U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended Commission file
March 31, 2001 Number 33-42408-NY
WESTBURY METALS GROUP, INC.
(Exact name of registrant as specified in its charter)
New York 11-3023099
- -------- ----------
(State or other jurisdiction of (IRS Employer Identification
Incorporation) Number)
750 Shames Drive, Westbury, New York 11590
(Address of principal executive offices)
Registrant's telephone number, including area code:
(516) 997-8333
-------------------------------------------
(Former name or address if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all
documents and reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or 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 ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13, or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes _______ No _______
APPLICABLE ONLY TO CORPORATE ISSUERS
As at May 10, 2001, 5,316,695 shares of the issuer's Common Stock, $.001 par
value, were outstanding.
WESTBURY METALS GROUP, INC.
FORM 10-Q
For the Quarter Ended March 31, 2001
TABLE OF CONTENTS
PART 1 - FINANCIAL INFORMATION
ITEM 1-FINANCIAL STATEMENTS Page
Consolidated Balance Sheets as of March 31, 2001 and June 30, 2000
.........................................................................................................2
Consolidated Statements of Operations for the Three and Nine Months Ended
March 31, 2001 and 2000................................................................................3
Consolidated Statements of Cash Flows for the Nine Months Ended
March 31, 2001 and 2000................................................................................4
Notes to Consolidated Financial Statements..............................................................5-13
ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................................................................14-20
PART II - OTHER INFORMATION
SIGNATURE...................................................................................................21
WESTBURY METALS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, JUNE 30,
2001 2000
-------------------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 453,118 628,840
Accounts receivable, net of allowance of $173,942 and $206,643,
respectively 4,026,120 8,012,368
Inventories (Note 4) 8,144,295 5,391,454
Prepaid expenses and other current assets 682,224 249,763
--------- -------
Total current assets 13,305,757 14,282,425
PROPERTY, PLANT AND EQUIPMENT - Net 2,928,520 2,491,142
GOODWILL - Net 2,452,874 2,552,054
OTHER ASSETS 242,160 265,939
------- -------
TOTAL ASSETS $ 18,929,311 $ 19,591,560
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, accrued expenses and income taxes payable $ 1,159,150 $ 2,118,241
Current portion of long-term debt 203,286 261,055
Revolving credit loan (Note 6) 5,781,154 -
Due to customers 1,620,023 1,636,048
----------- -------------
Total current liabilities 8,763,613 4,015,344
------------ --------------
REVOLVING CREDIT LOAN (Note 6) - 5,868,126
DIRECTOR LOAN (Note 7) 1,000,000 1,000,000
LONG-TERM DEBT 1,043,363 1,171,553
------------ -----------
Total long term debt 2,043,363 8,039,679
------------ ---------
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value - authorized, 50,000,000
shares; 5,316,695 shares issued and outstanding 5,317 5,317
Capital in excess of par value (Note 11) 9,835,942 9,802,609
Accumulated other comprehensive loss (60,061) (74,907)
Accumulated deficit (1,658,863) (2,196,482)
------------ ----------
Total stockholders' equity 8,122,335 7,536,537
------------ ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,929,311 $ 19,591,560
============ ============
See notes to unaudited consolidated financial statements.
WESTBURY METALS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------------------------------------------------
2001 2000 2001 2000
---- ---- ---- ----
REVENUE:
Precious metal sales $ 39,251,048 $ 24,082,168 $103,706,077 $ 55,160,458
Refining 10,343,099 2,890,013 25,366,433 8,286,523
--------------- -------------- ---------------- --------------
Total revenue 49,594,147 26,972,181 129,072,510 63,446,981
------------- -------------- ---------------- --------------
COST OF SALES:
Cost of precious metal sales 36,653,900 22,681,510 99,184,578 53,064,841
Cost of refining 9,611,036 2,992,846 22,942,323 7,130,402
--------------- -------------- ---------------- --------------
Total cost of sales 46,264,936 25,674,356 122,126,901 60,195,243
------------- -------------- ---------------- --------------
GROSS PROFIT 3,329,211 1,297,825 6,945,609 3,251,738
-------------- -------------- -------------- --------------
OPERATING EXPENSES:
Selling, general and administrative expenses 1,947,057 1,296,240 4,663,296 3,124,112
Depreciation and amortization 211,931 139,847 594,291 374,135
---------------- -------------- -------------- --------------
Total operating expenses 2,158,988 1,436,087 5,257,587 3,498,247
-------------- -------------- ------------ --------------
INCOME (LOSS) FROM OPERATIONS 1,170,223 (138,262) 1,688,022 (246,509)
-------------- --------------- ------------- ---------------
OTHER EXPENSE (INCOME):
Interest expense 319,281 338,414 1,085,417 753,223
Interest income 13,553 - (7,076) (21,051)
Non-cash warrant charge (Note 11) 5,644 - 33,334 1,200,570
Other income - (11,746) - -
-------------- -------------- -------------- --------------
Total other expense 338,478 326,668 1,111,675 1,932,742
--------------- -------------- -------------- --------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 831,745 (464,930) 576,347 (2,179,251)
PROVISION FOR INCOME TAXES (77) - 38,728 -
--------------- -------------- ----------- --------------
NET INCOME (LOSS) $ 831,822 $ (464,930) $ 537,619 $ (2,179,251)
============== ============== ========== ===============
NET INCOME (LOSS) PER SHARE:
Basic $ 0.16 $ (0.09) $ 0.10 $ (0.56)
============== ================ =========== ==============
Diluted $ 0.15 $ (0.09) $ 0.10 $ (0.56)
============= ================ ============ ===============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
Basic 5,316,695 5,087,306 5,316,695 3,915,205
============== ============== ============== ==============
Diluted 5,407,853 5,087,306 5,409,178 3,915,205
============== ============== ============== ==============
See notes to unaudited consolidated financial statements.
