U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 2001
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
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)
201 944-2200
(Registrant's Telephone Number, Including Area Code)
Check whether the Registrant: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 11,023,951 shares of common
stock outstanding as of May 1, 2001.
EMPIRE RESOURCES, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001
INDEX
PART I FINANCIAL INFORMATION
Item 1 Financial Statements Page
Condensed Consolidated Balance Sheets as of March 31, 2001
(unaudited) and December 31, 2000................................... 4
Condensed Consolidated Statements of Income for the Three
Months Ended March 31, 2001 and 2000 (unaudited).................... 5
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2001 and 2000 (unaudited).................... 6
Notes to Condensed Consolidated Financial Statements (unaudited).... 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 8
Item 3 Quantitative and Qualitative Disclosure of Market Risk.............. 11
PART II OTHER INFORMATION................................................... 12
Signatures.......................................................... 12
2
EMPIRE RESOURCES, INC.
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 with respect to Form 10-Q.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
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 three months ended March 31, 2001 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 Form 10-KSB
for the year ended December 31, 2000.
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EMPIRE RESOURCES, INC.
Condensed Consolidated Balance Sheets
March 31, December 31,
2001 2000
---- ----
ASSETS (Unaudited)
Current assets:
Cash $ 1,062,132 $ 1,207,926
Trade accounts receivable (less allowance for doubtful
accounts of $202,788 at March 31, 2001 and December 31, 2000) 38,138,649 37,405,445
Inventories 28,738,414 28,921,678
Due from stockholders 285,760
Other current assets 1,862,438 1,133,905
------------ ------------
Total current assets 69,801,633 68,954,714
Furniture and equipment (less accumulated depreciation
of $283,633 and $275,501) 49,438 56,137
Deferred financing costs, net 88,991 98,879
------------ ------------
$ 69,940,062 $ 69,109,730
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - banks $ 37,650,000 $ 38,000,000
Trade accounts payable 19,766,557 18,939,119
Accrued expenses 1,028,358 1,069,790
------------ ------------
Total current liabilities 58,444,915 58,008,909
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock $.01 par value, 5,000,000 shares authorized; none issued
Common stock $.01 par value, 40,000,000 shares authorized;
15,574,162 shares issued, including 3,824,511 shares held in escrow 155,742 155,742
Additional paid-in capital 10,549,898 10,509,649
Retained earnings 1,571,229 1,159,061
Accumulated other comprehensive income--cumulative translation adjustment 88,222 67,685
Treasury stock (720,100 and 646,500 shares) (869,944) (791,316)
------------ ------------
Total stockholders' equity 11,495,147 11,100,821
------------ ------------
$ 69,940,062 $ 69,109,730
============ ============
See notes to financial statements 4
EMPIRE RESOURCES, INC.
Condensed Consolidated Statements of Income (Unaudited)
Three Months Ended
March 31,
-------------------------
2001 2000
----------- -----------
Net sales $44,283,027 $31,101,411
Cost of goods sold 41,516,766 28,708,807
----------- -----------
Gross profit 2,766,261 2,392,604
Selling, general and administrative expenses 1,370,594 1,185,857
----------- -----------
Operating income 1,395,667 1,206,747
Interest expense 731,336 539,852
----------- -----------
Income before income taxes 664,331 666,895
Income taxes 252,164 257,811
----------- -----------
Net income $ 412,167 $ 409,084
=========== ===========
Weighted average shares outstanding:
Basic 11,037,280 11,388,751
=========== ===========
Diluted 11,136,244 11,489,387
=========== ===========
Earnings per share:
Basic $ .04 $ .04
=========== ===========
Diluted $ .04 $ .04
=========== ===========
See notes to financial statements 5
EMPIRE RESOURCES, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31,
----------------------------
2001 2000
----------- -----------
Cash flows from operating activities:
Net income $ 412,167 $ 409,084
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 18,020 17,809
Deferred income taxes (15,366)
Translation adjustment 20,537 15,014
Transfer of restricted shares to key employee 40,250 88,959
Changes in:
Trade accounts receivable (733,204) (5,202,314)
Inventories 183,264 (8,744,316)
Due from stockholders 285,760
Other current assets (713,167) 461,503
Trade accounts payable 827,438 6,860,882
Accrued expenses (41,432) 3,248
----------- -----------
Net cash provided by (used in) operating activities 284,267 (6,090,131)
----------- -----------
Cash flows from investing activities:
Additions to fixed assets (1,433)
----------- -----------
Cash flows from financing activities:
(Repayments of) proceeds from notes payable - banks (350,000) 6,400,000
Purchase of treasury stock (78,628) (454,109)
----------- -----------
Net cash (used in) provided by financing activities (428,628) 5,945,891
----------- -----------
Net decrease in cash (145,794) (144,240)
Cash at beginning of period 1,207,926 199,791
----------- -----------
Cash at end of period $ 1,062,132 $ 55,551
=========== ===========
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 831,845 $ 583,795
Income taxes $ 491,993 $ 104,765
See notes to financial statements 6
EMPIRE RESOURCES, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
1. The Company
Empire Resources, Inc. (the "Company" or "Empire") is engaged principally in the
purchase, sale and distribution of non-ferrous metals to a diverse customer base
located throughout North America, Australia and New Zealand. The Company sells
its products through its own marketing and sales personnel and through its
independent sales agents located in the U.S. who receive commissions on sales.
