UNITED STATES
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 JUNE 30, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO________
COMMISSION FILE NUMBER 0-14836
---------------------------------------------------
METAL MANAGEMENT, INC.
(Exact Name of Registrant as Specified in Its Charter)
---------------------------------------------------
DELAWARE 94-2835068
(State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification No.)
or Organization)
500 N. DEARBORN STREET, SUITE 405, CHICAGO, IL 60610
(Address of Principal Executive Offices) (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 is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No __
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No __
As of July 18, 2005, the registrant had 25,096,436 shares of common stock
outstanding.
INDEX
PAGE
----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations - three months ended
June 30, 2005 and 2004 (unaudited) 1
Consolidated Balance Sheets - June 30, 2005 and March 31,
2005 (unaudited) 2
Consolidated Statements of Cash Flows - three months ended
June 30, 2005 and 2004 (unaudited) 3
Consolidated Statement of Stockholders' Equity - three
months ended June 30, 2005 (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 24
Item 4. Controls and Procedures 24
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 6. Exhibits 26
Signatures 27
Exhibit Index 28
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METAL MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
THREE MONTHS ENDED
-------------------------
JUNE 30, JUNE 30,
2005 2004
---- ----
NET SALES $ 381,634 $ 367,176
OPERATING EXPENSES:
Cost of sales (excluding depreciation) 350,379 323,779
General and administrative 19,746 18,682
Depreciation and amortization 4,614 4,529
----------- -----------
OPERATING INCOME 6,895 20,186
Income from joint ventures 2,051 3,230
Interest expense (376) (1,313)
Interest and other income, net 472 39
Loss on debt extinguishment 0 (1,653)
----------- -----------
Income before income taxes 9,042 20,489
Provision for income taxes 3,596 7,964
----------- -----------
NET INCOME $ 5,446 $ 12,525
=========== ===========
EARNINGS PER SHARE:
Basic $ 0.22 $ 0.55
=========== ===========
Diluted $ 0.22 $ 0.52
=========== ===========
CASH DIVIDENDS DECLARED PER SHARE $ 0.075 $ 0.000
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 24,354 22,947
=========== ===========
Diluted 25,300 24,161
=========== ===========
See accompanying notes to consolidated financial statements
1
METAL MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)
JUNE 30, MARCH 31,
2005 2005
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 36,637 $ 52,821
Marketable securities 10,485 0
Accounts receivable, net 125,958 153,056
Inventories 105,462 96,345
Deferred income taxes 5,103 5,103
Prepaid expenses and other assets 4,620 4,193
-------- --------
TOTAL CURRENT ASSETS 288,265 311,518
Property and equipment, net 114,519 111,253
Goodwill and other intangibles, net 2,552 2,591
Deferred income taxes, net 10,327 10,996
Investments in joint ventures 38,829 39,782
Other assets 2,499 2,642
-------- --------
TOTAL ASSETS $456,991 $478,782
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 362 $ 367
Accounts payable 106,050 122,666
Income taxes payable 5,584 3,601
Other accrued liabilities 21,186 31,686
-------- --------
TOTAL CURRENT LIABILITIES 133,182 158,320
Long-term debt, less current portion 2,075 2,164
Other liabilities 3,688 5,682
-------- --------
TOTAL LONG-TERM LIABILITIES 5,763 7,846
Stockholders' equity:
Preferred stock 0 0
Common stock 251 249
Warrants 394 395
Additional paid-in capital 171,465 167,649
Deferred compensation (10,105) (8,154)
Accumulated other comprehensive loss (1,913) (1,913)
Retained earnings 157,954 154,390
-------- --------
TOTAL STOCKHOLDERS' EQUITY 318,046 312,616
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $456,991 $478,782
======== ========
See accompanying notes to consolidated financial statements
2
METAL MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
THREE MONTHS ENDED
---------------------
JUNE 30, JUNE 30,
2005 2004
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,446 $ 12,525
Adjustments to reconcile net income to cash flows from
operating activities:
Depreciation and amortization 4,614 4,529
Deferred income taxes 669 6,805
Income from joint ventures (2,051) (3,230)
Stock-based compensation expense 1,498 1,067
Amortization of debt issuance costs 159 254
Loss on debt extinguishment 0 1,653
Tax benefit on exercise of stock options and warrants 276 635
Other 702 326
Changes in assets and liabilities:
Accounts and other receivables 26,489 13,638
Inventories (9,117) 724
Accounts payable (20,214) (32,997)
Income taxes 218 294
Other accrued liabilities (12,506) (6,262)
Other (778) (1,315)
--------- ---------
Net cash used in operating activities (4,595) (1,354)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (6,506) (2,703)
Proceeds from sale of property and equipment 90 327
Investments in joint ventures, net 3,004 0
Purchases of available-for-sale marketable securities (10,485) 0
Other 0 100
--------- ---------
Net cash used in investing activities (13,897) (2,276)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuances of long-term debt 424,982 404,255
Repayments of long-term debt (425,075) (399,538)
Proceeds from exercise of stock options and warrants 94 523
Cash dividends paid to stockholders (1,882) 0
Other 4,189 (1,359)
--------- ---------
Net cash provided by financing activities 2,308 3,881
--------- ---------
Net increase (decrease) in cash and cash equivalents (16,184) 251
Cash and cash equivalents at beginning of period 52,821 1,155
--------- ---------
Cash and cash equivalents at end of period $ 36,637 $ 1,406
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash interest paid $ 196 $ 1,196
========= =========
Cash taxes paid $ 2,433 $ 230
========= =========
See accompanying notes to consolidated financial statements
3
METAL MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited, in thousands)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
-------------------- PAID-IN DEFERRED COMPREHENSIVE RETAINED
SHARES AMOUNT WARRANTS CAPITAL COMPENSATION LOSS EARNINGS
------ ------ -------- ------- ------------ ---- --------
BALANCE AT MARCH 31, 2005 24,878 $ 249 $ 395 $ 167,649 $ (8,154) $ (1,913) $ 154,390
Net income 0 0 0 0 0 0 5,446
Total comprehensive income
Issuance of restricted stock and options
(net of cancellations) 173 2 0 3,447 (3,449) 0 0
Exercise of stock options and warrants
and related tax benefits 45 0 (1) 369 0 0 0
Cash dividends paid to stockholders 0 0 0 0 0 0 (1,882)
Stock-based compensation expense 0 0 0 0 1,498 0 0
-------- --------- --------- --------- --------- ----------- ---------
BALANCE AT JUNE 30, 2005 25,096 $ 251 $ 394 $ 171,465 $ (10,105) $ (1,913) $ 157,954
======== ========= ========= ========= ========= =========== =========
TOTAL
-----
BALANCE AT MARCH 31, 2005 $ 312,616
Net income 5,446
-----------
Total comprehensive income 318,062
Issuance of restricted stock and options
(net of cancellations) 0
Exercise of stock options and warrants
and related tax benefits 368
Cash dividends paid to stockholders (1,882)
Stock-based compensation expense 1,498
-----------
BALANCE AT JUNE 30, 2005 $ 318,046
===========
See accompanying notes to consolidated financial statements
4
METAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
Organization and Business
Metal Management, Inc., a Delaware corporation, and its wholly owned
subsidiaries (the "Company") are principally engaged in the business of
collecting and processing ferrous and non-ferrous metals. The Company collects
industrial scrap metal and obsolete scrap metal, processes it into reusable
forms, and supplies the recycled metals to its customers, including electric-arc
furnace mills, integrated steel mills, foundries, secondary smelters and metals
brokers. These services are provided through the Company's recycling facilities
located in 15 states. The Company's ferrous products primarily include shredded,
sheared, cold briquetted and bundled scrap metal, and other purchased scrap
metal, such as turnings, cast and broken furnace iron. The Company also
processes non-ferrous metals, including aluminum, stainless steel and other
nickel-bearing metals, copper, brass, titanium and high-temperature alloys,
using similar techniques and through application of certain of the Company's
proprietary technologies.
The Company has one reportable segment operating in the scrap metal
recycling industry, as determined in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosure about Segments of an
Enterprise and Related Information."
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). All significant intercompany accounts,
transactions and profits have been eliminated. Certain information related to
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.
These unaudited consolidated financial statements reflect, in the opinion of
management, all material adjustments (which include normal recurring
adjustments) necessary to fairly state the financial position and the results of
operations for the periods presented. Certain amounts have been reclassified
from the previously reported financial statements in order to conform to the
financial statement presentation of the current period.
Operating results for interim periods are not necessarily indicative of the
results that can be expected for a full year. These interim financial statements
should be read in conjunction with the Company's audited consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended March 31, 2005.
