[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
We have prepared the condensed consolidated interim financial statements included herein, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been omitted pursuant to such rules and regulations. In the opinion of our management, such financial statements reflect all adjustments necessary for a fair presentation of the results for the interim periods presented and to make such financial statements not misleading. Our results of operations for the three and nine months ended September 30, 2007 are not necessarily indicative of the results to be expected for the full year. We urge you to read these interim financial statements in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report filed on Form 10-K for the year ended December 31, 2006.
Empire Resources, Inc.
1. The Company
We are engaged in the purchase, sale and distribution of principally aluminum semi-finished products to a diverse customer base located throughout the United States and Canada, Europe, Australia and New Zealand. We also manufacture prime aluminum extruded products in our facility located in Baltimore, Maryland. We sell our products through our own marketing and sales personnel as well as through independent sales agents who are located in North America and in Europe and who receive commissions on sales. We purchase products from suppliers located throughout the world. The majority of our business typically does not involve purchase of inventory for stock. In general, we place orders with our suppliers based upon orders that we have received from our customers.
The condensed consolidated financial statements include the accounts of Empire Resources, Inc. and its wholly-owned subsidiaries, Empire Resources Pacific Ltd., which acts as a sales agent in Australia, 6900 Quad Avenue LLC (the company which owns our warehouse facility in Baltimore), Imbali Metals BVBA (our European subsidiary), and Empire Resources Extrusions LLC (our extrusion business). All significant inter-company transactions and accounts have been eliminated on consolidation.
2. Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from these estimates.
One major customer accounted for approximately 11% of our consolidated net sales for the nine month period ended September 30, 2007 and 16% for the same period ended September 30, 2006.
We purchase aluminum from a limited number of suppliers located throughout the world. One supplier, Hulamin Ltd., accounted for 54% of total purchases during the nine month period ended September 30, 2007, and three other suppliers accounted for 31% of total purchases during that period. The loss of any one of our largest suppliers or a material default by any such supplier in its obligations to us would have a material adverse effect on our business.
4. Stock Options
We account for stock options using Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R requires recognition of stock-based compensation expense for an award of equity instruments, including stock options, over the vesting period based on the fair value of the award at the grant date. As of January 1, 2007, we did not have any outstanding unvested employee stock options, and during the nine month period ended September 30, 2007, we did not grant any stock options or any other stock-based awards.
5. Inventories
Inventories, which consist primarily of purchased semi-finished aluminum products, are stated at the lower of cost or market. Cost is determined by the specific-identification method. Inventory is mostly purchased for specific customer orders. The carrying amount of inventory which is hedged by futures contracts designated as fair value hedges is adjusted to fair value.
6. Notes Payable—Banks
We operate under a credit agreement with JPMorgan Chase Bank, N.A. as lenders’ agent, and Rabobank International, New York branch, Citicorp USA, Inc., Brown Brothers Harriman & Co., and Fortis Capital Corp.
Our credit agreement provides for a $150 million revolving line of credit, including a commitment to issue letters of credit and a swing-line loan sub-facility. The credit agreement provides that amounts under the facility may be borrowed, repaid and re-borrowed, subject to a borrowing base test, until the maturity date of June 30, 2011. As of September 30, 2007 and December 31, 2006, the credit utilized under this agreement amounted to respectively, $120,213,000 and $135,486,000 (including $18,963,000 and $21,236,000 of outstanding letters of credit).
Amounts borrowed under our credit agreement bear interest at LIBOR, Eurodollar, money market or base rates, at our option, plus an applicable margin. The applicable margin is determined by our leverage ratios. Borrowings under the credit agreement are collateralized by security interests in substantially all of our assets. The credit agreement contains financial and other covenants including, but not limited to, covenants requiring maintenance of minimum tangible net worth and compliance with leverage ratios, as well as an ownership minimum and limitations on other indebtedness, liens, and investments and dispositions of assets.
In connection with the revolving line of credit, we are a party to interest rate swaps with a total notional amount of $70 million terminating in 2010. These swaps are designated as a cash flow hedge of the variable interest on that portion of the credit agreement up to the notional amount. We will pay a weighted average fixed rate of 5.14% plus a spread to the bank, and in return the bank pays us floating LIBOR rate plus a spread. This floating rate resets monthly.
