-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WLs91rQ93omoSZyR0/ER/10+6qVMxVJ2PdZ86bVZY+HUoet75bfaXykfkIpbN/NP qmuNyiIDhwIvpBdLrXiOjA== 0000950137-04-004818.txt : 20040614 0000950137-04-004818.hdr.sgml : 20040611 20040614081803 ACCESSION NUMBER: 0000950137-04-004818 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040614 FILER: COMPANY DATA: COMPANY CONFORMED NAME: METAL MANAGEMENT INC CENTRAL INDEX KEY: 0000795665 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MISC DURABLE GOODS [5090] IRS NUMBER: 942835068 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14836 FILM NUMBER: 04859646 BUSINESS ADDRESS: STREET 1: 500 N DEARBORN ST STREET 2: STE 405 CITY: CHICAGO STATE: IL ZIP: 60610 BUSINESS PHONE: 3126450700 MAIL ADDRESS: STREET 1: 500 N. DEARBORN STREET STREET 2: SUITE 405 CITY: CHICAGO STATE: IL ZIP: 60610 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL PARAMETRICS CORP /DE/ DATE OF NAME CHANGE: 19920703 10-K 1 c85628e10vk.txt ANNUAL REPORT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 2004 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ---------- TO ----------
COMMISSION FILE NO. 0-14836 --------------------------- METAL MANAGEMENT, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-2835068 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number)
500 NORTH DEARBORN ST., SUITE 405, CHICAGO, IL 60610 (Address of principal executive offices) Registrant's telephone number, including area code: (312) 645-0700 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $.01 par value Series A Warrants (Expiration Date June 29, 2006) --------------------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes X No __ Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No __ The aggregate market value of voting stock held by non-affiliates of the registrant was approximately $207.2 million as of September 30, 2003, the last business day of the registrant's most recently completed second fiscal quarter, based on a closing stock price of $9.75 per share. As of May 3, 2004, the registrant had 23,476,114 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE We expect to file a definitive proxy statement no later than July 29, 2004. Portions of such proxy statement are incorporated by reference into Item 5 of Part II and Part III of this annual report on Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- METAL MANAGEMENT, INC. FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 2004 TABLE OF CONTENTS
PAGE PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 14 Item 3. Legal Proceedings........................................... 16 Item 4. Submission of Matters to a Vote of Security Holders......... 17 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters......................................... 18 Item 6. Selected Financial Data..................................... 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 21 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 35 Item 8. Financial Statements and Supplementary Data................. 36 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 36 Item 9A. Controls and Procedures..................................... 36 PART III Item 10. Directors and Executive Officers of the Registrant.......... 38 Item 11. Executive Compensation...................................... 38 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................. 38 Item 13. Certain Relationships and Related Transactions.............. 38 Item 14. Principal Accountant Fees and Services...................... 38 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 39 Signatures.................................................. 40 Exhibit Index............................................... 41
Certain statements made by us in this Form 10-K, including statements qualified by the words "believes," "intend," "anticipate," "expects" and words of similar import, are "forward-looking statements" and are thus prospective. These statements reflect the current expectations of Metal Management, Inc. (herein, "Metal Management," the "Company," "we," "us," "our" or other similar terms) regarding (i) our future profitability and liquidity and that of our subsidiaries, (ii) the benefits to be derived from the execution of our industry consolidation strategy and (iii) other future developments in our business or the scrap metals recycling industry. These forward-looking statements could involve, among other things, statements regarding our intent, belief or expectation with respect to our results of operations, financial condition, cash flows, liquidity or capital resources, including expectations regarding sales growth and our ability to fund our capital expenditures, interest payments and working capital needs; the consummation of acquisitions and financial transactions and their effect on our business; our plans and objectives for future operations; expected amounts of capital expenditures and the impact of such capital expenditures on our results of operations, financial condition, or cash flows; expected compliance obligations with respect to environmental and other laws, the expected cost of such compliance and the timing of such costs; the expected impact of any environmental liability on our results of operations, financial condition or cash flows; expectations regarding pension expenses; the expected impact of any market risks, such as interest rate risk, pension plan risk, foreign currency risk, commodity price risks, and rates of return; expectations regarding the implementation of financial accounting standards and the impact of such implemented standards; assumptions used to test long-lived assets including, but not limited to, goodwill, including expected operating profit and cash flows from the use of assets and expected present value of cash flows; projections regarding pension benefit obligations, including expected returns on plan assets, and expected increase in compensation levels; assumptions used to calculate the fair value of options, including expected term and stock price volatility; our belief regarding our ability to compete; and our assumptions and expectations regarding critical accounting policies. All such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. These risks, uncertainties and other factors are discussed under the heading "Risk Factors" in Part I, Item 1 of this report. PART I ITEM 1. BUSINESS OVERVIEW We are one of the largest full-service metals recyclers in the United States, with recycling facilities located in 13 states. We enjoy leadership positions in many major metropolitan markets, including Birmingham, Chicago, Cleveland, Denver, Hartford, Houston, Memphis, Newark, Phoenix, Salt Lake City, Toledo and Tucson. We have a 28.5% equity ownership position in Southern Recycling, L.L.C. ("Southern"), one of the largest scrap metals recyclers in the Gulf Coast region. 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 at our Northeast operations. 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, 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. 1 We have achieved a leading position in the metals recycling industry primarily by implementing a national strategy of completing and integrating regional acquisitions. In making acquisitions, we have focused on major metropolitan markets where prime industrial and obsolete scrap metals (automobiles, appliances and industrial equipment) are readily available and from where we believe we can better serve our customer base. In pursuing this strategy, we acquired certain large regional companies to serve as platforms into which subsequent acquisitions would be integrated. We believe that through the integration of our acquired businesses, we have enhanced our competitive position and profitability of the operations because of broader distribution channels, improved managerial and financial resources, enhanced purchasing power and increased economies of scale. RECENT DEVELOPMENTS Effective as of January 16, 2004, Albert A. Cozzi resigned as a director and Chief Executive Officer of our company. Our Board of Directors appointed Daniel W. Dienst as our new Chief Executive Officer. Mr. Dienst has been the Chairman of the Board since April 1, 2003 and a director since June 2001. Effective as of January 16, 2004, Frank J. Cozzi resigned as a Vice President of our company and as President of Metal Management Midwest, Inc. ("MTLM-Midwest"). Our Board of Directors appointed Harold "Skip" Rouster as a Vice President of our company and President of MTLM-Midwest. Effective with his new appointments, Mr. Rouster resigned from our Board of Directors on which he had served since June 2001. In addition to Albert A. Cozzi and Frank J. Cozzi, one other officer of MTLM-Midwest resigned and five other employees were terminated in a management realignment implemented during January 2004 principally involving our Midwest operations. We recognized a one-time expense of approximately $6.2 million related to this realignment during the year ended March 31, 2004 ("fiscal 2004") primarily in connection with aggregate severance payments, benefits, and expense associated with the acceleration of vesting of restricted stock held by Mr. Albert A. Cozzi. On January 16, 2004, Gerald E. Morris was appointed to our Board of Directors to fill the vacancy created by Mr. Rouster's resignation. Mr. Morris is President and Chief Executive Officer of Intalite International N.V., a multinational company engaged in manufacturing metal ceilings for commercial buildings. On March 25, 2004, Robert Lewon was appointed to our Board of Directors. Mr. Lewon has over 40 years of experience in the scrap metal industry and has served as an executive of scrap metal companies, including President of Simsmetal USA Corp. Mr. Morris and Mr. Lewon have been appointed to both the Audit Committee and Compensation Committee of the Board of Directors, replacing Messrs. Dienst and Rouster. Mr. Morris was also appointed the Chairman of the Compensation Committee. On March 8, 2004, our Board of Directors approved a two-for-one stock split in the form of a stock dividend. The stock dividend was paid on April 20, 2004 to shareholders of record on April 5, 2004. All share and per-share amounts for the Reorganized Company have been retroactively restated throughout this annual report on Form 10-K to reflect the stock split. INTEGRATION AND BRANDING INITIATIVES We continue to integrate our operations to take advantage of operational efficiencies and cost savings. By way of example, we have consolidated many of our administrative efforts including sales and marketing, accounting, transportation, procurement of services and employee benefits. Through our integration efforts, we are also standardizing the reporting systems and business practices of our operations so that we are better able to evaluate operating performance. Although we believe that cost savings from the elimination of redundant functions has been an important benefit of consolidation, we hope to realize additional cost benefits from the implementation of our best management practices across the country. Additionally, a component of our integration strategies includes the development of national account and branding programs. We believe that our strategy of creating brand awareness for the Metal Management name will help create awareness among our customers of the size and geographic scope of our operations and the breadth of our product offerings. We believe this will benefit us as our customers consolidate their supplier base to create purchasing efficiencies. 2 INDUSTRY According to the U.S. Geological Survey, an estimated 69 million metric tons of steel was recycled in steel mills and foundries in 2003. Although significant consolidation has occurred during the past several years, the scrap metals industry remains highly fragmented. The Institute of Scrap Recycling Industries ("ISRI"), the trade association of the scrap metal and recycling industry, represents approximately 1,200 member companies who operate nearly 3,000 facilities throughout North America and the world. Many of these companies are family-owned and operate only in local or regional markets. We believe that no single scrap metals recycler has a significant share of the domestic market, although certain recyclers may have significant shares of their local or regional markets. Ferrous Scrap Industry Ferrous scrap, used in most steel making processes, is the primary raw material for mini-mill steel producers that utilize electric-arc furnace, or EAF, technology. Ferrous scrap is also utilized in the production of steel by integrated steel producers, although to a lesser degree than EAF producers. Ferrous scrap sells as a commodity in international markets which are affected by relative economic conditions, fluctuating currencies, and the availability of ocean-going vessels and their related costs. By way of example, in calendar 2001, there was an increase in scrap metal imports by the U.S. from Europe and reduced export opportunities for scrap metals from the U.S. as a result of a strong U.S. dollar. In calendar 2002 and 2003, scrap metal export opportunities increased as a result of, among other factors, the weakening U.S. dollar. Additionally, demand for processed ferrous scrap metal is highly dependent on the overall strength of the domestic steel industry, particularly production utilizing EAF technology. Weak industry conditions caused declines in both pricing and demand for ferrous scrap from mid-1998 to 2001. As a consequence of improved levels of steel production in the U.S. coupled with robust export markets for ferrous scrap, our ferrous metals business has improved since 2002. However, ferrous prices can fluctuate greatly from month to month affecting our results. Much of the growth in the scrap metals industry in recent years has occurred as a result of the proliferation of mini-mill steel producers which utilize EAF technology. According to the U.S. Geological Survey, EAF production as a percentage of total domestic steel production has increased from 38% in 1991 to 49% in 2003. In addition to growth in EAF production over the past two years, as a result of steel industry consolidation, additional integrated steel making capacity has either been restarted or consolidated into fewer and larger steel makers. This consolidation has also contributed to strong demand for ferrous scrap during fiscal 2004. Accordingly, strong demand for inputs for EAF and integrated steelmaking including materials such as coke, pig iron, hot-briquetted iron and iron ore, some of which are consumed by both EAF and integrated steel producers, are relevant in considering the availability of scrap related to steel manufacturing processes. We believe that as a large, reliable supplier of scrap metals, we are well positioned to benefit from the growth in steel market share associated with EAF production. The growth in EAF production since the 1970's has been fueled, in part, by the historically low prices of prepared ferrous scrap and faster conversion time to process, which gives EAF producers a product cost advantage over integrated steel producers. Integrated steel producers operate blast furnaces, the primary raw material feedstock of which are coke and iron ore. If the price of ferrous scrap metals were to significantly increase, EAF operators may evaluate alternatives to prepared steel scrap, such as pre-reduced iron pellets or pig iron, to supply their EAF operations. We do not believe that these alternatives to ferrous scrap will replace ferrous scrap in EAF operations, but may be used as a supplemental feedstock thereby allowing EAF operators to rely to a greater degree on lower grades of prepared scrap. Due to its low price-to-weight ratio, raw ferrous scrap is generally purchased locally from industrial manufacturers, demolition firms, railroads, scrap dealers, peddlers, auto wreckers and various other sources, typically in the form of automobile hulks, appliances and plate and structural steel. Ferrous scrap prices are local and regional in nature; where there are overlapping regional markets, however, the prices do not tend to differ significantly between the regions due to the ability of companies to ship scrap metal from one region to another. The most significant limitation on the size of the geographic market for the procurement of ferrous scrap is the transportation cost. Additionally, large scale scrap processing facilities are typically located on or 3 near key modes of transportation, such as railways and waterways which allows for competitive access to ship processed scrap to consumers. Non-Ferrous Scrap Industry Non-ferrous metals include aluminum, copper, brass, stainless steel and other nickel-bearing metals, titanium, high-temperature alloys and other exotic metals. The geographic markets for non-ferrous scrap tend to be larger than those for ferrous scrap due to the higher selling prices of non-ferrous metals, which justify the cost of shipping over greater distances. Non-ferrous scrap is typically sold on a spot basis, either directly or through brokers, to intermediate or end-users, which include smelters, foundries and aluminum sheet and ingot manufacturers. Prices for non-ferrous scrap are driven by demand for finished non-ferrous metal goods and by the general level of economic activity, with prices generally linked to the price of the primary metal on the London Metals Exchange or COMEX. Secondary smelters, utilizing processed non-ferrous scrap as raw material, can produce non-ferrous metals at a lower cost than primary smelters producing such metals from ore. This is due to the significant savings in energy consumption, environmental compliance, and labor costs enjoyed by the secondary smelters. These cost advantages, and the long lead-time necessary to construct new non-ferrous primary smelting facilities, have historically resulted in sustained demand and strong prices for processed non-ferrous scrap during periods of high demand for finished non-ferrous metal products. Non-ferrous scrap is typically generated and supplied to us by: (i) manufacturers and other sources that process or sell non-ferrous metals; (ii) telecommunications, aerospace, defense and recycling companies that generate obsolete scrap consisting primarily of copper wire, used beverage cans and other non-ferrous metal alloys; and (iii) ferrous scrap operations that recover aluminum, zinc, die-cast metal, stainless steel and copper as by-products from the processing of ferrous scrap. The primary non-ferrous commodities that we recycle are aluminum, copper and stainless steel. OUR RECYCLING OPERATIONS Our recycling operations encompass buying, processing and selling scrap metals. The principal forms in which scrap metals are generated include industrial scrap and obsolete scrap. Industrial scrap results as a by-product generated from residual materials from metals manufacturing processes. Obsolete scrap consists primarily of residual metals from old or obsolete consumer products such as appliances and automobiles. Ferrous Operations Ferrous Scrap Purchasing. We purchase ferrous scrap from two primary sources: (i) manufacturers who generate steel and iron, known as prompt or industrial scrap; and (ii) scrap dealers, peddlers, auto wreckers, demolition firms, railroads and others who generate steel and iron scrap, known as obsolete scrap. In addition to these sources, we purchase, at auction, furnace iron from integrated steel mills and obsolete steel and iron from government and large industrial accounts. Market demand and the composition, quality, size, and weight of the materials are the primary factors that determine prices. Ferrous Scrap Processing. We prepare ferrous scrap metal for resale through a variety of methods including sorting, shredding, shearing, cutting, baling, briquetting or breaking. We produce a number of differently sized and shaped products depending upon customer specifications and market demand. Sorting. After purchasing ferrous scrap metal, we inspect the material to determine how it should be processed to maximize profitability. In some instances, scrap may be sorted and sold without further processing. We separate scrap for further processing according to its size and composition by using conveyor systems, front-end loaders, crane-mounted electromagnets or claw-like grapples. Shredding. Obsolete consumer scrap such as automobiles, home appliances and other consumer goods, as well as certain light gauge industrial scrap, is processed in our shredding operations. These items are fed into a shredder that quickly breaks the scrap into fist-size pieces of ferrous metal. The shredding process uses magnets and other technologies to separate ferrous, non-ferrous and non-metallic materials. The ferrous material is sold to our customers, including mini-mills. We recover non-ferrous metals as a by-product from 4 the shredding process that we refer to as Zorba. Zorba is generally sold through monthly auctions to customers that sort and recover intrinsic metals from the Zorba. The non-metallic by-product of the shredding operations, referred to as "shredder fluff," is disposed of in third-party landfills. Shearing or Cutting. Pieces of oversized ferrous scrap, such as obsolete steel girders and used drill pipes, which are too large for other processing, are cut with hand torches, crane-mounted alligator shears or stationary guillotine shears. After being reduced to specific lengths or sizes, the scrap is then sold to those customers who can accommodate larger materials, such as EAF mini-mills. Baling. We process light-gauge ferrous metals such as clips and sheet iron, and by-products from industrial manufacturing processes, such as stampings, clippings and excess trimmings, by baling these materials into large, uniform blocks. We use cranes, front-end loaders and conveyors to feed the metal into hydraulic presses, which compress the materials into uniform blocks at high pressure. Briquetting. We process borings and turnings made of steel and iron into briquettes using cold briquetting methods, and subsequently sell these briquettes to steel mills or foundries. We possess the technology to control the metallurgical content of briquettes to meet customer specifications. Breaking of Furnace Iron. We process furnace iron which includes blast furnace iron, steel pit scrap, steel skulls and beach iron. Large pieces of iron are broken down by the impact of forged steel balls dropped from cranes. The fragments are then sorted and screened according to size and iron content. Ferrous Scrap Sales. We sell processed ferrous scrap to end-users such as steel mini-mills, integrated steel makers and foundries, and brokers whom aggregate materials for other large users. Most of our customers purchase processed ferrous scrap through negotiated spot sales contracts which establishes the quantity purchased for the month. The price we charge for ferrous scrap depends upon market demand, as well as quality and grade of the scrap. In many cases, our selling price also includes the cost of transportation to the end-user. We believe our profitability may be enhanced by the broad product line that we offer to our customers. Our ferrous scrap sales are accomplished through a monthly sales program managed nationally. We believe that our coordinated ferrous marketing initiatives will allow us to be a uniquely capable supplier of ferrous scrap as we are able to fill larger quantity orders due to our ability to procure large amounts of raw materials. Non-Ferrous Operations Non-Ferrous Scrap Purchasing. We purchase non-ferrous scrap from three primary sources: (i) manufacturers and other non-ferrous scrap sources who generate or sell waste aluminum, copper, stainless steel and other nickel-bearing metals, brass, high-temperature alloys and other metals; (ii) producers of electricity, telecommunication service providers, aerospace, defense and recycling companies that generate obsolete scrap consisting primarily of copper wire, titanium and high-temperature alloys and used aluminum beverage cans; and (iii) peddlers who deliver directly to our facilities material which they collect from a variety of sources. We also collect non-ferrous scrap from sources other than those that are delivered directly to our processing facilities by placing retrieval boxes near these sources. The boxes are subsequently transported to our processing facilities. A number of factors can influence the continued availability of non-ferrous scrap such as the level of manufacturing activity and the quality of our supplier relationships. Consistent with industry practice, we have certain long-standing supply relationships which generally are not the subject of written agreements. Non-Ferrous Scrap Processing. We prepare non-ferrous scrap metals, principally stainless steel and other nickel-bearing metals, copper and aluminum, for resale by sorting, shearing, cutting, chopping or baling. Sorting. Our sorting operations separate non-ferrous scrap by using conveyor systems and front-end loaders. In addition, many non-ferrous metals are sorted and identified by using grinders, hand torches, eddy current separation systems and spectrometers. Our ability to identify metallurgical composition is critical to maximizing margins and profitability. Due to the high value of many non-ferrous metals, we can afford to utilize more labor-intensive sorting techniques than are employed in our ferrous operations. We sort non- 5 ferrous scrap for further processing according to type, grade, size and chemical composition. Throughout the sorting process, we determine whether the material requires further processing before being sold. Aluminum and Stainless Steel. We process aluminum, stainless steel and other nickel-bearing metals based on the size of the recycled metal and customer specifications. Large pieces of aluminum or stainless steel are cut using crane-mounted alligator shears and stationary guillotine shears and are baled along with small aluminum or stainless steel stampings to produce large bales of aluminum or stainless steel. Smaller pieces of aluminum and stainless steel are repackaged to meet customer specifications. Copper. Copper scrap may be processed in several ways. We have historically processed copper scrap predominantly by using a wire chopping line which grinds the wire into small pellets. During chopping operations, the plastic casing of the wire is separated from the copper using a variety of techniques. Wire chopping activities have been significantly curtailed in the last two years. In addition to wire chopping, we process copper scrap by baling and other repacking methods to meet customer specifications. Other Non-Ferrous Materials. We process other non-ferrous metals using similar cutting, baling and repacking techniques as used to process aluminum. Other significant non-ferrous metals we process include titanium, brass and high-temperature alloys. Non-Ferrous Scrap Sales. We sell processed non-ferrous scrap to end-users such as specialty steelmakers, foundries, aluminum sheet and ingot manufacturers, copper refineries and smelters, and brass and bronze ingot manufacturers. Prices for the majority of non-ferrous scrap metals change based upon the daily publication of spot and futures prices on COMEX or the London Metals Exchange. EMPLOYEES At March 31, 2004, we employed approximately 1,500 employees, of whom approximately 780 were covered by collective bargaining agreements. A strike or work stoppage could impact our ability to operate if we were unable to negotiate new agreements with our represented employees. Also, our profitability could be adversely affected if increased costs associated with any future labor contracts are not recoverable through productivity improvements, price increases or cost reductions. We believe that we have good relations with our employees. CAPITAL EXPENDITURES The scrap metals recycling business is capital intensive. In fiscal 2004, we invested approximately $15 million for replacement of equipment and expansion of our operations. We currently expect to spend between $14 million and $15 million in capital expenditures, including those to improve environmental control systems, during the year ending March 31, 2005 ("fiscal 2005"). SIGNIFICANT CUSTOMERS In fiscal 2004, our ten largest customers represented approximately 44% of consolidated net sales. These customers comprised approximately 52% of consolidated accounts receivable at March 31, 2004. Sales to The David J. Joseph Company, our largest customer and an agent for steel mills including Nucor Corporation, represented approximately 19% of consolidated net sales in fiscal 2004. The loss of any one of our significant customers could have a material adverse effect on our results of operations and financial condition. We historically have not experienced material losses from the noncollection of accounts receivables. However, from April 2000 to March 2002, weak market conditions in the steel sector led to bankruptcy filings by certain of our customers including, but not limited to, LTV Steel Company, Inc., Northwestern Steel and Wire Company and Special Metals Corporation. EXPORT SALES In fiscal 2004 and the year ended March 31, 2003 ("fiscal 2003"), export sales represented approximately 29% and 14% of consolidated net sales, respectively. At March 31, 2004, receivables from foreign customers represented approximately 10% of consolidated accounts receivable. There were no sales to any single country that exceeded 10% of our consolidated net sales in fiscal 2004 or fiscal 2003. 6 COMPETITION The markets for scrap metals are highly competitive, both in the purchase of raw scrap and the sale of processed scrap. With regard to the purchase of raw scrap, we compete with numerous independent recyclers, as well as smaller scrap companies engaged only in collecting industrial scrap. Though in many cases we also purchase unprocessed scrap metal from smaller scrap dealers. Successful procurement of materials is determined primarily by the price offered by the purchaser for the raw scrap and the proximity of our processing facility to the source of the raw scrap. With regard to the sale of processed scrap, we compete in a global market. Competition for sales of processed scrap is based primarily on the price and quality of the scrap metals, as well as the level of service provided in terms of reliability and timing of delivery. We believe that our ability to process substantial volumes, deliver a broad product line to consumers, collect and sell scrap in regional, national and international markets, and to provide other value-added services to our customers offers us a competitive advantage. We face potential competition for sales of processed scrap from producers of steel products, such as integrated steel mills and mini-mills, which may vertically integrate their current operations by entering the scrap metals recycling business. Many of these producers have substantially greater financial, marketing and other resources. Scrap metals processors also face competition from substitutes for prepared ferrous scrap, such as pre-reduced iron pellets, hot briquetted iron, pig iron, iron carbide and other forms of processed iron. The availability of substitutes for ferrous scrap could result in a decreased demand for processed ferrous scrap and could result in lower prices for such products. SEASONALITY AND OTHER CONDITIONS Our operations can be adversely affected by protracted periods of inclement weather or reduced levels of industrial production, which may reduce the volume of material processed at our facilities. In addition, periodic maintenance shutdowns or labor disruptions at our larger customers may have an adverse impact on our operations. Our business generally experiences seasonal slowness in the months of July and December, as customers tend to reduce production and inventories. BACKLOG The processing time for scrap metals is generally short which permits us to fill orders for most of our products in time periods of generally less than thirty days. Accordingly, we do not consider backlog to be material to our business. PATENTS AND TRADEMARKS Although we own certain patents and trademarks, we do not believe that our business is dependent on these intellectual property rights and the loss of any patent or trademark currently owned by us or the use thereof would not be material to our business. CHAPTER 11 FILING AND EMERGENCE On November 20, 2000, we filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). From November 20, 2000 to June 29, 2001, we operated our businesses as debtors-in-possession. These bankruptcy proceedings are referred to herein as the "Chapter 11 proceedings." In furtherance of an agreement reached between us and the holders of a significant percentage of our pre-petition debt prior to the initiation of the Chapter 11 proceedings, we filed a plan of reorganization (the "Plan") pursuant to Chapter 11 of the Bankruptcy Code on May 4, 2001. The Plan was confirmed by the Bankruptcy Court and became effective on June 29, 2001 (the "Effective Date"). On September 17, 2002, a Final Decree Motion was approved by the Bankruptcy Court, which officially closed our Chapter 11 proceedings. In the Chapter 11 proceedings, virtually all suppliers of scrap metals were paid their pre-petition claims as critical vendors. Additionally, the Plan provided for the conversion of approximately $211.9 million of unsecured debt and other liabilities into common stock, which strengthened our capitalization. 7 In connection with our emergence from bankruptcy, we reflected the terms of the Plan in our audited consolidated financial statements by adopting fresh-start reporting in accordance with AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code." Under fresh-start reporting, a new reporting entity is deemed to be created and the recorded amounts of assets and liabilities are adjusted to reflect their estimated fair values. For accounting purposes, the fresh-start adjustments were recorded in our audited consolidated financial statements as of June 30, 2001. As used in this report, the term "Predecessor Company" refers to our operations for periods prior to the Effective Date, while the term "Reorganized Company" refers to our operations for periods after the Effective Date. AVAILABLE INFORMATION We make available, free of charge, through our website, www.mtlm.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and amendments to those reports as soon as reasonably practicable after they have been electronically filed with the Securities and Exchange Commission. We also make available on our website our audit committee charter, our compensation committee charter, our Business Ethics Policy and Code of Conduct and our Code of Ethics for the CEO and senior financial officers. Please note that our Internet address is included in this annual report on Form 10-K as an inactive textual reference only. Information contained on our website is not incorporated by reference into this annual report on Form 10-K and should not be considered a part of this report. 8 RISK FACTORS Set forth below are risks that we believe are material to our business operations. Additional risks and uncertainties not known to us or that we currently deem immaterial may also impair our business operations. OUR INDEBTEDNESS CONTAINS COVENANTS THAT RESTRICT OUR ABILITY TO ENGAGE IN CERTAIN TRANSACTIONS. Our $130 million credit agreement due July 1, 2007 (the "Credit Agreement") contains covenants that, among other things, restrict our ability to: - - incur additional indebtedness; - - pay dividends; - - enter into transactions with affiliates; - - enter into certain asset sales; - - engage in certain acquisitions, investments, mergers and consolidations; - - prepay certain other indebtedness; - - create liens and encumbrances on our assets; and - - engage in certain other matters customarily restricted in such agreements. Our Credit Agreement requires us to satisfy specified financial covenants, including a minimum fixed charge coverage ratio of 1.25 to 1.00 and a maximum leverage ratio of 3.00 to 1.00, through December 31, 2004. After December 31, 2004, the maximum leverage ratio is 2.25 to 1.00. Both ratios are tested for the twelve-month period ending each fiscal quarter. Although we expect to be able to achieve these financial covenants, our ability to comply with these covenants may be affected by general economic conditions, industry conditions, and other events beyond our control. Our breach of any of these covenants could result in a default under the Credit Agreement. In the event of a default, the lenders could elect to declare all amounts borrowed under the Credit Agreement, together with accrued interest, to be due and payable. THE METALS RECYCLING INDUSTRY IS HIGHLY CYCLICAL AND EXPORT MARKETS CAN BE VOLATILE. The operating results of the scrap metals recycling industry in general, and our operations specifically, are highly cyclical in nature. They tend to reflect and be amplified by general economic conditions, both domestically and internationally. Historically, in periods of national recession or periods of slowing economic growth, the operations of scrap metals recycling companies have been materially and adversely affected. For example, during recessions or periods of slowing economic growth, the automobile and the construction industries typically experience major cutbacks in production, resulting in decreased demand for steel, copper and aluminum. This leads to significant fluctuations in demand and pricing for our products. Economic downturns in the national and international economy could likely materially and adversely affect our results of operations and financial condition. Our ability to withstand significant economic downturns in the future will depend in part on our level of capital and liquidity. Our business may also be adversely affected by increases in steel imports into the U.S. which will generally have an adverse impact on domestic steel production and a corresponding adverse impact on the demand for scrap metals. Additionally, our business could be negatively affected by strengthening in the U.S. dollar. For example, beginning in July 1998, the U.S. steel industry and, in turn, the U.S. metals recycling industry suffered a dramatic and precipitous collapse, resulting in a significant decline in the price and demand for scrap metals. The decline in the steel and scrap metal sectors was the result, in large part, of the increase in finished and semi-finished steel and scrap metal imports flowing into the U.S. during the last six months of 1998 and our results of operations were adversely impacted by reduced steel production in the U.S. during fiscal 1999. Export markets, including Asia and in particular China, are important to us. Weakness in economic conditions in Asia and in particular slowing growth in China could negatively affect us. During fiscal 2001, our business was adversely affected by slowing economies, a strong U.S. dollar and bankruptcies of many U.S. steel producers. The slowing domestic economy caused operating rates at U.S. steel producers to decline. Consequently, our unit sales declined and precluded us from generating sufficient margins to cover our fixed charges, causing substantial losses. Our fixed charges during fiscal 2001 9 were substantially higher due to our highly leveraged capital structure at that time. The strong dollar not only precluded us from exporting scrap metal, but also served as a mechanism that attracted scrap metal to the U.S. from other countries which further depressed prices for our products in the U.S. During fiscal 2001 and most of fiscal 2002, our business was negatively affected by our bankruptcy, the recession in the U.S. and a slowdown in industrial production. In January 2002, our ferrous business began to demonstrate a recovery and has remained strong through fiscal 2004. Ferrous markets improved as a result of increased demand from domestic and international steel mills. However, the slowdown in industrial production has impacted our purchases of industrial scrap which also limits sales and profitability. PRICES OF COMMODITIES WE OWN MAY BE VOLATILE. Although we seek to turn over our inventory of raw or processed scrap metals as rapidly as possible, we are exposed to commodity price risk during the period that we have title to products that are held in inventory for processing and/or resale. Prices of commodities, including scrap metals, can be volatile due to numerous factors beyond our control, including: - - general economic conditions; - - labor costs; - - competition; - - financial condition of our major customers; - - the availability of imports; - - the availability and relative pricing of scrap metal substitutes and coke and iron ore; - - import duties and ocean freight costs; and - - tariffs and currency exchange rates. In an increasing price environment, competitive conditions may limit our ability to pass on price increases to our customers. In a decreasing price environment, we may not have the ability to fully recoup the cost of raw scrap metal we process and sell to our customers. OUR OPERATIONS PRESENT SIGNIFICANT RISK OF INJURY OR DEATH. Because of the heavy industrial activities conducted at our facilities, there exists a risk of injury or death to our employees or other visitors of our operations, notwithstanding the safety precautions we take. During the period from fiscal 2001 through fiscal 2004, two accidental employee deaths occurred in transportation related accidents and a number of other serious accidental injuries have occurred at our facilities. Our operations are subject to regulation by federal, state and local agencies responsible for employee health and safety, including the Occupational Safety and Health Administration ("OSHA"). We, or our Predecessor Company, have been fined in regard to some of these incidents. While we have in place policies to minimize such risks, we may nevertheless be unable to avoid material liabilities for any employee death or injury that may occur in the future and these types of incidents may have a material adverse effect on our financial condition. WE MAY NOT BE ABLE TO NEGOTIATE FUTURE LABOR CONTRACTS ON FAVORABLE TERMS. Approximately half of our active employees are represented by various labor unions, including the Teamsters and the United Steelworkers of America. As our agreements with those unions expire, we may not be able to negotiate extensions or replacements on terms favorable to us, or at all, or avoid strikes, lockouts or other labor actions from time to time. We cannot assure you that new labor agreements will be reached with our unions as those labor contracts expire. Any labor action resulting from the failure to reach an agreement with one of our unions may have a material adverse effect on our operations. THE LOSS OF ANY MEMBER OF OUR SENIOR MANAGEMENT TEAM OR A SIGNIFICANT NUMBER OF OUR MANAGERS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS. Our operations depend heavily on the skills and efforts of our senior management team, including Daniel W. Dienst, our Chairman and Chief Executive Officer, Michael W. Tryon, our President and Chief Operating Officer, Robert C. Larry, our Executive Vice-President and Chief Financial Officer, and certain other key employees. In addition, we rely substantially on the experience of the management of our subsidiaries with 10 regard to day-to-day operations. While we have employment agreements with Messrs. Dienst, Tryon, and Larry and certain other members of our management team, we may nevertheless be unable to retain the services of any of those individuals. The loss of any member of our senior management team or a significant number of managers could have a material adverse effect on our operations. THE PROFITABILITY OF OUR SCRAP RECYCLING OPERATIONS DEPENDS, IN PART, ON THE AVAILABILITY OF AN ADEQUATE SOURCE OF SUPPLY. We procure our scrap inventory from numerous sources. These suppliers generally are not bound by long-term contracts and have no obligation to sell scrap metals to us. In periods of low industry prices, suppliers may elect to hold scrap waiting for higher prices. If a substantial number of scrap suppliers cease selling scrap metals to us, we would be unable to recycle metals at desired levels and our results of operations or financial condition could be materially and adversely affected. In addition, the slowdown of industrial production in the U.S. has reduced the supply of industrial grades of scrap metal to our industry. THE CONCENTRATION OF OUR CUSTOMERS AND OUR EXPOSURE TO CREDIT RISK COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS OR FINANCIAL CONDITION. Sales to our ten largest customers represented approximately 44% of consolidated net sales in fiscal 2004. Accounts receivable balances from these customers comprised approximately 52% of consolidated accounts receivable at March 31, 2004. Sales in fiscal 2004 to The David J. Joseph Company represented approximately 19% of consolidated net sales. The loss of any of our significant customers or our inability to collect accounts receivables could negatively impact our revenues and profitability. THE LOSS OF EXPORT SALES COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS OR FINANCIAL CONDITION. Export sales accounted for 29% of consolidated net sales in fiscal 2004. Risks associated with our export business include, among other factors, political and economic factors, economic conditions in the world's economies, changes in legal and regulatory requirements, the value of the U.S. dollar (variations to which will impact the amount and volume of export sales), and collection risks in some cases (such as Mexican steel mills where we extend open credit for other than vessel shipments). Any of these factors could result in lower export sales which may materially adversely affect our results of operations and financial condition. POTENTIAL CREDIT LOSSES FROM OUR SIGNIFICANT CUSTOMERS COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS OR FINANCIAL CONDITION. In connection with the sale of our products, we generally do not require collateral as security for customer receivables. Some of our subsidiaries have significant balances owing from customers that operate in cyclical industries and under leveraged conditions that may impair the collectibility of those receivables. Failure to collect a significant portion of amounts due on those receivables could have a material adverse effect on our results of operations or financial condition. During the weakening cycle for the steel business evident in fiscal 2001, there were bankruptcies filed by many large steel producers. In particular, our results of operations were adversely affected by the bankruptcies of LTV Steel Company, Inc., Northwestern Steel and Wire Company and Special Metals Corporation. A SIGNIFICANT INCREASE IN THE USE OF SCRAP METALS ALTERNATIVES BY CURRENT CONSUMERS OF PROCESSED SCRAP METALS COULD REDUCE DEMAND FOR OUR PRODUCTS. During periods of high demand for scrap metals, tightness can develop in the supply and demand for ferrous scrap. The relative scarcity of ferrous scrap, particularly the "cleaner" grades, and its high price during such periods have created opportunities for producers of alternatives to scrap metals, such as pig iron and direct reduced iron pellets. Although these alternatives have not been a major factor in the industry to date, we cannot assure you that the use of alternatives to scrap metals may not proliferate in the future if the prices for scrap metals rise or if the levels of available unprepared ferrous scrap decrease. 