Revenue Recognition
The Company's primary source of revenue is from the sale of processed
ferrous and non-ferrous scrap metals. The Company also generates revenues from
the brokering of scrap metals or from services performed, including but not
limited to tolling, stevedoring and dismantling. Revenues from processed ferrous
and non-ferrous scrap metal sales are recognized when title passes to the
customer. Revenues relating to brokered sales are recognized upon receipt of the
materials by the customer. Revenues from services are recognized as the service
is performed. Sales adjustments related to price and weight differences and
allowances for uncollectible receivables are accrued against revenues as
incurred.
5
Revenues by product category were as follows (in thousands):
THREE MONTHS ENDED
---------------------
JUNE 30, JUNE 30,
2005 2004
--------- ---------
Ferrous metals $ 248,582 $ 262,576
Non-ferrous metals 116,114 88,178
Brokerage - ferrous 11,010 11,557
Brokerage - non-ferrous 2,249 995
Other 3,679 3,870
--------- ---------
Net sales $ 381,634 $ 367,176
========= =========
Recently Issued Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4."
SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material (spoilage), requiring that
these items be recognized as current-period charges and not capitalized in
inventory overhead. In addition, this statement requires that allocation of
fixed production overhead to the costs of conversion be based on the normal
capacity of the production facilities. The provisions of this statement are
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. The adoption of this statement is not expected to materially impact
the Company's consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment."
The revised statement eliminates the ability to account for share-based
compensation transactions using Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees." This statement instead requires
that all share-based payments to employees be recognized as compensation expense
in the statement of operations based on their fair value over the applicable
vesting period. The provisions of this statement are effective for fiscal years
beginning after June 15, 2005. The Company will transition to SFAS No. 123(R)
using the "modified prospective application" effective April 1, 2006. Under the
"modified prospective application," compensation costs will be recognized in the
financial statements for all new share-based payments granted after April 1,
2006. Additionally, the Company will recognize compensation costs for the
portion of previously granted awards for which the requisite service has not
been rendered ("nonvested awards") that are outstanding as of the effective date
over the remaining requisite service period of the awards.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and SFAS No. 3." This
statement provides guidance on the accounting for and reporting of accounting
changes and error corrections. It requires, unless impracticable, retrospective
application for reporting a change in accounting principle, unless the newly
adopted accounting principle specifies otherwise, and reporting of a correction
of an error. The provisions of this statement are effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. The adoption of this statement is not expected to materially impact
the Company's consolidated financial statements.
In October 2004, the American Jobs Creation Act of 2004 ("AJCA") was signed
by the President. The AJCA provides a deduction for income from qualified
domestic production activities, which will be phased in from fiscal years
beginning after December 31, 2004 through 2010. In return, the AJCA also
provides for a two-year phase-out of the existing extraterritorial income
exclusion ("ETI") for foreign sales that was viewed to be inconsistent with
international trade protocols by the European Union. In December 2004, the FASB
issued Staff Position ("FSP") No. 109-1, "Application of FASB Statement No. 109,
Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004." FSP No. 109-1
treats a deduction for income from qualified production activities as a "special
deduction" as described in SFAS No. 109. As such, a special deduction has no
effect on deferred tax assets
6
and liabilities existing at the enactment date. Rather, the impact of such a
deduction will be reported in the period in which the deduction is claimed on
the Company's tax return. The Company is currently evaluating the impact the
AJCA will have on its results of operations, financial condition and effective
tax rate.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted average common shares outstanding. Diluted EPS reflects the potential
dilution that could occur from the exercise of stock options and warrants and
from unvested restricted stock. The following is a reconciliation of the
numerator and denominator used in computing EPS (in thousands, except for per
share amounts):
THREE MONTHS ENDED
---------------------
JUNE 30, JUNE 30,
2005 2004
--------- ---------
NUMERATOR:
Net income $ 5,446 $ 12,525
========= =========
DENOMINATOR:
Weighted average common shares outstanding, basic 24,354 22,947
Incremental common shares attributable to dilutive
stock options and warrants 752 1,162
Incremental common shares attributable to unvested
restricted stock 194 52
--------- ---------
Weighted average common shares outstanding, diluted 25,300 24,161
========= =========
Basic income per share $ 0.22 $ 0.55
========= =========
Diluted income per share $ 0.22 $ 0.52
========= =========
For the three months ended June 30, 2005 and 2004, options and warrants to
purchase 425,000 and 546,210 weighted average shares of common stock,
respectively, were excluded from the diluted EPS calculation. These shares were
excluded from the diluted EPS calculation as the option and warrant exercise
prices were greater than the average market price of the Company's common stock
for the respective periods referenced above, and therefore their inclusion would
have been anti-dilutive.
NOTE 3 - STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with APB
No. 25 and related interpretations. Compensation expense for stock options and
warrants is measured as the excess, if any, of the quoted market price of the
Company's common stock at the date of grant over the exercise price of the stock
option or warrant. Compensation expense for restricted stock awards is measured
at fair value on the date of grant based on the number of shares granted and the
quoted market price of the Company's common stock. Such value is recognized as
expense over the vesting period of the award. To the extent restricted stock
awards are forfeited prior to vesting, the previously recognized expense is
reversed.
7
The following table illustrates the pro forma effects on net income and
earnings per common share if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" to
stock-based compensation (in thousands, except for earnings per share):
THREE MONTHS ENDED
---------------------
JUNE 30, JUNE 30,
2005 2004
--------- ---------
Net income, as reported $ 5,446 $ 12,525
Add: Stock-based compensation expense included in
reported net income, net of related tax effects 901 652
Deduct: Total stock-based compensation expense
determined under the fair value method for all
awards, net of related tax effects (1,099) (1,022)
--------- ---------
PRO FORMA NET INCOME $ 5,248 $ 12,155
========= =========
Earnings per share:
Basic - as reported $ 0.22 $ 0.55
========= =========
Basic - pro forma $ 0.22 $ 0.53
========= =========
Diluted - as reported $ 0.22 $ 0.52
========= =========
Diluted - pro forma $ 0.21 $ 0.50
========= =========
Restricted Stock
Restricted stock grants consist of shares of the Company's common stock
which are awarded to employees. The grants are restricted such that they are
subject to substantial risk of forfeiture and to restrictions on their sale or
other transfer by the employee. During the three months ended June 30, 2005 and
2004, the Company granted 185,081 shares and 12,000 shares of restricted stock,
with a per share weighted average fair value of $19.02 and $18.57, respectively.
The Company recorded stock-based compensation expense related to restricted
stock of approximately $1.5 million and $1.1 million in the three months ended
June 30, 2005 and 2004, respectively.
Summarized information for restricted stock issued by the Company is as
follows:
SHARES
----------
Restricted stock outstanding at March 31, 2005 569,258
Granted 185,081
Vested (3,500)
Cancelled (11,800)
----------
Restricted stock outstanding at June 30, 2005 739,039
==========
NOTE 4 - OTHER BALANCE SHEET INFORMATION
Marketable Securities
All investments with original maturities of greater than 90 days are
accounted for in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Company determines the
appropriate classification at the time of purchase. At June 30, 2005, the
Company had marketable securities of approximately $10.5 million, which mainly
consisted of investments in auction rate securities which are classified as
available-for-sale. Investments in auction rate securities are recorded at cost,
which approximates fair value due to their variable interest rates which reset
every 7 to 30 days. As a result, these securities are classified as current
assets. Despite the long-term nature of their stated contractual maturities,
there is a readily liquid market for these securities. As a result, the Company
had no cumulative gross unrealized holding gains (losses) or gross realized
gains (losses) from its marketable securities. All
8
income generated from these investments was recorded as interest income. Auction
rate securities consist of tax-free bonds issued by municipalities which mainly
carry AAA ratings.
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 (in thousands):
JUNE 30, MARCH 31,
2005 2005
----------- -----------
Ferrous metals $ 46,503 $ 58,215
Non-ferrous metals 58,751 37,888
Other 208 242
----------- -----------
$ 105,462 $ 96,345
=========== ===========
Property and Equipment
Property and equipment consists of the following at (in thousands):
JUNE 30, MARCH 31,
2005 2005
----------- -----------
Land and improvements $ 30,704 $ 30,704
Buildings and improvements 22,665 22,069
Operating machinery and equipment 103,101 98,978
Automobiles and trucks 10,866 10,687
Computer equipment and software 2,116 1,995
Furniture, fixtures and office equipment 796 790
Construction in progress 9,268 6,709
----------- -----------
179,516 171,932
Less -- accumulated depreciation (64,997) (60,679)
----------- -----------
$ 114,519 $ 111,253
=========== ===========
Other Accrued Liabilities
Other accrued liabilities consist of the following at (in thousands):
JUNE 30, MARCH 31,
2005 2005
----------- -----------
Accrued employee compensation and benefits $ 8,783 $ 21,731
Accrued insurance 5,015 4,324
Accrued real and personal property taxes 2,412 2,237
Accrued equipment purchase commitment 2,000 0
Other 2,976 3,394
----------- -----------
$ 21,186 $ 31,686
=========== ===========
Accrued Severance and Other Charges
During the year ended March 31, 2004, the Company implemented a management
realignment that resulted in the recognition of $6.2 million of charges
consisting mainly of employee termination benefits. As of June 30, 2005,
approximately $1.2 million, which is reflected in other accrued liabilities, was
to be paid in July 2005. However, the Company is contesting these payments (see
Note 8 - Commitments and Contingencies).
