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 June 30, 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 August 1, 2001.
EMPIRE RESOURCES, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2001
INDEX
PART I FINANCIAL INFORMATION
Item 1 Financial Statements Page
Condensed Consolidated Balance Sheets as of June 30, 2001 (unaudited)
and December 31, 2000.................................................................. 4
Condensed Consolidated Statements of Income for the Three Months and Six Months Ended
June 30, 2001 and 2000 (unaudited)..................................................... 5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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.. 9
Item 3 Quantitative and Qualitative Disclosure of Market Risk................................. 12
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 and six months ended June 30, 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
June 30, December 31,
2001 2000
---- ----
ASSETS (Unaudited)
Current assets:
Cash $ 1,297,525 $ 1,207,926
Trade accounts receivable (less allowance for doubtful accounts of $202,788 at
June 30, 2001 and December 31, 2000) 34,970,255 37,405,445
Inventories 20,135,865 28,921,678
Due from stockholders 285,760
Other current assets 723,047 1,133,905
----------- -----------
Total current assets 57,126,692 68,954,714
Furniture and equipment (less accumulated depreciation of $292,912 and $275,501) 40,767 56,137
Deferred financing costs, net 79,103 98,879
----------- -----------
$57,246,562 $69,109,730
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - banks $31,600,000 $38,000,000
Trade accounts payable 13,073,114 18,939,119
Accrued expenses 647,801 1,069,790
----------- -----------
Total current liabilities 45,320,915 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;
11,749,651 shares issued at June 30, 2001 and 15,574,162 shares (including
3,824,511 shares held in escrow) issued at December 31, 2000 117,497 155,742
Additional paid-in capital 10,628,769 10,509,649
Retained earnings 1,988,167 1,159,061
Accumulated other comprehensive income--cumulative translation adjustment 66,870 67,685
Treasury stock (725,700 and 646,500 shares) (875,656) (791,316)
----------- -----------
Total stockholders' equity 11,925,647 11,100,821
----------- -----------
$57,246,562 $69,109,730
=========== ===========
See notes to financial statements
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EMPIRE RESOURCES, INC.
Condensed Consolidated Statements of Income (Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
-------- -------- ---- ----
Net sales $41,191,499 $38,610,235 $85,474,526 $69,711,646
Cost of goods sold 38,675,488 35,758,330 80,192,254 64,467,137
----------- ----------- ----------- -----------
Gross profit 2,516,011 2,851,905 5,282,272 5,244,509
Selling, general and administrative expenses 1,250,352 1,341,192 2,620,946 2,527,049
----------- ----------- ----------- -----------
Operating income 1,265,659 1,510,713 2,661,326 2,717,460
Interest expense 593,634 756,852 1,324,970 1,296,704
----------- ----------- ----------- -----------
Income before income taxes 672,025 753,861 1,336,356 1,420,756
Income taxes 255,084 291,546 507,248 549,357
----------- ----------- ----------- -----------
Net income $ 416,941 $ 462,315 $ 829,108 $ 871,399
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic 11,024,505 11,382,015 11,030,857 11,449,604
=========== =========== =========== ===========
Diluted 11,159,327 11,481,090 11,166,892 11,548,772
=========== =========== =========== ===========
Earnings per share:
Basic $.04 $.04 $.08 $.08
==== ==== ==== ====
Diluted $.04 $.04 $.07 $.08
==== ==== ==== ====
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EMPIRE RESOURCES, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30,
-------------------------
2001 2000
------ --------
Cash flows from operating activities:
Net income $ 829,108 $ 871,399
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 37,187 34,267
Deferred income taxes (30,732)
Translation adjustment (815) 18,437
Transfer of restricted shares to key employee 80,873 177,918
Changes in:
Trade accounts receivable 2,435,190 (9,532,617)
Inventories 8,785,813 (8,704,860)
Due from stockholders 285,760
Other current assets 441,590 322,432
Trade accounts payable (5,866,005) 5,550,403
Accrued expenses (421,989) (563,743)
----------- ------------
Net cash provided by (used in) operating activities 6,575,980 (11,826,364)
----------- ------------
Cash flows from investing activities:
Additions to fixed assets (2,041) (648)
----------- ------------
Cash flows from financing activities:
(Repayments of) proceeds from notes payable - banks (6,400,000) 12,700,000
Purchase of treasury stock (84,340) (473,209)
----------- ------------
Net cash (used in) provided by financing activities (6,484,340) 12,226,791
----------- ------------
Net increase in cash 89,599 399,779
Cash at beginning of period 1,207,926 199,791
----------- ------------
Cash at end of period $ 1,297,525 $ 599,570
=========== ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,279,220 $ 1,340,647
Income taxes $ 611,391 $ 426,920
See notes to financial statements
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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
independent sales agents who receive commissions on sales. The Company purchases
from suppliers located in a number of different countries.