11 OUR DEFINED BENEFIT PENSION PLANS ARE UNDERFUNDED. We currently maintain three defined benefit pension plans which cover various categories of employees and retirees. Our obligations to make contributions to fund benefit obligations under these pension plans are based on actuarial valuations which are based on certain assumptions, including the long-term return on plan assets and discount rate. Due to declining equity markets that have caused negative returns in our pension plan assets, and the low interest rate environment, our defined benefit pension plans are underfunded by approximately $4.0 million at March 31, 2004. As a result, we will have to make additional contributions in the foreseeable future until our defined benefit pension plans are funded in accordance with the Employee Retirement Income Security Act ("ERISA") guidelines. This will negatively impact our cash flow and results of operations. OUR OPERATIONS ARE SUBJECT TO STRINGENT REGULATIONS, PARTICULARLY UNDER APPLICABLE ENVIRONMENTAL LAWS. We are subject to comprehensive local, state, federal and international statutory and regulatory environmental requirements relating to, among others: - - the acceptance, storage, treatment, handling and disposal of solid and hazardous waste; - - the discharge of materials into air; - - the management and treatment of wastewater and storm water; - - the remediation of soil and groundwater contamination; - - the restoration of natural resource damages; and - - the protection of our employees' health and safety. We believe that we and our subsidiaries are currently in material compliance with applicable statutes and regulations governing the protection of human health and the environment, including employee health and safety. We can give you no assurance, however, that our subsidiaries and we will continue to be in material compliance, avoid material fines, penalties and expenses associated with compliance issues in the future. The nature of our business and previous operations by others at facilities currently or formerly owned or operated or otherwise used by us or our subsidiaries expose us to risks of claims under environmental laws and regulations, especially for the remediation of soil or groundwater contamination. We can give you no assurance, however, that we can avoid making material expenditures for remedial activities or capital improvements with regard to sites currently or formerly owned or operated or otherwise used by our subsidiaries or us. Environmental statutes and regulations have changed rapidly in recent years by requiring greater and more expensive protective measures, and it is possible that we will be subject to even more stringent environmental standards in the future. For example, in many states there is the potential for regulation and or legislation relating to mercury contaminants. Automobile hulks that are purchased and processed by our industry, including us, may contain mercury switches. We cannot estimate what legislation and or regulation will evolve, or the effects, if any, on our business relating to mercury switches. For these reasons and others, we cannot predict future capital expenditures for pollution control equipment, remediation, or other initiatives that may be required with accuracy. However, we expect that environmental standards will become increasingly more stringent and that the expenditures necessary to comply with those heightened standards will correspondingly increase. We are required to obtain, and must comply with, various permits and licenses to conduct our operations. Failure to obtain or violations of any permit or license, if not remedied, could result in our incurring substantial fines, suspension of operations or closure of a site. Further, our operations are conducted primarily outdoors and as such, depending on the nature of the ground cover, involve the risk of releases of wastes and other regulated materials to the soil and, possibly, to groundwater. From time to time, as part of our continuous improvement programs, we incur costs to improve environmental control systems. By way of example, we may decide to install water pollution control equipment or provide for concreting and paving at our North Haven, Connecticut facility to address certain concerns raised by the Connecticut Department of Environmental Protection in the lawsuit filed by that agency, which is discussed below in Item 3 - Legal Proceedings. 12 Because the scrap metals recycling industry has the potential for discharging wastes or other regulated materials into the environment, we believe that in any given year, a significant portion of our capital expenditures could be related, directly or indirectly, to pollution control or environmental remediation. Nevertheless, expenditures for environmentally-related capital improvements were not material in fiscal 2004 or prior years nor are they currently expected to be significant in fiscal 2005. However, for the reasons explained above, there can be no assurance that this will continue to be the case in the future. We do not have environmental impairment insurance. In general, we do not carry environmental impairment liability insurance because the cost of the premiums outweighs the benefit of coverage. If we or one or more of our subsidiaries were to incur significant liability for environmental damage, such as a claim for soil or groundwater remediation, not covered by environmental impairment insurance, our results of operations and financial condition could be materially and adversely affected. There are risks associated with certain by-products of our operations. Our scrap metals recycling operations produce significant amounts of wastes that we pay to have treated or discarded. For example, certain of our subsidiaries operate shredders for which the primary feedstock is automobile hulks and obsolete household appliances. Approximately 20% of the weight of an automobile hulk consists of material, referred to as automobile shredder residue ("ASR") which remains after the segregation of ferrous and saleable non-ferrous metals. State and federal environmental regulations require that we test ASR to determine if it is classified as hazardous waste before disposing of it off-site in permitted landfills. Our other waste streams are subject to similar requirements. Additionally, we employ significant source control programs to ensure to the fullest extent possible that contaminants do not enter our source stream. We can give no assurance, however, that such contaminants will be successfully removed from our source streams and resultant recycling by- products. As a result, our waste streams may, from time to time, be classified as a hazardous waste in which case we may incur higher costs for disposal. Pre-transaction reviews of sites that we have acquired from others and environmental assessments of our operating sites conducted by independent environmental consulting firms have revealed that some soil, surface water and/or groundwater contamination, including various metals, arsenic, petrochemical byproducts, waste oils, polychlorinated biphenyls and volatile organic compounds, is present at certain of our operating sites. Based on our review of these reports, we believe that it is likely that contamination at varying levels may exist at some of our sites, and we anticipate that some of our sites could require investigation, monitoring and remediation in the future. Moreover, the costs of such remediation could be material. The existence of contamination at some of our facilities could adversely affect our ability to sell our properties, and of sites that we have acquired from others, will generally require us to incur significant costs to take advantage of selling opportunities. We may have potential Superfund liability. Certain of our 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 have limited the exposure of scrap metal recyclers for sales of certain recyclable material under certain circumstances. However, the recycling defense is subject to a number of exceptions. 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 13 environment, we can provide no assurance that we will not become liable in the future for significant costs associated with investigation and remediation of CERCLA waste sites. ITEM 2. PROPERTIES Our facilities generally are comprised of: - - processing areas; - - warehouses for the storage of repair parts and certain types of raw and processed scrap; - - covered and open storage areas for raw and processed scrap; - - machine or repair shops for the maintenance and repair of vehicles and equipment; - - scales for weighing scrap; - - loading and unloading facilities; and - - administrative offices. Most of our facilities have specialized equipment for processing various types and grades of raw scrap which may include a heavy duty automotive shredder to process both ferrous and non-ferrous scrap, crane-mounted alligator or stationary guillotine shears to process large pieces of heavy scrap, wire stripping and chopping equipment, baling equipment and torch cutting facilities. The following table sets forth information regarding our principal properties:
APPROXIMATE LEASED/ LOCATION OPERATIONS SQUARE FEET OWNED -------- ---------- ----------- ------- Metal Management, Inc. 500 N. Dearborn St., Chicago, IL............ Corporate Headquarters 21,000 Leased 750 Lexington Ave., New York, NY............ Corporate Office 2,100 Leased Metal Management Aerospace, Inc. 500 Flatbush Ave., Hartford, CT............. Office/Processing 1,481,040 Leased Metal Management Alabama, Inc. 2020 Vanderbilt Rd., Birmingham, AL......... Office/Shear/Granulator 1,150,073 Owned Metal Management Arizona, L.L.C. 3640 S. 35th Ave., Phoenix, AZ.............. Office/Shear/Mega-Shredder/Baler 1,121,670 Leased 1525 W. Miracle Mile, Tucson, AZ............ Office/Shredder/Shear 513,569 Owned Metal Management Connecticut, Inc. 234 Universal Dr., North Haven, CT.......... Office/Shredder 1,089,000 Owned Metal Management Indiana, Inc. 3601 Canal St., East Chicago, IN............ Maintenance/Balers(2)/Shear 588,784 Owned Metal Management Memphis, L.L.C. 540 Weakley St., Memphis, TN................ Office/Maintenance 178,596 Owned 526 Weakley St., Memphis, TN................ Baler/Shear/Shredder 768,616 Owned 1270 N. Seventh St., Memphis, TN............ Warehouse 351,399 Owned
14
APPROXIMATE LEASED/ LOCATION OPERATIONS SQUARE FEET OWNED -------- ---------- ----------- ------- Metal Management Midwest, Inc. 2305 S. Paulina St., Chicago, IL............ Maintenance/Shredder 392,040 Owned 2500 S. Paulina St., Chicago, IL............ Office/Warehouse/Shear 168,255 Owned 2425 S. Wood St., Chicago, IL............... Office/Warehouse/Baler 103,226 Owned 2451 S. Wood St., Chicago, IL............... Office/Maintenance 178,596 Owned 350 N. Artesian Ave., Chicago, IL........... Office/Maintenance/Shredder 348,480 Owned 1509 W. Cortland St., Chicago, IL........... Office/Baler 162,540 Owned 1831 N. Elston Ave., Chicago, IL............ Warehouse 35,695 Owned 26th and Paulina Streets, Chicago, IL....... Office/Maintenance/Baler/Crusher 323,848 Owned 9331 S. Ewing Ave., Chicago, IL............. Office/Maintenance/Shredder 293,087 Owned 3200 E. 96th St., Chicago, IL............... Office/Maintenance/Eddy Current 364,969 Owned Separation System 3151 S. California Ave., Chicago, IL........ Office/Maintenance/Shredder 513,500 Leased 1000 N. Washington, Kankakee, IL............ Office/Maintenance/Warehouse 217,800 Owned 564 N. Entrance Ave., Kankakee, IL.......... Processing 206,910 Owned 320 Railroad St., Joliet, IL................ Feeder Yard/Stevedoring 43,760 Leased 12701 S. Doty Ave., Chicago, IL............. Shear/Iron Breaking 784,080 Leased Metal Management Mississippi, L.L.C. 120-121 Apache Dr., Jackson, MS............. Office/Processing 74,052 Owned Metal Management New Haven, Inc. 808 Washington Ave., New Haven, CT.......... Office/Shear/Warehouse 177,850 Leased Metal Management Northeast, Inc. Foot of Hawkins St., Newark, NJ............. Office/Baler/Shear 382,846 Owned 252-254 Doremus Ave., Newark, NJ............ Shredder/Processing 384,000 Owned Port of Newark, Newark, NJ.................. Barge & Ship 839,414 Leased Terminal/Stevedoring 303 Doremus Ave., Newark, NJ................ Bus Dismantling 270,100 Leased Metal Management Ohio, Inc. Rte. 281 East, Defiance, OH................. Office/Briquetting/Shear/Baler 3,267,000 Owned 2535 Hill Ave., Toledo, OH.................. Office/Processing 122,000 Owned 4431 W. 130th St., Cleveland, OH............ Office/Iron Breaking/Shear/Baler 2,178,000 Leased Metal Management Pittsburgh, Inc. 2045 Lincoln Blvd, Elizabeth, PA............ Office/Processing/Warehouse 423,054 Owned 77 E. Railroad St., Monongahela, PA......... Office/Warehouse/Baler/Shear 174,240 Owned Metal Management Stainless & Alloy, Inc. 6660 S. Nashville Ave., Bedford Park, IL.... Office/Warehouse/Baler 304,223 Owned Metal Management West, Inc. 5601 York St., Denver, CO................... Office/Shredder 392,040 Owned 3260 W. 500 South St., Salt Lake City, UT... Office/Shredder 435,600 Owned 2690 East Las Vegas St., Colorado Springs, CO........................................ Feeder Yard 522,720 Owned Proler Southwest Inc. 90 Hirsch Rd., Houston, TX.................. Office/Warehouse/Processing 378,972 Owned 15-21 Japhet, Houston, TX................... Terminal/Shear 1,960,200 Owned 1102 Navigation Blvd, Freeport, TX.......... Feeder Yard 352,400 Leased
15 We believe that our facilities are suitable for their present and intended purposes and that we have adequate capacity for our current levels of operation. ITEM 3. LEGAL PROCEEDINGS LITIGATION 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. We are involved in the litigation as described below. Connecticut DEP v. Metal Management Connecticut, Inc. ("MTLM-Connecticut") On July 1, 1998, our subsidiary MTLM-Connecticut 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 our 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 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 us from maintaining discharges and to require us to remediate the facility. The suit also seeks civil penalties from all of the defendants in accordance with Connecticut environmental statutes. At this stage, we are not able to predict our potential liability in connection with this action or any required investigation and/or remediation. We believe that we have meritorious defenses to certain of the claims asserted against us in the suit and intend to vigorously defend ourselves against the claims. In addition, we believe that we are entitled to indemnification from Joseph A. Schiavone Corp. and Schiavone for some or all of the obligations and liabilities that may be imposed on us in connection with this matter under the various agreements governing our purchase of the North Haven Facility from Joseph A. Schiavone Corp. We cannot provide assurances that Joseph A. Schiavone Corp. and Schiavone will have sufficient resources to fund any or all indemnifiable claims that we may assert. We have 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. We are currently working with an independent environmental consultant to develop an acceptable characterization plan. We cannot provide assurances that we will be able to reach an acceptable settlement of this matter with the other parties. Department of Justice Subpoena In January 2003, we received a subpoena requesting that we provide documents to a grand jury that is investigating scrap metal purchasing practices in the four state region of Ohio, Illinois, Indiana and Michigan. We are fully cooperating with the subpoena and the grand jury's investigation. To date, we have incurred approximately $0.5 million of legal fees associated with responding to the subpoena. We are not able at this preliminary stage to determine future legal costs or other costs to be incurred by us in responding to such subpoena or other impact to us of such investigation. Voluntary Disclosure to Department of Justice As a result of internal audits that we conducted, we determined that current and former employees of certain business units have 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, we 16 voluntarily disclosed our concerns regarding such cash payments to the U.S. Department of Justice. The Board of Directors has appointed a special committee, consisting of all of our independent directors, to conduct an investigation of these activities. We are cooperating with the U.S. Department of Justice. We have implemented policies to eliminate such cash payments to industrial customers. During fiscal 2004, such cash payments to industrial customers represented approximately 0.7% of our 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. We are 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 us, if any, and accordingly, we have not recorded any amounts in the financial statements. ENVIRONMENTAL MATTERS During the period from September 2002 to the present, the Arizona Department of Environmental Quality ("ADEQ") issued five Notices of Violations ("NOVs") to our subsidiary Metal Management Arizona, L.L.C. ("MTLM-Arizona") 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 ASR 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. Two of the original five NOVs have now been closed, and MTLM-Arizona is cooperating fully with ADEQ and the Arizona Attorney General's office with respect to the remaining issues. At this preliminary stage, we cannot predict MTLM-Arizona's potential liability, if any, in connection with the NOVs or any required remediation. On April 29, 1998, MTLM-Midwest acquired substantially all of the operating assets of 138 Scrap, Inc. ("138 Scrap") that were used in its scrap metal recycling business. Most of these assets were located at a recycling facility in Riverdale, Illinois (the "Facility"). In early November 2003, MTLM-Midwest was served with a Notice of Intent to Sue (the "Notice") by The Jeff Diver Group, L.L.C., on behalf of the Village of Riverdale, alleging, among other things, that the release or disposal of hazardous substances within the meaning of the CERCLA has occurred at an approximately 57 acre property in the Village of Riverdale (which includes the 8.8 acre Facility that was leased by MTLM-Midwest until December 31, 2003). The Notice indicates that the Village of Riverdale intends to file suit against MTLM-Midwest (directly and as a successor to 138 Scrap) and numerous other third parties under one or both of CERCLA and the Resource Conservation and Recovery Act. At this preliminary stage, we cannot predict MTLM-Midwest's potential liability, if any, in connection with such lawsuit or any required remediation. We believe that we have meritorious defenses to certain of the claims outlined in the Notice and MTLM-Midwest intends to vigorously defend itself against any claims ultimately asserted by the Village of Riverdale. In addition, although we believe that we would be entitled to indemnification from the sellers of 138 Scrap for some or all of the obligations that may be imposed on MTLM-Midwest in connection with this matter under the agreement governing its purchase of the operating assets of 138 Scrap, we cannot provide assurances that any of the sellers will have sufficient resources to fund any indemnifiable claims to which we may be entitled. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to our shareholders during the fourth quarter of fiscal 2004. 17 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS On June 12, 2003, our common stock commenced trading on the Nasdaq National Market System under the symbol "MTLM." From March 7, 2003 to June 11, 2003, our common stock traded on the Nasdaq SmallCap Market under the symbol "MTLM." From November 19, 2001 to March 6, 2003, our common stock traded on the OTC Bulletin Board under the symbol "MLMG." The following table sets forth the reported high and low bid information for our common stock for the periods indicated.
HIGH LOW ---- --- FISCAL YEAR ENDED MARCH 31, 2004 Fourth Quarter $22.15 $16.13 Third Quarter 18.50 10.25 Second Quarter 9.75 8.84 First Quarter 8.90 3.75 FISCAL YEAR ENDED MARCH 31, 2003 Fourth Quarter $ 4.02 $ 1.98 Third Quarter 2.03 1.68 Second Quarter 2.08 1.53 First Quarter 2.03 0.75
Stock split On March 8, 2004, our Board of Directors approved a two-for-one stock split in the form of a stock dividend. The stock dividend was paid on April 20, 2004 to shareholders of record on April 5, 2004. All share and per-share amounts for the Reorganized Company have been retroactively restated throughout this annual report on Form 10-K to reflect the stock split. Holders As of May 3, 2004, we had 1,319 registered shareholders based on our transfer agent's records. On May 3, 2004, the closing price per share of our common stock as reported on the Nasdaq National Market System was $14.45 per share. Dividends Neither the Predecessor Company nor we have paid any cash dividends since August 31, 1995. We presently have no intention of paying cash dividends in the foreseeable future and intend to utilize our cash for business operations. In addition, we are precluded from paying cash dividends under our Credit Agreement without lender approval. Unregistered sales of common stock During fiscal 2004, we sold 2,294,000 shares of our common stock pursuant to exercise of warrants held by our employees and directors. There were 65 exercise transactions in fiscal 2004 and the average exercise price for each transaction was $3.64 per share. We received proceeds of $8,352,000 from these sales and used the proceeds to repay borrowings outstanding under our Credit Agreement. 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. 18 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the consolidated financial statements and the related notes thereto included in Part IV, Item 15 of this report and the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in Part II, Item 7 of this report. The selected financial data presented below is not necessarily indicative of the future results of our operations or financial performance. We adopted fresh-start reporting in connection with our emergence from bankruptcy. Under fresh-start reporting, a new reporting entity is deemed to be created and the recorded amounts of assets and liabilities are adjusted to reflect their estimated fair values. For accounting purposes, the fresh-start adjustments were recorded in our consolidated financial statements as of June 30, 2001. Since fresh-start reporting materially affects the comparability of the amounts previously recorded in our Predecessor Company's consolidated financial statements, a black line separates the post-emergence financial data from the pre-emergence financial data. All share and per share amounts for the Reorganized Company have been restated to reflect the April 20, 2004 two-for-one stock split.
PREDECESSOR COMPANY | REORGANIZED COMPANY ----------------------------------- | ---------------------------------- (in thousands, except per share data) THREE | NINE YEARS ENDED MONTHS | MONTHS MARCH 31, ENDED | ENDED YEARS ENDED MARCH 31, ----------- JUNE 30, | MARCH 31, --------------------- 2000 2001 2001 | 2002 2003 2004 STATEMENT OF OPERATIONS DATA: ---- ---- -------- | --------- ---- ---- | Net sales $915,140 $ 766,591 $ 166,268 | $464,795 $770,009 $1,083,413 Gross profit 109,985 61,874 17,052 | 55,615 105,141 160,413 General and administrative expenses 55,021 56,312 11,686 | 34,237 50,509 59,991 Depreciation and amortization 27,167 23,341 4,718 | 13,673 17,533 18,193 Goodwill impairment charge (a) - 280,132 - | - - - Stock-based compensation expense - - - | - 35 972 Non-cash and non-recurring expense | (income) (b) 5,014 6,399 1,941 | 3,944 (695) 6,198 Operating income (loss) 22,783 (304,310) (1,293) | 3,761 37,759 75,059 Interest expense (38,043) (34,159) (5,169) | (9,450) (11,129) (6,925) Reorganization items (c) - 15,632 (135,364) | 457 - - Income (loss) before cumulative | effect of change in accounting | principle (d) (12,294) (365,322) 128,957 | (6,083) 20,501 51,389 Gain on sale of discontinued | operations, | net of tax 376 - - | - - - Cumulative effect of change in | accounting principle - - (358) | - - - Preferred stock dividends (e) 2,021 295 - | - - - Net income (loss) $(13,939) $(365,617) $ 128,599 | $ (6,083) $ 20,501 $ 51,389 | Income (loss) before cumulative | effect of change in accounting | principle per share: | Basic $ (0.26) $ (6.18) $ 2.09 | $ (0.30) $ 1.01 $ 2.42 Diluted $ (0.26) $ (6.18) $ 2.09 | $ (0.30) $ 0.99 $ 2.27 | Cash dividends per common share $ 0.00 $ 0.00 $ 0.00 | $ 0.00 $ 0.00 $ 0.00 | Weighted average shares outstanding 54,333 59,131 61,731 | 20,239 20,323 21,243 Weighted average diluted shares | outstanding 54,333 59,131 61,731 | 20,239 20,741 22,653
19
PREDECESSOR COMPANY | REORGANIZED COMPANY -------------------- | ----------------------------------------- (IN THOUSANDS) MARCH 31, | MARCH 31, -------------------- | JUNE 30, ------------------------------ 2000 2001 | 2001 2002 2003 2004 ---- ---- | -------- ---- ---- ---- | BALANCE SHEET DATA: | Working capital $140,433 $ 77,072 | $ 54,694 $ 52,474 $ (9,691) $ 80,740 Total assets 710,980 284,792 | 289,518 257,108 248,651 406,416 Liabilities subject to | compromise - 220,234 | - - - - Total debt (including current | maturities)(f) 384,710 152,977 | 148,435 133,960 89,610 44,297 Convertible preferred stock 6,277 5,915 | - - - - Common stockholders' equity | (deficit) 215,857 (149,172) | 65,000 59,487 78,282 202,839
- --------------------------------------- (a) During the third quarter of fiscal 2001, the Predecessor Company changed its method of assessing goodwill impairment and recorded a $280.1 million charge to write-off all unamortized goodwill and intangibles. (b) Non-cash and non-recurring expense (income) consist of the following items (in thousands):
PREDECESSOR COMPANY | REORGANIZED COMPANY -------------------------- | -------------------------- THREE | NINE YEARS ENDED MONTHS | MONTHS YEARS ENDED MARCH 31, ENDED | ENDED MARCH 31, --------------- JUNE 30, | MARCH 31, -------------- 2000 2001 2001 | 2002 2003 2004 ---- ---- -------- | --------- ---- ---- | Impairment of long-lived and other assets $ (210) $5,828 $1,941 | $3,944 $(695) $ 0 Severance, facility closure charges and | other 5,224 571 0 | 0 0 6,198 ------ ------ ------ | ------ ----- ------ $5,014 $6,399 $1,941 | $3,944 $(695) $6,198 ====== ====== ====== | ====== ===== ======
(c) The three months ended June 30, 2001 includes $145.7 million of income related to the discharge of indebtedness in accordance with the Plan. (d) Fiscal 2003 includes $3.3 million of gains recognized on the sale of two parcels of redundant real estate. (e) Fiscal 2000 includes $1.2 million in special dividends paid in connection with the redemption of $5.0 million principal amount of Series A and Series B convertible preferred stock. (f) Total debt at March 31, 2001 excludes $182.9 million of debt classified within liabilities subject to compromise. 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Form 10-K includes certain statements that may be deemed to be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Statements in this Form 10-K which address activities, events or developments that we expect or anticipate will or may occur in the future, including such things as future acquisitions (including the amount and nature thereof), business strategy, expansion and growth of our business and operations, general economic and market conditions and other such matters are forward-looking statements. Although we believe the expectations expressed in such forward-looking statements are based on reasonable assumptions within the bounds of our knowledge of our business, a number of factors could cause actual results to differ materially from those expressed in any forward- looking statements. See "Risk Factors" included in Part I, Item 1 of this report for a discussion of the factors that could have a significant impact on our financial condition or results of operations. The purpose of the following discussion is to facilitate the understanding and assessment of significant changes and trends related to our results of operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Part IV, Item 15 of this report. OUR BUSINESS We are one of the largest full-service metals recyclers in the United States, with recycling facilities located in 13 states. We enjoy leadership positions in many major metropolitan markets, including Birmingham, Chicago, Cleveland, Denver, Hartford, Houston, Memphis, Newark, Phoenix, Salt Lake City, Toledo and Tucson. We have a 28.5% equity ownership position in Southern Recycling, L.L.C. ("Southern"), one of the largest scrap metals recyclers in the Gulf Coast region. 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 at our Northeast operations. 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. We have achieved a leading position in the metals recycling industry primarily by implementing a national strategy of completing and integrating regional acquisitions. In making acquisitions, we have focused on major metropolitan markets where prime industrial and obsolete scrap metals (automobiles, appliances and industrial equipment) are readily available and from where we believe we can better serve our customer base. In pursuing this strategy, we acquired certain large regional companies to serve as platforms into which subsequent acquisitions would be integrated. We believe that through the integration of our acquired businesses, we have enhanced our competitive position and profitability of the operations because of broader distribution channels, improved managerial and financial resources, enhanced purchasing power and increased economies of scale. CHAPTER 11 FILING AND EMERGENCE On November 20, 2000, we filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy 21 Court"). From November 20, 2000 to June 29, 2001, we operated our businesses as debtors-in-possession. These bankruptcy proceedings are referred to herein as the "Chapter 11 proceedings." On May 4, 2001, we filed a plan of reorganization (the "Plan") pursuant to Chapter 11 of the Bankruptcy Code. The Plan was confirmed by the Bankruptcy Court and became effective on June 29, 2001 (the "Effective Date"). On September 17, 2002, a Final Decree Motion was approved by the Bankruptcy Court, which officially closed our Chapter 11 proceedings. In the Chapter 11 proceedings, virtually all suppliers of scrap metals were paid their pre-petition claims as critical vendors. Additionally, the Plan provided for the conversion of approximately $211.9 million of unsecured debt and other liabilities into common stock, which strengthened our capitalization. In connection with our emergence from bankruptcy, we reflected the terms of the Plan in our audited consolidated financial statements by adopting fresh-start reporting in accordance with AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code." Under fresh-start reporting, a new reporting entity is deemed to be created and the recorded amounts of assets and liabilities are adjusted to reflect their estimated fair values. For accounting purposes, the fresh-start adjustments were recorded in our audited consolidated financial statements as of June 30, 2001. As used in this report, the term "Predecessor Company" refers to our operations for periods prior to the Effective Date, while the term "Reorganized Company" refers to our operations for periods after the Effective Date. 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. 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 $1.7 million and $1.0 million at March 31, 2004 and 2003, 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. As indicated in the section entitled "Risk Factors - Potential credit losses from our significant customers could adversely affect our results of operations or financial condition," general weakness in the steel and metals sectors during the period from 1998 to 2001 previously led to bankruptcy filings by many of our customers which caused us to recognize additional allowances for uncollectible accounts receivable. While we believe our allowance for uncollectible accounts is adequate, changes in economic conditions or any weakness in the steel and metals industry could adversely impact our future earnings. 22 Inventory Our inventories primarily consist of ferrous and non-ferrous scrap metals and are valued at the lower of average purchased cost or market. Quantities of inventories are determined based on our inventory systems and are subject to periodic physical verification using estimation techniques including observation, weighing and other industry methods. As indicated in the section entitled "Risk Factors - Prices of commodities we own may be volatile," we are exposed to risks associated with fluctuations in the market price for both ferrous and non-ferrous metals, which are at times volatile. We attempt to mitigate this risk by seeking to rapidly turn our inventories. Valuation of long-lived assets and goodwill We regularly review the carrying value of certain long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be realizable. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset's carrying amount to determine if an impairment of such asset is necessary. The effect of any impairment would be to expense the difference between the fair value of such asset and its carrying value. During the nine months ended March 31, 2002, we recorded an impairment charge of $3.1 million related to a scrap metal operation that we exited and an impairment charge of $0.8 million related to fixed assets which we abandoned or otherwise intend to sell or dispose of. Effective June 30, 2001, we adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," which requires that goodwill be reviewed at least annually for impairment based on the fair value method. At March 31, 2004, we determined, based on current industry and other market information, that no impairment existed. Self-insured reserves We are self-insured for medical claims for most of our employees. Since April 1, 2003, we have also been self-insured for workers' compensation claims that involve a loss of less than $250,000 per claim. Our exposure to claims is protected by stop-loss insurance policies. We record a reserve for reported but unpaid claims and the estimated cost of incurred but not reported ("IBNR") claims. IBNR reserves are based on either a lag estimate (for medical claims) or on actuarial assumptions (for workers' compensation claims). Pension plans We sponsor three defined benefit pension plans for employees at certain of our subsidiaries. Pension benefits are based on formulas that reflect the employees' years of service and compensation during their employment period. We recognized pension expense of $0.5 million and $0.1 million in fiscal 2004 and 2003, respectively. We currently estimate that pension expense will be $0.4 million in fiscal 2005. Pension expense is determined using certain assumptions as required by SFAS No. 87, "Employers' Accounting for Pensions." These assumptions include the long-term rate of return on plan assets, discount rate and rate of compensation increases. Actual results will often differ from actuarial assumptions because of economic and other factors. We used a discount rate of 6.75% to compute pension expense in fiscal 2004. The discount rate that we used reflects the rates of high-quality debt instruments that would provide the future cash flows necessary to pay benefits when they come due. A decrease in the discount rate of 25 basis points, from 6.75% to 6.50%, while holding all other assumptions constant, would have resulted in an increase in our pension expense of approximately $30,000 in fiscal 2004. We have reduced our discount rate to 6.25% at March 31, 2004 to reflect market interest rate reductions. We assumed that long-term returns on pension assets were 8.00% during fiscal 2004. To determine the expected long-term rate of return on pension plan assets, we consider the current and expected asset allocations, as well as historical returns on plan assets. A decrease in the expected long-term rate of return of 25 basis points, from 8.00% to 7.75%, while holding all other assumptions constant, would have resulted in an increase in our pension expense of approximately $16,000 in fiscal 2004. 23 Income taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We had previously recorded a full valuation allowance against the emergence date net deferred tax assets, including net operating loss ("NOL") carryforwards, due to the uncertainty regarding their ultimate realization. During the three months ended December 31, 2003, we filed our tax return for the year ended March 31, 2003, recorded the final effects of post and pre-emergence tax positions and updated our forecasts of future operations. The updated forecasts took into consideration current market conditions and the eight consecutive quarters of profitable operations through December 2003. Based on these factors, we reversed most of the valuation allowance recorded against the emergence date net deferred tax assets because we now believe it is more likely than not that these deferred tax assets will be realized. Significant judgment is required in these evaluations, and differences in future results from our estimates could result in material differences in the realization of these assets. Contingencies We accrue reserves 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 audited consolidated financial statements and notes thereto included in Part IV, Item 15 of this report which contain accounting policies and other disclosures required by generally accepted accounting principles. RESULTS OF OPERATIONS During fiscal 2004, we acquired one scrap metals recycling business in November 2003. During fiscal 2003, we acquired one scrap metals recycling business in October 2002. The impact of both of these acquisitions was not material to our results of operations. In fiscal 2002, we did not acquire any scrap metals recycling businesses so there was no corresponding effect to our results of operations in that period. While we may acquire scrap metals recycling businesses in the future, we are not able to predict the effect any such acquisition could have on our consolidated results of operations. 24 FISCAL 2004 COMPARED TO FISCAL 2003 SALES Consolidated net sales for fiscal 2004 and for fiscal 2003 in broad product categories were as follows ($ in millions):
FISCAL 2004 FISCAL 2003 -------------------------- ------------------------ COMMODITY NET NET (WEIGHT IN THOUSANDS) WEIGHT SALES % WEIGHT SALES % - ---------------------------------------- ------ ----- - ------ ----- - Ferrous metals (tons) 4,403 $ 766.7 70.8 4,137 $492.7 64.0 Non-ferrous metals (lbs.) 424,494 254.7 23.5 442,234 205.5 26.7 Brokerage-ferrous (tons) 304 42.5 3.9 454 54.8 7.1 Brokerage-nonferrous (lbs.) 4,506 2.0 0.2 10,688 4.2 0.5 Other 17.5 1.6 12.8 1.7 -------- ----- ------ ----- $1,083.4 100.0 $770.0 100.0 ======== ===== ====== =====
