-----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, Dp14O+k/h0IbcaHL5oijSK+ft1YJzMJ/9FEIWZQB48j5NZR6dkE8E5tf8UI/y6aV 7DAfKMlYMBTV4P3WnFbQeg== 0000950137-04-009265.txt : 20041101 0000950137-04-009265.hdr.sgml : 20041101 20041101105015 ACCESSION NUMBER: 0000950137-04-009265 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041101 DATE AS OF CHANGE: 20041101 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14836 FILM NUMBER: 041108638 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-Q 1 c89122e10vq.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 --------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No ___ Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No ___ As of October 19, 2004, the registrant had 23,677,587 shares of common stock outstanding. INDEX
PAGE ---- PART I: FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Statements of Operations -- three and six months ended September 30, 2004 and 2003 (unaudited) 1 Consolidated Balance Sheets -- September 30, 2004 and March 31, 2004 (unaudited) 2 Consolidated Statements of Cash Flows -- six months ended September 30, 2004 and 2003 (unaudited) 3 Consolidated Statement of Stockholders' Equity -- six months ended September 30, 2004 (unaudited) 4 Notes to Consolidated Financial Statements (unaudited) 5 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 23 ITEM 4. Controls and Procedures 23 PART II: OTHER INFORMATION ITEM 1. Legal Proceedings 25 ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 25 ITEM 4. Submission of Matters to a Vote of Security Holders 25 ITEM 6. Exhibits and Reports on Form 8-K 26 Signatures 27 Exhibit Index 28
PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS METAL MANAGEMENT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in thousands, except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2004 2003 2004 2003 ---- ---- ---- ---- NET SALES $425,007 $230,048 $792,183 $457,030 Cost of sales (excluding depreciation) 350,066 198,553 673,845 395,511 -------- -------- -------- -------- Gross profit 74,941 31,495 118,338 61,519 Operating expenses: General and administrative 17,216 13,160 34,686 25,724 Depreciation and amortization 4,680 4,439 9,209 9,056 Stock-based compensation 1,104 46 2,171 78 -------- -------- -------- -------- Total operating expenses 23,000 17,645 46,066 34,858 -------- -------- -------- -------- OPERATING INCOME 51,941 13,850 72,272 26,661 Income from joint ventures 4,707 1,045 7,937 1,930 Interest expense (921) (1,966) (2,234) (4,228) Loss on debt extinguishment 0 (363) (1,653) (363) Interest and other income (expense) 41 (119) (65) (110) -------- -------- -------- -------- Income before income taxes 55,768 12,447 76,257 23,890 Provision for income taxes 21,715 4,953 29,679 9,377 -------- -------- -------- -------- NET INCOME $ 34,053 $ 7,494 $ 46,578 $ 14,513 ======== ======== ======== ======== EARNINGS PER SHARE: Basic $ 1.48 $ 0.35 $ 2.03 $ 0.70 ======== ======== ======== ======== Diluted $ 1.40 $ 0.34 $ 1.92 $ 0.67 ======== ======== ======== ======== SHARES USED IN COMPUTATION OF EARNINGS PER SHARE: Basic 22,986 21,220 22,967 20,840 ======== ======== ======== ======== Diluted 24,357 22,246 24,259 21,725 ======== ======== ======== ========
See accompanying notes to consolidated financial statements 1 METAL MANAGEMENT, INC. CONSOLIDATED BALANCE SHEETS (unaudited, in thousands)
SEPTEMBER 30, MARCH 31, 2004 2004 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 1,791 $ 1,155 Accounts receivable, net 155,710 146,427 Inventories 103,524 80,128 Deferred income taxes 4,201 4,201 Prepaid expenses and other assets 5,531 3,216 -------- -------- TOTAL CURRENT ASSETS 270,757 235,127 Property and equipment, net 109,489 114,708 Goodwill and other intangibles, net 2,597 2,690 Deferred financing costs, net 2,355 3,001 Deferred income taxes 15,757 39,772 Investments in joint ventures 18,326 10,592 Other assets 1,083 526 -------- -------- TOTAL ASSETS $420,364 $406,416 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 350 $ 471 Accounts payable 124,665 128,552 Other accrued liabilities 26,325 25,364 -------- -------- TOTAL CURRENT LIABILITIES 151,340 154,387 Long-term debt, less current portion 12,321 43,826 Other liabilities 2,702 5,364 -------- -------- TOTAL LONG-TERM LIABILITIES 15,023 49,190 Stockholders' equity: Preferred stock 0 0 Common stock 236 234 Warrants 427 427 Additional paid-in capital 149,730 146,969 Deferred stock-based compensation (6,474) (8,295) Accumulated other comprehensive loss (2,303) (2,303) Retained earnings 112,385 65,807 -------- -------- TOTAL STOCKHOLDERS' EQUITY 254,001 202,839 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $420,364 $406,416 ======== ========
See accompanying notes to consolidated financial statements 2 METAL MANAGEMENT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in thousands)
SIX MONTHS ENDED ---------------- SEPTEMBER 30, SEPTEMBER 30, 2004 2003 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 46,578 $14,513 Adjustments to reconcile net income to cash flows from operating activities: Depreciation and amortization 9,209 9,056 Deferred income taxes 25,381 8,848 Income from joint ventures (7,937) (1,930) Stock-based compensation 2,171 78 Amortization of debt issuance costs 411 768 Loss on debt extinguishment 1,653 363 Other 569 613 Changes in assets and liabilities: Accounts receivable (9,475) (19,864) Inventories (23,396) 3,289 Accounts payable (3,887) 2,334 Other (4,877) (4,624) --------- ------- Net cash provided by operating activities 36,400 13,444 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (5,055) (3,850) Proceeds from sale of property and equipment 987 317 Other 302 (38) --------- ------- Net cash used in investing activities (3,766) (3,571) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on credit agreement, net of repayments 0 2,632 Issuances of long-term debt 812,260 20,024 Repayments of long-term debt (843,886) (159) Repurchase of junior secured notes 0 (31,896) Proceeds from exercise of stock options and warrants 1,047 3,097 Fees paid to issue long-term debt (1,419) (2,893) --------- ------- Net cash used in financing activities (31,998) (9,195) --------- ------- Net increase in cash and cash equivalents 636 678 Cash and cash equivalents at beginning of period 1,155 869 --------- ------- Cash and cash equivalents at end of period $ 1,791 $ 1,547 ========= ======= SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 1,819 $ 4,369 ========= ======= Income taxes paid $ 1,805 $ 581 ========= =======
See accompanying notes to consolidated financial statements 3 METAL MANAGEMENT, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (unaudited, in thousands)
ACCUMULATED COMMON STOCK ADDITIONAL DEFERRED OTHER ------------ PAID-IN STOCK-BASED COMPREHENSIVE RETAINED SHARES AMOUNT WARRANTS CAPITAL COMPENSATION LOSS EARNINGS TOTAL ------ ------ -------- ------- ------------ ---- -------- ----- BALANCE AT MARCH 31, 2004 23,355 $234 $427 $146,969 $(8,295) $(2,303) $ 65,807 $202,839 Issuance of restricted stock 20 0 0 350 (350) 0 0 0 Exercise of stock options and warrants and related tax benefits 262 2 0 2,411 0 0 0 2,413 Amortization of stock-based compensation 0 0 0 0 2,171 0 0 2,171 Net income 0 0 0 0 0 0 46,578 46,578 ------ ---- ---- -------- ------- ------- -------- -------- BALANCE AT SEPTEMBER 30, 2004 23,637 $236 $427 $149,730 $(6,474) $(2,303) $112,385 $254,001 ====== ==== ==== ======== ======= ======= ======== ========