WESTBURY METALS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended March 31,
2001 2000
----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 537,619 $ (2,179,251)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization 594,291 374,135
Bad debt expense - 348,094
Warrant charge 33,334 1,200,570
Changes in assets and liabilities:
Inventories (2,752,841) (2,875,412)
Accounts receivable 3,986,248 (3,401,300)
Prepaid expenses and other current assets (432,461) (254,120)
Other non-current assets 23,779 (120,058)
Due to customers (16,025) (827,316)
Accounts payable, accrued expenses and income taxes payable (944,246) 1,310,220
------------ ---------------
Net cash provided by (used in) operating activities 1,029,698 (6,424,438)
CASH FLOWS FROM INVESTING ACTIVITIES:
Equipment additions (932,489) (346,056)
------------ ---------------
Net cash used in investing activities (932,489) (346,056)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note payable to former Reliable shareholder - (1,192,578)
Proceeds from issuance of subordinated debt - 2,000,000
Net (pay down on) proceeds from credit line (86,972) 2,466,815
Repayment of long-term debt (245,604) (267,690)
Proceeds from long-term debt 59,645 -
Repayment of subordinated debt - (2,000,000)
Proceeds from stock warrants exercised and private placement - 5,250,130
---------- ------------
Net cash (used in) provided by financing activities (272,931) 6,256,677
---------- -------------
NET DECREASE IN CASH (175,722) (513,817)
BEGINNING CASH BALANCE 628,840 1,242,230
--------------- ---------------
ENDING CASH BALANCE $ 453,118 $ 728,413
=============== ===============
Supplemental cash flow information:
Cash paid for interest expense $ 1,060,181 $ 652,803
=============== ===============
See notes to unaudited consolidated financial statements.
NOTE 1 - GENERAL
The accompanying unaudited consolidated financial statements as of and for the
three and nine months ended March 31, 2001 and 2000 include the accounts of
Westbury Metals Group, Inc. ("WMG") five subsidiaries, which are Westbury
Alloys, Inc., Alloy Trading S.A., Reliable-West Tech, Inc., Westbury
International, Inc., and Westbury Realty Management Corp., (collectively, the
"Company"). The Company was formed, initially as Rosecap, Inc., on March 31,
1998 through a reverse merger of Westbury Acquisition Corp. and Westbury Alloys,
Inc. On June 18, 1998, the Company's name was changed to Westbury Metals Group,
Inc. from Rosecap, Inc.
The Company primarily operates three inter-related businesses:
Industrial Commodities Management segment is comprised of two subsidiaries: (i)
Westbury International, Inc. ("International"), which engages in the risk
management of precious metals and foreign currency for the Company. The
Company's policy is to hedge all financed transactions so no gains and losses
occur due to market fluctuations. International was formed in July 1998; and
(ii) Alloy Trading S.A. ("Alloy"), which is a 98% owned Peruvian subsidiary of
the Company. Local managers of Alloy own the remaining 2%. Alloy primarily
exports precious metals for the Company's own use or sale to third parties.
Alloy is also engaged in the development of precious metal opportunities in
South America, which may include gold and silver bullion transactions with the
mining industry and other industrial users of precious metals.
Metal Processing & Refining segment is comprised of one subsidiary, Westbury
Alloys, Inc. ("Westbury"). Westbury principally reclaims gold, silver, platinum
and palladium from scrap and residues from the electronics, jewelry, petroleum,
dental, chemical, automotive, mining and aerospace industries. Once reclaimed,
the precious metals are weighed, sampled and assayed to determine values and
settled with the customer. Westbury either purchases the precious metal or
returns the metal to the customer. Using the trade name "West Cats", Westbury
purchases catalytic converters and recovers the platinum, palladium and rhodium.
Industrial Products segment is comprised of Reliable-West Tech, Inc. ("RWT").
RWT manufactures and sells silver in various forms and shapes, plating salts and
tin and tin-lead anodes used in manufacturing. RWT also will be involved in
precious metal casting grains, alloys and mill products as its business expands.
The Corporate segment includes the operations of one subsidiary, Westbury Realty
Management, Inc. ("Realty"). Realty acquired and now owns and manages properties
used by Westbury and RWT in their industrial product sales and metal processing
and refining segments. Realty was formed in June 1998, and did not have
financial activity during that year.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all the adjustments necessary to present fairly the results
of operations for each of the three- and nine-month periods ended March 31, 2001
and 2000, the financial position at March 31, 2001 and the cash flows for the
nine-month periods ended March 31, 2001 and 2000, respectively. Such adjustments
consist of normal recurring items. The consolidated financial statements and
notes thereto should be read in conjunction with the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 2000 as filed with the U.S.
Securities and Exchange Commission.
The interim financial results are not necessarily indicative of the results to
be expected for the full year.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Derivative & hedging activities - in June 1998, the Financial Accounting
Standards Board issued Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities", subsequently amended by statements 137 and 138, in June
1999 and June 2000, respectively ("SFAS 133"). Effective for the quarter
beginning July 1, 2000, the Company adopted this Statement.
SFAS 133 requires the Company to recognize all derivatives on 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 on the nature of the
hedge, changes in the fair value of derivatives are either offset against the
change in fair value of assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedge item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings. The adoption of SFAS 133, as
amended on June 1999 and June 2000, did not result in a material transition
adjustment.
NOTE 3 - ACQUISITION
On March 31, 2000, the Company entered into a purchase and sale agreement with
Southwestern Services, Inc. ("SPM") to acquire selected assets of SPM related to
its silver product line for a purchase price of $1.3 million, plus the value of
accounts receivable on the closing date. On April 21, 2000, the Company
finalized its purchase and sale agreement and paid the former owners of SPM a
total of $2,651,879, which included the payment for the selected assets and the
sum of $1,351,879 paid for accounts receivable. After the acquisition of SPM,
the Company merged the operations of SPM into RWT, which prior to the SPM
acquisition was comprised of the merged operations of West-Tech, Inc. and
Reliable Corp. ("Reliable"). The Company paid the seller $2,426,879 in cash and
issued a promissory note in the amount of $225,000, which bears interest at an
annual rate of 8% and is payable over 8 years. The purchase price exceeded the
fair value of net assets by $1,250,000, which was recorded as goodwill. The
goodwill is being amortized on a straight-line basis over 20 years.
