10-Q 1 a33203.txt EMPIRE RESOURCES, INC. U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [x] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 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: 9,442,251 shares of common stock outstanding as of August 14, 2002. EMPIRE RESOURCES, INC. FORM 10-Q FOR THE QUARTER ENDED June 30, 2002 INDEX PART I FINANCIAL INFORMATION
Page Item 1 Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2001................................................ 4 Condensed Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2002 and 2001 (unaudited).................. 5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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.................................................... 11 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 and six months ended June 30, 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. EMPIRE RESOURCES, INC. & SUBSIDIARIES Condensed Consolidated Balance Sheets In thousands, except shares and per share amounts
June 30, December 31, 2002 2001 ---------------------- (Unaudited) ASSETS Current assets: Cash $ 1,853 $ 1,147 Trade accounts receivable (net) 26,739 22,789 Inventories 18,386 27,782 Other current assets 5,554 923 -------- -------- Total current assets 52,532 52,641 Furniture and equipment (less accumulated depreciation of $327 and $313) 28 39 Deferred financing costs, net 55 82 -------- -------- $ 52,615 $ 52,762 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable - banks $ 26,500 $ 26,700 Trade accounts payable 10,560 13,000 Accrued expenses 2,265 1,118 -------- -------- Total current liabilities 39,325 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 10,711 10,681 Retained earnings 3,826 2,454 Accumulated other comprehensive income-- cumulative translation adjustment 31 30 Treasury stock (1,235,400 shares and 1,180,600 shares) (1,395) (1,338) -------- -------- Total stockholders' equity 13,290 11,944 -------- -------- $ 52,615 $ 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 June 30, Six Months Ended June 30, ---------------------------- ---------------------------- 2002 2001 2002 2001 ---------------------------- ---------------------------- Net sales $37,838 $41,191 $78,255 $85,474 Cost of goods sold 35,160 38,675 72,739 80,192 ------- ------- ------- ------- Gross profit 2,678 2,516 5,516 5,282 Selling, general and administrative expenses 1,389 1,250 2,767 2,621 ------- ------- ------- ------- Operating income 1,289 1,266 2,749 2,661 Interest expense 260 594 527 1,325 ------- ------- ------- ------- Income before income taxes 1,029 672 2,222 1,336 Income taxes 392 255 851 507 ------- ------- ------- ------- Net income $ 637 $ 417 $ 1,371 $ 829 ------- ------- ------- ------- Weighted average shares outstanding: Basic 10,564 11,025 10,564 11,031 ====== ====== ====== ====== Diluted 10,699 11,159 10,697 11,167 ====== ====== ====== ====== Earnings per share: Basic $ 0.06 $ 0.04 $ 0.13 $ 0.08 ====== ====== ====== ====== Diluted $ 0.06 $ 0.04 $ 0.13 $ 0.07 ====== ====== ====== ======
See notes to financial statements 5 EMPIRE RESOURCES, INC. & SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) In thousands
Six Months Ended June 30, ------------------------ 2002 2001 ------------------------ Cash flows from operating activities: Net income $ 1,371 $ 829 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 42 37 Deferred income taxes (31) Translation adjustment 1 (1) Transfer of restricted shares to key employee 30 81 Changes in: Trade accounts receivable (3,950) 2,435 Inventories 9,397 8,786 Due from stockholders 286 Other current assets (4,631) 442 Trade accounts payable (2,440) (5,866) Accrued expenses 1,147 (422) ------- ------- Net cash provided by operating activities 967 6,576 ------- ------- Cash flows used in investing activities: Additions to fixed assets (4) (2) ------- ------- Cash flows from financing activities: Repayments of notes payable -- banks (200) (6,400) Purchase of treasury stock (57) (84) ------- ------- Net cash used in financing activities (257) (6,484) ------- ------- Net increase in cash 706 90 Cash at beginning of period 1,147 1,208 ------- ------- Cash at end of period $ 1,853 $ 1,298 ======= ======= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 449 $ 1,279 Income taxes $ 673 $ 611
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 for 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 are stated at the lower of cost or market. Cost is determined by the specific-identification method. Inventory consists primarily of semi-finished aluminum products. 4. Notes Payable--Banks The Company operates under a $60 million revolving line of credit, including a commitment to issue letters 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 certain working capital and net worth ratios, as defined by the loan agreement. 7 EMPIRE RESOURCES, INC. & SUBSIDIARIES 5. Earnings Per Share
---------------------------------------------------------------------------------------------------------------------- Three months ended Six months ended June 30, June 30, --------------------------------------------------------------- 2002 2001 2002 2001 ---------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding-basic 10,563,763 11,024,505 10,563,763 11,030,857 Dilutive effect of stock options and warrants 135,545 134,822 133,375 136,035 ---------- ---------- ---------- ---------- Weighted average shares outstanding-diluted 10,699,308 11,159,327 10,697,138 11,166,892 ========== ========== ========== ==========
