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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended December 31, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
COMMISSION FILE NO. 0-14836
METAL MANAGEMENT, INC.
(Debtor-in-Possession as of November 20, 2000)
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2835068
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
500 N. DEARBORN ST., SUITE 405,
CHICAGO, IL 60610
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (312) 645 - 0700
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
As of April 10, 2001, the Registrant had 60,849,898 shares of Common
Stock outstanding.
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INDEX
PAGE
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PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements - Unaudited
Consolidated Balance Sheets - December 31, 2000
and March 31, 2000 1
Consolidated Statements of Operations - three and nine months
ended December 31, 2000 and 1999 2
Consolidated Statements of Cash Flows - nine months
ended December 31, 2000 and 1999 3
Consolidated Statements of Stockholders' Equity -
nine months ended December 31, 2000 4
Notes to Consolidated Financial Statements 5
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk 19
PART II: OTHER INFORMATION
ITEM 3: Defaults Upon Senior Securities 20
ITEM 6: Exhibits and Reports on Form 8-K 20
SIGNATURES 21
Exhibit Index 22
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PART I: FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
METAL MANAGEMENT, INC.
(DEBTOR-IN-POSSESSION AS OF NOVEMBER 20, 2000)
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)
DECEMBER 31, 2000 MARCH 31, 2000
----------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,278 $ 1,396
Accounts receivable, net 77,245 155,935
Inventories 39,493 70,275
Prepaid expenses and other assets 10,904 9,082
Deferred taxes 0 6,090
--------- ---------
Total current assets 129,920 242,778
Property and equipment, net 157,709 165,197
Goodwill, net 0 282,418
Deferred financing costs and other intangibles, net 2,942 12,300
Deferred taxes 0 2,201
Investments in joint ventures 2,338 3,473
Other assets 2,796 2,613
--------- ---------
TOTAL ASSETS $ 295,705 $ 710,980
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Post petition financing agreement $ 115,094 $ 0
Current portion of long-term debt 30,741 2,109
Accounts payable 25,463 76,094
Accrued interest 2,652 8,524
Other accrued liabilities 10,530 15,618
--------- ---------
Total current liabilities 184,480 102,345
Long-term liabilities:
Long-term debt, less current portion 1,288 382,601
Other liabilities 2,228 3,900
--------- ---------
Total long-term liabilities 3,516 386,501
Liabilities subject to compromise (Note 8) 232,226 0
Stockholders' equity (deficit):
Convertible preferred stock:
Series B 815 1,177
Series C 5,100 5,100
Common stock 609 577
Treasury stock, at cost (67) 0
Warrants 40,428 40,428
Additional paid-in-capital 271,589 270,696
Accumulated deficit (442,991) (95,844)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (124,517) 222,134
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 295,705 $ 710,980
========= =========
The accompanying notes are an integral part of these financial statements
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METAL MANAGEMENT, INC.
(DEBTOR-IN-POSSESSION AS OF NOVEMBER 20, 2000)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------- ----------------------
DECEMBER DECEMBER DECEMBER DECEMBER
31, 2000 31, 1999 31, 2000 31, 1999
--------- --------- --------- ---------
NET SALES $ 154,780 $ 233,734 $ 610,463 $ 643,882
Cost of sales 149,103 205,245 563,269 565,004
--------- --------- --------- ---------
Gross profit 5,677 28,489 47,194 78,878
OPERATING EXPENSES:
General and administrative 13,440 13,535 43,682 41,144
Depreciation and amortization 4,846 6,896 18,459 20,197
Goodwill impairment charge (Note 3) 280,132 0 280,132 0
Non-cash and non-recurring expense (Note 5) (211) 0 2,639 5,014
--------- --------- --------- ---------
Total operating expenses 298,207 20,431 344,912 66,355
--------- --------- --------- ---------
Operating income (loss) from continuing operations (292,530) 8,058 (297,718) 12,523
OTHER INCOME (EXPENSE):
Income (loss) from joint ventures (927) 100 (1,576) 69
Interest expense 7,850 9,834 28,853 27,828
Interest and other income, net 54 (3) 256 359
--------- --------- --------- ---------
Loss from continuing operations before reorganization
costs and income taxes (301,253) (1,679) (327,891) (14,877)
Reorganization costs (Note 1) 10,670 0 10,670 0
--------- --------- --------- ---------
Loss from continuing operations before income taxes (311,923) (1,679) (338,561) (14,877)
Provision (benefit) for income taxes 0 (91) 8,291 (4,285)
--------- --------- --------- ---------
Loss from continuing operations (311,923) (1,588) (346,852) (10,592)
Gain on sale of discontinued operations, net of taxes 0 14 0 41
--------- --------- --------- ---------
NET LOSS (311,923) (1,574) (346,852) (10,551)
Premium paid on redemption of preferred stock 0 0 0 616
Preferred stock dividends 62 183 295 642
--------- --------- --------- ---------
NET LOSS APPLICABLE TO COMMON STOCK $(311,985) $ (1,757) $(347,147) $ (11,809)
========= ========= ========= =========
Basic and diluted loss per share $ (5.20) $ (0.03) $ (5.93) $ (0.22)
========= ========= ========= =========
Shares used in computation of basic and diluted loss 60,021 54,215 58,569 53,350
per share
The accompanying notes are an integral part of these financial statements
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METAL MANAGEMENT, INC.
(DEBTOR-IN-POSSESSION AS OF NOVEMBER 20, 2000)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
NINE MONTHS ENDED DECEMBER 31,
------------------------------
2000 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $(346,852) $ (10,592)
Adjustments to reconcile net loss from continuing
operations to cash flows from operating activities:
Depreciation and amortization 18,459 20,197
Deferred income taxes 8,291 (4,257)
Amortization of debt issuance costs and bond discount 2,402 2,543
Goodwill impairment charge 280,132 0
Non-cash and non-recurring expense 2,639 211
Non-cash reorganization expenses 9,044 0
Provision for bad debt 5,006 1,095
Other 1,854 886
Changes in assets and liabilities:
Accounts and notes receivable 74,134 (37,878)
Inventories 30,782 (4,241)
Accounts payable (16,278) 7,347
Other (1,646) (5,398)
--------- ---------
Cash flows provided by (used in) operating activities 67,967 (30,087)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment (8,812) (7,042)
Proceeds from sale of property and equipment 1,111 2,008
Acquisitions, net of cash acquired 0 (4,542)
Other (124) 1,316
--------- ---------
Net cash used in investing activities (7,825) (8,260)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Issuances of long-term debt 638,492 772,312
Repayments of long-term debt (808,631) (730,173)
Net borrowings from DIP Agreement 115,094 0
Fees paid to issue long-term debt (4,148) (2,356)
Redemption of convertible preferred stock 0 (3,078)
Repurchase of common stock (67) 0
--------- ---------
Net cash provided by (used in) financing activities (59,260) 36,705
--------- ---------
Net increase (decrease) in cash and cash equivalents 882 (1,642)
Cash and cash equivalents at beginning of period 1,396 2,482
--------- ---------
Cash and cash equivalents at end of period $ 2,278 $ 840
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 23,066 $ 30,771
The accompanying notes are an integral part of these financial statements
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METAL MANAGEMENT, INC.
(DEBTOR-IN-POSSESSION AS OF NOVEMBER 20, 2000)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(unaudited, in thousands, except shares)
PREFERRED STOCK COMMON STOCK
NUMBER ADDITIONAL
OF TREASURY PAID-IN- ACCUMULATED
SERIES B SERIES C SHARES AMOUNT STOCK WARRANTS CAPITAL DEFICIT TOTAL
-------- -------- ---------- ------ -------- -------- ---------- ----------- ---------
BALANCE AT MARCH 31, 2000 $ 1,177 $ 5,100 57,711,427 $ 577 $ 0 $ 40,428 $ 270,696 $ (95,844) $ 222,134
Conversion of preferred stock (390) 0 1,667,769 17 0 0 379 0 6
Preferred stock dividends 28 0 1,442,284 14 0 0 399 (295) 146
Repurchase of common stock 0 0 (50,000) 0 (67) 0 0 0 (67)
Other 0 0 78,418 1 0 0 115 0 116
Net loss 0 0 0 0 0 0 0 (346,852) (346,852)
------- ------- ---------- ----- ----- -------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2000 $ 815 $ 5,100 60,849,898 $ 609 $ (67) $ 40,428 $ 271,589 $(442,991) $(124,517)
======= ======= ========== ===== ===== ======== ========= ========= =========
The accompanying notes are an integral part of these financial statements
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METAL MANAGEMENT, INC.
