UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to_________
Commission file number 001-12127
EMPIRE RESOURCES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-3136782
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Parker Plaza
Fort Lee, NJ 07024
(Address of Principal Executive Offices) (Zip Code)
(201) 944-2200
(Registrant's Telephone Number, Including Area Code)
Indicate by check 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 [ ] No [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act.
Yes [ ] No [X]
Common Stock, par value $0.01 per share 9,743,184
(Class) (Outstanding on November 11, 2005)
EMPIRE RESOURCES, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2005
INDEX
PART I FINANCIAL INFORMATION
Item 1 Financial Statements Page
Condensed Consolidated Balance Sheets as of September 30, 2005 (unaudited)
and December 31, 2004...................................................................................2
Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2005 and
2004 (unaudited)........................................................................................3
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and 2004
(unaudited).............................................................................................4
Notes to Condensed Consolidated Financial Statements (unaudited)........................................5
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................................................................9
Item 3 Quantitative and Qualitative Disclosures About Market Risk.............................................13
Item 4 Controls and Procedures................................................................................13
PART II OTHER INFORMATION
Item 1 Legal Proceedings......................................................................................14
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds............................................14
Item 3 Defaults Upon Senior Securities........................................................................14
Item 4 Submission of Matters to a Vote of Security Holders....................................................14
Item 5 Other Information......................................................................................14
Item 6 Exhibits...............................................................................................14
Signatures..........................................................................................15
(i)
Introduction
------------
The condensed consolidated interim financial statements included
herein have been prepared by the Company, 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 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. The results of operations of the Company for
the nine months ended September 30, 2005 are not necessarily indicative
of the results to be expected for the full year. It is suggested that
these interim financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report filed on Form 10-K for the year ended December
31, 2004.
1
EMPIRE RESOURCES, INC.
Condensed Consolidated Balance Sheets
In Thousands, except shares
September 30, December 31,
-----------------------------
2005 2004
-----------------------------
(unaudited)
ASSETS
Current assets:
Cash $ 662 $ 287
Trade accounts receivable (less allowance for doubtful accounts of 51,711 30,367
$191 and $191 respectively)
Inventories 86,506 58,969
Other current assets 2,897 1,397
----------- -----------
Total current assets 141,776 91,020
Property and Equipment (less accumulated depreciation of $534 and $472, respectively) 4,671 2,895
----------- -----------
$ 146,447 $ 93,915
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - banks $ 80,000 $ 40,300
Current maturities of long-term debt 99 94
Trade accounts payable 34,478 25,411
Accrued expenses 5,284 6,796
Dividends Payable 487 960
----------- -----------
Total current liabilities 120,348 73,561
----------- -----------
Long-term debt, net of current maturities 2,324 2,406
Commitments and contingencies
Stockholders' equity:
Common stock $.01 par value, 20,000,000 shares authorized and 117 117
11,749,651 shares issued at September 30, 2005 & December 31, 2004,
respectively
Additional paid-in capital 10,690 10,827
Retained earnings 15,322 9,547
Accumulated other comprehensive income (1) 14
Treasury stock (2,006,467 and 2,150,400 shares, respectively) (2,353) (2,557)
----------- -----------
Total stockholders' equity 23,775 17,948
----------- -----------
$ 146,447 $ 93,915
=========== ===========
See notes to condensed consolidated financial statements
2
Condensed Consolidated Statements of Income (Unaudited)
In thousands, except shares and per share amounts
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2005 2004 2005 2004
---------------------------- ----------------------------
Net sales $ 90,777 $ 53,809 $ 260,237 $ 159,599
Cost of goods sold 83,494 49,496 239,492 147,627
----------- ----------- ----------- -----------
Gross profit 7,283 4,313 20,745 11,972
Selling, general and administrative expenses 2,247 1,745 6,692 5,265
----------- ----------- ----------- -----------
Operating income 5,036 2,568 14,053 6,707
Interest expense 1,202 255 2,638 828
----------- ----------- ----------- -----------
Income before income taxes 3,834 2,313 11,415 5,879
Income taxes 1,446 898 4,281 2,265
----------- ----------- ----------- -----------
Net income $ 2,388 $ 1,415 $ 7,134 $ 3,614
