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 September 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: 10,683,451 shares of common
stock outstanding as of November 1, 2001.
EMPIRE RESOURCES, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2001
INDEX
PART I FINANCIAL INFORMATION
Item 1 Financial Statements Page
Condensed Consolidated Balance Sheets as of September 30, 2001 (unaudited) and December 31, 2000........4
Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended
September 30, 2001 and 2000 (unaudited).................................................................5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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.................................................13
PART II OTHER INFORMATION......................................................................................13
Signatures.............................................................................................13
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 accounting principles generally accepted
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 three months and nine months ended
September 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.
3
EMPIRE RESOURCES, INC.
Condensed Consolidated Balance Sheets
September 30, December 31,
2001 2000
---- ----
ASSETS (Unaudited)
Current assets:
Cash $ 2,262,259 $ 1,207,926
Trade accounts receivable (less allowance for doubtful accounts of $202,788 at
September 30, 2001 and December 31, 2000) 25,651,044 37,405,445
Inventories 17,581,223 28,921,678
Due from stockholders 285,760
Other current assets 1,059,845 1,133,905
------------ ------------
Total current assets 46,554,371 68,954,714
Furniture and equipment (less accumulated depreciation of $301,715 and $275,715) 31,797 56,137
Deferred financing costs, net 76,215 98,879
------------ ------------
$ 46,662,383 $ 69,109,730
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - banks $ 23,100,000 $ 38,000,000
Trade accounts payable 10,375,454 18,939,119
Accrued expenses 883,525 1,069,790
------------ ------------
Total current liabilities 34,358,979 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 September 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 10,665,161 10,509,649
Retained earnings 2,339,716 1,159,061
Accumulated other comprehensive income--cumulative translation adjustment 56,686 67,685
Treasury stock (725,700 and 646,500 shares) (875,656) (791,316)
------------ ------------
Total stockholders' equity 12,303,404 11,100,821
------------ ------------
$ 46,662,383 $ 69,109,730
============ ============
See notes to financial statements 4
EMPIRE RESOURCES, INC.
Condensed Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net sales $ 31,040,712 $ 52,383,189 $116,515,238 $122,094,835
Cost of goods sold 28,812,276 49,415,465 109,004,530 113,882,602
------------ ------------ ------------ ------------
Gross profit 2,228,436 2,967,724 7,510,708 8,212,233
Selling, general and administrative expenses 1,279,227 1,300,825 3,900,173 3,827,874
------------ ------------ ------------ ------------
Operating income 949,209 1,666,899 3,610,535 4,384,359
Interest expense 418,721 878,312 1,743,691 2,175,016
------------ ------------ ------------ ------------
Income before income taxes 530,488 788,587 1,866,844 2,209,343
Income taxes 178,941 310,236 686,189 859,593
------------ ------------ ------------ ------------
Net income $ 351,547 $ 478,351 $ 1,180,655 $ 1,349,750
============ ============ ============ ============
Weighted average shares outstanding:
Basic 11,023,951 11,291,435 11,028,530 11,396,496
============ ============ ============ ============
Diluted 11,159,660 11,390,451 11,164,403 11,494,711
============ ============ ============ ============
Earnings per share:
Basic $.03 $.04 $.11 $.12
==== ==== ==== ====
Diluted $.03 $.04 $.11 $.12
==== ==== ==== ====
See notes to financial statements 5
EMPIRE RESOURCES, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30,
------------------------------------
2001 2000
-------------- --------------
Cash flows from operating activities:
Net income $ 1,180,655 $ 1,349,750
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 58,878 50,684
Deferred income taxes 99,877
Translation adjustment (10,999) 35,250
Transfer of restricted shares to key employee 117,267 258,789
Changes in:
Trade accounts receivable 11,754,401 (15,402,997)
Inventories 11,340,455 (3,918,300)
Due from stockholders 285,760
Other current assets (25,817) (98,945)
Trade accounts payable (8,563,665) 6,903,355
Accrued expenses (186,265) (1,155,637)
-------------- --------------
Net cash provided by (used in) operating activities 16,050,547 (11,978,051)
-------------- --------------
Cash flows from investing activities:
Additions to fixed assets (1,874) (19,293)
-------------- --------------
Cash flows from financing activities:
(Repayments of) proceeds from notes payable - banks (14,900,000) 13,700,000
Purchase of treasury stock (84,340) (586,960)
Costs relating to financing (10,000)
-------------- --------------
Net cash (used in) provided by financing activities (14,994,340) 13,113,040
-------------- --------------
Net increase in cash 1,054,333 1,115,696
Cash at beginning of period 1,207,926 199,791
-------------- --------------
Cash at end of period $ 2,262,259 $ 1,315,487
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,785,079 $ 2,219,617
Income taxes $ 788,239 $ 737,745
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
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 subsidiary, Empire Resources Pacific Ltd.,
which acts as a sales agent of the Company in Australia. All significant
intercompany transactions and accounts have been eliminated in 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 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 Nine months ended
September 30, September 30,
-------------------------- --------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Weighted average shares outstanding-basic 11,023,951 11,291,435 11,028,530 11,396,496
Dilutive effect of stock options and warrants 135,709 99,016 135,873 99,215
Weighted average shares outstanding-diluted 11,159,660 11,390,451 11,164,403 11,494,711
7
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. Reduction in Authorized Shares
On October 5, 2001 the stockholders of the Company voted to amend the Company's
Certificate of Incorporation to reduce the number of authorized shares of Common
Stock of the Company from 40,000,000 shares to 20,000,000 shares and to
eliminate the 5,000,000 authorized shares of Preferred Stock. This reduction was
undertaken in order to reduce the Company's liability for Delaware franchise
taxes.
