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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(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, 2000
[ ] 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 Small Business Issuer 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
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (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: 15,145,562 shares of common
stock outstanding as of August 1, 2000.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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EMPIRE RESOURCES, INC.
FORM 10-QSB FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheet as of June 30, 2000
(unaudited)........................................................ 4
Condensed Consolidated Statements of Operations for the Three
Months and Six Months Ended June 30, 2000 and 1999
(unaudited)........................................................ 5
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 1999 (unaudited).................... 6
Notes to Condensed Consolidated Financial Statements(unaudited).... 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 9
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K................................... 12
Signatures......................................................... 12
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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-QSB. 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 six months ended June 30, 2000 are not
necessarily indicative of the results to be expected for the full year. It is
suggested that these interim financial statements be read in conjunction with
the consolidated financial statements and the notes thereto included in the
Company's Form 10-KSB for the year ended December 31, 1999.
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Empire Resources, Inc.
Condensed Consolidated Balance Sheet (Unaudited)
------------------------------------------------
JUNE 30
2000
ASSETS
Current assets:
Cash $ 599,570
Trade accounts receivable, net 35,488,341
Inventories 28,067,068
Other current assets 446,530
-----------
Total current assets 64,601,509
Furniture and equipment 309,431
Less: accumulated depreciation (259,977)
-----------
Net furniture and equipment 49,454
Deferred financing costs, net 28,065
-----------
$64,679,028
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable -- banks $39,000,000
Trade accounts payable 13,654,549
Accrued expenses 1,207,723
Distribution payable to former stockholders 46,482
-----------
Total current liabilities 53,908,754
-----------
Commitments
Stockholders' equity
Preferred stock
$.01 par value, 5,000,000 shares authorized;
none issued.
Common stock
$.01 par value; 40,000,000 shares authorized;
15,580,862 shares issued, including
3,824,511 shares held in escrow 155,809
Additional paid in capital 10,102,515
Cumulative translation adjustment 54,589
Retained earnings 989,671
Treasury stock (382,800 shares) (532,310)
-----------
Total stockholders' equity 10,770,274
-----------
$64,679,028
===========
See notes to financial statements
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Empire Resources, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $38,610,235 $25,152,600 $69,711,646 $46,284,940
Cost of goods sold 35,758,330 23,438,631 64,467,137 42,924,344
----------- ----------- ----------- -----------
Gross profit 2,851,905 1,713,969 5,244,509 3,360,596
Selling, general and administrative expenses 1,341,192 751,728 2,527,049 1,481,946
----------- ----------- ----------- -----------
Operating income 1,510,713 962,241 2,717,460 1,878,650
Interest expense 756,852 514,523 1,296,704 977,246
----------- ----------- ----------- -----------
Income before income taxes 753,861 447,718 1,420,756 901,404
Income taxes 291,546 6,996 549,357 13,410
----------- ----------- ----------- -----------
Net income $ 462,315 $ 440,722 $ 871,399 $ 887,994
=========== =========== =========== ===========
Income before income taxes $ 447,718 $ 901,404
Pro forma income taxes 174,610 351,548
----------- -----------
Pro forma net income $ 273,108 $ 549,856
=========== ===========
Weighted average shares outstanding--basic 11,382,015 5,560,250 11,449,604 5,560,250
Weighted average shares outstanding--diluted 11,481,090 5,560,250 11,548,772 5,560,250
Earnings per share -- basic $ 0.04 $ 0.08
Earnings per share -- diluted $ 0.04 $ 0.08
Pro forma earnings per share -- basic $ 0.05 $ 0.10
Pro forma earnings per share -- diluted $ 0.05 $ 0.10
</TABLE>
See notes to financial statements
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Empire Resources, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 871,399 $ 887,994
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 34,267 21,376
Translation adjustment 18,437 (17,053)
Transfer of restricted shares to key employee 177,918 0
Changes in:
Trade accounts receivable (9,532,617) 2,043,583
Inventories (8,704,860) (3,110,370)
Other current assets 322,432 (282,307)
Deferred financing costs -- (46,768)
Trade accounts payable 5,550,403 (3,973,150)
Accrued expenses (563,743) 2,729,692
------------ -----------
Net cash used in operating activities (11,826,364) (1,747,003)
------------ -----------
Cash flows from investing activities:
Additions to fixed assets (648) (12,660)
------------ -----------
Net cash (used in) investing activities (648) (12,660)
------------ -----------
Cash flows from financing activities:
Proceeds from notes payable--banks 12,700,000 10,204,550
Distributions to stockholders -- (810,000)
Purchase of treasury stock (473,209) 0
------------ -----------
Net cash provided by financing activities 12,226,791 9,394,550
------------ -----------
Net increase in cash 399,779 7,634,887
Cash at beginning of period 199,791 147,719
------------ -----------
Cash at end of period $ 599,570 $ 7,782,606
============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,340,647 $ 618,052
============ ===========
Income taxes $ 426,920 $ 33,280
============ ===========
Non-cash financing activity
Notes payable to former stockholders--distribution -- $10,922,475
============ ===========
</TABLE>
See notes to financial statements
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Empire Resources, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
--------------------------------------------------------------------------------
1. The Company
The Company (as defined below) is engaged principally in the purchase, sale and
distribution of nonferrous metals to a diverse customer base located throughout
North America and Australia. 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 a wide
array of suppliers located throughout the world.