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic 9,743 9,553 9,654 9,566
=========== =========== =========== ===========
Diluted 10,045 9,864 9,932 9,904
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.25 $ 0.15 $ 0.74 $ 0.38
=========== =========== =========== ===========
Diluted $ 0.24 $ 0.14 $ 0.72 $ 0.36
=========== =========== =========== ===========
See notes to condensed consolidated financial statements
3
EMPIRE RESOURCES, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
In thousands
Nine Months Ended
September 30,
-----------------------------
2005 2004
-----------------------------
Cash flows from operating activities:
Net income $ 7,134 $ 3,614
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization 62 48
Changes in:
Trade accounts receivable (21,344) (6,407)
Inventories (27,537) 12,100
Other current assets (1,500) 4,225
Trade accounts payable 9,067 469
Accrued expenses (1,527) (4,681)
----------- -----------
Net cash (used in) provided by operating activities (35,645) 9,368
----------- -----------
Cash flows used in investing activities:
Additions to fixed assets (1,838) (46)
----------- -----------
Cash flows from financing activities:
Net proceeds from notes payable - banks 39,623 (8,700)
Proceeds - options exercised 67 130
Dividends Paid (1,832) (1,528)
----------- -----------
Net cash provided by (used in) financing activities 37,858 (10,098)
----------- -----------
Net increase (decrease)in cash 375 (776)
Cash at beginning of period 287 1,477
----------- -----------
Cash at end of period $ 662 $ 701
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,538 $ 777
Income taxes $ 4,799 $ 1,859
Non Cash Financing Activities:
Dividend declared but not yet paid $ 487 $ 384
See notes to condensed consolidated financial statements
4
Empire Resources, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
1. The Company
Empire Resources, Inc. (the "Company" or "Empire") is engaged in the
purchase, sale and distribution of principally nonferrous metals to a diverse
customer base located throughout the United States and Canada, Australia and New
Zealand. The Company sells its products through its own marketing and sales
personnel and its independent sales agents located in North America who receive
commissions on sales. The Company purchases its products from suppliers located
throughout the world; however, one supplier, Hulett Aluminium Ltd., supplied
approximately 52% of the Company's products during the first nine months of
2005. The Company does not typically purchase inventory for stock; rather, it
places orders with its suppliers based upon orders that it has received from its
customers.
In the fall of 2004, the Company purchased a used aluminum extrusion
press. The Company is modernizing and installing the press in the newly
purchased warehouse/distribution facility in Baltimore, Maryland. The Company
expects to begin manufacturing extrusions in the new facility in the fourth
quarter of 2005 and expects that its current customers are potential customers
for its extrusions production.
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 for the Company in Australia. In
addition, the statements include 6900 Quad Avenue LLC, the company which
purchased the warehouse facility, and Empire Extrusions LLC the company which
will manufacture extrusions. All significant intercompany transactions and
accounts have been eliminated in consolidation.
Reclassification
Certain items reported as cost of sales in the quarter ended March 31,
2005 were reclassified to selling, general, and administrative expense for the
nine months ended September 30, 2005. The effect of this reclassification
reduced cost of goods sold for the nine months ended September 30, 2005 by
approximately $800,000 and increased selling general and administrative expenses
by a corresponding amount.
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 amount 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. The principle estimate made relates to the
allowance for doubtful accounts. Actual results could differ from these
estimates.
3. Concentrations
One major customer accounted for approximately 14% of the Company's
consolidated net sales for the nine month period ended September 30, 2005 and
17% for the nine month period ended September 30, 2004.
5
The Company's purchase of nonferrous metal is from a limited number of suppliers
located throughout the world. One supplier, Hulett Aluminium Ltd., accounted for
52% of total purchases during the nine month period ended September 30, 2005 and
three other suppliers accounted for 33% of total purchases. The Company's loss
of any one of its largest suppliers or a material default by any such supplier
in its obligations to the Company would have a material adverse effect on the
Company's business.
4. Stock Options
The Company accounts for stock-based employee compensation under the
recognitions and measurement principles of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. No stock-based employee compensation cost is reflected in net
income as all options granted under the Plan had an exercise price equal to the
market value of the underlying common stock on the date of grant. The Company
has adopted the disclosure-only provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123 and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." For the nine months ended September
30, 2005 and 2004, there would be no effect on net income and earnings per
share. (See Note 10.)
