the Company to rapidly
change the management and governance of the Company, if necessary or desirable.
No assurance can be provided that the proposed changes in management and
governance as contemplated in the Cozzi merger agreement will occur or that a
subsequent acquisition or merger will not similarly change the management and
governance structure of the Company nor can there be assurance that any changes
to the corporate governance will be advantageous to the Company.
CONTROL OF COMPANY BY MANAGEMENT, PRINCIPAL STOCKHOLDERS AND MEMBERS OF THE
BOARD OF DIRECTORS
As a result of the mergers and acquisition, Messrs. Jacobs and Jennings,
together with other members of the Board of Directors, have sufficient voting
power to control the outcome of all matters (including the election of directors
and future mergers, acquisitions or sale of assets) submitted to stockholders
for approval and may be deemed to have effective control over the affairs and
management of the Company. Messrs. Jacobs and Jennings along with the existing
members of the Board of Directors of the Company, currently beneficially own
approximately 51% of the Company's common stock on a fully diluted basis. To
date, the Directors of the Company have voted in support of initiatives
recommended by Messrs. Jacobs and Jennings. There can be no assurance that such
support will continue in the future with respect to voting by Directors. The
Cozzi merger, if consummated, will result in 75% ownership of the Company's
common stock on a fully diluted basis by management, principal stockholders and
current and former members of the Board of Directors which further concentrates
ownership and control among principals of the Company.
IMPACT OF THE COZZI DEFINITIVE AGREEMENTS ON MANAGEMENT OF THE COMPANY AND
STRATEGIC ACTIONS CONSIDERED BY THE COMPANY PRIOR TO CLOSING OF THE COZZI MERGER
On May 16, 1997, the Company executed a definitive agreement to merge a
subsidiary of the Company with Cozzi. The definitive agreement requires the
Company to seek approval from Cozzi shareholders prior to executing certain
strategic actions up to the closing of the Cozzi merger or termination thereof.
Actions that require approval by the Cozzi shareholders included but are not
limited to:
Amendments to or changes of the Company's charter or bylaws.
Issuance of equity, except those contemplated by Section 5.2(b) of the
merger agreement.
Changes in management of the Company or changes in the compensation
provided to officers and directors of the Company.
Acquisitions of companies, except those contemplated by Section 5.2(e)
of the merger agreement.
Incurrence of any indebtedness or other significant financing
transactions.
No assurance can be provided that the Cozzi merger will be consummated.
CYCLICALITY OF OPERATING RESULTS
The operating results of the scrap metal recycling processing industry in
general, are highly cyclical in nature as they tend to reflect and amplify the
general national economic condition. In periods of national recession or periods
of minimal economic growth, the operations of scrap metal recycling companies
have been materially adversely affected. During recessions or periods of minimal
economic growth, the automobile and the construction industries typically
experience major cutbacks in production, resulting in decreased demand for
steel, copper and aluminum supplies. For example, the scrap metal recycling
industry was adversely affected for a period of five years from approximately
1988 to 1993. Future economic downturns would materially and adversely affect
the operating results of the Company. The ability of the Company to withstand
significant economic downturns in the future will depend in part on the amount
of cash maintained
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and availability under lines of credit for the Company. Recently, EMCO has
required substantial cash infusions from the Company. The Company believes that
EMCO will require additional working capital funding during fiscal 1998.
PRICE FLUCTUATIONS
EMCO, MacLeod and HouTex's results of operations have been in the past, and
the results of operations of the overall Company are expected to be, subject to
price fluctuations that occur in the metals commodities markets. For example, up
to December 31, 1996, prices of non-ferrous metals generally declined during the
previous five quarters, which adversely affected revenues and net income through
the third quarter of fiscal 1997. The fourth quarter of fiscal 1997 showed
improvement for certain categories of scrap metal prices. A further decline in
commodity prices could further reduce revenues and net income prospectively.
Such losses could have a material adverse effect on the Company's results of
operations and liquidity of the Company.
DEPENDENCE ON SCRAP SUPPLIERS
The Company's scrap recycling operations are dependent upon the supply of
scrap materials from its suppliers. Few of such suppliers are bound by long-term
supply arrangements, and therefore they have no obligation to continue to supply
scrap materials to the Company. In the event that substantial numbers of scrap
suppliers cease supplying scrap materials to the Company, the financial
condition and results of operations of the Company would be materially and
adversely affected.
CONCENTRATION OF CUSTOMERS AND CREDIT RISK
13 customers represented 37% of revenues for the year ended March 31, 1997.
These customers comprised approximately 53% of accounts receivable at March 31,
1997. The Company's largest customer accounted for 9% of revenues and 22% of
accounts receivable for the year ended March 31, 1997. For the year ended
December 31, 1996, Cozzi generated approximately 42% of its revenue from 3
customers, including 1 customer that accounted for 23% of sales. The loss of any
one of the Company's or Cozzi's significant customers, if the Cozzi merger is
consummated, could affect the Company's results of operations and cash flows.
Financial instruments that potentially subject the Company to significant
concentration of credit risk are primarily trade accounts receivable. The
Company sells its products primarily to scrap metal brokers and steel mills
located in the United States. Generally, the Company does not require collateral
or other security to support customer receivables. Historically, the Company's
wholly-owned subsidiaries have not experienced material losses from the
noncollection of receivables, however, certain of the Company's subsidiaries
have significant balances owing from customers that operate in cyclical
industries and leveraged conditions which may impair the collectibility of
receivables.
OPERATING LOSSES AT EMCO
EMCO has incurred operating losses and required capital infusions since the
April 1996 merger. Management believes that the losses have resulted primarily
from unfavorable market conditions in Arizona, from operation of antiquated and
inefficient machinery and equipment, from lack of certain machinery and
equipment, and from certain operational issues. In October 1996, in an effort to
abate such operating losses, the Company initiated efforts to restructure the
operations of its EMCO subsidiary. The restructuring has reduced expenses by
primarily eliminating the utilization of certain leased equipment, eliminating
35 jobs representing approximately 16% of the workforce, and reducing the cost
of outside processing from certain vendors. In addition, as a part of the
restructuring program, EMCO management initiated a review of the buying and
selling departments. The Company is not certain whether it will be able to
accomplish a successful restructuring of EMCO's business. See "Recent Change in
Strategic Direction and Limited Operating History."
As part of the Cozzi merger, the Company will own 50% of a joint venture
owned by Cozzi in Phoenix, Arizona. It is the Company's intention to acquire the
remaining 50% interest in the joint venture and combine
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the operations of the Cozzi joint venture with the EMCO operations. There can be
no assurance that the Cozzi transaction will close nor if the Cozzi transaction
closes, that the Company will be successful in acquiring the other 50% interest
in the joint venture. Nor can any assurance be provided that any integration or
consolidation of EMCO's business with Cozzi will be successful.
RISK OF DILUTION TO EXISTING STOCKHOLDERS
The Company's strategy of expansion and additional acquisitions will
require it to issue additional shares of common stock or securities convertible
into common stock as consideration for additional acquisitions. Common stock may
be issued at a discount to the market price and issuance of a material amount of
common stock or such securities would result in significant dilution to the
then-existing stockholders of the Company. For example, the Cozzi merger, if
consummated, will result in the issuance of an additional 11.5 million shares of
common stock and warrants to purchase at least 1.5 million shares of common
stock. The Company expects to be required to seek equity financing to meet
future capital requirements, which would also result in additional dilution. See
"Immediate and Future Capital Requirements."
VOLATILITY OF STOCK PRICE
The Company's stock price has been, and in the future is expected to be,
volatile and to experience market fluctuation as a result of a number of
factors, including, but not limited to, merger and acquisition announcements and
developments, current and anticipated results of operations, future product
offerings by the Company or its competitors and factors unrelated to the
operating performance of the Company. The trading price of the Company's Common
Stock may also vary as a result of changes in the business, operations, or
financial results of the Company, prospects of general market and economic
conditions, additional future proposed acquisitions by the Company and other
factors. Failure in any quarter to meet the investment community's revenues or
earnings expectations, if any, could have an adverse impact on the Company's
stock price, as could sales of large amounts of stock by existing stockholders.
In addition, sales of substantial amounts of the Company's common stock in the
public market could adversely affect the market price of the Company's common
stock. In the event the market price were adversely affected by such sales, the
Company's access to equity capital markets could be adversely affected and
issuances of common stock by MTLM in connection with acquisitions, or otherwise,
could dilute future earnings per share.
Management believes that the investment public has factored the closing of
the Cozzi and Proler mergers as well as potential future acquisitions into the
Company's current stock price. If the Cozzi, Proler or any future acquisitions
do not close, an adverse impact may occur on the Company's stock price.
ENVIRONMENTAL MATTERS
COMPREHENSIVE REGULATORY REQUIREMENTS
The Company and its subsidiaries are subject to significant government
regulation including stringent environmental laws and regulations. Among other
things, these laws and regulations impose comprehensive local, state, federal,
foreign and supranational statutory and regulatory requirements concerning,
among other matters, the treatment, acceptance, identification, storage,
handling, transportation and disposal of industrial by-products, hazardous and
solid waste materials, waste water, stormwater effluent, air emissions, soil
contamination, surface and ground water pollution, employee health and safety,
operating permit standards, monitoring and spill containment requirements,
zoning, and land use, among others. Various laws and regulations set
prohibitions or limits on the release of contaminants into the environment. Such
laws and regulations also require permits to be obtained and manifests to be
completed and delivered in connection with any shipment of prescribed materials
so that the movement and disposal of such material can be traced and the persons
responsible for any mishandling of such material can be identified. This
regulatory framework imposes significant compliance burdens, costs and risks on
the Company and its subsidiaries. Violation of such laws and regulations may
give rise to significant liability of the Company, including fines, damages,
fees and expenses.
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Releases of certain industrial by-products and waste materials are subject
to particular laws and regulations. While the specific provisions of releases
related laws and regulations vary among jurisdictions, such laws and regulations
typically require that the relevant authorities be notified promptly, that the
release be cleaned up promptly, and that remedial action be taken by the
responsible party and/or owner of the site to restore the environment to levels
protective of human health and the environment. Generally, the governmental
authorities are empowered to act to clean up and remediate releases and
environmental damage and to charge the costs of such cleanup to one or more of
the owners of the property, the person responsible for the spill, the generator
of the contaminant and certain other parties or to direct the responsible party
to take such action. Such authorities may also impose a tax or other liens to
secure such parties' reimbursement obligations. Environmental laws and
regulations impose strict operational requirements on the performance of certain
aspects of hazardous or toxic substances remedial work. These requirements
specify complex methods for identification, monitoring, storage, treatment and
disposal of waste materials managed during a project. Failure to meet these
requirements could result in substantial fines and other penalties.
Environmental legislation and regulations have changed rapidly in recent
years, and it is likely that the Company and its subsidiaries will be subject to
even more stringent environmental standards in the future. For example, the
ultimate effect of the regulations to be implemented under the Clean Air Act
Amendments of 1990 (the "Clean Air Act") on the Company and its subsidiaries,
and the actual amount of any capital expenditures required thereby, will depend
on how the Clean Air Act is interpreted and implemented pursuant to regulations
that are currently being developed and on such additional factors as the
evolution of environmental control technologies and the economic viability of
such operations at the time. For these reasons, future capital expenditures for
environmental control facilities cannot be predicted with accuracy; however, one
may expect that environmental control standards will become increasingly
stringent and that the expenditures necessary to comply with them could increase
substantially.
Local, state, federal, foreign and supranational governments and agencies
have also from time to time proposed or adopted other types of laws, regulations
or initiatives with respect to the scrap metal recycling industry. Included
among them are laws, regulations and initiatives intended to ban or restrict the
intrastate, interstate or international shipment of wastes, to impose higher
taxes or fees on certain shipments of waste, or to classify or reclassify
certain categories of non-hazardous wastes as hazardous. Certain local, state,
federal, foreign and international governments and agencies have promulgated
"flow control" or other regulations, which attempt to require that all waste (or
certain types of waste) generated within the jurisdiction in question must go to
certain disposal sites. From time to time legislation is considered that would
enable or facilitate such laws, regulations or initiatives. Due to the
complexity of regulation of the industry and to public and political pressure,
implementation of existing or future laws, regulations or initiatives by
different levels of governments may be inconsistent and are difficult to
foresee.
The principal services of the Company and its subsidiaries are detailed in
and regulated by various permits and licenses governing their scrap metal
recycling operations. Government agencies continually monitor the performance of
a permit or license holder in relation to the terms of its permit or license.
The Company and its subsidiaries' facilities are subject to periodic unannounced
inspection by local, state and federal authorities to ensure compliance with
permit and license terms and applicable laws and regulations. The Company and
its subsidiaries work with the authorities to remedy any deficiencies found
during such inspections. If serious violations are found or deficiencies, if
any, are not remedied, the Company and its subsidiaries could incur substantial
fines and could be required to close a site.
Governmental authorities have a wide variety of powerful administrative
enforcement actions and remedial orders available to them to cause compliance
with environmental laws or to remedy or punish violations of such laws. Such
orders may be directed to various parties, including present or former owners or
operators of the concerned sites, or parties that have or had control over the
sites. In certain instances, fines and treble damages may be imposed. In the
event that administrative actions fail to cure a perceived problem or where the
relevant regulatory agency so desires, an injunction or temporary restraining
order or damages may be sought in a court proceeding. Some laws give private
parties the right, in addition to existing common laws claims, to file claims
for injunctive relief or damages against the owners or operators of the site.
