10-Q 1 a32704.txt EMPIRE RESOURCES, INC. 10-Q U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [x] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2002 [ ] 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: 10,569,051 shares of common stock outstanding as of May 1, 2002. EMPIRE RESOURCES, INC. FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2002 INDEX PART I FINANCIAL INFORMATION Item 1 Financial Statements Page Condensed Consolidated Balance Sheets as of March 31, 2002 (unaudited) and December 31, 2001.................................................................... 4 Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2002 and 2001 (unaudited)...................................................... 5 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001 (unaudited) ............................................... 6 Notes to Condensed Consolidated Financial Statements (unaudited)......................... 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................ 8 Item 3 Quantitative and Qualitative Disclosure of Market Risk.................................. 10 PART II OTHER INFORMATION....................................................................... 10 Signatures....................................................................................... 11
2 EMPIRE RESOURCES, INC. Introduction The condensed consolidated interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission with respect to Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. In the opinion of management, such financial statements reflect all adjustments necessary for a fair presentation of the results for the interim periods presented and to make such financial statements not misleading. The results of operations of the Company for the three months ended March 31, 2002 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-K for the year ended December 31, 2001. 3 EMPIRE RESOURCES, INC. & SUBSIDIARIES Condensed Consolidated Balance Sheets In thousands, except shares and per share amounts
March 31, December 31, ---------------------------- 2002 2001 ---------------------------- (Unaudited) ASSETS Current assets: Cash $ 818 $ 1,147 Trade accounts receivable (net) 30,420 22,789 Inventories 21,715 27,782 Other current assets 1,046 923 ------- ------- Total current assets 53,999 52,641 Furniture and equipment (less accumulated depreciation of $283 and $275) 35 39 Deferred financing costs, net 68 82 ------- ------- $54,102 $52,762 ------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable - banks $27,500 $26,700 Trade accounts payable 12,618 13,000 Accrued expenses 1,289 1,118 ------- ------- Total current liabilities 41,407 40,818 ------- ------- Commitments and contingencies Stockholders' equity: Preferred stock $.01 par value, 5,000,000 shares authorized; none issued Common stock $.01 par value, 20,000,000 shares authorized; 11,749,651 shares issued 117 117 Additional paid-in capital 10,698 10,681 Retained earnings 3,188 2,454 Accumulated other comprehensive income-- cumulative translation adjustment 30 30 Treasury stock (1,180,600 shares) (1,338) (1,338) ------- ------- Total stockholders' equity 12,695 11,944 ------- ------- $54,102 $52,762 ======= =======
See notes to financial statements 4 EMPIRE RESOURCES, INC. & SUBSIDIARIES Condensed Consolidated Statements of Income (Unaudited) In thousands, except per share data
Three Months Ended March 31, ---------------------- 2002 2001 ---------------------- Net sales $40,417 $44,283 Cost of goods sold 37,579 41,517 ------- ------- Gross profit 2,838 2,766 Selling, general and administrative expenses 1,378 1,371 ------- ------- Operating income 1,460 1,395 Interest expense 267 731 ------- ------- Income before income taxes 1,193 664 Income taxes 459 252 ------- ------- Net income $ 734 $ 412 ------- ------- Weighted average shares outstanding: Basic 10,569 11,037 ======= ======= Diluted 10,699 11,136 ======= ======= Earnings per share: Basic $0.07 $0.04 ===== ===== Diluted $0.07 $0.04 ===== =====
See notes to financial statements 5 EMPIRE RESOURCES, INC. & SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) In thousands
Three Months Ended March 31, ------------------------ 2002 2001 ------------------------ Cash flows from operating activities: Net income $ 734 $ 412 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 21 18 Deferred income taxes (15) Translation adjustment 1 21 Transfer of restricted shares to key employee 16 40 Changes in: Trade accounts receivable (7,631) (733) Inventories 6,067 183 Due from stockholders 285 Other current assets (123) (713) Trade accounts payable (382) 827 Accrued expenses 171 (41) ------- ------ Net cash (used in) provided by operating activities (1,126) 284 ------- ------ Cash flows used in investing activities: Additions to fixed assets (3) (1) ------- ------ Cash flows from financing activities: Net proceeds from (repayments of) notes payable--banks 800 (350) Purchase of treasury stock (79) ------- ------ Net cash provided by (used in) financing activities 800 (429) Net decrease in cash (329) (146) Cash at beginning of period 1,147 1,208 ------- ------ Cash at end of period $ 818 $1,062 ======= ====== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 273 $ 832 Income taxes $ 3 $ 492