See accompanying notes to consolidated financial statements 4 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. The Company has one reportable segment operating in the scrap metal recycling industry, as determined in accordance with Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosure about Segments of an Enterprise and Related Information." Basis of Presentation The accompanying unaudited consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). All significant intercompany accounts, transactions and profits have been eliminated. Certain information related to the Company's organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These unaudited consolidated financial statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to fairly state the financial position and the results of operations for the periods presented. Certain amounts have been reclassified from the previously reported financial statements in order to conform to the financial statement presentation of the current period. Operating results for interim periods are not necessarily indicative of the results that can be expected for a full year. These interim financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended March 31, 2004. Stock Split 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 share and per share amounts have been retroactively adjusted in this report to reflect the stock split. 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 September 30, 2004 and March 31, 2004 was 538,338 and 518,938, respectively. At September 30, 2004, the amount of related deferred stock-based compensation reflected in Stockholders' Equity in the consolidated balance sheet was $6.5 million. An aggregate of 7,500 and 19,500 shares of restricted stock, respectively, were granted in the three and six months ended September 30, 2004. The Company recorded stock-based compensation expense related to restricted stock of 5 approximately $1.1 million and $2.2 million in the three and six months ended September 30, 2004, respectively, and $38,000 and $70,000 in the three and six months ended September 30, 2003, respectively. 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. The vesting periods range from 2 to 4 years. To the extent restricted stock awards are forfeited prior to vesting, the previously recognized expense is reversed to stock-based compensation expense. The following table illustrates the pro forma effects on net income and earnings per common share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" to stock-based compensation (in thousands, except for earnings per share):
THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2004 2003 2004 2003 ---- ---- ---- ---- Net income, as reported $34,053 $7,494 $46,578 $14,513 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 674 28 1,326 47 Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects (1,094) (918) (2,116) (1,096) ------- ------ ------- ------- PRO FORMA NET INCOME $33,633 $6,604 $45,788 $13,464 ======= ====== ======= ======= Earnings per share: Basic -- as reported $ 1.48 $ 0.35 $ 2.03 $ 0.70 ======= ====== ======= ======= Basic -- pro forma $ 1.46 $ 0.31 $ 1.99 $ 0.65 ======= ====== ======= ======= Diluted -- as reported $ 1.40 $ 0.34 $ 1.92 $ 0.67 ======= ====== ======= ======= Diluted -- pro forma $ 1.38 $ 0.30 $ 1.89 $ 0.62 ======= ====== ======= =======
NOTE 2 -- EARNINGS PER SHARE Basic earnings per share ("EPS") is computed by dividing net income by the weighted average common shares outstanding. Diluted EPS reflects the potential dilution that could occur from the exercise of stock 6 options and warrants. The following is a reconciliation of the numerators and denominators used in computing EPS (in thousands, except for earnings per share):
THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2004 2003 2004 2003 ---- ---- ---- ---- NUMERATOR: Net income $34,053 $7,494 $46,578 $14,513 ======= ====== ======= ======= DENOMINATOR: Weighted average number of shares outstanding 22,986 21,220 22,967 20,840 Incremental common shares attributable to dilutive stock options and warrants 1,229 1,026 1,195 885 Incremental common shares attributable to restricted stock 142 0 97 0 ------- ------ ------- ------- Weighted average number of diluted shares outstanding 24,357 22,246 24,259 21,725 ======= ====== ======= ======= Basic earnings per share $ 1.48 $ 0.35 $ 2.03 $ 0.70 ======= ====== ======= ======= Diluted earnings per share $ 1.40 $ 0.34 $ 1.92 $ 0.67 ======= ====== ======= =======
For the three and six months ended September 30, 2004, options and warrants to purchase 360,000 and 453,105 shares of common stock, respectively, were excluded from the diluted EPS calculation. For the three and six months ended September 30, 2003, options and warrants to purchase 1,393,438 and 1,853,438 shares of common stock, respectively, were excluded from the diluted EPS calculation. These shares were excluded from the diluted EPS calculation as the option and warrant exercise prices were greater than the average market price of the Company's common stock for the respective periods. NOTE 3 -- SUPPLEMENTAL 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 consisted of the following at (in thousands):
SEPTEMBER 30, MARCH 31, 2004 2004 ------------- --------- Ferrous metals $ 68,692 $50,115 Non-ferrous metals 34,633 29,809 Other 199 204 -------- ------- $103,524 $80,128 ======== =======
7 Property and Equipment Property and equipment consisted of the following at (in thousands):
SEPTEMBER 30, MARCH 31, 2004 2004 ------------- --------- Land and improvements $ 30,665 $ 30,989 Buildings and improvements 21,829 20,662 Operating machinery and equipment 97,997 96,284 Automobiles and trucks 9,480 9,376 Computer equipment and software 2,375 2,207 Furniture, fixture and office equipment 873 788 Construction in progress 786 446 -------- -------- 164,005 160,752 Less -- accumulated depreciation (54,516) (46,044) -------- -------- $109,489 $114,708 ======== ========
Other Accrued Liabilities Other accrued liabilities consisted of the following at (in thousands):
SEPTEMBER 30, MARCH 31, 2004 2004 ------------- --------- Accrued employee compensation and benefits $11,429 $15,469 Accrued insurance 3,422 2,722 Accrued income taxes 5,172 2,679 Accrued real and personal property taxes 2,513 1,675 Other 3,789 2,819 ------- ------- $26,325 $25,364 ======= =======
Accrued Severance and Other Charges During the year ended March 31, 2004, the Company implemented a management realignment that resulted in the recognition of $6.2 million of charges consisting mainly of employee termination benefits. The Company recorded the following activity in the six months ended September 30, 2004 to the accrued severance and other charges liability (in thousands):
SEVERANCE AND OTHER CHARGES --------- Reserve balance at March 31, 2004 $1,571 Charge to income 0 Cash payments (293) ------ Reserve balance at September 30, 2004 $1,278 ======
As of September 30, 2004, the entire reserve balance is included in other accrued liabilities (classified as a current liability) on the Company's consolidated balance sheet as the obligations are scheduled to be paid by July 2005. 8 NOTE 4 -- GOODWILL AND OTHER INTANGIBLES Goodwill and other intangibles consisted of the following at (in thousands):
SEPTEMBER 30, 2004 MARCH 31, 2004 ------------------ -------------- GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION ------ ------------ ------ ------------ Other intangibles: Customer lists $1,280 $(171) $1,280 $(128) Non-compete agreement 240 (100) 240 (70) Pension intangible 192 0 192 0 Goodwill 1,156 0 1,176 0 ------ ----- ------ ----- Goodwill and other intangibles $2,868 $(271) $2,888 $(198) ====== ===== ====== =====