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 Six months ended
June 30, June 30,
----------------------- ----------------------
2001 2000 2001 2000
---- ---- ---- ----
Weighted average shares outstanding-basic 11,024,505 11,382,015 11,030,857 11,449,604
Dilutive effect of stock options and warrants 134,822 99,075 136,035 99,168
Weighted average shares outstanding-diluted 11,159,327 11,481,090 11,166,892 11,548,772
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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. Retirement of Contingent Shares
3,824,511 shares of the Company's common stock received by certain executive
officers of the Company had been held in escrow subject to an earn-out formula
dependent on the Company achieving a minimum cumulative after-tax net income
(subject to certain adjustments) of $4.4 million during the two-year period
ended March 31, 2001. This net income level was not achieved and in June 2001
the shares were 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 are either 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, is 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 June 30, 2001, net unrealized losses on the Company's fair value hedges of
foreign currency exposure amounted to approximately $61,000, and net unrealized
losses on fair value hedges of aluminum prices amounted to approximately
$98,000. These unrealized losses were offset by unrealized gains of like amount
on the underlying commitments which were hedged.
8
EMPIRE RESOURCES, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
The discussions set forth above 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.
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-KSB 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 60% of
the Company's purchases. The loss of this supply could have a material adverse
effect on the Company.
9
EMPIRE RESOURCES, INC.
Results of Operations
Net sales increased $2.6 million or 6.7% from $38.6 million in the
second quarter of 2000 to $41.2 million in the second quarter of 2001, and
increased $15.8 million or 22.6% in the six month period. The increase in sales
resulted from the increased availability of material from a principal supplier
after this supplier completed a mill expansion.
Gross profit decreased $0.3 million or 10.7% from $2.8 million in the
second quarter of 2000 to $2.5 million in the second quarter of 2001, and
decreased less than $0.1 million in the six month period. Gross profit as a
percentage of sales declined from 7.4% to 6.1% in the quarterly period and from
7.5% to 6.2% in the six month period as a result of higher purchasing costs,
more favorable sales terms to our customers and operating inefficiencies
relating to material handling and product staging associated with the increased
sales volume.
Selling, general and administrative expenses amounted to $1.3 million
in the second quarter of both years and increased $0.1 or 4.0% in the six month
period.
Interest expense decreased $0.2 million, or 25.0%, from $0.8 million in
the second quarter of 2000 to $0.6 million in the second quarter of 2001, and
amounted to $1.3 million in the six month period of both years. The decrease in
interest expense in the second quarter is related to lower levels of outstanding
bank indebtedness as the Company's accounts receivable and inventory decreased,
and lower interest rates.
The Company reported net income of $416,941 for the second quarter of
2001 compared to net income of $462,315 for the second quarter of 2000, and net
income of $829,108 in the six month period ending June 30, 2001 compared to net
income of $871,399 in the corresponding 2000 period.
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 dependent 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 in June 2001 the shares were returned
to the Company and cancelled.
Liquidity and Capital Resources
The Company's cash balance increased $0.1 million, to $1.3 million, in
the six month period ended June 30, 2001. Net cash of $6.6 million was provided
by operating activities, offset by $6.5 million of net cash used for repayment
of bank debt and purchase of treasury stock under the Company's stock buy-back
program.
10
EMPIRE RESOURCES, INC.
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 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, 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, is 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 June 30, 2001, net unrealized losses on the Company's fair value hedges of
foreign currency exposure amounted to approximately $61,000, and net unrealized
losses on fair value hedges of aluminum prices amounted to approximately
$98,000. These unrealized losses were offset by unrealized 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.
11
EMPIRE RESOURCES, INC.
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.
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: August 14, 2001
12