(DEBTOR-IN-POSSESSION AS OF NOVEMBER 20, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - REORGANIZATION UNDER CHAPTER 11
On November 20, 2000 (the "Petition Date"), Metal Management, Inc. and its
subsidiaries (collectively, the "Company") filed voluntary petitions (Case Nos.
00-4303 - 00-4331 (SLR)) for relief under Chapter 11 of the U.S. Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). The Company is operating its business as a
debtor-in-possession. These bankruptcy proceedings are referred to as the
"Chapter 11 Bankruptcy" herein. The voluntary petitions filed by the Company and
all of its subsidiaries in the Chapter 11 Bankruptcy have been consolidated for
administrative purposes. The bankruptcy filing resulted from a sequence of
events stemming primarily from significant operating losses and decreased
liquidity experienced during fiscal 2001, which culminated in the Company's
inability to make a $9 million interest payment on its Senior Subordinated Notes
(defined below) on November 15, 2000. The Company's poor operating results and
the resulting decrease in liquidity are primarily due to unprecedented cycles of
declines in prices and demand for scrap metals exacerbated by high levels of
fixed costs associated with the Company's leveraged capital structure.
In connection with the Chapter 11 Bankruptcy, the Company is required to
report in accordance with Statement of Position 90-7 "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7") for financial
statements for the periods beginning after November 20, 2000. Following the
approval of the proposed plan of reorganization, SOP 90-7 will require that the
Company adopt "fresh start" accounting resulting in recording assets and
liabilities at fair value. The application of fresh start accounting could
result in adjustments to the recorded historical cost basis of fixed assets and
other assets and liabilities.
The bankruptcy filing was made as a first step in the implementation of a
prenegotiated arrangement among the Company, its senior lenders, and the holders
of the Senior Secured Notes and Senior Subordinated Notes, to restructure its
debt (hereinafter referred to as the "Proposed Restructuring"). Pursuant to the
terms of the Proposed Restructuring, it is contemplated that the holders of the
Senior Subordinated Notes (and certain other creditors) are expected to receive
99% of the common stock of the restructured company in exchange for the
cancellation of such debt. The remaining 1% of the restructured company would be
distributed to existing and preferred stockholders. In addition, existing
stockholders would be issued, upon consummation of the Proposed Restructuring,
warrants to purchase up to 7.5% of the restructured company based on certain
levels of recovery by the Company's noteholders. In connection with the Proposed
Restructuring, the Company's senior lenders agreed to provide a $200 million
debtor-in-possession financing (the "DIP Agreement") providing $20 million of
initial incremental borrowing capacity (see Note 4). The DIP Agreement was
approved by the Bankruptcy Court on November 21, 2000. Proceeds from the DIP
Agreement were used to repay amounts outstanding under the Senior Credit
Facility. On May 4, 2001, the Bankruptcy Court approved for mailing the
disclosure statement including balloting procedures. The Company expects to
emerge from Chapter 11 Bankruptcy during June 2001.
The consolidated financial statements include adjustments and
reclassifications to reflect liabilities as "Liabilities Subject to Compromise"
under the Chapter 11 Bankruptcy. Certain pre-petition liabilities have been
approved for payment by the Bankruptcy Court, such as employee wages and
benefits, and specified pre-petition obligations to vendors, customers and
taxing authorities. Generally, actions to enforce or otherwise affect repayment
of all pre-chapter 11 liabilities other than those specifically approved by the
Bankruptcy Court, are stayed while the Company continues its business operations
as a debtor-in-possession.
Schedules were filed by the Company with the Bankruptcy Court setting forth
the assets and liabilities of the Company as of the Petition Date as reflected
in the Company's accounting records. Differences between the amounts reflected
in such schedules and claims filed by creditors will be investigated and may be
either amicably resolved or adjudicated before the Bankruptcy Court. The
ultimate amount and settlement terms for such liabilities are subject to an
approved plan of reorganization and accordingly are not presently determinable.
During January 2001, the Office of the United States Trustee for the District of
Delaware (the "U.S. Trustee") appointed an Official Committee of Unsecured
Creditors.
Under the Bankruptcy Code, the Company may elect to assume or reject real
estate leases, employment contracts, personal property leases, service contracts
and other executory pre-petition contracts, subject to Bankruptcy Court
approval. The Company cannot presently determine or reasonably estimate the
ultimate liability that may result from rejecting leases or from the filing of
claims for any rejected contracts, and no provisions have yet been made for
these items in the financial statements.
As a result of the Chapter 11 Bankruptcy, no principal or interest payments
will be made on unsecured pre-petition debt including but not limited to the
Company's 10% Senior Subordinated Notes due 2008 (the "Senior Subordinated
Notes") and the Company's 12 3/4% Senior Secured Notes due 2004 (the "Senior
Secured Notes"). Interest will continue to be accrued on the Senior Secured
Notes. Payments may be required to be made on other secured pre-petition debt
subject to Bankruptcy Court approval. Additionally, after the Petition Date, the
Company cannot declare dividends on its Series B and Series C Convertible
Preferred Stock (collectively, the "Preferred Stock").
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Reorganization costs are directly associated with the Chapter 11 Bankruptcy
reorganization proceedings. Reorganization costs for the period November 20,
2000 through December 31, 2000 are as follows (in thousands):
Professional Fees $ 1,574
Write-off of deferred financing costs 9,044
Other 52
--------
$ 10,670
========
The Company wrote-off $9.0 million of deferred financing costs related to
the Senior Credit Facility and the Senior Subordinated Notes. These amounts were
written-off as the Senior Credit Facility was terminated and replaced with the
DIP Agreement and the Proposed Restructuring contemplates all the Senior
Subordinated Notes to be exchanged into common stock.
NOTE 2 - INTERIM FINANCIAL STATEMENTS
The Company's accompanying consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") and assuming the Company will continue as a going concern,
which contemplates continuity of operations and realization of assets and
liquidation of liabilities in the normal course of business. As a result of the
Company's recurring losses, the Chapter 11 Bankruptcy and circumstances relating
to this event, including the Company's debt structure and current economic
conditions, realization of assets and liquidation of liabilities are subject to
significant uncertainty. These matters, among others, raise substantial doubt
about the Company's ability to continue as a going concern. The continuation of
the Company's business as a going concern is contingent upon, among other
things, the ability to (1) formulate a plan of reorganization that will be
confirmed by the Bankruptcy Court, (2) achieve satisfactory levels of future
profitable operations, (3) maintain adequate financing, and (4) generate
sufficient cash from operations to meet future obligations.
The March 31, 2000 balance sheet information has been derived from the
Company's audited financial statements. All significant intercompany accounts,
transactions and profits have been eliminated. Certain information related to
the Company's organization, significant accounting policies and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
The interim financial data for the three and nine months ended December 31, 2000
and December 31, 1999 is unaudited; however, in the opinion of management, the
interim data, subject to the qualifications described above related to
application of accounting principles in connection with a Chapter 11 Bankruptcy,
includes all material adjustments (which include only normal recurring
adjustments) necessary for a fair statement of the financial position and the
results of operations for the periods presented and the disclosures herein are
adequate to make the information presented not misleading. Operating results for
interim periods are not necessarily indicative of the results that can be
expected for a full year. These interim financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended March 31, 2000.