9
NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following at (in
thousands):
JUNE 30, 2005 MARCH 31, 2005
----------------------- -----------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------ ------------ ------ ------------
Intangible assets:
Customer lists $ 1,280 $ (234) $ 1,280 $ (213)
Non-compete agreement 290 (162) 290 (144)
Pension plan intangible 98 0 98 0
Goodwill 1,280 0 1,280 0
-------- -------- -------- --------
Goodwill and other intangibles,
net $ 2,948 $ (396) $ 2,948 $ (357)
======== ======== ======== ========
Total amortization expense for other intangible assets was $39,000 during
the three months ended June 30, 2005. Based on the other intangible assets
recorded as of June 30, 2005, annual amortization expense for other intangible
assets will be approximately $0.1 million for each of the fiscal years 2007
through 2011.
NOTE 6 - LONG-TERM DEBT
Long-term debt consists of the following at (in thousands):
JUNE 30, MARCH 31,
2005 2005
-------- ---------
Mortgage loan (interest rate of 5.50%) due January
2009 $ 2,126 $ 2,193
Other debt (including capital leases) 311 338
-------- --------
2,437 2,531
Less -- current portion of long-term debt (362) (367)
-------- --------
$ 2,075 $ 2,164
======== ========
Credit Agreement
In June 2004, the Company entered into a $200 million secured four-year
revolving credit and letter of credit facility, as amended, with a maturity date
of June 28, 2008 (the "Credit Agreement"). As of June 30, 2005, the Company had
no outstanding borrowings under its Credit Agreement. Interest rates under the
Credit Agreement are based on variable rates tied to the prime rate plus a
margin or the London Interbank Offered Rate ("LIBOR") plus a margin. The margin
is based on the Company's leverage ratio (as defined in the Credit Agreement) as
determined for the trailing four fiscal quarters. Based on the Company's current
leverage ratio, LIBOR and prime rate margins are 125 basis points and 0 basis
points, respectively.
Borrowings under the Credit Agreement are generally subject to borrowing
base limitations based upon a formula equal to 85% of eligible accounts
receivable plus the lesser of $65 million or 70% of eligible inventory.
Inventories cannot represent more than 40% of the total borrowing base. A
security interest in substantially all of the Company's assets and properties,
other than equipment, fixtures and real property, unless and until the average
excess availability for any two consecutive months is less than $10 million, has
been granted to the agent for the lenders as collateral against the Company's
obligations under the Credit Agreement. Pursuant to the Credit Agreement, the
Company pays a fee on the undrawn portion of the facility that is determined by
the leverage ratio. As of June 30, 2005, that fee was .25% per annum.
Under the Credit Agreement, the Company is required to satisfy specified
financial covenants, including a maximum leverage ratio of 2.50 to 1.00, a
minimum consolidated fixed charge coverage ratio of 1.50 to 1.00 and a minimum
tangible net worth of not less than the sum of $110 million plus 25% of
consolidated net income earned in each fiscal quarter. The leverage ratio and
consolidated fixed charge coverage ratio are tested for the twelve-month period
ending each fiscal quarter. The Credit Agreement also limits capital
expenditures to $20 million for the twelve-month period ending each fiscal
quarter. As a result of a recent
10
amendment to the Credit Agreement, the Company's limit on capital expenditures
was increased to $40 million for the current fiscal year.
The Credit Agreement contains restrictions which, among other things,
limits the Company's ability to (i) incur additional indebtedness; (ii) pay
dividends under certain conditions; (iii) enter into transactions with
affiliates; (iv) enter into certain asset sales; (v) engage in certain
acquisitions, investments, mergers and consolidations; (vi) prepay certain other
indebtedness; (vii) create liens and encumbrances on Company assets; and (viii)
engage in 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.
On June 28, 2004, the Company paid off all balances under its previous
credit agreement with proceeds from its Credit Agreement. The Company recognized
a loss on debt extinguishment of $1.7 million associated with the repayment of
its previous credit agreement. This amount represented a write-off of a portion
of the unamortized deferred financing costs associated with the previous credit
agreement.
NOTE 7 - EMPLOYEE BENEFIT PLANS
The Company sponsors three defined benefit pension plans for employees at
certain of its subsidiaries. Only employees covered under collective bargaining
agreements accrue future benefits under these defined benefit pension plans.
These benefits are based either on years of service and compensation or on years
of service at fixed benefit rates. The Company's funding policy for the pension
plans is to contribute amounts required to meet regulatory requirements. The
components of net pension costs were as follows (in thousands):
THREE MONTHS ENDED
-----------------------------
JUNE 30, JUNE 30,
2005 2004
------------- -------------
Service cost $ 33 $ 34
Interest cost 174 168
Expected return on plan assets (158) (158)
Amortization of prior service cost 24 24
Recognized net actuarial loss 33 33
----------- -----------
Net periodic benefit cost $ 106 $ 101
=========== ===========
In the three months ended June 30, 2005, the Company made cash
contributions of $0.4 million to its pension plans. Based on estimates provided
by its actuaries, the Company expects to make additional cash funding
contributions to its pension plans of approximately $0.6 million by March 31,
2006.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Environmental Matters
The Company is subject to comprehensive local, state, federal and
international regulatory and statutory environmental requirements relating to,
among others, the acceptance, storage, treatment, handling and disposal of solid
waste and hazardous waste, the discharge of materials into air, the management
and treatment of wastewater and storm water, the remediation of soil and
groundwater contamination, the restoration of natural resource damages and the
protection of employees' health and safety. The Company believes that it and its
subsidiaries are in material compliance with currently applicable statutes and
regulations governing the protection of human health and the environment,
including employee health and
11
safety. However, environmental legislation may in the future be enacted and
create liability for past actions and the Company or its subsidiaries may be
fined or held liable for damages.
Certain of the Company's subsidiaries have received notices from the United
States Environmental Protection Agency ("EPA"), state agencies or third parties
that the subsidiary has been identified as potentially responsible for the cost
of investigation and cleanup of landfills or other sites where the subsidiary's
material was shipped. In most cases, many other parties are also named as
potentially responsible parties. The Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA" or "Superfund") enables EPA and state
agencies to recover from owners, operators, generators and transporters the cost
of investigation and cleanup of sites which pose serious threats to the
environment or public health. In certain circumstances, a potentially
responsible party can be held jointly and severally liable for the cost of
cleanup. In other cases, a party who is liable may only be liable for a
divisible share. Liability can be imposed even if the party shipped materials in
a lawful manner at the time of shipment and the liability for investigation and
cleanup costs can be significant, particularly in cases where joint and several
liability may be imposed.
Recent amendments to CERCLA, including the Superfund Recycling Equity Act
of 1999, have limited the exposure of scrap metal recyclers for sales of certain
recyclable material under certain circumstances. However, the recycling defense
is subject to conducting of reasonable care evaluations of current and potential
consumers.
Because CERCLA can be imposed retroactively on shipments that occurred many
years ago, and because EPA and state agencies are still discovering sites that
present problems to public heath or the environment, the Company can provide no
assurance that it will not become liable in the future for significant costs
associated with investigation and remediation of CERCLA waste sites.