The decrease in goodwill in the six months ended September 30, 2004 was due to settlements relating to contingent consideration payable in connection with two acquisitions. Total amortization expense for other intangibles in the three and six months ended September 30, 2004 was $37,000 and $73,000, respectively. Based on the other intangibles recorded as of September 30, 2004, annual amortization expense for other intangibles will be approximately $0.1 million for each of the next five fiscal years. NOTE 5 -- LONG-TERM DEBT Long-term debt consisted of the following at (in thousands):
SEPTEMBER 30, MARCH 31, 2004 2004 ------------- --------- Credit Agreement: Revolving credit facility $10,000 $23,478 Term loan 0 17,900 Other debt (including capital leases) 2,671 2,919 ------- ------- 12,671 44,297 Less -- current portion of long-term debt (350) (471) ------- ------- $12,321 $43,826 ======= =======
Credit Agreement On June 28, 2004, the Company entered into a new credit agreement with a consortium of lenders led by LaSalle Bank, N.A. (the "Credit Agreement"). The Credit Agreement provides for maximum borrowings of $200 million with a maturity date of June 28, 2008. In consideration for the Credit Agreement, the Company incurred fees and expenses of approximately $1.4 million. The Credit Agreement is a revolving credit and letter of credit facility that supports the Company's working capital requirements and is also available for general corporate purposes. Borrowing costs are based on variable rates tied to the prime rate plus a margin or the London Interbank Offered Rate plus a margin. The margin is based on the Company's leverage ratio (as defined in the Credit Agreement) as determined for the trailing four fiscal quarters. Proceeds from the Credit Agreement were utilized to repay the amounts outstanding under the Company's prior credit agreement and a previously outstanding $18 million term loan. Borrowings under the Credit Agreement are generally subject to borrowing base limitations based upon a formula equal to 85% of eligible accounts receivable plus the lesser of $65 million or 70% of eligible inventory. Inventories cannot represent more than 40% of the borrowing base. 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, 9 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 on the undrawn portion of the facility that is determined by the leverage ratio. As of September 30, 2004, that fee is .30% per annum. Under the Credit Agreement, the Company is required to satisfy specified financial covenants, including a maximum leverage ratio of 2.50 to 1.00, a minimum consolidated fixed charge coverage ratio of 1.50 to 1.00 and a minimum tangible net worth of not less than the sum of $110 million plus 25% of consolidated net income earned in each fiscal quarter. The leverage ratio and consolidated fixed charge coverage ratio are tested for the twelve-month period ending each fiscal quarter. The Credit Agreement also limits capital expenditures to $20 million for the twelve-month period ending each fiscal quarter. The Credit Agreement contains restrictions which, among other things, limit the Company's ability to (i) incur additional indebtedness; (ii) pay dividends under certain conditions; (iii) enter into transactions with affiliates; (iv) enter into certain asset sales; (v) engage in certain acquisitions, investments, mergers and consolidations; (vi) prepay certain other indebtedness; (vii) create liens and encumbrances on the Company's assets; and (viii) engage in other matters customarily restricted in such agreements. As a result of the repayment of amounts outstanding under the Company's prior credit agreement, the Company recognized a loss on debt extinguishment of approximately $1.7 million in the six months ended September 30, 2004. This amount represents the write-off of a portion of the unamortized deferred financing costs associated with the prior credit agreement. NOTE 6 -- EMPLOYEE BENEFIT PLANS The Company sponsors three defined benefit pension plans for employees at certain of its subsidiaries. The Company's funding policy for the pension plans is to contribute amounts required to meet regulatory requirements. The components of net pension costs were as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------ ------------------------------ SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Service cost $ 31 $ 29 $ 65 $ 58 Interest cost 180 174 348 348 Expected return on plan assets (157) (132) (315) (264) Amortization of prior service cost 23 24 47 47 Recognized net actuarial loss 33 30 66 60 ----- ----- ----- ----- Net periodic benefit cost $ 110 $ 125 $ 211 $ 249 ===== ===== ===== =====
In the six months ended September 30, 2004, the Company made cash contributions of $1.2 million to its pension plans. Based on estimates provided by its actuaries, the Company expects to make cash funding contributions to its pension plans of approximately $0.1 million by March 31, 2005 and $1.0 million for the year ending March 31, 2006. NOTE 7 -- COMMITMENTS AND CONTINGENCIES Environmental Matters The Company is subject to comprehensive local, state, federal and international regulatory and statutory environmental requirements relating to, among others, the acceptance, storage, treatment, handling and disposal of solid waste and hazardous waste, the discharge of materials into air, the management and treatment of wastewater and storm water, the remediation of soil and groundwater contamination, the restoration of natural resource damages and the protection of employees' health and safety. The Company believes that it and its subsidiaries are in material compliance with currently applicable statutes and regulations governing the protection of human health and the environment, including employee health and 10 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 health 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 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 11 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. Certain of these NOVs have now been resolved, and MTLM-Arizona is cooperating fully with ADEQ and the Arizona Attorney General's office with respect to the remaining issues. The Company believes that MTLM-Arizona's potential liability and costs of any required remediation in connection with the remaining issues will not be material. On April 29, 1998, Metal Management Midwest, Inc. ("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. To date, the Company has incurred approximately $0.5 million in legal fees associated with responding to this subpoena. 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. The Company has incurred legal and other costs related to this matter of approximately $0.5 million and $2.1 million in the three and six months ended September 30, 2004, respectively. These expenses are included in general and administrative expenses on the Company's consolidated statement of operations. 12 From time to time, the Company is involved in various litigation matters involving ordinary and routine claims incidental to its business. A significant portion of these matters result from environmental compliance issues and workers' compensation related claims arising from the Company's operations. There are presently no legal proceedings pending against the Company, which, in the opinion of the Company's management, is likely to have a material adverse effect on its business, financial condition or results of operations. 