NOTE 3 - CHANGE IN ACCOUNTING POLICY
During the third quarter of fiscal 2001, the Company changed its method of
accounting for assessing whether an impairment exists in the recorded amount of
acquired business unit goodwill and other intangible assets, from an
undiscounted cash flow method to a fair value method. Under its previous
accounting method, this determination was made whenever events or circumstances
indicated that expected undiscounted future cash flows were less than the
recorded investment amounts of acquired businesses, including
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business unit goodwill and other intangible assets. Under the fair value method,
the determination of whether an impairment exists will be made whenever events
or circumstances indicate that the fair value of investments in acquired
businesses, including business unit goodwill and other intangibles, are less
than the recorded amount. Any impairment will be measured by comparing the
recorded amount of investments in acquired businesses, including business unit
goodwill and other intangibles, to the fair value. Fair value is determined on
the basis of appraised market values, or in the absence of appraised market
values, on the basis of discounted cash flows.
The Company believes that changes in the markets for its products,
characterized by the unchecked imports of foreign steel and scrap metals, has
had an adverse and permanent effect on its consolidation strategy. Under these
circumstances, the Company believes the fair value method is preferable for
evaluating the recorded amount of its acquired business unit goodwill and other
intangibles. In addition, in connection with Company's bankruptcy proceedings,
estimates of the reorganization value of the Company prepared by independent
valuation experts indicate that acquired business unit fair values are
significantly below the recorded amount of the Company's investments in its
business unit assets.
The change in method of accounting for assessing whether an impairment
exists in the recorded amount of acquired business unit goodwill and other
intangible assets is considered a change in accounting inseparable from a change
in estimate. The effects of the change in accounting are applied on a
prospective basis as of October 1, 2000. As a result of applying the new
accounting policy, the Company recorded a goodwill impairment charge of $280.1
million in the quarter ended December 31, 2000 representing the entire amount of
unamortized business unit goodwill and other intangibles at October 1, 2000.
NOTE 4 - POST PETITION FINANCING AGREEMENT
In connection with the Chapter 11 Bankruptcy, the Company entered into a
$200 million Post-Petition Financing Agreement (the "DIP Agreement") by and
among BT Commercial Corporation, as Agent for the lenders, and the Company, that
establishes a lending arrangement for the Company under certain conditions while
in bankruptcy. The Bankruptcy Court granted final approval on the DIP Agreement
on November 21, 2000. The DIP Agreement expires on the earlier of June 30, 2001
or the date the Bankruptcy Court confirms a plan of reorganization. The DIP
Agreement contains covenants and conditions that govern the loans to the
Company. Loans under the DIP Agreement are available to fund working capital
needs and general corporate purposes. Borrowings under the DIP Agreement are
limited by the amount of eligible collateral based upon a formula applied to the
Company's accounts receivable and inventory. The DIP Agreement is secured by
substantially all the assets of the Company. Proceeds from the DIP Agreement
were used to repay amounts outstanding under the Senior Credit Facility.
Pursuant to the DIP Agreement, the Company was required to generate a
minimum EBITDA of $2.5 million for the three months ended December 31, 2000. The
Company obtained waivers from its lenders under the DIP Agreement as a result of
its failure to satisfy these covenants.
In connection with obtaining the waivers, the Company and its lenders under
the DIP Agreement executed an amendment to the DIP Agreement which establishes
minimum month-end availability tests of $7.5 million and reset the minimum
EBITDA target for the three months ended March 31, 2001 to $8.0 million. In
light of market conditions, the Company will not likely achieve this result. As
a result, the Company's senior lenders will have to waive or otherwise amend the
DIP Agreement. Although it is not certain that waivers or amendments will be
provided by the Company's lenders, the Company expects to receive the necessary
waivers.
The DIP Agreement also restricts the Company's ability to make capital
expenditures. Capital expenditures are not to exceed $3.75 million from the
filing of the Chapter 11 Bankruptcy through March 31, 2001 and $750,000 per
month thereafter. The DIP Agreement requires the Company to make monthly
interest payments on outstanding loan balances at the prime rate (as specified
by Deutsche Bank AG, New York Branch) plus 150 basis points on the first day of
each month. In addition, the DIP Agreement provides for the Company to pay an
unused monthly commitment fee of .375% on the undrawn portion of the facility.
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NOTE 5 - NON-CASH AND NON-RECURRING EXPENSES
During the nine months ended December 31, 2000, the Company recorded the
following non-cash and non-recurring expenses and related reserve activity (in
thousands).
SEVERANCE,
FACILITY MERGER
CLOSURE & RELATED ASSET
OTHER COSTS IMPAIRMENT TOTAL
--------- ------- ---------- -------
Balance at March 31, 2000 $ 808 $ 413 $ 0 $ 1,221
Charge to income 0 0 2,639 2,639
Cash payments (583) (38) 0 (621)
Non-cash application 0 0 (2,639) (2,639)
------- ------- ------- -------
Balance at December 31, 2000 $ 225 $ 375 $ 0 $ 600
======= ======= ======= =======
The Company believes the reserves at December 31, 2000 are adequate for the
remaining obligations associated with these activities. Reserves of
approximately $450,000 have been classified as subject to compromise (see Note
8).
Fiscal 2001
During the three months ended September 30, 2000, the Company recognized
$0.2 million of bankruptcy costs as a non-cash and non-recurring expense. In the
current period, these costs were reclassified as reorganization costs, resulting
in the non-cash and non-recurring income during the three months ended December
31, 2000.
Asset Impairment
During the three months ended June 30, 2000, the Company recognized a $2.6
million asset impairment charge related to a promissory note, including accrued
interest, received by the Company in conjunction with the sale of its former
Superior Forge, Inc. subsidiary.
The Company determined it was necessary to fully reserve the note
receivable and accrued interest based on factors including (i) quarterly
interest payments on the note receivable have not been paid since September
1999, (ii) losses from Superior Forge, Inc.'s operations exceeded those planned,
and (iii) the perceived inability of Superior Forge, Inc. to obtain capital to
refinance its obligations. The Company intends to exert all of its rights to
maximize recovery of the note receivable.
Fiscal 2000
During the nine months ended December 31, 1999, the Company recorded
non-cash and non-recurring expenses of $5.0 million consisting of the following
(in thousands):
NINE MONTHS
ENDED 12/31/99
--------------
Severance and other benefits $ 4,701
Other 313
--------
$ 5,014
========
Severance and other benefits
Effective July 15, 1999, T. Benjamin Jennings resigned as the Company's
Chairman of the Board and Chief Executive Officer, as a director of the Company,
and as an officer and director of all of the Company's subsidiaries for which he
served in such capacities. In connection with his resignation, the Company
entered into a settlement agreement and general release with Mr. Jennings (the
"Jennings Settlement Agreement"). Mr. Jennings' employment agreement was
terminated and superseded by the terms of the Jennings Settlement Agreement.
Pursuant to the terms of the Jennings Settlement Agreement, Mr. Jennings
received approximately $2.1 million in a lump-sum cash payment from the Company,
and the continuation of health, dental and life insurance and certain other
benefits as set forth in the Jennings Settlement Agreement. In accordance with
the Jennings Settlement Agreement, on January 2, 2000, the Company also
relinquished its rights to an outstanding $500,000 loan previously advanced to
Mr. Jennings, plus accrued interest thereon. In addition, Mr. Jennings agreed to
release, waive and renounce his interest under and pursuant to the amended and
restated stockholders' agreement, dated
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February 12, 1999. The Company and Mr. Jennings agreed to mutual general
releases from any and all liabilities arising out of any matter or event
occurring on or prior to the date of the Jennings Settlement Agreement.
Effective August 1, 1999, George A. Isaac, III resigned as the Company's
Executive Vice President and as an officer and director of all of the Company's
subsidiaries for which he served in such capacities. In connection with his
resignation, Mr. Isaac invoked what he believed to be a contractual entitlement
to certain "change of control" provisions included in his employment agreement
with the Company which were triggered by the resignation of Gerard M. Jacobs,
the Company's former Chief Executive Officer. In connection with his resignation
and the invocation of the "change of control" provisions of his employment
agreement, the Company entered into a settlement agreement and general release
with Mr. Isaac (the "Isaac Settlement Agreement"). Mr. Isaac's employment
agreement was terminated and superseded by the terms of the Isaac Settlement
Agreement. Pursuant to the terms of the Isaac Settlement Agreement, Mr. Isaac
received cash payments of approximately $1.2 million, and the continuation of
health, dental and life insurance plans through June 23, 2002. The Company and
Mr. Isaac agreed to mutual general releases from any and all liabilities arising
out of any matter or event occurring on or prior to the date of the Isaac
Settlement Agreement.