On July 1, 1998, Metal Management Connecticut, Inc. ("MTLM-Connecticut"), a
subsidiary of the Company, acquired the scrap metal recycling assets of Joseph
A. Schiavone Corp. (formerly known as Michael Schiavone & Sons, Inc.). The
acquired assets include real property in North Haven, Connecticut upon which
MTLM-Connecticut's scrap metal recycling operations are currently performed (the
"North Haven Facility"). The owner of Joseph A. Schiavone Corp. was Michael
Schiavone ("Schiavone"). On March 31, 2003, the Connecticut Department of
Environmental Protection ("DEP") filed suit against Joseph A. Schiavone Corp.,
Schiavone, and MTLM-Connecticut in the Superior Court of the State of
Connecticut--Judicial District of Hartford. The suit alleges, among other
things, that the North Haven Facility discharged and continues to discharge
contaminants, including oily material, into the environment and has failed to
comply with the terms of certain permits and other filing requirements. The suit
seeks injunctions to restrict MTLM-Connecticut from maintaining discharges and
to require MTLM-Connecticut to remediate the facility. The suit also seeks civil
penalties from all of the defendants in accordance with Connecticut
environmental statutes. At this stage, the Company is not able to predict
MTLM-Connecticut's potential liability in connection with this action or any
required investigation and/or remediation. The Company believes that
MTLM-Connecticut has meritorious defenses to certain of the claims asserted in
the suit and MTLM-Connecticut intends to vigorously defend itself against the
claims. In addition, the Company believes it is entitled to indemnification from
Joseph A. Schiavone Corp. and Schiavone for some or all of the obligations and
liabilities that may be imposed on MTLM-Connecticut in connection with this
matter under the various agreements governing its purchase of the North Haven
Facility from Joseph A. Schiavone Corp. The Company cannot provide assurances
that Joseph A. Schiavone Corp. or Schiavone will have sufficient resources to
fund any or all indemnifiable claims that the Company may assert.
In a letter dated July 13, 2005, MTLM-Connecticut and the Company received
notification from Schiavone of his demand seeking indemnification (including the
advance of all costs, charges and expenses incurred by Schiavone in connection
with his defense) from MTLM-Connecticut and the Company to those claims made
against Schiavone in the action brought by the Connecticut DEP. Schiavone's
demand refers to his employment agreement and to the certificate of
incorporation of MTLM-Connecticut, which provide for indemnification against
claims by reason of his being or having been a director, officer, employee, or
agent of MTLM-Connecticut, or serving or having served at the request of
MTLM-Connecticut as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, or other enterprise to the
fullest extent permitted by applicable law.
12
The Company has engaged in settlement discussions with Joseph A. Schiavone
Corp., Schiavone and the Connecticut DEP regarding the possible characterization
of the North Haven Facility, and the subsequent remediation thereof should
contamination be present at concentrations that require remedial action. The
Company is currently working with an independent environmental consultant to
develop an acceptable characterization plan. The Company cannot provide
assurances that it will be able to reach an acceptable settlement of this matter
with the other parties.
During the years ended March 31, 2003 and March 31, 2004, the Arizona
Department of Environmental Quality ("ADEQ") issued five Notices of Violations
("NOVs") to Metal Management Arizona, L.L.C. ("MTLM-Arizona"), a subsidiary of
the Company, for alleged violations at MTLM-Arizona's Tucson and Phoenix
facilities including: (i) not developing and submitting a "Solid Waste Facility
Site Plan"; (ii) placing shredder residue on a surface that does not meet
Arizona's permeability specifications; (iii) alleged failure to follow ADEQ
protocol for sampling and analysis of waste from the shredding of motor vehicles
at the Phoenix facility; and (iv) use of excavated soil to stabilize railroad
tracks adjacent to the Phoenix facility. On September 5, 2003, MTLM-Arizona was
notified that ADEQ had referred the outstanding NOV issues to the Arizona
Attorney General. On April 12, 2005, the Company entered into a settlement
agreement with the ADEQ and Arizona Attorney General which resulted in a fine of
$80 thousand. This settlement agreement resolved all outstanding NOVs involving
MTLM-Arizona.
Legal Proceedings
As a result of internal audits conducted by the Company, the Company
determined that current and former employees of certain business units engaged
in activities relating to cash payments to individual industrial account
suppliers of scrap metal that may have involved violations of federal and state
law. In May 2004, the Company voluntarily disclosed its concerns regarding such
cash payments to the U.S. Department of Justice. The Board of Directors
appointed a special committee, consisting of all of its independent directors,
to conduct an investigation of these activities. The Company is cooperating with
the U.S. Department of Justice. The Company implemented policies to eliminate
cash payments to industrial customers. During the year ended March 31, 2004,
such cash payments to industrial customers represented approximately 0.7% of the
Company's consolidated ferrous and non-ferrous yard shipments. The fines and
penalties under applicable statutes contemplate qualitative as well as
quantitative factors that are not readily assessable at this stage of the
investigation, but could be material. The Company is not able to predict at this
time the outcome of any actions by the U.S. Department of Justice or other
governmental authorities or their effect on the Company, if any, and
accordingly, the Company has not recorded any amounts in the financial
statements. The Company has incurred legal and other costs related to this
matter of approximately $2.3 million to date.
On July 15, 2005, the Company and its subsidiary Metal Management Midwest,
Inc. ("MTLM-Midwest") filed a complaint (the "Complaint") against former
officers and directors, Albert A. Cozzi, Frank J. Cozzi, and Gregory P. Cozzi
(collectively, the "Defendants") in the Circuit Court of Cook County Illinois,
County Department, Chancery Division. The Complaint seeks damages from Frank J.
Cozzi and Gregory P. Cozzi for their actions in designing, implementing, and
maintaining cash payment practices in MTLM-Midwest's accounts payable that
violated Company policy and potentially federal law. The Complaint also alleges
that the Defendants breached the non-competition and non-solicitation provisions
of their respective separation and release agreements by seeking to engage in
business activities and seeking to solicit suppliers, customers and service
providers in competition with Plaintiffs' business. The Complaint seeks, among
other things, monetary compensation for Plaintiffs' actual losses and damages,
and an injunction restraining and enjoining the Defendants from breaching their
respective separation and release agreements.
For other commitment and contingencies, please see Note 11 to the Company's
consolidated financial statements included in our Annual Report on Form 10-K for
the year ended March 31, 2005. 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.
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," "our" or other similar terms) expects or
anticipates will or may occur in the future, including such things as future
acquisitions (including the amount and nature thereof), business strategy,
expansion and growth of our business and operations, general economic and market
conditions and other such matters are forward-looking statements. Although we
believe the expectations expressed in such forward-looking statements are based
on reasonable assumptions within the bounds of our knowledge of our business, a
number of factors could cause actual results to differ materially from those
expressed in any forward-looking statements. These and other risks,
uncertainties and other factors are discussed under "Risk Factors" appearing in
our Annual Report on Form 10-K for the year ended March 31, 2005, as the same
may be amended from time to time.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included under Item 1 of
this Report. In addition, reference should be made to the audited consolidated
financial statements and notes thereto and related Management's Discussion and
Analysis of Financial Condition and Results of Operations included in our Annual
Report on Form 10-K for the year ended March 31, 2005 ("Annual Report").
OVERVIEW
We are one of the largest domestic scrap metal recycling companies with
approximately 40 facilities in 15 states. We enjoy leadership positions in many
major metropolitan markets, such as Birmingham, Chicago, Cleveland, Denver,
Hartford, Houston, Memphis, Newark, New Haven, Phoenix, Pittsburgh, Salt Lake
City, Toledo and Tucson. We have a 28.5% equity ownership position in Southern
Recycling, L.L.C. ("Southern"), one of the largest scrap metals recyclers in the
Gulf Coast region. We operate in one reportable segment, the scrap metal
recycling industry.
Our operations primarily involve the collection and processing of ferrous
and non-ferrous scrap metals. We collect industrial scrap metal and obsolete
scrap metal, process it into reusable forms and supply the recycled metals to
our customers, including electric-arc furnace mills, integrated steel mills,
foundries, secondary smelters and metal brokers. In addition to buying,
processing and selling ferrous and non-ferrous scrap metals, we are periodically
retained as demolition contractors in certain of our large metropolitan markets
in which we dismantle obsolete machinery, buildings and other structures
containing metal and, in the process, collect both the ferrous and non-ferrous
metals from these sources. At certain of our locations adjacent to commercial
waterways, we provide stevedoring services. We also operate a bus dismantling
business combined with a bus replacement parts business in Newark, New Jersey.
We believe that we provide one of the most comprehensive product offerings
of both ferrous and non-ferrous scrap metals. Our ferrous products primarily
include shredded, sheared, cold briquetted and bundled scrap metal, and other
purchased scrap metal, such as turnings, cast and broken furnace iron. We also
process non-ferrous scrap metals, including aluminum, copper, stainless steel
and other nickel-bearing metals, brass, titanium and high-temperature alloys,
using similar techniques and through application of our proprietary
technologies.
RESULTS OF OPERATIONS
Our results for the three months ended June 30, 2005 were severely impacted
by a sharp fall in ferrous scrap metals prices and lower domestic demand for
ferrous scrap metals. After achieving record results in fiscal 2005, the market
for ferrous scrap metals weakened, and in the months of May and June 2005,
prices for certain grades of ferrous scrap declined by more than $100 per ton.