The following unaudited pro forma consolidated results of operations have been
prepared as if the acquisition of SPM had occurred as of July 1,1999:
Nine Months Ended
March 31,
2000
Total revenue $ 74,145,911
============
Net loss $ (1,833,066)
=============
Net loss per share
Basic and Diluted $ (0.47)
=============
The unaudited pro forma consolidated results of operations are not indicative of
the actual results that would have occurred had the acquisition been consummated
on the date indicated or of future operations of the combined companies under
the ownership and management of the Company.
NOTE 4 - INVENTORIES
Precious metal inventories are stated at market value. Other inventories,
including unrefined precious metals, are stated at lower of cost or market. As
of March 31, 2001, the Company's precious metal inventories at market value
totaled $2,896,375 and other inventory at lower of cost or market totaled
$5,247,920. The estimated aggregate market value of precious metal inventories
and other inventories at March 31, 2001, after all processing of inventories has
been completed, was $8,990,476.
Consistent with industry practice, some of the Company's gold, platinum,
palladium and silver requirements are furnished by customers and suppliers on a
consignment basis.
Title to the consigned precious metals remains with the consignor. The value of
consigned precious metals held by the Company is not included in the Company's
balance sheets. On March 31, 2001, the Company held $7,183,238 of precious
metals under a consignment agreement with a bank. The Company's precious metal
requirements are provided from a combination of owned inventories, precious
metals that have been purchased and sold for future delivery, and precious
metals received from suppliers and customers on a consignment basis.
NOTE 5 - DERIVATIVES
The Company manufactures and sells industrial products, which use silver as its
primary raw material. In conjunction with its metal processing and refining
segment, the Company processes numerous forms of scrap, which contain silver,
gold, platinum, palladium and by-products. This business segment also recovers
and sells platinum, palladium and rhodium from used automotive catalytic
converters. In order to manage its commodities price risk and to reduce the
impact of price fluctuations, the Company has arranged with its bank a
consignment of precious metals and it also uses derivative commodity instruments
to hedge its precious metals. The derivative instruments consist of forward and
futures contracts, which generally have a contract term of 15 to 180 days. The
value of the Company's forward and futures positions as of March 31, 2001 was
$11,405,126.
As of March 31, 2001, the Company had sold or purchased the following futures or
forward contracts:
Derivative Instrument Precious Metal Ounces Average Price
--------------------- -------------- ------ -------------
Forward - purchase Silver 566,156 $ 4.33
Forward - sale Silver 471,561 $ 4.62
Forward - sale Gold 250 $ 269.40
Forward - sale Platinum 6,850 $ 578.81
Forward - purchase Platinum 500 $ 567.00
Forward - sale Palladium 1,300 $ 768.35
Forward - sale Rhodium 735 $1,988.97
For the periods ended March 31, 2001 and 2000, the Company has unrealized gains
of $315,909 and $14,461, respectively, related to its futures and forward
derivative contracts, which it recorded as income, as these contracts did not
qualify for hedge accounting, as defined by SFAS 133.
NOTE 6 - REVOLVING CREDIT AGREEMENT
In July 1999, RWT, International and Westbury (the "Co-borrowers") entered into
a two-year revolving credit agreement with a bank under which it may borrow up
to $12,000,000. On May 10, 2000, the Company signed an amendment to its two-year
revolving credit agreement, which increased the amount the Company may borrow
from $12,000,000 to $13,000,000. All other terms and conditions remained the
same. As of March 31, 2001 the Company had total borrowings of $12,964,392,
which included $7,183,238 of consigned precious metals and $5,781,154 of dollar
borrowings. Interest on the consignment of precious metals accrues at the gold
cost of funds rate plus 2.50%. Interest on the remaining borrowings accrues at
the option of the Company at either LIBOR plus 2.50% or Prime plus .5% (Prime
rate was 8.0% at March 31, 2001). Consignments of precious metals are limited to
the balance of eligible inventory, with the remaining borrowings limited to the
balance of eligible accounts receivable. The facility is collateralized by the
assets of the Co-borrowers, and guaranteed by WMG. The Company has agreed to pay
fees of .375% on the unused amount of the facility payable monthly. The
agreement requires the Company to meet a minimum cash flow test and minimum debt
to net worth. The lender also requires the Company to submit its quarterly
financial statements within 45 days of the end of the quarter.
NOTE 7 - DIRECTOR LOAN
In May 2000, the Company issued John Conley, a director of the Company, a
$1,000,000 promissory note. The terms of the promissory note include interest at
a rate based on the commercial Certificate of Deposit interest rate and, in
addition, the payment of commissions on bullion sales to a specific customer. In
addition, Mr. Conley received warrants with a five-year maturity for the right
to purchase 60,000 shares of the Company's common stock at an exercise price of
$4.50 per share (see Note 11).
NOTE 8 - NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is calculated using the weighted
average number of common shares outstanding during the period. Diluted income
(loss) per share is calculated by including all dilutive potential common shares
such as stock options and warrants. A reconciliation between the numerators and
denominators of the basic and diluted net income (loss) per common share is as
follows:
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------------------------------------------------------
2001 2000 2001 2000
---- ---- --- ---- ----
Net income (loss) (numerator for basic and diluted
net income (loss) per common share) $ 831,822 $ (464,930) $ 537,619 $ (2,179,251)
Weighted average common shares (denominator for
basic net income (loss) per share) 5,316,695 5,087,306 5,316,695 3,915,205
Effect of dilutive securities - employee stock
options and warrants 91,158 - 92,483 -
--------------- ------------ ------------ -----------
Weighted average common and potential common
shares outstanding (denominator for diluted income
(loss) per common share) 5,407,853 5,087,306 5,409,178 3,915,205
Net income (loss) per common share - Basic $ 0.16 $ (0.09) $ 0.10 $ (0.56)
--------- ----------- ------------- ----------------
Net income (loss) per common share - Diluted $ 0.15 $ (0.09) $ 0.10 $ (0.56)
--------- ----------- ------------- ----------------
Potential common shares are not included for the three and nine-month periods
ended March 31, 2000 because they would be antidilutive.