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The Company believes that with heightened legal, political and citizen
awareness and concerns, all companies in the scrap metal recycling industry may
be faced, in the normal course of operating their businesses, with fines and
penalties and the need to expend substantial funds for capital projects,
remedial work and operating activities, such as environmental contamination
monitoring, and related activities. Regulatory or technological developments
relating to the environment may require companies engaged in the scrap metal
recycling industry to modify, supplement or replace equipment and facilities at
costs which may be substantial. Because the scrap metal recycling industry has
the potential for discharge of materials into the environment, a material
portion of the capital expenditures by the Company and its subsidiaries is
expected to relate, directly or indirectly, to such equipment and facilities.
Moreover, it is possible that future developments, such as increasingly strict
requirements of environmental laws and regulations, and enforcement policies
will require even more significant capital investments in this regard.
Due to the nature of the scrap metal recycling business, it is possible
that inquiries or claims based upon environmental laws may be made in the future
by governmental bodies or individuals against the Company and any other scrap
metal recycling entities that the Company may acquire. The location of the
Company's facilities in large urban areas may increase the risk of scrutiny and
claims. The Company is unable to predict whether any such future inquiries or
claims will in fact arise or the outcome of such matters. Additionally, it is
not possible to predict the total size of all capital expenditures or the amount
of any increases in operating costs or other expenses that may be incurred by
the Company to comply with the environmental requirements applicable to the
Company and its operations, or whether all such cost increases can be passed on
to customers through product price increases. Moreover, environmental
legislation has been enacted, and may in the future be enacted, to create
liability for past actions that were lawful at the time taken but that have been
found to affect the environment and to create public rights of action for
environmental conditions and activities. As is the case with scrap recyclers in
general, if damage to persons or the environment has been caused, or is in the
future caused, by hazardous materials activities of the Company or its
subsidiaries, the Company or its subsidiaries may be fined and held liable for
such damage. In addition, the Company and such subsidiaries may be required to
remedy such conditions and/or change procedures. Thus, there can be no assurance
that potential liabilities, expenditures, fines and penalties associated with
environmental laws and regulations will not be imposed on the Company in the
future or that such liabilities, expenditures, fines or penalties will not have
a material adverse effect on the Company.
In addition, public interest groups, local citizens, local municipalities
and other persons or organizations may have a right to seek relief from court
for purported violations of law. In some jurisdictions, recourse to the courts
for individuals under common law principles such as trespass or nuisance have
been or may be enhanced by legislation providing members of the public with
statutory rights of action to protect the environment. In such cases, even if a
scrap metals recycling facility is operated in full compliance with applicable
laws and regulations, local citizens and other persons and organizations may
seek compensation for damages caused by the operation of the facility. In some
cases, the operation of scrap metal recycling facilities is subjected to
heightened public scrutiny because of residential or other non-industrial
property uses that have developed around such facilities. So-called "Not In My
Backyard" ("NIMBY") grass roots community opposition to such facilities can
materially interfere with such facilities' on-going operations and growth.
SIGNIFICANT POTENTIAL ENVIRONMENTAL LIABILITY
General
The Company and its subsidiaries are subject to potential liability and may
also be required from time to time to clean up or take certain remediation
action with regard to sites currently or formerly used in connection with their
operations. Furthermore, the Company and its subsidiaries may be required to pay
for all or a portion of the costs of clean up or remediation at sites the
Company and its subsidiaries never owned or on which they never operated if they
are found to have arranged for transportation, treatment or disposal of
pollutants or hazardous substances on or to such sites. The Company and its
subsidiaries are also subject to potential liability for environmental damage
that their assets or operations may cause nearby landowners, particularly as a
result of any contamination of drinking water sources or soil, including damage
resulting from conditions existing prior to the acquisition of such assets or
operations. Any substantial liability for
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environmental damage could materially adversely affect the operating results and
financial condition of the Company, and could materially adversely affect the
marketability and price of the Company's stock. Risk factors include the
following:
Incompleteness of Site Investigations
As part of its pre-transaction "due diligence" investigations, the Company
typically hires an environmental consulting firm to conduct transaction screen
reviews, or Phase I and/or Phase II site assessments of the sites owned or
leased by particular acquisition or merger candidates (the "Pre-Transaction Site
Assessments"). However, such Pre-Transaction Site Assessments have not covered
(and will not in the future cover) all of the sites owned or leased by the
companies which are acquired by or merge with the Company or its subsidiaries.
Moreover, such Pre-Transaction Site Assessments which have occurred have not
been designed or expected (and will not in the future be designed or expected)
to disclose all material contamination that may be present. For example, the
Company does not include soil sampling or core borings as a standard part of its
Pre-Transaction Site Assessments, even though such sampling and core borings
might increase the chances of finding contamination on a particular site.
Failure to conduct soil sampling and core borings on a particular site could
result in the Company failing to identify a seriously contaminated site prior to
an acquisition or merger, and could materially adversely affect the Company.
Likelihood of Contamination at Some Sites
Pre-Transaction Site Assessments of the Company's current subsidiaries'
sites conducted by independent environmental consulting firms have revealed that
some soil, surface water and/or groundwater contamination is likely at certain
of such sites, and have recommended that certain additional investigations and
remediation be conducted. Based upon its review of these reports, the Company
believes that it is likely that contamination exists at certain of its
subsidiaries' sites and that it is likely that additional investigation,
monitoring and remediation will be required at some of the sites. Also based
upon its review of these reports, the Company believes that such contamination
is likely to include, but not be limited to: polychlorinated biphenyls (PCBs);
total petroleum hydrocarbons; volatile organic compounds (VOCs); antimony;
arsenic; cadmium; copper; lead; mercury; silver; zinc; waste oil; toluene; meta-
and para-xylenes; baghouse dust; and/or aluminum dross. The ultimate extent of
such contamination cannot be stated with any certainty at this point, and there
can be no assurance that the cost of remediation will be immaterial. The
existence of such contamination could result in federal, state, local or private
enforcement or cost recovery actions against the Company, possibly resulting in
disruption of Company operations, and substantial fines, penalties, damages,
costs and expenses being imposed against the Company and its subsidiaries.
The Company has supplied its Pre-Transaction Site Assessments to the
management of its subsidiaries, who are responsible for reviewing them,
examining ongoing operations, and taking any necessary steps to achieve and/or
maintain compliance with the environmental laws, including but not limited to
any necessary remedial measures or operational changes. The Company expects to
require future cash outlays as it incurs the actual costs relating to the
remediation of environmental liabilities. No assurance can be provided that such
costs will not be significant. The Company and its subsidiaries expect cash
flows from operations to provide the funds for environmental capital, operating
and remediation expenditures; however, no assurance can be given that such cash
flows will be adequate for this purpose.
Uncertain Costs of Environmental Compliance and Remediation
It must be emphasized that, as a result of certain factors which impact
upon the Company and its subsidiaries' future expenditures to comply with
environmental requirements -- such as new local, state and federal laws and
regulations; the developing nature of administrative standards promulgated under
Superfund and other environmental laws, and changing interpretations of such
laws; uncertainty regarding adequate control levels, testing and sampling
procedures, new pollution control technology and cost benefit analysis based on
market conditions; the incompleteness of information regarding the condition of
certain sites; the lack of standards and information for use in the
apportionment of remedial responsibilities; the numerous choices and costs
associated with diverse technologies that may be used in remedial actions at
such sites; the
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possible ability to recover indemnification or contribution from third parties;
and the time periods over which eventual remediation may occur -- the estimated
costs for future environmental compliance (capital expenditures or increases in
operating costs or other expenditures) and remediation cannot be accurately
predicted and are necessarily imprecise; however, such costs could be material
to future quarterly or annual results of operations of the Company. In addition
to not being possible to predict the amount or timing of future costs of
environmental compliance and remediation, it is not possible to predict whether
or not such costs can be passed on to customers through price increases.
Lack of Environmental Impairment Insurance
The Company and its subsidiaries do not carry environmental impairment
liability insurance. The Company and its subsidiaries operate under general
liability insurance policies, which Company management considers to be adequate
to protect the Company and its subsidiaries' assets and operations from other
risks but which does not cover environmental damage. If the Company and its
subsidiaries were to incur significant liability for environmental damage not
covered by environmental impairment insurance, or for other claims in excess of
its general liability insurance and umbrella coverage, the Company's financial
condition could be materially adversely affected.
Risks Associated With Certain By-Products
While the majority of the Company's metal products are currently exempt
from applicable solid waste regulations, the scrap metal recycling operations of
the Company's subsidiaries produce significant amounts of by-products.
Heightened environmental risk is associated with certain of these by-products
For example, the Company's EMCO subsidiary operates a shredder for which the
primary feed materials are automobile hulks and obsolete household appliances.
Approximately twenty percent (20%) of the weight of an automobile hulk consists
of material (shredder fluff) which remains after the segregation of ferrous and
saleable non-ferrous metals. Federal environmental regulations require shredder
fluff to pass a toxic leaching test to avoid classification as a hazardous
waste. The Company's EMCO subsidiary endeavors to have hazardous contaminants
removed from the feed material prior to shredding and as a result the Company
believes the shredder fluff generated is properly not considered a hazardous
waste. Should the laws, regulations or testing methods change with regard to
shredder fluff disposal, the Company and its EMCO subsidiary may incur
additional significant expenditures.
Potential Superfund Liability
The Company's Reserve subsidiary has received a notice from the United
States Environmental Protection Agency (the "EPA") that Reserve and numerous
other parties are considered potentially responsible parties (a "PRP") and may
be obligated under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("Superfund" or "CERCLA") to pay a portion of the cost of
remedial investigation, feasibility studies and ultimately remediation to
correct alleged releases of hazardous substances at the Standard Scrap
Metal/Chicago International Exporting Removal Action Site. Superfund may impose
joint and several liability for the costs of remedial investigations and actions
on the entities that arranged for disposal of certain wastes, the waste
transporters that selected the disposal sites, and the owners and operators of
such sites. Responsible parties (or any one of them) may be required to bear all
of such costs regardless of fault, legality of the original disposal, or
ownership of the disposal site. Based upon its analysis of the situation, the
management of Reserve currently does not expect such potential liability to be
in excess of $100,000.
Unregistered Storage Tanks
Underground storage tanks (UST's) exist at several of the Company's
subsidiaries' sites. UST's are subject to various federal, state and local laws
on their operation. In the event a release of regulated product has occurred,
the Company may incur significant costs to investigate and remediate the
release.
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Environmental consultants to the Company have reported that an underground
storage tank (UST) located at one of the Company's EMCO subsidiary's yards had
not been reported to the Arizona environmental authorities as required by law.
EMCO, as the lessee, reported the matter to the owner of the property, and
believes that such report is the extent of its obligations with respect to this
matter. However, there can be no assurance that any failure of the owner to
report will not result in liability or the assessment of penalties against the
Company or EMCO. Environmental consultants to the Company have also reported
that an above-ground storage tank at the Company's HouTex subsidiary is required
to be registered but is not yet registered.
Employee Health and Safety Issues
The Company and its subsidiaries are regulated by federal, state and local
agencies responsible for employee health and safety, including OSHA. A total of
two accidental deaths of, and one serious accidental injury to, employees have
occurred at the Company's HouTex and Reserve subsidiaries during the past three
years. Reserve has been fined by OSHA in regard to such incidents. HouTex has
also been cited and fined by OSHA for alleged failure to establish energy
control procedures and employee training in regard to mobile shearing equipment.
No assurance can be given that potential liabilities of the Company or its
subsidiaries in regard to such death and injuries, or in regard to any future
deaths of or injuries to employees of the Company's subsidiaries, will not be
material.
Recommendations of Environmental Consultants
Environmental consultants to the Company have recommended that a variety of
remedial actions be undertaken in regard to its subsidiaries, including: the
sampling of soil, surface and ground water at its various facilities; the
remediation of any existing contamination under applicable regulations; the
development of Spill Prevention Control and Countermeasure Plans ("SPCC"); the
completion of certain actions in regard to Storm Water Pollution Prevention
Plans; the timely completion and/or filing of certain annual reports and
summaries required by governmental agencies; the completion of Oil Discharge and
Response Plans; and the remediation of certain materials suspected of containing
asbestos. If these recommendations were to be not followed by the Company and
its subsidiaries for an indefinite period of time, one or more of the sites
might, potentially, be subject to a governmental enforcement action, the
imposition of fines, penalties and damages, and/or require remediation at some
future time at a cost which the Company cannot guarantee would not be material.
Compliance History
The Company's subsidiaries have, in the past, been found not to be in
compliance with certain environmental laws and regulations, and have incurred
fines associated with such violations which have not been material in amount.
The Company's subsidiaries have also paid a portion of the costs of certain
remediation actions at certain sites. No assurance can be given that additional
compliance issues and liabilities will not occur in the future, or that the
fines, penalties, damages and expenses might not be material.