In addition, we are a party to a mortgage and related interest rate swap that we entered into in 2004 in connection with the purchase of our Baltimore warehouse. The mortgage loan, which had an outstanding balance of $2.2 million at September 30, 2007 and $2.3 million at December 31, 2006, requires monthly payments of approximately $21,600, including interest at LIBOR + 1.75%, and matures in December 2014. Under the interest rate swap, which has been designated as a cash flow hedge and remains effective through the maturity of the mortgage loan, we pay a monthly fixed interest rate of 6.37% to the counterparty bank on a notional principal equal to the outstanding principal balance of the mortgage. In return, the bank pays us a floating rate, namely, LIBOR, which resets monthly, plus 1.75% on the same notional principal amount.
In addition, Imbali Metals BVBA, our wholly owned Belgian subsidiary ("Imbali"), is party to a secured credit facility with Fortis Bank SA/NV, New York Branch, under which Imbali has a EUR 10 million commitment available for loans and documentary letters of credit. This credit facility, which is unconditionally guaranteed by Empire Resources, Inc., provides that amounts may be borrowed, repaid and re-borrowed, subject to a borrowing base test. The loans under the facility bear interest at a rate equal to 1.75% per annum in excess of EUROBOR. The facility may be renewed subject to the agreement of both parties. As of September 30, 2007 the credit utilized under this agreement amounted to EUR 9.9 million (US $14,164,000).
7. Earnings Per Share (In thousands, except per share amounts)
| | | Three months ended | | | Nine months ended | |
| | | September 30, | | | September 30, | |
| | | 2007 | | | 2006 | | | 2007 | | | 2006 | |
| Weighted average shares outstanding-basic | | | 9,790 | | | | 9,785 | | | | 9,790 | | | | 9,771 | |
| Dilutive effect of stock options | | | 245 | | | | 273 | | | | 256 | | | | 298 | |
| Weighted average shares outstanding-diluted | | | 10,035 | | | | 10,058 | | | | 10,046 | | | | 10,069 | |
| Basic Earnings per Share | | $ | 0.05 | | | $ | 0.20 | | | $ | 0.42 | | | $ | 0.72 | |
| Diluted Earnings per Share | | $ | 0.05 | | | $ | 0.20 | | | $ | 0.41 | | | $ | 0.70 | |
Basic earnings per share are based upon weighted average number of common shares outstanding during each period. Diluted earnings per share are based upon the weighted average number of common shares outstanding during each period, plus dilutive potential common shares from assumed exercise of the outstanding stock options using the treasury stock method.
8. Dividends
During the nine month period ended September 30, 2007 our Board of Directors declared cash dividends aggregating $1,468,500 ($0.15 per share), including a cash dividend of $489,500 ($0.05 per share) declared on September 19, 2007 to stockholders of record at the close of business on September 28, 2007, which was paid on October 18, 2007. The Board of Directors intends to review its dividend policy on a quarterly basis, and a determination by the Board of Directors will be made subject to profitability, free cash flow and other requirements of the business.
9. Commitments and Contingencies
We have outstanding letters of credit to certain of our suppliers, which at September 30, 2007 amounted to approximately $18,963,000.
10. Derivative Financial Instruments and Risk Management
Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” issued by the Financial Accounting Standards Board requires us to recognize all derivatives in the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through earnings. If the derivative is a hedge, depending upon the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings (fair value hedge), or recognized in other comprehensive income until the hedged item is recognized in earnings (cash flow hedge). The ineffective portion of a derivative’s change in fair value, if any, is immediately recognized in earnings. When a hedged item in a fair value hedge is sold, the adjustment in the carrying amount of the hedged item is recognized in earnings.
There were no deposits with brokers for margin in connection with derivative contracts at September 30, 2007. At December 31, 2006, approximately $1,046,000 was deposited with various brokers in this connection. Such deposits are classified as restricted cash on the accompanying balance sheet.
At September 30, 2007 and December 31, 2006, net unrealized losses on our open foreign exchange forward contracts amounted to approximately ($2,162,000) and ($731,000) respectively. Net unrealized gains on aluminum futures contracts at September 30, 2007 were approximately $5,397,000 and net unrealized losses at December 31, 2006 amounted to approximately ($3,311,000).
These amounts, which represent the fair value of the open derivative contracts, were offset through earnings by like amounts for the changes in the fair value of inventories and commitments which were hedged. On September 30, 2007, open derivative contracts are reflected in the accompanying balance sheet in derivative liabilities ($2,162,000) and in derivative assets $5,397,000. On December 31, 2006, such amounts are reflected in the accompanying 2006 balance sheet in derivative liabilities ($4,042,000).