NOTE 9 - INDUSTRY SEGMENTS
The Company operates in three reportable segments, Industrial Commodities
Management, Industrial Products, and Metal Processing & Refining. The Industrial
Commodities Management segment consists principally of the sale of precious
metals to end-users. The Industrial Products segment provides silver in various
forms and shapes (plating salt, tin and tin-lead anodes), which are used in the
manufacturing process by customers of the Company. The Metal Processing and
Refining segment provides refining services to customers of the Company. The
Corporate segment combines the activity for the non-reportable segments. The
following table presents certain data by business segment. In the table, the
income (loss) before provision for income taxes is presented with the precious
metal inventories and other inventories stated at market value:
Industrial
Commodities Industrial Metal Processing
Management Products & Refining Corporate Consolidated
Nine months ended March 31, 2001
Sales to unaffiliated customers $ 77,618,800 $ 26,087,277 $ 25,366,433 $- $129,072,510
Transfers between segments 25,233,941 - - (25,233,941) -
------------ ------------ ------------ ------------ ------------
Total revenues $102,852,741 $ 26,087,277 $ 25,366,433 $(25,233,941) $129,072,510
============ ============ ============= ============ ============
Total assets $ 8,852,098 $ 6,457,771 $ 2,352,444 $ 1,266,998 $ 18,929,311
============ ============ ============ ============ ============
Interest expenses $ 161,955 $ 464,929 $ 427,903 $ 30,630 $ 1,085,417
============ ============ ============= ============ ============
Non-cash warrant charge $ - $ - $ - $ 33,334 $ 33,334
============= ============ ============= ============= ============
Depreciation and amortization $ 63,922 $ 321,268 $ 173,273 $ 35,828 $ 594,291
============ ============ ============ ============= ============
Income (loss) before provision for
income taxes $ 452,141 $ 137,516 $ 454,287 $ (127,083) $ 916,861
============ ============ ============ ============== ===========
Nine months ended March 31, 2000
Sales to unaffiliated customers $ 38,129,191 $ 17,031,267 $ 8,286,523 $ - $ 63,446,981
Transfers between segments 17,765,141 - - (17,765,141) -
------------ ---------------------------- ------------- ----
Total revenues $ 55,894,332 $ 17,031,267 $ 8,286,523 $(17,765,141) $ 63,446,981
============ ============ ============ ============= ============
Total assets $ 3,991,839 $ 1,278,637 $ 1,142,646 $ 8,460,965 $ 14,874,087
============ ============ ============ ============ ============
Interest expenses $ 489,043 $ 93,053 $ 15,492 $ 155,634 $ 753,223
============ ============ ============ ============ ============
Non-cash warrant charge $ - $ - $ - $ 1,200,570 $ 1,200,570
============ ============ ============ ============= ============
Depreciation and amortization $ 2,769 $ 223,653 $ 122,932 $ 24,781 $ 374,135
============ ============ ============ ============= ============
Income (loss) before provision for
income taxes $ (513,342) $ 608,070 $ 262,322 $ (1,946,004) $ (1,588,954)
============= ============ ============ ============= =============
RECONCLIATION TO CONSOLIDATED STATEMENT OF OPERATIONS
Nine months ended March 31, 2001
Income (loss) before provision for
income taxes- market value basis $ 452,141 $ 137,516 $ 454,287 $ (127,083) $ 916,861
Net adjustment of unrefined precious
metals from market basis to cost basis - - (340,514) - (340,514)
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 452,141 $ 137,516 $ 113,773 $ (127,083) $ 576,347
============ ============ =========== ============ ============
Nine months ended March 31, 2000
Income (loss) before provision for
income taxes- market value basis $ (513,342) $ 608,070 $ 262,322 $ (1,946,004) $(1,588,954)
Net adjustment of unrefined precious
metals from market basis to cost basis - - (590,297) - (590,297)
------------ ----------- ------------ ------------- -----------
Net (loss) income $ (513,342) $ 608,070 $ (327,975) $ (1,946,004) $(2,179,251)
============ =========== ============ ============== ===========
NOTE 10 - COMPREHENSIVE INCOME (LOSS)
Changes in stockholders' equity and other comprehensive income (loss) during the
nine months ended March 31, 2001 and 2000:
2001 2000
---- ----
Net income (loss) $ 537,619 $(2,179,251)
Foreign currency translation adjustment 14,846 (8,587)
---------- ----------------
Total comprehensive income (loss) $ 552,465 $ (2,187,838)
========= =============
NOTE 11 - WARRANTS
In conjunction with a subordinated note issued in July 1999, the Company granted
the lender 90,000 warrants to purchase the Company's stock at an exercise price
of $9.00 per share. The warrants may be exercised in July 2000 and expire in
July 2002. In November 1999, the Company borrowed an additional $250,000, and
issued the lender 3,293 additional warrants. The subordinated note and the
additional borrowing of $250,000 were repaid during the period ending March 31,
2000. These warrants, which were granted at an exercise price of $9.00 per
share, vested immediately and expire in March 2002. The Company, using the
Black-Scholes Model, has determined that the fair value of the July 1999 warrant
issuance and incurred a non-cash charge of $19,034 for the three months ended
September 30, 2000.