EFFECT OF ANTITAKEOVER PROVISIONS OF DELAWARE LAW, THE COMPANY'S CHARTER
DOCUMENTS AND EMPLOYMENT AGREEMENTS
The Company is a corporation governed by the laws of the state of Delaware.
Certain provisions of Delaware law and the charter documents of the Company may
have the effect of delaying, deferring or preventing changes in control or
management of the Company. Specifically, the Company's Board of Directors may
issue shares of Preferred Stock without stockholder approval on such terms as
the Board may determine. The rights of the holders of Common Stock of the
Company are subject to, and may be adversely affected by, the rights of any
Preferred Stock that may be issued in the future. The Company is subject to the
provisions of Section 203 of the Delaware General Corporation Law, which has the
effect of making changes in control of a company more difficult. The Company
entered into employment agreements with Gerard M. Jacobs, T. Benjamin Jennings
and George O. Moorehead. Such agreements provide for certain payments to be made
to such persons in the event of a change of control of the Company. The effects
of the
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antitakeover protections of Delaware corporate law, the Company charter
documents and these employment agreements could be to make it more difficult for
a third party to acquire, or could discourage a third party from acquiring, a
majority of the outstanding stock of Company.
The Cozzi merger, if consummated, contemplates a shareholder agreement
among Messrs. Jacobs, Jennings and the Cozzi shareholders which could discourage
a third party from acquiring a majority of the outstanding common stock of the
Company. Upon closing of the Cozzi merger, the Company expects to enter into
employment agreements with Albert, Frank and Greg Cozzi as well as new
employment agreements with Gerard M. Jacobs and T. Benjamin Jennings. Prior to
the closing, the Cozzi merger agreement forbids the Company from initiating
discussions or negotiations with third parties or responding to solicitations by
third persons relating to any merger, sale or other disposition of any
substantial part of the Company's assets, without an approval from Cozzi.
RECENT ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, entitled "EARNINGS PER SHARE" ("SFAS No. 128"), in
February 1997. The Company is required to adopt the provisions of SFAS No. 128
for its year ended March 31, 1998. Initial adoption of this standard is not
expected to have a material impact on the Company's financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) The Consolidated Balance Sheets as of October 31, 1995 and March 31,
1997, and the Consolidated Statements of Income, and of Stockholders' Equity and
of Cash Flows for the years ended October 31, 1994 and 1995, the five months
ended March 31, 1996, and the year ended March 31, 1997 and the Notes to the
Consolidated Financial Statements are included by reference to Part IV Item 14
of this Form 10-K.
(b) Selected Quarterly Financial Data (Unaudited) is set forth in Note 18
to the Consolidated Financial Statements referred to in Item 8(a) above.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
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PART III
Certain information required by Part III is omitted from this Report in
that the Registrant will file its definitive proxy statement pursuant to Rule
14a-3 (the "Proxy Statement") not later than 120 days after the end of the
fiscal year covered by this Report, and certain information included therein is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
information set forth under the caption "Directors and Executive Officers" in
the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information set forth under the caption "Executive Compensation" in the
Company's Proxy Statement for the 1997 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy Statement for the 1997
Annual Meeting of Stockholders.
ITEM 13.. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information set forth under the caption "Certain Transactions" in the Company's
Proxy Statement for the 1997 Annual Meeting of Stockholders.
27
30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Form 10-K.
PAGE
----
(1) Financial Statements
Report of Independent Public Accountants.................... F-1
Consolidated Statements of Income for the years ended
October 31, 1994 and 1995, the five months ended March 31,
1996, and the year ended March 31, 1997................... F-2
Consolidated Balance Sheets for the years ended October 31,
1995 and March 31, 1997................................... F-3
Consolidated Statements of Cash Flows for the years ended
October 31, 1994 and 1995, the five months ended March 31,
1996, and the year ended March 31, 1997................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended October 31, 1994 and 1995, the five months
ended March 31, 1996, and the year ended March 31, 1997... F-5
Notes to Consolidated Financial Statements.................. F-6
(2) Schedule II -- Valuation and Qualifying Accounts........ F-25
All other schedules have been omitted because the required information is
not significant or is not applicable.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the fourth quarter of
fiscal 1997:
(1) The Company filed a Form 8-K on January 15, 1997, dated January 1,
1997, disclosing the terms of the acquisition of the MacLeod Companies.
(2) The Company filed a Form 8-K on January 22, 1997, dated January 7,
1997, disclosing the terms of the acquisition of HouTex Metals Company,
Inc.
(3) The Company filed an Amendment Number 1 on Form 8-K on March 17, 1997,
dated January 1, 1997, and Amendment Number 2 on Form 8-K on April 26,
1997, dated January 1, 1997, to provide interim financial statements
and pro forma financial information relating to the acquisition of the
MacLeod Companies.
(4) The Company filed an Amendment Number 1 on Form 8-K on March 17, 1997,
dated January 7, 1997, and Amendment Number 2 on Form 8-K on April 26,
1997, dated January 7, 1997, to provide interim financial statements
and pro forma financial information relating to the acquisition of the
HouTex Metals Company, Inc.
(c) Exhibits
See Exhibit Index
28
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
METAL MANAGEMENT, INC.
By:
-----------------------------------------
Gerard M. Jacobs
Director, President and Chief Executive
Officer
By:
-----------------------------------------
T. Benjamin Jennings
Director, Chairman of the Board and Chief
Development Officer
Date: June 19, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
DATE SIGNATURE AND TITLE
---- -------------------
June 19, 1997 By:
----------------------------------------------------------------
Gerard M. Jacobs
Director, President and Chief Executive Officer
June 19, 1997 By:
----------------------------------------------------------------
T. Benjamin Jennings
Director, Chairman of the Board and Chief Development Officer
June 19, 1997 By:
----------------------------------------------------------------
Robert C. Larry
Vice President of Finance and Chief Financial Officer
(Principal Financial Officer)
June 19, 1997 By:
----------------------------------------------------------------
Xavier Hermosillo
Director
June 19, 1997 By:
----------------------------------------------------------------
Paul D. Joseph
Director and President of Reserve
June 19, 1997 By:
----------------------------------------------------------------
Ian MacLeod
Director
29
32
DATE SIGNATURE AND TITLE
---- -------------------
June 19, 1997 By:
------------------------------------------------------------
Mike Melnik
Director and President of HouTex
June 19, 1997 By:
----------------------------------------------------------------
Donald F. Moorehead, Jr.
Director
June 19, 1997 By:
----------------------------------------------------------------
George O. Moorehead
Director, Executive Vice President and President of EMCO
June 19, 1997 By:
----------------------------------------------------------------
Harold Rubenstein
Director
30
33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Metal Management, Inc.
(formerly General Parametrics Corporation)
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of changes in
stockholders' equity present fairly, in all material respects, the financial
position of Metal Management, Inc. (formerly General Parametrics Corporation)
and its subsidiaries at March 31, 1997 and October 31, 1995, and the results of
their operations and their cash flows for the year ended March 31, 1997, the
five months ended March 31, 1996 and for each of the two years in the period
ended October 31, 1995, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Chicago, Illinois
May 21, 1997, except as to Notes 16 and 17,
which are as of June 19, 1997
F-1
34
METAL MANAGEMENT INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
YEAR ENDED YEAR ENDED FIVE MONTHS ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, MARCH 31, MARCH 31,
1994 1995 1996 1997
----------- ----------- ----------------- ----------
Net sales................................... $ 0 $ 0 $ 0 $65,196
Cost of sales............................... 0 0 0 58,324
------ ------- ------- -------
Gross profit................................ 0 0 0 6,872
Operating expenses:
General and administrative................ 0 0 210 6,174
Depreciation and amortization............. 0 0 0 2,282
------ ------- ------- -------
Total operating expenses.................... 0 0 210 8,456
------ ------- ------- -------
Operating loss from continuing operations... 0 0 (210) (1,584)
Interest expense............................ 0 0 0 (1,449)
Interest income............................. 229 312 142 222
Other financing costs....................... 0 0 0 (166)
Other income................................ 0 0 0 125
------ ------- ------- -------
Income (loss) from continuing operations
before income taxes and discontinued
operations................................ 229 312 (68) (2,852)
Provision (benefit) for income taxes........ 1 51 (52) (842)
------ ------- ------- -------
Income (loss) from continuing operations.... 228 261 (16) (2,010)
Discontinued operations (Note 3):
Gain on sale of assets on former product
lines of GPAR, net of income tax
benefit................................ 0 0 0 502
Income (loss) from operations of former
product lines of GPAR, net of income tax
provision (benefit)....................... (440) (2,698) 22 345
------ ------- ------- -------
Net income (loss)........................... $ (212) $(2,437) $ 6 $(1,163)
======== ======== ============== ========
Earnings (loss) per share for:
Continuing operations..................... $ 0.04 $ 0.05 $ 0.00 $ (0.22)
Gain on sale of discontinued operations... $ 0.00 $ 0.00 $ 0.00 $ 0.05
Income (loss) from discontinued
operations............................. $(0.08) $ (0.53) $ 0.00 $ 0.04
Net income (loss)......................... $(0.04) $ (0.48) $ 0.00 $ (0.13)
Dividends declared per share of common
stock..................................... $ .24 $ .18 $ .00 $ .00
Weighted average common shares
outstanding............................... 5,098 5,125 5,299 9,106
See accompanying notes to Consolidated Financial Statements.
F-2
35
METAL MANAGEMENT INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
OCTOBER 31, MARCH 31,
1995 1997
----------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,032 $ 5,718
Marketable securities..................................... 3,246 14
Accounts receivable, net.................................. 1,599 9,560
Notes receivable from related parties..................... 0 406
Inventories............................................... 1,718 8,415
Prepaid expenses and other assets......................... 362 1,491
Current deferred taxes.................................... 0 104
------- -------
Total current assets................................. 9,957 25,708
Marketable securities....................................... 115 0
Property and equipment, net................................. 58 20,208
Goodwill and other intangibles, net......................... 0 23,484
Long-term notes receivable from related parties............. 0 300
Restricted cash............................................. 0 184
Other assets................................................ 0 241
------- -------
Total assets......................................... $10,130 $70,125
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Operating line of credit.................................. $ 0 $ 7,887
Accounts payable.......................................... 331 5,246
Other accrued liabilities................................. 485 2,746
Current portion of notes payable to related parties....... 0 12,575
Current portion of long-term debt......................... 0 10,809
------- -------
Total current liabilities............................ 816 39,263
Long-term notes payable to related parties, less current
portion................................................... 0 1,430
Long-term debt, less current portion........................ 0 3,740
Deferred taxes.............................................. 0 1,411
Other liabilities........................................... 0 1,133
------- -------
Total liabilities.................................... 816 46,977
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred Stock, $.01 par value -- 2,000,000 shares
authorized; none outstanding........................... 0 0
Common Stock, $.01 par value -- 40,000,000 shares
authorized; 10,154,740 issued and outstanding............. 52 102
Warrants, 2,015,038 issued and outstanding.................. 0 1,351
Additional paid-in-capital.................................. 3,038 16,628
Retained earnings........................................... 6,224 5,067
------- -------
Total stockholders' equity........................... 9,314 23,148
------- -------
Total liabilities and stockholders' equity............. $10,130 $70,125
======== =======
See accompanying notes to Consolidated Financial Statements.
F-3
36
METAL MANAGEMENT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED YEAR ENDED FIVE MONTHS ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, MARCH 31, MARCH 31,
1994 1995 1996 1997
----------- ----------- ----------------- ----------
Cash flows from continuing operations:
Net income (loss) from continuing
operations................................. $ 228 $ 261 $ (16) $(2,010)
Adjustments to reconcile net income (loss)
from continuing operations to cash flows
from continuing operations:
Depreciation and amortization............ 0 0 0 2,273
Gain on sale of assets................... 0 0 0 (19)
Deferred income taxes.................... 0 0 0 (733)
Other.................................... 0 0 0 273
Changes in assets and liabilities, net of
acquisitions:
Accounts and notes receivable............ 0 0 0 (1,413)
Inventories.............................. 0 0 0 42
Accounts payable......................... 0 0 0 (1,099)
Other.................................... 0 0 0 938
------- ------ ------- -------
Cash flows from continuing operations........ 228 261 (16) (1,748)
Cash flows provided (used) by investing
activities:
Marketable securities matured.............. 1,959 1,524 637 2,794
Marketable securities purchased............ (1,652) (33) 0 0
Purchases of property and equipment........ 0 0 0 (3,209)
Acquisitions, net of cash acquired......... 0 0 0 (2,545)
Proceeds from sale of assets............... 0 0 0 67
------- ------ ------- -------
Net cash provided (used) by investing
activities................................. 307 1,491 637 (2,893)
Cash flows provided (used) by financing
activities:
Net payments on lines-of-credit............ 0 0 0 (926)
Issuances of long-term debt................ 0 0 0 7,806
Repayments of long-term debt............... 0 0 0 (2,699)
Issuances of common stock.................. 68 276 288 317
Payment of cash dividends.................. (1,220) (920) 0 0
------- ------ ------- -------
Net cash provided (used) by financing
activities................................. (1,152) (644) 288 4,498
------- ------ ------- -------
Cash flows from discontinued operations, net
of divestiture proceeds.................... 363 1,285 (831) 2,751
Net increase (decrease) in cash and cash
equivalents................................ (254) 2,393 78 2,608
Cash and cash equivalents at beginning of
period..................................... 893 639 3,032 3,110
------- ------ ------- -------
Cash and cash equivalents at end of period... $ 639 $3,032 $3,110 $ 5,718
======= ====== ======= =======
See accompanying notes to Consolidated Financial Statements.