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. Subsequent Events - Common Stock Purchases Subsequent to June 30, 2002, the Company repurchased 1,072,000 shares of its common stock for an aggregate cost of $1,371,176, pursuant to an expansion of its stock repurchase program announced on July 16, 2002. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements The discussions set forth below and elsewhere herein contain certain statements that may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. The Company may make written or oral forward-looking statements in other documents we file with the SEC, in our annual reports to stockholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. 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 8 EMPIRE RESOURCES, INC. & SUBSIDIARIES 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 $3.353 million, or 8.1%, from $41.191 million in the second quarter of 2001 to $37.838 million in the second quarter of 2002 and decreased $7.219 million, or 8.4%, for the six month period. The decrease in sales is due primarily to lower selling prices of aluminum products. Gross profit increased $0.162 million, or 6.4%, from the second quarter of 2001 to the second quarter of 2002 and increased $0.234 million, or 4.4%, in the six month period. For the six month period, gross profit as a percentage of sales increased from 6.2% to 7.0% as a result of favorable purchasing terms on some special orders. Selling, general and administrative expenses increased by $.139 million for the three month period and $0.146 million for the six month period. These increases were attributable to increases in payroll, general office expenses and professional fees. Interest expense decreased $.334 million, or 56.2%, from $0.594 million during the second quarter of 2001 to $0.260 million during the second quarter of 2002. The six month period interest expense decreased $.798 million, or 60.2%. Interest expense decreased as a result of reductions in the floating interest rate on our credit facility. The decrease in interest expense represents the primary reason for the increase in net income for the three and six month periods. The Company reported net income of $.637 million for the second quarter of 2002 compared to net income of $.417 million for the second quarter of 2001, or an increase of $.220 million from the same period in 2001. For the six month period, the Company reported net income of $1.371 million compared to $0.829 million for the prior year. 9 EMPIRE RESOURCES, INC. & SUBSIDIARIES Liquidity and Capital Resources The Company's cash balance increased $0.706 million, from $1.147 million to $1.853 million, in the six month period ended June 30, 2002. Net cash of $.967 million was provided by operating activities, offset by $0.257 million of net cash used for repayment of bank debt and purchases of treasury stock. The Company's cash balance fluctuates primarily as a result of its levels of receivables and inventory. The Company operates under a $60 million revolving line of credit, including a commitment to issue letters 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 certain working capital and net worth ratios, as defined by the loan agreement. As of June 30, 2002, the outstanding loan balance on the revolving line of credit was $26.5 million and letters of credit totaled $4.124 million. 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 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 operations. 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. 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. 10 PART II OTHER INFORMATION Item 1. Legal Proceedings. There are no material legal proceedings to which the Company is a party or to which any of its properties is subject; however the Company is party from time to time to routine litigation incidental to its business. Item 2. Changes in Securities. None. Item 3. Defaults upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. (a) The Company held its annual meeting of stockholders on June 18, 2002. (b) All of the current directors, being William Spier, Nathan Kahn, Sandra Kahn, Harvey Wrubel, Jack Bendheim, Barry L. Eisenberg, Peter J. Howard, Nathan Mazurek and Morris J. Smith, were re-elected as directors at the annual meeting. (c) At the annual meeting, two matters were voted upon by shareholders. The results were as follows: Proposal 1 -- Election of Directors WILLIAM SPIER NATHAN KAHN SANDRA KAHN HARVEY WRUBEL JACK BENDHEIM BARRY L. EISENBERG PETER J. HOWARD NATHAN MAZUREK MORRIS J. SMITH For all of the above: 9,083,478 Against all of the above: 83,724 Proposal 2 - Ratification of Eisner, LLP as independent accountants: For: 9,159,402 Abstentions: 7,800 11 Item 5. Other Information. On July 16, 2002, the Company issued a press release to announce the expansion of its stock repurchase program. In connection with this expansion, the Company amended its credit facility with JP Morgan Chase Bank, as administrative agent, to permit the expansion of its stock repurchase program (filed as Exhibit 10.19 hereto). As of the date of this filing, the Company has repurchased a total of 2,307,400 shares. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit No. Description 2.1 Agreement and Plan of Merger among the Registrant, Empire Resources Inc., Empire Resource Pacific, Ltd., Nathan Kahn and Sandra Kahn, date as of February 22, 1999 (incorporated by reference to Exhibit 2.1 to the Registrant's Report on Form 8-K dated March 9, 1999). 3.1 Certificate of Merger of Empire Resources, Inc. into Integrated Technology USA, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant's Form 10-KSB dated December 31, 1999). 3.2 Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to the Registrant's Registration Statement on Form SB-2 (No. 333-9697)). 3.3 Amendment No. 1 to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.3 to the Registrant's Form 10-K dated December 31, 2001). 3.4 Amended and Restated By-Laws of the Registrant (incorporated by reference to the Registrant's Registration Statement on Form SB-2 (No. 333-9697)). 3.5 Amendment No. 1 to Amended and Restated By-Laws of the Registrant (incorporated by reference to Exhibit 3.3 to the Registrant's Report on Form 10-KSB for the year ended December 31, 1996). 3.6 Amendment No. 2 to Amended and Restated By-Laws of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant's Report on Form 8-K dated May 11, 1997). 10.19 Amendment No.1 to Credit Agreement dated July 16, 2002* ----------------- * Filed herewith (b) Reports on Form 8-K None. 12 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned hereunto duly authorized. EMPIRE RESOURCES, INC. By: /s/ Sandra Kahn ----------------------------- Sandra Kahn Chief Financial Officer (signing both on behalf of the registrant and in her capacity as Principal Financial and Principal Accounting Officer) Dated: August 14, 2002 13