5. Inventories
Inventories, which consist of purchased semi-finished aluminum
products, are stated at the lower of cost or market. Cost is determined by the
specific-identification method. Inventory has generally been purchased for
specific customer orders.
6. Notes Payable--Banks
As of September 30, 2005, the Company operated under a $90,000,000
committed credit facility with four commercial banks. This facility as amended,
expires on June 30, 2006. Borrowings by the Company under this line of credit
are collateralized by security interests in substantially all its assets. Under
the agreement, the Company is required to maintain working capital and net worth
ratios as defined by the loan agreement. As of September 30, 2005 and December
31, 2004 respectively, the credit utilized under this facility amounted to $85.1
million and $57.3 million (including approximately $5.1 million and $17.0
million of outstanding letters of credit). Interest on borrowings is either (i)
the federal funds rate, (ii) the prime rate of JP Morgan Chase or (iii) LIBOR,
plus the applicable margins defined in the loan agreement.
In December 2004, the Company entered into a mortgage and an interest
rate swap in connection with the purchase of a warehouse. The mortgage, which
requires monthly payments of approximately $21,000 including interest, bears
interest at LIBOR + 1.75% and matures in December 2014. At the same time, the
Company entered into an interest rate swap with a bank which has been designated
as a cash flow hedge. Effective 2004 through December 29, 2014 each month the
Company will pay a fixed interest rate of 6.37% to the bank on a notional
principal equal to the outstanding principal balance of the mortgage. In return,
the bank will pay to the Company a floating rate, namely, LIBOR, to reset
monthly plus 1.75% on the same notional principal amount.
6
Empire Resources, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) - (continued)
- --------------------------------------------------------------------------------
7. Earnings Per Share
Three months ended Nine months ended
September 30, September 30,
--------------------------------------------------------------
2005 2004 2005 2004
---- ---- ---- ----
Weighted average shares
outstanding-basic 9,743 9,553 9,654 9,566
Dilutive effect of stock options 302 311 278 338
----------- ----------- ----------- -----------
Weighted average shares
outstanding-diluted 10,045 9,864 9,932 9,904
=========== =========== =========== ===========
Basic earnings per share are based upon the Company's 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, assuming the issuance of common shares for all dilutive
potential common shares outstanding during the period, using the treasury stock
method.
8. Dividends
On September 16, 2005, the Board of Directors of the Company declared a
cash dividend of $0.05 per share to stockholders of record at the close of
business on September 30, 2005. The dividend totaling $487,000 is reflected in
dividends payable at September 30, 2005 and was paid on October 18, 2005.
9. Commitments and Contingencies
Empire has contingent liabilities in the form of letters of credit to
certain of its suppliers, which at September 30, 2005 amounted to approximately
$5.1 million.
The Company hedges metal pricing and foreign currency as it deems
appropriate for a portion of its purchase and sales contracts. There is a risk
of a counterparty default in fulfilling the hedge contract. Should there be a
counterparty default, the Company could be exposed to losses on the original
hedged contract.
10. Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 151, "Inventory Costs--an amendment of ARB No. 43," which is the
result of its efforts to converge U.S. accounting standards for inventories with
International Accounting Standards. SFAS No. 151 requires idle facility
expenses, freight, handling cost and wasted material (spoilage) costs to be
recognized as current-period charges. It also requires that allocation of fixed
production overhead to the costs of conversion be based on the normal capacity
of the production facilities. SFAS No. 151 will be
7
effective for us beginning January 1, 2006. We do not anticipate that the
adoption of SFAS No. 151 will have a material impact on our financial position,
results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004)
"Share-Based Payment" that prescribes the accounting for share-based payment
transactions in which a company receives employee services in exchange for (a)
equity instruments of the company or (b) liabilities that are based on the fair
value of the company's equity instruments or that may be settled by the issuance
of such equity instruments. SFAS No. 123R addresses all forms of share-based
payment awards, including shares issued under employee stock purchase plans,
stock options, restricted stock and stock appreciation rights. SFAS No. 123R
eliminates the ability to account for share-based compensation transactions
using APB Opinion No. 25, "Accounting for Stock Issued to Employees," that was
previously allowed under SFAS No. 123 as originally issued. Under SFAS No. 123R,
companies are required to record compensation expense for all share-based
payment award transactions measured at fair value. In April 2005, the Securities
and Exchange Commission ("SEC") delayed the effective date of SFAS No. 123R.
