--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
[ ] 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 400,
CHICAGO, IL 60610
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (312) 645-0700
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _
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 October 31, 2001, the Registrant had 8,918,224 shares of common stock
outstanding.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
INDEX
PAGE
----
PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements
Consolidated Balance Sheets -- September 30, 2001
(Reorganized Company) and March 31, 2001 (Predecessor
Company) (unaudited) 1
Consolidated Statements of Operations -- three months ended
September 30, 2001 (Reorganized Company), three months ended
September 30, 2000 and June 30, 2001 and six months ended
September 30, 2000 (Predecessor Company) (unaudited) 2
Consolidated Statements of Cash Flows -- three months ended
September 30, 2001 (Reorganized Company), three months ended
June 30, 2001 and six months ended September 30, 2000
(Predecessor Company) (unaudited) 3
Consolidated Statements of Stockholders' Equity -- three
months ended September 30, 2001 (Reorganized Company) and
three months ended June 30, 2001 (Predecessor Company)
(unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 5
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk 23
PART II: OTHER INFORMATION
ITEM 2: Changes in Securities 24
ITEM 5: Other Information 24
ITEM 6: Exhibits and Reports on Form 8-K 24
Signatures 25
Exhibit Index 26
PART I: FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
METAL MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)
REORGANIZED | PREDECESSOR
COMPANY | COMPANY
SEPTEMBER 30, 2001 | MARCH 31, 2001
------------------ | --------------
|
ASSETS |
Current assets: |
Cash and cash equivalents $ 1,159 | $ 1,428
Accounts receivable, net 66,392 | 79,607
Inventories (Note 5) 45,649 | 39,773
Prepaid expenses and other assets 11,450 | 11,394
-------- | ---------
Total current assets 124,650 | 132,202
|
Property and equipment, net 138,997 | 148,083
Goodwill (Note 3) 15,461 | 0
Deferred financing costs, net 1,148 | 2,204
Other assets 1,836 | 2,303
-------- | ---------
TOTAL ASSETS $282,092 | $ 284,792
======== | =========
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
Current liabilities: |
Current portion of long-term debt (Note 6) $ 1,735 | $ 2,444
Accounts payable 47,585 | 37,927
Accrued interest 1,715 | 4,149
Other accrued liabilities 14,218 | 10,610
-------- | ---------
Total current liabilities 65,253 | 55,130
|
Long-term debt, less current portion (Note 6) 148,247 | 150,533
Other liabilities 4,534 | 2,152
-------- | ---------
TOTAL LONG-TERM LIABILITIES 152,781 | 152,685
Liabilities subject to compromise 0 | 220,234
|
Stockholders' equity (deficit): (Note 8) |
Convertible Preferred Stock: |
Series B 0 | 815
Series C 0 | 5,100
Common Stock 2 | 542
Warrants 0 | 40,428
New common equity -- issuable 65,000 | 0
Additional paid-in-capital 1,047 | 271,319
Accumulated deficit (1,991) | (461,461)
-------- | ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 64,058 | (143,257)
-------- | ---------
TOTAL LIABILITIES AND STOCKHOLDERS' |
EQUITY $282,092 | $ 284,792
======== | =========
The accompanying notes are an integral part of these financial statements
1
METAL MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
REORGANIZED |
COMPANY | PREDECESSOR COMPANY
------------- | ----------------------------------------------
THREE MONTHS | THREE MONTHS THREE MONTHS SIX MONTHS
ENDED | ENDED ENDED ENDED
SEPTEMBER 30, | SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
2001 | 2000 2001 2000
-------- | -------- -------- --------
|
NET SALES $156,978 | $213,774 $166,268 $455,683
Cost of sales 139,364 | 195,238 149,216 414,166
-------- | -------- -------- --------
Gross profit 17,614 | 18,536 17,052 41,517
OPERATING EXPENSES: |
General and administrative 11,412 | 15,041 11,686 30,242
Depreciation and amortization 4,603 | 6,696 4,718 13,613
Non-cash and non-recurring expense (Note |
4) 0 | 211 1,941 2,850
-------- | -------- -------- --------
Total operating expenses 16,015 | 21,948 18,345 46,705
-------- | -------- -------- --------
Operating income (loss) 1,599 | (3,412) (1,293) (5,188)
OTHER INCOME (EXPENSE): |
Interest expense 3,389 | 10,675 5,169 21,003
Other income (expense), net 54 | (422) 55 (447)
-------- | -------- -------- --------
Loss before reorganization costs, income |
taxes, cumulative effect of change in |
accounting principle and extraordinary |
gain (1,736) | (14,509) (6,407) (26,638)
Reorganization costs (Note 2) 255 | 0 10,347 0
-------- | -------- -------- --------
Loss before income taxes, cumulative effect |
of change in accounting principle and |
extraordinary gain (1,991) | (14,509) (16,754) (26,638)
Provision for income taxes 0 | 12,201 0 8,291
-------- | -------- -------- --------
Loss before cumulative effect of change in |
accounting principle and extraordinary |
gain (1,991) | (26,710) (16,754) (34,929)
Cumulative effect of change in accounting |
principle (Note 1) 0 | 0 (358) 0
Extraordinary gain (Note 3) 0 | 0 145,711 0
-------- | -------- -------- --------
NET INCOME (LOSS) (1,991) | (26,710) 128,599 (34,929)
Preferred stock dividends 0 | 117 0 233
-------- | -------- -------- --------
NET INCOME (LOSS) APPLICABLE TO COMMON |
STOCK $ (1,991) | $(26,827) $128,599 $(35,162)
======== | ======== ======== ========
NET INCOME (LOSS) PER SHARE, BASIC AND |
DILUTED: |
Loss before cumulative effect of change |
in accounting principle and |
extraordinary gain $ (0.20) | $ (0.46) $ (0.27) $ (0.61)
Cumulative effect of change in accounting |
principle 0.00 | 0.00 (0.01) 0.00
Extraordinary gain 0.00 | 0.00 2.36 0.00
-------- | -------- -------- --------
Net income (loss) per share, basic |
and diluted $ (0.20) | $ (0.46) $ 2.08 $ (0.61)
======== | ======== ======== ========
Shares used in computation of basic and |
diluted loss per share 10,037 | 57,904 61,731 57,839
======== | ======== ======== ========
The accompanying notes are an integral part of these financial statements
2
METAL MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
REORGANIZED |
COMPANY | PREDECESSOR COMPANY
------------------ | -----------------------------------
THREE MONTHS | THREE MONTHS SIX MONTHS
ENDED | ENDED ENDED
SEPTEMBER 30, 2001 | JUNE 30, 2001 SEPTEMBER 30, 2000
------------------ | ------------- ------------------
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
Net income (loss) $ (1,991) | $ 128,599 $ (34,929)
Adjustments to reconcile net income (loss) to |