Ferrous scrap prices were impacted by lower demand from our domestic consumers
as a result of a buildup in their raw material inventories exacerbated by slower
demand for finished steel. As a result, scrap metal prices declined
precipitously during the period resulting in lower ferrous scrap metal margins.
This precipitous decline and its effect on our results
14
was most evident in markets in which we rely more significantly on the sale of
industrial grades of ferrous scrap to integrated steel mills.
The decline in ferrous scrap prices is evident in data published by the
American Metal Market ("AMM"). According to AMM, the average price for #1 Heavy
Melting Steel Scrap - Chicago (which is a common indicator for ferrous scrap)
declined from $217 per ton in April 2005 to approximately $125 per ton in June
2005.
Our non-ferrous businesses continued to perform well in the three months
ended June 30, 2005 primarily due to strong demand from our consumers in the
aerospace industry. This also resulted in higher pricing for high-temperature
alloys and nickel-based metals and alloys, which resulted in higher sales and
material margins.
Although our results of operations during the three months ended June 30,
2005 demonstrated lower profitability from the three months ended June 30, 2004
and from the record levels achieved during fiscal 2005, our objective of turning
our inventories rather than speculating on commodity prices allowed us to remain
profitable.
15
The following table sets forth selected statement of operations and sales
volume data for the three months ended June 30, 2005 and 2004.
STATEMENT OF OPERATIONS SELECTED ITEMS ($ IN THOUSANDS)
THREE MONTHS ENDED JUNE 30,
---------------------------------------
2005 % 2004 %
---- - ---- -
SALES BY COMMODITY:
Ferrous metals $ 248,582 65.1% $ 262,576 71.5%
Non-ferrous metals 116,114 30.4 88,178 24.0
Brokerage - ferrous 11,010 2.9 11,557 3.1
Brokerage - non-ferrous 2,249 0.6 995 0.3
Other 3,679 1.0 3,870 1.1
---------- ----- ---------- -----
Net sales 381,634 100.0% 367,176 100.0%
Cost of sales (excluding depreciation) 350,379 91.8 323,779 88.2
General and administrative expense 19,746 5.2 18,682 5.1
Depreciation and amortization expense 4,614 1.2 4,529 1.2
Income from joint ventures 2,051 0.5 3,230 0.9
Interest expense (376) 0.1 (1,313) 0.4
Interest and other income, net 472 0.1 39 0.0
Loss on debt extinguishment 0 0.0 (1,653) 0.4
Provision for income taxes 3,596 0.9 7,964 2.2
---------- ----- ---------- -----
Net income $ 5,446 1.4% $ 12,525 3.4%
========== ===== ========== =====
SALES VOLUME BY COMMODITY
(IN THOUSANDS): 2005 2004
---------- ----------
1,101 1,198
Ferrous metals (tons)
120,175 117,968
Non-ferrous metals (lbs.)
59 48
Brokerage - ferrous (tons)
1,943 1,035
Brokerage - non-ferrous (lbs.)
NET SALES
Consolidated net sales increased by $14.4 million (3.9%) to $381.6 million
in the three months ended June 30, 2005 compared to consolidated net sales of
$367.2 million in the three months ended June 30, 2004. The increase in
consolidated net sales was due to higher average selling prices when compared to
the three months ended June 30, 2004 and increased sales volumes for our
non-ferrous products.
Ferrous Sales
Ferrous sales decreased by $14.0 million (5.3%) to $248.6 million in the
three months ended June 30, 2005 compared to ferrous sales of $262.6 million in
the three months ended June 30, 2004. The decrease was attributable to lower
sales volumes despite slightly higher average sales prices. In the three months
ended June 30, 2005, the average selling price for ferrous products was
approximately $226 per ton, an increase of $7 per ton (3.0%) from the three
months ended June 30, 2004. The increase in selling prices is due to various
factors including the mix of ferrous products sold and a higher concentration of
FOB destination sales for which freight is included in revenue.
Ferrous sales volumes decreased by 8.1% to 1.1 million tons in the three
months ended June 30, 2005 compared to the three months ended June 30, 2004. As
noted above, this was due to lower demand from our domestic ferrous consumers.
16
Non-ferrous Sales
Non-ferrous sales increased by $27.9 million (31.7%) to $116.1 million in
the three months ended June 30, 2005 compared to non-ferrous sales of $88.2
million in the three months ended June 30, 2004. The increase was due to higher
average selling prices coupled with an increase in sales volumes. In the three
months ended June 30, 2005, non-ferrous sales volumes increased by 2.2 million
pounds (1.9%) and average selling price for non-ferrous products increased by
approximately $.22 per pound (29.3%) to $0.97 per pound compared to the three
months ended June 30, 2004.
Our non-ferrous operations have benefited from rising prices for aluminum,
copper and stainless steel (nickel base metal). The increase in non-ferrous
prices is evident in data published by the London Metals Exchange ("LME") and
COMEX. According to LME data, average prices for nickel and aluminum were 31.4%
and 6.6%, respectively, higher in the three months ended June 30, 2005 compared
to the three months ended June 30, 2004. According to COMEX data, average prices
for copper were 21.2% higher in the three months ended June 30, 2005 compared to
the three months ended June 30, 2004.
Our non-ferrous sales volumes increased due to greater demand from our
consumers. During the three months ended June 30, 2004, domestic demand was
previously impacted by lower output from U.S. industrial production and
international demand for scrap was low. The recent improvement in the U.S.
economy, coupled with improving economies in other countries, led to increased
demand for non-ferrous products.
Our non-ferrous sales are also impacted by the mix of non-ferrous metals
sold. Generally, prices for copper are higher than prices for aluminum and
stainless steel. In addition, the amount of high-temperature alloys that we sell
(generally from our Aerospace operations) and the selling prices for these
metals will impact our non-ferrous sales as prices for these metals are
generally higher than other non-ferrous metals.
Brokerage Sales
Brokerage ferrous sales decreased by $0.6 million (4.7%) to $11.0 million
in the three months ended June 30, 2005 compared to brokerage ferrous sales of
$11.6 million in the three months ended June 30, 2004. The decrease was a result
of a $54 per ton (22.4%) decline in average selling price for brokered ferrous
metals. The average selling price for brokered metals is significantly affected
by the product mix, such as prompt industrial grades versus obsolete grades,
which can vary significantly between periods. Prompt industrial grades of scrap
metal are generally associated with higher unit prices.
The decrease in average selling prices was partially offset by an increase
in brokered ferrous sales volumes. Brokered ferrous sales volume increased by
11,000 tons (22.9%) in the three months ended June 30, 2005 compared to the
three months ended June 30, 2004 due to brokerage orders which were placed in
March 2005, but not received until April 2005.
Brokerage non-ferrous sales increased by $1.2 million (126.0%) to $2.2
million in the three months ended June 30, 2005 compared to brokerage
non-ferrous sales of $1.0 million in the three months ended June 30, 2004. The
increase in the three months ended June 30, 2005 was a result of sales volumes
doubling and average selling price increasing by $0.20 per pound compared to the
three months ended June 30, 2004. The increase in sales volume was due to the
brokering of non-ferrous metals to a consumer for which our operations could not
completely fill the sales order.
Other Sales
Other sales are primarily derived from our stevedoring and bus dismantling
operations. The decrease in other sales in the three months ended June 30, 2005
is primarily a result of lower stevedoring revenue.
COST OF SALES (EXCLUDING DEPRECIATION)
Cost of sales was $350.4 million in the three months ended June 30, 2005
compared to cost of sales of $323.8 million in the three months ended June 30,
2004. The increase in the three months ended June 30, 2005 of $26.6 million
(8.2%) is primarily due to increased material costs related to non-ferrous
metals ($19.8 million), increased freight costs, and increased processing
expenses, partially offset by decreased ferrous material costs. Freight costs
were higher due to increases in freight rates resulting from higher fuel costs.
Processing costs on a per unit basis increased due to higher shredder repair
expense and fuel costs.
17
Cost of sales represented approximately 92% of sales in the three months
ended June 30, 2005 compared to 88% of sales in the three months ended June 30,
2004. The increase was due to ferrous material costs representing a higher
percentage of ferrous sales compared to the three months ended June 30, 2004.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $19.7 million in the three months
ended June 30, 2005 compared to general and administrative expenses of $18.7
million in the three months ended June 30, 2004. The $1.0 million increase is
mainly due to higher compensation expense partially offset by lower professional
fees. The increase in compensation expense was primarily due to higher salaries
as a result of an increase in headcount.
