-------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ 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, 2002 [ ] 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 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 (312) 645-0700 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE AND TELEPHONE NUMBER) 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 SERIES A WARRANTS TO PURCHASE COMMON STOCK 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. [X] 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 May 30, 2002 as reported on the NASDAQ over-the-counter bulletin board, was approximately $23.3 million. Shares of common stock held by each officer and director and each shareholder who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes. Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] As of May 30, 2002, the Registrant had 9,369,386 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III of this Report, to the extent not set forth herein, is incorporated by reference from the Registrant's definitive proxy statement relating to the annual meeting of stockholders to be held in 2002, which definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- TABLE OF CONTENTS PAGE ---- PART I Item 1: Business.................................................... 1 Item 2: Properties.................................................. 14 Item 3: Legal Proceedings........................................... 16 Item 4: Submission of Matters to a Vote of Security Holders......... 17 PART II Item 5: Market for the Registrant's Common Stock and Related Stockholder Matters......................................... 18 Item 6: Selected Consolidated Financial Data........................ 20 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 22 Item 7A: Quantitative and Qualitative Disclosures About Market Risk........................................................ 35 Item 8: Financial Statements and Supplementary Data................. 36 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 36 PART III Item 10: Directors and Executive Officers of the Registrant.......... 37 Item 11: Executive Compensation...................................... 37 Item 12: Security Ownership of Certain Beneficial Owners and Management.................................................. 37 Item 13: Certain Relationships and Related Transactions.............. 37 PART IV Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 38 Signatures.................................................. 39 Certain statements contained in this Form 10-K under Item 1, in addition to certain statements contained elsewhere in this Form 10-K, including statements qualified by the words "believe," "intend," "anticipate," "expects" and words of similar import, are "forward-looking statements" and are thus prospective. These statements reflect the current expectations of Metal Management, Inc. (herein, "Metal Management," the "Company," "we," "us" or other similar terms) regarding (i) our future profitability and liquidity and that of our subsidiaries, (ii) the benefits to be derived from the execution of our industry consolidation strategy and (iii) other future developments in our business or the scrap metals recycling industry. All such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. These risks, uncertainties and other factors are discussed under the heading "Risk Factors" in Part I, Item 1 of this Report. PART I ITEM 1. BUSINESS GENERAL We are one of the largest full-service metals recyclers in the United States, with recycling facilities located in 14 states. We enjoy leadership positions in many major metropolitan markets, including Birmingham, Chicago, Cleveland, Denver, Hartford, Houston, Memphis, Newark, Phoenix, Salt Lake City, Toledo and Tucson. We have a 28.5% equity ownership position in Southern Recycling, L.L.C., the largest scrap metals recycler in the Gulf Coast region. Our operations consist primarily of the collection and processing of ferrous and non-ferrous metals. We collect industrial scrap and obsolete scrap, process it into reusable forms and supply the recycled metals to our customers, including electric arc furnace mills, integrated steel mills, foundries, secondary smelters and 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, 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. We have achieved a leading position in the metals recycling industry primarily by implementing a national strategy of completing and integrating regional acquisitions. In making acquisitions, we have focused on major metropolitan markets where prime industrial and obsolete scrap (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 acquired regional platform companies to serve as platforms into which subsequent acquisitions could be integrated. We believe that through the integration of our acquired businesses, we have enhanced our competitive position and profitability of the operations because of broader distribution channels, improved managerial and financial resources, greater purchasing power and increased economies of scale. Demolition projects, in which we recycle the metals that demolition contractors collect from building and road construction projects, also serve as a source of scrap metals for our recycling operations. In addition, we act as demolition contractors in certain of our large metropolitan markets in which we dismantle obsolete machinery, buildings, gasholders and other large structures containing large quantities of metal and, in the process, collect both the ferrous and non-ferrous metals from these sources. Our materials handling expertise and logistics capabilities also afford us unique opportunities to secure sources of scrap which might not be available to smaller competitors. We also operate a bus dismantling business combined with a bus replacement parts business at our Northeast operations. At certain of our locations, which are adjacent to commercial waterways, we provide stevedoring services. By providing these services, we increase the utilization of our equipment and diversify our customer base. While traditionally most of our stevedoring efforts have been focused at our Port Newark facility in the Northeast, we have begun to expand these services at our Midwest locations during our fiscal year ended March 31, 2002. 1 RECENT DEVELOPMENTS On November 20, 2000 (the "Petition Date"), we filed voluntary petitions (Case Nos. 00-4303 -- 00-4331 (SLR)) under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). From November 20, 2000 to June 29, 2001, we operated our businesses as debtors-in-possession. These bankruptcy proceedings are referred to as the "Chapter 11 proceedings" herein. We filed a plan of reorganization (the "Plan") pursuant to Chapter 11 of the Bankruptcy Code on May 4, 2001. The Bankruptcy Court confirmed the Plan which became effective on June 29, 2001 (the "Effective Date"). As a consequence, as of the Effective Date, we no longer operate under bankruptcy protection. In the Chapter 11 proceedings, virtually all suppliers of scrap metals were paid their pre-petition claims as critical vendors. Additionally, the Plan provided for the conversion of approximately $215 million of unsecured debt into common stock, which strengthened our capitalization. As used in this Report, the term "Predecessor Company" refers to the Company and its operations for periods prior to the Effective Date, while the term "Reorganized Company" refers to the Company and its operations for periods after that date. In March 2002, the United States federal government ("U.S.") determined that it would impose tariffs on imports of steel in response to surging steel imports that caused many U.S. steel mills to file bankruptcy. The tariffs apply to steel imports from many countries and the tariffs range from 8% to 30%. The tariffs are staged in over the next three years. The tariffs vary by product category based on the extent of the damage caused by import surges to different segments of the steel industry. Generally, the tariffs decline over the three-year term of the new trade laws. The tariffs are expected to provide temporary relief to U.S. steel producers and encourage both additional production of steel in the U.S. in the short run and restructuring of the steel industry from a global supply perspective in the long run. In response to the U.S. tariffs, the European Union imposed similar tariffs on imported steel products. We believe that many of our domestic customers may benefit during the term of the tariffs and produce more steel domestically. As a result, we believe that the tariffs may result in an increased demand for scrap metals in order to produce more steel in the U.S. It is uncertain however, if domestic production of steel is increased as a consequence of the tariffs, whether U.S. steel producers will seek to purchase the incremental raw material requirements from domestic processors of scrap metals or international processors of scrap metals. Additionally, domestic steel producers may choose to increase their consumption of scrap substitutes such as pig iron or other scrap substitutes to satisfy their incremental raw material requirements. INTEGRATION AND BRANDING INITIATIVES We continued to integrate our operations during our 2002 fiscal year to take advantage of operational efficiencies and cost savings. By way of example, we have consolidated many of our administrative efforts including sales and marketing, transportation, procurement of services and employee benefits. Through our integration efforts, we are also standardizing the reporting systems and business practices of our operations so that we are better able to evaluate operating performance. Although we believe that cost savings from the elimination of redundant functions has been an important benefit of consolidation, we hope to realize even greater cost benefits from the implementation of our best management practices across the country. Additionally, an important part of our integration strategies includes the development of national account and branding programs. We believe that our strategy of creating brand awareness for the Metal Management name will help create awareness among our customers of the size and geographic scope of our operations and the breadth of our product offerings. We believe this will benefit us as our customers consolidate their supplier base to realize purchasing efficiencies. 2 INDUSTRY OVERVIEW According to government sources, total revenues generated in the scrap metals recycling industry in calendar year 2000 were approximately $20 billion. In 2000, domestic scrap recyclers handled approximately 71 million tons of metals including 61 million tons of iron and steel. Although significant consolidation has occurred in the industry during the past several years, the industry remains highly fragmented. We believe the scrap metals industry is comprised of more than 3,000 independent metals recyclers. Many of these companies are family-owned and operate only in local or regional markets. We believe that no single scrap metals recycler has a significant share of the domestic market, although certain recyclers may have significant shares of their local or regional markets. Ferrous Scrap Industry. Ferrous scrap, used in most steel making processes, is the primary raw material for mini-mill steel producers that utilize electric arc furnace, or EAF technology. Ferrous scrap also sells as a commodity in international markets which are affected by varying economic conditions, changing currency valuations, and the availability of ocean-going vessels and their related costs. By way of example, in 2001, there was an increase in scrap imports from Europe and reduced export opportunities for scrap metals from the United States as a result of a strong U.S. dollar. Additionally, demand for processed ferrous scrap is highly dependent on the overall strength of the domestic steel industry, particularly production utilizing EAF technology. Weak industry conditions have caused declines in both pricing and demand for ferrous scrap since mid-1998. As a consequence of recent improving economic conditions in the U.S., slowing of imports of steel into the U.S. and firming of export markets, our ferrous metals business has recently improved. However, ferrous prices can fluctuate greatly from month to month affecting our results. Much of the growth in the scrap metals industry in recent years has occurred as a result of the proliferation of mini-mill steel producers which utilize EAF technology. EAF production has increased from 14.8 million tons (11.1% of total domestic steel production) in 1966 to 53 million tons (47.3% of total domestic steel production) in 2000. We expect this trend to continue in the next few years as new EAF facilities start production. We believe that as a large, reliable supplier of scrap metals, we are well positioned to benefit from the growth in steel market share associated with EAF production. The growth in EAF production has been fueled, in part, by the historically low prices of prepared ferrous scrap and faster conversion time to process, which gives EAF producers a product cost advantage over integrated steel producers. Integrated steel producers operate blast furnaces, the primary raw material feedstock of which are coke and iron ore. If the price of ferrous scrap metals were to significantly increase, EAF operators may evaluate alternatives to prepared steel scrap, such as pre-reduced iron pellets or pig iron, to supply their EAF operations. We do not believe that these alternatives to ferrous scrap will replace ferrous scrap in EAF operations, but may be used as a supplemental feedstock thereby allowing EAF operators to utilize lower grades of prepared scrap. Additional new EAF mini-mill facilities are being built leading us to expect increasing demand for ferrous scrap over the next several years. Due to its low price-to-weight ratio, raw ferrous scrap is generally purchased locally from industrial companies, demolition firms, junk yards, railroads, the military, scrap dealers and various other sources, typically in the form of automobile hulks, appliances and plate and structural steel. Ferrous scrap prices are local and regional in nature, however, where there are overlapping regional markets, the prices do not tend to differ significantly between the regions due to the ability of companies to ship scrap from one region to the other. The most significant limitation on the size of the geographic market for ferrous scrap is the transportation cost. Therefore, large volume scrap processing facilities are typically located on or near key modes of transportation, such as railways and waterways. Non-Ferrous Scrap Industry. Non-ferrous metals include aluminum, copper, brass, stainless steel, titanium, high-temperature alloys and other exotic metals. The geographic markets for non-ferrous scrap tend to be larger than those for ferrous scrap due to the higher selling prices of non-ferrous metals, which justify the cost of shipping over greater distances. Non-ferrous scrap is typically sold on a spot basis, either directly or through brokers, to intermediate or end-users, which include smelters, foundries and aluminum sheet and ingot manufacturers. Prices for non-ferrous scrap are driven by demand for finished non-ferrous metal goods and by the general level of economic activity, with prices generally linked to the price of the primary metal on 3 the London Metals Exchange or COMEX. Suppliers and consumers of non-ferrous metals can also use these exchanges to hedge against future price fluctuations by buying or selling futures contracts. While ferrous markets have strengthened during Fiscal 2002, the non-ferrous markets have not demonstrated signs of recovery during such period. The conditions of non-ferrous markets are generally weak. In particular, we have experienced significant weakness in the stainless steel product line of our non-ferrous business. Secondary smelters, utilizing processed non-ferrous scrap as raw material, can produce non-ferrous metals at a lower cost than primary smelters producing such metals from ore. This is due to the significant savings in energy consumption, environmental compliance, and labor costs enjoyed by the secondary smelters. These cost advantages, and the long lead-time necessary to construct new non-ferrous primary smelting facilities, have generally resulted in sustained demand and strong prices for processed non-ferrous scrap during periods of high demand for finished non-ferrous metal products. Non-ferrous scrap is typically generated and supplied to us by: (i) manufacturers and other sources that process or sell non-ferrous metals; (ii) telecommunications, aerospace, defense and recycling companies that generate obsolete scrap consisting primarily of copper wire, used beverage cans and other non-ferrous metal alloys; and (iii) ferrous scrap operations that recover aluminum, zinc, die-cast metal, stainless steel and copper as by-products from processing of ferrous scrap. The most widely recycled non-ferrous metals are aluminum, copper and stainless steel. RECYCLING OPERATIONS Our recycling operations encompass buying, processing and selling scrap metals. The principal forms in which scrap metals are generated include industrial scrap and obsolete scrap. Industrial scrap results as a by-product generated from residual materials from metals 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. We purchase ferrous scrap from two primary sources: (i) manufacturers who generate steel and iron, known as prompt or industrial scrap; and (ii) junkyards, demolition firms, railroads, the military and others who generate steel and iron scrap, known as obsolete scrap. In addition to these sources, we purchase, at auction, furnace iron from integrated steel mills and obsolete steel and iron from government and large industrial accounts. We also purchase materials from scrap dealers, peddlers and auto wreckers who collect and deliver obsolete scrap directly to our processing facilities. Market demand and the composition, quality, size, and weight of the materials are the primary factors that determine prices. Ferrous Scrap Processing. We prepare ferrous scrap metal for resale through a variety of methods including sorting, shredding, shearing or cutting, baling, briquetting or breaking. We produce a number of differently sized and shaped products depending upon customer specifications and market demand. Sorting. After purchasing ferrous scrap metal, we inspect the material to determine how it should be processed to maximize profitability. In some instances, scrap may be sorted and sold without further processing. We separate scrap for further processing according to its size and composition by using 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 our shredding operation. These items are fed into a shredder that quickly breaks the scrap into fist-size pieces of ferrous metal. The shredding process uses magnets and other technologies to separate ferrous, non-ferrous and non-metallic materials. The ferrous material is sold to our customers, including mini-mills. We recover non-ferrous metals as a part of the shredding process that we refer to as residue. Residue is sold through monthly auctions to customers that sort and recover intrinsic metals from the residue. The non-metallic by-product of the shredding operations, referred to as "shredder fluff," is disposed of in third-party landfills. 4 Shearing or Cutting. Pieces of oversized ferrous scrap, such as obsolete steel girders and used drill pipes, which are too large for other processing, are cut with hand torches, crane-mounted alligator shears or stationary guillotine shears. After being reduced to specific lengths or sizes, the scrap is then sold to those customers who can accommodate larger materials, such as mini-mills. Baling. We process 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. We use cranes, front-end loaders and conveyors to feed the metal into hydraulic presses, which compress the materials into uniform blocks at high pressure. Briquetting. We process borings and turnings made of steel and iron into briquettes using cold briquetting methods, and subsequently sell these briquettes to steel mills or foundries. We possess the technology to control the metallurgical content of briquettes to meet customer specifications. Breaking of Furnace Iron. We process furnace iron which includes blast furnace iron, steel pit scrap, steel skulls and beach iron. Large pieces of iron are broken down by the impact of forged steel balls dropped from cranes. The fragments are then sorted and screened according to size and iron content. Ferrous Scrap Sales. We sell processed ferrous scrap to end-users such as steel mini-mills, integrated steel makers and foundries, and brokers who aggregate materials for other large users. Most of our customers purchase processed ferrous scrap according to a negotiated spot sales contract which establishes the quantity purchased for the month. The price we charge for ferrous scrap depends upon market demand, as well as quality and grade of the scrap. In many cases, our selling price also includes the cost of transportation to the end-user. We believe our profitability may be enhanced by our offering a broad product line to our customers. Our ferrous scrap sales are accomplished through a monthly sales program managed nationally. We believe that our coordinated ferrous marketing initiatives will allow us to be a uniquely capable supplier of scrap as we are able to fill larger quantity orders due to our ability to secure large amounts of raw materials. Non-Ferrous Operations Non-Ferrous Scrap Purchasing. We purchase non-ferrous scrap from three primary sources: (i) manufacturers and other non-ferrous scrap sources who generate or sell waste aluminum, copper, stainless steel, brass, high-temperature alloys and other metals; (ii) producers of electricity, telecommunication service providers, aerospace, defense, and recycling companies that generate obsolete scrap consisting primarily of copper wire, titanium and high-temperature alloys and used aluminum beverage cans; and (iii) peddlers who deliver directly to our facilities material which they collect from a variety of sources. We also collect non-ferrous scrap from sources other than those that are delivered directly to our processing facilities by placing retrieval boxes near these sources. The boxes are subsequently transported to our processing facilities. A number of factors can influence the continued availability of non-ferrous scrap such as the level of manufacturing activity and the quality of our supplier relationships. Consistent with industry practice, we have certain long-standing supply relationships (which generally are not the subject of written agreements) that we believe will improve as a result of implementing our consolidation strategy. Non-Ferrous Scrap Processing. We prepare non-ferrous scrap metals, principally stainless steel, copper and aluminum, for resale by sorting, shearing, cutting, chopping or baling. Sorting. Our sorting operations separate non-ferrous scrap by using conveyor systems and front-end loaders. In addition, many non-ferrous metals are sorted and identified by using grinders, hand torches, eddy current separation systems and spectrometers. Our ability to identify metallurgical composition is critical to maintaining high margins and profitability. Due to the high value of many non-ferrous metals, we can afford to utilize more labor-intensive sorting techniques than are employed in our ferrous operations. We sort non-ferrous scrap for further processing according to type, grade, size and chemical composition. Throughout the sorting process, we determine whether the material requires further processing before being sold. 5 Copper. Copper scrap may be processed in several ways. We process copper scrap predominantly 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, we process copper scrap by baling and other repacking methods to meet customer specifications. Aluminum and Stainless Steel. We process aluminum and stainless steel based on the size of the pieces and customer specifications. Large pieces of aluminum or stainless steel are cut using crane-mounted alligator shears and stationary guillotine shears and are baled along with small aluminum or stainless steel stampings to produce large bales of aluminum or stainless steel. Smaller pieces of aluminum and stainless steel are repackaged to meet customer specifications. Other Non-Ferrous Materials. We process other non-ferrous metals using similar cutting, baling and repacking techniques as used to process aluminum. Other significant non-ferrous metals we process include titanium, brass and high-temperature alloys. Non-Ferrous Scrap Sales. We sell processed non-ferrous scrap to end-users such as specialty steelmakers, foundries, aluminum sheet and ingot manufacturers, copper refineries and smelters, and brass and bronze ingot manufacturers. 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 Metals Exchange. SEASONALITY AND OTHER CONDITIONS Our operations can be adversely affected by protracted periods of inclement weather or reduced levels of industrial production, which could reduce the volume of material processed at our facilities. In addition, periodic maintenance shutdowns or labor disruptions at our larger customers may have an adverse impact on our operations. Our business generally experiences seasonal slowness in the months of July and December as customers tend to reduce production and inventories. EMPLOYEES As of March 31, 2002, we employed 1,491 persons, 778 of whom were covered by collective bargaining agreements. Our management believes that we have good relations with our employees. RESEARCH AND DEVELOPMENT Our expenditures on research and development have not been material for the nine months ended March 31, 2002, the three months ended June 30, 2001 and for the years ended March 31, 2001 and 2000, and we are not currently involved in any significant research and development projects. CAPITAL EXPENDITURES The scrap metals recycling business is capital intensive. For the nine months ended March 31, 2002 and the three months ended June 30, 2001, we invested approximately $3.3 million and $1.4 million, respectively, for replacement of equipment and expansion of our operations. We currently expect to invest approximately $10 million in capital investment during Fiscal 2003. SIGNIFICANT CUSTOMERS For the nine months ended March 31, 2002, our 10 largest customers represented approximately 39% of consolidated net sales. These customers comprised approximately 36% of accounts receivable at March 31, 2002. Sales to The David J. Joseph Company, our largest customer and an agent for Nucor Corporation, represented approximately 14% of our consolidated net sales for the nine months ended March 31, 2002. The loss of any one of our significant customers could have a material adverse effect on our results of operations and financial condition. We historically have not experienced material losses from the noncollection of accounts receivables. However, since April 2000, weak market conditions in the steel sector led to bankruptcy filings by certain of 6 our customers including, but not limited to, LTV Steel Company, Inc. and Northwestern Steel and Wire Company. Since April 2000, bankruptcy filings by our customers resulted in uncollected receivables of approximately $8 million. COMPETITION The markets for scrap metals are highly competitive, both in the purchase of raw scrap and the sale of processed scrap. With regard to the purchase of raw scrap, we compete with numerous independent recyclers, as well as smaller scrap companies engaged only in collecting industrial scrap. Successful procurement of materials is determined primarily by the price offered by the purchaser for the raw scrap and the proximity of the processing facility to the source of the raw scrap. With regard to the sale of processed scrap, we compete with other regional and local scrap metals recyclers. Competition for sales of processed scrap is based primarily on the price and quality of the scrap metals, as well as the level of service provided in terms of reliability and timing of delivery. We believe that our ability to process substantial volumes, deliver a broad product line to consumers, collect and sell scrap at both a regional and national level and provide other value-added services to our customers gives us a competitive advantage. We face potential competition for sales of processed scrap from producers of steel products, such as integrated steel mills and mini-mills, which may vertically integrate their current operations by entering the scrap metals recycling business. Many of these producers have substantially greater financial, marketing and other resources than we do. Scrap metals processors also face competition from substitutes for prepared ferrous scrap, such as pre-reduced iron pellets, hot briquetted iron, pig iron, iron carbide and other forms of processed iron. The availability of substitutes for ferrous scrap could result in a decreased demand for processed ferrous scrap, which could result in lower prices for such products. BACKLOG The processing time for scrap metals is generally sufficiently short so as to permit us to fill orders for most of our products in a period of time which is generally less than thirty days. Accordingly, we do not consider backlog to be material to our business. PATENTS AND TRADEMARKS Although we and our subsidiaries own certain patents and trademarks, we do not believe that our business is dependent on these intellectual property rights and the loss of any patent or trademark or the use thereof would not be material to our business. 