cash flows from operating activities: |
Depreciation and amortization 4,603 | 4,718 13,613
Deferred income taxes 0 | 0 8,291
Amortization of debt issuance costs and |
bond discount 154 | 1,359 1,596
Non-cash and non-recurring expense 0 | 1,941 2,639
Non-cash reorganization expenses 0 | 3,469 0
Extraordinary gain 0 | (145,711) 0
Cumulative effect of change in accounting |
principle 0 | 358 0
Provision for bad debt 296 | 1,058 539
Other 288 | (237) 760
Changes in assets and liabilities: |
Accounts and notes receivable 5,907 | 5,141 36,322
Inventories (4,127) | (1,749) 16,756
Accounts payable (3,265) | 9,200 (21,832)
Other (610) | 3,856 (4,081)
--------- | --------- ---------
Net cash provided by operating activities 1,255 | 12,002 19,674
CASH FLOWS USED IN INVESTING ACTIVITIES: |
Purchases of property and equipment (1,251) | (1,392) (5,783)
Proceeds from sale of property and equipment 357 | 1,141 575
Other (75) | (128) (169)
--------- | --------- ---------
Net cash used in investing activities (969) | (379) (5,377)
CASH FLOWS USED IN FINANCING ACTIVITIES: |
Issuances of long-term debt 163,375 | 111,627 532,752
Repayments of long-term debt (163,396) | (615) (544,676)
Repayments on DIP Agreement 0 | (121,666) 0
Fees paid to issue long-term debt (164) | (1,339) (2,792)
Repurchase of common stock 0 | 0 (67)
--------- | --------- ---------
Net cash used in financing activities (185) | (11,993) (14,783)
--------- | --------- ---------
Net increase (decrease) in cash and cash |
equivalents 101 | (370) (486)
Cash and cash equivalents at beginning of period 1,058 | 1,428 1,396
--------- | --------- ---------
Cash and cash equivalents at end of period $ 1,159 | $ 1,058 $ 910
========= | ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION: |
Interest paid $ 1,587 | $ 3,905 $ 19,247
The accompanying notes are an integral part of these financial statements
3
METAL MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(unaudited, in thousands)
NEW
PREFERRED STOCK COMMON ADDITIONAL
-------------------- COMMON EQUITY -- PAID-IN- ACCUMULATED
SERIES B SERIES C STOCK WARRANTS ISSUABLE CAPITAL DEFICIT TOTAL
-------- -------- ------ -------- --------- ---------- ----------- -----
BALANCE AT MARCH 31, 2001
(PREDECESSOR COMPANY) $ 815 $ 5,100 $ 542 $ 40,428 $ 0 $ 271,319 $(461,461) $(143,257)
Net issuances of common
stock 0 0 17 0 0 (17) 0 0
Net loss before
reorganization adjustments
and fresh start
adjustments 0 0 0 0 0 0 (16,193) (16,193)
Reorganization adjustments (815) (5,100) (559) (40,428) 65,000 (270,999) 477,654 224,753
Fresh start adjustments 0 0 0 0 0 (303) 0 (303)
----- ------- ----- -------- ------- --------- --------- ---------
---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2001
(REORGANIZED COMPANY) 0 0 0 0 65,000 0 0 65,000
Conversion of payable into
Common Stock 0 0 2 0 0 1,047 0 1,049
Net loss 0 0 0 0 0 0 (1,991) (1,991)
----- ------- ----- -------- ------- --------- --------- ---------
BALANCE AT SEPTEMBER 30,
2001 (REORGANIZED COMPANY) $ 0 $ 0 $ 2 $ 0 $65,000 $ 1,047 $ (1,991) $ 64,058
===== ======= ===== ======== ======= ========= ========= =========
The accompanying notes are an integral part of these financial statements
4
METAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
Interim Financial Statements
The unaudited consolidated financial statements include the accounts of
Metal Management, Inc., a Delaware corporation, and its subsidiaries (herein
referred to as the "Company") and have been prepared by the Company pursuant to
the rules and regulations of the Securities and Exchange Commission ("SEC").
Certain amounts have been reclassified from the previously reported financial
statements in order to conform to the financial statement presentation of the
current period.
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 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 unaudited
consolidated financial statements to distinguish, for accounting purposes, the
periods associated with the Reorganized Company and the Predecessor Company.
The March 31, 2001 balance sheet information has been derived from the
Predecessor Company's audited financial statements. All significant intercompany
accounts, transactions and profits have been eliminated. Certain information
related to the Company's organization, significant accounting policies and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. Aside from the effects of fresh-start reporting, the Reorganized
Company follows the same accounting policies as the Predecessor Company. These
unaudited consolidated financial statements reflect, in the opinion of
management, all material adjustments (which include only normal recurring
adjustments) necessary to fairly state the financial position and the results of
operations for the periods presented. Operating results for interim periods are
not necessarily indicative of the results that can be expected for a full year.
These interim financial statements should be read in conjunction with the
Predecessor Company's audited consolidated financial statements and notes
thereto included in the Predecessor Company's Annual Report on Form 10-K for the
year ended March 31, 2001.
New Accounting Pronouncements
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 an entity recognize all derivatives as
either assets or liabilities measured 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 open
contracts to market at April 1, 2001. The cumulative effect of adopting SFAS No.
133 resulted in an after-tax decrease in net earnings of $0.4 million at April
1, 2001. Management believes that the changes in fair value of these instruments
will not significantly impact the results of operations or financial position of
the Company.
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 addresses financial
accounting and reporting for business combinations and requires all business
combinations within the scope of this Statement to be accounted for using the
purchase method. Use
5
METAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION -- (CONTINUED)
of the pooling-of-interest method is prohibited for business combinations
initiated after June 30, 2001. SFAS No. 142 requires that, upon adoption,
amortization of goodwill and indefinite lived intangible assets will cease and
instead, the carrying value of such assets will be evaluated for impairment on
an annual basis. Identifiable intangible assets 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 results 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 will not be amortized, but will be
reviewed annually for impairment.