During the three months ended September 30, 1999, the Company also incurred
severance and other termination benefits relating to twelve employees totaling
$0.5 million as a result of consolidation and integration of its various
businesses.
NOTE 6 - INVENTORIES
Inventories for all periods presented are stated at the lower of cost or
market. Cost is determined principally on the average cost method. Inventories
consisted of the following categories (in thousands):
DECEMBER 31, 2000 MARCH 31, 2000
----------------- --------------
Ferrous metals $ 18,246 $ 38,344
Non-ferrous metals 20,240 28,069
Other 1,007 3,862
--------- ----------
$ 39,493 $ 70,275
========= ==========
NOTE 7 - DEBT NOT CLASSIFIED AS SUBJECT TO COMPROMISE
Long-term debt not subject to compromise consisted of the following (in
thousands):
DECEMBER 31, 2000 MARCH 31, 2000
----------------- --------------
Senior Credit Facility $ 0 $ 170,590
12 3/4% Senior Secured Notes 27,724 27,372
10% Senior Subordinated Notes 0 180,000
Other debt 4,305 6,748
--------- ---------
32,029 384,710
Less: current portion (30,741) (2,109)
--------- ---------
$ 1,288 $ 382,601
========= =========
As a consequence of the Chapter 11 Bankruptcy, the Company was in default
of the $250 million Senior Credit Facility, dated March 31, 1998 (as amended,
the "Senior Credit Facility") among the Company and its senior lenders, the
Indenture governing the Senior Secured Notes (the "Senior Secured Notes
Indenture") and the Indenture governing the Senior Subordinated Notes (the
"Senior Subordinated Notes Indenture").
On May 7, 1999, the Company issued $30.0 million principal amount of 12
3/4% Senior Secured Notes due on June 15, 2004. Interest on the Senior Secured
Notes is payable semi-annually. The Senior Secured Notes were
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issued at 90% of their principal amount and are redeemable by the Company, in
whole or in part, at 100% of their principal amount at any time after June 15,
2000. A second priority lien on substantially all of the Company's personal
property, plant (to the extent it constitutes fixtures) and equipment has been
pledged as collateral against the Senior Secured Notes. The Senior Secured Notes
are senior obligations of the Company, ranking equally with all of its existing
and future unsubordinated debt, including indebtedness under the Senior Credit
Facility, and senior to all of its existing and future subordinated debt,
including the Senior Subordinated Notes. The Company's payment obligation is
jointly and severally guaranteed by the Company's current and future
subsidiaries. The Company received net proceeds of approximately $25.5 million,
after the 10% original issue discount and transaction fees and expenses. The
default under the Senior Secured Notes Indenture has required the Company to
classify the Senior Secured Notes as current obligations. The December 15, 2000
semi-annual interest payment was not made as a result of the Chapter 11
Bankruptcy nor will periodic interest payments be paid during the pendency of
the Chapter 11 Bankruptcy.
Amounts outstanding at the Petition Date under debt instruments including,
but not limited to, the Senior Subordinated Notes are classified as liabilities
subject to compromise until a plan of reorganization is approved and implemented
(See Note 8).
Certain provisions of the Bankruptcy Code may relieve the Company from its
obligation to pay interest after the Petition Date. In accordance with SOP 90-7,
interest on secured claims will be accrued only to the extent that the value of
the underlying collateral exceeds the principal amount of the secured claim.
Interest on unsecured claims is not being accrued as it is unlikely such
interest would be paid in the plan of reorganization.
NOTE 8 - LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise refer to liabilities incurred prior to
the commencement of the Chapter 11 Bankruptcy. These liabilities consist
primarily of amounts outstanding for accounts payable, other accrued expenses
and obligations under unsecured debt arrangements. These amounts represent
management's best estimate of known or potential claims to be resolved in
connection with the Chapter 11 Bankruptcy. Such claims remain subject to future
adjustments based on negotiations, actions of the Bankruptcy Court, further
developments with respect to disputed claims or other events. The terms for the
satisfaction of these claims will be established in connection with the Chapter
11 Bankruptcy. Additional claims may arise from the rejection of executory
contracts and unexpired leases by the Debtors.
A summary of the principal categories of claims classified as liabilities
subject to compromise at December 31, 2000 are as follows (in thousands):
Accounts payable $ 34,352
Accrued interest 9,257
Accrued expenses 5,722
10% Senior Subordinated Notes 180,000
Other debt 2,895
----------
$ 232,226
==========
Accounts payable includes $18.5 million of amounts owed to critical
vendors, the repayment of which was authorized in a first day motion of the
Bankruptcy Court. To date, the Company has made approximately $26 million of
payments on account of critical vendor pre-petition claims.
On May 13, 1998, the Company issued $180.0 million, 10% Senior Subordinated
Notes due on May 15, 2008 and received net proceeds of $174.6 million. Interest
on the Senior Subordinated Notes is payable semi-annually. The Senior
Subordinated Notes are general unsecured obligations of the Company and are
subordinated in right to payment to all senior debt of the Company, including
the indebtedness of the Company under the Senior Credit Facility and the Senior
Secured Notes. The Company's payment obligations are jointly and severally
guaranteed by the Company's current and certain future subsidiaries. The Senior
Subordinated Notes are redeemable at the Company's option at specified
redemption prices and redemption events. On November 15, 2000, the Company
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failed to make a $9 million interest payment on the Senior Subordinated Notes
due to insufficient availability remaining under its Senior Credit Facility. The
Company's inability to make this interest payment precipitated the filing by the
Company of its voluntary petition under Chapter 11 of the Bankruptcy Code.
In accordance with SOP 90-7, the Company has not accrued interest on its
unsecured debt of $182.6 million after the Petition Date, as it is unlikely such
interest would be paid in a plan of reorganization. The amount of interest which
was not accrued during the period was approximately $2 million.
NOTE 9 - INCOME TAXES
As a result of the uncertainties surrounding the Chapter 11 Bankruptcy, the
Company recorded a charge of $8.3 million during the nine months ended December
31, 2000 to fully reserve for its net deferred tax assets.
NOTE 10 - RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," was issued by the FASB in
June 1998 and is effective for fiscal years beginning after June 15, 2000. The
Company will adopt SFAS No. 133 effective April 1, 2001. SFAS No. 133
established accounting and reporting standards for derivative instruments and
for hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The Company has reviewed the provisions of SFAS
No. 133 and does not believe that the adoption of this statement will have a
material impact on the financial position or results of operations of the
Company.
NOTE 11 - LOSS PER COMMON SHARE
Basic and diluted earnings per share (EPS) are calculated in accordance
with SFAS No. 128, "Earnings Per Share." Basic EPS is computed by dividing
reported net income (loss) applicable to Common Stock by the weighted average
shares outstanding. Diluted EPS includes the incremental shares issuable upon
the assumed exercise of stock options and warrants, using the treasury stock
method. The following is a reconciliation of the numerators and denominators of
the basic and diluted per share computations (in thousands, except per share
amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
LOSS (NUMERATOR):
Net loss $(311,923) $ (1,588) $(346,852) $ (10,592)
Premium paid on redemption of preferred stock 0 0 0 (616)
Dividends on convertible preferred stock (62) (183) (295) (642)
--------- --------- --------- ---------
Net loss applicable to Common Stock $(311,985) $ (1,771) $(347,147) $ (11,850)
========= ========= ========= =========
SHARES (DENOMINATOR):
Weighted average number of shares outstanding during
the period 60,021 54,215 58,569 53,350
Incremental common shares attributable to dilutive
stock options and warrants 0 0 0 0
--------- --------- --------- ---------
Diluted number of shares outstanding during the period 60,021 54,215 58,569 53,350
========= ========= ========= =========
Basic loss per common share $ (5.20) $ (0.03) $ (5.93) $ (0.22)
========= ========= ========= =========
Diluted loss per common share $ (5.20) $ (0.03) $ (5.93) $ (0.22)
========= ========= ========= =========
The effect of dilutive stock options and warrants were not included as
their effect would have been anti-dilutive for both periods presented. Also, the
potentially dilutive effect of the Company's convertible preferred stock were
not used in the diluted earnings per share calculation as its effect was also
anti-dilutive.