7 RISK FACTORS Set forth below are risks that we believe are material to our business operations. Additional risks and uncertainties not known to us or that we currently deem immaterial may also impair our business operations. The bankruptcy may have created a negative image of us. The effect, if any, which our bankruptcy proceedings may have on our future operations cannot be accurately predicted or quantified. We believe that our bankruptcy and consummation of our Plan has not had a material impact on our relationships with our customers, employees and suppliers. Nevertheless, there could be a detrimental impact on future sales and patronage because of the negative image of us that may have been created by our bankruptcy. Financial information related to our post-emergence operations is limited. Because we emerged from bankruptcy on June 29, 2001, there is limited operating and financial data available from which to analyze our operating results and cash flows. As a result of fresh-start reporting, a comparison of information reflecting our results of operations and financial condition after our emergence from bankruptcy to prior periods may not be meaningful. We are highly leveraged. As of March 31, 2002, we had $134 million of debt outstanding. Subject to certain restrictions, exceptions and financial tests set forth in certain of our debt instruments, we may incur additional indebtedness in the future. The degree to which we are leveraged could have important negative consequences to the holders of our securities, including the following: - a substantial portion of our cash flow from operations will be needed to pay debt service and will not be available to fund future operations; - our ability to obtain additional future financing for acquisitions, capital expenditures, working capital or general corporate purposes could be limited; - we will have increased vulnerability to adverse general economic and metals recycling industry conditions; and - we may be vulnerable to higher interest rates because interest expense on borrowings under our $150 million, two-year credit agreement (the "Credit Agreement") are based on interest rates equal to a base rate that is variable. Our business may not generate sufficient cash flow from operations and future working capital borrowings may not be available in an amount sufficient to enable us to service our indebtedness, or make necessary capital expenditures. Our Credit Agreement becomes due on June 29, 2003 and we may be unable to find replacement financing. Our Credit Agreement expires on June 29, 2003. Although we expect to be able to renew the Credit Agreement prior to June 2003, there is no assurance that this will be the case. If we cannot renew our Credit Agreement on favorable terms, we may be required to seek alternative financing for our working capital needs. The terms on which we may be able to obtain replacement financing may not be as favorable as under the Credit Agreement and may cause dilution to holders of our Common Stock. 8 Our indebtedness contains covenants that restrict our ability to engage in certain transactions. Our Credit Agreement and the indenture governing our 12 3/4%, $34.0 million secured notes, due June 2004 (the "New Notes") contain covenants that, among other things, restrict our ability to: - incur additional indebtedness; - pay dividends; - prepay subordinated indebtedness; - dispose of some types of assets; - make capital expenditures; - create liens and make acquisitions; and - engage in some fundamental corporate transactions. In addition, under our Credit Agreement, we are required to satisfy specified financial covenants, including an interest coverage ratio and a leverage ratio. Our ability to comply with these covenants may be affected by general economic conditions, industry conditions, and other events beyond our control. Our breach of any of these covenants could result in a default under our Credit Agreement. In the event of a default, the lenders could elect to declare all amounts borrowed under our Credit Agreement, together with accrued interest, to be due and payable. In addition, a default under the indenture governing our New Notes would constitute a default under our Credit Agreement and possibly other instruments governing our other indebtedness. The indenture governing our New Notes contains restrictions on our ability to incur additional indebtedness, subject to certain exceptions, unless we meet a fixed charge coverage ratio of 2.0 to 1.0 for the immediately preceding four calendar quarters. Our ability to incur additional indebtedness to maintain necessary levels of liquidity may be limited. The metals recycling industry is highly cyclical. The operating results of the scrap metals recycling industry in general, and our operations specifically, are highly cyclical in nature. They tend to reflect and be amplified by general economic conditions, both domestically and internationally. Historically, in periods of national recession or periods of slowing economic growth, the operations of scrap metals recycling companies have been materially and adversely affected. For example, during recessions or periods of slowing economic growth, the automobile and the construction industries typically experience major cutbacks in production, resulting in decreased demand for steel, copper and aluminum. This leads to significant fluctuations in demand and pricing for our products. Future economic downturns in the national and international economy would likely materially and adversely affect our results of operations and financial condition. Our ability to withstand significant economic downturns in the future will depend in part on our level of capital and liquidity. Our business may also be adversely affected by increases in steel imports into the United States which will generally have an adverse impact on domestic steel production and a corresponding adverse impact on the demand for scrap metals. For example, beginning in July 1998, the domestic steel industry and, in turn, the metals recycling industry suffered a dramatic and precipitous collapse, resulting in a significant decline in the price and demand for scrap metals. The decline in the steel and scrap metal sectors was the result, in large part, of the increase in steel imports flowing into the United States during the last six months of 1998. Our results of operations were adversely impacted by reduced steel production in the United States during Fiscal 1999. During Fiscal 2001, our business was adversely affected by slowing economies and a strong U.S. dollar. The slowing domestic economy caused operating rates at U.S. steel producers to decline. Consequently, our unit sales declined and precluded us from generating sufficient margins to cover our fixed charges, causing substantial losses. The strong dollar not only precluded us from exporting inventories, but served as a 9 mechanism that attracted scrap to the United States from other countries which further depressed prices for our products. During Fiscal 2002, our business was negatively affected by a recession in the U.S. and a slowdown in industrial production. Our ferrous business began to demonstrate recovery late in the fiscal year. Our non-ferrous business, including stainless steel, wire chopping and high-temperature alloy businesses, did not experience a recovery in Fiscal 2002. Prices of commodities we own may be volatile. Although we seek to turn over our inventory of raw or processed scrap metals as rapidly as possible, we are exposed to commodity price risk during the period that we have title to products that are held in inventory for processing and/or resale. Prices of commodities, including scrap metals, can be volatile due to numerous factors beyond our control, including: - general economic conditions; - labor costs; - competition; - financial condition of our major customers; - the availability of imports; - the availability and relative pricing of scrap metal substitutes; - import duties; and - tariffs and currency exchange rates. In an increasing price environment, competitive conditions may limit our ability to pass on price increases to our customers. In a decreasing price environment, we may not have the ability to fully recoup the cost of raw scrap we process and sell to our customers. Our operations present significant risk of injury or death. Because of the heavy industrial activities conducted at our facilities, there exists a risk of injury or death to our employees or other visitors of our operations, notwithstanding the safety precautions we take. During Fiscal 2000 through Fiscal 2002, two accidental employee deaths and a number of serious accidental injuries, have occurred at our facilities. Our operations are subject to regulation by federal, state and local agencies responsible for employee health and safety, including the Occupational Safety and Health Administration ("OSHA"). We, or our Predecessor Company, have been fined in regard to some of these incidents. While we have in place policies to minimize such risks, we may nevertheless be unable to avoid material liabilities for any employee death or injury that may occur in the future and these types of incidents may have a material adverse effect on our results of operations and financial condition. We may not be able to negotiate future labor contracts on favorable terms. Approximately half of our active employees are represented by various labor unions, including the Teamsters Union, the United Steel Workers Union and the United Auto Workers. As our agreements with those unions expire, we may not be able to negotiate extensions or replacements on terms favorable to us, or at all, or avoid strikes, lockouts or other labor actions from time to time. We cannot assure you that new labor agreements will be reached with our unions as those labor contracts expire. Any labor action resulting from the failure to reach an agreement with one of our unions may have a material adverse effect on our operations. 10 The loss of any member of our senior management team or a significant number of our managers could have a material adverse effect on our operations. Our operations depend heavily on the skills and efforts of our senior management team, including Albert A. Cozzi, our Chairman and Chief Executive Officer, and Michael W. Tryon, our President and Chief Operating Officer. In addition, we rely substantially on the experience of the management of our subsidiaries with regard to day-to-day operations. While we have employment agreements with Messrs. Cozzi and Tryon and certain members of our management team at the subsidiary level, we may nevertheless be unable to retain the services of any of those individuals. The loss of any member of our senior management team or a significant number of managers could have a material adverse effect on our operations. The profitability of our scrap recycling operations depends, in part, on the availability of an adequate source of supply. We acquire our scrap inventory from numerous sources. These suppliers generally are not bound by long-term contracts and have no obligation to continue selling scrap materials to us. In periods of low industry prices, suppliers may elect to hold scrap waiting for higher prices. If a substantial number of scrap suppliers cease selling scrap metals to us, we would be unable to recycle metals at desired levels and our results of operations or financial condition would be materially and adversely affected. The concentration of our customers and our exposure to credit risk could have a material adverse effect on our results of operations and financial condition. Sales to our ten largest customers represented approximately 39% of consolidated net sales in the nine months ended March 31, 2002. Accounts receivable balances from these customers represented approximately 36% of consolidated accounts receivable at March 31, 2002. Sales in the nine months ended March 31, 2002 to The David J. Joseph Company represented approximately 14% of consolidated net sales. The loss of any of our significant customers or our inability to collect accounts receivables would negatively impact our revenues and profitability. The loss of any significant customers could adversely affect our results of operations and financial condition. In connection with the sale of our products, we generally do not require collateral as security for customer receivables. Some of our subsidiaries have significant balances owing from customers that operate in cyclical industries and under leveraged conditions that may impair the collectibility of those receivables. Failure to collect a significant portion of amounts due on those receivables could have a material adverse effect on our results of operations and financial condition. During the weakening cycle for the steel business evident in Fiscal 2001, there were bankruptcies filed by many large steel producers. In particular, our results were adversely effected by bankruptcies of LTV Steel Company, Inc. and Northwestern Steel and Wire Company. Since April 2000, bankruptcy filings by our customers resulted in uncollected receivables of approximately $8 million. While we have made significant efforts to improve the monitoring of credit exposure to our customers, we may experience further losses as conditions in the metals sector generally remain weak. A significant increase in the use of scrap metals alternatives by current consumers of processed scrap metals could reduce demand for our products. During periods of high demand for scrap metals, a tightness can develop in the supply and demand balance for ferrous scrap. The relative scarcity of ferrous scrap, particularly the "cleaner" grades, and its high price during such periods have created opportunities for producers of alternatives to scrap metals, such as pig iron and direct reduced iron pellets. Although these alternatives have not been a major factor in the industry to date, we cannot assure you that the use of alternatives to scrap metals may proliferate in the future if the prices for scrap metals rise or if the levels of available unprepared ferrous scrap decrease. 11 Our operations are subject to stringent regulations, particularly under applicable environmental laws. We are subject to comprehensive local, state, federal and international statutory and regulatory requirements relating to, among others: - the acceptance, storage, treatment, handling and disposal of solid and hazardous waste; - the discharge of materials into air; - the management and treatment of wastewater and storm water; - the remediation of soil and groundwater contamination; - the restoration of natural resource damages; and - the protection of our employees' health and safety. We believe that we and our subsidiaries are currently in material compliance with applicable statutes and regulations governing the protection of human health and the environment, including employee health and safety. We can give you no assurance, however, that we and our subsidiaries will continue to be in compliance, avoid material fines, penalties and expenses associated with compliance issues in the future. The nature of our business and previous operations by others at facilities owned or operated by us expose us to risks of claims under environmental laws and regulations, especially for the remediation of soil or groundwater contamination. We can give you no assurance, however, that we can avoid making material expenditures for remedial activities with regard to sites owned or operated by us or our subsidiaries. Environmental statutes and regulations have changed rapidly in recent years, and it is likely that we will be subject to even more stringent environmental standards in the future. For these reasons, we cannot predict future capital expenditures for pollution control equipment with accuracy. However, we expect that environmental standards will become increasingly more stringent and that the expenditures necessary to comply with those heightened standards will correspondingly increase. We are required to obtain, and must comply with, various permits and licenses to conduct our operations. Violations of any permit or license, if not remedied, could result in our incurring substantial fines, suspension of operations or closure of a site. Further, our operations are conducted primarily outdoors and as such, depending on the nature of the ground cover, involve the risk of releases of regulated materials to the soil and, possibly, to groundwater. There can be no assurance that material expenditures will not be required to prevent or address any such conditions. For example, we are currently making improvements to reduce these kinds of risks at our North Haven, Connecticut site. The cost to make those improvements are included in the indemnification claim that we have brought against the seller of the property to us. See the discussion in Item 3., Legal Proceedings. Because the scrap metals recycling industry has the potential for discharging regulated materials into the environment, we believe that in any given year, a significant portion of our capital expenditures may be related, directly or indirectly, to pollution control or environmental remediation. Nevertheless, expenditures for environmentally-related capital improvements were not material in Fiscal 2002. However, for the reasons explained above, there can be no assurance that this will continue to be the case in the future. Some of our sites are likely to be contaminated. Pre-transaction reviews and environmental assessments of our operating sites conducted by independent environmental consulting firms have revealed that some soil, surface water and/or groundwater contamination, including various metals, arsenic, petrochemical byproducts, waste oils, polychlorinated biphenyls and volatile organic compounds, is present at certain of our operating sites. Based on our review of these reports, we believe that it is likely that contamination at varying levels exists at many of our sites, and we anticipate that some of our sites could require investigation, monitoring and remediation in the future. Moreover, the costs of such remediation could be material. We are currently undertaking investigation or remediation at two sites. At one of our Metal Management Midwest, Inc. yard operations, during the removal of underground storage tanks used to fuel our vehicles, we discovered soil contamination. We are removing the contaminated soil, and our current reserve includes an 12 amount for this clean-up. We are also in the initial stage of investigation at the North Haven, Connecticut site. This matter is discussed more fully in Item 3., Legal Proceedings. We typically make cash outlays as we incur the actual costs relating to the remediation of environmental liabilities at sites that we own or operate. In this regard, we have established an overall reserve of $0.7 million at March 31, 2002 for environmental remediation liabilities that have been identified and quantified. We may lack adequate environmental impairment insurance. In general, neither we nor our subsidiaries carry environmental impairment liability insurance. If we or one or more of our subsidiaries were to incur significant liability for environmental damage, such as a claim for soil or groundwater remediation, not covered by environmental impairment insurance, our results of operations and financial condition could be materially adversely affected. There are risks associated with certain by-products of our operations. Our scrap metals recycling operations produce significant amounts of wastes. For example, certain of our subsidiaries operate shredders for which the primary feed materials are automobile hulks and obsolete household appliances. Approximately 20% of the weight of an automobile hulk consists of material, referred to as "shredder fluff," which remains after the segregation of ferrous and saleable non-ferrous metals. State and federal environmental regulations require that we test shredder fluff before disposing of it off-site in permitted landfills. We endeavor to remove hazardous contaminants from the feed material prior to shredding to reduce the possibility that the shredder fluff could be classified as a hazardous waste thereby causing us to incur significantly higher waste handling and disposal charges. We can give no assurance, however, that such hazardous contaminants will be successfully removed or that the higher charges will be avoided. We may have potential Superfund liability. Prior to the Chapter 11 proceedings, certain of our subsidiaries had received notices from the United States Environmental Protection Agency ("USEPA") that these companies and numerous other parties are considered potentially responsible parties and may be obligated under Superfund, or similar state regulatory schemes, to pay a portion of the cost of remedial investigation, feasibility studies and, ultimately, remediation to correct alleged releases of hazardous substances at various third party sites. Superfund may impose joint and several liability for the costs of remedial investigations and actions on the entities that arranged for disposal of certain wastes, the waste transporters that selected the disposal sites, and the owners and operators of these sites. Responsible parties (or any one of them) may be required to bear all of such costs regardless of fault, legality of the original disposal, or ownership of the disposal site. Certain of our subsidiaries have been identified in the past as potential responsible parties under Federal Superfund laws and similar state laws as a result of the delivery of scrap metals and other recyclable materials to scrap metal recycling facilities that later became Superfund sites. During our bankruptcy proceedings, for example, we agreed to pay approximately $153,000 to the Jack's Creek PRP Group relative to the Jack's Creek Superfund site in Pennsylvania. In addition, the USEPA, during our bankruptcy proceedings, alleged that two of our subsidiaries were responsible under Superfund for remediation costs at the Consolidated Iron & Metal Superfund Site in New York. We are actively defending this claim and believe that valid procedural and substantive defensives exist with respect to USEPA's claims with respect to this site. Because Superfund laws impose joint and several liability on a party irrespective of the level of contribution to the contamination of a Superfund site, a determination of liability on the part of our subsidiaries with respect to the Consolidated Iron & Metal Superfund site could have a material adverse effect on our financial condition and results of operation. We have an accumulated deficit and our Predecessor Company has a history of significant losses. Our Predecessor Company incurred pre-tax losses of approximately $460 million from April 1, 1997 through March 31, 2001. At June 29, 2001, prior to the application of fresh-start reporting, the Predecessor Company had an accumulated deficit of $477.7 million. Although this accumulated deficit was eliminated effective June 30, 2001, we had an accumulated deficit of $6.1 million as of March 31, 2002 and we cannot assure you that we will not incur additional losses in the future. 13 Our security holders may experience dilution from the issuance of Common Stock underlying employment contracts. Three of our employees have employment contracts that require us to issue Common Stock if their employment is not terminated prior to July 7, 2003 (the "Employment Condition"). The employment contracts require the issuance of an aggregate of $1,000,000 of Common Stock if the Employment Condition is satisfied. The number of shares that will be issued will be determined by prevailing prices for our Common Stock for the ten days preceding July 7, 2003. Holders of our common stock may face a lack of liquidity and an absence of an active market for our Common Stock. Our Common Stock has only been trading on the Nasdaq over-the-counter bulletin board since November 19, 2001. As a result, there is currently a very limited trading market for our Common Stock. We cannot assure you that any active trading market will develop or will be sustained for our Common Stock. Even if an active or national market for our Common Stock develops, it may be subject to disruptions that will make it difficult or impossible for the holders of our Common Stock to sell shares at a time or a price they would like, and they may be unable to sell them at all. Additionally, in recent years, the stock market has experienced a high level of price and volume volatility and market prices for the stock of many companies (particularly of companies the common stock of which trades in the over-the-counter market) have experienced wide price fluctuations that have not necessarily been related to the operating performance or prospects of such companies. ITEM 2. PROPERTIES Our facilities generally are comprised of: - processing areas; - warehouses for the storage of repair parts and certain types of raw and processed scrap; - covered and open storage areas for raw and processed scrap; - machine or repair shops for the maintenance and repair of vehicles and equipment; - scales for weighing scrap; - loading and unloading facilities; and - administrative offices. Most of our facilities have specialized equipment for processing various types and grades of raw scrap which may include a heavy duty automotive shredder to process both ferrous and non-ferrous scrap, crane-mounted alligator or stationary guillotine shears to process large pieces of heavy scrap, wire stripping and chopping equipment, baling equipment and torch cutting facilities. The following table sets forth information regarding our principal properties: APPROXIMATE LEASED/ LOCATION OPERATIONS SQUARE FEET OWNED -------- ---------- ----------- ------- Metal Management, Inc. 500 N. Dearborn St., Chicago, IL............... Corporate Office 21,000 Leased Metal Management Aerospace, Inc. 500 Flatbush Ave., Hartford, CT................ Office/Processing 1,481,040 Leased Metal Management Alabama, Inc. 2020 Vanderbilt Rd., Birmingham, AL............ Office/Shear/Granulator 1,150,073 Owned 2222A Vanderbilt Rd., Birmingham, AL........... Granulator 25,000 Leased 14 APPROXIMATE LEASED/ LOCATION OPERATIONS SQUARE FEET OWNED -------- ---------- ----------- ------- Metal Management Arizona, L.L.C. 3640 S. 35th Ave., Phoenix, AZ................. Office/Shear/Shredder/Baler 1,121,670 Leased 1525 W. Miracle Mile, Tucson, AZ............... Shredder/Shear 513,569 Leased Metal Management Connecticut, Inc. 234 Universal Dr., North Haven, CT............. Office/Shredder/Baler/Shear 1,089,000 Owned Metal Management Indiana, Inc. 3601 Canal St., East Chicago, IN............... Maintenance/Balers(2)/Shear 588,784 Owned Metal Management Memphis, L.L.C. 540 Weakley St., Memphis, TN................... Office/Maintenance 178,596 Owned 526 Weakley St., Memphis, TN................... Warehouse/Baler/Shear/Shredder 768,616 Owned 1270 N. Seventh St., Memphis, TN............... Warehouse/Baler 351,399 Owned Metal Management Midwest, Inc. 2305 S. Paulina St., Chicago, IL............... Maintenance/Shredder 392,040 Owned 2500 S. Paulina St., Chicago, IL............... Office/Warehouse/Shear 168,255 Owned 2425 S. Wood St., Chicago, IL.................. Office/Warehouse/Baler 103,226 Owned 2451 S. Wood St., Chicago, IL.................. Office/Maintenance 178,596 Owned 350 N. Artesian Ave., Chicago, IL.............. Office/Maintenance/Shredder 348,480 Owned 1509 W. Cortland St., Chicago, IL.............. Warehouse 162,540 Owned 1831 N. Elston Ave., Chicago, IL............... Warehouse 35,695 Owned 26th and Paulina Streets, Chicago, IL.......... Office/Maintenance/Baler/Crusher 323,848 Owned 9331 S. Ewing Ave., Chicago, IL................ Office/Maintenance/Shredder 293,087 Owned 3200 E. 96th St., Chicago, IL.................. Office/Maintenance/Eddy Current 364,969 Owned Separation System 3151 S. California Ave., Chicago, IL........... Office/Maintenance/Shredder 513,500 Leased 1000 N. Washington, Kankakee, IL............... Office/Maintenance/Warehouse 217,800 Owned 564 N. Entrance Ave., Kankakee, IL............. Office/Warehouse 206,910 Owned 1201 W. 138th St., Riverdale, IL............... Office/Warehouse/Dismantling 9,000 Leased 320 Railroad St., Joliet, IL................... Feeder Yard/Stevedoring 43,760 Leased 12701 S. Doty Ave., Chicago, IL................ Shear/Iron Breaking 784,080 Leased Metal Management Mississippi, L.L.C. 120-121 Apache Dr., Jackson, MS................ Office/Processing 74,052 Owned Metal Management Northeast, Inc. Foot of Hawkins St., Newark, NJ................ Office/Baler/Shear 382,846 Owned 252-254 Doremus Ave., Newark, NJ............... Shredder/Processing 384,000 Owned Port of Newark, Newark, NJ..................... Barge & Ship Terminal/ 839,414 Leased Stevedoring Metal Management Ohio, Inc. Rte. 281 East, Defiance, OH.................... Office/Maintenance/Briquetting 3,267,000 Owned 2535 Hill Ave., Toledo, OH..................... Office/Feeder Yard 122,000 Leased 4431 W. 130th St., Cleveland, OH............... Office/Iron Breaking 2,178,000 Leased Metal Management Pittsburgh, Inc. 2045 Lincoln Blvd, Elizabeth, PA............... Office/Processing/Warehouse 423,054 Owned 77 E. Railroad St., Monongahela, PA............ Office/Warehouse/Baler/Shear 174,240 Owned Metal Management Stainless & Alloy, Inc. 6660 S. Nashville Ave., Bedford Park, IL....... Office/Warehouse/Baler 304,223 Owned Metal Management West, Inc. 5601 York St., Denver, CO...................... Office/Shredder 392,040 Owned 3260 W. 500 South St., Salt Lake City, UT...... Office/Shredder 435,600 Owned 2690 East Las Vegas St., Colorado Springs, Feeder Yard 522,720 Owned CO........................................... 15 APPROXIMATE LEASED/ LOCATION OPERATIONS SQUARE FEET OWNED -------- ---------- ----------- ------- Proler Southwest Inc. 90 Hirsch Rd., Houston, TX..................... Office/Warehouse/Processing 378,972 Owned 15-21 Japhet, Houston, TX...................... Terminal/Shear 1,960,200 Leased The MacLeod Companies 9309 Rayo Ave., Southgate, CA.................. Office/Warehouse/Processing 304,920 Owned We believe that our facilities are suitable for their present and intended purposes and that we have adequate capacity for our current levels of operation. ITEM 3. LEGAL PROCEEDINGS From time to time, we are involved in various litigation matters involving ordinary and routine claims incidental to our business. A significant portion of these matters result from environmental compliance issues and workers compensation related claims applicable to our operations. There are presently no legal proceedings pending against us, which, in the opinion of our management, are likely to have a material adverse effect on our business, financial condition or results of operations. However, we are involved in the litigation as described below. The Connecticut Department of Environmental Protection ("DEP") has inspected the North Haven, Connecticut facility (the "facility") of Metal Management Connecticut, Inc. and alleged that certain contaminants, including oily material and certain metals, had been and continue to be released from the facility into the environment. The DEP has informed us that it intends to require an environmental investigation of the facility to determine the source of the contaminants and the remediation of the contaminant source areas to appropriate levels. To date, the DEP has not formally requested that we perform the investigation or remediation. The facility was acquired from Michael Schiavone & Sons, Inc. and related companies ("Schiavone") on July 1, 1998, pursuant to an asset purchase agreement (the "Agreement"). The DEP has also informed us that it believes that Schiavone failed to comply with Connecticut's Transfer Act, Conn.Gen.Stat. sec. 22a-134 et seq., at the time of the sale; in particular, the DEP's position is that Schiavone should have conducted a formal investigation of the facility at the time of the sale and reported the results to the DEP. At this stage, it is not possible to predict the cost of any required investigation and/or remediation at the facility. The Agreement contains provisions pursuant to which we intend to seek indemnification from Schiavone for some or all of the claims and liabilities arising from this matter and that arose before the closing date. On April 7, 2000, we gave written notification to Schiavone that we intend to seek indemnification for the potential environmental liabilities identified at the facility, including the potential DEP required investigation and remediation and the removal of certain underground storage tanks, and the disposal of several drums of nickel-cadmium powder. On May 2, 2000, Schiavone denied that it was responsible for indemnification, claiming among other arguments that the notification was premature because the liabilities were still potential in nature and therefore no "loss" had occurred, and that at least some of the environmental liabilities did not predate the closing date. Metal Management Midwest, Inc. operates seven facilities in the Chicago area (the "MMMI Facilities") which have been the subject to a series of inspections dating back to the mid-1990s by, among other agencies, the United States Environmental Protection Agency ("USEPA") pursuant to the so-called Greater Chicagoland Initiative to perform multimedia and multi-agency inspections of scrap yards in the Chicago Area (the "USEPA Initiative"). The USEPA Initiative included the MMMI Facilities and inspections have occurred since 1997. In addition, the MMMI Facilities have responded to multiple document requests. In a letter dated January 10, 2000, USEPA alleged that certain of the MMMI Facilities had violated certain provisions of the Resource Conservation and Recovery Act, the Clean Air Act, the Clean Water Act, the Oil Pollution Standards and the Toxic Substances Control Act. The ensuing dialogue with the USEPA reached an impasse, and the Department of Justice filed suit in June 2001. We have vigorously defended this 16 matter. We are also engaged in settlement discussions with the United States. However, as with any litigation matter, outcomes are uncertain until definitive settlement terms are reached or the case is litigated. Due to the initiation of our bankruptcy proceedings, any monetary judgement related to these proceedings, to the extent that the same would constitute a "claim" under the Bankruptcy Code, would be satisfied through the issuance of Common Stock from a reserve we established in the bankruptcy proceedings to address unliquidated or disputed claims. Any issues related to ongoing compliance, however, and any claims that the MMMI Facilities continue to be in violation of environmental law for periods after the commencement of our bankruptcy proceedings could result in substantial monetary penalties or injunctive relief. On November 20, 2000 (the "Petition Date"), we filed voluntary petitions (Case Nos. 00-4303 -- 00-4331 (SLR)) under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). We emerged from bankruptcy on June 29, 2001, although the bankruptcy proceedings are currently still pending for the purposes of resolving several unliquidated claims. The only significant bankruptcy claim, which has not been substantially resolved, is the claim filed by USEPA against Metal Management Midwest, Inc. referred to above. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to our shareholders during the fourth quarter of Fiscal 2002. 17 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Since November 2001, our Common Stock has traded on the Nasdaq OTC Bulletin Board under the symbol "MLMG." Although we emerged from bankruptcy on June 29, 2001, distributions of Common Stock pursuant to the Plan were not made until October 2001 and trading of our Common Stock did not occur until November 19, 2001. The common stock of the Predecessor Company was listed on Nasdaq's smallcap market until December 28, 2000. From December 28, 2000 to July 3, 2001, the common stock of the Predecessor Company traded on the OTC Bulletin Board under the symbol "MTLMQ." The following table sets forth the high and low bid information for the common stock of the Predecessor Company for the periods indicated. They reflect inter-dealer prices, without retail mark-up, mark-down or commission. HIGH LOW ---- --- THREE MONTHS ENDED JUNE 30, 2001 Quarter Ended June 30, 2001 (through July 3, 2001).......... $0.07 $0.02 FISCAL YEAR ENDED MARCH 31, 2001 Fourth Quarter.............................................. $0.13 $0.01 Third Quarter............................................... 0.34 0.01 Second Quarter.............................................. 1.47 0.19 First Quarter............................................... 2.63 1.03 FISCAL YEAR ENDED MARCH 31, 2000 Fourth Quarter.............................................. $3.94 $2.00 Third Quarter............................................... 4.25 1.28 Second Quarter.............................................. 1.84 1.09 First Quarter............................................... 2.97 1.06 The following table sets forth the high and low bid information for our Common Stock for the periods indicated following our emergence from bankruptcy. They reflect inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. NINE MONTHS ENDED MARCH 31, 2002 Quarter Ended December 31, 2001............................. $2.75 $1.25 Quarter Ended March 31, 2002................................ 2.50 1.00 As of May 30, 2002, we had approximately 1,300 registered shareholders based on our transfer agent's records. On May 30, 2002, the closing price per share of our Common Stock as reported on the Nasdaq OTC Bulletin Board was $4.00 per share. Neither we nor the Predecessor Company have paid any cash dividends since August 31, 1995. We presently have no intention of paying dividends in the foreseeable future and intend to utilize our cash for business operations. In addition, we are restricted from paying cash dividends under our debt agreements, including the Credit Agreement and the New Notes. Under the Credit Agreement, we are precluded from paying dividends without lender approval. 18 EQUITY COMPENSATION PLAN INFORMATION The following table sets forth information regarding our equity compensation plans as of March 31, 2002: NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE NUMBER OF SECURITIES ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING REMAINING AVAILABLE FOR OUTSTANDING OPTIONS, OPTIONS, WARRANTS FUTURE ISSUANCE UNDER PLAN CATEGORY WARRANTS AND RIGHTS AND RIGHTS EQUITY COMPENSATION PLANS ------------- -------------------------- ------------------------- ------------------------- Equity compensation plans approved by security holders... 1,487,500 $8.35 12,500 Equity compensation plans not approved by security holders............ 0 0.00 0 --------- ----- ------ Total................ 1,487,500 $8.35 12,500 ========= ===== ====== The equity compensation plans approved by security holders represents the Management Equity Incentive Plan which was approved by a majority of the Predecessor Company's creditors, who now represent a majority of our stockholders. 19 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data for each of the four years in the period ended March 31, 2001, the three months ended June 30, 2001 and for the nine months ended March 31, 2002 are derived from our or our Predecessor Company's audited consolidated financial statements. The information presented below should be read in conjunction with the consolidated financial statements and the related notes included in this Report and the section called "Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected consolidated financial data presented below is not necessarily indicative of the future results of our operations or financial performance. We adopted fresh-start reporting in connection with our emergence from bankruptcy. Under fresh-start reporting, a new reporting entity is deemed to be created and the recorded amounts of assets and liabilities are adjusted to reflect their estimated fair values. For accounting purposes, the fresh-start adjustments have been recorded in our consolidated financial statement as of June 30, 2001. Since fresh-start reporting materially changed the amounts previously recorded in our Predecessor Company's consolidated financial statements, a black line separates the post-emergence financial data from the pre-emergence financial data. PREDECESSOR COMPANY | REORGANIZED --------------------------------------------------------------- | COMPANY YEARS ENDED MARCH 31, | ----------------- ------------------------------------------ THREE MONTHS ENDED | NINE MONTHS ENDED 1998 1999 2000 2001 JUNE 30, 2001 | MARCH 31, 2002 -------- -------- -------- --------- ------------------ | ----------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) | | STATEMENT OF OPERATIONS DATA: | Net sales...................... $570,035 $805,274 $915,140 $ 766,591 $166,268 | $464,795 Gross profit................... 52,141 65,213 109,985 61,874 17,052 | 55,615 General and administrative | expenses..................... 28,191 56,348 55,021 56,312 11,686 | 34,237 Depreciation and | amortization(a).............. 10,105 25,634 27,167 23,341 4,718 | 13,673 Goodwill impairment | charge(b).................... -- -- -- 280,132 -- | -- Non-cash and non-recurring | expenses(c).................. 43,548 16,196 5,014 6,399 1,941 | 3,944 Operating income (loss) from | continuing operations(a)..... (29,703) (32,965) 22,783 (304,310) (1,293) | 3,761 Interest expense............... 9,995 31,332 38,043 34,159 5,169 | 9,450 Reorganization costs........... -- -- -- 15,632 10,347 | 457 Loss from continuing operations | before cumulative effect of | change in accounting | principle and extraordinary | items(a)..................... (34,407) (47,034) (12,294) (365,322) (16,754) | (6,083) Gain on sale of discontinued | operations, net of tax....... 200 117 376 -- -- | -- Cumulative effect of change in | accounting principle......... -- -- -- -- (358) | -- Extraordinary gain (charge), | net of tax(d)................ -- (938) -- -- 145,711 | -- Preferred stock dividends(e)... 7,100 1,815 2,021 295 -- | -- Net income (loss) applicable to | common stock(a).............. $(41,307) $(49,670) $(13,939) $(365,617) $128,599 | $ (6,083) Loss from continuing operations | before cumulative effect of | change in accounting | principle and extraordinary | items per share: | Basic and Diluted(a)......... $ (2.00) $ (1.22) $ (0.27) $ (6.18) $ (0.27) | $ (0.60) Cash dividends per common | share........................ $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 | $ 0.00 Shares used in computing basic | and diluted loss per share... 20,762 40,139 54,333 59,131 61,731 | 10,120 20 PREDECESSOR COMPANY | REORGANIZED COMPANY ------------------------------------------ | -------------------------------------- YEARS ENDED MARCH 31, | ------------------------------------------ | THREE MONTHS ENDED NINE MONTHS ENDED 1998 1999 2000 2001 | JUNE 30, 2001 MARCH 31, 2002 -------- -------- -------- --------- | ------------------ ----------------- | BALANCE SHEET DATA: | Working capital................ $101,639 $ 85,894 $140,433 $ 77,072 | $ 54,694 $ 52,474 Total assets................... 497,234 667,736 710,980 284,792 | 289,518 257,108 Liabilities subject to | compromise(f)................ -- -- -- 220,234 | -- -- Total debt (including current | maturities)(f)............... 151,466 335,462 384,710 152,977 | 148,435 133,960 Convertible preferred stock.... 33,008 19,997 6,277 5,915 | -- -- Common stockholders' equity | (deficit).................... 215,381 219,207 215,857 (149,172)| 65,000 59,487 --------------- (a) We adopted SFAS No. 142 on June 30, 2001. Had our Predecessor Company adopted SFAS No. 142 as of April 1, 1997, the following proforma amounts would have been reported (in thousands): PREDECESSOR COMPANY ----------------------------------------- YEARS ENDED MARCH 31, ----------------------------------------- 1998 1999 2000 2001 -------- -------- ------- --------- Depreciation and amortization............................ $ 7,662 $ 18,654 $19,673 $ 19,694 Operating income (loss) from continuing operations....... (27,260) (25,985) 30,277 (300,663) Loss from continuing operations before cumulative effect of change in accounting principle and extraordinary items.................................................. (32,250) (41,910) (6,045) (361,675) Loss applicable to common stock.......................... (39,150) (44,546) (7,690) (361,970) Loss per share basic and diluted: Loss from continuing operations before cumulative effect of change in accounting principle and extraordinary items.................................. $ (1.90) $ (1.09) $ (0.15) $ (6.12) Loss applicable to common stock........................ $ (1.89) $ (1.11) $ (0.14) $ (6.12) (b) During the third quarter of Fiscal 2001, the Predecessor Company changed its method of assessing goodwill impairment and recorded a $280.1 million charge to write-off all unamortized goodwill and intangibles. (c) Non-cash and non-recurring expenses consist of the following items (in thousands): PREDECESSOR COMPANY | REORGANIZED -------------------------------------------------------- | COMPANY YEARS ENDED MARCH 31, | ----------------- ----------------------------------- THREE MONTHS ENDED | NINE MONTHS ENDED 1998 1999 2000 2001 JUNE 30, 2001 | MARCH 31, 2002 ------- ------- ------ ------ ------------------ | ----------------- | Non-cash warrant compensation | expense..................... $30,588 $(6,776) $ 0 $ 0 $ 0 | $ 0 Impairment of long-lived and | other assets................ 11,305 17,983 (210) 5,828 1,941 | 3,944 Severance, facility closure | charges and other........... 1,655 1,776 5,224 571 0 | 0 Merger related costs.......... 0 3,213 0 0 0 | 0 ------- ------- ------ ------ ------ | ------ $43,548 $16,196 $5,014 $6,399 $1,941 | $3,944 ======= ======= ====== ====== ====== | ====== (d) The extraordinary charge incurred in Fiscal 1999 relates to prepayment penalties, fees, and other costs incurred to refinance debt, net of related income tax benefit. The extraordinary gain recognized during the three months ended June 30, 2001 relates to the discharge of indebtedness in accordance with the Plan. (e) In Fiscal 1998, the Predecessor Company incurred a $5.6 million non-cash charge as a result of a beneficial conversion feature of its preferred stock. Fiscal 2000 includes $1.2 million in special dividends paid in connection with the redemption of $5.0 million principal amount of Series A and Series B convertible preferred stock. (f) Total debt at March 31, 2001 excludes $182.9 million of debt classified within liabilities subject to compromise. 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 we expect or anticipate will or may occur in the future, including such things as future acquisitions (including the amount and nature thereof), business strategy, expansion and growth of our business and operations, general economic and market conditions and other such matters are forward-looking statements. Although we believe the expectations expressed in such forward-looking statements are based on reasonable assumptions within the bounds of our knowledge of our business, a number of factors could cause actual results to differ materially from those expressed in any forward-looking statements. See "Risk Factors" included in Part I, Item 1 of this Report for a discussion of the factors that could have a significant impact on our financial condition or results of operations. The purpose of the following discussion is to facilitate the understanding and assessment of significant changes and trends related to our results of operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Part IV, Item 14 of this Report. GENERAL We are one of the largest full-service metals recyclers in the United States, with recycling facilities located in 14 states. We enjoy leadership positions in many major metropolitan markets, including Birmingham, Chicago, Cleveland, Denver, Hartford, Houston, Memphis, Newark, Phoenix, Salt Lake City, Toledo and Tucson. We have a 28.5% equity ownership position in Southern Recycling, L.L.C., the largest scrap metals recycler in the Gulf Coast region. Our operations consist primarily of the collection and processing of ferrous and non-ferrous metals. We collect industrial scrap and obsolete scrap, process it into reusable forms and supply the recycled metals to our customers, including electric arc furnace mills, integrated steel mills, foundries, secondary smelters and metal brokers. We believe that we provide one of the most comprehensive offerings of both ferrous and non-ferrous 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. We have achieved a leading position in the metals recycling industry primarily by implementing a national strategy of completing and integrating regional acquisitions. In making acquisitions, we have focused on major metropolitan markets where prime industrial and obsolete scrap metals (automobiles, appliances and industrial equipment) are readily available and from where we believe we can better serve our customer base. In pursuing this strategy, we have acquired regional platform companies to serve as platforms into which subsequent acquisitions could be integrated. We believe that through the integration of our acquired businesses, we have enhanced our competitive position and profitability of the operations because of broader distribution channels, improved managerial and financial resources, greater purchasing power and increased economies of scale. Demolition projects, in which we recycle the metals that demolition contractors collect from building and road construction projects also serve as a source of scrap metals for our recycling operations. In addition, we act as demolition contractors in certain of our large metropolitan markets in which we dismantle obsolete machinery, buildings, gasholders and other large structures containing large quantities of metal and, in the process, collect both the ferrous and non-ferrous metals from these sources. Our materials handling expertise and logistics capabilities also afford us unique opportunities to secure sources of scrap which might not be available to smaller competitors. We also operate a bus dismantling business combined with a bus replacement parts business at our Northeast operations. At certain of our locations, which are adjacent to commercial waterways, we provide stevedoring services. By providing these services, we increase the utilization of our equipment and diversify our customer base. While traditionally most of our stevedoring efforts have been focused at our Port Newark facility in the Northeast, we have begun to expand these services at our Midwest locations during the fiscal year ended March 31, 2002. 22 CHAPTER 11 BANKRUPTCY AND PLAN OF REORGANIZATION On November 20, 2000, we filed voluntary petitions (Case Nos. 00-4303-00-4331 (SLR)) under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). During the course of the bankruptcy proceedings, which we refer to as the "Chapter 11 proceedings" herein, we operated our businesses as debtors-in-possession. 