The following unaudited pro forma information presents a summary of the
consolidated statements of operations for the three and six months ended
September 30, 2000 assuming that SFAS No. 142 was adopted on April 1, 2000. The
adoption of SFAS No. 142 did not impact the Company's consolidated statement of
operations for the three months ended June 30, 2001 and September 30, 2001 as no
goodwill amortization expense was recognized (in thousands, except per share
amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
--------------------- ---------------------
AS AS
REPORTED PRO FORMA REPORTED PRO FORMA
-------- --------- -------- ---------
Loss before cumulative effect of change in
accounting principle and extraordinary gain $(26,710) $(24,931) $(34,929) $(31,282)
Net loss applicable to common stock $(26,827) $(25,048) $(35,162) $(31,515)
Loss per share, basic and diluted:
Loss before cumulative effect of change in
accounting principle and extraordinary gain $ (0.46) $ (0.43) $ (0.60) $ (0.54)
======== ======== ======== ========
Net loss applicable to common stock $ (0.46) $ (0.43) $ (0.61) $ (0.54)
======== ======== ======== ========
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 of SFAS No. 121. The Company is analyzing the effect of this
Statement and does not expect it to have a material effect on its 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 business as a
debtor-in-possession. These bankruptcy proceedings are referred to as the
"Chapter 11 proceedings" herein.
In furtherance of an agreement reached between the Company and the holders
of a significant percentage of its pre-petition debt prior to the initiation of
the Chapter 11 proceedings, the Company filed a Plan of Reorganization (the
"Plan") pursuant to Chapter 11 of the Bankruptcy Code on May 4, 2001. The
6
METAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 2 -- REORGANIZATION UNDER CHAPTER 11 -- (CONTINUED)
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 with its lenders (see Note 6 -- 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 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 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 October 31, 2001, the Company has issued
approximately 8.7 million 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 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 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 continues to serve 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").
7
METAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 2 -- REORGANIZATION UNDER CHAPTER 11 -- (CONTINUED)
Reorganization costs directly associated with the Chapter 11 proceedings
for the three months ended September 30, 2001 and June 30, 2001 are as follows
(in thousands):
REORGANIZED | PREDECESSOR
COMPANY | COMPANY
THREE MONTHS | THREE MONTHS
ENDED | ENDED
SEPTEMBER 30, 2001 | JUNE 30, 2001
------------------ | -------------
|
Professional fees $114 | $ 6,838
Liability for rejected contracts and settlements 0 | 2,445
Fresh-start adjustments 0 | 919
Other 141 | 145
---- | -------
$255 | $10,347
==== | =======
Professional fees recognized during the three months ended June 30, 2001
include restructuring success fees payable to two firms aggregating $4.7
million. The restructuring success fees are payable as follows: i) $2.05 million
in cash, ii) $1.60 million through the issuance of a 10%, convertible note
payable due December 31, 2002, and iii) $1.05 million paid through the issuance
of 161,538 shares of Common Stock (at $6.50 per share). The note payable is
convertible into Common Stock at a conversion price of $6.46 per share.
Rejected contracts and settlement charges represent amounts recorded for
additional allowable claims under rejected employment contracts and settlements
reached on existing claims during the three months ended June 30, 2001.
Fresh-start adjustments represent the net impact of adjustments to state
recorded assets and liabilities at their fair values.
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.
NOTE 3 -- FRESH-START REPORTING
As previously discussed, the unaudited consolidated financial statements
reflect the use of fresh-start reporting as required by SOP 90-7. Under
fresh-start reporting, the Company's assets and liabilities were adjusted to
fair values and a reorganization value for the entity was determined by the
Company based upon the estimated fair value of the enterprise before considering
values allocated to debt to be settled in the reorganization as determined by
the Company's investment advisors. 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 unaudited consolidated financial
statements and is not being amortized.
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 that of the Company, and
other applicable ratios and valuation techniques believed by the Company, and
its financial advisor during the Chapter 11 proceedings, 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. Accordingly, there can be no assurance that the
valuation will be realized, and actual results could vary materially. Moreover,
the value of the Company's Common Stock, when it commences trading on a national
exchange, may differ materially from the valuation.
8
METAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 3 -- FRESH-START REPORTING -- (CONTINUED)
The results of operations in the unaudited consolidated statements 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 the effects of fresh-start reporting on the
Company's consolidated balance sheet as of June 30, 2001 (in thousands):
PREDECESSOR REORGANIZED
(UNAUDITED) COMPANY REORGANIZATION FRESH START COMPANY
6/30/01 ADJUSTMENTS ADJUSTMENTS REF 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 15,148 313 (i) 15,461
Other assets................................. 2,038 (103) (g) 1,935
--------- --------- ----- --------
TOTAL ASSETS........................... $ 274,195 $ 15,113 $ 210 $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................... 271,302 (270,999) (303) (f,g) 0
Accumulated deficit.......................... (477,654) 477,654 0 (b,d,e,g,h) 0
--------- --------- ----- --------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)... (159,450) 224,753 (303) 65,000
--------- --------- ----- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.............................. $ 274,195 $ 15,113 $ 210 $289,518
========= ========= ===== ========
---------------
REFERENCES:
(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.
9
METAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 3 -- FRESH-START REPORTING -- (CONTINUED)
(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 of the Company's obligations under its
Subordinated Notes and other unsecured debt 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 Class 6 creditors is included in the
extraordinary gain of $145.7 million recognized in the three months ended
June 30, 2001.
(e)Reflects the conversion of $5.0 million of unsecured claims into a 4 year,
non-interest bearing payable for those creditors who have elected not to
receive Common Stock. 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 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. At September 30, 2001, $5.5 million of property and
equipment was classified as "held for sale" and is reported in prepaid expenses
and other assets.
During the six months ended September 30, 2000, the Company recognized a
$2.6 million asset impairment charge related to a promissory note, including
accrued interest, received by the Company in conjunction with the sale of its
former Superior Forge, Inc. subsidiary. The Company also recognized $0.2 million
of professional fees related to investment advisors hired to restructure the
Company's debt.
NOTE 5 -- INVENTORIES
Inventories are stated at average cost which approximates market value.