For the nine months ended September 30, 2007 and 2006, hedge ineffectiveness associated with derivatives designated as fair value hedges was insignificant, and no fair value hedges were derecognized.
We are a party to interest rate swaps with a total notional amount of $70 million terminating in 2010. These swaps are designated as a cash flow hedge of the variable interest on that portion of the credit agreement up to the notional amount. At September 30, 2007 and December 31, 2006, the fair value of the interest rate swaps amounted to ($1,035,000) and $340,000, respectively, and is included in derivative liabilities with a corresponding debit and credit, respectively, net of deferred tax, in accumulated other comprehensive (loss) income in the accompanying balance sheet.
11. Comprehensive Income
(In thousands)
| | | Three months ended | | | Nine months ended | |
| | | September 30, | | | September 30, | |
| | | 2007 | | | 2006 | | | 2007 | | | 2006 | |
| Net Income | | $ | 537 | | | $ | 1,968 | | | $ | 4,073 | | | $ | 7,061 | |
| Foreign currency translation gain (loss) | | | 111 | | | | (1 | ) | | | 117 | | | | 41 | |
| Change in fair value of marketable securities, net of tax | | | (26 | ) | | | (12 | ) | | | (14 | ) | | | (23 | ) |
Change in fair value of interest rate swap, net of tax | | | (862 | ) | | | (368 | ) | | | (843 | ) | | | 100 | |
| Comprehensive (loss) income | | $ | (240 | ) | | $ | 1,587 | | | $ | 3,333 | | | $ | 7,179 | |
On January 1, 2007 the Company adopted the provisions of “Accounting for Uncertainty in Income Taxes” (“FIN 48”). The adoption of FIN 48 did not have any impact on our consolidated financial statements. We file income tax returns in the U.S. federal jurisdiction, and various state, local, and foreign jurisdictions. Generally, our state, local and foreign jurisdiction income tax returns for 2003 – 2006 remain subject to examination by various tax authorities, depending on the specific tax jurisdiction.
The Internal Revenue Service (“IRS”) is currently examining the Company’s 2005 federal income tax return. At this time, the IRS has not proposed any adjustments, nor does the Company expect any adjustments that would have a material impact on the results of operations or financial condition.
13. Recent Accounting Pronouncements
In September 2006, the FASB issued FASB Statement No. 157, "Fair Value Measurements" (“FAS 157”) which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company has not yet determined the impact FAS 157 may have on its consolidated financial statements.
In February, 2007, the FASB issued FASB Statement No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities (“FAS 159”), which permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. FAS 159 is effective for fiscal years beginning after November 15, 2007. The Company has not yet determined the impact FAS 159 may have on its consolidated financial statements.
Forward Looking Statements
The discussions set forth below and elsewhere herein contain certain statements that may be considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our particular risks include those factors listed under “Risk Factors,” beginning on page 8 of our Annual Report on Form 10-K for the year ended December 31, 2006 as supplemented by Item 1A of Part II of this report. We are also subject to many other uncertainties, such as changes in general, national or regional economic conditions; an act of war or terrorism that disrupts international shipping; changes in laws, regulations and tariffs; the imposition of anti-dumping duties on the products imported, including those produced by Hulamin Ltd.; failure to successfully integrate manufacturing and the sales of extrusions in the business of the Company; changes in the size and nature of the Company’s competition; changes in interest rates, foreign currencies or spot prices of aluminum; counterparty defaults, loss of one or more foreign suppliers or key executives; loss of one or more significant customers; increased credit risk from customers; failure of the Company to grow internally or by acquisition and to integrate acquired businesses; and failure to improve operating margins and efficiencies. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
The following MD&A is intended to help you understand our results of operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to them.
We are engaged principally in the purchase, sale and distribution of semi-finished aluminum products to a diverse customer base located throughout the United States and Canada, Europe, Australia and New Zealand. We also manufacture prime aluminum extruded products in our facility located in Baltimore, MD. We sell our products through our own marketing and sales personnel and our independent sales agents who are located in North America and Europe and who receive commissions on sales. We purchase our products from suppliers located throughout the world. One supplier, Hulamin Ltd., furnished approximately 54% of our products in the first nine months of 2007. In our North American and Australian businesses we do not typically purchase inventory for stock, however we do maintain stock for sales to customers in Europe. In the majority of our North American and Australian transactions we place orders with our suppliers based upon orders that we have received
from our customers.