In May 2000, the Company issued John Conley, a director of the Company, a
$1,000,000 promissory note. The terms of the promissory note include interest
payments at an annual rate based on the commercial Certificate of Deposit
interest rate. In addition, Mr. Conley received 60,000 warrants exercisable at a
price of $4.50 per share. These warrants expire in May 2005. The vesting rights
under the warrants provide for immediate vesting of 30,000 warrants with the
balance vesting in the following manner: after an initial period of six months,
each quarter 5,000 warrants will vest as long as there is an outstanding balance
under the promissory note until all of the 30,000 warrants have vested. If the
promissory note is repaid before the warrants become vested, the remaining
unvested warrants are cancelled. During the periods ended December 31, 2000 and
March 31, 2001, 5,000 warrants vested each quarter period. The Company, using
the Black-Scholes Model, has determined the fair value of the vested warrants
and incurred a non-cash warrant charge of $2,993 and $5,081 for the three months
ended December 31, 2000 and March 31, 2001, respectively.
In May 2000, the Company granted Stern & Co., a public and investor relations
firm, warrants to purchase 20,000 shares of the Company's stock in return for
its services. The Company also pays Stern & Co. a monthly fee plus reimburses
Stern & Co. for it's out of pocket expenses. The warrants vest as follows: (i)
5,000 warrants vest August 15, 2000; (ii) 5,000 vest November 15, 2000; (iii)
5,000 vest February 15, 2001; and (iv) 5,000 vest May 15, 2001. The shares
vested above are exercisable at the following prices: (i) 5,000 at $4.50; (ii)
5,000 at $5.50; (iii) 5,000 at $6.50; and (iv) 5,000 at $7.50. In order for
Stern & Co. to exercise its warrants after they are vested, the stock must trade
at the above stated exercise prices for a minimum period of 30 days. The
warrants mature on May 23, 2003 and if unexercised they are cancelled. The
Company, using the Black-Scholes Model, has determined the fair value of the
vested warrants and incurred a non-cash warrant charge of $3,995, $1,668 and
$562 for the three month periods ended September 30, 2000, December 31, 2000 and
March 31, 2001, respectively.
NOTE 12 - LITIGATION
The Company is subject to litigation in the ordinary course of its business.
There are four pending legal proceedings to which the Company and, in one
instance, Alloy are parties. Each of the four pending proceedings is in its
discovery phase and as a result, management is uncertain of the potential
outcome. The following is a detailed description of each of these proceedings:
(i) In May 2000, Metallix Inc. ("Metallix") brought a suit against the Company
in relation to the hiring of a former Metallix employee involved in sales. These
allegations relate to the employee's violation of a non-compete clause in her
employment contract with Metallix and the Company benefiting unfairly by
retaining this employee and gaining access to confidential information and
consequently taking market share and significant business away from Metallix.
Company's counsel has filed a response on its behalf refuting all these
allegations.
(ii) Metallix brought a similar suit against the Company in June 2000 relating
to the employment of a former Metallix salesperson by the Company prior to the
expiration of his non-compete clause in his employment contract with Metallix.
Company's counsel is in the process of filing a response to these allegations
and the Company refutes all claims brought against the Company by Metallix.
(iii) Metallix brought a suit against the Company in May 2000 relating to
allegations stemming from a royalty dispute involving the sale of a company
involved with silver anodes, tin and tin-lead anodes by Metallix to a third
party and the subsequent sale of the company by the third party to the Company.
Metallix alleges that prior to the transfer by the third party to the Company,
the Company was aware of the royalty arrangement between Metallix and the third
party and should, therefore, continue to pay the royalties to Metallix for the
remainder of the term under the royalty arrangement. Company's counsel has filed
a response stating that the anode business was not subject to the royalty
agreement and, furthermore, the Company assumed no liabilities as a result of
this purchase and the royalty payment was essentially the obligation of the
third party.
(iv) The Company's subsidiary, Alloy, is involved in a value-added tax dispute
in Peru. On February 16, 2000, the Peruvian tax authorities, ("SUNAT") levied a
fine of approximately $1.7 million against Alloy stemming from allegations that
Alloy was engaged in improperly exporting gold to one of the Company's
subsidiaries, Westbury, from late 1996 through early 1998. In addition, SUNAT
claims Alloy is liable for approximately $1.5 million in refunds previously paid
and interest thereon. Alloy has engaged the services of legal counsel in Lima,
Peru, and is vigorously contesting these claims and fines. Based on information
presently available, management believes, after consultation with counsel that
all appropriate tax payments have been made and that Alloy should get a
favorable ruling from the Tax Court.
NOTE 13 - COMMITMENTS & CONTINGENCIES
On March 30, 2001, the Company entered into a purchase and sales agreement to
sell its land and building located at 900 Shames Drive, Westbury, New York. The
sale is conditioned upon a satisfactory environmental test of the property to
include the its sub-surfaces and the buyer obtaining satisfactory financing. The
environmental test was completed April 25, 2001 and it revealed soil
contamination in two areas, which will require remediation. The Company has
approved a plan of remediation and notified the buyer of its intention. Under
the agreement with the buyer, the Company fulfills its obligations to the buyer
once the remediation plan is completed. The operations conducted in this
facility moved to Waterbury, Connecticut, where the Company has recently leased
a 19,500 square foot facility.
On April 25, 2001, the Company signed a purchase offer to buy land and buildings
located in Providence, Rhode Island. The purchase is subject to the numerous
conditions, which include amongst others a satisfactory environmental test of
the site, a zoning variance, and the Company obtaining a conventional mortgage.
The Company plans to relocate its corporate headquarters to Providence, Rhode
Island and also manufacture industrial products at this location.