13 This Form 10-Q includes certain statements that may be deemed to be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Statements in this Form 10-Q which address activities, events or developments that Metal Management, Inc. (herein, "Metal Management," the "Company," "we," "us," "our" or other similar terms) expects or anticipates will or may occur in the future, including such things as future acquisitions (including the amount and nature thereof), business strategy, expansion and growth of our business and operations, general economic and market conditions and other such matters are forward-looking statements. Although we believe the expectations expressed in such forward-looking statements are based on reasonable assumptions within the bounds of our knowledge of our business, a number of factors could cause actual results to differ materially from those expressed in any forward-looking statements. These and other risks, uncertainties and other factors are discussed under "Risk Factors" appearing in our Annual Report on Form 10-K for the year ended March 31, 2004, as the same may be amended from time to time. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the unaudited consolidated financial statements and notes thereto included under Item 1 of this Report. In addition, reference should be made to the audited consolidated financial statements and notes thereto and related Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended March 31, 2004 ("Annual Report"). 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 in Newark, New Jersey. We believe that we provide one of the most comprehensive product offerings of both ferrous and non-ferrous scrap metals. Our ferrous products primarily include shredded, sheared, cold briquetted and bundled scrap metal, and other purchased scrap metal, such as turnings, cast and broken furnace iron. We also process non-ferrous scrap metals, including aluminum, copper, stainless steel and other nickel-bearing metals, brass, titanium and high-temperature alloys, using similar techniques and through application of our proprietary technologies. 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. 14 RECENT EVENTS On September 3, 2004, Michael W. Tryon resigned from all officer positions with the Company and its subsidiaries including the positions of President and Chief Operating Officer of the Company. Effective September 3, 2004, Daniel W. Dienst, Chairman and Chief Executive Officer, was appointed President. We eliminated the position of Chief Operating Officer. 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 $1.6 million and $1.7 million at September 30, 2004 and March 31, 2004, 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 our Annual Report under the section entitled "Risk Factors -- Potential credit losses from our significant customers could adversely affect our results of operations or financial condition," the 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. Inventory Our inventories primarily consist of ferrous and non-ferrous scrap metals and are valued at the lower of average purchased cost or market. Quantities of inventories are determined based on our inventory systems and are subject to periodic physical verification using estimation techniques including observation, weighing and other industry methods. As indicated in our Annual Report under the section entitled "Risk Factors -- Prices of commodities we own may be volatile," 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 apply the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," and SFAS No. 144, "Accounting for the Impairment or Disposal of Long- 15 Lived Assets," in assessing the carrying values of our long-lived assets. SFAS No. 142 and SFAS No. 144 both require that a company consider whether circumstances or conditions exist that suggest that the carrying value of a long-lived asset might be impaired. 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. 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). 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 our net deferred tax assets, including net operating loss ("NOL") carryforwards, due to the uncertainty regarding their ultimate realization. In the year ended March 31, 2004, we reversed most of the valuation allowance recorded against our 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. As a result of the utilization of NOL carryforwards, our cash taxes paid are significantly less than our income tax expense. However, our 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. 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 Annual Report, which contains accounting policies and other disclosures required by generally accepted accounting principles. 16 RESULTS OF OPERATIONS SALES Consolidated net sales for the three months ended September 30, 2004 and 2003 in general product categories were as follows ($ in thousands):
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003 --------------------------- --------------------------- COMMODITY NET NET (WEIGHT IN THOUSANDS) WEIGHT SALES % WEIGHT SALES % - ---------------------------------------- ------ ----- - ------ ----- - Ferrous metals (tons) 1,106 $302,873 71.3% 1,126 $165,843 72.1% Non-ferrous metals (lbs.) 134,471 103,850 24.4 104,233 53,767 23.4 Brokerage -- ferrous (tons) 51 12,364 2.9 33 5,368 2.3 Brokerage -- non-ferrous (lbs.) 408 357 0.1 987 462 0.2 Other 5,563 1.3 4,608 2.0 -------- ---- -------- ---- $425,007 100% $230,048 100% ======== ==== ======== ====
Consolidated net sales for the six months ended September 30, 2004 and 2003 in general product categories were as follows ($ in thousands):
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003 --------------------------- --------------------------- COMMODITY NET NET (WEIGHT IN THOUSANDS) WEIGHT SALES % WEIGHT SALES % - ---------------------------------------- ------ ----- - ------ ----- - Ferrous metals (tons)................... 2,304 $565,449 71.4% 2,211 $319,452 69.9% Non-ferrous metals (lbs.)............... 252,439 192,028 24.2 200,330 103,440 22.6 Brokerage-ferrous (tons)................ 99 23,921 3.0 184 23,963 5.2 Brokerage-non-ferrous (lbs.)............ 1,443 1,352 0.2 2,890 1,252 0.3 Other................................... 9,433 1.2 8,923 2.0 -------- ---- -------- ---- $792,183 100% $457,030 100% ======== ==== ======== ====
Consolidated net sales increased by $195.0 million (84.8%) and $335.2 million (73.3%) to $425.0 million and $792.2 million in the three and six month periods ended September 30, 2004, respectively, compared to consolidated net sales of $230.0 million and $457.0 million in the three and six month periods ended September 30, 2003, respectively. The increase in consolidated net sales was primarily due to higher average selling prices and increased volumes. Ferrous Sales Ferrous sales increased by $137.1 million (82.7%) and $245.9 million (77.0%) to $302.9 million and $565.4 million in the three and six months ended September 30, 2004, respectively, compared to ferrous sales of $165.8 million and $319.5 million in the three and six months ended September 30, 2003, respectively. The increase was attributable to higher average selling prices and an increase in sales volumes in the six months ended September 30, 2004. The increase in the three months ended September 30, 2004 over the comparable prior year period was due to higher average selling prices which increased by $127 per ton (86.3%) to $274 per ton, slightly offset by sales volumes which declined by 20,000 tons (1.8%). The increase in the six months ended September 30, 2004 over the comparable prior year period was due to higher average selling prices, which increased by $101 per ton (69.9%) to $245 per ton and sales volumes which increased by 93,000 tons (4.2%). The increase in selling prices for ferrous scrap is evident in data published by the American Metal Market ("AMM"). According to AMM data, the average price for #1 Heavy Melting Steel Scrap -- Chicago (which is a common indicator for ferrous scrap) was approximately $230 per ton and $213 per ton for the three and six months ended September 30, 2004, respectively, compared to $113 per ton and $107 per ton for the three and six months ended September 30, 2003, respectively. 