Professional fees were $1.3 million lower during the three months ended
June 30, 2005 compared to the three months ended June 30, 2004. The decrease was
due to legal fees and related costs resulting from the investigations performed
in connection with our voluntary disclosure to the U.S. Department of Justice
regarding cash payments made to certain industrial account suppliers (see the
section entitled "Legal Proceedings" in Part II of this report). We recorded
$0.1 million of expense in connection with this investigation during the three
months ended June 30, 2005 compared to $1.7 million of expense during the three
months ended June 30, 2004.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $4.6 million in the three months
ended June 30, 2005 compared to depreciation and amortization expense of $4.5
million in the three months ended June 30, 2004. Our depreciation expense
remained unchanged due to our decision to replace older material handling
equipment with new equipment financed through operating leases which contain
attractive terms compared to purchasing the equipment.
INCOME FROM JOINT VENTURES
Income from joint ventures was $2.1 million in the three months ended June
30, 2005 compared to income from joint ventures of $3.2 million in the three
months ended June 30, 2004. The income from joint ventures primarily represents
our 28.5% share of income from Southern, but also reflects results from three
other joint ventures. Southern is primarily a processor of ferrous metals and
its results were also impacted by weakness in the ferrous scrap metal market.
INTEREST EXPENSE
Interest expense was $0.4 million in the three months ended June 30, 2005
compared to interest expense of $1.3 million in the three months ended June 30,
2004. The decrease in interest expense was a result of lower borrowings. We had
no borrowings under our Credit Agreement in the three months ended June 30, 2005
while average borrowings under our credit facilities in the three months ended
June 30, 2004 were $50.4 million. Our interest expense primarily consists of
amortization of deferred financing costs, unused line fees under our Credit
Agreement and interest on mortgage loans.
INTEREST AND OTHER INCOME, NET
Interest and other income recognized in the three months ended June 30,
2005 consists mainly of an insurance reimbursement of $0.3 million and $0.1
million of interest income. As a result of our cash balances and marketable
securities, our interest income recognized has increased. In the three months
ended June 30, 2004, we did not have any cash balances earning interest nor did
we have any investments in marketable securities.
LOSS ON DEBT EXTINGUISHMENT
During the three months ended June 30, 2004, we recognized a loss on debt
extinguishment of $1.7 million associated with the repayment of our previous
credit agreement with proceeds from the Credit Agreement. This amount represents
a write-off of unamortized deferred financing costs associated with the previous
credit agreement.
18
INCOME TAXES
In the three months ended June 30, 2005, we recognized income tax expense
of $3.6 million, resulting in an effective tax rate of 39.8%. In the three
months ended June 30, 2004, our income tax expense was $8.0 million, resulting
in an effective tax rate of 38.9%. The effective tax rate differs from the
federal statutory rate mainly due to state taxes and permanent tax items.
As of March 31, 2005, we have fully consumed our federal net operating loss
("NOL") carryforwards and most of our state NOL carryforwards. As a result, our
cash tax payment obligations will be higher in fiscal 2006.
NET INCOME
Net income was $5.4 million in the three months ended June 30, 2005
compared to net income of $12.5 million in the three months ended June 30, 2004.
Net income in the three months ended June 30, 2005 was lower due to lower
ferrous material margins associated with weaker market conditions and lower unit
shipments, and lower income from joint ventures partially offset by lower
interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Our financial condition remained strong during the three months ended June
30, 2005. At June 30, 2005, our total indebtedness was $2.4 million (primarily a
single property real estate mortgage). We had no borrowings outstanding on our
Credit Agreement and had cash, cash equivalents and marketable securities of
$47.1 million at June 30, 2005. Our primary source of working capital is
collections from customers supplemented by financing under our Credit Agreement.
Cash Flows
In the three months ended June 30, 2005, our operating activities used net
cash of $4.6 million compared to net cash used of $1.4 million in the three
months ended June 30, 2004. The use of cash in the three months ended June 30,
2005 was due to an increase in working capital of $15.9 million, which offset
the $11.3 million of cash generated from net income, adjusted for non-cash
items. The working capital increase was mainly due to lower accounts payable
($20.2 million) and higher inventories ($9.1 million), offset in part by lower
accounts receivable ($26.5 million). Accounts payable and accounts receivable
decreased due to lower purchase and selling prices for scrap metal in May and
June 2005 as compared to March 2005. Inventories increased due to higher levels
and cost of non-ferrous inventory on hand at June 30, 2005 as compared to March
31, 2005. In addition, other working capital cash outflows during the three
months ended June 30, 2005 included the payment of $16.6 million relating to
incentive compensation for employees that was accrued for at March 31, 2005.
We used $13.9 million in net cash for investing activities in the three
months ended June 30, 2005 compared to the use of net cash of $2.3 million in
the three months ended June 30, 2004. In the three months ended June 30, 2005,
purchases of property and equipment were $6.5 million and we invested $10.5
million in available-for-sale marketable securities. We received an aggregate of
$3.0 million of cash distributions from our Southern and Port Albany joint
ventures.
We generated $2.3 million in net cash from financing activities in the
three months ended June 30, 2005 compared to net cash generated of $3.9 million
in the three months ended June 30, 2004. We paid cash dividends of $1.9 million
during the period.
Indebtedness
The Credit Agreement is a revolving credit and letter of credit facility
that is available to support our working capital requirements and is also
available for general corporate purposes. Borrowing costs are based on variable
rates tied to the prime rate plus a margin or the London Interbank Offered Rate
("LIBOR") plus a margin. The margin is based on our leverage ratio (as defined
in the Credit Agreement) as determined for the trailing four fiscal quarters.
Based on our current leverage ratio, our LIBOR and prime rate margins are 125
basis points and 0 basis points, respectively.
19
Borrowings under the Credit Agreement are generally subject to borrowing
base limitations based upon a formula equal to 85% of eligible accounts
receivable plus the lesser of $65 million or 70% of eligible inventory.
Inventories cannot represent more than 40% of the total borrowing base. A
security interest in substantially all of our assets and properties, other than
equipment, fixtures and real property, unless and until the average excess
availability for any two consecutive months is less than $10 million, has been
granted to the agent for the lenders as collateral against our obligations under
the Credit Agreement. Pursuant to the Credit Agreement, we pay a fee on the
undrawn portion of the facility that is determined by the leverage ratio. As of
June 30, 2005, that fee was .25% per annum.
Under the Credit Agreement, we are required to satisfy specified financial
covenants, including a maximum leverage ratio of 2.50 to 1.00, a minimum
consolidated fixed charge coverage ratio of 1.50 to 1.00 and a minimum tangible
net worth of not less than the sum of $110 million plus 25% of consolidated net
income earned in each fiscal quarter. The leverage ratio and consolidated fixed
charge coverage ratio are tested for the twelve-month period ending each fiscal
quarter. The Credit Agreement also limits capital expenditures to $20 million
for the twelve-month period ending each fiscal quarter. A recent amendment to
our Credit Agreement permits capital expenditures of up to $40 million in fiscal
2006. The Credit Agreement contains restrictions which, among other things,
limit our ability to (i) incur additional indebtedness; (ii) pay dividends under
certain conditions; (iii) enter into transactions with affiliates; (iv) enter
into certain asset sales; (v) engage in certain acquisitions, investments,
mergers and consolidations; (vi) prepay certain other indebtedness; (vii) create
liens and encumbrances on our assets; and (viii) engage in other matters
customarily restricted in such agreements. As of June 30, 2005, we were in
compliance with all financial covenants contained in the Credit Agreement. As of
July 26, 2005, we had no outstanding borrowings under the Credit Agreement, and
had undrawn availability of approximately $188 million.
Future Capital Requirements
We expect to fund our working capital needs, dividend payments and capital
expenditures over the next twelve months with cash generated from operations,
supplemented by undrawn borrowing availability under the Credit Agreement. Our
future cash needs will be driven by working capital requirements, planned
capital expenditures and acquisition objectives, should attractive acquisition
opportunities present themselves.
Capital expenditures were $6.5 million in the three months ended June 30,
2005. Capital expenditures are expected to be approximately $24 million to $33
million for the remainder of fiscal 2006. Our major capital expenditures in
fiscal 2006 will include, among other items, the rebuild of our shredder in
Newark, upgrades to equipment and technology deployed in our Aerospace
operations, installations of induction separation systems at five shredding
facilities and the purchase of leased land in Phoenix.
In addition, due to favorable financing terms made available by equipment
manufacturing vendors, we have entered into operating leases for new equipment.
Since April 2002, we have entered into 72 operating leases for equipment which
would have cost approximately $21.1 million to purchase. These operating leases
are attractive to us since the implied interest rates are lower than interest
rates under our Credit Agreement. We expect to selectively use operating leases
for new material handling equipment or trucks required by our operations.
We anticipate that our Board of Directors will continue to declare cash
dividends; however, the continuance of cash dividends is not guaranteed and
dependent on many factors, some of which are beyond our control.