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This Form 10-Q includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements in this Form 10-Q which address
activities, events or developments that Metal Management, Inc. (herein, "Metal
Management," the "Company," "we," "us" or other similar terms) expects or
anticipates will or may occur in the future, including such things as future
acquisitions (including the amount and nature thereof), business strategy,
expansion and growth of our business and operations and other such matters are
forward-looking statements. Although we believe the expectations expressed in
such forward-looking statements are based on reasonable assumptions within the
bounds of our knowledge of our business, a number of factors could cause actual
results to differ materially from those expressed in any forward-looking
statements. These and other risks, uncertainties and other factors are discussed
under "Investment Considerations" appearing in our Annual Report on Form 10-K
for the year ended March 31, 2000, as the same may be amended from time to time.
In addition, additional forward looking statements as a result of the Chapter 11
bankruptcy included herein are subject to our ability to successfully develop,
obtain approval for, and implement a plan of reorganization under Chapter 11 of
the Bankruptcy Code.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included under Item 1. In
addition, reference should be made to the audited consolidated financial
statements and notes thereto and related Management's Discussion and Analysis of
Financial Condition and Results of Operations included in our Annual Report on
Form 10-K for the year ended March 31, 2000.
GENERAL
We are one of the largest full-service metals recyclers in the United
States. We have a leadership position in many major metropolitan markets,
including Chicago, Cleveland, Denver, Hartford, Houston, Memphis, Newark,
Phoenix and Pittsburgh. Through an equity ownership position in Southern
Recycling, L.L.C. ("Southern Recycling"), the largest scrap metals recycler in
the Gulf Coast region, we have a leading share of this strategically important
market. We also hold leading market positions in several important product
segments, including stainless steel, copper and aluminum generated from electric
utility applications and titanium and other high-temperature nickel alloys
generated by the aerospace industry.
We have achieved a leading position in the metals recycling industry
primarily by implementing a national strategy of completing and integrating
regional acquisitions. Since April 1996, we have completed 27 acquisitions and,
in the process, added approximately $900 million in revenues, based on our
results of operations for fiscal 2000. In making acquisitions, we have focused
on major metropolitan markets where prime industrial and obsolete scrap
(automobiles, appliances and industrial equipment) is readily available and from
where we believe we can better serve our customer base. In pursuing this
strategy, we have sought to acquire regional platform companies with strong
operational management and a history of successful financial performance to
serve as platforms into which subsequent acquisitions can be integrated. We
believe that through consolidation, we will be able to enhance the competitive
position and profitability of the operations we acquire because of broader
distribution channels, improved managerial and financial resources, greater
purchasing power and increased economies of scale.
Our operations consist primarily of the collection and processing of
ferrous and non-ferrous metals for resale to metals brokers, steel producers,
and producers and processors of other metals. We collect industrial scrap and
obsolete scrap, process it into reusable forms and supply the recycled metals to
our customers, including steel mini-mills, integrated steel mills, foundries,
secondary smelters and metals brokers. We believe that we provide one of the
most comprehensive offerings of both ferrous and non-ferrous scrap metals in the
industry. Our ferrous products primarily include shredded, sheared, hot
briquetted, cold briquetted and bundled scrap and other purchased scrap, such as
turnings, cast and broken furnace iron. We also process non-ferrous metals,
including aluminum, copper, stainless steel, brass, titanium and high
temperature alloys, using similar techniques and through application of our
proprietary technologies.
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On December 28, 2000, our common stock was delisted from the The Nasdaq
SmallCap Market for failing to meet listing standards as required by Nasdaq
rules. Our common stock currently trades on the over-the-counter bulletin board
under the symbol MTLME.OB.
CHAPTER 11 BANKRUPTCY
On November 20, 2000, (the "Petition Date"), we filed voluntary petitions
for relief under Chapter 11 of the Bankruptcy Code. The filings (the "Chapter 11
Bankruptcy") were made in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). We are operating our businesses as a
debtors-in-possession under supervision of the Bankruptcy Court.
Subsequent to the commencement of the Chapter 11 Bankruptcy, we sought and
obtained several orders from the Bankruptcy Court which were intended to
stabilize our business and enable us to continue business operations as
debtors-in-possession. The most significant of these orders (i) authorized us to
borrow funds under a $200 million debtor-in-possession credit facility, (ii)
permitted us to operate our consolidated cash management system during the
Chapter 11 Bankruptcy in substantially the same manner as it was operated prior
to the commencement of the Chapter 11 Bankruptcy, (iii) authorized payment of
pre-petition wages, vacation pay and employee benefits and reimbursement of
employee business expenses, and (iv) authorized us to pay up to $40 million of
pre-petition obligations to critical vendors who provide us with scrap metals,
so that we could maintain the operation of our businesses.
During January 2001, a statutory committee of unsecured creditors (the
"Creditors' Committee") was appointed by the Office of the United States Trustee
to represent the interests of our unsecured creditors in the Chapter 11
Bankruptcy. The Creditors' Committee has the right to review and object to
certain business transactions and may participate in the formulation of our
long-term business plan and a plan or plans of reorganization. We are required
to reimburse certain fees and expenses of the Creditors' Committee, including
fees for attorneys and other professionals, to the extent allowed by the
Bankruptcy Court.
As debtors-in possession, we have the right, subject to Bankruptcy Court
approval and certain other limitations, to assume or reject executory contracts
and unexpired leases. Any damages resulting from rejection of executory
contracts and unexpired leases are treated as general unsecured claims in the
Chapter 11 Bankruptcy. We are reviewing all of our contracts and, at this time,
cannot estimate the ultimate liability that may result from rejecting executory
contracts and unexpired leases. No provisions have yet been made for these
items.
The bankruptcy filing was made as a first step in the implementation of a
prenegotiated arrangement among us, our senior lenders, and the holders of our
Senior Secured Notes and Senior Subordinated Notes to restructure our debt
(hereinafter referred to as the "Proposed Restructuring"). Pursuant to the terms
of the Proposed Restructuring, it is contemplated that the holders of our Senior
Subordinated Notes (and certain other creditors) are expected to receive 99% of
the common stock of the restructured company in exchange for the cancellation of
such debt. The remaining 1% of the restructured company would be distributed to
our existing and preferred stockholders. In addition, existing stockholders
would be issued, upon consummation of the Proposed Restructuring, warrants to
purchase up to 7.5% of the restructured company based on certain levels of
recovery by our noteholders. In connection with the Proposed Restructuring, our
senior lenders agreed to provide us with a $200 million debtor-in-possession
financing (the "DIP Agreement") providing $20 million of initial incremental
borrowing capacity. The DIP Agreement was approved by the Bankruptcy Court on
November 21, 2000. The terms of the DIP Agreement are discussed elsewhere in
this report.
After a plan of reorganization has been filed with the Bankruptcy Court,
the plan, along with a disclosure statement approved by the Bankruptcy Court, is
sent to impaired creditors and equity security holders who are entitled to vote.
Following the solicitation period, the Bankruptcy Court will consider whether to
confirm the plan. On May 4, 2001, Metal Management's disclosure statement was
approved by the Bankruptcy Court and will be mailed to creditors during the week
of May 14, 2001. If approved, the confirmation hearing on the plan of
reorganization will take place during the month of June 2001.