2. Basis of Presentation
Empire Resources, Inc., formerly known as Integrated Technology USA, Inc.,
("Integrated" or the "Company") was incorporated in 1990. On February 22, 1999,
the Company signed a merger agreement with Empire Resources, Inc. ("Empire"), a
distributor of value added, semi-finished aluminum products. Under the terms of
the Agreement and Plan of Merger, effective September 17, 1999, Empire was
merged with and into the Company.
Upon completion of the merger, the Company changed its name to Empire Resources,
Inc. The merged company is continuing the business of Empire.
In conjunction with the merger, Empire Resources Pacific Ltd.
("Empire-Pacific"), an affiliate of Empire Resources, Inc. operating in
Australia, became a wholly owned subsidiary of Empire in a combination of
companies under common control, which was accounted for at historical cost in a
manner similar to that in a pooling of interests.
In addition, the Company has other two wholly owned subsidiaries, I.T.I.
Innovative Technology, Ltd. ("Innovative") and CompuPrint Ltd. ("CompuPrint"),
both of which are incorporated in Israel and are presently inactive.
For accounting and other financial reporting purposes, the merger has been
treated as a "reverse acquisition." Under this treatment, the surviving
corporation has been treated as a continuation of Empire, and the merger has
been treated as an issuance of shares by Empire to the stockholders of
Integrated in exchange for Integrated's cash. Accordingly, the accompanying
condensed financial statements are the historical financial statements of Empire
and Empire Resources Pacific Ltd., and include the results of operations of
Integrated and the subsidiaries only from the September 17, 1999 merger date.
All significant intercompany transactions and accounts have been eliminated.
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3. Use of estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities at the date of the
financial statements and the reported amount of income and expenses during the
reported period. Actual results could differ from these estimates.
4. Income Taxes and Pro Forma Income Taxes
Empire had elected S corporation status for federal income tax purposes, and
accordingly was not subject to federal tax on its income for periods prior to
the merger with Integrated on September 17, 1999. Income tax expense for periods
prior to the merger date represents state and local taxes.
Pro forma income tax expense represents the provision for income taxes as if
Empire had been a C corporation for the three months and six months ended June
30, 1999.
5. Inventories
Inventories consist of semi-finished aluminum products stored in warehouses or
in transit.
6. Notes Payable--Banks
During 2000 the Company entered into amendments of its revolving credit
agreement with two commercial banks under which its line of credit was increased
from $45 million to $50 million until September 30, 2000, reverting after that
date to $45 million. In connection with this modification, certain of the
Company's covenants and ratio requirements were also modified. Borrowings under
this line of credit are collateralized by security interests in substantially
all assets of the Company.
7. Earnings Per Share
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
Weighted average shares
outstanding - basic 11,382,015 5,560,250 11,449,604 5,560,250
Dilutive effect of stock
options and warrants 99,075 99,168
Weighted average shares
outstanding - diluted 11,481,090 5,560,250 11,548,772 5,560,250
Basic earnings per share for the 2000 period are based upon the Company's number
of common shares outstanding during such period. Earnings per share for the 1999
period are based upon the number of shares of the Company's common stock issued
to the former
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Empire stockholders in the merger, excluding the 3,824,511 shares which were
placed in escrow.
Diluted earnings per share and pro forma 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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
Results of Operations
The merger between Integrated and Empire was completed on September 17,
1999 ("the Merger"). This discussion and analysis compares the results of the
Company for the three and six months ended June 30, 2000 with Empire's results
for the same periods of 1999, which was before the date of the Merger. For
accounting and other financial reporting purposes, the Merger has been treated
as a "reverse acquisition." Under this treatment, the Company has been treated
as a continuation of Empire, and the Merger has been treated as an issuance of
shares by Empire to the stockholders of Integrated in exchange for Integrated's
cash. Accordingly, the accompanying financial statements include the historical
financial statements of Empire and Empire-Pacific, and include the results of
operations of the Company only from September 17, 1999, the effective date of
the Merger.
Net sales increased $13.5 million or 53% from $25.2 million in the
second quarter of 1999 to $38.6 million in the first quarter of 2000, and
increased by $23.4 million, or 51% in the six month period. The increase in
sales represents an increase in mill availability for export from existing
supply relationships combined with the introduction of new suppliers and new
product lines in the latter part of 1999 and the early part of 2000.
Gross profit increased $1.1 million or 66% from second quarter 1999 to
second quarter 2000, and increased $1.9 million or 56% in the six month period
as a result of the increase in sales. Gross profit as a percentage of sales
improved from 6.8% to 7.4% in the quarter and from 7.3% to 7.5% in the six
months, as a result of distribution efficiencies.