The industry in which we operate is the sale and distribution of semi-finished aluminum products. These products are manufactured worldwide by rolling and extrusion facilities, many of which are owned by large integrated companies and others by independent producers. The products we purchase are in turn sold to varied metal working industries including automotive, housing, packaging, as well as distributors.
Our long-term growth will continue to depend upon understanding our customers’ particular requirements and delivering a high-level of service and quality products that meet those requirements consistently. Our growth and profitability will also depend upon our ability to continue building our market knowledge and in particular our understanding of the production capabilities of our suppliers. We will also need to maintain, strengthen and expand our supplier relationships in light of continued pricing pressures. Finally, we will need to succeed in identifying and executing opportunities to provide our customers additional value added offerings, in both our existing markets and product offerings as well as in broader or new product groups and geographic areas.
On August 13, 2007, we amended and restated our supply agreement with Hulamin, our largest supplier. Under the amended agreement, we will remain Hulamin's exclusive distributor in the U.S. and Canada. In contrast to the original agreement, which had no term but was terminable by either party on 12 months' written notice, the amended agreement provides for a fixed term that expires on August 9, 2008 and may be extended by mutual agreement. In requesting this amendment, Hulamin expressed a desire to improve their profitability and have stated their intention to review their route to market during the coming year which may result in our agreement being renewed or modified, or it may lapse. We do not know whether we and Hulamin will agree to renew or to further modify the contract upon or prior to its expiration and it is unlikely that we will know until that time draws near. Accordingly, we plan in the meantime to continue working closely with Hulamin as well as seeking to expand and diversify our sources of supply, including with some of our long-term existing suppliers, and with others that we have developed more recently, as well as with others with whom we may not have dealt previously. We will also continue to work to diversify our business through the growth of our extrusion production and distribution as well as by seeking opportunities to consider acquisitions both in our traditional and in other lines of business. We believe that doing so remains strategically critical to the maintenance and growth of our business, whether or not the Hulamin agreement is renewed next August.
Application of Critical Accounting Policies
Our condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America. Certain accounting policies have a significant impact on amounts reported in the financial statements. A summary of those significant accounting policies can be found in Note B to our financial statements included in our 2006 Annual Report on Form 10-K. Except for the adoption of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), we have not adopted any significant new accounting policies during the nine month period ended September 30, 2007.
We report accounts receivable, net of an allowance for doubtful accounts, to represent our estimate of the amount that ultimately will be realized in cash. We review the adequacy of our allowance for doubtful accounts on an ongoing basis, using historical collection trends, aging of receivables, as well as review of specific accounts, and we make adjustments in the allowance as we believe to be necessary. We maintain a credit insurance policy on the majority of our customers. This policy has a co-insurance provision and specific limits on each customer’s receivables. The co-pay may be increased in selected instances, and we sometimes elect to exceed these specific credit limits. Changes in economic conditions could have an impact on our collection of existing receivable balances or future allowance considerations.
Results of Operations for the Nine Months Ended September 30, 2007 (in thousands)
During the first nine months of 2007, net sales increased by $50,360 to $366,528 from $316,168, or a 16% increase, from the first nine months of 2006. This increase is primarily due to stronger underlying aluminum ingot pricing.
Gross profit for the period was $20,063, a decline of $3,849, or 16%, from our gross profit of $23,912 in the first nine months of 2006. Our gross profit margin has been negatively impacted by continued pricing pressures due to increased competition in our North American market from both domestic and overseas sources. This strong competition has compressed the fabrication premiums which we in turn can charge our customers. Additionally, our extrusion manufacturing facility continued to operate below capacity, which resulted in excessive fabrication costs and therefore diminished our overall profitability. In the current year, certain expenses that were treated as selling, general and administrative expenses in the nine months ended September 30, 2006 are now part of production costs and are therefore in cost of goods sold.
Interest expense for the first nine months of 2007 was $6,062, an increase of $1,553, or 34%, from our interest expense of $4,509 in the comparable period of 2006. This increase resulted primarily from an increase in our total borrowings.
Net income for this period was $4,073, a 42% decline from our net income of $7,061 in the first nine months of 2006.