F-4
37
METAL MANAGEMENT INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except shares)
COMMON ADDITIONAL
STOCK PAID-IN- RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL WARRANTS EARNINGS EQUITY
------ ------ ---------- -------- -------- -------------
Balance at October 31, 1993...... 5,067,389 $ 51 $ 2,695 $ 0 $11,013 $13,759
Common Stock issued under
Employee Stock Purchase Plan... 21,002 0 41 0 0 41
Common Stock issued upon exercise
of options..................... 7,200 0 22 0 0 22
Common Stock issued under
Executive Bonus Plan........... 2,300 0 5 0 0 5
Payment of cash dividends........ 0 0 0 0 (1,220) (1,220)
Net loss......................... 0 0 0 0 (212) (212)
---------- ---- ------- ------ ------- -------
Balance at October 31, 1994...... 5,097,891 51 2,763 0 9,581 12,395
Common Stock issued upon exercise
of options..................... 92,000 1 244 0 0 245
Common Stock issued under
Employee Stock Purchase Plan... 24,927 0 31 0 0 31
Payment of cash dividends........ 0 0 0 0 (920) (920)
Net loss......................... 0 0 0 0 (2,437) (2,437)
---------- ---- ------- ------ ------- -------
Balance at October 31, 1995...... 5,214,818 52 3,038 0 6,224 9,314
Common Stock issued upon exercise
of options..................... 108,636 1 271 0 0 272
Common Stock issued under
Employee Stock Purchase Plan... 11,199 0 16 0 0 16
Net income....................... 0 0 0 0 6 6
---------- ---- ------- ------ ------- -------
Balance at March 31, 1996........ 5,334,653 53 3,325 0 6,230 9,608
Common Stock and warrants issued
for acquisitions............... 4,700,000 47 12,759 1,048 0 13,854
Common Stock issued upon exercise
of options..................... 103,850 2 281 0 0 283
Common Stock issued under
Employee Stock Purchase Plan... 16,237 0 34 0 0 34
Other issuances of stock options
and warrants................... 0 0 122 303 0 425
Tax benefit on stock options
exercised...................... 0 0 107 0 0 107
Net loss......................... 0 0 0 0 (1,163) (1,163)
---------- ---- ------- ------ ------- -------
Balance at March 31, 1997........ 10,154,740 $102 $16,628 $1,351 $ 5,067 $23,148
========== ==== ======= ====== ======= =======
See accompanying notes to Consolidated Financial Statements.
F-5
38
METAL MANAGEMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ACCOUNTING POLICIES
Description of business
Metal Management Inc., (herein referred to as "Company" or "MTLM"),
formerly General Parametrics Corporation ("GPAR"), a Delaware corporation, and
its wholly-owned subsidiaries are engaged in the business of dismantling,
processing, marketing, brokering and recycling both ferrous and non-ferrous
metals. These services are provided through MTLM's seventeen recycling centers
located in Arizona, California and Texas. Upon completion of the pending
acquisitions (see Note 2 -- Acquisitions and Mergers), MTLM will operate an
additional eighteen recycling centers in Arizona, Illinois, Indiana,
Mississippi, Ohio, Pennsylvania, Tennessee and Texas.
Previously, the Company was engaged in the business of designing,
manufacturing and marketing color printers and related color printer consumable
products (see Note 3 -- Discontinued Operations).
Change of company name and fiscal year
On April 9, 1996, the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation to change the name of the Company from
General Parametrics Corporation to Metal Management, Inc. Effective April 15,
1996, the Company formally changed its Nasdaq stock symbol to "MTLM".
On April 25, 1996, the Board of Directors of the Company approved a change
in the Company's fiscal year end from October 31 to March 31, effective April 1,
1996.
Basis of presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts,
transactions and profits have been eliminated in consolidation.
Uses of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from these
estimates.
Cash equivalents
Highly liquid investments with original maturities of three months or less
are classified as cash equivalents. Restricted cash represents funds on deposit
with an outside lender related to outstanding borrowings. These funds are not
legally restricted from withdrawal.
Accounts receivable
Accounts receivable represents amounts due from customers on product sales.
A reserve for tonnage variances of $101,000 has been provided at March 31, 1997
to account for allowances in scrap metal shipment weights which are settled on a
quarterly basis. A reserve for uncollectible accounts of $414,000 related to
sales of color printers and related products was provided at October 31, 1995.
Property and equipment
Property and equipment are recorded at cost less accumulated depreciation.
Major renewals and improvements are capitalized while repairs and maintenance
are expensed as incurred. Property, plant and
F-6
39
equipment acquired in purchase transactions are recorded at its estimated fair
value at the time of the acquisition. Depreciation is computed using the
straight-line method over estimated useful lives of 29 to 39 years for buildings
and improvements, 3 to 15 years for operating machinery, equipment, furniture
and fixtures and 3 to 7 years for automobiles and trucks. When assets are sold
or otherwise disposed of, the cost and related accumulated depreciation are
removed from the accounts and any gain or loss is included in results of
operations.
Goodwill and other intangible assets
Goodwill represents the excess of consideration paid for companies acquired
in purchase transactions over the fair value of net assets acquired. Goodwill is
amortized on a straight-line basis over a period of 40 years. Non-compete
agreements are amortized on a straight-line basis over a period of 10 years.
Other intangible assets are amortized on a straight-line basis over the lesser
of their legal or estimated useful lives. The following items comprised the
balance at March 31, 1997 (in thousands):
Goodwill.................................................... $21,653
Non-compete agreements...................................... 1,403
Deferred financing and acquisition charges.................. 956
Other intangibles........................................... 23
-------
24,035
Less -- accumulated amortization............................ (551)
-------
$23,484
=======
Amortization expense for the year ended March 31, 1997 was $551,000. The
ongoing value and remaining useful life of goodwill and intangible assets are
subject to periodic evaluation and the Company currently expects the carrying
amounts to be fully recoverable.
Revenue recognition
The Company recognizes revenue when title passes to the customer, which
generally occurs at the time of shipment.
Income taxes
The Company utilizes the liability method of accounting for income taxes,
as set forth in Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes". Under this method, deferred income taxes are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse. Income tax benefits related to
non-qualified stock option exercises are credited to additional paid-in-capital
when recognized.
Financial instruments
The carrying values of financial instruments including cash and cash
equivalents, accounts receivable, notes receivable from related parties and
accounts payable approximate the related fair values because of the relatively
short maturity of these instruments. The carrying values of line of credit
borrowings, notes payable to related parties and long-term debt, including the
current portion, approximate the related fair values as the stated interest
rates approximate market rates. The Company does not enter into futures
contracts to hedge the effect of commodity prices.
Major customers and concentration of credit risk
13 customers represented 37% of revenues for the year ended March 31, 1997.
These customers comprised approximately 53% of accounts receivable at March 31,
1997. The Company's largest customer accounted for 9% of revenues and 22% of
accounts receivable for the year ended March 31, 1997.
F-7
40
Financial instruments that potentially subject the Company to significant
concentration of credit risk are primarily trade accounts receivable. The
Company sells its products primarily to scrap metal brokers and mills located in
the United States. Generally, the Company does not require collateral or other
security to support customer receivables. Historically, the Company's
wholly-owned subsidiaries have not experienced material losses from the
noncollection of receivables.
Reclassifications
Certain prior year financial information has been reclassified to conform
to the current year presentation. Such reclassifications had no material effect
on the previously reported consolidated balance sheet, results of operations or
cash flows of the Company.
Income (loss) per common share
Income (loss) per share is based upon weighted average common shares
outstanding and common stock equivalents, when dilutive. Common stock
equivalents are determined assuming the exercise of all dilutive stock options
and warrants adjusted for the assumed repurchase of common stock, at the average
market price, from the exercise proceeds. Due to the net loss for the years
ended October 31, 1994, October 31, 1995 and March 31, 1997, common stock
equivalents were not added to weighted average common shares outstanding as the
result would have been antidilutive. For the five months ended March 31, 1996,
the dilutive effect of common stock equivalents was immaterial and they were
therefore not added to weighted average shares outstanding.
The Financial Accounting Standards Board has issued SFAS No. 128, "Earnings
per Share". SFAS No. 128 replaces primary earnings per share with basic earnings
per share, which excludes dilution, and requires presentation of both basic and
diluted earnings per share on the face of the income statement. Diluted earnings
per share is computed similarly to the current fully diluted earnings per share.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, and requires restatement of all prior-period earnings
per share data presented. The adoption of this statement is not expected to
materially impact the Company's earnings per share computations.
Impairment of long-lived assets
Effective April 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
Of". SFAS No. 121 requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Statement No. 121 is applicable for most long-lived
assets, identifiable intangibles and goodwill related to those assets.
Management has determined that long-lived assets are fairly stated in the
accompanying balance sheets, and that no indicators of impairment are present.
NOTE 2 -- ACQUISITIONS AND MERGERS
Transactions during fiscal 1997
The Company merged with EMCO Recycling Corp. ("EMCO"), headquartered in
Phoenix, Arizona, and acquired The MacLeod Companies ("MacLeod"), headquartered
in Los Angeles, California and
F-8
41
HouTex Metals Company, Inc. ("HouTex"), headquartered in Houston, Texas. The
purchase consideration for each of the transactions as of March 31, 1997 was as
follows (in thousands, except shares and warrants):
EMCO MACLEOD HOUTEX TOTAL
---- ------- ------ -----
Date of acquisition................ April 11, 1996 January 1, 1997 January 7, 1997
Shares of restricted MTLM common
stock issued..................... 3,500,000 725,000 475,000 4,700,000
Warrants issued for MTLM common
stock............................ 1,000,000 175,000 310,000 1,485,000
Cash paid, including transaction
costs............................ $ 2,219 $ 1,119 $ 1,121 $ 4,459
Value of MTLM common stock
issued........................... 8,807 2,330 1,669 12,806
Value of MTLM warrants issued...... 316 137 596 1,049
Promissory notes issued............ 0 6,600 6,655 13,255
Other liabilities incurred......... 1,403 0 0 1,403
-------------- --------------- --------------- ---------
Total purchase
consideration............... $12,745 $10,186 $10,041 $32,972
============== =============== =============== =========
In connection with the above transactions, the Company also acquired
certain real property utilized in the scrap metal business. In connection with
the EMCO merger, the Company acquired certain real property which was indirectly
owned by one of the former principal owners of EMCO for $1.1 million ($150,000
in cash and $950,000 in 9% notes payable due in three years, see Note 8 -- Notes
Receivable/Payable to Related Parties and Note 14 -- Related Party
Transactions). In connection with the MacLeod acquisition, the Company acquired
certain real property on which the principal MacLeod operations are performed,
for $3.5 million ($500,000 in cash and $3.0 million in 8% mortgage notes payable
to an unrelated third party due on May 31, 1997, see Note 9 -- Long term Debt
and Leases).
The above transactions have been accounted for by the purchase method of
accounting and the results of the operations of the acquired companies have been
included in the consolidated financial statements since the date of acquisition.
The purchase price was allocated based on estimated fair values at the date of
acquisition. This resulted in an excess of purchase price over net assets
acquired of $9.8 million, $5.6 million and, $6.2 million for EMCO, MacLeod and
HouTex, respectively, as of March 31, 1997.
Transactions subsequent to year-end
On May 1, 1997, the Company acquired Reserve Iron & Metal L.P. ("Reserve"),
headquartered in Cleveland, Ohio. The acquisition of Reserve resulted in the
issuance of $5.9 million in cash, $1.5 million in promissory notes, warrants to
purchase up to 1.4 million shares of common stock and the assumption of debt.
Excess purchase price over net assets acquired will be approximately $4.5
million. The Company made arrangements with Reserve's lender to provide for the
existing loans to remain in place without changes to terms and conditions of the
credit agreement. The warrants have varying vesting provisions, and their
effective exercise prices will depend in part upon the resolution of specified
potential liabilities referred to in the following paragraph. The Company
entered into ten-year employment agreements with certain former shareholders of
Reserve and also entered into employment agreements with certain key employees
of Reserve for which warrants to purchase an aggregate of up to 175,000 shares
of common stock of the Company was issued.
The Company agreed, in principle, with certain of the sellers of Reserve to
amend the Purchase Agreement. Among other matters, certain of the sellers of
Reserve (the "Indemnifying Parties") have agreed to indemnify the Company and
its affiliates against a significant portion of specified potential liabilities.
As is customary with certain types of potential liabilities, Reserve's insurance
carriers have accepted the defense of Reserve, but have done so subject to
reserving their respective rights to deny coverage under certain circumstances.