17 Sales volumes in the six months ended September 30, 2004 benefited from higher domestic demand for our ferrous scrap. Domestic demand and scrap prices continue to be favorable partly due to 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. Exports of ferrous scrap decreased compared to the prior year periods due to lower demand from certain countries and more favorable domestic markets for ferrous scrap. Non-ferrous Sales Non-ferrous sales increased by $50.1 million (93.1%) and $88.6 million (85.6%) to $103.9 million and $192.0 million in the three and six months ended September 30, 2004, respectively, compared to non-ferrous sales of $53.8 million and $103.4 million in the three and six months ended September 30, 2003, respectively. The increase was due to higher average selling prices coupled with an increase in sales volumes. In the three and six months ended September 30, 2004, non-ferrous sales volumes increased by 30.2 million pounds (29.1%) and 52.1 million pounds (26.0%), respectively, and average selling price for non-ferrous products increased by approximately $.25 per pound (48.1%) and $.24 per pound (46.1%), respectively, compared to the three and six months ended September 30, 2003. 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 49% and 20% higher, respectively, in the six months ended September 30, 2004 compared to the six months ended September 30, 2003. According to COMEX data, average prices for copper were 62% higher in the six months ended September 30, 2004 compared to the six months ended September 30, 2003. Our non-ferrous sales volumes increased due to our efforts to expand that product line and reflected greater demand from our non-ferrous consumers. In the six months ended September 30, 2003, domestic supply of non-ferrous metals was impacted by lower output from U.S. industrial production and international demand was lower than the six months ended September 30, 2004. The recent improvement in the U.S. economy, coupled with improving economies in other countries, led to increased supply and demand for non-ferrous products, mainly in copper and stainless steel. 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 increased by $7.0 million (129.6%) to $12.4 million in the three months ended September 30, 2004 compared to brokerage ferrous sales of $5.4 million in the three months ended September 30, 2003. The increase was primarily the result of a $79 per ton (48.5%) increase in average selling price for brokered ferrous products. In the six months ended September 30, 2004, brokerage ferrous sales remained flat compared to the six months ended September 30, 2003, primarily due to fewer tons brokered offset by higher average selling prices. 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. Other Sales Other sales are primarily derived from our stevedoring and bus dismantling operations. The increase in other sales in the three and six months ended September 30, 2004 is primarily a result of higher stevedoring revenue. 18 GROSS PROFIT Gross profit was $74.9 million (17.6% of sales) and $118.3 million (14.9% of sales) in the three and six months ended September 30, 2004, respectively, compared to gross profit of $31.5 million (13.7% of sales) and $61.5 million (13.5% of sales) in the three and six months ended September 30, 2003, respectively. The improvement in the amount of gross profit earned was due to higher material margins per ton realized on both ferrous and non-ferrous products sold, partially offset by higher processing expenses. Processing costs on a per unit basis increased mainly due to higher freight, labor, repairs, maintenance, fuel and operating supplies costs. Freight expenses were higher due to increases in ocean vessel costs. The increase in labor costs were due to additional headcount and overtime resulting from the increasing demand for our products. The increase in repairs, maintenance, fuel and operating supplies resulted from additional tons of scrap metal processed. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were $17.2 million (4.1% of sales) and $34.7 million (4.4% of sales) in the three and six months ended September 30, 2004, respectively, compared to general and administrative expenses of $13.2 million (5.7% of sales) and $25.7 million (5.6% of sales) in the three and six months ended September 30, 2003, respectively. The increase is mainly due to higher compensation expense and professional fees. The increase in compensation expense is the result of accruals recorded in connection with employee incentive compensation plans and costs associated with newly hired employees. The compensation plans are generally measured as a function of return on net assets. We recorded $3.9 million and $6.8 million of expense in connection with the employee incentive compensation plans in the three and six months ended September 30, 2004, respectively, compared to $2.4 million and $3.2 million of expense in the three and six months ended September 30, 2003, respectively. Professional fees were $0.9 million and $2.8 million higher in the three and six months ended September 30, 2004, respectively, compared to the three and six months ended September 30, 2003. The increase was primarily due to $0.5 million and $2.1 million of legal fees and related costs incurred in the three and six months ending September 30, 2004, respectively, resulting from the investigations performed in connection with our voluntary disclosure to the U.S. Department of Justice regarding cash payments made to certain industrial account suppliers (see the section entitled "Legal Proceedings" in Part II of this report). DEPRECIATION AND AMORTIZATION Depreciation and amortization expense was $4.7 million (1.1% of sales) and $9.2 million (1.2% of sales) in the three and six months ended September 30, 2004, respectively, compared to depreciation and amortization expense of $4.4 million (1.9% of sales) and $9.1 million (2.0% of sales) in the three and six months ended September 30, 2003, respectively. Our depreciation expense remained relatively unchanged due to our decision to acquire new material handling equipment financed through operating leases which contain attractive terms compared to purchasing the equipment. STOCK-BASED COMPENSATION Stock-based compensation expense was $1.1 million and $2.2 million in the three and six months ended September 30, 2004, respectively, compared to stock-based compensation expense of $46,000 and $78,000 in the three and six months ended September 30, 2003, respectively. The increase is due to expense associated with restricted stock grants made since September 30, 2003. Stock-based compensation expense is recognized for restricted stock awards over the vesting period, which is generally 2 to 4 years. INCOME FROM JOINT VENTURES Income from joint ventures was $4.7 million (1.1% of sales) and $7.9 million (1.0% of sales) in the three and six months ended September 30, 2004, respectively, compared to income from joint ventures of $1.0 million (0.5% of sales) and $1.9 million (0.4% of sales) in the three and six months ended September 30, 2003, respectively. The income from joint ventures primarily represents our 28.5% share of income from 19 Southern. Southern is primarily a processor of ferrous metals and its operating results have also benefited from increased demand and strong market conditions. INTEREST EXPENSE Interest expense was $0.9 million (0.2% of sales) and $2.2 million (0.3% of sales) in the three and six months ended September 30, 2004, respectively, compared to interest expense of $2.0 million (0.9% of sales) and $4.2 million (0.9% of sales) in the