Inventories consisted of the following categories (in thousands):
REORGANIZED | PREDECESSOR
COMPANY | COMPANY
SEPTEMBER 30, 2001 | MARCH 31, 2001
------------------ | --------------
|
Ferrous metals $25,860 | $20,685
Non-ferrous metals 18,846 | 18,050
Other 943 | 1,038
------- | -------
$45,649 | $39,773
======= | =======
10
METAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 6 -- LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
REORGANIZED | PREDECESSOR
COMPANY | COMPANY
SEPTEMBER 30, 2001 | MARCH 31, 2001
------------------ | --------------
|
Credit Agreement $111,979 | $ 0
DIP Agreement 0 | 121,666
12 3/4% New Notes 33,963 | 0
12 3/4% Junior Secured Notes 0 | 27,851
10% convertible note payable 1,568 | 0
Other debt 2,472 | 3,460
-------- | --------
149,982 | 152,977
Less: current portion (1,735) | (2,444)
-------- | --------
$148,247 | $150,533
======== | ========
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 BT Commercial Corporation,
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 of $38.7 million, which amortizes on a quarterly basis and under
certain other conditions. In addition, $14 million of supplemental availability
is provided, subject to periodic amortization 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 may be required to pay a $2 million facility fee on June 30, 2002,
unless the Company is able to satisfy certain financial objectives.
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 the amount of capital expenditures, the incurrence of
additional indebtedness, the payment of dividends, transactions with affiliates,
asset sales, acquisitions, investments, mergers and consolidations, prepayments
of certain other indebtedness, liens and encumbrances and 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. 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
11
METAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 6 -- LONG-TERM DEBT -- (CONTINUED)
ratios and tests or that it will be able to obtain future amendments to the
Credit Agreement, if so needed, to avoid a default. In the event of a default,
the lenders could elect to declare all amounts borrowed under the Credit
Agreement to be due and payable.
Secured 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.
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 $10.0 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.
Other Debt
As indicated in Note 2 -- Reorganization under Chapter 11, the Company
issued a promissory note to one of the investment advisors involved in the
Chapter 11 proceedings. The promissory note is subject to Bankruptcy Court
approval which is expected to occur in November 2001. 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.
In accordance with SOP 90-7, the Company did not accrue interest of
approximately $4.6 million on debt subject to compromise from the period April
1, 2001 through June 29, 2001, as such amounts were not permitted to be paid
under the Plan.
NOTE 7 -- INCOME TAXES
As indicated in Note 3 -- Fresh-Start Reporting, a net extraordinary gain
of $145.7 million was recognized. Included in this net gain is $148.9 million of
gains on the settlement of debt in the reorganization which, for tax purposes,
is referred to as cancellation of indebtedness income ("COD"). For tax purposes,
12
METAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 7 -- INCOME TAXES -- (CONTINUED)
COD reduced the Company's pre-reorganization net operating loss ("NOL")
carryforward of approximately $140.1 million to zero and the remaining COD of
$8.8 million reduced the tax basis of depreciable assets.
The Company has reduced its net deferred tax assets by a valuation
allowance as management does not believe it is "more likely than not" that the
asset ultimately will be realizable. If all or a portion of the deferred tax
asset (recorded as of June 30, 2001) is realized in the future, or considered to
"more likely than not" be realizable by management, the goodwill recorded in
connection with fresh-start reporting will be reduced accordingly. If goodwill
is eliminated in full, the excess will be treated as an increase to additional
paid-in-capital.
NOTE 8 -- 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. The Common Stock
and Series A Warrants are not trading on any exchange. The Company has an
application pending for its Common Stock and Series A Warrants to be listed on
the National Market System (or Small Cap System) of the Nasdaq Stock Market,
Inc. ("Nasdaq"). During the pendancy of its application, the Company expects its
Common Stock to trade on the Bulletin Board of Nasdaq's Over-the-Counter Market.
No assurance can be made that the Company's Common Stock will qualify for
listing on the National Market System or the Small Cap System.
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 these financial statements, all
10,000,000 shares are deemed to be outstanding.
NOTE 9 -- INCOME (LOSS) PER COMMON SHARE
Basic and diluted earnings per common share are based upon the weighted
average number of common shares outstanding during the respective periods. Basic
EPS is calculated based on earnings available to common shareholders and the
weighted average number of common shares outstanding during the reported period.
Diluted EPS includes additional dilution from potential common stock, such as
stock issuable pursuant to conversion of preferred stock, convertible debt or
the exercise of stock options and warrants outstanding. The incremental shares
from the conversion of preferred stock, convertible debt and exercise of stock
options and warrants were not included in computing diluted EPS for all periods
presented since the effect of such is antidilutive during periods when a loss
before cumulative effect of change in accounting principle and extraordinary
gain is reported.
13
This Form 10-Q includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements in this Form 10-Q which address
activities, events or developments that Metal Management, Inc. (herein, "Metal
Management," the "Company," "we," "us" or other similar terms) expects or
anticipates will or may occur in the future, including such things as future
acquisitions (including the amount and nature thereof), business strategy,
expansion and growth of our business and operations and other such matters are
forward-looking statements. Although we believe the expectations expressed in
such forward-looking statements are based on reasonable assumptions within the
bounds of our knowledge of our business, a number of factors could cause actual
results to differ materially from those expressed in any forward-looking
statements. These and other risks, uncertainties and other factors are discussed
under "Investment Considerations" appearing in our Annual Report on Form 10-K
for the year ended March 31, 2001, as the same may be amended from time to time.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included under Item 1. In
addition, reference should be made to the audited consolidated financial
statements and notes thereto and related Management's Discussion and Analysis of
Financial Condition and Results of Operations included in our Annual Report on
Form 10-K for the year ended March 31, 2001.
GENERAL
We are one of the largest full-service metals recyclers in the United
States, with approximately 40 recycling facilities in 14 states. We enjoy
important market positions in many major metropolitan markets, including
Birmingham, Chicago, Cleveland, Denver, Hartford, Houston, Memphis, Newark,
Phoenix, Salt Lake City, Toledo and Tucson. We have a 28.5% equity ownership
position in Southern Recycling, L.L.C. ("Southern Recycling"), the largest scrap
metals recycler in the Gulf Coast region. We also hold important market
positions in several product segments, including stainless steel, copper and
aluminum generated from utilities and telecommunication providers and titanium
and other high-temperature nickel alloys generated for the aerospace industry.
We have achieved a leading position in the metals recycling industry
primarily by implementing a national strategy of completing and integrating
regional acquisitions. 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
sought to acquire regional platform companies with strong operational management
and a history of successful financial performance to serve as platforms into
which subsequent acquisitions could be integrated. We believe that through the
continued integration of our acquired businesses, we will be able to enhance 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.