Consolidated net sales increased by $313.4 million (40.7%) to $1.1 billion in fiscal 2004 compared to consolidated net sales of $770.0 million in fiscal 2003. The increase in consolidated net sales was primarily due to higher average selling prices for both ferrous and non-ferrous products. Ferrous sales Ferrous sales increased by $274.0 million (55.6%) to $766.7 million in fiscal 2004 compared to ferrous sales of $492.7 million in fiscal 2003. The increase was attributable to higher average selling prices combined with an increase in sales volumes. The average selling price for ferrous products was approximately $174 per ton in fiscal 2004 which represents an increase of $55 per ton (46.2%) from fiscal 2003. The increase in selling prices for ferrous scrap 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) was approximately $143 per ton in fiscal 2004 compared to approximately $97 per ton in fiscal 2003. Additionally, export prices for ferrous scrap increased in fiscal 2004 partly due to higher ocean freight costs. Demand for our ferrous scrap continues to be strong albeit with lower prices. International demand remains favorable for us due in part to the weakening U.S. dollar. Consequently, U.S. scrap is more attractive to overseas buyers and, in particular, we have seen strong demand from Turkey, Korea and China during fiscal 2004. In recent months, our industry has experienced lower demand from China. The strong international demand is evident in data released by the U.S. Commerce Department, which shows that U.S. exports of ferrous scrap for calendar 2003 were approximately 11.8 million tons, an increase of 20% from calendar 2002. Domestic demand for scrap metal has been favorable despite reduced levels of steel production because of tighter supplies of prompt industrial grades of scrap metal. Domestic demand for scrap metal has also been favorably impacted by higher prices for scrap substitute products such as DRI and HBI relative to obsolete grades of scrap metal, and by lower levels of imports of scrap metal to the U.S. Non-ferrous sales Non-ferrous sales increased by $49.2 million (23.9%) to $254.7 million in fiscal 2004 compared to non-ferrous sales of $205.5 million in fiscal 2003. The increase was due to higher average selling prices partially offset by lower sales volumes. In fiscal 2004, the average selling price for non-ferrous products increased by approximately $0.14 per pound to $0.60 per pound and non-ferrous sales volumes decreased by 17.7 million pounds compared to fiscal 2003. Non-ferrous unit shipments declined in fiscal 2004 primarily due to our decision to curtail wire-chopping operations. 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 53% and 10%, respectively, higher in fiscal 2004 compared to fiscal 2003. According to COMEX data, average 25 prices for copper were 28% higher in fiscal 2004 compared to fiscal 2003. However, the supply for non-ferrous metals continues to remain at levels that are lower than prior years due to lower than average output from U.S. industrial production, especially in the aerospace and telecommunications industries, which has also caused a decrease in our sales volumes. Competition from China has resulted in lower volumes of copper and aluminum wire being processed and sold from our wire-chopping operation. As a result, we have significantly curtailed our wire-chopping operation, choosing instead in many cases to sell unprocessed copper and aluminum abroad. 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 subsidiary) 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 $12.3 million (22.4%) to $42.5 million in fiscal 2004 compared to brokerage ferrous sales of $54.8 million in fiscal 2003. The decrease was primarily a result of changes to our business in Ohio that resulted in reduced sales to certain of our domestic brokerage customers. The decrease in brokered ferrous volume was partially offset by an increase in brokered ferrous sales price per ton. 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. Brokerage non-ferrous sales decreased by $2.2 million (52.4%) to $2.0 million in fiscal 2004 compared to brokerage non-ferrous sales of $4.2 million in fiscal 2003. The decrease was due to volume declining by 6.2 million pounds offset by an increase in the average selling price of $0.05 per pound. Margins associated with brokered non-ferrous metals are narrow so variations in this product category are not as significant to us as variations in other product categories. Other sales Other sales are primarily derived from our stevedoring and bus dismantling operations. Stevedoring operations are performed as a fee for service business primarily associated with our dock operations at Port Newark. The increase in other sales in fiscal 2004 is due to growth in these businesses. GROSS PROFIT Gross profit was $160.4 million (14.8% of sales) in fiscal 2004 compared to gross profit of $105.1 million (13.7% of sales) in fiscal 2003. The improvement in gross profit was due to higher material margins on both ferrous and non-ferrous products sold offset in part by higher processing expenses. Processing costs on a per unit basis increased mainly due to higher freight, labor, repairs, maintenance and waste removal costs. Freight expenses were higher due to an increase in the number of vessels shipped and higher vessel freight costs. The increase in labor costs was due to additional overtime and higher medical claims expenses. Overtime increased due to higher demand and unit shipments for our products. The increase in repairs, maintenance and waste removal costs resulted from additional tons of scrap metal processed. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were $60.0 million (5.5% of sales) in fiscal 2004 compared to general and administrative expenses of $50.5 million (6.6% of sales) in fiscal 2003. The increase results from higher compensation expense, medical claims expense and professional fees. The increase in compensation expense results from accruals recorded in connection with employee incentive compensation plans. The compensation plans are generally measured as a function of return on net assets. Based on our strong operating results, we recorded $11.2 million of expense in fiscal 2004 in connection with the employee incentive compensation plans compared to $6.2 million of expense in fiscal 2003. Payments under the incentive compensation plans were approved by the Compensation Committee of the Board of Directors. 26 We are self-insured for health insurance for most of our employees. Medical claims and premiums were higher by $1.3 million in fiscal 2004 compared to fiscal 2003. Professional fees were $1.3 million higher in fiscal 2004 due to increases in director, legal and accounting fees. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense was $18.2 million (1.7% of sales) in fiscal 2004 compared to depreciation and amortization expense of $17.5 million (2.3% of sales) in fiscal 2003. The increase is due to depreciation expense recorded on capital expenditures incurred since March 31, 2003. STOCK-BASED COMPENSATION In fiscal 2004, we recognized stock-based compensation expense of $1.0 million related to awards of restricted stock and options granted to employees. The restricted stock generally vests over a period of 3 to 5 years and is subject to forfeiture if certain employment conditions are not satisfied. In fiscal 2003, stock-based compensation expense of $35,000 was recognized on warrants which were granted to a consultant. NON-CASH AND NON-RECURRING EXPENSE (INCOME) Non-cash and non-recurring expense was $6.2 million in fiscal 2004 compared to non-cash and non-recurring income of $0.7 million in fiscal 2003. In January 2004, we implemented a management realignment. This management realignment resulted in the recognition of $6.2 million of non-recurring expense in fiscal 2004 primarily in connection with aggregate severance payments, benefits, and expense associated with the acceleration of vesting of restricted stock. In fiscal 2002, we recorded an impairment charge of $3.1 million related to the exit from our former MacLeod operations. The impairment charge for MacLeod was based on an evaluation of the proceeds that we expected to generate from the liquidation of the assets of MacLeod compared to our investment in MacLeod. We completed our exit from MacLeod during fiscal 2003 and generated $0.7 million of proceeds more than we expected resulting in non-cash and non-recurring income during this period. INCOME FROM JOINT VENTURES Income from joint ventures was $8.3 million in fiscal 2004 compared to income from joint ventures of $3.1 million in fiscal 2003. Income recognized from joint ventures primarily represents our 28.5% share of income from Southern. The increase in income was due to the favorable scrap markets in fiscal 2004. Southern is primarily a processor of ferrous metals and its results benefited from increased demand and higher selling prices. Income in fiscal 2003 from Southern includes the repayment of a $1.5 million note receivable for which we had previously reserved. INTEREST EXPENSE Interest expense was $6.9 million (0.6% of sales) in fiscal 2004 compared to interest expense of $11.1 million (1.4% of sales) in fiscal 2003. The decrease was a result of lower borrowings and interest rates. Our average borrowings under our Credit Agreement were approximately $62.8 million in fiscal 2004 which was $26.2 million less than our average borrowings under our Credit Agreement in fiscal 2003. Our average interest rate on indebtedness during fiscal 2004 was approximately 72 basis points lower than our average interest rate on indebtedness during fiscal 2003. This was primarily due to the repurchase and redemption of $31.5 million of 12.75% Junior Secured Notes in August and September 2003, which was funded from borrowings under our Credit Agreement. INTEREST AND OTHER INCOME (EXPENSE), NET The major components of this category are interest income and gains and losses from sale of fixed assets. In fiscal 2004, we recognized losses from the sale of fixed assets of $0.9 million. In fiscal 2003, we recognized $2.4 million of gains from the sale of fixed assets. We sold two parcels of redundant real estate which resulted in gains of $3.3 million. This was offset by losses on sales and disposals of equipment of $0.9 million. 27 INCOME TAXES In fiscal 2004, our income tax expense was $23.8 million resulting in an effective tax rate of 31.6%. The effective tax rate differs from the statutory rate primarily due to state income taxes and tax benefits associated with export sales. In fiscal 2003, our income tax expense was $12.8 million resulting in an effective tax rate of 38.4%. In December 2002, we finalized and filed our federal income tax return for the year ended March 31, 2002 and made an election that increased the amount of predecessor company NOL carryforwards utilized. Consequently, the effective income tax rate was higher due to the increase in the amount of predecessor company NOL carryforwards utilized. NET INCOME Net income was $51.4 million in fiscal 2004 compared to net income of $20.5 million in fiscal 2003. Net income increased due to higher material margins on ferrous products sold, income from joint ventures, lower interest expense and a lower effective tax rate. FISCAL 2003 COMPARED TO FISCAL 2002 In order to provide a meaningful basis of comparing fiscal 2003 to fiscal 2002 for purposes of the following tables and discussion, the operating results of the Reorganized Company for the nine months ended March 31, 2002 have been combined with the operating results of the Predecessor Company for the three months ended June 30, 2001 (collectively referred to as "fiscal 2002"). The combining of reorganized and predecessor periods does not result in a presentation that is in accordance with generally accepted accounting principles, but we believe such results will provide meaningful comparisons for sales, gross profit and general and administrative expenses. SALES Consolidated net sales for fiscal 2003 and for fiscal 2002 in broad product categories were as follows ($ in millions):
FISCAL 2003 FISCAL 2002 ------------------------ ------------------------ COMMODITY NET NET (WEIGHT IN THOUSANDS) WEIGHT SALES % WEIGHT SALES % - ----------------------------------------- ------ ----- - ------ ----- - Ferrous metals (tons) 4,137 $492.7 64.0 3,938 $374.4 59.3 Non-ferrous metals (lbs.) 442,234 205.5 26.7 447,636 200.3 31.7 Brokerage-ferrous (tons) 454 54.8 7.1 350 36.6 5.8 Brokerage-nonferrous (lbs.) 10,688 4.2 0.5 17,083 6.2 1.0 Other - 12.8 1.7 - 13.6 2.2 ------ ----- ------ ----- $770.0 100.0 $631.1 100.0 ====== ===== ====== =====
Consolidated net sales increased by $138.9 million (22.0%) to $770.0 million in fiscal 2003 compared to consolidated net sales of $631.1 million in fiscal 2002. The increase in consolidated net sales was primarily due to higher ferrous sales volumes combined with higher average selling prices for ferrous products. Ferrous sales Ferrous sales increased by $118.3 million (31.6%) to $492.7 million in fiscal 2003 compared to ferrous sales of $374.4 million in fiscal 2002. The increase in ferrous sales was attributable to increased demand and higher selling prices. In fiscal 2003, ferrous sales volumes increased by 199,000 tons (5.1%) and average selling price for ferrous products increased by $24 per ton (25.3%) to approximately $119 per ton as compared to fiscal 2002. Demand and pricing for our ferrous scrap was strong both domestically and internationally in fiscal 2003. International demand and pricing was higher due to the weakening U.S. dollar (which makes U.S. scrap more attractive to overseas buyers) and strong demand from China. Demand was also strong from Mexico which is an important market for our facilities in Houston and Arizona. The strong international demand in fiscal 2003 28 was evident in data released by the U.S. Commerce Department, which shows that U.S. exports of ferrous scrap for calendar 2002 were approximately 9.9 million tons, an increase of 20% from calendar 2001. Domestic demand and pricing were higher due to increased production by U.S. steel mills attributable, in part, to benefits from Section 201 tariffs. According to data published by the American Iron and Steel Institute, U.S. steel mills operated at an average capacity utilization rate of 89.5% in calendar 2002 compared to 75.1% in calendar 2001. Prior to calendar 2002, the strong U.S. dollar allowed U.S. steel mills to import ferrous scrap from Eastern European countries at lower prices than for ferrous scrap generated domestically, thereby adversely affecting our sales. With the decreased availability of Eastern European scrap and the weakening U.S. dollar, U.S. steel mills purchased more of their ferrous scrap domestically, which caused ferrous scrap prices to increase in fiscal 2003. The increase in selling prices for ferrous scrap in fiscal 2003 was evident in data published by the AMM. According to AMM, the average price for #1 Heavy Melting Steel Scrap - Chicago was approximately $97 per ton in fiscal 2003 compared to $73 per ton in fiscal 2002. Non-ferrous sales Non-ferrous sales increased by $5.2 million (2.6%) to $205.5 million in fiscal 2003 compared to non-ferrous sales of $200.3 million in fiscal 2002. The increase was due to higher average selling prices partially offset by lower sales volumes. In fiscal 2003, non-ferrous sales volumes decreased by 5.4 million pounds and average selling price for non-ferrous products increased by approximately $.01 per pound as compared to fiscal 2002. Fiscal 2002 included sales from our former MacLeod operations in California, which were discontinued in December 2001 and completely ceased operations during June 2002. Prior to its shutdown, MacLeod sold approximately 46 million pounds of non-ferrous metals in fiscal 2002. Although sales increased in fiscal 2003, our metal margins on non-ferrous metals remained unchanged in fiscal 2003 as compared to fiscal 2002. Our non-ferrous operations were impacted in both the supply and demand for non-ferrous metals due to weakness in the aerospace and telecommunications industries. The conditions of non-ferrous markets, including our three major products - aluminum, copper and stainless steel (nickel based metal) were weak in fiscal 2003 and 2002. Prices for certain non-ferrous metals began to stabilize and increase in fiscal 2003, but demand was still low. Although stainless steel demand showed some improvement in fiscal 2003, many U.S. stainless steel mills did not return to historic production levels. Our copper sales were impacted by lower availability of copper scrap, primarily due to increased competition from buyers of copper scrap in China. Aluminum and nickel markets were impacted by the general weakness in the aerospace industry, which was adversely affected by the events of September 11, 2001. Many companies in the aerospace industry did not operate at historical production levels in fiscal 2003 which impacted our non-ferrous sales. Our non-ferrous sales are also impacted by the mix of 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 subsidiary) and the selling prices for these metals will impact our non-ferrous sales as prices for these metals are much higher than other non-ferrous metals. Brokerage sales Brokerage ferrous sales increased by $18.2 million (49.7%) to $54.8 million in fiscal 2003 compared to brokerage ferrous sales of $36.6 million in fiscal 2002. The increase was primarily a result of a $16 per ton increase in average brokerage ferrous selling prices and a 104,000 ton increase in brokered ferrous tons. In fiscal 2003, we expanded our brokerage business at certain operations as a result of strong export demand for ferrous scrap. Demand from domestic customers for obsolete scrap also increased during fiscal 2003. 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. Brokerage non-ferrous sales decreased by $2.0 million (32.2%) to $4.2 million in fiscal 2003 compared to brokerage non-ferrous sales of $6.2 million in fiscal 2002. The decrease was due to volume declining by 29 6.4 million pounds offset by an increase in the average selling price of $0.03 per pound. Margins associated with brokered non-ferrous metals are narrow so variations in this product category are not as significant to us as variations in other product categories. Other sales Other sales is primarily derived from our stevedoring and bus dismantling operations. In fiscal 2002, our former MacLeod operations, which has been shut down, generated other sales of $2.7 million from the operation of its aluminum can redemption centers. Excluding the effect of the other sales from MacLeod in fiscal 2002, other sales increased by $1.9 million primarily as a result of higher stevedoring sales. GROSS PROFIT Gross profit was $105.1 million (13.7% of sales) in fiscal 2003 compared to gross profit of $72.7 million (11.5% of sales) in fiscal 2002. The improvement in gross profit was due to higher material margins realized on ferrous products sold in fiscal 2003. Our material margins for ferrous products benefited from rising prices throughout fiscal 2003 which more than offset the higher purchase costs associated with ferrous scrap. In addition, increased export sales in fiscal 2003 were also a contributing factor to the increase in gross profit. Export sales are generally at higher prices reflecting the higher cost of freight. Additionally, we realized benefits from higher realization of non-ferrous metals recovered as a by-product from the shredding process ("Zorba") and more attractive prices for Zorba in fiscal 2003. Our ferrous plant utilization was more efficient in fiscal 2003 as were able to process more scrap without increasing costs commensurately. Our processing expenses on a per unit basis and as a percentage of sales decreased in fiscal 2003 as compared to fiscal 2002. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were $50.5 million (6.6% of sales) in fiscal 2003 compared to general and administrative expenses of $45.9 million (7.3% of sales) in fiscal 2002. The increase was mainly a result of $6.2 million of compensation expense recognized pursuant to an incentive compensation plan (the "Incentive Plan"). The Incentive Plan is measured as a return on net assets, and based on our strong performance in fiscal 2003, resulted in the recognition of $6.2 million of expense. The Incentive Plan was administered and approved by the Compensation Committee of our Board of Directors. Medical claims expense declined by $1.8 million in fiscal 2003 as a result of improved claims experience among our employees and higher premium contributions by employees in fiscal 2003. Professional fees increased by $1.2 million in fiscal 2003 primarily due to higher legal and accounting fees. Legal fees increased due to our cooperation with a subpoena received from the Department of Justice and due to a decision to outsource all aspects of legal administration. Accounting fees increased primarily due to advisory services required in connection with tax consequences of our restructuring. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense was $17.5 million (2.3% of sales) in fiscal 2003 compared to depreciation and amortization expense of $18.4 million (2.9% of sales) in fiscal 2002. Approximately $0.3 million of the decrease was due to the elimination of depreciation expense associated with the exit from our MacLeod operations. Depreciation expense also decreased as we carefully allocated authorization for spending on capital equipment in fiscal 2003. In addition, we had chosen to replace some of our existing equipment by entering into operating leases, which contain favorable terms (see Liquidity and Capital Resources for further discussion). NON-CASH AND NON-RECURRING EXPENSE (INCOME) Non-cash and non-recurring expense was $5.9 million in fiscal 2002. We recorded an impairment charge of $3.1 million related to the exit from our former MacLeod operations and an impairment charge of $2.8 million related to fixed assets to be sold or otherwise abandoned. The impairment charge for MacLeod was based on an evaluation of the proceeds that we expected to generate from the liquidation of the assets of MacLeod compared to our investment in MacLeod. We completed our exit from MacLeod during fiscal 2003 30 and generated $0.7 million of proceeds more than we expected. As a result, we recognized non-cash and non-recurring income of $0.7 million in fiscal 2003. INCOME (LOSS) FROM JOINT VENTURES Income from joint ventures was $3.1 million in fiscal 2003 compared to loss from joint ventures of $0.3 million in fiscal 2002. During fiscal 2003, Southern realized substantial benefits from improved ferrous market conditions including a return to profitability. In addition, Southern strengthened its capitalization by accomplishing a long-term refinancing of its debt during fiscal 2003. As a result, in fiscal 2003, we collected $1.5 million on a note receivable from Southern that we had previously reserved and recognized $1.8 million of our share of income related to our investment in Southern. The note receivable from Southern had been fully reserved in fiscal 2001. The loss from joint ventures in fiscal 2002 represents our share of losses associated with another joint venture in the scrap metals recycling business in which we have a 50% ownership. INTEREST EXPENSE Interest expense was $11.1 million (1.4% of sales) in fiscal 2003 compared to interest expense of $14.6 million (2.3% of sales) in fiscal 2002. The decrease was a result of lower borrowings and interest rates under our credit facilities. Our average borrowings under our Credit Agreement in fiscal 2003 were approximately $24 million less than our average borrowings under our credit facilities in fiscal 2002. Our average interest rate on borrowings under our Credit Agreement in fiscal 2003 was approximately 185 basis points lower than our average interest rate on borrowings under credit facilities in fiscal 2002. This was due to the reduction of the prime rate of interest in November 2002 by 50 basis points and higher base interest rates in fiscal 2002 under our debtor-in-possession credit agreement. Interest expense in fiscal 2002 included three months of interest under our debtor-in-possession credit agreement, which was at higher base interest rates than the Credit Agreement governing our post-emergence bank borrowings. INTEREST AND OTHER INCOME (EXPENSE), NET The major components of this category are interest income and gains and losses from fixed assets. In fiscal 2003, we recognized $2.4 million of gains from the sale of fixed assets. We sold two parcels of redundant real estate which resulted in gains of $3.3 million. This was offset by losses on sales and disposals of equipment of $0.9 million. In fiscal 2002, we recognized losses from the sale of fixed assets of $0.2 million. REORGANIZATION ITEMS In fiscal 2002, we recognized reorganization income of $145.7 million related to the cancellation of debt in the Chapter 11 proceedings and incurred reorganization costs of $10.8 million, which mainly represented professional fees, liabilities for rejected contracts and settlements, fresh-start adjustments and other expenses associated with the Chapter 11 proceedings (see Note 3 to the consolidated financial statements included in Part IV, Item 15 of this report). INCOME TAXES In fiscal 2003, we recognized income tax expense of $12.5 million resulting in an effective tax rate of 38.4%. The recognition of income tax expense results from the utilization of Predecessor Company net operating loss carryforwards and other deferred tax assets, which is not offset by a corresponding reversal of the related valuation allowance. Valuation allowance reversals of the Predecessor Company, under generally accepted accounting principles, are recorded first as a reduction in goodwill and then as an increase to paid-in- capital. The effective tax rate differs from the statutory rate primarily due to the impact of state income taxes and the reversal of valuation allowances recorded against the Reorganized Company's deferred tax assets. CHANGE IN ACCOUNTING POLICY On April 1, 2001, we adopted SFAS No. 133, "Accounting for Derivatives and Hedges" (as amended). The cumulative effect of adopting SFAS No. 133 resulted in an after-tax decrease in net earnings of $0.4 million in fiscal 2002. 31 NET INCOME Net income was $20.5 million in fiscal 2003 compared to net income of $122.5 million in fiscal 2002. Net income in fiscal 2002 was primarily a result of a $145.7 million extraordinary gain associated with cancellation of indebtedness in the Chapter 11 proceedings. Net income in fiscal 2003 reflects significant improvement in our operations as a result of higher volumes of ferrous scrap metals sold, greater metal margins, lower interest expense and gains on sale of fixed assets. FINANCIAL CONDITION We believe that our financial condition has strengthened during fiscal 2004. At March 31, 2004, our total indebtedness was $44.3 million, a decrease of $45.3 million from March 31, 2003. Our primary source of working capital is collections from customers supplemented by financing under our Credit Agreement. Cash Flows In fiscal 2004, our operating activities generated net cash of $54.9 million compared to net cash generated of $46.3 million in fiscal 2003. Cash generated by operating activities during fiscal 2004 was comprised of $88.5 million of cash generated from net income, adjusted for non-cash items, offset by investments in working capital of $33.6 million. The working capital increase was due to higher scrap prices that resulted in an $80.8 million increase in accounts receivable and a $30.8 million increase in inventories offset by a $71.4 million increase in accounts payable. The increase in accounts receivable was due to higher sales during the three months ended March 31, 2004 ($369 million) compared to sales during the three months ended March 31, 2003 ($214 million). Inventories increased primarily due to higher per unit costs. Accounts payable increased due to higher purchase prices for scrap metals and extended terms offered by our suppliers. Due to the utilization of net operating loss carryforwards, cash payments for federal and state income taxes were only $1.3 million in fiscal 2004. We used $15.6 million in net cash for investing activities in fiscal 2004 compared to net cash generated of $0.2 million in fiscal 2003. In fiscal 2004, purchases of property and equipment were $15.0 million, while we generated $0.6 million of cash from the sale of redundant fixed assets. Capital expenditures included $4.0 million for the purchase of land on which we operate a scrap metal recycling facility in Houston, Texas and $4.1 million expended to complete the installation of a "Mega" Shredder, that we currently own, in Phoenix, Arizona. In addition, we purchased the scrap metal recycling assets of H. Bixon & Sons for $1.1 million of cash including transaction costs. During fiscal 2004, we used $39.0 million of net cash for financing activities compared to net cash used of $46.5 million in fiscal 2003. Cash generated from operating activities, net of cash used in investing activities, was used to reduce overall indebtedness by $45.3 million during fiscal 2004. In addition, we paid $3.0 million of fees and expenses associated with our Credit Agreement during this period. This was offset by $9.7 million of cash received from the exercise of stock options and warrants. Indebtedness On August 13, 2003, we entered into an amended and restated credit facility (the "Credit Agreement") with Deutsche Bank Trust Company Americas, as agent for the lenders thereunder. The Credit Agreement provides for maximum borrowings of $130 million and expires on July 1, 2007. $110 million of the Credit Agreement is available as a revolving loan and letter of credit facility and $20 million as a term loan. The Credit Agreement is available to fund working capital needs and for general corporate purposes. Borrowings under the Credit Agreement are subject to certain borrowing base limitations based upon a formula equal to 85% of eligible accounts receivable, the lesser of $45 million or 70% of eligible inventory, a fixed asset sublimit of $7.7 million as of March 31, 2004, and a term loan of $20.0 million (the "Term Loan"). The fixed asset sublimit amortizes by $2.5 million on a quarterly basis and under certain other conditions. Upon the full amortization of the fixed asset sublimit, the Term Loan will then amortize by $2.5 million on a quarterly basis and under certain other conditions. A security interest in substantially all of our assets and properties, including pledges of the capital stock of our subsidiaries, has been granted to the agent for the lenders as collateral against our obligations under the Credit Agreement. Pursuant to the Credit Agreement, we pay a fee of .375% on the undrawn portion of the facility. 32 Borrowings on all outstanding balances under the Credit Agreement (other than the Term Loan) bear interest, at our option, either at the prime rate (as specified by Deutsche Bank AG, New York Branch) plus a margin or LIBOR plus a margin. The margin on prime rate loans range from 0.50% to 1.00% and the margin on LIBOR loans range from 2.50% to 3.00%. The margin is based on our leverage ratio (as defined in the Credit Agreement) for the preceding quarter. Based on our current leverage ratio, we are borrowing at LIBOR plus 2.50%. Borrowings under the Term Loan bear interest at LIBOR plus 6.00% (with a floor on LIBOR equal to 2.50%). Under the Credit Agreement, we are required to satisfy specified financial covenants, including a minimum fixed charge coverage ratio of 1.25 to 1.00 and a maximum leverage ratio of 3.00 to 1.00, through December 31, 2004. After December 31, 2004, the maximum leverage ratio is 2.25 to 1.00. Both ratios are tested for the twelve-month period ending each fiscal quarter. The Credit Agreement also provides for maximum capital expenditures of $16 million for the twelve-month period ending each fiscal quarter. The Credit Agreement also contains restrictions which, among other things, limit our ability to (i) incur additional indebtedness; (ii) pay dividends; (iii) enter into transactions with affiliates; (iv) enter into certain asset sales; (v) engage in certain acquisitions, investments, mergers and consolidations; (vi) prepay certain other indebtedness; (vii) create liens and encumbrances on our assets; and (viii) engage in other matters customarily restricted in such agreements. We were in compliance with all financial covenants contained in the Credit Agreement as of March 31, 2004. As of May 25, 2004, we had outstanding borrowings of approximately $47.4 million under the Credit Agreement and undrawn availability of approximately $58.2 million. Our ability to meet financial ratios and tests in the future may be affected by events beyond our control, including fluctuations in operating cash flows and working capital. While we currently expect to be in compliance with the covenants and satisfy the financial ratios and tests in the future, there can be no assurance that we will meet such financial ratios and tests or that we will be able to obtain future amendments or waivers to the Credit Agreement, if so needed, to avoid a default. In the event of default, the lenders could elect to not make loans to us and declare all amounts borrowed under the Credit Agreement to be due and payable. The Credit Agreement was amended on February 10, 2004. The amendment eliminated the requirement that all proceeds from the collection of customer accounts be swept automatically to an account that reduced borrowings under the Credit Agreement from and after the closing date of the Credit Agreement, provided that we satisfy certain conditions as specified in the Credit Agreement. Pursuant to the amendment, we now control all collections through our lock-box accounts. As a result of the amendment, and the expectation that we will satisfy the conditions specified in the Credit Agreement, we classify the amounts outstanding under the Credit Agreement as a long-term obligation as of March 31, 2004. The Credit Agreement, which was entered into on August 13, 2003, matures on July 1, 2007 subject to the terms and conditions of the Credit Agreement. Prior to the amendment, the Credit Agreement previously required us to remit all collections received into our lock-box accounts into an account that would automatically reduce the borrowings under the Credit Agreement. During fiscal 2004, we determined that the Credit Agreement contains provisions that are deemed to be subjective acceleration clauses which provide the lenders with an ability to restrict future borrowings under the Credit Agreement. In accordance with Emerging Issues Task Force ("EITF") Issue No. 95-22, "Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements That Include both a Subjective Acceleration Clause and a Lock-Box Arrangement," the existence of the lock-box arrangement and subjective acceleration clauses requires the classification of the Credit Agreement as a current liability for dates preceding the amendment. Our prior credit agreement, which was repaid in its entirety on August 13, 2003, had similar lock-box arrangements and subjective acceleration clauses. Accordingly, we have restated through reclassification the March 31, 2003 balance sheet to properly classify the amounts outstanding under that prior credit agreement as a current liability. There were no other changes to the balance sheet and no changes to the results of operations. The reclassification of amounts owing under the prior credit agreement (which was repaid in August 2003) to a short-term liability at March 31, 2003 does not affect our operating results, cash flows or liquidity. 33 On August 14, 2003, we purchased approximately $30.5 million par amount of Junior Secured Notes at a price of 101% of the principal amount, plus accrued and unpaid interest. On September 18, 2003, we redeemed the remaining $1.0 million par amount of Junior Secured Notes at a price of 100% of the principal amount, plus accrued and unpaid interest. The repurchase and redemption of the Junior Secured Notes resulted in the recognition of a $0.4 million loss on debt extinguishment during fiscal 2004. We funded the repurchase and redemption of the Junior Secured Notes with availability under the Credit Agreement. The Junior Secured Notes were cancelled following the redemption of the remaining notes on September 18, 2003. Future capital requirements We expect to fund our working capital needs, interest payments and capital expenditures over the next twelve months with cash generated from operations, supplemented by undrawn borrowing availability under our 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. During fiscal 2004, we received $9.7 million of proceeds from the exercise of stock options and warrants. We may also receive additional cash in the future from the exercise of outstanding stock options and warrants. Capital expenditures were approximately $15.0 million in fiscal 2004. Capital expenditures are expected to be $14 to $15 million in fiscal 2005. 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 49 operating leases for equipment which would have cost approximately $12.9 million to purchase. These operating leases are attractive to us since the implied interest rates are lower than interest rates under our credit facilities. We expect to selectively use operating leases for new material handling equipment or trucks required by our operations. We believe these sources of capital will be sufficient to fund planned capital expenditures, interest 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 significant off-balance sheet arrangements that are likely to have a current or future effect on our financial condition, result of operations or cash flows. 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 March 31, 2004, 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 $44,297 $ 471 $18,581 $25,183 $ 62 Operating leases 44,976 9,021 11,424 7,345 17,186 Other contractual obligations 2,185 1,548 565 72 0 ------- ------- ------- ------- ------- Total contractual cash obligations $91,458 $11,040 $30,570 $32,600 $17,248 ======= ======= ======= ======= =======
Other commitments We are required to make contributions to our defined benefit pension plans. These contributions are required under the minimum funding requirements of ERISA. However, due to uncertainties regarding significant assumptions involved in estimating future required contributions, such as pension plan benefit 34 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 2005. Our minimum required pension contributions for fiscal 2005 will be approximately $1.9 million. We also enter into letters of credit in the ordinary course of operating and financing activities. As of May 3, 2004, we had outstanding letters of credit of $4.4 million which expire in fiscal 2005. In connection with the management realignment implemented during January 2004 (principally involving our Midwest operations), we paid severance and other expenses of approximately $4.0 million. The remaining severance and other benefits to be paid is approximately $1.6 million, most of which is payable in July 2005. RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting Standards Board (the "FASB") issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). In December 2003, the FASB issued FIN 46-R "Consolidation of Variable interest Entities" ("FIN 46-R") (revised December 2003), which replaces FIN 46. FIN 46-R incorporates certain modifications to FIN 46 adopted by the FASB subsequent to the issuance of FIN 46, including modifications to the scope of FIN 46. Additionally, FIN 46-R also incorporates much of the guidance previously issued in the form of FASB Staff Positions. For all special purposes entities ("SPEs") and variable interest entities ("VIEs") created prior to February 1, 2003, public entities must apply either the provisions of FIN 46, or early adoption of the provisions of FIN 46-R at the end of the first interim or annual reporting period after December 15, 2003. The adoption of this interpretation had no impact on our consolidated financial statements. In April 2003, the FASB issued Statement SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," to provide clarification on the financial accounting and reporting of derivative instruments and hedging activities and requires that contracts with similar characteristics be accounted for on a comparable basis. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of this statement had no impact on our consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003 and to all other instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. The adoption of this statement had no impact on our consolidated financial statements. In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This revised statement retains the requirements of the original SFAS No. 132 but requires additional disclosures concerning the economic resources and obligations related to pension plans and other postretirement benefits. This revised statement is effective for fiscal years ending after December 15, 2003. We have revised our disclosures to meet the requirements under this revised standard. In December 2003, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," which supercedes SAB No. 101, "Revenue Recognition in Financial Statements." SAB No. 104 rescinds accounting guidance in SAB No. 101 related to multiple-element revenue arrangements as this guidance has been superceded with the issuance of EITF Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." The adoption of SAB No. 104 had no impact on our consolidated financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to financial risk resulting from fluctuations in interest rates and commodity prices. We seek to minimize these risks through regular operating and financing activities. We do not use derivative financial instruments. 35 Commodity price risk We are exposed to risks associated with fluctuations in the market price for both ferrous and non-ferrous metals which are at times volatile. See the discussion under the section entitled "Risk Factors - The metals recycling industry is highly cyclical and export markets can be volatile." We attempt to mitigate this risk by seeking to turn our inventories quickly instead of holding inventories in speculation of higher commodity prices. Interest rate risk We are exposed to interest rate risk on our long-term fixed interest rate indebtedness and on our floating rate borrowings. As of March 31, 2004, variable rate borrowings mainly consisted of outstanding borrowings of $23.5 million under our Credit Agreement. Borrowings on our Credit Agreement bear interest at either the prime rate of interest plus a margin or LIBOR plus a margin. Any increase in either base rate would lead to higher interest expense. We do not have any interest rate swaps or caps in place which would mitigate our exposure to fluctuations in the interest rate on this indebtedness. Based on our average borrowings under our Credit Agreement in fiscal 2004, a hypothetical increase or decrease in interest rates by 1% would increase or decrease interest expense on our variable borrowings by approximately $0.6 million per year, with a corresponding change in cash flows. Foreign currency risk Although international sales accounted for 29% of our consolidated net sales in fiscal 2004, all of our international sales are denominated in U.S. dollars. We also purchase a small percentage of our raw materials from international vendors and some of these purchases are denominated in local currencies. Consequently, we do not enter into any foreign currency swaps to mitigate our exposure to fluctuations in the currency rates. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our consolidated financial statements are set forth in Part IV, Item 15 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 9A. CONTROLS AND PROCEDURES Annual Evaluation of our Disclosure Controls and Internal Controls. 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 (the "Exchange Act")). This controls evaluation was done under the supervision and with the participation of management, including Daniel W. Dienst, our Chairman of the Board and Chief Executive Officer ("CEO"), and Robert C. Larry, our Executive Vice President, Finance and Chief Financial Officer ("CFO"). Rules adopted by the Securities Exchange Commission ("SEC") require that in this section of the annual report, we present the conclusions of our CEO and CFO about the effectiveness of our disclosure controls based on and as of the date of the controls evaluation. 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 annual 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. 36 Disclosure Controls and Internal Controls. Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Internal controls are procedures which are designed with the objective of providing reasonable assurance that our transactions are properly authorized, our assets are safeguarded against unauthorized or improper use and our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles. Limitations on the Effectiveness of Controls. Our management, including our CEO and the CFO, does not expect that our disclosure controls or our internal controls 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. Scope of the Controls Evaluation. The evaluation of our disclosure controls 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 noted above, 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. There has been no change in our internal control over financial reporting during the fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However, since the date of the controls evaluation to the date of the filing of this report, the Company has effected the changes in internal controls discussed below. During the first quarter of fiscal 2005, the Company identified a material weakness in the design of its system of internal accounting control that may have permitted employees at certain company locations to circumvent federal and state laws relating to the reporting of certain cash payments. The Company voluntarily reported these findings to the U.S. Department of Justice in May 2004 and has implemented a company-wide policy to eliminate cash transactions for the purchase of scrap metals from industrial customers. The Company is cooperating with the U.S. Department of Justice. The Company also identified weaknesses, which collectively constitute a reportable condition, in the design and operation of internal accounting controls over industrial account scrap metal procurement in its Midwest operations relating to segregation of duties, approval of vendors, monitoring of pricing adjustments and check signing procedures. New policies and procedures have been implemented to address each of these weaknesses, including, among other things, by transferring oversight responsibility and control over the Company's industrial accounts payable function to the Company's finance department. 37 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required under this item is incorporated by reference from sections entitled "Proposal No. 1 - Election of Directors," "Executive Officers," "Section 16(a) Beneficial Ownership Reporting Compliance," and "Code of Ethics" in our definitive proxy statement, which will be filed with the Securities and Exchange Commission no later than July 29, 2004. ITEM 11. EXECUTIVE COMPENSATION The information required under this item is incorporated by reference from the section entitled "Executive Compensation," "Option Grants in the Last Fiscal Year," and "Option Exercises and Fiscal Year-End Values" in our definitive proxy statement, which will be filed with the Securities and Exchange Commission no later than July 29, 2004. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required under this item is incorporated by reference from the section entitled "Ownership of the Capital Stock of the Company" in our definitive proxy statement, which will be filed with the Securities and Exchange Commission no later than July 29, 2004. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required under this item is incorporated by reference from the section entitled "Certain Relationships and Related Transactions" in our definitive proxy statement, which will be filed with the Securities and Exchange Commission no later than July 29, 2004. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required under this item is incorporated by reference from the section entitled "Proposal No. 2 - Ratification of the Appointment of Independent Public Accountants" in our definitive proxy statement, which will be filed with the Securities and Exchange Commission no later than July 29, 2004. 38 PART IV. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report: (1) Financial Statements:
STATEMENT PAGE - --------- ---- Report of Independent Registered Public Accounting Firm F-1 Consolidated Statements of Operations for the years ended March 31, 2004 and 2003, the nine months ended March 31, 2002 (Reorganized Company), and the three months ended June 30, 2001 (Predecessor Company) F-3 Consolidated Balance Sheets at March 31, 2004 and 2003 (Reorganized Company) F-4 Consolidated Statements of Cash Flows for the years ended March 31, 2004 and 2003, the nine months ended March 31, 2002 (Reorganized Company), and the three months ended June 30, 2001 (Predecessor Company) F-5 Consolidated Statements of Stockholders' Equity for the years ended March 31, 2004 and 2003, the nine months ended March 31, 2002 (Reorganized Company), and the three months ended June 30, 2001 (Predecessor Company) F-6 Notes to Consolidated Financial Statements F-7 (2) Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts for the years ended March 31, 2004 and 2003, the nine months ended March 31, 2002 (Reorganized Company), and the three months ended June 30, 2001 (Predecessor Company) F-32
Schedules not listed above have been omitted because they are not required or they are inapplicable. (3) Exhibits: A list of the exhibits included as part of this report is set forth in the Exhibit Index that immediately precedes such exhibits, which is incorporated herein by reference. (b) Reports on Form 8-K: On January 20, 2004, we filed a report on Form 8-K relating to a press release we issued on January 19, 2004 announcing a realignment in management, including the appointments of Daniel W. Dienst as Chief Executive Officer, Harold "Skip" Rouster as President of MTLM-Midwest and Gerald E. Morris as a director. On March 10, 2004, we filed a report on Form 8-K relating to a press release we issued on March 8, 2004 announcing that our Board of Directors declared a two-for-one stock split in the form of a stock dividend, payable on April 20, 2004 to shareholders of record as of April 5, 2004. On March 26, 2004, we filed a report on Form 8-K relating to a press release we issued on March 25, 2004 announcing the appointment of Robert Lewon to the Company's Board of Directors. (c) See Item 15(a)(3) and separate Exhibit Index attached hereto. (d) Not applicable. 39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Chicago, Illinois on June 11, 2004. METAL MANAGEMENT, INC. By: /s/ Daniel W. Dienst ------------------------------------ Daniel W. Dienst Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on June 11, 2004.