Assuming, for hypothetical purposes, that insurance coverage would not be
available or would be inadequate, such potential liabilities, were they to
become actual liabilities, could be significant. Any amounts payable by the
Indemnifying Parties will be funded by reducing the purchase price note owed by
the
F-9
42
Company and/or by increasing the exercise price on warrants issued to such
Indemnifying Parties as part of the original terms of the Purchase Agreement and
the ten-year employment agreements, respectively. With reference to these
certain potential liabilities, Reserve has advised the Company it believes it
has adequate insurance coverage and has denied any liability for these potential
liabilities. There can be no assurance, however, that Reserve will not suffer
actual liability or that it will have adequate insurance to cover the liability.
Pro forma financial information (unaudited)
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company, MacLeod, HouTex and Reserve
as if the acquisitions had occurred on April 1, 1996. These unaudited pro forma
results have been prepared for comparative purposes only and include certain
adjustments, such as additional depreciation expense as a result of a step-up in
basis of fixed assets, additional amortization expense as a result of goodwill
and interest expense on acquisition debt. They do not purport to be indicative
of the results of operations which actually would have resulted had the
combination been in effect on April 1, 1996 (in thousands, except share data).
UNAUDITED
YEAR ENDED
MARCH 31, 1997
--------------
Net sales................................................... $222,090
Net loss from continuing operations......................... $ (4,038)
Net loss per share from continuing operations............... $ (.40)
UNAUDITED
MARCH 31, 1997
--------------
ASSETS
Current assets.............................................. $ 58,970
Property & equipment, net................................... 31,043
Other assets................................................ 1,556
Goodwill.................................................... 27,499
--------
Total assets.................................... $119,068
========
LIABILITIES & EQUITY
Current liabilities......................................... $ 56,609
Non-current liabilities..................................... 33,823
Stockholder's equity........................................ 28,636
--------
Total liabilities and equity........................... $119,068
========
See Note 16 -- Subsequent Events -- Financing Transactions.
Pending acquisitions
On May 16, 1997, the Company signed a definitive agreement to merge Cozzi
Iron & Metal, Inc. ("Cozzi"), headquartered in Chicago, Illinois with and into a
subsidiary of the Company. Cozzi will be the surviving entity. The closing of
the Cozzi merger is subject to shareholder and government approvals and is also
subject to certain other conditions precedent. At the closing of this merger,
the shareholders of Cozzi will likely receive 11.5 million shares of the
Company's common stock, 1.5 million warrants to purchase common stock, and $6.0
million in cash. Further, at the effective time of the merger, the Company
intends to appoint Albert A. Cozzi as President and the Chief Operating Officer
of the Company. T. Benjamin Jennings will remain Chairman of the Board and Chief
Development Officer, and Gerard M. Jacobs will remain the Chief Executive
Officer of the Company. Contemporaneous with closing, Albert A. and Frank J.
Cozzi, as well as T. Benjamin Jennings and Gerard M. Jacobs, anticipate entering
into five-year employment agreements with the Company. In addition, Albert A.,
Frank J. and Gregory P. Cozzi and T. Benjamin Jennings and Gerard M. Jacobs
intend to enter into a ten-year stockholder agreement to, among other things,
vote their
F-10
43
respective shares in a common fashion in regard to elections of directors and
officers and in certain other circumstances.
On March 18, 1997, the Company signed a binding Letter of Intent to acquire
Proler Southwest Inc., and Proler Steelworks LLC ("Proler"). Proler Southwest
Inc. and Proler Steelworks LLC have operations in Houston, Texas and Jackson,
Mississippi, respectively. The transaction is expected to be effected by the
Company acquiring all of the equity interests in Proler Southwest Inc., and
Proler Steelworks LLC in exchange for $15.0 million in cash, a $2.0 million
promissory note, 1.75 million shares of common stock of the Company and warrants
to purchase 375,000 shares of common stock.
NOTE 3 -- DISCONTINUED OPERATIONS
In October 1995, the Company elected to discontinue a portion of its
electronic presentation products, including the VideoShow, VideoShow PRESENTER
and related products and recorded restructuring costs of $1.44 million. Also in
October 1995, the Company recorded a $716,000 special charge for the
repositioning of its color printer products. These costs are reflected in
discontinued operations. The charges were comprised of: writedowns of
discontinued ($530,000) and slow-moving ($395,000) inventory, write-offs of
capitalized software development costs for discontinued products ($524,000) and
color printers ($321,000), write-off of fixed assets ($203,000) associated with
the manufacture of discontinued products and a reserve of $180,000 for lease
costs related to excess facilities to be vacated and sub-leased.
During the first quarter of fiscal 1997, management made the decision to
exit the Spectra*Star printer and consumables business and the VideoShow and
related products lines. In accordance with Accounting Principles Board (APB)
Opinion Number 30, the Company's consolidated statements of operations present
the operating results of discontinued operations separately from continuing
operations. Prior periods have been restated to conform with this presentation.
On July 16, 1996, Mannesmann Tally ("Tally") acquired the Spectra*Star
inventory and related production equipment for approximately $1.3 million in
cash and other contingent consideration in the form of royalties on future
revenues from the sale of Spectra*Star printers and related consumables by
Tally. The company recognized an after-tax gain of $502,000 (after transaction
related expenses) on the disposition of the assets, including $351,000 of
royalties.
The VideoShow business was sold in the third quarter of fiscal 1997 for
consideration in the form of royalties on future revenues from the sale of
VideoShow products. Future royalties are not expected to be material to the
Company. The after-tax gain on the disposition of these assets was not
considered material to the Company.
Net revenues recognized for the discontinued operations were $12.3 million,
$9.5 million, $3.1 million and $2.3 million for the years ended October 31, 1994
and 1995, the five months ended March 31, 1996 and the year ended March 31,
1997, respectively. Additional consideration from royalty income will be
recorded as earned and will be reported as adjustments to the gain on sale of
discontinued operations.
Income tax provisions (benefits) for the discontinued operations were
($389,000), ($551,000), $52,000, and ($307,000) for the years ended October 31,
1994 and 1995, the five months ended March 31, 1996 and the year ended March 31,
1997, respectively. Income tax benefit for the gain on sale of assets of
Spectra*Star was $15,000 for the year ended March 31, 1997.
NOTE 4 -- MARKETABLE SECURITIES
Marketable securities are stated at cost, which approximates market value.
Marketable securities maturing within one year are classified as current assets.
The Company's marketable securities are classified as "available for sale" in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", which the Company adopted in fiscal 1995. There was no
material impact on the
F-11
44
Company's financial position or results of operations as a result of the
adoption of this standard. Marketable securities consist of the following (in
thousands):
OCTOBER 31, MARCH 31,
1995 1997
----------- ---------
Municipal Bonds and Obligations.......................... $2,253 $ 0
Corporate Notes, Bonds and Obligations................... 1,108 14
------ ---
$3,361 $14
====== ===
NOTE 5 -- INVENTORIES
Inventories for all periods presented are stated at the lower of cost or
market. Cost is determined principally on the average cost method.
Discontinued operations
During the year ended October 31, 1995, a $925,000 charge was recorded to
write-off certain discontinued inventory items. Net inventories consisted of the
following at October 31, 1995 (in thousands):
Raw materials............................................... $ 534
Work-in-process............................................. 111
Finished goods.............................................. 1,073
------
$1,718
======
Continuing operations
Inventories consist of the following at March 31, 1997 (in thousands):
Ferrous metals.............................................. $2,707
Non-ferrous metals.......................................... 4,754
Other....................................................... 954
------
$8,415
======
NOTE 6 -- PROPERTY AND EQUIPMENT
The cost and accumulated depreciation of property and equipment are as
follows (in thousands):
DISCONTINUED CONTINUING
OPERATIONS OPERATIONS
OCTOBER 31, 1995 MARCH 31, 1997
---------------- --------------
Land and improvements............................. $ 0 $ 5,759
Buildings and improvements........................ 77 1,577
Operating machinery and equipment................. 2,936 8,799
Automobiles and trucks............................ 0 2,550
Furniture and fixtures............................ 0 3,221
------- -------
3,013 21,906
Less -- accumulated depreciation.................. (2,955) (1,698)
------- -------
$ 58 $20,208
======= =======
Depreciation expense for property and equipment of continuing operations
was $1.73 million for the year ended March 31, 1997.
F-12
45
NOTE 7 -- LINES OF CREDIT
The Company and its wholly-owned subsidiaries have various revolving lines
of credit with commercial lenders which provide for revolving credit at interest
rates that range from 0% to 1.75% in excess of the lenders' prime rates. The
Company's ability to borrow under the lines of credit is based primarily on its
accounts receivable and inventory balances. As of March 31, 1997, the Company
had fully drawn predominately all of the availability under the lines of credit.
The lines expire at various dates through August 1998. The Company is in
compliance with all covenants under the various lines of credit. One of the
revolving lines of credit requires an annual fee of .5% of the amount of the
line.
The weighted average interest rate on the borrowings outstanding at March
31, 1997 was 9.59%. Average borrowings under the various lines of credit during
fiscal 1997 were approximately $4.7 million. During fiscal 1997, amounts
outstanding under the various lines of credit ranged from $2.5 million to $7.9
million.
See Note 16 -- Subsequent Events -- Financing Transactions
NOTE 8 -- NOTES RECEIVABLE/PAYABLE TO RELATED PARTIES
Notes receivable/payable to related parties consists of the following at
March 31, 1997 (in thousands):
Notes receivable:
8% Notes receivable from Mike and Zalman Melnik, repaid as
due with accrued interest on April 30, 1997............... 406
9% Notes receivable from Ellis Metals, due with monthly
interest, principal due on April 11, 2006................. 300
--------
706
Less: current portion....................................... (406)
--------
Long-term notes receivable from related parties............. $ 300
========
Notes payable:
8% Notes payable to Ian MacLeod, due May 31, 1997, secured
by a stock pledge agreement (Note A)...................... $ 5,800
6% Notes payable to Clend Investment, due June 30, 1997,
secured by a stock pledge agreement....................... 5,000
6% Notes payable to Mike Melnik, due April 30, 1997, secured
by a stock pledge agreement............................... 960
6% Notes payable to Zalman Melnik, due April 30, 1997,
secured by a stock pledge agreement....................... 695
8% Notes payable to Ian MacLeod, due in annual installments
of $120 through January 1, 2002, secured by a stock pledge
agreement (Note B)........................................ 600
9% Notes payable to H&S Broadway, due April 11, 1999,
secured by real property.................................. 547
9% Notes payable to Harold Rubenstein, due April 11, 1999,
secured by real property.................................. 403
--------
14,005
Less: current portion....................................... (12,575)
--------
Long-term notes payable to related parties.................. $ 1,430
========
H&S Broadway is principally owned by Harold Rubenstein, a former principal
owner of EMCO, a current Director of the Company, and the Company's largest
shareholder. During the current fiscal year, $78,000 of interest was
collectively paid to H&S Broadway and Harold Rubenstein.
Ian MacLeod, the former owner of MacLeod, is employed by and also serves as
a Director of the Company. At March 31, 1997, the Company had a $129,000 of
interest payable due to Ian MacLeod.
F-13
46
Clend Investment ("Clend") is beneficially owned by Mike Melnik and Zalman
Melnik, who are the former owners of HouTex, and are currently employed by the
Company. Mike Melnik also serves as a Director of the Company. At March 31,
1997, the Company had an aggregate $92,000 interest payable due to Clend, Mike
Melnik and Zalman Melnik.
The HouTex acquisition agreement provided certain rights to Clend to
convert principal amounts of its note to common stock of the Company. Also, the
terms of the HouTex acquisition agreement require the Company to grant up to
250,000 warrants ("Limited Warrants") as contingent purchase consideration to
Clend if the entire principal amount of the note is not paid within specified
dates. The Limited Warrants are subject to early expiration if the Company's
closing stock price exceeds an amount equal to 175% of the exercise price for a
period of twenty consecutive trading days. Certain acceleration provisions in
the Limited Warrants are expected to result in the issuance of additional
restricted shares of common stock in fiscal 1998. In such case, the Limited
Warrants would expire 30 days from the date the Company gives the Limited
Warrant holder notice that the closing stock price has exceeded 175% of the
exercise price. As of March 31, 1997, the Company had issued 150,000 Limited
Warrants to Mike and Zalman Melnik, collectively, and 60,000 Limited Warrants to
Clend.
Scheduled maturities of notes payable to related parties are as follows (in
thousands):
FISCAL YEAR ENDING, MARCH 31
- ----------------------------
1998........................................................ 12,575
1999........................................................ 120
2000........................................................ 1,070
2001........................................................ 120
2002........................................................ 120
-------
$14,005
=======
See Note 16 -- Subsequent Events -- Financing Transactions.
NOTE 9 -- LONG-TERM DEBT AND LEASES
At March 31, 1997, long-term debt consisted of the following (in
thousands):
Term loan, interest at LIBOR +1.75%, due on June 30, 1997... $ 6,500
Mortgage note payable, interest at 8%, due with accrued
interest on May 31, 1997, secured by real property........ 3,000
Mortgage note payable, interest at 8%, payable in monthly
installments of $25 including interest through May 1998
and a $1,300 balloon payment, secured by real property.... 1,374
Term loan, interest at 9.75% payable in monthly installments
of $21 including interest through December 2001, secured
by equipment.............................................. 905
Note payable, interest at 9.25%, payable in monthly
installments of $19 including interest through October
1999, secured by vehicles and equipment................... 522
State of California Pollution Control Bonds, interest
ranging from 5.5% to 6.1%, payable in monthly installments
of $8 including interest, due November 2001............... 385
Other notes payable (24 notes with balances ranging from $6
to $266) maturing at various dates through 2001, interest
at rates ranging from 7.31% to 12.46%, secured by
equipment................................................. 1,863
--------
14,549
Less current portion........................................ (10,809)
--------
$ 3,740
========
F-14
47
The $6.5 million term loan may be extended, at the Company's option and for
a fee of $25,000, to September 30, 1997. The loan can be extended further, at
the Company's option and for a fee of $100,000, to July 1, 1998. This loan was
unsecured, except for personal guarantees from certain officers and directors of
the Company (See Note 14 -- Related Party Transactions).