Accordingly, this statement is effective for us beginning January 1, 2006. We
believe that the impact, if any, that the adoption of SFAS No. 123R will have on
our financial position, results of operations or cash flows will not be
material.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements
The discussions set forth below and elsewhere herein contain certain
statements that may be considered forward-looking statements under the Private
Securities Litigation Reform Act of 1995. The Company may make written or oral
forward-looking statements in other documents we file with the Securities and
Exchange Commission, in our annual reports to stockholders, in press releases
and other written materials, and in oral statements made by our officers,
directors or employees.
You can identify forward-looking statements by the use of the words
"believe," "expect," "anticipate," "intend," estimate," "assume," "will,"
"should," and other expressions which predict or indicate future events or
trends and which do not relate to historical matters. You should not rely on
forward-looking statements, because they involve known and unknown risks,
uncertainties and other factors, some of which are beyond the control of the
Company. These risks, uncertainties and other factors may cause the actual
results, performance or achievements of the Company to be materially different
from the anticipated future results, performance or achievements expressed or
implied by the forward-looking statements.
Among the significant factors that could cause our actual results to
differ materially from those expressed in forward-looking statements are:
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 Hulett Aluminium Ltd.; failure to successfully
integrate manufacturing 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; 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; failure to improve
operating margins and efficiencies; and changes in the assumptions used in
making such forward-looking statements. The risks set forth in the immediately
preceding sentence are not exhaustive. You should carefully review all of these
risk factors, and you should be aware that there may be other factors that could
cause these differences, including, among others, the factors listed under "Risk
Factors," beginning on page 17 of our Annual Report on Form 10-K for the year
ended December 31, 2004. Readers should carefully review the factors described
under "Risk Factors" and should not place undue reliance on our forward-looking
statements. In addition, readers should refer to our annual reports on Form 10-K
and our quarterly reports on Form 10-Q for future periods and our current
reports on Form 8-K as we file them with the Securities and Exchange Commission,
and to other materials we may furnish to the public from time to time through
Form 8-K or otherwise.
These forward-looking statements were based on information, plans and
estimates at the date of this report, and we undertake no obligation to update
any forward-looking statements to reflect changes in underlying assumptions or
factors, new information, future events or other changes. New risk factors
emerge from time to time, and it is not possible for us to predict all risk
factors, nor can we predict the impact of all risk factors on our business or to
the extent which any factor, or combination of factors, may cause actual results
to differ materially from those contained in forward-looking statements.
9
Overview
Empire is a distributor of value added, semi-finished aluminum
products. Consequently, Empire's sales volume has been, and will continue to be,
a function of its ongoing ability to secure quality aluminum products from its
suppliers. While the Company maintains long-term supply relationships with
several foreign mills, one such supplier, Hulett Aluminium Ltd., ("Hulett")
accounted for approximately 52% of the Company's purchases during the nine
months ended September 30, 2005.
The Company's ability to succeed is driven in part by continued
customer satisfaction, supplier and customer loyalty and the ability to manage
the competitive economic environment through the expansion and upgrading of its
service to its suppliers and customers. This includes the ability to ship
material on a just in time basis from both private and public warehouses, and
the establishment of a proprietary on-line service modules for customers to
track their shipments. This bolstered the Company's commitment to service and
customer satisfaction. The Company has also used its excellent customer
relationships to leverage sales by developing long term relationships with its
customers and understanding their needs. Because the Company has always engaged
in a strategy of developing long term relationships, it has been able to build
sales volume without a similar increase in selling, general and administrative
expenses that would otherwise accompany customer turnover. The stable customer
and supplier base has enabled the Company to increase its purchases from its
suppliers and to sell the majority of these quantities to its existing customer
base. While this does expose the Company to concentration risks, it has provided
the foundation of the Company's growth and performance.