Our operations consist primarily of the collection and processing of
ferrous and non-ferrous metals for resale to metals brokers, steel producers,
and producers and processors of other metals. We collect industrial scrap and
obsolete scrap, process it into reusable forms and supply the recycled metals to
our customers, including 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.
On December 28, 2000, our common stock, par value $.01 per share ("Old
Common Stock") was delisted from the Nasdaq Small Cap System for failing to meet
listing standards as required by Nasdaq rules.
14
From December 28, 2000 to June 29, 2001, our Old Common Stock traded on the
Bulletin Board of Nasdaq's Over-the-Counter Market. We have an application
pending for our common stock, par value $.01 per share ("Common Stock") and
Series A Warrants (as defined herein) to be quoted on the National Market System
(or Small Cap System) of the Nasdaq Stock Market, Inc. ("Nasdaq"). No trading
has occurred with respect to the Common Stock or the Series A Warrants issued in
connection with implementing our plan of reorganization and there can be no
assurance that the Common Stock and Series A Warrants will qualify for listing
on the National Market System or Small Cap System of Nasdaq. Failure to qualify
would result in our shares trading on the Bulletin Board of Nasdaq's
Over-the-Counter Market which is generally less liquid than the National Market
System or Small Cap System.
CHAPTER 11 BANKRUPTCY AND PLAN OF REORGANIZATION
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"). During the course of the
bankruptcy proceedings, we operated our business as a debtor-in-possession.
These bankruptcy proceedings are referred to as the "Chapter 11 proceedings"
herein. The bankruptcy filing resulted from a sequence of events stemming
primarily from significant operating losses and decreased liquidity experienced
during the year ended March 31, 2001 ("Fiscal 2001"), which culminated in our
inability to make a $9 million interest payment on our 10% Senior Subordinated
Notes due May 2008 (the "Subordinated Notes") on November 15, 2000. Our
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 leveraged capital
structure.
In furtherance of an agreement we had reached with holders of a significant
percentage of our pre-petition debt prior to the initiation of our Chapter 11
proceedings, 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").
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 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
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
Subordinated Notes and 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 October 31,
2001, we have issued approximately 8.7 million 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 total
Class 6 Claims. The estimate of 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.
15
- 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 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 continues to serve 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" ("SOP 90-7"). Under fresh-start reporting, the
reorganization fair value was allocated to our assets; our accumulated deficit
was eliminated; our Series B and Series C convertible preferred stock, Old
Common Stock 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, when it commences trading on a national exchange, may differ
materially from the valuation.
As a result of adopting SFAS No. 142 (see "Recent Accounting
Pronouncements"), the goodwill recognized in fresh-start reporting of $15.5
million will not be amortized, but will be reviewed annually for impairment.
However, future impairment of the recorded goodwill may result if actual results
of operations or changes in economic or industry conditions differ significantly
from assumptions used to derive the reorganization value.
RESULTS OF OPERATIONS
The unaudited consolidated financial statements after the Effective Date
are those of a new reporting entity (the "Reorganized Company") and are not
comparable to the pre-confirmation periods of the old reporting entity (the
"Predecessor Company"). However, for purposes of this discussion, the
Reorganized Company's results for the three months ended September 30, 2001 are
compared to the Predecessor Company's results for the three months ended
September 30, 2000. In addition, the Reorganized Company's results for the three
months ended September 30, 2001 have been combined with the Predecessor
Company's results for the three months ended June 30, 2001 (as summarized in the
following table) and are compared to
16
the Predecessor Company's results for the six months ended September 30, 2000.
Differences between periods due to fresh start accounting are explained when
necessary.
SIX MONTHS ENDED SEPTEMBER 30 (IN THOUSANDS) 2001 2000
-------------------------------------------- ---- ----
Net sales $323,246 $455,683
Gross profit 34,666 41,517
Operating expenses:
General and administrative 23,098 30,242
Depreciation and amortization 9,321 13,613
Non-cash and non-recurring expense 1,941 2,850
Operating income (loss) 306 (5,188)
Interest expense 8,558 21,003
Reorganization costs 10,602 0
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 $126,608 $(35,162)
Our consolidated net sales consist primarily of revenues derived from the
sale and brokerage of scrap metals. We recognize revenues from processed
products when title passes to the customer. Revenues related to brokerage sales
are recognized upon receipt of the material by the customer. Sales adjustments
related to price and weight differences and allowances for uncollectible
receivables are recorded against revenues.
Cost of sales consists primarily of the cost of metals sold, direct and
indirect labor and related taxes and benefits, realized and unrealized gains and
losses from hedging activities, repairs and maintenance, utilities and freight.
General and administrative expenses include management salaries, clerical
and administrative costs, professional services, facility rentals and related
insurance and utility costs, as well as costs related to our marketing and
business development activities.
Non-cash and non-recurring expenses represent impairments of long-lived
assets to be disposed of or otherwise abandoned and the write-off of a
promissory note received in connection with a business disposition.
Other income and expense consists principally of interest expense, interest
income, gains or losses on the sale of fixed assets, and income and losses from
joint ventures which represent an allocation of income and losses attributable
to investments made by us in joint ventures. The joint ventures are accounted
for under the equity method of accounting.
Reorganization costs consist of expenses incurred as a result of the
Chapter 11 proceedings including professional fees, fees paid to the United
States Trustee's office, fresh-start accounting adjustments, and liabilities
resulting from the rejection of executory contracts and unexpired leases.