SIGNATURE TITLE --------- ----- /s/ Daniel W. Dienst Chairman of the Board - -------------------------------------- and Chief Executive Officer Daniel W. Dienst (Principal Executive Officer) /s/ John T. DiLacqua Director - -------------------------------------- John T. DiLacqua /s/ Robert C. Larry Executive Vice President, Finance - -------------------------------------- and Chief Financial Officer Robert C. Larry (Principal Financial Officer) /s/ Robert Lewon Director - -------------------------------------- Robert Lewon /s/ Kevin P. McGuinness Director - -------------------------------------- Kevin P. McGuinness /s/ Gerald E. Morris Director - -------------------------------------- Gerald E. Morris /s/ Amit N. Patel Vice President, Finance and Controller - -------------------------------------- (Principal Accounting Officer) Amit N. Patel /s/ Michael W. Tryon President and - -------------------------------------- Chief Operating Officer Michael W. Tryon
40 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 Series A Warrant Agreement, dated June 29, 2001 by and among Metal Management, Inc. and LaSalle Bank National Association, as Warrant Agent (incorporated by reference to Exhibit 4.1 of the Company's Annual Report on Form 10-K for the year ended March 31, 2001). 4.2 Form of Series B Warrant Agreement (incorporated by reference to Exhibit 4.3 of the Company's Annual Report on Form 10-K for the year ended March 31, 2001). 4.3 Form of Series C Warrant Agreement (incorporated by reference to Exhibit 4.4 of the Company's Annual Report on Form 10-K for the year ended March 31, 2001). 4.4 Amended and Restated Credit Agreement, dated as of August 13, 2003, among Metal Management, Inc. and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 4.1 of the Company's Current Report on Form 8-K dated August 11, 2003). 4.5 Amendment No. 1 to Amended and Restated Credit Agreement, dated February 10, 2004 among Metal Management, Inc. and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 4.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2003). 10.1 Metal Management, Inc. Management Equity Incentive Plan (incorporated by reference to Exhibit 4.2 of the Company's Annual Report on Form 10-K for the year ended March 31, 2001). 10.2 Metal Management, Inc. 2002 Incentive Stock Plan (incorporated by reference to Appendix A of the Company's 2002 Proxy Statement). 10.3 Employment Agreement, dated April 1, 2000 between Michael W. Tryon and the Company (incorporated by reference to Exhibit 10.15 of the Company Annual Report on Form 10-K for the year ended March 31, 2000). 10.4 Letter Agreement, dated June 7, 2001 and June 13, 2001 between the Company and Michael W. Tryon reflecting certain modifications to the Employment Agreement of Michael W. Tryon (incorporated by reference to Exhibit 10.12 of the Company's Annual Report on Form 10-K for the year ended March 31, 2001).
41
10.5 Letter Agreement, dated April 21, 2003 between the Company and Michael W. Tryon reflecting certain modifications to the Employment Agreement of Michael W. Tryon (incorporated by reference to Exhibit 10.9 of the Company's Annual Report on Form 10-K for the year ended March 31, 2003). 10.6 Employment Agreement, dated July 1, 2001 between Robert C. Larry and the Company (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002). 10.7 Confidentiality and Standstill Agreement dated September 8, 2003 between the Company and European Metal Recycling Ltd. (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K dated September 8, 2003). 10.8 Employment Agreement, dated January 16, 2004 between Daniel W. Dienst and the Company. 10.9 Separation and Release Agreement, dated January 18, 2004 between Albert A. Cozzi and the Company. 10.10 Separation and Release Agreement, dated January 18, 2004 between Frank J. Cozzi and the Company. 10.11 Form of Outside Director Indemnification Agreement (incorporated by reference to Exhibit 10.8 of the Company's Annual Report on Form 10-K for the year ended March 31, 2001). 21.1 Subsidiaries of the Company. 23.1 Consent of Independent Accountants. 31.1 Certification of Daniel W. Dienst pursuant to Section 240.13a-14 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 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 pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Robert C. Larry pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
42 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Metal Management, Inc.: In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) on page 39 present fairly, in all material respects, the financial position of Metal Management, Inc. and its subsidiaries (the "Reorganized Company") at March 31, 2004 and 2003, and the results of their operations and their cash flows for each of the two years in the period ended March 31, 2004 and the nine months ended March 31, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the Reorganized Company financial statement schedule as of March 31, 2004, 2003 and 2002, and for each of the two years in the period ended March 31, 2004 and the nine months ended March 31, 2002 listed in the index under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related Reorganized Company consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Reorganized Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1, the consolidated financial statements of the Reorganized Company have been prepared in conformity with fresh start accounting provisions of Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," and accordingly are not comparable with any prior periods presented. As discussed in Note 10, the consolidated balance sheet has been restated at March 31, 2003 to classify borrowings under the Credit Agreement as a short-term liability. PricewaterhouseCoopers LLP Chicago, Illinois June 11, 2004 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Metal Management, Inc.: In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) on page 39 present fairly, in all material respects, the results of operations and cash flows of Metal Management, Inc. and its subsidiaries (the "Predecessor Company") for the three months ended June 30, 2001 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the Predecessor Company financial statement schedule for the three months ended June 30, 2001 listed in the index under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related Predecessor Company consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Predecessor Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1, the Predecessor Company filed for relief under Chapter 11 of the United States Bankruptcy Code in November 2000 and emerged from bankruptcy proceedings on June 29, 2001. Upon emergence from bankruptcy, the consolidated financial statements of the Predecessor Company are presented in accordance with Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code." As discussed in Note 2, the Predecessor Company changed its method of accounting for derivatives effective April 1, 2001. PricewaterhouseCoopers LLP Chicago, Illinois June 5, 2002 F-2 METAL MANAGEMENT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
| PREDECESSOR REORGANIZED COMPANY | COMPANY ----------------------------------- | ----------- NINE | THREE MONTHS | MONTHS YEAR ENDED YEAR ENDED ENDED | ENDED MARCH 31, MARCH 31, MARCH 31, | JUNE 30, 2004 2003 2002 | 2001 ---------- ---------- --------- | --------- | NET SALES $1,083,413 $770,009 $464,795 | $ 166,268 Cost of sales 923,000 664,868 409,180 | 149,216 ---------- -------- -------- | --------- Gross profit 160,413 105,141 55,615 | 17,052 | Operating expenses: | General and administrative 59,991 50,509 34,237 | 11,686 Depreciation and amortization 18,193 17,533 13,673 | 4,718 Stock-based compensation expense 972 35 0 | 0 Non-cash and non-recurring expense (income) (Note 5) 6,198 (695) 3,944 | 1,941 ---------- -------- -------- | --------- Total operating expenses 85,354 67,382 51,854 | 18,345 ---------- -------- -------- | --------- Operating income (loss) 75,059 37,759 3,761 | (1,293) Income (loss) from joint ventures (Note 4) 8,300 3,113 (224) | (56) Interest expense (6,925) (11,129) (9,450) | (5,169) Interest and other income (expense), net (902) 2,934 287 | 111 (Loss) gain on debt extinguishment (363) 607 0 | 0 ---------- -------- -------- | --------- Income (loss) before reorganization items, income taxes | and cumulative effect of change in accounting principle 75,169 33,284 (5,626) | (6,407) Reorganization items (Note 3) 0 0 457 | (135,364) ---------- -------- -------- | --------- Income (loss) before income taxes and cumulative effect | of change in accounting principle 75,169 33,284 (6,083) | 128,957 Provision for income taxes (Note 11) 23,780 12,783 0 | 0 ---------- -------- -------- | --------- Income (loss) before cumulative effect of change in | accounting principle 51,389 20,501 (6,083) | 128,957 Cumulative effect of change in accounting principle | (Note 2) 0 0 0 | (358) ---------- -------- -------- | --------- NET INCOME (LOSS) $ 51,389 $ 20,501 $ (6,083) | $ 128,599 ========== ======== ======== | ========= | BASIC EARNINGS (LOSS) PER SHARE: | Income (loss) before cumulative effect of change in | accounting principle $ 2.42 $ 1.01 $ (0.30) | $ 2.09 Cumulative effect of change in accounting principle 0.00 0.00 0.00 | (0.01) ---------- -------- -------- | --------- Basic earnings (loss) per share $ 2.42 $ 1.01 $ (0.30) | $ 2.08 ========== ======== ======== | ========= | DILUTED EARNINGS (LOSS) PER SHARE: | Income (loss) before cumulative effect of change in | accounting principle $ 2.27 $ 0.99 $ (0.30) | $ 2.09 Cumulative effect of change in accounting principle 0.00 0.00 0.00 | (0.01) ---------- -------- -------- | --------- Diluted earnings (loss) per share $ 2.27 $ 0.99 $ (0.30) | $ 2.08 ========== ======== ======== | ========= Weighted average common shares outstanding 21,243 20,323 20,239 | 61,731 ========== ======== ======== | ========= Weighted average diluted common shares outstanding 22,653 20,741 20,239 | 61,731 ========== ======== ======== | =========
See accompanying notes to consolidated financial statements F-3 METAL MANAGEMENT, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except par value amounts)
REORGANIZED COMPANY --------------------- MARCH 31, --------------------- 2004 2003 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 1,155 $ 869 Accounts receivable, net 146,427 66,746 Inventories (Note 7) 80,128 49,319 Deferred income taxes (Note 11) 4,201 0 Prepaid expenses and other assets 3,216 7,167 -------- -------- TOTAL CURRENT ASSETS 235,127 124,101 Property and equipment, net (Note 8) 114,708 114,684 Goodwill and other intangibles, net (Notes 1 and 9) 2,690 5,809 Deferred financing costs, net 3,001 1,290 Deferred income taxes (Note 11) 39,772 0 Other assets 11,118 2,767 -------- -------- TOTAL ASSETS $406,416 $248,651 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt (Restated - Note 10) $ 471 $ 57,543 Accounts payable 128,552 57,195 Other accrued liabilities (Note 7) 25,364 19,054 -------- -------- TOTAL CURRENT LIABILITIES 154,387 133,792 Long-term debt, less current portion (Restated - Note 10) 43,826 32,067 Other liabilities 5,364 4,510 -------- -------- TOTAL LONG-TERM LIABILITIES 49,190 36,577 Commitments and contingencies (Note 13) Stockholders' equity (Note 14): Preferred stock, $.01 par value; $1,000 stated value; 2,000 shares authorized; none issued and outstanding at March 31, 2004 and 2003 0 0 New common equity - issuable 0 98 Common stock, $.01 par value, 50,000 shares authorized; 23,355 and 20,305 shares issued and outstanding at March 31, 2004 and 2003, respectively 234 203 Warrants 427 423 Additional paid-in capital 146,969 65,352 Deferred compensation (8,295) 0 Accumulated other comprehensive loss (2,303) (2,212) Retained earnings 65,807 14,418 -------- -------- TOTAL STOCKHOLDERS' EQUITY 202,839 78,282 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $406,416 $248,651 ======== ========
See accompanying notes to consolidated financial statements F-4 METAL MANAGEMENT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
| PREDECESSOR REORGANIZED COMPANY | COMPANY --------------------------------------- | ------------ NINE | THREE YEAR ENDED YEAR ENDED MONTHS ENDED | MONTHS ENDED MARCH 31, MARCH 31, MARCH 31, | JUNE 30, 2004 2003 2002 | 2001 ---------- ---------- ------------ | ------------ | CASH FLOWS FROM OPERATING ACTIVITIES: | Net income (loss) $ 51,389 $ 20,501 $ (6,083) | $ 128,599 Adjustments to reconcile net income (loss) to cash flows | from operating activities: | Depreciation and amortization 18,193 17,533 13,673 | 4,718 (Gain) loss on sale of property and equipment 886 (2,368) 185 | (117) Non-cash and non-recurring expense (income) 607 (695) 3,944 | 1,941 Provision for uncollectible receivables 1,186 365 2,035 | 1,058 Amortization of deferred compensation 972 35 0 | 0 Amortization of debt issuance costs and bond discount 1,280 2,185 894 | 1,359 (Income) loss from joint ventures (8,300) (3,113) 224 | 56 Deferred income taxes 21,310 12,197 0 | 0 Non-cash reorganization items 0 0 0 | (142,242) (Gain) loss on debt extinguishment 363 (607) 0 | 0 Cumulative effect of change in accounting principle 0 0 0 | 358 Other 567 149 (266) | (176) Changes in assets and liabilities, net of acquisitions: | Accounts and other receivables (80,831) (4,970) 8,681 | 5,141 Inventories (30,809) (12,038) 4,240 | (1,749) Accounts payable 71,357 14,272 (7,927) | 9,200 Other 6,702 2,847 (420) | 3,856 ----------- -------- -------- | --------- Net cash provided by operating activities 54,872 46,293 19,180 | 12,002 | CASH FLOWS FROM INVESTING ACTIVITIES: | Purchases of property and equipment (14,995) (8,483) (3,295) | (1,392) Acquisitions, net of cash acquired (1,071) (3,300) 0 | 0 Proceeds from sale of property and equipment 624 10,625 520 | 1,141 Proceeds from the collection of notes receivable 0 1,504 0 | 0 Investments in joint ventures (138) (180) (104) | (128) Other 0 75 0 | 0 ----------- -------- -------- | --------- Net cash provided by (used in) investing activities (15,580) 241 (2,879) | (379) | CASH FLOWS FROM FINANCING ACTIVITIES: | (Borrowings) Repayments on credit agreement, net 0 (39,829) (14,541) | 111,595 Issuances of long-term debt 1,017,225 309 83 | 32 Repayments of long-term debt (1,031,005) (2,400) (1,585) | (615) Fees paid to issue long-term debt (2,990) (2,760) (469) | (1,339) Repurchase of Junior Secured Notes (31,896) (1,823) 0 | 0 Repayments on debtor-in-possession credit agreement 0 0 0 | (121,666) Proceeds from exercise of stock options and warrants 9,660 0 0 | 0 Other 0 0 (9) | 0 ----------- -------- -------- | --------- Net cash used in financing activities (39,006) (46,503) (16,521) | (11,993) ----------- -------- -------- | --------- Net increase (decrease) in cash and cash equivalents 286 31 (220) | (370) Cash and cash equivalents at beginning of period 869 838 1,058 | 1,428 ----------- -------- -------- | --------- Cash and cash equivalents at end of period $ 1,155 $ 869 $ 838 | $ 1,058 =========== ======== ======== | ========= SUPPLEMENTAL CASH FLOW INFORMATION: | Interest paid $ 6,922 $ 9,169 $ 6,819 | $ 3,905 Taxes paid $ 1,337 $ 587 $ 7 | $ 39
See accompanying notes to consolidated financial statements F-5 METAL MANAGEMENT, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
CONVERTIBLE NEW PREFERRED STOCK COMMON COMMON STOCK ADDITIONAL --------------- EQUITY - ------------ PAID-IN DEFERRED SERIES B SERIES C ISSUABLE SHARES AMOUNT WARRANTS CAPITAL COMPENSATION -------- -------- -------- ------ ------ -------- ---------- ------------ PREDECESSOR COMPANY: BALANCE AT MARCH 31, 2001 $ 815 $ 5,100 $ 0 60,899 $ 542 $40,428 $ 271,622 $ 0 Other 0 0 0 1,740 17 0 (17) 0 Net loss before reorganization adjustments and fresh start adjustments 0 0 0 0 0 0 0 0 Reorganization adjustments (815) (5,100) 65,000 (62,639) (559) (40,428) (271,605) 0 Fresh start adjustments 0 0 0 0 0 0 0 0 ----- ------- -------- ------- ----- -------- --------- ------- - --------------------------------------------------------------------------------------------------------------------------- REORGANIZED COMPANY: BALANCE AT JUNE 30, 2001 0 0 65,000 0 0 0 0 0 Distribution of equity in accordance with the Plan 0 0 (58,730) 18,070 181 414 58,135 0 Conversion of payable into common stock 0 0 0 323 3 0 1,047 0 Other 0 0 0 0 0 0 (9) 0 Net loss 0 0 0 0 0 0 0 0 Other comprehensive loss 0 0 0 0 0 0 0 0 ----- ------- -------- ------- ----- -------- --------- ------- BALANCE AT MARCH 31, 2002 0 0 6,270 18,393 184 414 59,173 0 Distribution of equity in accordance with the Plan 0 0 (6,172) 1,912 19 6 6,147 0 Other 0 0 0 0 0 3 32 0 Net income 0 0 0 0 0 0 0 0 Other comprehensive loss 0 0 0 0 0 0 0 0 ----- ------- -------- ------- ----- -------- --------- ------- BALANCE AT MARCH 31, 2003 0 0 98 20,305 203 423 65,352 0 Distribution of equity in accordance with the Plan 0 0 (98) 4 0 8 90 0 Issuance of restricted stock and options 0 0 0 560 6 0 9,867 (9,865) Exercise of stock options and warrants and related tax benefits 0 0 0 2,486 25 (4) 19,546 0 Reversal of predecessor company valuation allowance (Note 11) 0 0 0 0 0 0 52,114 0 Amortization of deferred compensation 0 0 0 0 0 0 0 1,570 Net income 0 0 0 0 0 0 0 0 Other comprehensive loss 0 0 0 0 0 0 0 0 ----- ------- -------- ------- ----- -------- --------- ------- BALANCE AT MARCH 31, 2004 $ 0 $ 0 $ 0 23,355 $ 234 $ 427 $ 146,969 $(8,295) ===== ======= ======== ======= ===== ======== ========= ======= ACCUMULATED OTHER RETAINED COMPREHENSIVE EARNINGS LOSS (DEFICIT) TOTAL ------------- --------- ----- PREDECESSOR COMPANY: BALANCE AT MARCH 31, 2001 $ (303) $(461,461) $(143,257) Other 0 0 0 Net loss before reorganization adjustments and fresh start adjustments 0 (16,193) (16,193) Reorganization adjustments 0 477,654 224,147 Fresh start adjustments 303 0 303 ------- --------- --------- - --------------------------------- REORGANIZED COMPANY: BALANCE AT JUNE 30, 2001 0 0 65,000 Distribution of equity in accordance with the Plan 0 0 0 Conversion of payable into common stock 0 0 1,050 Other 0 0 (9) Net loss 0 (6,083) (6,083) Other comprehensive loss (471) 0 (471) ------- --------- --------- BALANCE AT MARCH 31, 2002 (471) (6,083) 59,487 Distribution of equity in accordance with the Plan 0 0 0 Other 0 0 35 Net income 0 20,501 20,501 Other comprehensive loss (1,741) 0 (1,741) ------- --------- --------- BALANCE AT MARCH 31, 2003 (2,212) 14,418 78,282 Distribution of equity in accordance with the Plan 0 0 0 Issuance of restricted stock and options 0 0 8 Exercise of stock options and warrants and related tax benefits 0 0 19,567 Reversal of predecessor company valuation allowance (Note 11) 0 0 52,114 Amortization of deferred compensation 0 0 1,570 Net income 0 51,389 51,389 Other comprehensive loss (91) 0 (91) ------- --------- --------- BALANCE AT MARCH 31, 2004 $(2,303) $ 65,807 $ 202,839 ======= ========= =========
See accompanying notes to consolidated financial statements F-6 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - GENERAL 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 13 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. Basis of Presentation The accompanying consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). All significant intercompany accounts, transactions and profits have been eliminated in consolidation. Investments in less than majority-owned companies (principally corporate joint ventures), which engage in ferrous and non-ferrous scrap metal recycling, are accounted for using the equity method. As discussed in Note 3 - Reorganization under Chapter 11 of the Bankruptcy Code, on November 20, 2000, the Company filed voluntary petitions commencing cases under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). On June 29, 2001, the Company emerged from Chapter 11 bankruptcy. On September 17, 2002, a Final Decree Motion was approved by the Bankruptcy Court, which officially closed the Chapter 11 proceedings. Upon emergence from Chapter 11 bankruptcy, the Company adopted fresh-start reporting pursuant to the American Institute of Certified Public Accountants' Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"). Under fresh-start reporting, a reorganization value for the entity was determined by the Company's financial advisor based upon the estimated fair value of the enterprise before considering values allocated to debt to be settled in the reorganization. The reorganization value was allocated to the fair values of the Company's assets and liabilities. The portion of the reorganization value which could not be attributed to specific tangible or identified intangible assets was $15.5 million. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangibles," this amount was reported as "Goodwill" in the consolidated financial statements (See Note 9 - Business Acquisitions, Goodwill and Other Intangible Assets). As a result of fresh-start reporting, consolidated financial statements for the Company for the periods subsequent to June 30, 2001, following the effective date of the Company's plan of reorganization in the bankruptcy proceedings, are referred to as the "Reorganized Company" and are not comparable to those for the periods prior to June 30, 2001, which are referred to as the "Predecessor Company." A black line has been drawn in the audited consolidated financial statements to distinguish, for accounting purposes, the periods associated with the Reorganized Company and the Predecessor Company. Aside from the effects of fresh-start reporting and new accounting pronouncements adopted since the effective date of the plan of reorganization, the Reorganized Company follows the same accounting policies as the Predecessor Company. F-7 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Reclassifications Certain prior year financial information has been reclassified to conform to the current year presentation. Such reclassifications had no material effect on the previously reported consolidated balance sheet, results of operations or cash flows of the Company. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Uses of estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. 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. Shipping and handling revenues and costs The Company classifies shipping and handling charges billed to customers as revenue. The Company classifies shipping and handling costs incurred as a component of cost of sales. Derivatives Effective April 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivatives and Hedges" (as amended). SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at fair value. The Company previously utilized futures and forward contracts to hedge its net position in certain non-ferrous metals. As a result of adopting SFAS No. 133, the Company marked its outstanding futures and forwards contracts to market at April 1, 2001 and recognized the changes in fair values of its futures and forwards contracts in the statement of operations. The cumulative effect of adopting SFAS No. 133 resulted in an after-tax reduction in net earnings of $0.4 million recorded as of April 1, 2001. The Company currently does not utilize any futures or forward contracts. Cash and cash equivalents The Company classifies as cash equivalents all highly liquid investments with original maturities of three months or less. The carrying amount of cash and cash equivalents approximates fair value. Accounts receivable Accounts receivable represents amounts due from customers on product, broker and other sales. The carrying amount of accounts receivable approximates fair value. The Company's 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. Allowance for uncollectible accounts were approximately $1.7 million and $1.0 million at March 31, 2004 and 2003, respectively. F-8 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Property and equipment Property and equipment are recorded at cost less accumulated depreciation. Major rebuilds and improvements are capitalized, while repairs and maintenance costs are expensed as incurred. Depreciation is determined for financial reporting purposes using the straight-line method over the following estimated useful lives: 10 to 40 years for buildings and improvements, 3 to 15 years for operating machinery and equipment, 2 to 10 years for furniture, fixtures and computer equipment and 3 to 10 years for automobiles and trucks. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is recorded in the statement of operations. Goodwill and Other Intangible Assets Goodwill includes the excess reorganization value recognized in fresh-start reporting and the excess of the acquisition cost of an acquired entity over the fair value of identifiable net assets acquired. Pursuant to the provisions of SFAS No. 142, goodwill is no longer amortized, but is subject to an impairment test annually, or earlier if certain events occur indicating that the carrying value of goodwill may be impaired. Other intangible assets consist of customer lists and non-competition agreements. The Company amortizes these intangibles on a straight-line basis over the estimated useful life or the term of the related agreements. Long-lived assets The Company periodically evaluates the recoverability of its long-lived assets (including other intangible assets) in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Such assets are evaluated for impairment whenever events or circumstances indicate that the carrying amount of such assets (or group of assets) may not be recoverable. Impairment is determined to exist if the estimated future undiscounted cash flows are less than the carrying value of such asset. If an impairment exists, the asset is written down to its estimated fair value. Deferred financing costs, net Deferred financing costs represent costs incurred in connection with the placement of long-term debt and are capitalized and amortized to interest expense using the straight-line method over the term of the long-term debt. Deferred financing costs expensed for the years ended March 31, 2004 and 2003, the nine months ended March 31, 2002, and the three months ended June 30, 2001 was $1.3 million, $2.2 million, $0.9 million and $1.2 million, respectively. The deferred financing cost accumulated amortization at March 31, 2004 and 2003 was $4.4 million and $3.1 million, respectively. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Concentration of credit risk Financial instruments that potentially subject the Company to significant concentrations of credit risk are primarily trade accounts receivable. The Company sells its products primarily to scrap metal brokers and steel mills located in the U.S. Generally, the Company does not require collateral or other security to support customer receivables. Sales to customers outside of the U.S. are settled by payment in U.S. dollars and generally are secured by letters of credit, except when shipping by railcar or barge to Mexico. F-9 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company historically had not experienced material losses from the noncollection of accounts receivables. However, from April 2001 to March 2002, weak market conditions in the steel sector led to bankruptcy filings by certain of the Company's customers including, but not limited to, Northwestern Steel and Wire Company and Special Metals Corporation. These bankruptcies resulted in uncollected receivables of approximately $3.1 million which were recorded in the three months ended June 30, 2001 and the nine months ended March 31, 2002. For the year ended March 31, 2004, the ten largest customers of the Company represented approximately 44% of consolidated net sales. These customers comprised approximately 52% of accounts receivable at March 31, 2004. Sales during the year ended March 31, 2004 to The David J. Joseph Company represented approximately 19% of consolidated net sales. For the year ended March 31, 2004, export sales represented approximately 29% of consolidated net sales. At March 31, 2004, receivables from foreign customers represented approximately 10% of consolidated accounts receivable. Comprehensive income (loss) Comprehensive income (loss), which is reported on the consolidated statement of stockholders' equity, consists of net income (loss) and other gains/losses affecting stockholders' equity that, under generally accepted accounting principles, are excluded from net income (loss). Earnings (loss) per common share Basic earnings (loss) per common share ("EPS") is computed by dividing net income (loss) by the weighted average common shares outstanding. Diluted EPS reflects the potential dilution that could occur from the exercise of stock options and warrants or the conversion of debt and preferred stock into common stock. Fair value of financial instruments The fair values of financial instruments including other assets, accounts payable, and current portion of long-term debt approximate the related carrying value because of the relatively short maturity of these instruments. The fair value of the Credit Agreement approximates its carrying value as the facility bears a floating rate of interest based on the prime rate. The fair market value of the Junior Secured Notes, based on market quotes, was $23.6 million (carrying value of $31.5 million) at March 31, 2003. The carrying value of the Company's other borrowings approximates fair value at March 31, 2004 and 2003. Stock-based compensation The Company accounts for stock-based compensation in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," 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 to stock-based compensation expense. F-10 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table illustrates the pro forma effects on net income (loss) and earnings (loss) 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):
| PREDECESSOR REORGANIZED COMPANY | COMPANY ----------------------------------- | ------------ YEAR YEAR NINE MONTHS | THREE MONTHS ENDED ENDED ENDED | ENDED MARCH 31, MARCH 31, MARCH 31, | JUNE 30, 2004 2003 2002 | 2001 --------- --------- ----------- | ------------ | Net income (loss), as reported $ 51,389 $20,501 $(6,083) | $128,599 Add: Stock-based compensation | expense included in reported net | income, | net of related tax effects 1,079 22 0 | 0 Deduct: Total stock-based compensation | expense determined under the fair | value method for all awards, net of | related | tax effects (4,253) (956) (962) | (328) --------- ------- ------- | -------- | PRO FORMA NET INCOME (LOSS) $ 48,215 $19,567 $(7,045) | $128,271 ========= ======= ======= | ======== Earnings per share: | Basic -- as reported $ 2.42 $ 1.01 $ (0.30) | $ 2.08 ========= ======= ======= | ======== Basic -- pro forma $ 2.27 $ 0.96 $ (0.35) | $ 2.08 ========= ======= ======= | ======== | Diluted -- as reported $ 2.27 $ 0.99 $ (0.30) | $ 2.08 ========= ======= ======= | ======== Diluted -- pro forma $ 2.11 $ 0.94 $ (0.35) | $ 2.08 ========= ======= ======= | ======== ASSUMPTIONS: | Expected life (years) 4 3 3 | 3 Expected volatility 106.7% 124.2% 269.2% | 89.8% Dividend yield 0.00% 0.00% 0.00% | 0.00% Risk-free interest rate 2.28% 1.93% 4.31% | 4.48% Weighted-average fair value per option/ | warrant granted $ 7.91 $ 1.21 $ 0.60 | n/a
The fair value of each option and warrant grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option valuation model was originally developed for use in estimating the fair value of traded options, which have different characteristics than the Company's employee stock options and warrants. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. As a result, it is management's opinion that the Black-Scholes model may not necessarily provide a reliable single measure of the fair value of employee stock options and warrants. Segment reporting The Company currently operates in one reportable segment, the scrap metal recycling industry, as determined in accordance with SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." F-11 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Self-insured reserves The Company is self-insured for medical claims for most of its employees. Since April 1, 2003, the Company has also been self-insured for workers' compensation claims that involve a loss of less than $250,000 per claim. The Company's exposure to claims is protected by stop-loss insurance policies. The Company records a reserve for reported but unpaid claims and the estimated cost of incurred but not reported ("IBNR") claims. IBNR reserves are based on either a lag estimate (for medical claims) or on actuarial assumptions (for workers' compensation claims). New accounting pronouncements In January 2003, the Financial Accounting Standards Board (the "FASB") issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). In December 2003, the FASB issued FIN 46-R "Consolidation of Variable interest Entities" ("FIN 46-R") (revised December 2003), which replaces FIN 46. FIN 46-R incorporates certain modifications to FIN 46 adopted by the FASB subsequent to the issuance of FIN 46, including modifications to the scope of FIN 46. Additionally, FIN 46-R also incorporates much of the guidance previously issued in the form of FASB Staff Positions. For all special purposes entities ("SPEs") and variable interest entities ("VIEs") created prior to February 1, 2003, public entities must apply either the provisions of FIN 46, or early adoption of the provisions of FIN 46-R at the end of the first interim or annual reporting period after December 15, 2003. The adoption of this interpretation had no impact on the Company's consolidated financial statements. In April 2003, the FASB issued Statement SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS No. 133, to provide clarification on the financial accounting and reporting of derivative instruments and hedging activities and requires that contracts with similar characteristics be accounted for on a comparable basis. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of this statement had no impact on the Company's consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003 and to all other instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. The adoption of this statement had no impact on the Company's consolidated financial statements. In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This revised statement retains the requirements of the original SFAS No. 132 but requires additional disclosures concerning the economic resources and obligations related to pension plans and other postretirement benefits. This revised statement is effective for fiscal years ending after December 15, 2003. The Company has revised its disclosures to meet the requirements under this revised standard. In December 2003, the SEC issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," which supercedes SAB No. 101, "Revenue Recognition in Financial Statements." SAB No. 104 rescinds accounting guidance in SAB No. 101 related to multiple-element revenue arrangements as this guidance has been superceded as a result of the issuance of Emerging Issues Task Force ("EITF") Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." The adoption of SAB No. 104 had no impact on the Company's consolidated financial statements. F-12 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3 - REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE From November 20, 2000 until June 30, 2001, the Company operated its business as a debtor-in-possession. These bankruptcy proceedings are referred to as the "Chapter 11 proceedings" herein. Plan of reorganization In furtherance of an agreement reached between the Company and the holders of a significant percentage of its pre-petition debt prior to the initiation of the Chapter 11 proceedings, the Company filed a plan of reorganization (the "Plan") pursuant to Chapter 11 of the Bankruptcy Code on May 4, 2001. The Bankruptcy Court confirmed the Plan which became effective on June 29, 2001 (the "Effective Date"). Reorganization items Reorganization items directly associated with the Chapter 11 proceedings for the nine months ended March 31, 2002 and the three months ended June 30, 2001 are as follows (in thousands):
REORGANIZED | PREDECESSOR COMPANY | COMPANY -------------- | ------------- NINE MONTHS | THREE MONTHS ENDED | ENDED MARCH 31, 2002 | JUNE 30, 2001 -------------- | ------------- | Professional fees $151 | $ 6,838 Liability for rejected contracts and | settlements 154 | 2,445 Debt extinguishment 0 | (145,711) Fresh-start adjustments 0 | 919 Other 152 | 145 ---- | --------- $457 | $(135,364) ==== | =========
The consolidated statement of operations of the Predecessor Company for the three months ended June 30, 2001 reflect fresh start reporting adjustments of $0.9 million and a gain of $145.7 million related to the discharge of indebtedness in accordance with the Plan. During the Chapter 11 proceedings, the Company and the Official Committee of Unsecured Creditors each engaged financial advisors. As a result of the consummation of the Plan, both financial advisors were entitled to restructuring success fees. The restructuring success fees paid to the Company's financial advisor aggregated $2.6 million. The financial advisor for the Official Committee of Unsecured Creditors was CIBC World Markets Corp. ("CIBC"), a company in which Daniel W. Dienst, the Chairman of the Board and Chief Executive Officer of the Company, was previously a managing director. Fees paid to CIBC during the three months ended June 30, 2001 were $2.6 million, including restructuring success fees of $2.1 million. NOTE 4 - EQUITY METHOD INVESTMENTS The Company has investments in two joint ventures which are engaged in the scrap metals recycling business. One of its joint venture investments is Southern Recycling, L.L.C. ("Southern"), one of the largest scrap metals recyclers in the Gulf Coast region, in which the Company has a 28.5% interest. Both of these investments are accounted for using the equity method. At March 31, 2004 and 2003, the equity investment included in other assets on the Company's consolidated balance sheet was $10.6 million and $2.2 million, respectively. F-13 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table represents summarized financial information for Southern at March 31, 2004 and for the year then ended (in thousands): Net sales $200,470 Gross profit 43,507 Net income 29,686 Current assets $ 56,535 Noncurrent assets 17,066 Current liabilities 22,578 Noncurrent liabilities 8,707
NOTE 5 - NON-CASH AND NON-RECURRING EXPENSE (INCOME) During the years ended March 31, 2004 and 2003, the nine months ended March 31, 2002 and the three months ended June 30, 2001, the Company recorded the following non-cash and non-recurring expense (income) and related reserve activity (in thousands):
SEVERANCE, FACILITY ASSET CLOSURE AND IMPAIRMENT OTHER AND DIVESTITURE CHARGES GAINS/LOSSES TOTAL ----------- --------------- ----- PREDECESSOR COMPANY: - ----------------------- Reserve balances at March 31, 2001 $ 185 $ 0 $ 185 Charge to income 0 1,941 1,941 Cash payments (148) 0 (148) Non-cash application 0 (1,941) (1,941) - -------------------------------------------------------------------------- REORGANIZED COMPANY: - ------------------------ Reserve balances at June 30, 2001 37 0 37 Charge to income 0 3,944 3,944 Cash payments (37) 0 (37) Non-cash application 0 (3,944) (3,944) ------- ------- ------- Reserve balances at March 31, 2002 0 0 0 Credit to income 0 (695) (695) Non-cash application 0 695 695 ------- ------- ------- Reserve balances at March 31, 2003 0 0 0 Charge to income 6,198 0 6,198 Cash payments (4,020) 0 (4,020) Non-cash application (607) 0 (607) ------- ------- ------- Reserve balances at March 31, 2004 $ 1,571 $ 0 $ 1,571 ======= ======= =======