NOTE 14 - Subsequent Events
The Company commenced trading on the Bulletin Board in September 1998 under the
symbol WMET.OB. On February 15, 2001 the Company's stock ceased trading on the
Bulletin Board due to the Company's continuing failure to file its financial
statements with the U.S. Securities and Exchange Commission. During the period
February 15, 2001 until May 9, 2001, the Company's stock traded under the symbol
WMETE on the Pink Sheet Bulletin Board. As of April 27, 2001, the Company
reapplied for listing of its stock on the over-the-counter bulletin board
("OTCBB"). On May 9, 2001, the Company's stock resumed trading on the OTCBB
under the symbol WMET.OB.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Form 10-Q contains forward-looking statements. Additional written and oral
forward-looking statements may be made by the Company from time to time in the
U.S. Securities and Exchange Commission ("SEC") filings and otherwise. The
Company cautions readers that results predicted by forward-looking Statements,
including, without limitation, those relating to the Company's future business
prospects, revenues, working capital, liquidity, capital needs and income are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those indicated in the forward-looking statements due to
risks and factors identified in this Form 10-Q and as may be identified from
time to time in the Company's future filings with the SEC.
General
Through its subsidiaries, the Company operates in three inter-related areas of
the precious metals business:
Industrial Products -- The Company manufactures and sells customized,
value-added precious and base metal products principally to the North American
metal finishing and plating industry.
Metal Processing & Refining -- The Company reclaims precious and specialty metal
materials through processing and refining services, including the reclamation of
platinum group metals from used automotive catalytic converters.
Industrial Commodities Management -- The Company buys, sells and finances metal
for its own account and its customers and offers hedging and risk management
services, including spot fixing market pricing and forward contracts to its
customers.
Results of Operations
The following table sets forth, as a percentage of revenue, certain items
appearing in the Company's Consolidated Statements of Operations for the
indicated period.
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------------------------------------------------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues:
- --------
Precious metal sales 79.1% 89.3% 80.3% 86.9%
Refining 20.9% 10.7% 19.7% 13.1%
------- ------- ------- -------
Total Revenues 100.0% 100.0% 100.0% 100.0%
------- ------- ------- -------
The net income (loss) for the three months ended March 31, 2001, December 31,
2000 and September 30, 2000 was $831,822, $(726,505) and $432,302, respectively.
The net income (loss) per diluted share for the three months ended March 31,
2001, December 31, 2000 and September 30, 2000 was $0.15, $(0.14) and $0.08,
respectively.
Three Months Ended March 31, 2001 versus Three Months Ended March 31, 2000
Revenues were $49,594,147 for three months ended March 31, 2001 compared to
$26,972,181 for three months ended March 31, 2000. Of the total increase,
$15,168,880 related to the Industrial Products and Industrial Commodities
Management segments, while $7,453,086 related to the Metal Processing and
Refining segment. The increased sales in the Industrial Products and Industrial
Commodities Management segments are directly related to the financing
arrangement with the bank, cross-selling products and services to other
segment's customers, and the acquisitions of Reliable and SPM.
West Tech, a subsidiary of the Company formed in March 1998, acquired
substantially all of the assets of Reliable in June 1999. Reliable and West Tech
merged their operations and the new entity was named Reliable-West Tech, Inc.
("RWT"), which comprises the Industrial Products segment. For the three months
ended March 31, 2001, the Industrial Products segment recorded gross revenue of
$8,005,143. The Industrial Commodities Management segment, which started
business in July 1998, was responsible for an additional $31,245,905 in gross
revenues for the three months ended March 31, 2001. The revenues relate to
precious metal sales to industrial end users. The combined sales of the
Industrial Products and Industrial Commodities Management segments were
$39,251,048 for the three months ended March 31, 2001 compared to $24,082,168
for the three months ended March 31, 2000, resulting in an increase of
$15,168,880.
Through the diversification of the refining area, greater efficiencies in the
catalytic converter operations, and expansion of the Company's network of used
automotive catalytic converter collectors, the Metal Processing and Refining
segment revenues for three months ended March 31, 2001 were $10,343,099 compared
to $2,890,013 for the three months ended March 31, 2000 for an increase of
$7,453,086.
Cost of precious metal sales were $36,653,900 or 93.4% of sales for three months
ended March 31, 2001 compared to $22,681,510 or 94.2% of sales for three months
ended March 31, 2000. This 0.8% decrease in cost of sales is nominally lower
than the precious metals cost of sales during the prior year's comparable
period. The higher volume in both the Industrial Commodities Management and
Industrial Products segments has resulted in more efficient usage of production
assets and a decreasing cost of sales trend for the current year.
Cost of refining revenues were $9,611,036 or 92.9% of refining fees for three
months ended March 31, 2001 compared to $2,992,846 or 103.6% of refining fees
for three months ended March 31, 2000. The decrease of 10.7% in the cost of
refining is primarily due to the increased volume in catalytic converters, which
contains platinum group metals. In addition, the volume of scrap materials
processed by the Company's refining operation improved significantly during the
quarter ended March 31, 2001.
Selling, general and administrative expenses increased by $650,817 or 50.2%,
from $1,296,240 for the three months ended March 31, 2000 to $1,947,057 for the
three months ended March 31, 2001. This increase is the result of new employees
hired at the sales and operations' levels to facilitate the expansion of sales
in both the Industrial Products and catalytic converter processing business,
which is part of the Metal Processing & Refining segment.
Depreciation and amortization expense was $211,931 for the three months ended
March 31, 2001 compared to $139,847 for the three months ended March 31, 2000.
This increase of $72,084, or 51.5%, was principally due to the amortization of
goodwill from the acquisition of SPM.
Interest expense was $319,281 for the three months ended March 31, 2001 compared
to $338,414 for the three months ended March 31, 2000. The decrease of $19,133
or 5.7% was primarily due to the Company borrowing lower cost working capital
loans as opposed to long-term debt, which carries a higher interest rate. In
addition, the Company's has retained its operating profits during the previous
four quarters, which has partially funded the overall increase in volume.
For the three months ended March 31, 2001, the Company incurred non-cash charges
of $5,644. The non-cash charges of $5,644 for the period ended March 31, 2001
related to the warrants issued in conjunction with a director loan, which
originated in May 2000, and also services provided by the public relations firm,
Stern & Co. (see Note 11).