Since the Petition Date, we have continued to conduct business in the
ordinary course as debtors-in-possession under the protection of the Bankruptcy
Court. Our management is in the process of stabilizing our business and
evaluating our operations before seeking approval by the Bankruptcy Court of the
adequacy of the
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disclosures made in our Proposed Plan of Reorganization for circulation to our
creditors. Until a reorganization plan is confirmed by the Bankruptcy Court,
payments of prepetition liabilities are limited to those approved by the
Bankruptcy Court.
In the Chapter 11 Bankruptcy, we may, with Bankruptcy Court approval, sell
assets and settle liabilities, including for amounts other than those reflected
in the financial statements. The administrative and reorganization expense
resulting from the Chapter 11 Bankruptcy will unfavorably affect our results.
Moreover, future results may be adversely affected by other claims and factors
resulting from the Chapter 11 Bankruptcy.
RESULTS OF OPERATIONS
Our consolidated net sales consist primarily of revenues derived from the
sale and brokerage of scrap metals. We recognize revenues from processed product
sales at the time of shipment. Revenues related to brokerage sales are
recognized upon receipt of the material by the customer. Sales adjustments
related to price and weight differences and allowances for uncollectible
receivables are recorded against revenues.
Cost of sales consists primarily of the cost of metals sold, direct and
indirect labor and related taxes and benefits, repairs and maintenance,
utilities and freight.
General and administrative expenses include management salaries, clerical
and administrative costs, professional services, facility rentals and related
insurance and utility costs, as well as costs related to our marketing and
business development activities.
Other income and expense consists principally of interest expense, interest
income, gains or losses on the sale of fixed assets, and income and losses from
joint ventures which represent an allocation of income and losses attributable
to investments made by us in joint ventures. The joint ventures are accounted
for under the equity method of accounting.
Reorganization expenses consists of expenses incurred as a result of the
Chapter 11 Bankruptcy including professional fees, fees paid to the United
States Trustee's office, and the write-off of deferred financing costs.
Our results of operations for the nine months ended December 31, 2000 were
negatively impacted by the adverse market conditions prevalent in the steel and
scrap metals sectors during the year. These market conditions were characterized
by weak demand for scrap metals combined with an abundant supply causing prices
for scrap metals to decline precipitously. This decline resulted in part from
the increase in scrap imports flowing into the United States. During this period
of adverse market conditions, our sales were significantly lower than expected.
Accordingly, we were unable to implement our strategy of maximizing inventory
turns, resulting in significant losses associated with holding commodity
inventories during declining markets. Weak markets conditions in the steel
sector has also led to bankruptcy filings by certain of our customers including,
but not limited to, LTV Steel and Northwestern Steel and Wire Company.
Bankruptcies of steel customers resulted in credit losses of $4.3 million during
the three months ended December 31, 2000.
Consolidated net sales for the three months ended December 31, 2000 and
1999 in broad product categories were as follows (in thousands):
12/31/00 12/31/99
----------------------------------- -----------------------------------
COMMODITY WEIGHT NET SALES % WEIGHT NET SALES %
--------- ------ --------- ----- ------ --------- ----
Ferrous metals (tons) 923 $ 85,589 55.3 1,143 $ 130,717 55.9
Non-ferrous metals (lbs) 110,154 57,213 37.0 133,175 70,538 30.2
Brokerage - ferrous (tons) 46 4,510 2.9 199 21,147 9.0
Brokerage - non ferrous (lbs) 7,400 3,482 2.2 15,503 6,036 2.6
Other 3,986 2.6 5,296 2.3
----------- ---- --------- ----
$ 154,780 100% $ 233,734 100%
=========== ==== ========== ====
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Consolidated net sales for the nine months ended December 31, 2000 and 1999
in broad product categories were as follows (in thousands):
12/31/00 12/31/99
----------------------------------- -----------------------------------
COMMODITY WEIGHT NET SALES % WEIGHT NET SALES %
--------- ------ --------- ----- ------ --------- ----
Ferrous metals (tons) 3,197 $ 335,396 54.9 3,194 $ 343,802 53.4
Non-ferrous metals (lbs) 406,956 218,944 35.9 405,535 196,106 30.5
Brokerage - ferrous (tons) 260 27,899 4.6 767 74,461 11.6
Brokerage - non ferrous (lbs) 31,914 14,700 2.4 48,580 14,381 2.2
Other 13,524 2.2 15,132 2.3
----------- ---- ---------- ----
$ 610,463 100% $ 643,882 100%
=========== ==== ========== ====
Consolidated net sales decreased by $78.9 million (33.8%) to $154.8 million
during the three months ended December 31, 2000 from consolidated net sales of
$233.7 million during the three months ended December 31, 1999. The decrease in
consolidated net sales was primarily due to lower volumes and lower average
realized sales prices. During the nine months ended December 31, 2000,
consolidated net sales decreased by $33.4 million (5.2%) to $610.5 million from
consolidated net sales of $643.9 million during the nine months ended December
31, 1999. The decrease was principally due to lower volume of brokered ferrous
metals, offset by higher non-ferrous sales.
Ferrous sales decreased by $45.1 million (34.5%) and $8.4 million (2.4%)
during the three and nine months ended December 31, 2000, respectively, compared
to ferrous sales in the three and nine months ended December 31, 1999. During
the current fiscal year, our revenues were impacted by deteriorating conditions
in the scrap metals and steel industries which resulted in lower demand for
ferrous metals and lower average realized sales prices. Ferrous sales were also
reduced by $3.5 million of sales adjustments recorded as a result of bankruptcy
filings by two domestic steel companies.
Non-ferrous sales decreased by $13.3 million (18.9%) during the three
months ended December 31, 2000 compared to the three months ended December 31,
1999. The decrease is primarily due to unit sales declining by 23 million
pounds. However, non-ferrous sales for the nine months ended December 31, 2000
are $22.8 million higher than non-ferrous sales for the nine months ended
December 31, 1999. The increase was due to higher volumes and average realized
selling prices during the first two quarters of the current fiscal year. Our
average selling price for the non-ferrous product category is impacted by market
conditions and the product mix of non-ferrous metals sold. The majority of our
non-ferrous sales are derived from copper, aluminum and stainless steel.
Brokerage ferrous sales decreased by $16.6 million (78.7%) and $46.6
million (62.5%) during the three and nine months ended December 31, 2000,
respectively, compared to brokerage ferrous sales in the three and nine months
ended December 31, 1999. The decrease was primarily due to a contraction in our
brokerage business resulting from credit concerns of our brokerage customers.
Brokerage non-ferrous sales decreased by $2.6 million (42.3%) and increased
$0.3 million (2.2%) during the three and nine months ended December 31, 2000,
respectively, compared to brokerage non-ferrous sales during the three and nine
months ended December 31, 1999. Pounds of non-ferrous metals brokered decreased
during both periods, however, average realized selling prices increased due to
the brokering of higher-priced non-ferrous metals.
Gross profit was $5.7 million and $47.2 million for the three and nine
months ended December 31, 2000, respectively, compared to gross profit of $28.5
million and $78.9 million for the three and nine months ended December 31, 1999,
respectively. The decrease in consolidated gross profit reflects lower sales,
increased operating costs compared with the prior year periods and weakening
market conditions for scrap metals. The decreases in scrap metals prices also
resulted in inventory holding losses being incurred in the three and nine month
periods ended December 31, 2000, further reducing gross margins.
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General and administrative expenses were $13.4 million and $43.7 million
for the three and nine months ended December 31, 2000, respectively, compared to
general and administrative expenses of $13.5 million and $41.1 million for the
three and nine months ended December 31, 1999, respectively. The increase in
general and administrative expenses in the nine months ended December 31, 2000
is principally the result of increased labor and related benefit costs compared
with the prior year periods. We have taken actions to reduce personnel related
costs in recent months and expect to see benefit of these cost reductions in
subsequent periods.
Depreciation and amortization expense was $4.8 million and $18.5 million
for the three and nine months ended December 31, 2000, respectively, compared to
depreciation and amortization expense of $6.9 million and $20.2 million for the
three and nine months ended December 31, 1999, respectively. The decrease in
depreciation and amortization expense for both periods is a result of the
goodwill impairment charge recorded as of October 1, 2000 which results in the
elimination of goodwill amortization expense for periods after October 1, 2000.