The State of California Pollution Control Bonds are guaranteed by the Small
Business Association (SBA) and require monthly base loan payments in amounts
necessary to fund annual redemption and interest. Funds received in excess of
current interest and principal reductions accumulate for the benefit of the
Company in a restricted cash account. In addition, a deposit is maintained equal
to three months of base loan payments plus interest earned. The Company's plant
and equipment are security for the indebtedness.
Scheduled maturities of long-term debt are as follows (in thousands):
FISCAL YEAR ENDING, MARCH 31
- ----------------------------
1998........................................................ $10,809
1999........................................................ 2,132
2000........................................................ 811
2001........................................................ 527
2002........................................................ 270
-------
$14,549
=======
See Note 16 -- Subsequent Events -- Financing Transactions.
The Company leases certain facilities and equipment under operating and
capital leases expiring at various dates. Rent expense for buildings and land
was $476,000 and rent expense for equipment was $2,000 for the year ended March
31, 1997. Payments under capital leases were $91,000 for the year ended March
31, 1997. Most of the operating leases contain renewal options. Future minimum
lease payments are as follows (in thousands):
OPERATING CAPITAL
FISCAL YEAR ENDING, MARCH 31 LEASES LEASES
---------------------------- --------- -------
1998........................................................ $ 597 $121
1999........................................................ 476 83
2000........................................................ 490 81
2001........................................................ 491 79
2002........................................................ 403 34
Thereafter.................................................. 1,642 0
------ ----
$4,099 $398
====== ====
F-15
48
NOTE 10 -- INCOME TAXES
The provision (benefit) for federal and state income taxes from continuing
operations is as follows (in thousands):
OCTOBER 31, OCTOBER 31, MARCH 31, MARCH 31,
1994 1995 1996 1997
----------- ----------- --------- ---------
Federal:
Current.............................. $1 $40 $(41) $(170)
Deferred............................. 0 0 0 (649)
-- --- ---- -----
1 40 (41) (819)
-- --- ---- -----
State:
Current.............................. 0 11 (11) 61
Deferred............................. 0 0 0 (84)
-- --- ---- -----
0 11 (11) (23)
-- --- ---- -----
Total tax provision (benefit).......... $1 $51 $(52) $(842)
== === ===== ======
The components of deferred tax liabilities and assets are comprised of the
following (in thousands):
OCTOBER 31, MARCH 31,
1995 1997
----------- ---------
Cash to accrual adjustment............................... $ 0 $ 255
Depreciation............................................. 5 2,329
----- -------
Gross deferred income tax liabilities...................... 5 2,584
----- -------
Accounts receivable reserves............................. (165) 0
Inventory................................................ (103) (221)
Vacation reserve......................................... (67) (65)
Fixed asset reserves..................................... (93) 0
Lease reserve............................................ (72) (2)
NOL carryforward......................................... 0 (792)
Financing costs.......................................... 0 (60)
Other.................................................... (10) (137)
----- -------
Gross deferred income tax assets........................... (510) (1,277)
----- -------
Deferred tax asset valuation allowance..................... 505 0
----- -------
$ 0 $ 1,307
===== =======
Realization of deferred tax assets is dependent upon generating sufficient
future taxable income in the periods in which the assets reverse or the benefits
expire. Although realization is not assured, management believes it is more
likely than not that the Company's deferred tax assets will be realized through
future taxable earnings. The current year U.S. federal net operating loss
carryforward expires in 2012.
The reconciliation of income tax from continuing operations computed at the
U.S. federal statutory tax rate to the company's effective rate is as follows:
YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31,
1994 % 1995 %
----------- - ----------- -
Normal statutory rate............................. $ 78 34.0 $ 106 $ 34.0
State income taxes, net of federal benefit........ 0 0.0 11 3.5
Tax exempt interest............................... (77) (33.6) (66) (21.2)
---- ------ ----- ------
$ 1 .4 $ 51 16.3
==== ====== ===== ======
F-16
49
5 MONTHS ENDED YEAR ENDED
MARCH 31, 1996 % MARCH 31, 1997 %
-------------- - -------------- -
Normal statutory rate.......................... $(23) (34.0) $(998) (35.0)
State income taxes, net of federal benefit..... (11) (16.1) (105) (3.7)
Non-deductible goodwill........................ 0 0.0 145 5.1
Non-deductible acquisition costs............... 0 0.0 70 2.5
Non-deductible meals & entertainment........... 0 0.0 56 2.0
Other.......................................... (18) (26.4) (10) (.4)
---- ----- ----- -----
$(52) (76.5) $(842) (29.5)
==== ===== ====== =====
NOTE 11 -- STOCKHOLDERS' EQUITY
Common stock and preferred stock
On April 9, 1996, the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation to increase the number of authorized
shares of the Company's common stock to 40,000,000. The Company's Certificate of
Incorporation also allows the issuance of up to 2,000,000 shares of preferred
stock. No preferred shares have been issued to date. See Note 16 -- Events --
Financing Transactions.
Stock option plans
On April 9, 1996, the Company's stockholders approved the adoption of the
1996 Director Option Plan (the "Director Plan") and the reservation of 100,000
shares of common stock for issuance thereunder. The Director Plan provides for
options to be granted to outside directors of the Company who are subject to the
reporting requirements of Section 16 of the Securities Exchange Act of 1934.
Under the Director Plan, each outside director is automatically granted an
option to purchase 10,000 shares on the date on which such person first becomes
an outside director. Thereafter, each outside director is automatically granted
an option to purchase 2,500 shares on January 15th of each year, as long as such
outside director has served on the Board of Directors for at least one month.
The options are granted at 100% of the market price on the date of the grant,
become fully vested and exercisable on such date and expire 10 years from the
date of the grant.
On April 9, 1996, the Company's stockholders approved an amendment to the
Company's 1995 Stock Option Plan (the "1995 Plan") to reserve an additional
800,000 shares of common stock for an aggregate 1,300,000 shares of common stock
which can be issued under the 1995 Plan. The 1995 Plan allows the Board of
Directors to grant options to purchase shares to officers and employees in the
form of either incentive stock options (ISO's) or nonstatutory stock options
(NSO's). The Board of Directors determines, within limits set forth in the 1995
Plan, the term of each option, the option exercise price, the number of shares
subject to each option and the times at and conditions under which each option
is or becomes exercisable.
During fiscal 1995, the Board of Directors terminated the 1986 Stock Option
Plan with respect to future grants. The following summarizes the activity of the
Director Plan, 1995 Plan and the 1986 Plan for the year ended March 31, 1997,
the five months ended March 31, 1996 and the years ended October 31, 1995 and
1994, respectively:
DIRECTOR & 1995 PLAN
---------------------------------------------------
1997 1996
------------------------ ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ --------------
Beginning balance................................ 716,750 $3.92 51,000 $3.22
Granted.......................................... 110,000 $4.53 665,750 $3.97
Exercised........................................ (16,750) $2.90 0 $0.00
Canceled......................................... (57,500) $3.89 0 $0.00
------- -------
Ending balance................................... 752,500 $4.03 716,750 $3.92
======= =======
Exercisable at end of period..................... 667,500 $3.96 669,750 $3.91
======= =======
Options available for grant...................... 530,750 83,250
======= =======
F-17
50
For the year ended March 31, 1997 and the five months ended March 31, 1996,
the weighted average fair value and weighted average exercise price of options
granted was as follows:
DIRECTOR & 1995 PLAN
----------------------------------------------------------------------------
1997 1996
------------------------------------ -------------------------------------
SHARES FAIR VALUE EXERCISE PRICE SHARES FAIR VALUE EXERCISE PRICE
------ ---------- -------------- ------ ---------- --------------
Exercise price > Market
price........................ 95,000 $1.59 $4.53 562,500 $0.99 $4.01
Exercise price = Market
price........................ 15,000 $2.07 $4.54 84,000 $1.26 $4.00
Exercise price < Market
price........................ n/a n/a n/a 19,250 $1.80 $2.85
DIRECTOR & 1995 PLAN
-----------------------------------------------
1995 1994
----------------------- ---------------------
OPTION PRICE OPTION PRICE
SHARES PER SHARE SHARES PER SHARE
------ ------------ ------ ------------
Beginning balance.................................. 0 $0.00 0 $0.00
Granted............................................ 51,000 $1.57 - $4.00 0 $0.00
Exercised.......................................... 0 $0.00 0 $0.00
Canceled........................................... 0 $0.00 0 $0.00
------- --
Ending balance..................................... 51,000 $1.57 - $4.00 0 $0.00
======= ==
Exercisable at end of period....................... 25,000 $2.50
=======
Options available for grant........................ 449,000
=======
1986 PLAN
----------------------------------------------------
1997 1996
------------------------ -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ --------------
Beginning balance............................... 156,850 $2.82 304,800 $2.71
Granted......................................... 0 $0.00 0 $0.00
Exercised....................................... (87,100) $2.65 (108,636) $2.55
Canceled........................................ (64,750) $3.07 (39,314) $2.77
------- --------
Ending balance.................................. 5,000 $2.50 156,850 $2.82
======= ========
Exercisable at end of period.................... 5,000 $2.50 141,788 $2.87
======= ========
Options available for grant..................... 0 0
======= ========
1986 PLAN
---------------------------------------------------
1995 1994
------------------------ ------------------------
OPTION PRICE OPTION PRICE
SHARES PER SHARE SHARES PER SHARE
------ ------------ ------ ------------
Beginning balance............................ 572,800 $1.90 - $6.00 569,600 $1.90 - $6.00
Granted...................................... 1,500 $1.57 - $1.63 190,000 $1.88 - $2.75
Exercised.................................... (92,000) $2.34 - $2.98 (7,200) $1.90 - $2.34
Canceled..................................... (177,500) $2.23 - $3.56 (179,600) $2.23 - $4.25
-------- --------
Ending balance............................... 304,800 $1.57 - $6.00 572,800 $1.90 - $6.00
======== ========
Exercisable at end of period................. 277,497 $1.88 - $6.00 353,785 $1.90 - $6.00
======== ========
Options available for grant.................. 0 462,630
======== ========
Exercise price for options outstanding at March 31, 1997 ranged from $2.50
to $5.00. The weighted average remaining contractual life of the outstanding
options is 8.73 years. The exercise of non-qualified stock options resulted in
income tax benefits of $107,000 for the year ended March 31, 1997, which were
credited to
F-18
51
additional paid-in-capital. The income tax benefits are the tax effect of the
difference between market price on the date of exercise and option price.
Warrants
The Company has issued warrants to purchase restricted common stock,
primarily as consideration for acquisitions and loan guarantees. The summary of
warrant activity for the year ended March 31, 1997, five months ended March 31,
1996 and the years ended October 31, 1995, and 1994, respectively, is as
follows:
1997 1996
---------------------------- ---------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
WARRANTS EXERCISE PRICE WARRANTS EXERCISE PRICE
-------- ---------------- -------- ----------------
Beginning balance.......................... 20,000 $3.50 10,000 $3.00
Granted.................................... 1,995,038 $4.66 10,000 $4.00
Exercised.................................. 0 $0.00 0 $0.00
Canceled................................... 0 $0.00 0 $0.00
--------- -------
Ending balance............................. 2,015,038 $4.65 20,000 $3.50
========= =======
Exercisable at end of period............... 2,015,038 $4.65 20,000 $3.50
========= =======
1995 1994
--------------------------- ---------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
WARRANTS EXERCISE PRICE WARRANTS EXERCISE PRICE
-------- ---------------- -------- ----------------
Beginning Balance........................... 0 $0.00 0 $0.00
Granted..................................... 10,000 $3.00 0 $0.00
Exercised................................... 0 $0.00 0 $0.00
Canceled.................................... 0 $0.00 0 $0.00
------- -
Ending Balance.............................. 10,000 $3.00 0 $0.00
======= ==
Exercisable at end of period................ 10,000 $3.00
=======
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan ("Plan") was initiated in fiscal
1987. The Plan allowed employees to purchase shares of the Company's Common
Stock at the lower of 85% of the fair market value of the Common Stock, as
determined by the closing bid price on the NASDAQ National Market System, on the
first and last day of the offering period. Shares issued for the year ended
March 31, 1997, five months ended March 31, 1996, and the years ended October
31, 1995 and 1994 were 16,237, 11,199, 24,927 and 21,002, respectively.