three and six months ended September 30, 2003, respectively. The decrease was a result of lower debt and interest rates. Average debt was approximately $48 million and $55 million in the three and six months ended September 30, 2004, respectively, compared to average debt of approximately $92 million and $96 million in the three and six months ended September 30, 2003, respectively. Interest expense was also higher in the prior year periods due to interest associated with $31.5 million, 12.75% junior secured notes which were repurchased in August 2003 and September 2003. LOSS ON DEBT EXTINGUISHMENT In the six months ended September 30, 2004, we recognized a loss on debt extinguishment of $1.7 million associated with the repayment of our previous credit agreement with proceeds from the Credit Agreement (see "Liquidity and Capital Resources -- Indebtedness" below). This amount represents a write-off of a portion of the unamortized deferred financing costs associated with the previous credit agreement. In the three and six months ended September 30, 2003, we recognized a loss on debt extinguishment of $0.4 million associated with the repurchase and redemption of our $31.5 million, 12.75% junior secured notes in August 2003 and September 2003. This amount represents a premium paid to accomplish a repurchase of a junior secured note. INCOME TAXES In the three and six months ended September 30, 2004, we recognized income tax expense of $21.7 million and $29.7 million, respectively, resulting in an effective tax rate of 38.9%. In the three and six months ended September 30, 2003, our income tax expense was $5.0 million and $9.4 million, respectively, resulting in an effective tax rate of 39.8% and 39.3%, respectively. The effective tax rate differs from the federal statutory rate mainly due to state taxes and permanent tax items. Our cash taxes paid have been significantly lower than our income tax expense due to the utilization of NOL carryforwards and other deferred tax assets. As a result of our strong operating performance, we expect to fully utilize our federal NOL carryforwards by the end of fiscal 2005 which will increase cash tax payment obligations. NET INCOME Net income was $34.1 million and $46.6 million in the three and six months ended September 30, 2004, respectively, compared to net income of $7.5 million and $14.5 million in the three and six months ended September 30, 2003, respectively. Net income was higher due to higher operating income, income from joint ventures and lower interest expense, offset by the loss on debt extinguishment. LIQUIDITY AND CAPITAL RESOURCES Cash Flows In the six months ended September 30, 2004, our operating activities generated net cash of $36.4 million compared to net cash generated of $13.4 million in the six months ended September 30, 2003. Cash provided by operating activities in the six months ended September 30, 2004 was due to cash generated from net income, adjusted for non-cash items, of $78.0 million, that was offset by a $41.6 million increase in working capital. The working capital increase was mainly due to higher accounts receivable ($9.5 million), higher inventories ($23.4 million) and lower accounts payable ($3.9 million). Accounts receivable and inventories increased due to higher sales and purchase prices for scrap metals. 20 We used $3.8 million in net cash for investing activities in the six months ended September 30, 2004 compared to net cash used of $3.6 million in the six months ended September 30, 2003. In the six months ended September 30, 2004, purchases of property and equipment were $5.1 million, while we generated $1.0 million of cash from the sale of redundant fixed assets, including a small parcel of land in Arizona. In the six months ended September 30, 2004, we used $32.0 million of net cash for financing activities compared to net cash used of $9.2 million in the six months ended September 30, 2003. We reduced debt by $31.6 million through cash generated from operations. We also received $1.0 million of cash from the exercise of stock warrants. Indebtedness At September 30, 2004, our total indebtedness was $12.7 million, a decrease of $31.6 million from March 31, 2004. Our primary source of financing is our cash generated from operations supplemented by borrowings under the Credit Agreement. The Credit Agreement that we entered into on June 28, 2004 provides for maximum borrowings of $200 million with a maturity date of June 28, 2008. In consideration for the Credit Agreement, we incurred fees and expenses of approximately $1.4 million. The Credit Agreement is a revolving credit and letter of credit facility that supports our working capital requirements and is also available for general corporate purposes. Borrowing costs are based on variable rates tied to the prime rate plus a margin or the London Interbank Offered Rate ("LIBOR") plus a margin. The margin is based on our leverage ratio (as defined in the Credit Agreement) as determined for the trailing four fiscal quarters. Based on our current leverage ratio, our LIBOR and prime rate margins are 125 basis points and 0 basis points, respectively, beginning November 1, 2004. Borrowings under the Credit Agreement are generally subject to borrowing base limitations based upon a formula equal to 85% of eligible accounts receivable plus the lesser of $65 million or 70% of eligible inventory. Inventories cannot represent more than 40% of the total borrowing base. A security interest in substantially all of our assets and properties, 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 on the undrawn portion of the facility that is determined by the leverage ratio. As of September 30, 2004, that fee is .30% per annum. Under the Credit Agreement, we are required to satisfy specified financial covenants, including a maximum leverage ratio of 2.50 to 1.00, a minimum consolidated fixed charge coverage ratio of 1.50 to 1.00 and a minimum tangible net worth of not less than the sum of $110 million plus 25% of consolidated net income earned in each fiscal quarter. The leverage ratio and consolidated fixed charge coverage ratio are tested for the twelve-month period ending each fiscal quarter. The Credit Agreement also limits capital expenditures to $20 million for the twelve-month period ending each fiscal quarter. The Credit Agreement contains restrictions which, among other things, limit our ability to (i) incur additional indebtedness; (ii) pay dividends under certain conditions; (iii) enter into transactions with affiliates; (iv) enter into certain asset sales; (v) engage in certain acquisitions, investments, mergers and consolidations; (vi) prepay certain other indebtedness; (vii) create liens and encumbrances on our assets; and (viii) engage in other matters customarily restricted in such agreements. As of September 30, 2004, we were in compliance with all financial covenants contained in the Credit Agreement. As of October 19, 2004, we had outstanding borrowings of approximately $31.9 million under the Credit Agreement and undrawn availability of approximately $161.1 million. 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 the Credit Agreement. Our future cash needs will be driven by working capital requirements, planned capital expenditures and acquisition objectives, should attractive acquisition opportunities present themselves. Capital 21 expenditures are planned to be approximately $14 million to $15 million in fiscal 2005, of which $5.1 million has been incurred in the six months ended September 30, 2004. 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 58 operating leases for equipment which would have cost approximately $16.2 million to purchase. These operating leases are attractive to us since the implied interest rates are lower than interest rates under the Credit Agreement. 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 September 30, 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 $12,671 $ 350 $ 697 $11,592 $ 32 Operating leases 46,550 10,314 12,706 7,817 15,713 Other contractual obligations 1,846 1,702 72 72 0 ------- ------- ------- ------- ------- Total contractual cash obligations $61,067 $12,366 $13,475 $19,481 $15,745 ======= ======= ======= ======= =======