Results of Operations for the Three Months Ended September 30, 2007 (in thousands)
Net sales for this quarter were $109,907, an increase of $3,646 or 3%, from our third quarter net sales of $106,261 in 2006. This increase is primarily due to stronger pricing in the underlying aluminum ingot.
Gross profit for the quarter was $5,124, a decrease of $2,298, or 31%, from our third quarter gross profit of $7,422 in 2006. As with our 2007 nine-month results discussed above, our gross profit margin for this quarter was hurt by continued price pressures from increased competition in North America from both domestic and overseas mills. As discussed above, this strong competition has compressed the fabrication premiums in the marketplace, which has affected the pricing spreads we can charge to our customers. Additionally, our extrusion manufacturing facility continued to operate below capacity, which resulted in excessive fabrication costs and therefore diminished our overall profitability. In the current year, certain expenses that were treated as selling, general and administrative expenses in the three months ended September 30, 2006, are now part of production costs and are therefore in cost of goods sold.
Interest expense for the quarter was $1,955, an increase of $398, or 26%, from our third quarter interest expense of $1,557 in 2006. This increase in interest expense is due to the growth in loans outstanding during the period.
Net income for the quarter was $537, a decrease of $1,431, or 73%, from our third quarter net income of $1,968 in 2006.
Liquidity and Capital Resources (in thousands, except per share data)
Our cash flow provided by operations during the first nine months of 2007 was $3,245, as compared to $2,865 used by operations during the first nine months of 2006. Net cash provided by operations was primarily the result of decreases in inventories of $14,101, increases in accrued expenses and derivative liabilities of $1,918 and net income of $4,073 less increases in accounts receivable of $4,916, increases in other current assets of $9,717and decreases in trade accounts payable of $3,986.
Cash flows used in financing activities during the first nine months of 2007 amounted to $1,957 mainly consisting of dividends paid of $3,034, less a net increase in borrowings of $1,164 under our lines of credit.
We currently operate under a $150 million revolving line of credit, including a commitment to issue letters of credit, with five commercial banks. Amounts borrowed bear interest of Eurodollar, money market or base rates, at our option, plus an applicable margin. The applicable margin is determined by our leverage ratios. Our borrowings under this line of credit are secured by substantially all of our assets. The credit agreement contains financial and other covenants including but not limited to, covenants requiring maintenance of minimum tangible net worth and compliance with leverage ratios, as well as an ownership minimum and limitations on other indebtedness, liens, and investments and dispositions of assets. This facility will expire on June 30, 2011.
The credit agreement provides that amounts under the facility may be borrowed and repaid, and re-borrowed, subject to a borrowing base test, until the maturity date of June 30, 2011. As of September 30, 2007 and December 31, 2006, the credit utilized amounted to, respectively, $120,213 and $135,486 (including approximately $18,963 and $21,236 of outstanding letters of credit).
In addition, our European subsidiary, Imbali Metals has entered into a separate credit facility for EUR 10 million, which includes a commitment to issues letters of credit with a commercial bank. Amounts borrowed bear interest at EUROBOR plus an applicable margin. The borrowings under this line of credit are secured by all of the assets of Imbali Metals and are unconditionally guaranteed by Empire Resources, Inc. This agreement contains financial and other covenants. The agreement has a one year term and may be renewed only by mutual agreement of both Imbali Metals and the bank. As of September 30, 2007 the credit utilized under this agreement amounted to EUR 9.9 million (US $14,164).
On September 19, 2007, our Board of Directors declared a cash dividend of $0.05 per share to stockholders of record at the close of business on September 28, 2007. The dividend totaling $490 is reflected in dividends payable and was paid on October 18, 2007. The Board of Directors will review its dividend policy on a quarterly basis, and a determination by the Board of Directors will be made subject to the profitability and free cash flow and the other requirements of our business.
Management believes that cash from operations, together with funds available under our credit facility, will be sufficient to fund the anticipated cash requirements relating to our existing operations through the expiration of our current credit facility. We may require additional debt financing in connection with any future expansion of our operations.
Commitments and Contingencies
We had outstanding letters of credit totaling $18,963,000 to certain of our suppliers and as of September 30, 2007, the credit utilized under our credit facility amounted to $120,213,000.
As discussed above, we have unconditionally guaranteed the EUR 10 million, one-year renewable credit facility of our wholly owned Belgian subsidiary, Imbali. Loans under the facility bear interest at a rate of 1.75% per annum in excess of EUROBOR, and as of September 30, 2007, there were loans of EUR 9.9 million (US $14,164,000) outstanding.