Pro forma disclosures
The Company has adopted SFAS No. 123 "Accounting for Stock-Based
Compensation". However, in accordance with the provisions of SFAS No. 123, the
Company continues to account for stock-based compensation under the provisions
of APB 25, "Accounting for Stock Issued to Employees", and accordingly does not
recognize compensation cost for options with exercise prices equal to market
value at the date of grant. As required by SFAS No. 123, the following
disclosure of pro forma information provides the effects on net income (loss)
and net income (loss) per share as if the Company had accounted for its employee
stock awards under the fair value method prescribed by SFAS 123 (in thousands,
except per share data).
YEAR ENDED 5 MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
Pro forma net (loss).............................. $(1,290) $(556)
Pro forma net (loss) per share.................... $ (.14) $(.10)
F-19
52
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants for the year ended March 31, 1997 and the five months ended March 31,
1996: expected dividend yield of 0% and expected option lives of 3 years for
both years, an expected volatility of 60.0% and 34.2% and risk free interest
rate of 6.52% and 5.89%, respectively. The Black-Scholes option valuation model
was developed for use in estimating the fair value of traded options which have
no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from traded options and
because changes in the subjective input assumptions can materially affect the
fair value estimate, it is management's opinion that the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
NOTE 12 -- EMPLOYEE BENEFIT PLANS
The Company offers a defined contribution 401(k) Plan covering eligible
employees. Participants can elect to contribute up to 15% of their qualified
pre-tax compensation. The Company may match participant contributions as
determined at the sole discretion of the Company. Since inception of the plan,
the Company has made no contributions to the plan.
The Company's wholly-owned EMCO subsidiary offers a defined contribution
401(k) Plan and a profit-sharing Plan. Eligible employees can contribute up to
15% of their qualified pre-tax compensation. EMCO matches 50% of participant
contributions up to 6% of compensation. EMCO made matching contributions of
$52,000 for the year ended March 31, 1997. No contributions were made to the
profit-sharing plan.
NOTE 13 -- COMMITMENTS AND CONTINGENCIES (SEE NOTE 2 -- ACQUISITIONS AND
MERGERS)
Environmental matters
The Company is subject to comprehensive local, state and international
regulatory and statutory requirements relating to the acceptance, storage,
handling and disposal of solid waste and waste water, air emissions, soil
contamination and employee health, among others. The Company believes that it
and its subsidiaries are in material compliance with currently applicable
environmental and other applicable laws and regulations. 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.
There can be no assurance that potential damages, liabilities, expenditures,
fines and penalties will not have a material adverse effect on the Company's
financial condition or results of operations.
Substantial leverage
The Company has substantial leverage which could have adverse consequences
to the Company including the following: (1) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired; (2)
a substantial portion of the Company's cash flow from operations will be
dedicated to the payment of principal and interest; and (3) the Company will be
more vulnerable to an economic downturn in the scrap metal recycling industry
which has historically been sensitive to changes in general economic conditions.
See Note 16 -- Subsequent Events -- Financing Transactions and Note 17 --
Management's Plan Regarding Current Debt Obligations.
Purchase of real property
On January 7, 1997, the Company's HouTex subsidiary entered into a 10 year
lease agreement with 15/21 Japhet Realty Ltd. ("Japhet"), which is principally
owned by the former HouTex shareholders, Mike and Zalman Melnik. Rent paid for
the year ended March 31, 1997 was $51,000. The lease agreement allows Japhet to
sell the property to the Company for $4.0 million between the 54th month and the
89th month of the lease term. The Company also has an option to buy the property
for $4.0 million during the same period.
F-20
53
NOTE 14 -- RELATED PARTY TRANSACTIONS
See Note 8 Notes Receivable/Payable to Related Parties, Note 11 --
Stockholder's Equity, Note 13 -- Commitments and Contingencies and Note 16 --
Subsequent Events -- Financing Transactions.
On April 11, 1996, the Company and Harold Rubenstein entered into a five
year consulting agreement. The services provided include consultation and direct
management assistance with respect to operations, strategic planning and other
aspects of the Company's business. Fees paid for these services amounted to
$84,000 for the year ended March 31, 1997.
The Company has entered into various transactions with Ellis Metals, Inc.
("Ellis Metals") and Empire Metals ("Empire") which are companies principally
owned by Harold Rubenstein. On April 11, 1996, the Company entered into a five
year exclusive supply agreement with Ellis Metals, which requires Ellis Metals
to sell all of its inventory to the Company's wholly owned EMCO subsidiary or to
EMCO's customers through a direct shipment arrangement. In the latter
arrangement, EMCO receives a brokerage fee. In consideration for entering into
this agreement, Ellis Metals receives a monthly exclusivity fee of $2,500 during
the term of the agreement. During the current year, the Company paid Ellis
Metals $30,000 under terms of the agreement. The Company also advanced $300,000
to Ellis Metals which is reflected as a note receivable. The Company also
purchases inventory from Empire, from time to time, at prices equivalent to
market value. During the current year, the Company purchased $3.9 million and
$.3 million of inventory from Ellis Metals and Empire, respectively, and also
had sales of $.3 million to Ellis Metals. At March 31, 1997, the Company had
accounts payable of $93,000 and $84,000 to Ellis Metals and Empire,
respectively.
The Company owns the land on which certain Ellis Metals operations are
located and leases the land to Ellis Metals. During the current fiscal year, the
Company received $78,000 in rent payments from Ellis Metals. The Company has a
five year option, beginning June 1, 1999, to purchase certain assets of Ellis
Metals for $1.364 million, subject to certain adjustments. It is the Company's
intention to exercise such option.
In conjunction with a loan obtained from a commercial bank on January 7,
1997 (see Note 9 -- Long-term Debt and Leases), personal guarantees were
provided by certain corporate officers an six directors of the Company,
including Gerard M. Jacobs, T. Benjamin Jennings, Donald F. Moorehead, Jr.,
George O. Moorehead, Harold Rubenstein and Raymond F. Zack. These individuals
received warrants to purchase an aggregate of 500,000 shares of restricted
common stock of the Company at $4.00 per share (subject to certain restrictions)
in consideration for making such guarantees. The warrants were recorded as other
financing costs during the current fiscal year based on the estimated fair value
of the loan guaranty of $302,000. The cost is being amortized over the six month
term of the loan.
The Company receives investor and public relations services from Xavier
Hermosillo, a Director of the Company. The Company paid fees of $15,000 and
$36,000 for the five months ended March 31, 1996 and the year ended March 31,
1997, respectively, for these services.
Certain of the Company's wholly-owned MacLeod subsidiaries lease space on
which certain MacLeod operations are located from Ian MacLeod. Rent paid for the
year ended March 31, 1997 was $13,200. This lease expires on January 31, 1998.
The Company owns the real property on which MacLeod's principal activities are
performed.
F-21
54
NOTE 15 -- SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is summarized as follows (in thousands):
FIVE MONTHS
ENDED
OCTOBER 31, OCTOBER 31, MARCH 31, MARCH 31,
1994 1995 1996 1997
----------- ----------- ----------- ---------
Interest paid..................................... $ 0 $ 0 $ 0 $ 1,085
Income taxes refunded............................. $17 $320 $256 $ 1,184
Details of business acquisitions:
Fair value of assets acquired................... $ 0 $ 0 $ 0 $ 58,455
Liabilities assumed............................. 0 0 0 (25,483)
Stock and warrants issued....................... 0 0 0 (13,855)
Promissory notes and other consideration
issued....................................... 0 0 0 (14,658)
--- ---- ---- --------
Cash paid....................................... 0 0 0 4,459
Less: cash acquired............................... 0 0 0 (1,914)
--- ---- ---- --------
Net cash paid for acquisitions.................... $ 0 $ 0 $ 0 $ 2,545
=== ==== ==== ========
Noncash investing and financing activities:
Notes payable issued for real estate............ $ 0 $ 0 $ 0 3,950
tax benefit on stock options exercised.......... $ 0 $ 0 $ 0 107
NOTE 16 -- SUBSEQUENT EVENTS -- FINANCING TRANSACTIONS
Subsequent to March 31, 1997, the Company completed several financing and
capital transactions which raised additional cash and refinanced or paid down
existing related party and third party debt. The transactions were as follows:
1. During April 1997, the Board of Directors approved a private sale of up to
2,025,000 restricted shares of the Company's common stock at $7.25 (the
"Private Placement"). As of June 19, 1997, all the restricted shares
available for sale in the private placement had been sold, including the sale
of 260,000 shares, collectively, to five directors of the Company, including
Gerard M. Jacobs, T. Benjamin Jennings, Gerard M. Jacobs, Harold Rubenstein,
Donald F. Moorehead, Jr., and George O. Moorehead and Harold Rubenstein. A
purchaser of the restricted stock that is not a Director or employee of the
Company exchanged consideration comprised of cash and a short term note. The
short term note, in the principal amount of $2.25 million, accrues interest
at the prime rate and is payable on or before June 30, 1997. On June 16,
1997, the Company received a $500,000 payment on the note.
2. On April 1, 1997, the Company issued 60,000 Limited Warrants to Clend, which
resulted in additional goodwill of $216,000 (see Note 8).
3. On April 15, 1997, Clend converted $1.0 million of its note payable into
182,481 restricted shares of common stock of the Company (see Note 8).
4. On April 30, 1997, the Company made a $200,000 payment on Promissory Note A
due to Ian MacLeod and paid the $960,000 and $695,000 notes payable due to
Mike and Zalman Melnik, respectively (see Note 8).
5. On May 1, 1997, the Company issued 60,000 Limited Warrants to Clend, which
resulted in additional goodwill of $221,000 (see Note 8).
6. On May 21, 1997, Mike and Zalman Melnik exercised their Limited Warrants to
purchase 150,000 shares of restricted common stock in exchange for aggregate
cash payments to the Company of $600,000 (see Note 8). Also, on May 21, 1997,
Clend exercised its Limited Warrants to purchase 180,000 shares of restricted
common stock in exchange for a $720,000 reduction of the amount owned by the
Company pursuant to the Clend Note.
F-22
55
7. On May 27, 1997, the Company made a $1.0 million payment on a line of credit
from a commercial bank (see Note 7).
8. On May 29, 1997, the Company made a payment of all principal and interest on
its $3.0 million mortgage payable (see Note 9). Also, on May 29, 1997, Ian
MacLeod and the Company agreed to amend the acquisition agreement dated
January 1, 1997, whereby the Company agreed to issue 160,000 restricted
shares of common stock of the Company in exchange for a $1.0 million
reduction of Promissory Note A. In addition, Ian MacLeod agreed to eliminate
the restrictions on the Company's ability to incur indebtedness involving the
MacLeod subsidiaries and to release stock pledges involving MacLeod. At the
same time, the Company made a $1.6 million payment on Promissory Note A and
executed a note to refinance the remaining $3.0 million principal portion of
Promissory Note A into a 5 year note due June 29, 2002 which accrues interest
at 8.5% (see Note 8).
9. On May 30, 1997, the Company entered into a $6.0 million revolving and term
loan agreement with a commercial bank under which the Company received
proceeds of $4.5 million. The loans are due on July 1, 1998 and carry an
interest rate equal to 1% above the lenders' prime rate. The proceeds from
the loans were utilized to repay the remaining $3.28 million balance on the
Clend Note (thereby ceasing the issuance of any additional Limited Warrants),
to repay the $600,000 MacLeod Promissory Note B (see Note 8 -- Notes
Receivable/Payable to Related Parties), and for working capital purposes.
There was no material gain or loss, individually or in the aggregate, as a
result of the above transactions. The following tables summarizes the unaudited
pro forma outstanding debt and equity balances of the Company at March 31, 1997,
giving effect to the debt assumed in the Reserve acquisition (see Note 2) and
the transactions described above (in thousands):
ADJUSTMENTS FOR
SUBSEQUENT UNAUDITED
ACTUAL FINANCINGS AND PRO FORMA
MARCH 31, 1997 ACQUISITIONS REF MARCH 31, 1997
-------------- --------------- --- --------------
Operating line of credit....................... 7,887 (1,000) 7 6,887
0 4,500 9 4,500
-------- -------- -------
7,887 3,500 11,387
======== ======== =======
Notes payable to Related Parties:
Promissory note A to Ian MacLeod............. 5,800 (200) 4 0
-- (5,600) 8 --
Note payable to Clend Investment............. 5,000 (1,000) 3 0
-- (720) 6 --
-- (3,280) 9 --
Note payable to Mike and Zalman Melnik....... 1,655 (1,655) 4 0
Promissory note B to Ian MacLeod............. 600 (600) 9 0
Note payable to H&S Broadway................. 547 -- 547
Note payable to Harold Rubenstein............ 403 -- 403
Note payable issued to Ian MacLeod........... 0 3,000 8 3,000
Note payable issued for Reserve
acquisition............................... 0 1,542 1,542
-------- -------- -------
14,005 (8,513) 5,492
Less: current portion........................ (12,575) (12,575) 0
-------- -------- -------
Long-term notes payable to Related Parties..... 1,430 4,062 5,492
======== ======== =======
F-23
56
ADJUSTMENTS FOR
SUBSEQUENT UNAUDITED
FINANCINGS AND PRO FORMA
MARCH 31, 1997 ACQUISITIONS REF MARCH 31, 1997
-------------- --------------- --- --------------
Long-term debt................................. 14,549 (3,000) 8 11,549
Debt assumed from Reserve...................... 0 27,126 27,126
-------- -------- -------
14,549 24,126 38,675
Less: current portion........................ (10,809) 1,546 (9,263)
-------- -------- -------
3,740 25,672 29,412
======== ======== =======
Common stock and paid in capital............... 16,730 14,681 1 31,411
-- 1,000 3 1,000
-- 2,142 6 2,142
0 1,000 8 1,000
-------- -------- -------
16,730 18,823 35,553
======== ======== =======
Warrants....................................... 1,351 216 2 1,567
-- 221 5 221
-- (822) 6 (822)
Warrants issued for Reserve acquisition........ 0 5,488 5,488
-------- -------- -------
1,351 5,103 6,454
======== ======== =======
NOTE 17 -- MANAGEMENT'S PLAN REGARDING CURRENT DEBT OBLIGATIONS
As outlined in Notes 7, 8, and 9, certain of the Company's debt obligations
at March 31, 1997 existed under facilities that were scheduled to mature within
approximately one year. In addition, the Company assumed $1,454,000 of
short-term debt obligations when it acquired Reserve on May 1, 1997 (see Notes 2
and 16). Management's current projections indicate that there will not be
sufficient cash flow from operations to fund the repayment of all principal
obligations on maturing short-term debt. Substantially all of the Company's
assets are pledged as collateral under the Company's various borrowing
facilities.