The Company purchases from suppliers located throughout the world.
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 of the Company in Australia, and two other
subsidiaries, both of which are presently inactive. All significant intercompany
transactions and accounts have been eliminated in consolidation.
2. Use of estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities at the date of the
financial statements and the reported amount of income and expenses during the
reported period. Actual results could differ from these estimates.
3. Inventories
Inventories consist of semi-finished aluminum products stored in warehouses or
in transit.
4. Notes Payable--Banks
The Company operates under a $60 million line of credit with three commercial
banks. Borrowings by the Company under this line of credit are collateralized by
security interests in substantially all assets of Empire. Under the agreement,
Empire is required to maintain working capital and net worth ratios, as defined
by the loan agreement.
5. Earnings Per Share
Three months ended
March 31,
-------------------------
2001 2000
---- ----
Weighted average shares outstanding-basic 11,037,280 11,388,751
Dilutive effect of stock options and warrants 98,964 100,636
Weighted average shares outstanding-diluted 11,136,244 11,489,387
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EMPIRE RESOURCES, INC.
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.
6. Contingent Shares
3,824,511 shares of the Company's common stock received by certain executive
officers of the Company have been held in escrow subject to an earn-out formula
dependant on the Company achieving a minimum cumulative after-tax net income
(subject to certain adjustments) of $4.4 million during the two-year period
ending March 31, 2001. This net income level was not achieved and the shares
will be returned to the Company and cancelled.
7. Recent Accounting Pronouncement
As of January 1, 2001, the Company has adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting For Derivative Instruments and Hedging
Activities", issued by the Financial Accounting Standards Board. SFAS No. 133
requires the Company 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 will either be offset against the
change in fair value of the hedged assets, liabilities or firm commitments
through earnings, or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value, if any, will be immediately recognized in earnings.
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 transactions. 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. The gains and losses on futures
and forward positions as of January 1, 2001 offset the gains and losses at that
date on the underlying firm purchase and sales commitments which they hedged,
and accordingly the Company did not record a transition adjustment as of January
1, 2001.
At March 31, 2001, net unrealized losses on the Company's fair value hedges of
foreign currency exposure amounted to approximately $423,000, and net unrealized
gains on fair value hedges of aluminum prices amounted to approximately
$345,000. These unrealized net losses were offset by unrealized net gains of
like amount on the underlying commitments which were hedged.
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 SEC, in our
annual reports to stockholders, in press releases and other written materials,
and in oral statements made by our officers, directors or employees.
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EMPIRE RESOURCES, INC.
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.
Some of the factors that might cause these differences include the
following: changes in general, national or regional economic conditions; changes
in laws, regulations and tariffs; 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;
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. You should carefully review all of these
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 7 of our Annual Report on Form 10-K for the year
ended December 31, 2000. Readers should carefully review the factors described
under "Risk Factors" and should not place undue reliance on our forward-looking
statements.
These forward-looking statements were based on information, plans and
estimates at the date of this report, and we do not promise to update any
forward-looking statements to reflect changes in underlying assumptions or
factors, new information, future events or other changes.
General
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 presently accounts for more than 50% of
the Company's purchases.