We believe these sources of capital will be sufficient to fund planned
capital expenditures, dividend payments and working capital requirements for the
next twelve months, although there can be no assurance that this will be the
case.
OFF-BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
Off-Balance Sheet Arrangements
Other than operating leases, we do not have any off-balance sheet
arrangements that are likely to have a current or future effect on our financial
condition, result of operations or cash flows.
20
Contractual Obligations
We have various financial obligations and commitments assumed in the normal
course of our operations and financing activities. Financial obligations are
considered to represent known future cash payments that we are required to make
under existing contractual arrangements, such as debt and lease agreements.
The following table sets forth our known contractual obligations as of June
30, 2005, and the effect such obligations are expected to have on our liquidity
and cash flow in future periods (in thousands):
LESS THAN ONE TO THREE TO
TOTAL ONE YEAR THREE YEARS FIVE YEARS THEREAFTER
----- --------- ----------- ---------- ----------
Long-term debt and capital leases $ 2,796 $ 486 $ 911 $ 1,399 $ 0
Operating leases 54,818 10,951 16,485 10,357 17,025
Other contractual obligations* 8,027 7,676 266 85 0
--------- --------- --------- --------- ---------
Total contractual cash obligations $ 65,641 $ 19,113 $ 17,662 $ 11,841 $ 17,025
========= ========= ========= ========= =========
* Includes $1.2 million of employee termination benefits scheduled for payment
in July 2005 for which we are contesting the payments (see "Legal Proceedings"
under Part II, Item 1 of this report).
Other Commitments
We are required to make contributions to our defined benefit pension plans.
These contributions are required under the minimum funding requirements of the
Employee Retirement Security Act (ERISA). However, due to uncertainties
regarding significant assumptions involved in estimating future required
contributions, such as pension plan benefit levels, interest rate levels and the
amount of pension plan asset returns, we are not able to reasonably estimate the
amount of future required contributions beyond fiscal 2006. Our minimum required
pension contributions for fiscal 2006 are approximately $1.0 million, of which
we paid $0.4 million in the three months ended June 30, 2005.
We also enter into letters of credit in the ordinary course of operating
and financing activities. As of July 26, 2005, we had outstanding letters of
credit of approximately $7.0 million, much of which is securing insurance
policies.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of our financial statements requires the use of
estimates and judgments that affect the reported amounts and related disclosures
of commitments and contingencies. We rely on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances to make judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ materially from these estimates.
We believe the following critical accounting policies, among others, affect
the more significant judgments and estimates used in the preparation of our
consolidated financial statements.
Revenue Recognition
Our primary source of revenue is from the sale of processed ferrous and
non-ferrous scrap metals. We also generate revenue from the brokering of scrap
metals or from services performed, including, but not limited to, tolling,
stevedoring and dismantling. Revenues from processed ferrous and non-ferrous
scrap metal sales are recognized when title passes to the customer. Revenues
relating to brokered sales are recognized upon receipt of the materials by the
customer. Revenues from services are recognized as the service is performed.
Sales adjustments related to price and weight differences and allowances for
uncollectible receivables are accrued against revenues as incurred.
21
Marketable Securities
All investments with original maturities of greater than 90 days are
accounted for in accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." We determine the appropriate classification at the time of
purchase. At June 30, 2005, we had marketable securities of approximately $10.5
million, which mainly consisted of investments in auction rate securities which
are classified as available-for-sale. Investments in auction rate securities are
recorded at cost, which approximates fair value due to their variable interest
rates which reset every 7 to 30 days. As a result, these securities are
classified as current assets. Despite the long-term nature of their stated
contractual maturities, there is a readily liquid market for these securities.
As a result, we had no cumulative gross unrealized holding gains (losses) or
gross realized gains (losses) from our marketable securities. All income
generated from these investments was recorded as interest income. Auction rate
securities consist of tax-free bonds issued by municipalities which mainly carry
AAA ratings.
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 $2.7 million at June 30, 2005 and March 31, 2005,
respectively. Our determination of the allowance for uncollectible accounts
receivable includes a number of factors, including the age of the balance, past
experience with the customer account, changes in collection patterns and general
industry conditions.
Inventory
Our inventories primarily consist of ferrous and non-ferrous scrap metals
and are valued at the lower of average purchased cost or market. Quantities of
inventories are determined based on our inventory systems and are subject to
periodic physical verification using estimation techniques including
observation, weighing and other industry methods. As indicated in our Annual
Report under the section entitled "Risk Factors - Prices of commodities we own
may be volatile and markets are competitive," 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.
Goodwill
We account for goodwill and other intangible assets under SFAS No. 142,
"Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill is not
amortized, but it is tested for impairment at least annually, or earlier if
certain events occur indicating that the carrying value of goodwill may be
impaired. Other intangible assets are also tested for impairment at least
annually. If an impairment exists, a loss is recognized in an amount equal to
the excess of the carrying value over the fair value.
Long-lived Assets
We assess the impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. 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 the
recognition of a loss representing the difference between the fair value of such
asset and its carrying value.
Self-insured Accruals
We are self-insured for medical claims for most of our employees. We are
self-insured for workers' compensation claims that involve a loss of not greater
than $350,000 per claim. Our exposure to claims is protected by stop-loss
insurance policies. We record an accrual for reported but unpaid claims and the
estimated cost of incurred but not reported ("IBNR") claims. IBNR accruals are
based on either a lag estimate (for medical claims) or on actuarial assumptions
(for workers' compensation claims).
Income Taxes
Income taxes are accounted for under the asset and liability method
prescribed by SFAS No. 109, "Accounting for Income Taxes." Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
22
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.
Contingencies
We record accruals for estimated liabilities, which include environmental
remediation, potential legal claims and IBNR claims. A loss contingency is
accrued when our assessment indicates that it is probable that a liability has
been incurred and the amount of the liability can be reasonably estimated. Our
estimates are based upon currently available facts and presently enacted laws
and regulations. These estimated liabilities are subject to revision in future
periods based on actual costs or new information.
The above listing is not intended to be a comprehensive list of all of our
accounting policies. Please refer to our Annual Report, which contains
accounting policies and other disclosures required by generally accepted
accounting principles.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4."
SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material (spoilage), requiring that
these items be recognized as current-period charges and not capitalized in
inventory overhead. In addition, this statement requires that allocation of
fixed production overhead to the costs of conversion be based on the normal
capacity of the production facilities. The provisions of this statement are
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. The adoption of this statement is not expected to materially impact
our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment."
The revised statement eliminates the ability to account for share-based
compensation transactions using Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." This statement instead requires that
all share-based payments to employees be recognized as compensation expense in
the statement of operations based on their fair value over the applicable
vesting period. The provisions of this statement are effective for fiscal years
beginning after June 15, 2005. We will transition to SFAS No. 123(R) using the
"modified prospective application" effective April 1, 2006. Under the "modified
prospective application," compensation costs will be recognized in the financial
statements for all new share-based payments granted after April 1, 2006.
Additionally, we will recognize compensation costs for the portion of previously
granted awards for which the requisite service has not been rendered ("nonvested
awards") that are outstanding as of the effective date over the remaining
requisite service period of the awards.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and SFAS No. 3." This
statement provides guidance on the accounting for and reporting of accounting
changes and error corrections. It requires, unless impracticable, retrospective
application for reporting a change in accounting principle, unless the newly
adopted accounting principle specifies otherwise, and reporting of a correction
of an error. The provisions of this statement are effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. The adoption of this statement is not expected to materially impact
our consolidated financial statements.
In October 2004, the American Jobs Creation Act of 2004 ("AJCA") was signed
by the President. The AJCA provides a deduction for income from qualified
domestic production activities, which will be phased in from fiscal years
beginning after December 31, 2004 through 2010. In return, the AJCA also
provides for a two-year phase-out of the existing extraterritorial income
exclusion ("ETI") for foreign sales that was viewed to be inconsistent with
international trade protocols by the European Union. In December 2004, the FASB
issued Staff Position ("FSP") No. 109-1, "Application of FASB Statement No. 109,
Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004." FSP No. 109-1
treats a deduction for income from qualified production activities as a "special
deduction" as described in SFAS No. 109. As such, a special deduction has no
effect on deferred tax assets
23
and liabilities existing at the enactment date. Rather, the impact of such a
deduction will be reported in the period in which the deduction is claimed on
our tax return. We are currently evaluating the impact the AJCA will have on our
results of operations, financial condition and effective tax rate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial risk resulting from fluctuations in interest
rates and commodity prices. We seek to minimize these risks through regular
operating and financing activities. We do not use derivative financial
instruments. Refer to Item 7A of the Annual Report.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of our Disclosure Controls and Procedures.