Nine Months Ended March 31, 2001 to the Nine Months Ended March 31, 2000
Revenues were $129,072,510 for the nine months ended March 31,2001 compared to
$63,446,981 for the nine months ended March 31, 2000. Of the total increase,
$48,545,619 related to the Industrial Products and Industrial Commodities
Management segments, while $17,079,910 related to the Metal Processing and
Refining segment. The increased sales in the Industrial Products and Industrial
Commodities Management segments are directly related to the new financing
arrangement with the bank, cross-selling products and services to the other
segment's customers, and the acquisitions of Reliable and SPM.
West Tech, a subsidiary of the Company formed in March 1998, acquired
substantially all of the assets of Reliable in June 1999. Reliable and West Tech
merged their operations and the new entity was named Reliable-West Tech, Inc.
("RWT"), which comprises the Industrial Products segment. For the nine months
ended March 31, 2001, the Industrial Products segment recorded gross revenues of
$26,087,277. The Industrial Commodities Management segment, which started
business in July 1998, was responsible for an additional $77,618,800 in gross
revenues for the nine months ended March 31, 2001. The revenues relate to
precious metal sales to industrial end users. The combined sales of the
Industrial Products and Industrial Commodities Management segments were
$103,706,077 for the nine months ended March 31, 2001 compared to $55,160,458
for the nine months ended March 31, 2000, resulting in an increase of
$48,545,619.
Through the diversification of the refining area, greater efficiencies in the
catalytic converter operations, and expansion of the Company's network of used
automotive catalytic converter collectors, the Metal Processing and Refining
segment revenues for the nine months ended March 31, 2001 were $25,366,433
compared to $8,286,523 for the nine months ended March 31, 2000 for an increase
of $17,079,910.
Cost of precious metal sales were $99,184,518 or 95.6% of sales for the nine
months ended March 31, 2001 compared to $53,064,841 or 96.2% of sales for the
nine months ended March 31, 2000. This 0.6% decrease in cost of sales is due to
higher volume in both the Industrial Commodities Management and Industrial
Products segments. Another factor, which contributed to the decrease in the cost
of sales, is a modest change in the product mix of precious metal sales, which
includes more sales of higher margin Industrial Products versus the Industrial
Commodities Management segment sales.
Cost of refining revenues were $22,942,323 or 90.4% of refining fees for the
nine months ended March 31, 2001 compared to $7,130,402 or 86.0% of refining
fees for the nine months ended March 31, 2000. This increase of 4.4% in cost of
refining is primarily due to the increased volume in catalytic converters, which
contain platinum group metals. The market prices of these precious metals have
risen during the nine months ended March 31, 2001. As a result of the rising
prices for these inventories, the cost of sales of the Metal Processing &
Refining segment increased during the nine months ended March 31, 2001 as not
all of these increases were passed on to the customer.
Selling, general and administrative expenses increased by $1,539,184 or 49.3%
from $3,124,112 for the nine months ended March 31, 2000 to $4,663,296 for the
nine months ended March 31, 2001. This increase is the result of new employees
hired at the sales and operational levels to facilitate the expansion of sales
in both the Industrial Products and the catalytic converter processing business,
which is part of the Metal Processing and Refining segment.
Depreciation and amortization expense was $594,291 for the nine months ended
March 31, 2001 compared to $374,135 for the nine months ended March 31, 2000.
This increase of $220,156 or 58.8% was principally due to the amortization of
goodwill from the acquisition of SPM.
Interest expense was $1,085,417 for the nine months ended March 31, 2001
compared to $753,223 for the nine months ended March 31, 2000. The increase of
$332,194 or 44.1% was primarily due to the Company's full usage of its credit
facility with a bank in order to finance overall sales growth. The Company also
incurred higher debt service costs due to the acquisition of SPM.
For the nine months ended March 31, 2001 and 2000, the Company incurred non-cash
charges of $33,334 and $1,200,570 respectively. The non-cash charges of $33,334
for the nine months ended March 31, 2001 related to the warrants issued in
conjunction with a subordinated loan, which originated in July 1999 and was
repaid in March 2000; a director loan, which originated in May 2000; and
services provided by the public relations firm, Stern & Co. (see Note 11). The
Company also incurred non-recurring non-cash charges of $1,200,570 for the nine
months ended March 31, 2000 related to: (i) the issuance of warrants to third
parties, which enabled the third parties to buy the Company's common stock at a
price less the market price of the Company's stock and (ii) an inducement by the
Company to warrant holders to exercise their warrant rights. On December 14,
1999, new warrants were issued to the Company's former bridge loan holders at an
exercise price of $2.25, which was below the market value of Company's common
stock, and it resulted in a non-cash charge of $1,118,714. Also, an inducement
was offered to warrant holders during the period July 1999 through December
1999, and it resulted in the exercise of 147,222 shares of common stock. The
inducement charge was partially a cash expense totaling $36,805 and partially a
non-cash expense totaling $81,856, which represented an incremental increase in
the fair value of the warrants based on the Black-Scholes Model.
Liquidity, Capital Resources and Other Financial Data
Cash flows from Operating activities
Net cash provided by operating activities was $1,029,698 for the nine months
ended March 31, 2001 compared to net cash used of $(6,424,438) for the nine
months ended March 31, 2000, an increase of $7,454,136. Cash provided by
operating activities was primarily due to an operating profit of $537,619 and
decreases in accounts receivable of $3,986,248. Partially offsetting the cash
provided were increases in inventory of $2,752,841 and prepaids and other
current assets of $432,461, and a decrease in accounts payable and accruals of
$944,246.