Consolidated net sales for the three months ended September 30, 2001 and
2000 in broad product categories were as follows (in thousands):
9/30/01 9/30/00
--------------------------- ---------------------------
COMMODITY WEIGHT NET SALES % WEIGHT NET SALES %
--------- ------ --------- - ------ --------- -
Ferrous metals (tons) 943 $ 91,071 58.0 1,092 $115,969 54.2
Non-ferrous metals (lbs) 113,977 52,902 33.7 144,793 77,740 36.4
Brokerage -- ferrous (tons) 70 7,439 4.7 89 9,149 4.3
Brokerage -- non-ferrous (lbs) 4,550 1,994 1.3 9,234 5,188 2.4
Other 3,572 2.3 5,728 2.7
-------- --- -------- ---
$156,978 100% $213,774 100%
======== === ======== ===
17
Consolidated net sales for the six months ended September 30, 2001 and 2000
in broad product categories were as follows (in thousands):
9/30/01 9/30/00
-------------------------------- --------------------------------
COMMODITY WEIGHT NET SALES % WEIGHT NET SALES %
--------- ------ --------- - ------ --------- -
Ferrous metals (tons) 1,917 $181,929 56.3 2,274 $249,807 54.8
Non-ferrous metals (lbs) 237,285 111,025 34.3 296,802 161,731 35.5
Brokerage -- ferrous (tons) 195 19,345 6.0 214 23,389 5.1
Brokerage -- non-ferrous (lbs) 9,766 4,095 1.3 24,514 11,218 2.5
Other 6,852 2.1 9,538 2.1
-------- ---- -------- ----
$323,246 100% $455,683 100%
======== ==== ======== ====
Consolidated net sales decreased by $56.8 million (26.6%) and $132.4
million (29.1%) to $157.0 million and $323.3 million during the three and six
months ended September 30, 2001, respectively, compared to consolidated net
sales of $213.8 million and $455.7 million during the three and six months ended
September 30, 2000, respectively. The decrease in consolidated net sales was
primarily due to lower volumes of products sold coupled with lower average
selling prices. Scrap metals prices continue to be impacted by the weakening
economy contributing to lower industrial output which has impacted both supply
and demand for scrap metals.
Ferrous sales decreased by $24.9 million (21.5%) and $67.9 million (27.2%)
to $91.1 million and $181.9 million during the three and six months ended
September 30, 2001, respectively, compared to ferrous sales of $116.0 million
and $249.8 million during the three and six months ended September 30, 2000,
respectively. Although ferrous prices have remained stable through the first six
months of fiscal 2002, ferrous scrap prices are $10 to $20 per ton lower than
the same period last year. Unit sales have been impacted by lower demand from
our steel customers, which have reduced production due to weakness in their
markets. In Fiscal 2001, our ferrous sales were significantly impacted by the
bankruptcy filings of three steel companies. The high number of bankruptcies
filed by steel companies over the last few years has led us to tighten our
credit terms with certain customers, which tends to reduce the units of ferrous
metals sold.
Non-ferrous sales decreased by $24.8 million (32.0%) and $50.7 million
(31.4%) to $52.9 million and $111.0 million during the three and six months
ended September 30, 2001, respectively, compared to non-ferrous sales of $77.7
million and $161.7 million during the three and six months ended September 30,
2000, respectively. The decrease is primarily due to lower unit sales and
average selling prices. The decrease in average selling prices and unit sales
were mainly in the aluminum and copper product categories. However, average
prices and units sales for titanium and hi-temperature alloys and stainless
steel during the current fiscal year are comparable or better than the same
period last year.
Brokerage ferrous sales decreased by $1.7 million (18.7%) and $4.1 million
(17.3%) to $7.4 million and $19.3 million during the three and six months ended
September 30, 2001, respectively, compared to brokerage ferrous sales of $9.1
million and $23.4 million during the three and six months ended September 30,
2000, respectively. The decrease during the three months ended September 30,
2001 was due to 19,000 fewer tons brokered, offset by a $4 per ton increase in
average selling price. The decrease during the six months ended September 30,
2001 was due to 19,000 fewer tons brokered combined with a $10 per ton decrease
in average selling price. The average selling price for brokered materials is
significantly affected by the product mix which can vary significantly between
periods.
Brokerage non-ferrous sales decreased by $3.2 million (61.6%) and $7.1
million (63.5%) to $2.0 million and $4.1 million during the three and six months
ended September 30, 2001, respectively, compared to brokerage non-ferrous sales
of $5.2 million and $11.2 million during the three and six months ended
September 30, 2000, respectively. Brokerage non-ferrous volume declined by 4.7
million pounds and 14.7 million pounds during the three and six months ended
September 30, 2001, respectively, due to lower demand. Margins associated with
brokered non-ferrous metals are narrow so variations in this product category
are not significant to us.
18
Gross profit was $17.6 million (11.2% of sales) and $34.7 million (10.7% of
sales) during the three and six months ended September 30, 2001, respectively,
compared to gross profit of $18.5 million (8.7% of sales) and $41.5 million
(9.1% of sales) during the three and six months ended September 30, 2000,
respectively. Gross profit percentage during the three and six months ended
September 30, 2001 demonstrates significant improvement from the comparable
prior year periods as a result of better buying practices and reductions in
operating expenses. Gross profit in the six months ended September 30, 2001 was
impacted by $1.1 million of sales adjustments recorded with respect to sales
made to a consumer that commenced liquidation during May 2001.
General and administrative expenses were $11.4 million (7.3% of sales) and
$23.1 million (7.1% of sales) during the three and six months ended September
30, 2001, respectively, compared to general and administrative expenses of $15.0
million (7.0% of sales) and $30.2 million (6.6% of sales) during the three and
six months ended September 30, 2000, respectively. General and administrative
expenses as a percentage of sales are higher during the current fiscal year
because of lower sales caused by lower unit sales and average prices. However,
more importantly, general and administrative expenses have declined by over 23%
during the current fiscal year.
Depreciation and amortization expense was $4.6 million (2.9% of sales) and
$9.3 million (2.9% of sales) during the three and six months ended September 30,
2001, respectively, compared to depreciation and amortization expense of $6.7
million (3.1% of sales) and $13.6 million (3.0% of sales) during the three and
six months ended September 30, 2000, respectively. The decrease in depreciation
and amortization expense is 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 approximated $1.9 million each quarter.
Non-cash and non-recurring expense was $1.9 million during the three months
ended June 30, 2001. We recorded an impairment charge of $1.9 million related to
fixed assets which are to be sold or otherwise abandoned. Non-cash and
non-recurring expense was $2.8 million during the six months ended September 30,
2000. During the three months ended June 30, 2000, we recorded an impairment
charge of $2.6 million related to a note receivable received in connection with
the sale of our former Superior Forge subsidiary. During the three months ended
September 30, 2000, we recognized $0.2 million of professional fees associated
with investment advisors hired to restructure our debt.