As of the end of the period covered by this report, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")). This evaluation was done
under the supervision and with the participation of management, including Daniel
W. Dienst, our Chairman of the Board, Chief Executive Officer and President
("CEO"), and Robert C. Larry, our Executive Vice President, Finance and Chief
Financial Officer ("CFO").
The evaluation of our disclosure controls and procedures by our CEO and CFO
included a review of the controls' objectives and design, the controls'
implementation by the Company and the effect of the controls on the information
generated for use in this report. Based upon the controls evaluation, our CEO
and our CFO have concluded that, subject to the limitations on the effectiveness
of controls noted below, our disclosure controls and procedures are reasonably
effective in enabling us to record, process, summarize, and report information
required to be included in our periodic SEC filings within the required time
period.
Changes in Internal Control over Financial Reporting.
There has been no change in our internal control over financial reporting
during the three months ended June 30, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
CEO and CFO Certifications.
As an exhibit to this report, there are "Certifications" of the CEO and
CFO. The first form of Certification is required in accordance with Section 302
of the Sarbanes-Oxley Act of 2002. This section of the quarterly report is the
information concerning the controls evaluation referred to in the Section 302
Certifications and this information should be read in conjunction with the
Section 302 Certifications for a more complete understanding of the topics
presented.
Limitations on the Effectiveness of Controls.
Our management, including our CEO and the CFO, does not expect that our
disclosure controls and procedures or our internal controls over financial
reporting will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
24
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 1, 1998, Metal Management Connecticut, Inc. ("MTLM-Connecticut"), a
subsidiary of the Company, acquired the scrap metal recycling assets of Joseph
A. Schiavone Corp. (formerly known as Michael Schiavone & Sons, Inc.). The
acquired assets include real property in North Haven, Connecticut upon which
MTLM-Connecticut's scrap metal recycling operations are currently performed (the
"North Haven Facility"). The owner of Joseph A. Schiavone Corp. was Michael
Schiavone ("Schiavone"). On March 31, 2003, the Connecticut Department of
Environmental Protection ("DEP") filed suit against Joseph A. Schiavone Corp.,
Schiavone, and MTLM-Connecticut in the Superior Court of the State of
Connecticut -- Judicial District of Hartford. The suit alleges, among other
things, that the North Haven Facility discharged and continues to discharge
contaminants, including oily material, into the environment and has failed to
comply with the terms of certain permits and other filing requirements. The suit
seeks injunctions to restrict MTLM-Connecticut from maintaining discharges and
to require MTLM-Connecticut to remediate the facility. The suit also seeks civil
penalties from all of the defendants in accordance with Connecticut
environmental statutes. At this stage, the Company is not able to predict
MTLM-Connecticut's potential liability in connection with this action or any
required investigation and/or remediation. The Company believes that
MTLM-Connecticut has meritorious defenses to certain of the claims asserted in
the suit and MTLM-Connecticut intends to vigorously defend itself against the
claims. In addition, the Company believes it is entitled to indemnification from
Joseph A. Schiavone Corp. and Schiavone for some or all of the obligations and
liabilities that may be imposed on MTLM-Connecticut in connection with this
matter under the various agreements governing its purchase of the North Haven
Facility from Joseph A. Schiavone Corp. The Company cannot provide assurances
that Joseph A. Schiavone Corp. or Schiavone will have sufficient resources to
fund any or all indemnifiable claims that the Company may assert.
In a letter dated July 13, 2005, MTLM-Connecticut and the Company received
notification from Schiavone of his demand seeking indemnification (including the
advance of all costs, charges and expenses incurred by Schiavone in connection
with his defense) from MTLM-Connecticut and the Company to those claims made
against Schiavone in the action brought by the Connecticut DEP. Schiavone's
demand refers to his employment agreement and to the certificate of
incorporation of MTLM-Connecticut, which provide for indemnification against
claims by reason of his being or having been a director, officer, employee, or
agent of MTLM-Connecticut, or serving or having served at the request of
MTLM-Connecticut as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, or other enterprise to the
fullest extent permitted by applicable law.
The Company has engaged in settlement discussions with Joseph A. Schiavone
Corp., Schiavone and the Connecticut DEP regarding the possible characterization
of the North Haven Facility, and the subsequent remediation thereof should
contamination be present at concentrations that require remedial action. The
Company is currently working with an independent environmental consultant to
develop an acceptable characterization plan. The Company cannot provide
assurances that it will be able to reach an acceptable settlement of this matter
with the other parties.
As a result of internal audits conducted by the Company, the Company
determined that current and former employees of certain business units engaged
in activities relating to cash payments to individual industrial account
suppliers of scrap metal that may have involved violations of federal and state
law. In May 2004, the Company voluntarily disclosed its concerns regarding such
cash payments to the U.S. Department of Justice. The Board of Directors
appointed a special committee, consisting of all of its independent directors,
to conduct an investigation of these activities. The Company is cooperating with
the U.S. Department of Justice. The Company implemented policies to eliminate
cash payments to industrial customers. During the year ended March 31, 2004,
such cash payments to industrial customers represented approximately 0.7% of the
Company's consolidated ferrous and non-ferrous yard shipments. The fines and
penalties under applicable statutes contemplate qualitative as well as
quantitative factors that are not readily assessable at this stage of the
investigation, but could be material. The Company is not able to predict at this
time the outcome of any actions by the U.S. Department of Justice or other
governmental authorities or their
25
effect on the Company, if any, and accordingly, the Company has not recorded any
amounts in the financial statements. The Company has incurred legal and other
costs related to this matter of approximately $2.3 million to date.
On July 15, 2005, the Company and its subsidiary Metal Management Midwest,
Inc. ("MTLM-Midwest") filed a complaint (the "Complaint") against former
officers and directors, Albert A. Cozzi, Frank J. Cozzi, and Gregory P. Cozzi
(collectively, the "Defendants") in the Circuit Court of Cook County Illinois,
County Department, Chancery Division. The Complaint seeks damages from Frank J.
Cozzi and Gregory P. Cozzi for their actions in designing, implementing, and
maintaining cash payment practices in MTLM-Midwest's accounts payable that
violated Company policy and potentially federal law. The Complaint also alleges
that the Defendants breached the non-competition and non-solicitation provisions
of their respective separation and release agreements by seeking to engage in
business activities and seeking to solicit suppliers, customers and service
providers in competition with Plaintiffs' business. The Complaint seeks, among
other things, monetary compensation for Plaintiffs' actual losses and damages,
and an injunction restraining and enjoining the Defendants from breaching their
respective separation and release agreements.
From time to time, we are involved in various litigation matters involving
ordinary and routine claims incidental to our business. A significant portion of
these matters result from environmental compliance issues and workers
compensation related claims applicable to our operations. Management currently
believes that the ultimate outcome of these proceedings, individually and in the
aggregate, will not have a material adverse effect on our results of operations
or financial condition. Please refer to Part I, Item 3 of the Annual Report for
a description of other litigation in which we are currently involved.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended June 30, 2005, we sold 45,000 shares of our
common stock pursuant to exercise of warrants held by a current employee. There
were three exercise transactions during the three months ended June 30, 2005 and
the average exercise price for each transaction was $2.03 per share. We received
proceeds of $91,250 from these sales and used the proceeds for general corporate
purposes. The sales are exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended, as the grant of warrants, and the issuance
of shares of common stock upon exercise of such warrants, were made to a limited
number of our employees and directors without public solicitation.
ITEM 6. EXHIBITS
See Exhibit Index
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
METAL MANAGEMENT, INC.
By: /s/ Daniel W. Dienst
------------------------------------
Daniel W. Dienst
Chairman of the Board,
Chief Executive Officer
and President
(Principal Executive Officer)
By: /s/ Robert C. Larry
------------------------------------
Robert C. Larry
Executive Vice President,
Finance, Chief Financial
Officer, Treasurer and
Secretary
(Principal Financial Officer)
By: /s/ Amit N. Patel
------------------------------------
Amit N. Patel
Vice President, Finance
and Controller
(Principal Accounting Officer)
Date: August 2, 2005
27
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
April 29, 2003 (incorporated by reference to Exhibit 3.2 of
the Company's Annual Report on Form 10-K for the year ended
March 31, 2003).
4.1 Amendment No. 2 to Credit Agreement, dated May 9, 2005,
among Metal Management, Inc. and LaSalle Bank National
Association (incorporated by reference to Exhibit 4.1 of the
Company's Current Report on Form 8-K dated May 12, 2005).
31.1 Certification of Daniel W. Dienst pursuant to Section
240.13a-14(a) and Section 240.15d-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Robert C. Larry pursuant to Section
240.13a-14(a) and Section 240.15d-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Daniel W. Dienst and Robert C. Larry
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
28