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 our Predecessor Company's inability to make a $9 million interest payment on its 10% Senior Subordinated Notes, due May 2008 (the "Subordinated Notes") on November 15, 2000. Our Predecessor Company's operating results and the resulting decrease in liquidity were primarily due to unprecedented cycles of declines in prices and demand for scrap metals exacerbated by high levels of fixed costs associated with our Predecessor Company's highly leveraged capital structure. On May 4, 2001, in furtherance of an agreement we had reached with holders of a significant percentage of our Predecessor Company's pre-petition debt prior to the initiation of the Chapter 11 proceedings, we filed a Joint and Amended Plan of Reorganization (the "Plan") pursuant to Chapter 11 of the Bankruptcy Code. The Plan was confirmed by the Bankruptcy Court and became effective on June 29, 2001 (the "Effective Date"). As used in this Report, the term "Predecessor Company" refers to the Company and its operations for periods prior to the Effective Date, while the term "Reorganized Company" refers to the Company and its operations for periods after that date. The following is a summary of certain material provisions of the Plan. The summary does not purport to be complete and is qualified in its entirety by reference to all of the provisions of the Plan, as filed with the Securities and Exchange Commission and the Bankruptcy Court. The Plan provided for, among other things, the following: - Junior Secured Note Claims -- on June 29, 2001, the holders of the Predecessor Company's $30 million par amount, 12 3/4% Junior Secured Notes, due June 2004 (the "Junior Secured Notes"), received new junior secured notes aggregating $34.0 million (the "New Notes"). The New Notes bear interest at 12 3/4% and are due on June 15, 2004. The par amount of the New Notes represents the par amount of the Junior Secured Notes plus accrued and unpaid interest through June 29, 2001. - General Trade Claims or "Class 5 Claims" -- the holders of the general trade claims of the Predecessor Company who elected not to receive common stock, par value $.01 per share ("Common Stock") of the Reorganized Company will receive cash payments totaling 30% of their allowed claim. Such payments will be made, without interest, in four equal annual installments, with the first installment payable on June 30, 2002. As of June 29, 2001, we established a payable of $1.3 million representing our liability recorded in connection with the estimated fair value of the allowed Class 5 Claims. - Impaired Unsecured Claims or "Class 6 Claims" -- the holders of the Subordinated Notes and the holders of the Predecessor Company's general trade claims who elected (or are otherwise deemed under the Plan to have elected) on their ballot to be treated as an allowed Class 6 Claim, will receive a total of 9,900,000 shares of Common Stock. As of March 31, 2002, we have issued 8,946,370 shares of Common Stock to holders of allowed Class 6 Claims. The initial distribution of Common Stock on account of Class 6 Claims was based on an estimate of Class 6 Claims. The estimate of total Class 6 Claims in the initial distribution was comprised of resolved claims and reserves for unresolved claims. We have filed objections with the Bankruptcy Court related to unresolved claims. Additional distributions of Common Stock will be made after the unresolved claims are either resolved through agreement of the parties or by a final order of the Bankruptcy Court. - Preferred Stockholder and Old Common Stockholder or "Equity Claims" -- On June 29, 2001, the holders of the Predecessor Company's convertible preferred stock and common stock received their pro-rata share of 100,000 shares of Common Stock and warrants (designated as "Series A Warrants") 23 to purchase 750,000 shares of Common Stock. The Series A Warrants are immediately exercisable at a price per share equal to the total amount of liabilities (allowed under Class 6 of the Plan) converted into Common Stock in accordance with the Plan divided by 10,000,000. We currently estimate the exercise price of the Series A Warrants to be approximately $21.50 per share. - Other Significant Provisions -- as of June 29, 2001, our Board of Directors consists of the following non-employee directors: Daniel W. Dienst, John T. DiLacqua, Kevin P. McGuinness and Harold "Skip" Rouster. Albert A. Cozzi serves as Chairman of the Board of Directors and Chief Executive Officer. - A Management Equity Incentive Plan was approved under the Plan and provides for the issuance of warrants to purchase 1,000,000 shares of Common Stock at an exercise price of $6.50 per share (designated as "Series B Warrants") and warrants to purchase 500,000 shares of Common Stock at an exercise price of $12.00 per share (designated as "Series C Warrants"). As of June 30, 2001, we adopted fresh-start reporting in accordance with Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code." Under fresh-start reporting, the reorganization fair value was allocated to our assets; the Predecessor Company's accumulated deficit, Series B and Series C convertible preferred stock, common stock, warrants and options, and Subordinated Notes were eliminated; and equity in the Reorganized Company was recorded. The reorganization value of $65 million for the equity of the Reorganized Company was based on the consideration of many factors and various valuation methods, including a discounted cash flow analysis using projected financial information, selected publicly traded company market multiples of certain companies operating businesses viewed to be similar to us, and other applicable ratios and valuation techniques that we, and our financial advisor during the Chapter 11 proceedings, believe to be representative of our business and industry. The valuation was based upon a number of estimates and assumptions, which are inherently subject to significant uncertainties and contingencies beyond our control. Accordingly, there can be no assurance that the valuation will be realized, and actual results could vary materially. Moreover, the value of our Common Stock may differ materially from the share value implied in the reorganization value. CRITICAL ACCOUNTING POLICIES The SEC has recently issued Financial Reporting Release No. 60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" ("FRR No. 60"), which suggests that companies provide additional disclosure and commentary on those accounting policies considered most critical. Our discussion and analysis of the financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates and judgments that affect the reported amounts and related disclosures of commitments and contingencies. We rely on historical experience and on various other assumptions that we believe to be reasonable under the circumstances to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates. We believe the following critical accounting policies, among others, affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. Revenue recognition Revenues for processed product sales are recognized when title passes to the customer and for services as they are performed. Revenue relating to brokered sales are recognized upon receipt of the materials by the customer. Sales adjustments related to price and weight differences and allowances for uncollectible receivables are accrued against revenues as incurred. 24 Accounts receivable and allowance for uncollectible accounts receivable Accounts receivable consist primarily of amounts due from customers from product and brokered sales. The allowance for uncollectible accounts receivable totaled $2.4 million and $1.6 million at March 31, 2002 and 2001, respectively. Our determination of the allowance for uncollectible accounts receivable includes a number of factors, including the age of the accounts, past experience with accounts, changes in collection patterns and general industry conditions. As indicated in the section titled "Risk Factors -- The loss of any significant customers could adversely affect our results of operations or financial condition," general weakness in the steel and metals sectors over the last few years has led to bankruptcy filings by many of our customers which have caused us to recognize additional allowances for uncollectible accounts receivable. While we believe our allowance for uncollectible accounts receivable is adequate, changes in economic conditions or any weakness in the steel and metals industry could adversely impact our future earnings. Inventory Our inventories primarily consist of ferrous and non-ferrous scrap metals and are valued at the lower of average purchased cost or market. Quantities of inventories are determined based on our inventory systems and are subject to periodic physical verification using estimation techniques including observation, weighing and other industry methods. As indicated in the section titled "Risk Factors -- Prices of commodities we own may be volatile," we are exposed to risks associated with fluctuations in the market price for both ferrous and non-ferrous metals, which are at times volatile. We attempt to mitigate this risk by seeking to rapidly turn our inventories. Property and equipment held for sale We continually review our scrap metals operations to evaluate the long term economic viability of certain of our investments. These reviews result in the identification of redundant property and equipment which we hold for sale. We have classified theses assets as held for sale and have recorded them as a component of current assets as we expect to sell the property and equipment within one year. These assets held for sale have been taken out of production and are recorded at their estimated fair value less costs to dispose, if any. Fair value estimates are based on independent brokers, published used equipment lists and recent experience with similar property and equipment. Valuation of long-lived assets and goodwill We periodically review the carrying value of certain long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be realizable. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset's carrying amount to determine if an impairment of such asset is necessary. The effect of any impairment would be to record an expense equal to the difference between the fair value of such asset and its carrying value. During the nine months ended March 31, 2002, we recorded an impairment charge of $3.1 million related to a scrap metal operation that we have exited and an impairment charge of $0.8 million related to fixed assets which we abandoned or otherwise intend to sell or dispose of. Effective June 30, 2001, we adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," which requires that the goodwill we recorded in connection with fresh-start reporting be reviewed at least annually for impairment based on the fair value method. At March 31, 2002, we determined based on current industry information and other market information, that no impairment existed. Self-Insured Reserves We are self-insured for health insurance plans offered to many of our employees. Our exposure to health insurance claims is protected by a stop-loss insurance policy. We record a reserve for the estimated cost of 25 incurred but not reported ("IBNR") claims. Our estimate is based on a lag estimate calculated by our insurance plan administrator and our historical claims experience. The lag accrual that we establish is based on recent actual claims paid. Contingencies We accrue reserves for estimated liabilities, which include environmental remediation and potential legal claims. A loss contingency is accrued when our assessment indicates that it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Our estimates are based upon currently available facts and presently enacted laws and regulations. These estimated liabilities are subject to revision in future periods based on actual costs or new information. The above listing is not intended to be a comprehensive list of all of our accounting policies. Please refer to our audited consolidated financial statements and notes thereto which begin on page F-1 of this Report and contain accounting policies and other disclosures required by generally accepted accounting principles. RESULTS OF OPERATIONS Fiscal 2002 compared to Fiscal 2001 In order to provide a meaningful basis of comparing Fiscal 2002 to Fiscal 2001 for purposes of the following tables and discussion, the operating results of the Reorganized Company for the nine months ended March 31, 2002, have been combined with the operating results of the Predecessor Company for three months ended June 30, 2001 (collectively referred to as "Fiscal 2002") and are compared to the year ended March 31, 2001 ("Fiscal 2001"). The combining of reorganized and predecessor periods does not result in a presentation that is in accordance with generally accepted accounting principles, but we believe such results will provide meaningful comparisons for net sales, gross profit and general and administrative expenses. 2002 2001 TWELVE MONTHS ENDED MARCH 31 (IN THOUSANDS) ---- ---- Net sales................................................... $631,063 $ 766,591 Gross profit................................................ 72,667 61,874 Operating expenses: General and administrative................................ 45,923 56,312 Depreciation and amortization............................. 18,391 23,341 Goodwill impairment charge................................ 0 280,132 Non-cash and non-recurring expense........................ 5,885 6,399 Operating income (loss) from continuing operations.......... 2,468 (304,310) Interest expense............................................ 14,619 34,159 Reorganization costs........................................ 10,804 15,632 Income taxes................................................ 0 8,291 Cumulative effect of change in accounting principle......... 358 0 Extraordinary gain.......................................... 145,711 0 Net income (loss) applicable to common stock................ $122,516 $(365,617) Our results from operations for Fiscal 2002 were impacted much of the year by the weakening economy. However, since January 2002, our ferrous operations improved as a result of improving economic conditions in the U.S., slowing of imports of steel into the U.S. and firming of export markets for scrap. Our non-ferrous operations, including stainless steel, wire chopping and the high-temperature alloy businesses, did not experience a recovery during Fiscal 2002. 26 Consolidated net sales for Fiscal 2002 and for Fiscal 2001 in broad product categories were as follows ($ in millions): FISCAL 2002 FISCAL 2001 -------------------------- -------------------------- NET NET WEIGHT SALES % WEIGHT SALES % ------ ----- - ------ ----- - COMMODITY (WEIGHT IN THOUSANDS) Ferrous metals (tons)....................... 3,938 $374.4 59.3 4,071 $422.0 55.0 Non-ferrous metals (lbs.)................... 447,636 200.3 31.7 528,150 276.4 36.1 Brokerage-ferrous (tons).................... 350 36.6 5.8 310 32.2 4.2 Brokerage-nonferrous (lbs.)................. 17,083 6.2 1.0 38,623 17.1 2.2 Other....................................... -- 13.6 2.2 -- 18.9 2.5 ------ ----- ------ ----- $631.1 100.0 $766.6 100.0 ====== ===== ====== ===== Consolidated net sales decreased by $135.5 million (17.7%) to $631.1 million in Fiscal 2002 compared to consolidated net sales of $766.6 million in Fiscal 2001. The decrease in consolidated net sales was primarily due to lower volumes of products shipped coupled with lower average selling prices. Through December 2001, scrap metals prices were impacted by the weakening economy contributing to lower industrial output that negatively impacted both supply and demand for scrap metals. However, since January 2002, ferrous scrap metals prices and volumes have increased which contributed to a profitable quarter for the three months ended March 31, 2002. Ferrous sales decreased by $47.6 million (11.3%) to $374.4 million in Fiscal 2002 compared to ferrous sales of $422.0 million in Fiscal 2001. The decrease was mainly a result of lower shipments and lower average sales prices realized during the nine months ended December 31, 2001. During the three months ended March 31, 2002, ferrous sales improved as a result of increased volume and prices. Since January 2002, we have seen improvement in domestic demand for ferrous scrap and export opportunities are also available. Non-ferrous sales decreased by $76.1 million (27.5%) to $200.3 million in Fiscal 2002 compared to non-ferrous sales of $276.4 million in Fiscal 2001. The decrease was primarily due to lower unit shipments and lower average selling prices. Since November 2001, demand from the aerospace industry has declined substantially which resulted in lower average selling prices and units sales for non-ferrous metals including titanium and high-temperature alloys. Brokerage ferrous sales increased by $4.4 million (13.7%) to $36.6 million in Fiscal 2002 compared to brokerage ferrous sales of $32.2 million in Fiscal 2001. The increase was a result of more tons brokered (13%) during Fiscal 2002. During Fiscal 2001, brokerage transactions were limited by the effects of our bankruptcy. During the three months ended March 31, 2002, our brokerage ferrous sales were $10.9 million, an increase of $4 million and $7 million from the three months ended December 31, 2001 and the three months ended March 31, 2001, respectively. The average selling price for brokered metals is significantly affected by the product mix, such as prompt industrial grades versus obsolete grades, which can vary significantly between periods. Prompt industrial grades of scrap are generally associated with higher unit prices. Brokerage non-ferrous sales decreased by $10.9 million (63.7%) to $6.2 million in Fiscal 2002 compared to brokerage non-ferrous sales of $17.1 million in Fiscal 2001. Brokerage non-ferrous volume declined by 21.5 million pounds and average realized sales prices declined by $0.08 per pound during Fiscal 2002 compared to Fiscal 2001. Margins associated with brokered non-ferrous metals are narrow so variations in this product category are not as significant to us as variations in other product categories. Gross profit was $72.7 million (11.5% of sales) in Fiscal 2002 compared to gross profit of $61.9 million (8.1% of sales) in Fiscal 2001. Gross profit as a percentage of sales in Fiscal 2002 reflects significant improvement from Fiscal 2001 as a result of better buying practices and reductions in operating expenses. General and administrative expenses were $45.9 million (7.3% of sales) in Fiscal 2002 compared to general and administrative expenses of $56.3 million (7.3% of sales) in Fiscal 2001. General and administrative 27 expenses have declined by over 18% during Fiscal 2002 from Fiscal 2001 due to reductions in headcount and other cost containment initiatives implemented during Fiscal 2002. Depreciation and amortization expense was $18.4 million (2.9% of sales) in Fiscal 2002 compared to depreciation and amortization expense of $23.3 million (3.0% of sales) in Fiscal 2001. The decrease in depreciation and amortization expense was the result of the goodwill impairment charge recorded as of October 1, 2000 which resulted in the elimination of goodwill amortization expense for periods after October 1, 2000. Prior to the goodwill impairment charge, goodwill amortization was approximately $8 million annually. Depreciation expense has remained relatively constant as we operated with the same installed base of equipment during Fiscal 2002 and Fiscal 2001. In Fiscal 2001, the Predecessor Company changed its method of accounting for assessing whether an impairment existed 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, the Predecessor Company recorded a goodwill impairment charge of $280.1 million in Fiscal 2001 (see Note 1 to the consolidated financial statements included in Part IV, Item 14 of this Report). Non-cash and non-recurring expense was $5.9 million in Fiscal 2002. We recorded an impairment charge of $3.1 million related to one of our operations which we are in the process of exiting and an impairment charge of $2.8 million related to fixed assets which are to be sold or otherwise abandoned. Non-cash and non-recurring expense was $6.4 million in Fiscal 2001, which primarily represents asset impairments (see Note 4 to the consolidated financial statements included in Part IV, Item 14 of this Report). Interest expense was $14.6 million (2.3% of sales) in Fiscal 2002 compared to interest expense of $34.2 million (4.4% of sales) in Fiscal 2001. The decrease in interest expense was a result of lower borrowings under credit facilities, lower interest rates on borrowings under credit facilities, and the elimination of interest expense related to unsecured debt after the Petition Date, including but not limited to interest on the Subordinated Notes. Interest expense related to the Subordinated Notes was $1.5 million per month prior to the Petition Date. Borrowings on credit facilities are at variable rates tied to the prime rate of interest, which has declined by 4.75% per annum since January 2001. Reorganization costs mainly represent professional fees, liabilities for rejected contracts and settlements, fresh-start adjustments and other expenses associated with the Chapter 11 proceedings (see Note 2 to the consolidated financial statements included in Part IV, Item 14 of this Report). We will continue to incur additional reorganization costs until all of the claims arising from the Chapter 11 proceedings have been adjudicated. The additional costs are not expected to be significant. As a result of our past losses and uncertainties regarding our ability to generate taxable income, we have determined that it is more likely than not that we will not realize recorded tax benefits. As a result, we have fully reserved our net deferred tax assets as of March 31, 2002. In Fiscal 2001, we 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. On April 1, 2001, we adopted SFAS No. 133, "Accounting for Derivatives and Hedges" (as amended). The cumulative effect of adopting SFAS No. 133 resulted in an after-tax decrease in net earnings of $0.4 million. We recognized an extraordinary gain of $145.7 million related to the cancellation of our Subordinated Notes and other unsecured claims in the Chapter 11 proceedings (see Note 3 to the consolidated financial statements included in Part IV, Item 14 of this Report). Net income was $122.5 million in Fiscal 2002 compared to a net loss of $365.6 million in Fiscal 2001. The improvement was a result of an extraordinary gain associated with cancellation of indebtedness, lower interest and general and administrative expenses, and the elimination of goodwill amortization. 28 Fiscal 2001 compared to Fiscal 2000 Our Predecessor Company's results of operations for Fiscal 2001 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 losses associated with holding commodity inventories during declining markets. Additionally, we were unable to reduce operating expenses commensurately with volume which precluded us from covering fixed expenses and caused losses. Weak markets conditions in the steel sector during Fiscal 2001 also led to bankruptcy filings by certain of our customers including, but not limited to, LTV Steel Company, Inc. and Northwestern Steel and Wire Company. Bankruptcies of steel customers resulted in uncollected receivables of approximately $4.9 million during Fiscal 2001. Consolidated net sales for Fiscal 2001 and for the year ended March 31, 2000 ("Fiscal 2000") in broad product categories were as follows ($ in millions): FISCAL 2001 FISCAL 2000 -------------------------- -------------------------- NET NET WEIGHT SALES % WEIGHT SALES % ------ ----- - ------ ----- - COMMODITY (WEIGHT IN THOUSANDS) Ferrous metals (tons)....................... 4,071 $422.0 55.0 4,350 $482.6 52.7 Non-ferrous metals (lbs.)................... 528,150 276.4 36.1 583,860 288.6 31.5 Brokerage-ferrous (tons).................... 310 32.2 4.2 999 103.6 11.3 Brokerage-nonferrous (lbs.)................. 38,623 17.1 2.2 72,906 20.5 2.3 Other....................................... -- 18.9 2.5 -- 19.8 2.2 ------ ----- ------ ----- $766.6 100.0 $915.1 100.0 ====== ===== ====== ===== Consolidated net sales decreased by $148.5 million (16.2%) to $766.6 million in Fiscal 2001 compared with consolidated net sales of $915.1 million in Fiscal 2000. The decrease in consolidated net sales was primarily due to lower volumes of ferrous and non-ferrous products sold during the period and lower average realized sales prices for ferrous commodities. Ferrous sales decreased by $60.6 million (12.6%) in Fiscal 2001 compared to ferrous sales in Fiscal 2000. During Fiscal 2001, revenues were negatively 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 which declined by $7 per ton for processed ferrous metals. Ferrous sales were also reduced by $3.5 million of sales adjustments recorded during December 2000 as a result of bankruptcy filings by two domestic steel companies. Non-ferrous sales decreased by $12.2 million (4.2%) in Fiscal 2001 compared to non-ferrous sales in Fiscal 2000. The decrease was primarily due to unit sales declining by 55.7 million pounds, offset by a $.03 per pound increase in average realized sales prices. 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 $71.4 million (68.9%) in Fiscal 2001 compared to brokerage ferrous sales in Fiscal 2000. The decrease was primarily due to a contraction in our brokerage business resulting from credit concerns in trading markets of our brokerage customers. Brokerage non-ferrous sales decreased by $3.4 million (16.6%) in Fiscal 2001 compared to brokerage non-ferrous sales in Fiscal 2000. Although average realized sales prices for brokered non-ferrous products were $0.16 per pound higher in Fiscal 2001 compared to Fiscal 2000, the volume of non-ferrous metals brokered decreased by 34.3 million pounds in Fiscal 2001. 29 Gross profit was $61.9 million (8.1% of sales) in Fiscal 2001 compared to gross profit of $110.0 million (12.0% of sales ) in Fiscal 2000. The decrease in consolidated gross profit reflects lower sales, increased operating expenses compared with Fiscal 2000 and weakening market conditions for scrap metals. The decreases in scrap metals prices in Fiscal 2001 also resulted in the recognition of inventory losses further reducing gross margins. General and administrative expenses were $56.3 million (7.3% of sales) in Fiscal 2001 compared to general and administrative expenses of $55.0 million (6.0% of sales) in Fiscal 2000. During Fiscal 2001, we took actions to reduce personnel-related costs and began to realize the benefit of these cost reduction initiatives during the fourth quarter of Fiscal 2001. The overall increase in general and administrative expenses in Fiscal 2001 was primarily due to higher health insurance costs which offset declines in other categories of administrative expenses. Depreciation and amortization expense was $23.3 million (3.0% of sales) in Fiscal 2001 compared to depreciation and amortization expense of $27.2 million (3.0% of sales) in Fiscal 2000. The decrease in depreciation and amortization expense was the result of the goodwill impairment charge recorded as of October 1, 2000 which resulted in the elimination of goodwill amortization expense for periods after October 1, 2000. On October 1, 2000, the Predecessor Company changed its method of accounting for assessing whether an impairment existed 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, the Predecessor Company recorded a goodwill impairment charge of $280.1 million in Fiscal 2001 (see Note 1 to the consolidated financial statements included in Part IV, Item 14 of this Report). Non-cash and non-recurring expense was $6.4 million in Fiscal 2001. During Fiscal 2001, $5.8 million of non-cash charges were recorded for asset impairments including an impairment charge of $2.6 million relating to a note receivable issued in connection with the sale of our former Superior Forge subsidiary and $3.2 million relating to fixed asset impairments in scrap metals yards which we closed during the fourth quarter of Fiscal 2001. During Fiscal 2000, $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 4 to the consolidated financial statements included in Part IV, Item 14 of this Report). Loss from joint ventures was $3.5 million in Fiscal 2001 compared to income from joint ventures of $0.4 million in Fiscal 2000. The losses reflect our 28.5% share of losses incurred by Southern Recycling as a result of weakening market conditions for scrap metals. Additionally, as a result of these losses and continued adverse scrap industry conditions, we concluded that our investment was impaired and recorded a charge of $1.7 million to loss from joint ventures to reduce the carrying value of our investment in Southern Recycling to zero. Interest expense was $34.2 million (4.5% of sales) in Fiscal 2001 compared to interest expense of $38.0 million (4.2% of sales) in Fiscal 2000. The decrease in interest expense in Fiscal 2001 was a result of lower borrowings under credit facilities and interest expense not accrued for unsecured debt after the Petition Date. Reorganization costs recognized in Fiscal 2001 represent professional fees and other expenses associated with the Chapter 11 proceedings and the write-off of deferred financing costs (see Note 2 to the consolidated financial statements included in Part IV, Item 14 of this Report). As a result of uncertainties regarding our ability to realize previously recognized tax benefits following the initiation of the Chapter 11 proceedings, we 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 fully reserved any tax benefits associated with our operating losses. Net loss, after preferred stock dividends, was $365.6 million ($6.18 per share) in Fiscal 2001 compared to a net loss, after preferred stock dividends, of $13.9 million ($0.26 per share) in Fiscal 2000. The increase in the net loss was primarily due to the goodwill impairment charge recorded in Fiscal 2001, expenses associated 30 with the Chapter 11 proceedings, as well as higher operating losses incurred as a result of deteriorating conditions in the scrap metals industry in Fiscal 2001. LIQUIDITY AND CAPITAL RESOURCES Working Capital and Cash Flows Our accounts receivable balances decreased from $79.6 million at March 31, 2001 to $61.5 million at March 31, 2002 principally due to improved collections. Our accounts payable balances increased from $37.9 million at March 31, 2001 to $42.9 million at March 31, 2002. The increase in accounts payable resulted principally from improvements in credit terms received from trade suppliers. Inventory levels can vary significantly among our operations and with changes in market conditions. Our inventories consist of the following categories (in thousands): REORGANIZED | PREDECESSOR COMPANY | COMPANY MARCH 31, 2002 | MARCH 31, 2001 -------------- | -------------- | Ferrous metals.................................. $19,654 | $20,685 Non-ferrous metals.............................. 