Interest expense was $3.4 million (2.2% of sales) and $8.6 million (2.6% of
sales) during the three and six months ended September 30, 2001, respectively,
compared to interest expense of $10.7 million (5.0% of sales) and $21.0 million
(4.6% of sales) during the three and six months ended September 30, 2000,
respectively. The decrease in interest expense of $7.3 million and $12.4 million
during the three and six months ended September 30, 2001 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 on the Subordinated Notes was $1.5 million per
month. Borrowings on credit facilities are at variable rates tied to the prime
rate of interest, which has declined by 3.5% since the beginning of April.
Reorganization costs recognized during the three months ended September 30,
2001 represent professional fees and U.S. Trustee fees related to the Chapter 11
proceedings. We will continue to incur these costs until all of the claims
arising from the Chapter 11 proceedings have been adjudicated. Reorganization
costs during the six months ended September 30, 2001 mainly represent
professional fees, fresh-start adjustments and other expenses associated with
the Chapter 11 proceedings incurred during the three months ended June 30, 2001
(see Note 3 to the consolidated financial statements included in Part I, Item 1
of this Report).
As a result of our past losses and uncertainties regarding our ability to
realize recorded tax benefits, we have fully reserved our net deferred tax
assets as of September 30, 2001.
On April 1, 2001, we adopted Statement of Financial Accounting Standards
("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.
19
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 I, Item 1 of this Report).
Net loss was $2.0 million during the three months ended September 30, 2001
compared to a net loss of $26.8 million during the three months ended September
30, 2000. The improvement is a result of lower interest and general and
administrative expenses and the elimination of goodwill amortization. Also, our
results for the three months ended September 30, 2000, include a $12.2 million
tax provision recorded to fully reserve our net deferred tax assets.
Net income was $126.6 million during the six months ended September 30,
2001 compared to a net loss of $35.2 million during the six months ended
September 30, 2000. Income was recognized mainly due to the recognition of an
extraordinary gain on debt cancellation of $145.7 million. Excluding the
extraordinary gain, cumulative effect of change in accounting principle and
reorganization costs, net loss was $8.1 million for the six months ended
September 30, 2001. The improvement is a result of lower interest and general
and administrative expenses and the elimination of goodwill amortization, offset
by lower gross profit.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the consummation of the Plan, we substantially reduced the
amount of our overall indebtedness. As of September 30, 2001, our total
indebtedness was approximately $150 million. Although the Plan resulted in a
reduction in debt, further improvements in our liquidity position will be
subject to 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 payments on
outstanding borrowings.
On the Effective Date, our $200 million debtor-in-possession credit
facility (the "DIP Agreement") was replaced by a $150 million revolving credit
and letter of credit facility (the "Credit Agreement"). The Credit Agreement was
entered into by BT Commercial Corporation, 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.
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 $38.7 million, which amortizes on a quarterly basis and under
certain other conditions. In addition, approximately $14 million of supplemental
availability is provided under the Credit Agreement, subject to periodic
amortization 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 lenders 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 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 30, 2002, unless we are able to meet certain
financial objectives.
The Credit Agreement requires us to meet certain financial tests, including
an interest coverage ratio and a leverage ratio (as defined in the Credit
Agreement). The Credit Agreement also contains covenants which, among other
things, limit the amount of capital expenditures, the incurrence of additional
indebtedness, the payment of dividends, transactions with affiliates, asset
sales, acquisitions, investments, mergers and consolidations, prepayments of
certain other indebtedness, liens and encumbrances and other matters customarily
restricted in such agreements. We were in compliance with all financial
covenants as of September 30, 2001.
Our ability to meet financial ratios and tests in the future may be
affected by events beyond our control. 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
20
obtain future amendments to the Credit Agreement, if so needed, to avoid a
default. In the event of default, the lenders could elect to declare all amounts
borrowed under the Credit Agreement to be due and payable.
Pursuant to the Plan, on the Effective Date, 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
will rank equally in right of payment with all of our unsubordinated debt,
including our indebtedness under the Credit Agreement, and senior in right of
payment to all of our subordinated debt.
The New Notes are redeemable at our option (in multiples of $10.0 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 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 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, 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) merge or consolidate with
another company; and (viii) transfer and sell assets or enter into sale and
leaseback transactions.
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. Capital expenditures were approximately $11.1 million in Fiscal 2001
representing approximately 57% of depreciation expense in Fiscal 2001. On
December 15, 2001, we are required to make a $2.2 million coupon payment on the
New Notes. We do not expect such capital expenditures nor interest payments 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. As of
November 7, 2001, we had outstanding borrowings of approximately $117 million
under the Credit Agreement and undrawn availability of approximately $8 million.
Cash Flows from Operations
During the three months ended September 30, 2001, we generated $1.3 million
of cash from operating activities. During the period, our operations generated
$3.4 million of cash and accounts receivable decreased by $5.9 million. This was
offset by an increase in inventories of $4.1 million and a decrease in accounts
payable and other liabilities of $3.9 million.
Cash Flows from Investing Activities
During the three months ended September 30, 2001, we used $1.0 million of
cash for investing activities. Purchases of property and equipment were $1.3
million, while we generated $0.4 million of cash from the sale of redundant
fixed assets.
21
Cash Flows from Financing Activities
During the three months ended September 30, 2001, our financing activities
used $0.2 million of cash. Cash generated from operations were used to repay
borrowings under the Credit Agreement.
FINANCIAL CONDITION
Working Capital Availability and Requirements
Our accounts receivable balances decreased from $79.6 million at March 31,
2001 to $66.4 million at September 30, 2001 principally due to improved
collections of accounts receivable and lower sales.
Our accounts payable balances increased from $37.9 million at March 31,
2001 to $47.6 million at September 30, 2001. The increase in accounts payable
resulted principally from an increase in the amount of scrap metal purchases and
by obtaining more favorable payment terms from our vendors.
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
SEPTEMBER 30, 2001 | MARCH 31, 2001
------------------ | --------------
|
Ferrous metals $25,860 | $20,685
Non-ferrous metals 18,846 | 18,050
Other 943 | 1,038
------- | -------
$45,649 | $39,773
======= | =======
Ferrous inventory dollars increased due to higher units of ferrous metals
on hand at September 30, 2001 compared to March 31, 2001. Non-ferrous inventory
slightly increased as a result of higher units of non-ferrous materials on hand
offset by lower average purchase prices at September 30, 2001 compared to March
31, 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective April 1, 2001, we adopted SFAS No. 133, "Accounting for
Derivatives and Hedges" (as amended). SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities measured at fair
value. We utilize futures and forward contracts to hedge our net position in
certain non-ferrous metals and do not use futures and forward contracts for
trading purposes. We classified our investment in these contracts as speculative
under the provisions of SFAS No. 133. As a result, we marked our open contracts
to market at April 1, 2001. The cumulative effect of adopting SFAS No. 133
resulted in an after-tax decrease in net earnings of $0.4 million at April 1,
2001. We believe that the changes in fair value of these instruments will not
significantly impact our results of operations or financial position.