F-14 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SEVERANCE, FACILITY CLOSURE AND OTHER CHARGES AND ASSET IMPAIRMENT Three months ended June 30, 2001 activity During the three months ended June 30, 2001, the Company recognized a $1.9 million asset impairment charge related to excess equipment to be disposed of or otherwise abandoned. Nine months ended March 31, 2002 activity During December 2001, the Company completed an evaluation of the economic viability of its Macleod operations in California considering the current market conditions, liquidity needs and the outlook for a return to historical operating levels. As a result, management implemented a plan to dispose of this facility and commenced a complete wind-down of its operations. The Company recognized a $3.1 million asset impairment charge related to this decision. During March 2002, the Company recognized a $0.8 million asset impairment charge related to property and equipment. The impairment charge included adjustments to the carrying value of property and equipment previously classified as held-for-sale, as estimates of their fair values were revised based on current market conditions, and charges related to additional excess equipment to be disposed of or otherwise abandoned. Year ended March 31, 2003 activity During December 2002, the Company completed its exit from its Macleod operations and generated $0.7 million more proceeds from the sale of assets than originally anticipated. As a result, the Company recognized non-cash and non-recurring income of $0.7 million. Year ended March 31, 2004 activity On January 16, 2004, the Company implemented a management realignment that resulted in the recognition of $6.2 million of non-cash and non-recurring expenses. The management realignment involved the resignation of Albert A. Cozzi as the Company's Chief Executive Officer, Frank J. Cozzi as the Company's Vice-President and President of Metal Management Midwest, Inc. ("MTLM-Midwest") and six other employees. The Company entered into separation and release agreements with Messrs. Albert Cozzi, Frank Cozzi and the other employees that resulted in the payment of employee termination benefits. Certain of the termination benefits are payable over periods up to fifteen months. The non-cash and non-recurring expense also included $0.6 million of expense related to the accelerated vesting of restricted stock held by Mr. Albert Cozzi. F-15 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6 - EARNINGS PER SHARE The following is a reconciliation of the numerator and denominator used in computing EPS (in thousands, except per share amounts):
| PREDECESSOR REORGANIZED COMPANY | COMPANY ----------------------------------- | ------------ YEAR YEAR NINE MONTHS | THREE MONTHS ENDED ENDED ENDED | ENDED MARCH 31, MARCH 31, MARCH 31, | JUNE 30, 2004 2003 2002 | 2001 --------- --------- ----------- | ------------ | NUMERATOR: | Income (loss) before cumulative effect of change in | accounting principle $51,389 $20,501 $(6,083) | $128,957 Elimination of interest expense upon assumed | conversion of note payable, net of tax 0 77 0 | 0 ------- ------- ------- | -------- Net income (loss) $51,389 $20,578 $(6,083) | $128,957 ======= ======= ======= | ======== DENOMINATOR: | Weighted average number of shares outstanding 21,243 20,323 20,239 | 61,731 Assumed conversion of note payable 0 384 0 | 0 Incremental common shares attributable to dilutive | stock options and warrants 1,410 34 0 | 0 ------- ------- ------- | -------- Weighted average number of diluted shares | outstanding 22,653 20,741 20,239 | 61,731 ======= ======= ======= | ======== Basic income (loss) per share $ 2.42 $ 1.01 $ (0.30) | $ 2.09 ======= ======= ======= | ======== Diluted income (loss) per share $ 2.27 $ 0.99 $ (0.30) | $ 2.09 ======= ======= ======= | ========
For the years ended March 31, 2004 and 2003, approximately 0.7 million and 4.1 million, respectively, of the Company's stock options and warrants were excluded from the diluted EPS calculation as the exercise prices of the stock options and warrants were greater than the average market price of the Company's common stock for the period. Due to the net loss for the nine months ended March 31, 2002, the effect of dilutive stock options and warrants and convertible note payable were not included as their effect would have been anti-dilutive. NOTE 7 - OTHER FINANCIAL INFORMATION Inventories Inventories for all periods presented are stated at the lower of cost or market. Cost is determined principally on the average cost method. Inventories consist of the following categories at March 31 (in thousands):
2004 2003 ---- ---- Ferrous metals $50,115 $32,791 Non-ferrous metals 29,809 15,851 Other 204 677 ------- ------- $80,128 $49,319 ======= =======
F-16 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Other accrued liabilities Other accrued liabilities consist of the following at March 31 (in thousands):
2004 2003 ---- ---- Accrued employee compensation and benefits $15,469 $ 9,783 Accrued real and personal property taxes 1,675 1,659 Accrued insurance 2,722 1,059 Accrued income taxes 2,679 1,547 Accrued interest 162 1,483 Other 2,657 3,523 ------- ------- $25,364 $19,054 ======= =======
Comprehensive income (loss) Comprehensive income (loss) was as follows (in thousands):
| PREDECESSOR REORGANIZED COMPANY | COMPANY ------------------------------------ | ------------ YEAR YEAR NINE | THREE ENDED ENDED MONTHS ENDED | MONTHS ENDED MARCH 31, MARCH 31, MARCH 31, | JUNE 30, 2004 2003 2002 | 2001 --------- --------- ------------ | ------------ | Net income (loss) $51,389 $20,501 $(6,083) | $128,599 Adjustment to minimum pension liability (91) (1,741) (471) | 0 ------- ------- ------- | -------- $51,298 $18,760 $(6,554) | $128,599 ======= ======= ======= | ========
Interest and other income (expense), net Significant components of interest and other income (expense) are as follows (in thousands):
| PREDECESSOR REORGANIZED COMPANY | COMPANY ----------------------------------- | ------------ YEAR YEAR NINE MONTHS | THREE MONTHS ENDED ENDED ENDED | ENDED MARCH 31, MARCH 31, MARCH 31, | JUNE 30, 2004 2003 2002 | 2001 --------- --------- ----------- | ------------ | Gain (loss) on disposal of real and personal | property $(886) $2,368 $(185) | $ 0 Interest income 9 180 273 | 92 Other income (25) 386 199 | 19 ----- ------ ----- | ---- $(902) $2,934 $ 287 | $111 ===== ====== ===== | ====
F-17 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 8 - PROPERTY AND EQUIPMENT Property and equipment consists of the following at March 31 (in thousands):
2004 2003 ---- ---- Land and improvements $ 30,989 $ 23,759 Buildings and improvements 20,662 19,180 Operating machinery and equipment 96,284 87,846 Automobiles and trucks 9,376 8,724 Computer equipment and software 2,207 2,227 Furniture, fixture and office equipment 788 773 Construction in progress 446 2,570 -------- -------- 160,752 145,079 Less -- accumulated depreciation (46,044) (30,395) -------- -------- $114,708 $114,684 ======== ========
Depreciation expense was $18.0 million, $17.5 million, $13.7 million and $4.7 million for the years ended March 31, 2004 and 2003, the nine months ended March 31, 2002 and the three months ended June 30, 2001, respectively. At March 31, 2003, $3.5 million of property and equipment was classified as held-for-sale and is reported in prepaid expenses and other assets in the consolidated balance sheet. NOTE 9 - BUSINESS ACQUISITIONS, GOODWILL AND OTHER INTANGIBLE ASSETS In October 2002, the Company acquired certain assets of a scrap metals recycling company. The aggregate purchase consideration was $3.3 million consisting of (i) $3.0 million of cash paid at closing, (ii) contingent consideration of $0.2 million of cash placed in escrow, and payable after the achievement of certain earnout targets measured by tons of material purchased from acquired customer accounts, and (iii) $0.1 million of transaction costs. The contingent consideration was determined to be $0.1 million and was paid in May 2004. The Company obtained independent valuations of the tangible and intangible assets associated with the purchase and allocated the purchase consideration as follows: (i) $0.9 million to the fair value of equipment, (ii) $1.3 million to customer lists (which is being amortized over 15 years), and (iii) $1.1 million to goodwill. In November 2003, the Company acquired certain scrap metal recycling assets of H. Bixon and Sons located in New Haven, Connecticut. The aggregate purchase consideration was $1.1 million consisting of (i) $0.9 million of cash paid at closing, (ii) contingent consideration of up to $0.3 million per year for three years based on the achievement of certain earnout targets, and (iii) $0.2 million of transaction costs. The Company obtained independent valuations on the equipment purchased and allocated the purchase consideration as follows: (i) $1.2 million to the fair value of equipment and (ii) $0.1 million to liabilities. The Company's goodwill and other intangible assets consist of the following at March 31 (in thousands):
2004 2003 ----------------------- ----------------------- GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION -------- ------------ -------- ------------ Intangible assets: Customer lists $1,280 $(128) $1,280 $ (43) Non-compete agreement 240 (70) 240 (10) Pension plan intangible 192 0 6 0 Goodwill 1,176 0 4,336 0 ------ ----- ------ ----- Goodwill and other intangibles, net $2,888 $(198) $5,862 $ (53) ====== ===== ====== =====
F-18 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Total amortization expense for other intangible assets for the years ended March 31, 2004 and 2003 was $145,000 and $53,000, respectively. Amortization expense for other intangible assets for the next five years is as follows (in thousands):
FISCAL YEAR ENDING MARCH 31, - ---------------------------- 2005 $145 2006 145 2007 135 2008 85 2009 85
During the years ended March 31, 2004 and 2003, the Company reduced goodwill by $3.3 million and $12.2 million, respectively, as a result of the utilization of pre-emergence deferred tax assets (see Note 11 - Income Taxes). NOTE 10 - LONG-TERM DEBT Long-term debt consists of the following at March 31 (in thousands):
2004 2003 ---- ---- Credit Agreement: Revolving credit facility, average interest rate of 4.62% in 2004 and 4.97% in 2003 $23,478 $ 57,225 Term loan, 8.50% 17,900 0 12 3/4% Junior Secured Notes 0 31,533 Other debt (including capital leases), due 2004 to 2009, average interest rate of 5.88% in 2004 and 8.26% in 2003, with equipment and real estate generally pledged as collateral 2,919 852 ------- -------- 44,297 89,610 Less -- current portion of long-term debt (Restated *) (471) (57,543) ------- -------- $43,826 $ 32,067 ======= ========
- ------------------------------- * See "Amendment to the Credit Agreement and its Effect on Classification of the Credit Agreement" discussion below. Scheduled maturities of long-term debt are as follows (in thousands):
FISCAL YEAR ENDING MARCH 31, - ---------------------------- 2005 $ 471 2006 18,237 2007 344 2008 23,840 2009 1,343 Thereafter 62 ------- Total $44,297 =======
Credit Agreement On August 13, 2003, the Company entered into an amended and restated credit facility (the "Credit Agreement") with Deutsche Bank Trust Company Americas, as agent for the lenders thereunder. The Credit Agreement provides for maximum borrowings of $130 million and expires on July 1, 2007. $110 million of the F-19 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Credit Agreement is available as a revolving loan and letter of credit facility and $20 million as a term loan. In consideration for the Credit Agreement, the Company paid fees and expenses of approximately $2.6 million. The Credit Agreement is available to fund working capital needs and for general corporate purposes. Borrowings under the Credit Agreement are subject to certain borrowing base limitations based upon a formula equal to 85% of eligible accounts receivable, the lesser of $45 million or 70% of eligible inventory, a fixed asset sublimit of $7.7 million as of March 31, 2004, and a term loan of $20.0 million (the "Term Loan"). The fixed asset sublimit amortizes by $2.5 million on a quarterly basis and under certain other conditions. Upon the full amortization of the fixed asset sublimit, the Term Loan will then amortize by $2.5 million on a quarterly basis and under certain other conditions. A security interest in substantially all of the assets and properties of the Company, including pledges of the capital stock of the Company's subsidiaries, has been granted to the agent for the lenders as collateral against the obligations of the Company under the Credit Agreement. Pursuant to the Credit Agreement, the Company pays a fee of .375% on the undrawn portion of the facility. Borrowings on all outstanding balances under the Credit Agreement (other than the Term Loan) bear interest, at the Company's option, either at the prime rate (as specified by Deutsche Bank AG, New York Branch) plus a margin or LIBOR plus a margin. The margin on prime rate loans range from 0.50% to 1.00% and the margin on LIBOR loans range from 2.50% to 3.00%. The margin is based on the leverage ratio (as defined in the Credit Agreement) achieved by the Company for the preceding quarter. Based on the Company's current leverage ratio, the Company is borrowing at LIBOR plus 2.50%. Borrowings under the Term Loan bear interest at LIBOR plus 6.00% (with a floor on LIBOR equal to 2.50%). Under the Credit Agreement, the Company is required to satisfy specified financial covenants, including a minimum fixed charge coverage ratio of 1.25 to 1.00 and a maximum leverage ratio of 3.00 to 1.00, through December 31, 2004. After December 31, 2004, the maximum leverage ratio is 2.25 to 1.00. Both ratios are tested for the twelve-month period ending each fiscal quarter. The Credit Agreement also provides for maximum capital expenditures of $16 million for the twelve-month period ending each fiscal quarter. The Credit Agreement also contains restrictions which, among other things, limit the Company's ability to (i) incur additional indebtedness; (ii) pay dividends; (iii) enter into transactions with affiliates; (iv) enter into certain asset sales; (v) engage in certain acquisitions, investments, mergers and consolidations; (vi) prepay certain other indebtedness; (vii) create liens and encumbrances on the Company's 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. Amendment to the Credit Agreement and its effect on classification of the Credit Agreement The Credit Agreement was amended on February 10, 2004. The amendment eliminated the requirement that all proceeds from the collection of customer accounts be swept automatically to an account that reduced borrowings under the Credit Agreement from and after the closing date of the Credit Agreement, provided the Company satisfies certain conditions as specified in the Credit Agreement. Pursuant to the amendment, the Company now controls all collections through its lock-box accounts. As a result of the amendment, and the expectation that the Company will satisfy the conditions specified in the Credit Agreement, the Company classifies the amounts outstanding under the Credit Agreement as a long-term obligation as of March 31, F-20 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2004. The Credit Agreement, which was entered into by the Company on August 13, 2003, matures on July 1, 2007 subject to the terms and conditions of the Credit Agreement. Prior to the amendment, the Credit Agreement previously required the Company to remit all collections received into its lock-box accounts into an account that would automatically reduce the borrowings under the Credit Agreement. Recently, the Company determined that the Credit Agreement contains provisions that are deemed to be subjective acceleration clauses which provide the lenders with an ability to restrict future borrowings under the Credit Agreement. In accordance with EITF Issue No. 95-22, "Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements That Include both a Subjective Acceleration Clause and a Lock-Box Arrangement," the existence of the lock-box arrangement and subjective acceleration clauses requires the classification of the Credit Agreement as a current liability for dates preceding the amendment. The Company's prior credit agreement, which was repaid in its entirety on August 13, 2003, had similar lock-box arrangements and subjective acceleration clauses. Accordingly, the Company has restated through reclassification its March 31, 2003 balance sheet to properly classify the amounts outstanding under that prior credit agreement as a current liability. There were no other changes to the balance sheet and no changes to the results of operations. The reclassification of amounts owing under the Company's prior credit agreement (which was repaid on August 13, 2003) to a short-term liability at March 31, 2003 does not affect the Company's operating results, cash flows or liquidity. Debt issuance In August 2003, the Company exercised a purchase option for land on which it operates a scrap metals recycling facility in Houston, Texas. The land purchase closed on January 21, 2004 for a purchase price of approximately $4.0 million. The Company financed $2.5 million of the purchase price from a promissory note which bears interest at 5.50% and is due on January 1, 2009. Debt extinguishment On April 1, 2003, the Company adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement requires the classification of gains and losses from extinguishment of debt as a component of income from operations. The Company previously recorded gains and losses from extinguishments of debt as an extraordinary item, net of income taxes. During the year ended March 31, 2003, the Company repurchased $2.4 million par amount of Junior Secured Notes and recognized an extraordinary gain. The Company reclassified $607,000 ($359,000 net of tax) from extraordinary gain on extinguishment of debt to gain on debt extinguishment. On August 14, 2003, the Company purchased approximately $30.5 million par amount of Junior Secured Notes at a price of 101% of the principal amount, plus accrued and unpaid interest. On September 18, 2003, the Company redeemed the remaining $1.0 million par amount of Junior Secured Notes at a price of 100% of the principal amount, plus accrued and unpaid interest. The repurchase and redemption of the Junior Secured Notes resulted in the recognition of a $0.4 million loss on debt extinguishment during the year ended March 31, 2004. The Company used availability under the Credit Agreement to fund the repurchase and redemption of the Junior Secured Notes. The Junior Secured Notes were cancelled following the redemption of the remaining notes on September 18, 2003. F-21 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 11 - INCOME TAXES The provision for federal and state income taxes is as follows (in thousands):
| PREDECESSOR REORGANIZED COMPANY | COMPANY ------------------------------------ | ------------ YEAR YEAR NINE | THREE ENDED ENDED MONTHS ENDED | MONTHS ENDED MARCH 31, MARCH 31, MARCH 31, | JUNE 30, 2004 2003 2002 | 2001 --------- --------- ------------ | ------------ | Federal: | Current $ 683 $ 363 $0 | $0 Deferred 20,648 10,452 0 | 0 ------- ------- -- | -- 21,331 10,815 0 | 0 ------- ------- -- | -- State: | Current $ 872 $ 223 $0 | $0 Deferred 1,577 1,745 0 | 0 ------- ------- -- | -- 2,449 1,968 0 | 0 ------- ------- -- | -- Total tax provision $23,780 $12,783 $0 | $0 ======= ======= == | ==
The components of deferred tax assets and liabilities at March 31, related to the following (in thousands):
2004 2003 ---- ---- Deferred tax assets: Net operating loss carryforward $ 29,389 $ 41,274 Goodwill and other intangibles 31,998 37,380 Depreciation 0 1,435 Employee benefit accruals 1,495 1,222 AMT credit 945 363 Other 2,855 2,151 -------- -------- 66,682 83,825 -------- -------- Deferred tax liabilities: Depreciation (19,877) (24,392) Joint ventures (1,316) (250) -------- -------- (21,193) (24,642) -------- -------- Net deferred tax asset before valuation allowance 45,489 59,183 Valuation allowance (1,516) (59,183) -------- -------- Net deferred tax asset $ 43,973 $ 0 ======== ========
Upon emergence from bankruptcy in June 2001, the Company recorded a full valuation allowance against the emergence date net deferred tax assets, including net operating loss ("NOL") carryforwards, due to the uncertainty regarding their ultimate realization. During the three months ended December 31, 2003, the Company filed its tax return for the year ended March 31, 2003, recorded the final effects of post and pre-emergence tax positions and updated its forecasts of future operations. The updated forecasts took into consideration current market conditions and the eight consecutive quarters of profitable operations through December 2003. Based on these factors, the Company reversed most of the valuation allowance recorded against the emergence date net deferred tax assets because it believed it is more likely than not that these deferred tax assets will be realized. Significant judgment is required in these evaluations, and differences in F-22 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) future results from the Company's estimates could result in material differences in the realization of these assets. In accordance with SFAS No. 109, "Accounting for Income Taxes," the reversal of the emergence date valuation allowance reduced the excess reorganization value recorded in fresh-start reporting to zero and the remainder was recorded as an increase to additional paid-in capital. As of March 31, 2004, the Company has a $1.5 million valuation allowance associated with certain state NOL carryforwards due to either their short expiration periods or the expectation that more likely than not these benefits will not be realized. The Company's ability to utilize NOL carryforwards could become subject to annual limitations under Section 382 of the Internal Revenue Code if a change of control occurs, as defined by the Internal Revenue Code, and could result in increased income tax payment obligations. During the year ended March 31, 2004, the Company also recorded a tax benefit of $9.9 million, related to the exercise of stock options and warrants, as an increase to additional paid-in capital. The tax benefits from the exercise of stock options and warrants resulted in a lower utilization of NOL carryforwards, but had no impact on the effective income tax rate. The reconciliation of the federal income tax rate to the Company's effective tax rate is as follows:
| PREDECESSOR REORGANIZED COMPANY | COMPANY ------------------------------------ | ------------ YEAR YEAR NINE | THREE ENDED ENDED MONTHS ENDED | MONTHS ENDED MARCH 31, MARCH 31, MARCH 31, | JUNE 30, 2004 2003 2002 | 2001 --------- --------- ------------ | ------------ | Statutory federal income tax rate 35.0% 35.0% (35.0)% | 35.0% State income taxes, net of federal benefit 3.2 4.5 (3.9) | 3.9 Change in valuation allowance -- (0.6) 37.3 | (21.5) Export sales benefit (3.8) (1.1) -- | -- Loss on sale of capital stock (0.6) -- -- | -- Non-taxable cancellation of indebtedness income -- -- -- | (19.4) Non-deductible reorganization costs -- -- -- | 2.0 Other (2.2) 0.6 1.6 | 0.0 ---- ---- ----- | ----- Effective income tax rate 31.6% 38.4% 0.0% | 0.0% ==== ==== ===== | =====
NOTE 12 - EMPLOYEE BENEFIT PLANS 401(k) plan The Company offers a 401(k) plan covering substantially all employees. For non-union employees, the Company provides a matching contribution equal to 25% of the employee's pre-tax contribution, up to 6% of the employee's compensation. For employees covered under collective bargaining agreements, Company matching contributions are made in accordance with each respective collective bargaining agreement. Forfeitures of unvested Company contributions are used to reduce future Company matching contributions. The Company may also make a discretionary profit sharing contribution to the 401(k) plan. Matching contributions made by the Company amounted to $0.3 million for both the years ended March 31, 2004 and 2003, and $0.2 million for the nine months ended March 31, 2002. No discretionary profit sharing contributions have been made into the 401(k) plan. Pension plans The Company sponsors three defined benefit pension plans for employees at certain of its subsidiaries. As of March 31, 2000, the Company permanently eliminated benefit accruals for future service for non-union employees covered under its pension plans. For union employees, benefits under the pension plans 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. F-23 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth the pension costs under the pension plans for the years ended March 31 (in thousands):
2004 2003 2002 ---- ---- ---- Service cost $ 116 $ 88 $ 68 Interest cost 695 669 527 Expected return on plan assets (528) (666) (542) Amortization of prior service cost 94 0 0 Recognized net actuarial loss 121 0 0 ----- ----- ----- Net periodic benefit cost $ 498 $ 91 $ 53 ===== ===== =====
The components of the change in benefit obligation of the pension plans are as follows at March 31 (in thousands):
2004 2003 ---- ---- Benefit obligation at beginning of year $10,298 $ 9,702 Service cost 116 88 Interest cost 695 669 Plan amendments 281 6 Benefits paid (887) (648) Actuarial loss 744 481 ------- ------- Benefit obligation at end of year $11,247 $10,298 ======= =======
The reconciliation of the beginning and ending balances of the fair value of the assets of the pension plans are as follows at March 31 (in thousands):
2004 2003 ---- ---- Fair value of plan assets at beginning of year $6,409 $7,518 Actual gain (loss) on plan assets 1,082 (882) Contributions 673 421 Benefits paid (887) (648) ------ ------ Fair value of plan assets at end of year $7,277 $6,409 ====== ======
The funded status of the pension plans are as follows at March 31 (in thousands):
2004 2003 ---- ---- Funded status $(3,970) $(3,889) Unrecognized prior service cost 192 6 Unrecognized net loss 2,781 2,575 ------- ------- Net amount recognized $ (997) $(1,308) ======= =======
Amounts recognized in the consolidated balance sheet consist of the following at March 31 (in thousands):
2004 2003 ---- ---- Intangible asset $ 192 $ 6 Accrued benefit liability (3,492) (3,526) Accumulated other comprehensive loss 2,303 2,212 ------- ------- Net amount recognized $ (997) $(1,308) ======= =======
F-24 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Weighted average assumptions used in the pension plans to determine benefit obligations and net periodic benefit cost are as follows at March 31:
2004 2003 2002 ---- ---- ---- Discount rate 6.25% 6.75% 7.50% Expected return on plan assets 8.00% 9.00% 9.00% Rate of compensation increase* 5.00% 5.00% 5.00%
* Rate of compensation increase is applicable to only one of the defined benefit pension plans. Benefits for the other two defined benefit pension plans are based on years of service. Declines in equity markets and lower interest rates have caused pension assets to be lower than actuarial liabilities. As a result, the Company recorded additional minimum pension liabilities of $0.3 million and $1.7 million during the years ended March 31, 2004 and 2003, respectively. The expected rate of return on plan assets assumption is based upon actual historical returns, future expectations for returns for each asset class and the effect of periodic target asset allocation rebalancing. These expected results were adjusted for the payment of reasonable expenses of the plan from plan assets. The Company expects to make cash funding contributions to its pension plans of approximately $1.9 million in the year ending March 31, 2005. The weighted-average asset allocation of the pension plan assets by asset category and target range are as follows:
PENSION ASSETS ------------------------------------------- PERCENTAGE OF PLAN ASSETS AT MARCH 31, TARGET ------------------------- RANGE 2004 2003 ---------------- ----------- ----------- Equity securities 60% - 80% 71% 68% Debt securities 20% - 40% 20% 24% Fixed income and cash 0% - 15% 9% 8% -------- -------- TOTAL 100% 100% ======== ========
The Company's pension plan assets are managed by outside investment managers. The Company's investment strategy with respect to pension plan assets is to maximize returns while preserving principal. NOTE 13 - COMMITMENTS AND CONTINGENCIES Leases The Company leases certain facilities and equipment under operating leases expiring at various dates. Lease expense was approximately $10.4 million, $9.7 million, $6.9 million and $2.2 million for the years ended March 31, 2004 and 2003, the nine months ended March 31, 2002 and the three months ended June 30, 2001, respectively. Future minimum lease payments under non-cancelable operating leases are as follows (in thousands):
FISCAL YEAR ENDING MARCH 31, - ---------------------------- 2005 $ 9,021 2006 6,805 2007 4,619 2008 3,981 2009 3,364 Thereafter 17,186
F-25 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Letters of credit As of March 31, 2004, the Company has outstanding letters of credit of $4.0 million. The letters of credit typically secure the rights to payment to certain third parties in accordance with specified terms and conditions. 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 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 have limited the exposure of scrap metal recyclers for sales of certain recyclable material under certain circumstances. However, the recycling defense is subject to a number of exceptions. 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 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 F-26 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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 period from September 2002 to the present, 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. Two of the original five NOVs have now been closed and MTLM-Arizona is cooperating fully with ADEQ and the Arizona Attorney General's office with respect to the remaining issues. At this preliminary stage, the Company cannot predict MTLM-Arizona's potential liability, if any, in connection with the NOVs or any required remediation. On April 29, 1998, MTLM-Midwest, a subsidiary of the Company, acquired substantially all of the operating assets of 138 Scrap, Inc. ("138 Scrap") that were used in its scrap metal recycling business. Most of these assets were located at a recycling facility in Riverdale, Illinois (the "Facility"). In early November 2003, MTLM-Midwest was served with a Notice of Intent to Sue (the "Notice") by The Jeff Diver Group, L.L.C., on behalf of the Village of Riverdale, alleging, among other things, that the release or disposal of hazardous substances within the meaning of CERCLA has occurred at an approximately 57 acre property in the Village of Riverdale (which includes the 8.8 acre Facility that was leased by MTLM-Midwest until December 31, 2003). The Notice indicates that the Village of Riverdale intends to file suit against MTLM-Midwest (directly and as a successor to 138 Scrap) and numerous other third parties under one or both of CERCLA and the Resource Conservation and Recovery Act. At this preliminary stage, the Company cannot predict MTLM-Midwest's potential liability, if any, in connection with such lawsuit or any required remediation. The Company believes that it has meritorious defenses to certain of the claims outlined in the Notice and MTLM-Midwest intends to vigorously defend itself against any claims ultimately asserted by the Village of Riverdale. In addition, although the Company believes that it would be entitled to indemnification from the sellers of 138 Scrap for some or all of the obligations that may be imposed on MTLM-Midwest in connection with this matter under the agreement governing its purchase of the operating assets of 138 Scrap, the Company cannot provide assurances that any of the sellers will have sufficient resources to fund any indemnifiable claims to which the Company may be entitled. Legal proceedings In January 2003, the Company received a subpoena requesting that it provide documents to a grand jury that is investigating scrap metal purchasing practices in the four state region of Ohio, Illinois, Indiana and Michigan. The Company is fully cooperating with the subpoena and the grand jury's investigation. The Company is unable at this preliminary stage to determine future legal costs or other costs to be incurred in responding to such subpoena or other impact to the Company of such investigation. F-27 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As a result of internal audits conducted by the Company, the Company determined that current and former employees of certain business units have 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 has 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 has implemented policies to eliminate such 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. 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. NOTE 14 - STOCKHOLDERS' EQUITY The Company is authorized to issue, in one or more series, up to a maximum of 2,000,000 shares of preferred stock. The Company has currently not issued any shares of preferred stock. The Company is authorized to issue 50,000,000 shares of common stock, par value $0.01 per share. On March 8, 2004, the Company's Board of Directors approved a two-for-one stock split in the form of a stock dividend. As a result of the stock split, the Company's stockholders received one additional share for each share of common stock held on the record date of April 5, 2004. The additional shares of common stock were distributed on April 20, 2004. All common share and per share amounts for the Reorganized Company have been retroactively adjusted in the financial statements and related notes in order to reflect the stock split. In accordance with the Plan, the Company distributed 697,465 warrants to purchase 1,394,930 shares of common stock (designated as "Series A Warrants"). The Series A Warrants were distributed to the Predecessor Company's stockholders and are immediately exercisable with an expiration date of June 29, 2006. Each Series A Warrant has a strike price of $10.595 per share and is exercisable into two shares of common stock. At March 31, 2004 and 2003, there were 696,244 and 684,029 Series A Warrants outstanding, respectively. NOTE 15 - STOCK-BASED COMPENSATION PLANS Stock option plans In accordance with the Plan, all options granted by the Predecessor Company were cancelled as of the Effective Date. On September 18, 2002, the shareholders of the Company approved the Metal Management, Inc. 2002 Incentive Stock Plan (the "2002 Incentive Stock Plan"). The 2002 Incentive Stock Plan provides for the issuance of up to 4,000,000 shares of common stock of the Company. The Compensation Committee of the Board of Directors has the authority to issue stock awards under the 2002 Incentive Stock Plan to the Company's employees, consultants and directors over a period of up to ten years. The stock awards can be in F-28 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the form of stock options, stock appreciation rights or stock grants. Summarized information for the Company's stock option plans are as follows:
WEIGHTED AVERAGE SHARES EXERCISE PRICE ------ -------------- Options outstanding at March 31, 2002 0 $ 0.00 Granted 120,000 1.88 Exercised 0 0.00 Expired/forfeited 0 0.00 -------- ------ Options outstanding at March 31, 2003 120,000 1.88 Granted 826,210 17.06 Exercised (190,000) 6.75 Expired/forfeited (30,000) 3.88 -------- ------ Options outstanding at March 31, 2004 726,210 $17.80 ======== ====== Exercisable at March 31, 2004 576,210 $15.41 ======== ======
Warrants In accordance with the Plan, all warrants issued by the Predecessor Company were cancelled as of the Effective Date. A Management Equity Incentive Plan was approved under the Plan pursuant to which the Company issued warrants to purchase 1,975,000 shares of common stock at an exercise price of $3.25 per share (designated as "Series B Warrants") and warrants to purchase 1,000,000 shares of common stock at an exercise price of $6.00 per share (designated as "Series C Warrants"). The Series B and Series C Warrants were issued to key employees and each vested ratably over three years and are exercisable for a period of five years and seven years, respectively, from the grant date. In May 2002, the Company issued, to certain employees, warrants to purchase 520,000 shares of common stock at an exercise price of $1.88 per share, and also issued to each non-employee director a warrant to purchase 30,000 shares of common stock at an exercise price of $3.25 per share. F-29 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Summarized information for warrants issued by the Company is as follows:
WEIGHTED AVERAGE SHARES EXERCISE PRICE ------ -------------- Warrants outstanding at June 30, 2001 0 $0.00 Granted 2,975,000 4.17 Exercised 0 0.00 Expired/forfeited 0 0.00 ---------- ----- Warrants outstanding at March 31, 2002 2,975,000 4.17 Granted 640,000 2.13 Exercised 0 0.00 Expired/forfeited (25,000) (5.18) ---------- ----- Warrants outstanding at March 31, 2003 3,590,000 3.80 Granted 0 0.00 Exercised (2,294,000) (3.64) Expired/forfeited (45,000) (5.54) ---------- ----- Warrants outstanding at March 31, 2004 1,251,000 $4.04 ========== ===== Exercisable at March 31, 2004 1,251,000 $4.04 ========== =====
The following table summarizes information about options and warrants outstanding at March 31, 2004:
OPTIONS/WARRANTS OPTIONS/WARRANTS OUTSTANDING EXERCISABLE ---------------------------------- -------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE CONTRACTUAL EXERCISE EXERCISE EXERCISE PRICES SHARES LIFE (YRS) PRICE SHARES PRICE --------------- ------ ----------- -------- ------ -------- $1.87 - $5.99 1,022,000 3.80 $ 3.05 1,022,000 $ 3.05 $6.00 - $14.99 539,000 4.27 $ 6.56 539,000 $ 6.56 $15.00 - $25.99 116,210 9.89 $18.44 66,210 $17.52 $26.00 - $35.00 300,000 9.83 $30.63 200,000 $30.63 --------- --------- 1,977,210 5.20 $ 9.09 1,827,210 $ 7.62 ========= =========
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. Total shares of restricted stock outstanding at March 31, 2004 and 2003 was 518,938 and 0, respectively. At March 31, 2004, the amount of related deferred compensation reflected in Stockholders' Equity in the consolidated balance sheet was $8.3 million. An aggregate of 560,188 shares of restricted stock were granted during the year ended March 31, 2004. The Company recorded amortization of deferred compensation of approximately $1.0 million related to restricted stock during the year ended March 31, 2004. F-30 METAL MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 16 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth certain unaudited quarterly financial information for the Company's last eight fiscal quarters (in thousands, except per share amounts):