See notes to financial statements 6 EMPIRE RESOURCES, INC. & SUBSIDIARIES 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 the United States and in Canada, Australia and New Zealand. The Company sells its products through its own marketing and sales personnel and through its independent sales agents located in the U.S. who receive commissions on sales. The Company purchases from suppliers located throughout the world. The condensed consolidated financial statements include the accounts of Empire Resources, Inc. and its wholly-owned 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 generally accepted accounting principles 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 March 31, ---------------------------- 2002 2001 ---- ---- Weighted average shares outstanding-basic 10,569,051 11,037,280 Dilutive effect of stock options and warrants 129,578 98,964 ------- ------ Weighted average shares outstanding-diluted 10,698,629 11,136,244 ========== ==========
7 EMPIRE RESOURCES, INC. & SUBSIDIARIES 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. Derivative Financial Instruments and Risk Management As of January 1, 2001, the Company 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 uses financial instruments designated as fair value hedges to manage its exposure to commodity price risk and foreign currency exchange risk inherent in its trading activities. It is the Company's policy to hedge such risks, to the extent practicable. The Company enters into high-grade aluminum futures contracts to limit its gross margin exposure by hedging the metals content element of firmly committed purchase and sales commitments. The Company also enters into foreign exchange forward contracts to hedge its exposure related to commitments to purchase or sell non-ferrous metals denominated in international currencies. The Company records "mark-to-market" adjustments on these futures and forward positions, and on the underlying firm purchase and sales commitments which they hedge, and reflects the net gains and losses currently in earnings. For the periods ended March 31, 2002, and 2001, hedge ineffectiveness associated with derivatives designated as fair value hedges was insignificant, and no fair value hedges were derecognized. 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. 8 EMPIRE RESOURCES, INC. & SUBSIDIARIES 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 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 15 of our Annual Report on Form 10-K for the year ended December 31, 2001. 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. Results of Operations Net sales decreased $3.9 million or 8.8% from $44.3 million in the first quarter of 2001 to $40.4 million in the first quarter of 2002. The decrease in sales resulted primarily from the lower selling prices of aluminum products. Gross profit increased $0.07 million or 2.6% from the first quarter of 2001 to the first quarter of 2002. Gross profit as a percentage of sales increased from 6.3% to 7.0% as a result of favorable purchasing terms on some special orders. Selling, general and administrative expenses were generally flat year on year. 9 EMPIRE RESOURCES, INC. & SUBSIDIARIES Interest expense decreased $.46 million, or 63.0%, from $0.73 million during the first quarter of 2001 to $0.27 million during the first quarter of 2002. The decrease in interest expense is related to lower levels of outstanding bank indebtedness and lower interest rates. The decrease in interest expense represents the main reason for the increase in net income for the quarter. The Company reported net income of $.734 million for the first quarter of 2002 compared to net income of $.412 million for the first quarter of 2001 or an increase of $.322 million from the same period in 2001. Liquidity and Capital Resources The Company's cash balance decreased $0.3 million, to $.8 million, in the three month period ended March 31, 2002. Net cash of $1.1 million was used in operating activities, offset by $0.8 million of net cash provided by bank debt. The Company's cash balance fluctuates in relation to its receivables and inventory. 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. Commitments and Contingencies Empire has contingent liabilities in the form of letters of credit to certain of its suppliers. In addition, under the terms of some of its supply contracts, the Company may be required to take minimum tonnages as specified in those contracts. As a result, the Company could, under certain circumstances, be forced to sell the required tonnage at a loss. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK There have been no material changes to the Company's market risk from that disclosed in our Annual Report on Form 10-K for the year ended December 31, 2001. PART II OTHER INFORMATION As reported in the Company's press release dated April 12, 2002, the Company has scheduled its Annual Meeting of Shareholders for June 18, 2002. The Company expects to distribute proxy materials related to this meeting over the next few weeks. The deadline for submitting shareholder proposals as announced in that press release has now passed, and no shareholder proposals were received prior to its expiration. 10 EMPIRE RESOURCES, INC. & SUBSIDIARIES SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned hereunto duly authorized. EMPIRE RESOURCES, INC. By: /s/ Sandra Kahn ----------------------------- Sandra Kahn Chief Financial Officer (signing both on behalf of the registrant and in her capacity as Principal Financial and Principal Accounting Officer) Dated: May 15, 2002 11