Except as noted, there have been no material changes to our commitments and contingencies from that disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006.
We hedge metal pricing and foreign currency for the portion of our purchase and sales contracts that we deem appropriate. There is a risk of a counterparty default in fulfilling the hedge contract. Should there be a counterparty default, we could be exposed to losses on the original hedged contract.
We use financial instruments designated as fair value hedges to manage our exposure to commodity price risk and foreign currency exchange risk inherent in our operations. It is our policy to hedge such risks, to the extent practicable. We enter into high-grade aluminum futures contracts to limit our gross margin exposure by hedging the metals content element of firmly committed purchase and sales commitments. We also enter into foreign exchange forward contracts to hedge our exposure related to commitments to purchase or sell aluminum denominated in international currencies. Our European subsidiary, which operates entirely in a Euro based environment typically does not hedge its Euro based commitments. We record “mark-to-market” adjustments on these futures and forward positions, and on the underlying firm purchase and sales commitments which they hedge, and reflect the net gains and losses currently in earnings.
Please refer to our Annual Report on Form 10-K for the year ended December 31, 2006 for more detailed disclosure about quantitative and qualitative disclosure of market risk. Quantitative and qualitative disclosure about market risk has not materially changed since December 31, 2006.
As required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management conducted an evaluation with the participation of our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Exchange Act), as of the end of the fiscal quarter covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. We intend to continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and we may from time to time make changes to the disclosure controls and procedures to enhance their effectiveness and to ensure that our systems evolve with our business.
There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
We are a party from time to time to certain legal proceedings and claims that arise in the ordinary course of our business. We do not believe that the disposition of any claims that are pending or have been asserted would have a material adverse effect on our results of operation or financial position.
Item 1A. Risk Factors
As discussed in our MD &A overview under Part I and in Item 5 of this Part II, on August 13, 2007 we amended and restated our supply agreement with Hulamin, our largest supplier. Hulamin supplied approximately 54%, 54% and 52% of our product in 2004, 2005 and 2006, respectively, and approximately 54% during the nine month period ended September 30, 2007. Under the amended agreement, we will remain Hulamin's exclusive distributor in the U.S. and Canada. In contrast to the original agreement, which had no term but was terminable by either party on 12 months' written notice, the amended agreement provides for a fixed term that expires on August 9, 2008 and may be extended by mutual agreement. We do not know whether we and Hulamin will agree to renew or to further modify the contract upon or prior to its expiration, and it is unlikely that we will know until that time draws near. The non-renewal or substantial modification of the Hulamin agreement may have a material adverse effect on our business, financial position and results of operation.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
None.
(a) On August 13, 2007, we amended and restated our supply agreement with Hulamin, our largest supplier. Hulamin supplied approximately 54%, 54% and 52% of our product in 2004, 2005 and 2006, respectively, and approximately 54% during the nine month period ended September 30, 2007.
Under the amended agreement, we will remain Hulamin's exclusive distributor in the U.S. and Canada. In contrast to the original agreement, which had no term but was terminable by either party on 12 months' written notice, the amended agreement provides for a fixed term that expires on August 9, 2008 and may be extended by mutual agreement. The agreement otherwise remains substantially unchanged and continues to provide, among other things, that our transactions with Hulamin will be negotiated on a transaction by transaction basis and that we will continue to provide customer support services, including market research and planning.
In requesting this amendment, Hulamin expressed a desire to improve their profitability, and have stated their intention to review their route to market during the coming year which may result in our agreement being renewed or modified, or it may lapse. We do not know whether we and Hulamin will agree to renew or to further modify the contract upon or prior to its expiration, and it is unlikely that we will know until that time draws near. Accordingly, we plan in the meantime to continue working closely with Hulamin as well as seeking to expand and diversify our sources of supply, including with some of our long-term existing suppliers, and with others that we have developed more recently, as well as with others with whom we may not have dealt previously. We will also continue to work to diversify our business through the growth of our extrusion production and distribution as well as by seeking opportunities to consider acquisitions both in our traditional and in other lines of business. We believe that doing so remains strategically critical to the maintenance and growth of our business, whether or not the Hulamin agreement is renewed next August. The non-renewal or substantial modification of the Hulamin agreement may have a material adverse effect on our business, financial position and results of operation.
(b) None.
The following are included as exhibits to this report:
* Filed herewith
** Furnished herewith