Application of Critical Accounting Policies
The Company's 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 the Company's financial statements
included in the Company's 2004 Annual Report on Form 10-K. The Company has not
adopted any significant new accounting policies during the nine month period
ended September 30, 2005.
Among the significant judgments made by management in the preparation
of the Company's financial statements are the determination of the allowance for
doubtful accounts and accruals for inventory claims. These adjustments are made
each quarter in the ordinary course of accounting.
The Company reports accounts receivable, net of an allowance for
doubtful accounts, to represent its estimate of the amount that ultimately will
be realized in cash. The Company reviews the adequacy of its allowance for
doubtful accounts on an ongoing basis, using historical collection trends, aging
of receivables, as well as review of specific accounts, and makes adjustments in
the allowance as it believes necessary. The Company maintains a credit insurance
policy on the majority of its customers. This policy generally has a
co-insurance provision and specific limits on each customer's receivables. The
co-pay may be increased in selected instances and the Company sometimes elects
to exceed these specific credit limits. Changes in economic conditions could
have an impact on the collection of existing receivable balances or future
allowance considerations.
Generally, the Company's exposure on claims for defective material is
small as the Company refers all claims on defects back to the mill supplying the
material. In the event that the Company does not believe the mill will honor a
claim, the Company will record an allowance for inventory adjustments.
10
Results of Operations for the Nine Months ended September 30, 2005 (in
thousands)
During the first nine months of 2005 net sales increased $100,638 to
$260,237, or a 63% increase, from $159,599 in the first nine months of 2004.
This increase was due to approximately a 34% volume increase in shipments to the
Company's customers and an increase of approximately 21% in average pricing.
Gross profit increased $8,773 to $20,745 in this period, or a 73% increase, from
$11,972 in the first nine months of 2004. The dollar increase in gross profit is
due primarily to the increased sales volume and to a lesser extent to the
increase in the gross profit margin. During the nine months gross profit as a
percentage of sales increased due to strong demand for value added products
sold.
The Company experienced approximately a 27% increase in selling,
general and administrative costs. These costs are primarily attributable to
increased sales commissions and payroll costs.
Interest expense grew during the nine month period by $1,810 from $828
to $2,638. This 219% increase in interest expense is due to both the increase in
loans outstanding during the nine month period to support revenue growth and the
continuing upward trend in interest rates.
The Company's ability to grow sales without as large a percentage
increase in selling, general and administrative costs led to an increase in net
income of 97% from $3,614 in September 2004 to $7,134 in September 2005. The
Company's ability to increase its supply of product has been and will continue
to be the main factor for increased revenues. The Company's top ten customers
represented 43% of sales in the nine months of 2005 as compared to 44% during
the nine months of 2004. One customer represented 14% of the Company's net sales
for the nine months of 2005 and 17% for the nine month period of 2004.
Results of Operations for the Three Months ended September 30, 2005 (in
thousands)
Net sales increased $36,968 or 69% during the third quarter of 2005
from $53,809 in 2004 to $90,777 in 2005. The Company achieved approximately a
43% increase in shipment volume to its customers and average prices increased
approximately 18%. Gross profit increased in this three month period of 2005 by
$2,970 to $7,283 from $4,313 as compared to the three months of 2004. The dollar
increase in gross profit is due to the increased sales volume.
The Company experienced approximately a 28% increase in selling,
general and administrative costs for the third quarter of 2005 as compared to
the same period in 2004. These costs are primarily attributable to increased
sales commissions and payroll costs.
Interest expense increased during the three month period by $947 from
$255 to $1,202. This 372% increase in interest expense is due to both the
increase in loans outstanding during the period to support revenue growth and
the continuing upward trend in interest rates.
Net income increased by $973 from $1,415 to $2,388 for the three months
ended September 30, 2005, an increase of 69%. The Company's ability to increase
its supply has been and will continue to be the main factor in increased
revenues.
11
Liquidity and Capital Resources (in thousands, except per share data)
The Company's cash flow increased slightly by $375 in the first nine
months of 2005. The Company used $35,645 in operating activities for the nine
month period, comprised largely of increases in accounts receivable and
inventories. Accounts receivables increased to $21,344 and inventories increased
to $27,537. The increase in accounts receivables and inventories is driven by
the growth of the Company's sales. Cash flows from financing activities provided
$37,858, primarily from the increased borrowings under the Company's line of
credit.