Cash flows from Investing activities
Net cash used in investing activities for the nine months ended March 31, 2001
was $932,489 and primarily included: (i) the acquisition of equipment for the
refinery in order to process used automotive catalytic converters; (ii)
leasehold improvements to the recently leased facility in Waterbury,
Connecticut, where the processing of catalytic converters occurs; (iii)
leasehold improvements to the Reliable building; and (iv) payment for the
Company's new computer equipment and software system.
Net cash used in investing activities for the nine months ended March 31, 2000
was $346,056. The net property, plant & equipment expenditures of $346,056
primarily included the acquisition of equipment for the processing of materials
from the film industry and coin blanking tools and dies.
Cash flows from Financing activities
Net cash used in financing activities of $272,931 for the nine months ended
March 31, 2001 is due to the repayment of $86,972 of revolving credit loans and
the repayment of $245,604 of long-term debt. The Company received $59,645 from
the proceeds of long-term debt.
Net cash provided by financing activities for the nine months ended March 31,
2000 is primarily due to $5,250,130 of net capital proceeds from the private
placement and exercise of stock warrants (see below). Additionally, proceeds
from the new revolving credit agreement, which commenced in July 1999, and the
issuance of a note for $2,000,000 in subordinated debt contributed to the cash
provided from financing activities. The increase was offset by the repayment of
the note payable to the former Reliable shareholder of $1,192,578 and the
repayment of $2,267,690 of long-term debt, which included $2,000,000 related to
the subordinated note.
During the nine months ended March 31, 2000, the Company issued 147,222 shares
of common stock to warrant holders at an exercise prices of $2.25 per share and
received, after payment of warrant inducement charges of $36,805, net proceeds
of $294,444.
Liquidity and Capital Resources
Working capital decreased from $10,267,081 at June 30, 2000 to $4,542,143 at
March 31, 2001, a decrease of $5,724,938, which was primarily due to the
revolving credit loan with the bank coming within twelve months of its scheduled
maturity and therefore being classified as a current liability versus long-term
debt as of the year ended June 30, 2000.
The Company had been relying on a gold consignment program and internally
generated funds to finance its metal purchases, inventories and accounts
receivable. Precious metals inventories are stated at market value. Other
inventories, including unrefined precious metals, are stated at lower of cost or
market. On July 13 1999, the Company negotiated with a bank a new revolving
credit agreement, which included a precious metal consignment facility. The
Company may now borrow on consignment and fund its gold, platinum, and palladium
and silver requirements. Title to the consigned precious metals remains with the
consignor. The value of consigned gold, platinum, palladium and silver that the
Company holds is not included in its inventory and there is no related liability
recorded. At March 31, 2000 and March 31, 2001 the Company held $6,369,989 and
$7,183,238, respectively, of precious metals under the consignment agreement
with a bank for which it is charged a consignment fee based on current market
rates. Price fluctuations in the precious metals markets may result in an
interruption of the Company's gold, platinum, palladium and silver supplies and
use of the precious metals consignment facility.
On September 28, 1998 the Company entered into a loan agreement with a credit
corporation for a $2,000,000 revolving line of credit used for working capital
requirements. The Company was charged an origination fee of 2% of the available
line of credit, an underutilized loan fee of 1% and interest at the prime rate
plus 2%. In July 1999, the Company replaced this loan agreement with a
$12,000,000 revolving credit loan from Bank Boston N.A. The Company, Westbury
International, Inc. and Westbury Alloys, Inc. are co-borrowers under the credit
facility. This $12,000,000 revolving credit loan has a $7,000,000 sub-limit for
a consignment facility, $1,500,000 credit facility for forward contracts and the
remaining balance may be utilized to meet working capital requirements. Interest
on the consignment of precious metals accrues at the Bank Boston Precious Metals
Cost of funds rate plus 2.50%. Interest on the remaining borrowings accrues at
the Company's option at LIBOR (as defined in the agreement) plus 2.50% or Prime
(as defined in the agreement) plus .50%. The co-borrowers' obligations are
secured by a security interest in the assets of the co-borrowers and the
guaranties of the co-borrowers. In addition, the loan obligations are further
secured by an unlimited guaranty of the Westbury Metals Group, secured by a
first priority security interest in all of its tangible and intangible personal
property and by a pledge of the stock of Reliable-West Tech, Westbury
International, Inc. and Westbury Alloys, Inc. During April 2000, Bank Boston
N.A. merged with Fleet National Bank. As part of the merger agreement, Bank
Boston NA sold some of the assets of its precious metals lending division,
including the loans and consignments to the Company, to Sovereign Bank of New
England, Inc. The Agreement between the Company and co-borrowers (the
"Agreement") was amended to reflect the change of lender from Bank Boston N.A.
to Sovereign Bank of New England, Inc. On May 10, 2000, the Company and
co-borrowers signed an amendment with Sovereign Bank of New England to increase
the revolving line of credit from $12,000,000 to $13,000,000. All other terms
and conditions of the Agreement remained the same. The Agreement expires July
15, 2001.
Prior to the period ended March 31, 2001, the Company has incurred losses, and
therefore has not generated sufficient cash flow to fund its overall expansion
and growth plans. In order to continue its expansion and growth strategy, the
Company will need to raise additional capital from either the sale of securities
or the restructure of its working capital financing arrangements. There can be
no assurances that the Company will be successful in raising additional capital
or restructuring its working capital financing agreement. If the Company is
unable to raise additional capital or further leverage its assets, then it may
have to curtail some of its expansion and growth plans.
Inflation
The Company does not believe that inflation has had, or will have in the
foreseeable future, a material impact upon the Company's operating results.
Forward Looking Statements
Through its continued efforts to diversify its Metal Processing & Refining
segment and expand its activities in the Industrial Products segment through
acquisitions, management anticipates an improvement in its operating results for
the fiscal year ended June 30, 2001, although there can be no assurances that
management will be successful in its efforts.
SIGNATURE
In accordance with the requirements of the exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WESTBURY METALS GROUP, INC.
By: /s/ Mark R. Buckley
Chief Financial Officer
Date: May 14, 2001