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 addresses financial
accounting and reporting for business combinations and requires all business
combinations within the scope of this Statement to be accounted for using the
purchase method. Use of the pooling-of-interest method is prohibited for
business combinations initiated after June 30, 2001. SFAS No. 142 requires that,
upon adoption, amortization of goodwill and indefinite lived intangible assets
will cease and instead, the carrying value of such assets will be evaluated for
impairment on an annual basis. Identifiable intangible assets will continue to
be amortized over their useful lives and reviewed for impairment.
In accordance with 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 our consolidated financial statements as we had no
recorded goodwill or intangible assets at adoption. The adoption of SFAS No. 142
results in the classification of the reorganization intangible recognized in
fresh-start reporting as
22
goodwill with an indefinite life. As a result, goodwill of $15.5 million will
not be amortized, but will be reviewed annually for impairment.
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 of SFAS No. 121. We are analyzing the effect of SFAS No. 144 and do
not expect it to have a material effect on our consolidated financial position,
results of operations or cash flows.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial risk resulting from fluctuations in interest
rates and commodity prices. We seek to minimize these risks through regular
operating and financing activities and, where appropriate, through use of
futures or forward contracts. Our use of these contracts is limited and relates
solely to hedges of certain of our non-ferrous inventory positions. Under the
provisions of SFAS No. 133, we have classified these contracts as speculative
and as a result, these contracts are marked to market in our consolidated
financial statements. The adoption of SFAS No. 133 on April 1, 2001 resulted in
an after-tax decrease in net earnings of $0.4 million.
Reference is made to the quantitative disclosures about market risk as of
March 31, 2001 included under Item 7A of our most recent Annual Report on Form
10-K.
23
PART II -- OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES
On June 29, 2001 (the "Effective Date"), the Company emerged from
bankruptcy pursuant to its Plan of Reorganization (the "Plan"). On such date,
the Company canceled all existing equity securities. 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. Under the
Plan, approximately 10,000,000 shares of Common Stock and Series A Warrants to
purchase 750,000 shares of Common Stock will be issued. As of October 31, 2001,
8,918,224 shares of Common Stock had been issued.
ITEM 5: OTHER INFORMATION
In accordance with the Plan, the Company's Board of Directors consists of
the following new, non-employee directors: Daniel W. Dienst, John T. DiLacqua,
Kevin P. McGuinness and Harold "Skip" Rouster. Albert A. Cozzi continues to
serve as Chairman of the Board of Directors and Chief Executive Officer. In
accordance with the Plan, Richard Measelle, Governor James R. Thompson, Patrick
J. Ottensmeyer, Kenneth A. Merlau, Timothy T. Orlowski, William T. Proler,
Gregory P. Cozzi and Frank J. Cozzi resigned as directors of the Company,
effective June 29, 2001.
The ferrous operations of the Company's subsidiary, Proler Southwest Inc.
("PSW") is operated on an approximately 47 acre facility (the "Facility") that
is leased by PSW from 15/21 Japhet Realty, Ltd. (hereinafter "Landlord"), an
affiliate of the former owner of the Company's former HouTex Metals Co., Inc.
subsidiary. In August 2001, the Landlord exercised a put option set forth in the
lease agreement (the "Lease Agreement") between PSW and Landlord, which requires
PSW to acquire the Facility from the Landlord for an aggregate consideration of
$4 million, $3 million of which is payable in cash and $1 million of which is
payable by the issuance by PSW of a note, payable over three years and bearing
interest at the prime rate less three percent. The put option closing was
scheduled to occur on October 25, 2001 in accordance with the Lease Agreement.
Due to on-going discussions with the Landlord concerning a proposed revocation
of the exercise of the put option and the continuation of the leasehold
arrangement, the closing of the purchase of the Facility did not occur on
October 25, 2001. On November 2, 2001, PSW tendered its performance of the put
option by depositing the cash portion of the purchase price and a $1 million
note with a title company as designated in accordance with the Lease Agreement.
Landlord, however, has refused to proceed with the closing and instead insists
that it has the right to terminate the Lease Agreement.
PSW believes that based upon the terms of the lease and after consultation
with legal counsel, that even if the failure to close the purchase of the
Facility on October 25, 2001 constituted a breach of the underlying lease, it
had the right to cure such breach within a five day cure period as set forth in
the Lease Agreement for monetary obligations. PSW further believes that it in
fact cured any alleged breach by satisfying all conditions to the closing within
a five day cure period. Notwithstanding the forgoing, no assurance can be made
that PSW will prevail if litigation results from the dispute with the Landlord.
PSW intends to vigorously defend any cause of action arising from the matters
described above. An adverse ruling in litigation arising from the dispute,
however, could result in significant damages being awarded in favor of the
Landlord or possible termination of the Lease Agreement.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
See Exhibit Index
(B) REPORTS ON FORM 8-K
No reports were filed on Form 8-K during the quarter ended September 30,
2001.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
METAL MANAGEMENT, INC.
By: /s/ ALBERT A. COZZI
------------------------------------
Albert A. Cozzi
Director, Chairman of the
Board, and Chief
Executive Officer
(Principal Executive Officer)
By: /s/ MICHAEL W. TRYON
------------------------------------
Michael W. Tryon
President and Chief
Operating Officer
By: /s/ ROBERT C. LARRY
------------------------------------
Robert C. Larry
Executive Vice President,
Finance and Chief
Financial Officer
(Principal Financial Officer)
By: /s/ AMIT N. PATEL
------------------------------------
Amit N. Patel
Vice President, Finance
and Controller
(Principal Accounting Officer)
Date: November 14, 2001
25
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).
3.3 Specimen certificate evidencing the Common Stock of the
Company (incorporated by reference to Exhibit 3.3 of the
Company's Report on Form 8-A filed on August 21, 2001).
3.4 Specimen certificate evidencing the Series A Warrants of the
Company (incorporated by reference to Exhibit 3.4 of the
Company's Report on Form 8-A filed on August 21, 2001).
26