As of October 1, 2000, we changed our method of accounting for assessing
whether an impairment exists in the recorded amount of acquired business unit
goodwill and other intangible assets from an undiscounted cash flow method to a
fair value method. As a result of applying the fair value method, we recorded a
goodwill impairment charge of $280.1 million during the three months ended
December 31, 2000 (see Note 3 to the condensed consolidated financial
statements).
Non-cash and non-recurring expense (income) were $(0.2) million and $2.6
million for the three and nine months ended December 31, 2000, respectively.
Non-cash and non-recurring income of $(0.2) million relates to the
reclassification of bankruptcy costs to reorganization costs. During the nine
months ended December 31, 2000, an impairment charge of $2.6 million was
established with respect to a note receivable for which we determined on the
basis of circumstances learned during the three months ended June 30, 2000, that
it became probable that payments of principal and interest would not be
received. The promissory note was issued in conjunction with the sale of our
former subsidiary, Superior Forge, Inc. During the nine months ended December
31, 1999, $5.0 million of non-cash and non-recurring expense was recorded to
reflect termination and separation agreements with two of our former officers
(see Note 5 to the condensed consolidated financial statements).
Loss from joint ventures was $0.9 million and $1.6 million for the three
and nine months ended December 31, 2000, respectively, compared to a income from
joint ventures of $0.1 million and $0.1 million for the three and nine months
ended December 31, 1999, respectively. The losses reflects our 28.5% share of
losses incurred by Southern Recycling as a result of weakening market conditions
for scrap metals.
Interest expense was $7.9 million and $28.9 million for the three and nine
months ended December 31, 2000, respectively, compared to interest expense of
$9.8 million and $27.8 million for the three and nine months ended December 31,
1999, respectively. The decrease in interest expense during the three months
ended December 31, 2000 was a result of lower borrowings under credit facilities
and interest expense not accrued for unsecured debt after the Petition Date. The
increase in interest expense during the nine months ended December 31, 2000 is
primarily due to an increase in the applicable base interest rates payable under
the Senior Credit Facility, offset, in part, by interest expense not accruing
for unsecured debt after the Petition Date.
Reorganization costs recognized represent fees and other expenses
associated with the Chapter 11 Bankruptcy and the write-off of deferred
financing costs (see Note 1 to the condensed consolidated financial statements).
As a result of uncertainties surrounding the Chapter 11 Bankruptcy, we have
recorded an income tax expense of $8.3 million during the six months ended
September 30, 2000 in order to provide a valuation allowance against net
deferred tax assets. We continue to fully reserve any tax benefits associated
with our operating losses.
Net loss, after preferred stock dividends, was $312.0 million ($5.20 per
share) and $347.1 million ($5.93 per share) for the three and nine months ended
December 31, 2000, respectively, compared to a net loss, after preferred stock
dividends, of $1.8 million ($0.03 per share) and $11.8 million ($0.22 per share)
during the three and nine months ended December 31, 1999, respectively. The
increase in the net loss is primarily due to the goodwill impairment charge
recorded in the current quarter.
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LIQUIDITY AND CAPITAL RESOURCES
On November 20, 2000, we filed the Chapter 11 Bankruptcy to address certain
operational and liquidity issues that we face. Our liquidity position will be
impacted primarily by the success of initiatives we are undertaking to reduce
operating expenses, whether improvements in the scrap metals industry
materialize, and the effects of the Chapter 11 Bankruptcy on our business. Our
uses of capital are expected to include working capital for operating expenses
and satisfaction of current liabilities, capital expenditures, interest payments
on outstanding borrowings, and costs associated with the Chapter 11 Bankruptcy.
Our long-term liquidity and the adequacy of our capital resources cannot be
determined until a plan of reorganization has been confirmed in connection with
the Chapter 11 Bankruptcy.
In connection with the Chapter 11 Bankruptcy, we entered into a $200
million Post-Petition Credit Agreement by and among BT Commercial Corporation,
as Agent for the lenders, and us that establishes a lending arrangement under
certain conditions while in bankruptcy. The DIP Agreement expires on the earlier
of June 30, 2001 or the date the Bankruptcy Court confirms our plan of
reorganization. Loans under the DIP Agreement are available to fund working
capital needs and general corporate purposes. Borrowings under the DIP Agreement
are limited by the amount of eligible collateral based upon a formula equal to
85% of eligible accounts receivable, 70% of eligible inventory, a fixed asset
sublimit of $40.1 million, plus a supplemental advance of $20 million. The DIP
Agreement is secured by substantially all of our assets. Proceeds from the DIP
Agreement were used to repay borrowings outstanding under the Senior Credit
Facility. At April 30, 2001, we had outstanding borrowings under the DIP
Agreement of approximately $118.0 million and $4.9 million outstanding as issued
letters of credit. Undrawn availability as of April 30, 2001 under the DIP
Agreement was $18.1 million. The DIP Agreement also places certain restrictions
on our ability to make capital expenditures. The DIP Agreement requires us to
make monthly interest payments on outstanding loan balances at the prime rate
(as specified by Deutsche Bank AG, New York Branch) plus 150 basis points on the
first day of each month. In addition, the DIP Agreement also requires us pay an
unused monthly commitment fee of .375% on the undrawn portion of the facility.
During the pendancy of the Chapter 11 Bankruptcy, cash generated from
operating activities and borrowings under the DIP Agreement are our principal
sources of working capital. The DIP Agreement contains certain measurable
covenants which need to be satisfied to allow us to continue borrowing under
that agreement. In the period ended December 31, 2000, we were unable to satisfy
certain financial covenants under the DIP Agreement requiring the generation of
minimum levels of EBITDA. We sought and received waivers from our senior lenders
with respect to these covenant violations. However, for the fiscal year quarter
ended March 31, 2001, the DIP Agreement requires that we achieve a minimum
EBITDA of $8.0 million and, in light of market conditions, we will not likely
achieve this result. As a result, our senior lenders will have to waive or
otherwise amend the DIP Agreement. Although it is not certain that waivers or
amendments will be provided by our lenders, we expect that we will receive the
necessary waivers.
At December 31, 2000, we had approximately $330.0 million of indebtedness
outstanding, including $182.9 million of indebtedness subject to compromise. As
a result of the Chapter 11 Bankruptcy, we are not currently permitted to pay our
debt obligations that are outstanding as of the Petition Date. We have over $9.3
million of interest obligations, which we are not currently permitted to pay
under bankruptcy law. In addition, future payment of principal and interest on
all of our outstanding indebtedness is subject to Bankruptcy Court approval and
may be discharged in whole or in part in bankruptcy with a court approved plan
of reorganization. There can be no assurance that any amounts owed to unsecured
creditors will be paid or that secured creditors will be paid in full. In
connection with our Proposed Restructuring, we have agreed with holders
representing in excess of two-thirds of our Senior Subordinated Notes, subject
to certain conditions, to exchange all principal and interest on the Senior
Subordinated Notes and certain other debt, for 99% of the common stock of the
restructured company. The conversion of the Senior Subordinated Notes into
common stock, if successfully implemented, will eliminate in excess of $18
million of annual interest expense, and as a consequence, significantly reduce
fixed charges.
Cash Flows from Operations
Net cash provided by operating activities of $68.0 million during the nine
months ended December 31, 2000 resulted primarily from $87.0 million of cash
generated from working capital offset by losses from operations for
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the period. During this period, collections on accounts and notes receivable
were $74.1 million and inventories and accounts payable were reduced by $30.8
million and $16.3 million, respectively.
Cash Flows from Investing Activities
During the nine months ended December 31, 2000, we used $7.8 million of
cash for investing activities. Purchases of property and equipment totaled $8.8
million, while we generated $1.1 million of cash from the sale of certain
equipment.