FISCAL 2004: JUNE 30 SEPT. 30 DEC. 31 MAR. 31 - ------------ ------- -------- ------- ------- Net sales $226,982 $230,048 $257,715 $368,668 Gross profit 30,024 31,495 35,535 63,359 Non-cash and non-recurring expense(a) 0 0 0 6,198 Net income 7,019 7,494 12,573 24,303 Basic earnings per share(e) $ 0.35 $ 0.36 $ 0.59 $ 1.11 Diluted earnings per share(e) $ 0.33 $ 0.34 $ 0.54 $ 1.02
FISCAL 2003: JUNE 30 SEPT. 30 DEC. 31 MAR. 31 - ------------ ------- -------- ------- ------- Net sales $193,468 $192,845 $169,546 $214,150 Gross profit 28,280 24,815 19,080 32,966 Non-cash and non-recurring income(a) 0 0 (695) 0 Net income (loss) 7,337 6,355(b) (272)(c) 7,081(d) Basic earnings per share(e) $ 0.36 $ 0.31 $ (0.02) $ 0.35 Diluted earnings per share(e) $ 0.36 $ 0.31 $ (0.02) $ 0.34
- ------------------------- (a) Reflects charges recorded for severance, impairment of fixed assets and facility abandonments. See Note 5 - Non-Cash and Non-Recurring Expense (Income). (b) Includes a $2.6 million pre-tax gain on the sale of excess real estate. (c) Includes a tax charge of $1.8 million to reflect positions taken upon filing the fiscal 2002 tax return in December 2002. As a result of the tax filing, the Company revised its estimates relating to emergence date tax assets that are available to offset taxable income. (d) Includes $1.5 million from the cash recovery of an impaired note. (e) The sum of the quarterly per share amounts will not equal per share amounts reported for the year-to-date period due to the changes in the number of weighted-average shares outstanding for each period. F-31 METAL MANAGEMENT, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) - --------------------------------------------------------------------------------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS, BALANCE AT BEGINNING COSTS AND OTHER NET OF END OF OF PERIOD EXPENSES ACCOUNTS RECOVERIES PERIOD ---------- ---------- ---------- ----------- ---------- ALLOWANCE FOR DOUBTFUL ACCOUNTS: PREDECESSOR COMPANY: Three Months Ended June 30, 2001 $ 1,603 $1,058 $ 0 $ (357) $ 2,304 - --------------------------------------------------------------------------------------------------------- REORGANIZED COMPANY: Nine Months Ended March 31, 2002 $ 2,304 $2,031 $ 0 $ (1,968) $ 2,367 Year Ended March 31, 2003 $ 2,367 $ 365 $ 0 $ (1,729) $ 1,003 Year Ended March 31, 2004 $ 1,003 $1,186 $ 0 $ (539) $ 1,650 TAX VALUATION ALLOWANCE: PREDECESSOR COMPANY: Three Months Ended June 30, 2001 $87,393 $ 0 $ 0 $(22,881) $64,512 - --------------------------------------------------------------------------------------------------------- REORGANIZED COMPANY: Nine Months Ended March 31, 2002 $64,512 $ 0 $ 0 $ (5,030) $59,482 Year Ended March 31, 2003 $59,482 $ 0 $ 2,634 $ (2,933) $59,183 Year Ended March 31, 2004 $59,183 $ 168 $(57,835) $ 0 $ 1,516
F-32 EX-10.8 2 c85628exv10w8.txt EMPLOYMENT AGREEMENT Exhibit 10.8 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT ("AGREEMENT"), is made and entered into as of January 16, 2004, by and between Daniel Dienst ("EXECUTIVE") and Metal Management, Inc., a Delaware corporation (the "MTLM"). NOW, THEREFORE, in consideration of the premises, promises, mutual covenants and mutual agreements contained herein, Executive and MTLM hereby agree as follows: 1. EMPLOYMENT. (a) On the terms and subject to the conditions set forth in this Agreement, MTLM employs Executive as its Chief Executive Officer to perform such duties and responsibilities as are consistent with such position and such other positions as may be assigned to Executive, from time to time, by the Board of Directors of MTLM (the "BOARD"). For as long as Executive is so employed, he shall devote his full business time, energy and ability to his duties, except for incidental attention to the management of his personal affairs. Further, during the Employment Period (as defined below), MTLM shall take all action possible to see that Executive while employed under this Agreement continues to be nominated and elected to serve on the Board and, if elected to so serve, that Executive be elected as the Chairman of the Board. If Executive is Chairman of the Board when his employment terminates under this Agreement, whether pursuant to Section 6 or 7 of this Agreement, he shall tender his resignation as Chairman and director effective as of the Termination Date (as defined below). (b) Executive's worksites during the Employment Period (as defined below) shall be 500 N. Dearborn Street, Suite 600, Chicago, Illinois 60610 and a location in New York City to be mutually agreed upon by MTLM and Executive, with Executive's time allocated between the two sites as shall be reasonably determined to be necessary and appropriate by Executive to fulfill Executive's duties and responsibilities and exercise Executive's powers under the terms of this Agreement. (c) Executive shall have the right to continue to serve on the board of directors of those business, civic and charitable organizations on which Executive is now serving as of the date of this Agreement, and which are set forth on EXHIBIT A attached hereto, as long as doing so has no significant adverse affect on the performance of Executive's duties and responsibilities or the exercise of Executive's powers under this Agreement. Executive shall not serve on any other boards of directors and shall not provide services (whether as an employee or independent contractor) to any for-profit organization on or after the date of this Agreement without the prior consent of the Board (which shall not be unreasonably withheld in light of Executive's duties and responsibilities under this Agreement); provided, however, MTLM understands and acknowledges that Executive shall be entitled to wrap up or otherwise complete within 30 days after the date of this Agreement the matters on which Executive is currently working pursuant to his prior employment. 2. TERM. The term of employment under this Agreement shall commence on January 16, 2004 (the "COMMENCEMENT DATE") and shall continue through, and end as of the close of business on March 31, 2008 (the "EMPLOYMENT PERIOD"); provided, however, that on March 31, 2008 and each anniversary thereof, the Employment Period shall be extended for an additional year unless either MTLM or Executive, as the case may be, notifies the other not less than 60 days prior to the end of the then current Employment Period of its or his desire not to extend the Employment Period; provided further that the Employment Period may terminate sooner upon the occurrence of certain events as described in Sections 5, 6, 7, 8 and 9 of this Agreement. The date on which Executive's employment is terminated shall be referred to herein as the "TERMINATION DATE" 3. COMPENSATION. (a) Base Compensation. The base compensation to be paid to Executive for his services under this Agreement shall be not less than $750,000 per year, subject to applicable withholdings, payable in equal periodic installments in accordance with the usual payroll practices of MTLM, but no less frequently than monthly, commencing on the Commencement Date. Executive's base compensation shall be subject to annual review for cost of living and merit factors, with any adjustments determined by the compensation committee of the Board. The foregoing is hereafter referred to as Executive's "BASE COMPENSATION." (b) Bonuses. During the Employment Period, Executive shall also be eligible to receive the following: (i) Signing Bonus. MTLM shall, subject to applicable withholdings, pay Executive $375,000 as a signing bonus, such amount to be paid within ten days after the execution of this Agreement. (ii) Annual Bonus. For the period ending March 31, 2004, and for each subsequent twelve-month period during the Employment Period ending March 31, Executive shall be eligible to receive an annual bonus in accordance with the terms of MTLM's annual bonus program as then in effect for MTLM's senior executives as such program is modified by this Section 3(b)(ii); provided, however, the compensation committee of the Board may direct MTLM to pay Executive an annual bonus which exceeds the annual bonus otherwise payable under such program or the minimum annual bonus set forth below. Notwithstanding anything contained herein to the contrary, Executive's minimum annual bonus shall (subject to applicable withholdings) for each period set forth below shall be the figure set forth opposite such period: January 16, 2004 through March 31, 2004 $350,000 March 31, 2004 through March 31, 2005 $750,000 March 31, 2005 through March 31, 2006 $375,000 March 31, 2006 through March 31, 2007 $187,500
Each annual bonus described in this Section 3(b)(ii) shall be paid at the time called for under MTLM's annual bonus program for senior executives. 2 (c) Restricted Stock. Upon execution and delivery of the this Agreement by MTLM and Executive, Executive shall be granted 250,000 shares of common stock, $0.01 par value per share (the "MTLM STOCK") pursuant to the terms of the Metal Management, Inc. 2002 Incentive Stock Plan (the "PLAN"). Except as otherwise provided in this Agreement or the Plan, Executive's interest in 62,500 shares shall become non-forfeitable on March 31, 2005 provided Executive is still employed by MTLM on such date, and his interest in an additional 62,500 shares shall become non-forfeitable on each of the next three subsequent anniversaries of such date provided Executive is still employed by MTLM on such anniversary date. All the terms and conditions to such grant shall be set forth for Executive in a certificate in accordance with the terms of the Plan. (d) Options. Upon execution and delivery of this Agreement by MTLM and Executive, Executive shall be granted two options to purchase shares of MTLM Stock pursuant to the terms of the Plan, one for 50,000 shares of MTLM Stock at an exercise price of $52.50 per share and another for 50,000 shares of MTLM Stock at an exercise price of $70.00 per share, exercisable, at the election of Executive, at any time on or after the date hereof and on or prior to the tenth anniversary date of this Agreement. All the terms and conditions to such grant shall be set forth for Executive in a certificate in accordance with the terms of the Plan. 4. FRINGE BENEFITS. MTLM shall furnish Executive with accident, health and life insurance and reimbursement of all documented reasonable and necessary out-of-pocket expenses incurred by Executive on behalf of MTLM by reason of the performance of Executive's duties and responsibilities hereunder. Further, MTLM shall furnish Executive with all of the additional fringe benefits made generally available by MTLM to its executive officers recognizing that such fringe benefits may be changed from time to time provided Executive shall be deemed immediately eligible for any such fringe benefits to the extent permissible under the terms of applicable law and the terms of the underlying plans, programs and policies. Executive shall be entitled to take five (5) weeks of paid vacation per calendar year, and shall be paid on all national and state holidays, during the Employment Period. Vacation allowances shall not be cumulative from year to year. MTLM shall include Executive as a covered person under MTLM's directors and officers' insurance policy. MTLM shall furnish Executive with appropriate office space (as set forth in Section 1(b) of this Agreement), equipment, supplies, and such other facilities and personnel as necessary or appropriate (de minimis use thereof by Executive for personal reasons shall not be deemed a breach of this Agreement). MTLM shall pay Executive's dues in such societies and organizations as MTLM deems appropriate, and shall pay on behalf of Executive (or reimburse Executive for) documented reasonable out-of-pocket expenses incurred by Executive in attending conventions, seminars, trade shows and other business meetings and business entertainment and promotional expenses. MTLM shall pay Executive an automobile allowance of $1,000.00 per month, subject to applicable withholdings. 5. DEATH OR PERMANENT DISABILITY. If, during the Employment Period, Executive dies (as confirmed by a certificate of death) or Executive is permanently disabled such that, in the opinion of a physician selected by MTLM and Executive, Executive is rendered incapable of performing the services contemplated under this Agreement for a period of twelve (12) 3 consecutive months by reason of illness, accident, or other physical or mental disability ("PERMANENT DISABILITY"), this Agreement shall be deemed to be terminated as of the date of such death or of the determination of Permanent Disability. Notwithstanding the foregoing, Executive shall be entitled to the benefits as provided in Section 8 of this Agreement. During any period prior to such time when Executive is permanently disabled, as described above, MTLM shall be obligated to perform its obligations under this Agreement in accordance with its terms, including, but limited to, its obligations under Section 3 of this Agreement. 6. INVOLUNTARY TERMINATION. Except in the case of termination for Cause pursuant to Section 7 of this Agreement, if MTLM terminates Executive's employment hereunder without Executive's consent, all of Executive's benefits under this Agreement shall cease immediately upon the date of such termination, provided that Executive shall continue to be entitled to receive the benefits as provided in Section 8(b) of this Agreement. 7. TERMINATION VOLUNTARY OR FOR CAUSE. (a) In the event: (i) Executive voluntarily terminates his employment hereunder without Good Reason (as defined below); (ii) pursuant to Section 9(b) of this Agreement; or (iii) Executive's employment hereunder is terminated for Cause, unless otherwise provided herein, all of his compensation and benefits under this Agreement shall cease immediately upon the date of such termination, provided that Executive shall be entitled to receive the compensation provided in Section 3 of this Agreement paid on a pro rata basis to the date of such termination. (b) Termination for Cause. Any of the following events shall be considered as "CAUSE" for the immediate termination of the Employment Period by MTLM: (i) final and non-appealable conviction of Executive for a felony or a nolo contendere plea with respect to a felony; or (ii) final and non-appealable conviction of Executive for (a) misappropriation by Executive of funds or property of MTLM or (b) the commission of other acts of dishonesty relating to his employment; or (iii) (a) willful breach of this Agreement which is not cured by Executive within 10 days following receipt by Executive of written notice of such breach from MTLM or (b) material neglect by Executive of any of his material duties or responsibilities hereunder which is not cured by Executive within 30 days following receipt by Executive of written notice of the acts that MTLM assert constitute such neglect by Executive, provided, however, that any such willful breach which is not curable shall be considered Cause for the immediate termination of the Employment Period by MTLM; or (iv) conduct on the part of Executive which is materially adverse to any known interest of MTLM that continues unabated, or uncured to the 4 reasonable satisfaction of MTLM, after the expiration of 10 days following receipt of written notice by Executive from MTLM. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a written termination notice signed by a member of the Board duly authorized to deliver such notice. 8. ACCELERATION OF PAYMENTS. (a) For this Agreement, the following terms shall have the following meanings: (i) "GOOD REASON" shall mean the occurrence of any of the following events without Executive's express written consent: (a) a reduction by MTLM of Executive's compensation provided in Section 3 of this Agreement; (b) any material breach by MTLM of any provisions of this Agreement which is not cured by MTLM within 10 days following receipt by MTLM of written notice of such breach from Executive; (c) the assignment of Executive by MTLM without his consent to a position, responsibility or duties of a materially lesser status or degree of responsibility than his position, responsibilities or duties as of the Commencement Date or (d) the Committee appointed by the Board to administer the Plan takes action that materially reduces the value of the stock options awarded in connection with Section 3(d) of this Agreement and has the result of treating Executive materially differently than other employees and directors who received options, stock appreciation rights or stock grants under the Plan. (ii) "TRIGGER DATE" means the date on which a Triggering Event occurs. (iii) "TRIGGERING EVENT" means any of: (a) a resignation of Executive as an employee of MTLM due to Good Reason; (b) termination of the Employment Period under Section 5 of this Agreement; or (c) involuntary termination of the Employment Period by MTLM, except in the case of termination for Cause. (b) OCCURRENCE OF TRIGGERING EVENT. Upon the occurrence of a Triggering Event, Executive shall receive from MTLM a lump sum payment equal to the Base Compensation provided under Section 3(a) and the minimum annual bonuses provided under Section 3(b)(ii) of this Agreement that otherwise would have been payable to Executive through March 31, 2008 but for the occurrence of a Triggering Event; provided, if he would have earned a bonus in accordance with Section 3(b)(ii) of this Agreement for the fiscal year in which the Triggering Event occurred if Executive had remained employed through the end of the fiscal year, he shall be paid 5 such bonus in lieu of the minimum bonus for such year. Furthermore, any unvested stock options or stock grants or any unvested long term incentive plan compensation shall immediately become vested. Additionally, unless (i) MTLM terminates Executive's employment for Cause, (ii) Executive terminates this Agreement without Good Reason, or (iii) this Agreement is terminated as a result of Executive's death, Executive shall, at no cost to Executive, be entitled to continue to participate in the MTLM-provided health and medical insurance programs until March 31, 2008, provided, however, that, if this Agreement is terminated as a result of Executive's death, Executive's then current spouse and dependent children shall be entitled to continue to participate in the MTLM-provided health and medical insurance programs for one-year after such death, unless, in each case, such continued participation is prohibited by any applicable laws or would otherwise jeopardize the tax qualified status of any such programs. If MTLM is prohibited by applicable law or would otherwise jeopardize the tax qualified status of any health or medical insurance plan and as a result MTLM terminates coverage, it shall promptly reimburse Executive for the cost of obtaining comparable third party coverage. (c) TIME OF PAYMENT FOLLOWING TRIGGERING EVENT. All accelerated payments of Base Compensation, bonuses, and long term incentive plan compensation due to Executive pursuant to this Section shall be paid promptly but in any event within thirty (30) days after the Trigger Date, provided, however, that any earned bonuses as set forth in Section 3(b)(iii) of this Agreement shall be paid as otherwise set forth herein. 9. NON-COMPETITION. (a) GENERAL. In addition to any other obligations of Executive under any other agreement with MTLM, in order to assure that MTLM shall realize the benefits of this Agreement and in consideration of the employment set forth in this Agreement, Executive shall not: (i) during the period beginning on the date of this Agreement and ending eighteen months after the Termination Date (the "NON-COMPETITION PERIOD"), directly or indirectly, whether through an affiliate or otherwise, alone or as a partner, joint venturer, member, officer, director, employee, consultant, agent, independent contractor, stockholder, or in any other capacity of any company or business, engage in any business activity in any state in the United States in which, prior to the Termination Date, MTLM or any subsidiary or affiliate of MTLM conducts business or is actively planning to conduct business and, on and after the Termination Date, MTLM or any subsidiary or affiliate of MTLM on the Termination Date conducts business or is actively planning to conduct business, which business activity is directly or indirectly in competition with the business, prior to the Termination Date, that is conducted by or is actively planned to be conducted by MTLM or any 6 subsidiary or affiliate of MTLM and, on and after the Termination Date, is on the Termination Date conducted by or is actively planned to be conducted by MTLM or any subsidiary or affiliate of MTLM; provided, however; that, the beneficial ownership of less than 5% of the shares of stock of any corporation having a class of equity securities actively traded on a national securities exchange or over-the-counter market shall not be deemed, in and of itself, to violate the prohibitions of this Section; provided, however, that Executive shall not be bound by the restrictions set forth in this Section 9(a)(i) if MTLM shall not have cured the failure to make any material payment to Executive under this Agreement within 30 days following receipt by MTLM of written notice from Executive of such failure unless such failure to make such payment is due to MTLM's allegation of a material breach of the terms of this Agreement; (ii) during the Non-Competition Period, directly or indirectly (a) induce any person which is a customer of MTLM or any subsidiary or affiliate of MTLM on the Termination Date to patronize any business directly or indirectly in competition with the business conducted by MTLM or any subsidiary or affiliate of MTLM on the Termination Date; (b) canvass, solicit or accept from any person which is a customer of MTLM or any subsidiary or affiliate of MTLM on the Termination Date, any such competitive business, or (c) request or advise any person which is a customer of MTLM or any subsidiary or affiliate of MTLM on the Termination Date to withdraw, curtail or cancel any such customer's business with MTLM or any subsidiary or affiliate of MTLM on the Termination Date; (iii) during the Non-Competition Period, directly or indirectly employ, or knowingly permit any company or business directly or indirectly controlled by him, to employ, any person who was employed by any of MTLM or any then subsidiary or affiliate of MTLM at or within six months prior to the Termination Date, or in any manner seek to induce any such person to leave his or her employment; or (iv) directly or indirectly, at any time following the Termination Date, in any way utilize, disclose, copy, reproduce or retain in his possession any of MTLM's or any subsidiary's or affiliate's proprietary rights or records, including, but not limited to, any of their customer or price lists. (b) EXECUTIVE ELECTION TO END NON-COMPETITION PERIOD. In the event that a Change in Control occurs, Executive shall have the right to elect, within one hundred twenty (120) days of such Change of Control ("CHANGE OF CONTROL EVENT"), to terminate this Agreement, effective as of ninety (90) days after such election. The Non-Competition Period shall terminate effective with the date of such termination. In the event of a termination under this clause (b), except as otherwise provided in this clause (b), Executive shall not be entitled to any separation or severance benefits 7 provided for under this Agreement for periods following the date of termination notwithstanding anything in this Agreement to the contrary. (c) SCOPE OF RESTRICTION. Executive agrees and acknowledges that the restrictions contained in this Section 9 are reasonable in scope and duration and are necessary to protect MTLM after the Commencement Date. If any provision of this Section 9 as applied to any party or to any circumstance is adjudged by a court to be invalid or unenforceable, the same shall in no way affect any other circumstance or the validity or enforceability of this Agreement. If any such provision, or any part thereof, is held to be unenforceable because of the duration of such provision or the area covered thereby, the parties agree that the court making such determination shall have the power to reduce the duration and/or area of such provision, and/or to delete specific words or phrases, and in its reduced form, such provision shall then be enforceable and shall be enforced. The parties agree and acknowledge that the breach of this Section 9 shall cause irreparable damage to MTLM and upon breach of any provision of this Section 9, MTLM shall be entitled to injunctive relief, specific performance or other equitable relief; provided, however, that this shall in no way limit any other remedies which MTLM may have (including, but not limited to, the right to seek monetary damages). 10. CHANGE OF CONTROL. (a) GENERAL. Notwithstanding anything in the Plan to the contrary, for purposes of this Agreement and with respect to any options, stock grants and stock appreciation rights issued under the Plan to Executive, "CHANGE OF CONTROL" shall be deemed to mean a "change in control" of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "1934 ACT"), as in effect at the time of such "change in control," provided that such a change in control shall be deemed to have occurred at such time as (1) any "person" (as that term is used in Sections 13(d) and 14(d)(2) of the 1934 Act) becomes after the effective date of this Agreement the beneficial owner (as defined in Rule 13d-3 under the 1934 Act) directly or indirectly of securities representing 40% or more of the combined voting power of the then outstanding securities for election of directors of the Company or any successor to the Company, (2) during any period of two consecutive years or less, individuals who at the beginning of such period constitute the Board cease, for any reason, to constitute at least a majority of the Board, unless the election or nomination for election of each person who was not a director at the beginning of such period was approved by vote of at least two-thirds of the directors then in office who were directors at the beginning of such period or who were directors previously so approved, (3) there is a dissolution or liquidation of the Company or any sale or disposition of 50% or more of the assets or business of the Company, or 8 (4) there is a reorganization, merger, consolidation or share exchange (other than a reorganization, merger, consolidation, or share exchange with a wholly-owned subsidiary of the Company) of the Company unless (A) the persons who were the beneficial owners of the outstanding shares of the common stock of the Company immediately before the consummation of such transaction beneficially own more than 50% of the outstanding shares of the common stock of the successor or survivor corporation in such transaction immediately following the consummation of such transaction and (B) the shares of the common stock of such successor or survivor corporation beneficially owned by the persons described in clause (A) immediately following the consummation of such transaction are beneficially owned by each such person in substantially the same proportion that each such person had beneficially owned shares of Company common stock immediately before the consummation of such transaction. (b) OCCURRENCE OF A CHANGE OF CONTROL TERMINATION ELECTION. Upon the occurrence of (x) a Change of Control (as defined below) and (y) Executive's election to terminate this Agreement, as set forth in Section 9(b), Executive shall be entitled to receive an amount equal to the greater of (1) one year's salary as provided in Section 3(a) of this Agreement and (2) 50% of the amount provided in Sections 3(a) and 3(b)(ii) that otherwise would have been payable to Executive for the remainder of the Employment Period. (c) TIME OF BONUS PAYMENTS FOLLOWING CHANGE OF CONTROL TERMINATION ELECTION. All payments of bonuses due to Executive pursuant to Section 9(b)(ii) of this Agreement shall be paid by the later of (y) ninety (90) days after the Change of Control Event and (z) receipt of the audit relating to the financial statements of MTLM for the fiscal year during which the Change of Control Event occurred. 11. CONFIDENTIALITY OF INFORMATION; DUTY OF NON-DISCLOSURE. Executive acknowledges and agrees that his employment by MTLM under this Agreement necessarily involves his understanding of and access to certain trade secrets and confidential information pertaining to the business of MTLM or any subsidiary or affiliate of MTLM. Accordingly, during the Employment Period, and until the expiration of the Non-Competition Period, Executive shall not, directly or indirectly, without the prior written consent of MTLM, disclose to or use for the benefit of any person, corporation or other entity, or for himself any and all files, trade secrets or other confidential information concerning the internal affairs of MTLM or any subsidiary or affiliate of MTLM, including, but not limited to, confidential information pertaining to clients, services, products, earnings, finances, operations, methods or other activities; provided, however, that the foregoing shall not apply to information which is of public record or is generally known, disclosed or available to the general public or the industry generally. Further, Executive shall not, directly or indirectly, remove or retain, without the express prior written consent of MTLM, and upon termination of this Agreement for any reason shall return to MTLM, any confidential figures, calculations, letters, papers, records, computer 9 disks, computer print-outs, lists, documents, instruments, drawings, designs, programs, brochures, sales literature, or any copies thereof, or any information or instruments derived therefrom, or any other similar information of any type or description, however such information might be obtained or recorded, arising out of or in any way relating to the business of MTLM or any subsidiary or affiliate of MTLM or obtained as a result of his employment by MTLM or any subsidiary or affiliate of MTLM. Executive acknowledges that all of the foregoing are proprietary information, and are the exclusive property of MTLM. The covenants contained in this Section 11 shall survive the termination of this Agreement. 12. AUTHORITY; ENFORCEABILITY. MTLM has full corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. The execution and delivery of this Agreement, the performance by MTLM of its obligations hereunder have been duly and validly authorized by all necessary corporate action on the part of MTLM. This Agreement has been duly executed and delivered by MTLM and constitutes a valid and binding agreement of MTLM, enforceable against MTLM in accordance with its terms, subject to applicable bankruptcy, insolvency and other similar laws affecting the enforceability of creditors' rights generally, general equitable principles and the discretion of courts in granting equitable remedies. 13. GOODWILL. MTLM has invested substantial time and money in the development of its products, services, territories, advertising and marketing thereof, soliciting clients and creating goodwill. By accepting employment with MTLM, Executive acknowledges that the customers are the customers of MTLM and its subsidiaries and affiliates and that any goodwill created by Executive belongs to and shall inure to the benefit of MTLM. 14. NO DUTY TO MITIGATE. In the event that Executive's employment terminates hereunder, MTLM acknowledges and agrees that Executive has no duty to mitigate the costs to MTLM with respect to any amounts payable hereunder to the Executive. 15. NOTICES. Any notice or request to be given hereunder to either party hereto shall be deemed effective only if in writing and either (a) delivered personally or (b) sent by certified or registered mail, postage prepaid, to the following addresses or to such other address as either party may hereafter specify to the other by notice similarly served: If to Executive: Daniel Dienst c/o Michael Schwartzbard 358 Eisenhower Parkway Roseland, New Jersey 07068 10 with a copy to: Blank Rome LLP The Chrysler Building 405 Lexington Avenue New York, New York 10174 Attn: Michael S. Mullman If to MTLM: Metal Management, Inc. 500 N. Dearborn Street Suite 600 Chicago, Illinois 60610 Attn: President with a copy to: King & Spalding LLP 1185 Avenue of the Americas New York, New York 10036 Attn: E. William Bates, II Lawrence A. Larose 16. ASSIGNMENT. Except as set forth in Section 9(b) of this Agreement, this Agreement shall be binding upon and inure to the benefit of the successors and assigns of MTLM, whether by merger, sale of assets or otherwise. This Agreement shall be binding upon and inure to the benefit of Executive's heirs. 17. ATTORNEYS' FEES. (a) Upon receipt by MTLM of statement for legal services from the attorneys representing Executive, MTLM shall reimburse Executive or to pay on behalf of Executive the reasonable and necessary attorneys' fees and associated expenses incurred by Executive in connection with the negotiation of this Agreement. (b) In the event suit or action is brought by any party under this Agreement to enforce or construe any of its terms, the prevailing party shall be entitled to recover, in addition to all other amounts and relief, its reasonable and necessary attorneys' fees and associated expenses incurred at and in preparation for arbitration, trial, appeal and review. 18. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with the laws of the State of New York without reference to its choice-of-law principles. 19. MODIFICATION. No modification or waiver of any provision hereof shall be made unless it is in writing and signed by both of the parties hereto. 20. SCOPE OF AGREEMENT. This Agreement constitutes the whole of the agreement between the parties on the subject matter, superseding all prior oral and written conversations, 11 negotiations, understandings, and agreements in effect as of the date of this Agreement specifically including, but not limited to, the Prior Agreement. 21. SEVERABILITY. To the extent that any provision of this Agreement may be deemed or determined to be unenforceable for any reason, such unenforceability shall not impair or affect any other provision, and this Agreement shall be interpreted so as to most fully give effect to its terms and still be enforceable. 22. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. METAL MANAGEMENT, INC. By_____________________________ John T. DiLacqua Director _______________________________ Daniel Dienst 12 EXHIBIT A DIRECTORSHIPS Metals USA, Inc. (Non-Executive Chairman of the Board of Directors) EX-10.9 3 c85628exv10w9.txt SEPARATION AND RELEASE AGREEMENT Exhibit 10.9 SEPARATION AND RELEASE AGREEMENT This Separation and Release Agreement ("Agreement") is entered into between Metal Management, Inc., a Delaware corporation ("Company"), for and on behalf of itself and any affiliated and related entities (hereinafter referred to collectively as the "Company Affiliates" or, individually, as a "Company Affiliate") and Albert A. Cozzi, an individual resident of the state of Illinois ("Executive"), this 18th day of January 2004. For purposes of this Agreement, "affiliated and related entities" means, with respect to any entity or entities, any other entity or entities directly or indirectly controlling, controlled by, or under common control with, such entity or entities, as well as any joint venture involving any such entity and, for purposes of this definition, "control" means the power to direct or cause the direction of the management or policies of the controlled entity. For and in consideration of the covenants and agreements set forth herein, including the waiver and release by the parties of certain rights thereof, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Resignation. Executive hereby resigns as an employee, director, board member, and/or officer of Company and all Company Affiliates of which he is an employee, director, board member, and/or officer, effective as of 4:30 p.m. (CST) on January 16, 2004 (the "Resignation Date"), and shall take such action as may be required to document such resignation as may be reasonably requested by the applicable Company or Company Affiliate. Executive shall have no further official duties after the Resignation Date. Executive's resignation shall be treated as a unilateral termination by Executive, without "Good Reason," as such term is defined in that certain Employment Agreement, dated December 1, 1997 (as amended by that certain letter agreement, dated as of June 7, 2001 and that certain letter agreement dated as of June 13, 2001, the "Employment Agreement"), by and between Executive and Company. 2. Post-Employment Compensation and Benefits. Subject to withholding for taxes and other amounts required by law to be withheld, and to the terms of any applicable benefit plans, Executive shall receive the compensation and benefits described in this paragraph, provided that Executive does not revoke this Agreement pursuant to paragraph 3(e). Executive acknowledges and agrees that the releases, promises and obligations of Company and the Company Affiliates pursuant to this Agreement constitute good and valuable consideration for Executive's entering into this Agreement. (a) Executive shall receive an amount equal to Two Million, Thirty-Nine Thousand, Two Hundred Sixty-Five U.S. Dollars ($2,039,265) ("Severance"), of which (i) One Million Six Hundred Two Thousand Four Hundred Seventy-Eight U.S. Dollars ($1,602,478) which shall be paid on January 30, 2004 and (ii) Four Hundred Thirty-Six Thousand Seven Hundred Eighty-Seven U.S. Dollars ($436,787) shall be paid on July 18, 2005. The Severance is inclusive of all severance benefits, salary, short-term and long-term bonuses, and in lieu of any and all other compensation (if any) to which Executive may be entitled, including, without limitation, any payments arising under the Employment Agreement, from Company or any Initials of Parties Executive _____________ Company _______________ Company Affiliate, except as otherwise expressly provided in this paragraph 2, and including salary and other amounts Executive is entitled to through the Resignation Date. Except for the portion of this payment attributable to accrued unpaid salary, this payment shall not be considered earnings for purposes of the retirement, savings, 401(k) or other employee benefit plans of Company or any Company Affiliate. (b) Executive shall not be eligible for any awards under an incentive compensation plan of Company or any Company Affiliate. (c) All warrants for the purchase of Company common stock previously awarded or granted to Executive are fully vested as of the Resignation Date and are exercisable (according to the terms of the respective plan or scheme pursuant to which such warrants were issued) for the remainder of their respective exercise terms. (d) All shares of Company common stock subject to forfeiture awarded or granted to Executive shall become fully non-forfeitable as of the Resignation Date. (e) Executive shall be eligible to continued group health plan coverage under Company's medical and dental plan in accordance with the terms of provisions of such plan for a period of 18 months from the Resignation Date at no charge to Executive. (f) Company shall reimburse Executive for up to $24,900 of the cost of life insurance purchased after the Resignation Date upon submission to Company of proof of payments by Executive. (g) Except as otherwise expressly provided in this paragraph 2, nothing in this Agreement shall limit or reduce any benefits or rights Executive may have under any retirement, savings, deferred compensation, 401(k), or any other employee benefit plan of Company or any Company Affiliate, or pursuant to any personal life insurance, health or annuity contract that Executive may have with Company or any Company Affiliate; provided, further, that, notwithstanding the provisions of this Section 2(f), neither Company nor any Company Affiliate shall be liable to Executive for any non-vested matching funds or other non-vested benefits under any retirement, savings, deferred compensation, 401(k), or any other employee benefit plan of Company or any Company Affiliate. (h) Attached hereto as Schedule "A" is a listing of all of Executive's common stock subject to forfeiture described in this Section 2 that are outstanding as of this Agreement, along with the relevant grant dates. This common stock shall become vested on the Resignation Date in accordance with 2(d) above. 