16,807 | 18,050 Other........................................... 820 | 1,038 ------- | ------- $37,281 | $39,773 ======= | ======= Ferrous inventory dollars decreased due to lower units of ferrous metals on hand at March 31, 2002 compared to March 31, 2001. Non-ferrous inventory decreased as a result of lower units of non-ferrous materials on hand coupled with lower average purchase prices at March 31, 2002 compared to March 31, 2001. During Fiscal 2002, we generated $31.2 million of cash from operating activities. During this period, our operations generated $10.2 million of cash, which was supplemented by cash flows in changes in working capital including accounts receivable, inventories and accounts payable that generated cash flows of $13.8 million, $2.5 million and $1.3 million, respectively. During Fiscal 2002, we used $3.3 million of cash for investing activities. Purchases of property and equipment were $4.7 million, while we generated $1.7 million of cash from the sale of redundant fixed assets. During Fiscal 2002, our financing activities used $28.5 million of cash. Cash generated from operations were used to repay borrowings under the credit facilities. Indebtedness As a result of the consummation of the Plan, we substantially reduced the amount of our overall indebtedness. As of March 31, 2002, our total indebtedness was approximately $134 million. Although the Plan resulted in a reduction in debt, further improvements in our liquidity position will depend on the success of initiatives we are undertaking to reduce operating expenses and the effects on our liquidity of changes in the market conditions in the scrap metals industry. Our uses of capital are expected to include working capital for operating expenses and satisfaction of current liabilities, capital expenditures, payment of reorganization expenses, and interest and other payments on outstanding borrowings. On the Effective Date, our $200 million debtor-in-possession credit facility was replaced by a $150 million revolving credit and letter of credit facility (the "Credit Agreement"). The Credit Agreement was entered into by Bankers Trust Company, as agent for the lenders thereunder, the lenders a party thereto and us and expires on June 29, 2003. The Credit Agreement is available to fund working capital needs and for general corporate purposes. 31 Borrowings under the Credit Agreement are subject to certain borrowing base limitations based upon a formula equal to 85% of eligible accounts receivable, the lesser of $65 million or 70% of eligible inventory, and a fixed asset sublimit of $33.9 million as of March 31, 2002, which amortizes by $2.4 million on a quarterly basis and under certain other conditions. In addition, as of March 31, 2002, approximately $11.6 million of supplemental availability is provided under the Credit Agreement, subject to periodic amortization of $1.2 million each quarter and other reductions. A security interest in substantially all of our assets and properties, including pledges of the capital stock of our subsidiaries, has been granted to the agent under the new credit facility to secure our obligations under the Credit Agreement. The Credit Agreement provides us with the option of borrowing based either on the prime rate (as specified by Deutsche Bank AG, New York Branch) or the London Interbank Offered Rate ("LIBOR") plus a margin. Pursuant to the Credit Agreement, we pay a fee of .375% on the undrawn portion of the credit facility. In consideration for the Credit Agreement, we paid a closing fee of $1 million and may be required to pay a $2 million facility fee on June 29, 2002, unless we are able to meet certain financial objectives. We currently expect that we will be required to pay the $2 million facility fee on June 29, 2002. The Credit Agreement requires us to meet certain financial tests, including an interest coverage ratio and leverage ratio (as defined in the Credit Agreement) as follows: MINIMUM INTEREST MAXIMUM TWELVE MONTH PERIOD ENDING COVERAGE RATIO LEVERAGE RATIO -------------------------- ---------------- -------------- 06/30/02....................................... 1.90 to 1.00 5.25 to 1.00 09/30/02....................................... 2.00 to 1.00 4.90 to 1.00 12/31/02....................................... 2.10 to 1.00 4.65 to 1.00 03/31/03 and the last day of each fiscal quarter ending thereafter.................... 2.10 to 1.00 4.25 to 1.00 The Credit Agreement limits our capital expenditures to $16 million each fiscal year. The Credit Agreement also contains restrictions which, among other things, limit our ability to (i) incur additional indebtedness; (ii) pay dividends; (iii) enter into transactions with affiliates; (iv) enter into certain asset sales; (v) engage in certain acquisitions, investments, mergers and consolidations; (vi) prepay certain other indebtedness; (vii) create liens and encumbrances on our assets and (viii) other matters customarily restricted in such agreements. We were in compliance with all financial covenants as of March 31, 2002. As of May 30, 2002, we had outstanding borrowings of approximately $102 million under the Credit Agreement and undrawn availability of approximately $18 million. Our ability to meet financial ratios and tests in the future may be affected by events beyond our control, including fluctuations in operating cash flows and working capital, and the timing of fixed asset sales. While we currently expect to be in compliance with the covenants and satisfy the financial ratios and tests in the future, there can be no assurance that we will meet such financial ratios and tests or that we will be able to obtain future amendments or waivers to the Credit Agreement, if so needed, to avoid a default. In the event of default, the lenders could elect to not make loans to us and declare all amounts borrowed under the Credit Agreement to be due and payable. Pursuant to our Plan, the Junior Secured Notes were exchanged for New Notes, having an outstanding principal balance of $34.0 million. The New Notes mature on June 15, 2004 and bear interest at the rate of 12 3/4% per annum. Interest on the New Notes is payable semi-annually during June and December of each year. The New Notes are our senior obligations and rank equally in right of payment to all of our unsubordinated debt, including our indebtedness under the Credit Agreement, and senior in right of payment to all of our subordinated debt. A second priority lien on substantially all of our personal property, plant (to the extent it constitutes fixtures) and equipment has been pledged as collateral against the New Notes. The New Notes are redeemable at our option (in multiples of $10 million) at a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest. The New Notes are redeemable at the option of the holders of such notes at a repurchase price of 101% of the principal amount thereof, plus accrued and unpaid interest, in the event we experience a change of control (as defined in the indenture governing the 32 New Notes). We are required to redeem all or a portion of the New Notes at a repurchase price of 100% of the principal amount thereof, plus accrued and unpaid interest, in the event we make certain asset sales. The indenture governing the Junior Secured Notes was amended and restated in accordance with our Plan in order to reflect, among other things, the increase in the principal amount of the New Notes. The Indenture, as amended, contains restrictions including limits on, among other things, our ability to: (i) incur additional indebtedness; (ii) pay dividends or distributions on our capital stock or repurchase our capital stock; (iii) issue stock of subsidiaries; (iv) make certain investments; (v) create liens on our assets; (vi) enter into transactions with affiliates; (vii) transfer or consolidate with another company; and (viii) transfer and sell assets or enter into sale and leaseback transactions. Future Capital Requirements Our future cash needs will be driven by working capital requirements (including interest payments on the New Notes), planned capital expenditures and acquisition objectives, should attractive acquisition opportunities present themselves. While we have no pending acquisitions, we may choose to consider selective opportunities for "tuck-in" acquisitions in Fiscal 2003. Capital expenditures were approximately $5 million in Fiscal 2002 representing approximately 25% of depreciation expense in Fiscal 2002. Capital expenditures are planned to be approximately $10 million in Fiscal 2003 reflecting primarily replacement investments. On June 15, 2002, we are required to make a $2.2 million coupon payment on the New Notes. On June 29, 2002, we expect that we will be required to pay a facility fee of $2 million under the terms of the Credit Agreement. We do not expect such capital expenditures nor interest payments and fees to have a material adverse effect on our liquidity. We expect to fund our working capital needs, interest payments and capital expenditures with cash generated from operations, supplemented by undrawn borrowing availability under the Credit Agreement. We believe these sources of capital will be sufficient to fund planned capital expenditures, interest payments and working capital requirements for the foreseeable future, although there can be no assurance that this will be the case. In addition, the instruments governing the Credit Agreement and the New Notes will limit our ability to incur additional debt to fund significant acquisition or expansion opportunities unless and until our results of operations show significant improvement for four consecutive quarters. Our Credit Agreement expires on June 29, 2003. Although we expect to be able to renew the Credit Agreement prior to June 2003, there is no assurance that this will be the case. If we cannot renew our Credit Agreement on favorable terms, we may be required to seek alternative financing for our working capital needs. The terms on which we may be able to obtain replacement financing may not be as favorable as under the Credit Agreement and may cause dilution to holders of our Common Stock. The Predecessor Company historically financed a part of its operations through the issuance of common stock or convertible preferred stock. Since we recently emerged from bankruptcy and a market for our Common Stock has developed, we may issue equity in the future to finance our operations. The issuance of equity would dilute the ownership of the existing shareholders. Contractual Obligations and Commercial Commitments We have assumed various financial obligations and commitments in the normal course of our operations and financing activities. Financial obligations are considered to represent known future cash payments that we are required to make under existing contractual arrangements, such as debt and lease agreements. The 33 following table represents the scheduled maturities of our long-term contractual obligations as of March 31, 2002 (in thousands): FISCAL YEAR ENDING MARCH 31, 2003 2004 2005 2006 2007 THEREAFTER ---------------------------- ------- -------- ------- ------ ------ ---------- Long-term debt................. $ 2,178 $ 163 $34,114 $ 49 $ 53 $ 185 Capital lease obligations...... 143 13 4 4 0 0 Credit Agreement............... 0 97,054 0 0 0 0 Operating leases............... 7,724 6,719 5,473 4,387 3,381 25,453 Other contractual obligations.................. 652 652 575 425 0 0 ------- -------- ------- ------ ------ ------- Total contractual cash obligations............. $10,697 $104,601 $40,166 $4,865 $3,434 $25,638 ======= ======== ======= ====== ====== ======= We also enter into letters of credit in the ordinary course of operating and financing activities. As of March 31, 2002, we had outstanding letters of credit of $3.2 million which expire in Fiscal 2003. In November 2001, we amended our lease agreement for real property on which we operate a scrap metals recycling facility in Houston, Texas. The lease agreement expires on October 31, 2006 and provides for, among other things, an option for the lessor to sell the real property to us beginning on the 22nd month of the lease. We also have an option to purchase the real property beginning on the 22nd month of the lease. The purchase price for the real property is based on the month in which the option is exercised as follows: PURCHASE AMOUNT DATE OF EXERCISE (IN THOUSANDS) ---------------- --------------- Months 22 - 24.............................................. $4,000 Months 25 - 48.............................................. $4,250 Months 49 - 60.............................................. $4,500 We also have an option to purchase real property in Tucson, Arizona, where we currently operate a scrap metals recycling facility, for $1.1 million. The purchase option must be exercised before December 31, 2002. If we choose not to exercise the option, we will forfeit a $0.2 million deposit. RELATED PARTY TRANSACTIONS In the Chapter 11 proceedings, the Official Committee of Unsecured Creditors was represented by CIBC World Markets Corp. ("CIBC"), a company in which Daniel W. Dienst, now a director of our company, is a managing director. Professional fees paid to CIBC during Fiscal 2001 and Fiscal 2002 were approximately $0.4 million and $2.6 million, respectively. Fees paid to CIBC during Fiscal 2002 include restructuring success fees of $2.1 million, paid as follows: i) $1.05 million in cash and ii) $1.05 million paid through the issuance of 161,538 shares of Common Stock (at $6.50 per share). We utilize legal services from Mayer, Brown, Rowe and Maw, a firm in which David A. Carpenter, our former General Counsel, is a partner. Fees paid to Mayer, Brown, Rowe and Maw during Fiscal 2002 were approximately $1.2 million. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued two new pronouncements: SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the use of the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the use of the pooling-of-interests method. SFAS No. 142 requires, among other things, the discontinuance of amortization related to goodwill and indefinite lived intangible assets. The carrying value of such assets will be evaluated for impairment on an annual basis using the fair value method. Identifiable intangible assets with definite lives will continue to be amortized over their useful lives and reviewed periodically for impairment. 34 In accordance with Statement of Position 90-7 "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7") and the application of fresh-start reporting, we adopted SFAS No. 141 and SFAS No. 142 as of June 30, 2001. The adoption of SFAS No. 141 had no impact on the consolidated financial statements as we had no recorded goodwill or intangible assets at adoption. The adoption of SFAS No. 142 resulted in the classification of the reorganization intangible recognized in fresh-start reporting as goodwill with an indefinite life. As a result, goodwill of $15.5 million is not being amortized, but is being reviewed annually for impairment. Our assessment indicated that no impairment existed at March 31, 2002. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144, which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 significantly changes the criteria that would have to be met to classify an asset as held-for-sale, although it retains many of the fundamental recognition and measurement provisions of SFAS No. 121. We adopted SFAS No. 144 as of April 1, 2002 and the adoption did not have a material impact on our consolidated financial position or results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to financial risk resulting from fluctuations in interest rates and commodity prices. We seek to minimize these risks through regular operating and financing activities and, where appropriate, through use of derivative financial instruments. Our use of derivative financial instruments is limited and related solely to hedges of certain non-ferrous inventory positions and purchase and sales commitments. COMMODITY PRICE RISK We are exposed to risks associated with fluctuations in the market price for both ferrous and non-ferrous metals which are at times volatile. See the discussion under the heading "Risk Factors -- The metals recycling industry is highly cyclical," included in Part I, Item 1 of this Report. We attempt to mitigate this risk by seeking to turn our inventories quickly instead of holding inventories in speculation of higher commodity prices. We employ various strategies to mitigate the risk of fluctuations in the price of non-ferrous metals. None of the instruments employed by us to hedge these risks are entered into for trading purposes or speculation, but instead are effected as hedges of underlying physical transactions and commitments. All hedges are recorded at fair value with adjustments to the fair values recorded in the statement of operations. INTEREST RATE RISK We are exposed to interest rate risk on our long-term fixed interest rate indebtedness and on our floating rate borrowings. As of March 31, 2002, long-term fixed borrowings consisted mainly of $34.0 million of New Notes which bear interest at a fixed rate of 12 3/4%. Changes in interest rates could cause the fair market value of indebtedness with a fixed interest rate to increase or decrease, and thus increase or decrease the amount required to refinance the indebtedness. As of March 31, 2002, variable rate borrowings mainly consisted of outstanding borrowings of $97 million under our Credit Agreement. Our borrowings on our Credit Agreement bear interest on either the prime rate of interest or LIBOR plus a margin. Any increase in either base rate would lead to higher interest expense. We do not have any interest rate swaps or caps in place which would mitigate our exposure to fluctuations in the interest rate on this indebtedness. 35 FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values and estimated fair values of futures contracts and long-term debt were as follows at March 31, (in thousands): REORGANIZED COMPANY | PREDECESSOR COMPANY 2002 | 2001 -------------------- | -------------------- CARRYING FAIR | CARRYING FAIR AMOUNT VALUE | AMOUNT VALUE -------- ----- | -------- ----- | Futures contracts................................... $ 544 $ 544 | $ 617 $ 259 Long-term debt, less current maturities............. $131,639 $118,903 | $150,533 $146,682 Debt subject to compromise.......................... $ 0 $ 0 | $182,895 $ 3,345 As a result of adopting SFAS No. 133 on April 1, 2001, the carrying amounts of futures contracts are equal to the fair values as determined from market quotes. The fair values of long-term debt were determined from either market quotes or from instruments with similar terms and maturities. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See "Index to Consolidated Financial Statements of Metal Management, Inc. and Subsidiaries" set forth in Part IV, Item 14 of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 36 PART III The information called for by Part III of Form 10-K (consisting of Item 10 -- Directors and Executive Officers of the Registrant, Item 11 -- Executive Compensation, Item 12 -- Security Ownership of Certain Beneficial Owners and Management and Item 13 -- Certain Relationships and Transactions), is incorporated by reference from our definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates. 37 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS: INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF METAL MANAGEMENT, INC. AND SUBSIDIARIES PAGE ---- Report of Independent Accountants........................... F-1 Consolidated Statements of Operations -- nine months ended March 31, 2002 (Reorganized Company), three months ended June 30, 2001 and the years ended March 31, 2001 and 2000 (Predecessor Company)..................................... F-2 Consolidated Balance Sheets -- March 31, 2002 (Reorganized Company) and March 31, 2001 (Predecessor Company)......... F-3 Consolidated Statements of Cash Flows -- nine months ended March 31, 2002 (Reorganized Company), three months ended June 30, 2001 and the years ended March 31, 2001 and 2000 (Predecessor Company)..................................... F-4 Consolidated Statements of Stockholders' Equity -- nine months ended March 31, 2002 (Reorganized Company), three months ended June 30, 2001 and the years ended March 31, 2001 and 2000 (Predecessor Company)....................... F-5 Notes to Consolidated Financial Statements.................. F-6 (2) FINANCIAL STATEMENT SCHEDULES: Schedule II -- Valuation and qualifying accounts -- for the nine months ended March 31, 2002 (Reorganized Company), the three months ended June 30, 2001 and the years ended March 31, 2001 and 2000 (Predecessor Company)............. F-30 Schedules not listed above have been omitted because they are not required or they are inapplicable. (3) EXHIBITS: A list of the exhibits included as part of this Form 10-K is set forth in the Exhibit Index that immediately precedes such exhibits, which is incorporated herein by reference. (b) REPORTS ON FORM 8-K: We did not file any reports on Form 8-K during the fourth quarter of Fiscal 2002. 38 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, in Chicago, Illinois on June 4, 2002. METAL MANAGEMENT, INC. By: /s/ ALBERT A. COZZI ------------------------------------ Albert A. Cozzi Chairman of the Board and Chief Executive Officer 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 indicated on June 4, 2002. SIGNATURE TITLE --------- ----- /s/ ALBERT A. COZZI Director, Chairman of the Board and Chief ----------------------------------------------------- Executive Officer (Principal Executive Albert A. Cozzi Officer) /s/ MICHAEL W. TRYON President and Chief Operating Officer ----------------------------------------------------- Michael W. Tryon /s/ DANIEL W. DIENST Director ----------------------------------------------------- Daniel W. Dienst /s/ JOHN T. DILACQUA Director ----------------------------------------------------- John T. DiLacqua /s/ KEVIN P. MCGUINNESS Director ----------------------------------------------------- Kevin P. McGuinness /s/ HAROLD J. ROUSTER Director ----------------------------------------------------- Harold J. Rouster /s/ ROBERT C. LARRY Executive Vice President, Finance and Chief ----------------------------------------------------- Financial Officer (Principal Financial Robert C. Larry Officer) /s/ AMIT N. PATEL Vice President, Finance and Controller ----------------------------------------------------- (Principal Accounting Officer) Amit N. Patel 39 METAL MANAGEMENT, INC. EXHIBIT INDEX NUMBER AND DESCRIPTION OF EXHIBIT --------------------------------- 2.1 Disclosure Statement with respect to First Amended Joint Plan of Reorganization of Metal Management, Inc. and its Subsidiary Debtors, dated May 4, 2001 (incorporated by reference to Exhibit 2.1 of the Company's Annual Report on Form 10-K for the year ended March 31, 2001). 3.1 Second Amended and Restated Certificate of Incorporation of the Company, as filed with the Secretary of State of the State of Delaware on June 29, 2001 (incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the year ended March 31, 2001). 3.2 Amended and Restated By-Laws of the Company adopted as of June 29, 2001 (incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the year ended March 31, 2001). 4.1 Amended and Restated Indenture, dated as of June 29, 2001, among the Company and BNY Midwest Trust Company (incorporated by reference to Exhibit 4.5 of the Company's Annual Report on Form 10-K for the year ended March 31, 2001). 10.1 $150 million Credit Agreement, dated as of June 29, 2001 (the "Credit Agreement") by and among the Company and its subsidiaries named therein and Bankers Trust Company, as Agent and the financial institutions parties thereto (incorporated by reference to Exhibit 10.1 of the Company's Annual Report on Form 10-K for the year ended March 31, 2001). 10.2 Intercreditor Agreement, dated as of June 29, 2001 between Bankers Trust Company, as Agent for the lenders under the Credit Agreement, and BNY Midwest Trust Company, as Trustee under the Indenture (incorporated by reference to Exhibit 10.2 of the Company's Annual Report on Form 10-K for the year ended March 31, 2001). 10.3 Employment Agreement, dated December 1, 1997 between Albert A. Cozzi and the Company (incorporated by reference to Exhibit 10.12 of the Company's Current Report on Form 8-K dated December 1, 1997). 10.4 Employment Agreement, dated December 1, 1997 between Frank J. Cozzi and the Company (incorporated by reference to Exhibit 10.15 of the Company's Current Report on Form 8-K dated December 1, 1997). 10.5 Employment Agreement, dated November 30, 1997 between Larry S. Snyder, the Company and Cozzi Iron & Metal, Inc. (incorporated by reference to Exhibit 10.21 of the Company's Annual Report on Form 10-K for the year ended March 31, 1999). 10.6 Employment Agreement, dated September 1, 2001 between William T. Proler and the Company (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the period ended December 31, 2001). 10.7 Employment Agreement, dated April 1, 2000 between Michael W. Tryon and the Company (incorporated by reference to Exhibit 10.15 of the Company Annual Report on Form 10-K for the year ended March 31, 2000). 10.8 Form of Outside Director Indemnification Agreement (incorporated by reference to Exhibit 10.8 of the Company's Annual Report on Form 10-K for the year ended March 31, 2001). 10.9 Letter Agreement, dated June 7, 2001 and June 13, 2001 between the Company and Albert A. Cozzi reflecting certain modifications to the Employment Agreement of Albert A Cozzi (incorporated by reference to Exhibit 10.9 of the Company's Annual Report on Form 10-K for the year ended March 31, 2001). 10.10 Letter Agreement, dated June 7, 2001 and June 13, 2001 between the Company and Frank J. Cozzi reflecting certain modifications to the Employment Agreement of Frank J. Cozzi (incorporated by reference to Exhibit 10.10 of the Company's Annual Report on Form 10-K for the year ended March 31, 2001). NUMBER AND DESCRIPTION OF EXHIBIT --------------------------------- 10.11 Letter Agreement, dated June 7, 2001 and June 13, 2001 between the Company and Larry S. Snyder reflecting certain modifications to the Employment Agreement of Larry S. Snyder (incorporated by reference to Exhibit 10.11 of the Company's Annual Report on Form 10-K for the year ended March 31, 2001). 10.12 Letter Agreement, dated June 7, 2001 and June 13, 2001 between the Company and Michael W. Tryon reflecting certain modifications to the Employment Agreement of Michael W. Tryon (incorporated by reference to Exhibit 10.12 of the Company's Annual Report on Form 10-K for the year ended March 31, 2001). 10.13 Series A Warrant Agreement, dated June 29, 2001 by and among Metal Management, Inc. and LaSalle Bank National Association, as Warrant Agent (incorporated by reference to Exhibit 4.1 of the Company's Annual Report on Form 10-K for the year ended March 31, 2001). 10.14 Form of Series B Warrant Agreement (incorporated by reference to Exhibit 4.3 of the Company's Annual Report on Form 10-K for the year ended March 31, 2001). 10.15 Form of Series C Warrant Agreement (incorporated by reference to Exhibit 4.4 of the Company's Annual Report on Form 10-K for the year ended March 31, 2001). 