As described in Note 16, the Company has completed several debt and capital
transactions since March 31, 1997 that have raised cash or refinanced or repaid
existing debt. Additionally, management has entered into amendments or obtained
binding commitments from certain current lenders to extend maturities of
existing current obligations beyond June 30, 1998. These transactions and
commitments should provide the Company with sufficient cash and available
borrowings to fund the Company's current debt obligations and anticipated
operating cash needs for fiscal 1998. Management continues to explore various
other financing strategies, including the refinancing of certain existing debt
facilities on a long-term basis, the issuance of convertible or other types of
debt, and the issuance of equity securities. There can be no assurance that the
Company will be able to access sufficient capital on acceptable terms.
F-24
57
NOTE 18 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain unaudited quarterly financial
information for the Company's last ten fiscal quarters (in thousands, except per
share amounts).
QUARTER ENDED
-----------------------------------------------
JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
---------- -------- ------- ----------
FISCAL 1995
Net sales............................................... $ 0 $ 0 $ 0 $ 0
Gross profit............................................ 0 0 0 0
Net income from continuing operations................... 76 49 74 62
Net income (loss) from discontinued operations.......... 14 (136) (329) (2,247)
Net income (loss)....................................... $ 90 $ (87) $(255) $(2,185)
Earnings (loss) per share for:
Continuing operations................................. $.02 $ .01 $ .01 $ .01
Discontinued operations............................... .00 (.03) (.06) (.44)
Net income (loss)..................................... .02 (.02) (.05) (.43)
QUARTER ENDED TWO MONTHS ENDED
JANUARY 31 MARCH 31
------------- ----------------
FISCAL 1996
Net sales................................................... $ 0 $ 0
Gross profit................................................ 0 0
Net income (loss) from continuing operations................ (20) 4
Net income (loss) from discontinued operations.............. 68 (46)
Net income (loss)........................................... 48 (42)
Earnings (loss) per share for:
Continuing operations..................................... $.00 $.00
Discontinued operations................................... .01 (.01)
Net income (loss)......................................... .01 (.01)
QUARTER ENDED
--------------------------------------------------
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
------- ------------ ----------- --------
FISCAL 1997
Net sales.......................................... $15,978 $13,963 $10,402 $24,853
Gross profit....................................... 2,000 823 382 3,667
Net income (loss) from continuing operations....... 5 (915) (1,160) 60
Net income from discontinued operations............ 146 147 25 529
Net income (loss).................................. 151 (768) (1,135) 589
Earnings (loss) per share for:
Continuing operations............................ $ .00 $ (.10) $ (.13) $ .01
Discontinued operations.......................... .02 .02 .00 .05
Net income (loss)................................ .02 (.08) (.13) .06
Fiscal 1995 and 1996 results are restated to reflect the results of
discontinued operations (see Note 3 -- Discontinued Operations).
F-25
58
METAL MANAGEMENT, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Fiscal 1994 and 1995 represents the twelve month period ended October 31.
Fiscal 1996 represents the five month period from November 1, 1995 to March 31,
1996. Fiscal 1997 represents the twelve month period ended March 31.
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS, BALANCE AT
FISCAL BEGINNING COSTS AND OTHER NET OF END
YEAR DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RECOVERIES OF PERIOD
- ------ ----------- ---------- ---------- ---------- ----------- ----------
1997 Allowance for doubtful accounts... $474,000 $ 223,000 $ 0 $(596,000) $101,000
Tax valuation allowance........... $505,000 $(505,000) $ 0 $ 0 $ 0
1996 Allowance for doubtful accounts... $414,000 $ 60,000 $ 0 $ 0 $474,000
Tax valuation allowance........... $505,000 $ $ 0 $ 0 $505,000
1995 Allowance for doubtful accounts... $373,000 $ 231,000 $10,000 $(200,000) $414,000
Tax valuation allowance........... $ 0 $ 505,000 $ 0 $ 0 $505,000
1994 Allowance for doubtful accounts... $311,000 $ 35,000 $27,000 $ 0 $373,000
F-26
59
METAL MANAGEMENT, INC.
EXHIBIT INDEX
NUMBER AND DESCRIPTION OF EXHIBIT
2.1 Merger Agreement dated as of December 1, 1995, and as
amended through March 7, 1996, among the Registrant, GPAR
Merger, Inc., EMCO and the direct and indirect beneficial
owners of EMCO's Common Stock (incorporated by reference
from Definitive Proxy Statement of the Company and EMCO,
dated March 8, 1996).
2.2 Form of Asset Purchase and Sale Agreement by and between the
Registrant and Mannesmann Tally Corporation dated July 16,
1996 (incorporated by reference to Exhibit 2.2 of the
Registrant's report on Form 8-K dated July 16, 1996).
2.3 Acquisition Agreement by and among the Registrant; MMI
Acquisition, Inc., a California corporation and wholly owned
subsidiary of the Registrant, Metal Management Realty, Inc.,
an Arizona corporation and a wholly owned subsidiary of the
Registrant, California Metals Recycling, Inc., a California
corporation ("CA Metals"), Firma, Inc., a California
corporation ("Firma"), MacLeod Metals Co., a California
corporation ("MacLeod Metals"), Firma Plastic Co., Inc., a
California corporation ("Plastics"), Trojan Trading Co., a
California corporation (together with Firma, CA Metals,
MacLeod Metals and Plastics, the "MacLeod Companies"), Ian
MacLeod, an individual and shareholder of each of the
MacLeod Companies, Marilyn MacLeod, an individual and
shareholder of each of the MacLeod Companies and the MacLeod
Family Trust dated January 30, 1993 (incorporated by
reference to Exhibit 2.1 of the Registrant's report on Form
8-K dated January 1, 1997).
2.4 Merger Agreement by and among the Registrant, MTLM Merger,
Inc., HouTex Metals Company, Inc., Mike Melnik, Zalman
Melnik, and Clend Investment Holdings, Ltd., dated as of
December 10, 1996 (incorporated by reference to Exhibit 2.1
of the Registrant's report on Form 8-K dated January 7,
1997).
2.5 First Amendment to Merger Agreement among the Registrant,
MTLM Merger Inc., HouTex Metals Company, Inc., Mike Melnik,
Zalman Melnik and Clend Investment Holdings, Ltd., dated as
of December 10, 1996 (incorporated by reference to Exhibit
2.2 of the Registrant's report on Form 8-K dated January 7,
1997).
2.6 Purchase Agreement, dated as of March 10, 1997, between
Registrant and BancBoston Ventures, Inc. (incorporated by
reference to Exhibit 2.1 of the Registrant's report on Form
8-K dated May 15, 1997).
2.7 Purchase Agreement, dated as of January 17, 1997, among
Registrant, P. Joseph Iron & Metal, Inc., the sole general
partner of Reserve Iron & Metal Limited Partnership, and
Paul D. Joseph, Steven Joseph and Scott Joseph (incorporated
by reference to Exhibit 2.2 of the Registrant's report on
Form 8-K dated May 15, 1997).
2.8 First Amendment to Purchase Agreement, dated as of March 6,
1997, among Registrant, P. Joseph Iron & Metal, Inc., the
sole general partner of Reserve Iron & Metal Limited
Partnership, and Paul D. Joseph, Steven Joseph and Scott
Joseph (incorporated by reference to Exhibit 2.3 of the
Registrant's report on Form 8-K dated May 15, 1997).
2.9 Second Amendment to Purchase Agreement, dated May 1, 1997,
among Registrant, P. Joseph Iron & Metal, Inc., the sole
general partner of Reserve Iron & Metal Limited Partnership,
and Paul D. Joseph, Steven Joseph and Scott Joseph
(incorporated by reference to Exhibit 2.4 of the
Registrant's report on Form 8-K dated May 15, 1997).
2.10 Agreement and Plan of Merger dated May 16, 1997 among Cozzi
Iron & Metal, Inc. and its Shareholders, Metal Management,
Inc. and CIM Acquisition Co.
2.11 Form of Stockholders' Agreement for Metal Management, Inc..
EX-1
60
3.1 Restated Certificate of Incorporation, as amended through
April 12, 1996 (incorporated by reference to Exhibit 3.1 of
the Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 1996).
3.2 Amended and Restated Bylaws, as amended through May 24,
1997.
4.1 Specimen of Stock Certificate
4.2 1995 Stock Plan and Form of Option Agreement (incorporated
by reference to Exhibit 4.1 of the Registrant's Registration
Statement on Form S-8, File No. 0-14836).
4.3 1996 Director Option Plan and Form of Option Agreement
(incorporated by reference to Exhibit 4.2 of the
Registrant's Registration Statement on Form S-8, File No.
0-14836).
10.1 1996 Director Option Plan (incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 1996).
10.2 1995 Stock Plan (incorporated by reference to Exhibit 10.3
to the Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 1996).
10.3 Subordination Agreement dated April 11, 1996 among the
Registrant, Fidelity Funding of California, Inc. and EMCO
(incorporated by reference to Exhibit 10.6 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended June 30, 1996).
10.4 Assignment of Lease between Empire and EMCO, dated April 11,
1996 (incorporated by reference to Exhibit 10.9 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended June 30, 1996).
10.5 Assignment of Lease between Empire CAN and EMCO, dated April
11, 1996 (incorporated by reference to Exhibit 10.10 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended June 30, 1996).
10.6 Employment Agreement dated April 11, 1996 between EMCO and
Raymond Zack (incorporated by reference to Exhibit 10.20 to
the Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 1996).
10.7 Employment Agreement dated April 11, 1996 between the
Registrant and George Moorehead (incorporated by reference
to Exhibit 10.21 to the Registrant's Quarterly Report on
Form 10-Q for the period ended June 30, 1996).
10.8 Employment Agreement dated April 11, 1996 between the
Registrant and T. Benjamin Jennings (incorporated by
reference to Exhibit 10.22 to the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 1996).
10.9 Employment Agreement dated April 11, 1996 between the
Registrant and Gerard M. Jacobs (incorporated by reference
to Exhibit 10.23 to the Registrant's Quarterly Report on
Form 10-Q for the period ended June 30, 1996).
10.10 Consulting Agreement between EMCO and Harold Rubenstein
dated April 11, 1996 (incorporated by reference to Exhibit
10.24 to the Registrant's Quarterly Report on Form 10-Q for
the period ended June 30, 1996).
10.11 Employment Agreement dated August 26, 1996 between the
Registrant and Robert C. Larry (incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the period ended December 31, 1996.)
10.12 Employment Agreement dated January 1, 1997 by the Registrant
and Ian MacLeod.
10.13 Guaranty, dated as of January 7, 1997, by certain directors
of the Registrant to and for the benefit of LaSalle National
(re loan to Registrant, incorporated by reference to Exhibit
10.1 on the Registrant's 8-K dated January 7, 1997).
10.14 Guaranty, dated as of January 7, 1997, by certain directors
of the Registrant to and for the benefit of LaSalle National
(re loan to HouTex incorporated by reference to Exhibit 10.2
on the Registrant's 8-K dated January 7, 1997).
10.15 Loan Agreement, dated as of January 7, 1997, by and among
the Registrant, HouTex and LaSalle National (incorporated by
reference to Exhibit 10.3 on the Registrant's 8-K dated
January 7, 1997).
EX-2
61
10.16 Subordination Agreement, dated as of January 7, 1997, by and
between the Registrant and LaSalle National (incorporated by
reference to Exhibit 10.7 on the Registrant's 8-K dated
January 7, 1997).
10.17 Employment Agreement dated January 7, 1997 between the
Registrant and Mike Melnik.
10.18 Office Lease between Friedman Properties, Ltd., and the
Registrant (incorporated by reference to Exhibit 10.1 of the
Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 1996).
10.19 Employment Agreement effective as of May 1, 1997, entered
into by and between Paul D. Joseph and Reserve Iron & Metal
Limited Partnership.
11.1 Computation of Earnings Per Share.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Price Waterhouse, L.L.P.
27.1 Financial Data Schedule.
EX-3