Cash Flows from Financing Activities
During the nine months ended December 31, 2000, our financing activities
used $59.3 million of cash. As a result of the Chapter 11 Bankruptcy, borrowings
on the DIP Agreement and cash generated from reductions in working capital were
used to repay outstanding balances under the Senior Credit Facility.
FINANCIAL CONDITION
Working Capital Availability and Requirements
Our accounts receivable balances decreased from $155.9 million at March 31,
2000 to $77.2 million at December 31, 2000 principally due to collections in
accounts receivable and lower sales.
Our accounts payable balances decreased from $76.1 million at March 31,
2000 to $59.8 million at December 31, 2000. The decrease in accounts payable
resulted principally from a reduction in the amount of scrap metal purchases. As
a result of the Chapter 11 Bankruptcy, $15.9 million of non-critical vendor
accounts payable is classified as subject to compromise and will be discharged
in accordance with our plan of re-organization.
Inventory levels can vary significantly among our operations and with
changes in market conditions. Inventories consisted of the following categories
(in thousands):
DECEMBER 31, 2000 MARCH 31, 2000
----------------- --------------
Ferrous metals $ 18,246 $ 38,344
Non-ferrous metals 20,240 28,069
Other 1,007 3,862
--------- ----------
$ 39,493 $ 70,275
========= ==========
Ferrous inventory dollars decreased primarily due to fewer units of ferrous
material on hand and lower average purchase costs per ton as of December 31,
2000 compared to March 31, 2000. Non-ferrous inventory decreased primarily due
to fewer units of non-ferrous materials on hand at December 31, 2000 compared to
March 31, 2000.
COMPANY INDEBTEDNESS
Our level of indebtedness has several important effects on our operations,
including (i) a substantial portion of our cash flows from operations must be
dedicated to the payment of interest, (ii) covenants contained in our various
indentures require us to satisfy certain financial tests, and contain other
restrictions that limit our ability to borrow additional funds, and (iii) our
ability to obtain additional financing in the future may be impaired.
10% SENIOR SUBORDINATED NOTES DUE 2008
On May 13, 1998, we issued $180.0 million of 10% Senior Subordinated Notes
due on May 15, 2008 (the "Senior Subordinated Notes") in a private placement
pursuant to exemptions under the Securities Act of 1933. Interest on the Senior
Subordinated Notes is payable semi-annually during May and November of each
year. We received net proceeds of $174.6 million in the offering of the Senior
Subordinated Notes. The Senior Subordinated
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Notes are our general unsecured obligations and are subordinated in right of
payment to all of our senior debt, including our indebtedness under the Senior
Credit Facility and the Senior Secured Notes. Our payment obligations are
jointly and severally guaranteed by all of our current and certain future
subsidiaries. On November 15, 2000, we were unable to fund the $9.0 million
interest payment and we are currently in default under the Indenture governing
the Senior Subordinated Notes.
12 3/4% SENIOR SECURED NOTES DUE 2004
On May 7, 1999, we issued $30.0 million aggregate principal amount of
Senior Secured Notes (the "Senior Secured Notes") in a private placement
pursuant to exemptions under the Securities Act of 1933. The Senior Secured
Notes were issued at 90% of their stated principal amount at maturity. The
Senior Secured Notes mature on June 15, 2004 and bear interest at the rate of 12
3/4% per annum. The scheduled interest payment on December 15, 2000 was not
paid. Interest on the Senior Secured Notes is payable semi-annually during
September and December of each year. We received net proceeds of $25.5 million
in the offering of the Senior Secured Notes. The Senior Secured Notes are our
senior obligations and will rank equally in right of payment with all of our
unsubordinated debt, including our indebtedness under the Senior Credit
Facility, and senior in right of payment to all of our subordinated debt,
including the Senior Subordinated Notes.
Our payment obligations are jointly and severally guaranteed by all of our
current and future subsidiaries. The Senior Secured Notes are also secured by a
second priority lien on substantially all of our personal property, plant (to
the extent it constitutes fixtures) and equipment that secure the Senior Credit
Facility. The liens that secure the Senior Secured Notes are subordinated to the
liens that secure the indebtedness under the Senior Credit Facility.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," was issued by the FASB in
June 1998 and is effective for fiscal years beginning after June 15, 2000. We
will adopt SFAS No. 133 on April 1, 2001. SFAS No. 133 established accounting
and reporting standards for derivative instruments and for hedging activities.
SFAS No. 133 requires that an entity recognize all derivatives as either assets
or liabilities in the balance sheet and measure those instruments at fair value.
Our management has reviewed the provisions of SFAS No. 133 and does not believe
that the adoption of this statement will have a material impact on our financial
position or results of our operations.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial risk resulting from fluctuations in interest
rates and commodity prices. We seek to minimize these risks through regular
operating and financing activities and, where appropriate, through use of
derivative financial instruments. Our use of derivative financial instruments is
limited and related solely to hedges of certain non-ferrous inventory positions.
Reference is made to the quantitative disclosures about market risk as of March
31, 2000 included under Item 7A of our most recent Annual Report on Form 10-K.
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PART II - OTHER INFORMATION
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
On November 20, 2000, the Company filed a voluntary petition with the
Bankruptcy Court to reorganize under Chapter 11 of the Bankruptcy Code. The
bankruptcy case is pending in the United States Bankruptcy Court in the District
of Delaware. As a consequence of the bankruptcy filing, the Company was in
default of the $250 million Senior Credit Facility, dated March 31, 1998 among
the Company and its senior lenders, the Indenture governing the Senior Secured
Notes Indenture and the Indenture governing the Senior Subordinated Notes
Indenture.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index
(b) Reports on Form 8-K
The following report on form 8-K was filed during the quarter ended
December 31, 2000:
Form 8-K dated November 20, 2000, relating to the Company's filing of a
voluntary petition to reorganize under Chapter 11 of the United States
Bankruptcy Code.
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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: /s/ ALBERT A. COZZI
-----------------------------
Albert A. Cozzi
Director, Chairman of the
Board, and Chief Executive
Officer
(Principal Executive Officer)
By: /s/ MICHAEL W. TRYON
-----------------------------
Michael W. Tryon
President and Chief
Operating Officer
By: /s/ ROBERT C. LARRY
-----------------------------
Robert C. Larry
Executive Vice President,
Finance and Chief Financial
Officer
(Principal Financial Officer)
By: /s/ AMIT N. PATEL
-----------------------------
Amit N. Patel
Vice President, Finance and
Controller
(Principal Accounting Officer)
Date: May 4, 2001
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METAL MANAGEMENT, INC.
EXHIBIT INDEX
NUMBER AND DESCRIPTION OF EXHIBIT
---------------------------------
3.1 Amended and Restated Certificate of Incorporation of the Company, as
filed with the Secretary of State of the State of Delaware on November
2, 1998 (incorporated by reference to Exhibit 3.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998).
3.2 Certificate of Designations, Preferences and Rights of Series C
Convertible Preferred Stock of the Company, as filed with the
Secretary of State of the State of Delaware on November 2, 1998
(incorporated by reference to Exhibit 3.2 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998).
3.3 Restated By-Laws of the Company, as amended through March 31, 1999
(incorporated by reference to Exhibit 3.3 of the Company's Annual
Report on Form 10-K for the year ended March 31, 1999).
10.1 Lock-up Agreement, dated November 15, 2000, by and among the Company
and certain holders of the Company's Senior Secured Notes and Senior
Subordinated Notes (incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000).
10.2 $200,000,000 Post-Petition Credit Agreement, dated November 20, 2000
among the Company and its subsidiaries, as Borrowers, BT Commercial
Corporation, as Agent, and the financial institution parties thereto,
as lenders (incorporated by reference to Exhibit 10.2 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2000).
10.3 Waiver and Amendment No. 1 to Post-Petition Credit Agreement, dated
February 15, 2001, among the Company and its subsidiaries, as
Borrowers, BT Commercial Corporation, as Agent, and the financial
institution parties thereto, as lenders.
18.1 Preferability Letter of PricewaterhouseCoopers LLP, Independent
Auditors, regarding change in accounting principle.
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