8. Expiration of Warrants
Warrants to acquire 3,360,082 shares of the Company's common stock at an
exercise price of $9.00 per share expired by their terms on October 1, 2001.
9. Recent Accounting Pronouncements
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
8
EMPIRE RESOURCES, INC.
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 September 30, 2001, net unrealized losses on the Company's fair value hedges
of foreign currency exposure amounted to approximately $238,000, and net
unrealized losses on fair value hedges of aluminum prices amounted to
approximately $354,000. These unrealized losses were offset by unrealized gains
of like amount on the underlying commitments which were hedged.
In July 2001, The Financial Accounting Standards Board ("FASB") issued Statement
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Intangible Assets." SFAS 141 requires that all
business combinations be accounted for by the purchase method of accounting and
changes the criteria for recognition of intangible assets acquired in a business
combination. The provisions of SFAS 141 apply to all business combinations
initiated after June 30, 2001. SFAS 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized but tested for
impairment at least annually, while intangible assets with finite useful lives
continue to be amortized over their respective useful lives. The statement also
establishes specific guidance for testing goodwill and intangible assets with
indefinite useful lives for impairment. The provisions of SFAS 142 will be
effective for 2002. However, goodwill and intangible assets acquired after June
30, 2001 will be subject immediately to the provisions of SFAS 142. The Company
does not expect that the adoption of SFAS 141 and 142 will have a material
effect on its consolidated financial statements.
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;
9
EMPIRE RESOURCES, INC.
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 government to renew the generalized system of preference, which
provides preferential tariff treatment for certain of the Company's imports;
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 65% of
the Company's purchases. The loss of this supply could have a material adverse
effect on the Company.
Results of Operations
Net sales decreased $21.4 million or 40.8% from $52.4 million in the third
quarter of 2000 to $31.0 million in the third quarter of 2001, and decreased
$5.6 million or 4.6% in the nine month period. The decrease in sales resulted
from the Company rationalizing its customer base and selling more selectively,
combined with lower demand as a result of the turndown in the economy in the
quarter. The Company expects that demand in the near term will continue to be
lower than in the corresponding periods last year.
Gross profit decreased $0.8 million or 26.7% from $3.0 million in the third
quarter of 2000 to $2.2 million in the third quarter of 2001, and decreased $0.7
million in the nine month period. Gross profit as a percentage of sales
increased from 5.7% to 7.2% in the quarterly period as a result of a reduction
in lower margin sales and an increase in material handling and product staging
efficiency. Gross profit as a percentage of sales decreased from 6.7% to 6.4% in
the nine month period as a result of higher purchasing costs, more favorable
sales terms to customers and operating inefficiencies in the first half of the
year.
Selling, general and administrative expenses amounted to $1.3 million in
the third quarter of both years and increased less than $0.1 million in the nine
month period.
Interest expense decreased $0.5 million, or 55.6%, from $0.9 million in the
third quarter of 2000 to $0.4 million in the third quarter of 2001, and
decreased $0.4 million or 18.2% in the nine month period. The decrease in
interest expense is related to lower levels of outstanding
10
EMPIRE RESOURCES, INC.
bank indebtedness as the Company's accounts receivable and inventory decreased,
and lower interest rates.
The effective income tax rate decreased from 39.3% in the third quarter of
2000 to 33.7% in the third quarter of 2001 and from 38.9% to 36.7% in the nine
month period as a result of changes in state income tax allocation factors.
The Company reported net income of $351,547 for the third quarter of 2001
compared to net income of $478,351 for the third quarter of 2000, and net income
of $1,180,655 in the nine month period ending September 30, 2001 compared to net
income of $1,349,750 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 $1.1 million, to $2.3 million, in the
nine month period ended September 30, 2001. Net cash of $16.1 million was
provided by operating activities, offset by $15.0 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 Pronouncements
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
11
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 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 September 30, 2001, net unrealized losses on the Company's fair value
hedges of foreign currency exposure amounted to approximately $238,000, and net
unrealized losses on fair value hedges of aluminum prices amounted to
approximately $354,000. These unrealized losses were offset by unrealized gains
of like amount on the underlying commitments which were hedged.
In July 2001, The Financial Accounting Standards Board ("FASB") issued
Statement Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Intangible Assets." SFAS 141
requires that all business combinations be accounted for by the purchase method
of accounting and changes the criteria for recognition of intangible assets
acquired in a business combination. The provisions of SFAS 141 apply to all
business combinations initiated after June 30, 2001. SFAS 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized but tested for impairment at least annually, while intangible assets
with finite useful lives continue to be amortized over their respective useful
lives. The statement also establishes specific guidance for testing goodwill and
intangible assets with indefinite useful lives for impairment. The provisions of
SFAS 142 will be effective for 2002. However, goodwill and intangible assets
acquired after June 30, 2001 will be subject immediately to the provisions of
SFAS 142. The Company does not expect that the adoption of SFAS 141 and 142 will
have a material effect on its consolidated financial statements.
Commitments and Contingencies
Empire has contingent liabilities in the form of letters of credit to some
of its suppliers, which at September 30, 2001 amounted to approximately
$773,000. 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.
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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: November 9, 2001