Other Commitments We are required to make contributions to our defined benefit pension plans. These contributions are required under the minimum funding requirements of the Employee Retirement Income Security Act (ERISA). However, due to uncertainties regarding significant assumptions involved in estimating future required contributions, such as pension plan benefit levels, interest rate levels and the amount of pension plan asset returns, we are not able to reasonably estimate the amount of future required contributions beyond fiscal 2006. Our minimum required pension contributions for fiscal 2005 are approximately $1.3 million, of which we contributed $1.2 million in the six months ended September 30, 2004. Our minimum required pension contributions for fiscal 2006 will be approximately $1.0 million. We also enter into letters of credit in the ordinary course of operating and financing activities. As of October 19, 2004, we had outstanding letters of credit of $5.6 million. In connection with the management realignment implemented during January 2004 (principally involving our Midwest operations), we paid severance and other expenses of approximately $0.3 million in the six months ended September 30, 2004. The remaining severance and other benefits to be paid is approximately $1.3 million, most of which is payable in July 2005. 22 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to financial risk resulting from fluctuations in interest rates and commodity prices. We seek to minimize these risks through regular operating and financing activities. We do not use derivative financial instruments. Refer to Item 7A of the Annual Report. ITEM 4. CONTROLS AND PROCEDURES Evaluation of our Disclosure Controls and 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, as amended (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, Chief Executive Officer ("CEO") and President, and Robert C. Larry, our Executive Vice President, Finance and Chief Financial Officer ("CFO"). Rules adopted by the SEC require that in this section of the quarterly 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 quarterly report is the information concerning the controls evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented. 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 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. 23 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 CFO have concluded that, subject to the limitations noted above, (i) 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, and (ii) there has been no change in our internal control over financial reporting during the three months ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 24 PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 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 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. As of September 30, 2004, we have incurred legal and other costs related to this matter of approximately $2.1 million. From time to time, we are involved in various litigation matters involving ordinary and routine claims incidental to our business. A significant portion of these matters result from environmental compliance issues and workers compensation related claims applicable to our operations. Management currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our results of operations or financial condition. Please refer to Part II, Item 3 of the Annual Report for a description of the litigation in which we are currently involved. ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES Unregistered Sales of Common Stock In the three months ended September 30, 2004, we sold 140,000 shares of our common stock pursuant to exercise of warrants held by current and former employees. There were eight exercise transactions with an average exercise price for each transaction of $3.64 per share in the three months ended September 30, 2004. We received proceeds of $0.5 million from these sales and used the proceeds to repay borrowings outstanding under the 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Our Annual Meeting of Stockholders was held on September 21, 2004 in New York, New York. At the meeting, our stockholders elected five members to our board of directors pursuant to the following votes:
VOTES IN VOTES NAME FAVOR WITHHELD - ---- ----- -------- Daniel W. Dienst 21,253,745 458,015 John T. DiLacqua 21,500,483 211,277 Robert Lewon 21,500,680 211,080 Kevin P. McGuinness 21,545,102 166,658 Gerald E. Morris 21,497,029 214,731
In addition to electing directors, our stockholders approved the proposal to ratify the material terms of our annual RONA Incentive Compensation Plan by the vote of 12,394,476 in favor, 378,503 against, 35,351 abstentions and 8,903,430 broker non-votes. Stockholders also approved the proposal to ratify the appointment 25 of PricewaterhouseCoopers LLP as our independent accountants for the fiscal year ending March 31, 2005 by the vote of 21,118,256 in favor, 502,568 against and 90,936 abstentions. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits See Exhibit Index (b) Reports on Form 8-K We filed a Current Report on Form 8-K on September 3, 2004, which announced the resignation of Michael W. Tryon from the positions of President and Chief Operating Officer and the appointment of Daniel W. Dienst, Chairman and Chief Executive Officer, as President. 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. METAL MANAGEMENT, INC. By: /s/ Daniel W. Dienst --------------------------------- Daniel W. Dienst Chairman of the Board, Chief Executive Officer and President (Principal Executive Officer) By: /s/ Robert C. Larry --------------------------------- Robert C. Larry Executive Vice President, Finance and Chief Financial Officer (Principal Financial Officer) By: /s/ Amit N. Patel --------------------------------- Amit N. Patel Vice President, Finance and Controller (Principal Accounting Officer) Date: October 29, 2004 27 METAL MANAGEMENT, INC. EXHIBIT INDEX
NUMBER AND DESCRIPTION OF EXHIBIT --------------------------------- 2.1 Disclosure Statement with respect to First Amended Joint Plan of Reorganization of Metal Management, Inc. and its Subsidiary Debtors, dated May 4, 2001 (incorporated by reference to Exhibit 2.1 of the Company's Annual Report on Form 10-K for the year ended March 31, 2001). 3.1 Second Amended and Restated Certificate of Incorporation of the Company, as filed with the Secretary of State of the State of Delaware on June 29, 2001 (incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the year ended March 31, 2001). 3.2 Amended and Restated By-Laws of the Company adopted as of April 29, 2003 (incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the year ended March 31, 2003). 10.1 Separation and Mutual Release Agreement, dated September 2, 2004 between Michael W. Tryon and the Company. 31.1 Certification of Daniel W. Dienst pursuant to Section 240.13a-14(a) and Section 240.15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Robert C. Larry pursuant to Section 240.13a-14(a) and Section 240.15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Daniel W. Dienst 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.