10.16 Metal Management, Inc. Management Equity Incentive Plan (incorporated by reference to Exhibit 4.2 of the Company's Annual Report on Form 10-K for the year ended March 31, 2001). 21.1 Subsidiaries of the Company REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Metal Management, Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) on page 38 present fairly, in all material respects, the financial position of Metal Management, Inc. and its subsidiaries at March 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2002, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) on page 38 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, 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 our opinion. As discussed in Notes 1, 2 and 3 to the consolidated financial statements, the Company emerged from Chapter 11 bankruptcy on June 29, 2001. Effective June 30, 2001, the Company changed its basis of financial statement presentation to reflect the adoption of "fresh start" accounting. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for derivatives effective April 1, 2001 and its method of accounting for goodwill and intangible assets effective June 30, 2001. As discussed in Note 1 to the consolidated financial statements, 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 in 2001. /s/ PricewaterhouseCoopers LLP Chicago, Illinois June 5, 2002 F-1 METAL MANAGEMENT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) REORGANIZED | COMPANY | PREDECESSOR COMPANY ------------ | ------------------------------------- NINE | THREE MONTHS ENDED | MONTHS ENDED YEAR ENDED MARCH 31, MARCH 31, | JUNE 30, --------------------- 2002 | 2001 2001 2000 ------------ | ------------ --------- -------- | Net sales $464,795 | $166,268 $ 766,591 $915,140 Cost of sales 409,180 | 149,216 704,717 805,155 -------- | -------- --------- -------- Gross profit 55,615 | 17,052 61,874 109,985 Operating expenses: | General and administrative 34,237 | 11,686 56,312 55,021 Depreciation and amortization 13,673 | 4,718 23,341 27,167 Goodwill impairment (Note 1) 0 | 0 280,132 0 Non-cash and non-recurring expenses (Note 4) 3,944 | 1,941 6,399 5,014 -------- | -------- --------- -------- Total operating expenses 51,854 | 18,345 366,184 87,202 -------- | -------- --------- -------- Operating income (loss) from continuing operations 3,761 | (1,293) (304,310) 22,783 Other income (expense): | Income (loss) from joint ventures (Note 1) (224) | (56) (3,449) 410 Interest expense 9,450 | 5,169 34,159 38,043 Interest and other income (expense), net 287 | 111 519 (276) -------- | -------- --------- -------- Loss from continuing operations before | reorganization costs, income taxes, cumulative | effect of change in accounting principle and | extraordinary gain (5,626) | (6,407) (341,399) (15,126) Reorganization costs (Note 2) 457 | 10,347 15,632 0 -------- | -------- --------- -------- Loss from continuing operations before income | taxes, cumulative effect of change in accounting | principle and extraordinary gain (6,083) | (16,754) (357,031) (15,126) Provision (benefit) for income taxes (Note 9) 0 | 0 8,291 (2,832) -------- | -------- --------- -------- Loss from continuing operations before cumulative | effect of change in accounting principle and | extraordinary gain (6,083) | (16,754) (365,322) (12,294) Gain on sale of discontinued operations, net of | income taxes (Note 5) 0 | 0 0 376 -------- | -------- --------- -------- Loss before cumulative effect of change in | accounting principle and extraordinary gain (6,083) | (16,754) (365,322) (11,918) Cumulative effect of change in accounting | principle (Note 1) 0 | (358) 0 0 Extraordinary gain (Note 3) 0 | 145,711 0 0 -------- | -------- --------- -------- Net income (loss) (6,083) | 128,599 (365,322) (11,918) Preferred stock dividends 0 | 0 (295) (2,021) -------- | -------- --------- -------- NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ (6,083) | $128,599 $(365,617) $(13,939) ======== | ======== ========= ======== NET INCOME (LOSS) PER SHARE, BASIC AND DILUTED: | Loss from continuing operations before cumulative | effect of change in accounting principle and | extraordinary gain $ (0.60) | $ (0.27) $ (6.18) $ (0.27) Gain on sale of discontinued operations 0.00 | 0.00 0.00 0.01 Cumulative effect of change in accounting | principle 0.00 | (0.01) 0.00 0.00 Extraordinary gain 0.00 | 2.36 0.00 0.00 -------- | -------- --------- -------- Net income (loss) per share, basic and diluted $ (0.60) | $ 2.08 $ (6.18) $ (0.26) ======== | ======== ========= ======== Shares used in computation of basic and diluted | income (loss) per share 10,120 | 61,731 59,131 54,333 ======== | ======== ========= ======== See accompanying notes to consolidated financial statements F-2 METAL MANAGEMENT, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) REORGANIZED | PREDECESSOR COMPANY | COMPANY ----------- | ----------- MARCH 31, | MARCH 31, 2002 | 2001 ----------- | ----------- | ASSETS | Current assets: | Cash and cash equivalents $ 838 | $ 1,428 Accounts receivable, net 61,519 | 79,607 Inventories (Note 6) 37,281 | 39,773 Property and equipment held for sale (Note 7) 10,102 | 6,456 Prepaid expenses and other assets 4,179 | 4,938 -------- | --------- Total current assets 113,919 | 132,202 Property and equipment, net (Note 7) 123,666 | 148,083 Goodwill (Notes 1 and 3) 15,461 | 0 Deferred financing costs, net 2,715 | 2,204 Other assets 1,347 | 2,303 -------- | --------- TOTAL ASSETS $257,108 | $ 284,792 ======== | ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | Current liabilities: | Current portion of long-term debt (Note 8) $ 2,321 | $ 2,444 Accounts payable 42,923 | 37,927 Accrued interest 1,760 | 4,149 Other accrued liabilities 14,441 | 10,610 -------- | --------- Total current liabilities 61,445 | 55,130 Long-term debt, less current portion (Note 8) 131,639 | 150,533 Other liabilities 4,537 | 2,152 -------- | --------- Total long-term liabilities 136,176 | 152,685 Liabilities subject to compromise (Note 2) 0 | 220,234 Commitments and contingencies (Note 11) | Stockholders' equity (deficit): | Reorganized Company preferred stock, $.01 par value; $1,000 | stated value; 10,000,000 shares authorized; none issued | and outstanding at March 31, 2002 0 | 0 Predecessor Company convertible preferred stock, $.01 par | value; $1,000 stated value; 4,000,000 shares authorized: | Series B, 4.5%; 20,743 issued and 815 shares outstanding | at March 31, 2001 0 | 815 Series C, 6.9%; 6,000 shares issued and outstanding at | March 31, 2001 0 | 5,100 New common equity -- issuable 6,270 | 0 Reorganized Company common stock, $.01 par | value -- 50,000,000 shares authorized; 9,197,127 shares | issued and outstanding at March 31, 2002 92 | 0 Predecessor Company common stock, $.01 par | value -- 140,000,000 shares authorized; 60,899,898 shares | issued and outstanding at March 31, 2001 0 | 542 Warrants 414 | 40,428 Additional paid-in-capital 59,265 | 271,622 Accumulated other comprehensive loss (471) | (303) Accumulated deficit (6,083) | (461,461) -------- | --------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 59,487 | (143,257) -------- | --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $257,108 | $ 284,792 ======== | ========= See accompanying notes to consolidated financial statements F-3 METAL MANAGEMENT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) REORGANIZED | COMPANY | PREDECESSOR COMPANY ----------- | ---------------------------------------- NINE MONTHS | THREE MONTHS ENDED | ENDED YEAR ENDED MARCH 31, MARCH 31, | JUNE 30, ------------------------ 2002 | 2001 2001 2000 ----------- | ------------ --------- ----------- | CASH FLOWS FROM OPERATING ACTIVITIES: | Net income (loss) $ (6,083) | $ 128,599 $(365,322) $ (11,918) Adjustments to reconcile net income (loss) to | cash flows from operating activities: | Depreciation and amortization 13,673 | 4,718 23,341 27,167 Non-cash and non-recurring expense 3,944 | 1,941 5,792 143 Provision for uncollectible receivables 2,035 | 1,058 5,678 2,343 Amortization of debt issuance costs and bond | discount 894 | 1,359 3,478 3,428 (Income) loss from joint ventures 224 | 56 3,534 (410) Deferred income taxes 0 | 0 8,291 (3,698) Goodwill impairment 0 | 0 280,132 0 Non-cash reorganization expenses 0 | 3,469 9,044 0 Cumulative effect of change in accounting | principle 0 | 358 0 0 Extraordinary gain 0 | (145,711) 0 0 Other (81) | (293) 509 1,338 Changes in assets and liabilities, net of | acquisitions: | Accounts and other receivables 8,681 | 5,141 71,809 (53,503) Inventories 4,240 | (1,749) 30,502 (9,461) Accounts payable (7,927) | 9,200 (18,329) 13,864 Other (420) | 3,856 4,717 193 --------- | --------- --------- ----------- Net cash provided by (used in) operating | activities 19,180 | 12,002 63,176 (30,514) CASH FLOWS FROM INVESTING ACTIVITIES: | Purchases of property and equipment (3,295) | (1,392) (11,133) (9,959) Acquisitions, net of cash acquired 0 | 0 0 (4,609) Proceeds from sale of property and equipment 520 | 1,141 1,815 1,994 Other (104) | (128) (83) 1,418 --------- | --------- --------- ----------- Net cash used in investing activities (2,879) | (379) (9,401) (11,156) CASH FLOWS FROM FINANCING ACTIVITIES: | Issuances of long-term debt 460,961 | 111,627 638,557 1,071,178 Repayments of long-term debt (477,004) | (615) (809,540) (1,022,018) Fees paid to issue long-term debt (469) | (1,339) (4,359) (2,361) Redemptions of convertible preferred stock 0 | 0 0 (6,215) Borrowings (repayments) on DIP Agreement, net 0 | (121,666) 121,666 0 Other (9) | 0 (67) 0 --------- | --------- --------- ----------- Net cash provided by (used in) financing | activities (16,521) | (11,993) (53,743) 40,584 --------- | --------- --------- ----------- Net increase (decrease) in cash and cash | equivalents (220) | (370) 32 (1,086) Cash and cash equivalents at beginning of period 1,058 | 1,428 1,396 2,482 --------- | --------- --------- ----------- Cash and cash equivalents at end of period $ 838 | $ 1,058 $ 1,428 $ 1,396 ========= | ========= ========= =========== SUPPLEMENTAL CASH FLOW INFORMATION: | Interest paid $ 6,819 | $ 3,905 $ 25,800 $ 34,833 See accompanying notes to consolidated financial statements F-4 METAL MANAGEMENT, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (in thousands) NEW ACCUMULATED CONVERTIBLE PREFERRED STOCK COMMON ADDITIONAL OTHER ------------------------------ EQUITY- COMMON PAID-IN- COMPREHENSIVE SERIES A SERIES B SERIES C ISSUABLE STOCK WARRANTS CAPITAL LOSS -------- -------- -------- -------- ------ -------- ---------- ------------- PREDECESSOR COMPANY: BALANCE AT MARCH 31, 1999 $ 4,020 $10,877 $ 5,100 $ 0 $ 489 $ 40,745 $ 259,917 $ (39) Conversion of preferred stock (1,620) (7,393) 0 0 83 0 9,498 0 Cash redemption of preferred stock (2,462) (2,500) 0 0 0 0 0 0 Preferred stock dividends 62 193 0 0 0 0 0 0 Other comprehensive income 0 0 0 0 0 0 0 6 Other 0 0 0 0 5 (317) 1,314 0 Net loss 0 0 0 0 0 0 0 0 ------- ------- ------- -------- ----- -------- --------- ----- BALANCE AT MARCH 31, 2000 0 1,177 5,100 0 577 40,428 270,729 (33) Conversion of preferred stock 0 (390) 0 0 31 0 778 0 Preferred stock dividends 0 28 0 0 0 0 0 0 Other comprehensive loss 0 0 0 0 0 0 0 (270) Other 0 0 0 0 (66) 0 115 0 Net loss 0 0 0 0 0 0 0 0 ------- ------- ------- -------- ----- -------- --------- ----- BALANCE AT MARCH 31, 2001 0 815 5,100 0 542 40,428 271,622 (303) Other 0 0 0 0 17 0 (17) 0 Net loss before reorganization adjustments and fresh start adjustments 0 0 0 0 0 0 0 0 Reorganization adjustments 0 (815) (5,100) 65,000 (559) (40,428) (271,605) 0 Fresh start adjustments 0 0 0 0 0 0 0 303 ------- ------- ------- -------- ----- -------- --------- ----- ------------------------------------------------------------------------------------------------------------------------------- REORGANIZED COMPANY: BALANCE AT JUNE 30, 2001 0 0 0 65,000 0 0 0 0 Distribution of equity in accordance with the Plan 0 0 0 (58,730) 90 414 58,226 0 Conversion of payable into common stock 0 0 0 0 2 0 1,048 0 Other 0 0 0 0 0 0 (9) 0 Net loss 0 0 0 0 0 0 0 0 Other comprehensive loss 0 0 0 0 0 0 0 (471) ------- ------- ------- -------- ----- -------- --------- ----- BALANCE AT MARCH 31, 2002 $ 0 $ 0 $ 0 $ 6,270 $ 92 $ 414 $ 59,265 $(471) ======= ======= ======= ======== ===== ======== ========= ===== ACCUMULATED DEFICIT TOTAL ----------- --------- PREDECESSOR COMPANY: BALANCE AT MARCH 31, 1999 $ (81,905) $ 239,204 Conversion of preferred stock 0 568 Cash redemption of preferred stock (1,241) (6,203) Preferred stock dividends (780) (525) Other comprehensive income 0 6 Other 0 1,002 Net loss (11,918) (11,918) --------- --------- BALANCE AT MARCH 31, 2000 (95,844) 222,134 Conversion of preferred stock 0 419 Preferred stock dividends (295) (267) Other comprehensive loss 0 (270) Other 0 49 Net loss (365,322) (365,322) --------- --------- BALANCE AT MARCH 31, 2001 (461,461) (143,257) Other 0 0 Net loss before reorganization adjustments and fresh start adjustments (16,193) (16,193) Reorganization adjustments 477,654 224,147 Fresh start adjustments 0 303 --------- --------- ----------------------------------------------------------------------- REORGANIZED COMPANY: BALANCE AT JUNE 30, 2001 0 65,000 Distribution of equity in accordance with the Plan 0 0 Conversion of payable into common stock 0 1,050 Other 0 (9) Net loss (6,083) (6,083) Other comprehensive loss 0 (471) --------- --------- BALANCE AT MARCH 31, 2002 $ (6,083) $ 59,487 ========= ========= See accompanying notes to consolidated financial statements F-5 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Metal Management, Inc., a Delaware corporation, and its wholly-owned subsidiaries (the "Company") are principally engaged in the business of collecting and processing ferrous and non-ferrous metals. The Company collects industrial scrap and obsolete scrap, processes it into reusable forms, and supplies the recycled metals to its customers, including electric arc furnace mills, integrated steel mills, foundries, secondary smelters and metals brokers. These services are provided through the Company's recycling facilities located in 14 states. The Company's ferrous products primarily include shredded, sheared, cold briquetted, bundled scrap, turnings and broken furnace iron. The Company also processes non-ferrous metals, including aluminum, stainless steel, copper, brass, titanium and high-temperature alloys, using similar techniques and through application of certain of the Company's proprietary technologies. Prior to April 1996, the Company was engaged in the business of designing, manufacturing and marketing color printers and related color printer consumable products (see Note 5 -- Discontinued Operations). BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). All significant intercompany accounts, transactions and profits have been eliminated in consolidation. Investments in less than majority-owned companies (principally corporate joint ventures), which engage in ferrous and non-ferrous scrap metal recycling, are accounted for using the equity method. As discussed in Note 2 -- Reorganization Under Chapter 11, on November 20, 2000 (the "Petition Date"), the Company filed voluntary petitions (Case Nos. 00-4303 -- 00-4331 (SLR)) commencing cases under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). On June 29, 2001, the Company emerged from Chapter 11 bankruptcy. As a result of the Company's emergence from Chapter 11 bankruptcy and the application of fresh-start reporting (see Note 3 -- Fresh-Start Reporting), consolidated financial statements for the Company for the periods subsequent to June 30, 2001, following the effective date of the Company's plan of reorganization in the bankruptcy proceedings, are referred to as the "Reorganized Company" and are not comparable to those for the periods prior to June 30, 2001, which are referred to as the "Predecessor Company." A black line has been drawn in the audited consolidated financial statements to distinguish, for accounting purposes, the periods associated with the Reorganized Company and the Predecessor Company. Aside from the effects of fresh-start reporting and new accounting pronouncements adopted as of the effective date of the plan of reorganization, the Reorganized Company follows the same accounting policies as the Predecessor Company. 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. 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 could differ from these estimates. F-6 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) REVENUE RECOGNITION Revenues for processed product sales are recognized when title passes to the customer and for services as they are performed. Revenue relating to brokered sales are recognized upon receipt of the materials by the customer. Sales adjustments related to price and weight differences and allowances for uncollectible receivables are accrued against revenues as incurred. SHIPPING AND HANDLING REVENUES AND COSTS The Company classifies shipping and handling charges billed to customers as revenue. The Company classifies shipping and handling costs incurred as a component of cost of sales. DERIVATIVES Effective April 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivatives and Hedges" (as amended). SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at fair value. The Company utilizes futures and forward contracts to hedge its net position in certain non-ferrous metals and does not use futures and forward contracts for trading purposes. The Company has classified its investment in these contracts as speculative under the provisions of SFAS No. 133. As a result, the Company marked its outstanding futures and forwards contracts to market at April 1, 2001 and recognizes the changes in fair values of its futures and forwards contracts in the statement of operations. The cumulative effect of adopting SFAS No. 133 resulted in an after-tax reduction in net earnings of $0.4 million recorded as of April 1, 2001. SEGMENT REPORTING The Company currently operates in one reportable segment, the scrap metal recycling industry, as determined in accordance with SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." CASH AND CASH EQUIVALENTS The Company classifies as cash equivalents all highly liquid investments with original maturities of three months or less. The carrying amount of cash and cash equivalents approximates fair value. ACCOUNTS RECEIVABLE Accounts receivable represents amounts due from customers on product, broker and other sales. The carrying amount of accounts receivable approximates fair value. Reserves for uncollectible accounts were approximately $2.4 million and $1.6 million at March 31, 2002 and 2001, respectively. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost less accumulated depreciation. Major renewals and improvements are capitalized, while repairs and maintenance costs are expensed as incurred. Depreciation is determined for financial reporting purposes using the straight-line method over the following estimated useful lives: 10 to 40 years for buildings and improvements, 3 to 15 years for operating machinery and equipment, 2 to 10 years for furniture, fixtures and computer equipment and 3 to 10 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 recorded in the statement of operations. PROPERTY AND EQUIPMENT HELD FOR SALE The Company continually reviews its scrap metals operations to evaluate the long term economic viability of certain of its investments in property and equipment. These reviews result in the identification of redundant property and equipment which the Company holds for sale. The Company has classified theses assets as held for sale and, in the aggregate, has reported the amount as a component of current assets as the Company F-7 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) expects to sell the property and equipment within one year. The assets are recorded at their estimated fair value less costs to dispose of, if any. GOODWILL In July 2001, the Financial Accounting Standards Board ("FASB") issued two new pronouncements: SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the use of the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the use of the pooling-of-interests method. SFAS No. 142 requires, among other things, the discontinuance of amortization related to goodwill and indefinite lived intangible assets. The carrying value of such assets will be evaluated for impairment on an annual basis using the fair value method. Identifiable intangible assets with definite lives will continue to be amortized over their useful lives and reviewed periodically for impairment. In accordance with Statement of Position 90-7 "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7") and the application of fresh-start reporting, the Company adopted SFAS No. 141 and SFAS No. 142 as of June 30, 2001. The adoption of SFAS No. 141 had no impact on the consolidated financial statements as the Company had no recorded goodwill or intangible assets at adoption. The adoption of SFAS No. 142 resulted in the classification of the reorganization intangible recognized in fresh-start reporting (see Note 3 -- Fresh-Start Reporting) as goodwill with an indefinite life. As a result, goodwill of $15.5 million is not being amortized. At March 31, 2002, the Company determined that its goodwill is not impaired. The following unaudited pro forma information presents a summary of the consolidated statements of operations for the years ended March 31, 2001 and 2000 assuming that SFAS No. 142 was adopted on April 1, 1999. The adoption of SFAS No. 142 did not impact the Company's consolidated statement of operations for the three months ended June 30, 2001 as no goodwill amortization expense was previously recognized (in thousands, except per share amounts): MARCH 31, 2001 MARCH 31, 2000 ---------------------- --------------------- AS AS PREDECESSOR COMPANY REPORTED PRO FORMA REPORTED PRO FORMA ------------------- --------- --------- -------- --------- Loss from continuing operations before cumulative effect of change in accounting principle and extraordinary gain $(365,322) $(361,675) $(12,294) $(6,045) Net loss applicable to common stock $(365,617) $(361,970) $(13,939) $(7,690) Loss per share, basic and diluted: Loss from continuing operations before cumulative effect of change in accounting principle and extraordinary gain $ (6.18) $ (6.12) $ (0.27) $ (0.15) ========= ========= ======== ======= Net loss applicable to common stock $ (6.18) $ (6.12) $ (0.26) $ (0.14) ========= ========= ======== ======= Goodwill of the Predecessor Company represented the excess of purchase consideration paid over the fair value of net assets acquired and was amortized on a straight-line basis over a period of 40 years. Accumulated goodwill amortization at March 31, 2001 was $0. Goodwill amortization expense was $3.6 million and $7.5 million for the years ended March 31, 2001 and 2000, respectively. During the third quarter of the year ended March 31, 2001, the Predecessor Company changed its method of accounting for assessing whether an impairment existed 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 business unit goodwill and other intangible assets. Under the fair F-8 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) value method, the determination of whether an impairment exists was made whenever events or circumstances indicated that the fair value of investments in acquired businesses, including business unit goodwill and other intangibles, was less than the recorded amount. Any impairment was measured by comparing the recorded amount of investments in acquired businesses, including business unit goodwill and other intangibles, to the fair value. Fair value was determined on the basis of appraised market values, or in the absence of appraised market values, on the basis of discounted cash flows. The change in method of accounting for assessing whether an impairment existed in the recorded amount of acquired business unit goodwill and other intangible assets was 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 Predecessor 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. DEFERRED FINANCING COSTS, NET Deferred financing costs represent costs incurred in connection with the placement of long-term debt and are capitalized and amortized to interest expense over the term of the long-term debt. Deferred financing costs amortization expense for the nine months ended March 31, 2002, the three months ended June 30, 2001 and the years ended March 31, 2001 and 2000 was $0.9 million, $1.2 million, $3.0 million and $3.1 million, respectively. The deferred financing cost accumulated amortization at March 31, 2002 and 2001 was $0.9 million and $1.9 million, respectively. INVESTMENTS IN JOINT VENTURES Investments in joint ventures represents the Company's interest in joint ventures which are engaged in the scrap metals recycling business, including the Company's 28.5% interest in Southern Recycling, L.L.C. ("Southern"). Adverse conditions in the scrap industry caused substantial losses pervasively throughout the domestic scrap processing industry during the year ended March 31, 2001, including Southern. The adverse conditions effected the results and outlook for the Company's joint venture investment in Southern. Consequently, in the fourth quarter of the year ended March 31, 2001, the Company identified an impairment in its investment in Southern. The Company recorded a charge of $1.7 million to reduce its investment in Southern to zero. This charge is reflected in income (loss) from joint ventures in the statement of operations. COMPREHENSIVE LOSS Comprehensive loss, which is reported on the consolidated statement of stockholders' equity, consists of net income (loss) and other gains/losses affecting stockholders' equity that, under generally accepted accounting principles, are excluded from net income (loss). Comprehensive loss was as follows (in thousands): REORGANIZED | COMPANY | PREDECESSOR COMPANY ----------- | ----------------------------------- NINE MONTHS | THREE MONTHS ENDED | ENDED YEAR ENDED MARCH 31, MARCH 31, | JUNE 30, -------------------- 2002 | 2001 2001 2000 ----------- | ------------ ---- ---- | Net income (loss) $(6,083) | $128,599 $(365,322) $(11,918) Adjustment to minimum pension | liability (471) | 0 (270) 6 ------- | -------- --------- -------- Total comprehensive income | (loss) $(6,554) | $128,599 $(365,592) $(11,912) ======= | ======== ========= ======== F-9 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations 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. Sales to customers outside of the United States are settled by payment in U.S. dollars and generally are secured by letters of credit. The Company historically had not experienced material losses from the noncollection of accounts receivables. However, since April 2000, weak market conditions in the steel sector led to bankruptcy filings by certain of the Company's customers including, but not limited to, LTV Steel Company, Inc. and Northwestern Steel and Wire Company. These bankruptcies have resulted in uncollected receivables of approximately $8 million since April 2000. For the nine months ended March 31, 2002, the ten largest customers of the Company represented approximately 39% of consolidated sales. These customers comprised approximately 36% of accounts receivable at March 31, 2002. Sales during the nine months ended March 31, 2002 to The David J. Joseph Company represented approximately 14% of consolidated net sales. For the year ended March 31, 2001, the 10 largest customers of the Company represented approximately 33% of consolidated net sales. These customers comprised approximately 30% of accounts receivable at March 31, 2001. Sales during the year ended March 31, 2001 to The David J. Joseph Company represented approximately 10% of consolidated net sales. EARNINGS (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 attributable to common stock equivalents, including stock options, warrants, convertible debt and convertible preferred stock. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values of financial instruments including other assets, accounts payable, and current portion of long-term debt approximate the related fair value because of the relatively short maturity of these instruments. The carrying values and estimated fair values of futures contracts and long-term debt were as follows at March 31, (in thousands): REORGANIZED COMPANY | PREDECESSOR COMPANY ------------------- | ------------------- 2002 | 2001 ------------------- | ------------------- CARRYING FAIR | CARRYING FAIR AMOUNT VALUE | AMOUNT VALUE -------- ----- | -------- ----- | Futures contracts $ 544 $ 544 | $ 617 $ 259 Long-term debt, less current | maturities $131,639 $118,903 | $150,533 $146,682 Debt subject to compromise $ 0 $ 0 | $182,895 $ 3,345 As a result of adopting SFAS No. 133 on April 1, 2001, the carrying amounts of futures contracts are equal to the fair values as determined from market quotes. The fair values of long-term debt were determined from either market quotes or from instruments with similar terms and maturities. RECENT ACCOUNTING PRONOUNCEMENT In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144, which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," provides a single accounting model for long-lived assets to be disposed of. SFAS No. 144 significantly changes the criteria that would have to be met to classify an asset as held-for-sale, although it retains many of the fundamental recognition and measurement provisions F-10 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of SFAS No. 121. This Statement became effective for the Company on April 1, 2002 and is not expected to have a material effect on the Company's consolidated financial position, results of operations or cash flows. NOTE 2 -- REORGANIZATION UNDER CHAPTER 11 On the Petition Date, the Company filed voluntary petitions commencing cases under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court. From November 20, 2000 until June 30, 2001, the Company operated its businesses as debtors-in-possession. These bankruptcy proceedings are referred to as the "Chapter 11 proceedings" herein. PLAN OF REORGANIZATION In furtherance of an agreement reached between the Company and the holders of a significant percentage of the Predecessor Company's pre-petition debt prior to the initiation of the Chapter 11 proceedings, the Company filed a Joint and Amended Plan of Reorganization (the "Plan") pursuant to Chapter 11 of the Bankruptcy Code on May 4, 2001. The Bankruptcy Court confirmed the Plan which became effective on June 29, 2001 (the "Effective Date"). On the Effective Date, the Company entered into a new two year, $150 million credit agreement (the "Credit Agreement") with its lenders (see Note 8 -- Long-term Debt). The following is a summary of certain material provisions of the Plan. The summary does not purport to be complete and is qualified in its entirety by reference to all of the provisions of the Plan, as filed with the SEC and the Bankruptcy Court. The Plan provided for, among other things, the following: - Junior Secured Note Claims -- on the Effective Date, the holders of the Predecessor Company's $30 million par amount, 12 3/4% Junior Secured Notes due June 2004 (the "Junior Secured Notes") received new junior secured notes (the "New Notes") aggregating $34.0 million. The New Notes bear interest at 12 3/4% and are due on June 15, 2004. The par amount of the New Notes represent the par amount of the Junior Secured Notes plus accrued and unpaid interest through the Effective Date. - General Trade Claims ("Class 5 Claims") -- the holders of general trade claims of the Predecessor Company who elected not to receive common stock, par value $.01 per share ("Common Stock") of the Reorganized Company, will receive cash payments totaling 30% of their allowed claim. Such payments will be made, without interest, in four equal annual installments, with the first installment payable on June 30, 2002. As of the Effective Date, a payable of $1.3 million was established representing the liability recorded in connection with the estimated fair value of the allowed Class 5 Claims. - Impaired Unsecured Claims ("Class 6 Claims") -- the holders of the Predecessor Company's $180 million par amount, 10% Senior Subordinated Notes due May 2008 (the "Subordinated Notes") and the holders of the Predecessor Company's general trade claims who elected (or are otherwise deemed under the Plan to have elected) on their ballot to be treated as an allowed Class 6 Claim, will receive a total of 9,900,000 shares of Common Stock. As of March 31, 2002, 8,946,370 shares of Common Stock have been issued to holders of allowed Class 6 Claims. The initial distribution of Common Stock on account of Class 6 Claims was based on an estimate of total Class 6 Claims. Class 6 Claims in the initial distribution was comprised of resolved claims and reserves for unresolved claims. The Company has filed objections with the Bankruptcy Court related to unresolved claims. Additional distributions of Common Stock will be made after the unresolved claims are either resolved through agreement of the parties or by a final order of the Bankruptcy Court. - Preferred Stockholder and Common Stockholder Claims ("Equity Claims") -- the holders of the Predecessor Company's convertible preferred stock and common stock on the Effective Date received their pro-rata share of 100,000 shares of Common Stock and warrants (designated as "Series A Warrants") to purchase 750,000 shares of Common Stock. The Series A Warrants are immediately F-11 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) exercisable at a price per share equal to the total amount of liabilities (allowed under Class 6 of the Plan) converted into Common Stock in accordance with the Plan divided by 10,000,000. - Other Significant Provisions -- as of the Effective Date, the Board of Directors consists of the following non-employee directors: Daniel W. Dienst, John T. DiLacqua, Kevin P. McGuinness and Harold "Skip" Rouster. Albert A. Cozzi serves as Chairman of the Board of Directors and Chief Executive Officer. - A Management Equity Incentive Plan was approved under the Plan and provides for the issuance of warrants to purchase 1,000,000 shares of Common Stock at an exercise price of $6.50 per share (designated as "Series B Warrants") and warrants to purchase 500,000 shares of Common Stock at an exercise price of $12.00 per share (designated as "Series C Warrants"). REORGANIZATION COSTS Reorganization costs directly associated with the Chapter 11 proceedings for the nine months ended March 31, 2002, the three months ended June 30, 2001 and the year ended March 31, 2001 are as follows (in thousands): REORGANIZED | COMPANY | PREDECESSOR COMPANY -------------- | ------------------------------ NINE MONTHS | THREE MONTHS YEAR ENDED | ENDED ENDED MARCH 31, 2002 | JUNE 30, 2001 MARCH 31, 2001 -------------- | ------------- -------------- | Professional fees $151 | $ 6,838 $ 3,061 Liability for rejected contracts and | settlements 154 | 2,445 2,948 Write-off of deferred financing costs 0 | 0 9,044 Fresh-start adjustments 0 | 919 0 Other 152 | 145 579 ---- | ------- ------- $457 | $10,347 $15,632 ==== | ======= ======= The Company wrote-off $9.0 million of deferred financing costs related to its pre-petition credit facility (the "Predecessor Credit Facility") and its Subordinated Notes. These amounts were written-off because the Predecessor Credit Facility was terminated and replaced with a $200 million debtor-in-possession credit facility. In addition, in accordance with the Plan, all of the Subordinated Notes were cancelled and exchanged for Common Stock. During the Chapter 11 proceedings, the Company and the Official Committee of Unsecured Creditors each engaged financial advisors. As a result of the consummation of the Plan, both financial advisors were entitled to restructuring success fees. The restructuring success fees paid to the Company's financial advisor aggregated $2.6 million consisting of $1.0 million paid in cash and $1.6 million paid through the issuance of a 10% note payable due December 31, 2002, convertible into Common Stock at $6.46 per share. The financial advisor for the Official Committee of Unsecured Creditors was CIBC World Markets Corp. ("CIBC"), a company in which Daniel W. Dienst, now a director of the Company, is a managing director. Professional fees paid to CIBC during the year ended March 31, 2001 and the three months ended June 30, 2001 was approximately $0.4 million and $2.6 million, respectively. Fees paid to CIBC during the three months ended June 30, 2001 include restructuring success fees of $2.1 million, paid as follows: i) $1.05 million in cash and ii) $1.05 million paid through the issuance of 161,538 shares of Common Stock (at $6.50 per share). Rejected contracts and settlement charges represent amounts recorded for additional allowable claims under rejected employment, lease and other contracts and settlements reached on existing claims. Fresh-start adjustments represent the net impact of adjustments to state recorded assets and liabilities at their fair values. F-12 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Although the Company has emerged from Chapter 11 bankruptcy, reorganization costs are still being incurred for professional fees, U.S. Trustee fees and for settlements related to resolving all claims filed against the Predecessor Company. LIABILITIES SUBJECT TO COMPROMISE The consolidated financial statements of the Predecessor Company include adjustments and reclassifications to reflect liabilities as "Liabilities Subject to Compromise." These liabilities were incurred prior to the Petition Date and were or will be settled in accordance with the Plan. The liabilities subject to compromise as of March 31, 2001 were as follows (in thousands): Accounts payable $ 20,204 Accrued interest 9,256 Accrued expenses 7,879 10% Subordinated Notes 180,000 Other debt 2,895 -------- $220,234 ======== In accordance with SOP 90-7, the Company did not accrue interest of approximately $4.6 million and $6.6 million on debt subject to compromise from the period April 1, 2001 through June 29, 2001, and from the period November 20, 2000 to March 31, 2001, respectively, as such amounts were not permitted to be paid under the Plan. NOTE 3 -- FRESH-START REPORTING As previously discussed, the consolidated financial statements reflect the use of fresh-start reporting as required by SOP 90-7. Under fresh-start reporting, a reorganization value for the entity was determined by the Company's financial advisor based upon the estimated fair value of the enterprise before considering values allocated to debt to be settled in the reorganization. The reorganization value was allocated to the fair values of the Company's assets and liabilities. The portion of the reorganization value which could not be attributed to specific tangible or identified intangible assets of the Reorganized Company, was $15.5 million. In accordance with SFAS No. 142, this amount is reported as "Goodwill" in the consolidated financial statements and is not being amortized. The reorganization value for the equity of the Reorganized Company, aggregating $65 million, was based on the consideration of many factors and various valuation methods, including a discounted cash flow analysis using projected financial information, selected publicly traded company market multiples of certain companies operating businesses viewed to be similar to that of the Company, and other applicable ratios and valuation techniques believed by the Company and its financial advisor, to be representative of the Company's business and industry. The valuation was based upon a number of estimates and assumptions, which are inherently subject to significant uncertainties and contingencies beyond the control of the Company. The consolidated statement of operations of the Predecessor Company for the three months ended June 30, 2001 reflect fresh start reporting adjustments of $0.9 million and an extraordinary gain of $145.7 million related to the discharge of indebtedness in accordance with the Plan. The following summarizes F-13 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the effects of fresh-start reporting on the Company's consolidated balance sheet as of June 30, 2001 (in thousands): PREDECESSOR REORGANIZED COMPANY REORGANIZATION FRESH START COMPANY 6/30/01 ADJUSTMENTS ADJUSTMENTS NOTES 6/30/01 ----------- -------------- ----------- ----- ----------- ASSETS Current assets $ 128,099 $128,099 Property and equipment, net 142,883 142,883 Deferred financing costs, net 1,175 (35) (a,b) 1,140 Goodwill 0 14,542 919 (i) 15,461 Other assets 2,038 (103) (g) 1,935 --------- --------- ----- -------- TOTAL ASSETS $ 274,195 $ 14,507 $ 816 $289,518 ========= ========= ===== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 1,980 $ 1,980 Accounts payable 50,442 1,339 (c) 51,781 Accrued interest 4,053 (3,963) (b) 90 Other accrued liabilities 19,554 19,554 --------- --------- ----- -------- TOTAL CURRENT LIABILITIES 76,029 (2,624) 73,405 Long-term debt, less current portion: DIP Agreement 110,455 (110,455) (a) 0 Junior Secured Notes 27,983 (27,983) (b) 0 Credit Agreement 0 111,595 (a) 111,595 New Notes 0 33,963 (b) 33,963 Other debt 897 897 Other liabilities 2,645 1,500 513 (e,g) 4,658 --------- --------- ----- -------- TOTAL LONG-TERM LIABILITIES 141,980 8,620 513 151,113 Liabilities subject to compromise 215,636 (215,636) (c,d,e) 0 Stockholders' equity (deficit): Series B convertible preferred stock 815 (815) (f) 0 Series C convertible preferred stock 5,100 (5,100) (f) 0 Common stock 559 (559) (f) 0 Warrants 40,428 (40,428) (f) 0 New common equity -- issuable 0 65,000 (d,f) 65,000 Additional paid-in-capital 271,605 (271,605) (f) 0 Accumulated other comprehensive loss (303) 0 303 (g) Accumulated deficit (477,654) 477,654 0 (b,d,e,g,h) 0 --------- --------- ----- -------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (159,450) 224,147 303 65,000 --------- --------- ----- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 274,195 $ 14,507 $ 816 $289,518 ========= ========= ===== ======== --------------- NOTES: (a) Reflects the proceeds of the Credit Agreement, the repayment of the Company's obligations under the DIP Agreement and the deferred financing costs paid with respect to the Credit Agreement. (b) Reflects the exchange of the Junior Secured Notes for the New Notes in an amount equal to the par amount of the Junior Secured Notes plus unpaid and accrued interest, the write-off of $2.0 million of unamortized discount on the Junior Secured Notes and the write-off of $1.2 million of unamortized deferred financing costs on the Junior Secured Notes. (c) Reflects the reclassification of cure payments and convenience class payments to be paid in cash under the Plan. (d) Reflects the conversion of all Class 6 Claims into 9,900,000 shares of Common Stock. The $145.4 million excess of obligations eliminated over the fair value of Common Stock issued to holders of Class 6 Claims is included in the extraordinary gain of $145.7 million recognized in the three months ended June 30, 2001. F-14 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (e) Reflects the conversion of $5.0 million of Class 5 Claims into a 4 year, non-interest bearing payable. In accordance with the Plan, the non-interest bearing payable represents 30% of the original claim and is recorded at its present value. The $3.5 million excess of the obligations eliminated over the fair value of the non-interest bearing payable is included in the extraordinary gain of $145.7 million recognized in the three months ended June 30, 2001. (f) Reflects the cancellation of the Predecessor Company's convertible preferred stock, common stock and warrants to purchase common stock and the issuance of 100,000 shares of Common Stock and warrants to purchase 750,000 shares of Common Stock to the shareholders of the Predecessor Company. (g) Reflects the adjustment of pension assets and liabilities to fair value. (h) Reflects the elimination of the accumulated deficit as of June 30, 2001. (i) Reflects the establishment of Goodwill representing the excess of the reorganization value over the aggregate fair value of the Company's tangible and identifiable intangible assets. NOTE 4 -- NON-CASH AND NON-RECURRING EXPENSES During the nine months ended March 31, 2002, the three months ended June 30, 2001 and the years ended March 31, 2001 and 2000, the Company recorded the following non-cash and non-recurring expenses and related reserve activity (in thousands): SEVERANCE, FACILITY ASSET IMPAIRMENT CLOSURE AND OTHER AND DIVESTITURE MERGER RELATED CHARGES GAINS/LOSSES COSTS TOTAL ------------------- ---------------- -------------- ------ PREDECESSOR COMPANY: Reserve balances at March 31, 1999 $1,473 $ 0 $563 $2,036 Charge (credit) to income 5,224 (210) 0 5,014 Cash payments (4,896) 0 (150) (5,046) Non-cash application (993) 210 0 (783) ------ ------- ---- ------ Reserve balances at March 31, 2000 808 0 413 1,221 Charge to income 571 5,828 0 6,399 Cash payments (1,055) 0 (38) (1,093) Non-cash application (139) (5,828) (375) (6,342) ------ ------- ---- ------ Reserve balances at March 31, 2001 185 0 0 185 Charge to income 0 1,941 0 1,941 Cash payments (148) 0 0 (148) Non-cash application 0 (1,941) 0 (1,941) ---------------------------------------------------------------------------------------------------------- REORGANIZED COMPANY: Reserve balances at June 30, 2001 37 0 0 37 Charge to income 0 3,944 0 3,944 Cash payments (37) 0 0 (37) Non-cash application 0 (3,944) 0 (3,944) ------ ------- ---- ------ Reserve balances at March 31, 2002 $ 0 $ 0 $ 0 $ 0 ====== ======= ==== ====== SEVERANCE, FACILITY ABANDONMENT AND INTEGRATION AND ASSET IMPAIRMENT YEAR ENDED MARCH 31, 2000 ACTIVITY 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 F-15 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) approximately $2.1 million in the year ended March 31, 2000 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 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 in the year ended March 31, 2000, and the continuation of health, dental and life insurance plans. 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. Severance, facility closure and other charges also included severance, relocation and other employee costs totaling $1.2 million. Non-cash utilization primarily relates to the forgiveness of a note receivable from T. Benjamin Jennings and non-cash severance and other compensation. YEAR ENDED MARCH 31, 2001 ACTIVITY 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. ("Superior") 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's operations exceeded those planned, and (iii) the perceived inability of Superior to obtain capital to refinance its obligations. As a result of the initiation of the Chapter 11 proceedings, the Company performed a comprehensive review of its scrap metals operations to evaluate the long term economic viability of certain of its investments and to accelerate the integration of various operations in recognition of the significant adverse market conditions during the year ended March 31, 2001, its liquidity needs, and ongoing integration and consolidation efforts. The review resulted in decisions made in the fourth quarter of the year ended March 31, 2001 to abandon under-performing recycling operations in Ohio and Arizona. In connection with the facility abandonments and other termination arrangements, the Company incurred $0.2 million of severance and $0.4 million for lease cancellation, facility cleanup and other facility closure costs. The recycling facilities that were abandoned were integrated, where economically justified, into other Company facilities. In those instances where equipment was transferred to other Company facilities, such equipment was transferred at its carrying value. Equipment to be disposed of or otherwise converted to scrap was taken out of service and written down to its net realizable value resulting in a non-cash charge of $3.2 million. F-16 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) THREE MONTHS ENDED JUNE 30, 2001 ACTIVITY During the three months ended June 30, 2001, the Company recognized a $1.9 million asset impairment charge related to excess equipment to be disposed of or otherwise abandoned. NINE MONTHS ENDED MARCH 31, 2002 ACTIVITY During December 2001, the Company completed an evaluation of the economic viability of certain of its operations considering the current market conditions, liquidity needs and the outlook for a return to historical operating levels. As a result, management implemented a plan to dispose of a facility and has commenced a complete wind-down of its operations. Non-cash and non-recurring expense includes a $3.1 million asset impairment charge related to this decision recorded during the three months ended December 31, 2001. During March 2002, the Company recognized a $0.8 million asset impairment charge related to property and equipment. The impairment charge included adjustments to the carrying value of property and equipment previously classified as held for sale as estimates of their fair values were revised based on current market conditions and charges related to additional excess equipment to be disposed of or otherwise abandoned. MERGER RELATED COSTS The activity during the year ended March 31, 2000 represents payments made on the buy-out of contracts assumed in connection with an acquisition. During the year ended March 31, 2001, the Company made payments of $38,000 relating to the contracts and then rejected the contracts in the Chapter 11 proceedings. The non-cash utilization of $375,000 represented the remaining balance due on the contracts which were reclassified to a liability subject to compromise and settled in accordance with the Plan. NOTE 5 -- DISCONTINUED OPERATIONS During the year ended March 31, 1997, the Company sold its computer printer and related products business for approximately $1.3 million in cash and other contingent consideration in the form of royalties on future product sales. The royalty agreement expired during the year ended March 31, 2000. Consideration from royalty income was recognized as earned and was reported as additional gain on sale of discontinued operations. Income tax provision for the gain on sale of discontinued operations was approximately $0.3 million for the year ended March 31, 2000. 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 consist of the following categories at March 31 (in thousands): REORGANIZED | PREDECESSOR COMPANY | COMPANY ----------- | ----------- 2002 | 2001 ----------- | ----------- | Ferrous metals $19,654 | $20,685 Non-ferrous metals 16,807 | 18,050 Other 820 | 1,038 ------- | ------- $37,281 | $39,773 ======= | ======= F-17 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 7 -- PROPERTY AND EQUIPMENT As a result of fresh-start reporting, on the Effective Date, property and equipment was recorded at fair value (which approximated book value) and accumulated depreciation was eliminated. Property and equipment consists of the following at March 31 (in thousands): REORGANIZED | PREDECESSOR COMPANY | COMPANY ----------- | ----------- 2002 | 2001 ---- | ---- | Land and improvements $ 22,496 | $ 24,637 Buildings and improvements 18,546 | 28,064 Operating machinery and equipment 82,164 | 130,659 Automobiles and trucks 8,398 | 17,908 Computer equipment 2,046 | 4,110 Furniture, fixture and office equipment 764 | 1,344 Construction in progress 2,482 | 3,376 -------- | -------- 136,896 | 210,098 Less -- accumulated depreciation (13,230) | (62,015) -------- | -------- $123,666 | $148,083 ======== | ======== Depreciation expense was $13.7 million, $4.7 million, $19.4 million and $18.9 million for the nine months ended March 31, 2002, the three months ended June 30, 2001 and the years ended March 31, 2001 and 2000, respectively. At March 31, 2002 and 2001, $10.1 million and $6.5 million of property and equipment was classified as held for sale, respectively, and is reported in current assets in the consolidated balance sheets. NOTE 8 -- LONG-TERM DEBT Long-term debt consists of the following at March 31 (in thousands): REORGANIZED | PREDECESSOR COMPANY | COMPANY ----------- | ----------- 2002 | 2001 ---- | ---- | Credit Agreement, average interest rate of 5.86% $ 97,054 | $ 0 DIP Agreement, average interest rate of 11.02% 0 | 121,666 12 3/4% New Notes due June 2004 33,963 | 0 12 3/4% Junior Secured Notes due June 2004 0 | 27,851 10% convertible note payable due December 2002 1,568 | 0 Other debt, due 2002 to 2009, average interest rate of | 8.28% in 2002 and 8.97% in 2001, with equipment and | real estate generally pledged as collateral 1,375 | 3,460 -------- | -------- 133,960 | 152,977 Less -- current portion of long-term debt (2,321) | (2,444) -------- | -------- $131,639 | $150,533 ======== | ======== F-18 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Scheduled maturities of long-term debt are as follows (in thousands): FISCAL YEAR ENDING, MARCH 31 2003 $ 2,321 2004 97,230 2005 34,118 2006 53 2007 53 Thereafter 185 -------- Total $133,960 ======== CREDIT FACILITIES In connection with the Chapter 11 proceedings, the Company entered into a $200 million debtor-in-possession credit facility (the "DIP Agreement") which established a lending arrangement for the Company under certain conditions while in bankruptcy. The DIP Agreement was replaced on June 29, 2001 by a $150 million revolving loan and letter of credit facility (the "Credit Agreement"). The Credit Agreement was entered into by the Company and Bankers Trust Company, as agent for the lenders thereunder and the lenders a party thereto and expires on June 29, 2003. The Credit Agreement is available to fund working capital needs and for general corporate purposes. Borrowings under the Credit Agreement are subject to certain borrowing base limitations based upon a formula equal to 85% of eligible accounts receivable, the lesser of $65 million or 70% of eligible inventory, and a fixed asset sublimit as of March 31, 2002 of $33.9 million, which amortizes by $2.4 million on a quarterly basis and under certain other conditions. In addition, as of March 31, 2002, supplemental availability of approximately $11.6 million is provided, subject to periodic amortization of $1.2 million each quarter and other reductions. A security interest in substantially all of the assets and properties of the Company, including pledges of the capital stock of the Company's subsidiaries, has been granted to the lenders as collateral against the obligations of the Company under the Credit Agreement. The Credit Agreement provides the Company with the option of borrowing based either on the prime rate (as specified by Deutsche Bank AG, New York Branch) or at the London Interbank Offered Rate ("LIBOR") plus a margin. Pursuant to the Credit Agreement, the Company pays a fee of .375% on the undrawn portion of the facility. In consideration for the Credit Agreement, the Company paid a closing fee of $1 million to the lenders under the Credit Agreement and is expecting to pay a $2 million facility fee on June 29, 2002. The Credit Agreement requires the Company to meet certain financial tests, including an interest coverage ratio and a leverage ratio (each as defined in the Credit Agreement). The Credit Agreement also contains covenants which, among other things, limit (i) the amount of capital expenditures; (ii) the incurrence of additional indebtedness; (iii) the payment of dividends; (iv) transactions with affiliates; (v) asset sales; (vi) acquisitions; (vii) investments; (viii) mergers and consolidations; (ix) prepayments of certain other indebtedness; (x) liens and encumbrances; and (xi) other matters customarily restricted in such agreements. The Company's ability to meet financial ratios and tests in the future may be affected by events beyond its control, including fluctuations in operating cash flows and working capital. While the Company currently expects to be in compliance with the covenants and satisfy the financial ratios and tests in the future, there can be no assurance that the Company will meet such financial ratios and tests or that it will be able to obtain future amendments or waivers to the Credit Agreement, if so needed, to avoid a default. In the event of a default, the lenders could elect to not make loans available to the Company and declare all amounts borrowed under the Credit Agreement to be due and payable. F-19 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Credit Agreement provides for a maturity date of June 29, 2003. The Company expects that it will be able to refinance its obligations under the Credit Agreement by either extending the maturity date of the existing facility or through replacement of the facility with a facility including substitute lenders. In the event that the Company is unable to extend the maturity date of the Credit Agreement, the lenders could elect to not make loans available to the Company and declare all amounts borrowed under the Credit Agreement to be due and payable. NEW NOTES On May 7, 1999, the Company issued $30 million par amount of Junior Secured Notes. The December 15, 2000 and June 15, 2001 semi-annual interest payments, totaling approximately $3.8 million, were not made in respect of the Junior Secured Notes as a result of the Chapter 11 proceedings. On the Effective Date, pursuant to the Plan, the Junior Secured Notes were exchanged for New Notes in a principal amount equal to the par amount of the Junior Secured Notes, plus approximately $4.0 million of accrued and unpaid interest up to the Effective Date. 