Results of Operations
Net sales increased $13.2 million or 42.4% from $31.1 million in the
first quarter of 2000 to $44.3 million in the first quarter of 2001. The
increase in sales resulted from the increased availability of material from a
principal supplier after this supplier completed a mill expansion.
Gross profit increased $0.4 million or 16.7% from $2.4 million in the
first quarter of 2000 to $2.8 million in the first quarter of 2001 as a result
of the increase in sales. Gross profit as a percentage of sales declined from
7.7% to 6.3% as a result of higher purchasing costs, more favorable sales terms
and operating inefficiencies relating to material handling and product staging
associated with the sharply increased sales volume.
Selling, general and administrative expenses increased $0.2, or 16.7%,
from $1.2 million in the first quarter of 2000 to $1.4 million in the first
quarter of 2001. The increases were
9
EMPIRE RESOURCES, INC.
a result of increased staffing costs associated with customer service and costs
related to employment contracts with certain executive officers.
Interest expense increased $.2 million, or 40.0%, from $0.5 million
during the first quarter of 2000 to $0.7 million during the first quarter of
2001. The increase in interest expense is related to higher levels of
outstanding bank indebtedness required in order to fund the Company's higher
receivables levels that resulted from the increase in sales.
The Company reported net income of $412,167 for the first quarter of
2001 compared to net income of $409,084 for the first quarter of 2000.
Contingent Shares
In conjunction with the merger of the Company with Empire Resources,
Inc. on September 17, 1999, (the "Merger"), Nathan and Sandra Kahn ("the Empire
Stockholders") received an aggregate of 9,384,761 shares of common stock of the
Company in exchange for the outstanding stock of Empire owned by them prior to
the Merger. Pursuant to the Merger agreement, 3,824,511 of these shares (the
"Contingent Shares") were deposited into escrow. The Contingent Shares were
subject to an earn-out formula dependant on the Company achieving a minimum
cumulative after-tax net income (subject to certain adjustments) of $4.4 million
during the two-year period commencing April 1, 1999 and ending March 31, 2001.
This net income level was not achieved and the shares will be returned to the
Company and cancelled.
Liquidity and Capital Resources
The Company's cash balance decreased $0.1 million, to $1.1 million, in
the three month period ended March 31, 2001. Net cash of $0.3 million was
provided by operating activities, offset by $0.4 million of net cash used for
repayment of bank debt and purchase of treasury stock under the Company's stock
buy-back program.
Empire currently operates under a $60 million revolving line of credit,
including a commitment to issue letters of credit, with three commercial banks.
Borrowings under these lines 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 these credit agreements. These facilities
expire on June 30, 2003.
Management believes that cash from operations, together with funds
available under its credit facility, will be sufficient to fund the cash
requirements relating to the Company's existing operations for the next twelve
months. Empire may require additional debt or equity financing in connection
with the future expansion of its operations.
Recent Accounting Pronouncement - Derivative Financial Instruments
As of January 1, 2001, the Company has adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting For Derivative Instruments and
Hedging Activities", issued by the Financial Accounting Standards Board. SFAS
No. 133 requires the Company to recognize all derivatives in the balance sheet
at fair value. Derivatives that are not hedges
10
EMPIRE RESOURCES, INC.
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 will either be offset against the change in fair value of the hedged
assets, liabilities or firm commitments through earnings, or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value, if any, will be
immediately recognized in earnings.
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 transactions. 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. The Company does not
engage in trading or speculative transactions.
At March 31, 2001, net unrealized losses on the Company's fair value
hedges of foreign currency exposure amounted to approximately $423,000, and net
unrealized gains on fair value hedges of aluminum prices amounted to
approximately $345,000. These unrealized net losses were offset by unrealized
net gains of like amount on the underlying commitments which were hedged.
Commitments and Contingencies
Empire has contingent liabilities in the form of letters of credit to
some of its suppliers. In addition, under the terms of some of its supply
contracts, the Company is required to take minimum tonnages as specified in
those contracts. As a result, the Company could, under certain circumstances, be
forced to sell the required tonnage at a loss.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The information called for by this item is provided under the caption
"Recent Accounting Pronouncement - Derivative Financial Instruments" under item
2 - Management's Discussion and Analysis of Financial Condition and Results of
Operations.
11
PART II OTHER INFORMATION
None
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.
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)
Dated: May 15, 2001
12