28 EX-10.1 2 c89122exv10w1.txt SEPARATION AND MUTUAL RELEASE AGREEMENT EXHIBIT 10.1 SEPARATION AND MUTUAL 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 Michael W. Tryon, an individual resident of the state of Illinois ("Executive"), this 2nd day of September 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 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 of the date hereof as a director, board member and/or officer of Company and all Company Affiliates of which Executive is a director, board member and/or officer as of the date hereof and resigns as of September 14, 2004 (the "Resignation Date") as an employee of Company and all Company Affiliates of which he is an employee as of 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 April 1, 2000 (as amended or otherwise modified on June 7, 2001, June 13, 2001 and April 21, 2003, the "Employment Agreement"), by and between Executive and Company. 2. 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, 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, Initials of Parties Executive _________ Company _________ 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, as amended (the "Securities Act"); the Securities Exchange Act of 1934, as amended (the "Exchange Act"); 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. 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) 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 Section 2(b) 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. (d) 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 Initials of Parties -2- Executive _________ Company _________ Resignation 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-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 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 Section 2(d) above. 5. Recommendations by Company. Upon request by Executive, Company hereby agrees to provide Executive with oral and/or written, positive recommendations and referrals to third parties. 6. Agreements to Cooperate. (a) Company shall use reasonable efforts to effect the timely issuance of common stock issuable in respect of all of Executive's warrants (the "Common Stock") 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 . (b) Executive hereby represents and warrants that Executive does not possess any material non-public information of Company as of the date of this Agreement and will not be provided with any material nonpublic information of Company through the Resignation Date. (c) Company hereby acknowledges that, commencing as of the date hereof, Executive is not an affiliate of Company for purposes of the Securities Act or the Exchange Act. (d) Executive hereby acknowledges that Executive is entitled to sell freely the Common Stock under the registration statement of Company on Form S-8 filed on July 9, 2003 with the Securities and Exchange Commission provided such sales are effected in accordance Initials of Parties -3- Executive _________ Company _________ with the terms of the Plan of Distribution described in the prospectus comprising a part of such registration statement. 7. Applicable Law. This Agreement has been entered into in and shall be governed by and construed under the laws of the State of Illinois without reference to the choice of law principles thereof. 8. 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. 9. Unpaid Amounts. Notwithstanding anything to the contrary contained in this Agreement, Company shall pay to Executive any and all accrued but unpaid salary, vacation and reimbursement of business expenses up to and including the Resignation Date. Such amounts shall be paid to Executive in cash within five days following the Resignation Date. Initials of Parties -4- Executive _________ Company _________ This Agreement was executed by the parties as of the date first above written. EXECUTIVE: - -------------------------------------------- Michael W. Tryon COMPANY: METAL MANAGEMENT, INC. By -------------------------------------------- Daniel Dienst Chief Executive Officer Initials of Parties -5- Executive _________ Company _________ EX-31.1 3 c89122exv31w1.txt 302 CERTIFICATION OF DANIEL W. DIENST Exhibit 31.1 RULE 13a-14(a)/15d-14(a) CERTIFICATION I, Daniel W. Dienst, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Metal Management, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent 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: October 29, 2004 /s/ Daniel W. Dienst ------------------------------- Daniel W. Dienst Chairman of the Board, Chief Executive Officer and President EX-31.2 4 c89122exv31w2.txt 302 CERTIFICATION OF ROBERT C. LARRY Exhibit 31.2 RULE 13a-14(a)/15d-14(a) CERTIFICATION I, Robert C. Larry, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Metal Management, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent 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: October 29, 2004 /s/ Robert C. Larry --------------------------------- Robert C. Larry Executive Vice President, Finance and Chief Financial Officer EX-32.1 5 c89122exv32w1.txt 906 CERTIFICATION OF DANIEL W. DIENST Exhibit 32.1 SECTION 1350 CERTIFICATION Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with the quarterly report on Form 10-Q of Metal Management, Inc. (the "Corporation") for the period ended September 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, the Chairman of the Board, Chief Executive Officer and President 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, Chief Executive Officer and President October 29, 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 6 c89122exv32w2.txt 906 CERTIFICATION OF ROBERT C. LARRY Exhibit 32.2 SECTION 1350 CERTIFICATION Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with the quarterly report on Form 10-Q of Metal Management, Inc. (the "Corporation") for the period ended September 30, 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 October 29, 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-----