3. Release of Claims. (a) General. Executive acknowledges and agrees that this Agreement includes a complete, final, and binding settlement, release and covenant not to sue with respect to any claims he may have against the Releasees (as defined below), including, but not limited to, Initials of Parties Executive _____________ Company _______________ - 2 - all claims arising from or in any way related to Executive's employment with Company or any of the Company Affiliates or the termination thereof, as well as claims arising from any contracts, agreements, or employment relationships, currently in force or contemplated, between Executive and Company and the Company Affiliates. (b) Release. Executive hereby releases, discharges, and covenants not to sue Company and the Company Affiliates, or any of them, and/or their respective predecessors, successors, parents, subsidiaries, affiliates, divisions, assigns, current or former employees, officers, directors, shareholders, representatives, attorneys, and agents (collectively referred to herein as "Releasees"), collectively, separately, and severally, from any and all claims, causes of action, liabilities, and judgments of every type and description whatsoever, known and unknown, arising under any state (including the employment laws of State of Illinois), local, federal, administrative or foreign (for purposes of this Agreement, "foreign" means the legal jurisdiction of any sovereign state or country other than the United States of America) law (including, but not limited to, claims arising under the Civil Rights Act of 1964, as amended; 42 U.S.C. Section 1981; the Rehabilitation Act of 1973, as amended; the Employee Retirement Income Security Act of 1974, as amended; the Fair Labor Standards Act of 1938, as amended; the Americans with Disabilities Act; the Securities Act of 1933; the Securities Exchange Act of 1934; the Family and Medical Leave Act; or claims for declaratory judgment, equitable relief, or attorney's fees) which he, his heirs, administrators, executors, personal representatives, beneficiaries, and assigns may have or claim to have against Releasees for any reason whatsoever, which arise from events occurring prior to the date of this Agreement, other than a claim to pay the benefits described in Paragraph 2 hereof. Executive understands and agrees that the payments made to him pursuant to this Agreement and this release include and encompass therein any and all claims with respect to attorneys' fees, costs, and expenses for or by any and all attorneys who have represented him or with whom he has consulted or who have done anything in connection with the subject matter of this Agreement or any and all claims released herein. Notwithstanding anything contained herein to the contrary, nothing in this subparagraph shall prevent Executive from bringing a claim or claims to enforce the terms of this Agreement. (c) Release of Claims under the Age Discrimination in Employment Act of 1967, as Amended. In addition to the foregoing, Executive hereby knowingly and voluntarily releases, discharges and covenants not to sue or move for arbitration in any court or other tribunal, Releasees, collectively, separately and severally, from or for any and all liability, claims, allegations, and causes of action arising under the Age Discrimination in Employment Act of 1967, as amended ("ADEA"), which Executive, Executive's heirs, administrators, executors, personal representatives, beneficiaries, and assigns may have or claim to have against Releasees. (d) Opportunity to Consider/Consideration. Executive hereby acknowledges and represents that Executive (i) has been advised in writing to consult with an attorney prior to executing this Agreement, (ii) has been given the opportunity to consider for a period of at least 21 days the terms of this Agreement and (iii) has received valuable and good consideration to which Executive is otherwise not entitled in exchange for Executive's execution of this Agreement. Initials of Parties Executive _____________ Company _______________ - 3 - (e) Revocation Period. The parties hereby acknowledge that Executive may revoke the release by Executive set forth in subparagraphs 3(b) and 3(c) (the "General Release") at any time prior to 5:00 p.m. on the seventh day after this Agreement is executed by Executive (the "Effective Date") and that the General Release and agreements of Company set forth in Section 2 and this Section 3 shall not be effective or enforceable prior to the Effective Date unless Executive shall not have revoked the General Release in accordance with the terms hereof on or prior to the Effective Date. In the event Executive chooses to exercise Executive's option to revoke the General Release, Executive shall notify Company in writing to Company's agent designated below for this purpose, and return all monies paid pursuant to this Agreement (if any) no later than 5:00 p.m. on the Effective Date. Such notice shall be delivered by registered or certified mail, return receipt requested and addressed as follows: Metal Management, Inc. 500 N. Dearborn Street Suite 600 Chicago, Illinois 60610 Attn: Daniel Dienst with a copy to: King & Spalding LLP 1185 Avenue of the Americas New York, New York 10036 Attn: E. William Bates, II, Esq. Lawrence A. Larose, Esq. (f) Full Settlement and Agreement. Executive agrees that this Agreement resolves any and all claims which have been or might be filed by Executive or on Executive's behalf against any Releasees with any State of Illinois administrative agency, the Equal Employment Opportunity Commission (the "EEOC") and any other federal, state, or local court, tribunal agency or commission of the United States, or of any other sovereign state or country as of the Effective Date and as specified in subparagraphs 3(b) or 3(c) above. Executive agrees that this Agreement constitutes a full resolution of any and all such claims, and if any action should be taken to pursue any such charge, any or all Releasees shall be entitled to a protective order against or summary judgment dismissing any such action, and neither he nor anyone on Executive's behalf shall file or cause to be filed any charge, claim, or complaint in any forum against any of the Releasees. (g) Release and Indemnification by Company. Company and Company Affiliates hereby release, discharge, and covenant not to sue Executive from any and all claims, causes of action, liabilities, and judgments of every type and description whatsoever, arising under any state, local, federal, administrative or foreign law (including, but not limited to claims for declaratory judgment, equitable relief, or attorney's fees) which they may have or claim to have against Executive for any reason whatsoever, excluding theft or fraud. Further, Company and Company Affiliates, jointly and severally, agree to indemnify and hold Executive harmless Initials of Parties Executive _____________ Company _______________ - 4 - from any and all claims, causes of action, liabilities, and judgments of every type and description whatsoever, known and unknown, excluding theft or fraud, arising under any state, local, federal, administrative or foreign law (including, but not limited to claims for declaratory judgment, equitable relief, or attorney's fees) brought against him by or on behalf of any other Company Affiliate, including, without limitation, the Releasees (or other association for which Executive served as an officer or in a similar business capacity on behalf of or in his capacity as an officer of Company or any Company Affiliate), which arise from events occurring prior to the Effective Date. Notwithstanding anything contained herein to the contrary, nothing in this subparagraph shall prevent Company or any Company Affiliate from bringing a claim or claims for theft or fraud or to enforce the terms of this Agreement. 4. Non-Assignment. Executive, Company and Company Affiliates each represent, warrant and agree that they have not assigned, transferred, sold or hypothecated any of the claims released by this Agreement. The parties covenant and agree that if there is any claim arising from the assignment, sale or hypothecation of any claim released hereunder, the party who assigned, sold or hypothecated such claim shall indemnify and hold the other party harmless from any liability, including costs and expenses (as well as reasonable attorneys' fees) incurred as a result of any such claim. 5. Indemnification for Loss of Consortium. Executive covenants and agrees that if there is any claim for loss of consortium against Releasees, or any other similar claim, arising out of or related to Executive's relationship or transactions with Company or any Company Affiliate (including not limited to his employment or separation of employment with Company and any Company Affiliate), Executive agrees to indemnify and hold Company and any Company Affiliate harmless from any liability, including costs and expenses (as well as reasonable attorneys' fees) incurred by Company or any Company Affiliate as a result of any such claim. 6. Confidentiality. (a) Except as otherwise specifically provided in Section 6(b) of this Agreement, Executive represents, agrees and covenants that he has maintained and shall continue to maintain the confidentiality of, and not to disclose, reveal, publish, disseminate, or discuss, directly or indirectly, to or with any other person or entity the terms of this Agreement (including whether or not any amount was paid, the amount paid, or information he may have with respect to this Agreement). (b) The following disclosures, which are specific exceptions to Section 6(a) above, are permitted in the following limited circumstances: (i) Executive may make such disclosures as are reasonably necessary for tax reporting purposes; (ii) Executive may disclose the terms and amount paid under this Agreement as reasonably necessary to obtain legal, tax, or accounting advice or services; Initials of Parties Executive _____________ Company _______________ - 5 - (iii). Executive is permitted to disclose the terms of this Agreement to the extent required in any legal proceeding involving the enforcement of this Agreement, but, as to any other legal proceedings, Executive is permitted to disclose the terms of this Agreement only to the extent (1) specifically requested and consented to in writing by an officer or other authorized representative of Company or the Company Affiliates, or (2) compelled pursuant to a subpoena or other court order, provided, however, that before disclosing this Agreement pursuant to a subpoena or court order, Executive shall provide notice to Company that Executive has been served with such subpoena or court order, including by providing Company with a copy thereof, and shall not disclose this Agreement before Company or another Company Affiliate (if relevant to the matter at hand) has had the opportunity to object to such disclosure within the time allowed by law or otherwise to act to protect such information from disclosure. (iv). Executive is permitted to disclose the terms of this Agreement to his spouse, provided that his spouse has been advised of and agrees to abide by the requirements of this Section 6. (v). Notwithstanding anything contained herein to the contrary, Executive's communications regarding this Agreement to members of the board of directors of Company on or prior to the date of this Agreement shall not be considered a violation of this Section 6. 7. Nondisclosure. (a) Introduction. Executive acknowledges and agrees that he has been employed as the Chief Executive Officer of Company, serves as director, board member and/or officer of several other Company Affiliates, and in his senior executive role has been privy to other confidential and proprietary information relating to Company and the Company Affiliates. In light of the foregoing, Executive agrees to hold in a fiduciary capacity and keep confidential certain information relating to Company and the Company Affiliates, as set forth in this paragraph 7. (b) Nondisclosure of Attorney-Client Communications and Work Product. Executive acknowledges and agrees that during the term of his employment, Executive has been exposed to or has had access to the confidential attorney-client communications of Company and the Company Affiliates and attorney work product relating to Company and the Company Affiliates. Executive hereby agrees that he shall not directly or indirectly use or disclose any information or document conveyed to him in the course of his employment that is a confidential attorney client communication or is attorney work product except to the attorneys of the applicable Company or Company Affiliates or as required by a validly issued court order. Initials of Parties Executive _____________ Company _______________ - 6 - (c) Acknowledgement of Access to Trade Secrets and Confidential Information. Executive acknowledges and agrees during his employment as the Chief Executive Officer of Company and in his capacity as an officer, director, and/or board member of other Company Affiliates, Executive was intimately involved in developing business strategy and planning for Company and the Company Affiliates, and was provided or had access to Trade Secrets and Confidential Information of Company and the Company Affiliates, including but not limited to present and future operations of Company and the Company Affiliates, their customers, distributors, and suppliers, marketing, pricing and bidding strategies, and the methods used by Company and the Company Affiliates and their respective employees. Executive acknowledges and agrees that such information has been developed or obtained by Company and the Company Affiliates by the investment of significant time, effort and expense, and that such information is a valuable, special and unique asset of Company and the Company Affiliates which provides them with a significant competitive advantage. Executive further understands and acknowledges that such information is proprietary to Company and the Company Affiliates and that, if exploited by Executive in contravention of this Agreement, would seriously, adversely and irreparably affect the business of Company and the Company Affiliates. (d) Nondisclosure of Trade Secrets. Executive hereby agrees that he shall not directly or indirectly use or disclose any Trade Secret of Company or the Company Affiliates for so long as such information remains a Trade Secret. As used herein, a Trade Secret includes, but is not limited to, any technical or non-technical data, a formula, a pattern, a compilation, a program, a device, a method, a technique, a drawing, a process, financial data, financial plans, product plans, or a list of actual or potential customers or suppliers which: (i) derives economic value, actual or potential from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; (ii) is the subject of reasonable efforts by Company or any Company Affiliate to maintain its secrecy; and (iii) is not otherwise in the public domain. (e) Nondisclosure of Confidential Information. In addition to the foregoing, and not in limitation thereof, Executive agrees that for a period of 18 months after the Resignation Date, Executive shall hold in a fiduciary capacity for the benefit of Company and each of the Company Affiliates and shall not directly or indirectly use or disclose any Confidential Information, as defined herein, that Executive may have acquired (whether or not developed or compiled by Executive and whether or not Executive was authorized to have access to such information) during the term of, in the course of or as a result of Executive's employment by or in the performance of Executive's duties for Company or any Company Affiliate. The term "Confidential Information" as used in this Agreement means any secret, confidential or proprietary information of Company or any Company Affiliate not otherwise included in the definition of "Trade Secrets" above. The term "Confidential Information" does not include information that has become generally available to the public (unless Executive is aware that the information has been made public in contravention of a contractual, statutory or fiduciary duty). (f) Remedies Not Exclusive. Executive hereby acknowledges and agrees that the prohibitions against disclosure of Confidential Data or Trade Secrets recited herein are in Initials of Parties Executive _____________ Company _______________ - 7 - addition to, and not in lieu of, any rights or remedies that Company or any Company Affiliate may have available pursuant to the laws of any jurisdiction or common law or judicial precedent, to prevent the disclosure of trade secrets or proprietary information, and the enforcement by Company or any Company Affiliate of their rights and remedies pursuant to this Agreement shall not be construed as a waiver of any other rights or available remedies that they may possess in law or equity absent this Agreement. 8. Return of Property. (a) Company Property. Executive shall, promptly after the date of this Agreement, make available to Company and the Company Affiliates, or its representative, (a) all memoranda, notes, records, manuals or other documents (including, but not limited to, written instruments, voice or data recordings, or computer tapes, disks or files of any nature), including all copies of such materials and all documentation prepared or produced in connection therewith, pertaining to the performance of Executive's services for Company and the Company Affiliates or the business of Company and the Company Affiliates whether compiled by Executive or furnished to Executive by virtue of his employment with Company or any Company Affiliate, and (b) all equipment, automobiles, computers, credit cards, telephones, office equipment, software, and other property that Company or any Company Affiliate furnished to Executive by virtue of his employment with such Company or Company Affiliate. Notwithstanding the foregoing, the parties agree that Executive may retain copies of documents relating to his own employment, compensation, benefits, and retirement benefits. (b) Executive Property. Company shall, promptly after the date of this Agreement and in cooperation with Executive, identify all of Executive's personal property located on Company's premises and deliver to Executive's home address all such property. 9. Restrictive Covenants. (a) Introduction. Executive acknowledges and agrees that he has been employed as the Chief Executive Officer of Company, serves as director, board member and/or officer of several other Company Affiliates, and in his senior executive role has been privy to other confidential and proprietary information relating to Company and the Company Affiliates, each individually and as a whole. Executive acknowledges and agrees that the use or disclosure of Company's and the Company Affiliates' Trade Secrets and Confidential Information in competition with Company and each of the Company Affiliates, or any of them, could cause serious harm to Company and the Company Affiliates. The parties recognize that an important part of Executive's duties was to develop business strategies, supervise employees performing a variety of services, and to develop goodwill for Company and the Company Affiliates through Executive's personal contact with customers, agents and others having business relationships with Company and the Company Affiliates. There is therefore a danger that this goodwill, a proprietary asset of Company and each Company Affiliate, may follow Executive when his relationship with Company and the Company Affiliates is terminated. The parties further recognize that such knowledge of Company's, and the Company Affiliates' business strategies, employees, Trade Secrets and Confidential Information would enable Executive to compete Initials of Parties Executive _____________ Company _______________ - 8 - unfairly with Company and the Company Affiliates. In light of the foregoing, Executive acknowledges and reaffirms his obligation and agreement to abide by the terms of the restrictive covenants as set forth below. (b) Noncompetition. In addition to any other obligation of Executive under any other agreement with Company or any Company Affiliate, in order to assure that Company shall realize the benefits of this Agreement, Executive agrees that, for a period of 18 months following the Resignation Date, he shall not directly or indirectly, alone or as a partner, joint venturer, member, officer, director, employee, consultant, agent, independent contractor, stockholder, creditor or in any other capacity, engage in any activity in any state that is directly or indirectly in competition in any respect with Company, any Company Affiliate or the Business; provided, however, that, the beneficial ownership of less than 5% of the shares of stock of any corporation having a class of equity securities actively traded on a national securities exchange or over-the-counter market shall not be deemed, in and of itself, to violate the prohibitions of this Section. As used in this Agreement, "Business" means the businesses of collecting, delivering, processing, tolling, supplying, brokering and/or recycling ferrous and/or non-ferrous metals, including, without limitation, (i) collecting, delivering processing, tolling, supplying, brokering and/or recycling industrial scrap metal and/or obsolete scrap metal, (ii) producing shredded, sheared, torched, cold briquetted and/or bundled scrap metal, turnings, cast and broken furnace iron, and/or (iii) collecting, delivering, processing, tolling, supplying, brokering and/or recycling aluminum, stainless steel, copper, brass, titanium and high-temperature alloys, each of which Executive agrees is the business in which he provided services and/or oversight to Company and each Company Affiliate as of the Resignation Date. (c) Nonsolicitation of Employees. Executive covenants and agrees that, for a period of 18 months following the Resignation Date, Executive shall not solicit, or take away, or attempt to solicit or take away, any person who either is an employee of Company or any Company Affiliate as of the Resignation Date or who was an employee of Company or any Company Affiliate at any time during the six-month period immediately preceding the Resignation Date, either on Executive's behalf or on behalf of any other individual or entity. (d) Nonsolicitation of Suppliers, Customers and Business Partners. Executive covenants and agrees that, for a period of 18 months following the Resignation Date, Executive shall not solicit, call upon, divert or take away, or attempt to solicit, call upon, divert or take away, for the purpose of competing with Company, any Company Affiliate or the Business, any supplier or customer of Company, any Company Affiliate or the Business. Executive further covenants and agrees that, for a period of 18 months following the Resignation Date, Executive shall not solicit or call upon, or attempt to solicit or call upon, any agent or agency, broker, broker-dealer, financial planner, registered principal or representative, supplier or service provider of any entity or person, if the purpose of such solicitation is either (i) to compete with Company, any Company Affiliate or the Business or (ii) to encourage that person or entity to terminate, diminish or alter the business relationship between Company or any Company Affiliate and that person or entity. (e) Equitable Relief. Executive acknowledges that the services rendered by Initials of Parties Executive _____________ Company _______________ - 9 - Executive to Company and the Company Affiliates have been of a special, unique, unusual and extraordinary character, which gives them a peculiar value, the loss of which cannot reasonably or adequately be compensated in damages in an action at law, and that a breach by Executive of any of the provisions contained in this Agreement shall cause Company and the Company Affiliates irreparable injury and damage. Executive further acknowledges that Executive possesses confidential and proprietary information regarding Company and the Company Affiliates and that any material breach of the provisions of this Agreement would be extremely detrimental to Company and the Company Affiliates. By reason thereof, Executive agrees that Company and the Company Affiliates shall be entitled, in addition to any other remedies they may have under this Agreement or otherwise, to injunctive and other equitable relief to prevent or curtail any breach of this Agreement by Executive; provided, however, that no recital in this Agreement of a specific legal or equitable remedy shall be construed as a waiver or prohibition against the pursuing of other legal or equitable remedies in the event of a breach. 10. Agreements to Cooperate. (a) By Executive. Executive covenants and agrees that following the Resignation Date, Executive shall cooperate with Company and the Company Affiliates in any pending or future inquiry, audit, litigation, investigation or other dispute, in which Executive, by virtue of Executive's prior relationship with Company or any Company Affiliate, has relevant knowledge or information. Executive further agrees and covenants that, in any such matter he shall, without the necessity for subpoena, in any jurisdiction, provide truthful testimony or information relevant to said matter. The parties acknowledge and agree that Executive, as a former officer and director of Company and certain Company Affiliates, is entitled to indemnification to the same extent and upon the same conditions as active officers or directors of such entities, in actions, suits or proceedings of whatever nature brought against Executive by reason of the fact that he was an officer or director of Company and certain Company Affiliates. Executive shall be reimbursed for the reasonable cost of travel, lodging, meals and automobile rental and reasonable attorneys' fees and expenses incurred by Executive in complying with this paragraph. In addition, after the date which is 18 months after the Resignation Date, Executive shall receive reasonable per diem compensation for each day that Executive shall be required by Company to perform services pursuant to the requirements of this Section 10. Any request for cooperation shall be limited to the minimum amount of Executive's time as is reasonably necessary to accomplish the business purpose. (b) By Company. Company shall use reasonable efforts to effect the timely issuance of common stock issuable in respect of Executive's warrants promptly following Executive's notice of exercise of such warrants and will provide reasonable assurances to any brokerage firm utilized by Executive that the shares of common stock issued upon the exercise of such warrants and the shares of restricted stock held by Executive have been duly registered under the Securities Act of 1933, as amended. Initials of Parties Executive _____________ Company _______________ - 10 - 11. Non-Disparagement. (a) By Executive. Except as otherwise required by law, Executive hereby agrees and covenants that he shall not make any statement, written or verbal, in any forum or media, or take any other action, in disparagement of Company or any Company Affiliate. Without limiting the foregoing, the statements prohibited by this section include negative references to Company's or any Company Affiliates' products, services, corporate policy, officers and/or directors. (b) By Company. Except as otherwise required by law, Company hereby agrees and covenants that it shall cause all officers and directors of Company (including, but not limited to, members of Company's Board of Directors, President and bChief Financial Officer) to refrain from making any statement, written or verbal, in any forum or media, or taking any other action, either directly or indirectly through the officers or employees of Company or any Company Affiliate, in disparagement of Executive. Without limiting the foregoing, the statements prohibited by this section include negative references to Executive's service as an employee, officer, director or board member of Company or the Company Affiliates but do not include statements regarding any claims not released in subsection 3(e) above. 12. Applicable Law. This Agreement has been entered into in and shall be governed by and construed under the laws of the State of New York without reference to the choice of law principles thereof. 13. Successors. This Agreement shall be binding on the parties hereto and their respective heirs, successors and assigns. 14. Arbitration. Subject to Company's and the Company Affiliates' right to seek immediate injunctive or equitable relief as described in paragraph 9(d) above, any dispute, controversy, or claim arising out of or relating to this Agreement, the breach, termination or invalidity thereof, or Executive's employment, including claims of tortious interference or other tort or statutory claims, and including without limitation any dispute concerning the scope of this arbitration clause, shall be settled by arbitration administered by the American Arbitration Association in accordance with the Employment Dispute Resolution Rules then in effect. If a dispute arises between the parties, the parties agree that their respective representatives shall meet and consult in good faith and attempt to settle the dispute, within 30 days of written notice thereof, as a condition precedent to the initiation of arbitration proceedings hereunder. If the parties are unable to resolve their differences within that 30-day period, then within ten days thereafter, the parties shall select three arbitrators from a list of potential arbitrators supplied by the American Arbitration Association, in accordance with the arbitrator selection procedures of the American Arbitration Association then in effect. Not later than 45 days following the selection of the arbitrators, a hearing shall be convened by the arbitrators in Chicago, Illinois. At such hearing, each party shall be entitled to present arguments in favor of, and call witnesses in support of such party's position with respect to the item in dispute; provided, however, that absent a written agreement of the parties to the contrary, presentation and/or arguments (including the direct testimony of any witnesses called by a party) of each side of the dispute Initials of Parties Executive _____________ Company _______________ - 11 - shall be limited to five hours. The judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. 15. Severability. If fulfillment of any provision of this Agreement, at the time such fulfillment shall be due, shall transcend the limit of validity prescribed by law, then the obligation to be fulfilled shall be reduced or modified to the limit of such validity; and if any clause or provision contained herein operates or would operate to invalidate this Agreement in whole or in part, then such clause or provision only shall be held ineffective as though not herein contained, and the remainder this Agreement shall remain in full force and effect. 16. Understanding. Executive herewith covenants and agrees that he has read and fully understands the contents and the effect of this Agreement. Executive accepts each and all of the terms, provisions, and conditions of this Agreement, and does so voluntarily and with full knowledge and understanding of the contents, nature, and effect of this Agreement. 17. Attorneys' Fees, Costs and Expenses. Company shall reimburse Executive for reasonable attorneys' fees and expenses incurred by Executive in connection with the preparation and negotiation of this Agreement. In addition, if any arbitration proceeding or action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 18. Third Party Beneficiaries. The Company Affiliates shall be third-party beneficiaries of this Agreement for the purposes enforcing paragraphs 3 through 19 hereof. Except as expressly provided herein, there are no third party beneficiaries of this Agreement and this Agreement shall inure solely to the benefit of the parties hereto and the Company Affiliates. 19. Entire Agreement; Miscellaneous. Except as expressly provided herein, the parties acknowledge and agree that they are not relying on any representations, oral or written, other than those expressly contained in this Agreement. Except as expressly provided herein, this Agreement supersedes all prior agreements, proposals, negotiations, conversations, discussions and course of dealing between the parties, including but not limited to any employment, severance or benefits agreements between Company or any Company Affiliate and Executive. Section headings are for convenience of reference only and are not intended to create substantive rights or obligations. This Agreement may be executed in counterparts, each of which shall be deemed an original, and together shall constitute one and the same Agreement. Initials of Parties Executive _____________ Company _______________ - 12 - This Agreement was executed in duplicate with all pages preceding the signature page having been initialed by all parties hereto. GIVEN under the hand and seal of the parties or by their duly authorized agent, as of the date first above written. EXECUTIVE: _______________________________________ Albert A. Cozzi COMPANY: METAL MANAGEMENT, INC. By____________________________________ Daniel Dienst Chief Executive Officer and Chairman of the Board Initials of Parties Executive _____________ Company _______________ - 13 - SCHEDULE A
WARRANT/OPTION GRANT DATE NUMBER -------------- ---------- ------ Restricted Stock May 12, 2003 15,000 Restricted Stock May 20, 2003 5,580