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 New Notes. Interest on the New Notes is payable semi-annually during June and December of each year. The New Notes are redeemable at the Company's option (in multiples of $10 million) at a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest. The New Notes are redeemable at the option of the holders of such notes at a repurchase price of 101% of the principal amount thereof, plus accrued and unpaid interest, in the event the Company experiences a change of control (as such term is defined in the Indenture governing the New Notes). The Company is required to redeem all or a pro-rata portion of the New Notes at a repurchase price of 100% of the principal amount thereof, plus accrued and unpaid interest, in the event that the Company makes certain asset sales. The Indenture governing the Junior Secured Notes was amended and restated in accordance with the Plan in order to reflect, among other things, the increase in the principal amount of the New Notes. The Indenture, as amended, contains restrictions including limits on, among other things, the Company's ability to: (i) incur additional indebtedness; (ii) pay dividends or distributions on its capital stock or repurchase its capital stock; (iii) issue stock of subsidiaries; (iv) make certain investments; (v) create liens on its assets; (vi) enter into transactions with affiliates; (vii) merge or consolidate with another company; and (viii) transfer and sell assets or enter into sale and leaseback transactions. CONVERTIBLE DEBT As indicated in Note 2 -- Reorganization under Chapter 11, the Company issued a promissory note to its financial advisor involved in the Chapter 11 proceedings. The promissory note was issued in an amount of $1.6 million and bears interest at 10% per annum. The promissory note matures on December 31, 2002 and the Company is required to make interest payments each quarter. The holder of the promissory note has the option of converting a minimum of $500,000 of the principal amount of the promissory note into Common Stock at $6.46 per share at any time prior to maturity. NOTE 9 -- INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Due to the Predecessor Company's history of losses and uncertainty regarding the Company's ability to generate future taxable income, management has determined that it is F-20 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) more likely than not that deferred tax benefits will not be realizable. Accordingly, the net benefit of the Company's deferred tax asset has been reduced by a valuation allowance. The provision (benefit) for federal and state income taxes is as follows (in thousands): REORGANIZED | COMPANY | PREDECESSOR COMPANY ----------- | --------------------------------- NINE MONTHS | THREE MONTHS YEAR ENDED ENDED | ENDED MARCH 31, MARCH 31, | JUNE 30, ----------------- 2002 | 2001 2001 2000 ----------- | ------------ ---- ---- | Federal: | Current $0 | $0 $ 0 $ 0 Deferred 0 | 0 6,080 (2,609) -- | -- ------ ------- 0 | 0 6,080 (2,609) -- | -- ------ ------- State: | Current $0 | $0 0 866 Deferred 0 | 0 2,211 (1,089) -- | -- ------ ------- 0 | 0 2,211 (223) -- | -- ------ ------- Total tax provision (benefit) $0 | $0 $8,291 $(2,832) == | == ====== ======= The components of deferred tax assets and liabilities at March 31, related to the following (in thousands): REORGANIZED | PREDECESSOR COMPANY | COMPANY ----------- | ----------- 2002 | 2001 ---- | ---- | DEFERRED TAX ASSETS: | Net operating loss carryforward $ 37,053 | $ 50,731 Goodwill and other intangibles 39,943 | 43,949 Depreciation 2,869 | 0 Employee benefit accruals 1,383 | 2,028 Other 7,143 | 6,749 -------- | -------- 88,391 | 103,457 -------- | -------- DEFERRED TAX LIABILITIES: | Depreciation (28,909) | (16,064) Other 0 | 0 -------- | -------- (28,909) | (16,064) -------- | -------- NET DEFERRED TAX ASSET BEFORE VALUATION ALLOWANCE 59,482 | 87,393 VALUATION ALLOWANCE (59,482) | (87,393) -------- | -------- NET DEFERRED TAX ASSET $ 0 | $ 0 ======== | ======== At the Effective Date, the Predecessor Company and its subsidiaries had available net operating loss ("NOL") carryforwards for federal income tax purposes of approximately $130 million. These NOL carryforwards have been reduced as result of the discharge and cancellation of various pre-petition liabilities under the Plan. The Reorganized Company has not recorded a financial statement benefit for the NOL carryforwards because the requirements to record such a benefit have not been satisfied. The Reorganized Company has available NOL carryforwards of approximately $76 million, for federal income tax purposes, which expire through 2022. Further, as a result of a statutory "ownership change" (as defined in Section 382 of the Internal Revenue Code) that occurred as a result of the effectiveness of the Plan, it is anticipated that F-21 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the Reorganized Company's ability to utilize the Predecessor Company's NOL carryforwards for federal income tax purposes will be restricted to approximately $3 million per year. If the Company, in future tax periods, were able to and elected to utilize such NOL carryforwards and recognize tax benefits attributable to the Predecessor Company's NOL carryforwards, such benefits would be applied to certain balance sheet accounts in accordance with SFAS No. 109, "Accounting for Income Taxes." The Reorganized Company has incurred an additional $22 million of post-change NOL carryforwards which also expire in 2022. The reconciliation of the federal income tax rate to the Company's effective tax rate is as follows: REORGANIZED | COMPANY | PREDECESSOR COMPANY ----------- | ---------------------------------- NINE MONTHS | THREE MONTHS YEAR ENDED ENDED | ENDED MARCH 31, MARCH 31, | JUNE 30, ---------------- 2002 | 2001 2001 2000 ----------- | ------------ ---- ---- | Normal statutory rate (35.0)% | 35.0% (35.0)% (35.0)% State income taxes, net of federal benefit (3.9) | 3.9 (3.2) (1.4) Change in valuation allowance 37.3 | (21.5) 24.2 -- Non-taxable cancellation of indebtedness | income -- | (19.4) -- -- Non-deductible goodwill impairment -- | -- 15.7 -- Non-deductible reorganization costs -- | 2.0 0.3 -- Non-deductible goodwill amortization -- | -- 0.2 10.3 IRS audit adjustments -- | -- -- 5.4 Other 1.6 | 0.0 0.1 2.0 ----- | ----- ----- ----- Effective tax rate 0.0% | 0.0% 2.3% (18.7)% ===== | ===== ===== ===== NOTE 10 -- EMPLOYEE BENEFIT PLANS 401(K) AND PROFIT SHARING PLANS The Company offers a 401(k) plan covering substantially all employees. For non-union employees, the Company provides a matching contribution equal to 20% of the employees pre-tax contribution, up to 5% of the employees compensation. For employees covered under collective bargaining agreements, Company matching contributions are made in accordance with each respective collective bargaining agreement. Forfeitures of unvested Company contributions are used to reduce future Company matching contributions. The Company also may make a discretionary profit sharing contribution to the 401(k) plan. Matching contributions made by the Company amounted to $0.2 million for the nine months ended March 31, 2002, and $0.2 million for both the years ended March 31, 2001 and 2000. No discretionary contributions have been made into the 401(k) plan. PENSION PLANS Some of the Company's wholly-owned subsidiaries have defined benefit pension plans covering certain employees and groups of employees. Net pension cost (income) under these plans for the nine months ended March 31, 2002, the three months ended June 30, 2001 and the years ended March 31, 2001 and 2000 were approximately $0.1 million, $0.0 million, $(0.1) million and $0.3 million, respectively. At March 31, 2002 and 2001, the pension benefit obligation exceeded the fair value of plan assets by $2.2 million and $0.4 million, respectively. The Company has recorded minimum pension liabilities of $2.1 million and $1.1 million at March 31, 2002 and 2001, respectively. As of March 31, 2000, the Company permanently eliminated benefit accruals for future service for non-union employees covered under its defined benefit pension plans. As a result, the Company recognized a net curtailment gain of approximately $0.6 million which was recorded as a reduction in general and administrative expenses in the fourth quarter of the year ended March 31, 2000. F-22 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 11 -- COMMITMENTS AND CONTINGENCIES LEASES The Company leases certain facilities and equipment under operating leases expiring at various dates. Lease expense was approximately $6.9 million, $2.2 million, $8.2 million and $6.2 million for the nine months ended March 31, 2002, the three months ended June 30, 2001 and the years ended March 31, 2001 and 2000, respectively. Future minimum lease payments under non-cancelable operating leases are as follows (in thousands): FISCAL YEAR ENDING, MARCH 31 ---------------------------- 2003 $ 7,724 2004 6,719 2005 5,473 2006 4,387 2007 3,381 Thereafter 25,453 ENVIRONMENTAL MATTERS The Company is subject to comprehensive local, state, federal and international regulatory and statutory requirements relating to the acceptance, storage, handing 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. Prior to the Chapter 11 proceedings, certain of the Company's subsidiaries received notices from the United States Environmental Protection Agency ("EPA") that each of these companies and numerous other parties are considered potentially responsible parties and may be obligated under Superfund to pay a portion of the cost of remedial investigation, feasibility studies and, ultimately, remediation to correct alleged releases of hazardous substances at various third party sites. Superfund may impose joint and several liability for the costs of remedial investigations and actions on the entities that arranged for disposal of certain wastes, the waste transporters that selected the disposal sites, and the owners and operators of these sites. Responsible parties (or any one of them) may be required to bear all of such costs regardless of fault, legality of the original disposal, or ownership of the disposal site. Based upon the Company's analysis of its environmental exposure, the Company currently does not expect the potential liability of its subsidiaries in these matters to have a material adverse effect on the its financial condition or results of operations. At March 31, 2002 and 2001, the Company had reserves of $0.7 million and $1.3 million, respectively, for environmental-related contingencies. LEGAL PROCEEDINGS From time to time, the Company is involved in various litigation matters involving ordinary and routine claims incidental to its business. A significant portion of these matters result from environmental compliance issues and workers compensation related claims arising from the Company's operations. There are presently no legal proceedings pending against the Company which, in the opinion of the Company's management, is likely to have a material adverse effect on its business, financial condition or results of operations. PURCHASE OF REAL PROPERTY In November 2001, the Company amended its lease agreement for real property on which it operates a scrap metals recycling facility in Houston, Texas. The lease agreement expires on October 31, 2006 and provides for, among other things, an option for the lessor to sell the real property to the Company beginning on the 22nd month of the lease at an amount which approximates fair value. The Company also has an option to F-23 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) purchase the real property beginning on the 22nd month of the lease. The purchase price for the real property is based on the month in which the option is exercised as follows: PURCHASE AMOUNT DATE OF EXERCISE (IN THOUSANDS) ---------------- --------------- Months 22 - 24 $4,000 Months 25 - 48 $4,250 Months 49 - 60 $4,500 The Company has an option to purchase real property in Tucson, Arizona, where it currently operates a scrap metals recycling facility, for $1.1 million. The purchase option expires on December 31, 2002. If the Company chooses not to exercise its option, the Company will forfeit a $0.2 million deposit. ISSUANCE OF COMMON STOCK In July 2003, the Company may be required to issue Common Stock to three of its employees with an aggregate value of $1.0 million, pursuant to employment contracts with these three employees. The issuance of the Common Stock is contingent on these individuals being employed by the Company on July 7, 2003. At March 31, 2002, $0.7 million has been accrued as a liability associated with these contracts. NOTE 12 -- STOCKHOLDERS' EQUITY Pursuant to the Plan, the Company filed a Second Amended and Restated Certificate of Incorporation with the Delaware Secretary of State under which the authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, par value $.01 per share and 2,000,000 shares of preferred stock, par value $.01 per share. In accordance with the Plan, all outstanding shares of the Predecessor Company's common stock, convertible preferred stock, and warrants and options to purchase common stock were cancelled as of the Effective Date. As indicated in Note 2 -- Reorganization Under Chapter 11, the Company has not yet issued all the shares of Common Stock and Series A Warrants pursuant to the Plan. The Company has reported the value of the Common Stock and Series A Warrants not yet issued as "new common equity -- issuable." In the case of Class 6 Claims holders, remaining shares of Common Stock will be distributed upon resolution of unresolved claims in the Chapter 11 proceedings. Distributions of Common Stock and Series A Warrants to Equity Claims holders require the return of the Predecessor Company's common stock by the Equity Claims holders. NOTE 13 -- LOSS PER SHARE As indicated in Note 2 -- Reorganization Under Chapter 11, the Company has not yet issued all 10,000,000 shares required to be distributed in accordance with the Plan. However, for purposes of the EPS calculation, all 10,000,000 shares are deemed to be issued and outstanding. F-24 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a reconciliation of the numerators and denominators used in computing EPS (in thousands, except per share amounts): REORGANIZED | COMPANY | PREDECESSOR COMPANY ------------ | ------------------------------------- NINE | THREE MONTHS ENDED | MONTHS ENDED YEAR ENDED MARCH 31, MARCH 31, | JUNE 30, --------------------- 2002 | 2001 2001 2000 ------------ | ------------ ---- ---- | LOSS (NUMERATOR): | Loss from continuing operations before | cumulative effect of change in accounting | principle and extraordinary gain $(6,083) | $(16,754) $(365,322) $(12,294) Dividends on convertible preferred stock 0 | 0 (295) (2,021) ------- | -------- --------- -------- Loss from continuing operations before | cumulative effect of change in accounting | principle and extraordinary gain applicable | to common stock $(6,083) | $(16,754) $(365,617) $(14,315) ======= | ======== ========= ======== SHARES (DENOMINATOR): | Weighted average number of shares outstanding | during the period 10,120 | 61,731 59,131 54,333 Incremental common shares attributable to | dilutive stock options and warrants 0 | 0 0 0 ------- | -------- --------- -------- Diluted number of shares outstanding during the | period 10,120 | 61,731 59,131 54,333 ======= | ======== ========= ======== Basic loss per common share $ (0.60) | $ (0.27) $ (6.18) $ (0.27) ======= | ======== ========= ======== Diluted loss per common share $ (0.60) | $ (0.27) $ (6.18) $ (0.27) ======= | ======== ========= ======== Due to the loss from continuing operations applicable to common stock for all the periods presented, the effect of dilutive stock options and warrants were not included as their effect would have been anti-dilutive. In addition, the convertible note payable (see Note 8 -- Long-term Debt) is anti-dilutive and has not been included in the calculation of diluted EPS. NOTE 14 -- STOCK BASED COMPENSATION STOCK OPTION PLANS On November 2, 1998, the Predecessor Company's stockholders approved an amendment to its 1995 Stock Option Plan (the "1995 Plan") to reserve an aggregate 5,200,000 shares of common stock which could be issued to employees and consultants. Options under the 1995 Plan were generally granted at an exercise price equal to or greater than the market price of the common stock on the date of grant. These options generally vested between 3 to 5 years and had terms ranging from 5 to 10 years. The 1995 Plan and all options granted thereunder were cancelled as of the Effective Date in accordance with the Plan. On November 2, 1998, the Predecessor Company's stockholders approved the 1998 Director Compensation Plan (the "Director Plan") under which up to 250,000 shares of common stock were available for grant to nonemployee directors. Options granted under the Director Plan were fully vested and exercisable at the time of grant. The Director Plan and all options granted thereunder were cancelled as of the Effective Date in accordance with the Plan. F-25 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Summarized information for the Predecessor Company's stock option plans are as follows: WEIGHTED AVERAGE EXERCISE SHARES PRICE ------ -------- PREDECESSOR COMPANY: Options outstanding at March 31, 1999 2,865,945 $ 4.44 Granted 1,043,489 2.69 Exercised 0 0.00 Expired/forfeited (432,587) 5.63 ---------- ------ Options outstanding at March 31, 2000 3,476,847 3.78 Granted 153,040 2.40 Exercised 0 0.00 Expired/forfeited (591,275) 4.76 ---------- ------ Options outstanding at March 31, 2001 3,038,612 3.52 Cancellation of stocks options in accordance with the Plan (3,038,612) (3.52) ---------- ------ Options outstanding at June 30, 2001 0 $ 0.00 ========== ====== Exercisable at March 31, 2000 1,225,247 $ 4.59 Exercisable at March 31, 2001 1,917,777 $ 3.64 Options available for grant as of March 31, 2001 and 2000 were 2,264,638 and 1,861,403, respectively. WARRANTS As indicated in Note 2 -- Reorganization Under Chapter 11, a Management Equity Incentive Plan was approved under the Plan. The Series B and Series C Warrants were issued to key employees and each vest ratably over three years and are exercisable for a period of five years and seven years, respectively, from the grant date. The Series A Warrants, issued pursuant to the Plan, are immediately exercisable and expire on June 29, 2006. As of March 31, 2002, Series A Warrants to purchase 675,218 shares of Common Stock had been issued. The exercise price for the Series A Warrants has not yet been fixed. The estimated strike price is based on a formula designated in the Plan which calls for the strike price to be equal to the allowed Class 6 Claims divided by 10 million. The Company currently estimates the exercise price to be approximately $21.50 per share. The Predecessor Company also issued warrants to purchase common stock in connection with acquisitions and to employees and directors for services. All warrants issued by the Predecessor Company were cancelled pursuant to the Plan. F-26 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The summary of warrant activity is as follows: WEIGHTED AVERAGE EXERCISE SHARES PRICE ------ -------- PREDECESSOR COMPANY: Warrants outstanding at March 31, 1999 8,442,947 $ 8.85 Granted 695,000 3.86 Exercised 0 0.00 Expired/forfeited (811,875) 4.02 ---------- ------ Warrants outstanding at March 31, 2000 8,326,072 8.91 Granted 0 0.00 Exercised 0 0.00 Expired/forfeited (56,250) 7.90 ---------- ------ Warrants outstanding at March 31, 2001 8,269,822 8.92 Cancellation of warrants in accordance with the Plan (8,269,822) (8.92) ---------- ------ ----------------------------------------------------------------------------------------- REORGANIZED COMPANY: Warrants outstanding at June 30, 2001 0 0.00 Granted 2,162,718 12.45 ---------- ------ Warrants outstanding at March 31, 2002 2,162,718 $12.45 ========== ====== The following table summarizes information about warrants outstanding at March 31, 2002: WARRANTS OUTSTANDING WARRANTS EXERCISABLE -------------------------------------- --------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE CONTRACTUAL EXERCISE EXERCISE EXERCISE PRICES SHARES LIFE (YRS) PRICE SHARES PRICE --------------- ------ ----------- -------- ------ -------- $6.50 987,500 4.25 $ 6.50 329,163 $ 6.50 $12.00 500,000 6.25 $12.00 166,662 $12.00 $21.50 675,218 4.25 $21.50 675,218 $21.50 PRO FORMA DISCLOSURES The Company has adopted the disclosure-only provisions of SFAS No. 123 "Accounting or Stock-Based Compensation." The Company continues to account for stock-based compensation under the provisions of APB Opinion No. 25 and, accordingly, does not recognize compensation cost for options and warrants with exercise prices equal to or greater than 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 loss and net loss per share as if the F-27 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company had accounted for its employee stock-based compensation under the fair value method prescribed by SFAS No. 123 (in thousands, except per share data and assumptions): REORGANIZED | COMPANY | PREDECESSOR COMPANY ----------- | --------------------------------- NINE | THREE MONTHS | MONTHS ENDED | ENDED YEAR ENDED MARCH 31, MARCH 31, | JUNE 30, --------------------- 2002 | 2001 2001 2000 --------- | -------- ---- ---- | NET INCOME (LOSS) APPLICABLE TO COMMON STOCK: | As reported $(6,083) | $128,599 $(365,617) $(13,939) Pro forma $(7,045) | $128,271 $(367,227) $(16,359) BASIC AND DILUTED EPS APPLICABLE TO COMMON STOCK: | As reported $ (0.60) | $ 2.08 $ (6.18) $ (0.26) Pro forma $ (0.70) | $ 2.08 $ (6.21) $ (0.30) ASSUMPTIONS: | Expected life (years) 3 | 3 3 3 Expected volatility 269.23% | 89.80% 89.80% 96.15% Dividend yield -- | -- -- -- Risk-free interest rate 4.31% | 4.48% 4.33% 6.47% The fair value of each option and warrant grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option valuation model was originally developed for use in estimating the fair value of traded options, which have different characteristics than the Company's employee stock options and warrants. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. As a result, it is management's opinion that the Black-Scholes model may not necessarily provide a reliable single measure of the fair value of employee stock options and warrants. NOTE 15 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth certain unaudited quarterly financial information for the Company's last eight fiscal quarters (in thousands, except per share amounts): PREDECESSOR | COMPANY | REORGANIZED COMPANY ----------- | ------------------------------------ FISCAL 2002: JUNE 30 | SEPT. 30 DEC. 31 MAR. 31 ------------ ------- | -------- ------- ------- | Net sales $166,268 | $156,978 $141,265 $166,552 Gross profit 17,052 | 17,614 15,344 22,657 Non-cash and non-recurring expense(a) 1,941 | 0 3,100 844 Income (loss) from continuing operations before | reorganization costs, income taxes, | cumulative effect of change in accounting | principle and extraordinary gain (6,407) | (1,736) (6,203) 2,313 Net income (loss) applicable to common stock 128,599 | (1,991) (6,405) 2,313 Basic and diluted earnings (loss) per share(d) $ 2.08 | $ (0.20) $ (0.63) $ 0.23 F-28 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PREDECESSOR COMPANY --------------------------------------------------- FISCAL 2001: JUNE 30 SEPT. 30 DEC. 31 MAR. 31 ------------ ------- -------- ------- ------- Net sales $241,909 $213,774 $ 154,780 $156,128 Gross profit 22,981 18,536 5,677 14,680 Goodwill impairment(b) 0 0 280,132 0 Non-cash and non-recurring expense(a) 2,639 211 (211) 3,760 Loss from joint ventures(c) (134) (515) (927) (1,873) Net loss applicable to common stock (8,335) (26,827) (311,985) (18,470) Basic and diluted earnings (loss) per share (d) $ (0.14) $ (0.46) $ (5.20) $ (0.30) --------------- (a) Reflects charges recorded for the impairment of fixed assets, facility abandonments and a note receivable from Superior. See Note 4 -- Non-Cash and Non-Recurring Expenses. (b) Reflects the impairment of goodwill recognized in the quarter ended December 31, 2000, as a result of a change in the Predecessor Company's accounting policy for evaluating the carrying value of goodwill. See Note 1 -- Significant Accounting Policies. (c) Loss in the quarter ended March 31, 2001 includes the impairment of the Company's investment in Southern of approximately $1.8 million. See Note 1 -- Significant Accounting Policies. (d) The sum of the quarterly per share amounts will not equal per share amounts reported for the year-to-date period due to the changes in the number of weighted-average shares outstanding for each period. F-29 METAL MANAGEMENT, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) ----------------------------------------------------------------------------------------------------------------- BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS, BALANCE AT BEGINNING COSTS AND OTHER NET OF END OF OF PERIOD EXPENSES ACCOUNTS(a) RECOVERIES PERIOD ---------- ---------- ----------- ----------- ---------- ALLOWANCE FOR DOUBTFUL ACCOUNTS: PREDECESSOR COMPANY: Year Ended March 31, 2000 $ 2,020 $ 2,343 $(500) $ (1,221) $ 2,642 Year Ended March 31, 2001 $ 2,642 $ 5,678 $ 0 $ (6,717) $ 1,603 Three months ended June 30, 2001 $ 1,603 $ 1,058 $ 0 $ (357) $ 2,304 ----------------------------------------------------------------------------------------------------------------- REORGANIZED COMPANY: Nine months ended March 31, 2002 $ 2,304 $ 2,031 $ 0 $ (1,968) $ 2,367 TAX VALUATION ALLOWANCE: PREDECESSOR COMPANY: Year Ended March 31, 2000 $ 250 $ 220 $ 0 $ 0 $ 470 Year Ended March 31, 2001 $ 470 $86,923 $ 0 $ 0 $87,393 Three months ended June 30, 2001 $87,393 $ 0 $ 0 $(22,881) $64,512 ----------------------------------------------------------------------------------------------------------------- REORGANIZED COMPANY: Nine months ended March 31, 2002 $64,512 0 $ 0 $ (5,132) $59,380 F-30