Empire currently operates under a $90,000 revolving line of credit,
including a commitment to issue letters of credit, with four commercial banks.
The Company's borrowings under this line of credit are collateralized by
security interests in substantially all of Empire's assets. Empire is required
to maintain working capital and net worth ratios under this credit agreement.
This facility will expire on June 30, 2006.
On October 3, 2005, the Company entered into Amendment No. 7 to its
Credit Agreement with JPMorgan Chase Bank, N.A., as Lead Arranger and
Administrative Agent. This Amendment principally amended certain defined terms
in the Credit Agreement.
On September 16, 2005, the Company announced that its Board of
Directors declared a cash dividend of $0.05 per share. The dividend totaling
$487 was paid on October 18, 2005 to stockholders of record at the close of
business on September 30, 2005. 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 the business.
Management believes that cash from operations, together with funds
available under its credit facility, will be sufficient to fund the anticipated
cash requirements relating to the Company's existing operations through June 30,
2006. The Company has begun discussions with its bank group to extend the credit
facility, however, there can be no assurances that current and forecasted cash
from operations will be sufficient to fund further operations and there can be
no assurance that the sources of capital available to the Company will be
available in the future or, if available, that any such sources will be
available on favorable terms. Empire may require additional debt financing in
connection with the future expansion of its operations.
Commitments and Contingencies (in thousands)
Empire has contingent liabilities in the form of letters of credit
totaling $5,100 to certain of its suppliers and as of September 30, 2005, the
credit utilized under its credit facility amounted to $85,100. Except as noted,
there have been no material changes to the Company's commitments and
contingencies from that disclosed in our Annual Report on Form 10-K for the year
ended December 31, 2004.
The Company hedges metal pricing and foreign currency as it deems
appropriate for a portion of its purchase and sales contracts. There is a risk
of a counterparty default in fulfilling the hedge contract. Should there be a
counterparty default, the Company could be exposed to losses on the original
hedged contract.
12
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company uses financial instruments designated as fair value hedges
to manage its exposure to commodity price risk and foreign currency exchange
risk inherent in its operations. It is the Company's policy to hedge such risks,
to the extent practicable. The Company enters into high-grade aluminum futures
contracts to limit its gross margin exposure by hedging the metals content
element of firmly committed purchase and sales commitments. The Company also
enters into foreign exchange forward contracts to hedge its exposure related to
commitments to purchase or sell non-ferrous metals denominated in international
currencies. The Company records "mark-to-market" adjustments on these futures
and forward positions, and on the underlying firm purchase and sales commitments
which they hedge, and reflects the net gains and losses currently in earnings.
Refer to our Annual Report on Form 10-K for the year ended December 31,
2004 for more detailed disclosure about quantitative and qualitative disclosure
of market risk. Quantitative and qualitative disclosure about market risk have
not materially changed since December 31, 2004.
ITEM 4. CONTROLS AND PROCEDURES
As required by the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the Company's management conducted an evaluation with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, regarding the effectiveness of the Company's "disclosure controls and
procedures" (as defined in Rule 13a-15(e) of the Exchange), as of the end of the
fiscal quarter covered by this report. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of the end of
the period covered by this report, the Company's disclosure controls and
procedures were effective to ensure that information required to be disclosed by
the Company in reports it files or submits 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.
13
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is party from time to time to certain legal proceedings and
claims that arise in the ordinary course of business. The Company does not
believe that any such litigation would have a material adverse effect on its
results of operation or financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
The following are included as exhibits to this report:
Exhibit No. Description
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of
the Securities Exchange Act of 1934*
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of
the Securities Exchange Act of 1934*
32.1 Certifications of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002**
- -------------------------
* Filed herewith
** Furnished herewith
14
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
EMPIRE RESOURCES, INC.
Dated: November 14, 2005 By: /s/ Sandra Kahn
---------------
Sandra Kahn
Chief Financial Officer
(signing both on behalf of the registrant and in her
capacity as Principal Financial and Principal
Accounting Officer)
15