Initials of Parties Executive _____________ Company _______________ - 14 - EX-10.10 4 c85628exv10w10.txt SEPARATION AGREEMENT Exhibit 10.10 SEPARATION AND RELEASE AGREEMENT This Separation and Release Agreement ("Agreement") is entered into between Metal Management, Inc., a Delaware corporation ("Company"), for and on behalf of itself and any affiliated and related entities (hereinafter referred to collectively as the "Company Affiliates" or, individually, as a "Company Affiliate") and Frank J. Cozzi, an individual resident of the state of Illinois ("Executive"), on this 18th day of January 2004. For purposes of this Agreement, "affiliated and related entities" means, with respect to any entity or entities, any other entity or entities directly or indirectly controlling, controlled by, or under common control with, such entity or entities, as well as any joint venture involving any such entity and, for purposes of this definition, "control" means the power to direct or cause the direction of the management or policies of the controlled entity. For and in consideration of the covenants and agreements set forth herein, including the waiver and release by the parties of certain rights thereof, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Resignation. Executive hereby resigns as an employee, director, board member, and/or officer of Company and all Company Affiliates of which he is an employee, director, board member, and/or officer, effective as of 4:30 p.m. (CST) on January 16, 2004 (the "Resignation Date"), and shall take such action as may be required to document such resignation as may be reasonably requested by the applicable Company or Company Affiliate. Executive shall have no further official duties after the Resignation Date. Executive's resignation shall be treated as a unilateral termination by Executive, without "Good Reason," as such term is defined in that certain Employment Agreement, dated December 1, 1997 (as amended by that certain letter agreement, dated as of June 7, 2001 and that certain letter agreement dated as of June 13, 2001, the "Employment Agreement"), by and between Executive and Company. 2. Post-Employment Compensation and Benefits. Subject to withholding for taxes and other amounts required by law to be withheld, and to the terms of any applicable benefit plans, Executive shall receive the compensation and benefits described in this paragraph, provided that Executive does not revoke this Agreement pursuant to paragraph 3(e). Executive acknowledges and agrees that the releases, promises and obligations of Company and the Company Affiliates pursuant to this Agreement constitute good and valuable consideration for Executive's entering into this Agreement. (a) Executive shall receive an amount equal to One Million Seven Hundred Fifty-Seven Thousand Seven Hundred Forty-Seven U.S. Dollars ($1,757,747) ("Severance"), of which (i) One Million Two Hundred Twenty-One Thousand Two Hundred Ninety-Six U.S. Dollars ($1,221,296) shall be paid on January 30, 2004 and (ii) Five Hundred Thirty-Six Thousand Four Hundred Fifty-One ($536,451) shall be paid on July 18, 2005. The Severance is inclusive of all severance benefits, salary, short-term and long-term bonuses, and in lieu of any and all other compensation (if any) to which Executive may be entitled, including, without limitation, any payments arising under the Employment Agreement, from Company or any Initials of Parties Executive _____________ Company _______________ Company Affiliate, except as otherwise expressly provided in this paragraph 2, and including salary and other amounts Executive is entitled to through the Resignation Date. Except for the portion of this payment attributable to accrued unpaid salary, this payment shall not be considered earnings for purposes of the retirement, savings, 401(k) or other employee benefit plans of Company or any Company Affiliate. (b) Executive shall not be eligible for any awards under an incentive compensation plan of Company or any Company Affiliate. (c) All warrants for the purchase of Company common stock previously awarded or granted to Executive are fully vested as of the Resignation Date and are exercisable (according to the terms of the respective plan or scheme pursuant to which such warrants were issued) for the remainder of their respective exercise terms. (d) Executive shall be eligible to continued group health plan coverage under Company's medical and dental plan in accordance with the terms of provisions of such plan for a period of 18 months from the Resignation Date at no charge to Executive. (e) Company shall reimburse Executive for up to $27,504 of the cost of life insurance purchased after the Resignation Date upon submission to Company of proof of payments by Executive. (f) Except as otherwise expressly provided in this paragraph 2, nothing in this Agreement shall limit or reduce any benefits or rights Executive may have under any retirement, savings, deferred compensation, 401(k), or any other employee benefit plan of Company or any Company Affiliate, or pursuant to any personal life insurance, health or annuity contract that Executive may have with Company or any Company Affiliate; provided, further, that, notwithstanding the provisions of this Section 2(f), neither Company nor any Company Affiliate shall be liable to Executive for any non-vested matching funds or other non-vested benefits under any retirement, savings, deferred compensation, 401(k), or any other employee benefit plan of Company or any Company Affiliate. 3. Release of Claims. (a) General. Executive acknowledges and agrees that this Agreement includes a complete, final, and binding settlement, release and covenant not to sue with respect to any claims he may have against the Releasees (as defined below), including, but not limited to, all claims arising from or in any way related to Executive's employment with Company or any of the Company Affiliates or the termination thereof, as well as claims arising from any contracts, agreements, or employment relationships, currently in force or contemplated, between Executive and Company and the Company Affiliates. (b) Release. Executive hereby releases, discharges, and covenants not to sue Company and the Company Affiliates, or any of them, and/or their respective predecessors, successors, parents, subsidiaries, affiliates, divisions, assigns, current or former employees, Initials of Parties Executive _____________ Company _______________ - 2 - officers, directors, shareholders, representatives, attorneys, and agents (collectively referred to herein as "Releasees"), collectively, separately, and severally, from any and all claims, causes of action, liabilities, and judgments of every type and description whatsoever, known and unknown, arising under any state (including the employment laws of State of Illinois), local, federal, administrative or foreign (for purposes of this Agreement, "foreign" means the legal jurisdiction of any sovereign state or country other than the United States of America) law (including, but not limited to, claims arising under the Civil Rights Act of 1964, as amended; 42 U.S.C. Section 1981; the Rehabilitation Act of 1973, as amended; the Employee Retirement Income Security Act of 1974, as amended; the Fair Labor Standards Act of 1938, as amended; the Americans with Disabilities Act; the Securities Act of 1933; the Securities Exchange Act of 1934; the Family and Medical Leave Act; or claims for declaratory judgment, equitable relief, or attorney's fees) which he, his heirs, administrators, executors, personal representatives, beneficiaries, and assigns may have or claim to have against Releasees for any reason whatsoever, which arise from events occurring prior to the date of this Agreement, other than a claim to pay the benefits described in Paragraph 2 hereof. Executive understands and agrees that the payments made to him pursuant to this Agreement and this release include and encompass therein any and all claims with respect to attorneys' fees, costs, and expenses for or by any and all attorneys who have represented him or with whom he has consulted or who have done anything in connection with the subject matter of this Agreement or any and all claims released herein. Notwithstanding anything contained herein to the contrary, nothing in this subparagraph shall prevent Executive from bringing a claim or claims to enforce the terms of this Agreement. (c) Release of Claims under the Age Discrimination in Employment Act of 1967, as Amended. In addition to the foregoing, Executive hereby knowingly and voluntarily releases, discharges and covenants not to sue or move for arbitration in any court or other tribunal, Releasees, collectively, separately and severally, from or for any and all liability, claims, allegations, and causes of action arising under the Age Discrimination in Employment Act of 1967, as amended ("ADEA"), which Executive, Executive's heirs, administrators, executors, personal representatives, beneficiaries, and assigns may have or claim to have against Releasees. (d) Opportunity to Consider/Consideration. Executive hereby acknowledges and represents that Executive (i) has been advised in writing to consult with an attorney prior to executing this Agreement, (ii) has been given the opportunity to consider for a period of at least 21 days the terms of this Agreement and (iii) has received valuable and good consideration to which Executive is otherwise not entitled in exchange for Executive's execution of this Agreement. (e) Revocation Period. The parties hereby acknowledge that Executive may revoke the release by Executive set forth in subparagraphs 3(b) and 3(c) (the "General Release") at any time prior to 5:00 p.m. on the seventh day after this Agreement is executed by Executive (the "Effective Date") and that the General Release and agreements of Company set forth in Section 2 and this Section 3 shall not be effective or enforceable prior to the Effective Date unless Executive shall not have revoked the General Release in accordance with the terms hereof on or prior to the Effective Date. In the event Executive chooses to exercise Executive's option Initials of Parties Executive _____________ Company _______________ - 3 - to revoke the General Release, Executive shall notify Company in writing to Company's agent designated below for this purpose, and return all monies paid pursuant to this Agreement (if any) no later than 5:00 p.m. on the Effective Date. Such notice shall be delivered by registered or certified mail, return receipt requested and addressed as follows: Metal Management, Inc. 500 N. Dearborn Street Suite 600 Chicago, Illinois 60610 Attn: Daniel Dienst with a copy to: King & Spalding LLP 1185 Avenue of the Americas New York, New York 10036 Attn: E. William Bates, II, Esq. Lawrence A. Larose, Esq. (f) Full Settlement and Agreement. Executive agrees that this Agreement resolves any and all claims which have been or might be filed by Executive or on Executive's behalf against any Releasees with any State of Illinois administrative agency, the Equal Employment Opportunity Commission (the "EEOC") and any other federal, state, or local court, tribunal agency or commission of the United States, or of any other sovereign state or country as of the Effective Date and as specified in subparagraphs 3(b) or 3(c) above. Executive agrees that this Agreement constitutes a full resolution of any and all such claims, and if any action should be taken to pursue any such charge, any or all Releasees shall be entitled to a protective order against or summary judgment dismissing any such action, and neither he nor anyone on Executive's behalf shall file or cause to be filed any charge, claim, or complaint in any forum against any of the Releasees. (g) Release and Indemnification by Company. Company and Company Affiliates hereby release, discharge, and covenant not to sue Executive from any and all claims, causes of action, liabilities, and judgments of every type and description whatsoever, arising under any state, local, federal, administrative or foreign law (including, but not limited to claims for declaratory judgment, equitable relief, or attorney's fees) which they may have or claim to have against Executive for any reason whatsoever, excluding theft or fraud. Further, Company and Company Affiliates, jointly and severally, agree to indemnify and hold Executive harmless from any and all claims, causes of action, liabilities, and judgments of every type and description whatsoever, known and unknown, excluding theft or fraud, arising under any state, local, federal, administrative or foreign law (including, but not limited to claims for declaratory judgment, equitable relief, or attorney's fees) brought against him by or on behalf of any other Company Affiliate, including, without limitation, the Releasees (or other association for which Executive served as an officer or in a similar business capacity on behalf of or in his capacity as an officer of Company or any Company Affiliate), which arise from events occurring prior to the Effective Initials of Parties Executive _____________ Company _______________ - 4 - Date. Notwithstanding anything contained herein to the contrary, nothing in this subparagraph shall prevent Company or any Company Affiliate from bringing a claim or claims for theft or fraud or to enforce the terms of this Agreement. 4. Non-Assignment. Executive, Company and Company Affiliates each represent, warrant and agree that they have not assigned, transferred, sold or hypothecated any of the claims released by this Agreement. The parties covenant and agree that if there is any claim arising from the assignment, sale or hypothecation of any claim released hereunder, the party who assigned, sold or hypothecated such claim shall indemnify and hold the other party harmless from any liability, including costs and expenses (as well as reasonable attorneys' fees) incurred as a result of any such claim. 5. Indemnification for Loss of Consortium. Executive covenants and agrees that if there is any claim for loss of consortium against Releasees, or any other similar claim, arising out of or related to Executive's relationship or transactions with Company or any Company Affiliate (including not limited to his employment or separation of employment with Company and any Company Affiliate), Executive agrees to indemnify and hold Company and any Company Affiliate harmless from any liability, including costs and expenses (as well as reasonable attorneys' fees) incurred by Company or any Company Affiliate as a result of any such claim. 6. Confidentiality. (a) Except as otherwise specifically provided in Section 6(b) of this Agreement, Executive represents, agrees and covenants that he has maintained and shall continue to maintain the confidentiality of, and not to disclose, reveal, publish, disseminate, or discuss, directly or indirectly, to or with any other person or entity the terms of this Agreement (including whether or not any amount was paid, the amount paid, or information he may have with respect to this Agreement). (b) The following disclosures, which are specific exceptions to Section 6(a) above, are permitted in the following limited circumstances: (i) Executive may make such disclosures as are reasonably necessary for tax reporting purposes; (ii) Executive may disclose the terms and amount paid under this Agreement as reasonably necessary to obtain legal, tax, or accounting advice or services; (iii). Executive is permitted to disclose the terms of this Agreement to the extent required in any legal proceeding involving the enforcement of this Agreement, but, as to any other legal proceedings, Executive is permitted to disclose the terms of this Agreement only to the extent (1) specifically requested and consented to in writing by an officer or other authorized Initials of Parties Executive _____________ Company _______________ - 5 - representative of Company or the Company Affiliates, or (2) compelled pursuant to a subpoena or other court order, provided, however, that before disclosing this Agreement pursuant to a subpoena or court order, Executive shall provide notice to Company that Executive has been served with such subpoena or court order, including by providing Company with a copy thereof, and shall not disclose this Agreement before Company or another Company Affiliate (if relevant to the matter at hand) has had the opportunity to object to such disclosure within the time allowed by law or otherwise to act to protect such information from disclosure. (iv). Executive is permitted to disclose the terms of this Agreement to his spouse, provided that his spouse has been advised of and agrees to abide by the requirements of this Section 6. (v). Notwithstanding anything contained herein to the contrary, Executive's communications regarding this Agreement to members of the board of directors of Company on or prior to the date of this Agreement shall not be considered a violation of this Section 6. 7. Nondisclosure. (a) Introduction. Executive acknowledges and agrees that he has been employed as the Vice President of Company, serves as director, board member and/or officer of several other Company Affiliates, and in his senior executive role has been privy to other confidential and proprietary information relating to Company and the Company Affiliates. In light of the foregoing, Executive agrees to hold in a fiduciary capacity and keep confidential certain information relating to Company and the Company Affiliates, as set forth in this paragraph 7. (b) Nondisclosure of Attorney-Client Communications and Work Product. Executive acknowledges and agrees that during the term of his employment, Executive has been exposed to or has had access to the confidential attorney-client communications of Company and the Company Affiliates and attorney work product relating to Company and the Company Affiliates. Executive hereby agrees that he shall not directly or indirectly use or disclose any information or document conveyed to him in the course of his employment that is a confidential attorney client communication or is attorney work product except to the attorneys of the applicable Company or Company Affiliates or as required by a validly issued court order. (c) Acknowledgement of Access to Trade Secrets and Confidential Information. Executive acknowledges and agrees during his employment as the Vice President of Company and in his capacity as an officer, director, and/or board member of other Company Affiliates, Executive was intimately involved in developing business strategy and planning for Company and the Company Affiliates, and was provided or had access to Trade Secrets and Confidential Information of Company and the Company Affiliates, including but not limited to Initials of Parties Executive _____________ Company _______________ - 6 - present and future operations of Company and the Company Affiliates, their customers, distributors, and suppliers, marketing, pricing and bidding strategies, and the methods used by Company and the Company Affiliates and their respective employees. Executive acknowledges and agrees that such information has been developed or obtained by Company and the Company Affiliates by the investment of significant time, effort and expense, and that such information is a valuable, special and unique asset of Company and the Company Affiliates which provides them with a significant competitive advantage. Executive further understands and acknowledges that such information is proprietary to Company and the Company Affiliates and that, if exploited by Executive in contravention of this Agreement, would seriously, adversely and irreparably affect the business of Company and the Company Affiliates. (d) Nondisclosure of Trade Secrets. Executive hereby agrees that he shall not directly or indirectly use or disclose any Trade Secret of Company or the Company Affiliates for so long as such information remains a Trade Secret. As used herein, a Trade Secret includes, but is not limited to, any technical or non-technical data, a formula, a pattern, a compilation, a program, a device, a method, a technique, a drawing, a process, financial data, financial plans, product plans, or a list of actual or potential customers or suppliers which: (i) derives economic value, actual or potential from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; (ii) is the subject of reasonable efforts by Company or any Company Affiliate to maintain its secrecy; and (iii) is not otherwise in the public domain. (e) Nondisclosure of Confidential Information. In addition to the foregoing, and not in limitation thereof, Executive agrees that for a period of 18 months after the Resignation Date, Executive shall hold in a fiduciary capacity for the benefit of Company and each of the Company Affiliates and shall not directly or indirectly use or disclose any Confidential Information, as defined herein, that Executive may have acquired (whether or not developed or compiled by Executive and whether or not Executive was authorized to have access to such information) during the term of, in the course of or as a result of Executive's employment by or in the performance of Executive's duties for Company or any Company Affiliate. The term "Confidential Information" as used in this Agreement means any secret, confidential or proprietary information of Company or any Company Affiliate not otherwise included in the definition of "Trade Secrets" above. The term "Confidential Information" does not include information that has become generally available to the public (unless Executive is aware that the information has been made public in contravention of a contractual, statutory or fiduciary duty). (f) Remedies Not Exclusive. Executive hereby acknowledges and agrees that the prohibitions against disclosure of Confidential Data or Trade Secrets recited herein are in addition to, and not in lieu of, any rights or remedies that Company or any Company Affiliate may have available pursuant to the laws of any jurisdiction or common law or judicial precedent, to prevent the disclosure of trade secrets or proprietary information, and the enforcement by Company or any Company Affiliate of their rights and remedies pursuant to this Agreement shall not be construed as a waiver of any other rights or available remedies that they may possess in law or equity absent this Agreement. Initials of Parties Executive _____________ Company _______________ - 7 - 8. Return of Property. (a) Company Property. Executive shall, promptly after the date of this Agreement, make available to Company and the Company Affiliates, or its representative, (a) all memoranda, notes, records, manuals or other documents (including, but not limited to, written instruments, voice or data recordings, or computer tapes, disks or files of any nature), including all copies of such materials and all documentation prepared or produced in connection therewith, pertaining to the performance of Executive's services for Company and the Company Affiliates or the business of Company and the Company Affiliates whether compiled by Executive or furnished to Executive by virtue of his employment with Company or any Company Affiliate, and (b) all equipment, automobiles, computers, credit cards, telephones, office equipment, software, and other property that Company or any Company Affiliate furnished to Executive by virtue of his employment with such Company or Company Affiliate. Notwithstanding the foregoing, the parties agree that Executive may retain copies of documents relating to his own employment, compensation, benefits, and retirement benefits. (b) Executive Property. Company shall, promptly after the date of this Agreement and in cooperation with Executive, identify all of Executive's personal property located on Company's premises and deliver to Executive's home address all such property. 9. Restrictive Covenants. (a) Introduction. Executive acknowledges and agrees that he has been employed as the Vice President of Company, serves as director, board member and/or officer of several other Company Affiliates, and in his senior executive role has been privy to other confidential and proprietary information relating to Company and the Company Affiliates, each individually and as a whole. Executive acknowledges and agrees that the use or disclosure of Company's and the Company Affiliates' Trade Secrets and Confidential Information in competition with Company and each of the Company Affiliates, or any of them, could cause serious harm to Company and the Company Affiliates. The parties recognize that an important part of Executive's duties was to develop business strategies, supervise employees performing a variety of services, and to develop goodwill for Company and the Company Affiliates through Executive's personal contact with customers, agents and others having business relationships with Company and the Company Affiliates. There is therefore a danger that this goodwill, a proprietary asset of Company and each Company Affiliate, may follow Executive when his relationship with Company and the Company Affiliates is terminated. The parties further recognize that such knowledge of Company's, and the Company Affiliates' business strategies, employees, Trade Secrets and Confidential Information would enable Executive to compete unfairly with Company and the Company Affiliates. In light of the foregoing, Executive acknowledges and reaffirms his obligation and agreement to abide by the terms of the restrictive covenants as set forth below. (b) Noncompetition. In addition to any other obligation of Executive under any other agreement with Company or any Company Affiliate, in order to assure that Company shall realize the benefits of this Agreement, Executive agrees that, for a period of 18 months Initials of Parties Executive _____________ Company _______________ - 8 - following the Resignation Date, he shall not directly or indirectly, alone or as a partner, joint venturer, member, officer, director, employee, consultant, agent, independent contractor, stockholder, creditor or in any other capacity, engage in any activity in any state that is directly or indirectly in competition in any respect with Company, any Company Affiliate or the Business; provided, however, that, the beneficial ownership of less than 5% of the shares of stock of any corporation having a class of equity securities actively traded on a national securities exchange or over-the-counter market shall not be deemed, in and of itself, to violate the prohibitions of this Section. As used in this Agreement, "Business" means the businesses of collecting, delivering, processing, tolling, supplying, brokering and/or recycling ferrous and/or non-ferrous metals, including, without limitation, (i) collecting, delivering processing, tolling, supplying, brokering and/or recycling industrial scrap metal and/or obsolete scrap metal, (ii) producing shredded, sheared, torched, cold briquetted and/or bundled scrap metal, turnings, cast and broken furnace iron, and/or (iii) collecting, delivering, processing, tolling, supplying, brokering and/or recycling aluminum, stainless steel, copper, brass, titanium and high-temperature alloys, each of which Executive agrees is the business in which he provided services and/or oversight to Company and each Company Affiliate as of the Resignation Date. (c) Nonsolicitation of Employees. Executive covenants and agrees that, for a period of 18 months following the Resignation Date, Executive shall not solicit, or take away, or attempt to solicit or take away, any person who either is an employee of Company or any Company Affiliate as of the Resignation Date or who was an employee of Company or any Company Affiliate at any time during the six-month period immediately preceding the Resignation Date, either on Executive's behalf or on behalf of any other individual or entity. (d) Nonsolicitation of Suppliers, Customers and Business Partners. Executive covenants and agrees that, for a period of 18 months following the Resignation Date, Executive shall not solicit, call upon, divert or take away, or attempt to solicit, call upon, divert or take away, for the purpose of competing with Company, any Company Affiliate or the Business, any supplier or customer of Company, any Company Affiliate or the Business. Executive further covenants and agrees that, for a period of 18 months following the Resignation Date, Executive shall not solicit or call upon, or attempt to solicit or call upon, any agent or agency, broker, broker-dealer, financial planner, registered principal or representative, supplier or service provider of any entity or person, if the purpose of such solicitation is either (i) to compete with Company, any Company Affiliate or the Business or (ii) to encourage that person or entity to terminate, diminish or alter the business relationship between Company or any Company Affiliate and that person or entity. (e) Equitable Relief. Executive acknowledges that the services rendered by Executive to Company and the Company Affiliates have been of a special, unique, unusual and extraordinary character, which gives them a peculiar value, the loss of which cannot reasonably or adequately be compensated in damages in an action at law, and that a breach by Executive of any of the provisions contained in this Agreement shall cause Company and the Company Affiliates irreparable injury and damage. Executive further acknowledges that Executive possesses confidential and proprietary information regarding Company and the Company Affiliates and that any material breach of the provisions of this Agreement would be extremely Initials of Parties Executive _____________ Company _______________ - 9 - detrimental to Company and the Company Affiliates. By reason thereof, Executive agrees that Company and the Company Affiliates shall be entitled, in addition to any other remedies they may have under this Agreement or otherwise, to injunctive and other equitable relief to prevent or curtail any breach of this Agreement by Executive; provided, however, that no recital in this Agreement of a specific legal or equitable remedy shall be construed as a waiver or prohibition against the pursuing of other legal or equitable remedies in the event of a breach. 10. Agreements to Cooperate. Executive covenants and agrees that following the Resignation Date, Executive shall cooperate with Company and the Company Affiliates in any pending or future inquiry, audit, litigation, investigation or other dispute, in which Executive, by virtue of Executive's prior relationship with Company or any Company Affiliate, has relevant knowledge or information. Executive further agrees and covenants that, in any such matter he shall, without the necessity for subpoena, in any jurisdiction, provide truthful testimony or information relevant to said matter. The parties acknowledge and agree that Executive, as a former officer and director of Company and certain Company Affiliates, is entitled to indemnification to the same extent and upon the same conditions as active officers or directors of such entities, in actions, suits or proceedings of whatever nature brought against Executive by reason of the fact that he was an officer or director of Company and certain Company Affiliates. Executive shall be reimbursed for the reasonable cost of travel, lodging, meals and automobile rental and reasonable attorneys' fees and expenses incurred by Executive in complying with this paragraph. In addition, after the date which is 18 months after the Resignation Date, Executive shall receive reasonable per diem compensation for each day that Executive shall be required by Company to perform services pursuant to the requirements of this Section 10. Any request for cooperation shall be limited to the minimum amount of Executive's time as is reasonably necessary to accomplish the business purpose. 11. Non-Disparagement. (a) By Executive. Except as otherwise required by law, Executive hereby agrees and covenants that he shall not make any statement, written or verbal, in any forum or media, or take any other action, in disparagement of Company or any Company Affiliate. Without limiting the foregoing, the statements prohibited by this section include negative references to Company's or any Company Affiliates' products, services, corporate policy, officers and/or directors. (b) By Company. Except as otherwise required by law, Company hereby agrees and covenants that it shall cause all officers and directors of Company (including, but not limited, the members of the Company's Board, President and Chief Financial Officer) to refrain from making any statement, written or verbal, in any forum or media, or taking any other action, either directly or indirectly through the officers or employees of Company or any Company Affiliate, in disparagement of Executive. Without limiting the foregoing, the statements prohibited by this section include negative references to Executive's service as an employee, officer, director or board member of Company or the Company Affiliates but do not include statements regarding any claims not released in subsection 3(e) above. Initials of Parties Executive _____________ Company _______________ - 10 - 12. Applicable Law. This Agreement has been entered into in and shall be governed by and construed under the laws of the State of New York without reference to the choice of law principles thereof. 13. Successors. This Agreement shall be binding on the parties hereto and their respective heirs, successors and assigns. 14. Arbitration. Subject to Company's and the Company Affiliates' right to seek immediate injunctive or equitable relief as described in paragraph 9(d) above, any dispute, controversy, or claim arising out of or relating to this Agreement, the breach, termination or invalidity thereof, or Executive's employment, including claims of tortious interference or other tort or statutory claims, and including without limitation any dispute concerning the scope of this arbitration clause, shall be settled by arbitration administered by the American Arbitration Association in accordance with the Employment Dispute Resolution Rules then in effect. If a dispute arises between the parties, the parties agree that their respective representatives shall meet and consult in good faith and attempt to settle the dispute, within 30 days of written notice thereof, as a condition precedent to the initiation of arbitration proceedings hereunder. If the parties are unable to resolve their differences within that 30-day period, then within ten days thereafter, the parties shall select three arbitrators from a list of potential arbitrators supplied by the American Arbitration Association, in accordance with the arbitrator selection procedures of the American Arbitration Association then in effect. Not later than 45 days following the selection of the arbitrators, a hearing shall be convened by the arbitrators in Chicago, Illinois. At such hearing, each party shall be entitled to present arguments in favor of, and call witnesses in support of such party's position with respect to the item in dispute; provided, however, that absent a written agreement of the parties to the contrary, presentation and/or arguments (including the direct testimony of any witnesses called by a party) of each side of the dispute shall be limited to five hours. The judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. 15. Severability. If fulfillment of any provision of this Agreement, at the time such fulfillment shall be due, shall transcend the limit of validity prescribed by law, then the obligation to be fulfilled shall be reduced or modified to the limit of such validity; and if any clause or provision contained herein operates or would operate to invalidate this Agreement in whole or in part, then such clause or provision only shall be held ineffective as though not herein contained, and the remainder this Agreement shall remain in full force and effect. 16. Understanding. Executive herewith covenants and agrees that he has read and fully understands the contents and the effect of this Agreement. Executive accepts each and all of the terms, provisions, and conditions of this Agreement, and does so voluntarily and with full knowledge and understanding of the contents, nature, and effect of this Agreement. 17. Attorneys' Fees, Costs and Expenses. Company shall reimburse Executive for reasonable attorneys' fees and expenses incurred by Executive in connection with the preparation and negotiation of this Agreement. In addition, if any arbitration proceeding or action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party Initials of Parties Executive _____________ Company _______________ - 11 - shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 18. Third Party Beneficiaries. The Company Affiliates shall be third-party beneficiaries of this Agreement for the purposes enforcing paragraphs 3 through 19 hereof. Except as expressly provided herein, there are no third party beneficiaries of this Agreement and this Agreement shall inure solely to the benefit of the parties hereto and the Company Affiliates. 19. Entire Agreement; Miscellaneous. Except as expressly provided herein, the parties acknowledge and agree that they are not relying on any representations, oral or written, other than those expressly contained in this Agreement. Except as expressly provided herein, this Agreement supersedes all prior agreements, proposals, negotiations, conversations, discussions and course of dealing between the parties, including but not limited to any employment, severance or benefits agreements between Company or any Company Affiliate and Executive. Section headings are for convenience of reference only and are not intended to create substantive rights or obligations. This Agreement may be executed in counterparts, each of which shall be deemed an original, and together shall constitute one and the same Agreement. Initials of Parties Executive _____________ Company _______________ - 12 - This Agreement was executed in duplicate with all pages preceding the signature page having been initialed by all parties hereto. GIVEN under the hand and seal of the parties or by their duly authorized agent, as of the date first above written. EXECUTIVE: _____________________________ Frank J. Cozzi COMPANY: METAL MANAGEMENT, INC. By___________________________ Daniel Dienst Chief Executive Officer and Chairman of the Board Initials of Parties Executive _____________ Company _______________ - 13 - EX-21.1 5 c85628exv21w1.txt SUBSIDIARIES Exhibit 21.1 SUBSIDIARIES OF THE COMPANY CIM Trucking, Inc., an Illinois corporation Mac Leod Metals Co., a California corporation Metal Management Aerospace, Inc., a Delaware corporation Metal Management Alabama, Inc., a Delaware corporation MTLM Arizona, Inc., an Arizona corporation Metal Management Arizona, L.L.C., an Arizona limited liability company Metal Management Connecticut, Inc., a Delaware corporation Metal Management Gulf Coast, Inc., a Delaware corporation Metal Management Indiana, Inc., an Illinois corporation Metal Management Memphis, L.L.C., a Tennessee limited liability company Metal Management Midwest, Inc., an Illinois corporation Metal Management Mississippi, L.L.C., a Delaware limited liability company Metal Management New Haven, Inc., a Delaware corporation Metal Management Northeast, Inc., a New Jersey corporation Metal Management Ohio, Inc., a Ohio corporation Metal Management S&A Holdings, Inc., a Delaware corporation Metal Management Pittsburgh, Inc., a Delaware corporation Metal Management Realty, Inc., an Arizona corporation Metal Management Stainless & Alloy, Inc., a Delaware corporation Metal Management Services, Inc., a Delaware corporation Metal Management West, Inc., a Colorado corporation Metal Management West Coast Holdings, Inc., a Delaware corporation Proler Southwest Inc., a Texas corporation Reserve Iron & Metal Limited Partnership, a Delaware limited partnership Southern Recycling, L.L.C., a Louisiana limited liability company (ownership of a 28.5% interest) Rondout Iron & Metal, L.L.C., a Delaware limited liability company (ownership of 50%) EX-23.1 6 c85628exv23w1.txt CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No.333-106910) and in the Registration Statement on Form S-8 (No.333-100726) of Metal Management, Inc. of our reports dated June 11, 2004 and June 5, 2002 relating to the Reorganized Company and Predecessor Company financial statements and financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP Chicago, Illinois June 11, 2004 EX-31.1 7 c85628exv31w1.txt CERTIFICATION Exhibit 31.1 I, Daniel W. Dienst, certify that: 1. I have reviewed this annual report on Form 10-K of Metal Management, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and c) Disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 11, 2004 /s/ Daniel W. Dienst --------------------------- Daniel W. Dienst Chairman of the Board and Chief Executive Officer EX-31.2 8 c85628exv31w2.txt CERTIFICATION Exhibit 31.2 I, Robert C. Larry, certify that: 1. I have reviewed this annual report on Form 10-K of Metal Management, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and c) Disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 11, 2004 /s/ Robert C. Larry ------------------------------- Robert C. Larry Executive Vice President, Finance and Chief Financial Officer EX-32.1 9 c85628exv32w1.txt CERTIFICATION Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with the annual report on Form 10-K of Metal Management, Inc. (the "Corporation") for the period ended March 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, the Chairman of the Board and Chief Executive Officer of the Corporation, certifies that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. /s/ Daniel W. Dienst - --------------------------- Daniel W. Dienst Chairman of the Board and Chief Executive Officer June 11, 2004 A signed original of this written statement required by Section 906 has been provided to the Corporation and will be retained by the Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 10 c85628exv32w2.txt CERTIFICATION Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with the annual report on Form 10-K of Metal Management, Inc. (the "Corporation") for the period ended March 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, the Executive Vice President, Finance and Chief Financial Officer of the Corporation, certifies that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. /s/ Robert C. Larry - ------------------------------- Robert C. Larry Executive Vice President, Finance and Chief Financial Officer June 11, 2004 A signed original of this written statement required by Section 906 has been provided to the Corporation and will be retained by the Corporation and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----