Selling, general and administrative expenses increased from $.8 million
in the second quarter of 1999 to $1.3 million in the second quarter of 2000, or
63%, and increased from $1.5 million to $2.5 million, or 67% in the six month
period. The increases were a result of a non-cash compensation charge of $0.2
million, increased staffing costs associated with customer service enhancements,
costs related to employment contracts with certain executive officers, and costs
related to professional fees as a public company.
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Interest expense increased from $.5 million during the second quarter
of 1999 to $.8 million during the second quarter of 2000, and from $1.0 million
to $1.3 million for the six months ended June 30, 1999 and 2000 respectively.
The increase in interest expense during these periods is related to higher
levels of outstanding bank indebtedness required in order to fund the Company's
working capital requirements.
Income before income taxes rose $306,143 or 68% from $447,718 to
$753,861 in the quarterly period and rose $519,352 or 58% from $901,404 to
$1,420,756 in the six month period.
Income taxes were $284,550 higher in second quarter 2000 than in second
quarter 1999, and $535,947 higher in the six month period due to the change in
the tax status of the Company. Prior to the Merger, Empire had been taxed as an
S corporation for Federal income tax purposes. In general, the income or loss of
an S corporation is passed through to its owners rather than being subject to
tax at the entity level. Post Merger the Company has been taxed as a C
corporation. As a result, income taxes in the second quarter and six month
periods in 1999 reflect only state and local income tax, while 2000 taxes
reflect both federal and state and local taxes. Consequently, the Company has
presented pro-forma income taxes as if the Company had been taxed as a C
corporation for the 1999 periods, together with the resulting pro-forma net
income for those periods.
The Company reported net income of $462,315 for second quarter 2000 and
$871,399 for the six month period ended June 30, 2000, compared to net income of
$440,722 for second quarter 1999 and $887,994 in the six month period ended June
30, 1999. The change in the Company's income tax status had a significant impact
on net income. The net income for second quarter 2000 was 69% greater than pro
forma net income of $273,108, net of pro forma income taxes for second quarter
1999, and net income for the six month period ended June 30, 2000 was 58%
greater than pro forma net income, net of pro forma income taxes for the
corresponding period in 1999.
Distribution of Surplus Net Worth, Distribution of Promissory Notes and
Restricted Stock Agreement
In February 1999, Empire determined to distribute to the former Empire
stockholders an amount ("Surplus Net Worth") equal to 60% of the
pre-distribution total fair value of Empire's business and net assets , but in
no event more than the total stockholders' equity of Empire as shown on the
balance sheet of Empire as of December 31, 1998 (or $10,922,475). Empire carried
out the foregoing through the distribution to the Empire stockholders of two
promissory notes in the aggregate principal amount of $10,922,475, bearing
interest at the rate of 6% per annum. These notes were paid in full in September
and October of 1999.
In conjunction with the Merger, The Company and Nathan and Sandra Kahn,
the former stockholders of Empire, entered into a restricted stock agreement
with the Vice President of Sales of the Company, (the "VP"). Pursuant to the
restricted stock agreement, the Kahns have transferred to the VP 469,238 shares
("Restricted Shares") of common stock of the Company which represents a portion
of the shares that were received by the Kahns in the Merger.
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The transfer of the Restricted Shares from the Kahns to the VP did not
involve the issuance of any shares or any cash expenditure by the Company.
However, under applicable accounting rules, such transfer is being treated the
same as if the Company had issued such shares to the VP as compensation for
services and, accordingly, the Company is required to recognize an expense
relating thereto.
Please refer to the Company's Form 10-KSB for the fiscal year ended
December 31, 1999 for a more detailed discussion of these events and their
effect on the financial statements of the Company.
Liquidity and Capital Resources
Empire currently operates under a revolving line of credit, including a
commitment to issue letters of credit, with two commercial banks. Prior to June
30, 2000, the Company entered into amendments of its credit agreement as a
result of which its line of credit was increased to $50 million, of which $40
million can be borrowed in the form of loans, with the balance available for
letters of credit. Unless further amended, on September 30, 2000, the available
line reverts to $45 million, of which $35 million will be available for
borrowing in the form of loans. Borrowings under these lines of credit are
collateralized by security interests in substantially all of Empire's assets.
Under these credit agreements, Empire is required to maintain working capital
and net worth ratios. These facilities expire on June 30, 2001. As of June 30,
2000, the amount of loans outstanding under Empire's revolving lines of credit
was $39 million, and outstanding letters of credit amounted to $4.9 million.
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
some of its suppliers. In addition, under the terms of some of its supply
contracts, the Company is required to take minimum tonnages as specified in
those contracts. As a result, the Company could, under certain circumstances, be
forced to sell the required tonnage at a loss.
Forward Looking Statements
This report contains certain forward-looking statements reflecting
management's current views with respect to future events and financial
performance. These forward looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those in
the forward looking statements, all of which are difficult to predict and many
of which are beyond the control of the Company.
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PART II
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is furnished with this report:
27.1 Financial Data Schedule
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 7, 2000
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